Notes to Consolidated Financial Statements
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BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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Business
Catalent, Inc. (“Catalent” or the “Company”) directly and wholly owns PTS Intermediate Holdings LLC (“Intermediate Holdings”). Intermediate Holdings directly and wholly owns Catalent Pharma Solutions, Inc. (the “Operating Company”). The financial results of Catalent are primarily comprised of the financial results of the Operating Company and its subsidiaries on a consolidated basis.
In July 2014, the Company’s board of directors and holders of the requisite number of outstanding shares of its capital stock approved an amendment to the Company’s amended and restated certificate of incorporation to effect a
70
-for-1 stock split of its outstanding common stock (the “stock split”). The stock split became effective on July 17, 2014 upon the filing of the Company’s Certificate of Amendment of the Amended and Restated Certificate of Incorporation with the Delaware Secretary of State. On the effective date of the stock split, (i) each outstanding share of common stock was increased to seventy shares of common stock, (ii) the number of shares of common stock issuable under each outstanding option to purchase common stock was proportionately increased on a one-to-seventy basis, (iii) the exercise price of each outstanding option to purchase common stock was proportionately decreased on a one-to-seventy basis, and (iv) the number of shares underlying each restricted stock unit was proportionately increased on a one-to-seventy basis. All of the share and per share information referenced throughout the financial statements and notes to the consolidated financial statements have been retroactively adjusted to reflect this stock split.
On July 31, 2014, the Company commenced an initial public offering of its common stock (the “IPO”). As part of its IPO, the Company sold a total of
48.9 million
shares at a price of
$20.50
per share, before underwriting discounts and commissions. Net of these discounts and commissions and other offering expenses, the Company obtained total proceeds from the IPO, including the underwriters’ over-allotment option, of
$952.2 million
, which it used to fully redeem the outstanding 9.75% senior subordinated notes due 2017 (the "Senior Subordinated Notes"), redeem the outstanding 7.85% senior notes due 2018 (the "Senior Notes"), repay portions of the Company’s unsecured term loan, and pay to Blackstone and certain other shareholders an advisory agreement termination fee of
$29.8 million
(recorded within other income/(expense), net on the Consolidated Statement of Operations), and for other corporate purposes. The Company’s common stock began trading on the New York Stock Exchange (the “NYSE”) under the symbol “CTLT” as of the IPO. Refer to Note 6 for further discussion regarding debt repayments.
On March 9, 2015, an affiliate of The Blackstone Group, L.P. that owned shares in the Company (“Blackstone”), Genstar Capital and Aisling Capital (collectively the "selling stockholders") completed a secondary offering of
27.3 million
shares of the Company’s common stock, including
3.6 million
shares sold pursuant to the over-allotment option granted to the underwriters at a price of
$29.50
per share before underwriting discounts and commissions. On June 2, 2015, the selling stockholders completed an additional secondary offering of
16.1 million
shares, including
2.1 million
shares sold pursuant to the over-allotment option, at a price of
$29.00
per share, before underwriting discounts and commissions. On June 6, 2016, the selling stockholders completed a secondary offering of
10.0 million
shares of the Company's common stock at a price of
$24.85
per share before underwriting discounts and commissions. The Company did not sell any stock in any of the secondary offerings and did not receive any proceeds of the sales. Blackstone’s ownership in the Company was reduced to
32.7%
,
20.8%
and
13.7%
following the March 2015, June 2015 and June 2016 offerings, respectively, and as a result the Company has not qualified as a “controlled company” under applicable NYSE listing standards since March 9, 2015.
The Company is the leading global provider of advanced delivery technologies and development solutions for drugs, biologics and consumer and animal health products. Its oral, injectable, and respiratory delivery technologies address the full diversity of the pharmaceutical industry including small molecules, large molecule biologics and consumer and animal health products. Through its extensive capabilities and deep expertise in product development, it helps its customers take products to market faster, including nearly half of new drug products approved by the Food and Drug Administration (the "FDA") in the last decade. Its advanced delivery technology platforms, its proven formulation, manufacturing and regulatory expertise, and its broad and deep intellectual property enable its customers to develop more products and better treatments for patients and consumers. Across both development and delivery, its commitment to reliably supply its customers’ and their patient's needs is the foundation for the value it provides; annually, it produces more than
70 billion
doses for nearly
7,000
customer products, or approximately 1 in every 20 doses of such products taken each year by patients and consumers around the world. The Company believes that through its investments in growth-enabling capacity and capabilities, its ongoing focus on operational and quality excellence, the sales of existing customer products, the introduction of new customer products, its innovation activities and patents, and its entry into new markets, it will continue to benefit from attractive and differentiated margins, and realize the growth potential from these areas.
Reportable Segments
In fiscal 2016, the Company engaged in a business reorganization which was finalized in the fourth quarter to better align its internal business unit structure with its "Follow the Molecule" strategy. As part of the revised structure, it created a Drug Delivery Solutions ("DDS") reporting segment, which encompasses all of its modified release technologies; prefilled syringes and other injectable formats; blow-fill seal unit dose development and manufacturing; biologic cell line development; analytical services; micronization technologies; and other conventional oral dose forms under a single DDS management team. Additionally, as part of the re-alignment, it created a stand-alone Clinical Supply Services ("CSS") reporting segment and management team with sole focus on providing global clinical supply chain management services that aim to speed its customers' drugs to market. Further, as a result of the business unit re-alignment, the Softgel Technologies reporting segment is now reported separately. For financial reporting purposes, the Company presents
three
financial reporting segments based on criteria established by those accounting principles generally accepted in the United States ("U.S. GAAP"): Softgel Technologies, Drug Delivery Solutions and Clinical Supply Services.
All prior period comparative segment information has been restated to reflect the reportable segments in accordance with
ASC 280 Segment Reporting.
Softgel Technologies
Through the Softgel Technologies segment, the Company provides formulation, development and manufacturing services for soft capsules, or “softgels,” which it first commercialized in the 1930s and have continually enhanced. The Company is the market leader in overall softgel manufacturing, and hold the leading market position in the prescription arena. Its principal softgel technologies include traditional softgel capsules, in which the shell is made of animal-derived gelatin, and Vegicaps and OptiShell capsules, in which the shell is made from vegetable-derived materials. Softgel capsules are used in a broad range of customer products, including prescription drugs, over-the-counter medications, dietary supplements and unit-dose cosmetics. Softgel capsules encapsulate liquid, paste or oil-based active compounds in solution or suspension within an outer shell, filling and sealing the capsule simultaneously. The Company typically perform all encapsulation for a product within one of its softgel facilities, with active ingredients provided by customers or sourced directly by the Company. Softgels have historically been used to solve formulation challenges or technical issues for a specific drug, to help improve the clinical performance of compounds, to provide important market differentiation, particularly for over-the-counter compounds, and to provide safe handling of hormonal, potent and cytotoxic drugs. The Company also participate in the softgel vitamin, mineral and supplement business in selected regions around the world. With the 2001 introduction of its vegetable-derived softgel shell, Vegicaps capsules, consumer health manufacturers have been able to extend the softgel dose form to a broader range of active ingredients and serve patient/consumer populations that were previously inaccessible due to religious, dietary or cultural preferences. In recent years, the Company has extended this platform to pharmaceutical products via its OptiShell offering. The Company's Vegicaps and OptiShell capsules are protected by patents in most major global markets. Physician and patient studies the Company has conducted have demonstrated a preference for softgels versus traditional tablet and hard capsule dose forms in terms of ease of swallowing, real or perceived speed of delivery, ability to remove or eliminate unpleasant odor or taste and, for physicians, perceived improved patient adherence with dosing regimens.
Drug Delivery Solutions
The Company's Drug Delivery Solutions segment provides various complex advanced formulation delivery technologies, and related integrated solutions including: development and manufacturing of a broad range of oral dose forms including fast-dissolve tablets and both proprietary and conventional controlled release products, and delivery of pharmaceuticals, biologics and biosimilars administered via injection, inhalation and ophthalmic routes, using both traditional and advanced technologies.
The Company provides comprehensive pre-formulation, development, and both clinical and commercial scale for most traditional and advanced oral solid dose formats, including uncoated and coated tablets, powder/pellet/bead-filled two piece hard capsules, lozenges, powders and other forms for immediate and modified release prescription, consumer and animal health products. The Company has substantial experience developing and scaling up products requiring accelerated development timelines, requiring specialized handling, complex technology transfers, or specialized manufacturing processes.
The Company launched its orally dissolving tablet business in 1986 with the introduction of Zydis tablets, a unique oral dosage form that is freeze-dried in its package, can be swallowed without water, and typically dissolves in the mouth in less than three seconds. Most often used for indications, drugs and patient groups that can benefit from rapid oral disintegration, the Zydis technology is utilized in a wide range of products and indications, including treatments for a variety of central nervous system-related conditions such as migraines, Parkinson’s Disease, schizophrenia, and pain relief and consumer healthcare products targeting allergy relief. Zydis tablets continue to be used in new ways by the Company's customers as it extends the application of the technology to new categories, such as for immunotherapies, vaccines and biologics delivery.
The Company's range of injectable manufacturing offerings includes filling drugs or biologics into pre-filled syringes and glass-free ADVASEPT vials, with flexibility to accommodate other formats within our existing network, increasingly focused on complex pharmaceuticals and biologics. With its range of technologies, the Company is able to meet a wide range of specifications, timelines and budgets. The complexity of the manufacturing process, the importance of experience and know-how, regulatory compliance, and high start-up capital requirements create significant barriers to entry and, as a result, limit the number of competitors in the market. For example, blow-fill-seal is an advanced aseptic processing technology, which uses a continuous process to form, fill with drug, and seal a plastic container in a sterile environment. Blow-fill-seal units are currently used for a variety of pharmaceuticals in liquid form, such as respiratory, ophthalmic and otic products. The Company is a leader in the outsourced blow-fill-seal market, and operate one of the largest capacity commercial manufacturing blow-fill-seal facilities in the world. Its sterile blow-fill-seal manufacturing has significant capacity and flexibility of manufacturing configurations. This business provides flexible and scalable solutions for unit-dose delivery of complex formulations such as suspensions and emulsions. Further, the business provides engineering and manufacturing solutions related to complex containers. The Company's regulatory expertise can lead to decreased time to commercialization, and its dedicated development production lines support feasibility, stability and clinical runs. The Company plan to continue to expand its product line in existing and new markets, and in higher margin specialty products with additional respiratory, ophthalmic, injectable and nasal applications.
The Company's fast-growing biologics offerings include its formulation development and cell-line manufacturing based on its advanced and patented GPEx technology, which is used to develop stable, high-yielding mammalian cell lines for both innovator and biosimilar biologic compounds. Its GPEx technology can provide rapid cell-line development, high biologics production yields, flexibility and versatility. It believes its development-stage SMARTag next-generation antibody-drug conjugate technology will provide more precision targeting for delivery of drugs to tumors or other locations, with improved safety versus existing technologies. The Company's biologics facility in Madison, Wisconsin has the capability and capacity to produce clinical-scale biologic supplies; combined with offerings from its other businesses and external partners, the Company provides the broadest range of technologies and services supporting the development and launch of new biologic entities, biosimilars or biobetters to bring a product from gene to market commercialization, faster.
The Company also offers analytical chemical and cell-based testing and scientific services, stability testing, respiratory products formulation and manufacturing, micronization and particle engineering services, regulatory consulting, and bioanalytical testing for biologic products. Its respiratory product capabilities include development and manufacturing services for inhaled products for delivery via metered dose inhalers, dry powder inhalers and intra-nasal sprays. The Company also provides formulation development and clinical and commercial manufacturing for conventional and specialty oral dose forms. It provides global regulatory and clinical support services for its customers’ regulatory and clinical strategies during all stages of development. Demand for its offerings is driven by the need for scientific expertise and depth and breadth of services offered, as well as by the reliable supply thereof, including quality, execution and performance.
Clinical Supply Services
The Company's Clinical Supply Services segment provides manufacturing, packaging, storage and inventory management for drugs and biologics in clinical trials. It offers customers flexible solutions for clinical supplies production, and provides distribution and inventory management support for both simple and complex clinical trials. This includes dose form manufacturing or over-encapsulation where needed; supplying placebos, comparator drug procurement and clinical packages and kits for physicians and patients; inventory management; investigator kit ordering and fulfillment; and return supply reconciliation and reporting. This business supports trials in all regions of the world through its facilities and distribution network. In fiscal 2016, the Company commenced an expansion of its Singapore facility by building new flexible cGMP space and it introduced clinical supply services at its 200,000 square foot facility in Japan, expanding its Asia Pacific capabilities. Additionally, in fiscal 2013, the Company established its first clinical supply services facility in China as a joint venture and assumed full ownership in fiscal 2015. The Company is the leading provider of integrated development solutions and one of the leading providers of clinical trial supplies and respiratory products.
Basis of Presentation
These financial statements include all of the Company’s subsidiaries, including those operating outside the United States ("U.S.") and are prepared in accordance with U.S. GAAP. All significant transactions among the Company’s businesses have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect amounts reported in the financial statements and accompanying notes. Such estimates include, but are not limited to, allowance for doubtful accounts, inventory and long-lived asset valuation, goodwill and other intangible asset valuation and impairment, equity-based compensation, income taxes, and pension plan asset and liability valuation. Actual amounts may differ from these estimated amounts.
Foreign Currency Translation
The financial statements of the Company’s operations outside the U.S. are generally measured using the local currency as the functional currency. Adjustments to translate the assets and liabilities of these foreign operations into U.S. dollars are accumulated as a component of other comprehensive income/(loss) utilizing period-end exchange rates. The currency fluctuation related to certain long-term inter-company loans deemed to not be repayable in the foreseeable future have been recorded within the cumulative translation adjustment, a component of other comprehensive income/(loss). In addition, the currency fluctuation associated with the portion of the Company’s euro-denominated debt designated as a net investment hedge is included as a component of other comprehensive income/(loss). Foreign currency transaction gains and losses calculated by utilizing weighted average exchange rates for the period are included in the statements of operations in “other expense, net.” Such foreign currency transaction gains and losses include inter-company loans that are repayable in the foreseeable future.
Revenue Recognition
In accordance with
Accounting Standards Codification
("
ASC") 605 Revenue Recognition,
the Company recognizes revenue when persuasive evidence of an arrangement exists, product delivery has occurred or the services have been rendered, the price is fixed or determinable and collectability is reasonably assured. In cases where the Company has multiple contracts with the same customer, the Company evaluates those contracts to assess if the contracts are linked or are separate arrangements. Factors the Company considers include the timing of negotiation, interdependency with other contracts or elements and payment terms. The Company and its customers generally view each contract as a separate arrangement.
Manufacturing and packaging service revenue is recognized upon delivery of the product in accordance with the terms of the contract, which specify when transfer of title and risk of loss occurs. Some of the Company’s manufacturing contracts with its customers have annual minimum purchase requirements. At the end of the contract year, revenue is recognized for the unfilled purchase obligation in accordance with the contract terms. Development service contracts generally take the form of a fee-for-service arrangement. After the Company has evidence of an arrangement, the price is determinable and there is a reasonable expectation regarding payment, the Company recognizes revenue at the point in time the service obligation is completed and accepted by the customer. Examples of output measures include a formulation report, analytical and stability testing, clinical batch production or packaging and the storage and distribution of a customer’s clinical trial material. Development service revenue is primarily driven by the Company’s Drug Delivery Solutions segment.
Arrangements containing multiple elements, including service arrangements, are accounted for in accordance with the provisions of
ASC 605-25
Revenue Recognition—Multiple-Element Arrangements
. The Company determines the separate units of account in accordance with ASC 605-25. If the deliverable meets the criteria of a separate unit of accounting, the arrangement consideration is allocated to each element based upon its relative selling price. In determining the best evidence of selling price of a unit of account the Company utilizes vendor-specific objective evidence (“VSOE”), which is the price the Company charges when the deliverable is sold separately. When VSOE is not available, management uses relevant third-party evidence (“TPE”) of selling price, if available. When neither VSOE nor TPE of selling price exists, management uses its best estimate of selling price.
Cash and Cash Equivalents
All liquid investments purchased with original maturities of three months or less are considered to be cash and equivalents. The carrying value of these cash equivalents approximates fair value. Liquid investments purchased with original maturities greater than three months but less than one year when purchased are classified as other current assets, and aggregate to $7.0 million as of
June 30, 2016
.
Receivables and Allowance for Doubtful Accounts
Trade receivables are primarily comprised of amounts owed to the Company through its operating activities and are presented net of an allowance for doubtful accounts. The Company monitors past due accounts on an ongoing basis and establishes appropriate reserves to cover probable losses. An account is considered past due on the first day after its due date. The Company makes judgments as to its ability to collect outstanding receivables and provides allowances when it concludes that all or a portion of the receivable will not be collected. The Company determines its allowance by considering a number of factors, including the
length of time accounts receivable are past due, the Company’s previous loss history, the specific customer’s ability to pay its obligation to the Company, and the condition of the general economy and the customer’s industry.
Concentrations of Credit Risk and Major Customers
Concentration of credit risk, with respect to accounts receivable, is limited due to the large number of customers and their dispersion across different geographic areas. The customers are primarily concentrated in the pharmaceutical and healthcare industry. The Company normally does not require collateral or any other security to support credit sales. The Company performs ongoing credit evaluations of its customers’ financial conditions and maintains reserves for credit losses. Such losses historically have been within the Company’s expectations. No single customer exceeded 10% of revenue during the fiscal years ended
2016
,
2015
and
2014
or 10% of accounts receivable as of the years ended
2016
and
2015
.
Inventories
Inventory is stated at the lower of cost or market, using the first-in, first-out (“FIFO”) method. The Company provides reserves for excess, obsolete or slow-moving inventory based on changes in customer demand, technology developments or other economic factors. Inventory consists of costs associated with raw material, labor and overhead.
Goodwill
The Company accounts for purchased goodwill and intangible assets with indefinite lives in accordance with ASC 350
Goodwill, Intangible and Other Assets
. Under ASC 350, goodwill and intangible assets with indefinite lives are not amortized, but instead are tested for impairment at least annually. The Company’s annual goodwill impairment test was conducted as of April 1,
2016
. The Company assesses goodwill for possible impairment by comparing the carrying value of its reporting units to their fair values. The Company determines the fair value of its reporting units utilizing estimated future discounted cash flows and incorporates assumptions that it believes marketplace participants would utilize. In addition, the Company uses comparative market information and other factors to corroborate the discounted cash flow results.
Property and Equipment and Other Definite Lived Intangible Assets
Property and equipment are stated at cost. Depreciation expense is computed using the straight-line method over the estimated useful lives of the assets, including capital lease assets that are amortized over the shorter of their useful lives or the terms of the respective leases. The Company generally uses the following range of useful lives for its property and equipment categories: buildings and improvements—
5
to
50
years; machinery and equipment—
3
to
10
years; and furniture and fixtures—
3
to
7
years. Depreciation expense was
$94.2 million
for the fiscal year ended
June 30, 2016
,
$94.3 million
for the fiscal year ended
June 30, 2015
, and
$100.5 million
for the fiscal year ended
June 30, 2014
. Depreciation expense includes amortization of assets related to capital leases. The Company charges repairs and maintenance costs to expense as incurred. The amount of capitalized interest was immaterial for all periods presented.
Intangible assets with finite lives, primarily including customer relationships, patents and trademarks are amortized over their useful lives. The Company evaluates the recoverability of its other long-lived assets, including amortizing intangible assets, if circumstances indicate impairment may have occurred pursuant to
ASC 360 Property, Plant and Equipment
. This analysis is performed by comparing the respective carrying values of the assets to the current and expected future cash flows, on an un-discounted basis, to be generated from such assets. If such analysis indicates that the carrying value of these assets is not recoverable, the carrying value of such assets is reduced to fair value through a charge to the Consolidated Statements of Operations. Fair value is determined based on assumptions the Company believes marketplace participants would utilize and comparable marketplace information in similar arm’s length transactions. The Company recorded impairment charges related to definite lived intangible assets and property, plant and equipment, net of gains on sale, of approximately
$2.7 million
,
$4.7 million
and
$3.2 million
, for the fiscal years ended
June 30, 2016
,
June 30, 2015
and
June 30, 2014
, respectively.
Post-Retirement and Pension Plans
The Company sponsors various retirement and pension plans, including defined benefit retirement plans and defined contribution retirement plans. The measurement of the related benefit obligations and the net periodic benefit costs recorded each year are based upon actuarial computations, which require management’s judgment as to certain assumptions. These assumptions include the discount rates used in computing the present value of the benefit obligations and the net periodic benefit costs, the expected future rate of salary increases (for pay-related plans) and the expected long-term rate of return on plan assets (for funded plans).
Effective
June 30, 2016
, the approach used to estimate the service and interest components of net periodic benefit cost for benefit plans was changed to provide a more precise measurement of service and interest costs. Historically, the Company estimated these service and interest components utilizing a single weighted-average discount rate derived from the yield curve used to measure the benefit obligation at the beginning of the period. Going forward, the Company has elected to utilize an approach that discounts the individual expected cash flows using the applicable spot rates derived from the yield curve over the projected cash flow period. The Company has accounted for this change as a change in accounting estimate that is inseparable from a change in accounting principle and accordingly has accounted for it prospectively.
The expected long-term rate of return on plan assets is based on the target asset allocation and the average expected rate of growth for the asset classes invested. The average expected rate of growth is derived from a combination of historic returns, current market indicators, the expected risk premium for each asset class and the opinion of professional advisors. The Company uses a measurement date of June 30 for all its retirement and postretirement benefit plans.
Derivative Instruments, Hedging Activities, and Fair Value
Derivatives Instruments and Hedging Activities
The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest-rate, liquidity, and credit risk primarily by managing the amount, sources and duration of its debt funding and the use of derivative financial instruments. Specifically, the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The Company’s derivative financial instruments are used to manage differences in the amount, timing, and duration of the Company’s known or expected cash receipts and its known or expected cash payments principally related to the Company’s borrowings. The Company does not net any of its derivative positions under master netting arrangements.
Specifically, the Company is exposed to fluctuations in the EUR-USD exchange rate on its investments in foreign operations in Europe. While the Company does not actively hedge against changes in foreign currency, it has mitigated the exposure of investments in its European operations through a net-investment hedge by denominating a portion of its debt in euros.
Fair Value
The Company is required to measure certain assets and liabilities at fair value, either upon initial measurement or for subsequent accounting or reporting. The Company uses fair value extensively in the initial measurement of net assets acquired in a business combination and when accounting for and reporting on certain financial instruments. The Company estimates fair value using an exit price approach, which requires, among other things, that it determine the price that would be received to sell an asset or paid to transfer a liability in an orderly market. The determination of an exit price is considered from the perspective of market participants, considering the highest and best use of assets and, for liabilities, assuming the risk of non-performance will be the same before and after the transfer. A single estimate of fair value results from a complex series of judgments about future events and uncertainties and relies heavily on estimates and assumptions. When estimating fair value, depending on the nature and complexity of the assets or liability, the Company may use one or all of the following approaches:
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Market approach, which is based on market prices and other information from market transactions involving identical or comparable assets or liabilities.
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Cost approach, which is based on the cost to acquire or construct comparable assets less an allowance for functional and/or economic obsolescence.
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Income approach, which is based on the present value of the future stream of net cash flows.
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These fair value methodologies depend on the following types of inputs:
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Quoted prices for identical assets or liabilities in active markets (called Level 1 inputs).
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Quoted prices for similar assets or liabilities in active markets or quoted prices for identical or similar assets or liabilities in markets that are directly or indirectly observable (called Level 2 inputs).
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Unobservable inputs that reflect estimates and assumptions (called Level 3 inputs).
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Self-Insurance
The Company is partially self-insured for certain employee health benefits and partially self-insured for property losses and casualty claims. The Company accrues for losses based upon experience and actuarial assumptions, including provisions for incurred but not reported losses.
Shipping and Handling
The Company includes shipping and handling costs in cost of sales in the Consolidated Statements of Operations. Shipping and handling revenue received was immaterial for all periods presented and is presented within net revenues.
Accumulated Other Comprehensive Income/(Loss)
Accumulated other comprehensive income/(loss), which is reported in the accompanying Consolidated Statements of Changes in Shareholders’ Equity, consists of net earnings/(loss), foreign currency translation, deferred compensation, and minimum pension liability changes.
Research and Development Costs
The Company expenses research and development costs as incurred. It records costs incurred in connection with the development of new offerings and manufacturing process improvements within selling, general, and administrative expenses. Such research and development costs amounted to
$7.6 million
,
$12.2 million
and
$17.5 million
for the fiscal years ended
June 30, 2016
,
June 30, 2015
and
June 30, 2014
, respectively. The Company records within cost of sales the costs it incurred in connection with the research and development services that it provided to customers and services it performed for customers in support of the commercial manufacturing process. This second type of research and development costs amounted to
$47.4 million
,
$41.3 million
and
$34.0 million
for the fiscal years ended
June 30, 2016
,
June 30, 2015
and
June 30, 2014
, respectively.
Earnings / (Loss) Per Share
The Company reports net earnings (loss) per share in accordance with
ASC 260 Earnings per Share
. Under ASC 260, basic earnings per share, which excludes dilution, is computed by dividing net earnings or loss available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution due to securities that could be exercised or converted into common shares, and is computed by dividing net earnings or loss available to common stockholders by the weighted average of common shares outstanding plus the dilutive potential common shares. Diluted earnings per share include as appropriate in-the-money stock options and outstanding restricted stock units using the treasury stock method. During a loss period, the assumed exercise of in-the-money stock options has an anti-dilutive effect and therefore, these instruments are excluded from the computation of diluted earnings per share in a loss period.
Income Taxes
In accordance with
ASC 740 Income Taxes,
the Company accounts for income taxes using the asset and liability method. The asset and liability method requires recognition of deferred tax assets and liabilities for expected future tax consequences of temporary differences that currently exist between tax bases and financial reporting bases of the Company’s assets and liabilities. The Company measures deferred tax assets and liabilities using enacted tax rates in the respective jurisdictions in which it operates. In assessing the ability to realize deferred tax assets, the Company considers whether it is more likely than not that the Company will be able to realize some or all of the deferred tax assets. The calculation of the Company’s tax liabilities involves dealing with uncertainties in the application of complex tax regulations in each of its tax jurisdictions. The number of years with open tax audits varies by tax jurisdiction. A number of years may lapse before a particular matter is audited and finally resolved. The Company applies ASC 740 to determine the accounting for uncertain tax positions. This standard clarifies the accounting for income taxes, by prescribing a minimum recognition threshold a tax position is required to meet before the Company may recognize the position in its financial statements. The standard also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition.
Equity-Based Compensation
The Company accounts for its equity-based compensation in accordance with
ASC 718 Compensation—Stock Compensation.
Under ASC 718, companies recognize compensation expense using a fair value based method for costs related to share-based payments, including stock options and restricted stock units. The expense is measured based on the grant date fair value of the awards that are expected to vest, and the expense is recorded over the applicable requisite service period. In the absence of an observable market price for a share-based award, the fair value is based upon a valuation methodology that takes into consideration various factors, including the exercise price of the award, the expected term of the award, the current price of the underlying shares, the expected volatility of the underlying share price based on peer companies, the expected dividends on the underlying shares and the risk-free interest rate.
The terms of the Company’s equity-based compensation plans permit an employee holding vested stock options to elect to have the Company withhold a portion of the shares otherwise issuable upon the employee’s exercise of the option, a so-called "net settlement transaction," as a means of paying the exercise price, meeting tax withholding requirements, or both.
Recent Financial Accounting Standards
In March 2016, the Financial Accounting Standards Board ("FASB") issued
Accounting Standards Update ("ASU") 2016-09 Improvements to Employee Share-Based Payment Accounting
, which simplifies the accounting for share-based payment transactions, requiring all excess tax benefits and deficiencies to be recognized in income tax expense or benefit in earnings. An entity can make an accounting policy election to either estimate the expected future forfeiture of awards or account for the cost or benefit as forfeitures occur. The guidance will be effective for publicly reporting entities in fiscal periods beginning after December 15, 2016, and interim periods within those fiscal years. Early adoption is permitted in any interim or annual period. The Company early-adopted ASU 2016-09 during the fourth quarter of fiscal 2016 on a modified retrospective basis. Accordingly, the Company recognized the previously unrecognized excess tax benefits, which resulted in a cumulative-effect adjustment benefit of $19.9 million recorded as part of accumulated deficit, with the tax effects recorded as deferred tax assets at the beginning of the 2016 fiscal year. In addition, excess tax benefits of $4.3 million generated during fiscal 2016 are recorded as part of income tax expense/(benefit) in the consolidated statement of income. Furthermore, the Company recognized a cumulative-effect adjustment charge of approximately $0.7 million, net of income taxes, to the beginning accumulated deficit for the impact of electing to account for forfeiture as it occurs.
In February 2016, the FASB issued
ASU 2016-02 Leases (Topic 842)
, which will supersede A
SC 840 Leases
. The new guidance requires lessees to recognize most leases on their balance sheets for the rights and obligations created by those leases. The guidance requires enhanced disclosures regarding the amount, timing and uncertainty of cash flows arising from leases and will be effective for publicly reporting entities in annual reporting periods beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the impact of adopting this guidance on its consolidated financial statements.
In November 2015, the FASB issued
ASU 2015-17 Balance Sheet Classification of Deferred Taxes
, which requires that all deferred tax assets and liabilities, along with any related valuation allowance, be classified as noncurrent on the balance sheet. As a result, each jurisdiction will now only have one net noncurrent deferred tax asset or liability. The new guidance will be effective for publicly reporting entities in annual reporting periods beginning after December 15, 2016, including interim periods within those years. Early adoption is permitted for all entities as of the beginning of an interim or annual reporting period. The guidance may be applied either prospectively, for all deferred tax assets and liabilities, or retrospectively. The Company has elected to early adopt this update as of the end of the 2016 fiscal year and applied its provisions prospectively. As a result, the prior period was not retrospectively adjusted.
In April 2015, the FASB issued
ASU 2015-03 Simplifying the Presentation of Debt Issuance Costs
, which requires that debt issuance costs be presented in the balance sheet as a direct reduction from the carrying value of the associated debt liability, consistent with the presentation of a debt discount. The new guidance is effective for publicly reporting entities for annual and interim periods beginning after December 15, 2015. Early adoption is permitted. The Company early-adopted this guidance as of January 1, 2016, on a retrospective basis, which had an effect on the consolidated balance sheet as of June 30, 2015 and no effect on the consolidated statements of income, comprehensive income (loss), cash flows or changes in stockholders' equity/(deficit) for the year then ended. The unamortized debt issuance costs associated with the Company's revolving credit facility continues to be included within other assets. The following table summarizes the Company's As Reported and As Adjusted changes to the consolidated balance sheet as of June 30, 2015:
|
|
|
|
|
|
|
|
|
|
June 30, 2015
|
(Dollars in millions)
|
As Reported
|
|
As Adjusted
|
Other assets:
|
|
|
|
Other
|
$
|
28.4
|
|
|
$
|
21.3
|
|
Total assets
|
$
|
3,145.4
|
|
|
$
|
3,138.3
|
|
|
|
|
|
Long-term obligations, less current portion
|
$
|
1,864.1
|
|
|
$
|
1,857.0
|
|
Total liabilities, redeemable noncontrolling interest and shareholders' equity
|
$
|
3,145.4
|
|
|
$
|
3,138.3
|
|
In May 2014, the FASB issued
ASU 2014-09
Revenue from Contracts with Customers
, which will supersede nearly all existing revenue recognition guidance. The new guidance's core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In doing so, the new guidance creates a five-step model that requires a company to exercise judgment when considering the terms of the contracts and all relevant facts and circumstances. The five steps require a company to identify customer contracts, identify the separate performance obligations, determine the transaction price, allocate the transaction price to the separate performance obligations and recognize revenue when each performance obligation is satisfied. On July 9, 2015, the FASB approved a one-year deferral of the effective date, so that the new guidance will be effective for publicly reporting entities for annual and interim periods beginning after December 15, 2017. The new guidance allows for either full retrospective adoption, where the standard is applied to all periods presented, or modified retrospective adoption where the standard is applied only to the most current period presented in the financial statements. Early adoption is permitted. The Company is currently evaluating the impact of this new guidance on its consolidated results of operations and financial positio
n.
|
|
2
.
|
BUSINESS COMBINATIONS
|
During the year ended June 30, 2015, the Company completed acquisitions which were immaterial, individually and in the aggregate, to the overall consolidated financial position and results of operations of the Company. Notably, in October 2014, the Company acquired the remaining shares of Redwood Bioscience Inc. and its SMARTag Antibody-Drug Conjugate (ADC) technology platform. The acquired business is based in the U.S. and is included in the Drug Delivery Solutions segment. Additionally, in November 2014, the Company acquired 100% of the shares of MTI Pharma Solutions, Inc. (Micron Technologies), a company specializing in particle size reduction (micronization), milling and analytical contract services. The acquired business is based in the U.S. and the U.K. and is included in the Drug Delivery Solutions segment.
The Company’s consolidated balance sheet as of June 30, 2015 includes the fair value allocations for these acquisitions, which were completed in the fiscal year. Aggregate purchase consideration for both acquisitions totaled
$110.8 million
. As a result of the fair value allocations, the Company recognized intangible assets of
$56 million
, comprised of
$34 million
of customer relationships and
$22 million
of core technology. The remainder of fair value was allocated to tangible assets acquired and goodwill.
The following table summarizes the changes between
June 30, 2014
,
June 30, 2015
and
June 30, 2016
in the carrying amount of goodwill in total and by reporting segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
Softgel Technologies
|
|
Drug Delivery Solutions
|
|
Clinical Supply Services
|
|
Total
|
Balance at June 30, 2014
|
$
|
472.9
|
|
|
$
|
430.6
|
|
|
$
|
193.6
|
|
|
$
|
1,097.1
|
|
Additions/(impairments)
|
2.3
|
|
|
58.7
|
|
|
—
|
|
|
61.0
|
|
Foreign currency translation adjustments
|
(64.0
|
)
|
|
(17.8
|
)
|
|
(14.8
|
)
|
|
(96.6
|
)
|
Balance at June 30, 2015
|
411.2
|
|
|
471.5
|
|
|
178.8
|
|
|
1,061.5
|
|
Additions/(impairments)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Foreign currency translation adjustments
|
(5.3
|
)
|
|
(36.4
|
)
|
|
(23.3
|
)
|
|
(65.0
|
)
|
Balance at June 30, 2016
|
$
|
405.9
|
|
|
$
|
435.1
|
|
|
$
|
155.5
|
|
|
$
|
996.5
|
|
No goodwill impairment charges were required during the current or comparable prior year period. When required, impairment charges are recorded within the consolidated statements of operations as impairment charges and (gain)/loss on sale of assets.
|
|
4
.
|
DEFINITE-LIVED LONG-LIVED ASSETS
|
The Company’s definite-lived long-lived assets include property, plant and equipment as well as other intangible assets with definite lives. Refer to Note
18
Supplemental Balance Sheet Information for details related to property, plant and equipment.
The details of other intangible assets subject to amortization as of
June 30, 2016
and
June 30, 2015
, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
Weighted Average Life
|
|
Gross
Carrying
Value
|
|
Accumulated
Amortization
|
|
Net
Carrying
Value
|
June 30, 2016
|
|
|
|
|
|
|
|
Amortized intangibles:
|
|
|
|
|
|
|
|
Core technology
|
18 years
|
|
$
|
170.6
|
|
|
$
|
(64.9
|
)
|
|
$
|
105.7
|
|
Customer relationships
|
14 years
|
|
230.3
|
|
|
(90.9
|
)
|
|
139.4
|
|
Product relationships
|
12 years
|
|
208.6
|
|
|
(159.7
|
)
|
|
48.9
|
|
Total intangible assets
|
|
|
$
|
609.5
|
|
|
$
|
(315.5
|
)
|
|
$
|
294.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
Weighted Average Life
|
|
Gross
Carrying
Value
|
|
Accumulated
Amortization
|
|
Net
Carrying
Value
|
June 30, 2015
|
|
|
|
|
|
|
|
Amortized intangibles:
|
|
|
|
|
|
|
|
Core technology
|
18 years
|
|
$
|
177.6
|
|
|
$
|
(57.6
|
)
|
|
$
|
120.0
|
|
Customer relationships
|
14 years
|
|
259.2
|
|
|
(81.8
|
)
|
|
177.4
|
|
Product relationships
|
12 years
|
|
222.9
|
|
|
(151.6
|
)
|
|
71.3
|
|
Total intangible assets
|
|
|
$
|
659.7
|
|
|
$
|
(291.0
|
)
|
|
$
|
368.7
|
|
Amortization expense was
$46.4 million
,
$46.5 million
, and
$42.4 million
for the fiscal year ended
June 30, 2016
,
June 30, 2015
, and
June 30, 2014
, respectively. Future amortization expense for the next five years is estimated to be:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
2017
|
|
2018
|
|
2019
|
|
2020
|
|
2021
|
Amortization expense
|
$
|
45.0
|
|
|
$
|
44.9
|
|
|
$
|
39.1
|
|
|
$
|
24.8
|
|
|
$
|
24.8
|
|
The Company impaired definite lived intangible assets of $0.7 million, $3.4 million and zero in the fiscal years ended June 30, 2016, 2015 and 2014, respectively.
|
|
5
.
|
RESTRUCTURING AND OTHER COSTS
|
The Company has implemented plans to restructure certain operations, both domestically and internationally. The restructuring plans focused on various aspects of operations, including closing and consolidating certain manufacturing operations, rationalizing headcount and aligning operations in a strategic and more cost-efficient structure. In addition, the Company may incur restructuring charges in the future in cases where a material change in the scope of operation with its business occurs.
The following table summarizes the significant costs recorded within restructuring costs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended June 30,
|
(Dollars in millions)
|
2016
|
|
2015
|
|
2014
|
Restructuring costs:
|
|
|
|
|
|
Employee-related reorganization
(1)
|
$
|
3.7
|
|
|
$
|
11.5
|
|
|
$
|
16.5
|
|
Asset impairments
|
0.4
|
|
|
—
|
|
|
—
|
|
Facility exit and other costs
(2)
|
4.9
|
|
|
1.9
|
|
|
3.2
|
|
Total restructuring costs
|
$
|
9.0
|
|
|
$
|
13.4
|
|
|
$
|
19.7
|
|
|
|
(1)
|
Employee-related costs consist primarily of severance costs and also include outplacement services provided to employees who have been involuntarily terminated and duplicate payroll costs during transition periods.
|
|
|
(2)
|
Facility exit and other costs consist of accelerated depreciation, equipment relocation costs and costs associated with planned facility expansions and closures to streamline Company operations.
|
|
|
6
.
|
LONG-TERM OBLIGATIONS AND OTHER SHORT-TERM BORROWINGS
|
Long-term obligations and other short-term borrowings consist of the following at
June 30, 2016
and
June 30, 2015
:
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
Maturity
|
|
June 30,
2016
|
|
June 30,
2015
(1)
|
Senior Secured Credit Facilities
|
|
|
|
|
|
Term loan facility dollar-denominated
|
May 2021
|
|
$
|
1,454.2
|
|
|
$
|
1,465.9
|
|
Term loan facility euro-denominated
|
May 2021
|
|
345.2
|
|
|
353.8
|
|
Capital lease obligations
|
2020 to 2032
|
|
51.4
|
|
|
55.5
|
|
Other obligations
|
2016 to 2018
|
|
9.7
|
|
|
5.6
|
|
Total
|
|
|
1,860.5
|
|
|
1,880.8
|
|
Less: Current portion of long-term obligations and other short-term borrowings
|
|
|
27.7
|
|
|
23.8
|
|
Long-term obligations, less current portion
|
|
|
$
|
1,832.8
|
|
|
$
|
1,857.0
|
|
|
|
(1)
|
In connection with the Company's adoption of ASU 2015-03, prior year debt balances have been retrospectively adjusted to include a direct deduction of unamortized debt issuance costs, resulting in a reclassification of $7.1 million of debt issuance costs to long-term debt obligation, less current portion. Prior to the adoption of ASU 2015-03, the unamortized debt issuance costs were included in other assets on the Company's consolidated balance sheets. The unamortized debt issuance costs associated with the Company's revolving credit facility continues to be included within other assets.
|
Senior Secured Credit Facilities
On May 20, 2014, the Operating Company entered into the Amended and Restated Credit Agreement (as amended to date, the "Credit Agreement") to provide senior secured financing consisting of a
seven
-year
$1,400.0 million
dollar term loan (the “Dollar Term Loan”), a
seven
-year
€250.0 million
euro term loan (the “Euro Term Loan” and, together with the Dollar
Term Loan, the "Term Loan Facilities") and a five-year
$200.0 million
revolving credit facility (the "Revolving Credit Facility"), the proceeds of which were used to prepay in full all outstanding Refinancing Dollar Term-1 Loans, Refinancing Dollar Term-2 Loans and Extended Euro Term Loans under the prior version of the Credit Agreement. The Revolving Credit Facility includes borrowing capacity available for letters of credit and for short-term borrowings, referred to as the swing line borrowings.
Borrowings under the Term Loan Facilities and the Revolving Credit Facility bear interest, at the Company’s option, at a rate equal to a margin over either (a) a base rate determined by reference to the higher of (1) the rate of interest published by
The Wall Street Journal
as its “prime lending rate” and (2) the federal funds rate plus
one half of 1%
or (b) a LIBOR rate determined by reference to the London Interbank Offered Rate set by ICE Benchmark Administration (or any successor thereto). The applicable margin for the Term Loan Facilities and borrowings under the Revolving Credit Facility may be reduced subject to the Company attaining a certain total net leverage ratio. The applicable margin for borrowings is
3.50%
for loans based on a LIBOR rate and
2.50%
for loans based on base rate. The LIBOR rate for the Term Loan Facilities is subject to a floor of
1.00%
and the base rate for the Term Loan Facilities is subject to a floor of
2.00%
. Cash paid associated with this financing activity approximated
$23.9
million. The Company expensed
$7.2 million
of unamortized deferred finance costs and debt discounts.
On December 1, 2014, the Operating Company entered into Amendment No. 1 to the Credit Agreement to provide additional senior secured financing of incremental dollar- and euro- denominated term loan facilities of
$100 million
and
€72.8 million
(
$91 million
), respectively. The incremental term loans have substantially similar terms as Catalent's existing Term Loan Facilities. The proceeds of the borrowing were primarily used to pay the remaining
$40.5 million
outstanding of unsecured term loans, fund acquisitions completed in the second quarter of
$111.6 million
and general corporate purposes. The Company incurred approximately
$2.8 million
in financing costs, of which
$1.2 million
was recorded in other (income) / expense, net in the consolidated statement of operations.
As of
June 30, 2016
, there were
$13.9 million
in outstanding letters of credit that reduced the borrowing capacity under the Revolving Credit Facility.
Redemption of Notes and Unsecured Term Loan Prepayment
In July 2014, the Company provided notice of its election to redeem the entire
$350.0 million
aggregate principal amount outstanding of Senior Notes and redeemed them in August 2014 at a redemption price of
101.5%
of their principal amount plus accrued and unpaid interest. The redemption was funded with proceeds from the IPO. In connection with the redemption the Company recorded
$5.3 million
in expense related to the call premium and expensed
$5.9 million
of unamortized debt discount and deferred financing costs, both in other (income) / expense, net in the consolidated statements of operations.
In August 2014, the Company provided notice of its election to redeem the entire
€225.0 million
aggregate principal amount outstanding of Senior Subordinated Notes and redeemed them in September 2014 at a redemption price of
101.625%
of their principal amount plus accrued and unpaid interest. The redemption was funded with proceeds from the IPO. In connection with the redemption the Company recorded
$4.5 million
in expense related to the call premium and expensed
$4.0 million
of unamortized debt discount and deferred financing costs, both in other (income) / expense, net in the consolidated statements of operations.
In August 2014, the Company repaid
$114.5 million
of the outstanding borrowings under unsecured term loans with proceeds from the IPO. In September 2014, the Company repaid
$120.0 million
of the outstanding borrowings under the unsecured term loans with proceeds from the additional shares purchased by the representatives of the underwriters in connection with the IPO. In connection with the debt payments, the Company expensed
$0.9 million
of unamortized debt discount and deferred financing costs in other (income) / expense, net in the consolidated statements of operations. In December 2014, the Company paid the remaining
$40.5 million
outstanding on the unsecured term loans with proceeds from the incremental Term Loan Facility.
Long-Term and Other Obligations
Other obligations consist primarily of capital leases for buildings and other loans for business and working capital needs.
Maturities of long-term obligations, including capital leases of
$51.4 million
, and other short-term borrowings for future fiscal years are:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
2017
|
2018
|
2019
|
2020
|
2021
|
Thereafter
|
Total
|
Maturities of long-term and other obligations
|
$
|
27.9
|
|
23.2
|
|
21.0
|
|
21.2
|
|
1,747.5
|
|
39.3
|
|
$
|
1,880.1
|
|
Debt Issuance Costs
Debt issuance costs associated with the Company's Term Loan Facilities are presented as a reduction to the carrying value of the debt while the debt issuance costs associated with the Revolving Credit Facility are capitalized within prepaid expenses and other assets on the balance sheet. All debt issuance costs are amortized over the life of the related obligation through charges to interest expense in the Consolidated Statements of Operations. The unamortized total of debt issuance costs were approximately
$7.7 million
and
$9.5 million
as of June 30, 2016 and June 30, 2015, respectively. Amortization of debt issuance costs totaled
$1.8 million
and
$2.2 million
for the fiscal years ended June 30, 2016 and June 30, 2015, respectively.
Guarantees and Security
All obligations under the Credit Agreement, and the guarantees of those obligations, are secured by substantially all of the following assets of the Operating Company and each guarantor, subject to certain exceptions:
|
|
•
|
a pledge of
100%
of the capital stock of the borrower and
100%
of the equity interests directly held by the borrower and each guarantor in any wholly owned material subsidiary of the borrower or any guarantor (which pledge, in the case of any non-U.S. subsidiary of a U.S. subsidiary, will not include more than
65%
of the voting stock of such non-U.S. subsidiary); and
|
|
|
•
|
a security interest in, and mortgages on, substantially all tangible and intangible assets of the borrower and of each guarantor, subject to certain limited exceptions.
|
Debt Covenants
The Credit Agreement contains a number of covenants that, among other things, restrict, subject to certain exceptions, the Company’s (and the Company’s 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; engage in certain transactions with affiliates; make investments, loans or advances; make certain acquisitions; enter into sale and leaseback transactions and change its 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
June 30, 2016
, the Company was in compliance with all material covenants related to its long-term obligations.
Subject to certain exceptions, the Credit Agreement permits the Company and its restricted subsidiaries to incur certain additional indebtedness, including secured indebtedness. None of the Company’s non-U.S. subsidiaries or Puerto Rico subsidiaries is a guarantor of the loans.
Under the Credit Agreement, the Company’s 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 and is not defined under U.S. GAAP, and is subject to important limitations.
Fair Value of Debt Measurements
The estimated fair value of the long-term debt, which is considered a Level 2 liability, is based on the quoted market prices for the same or similar issues or on the current rates offered for debt of the same remaining maturities and considers collateral, if any. The carrying amounts and the estimated fair values of financial instruments as of
June 30, 2016
and
June 30, 2015
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2016
|
|
June 30, 2015
|
(Dollars in millions)
|
Carrying
Value
|
|
Estimated Fair
Value
|
|
Carrying
Value
(1)
|
|
Estimated Fair
Value
|
Long-term debt and other
|
$
|
1,860.5
|
|
|
$
|
1,868.8
|
|
|
$
|
1,880.8
|
|
|
$
|
1,854.7
|
|
(1) In connection with the Company's adoption of ASU 2015-03, prior year debt balances have been retrospectively adjusted to include a direct deduction of unamortized debt issuance costs, resulting in a reclassification of $7.1 million of debt issuance costs to long-term debt obligation, less current portion. Prior to the adoption of ASU 2015-03, the unamortized debt issuance costs were included in other assets on the Company's consolidated balance sheets. The unamortized debt issuance costs associated with the Company's revolving credit facility continues to be included within other assets.
The reconciliations between basic and diluted earnings per share attributable to Catalent common shareholders for the fiscal years ended
June 30, 2016
,
2015
and
2014
are as follows (in millions, except share and per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended June 30,
|
|
2016
|
|
2015
|
|
2014
|
Earnings from continuing operations less net income / (loss) attributable to noncontrolling interest
|
$
|
111.5
|
|
|
$
|
212.1
|
|
|
$
|
18.9
|
|
Earnings / (loss) from discontinued operations
|
—
|
|
|
0.1
|
|
|
(2.7
|
)
|
Net earnings attributable to Catalent
|
$
|
111.5
|
|
|
$
|
212.2
|
|
|
$
|
16.2
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
124,787,819
|
|
|
119,575,568
|
|
|
75,045,147
|
|
Dilutive securities issuable-stock plans
|
1,082,275
|
|
|
1,773,068
|
|
|
1,078,710
|
|
Total weighted average diluted shares outstanding
|
125,870,094
|
|
|
121,348,636
|
|
|
76,123,857
|
|
|
|
|
|
|
|
Basic earnings per share of common stock:
|
|
|
|
|
|
|
|
Earnings from continuing operations
|
$
|
0.89
|
|
|
$
|
1.77
|
|
|
$
|
0.25
|
|
Earnings / (loss) from discontinued operations
|
—
|
|
|
—
|
|
|
(0.03
|
)
|
Net earnings attributable to Catalent
|
$
|
0.89
|
|
|
$
|
1.77
|
|
|
$
|
0.22
|
|
|
|
|
|
|
|
Diluted earnings per share of common stock-assuming dilution:
|
|
|
|
|
|
|
|
Earnings from continuing operations
|
$
|
0.89
|
|
|
$
|
1.75
|
|
|
$
|
0.25
|
|
Earnings / (loss) from discontinued operations
|
—
|
|
|
—
|
|
|
(0.04
|
)
|
Net earnings attributable to Catalent
|
$
|
0.89
|
|
|
$
|
1.75
|
|
|
$
|
0.21
|
|
The computation of diluted earnings per share for the years ended
June 30, 2016
,
2015
and 2014 excludes the effect of potential shares issuable under the Company's pre-IPO employee stock option plan of
2.2 million
,
2.1 million
and
2.3 million
options, respectively, because the vesting provisions of those awards specify performance or market-based conditions that had not been met as of the period end. Further, the computation of diluted earnings per share for the year ended
June 30, 2016
excludes the effect of potential common shares issuable under the employee stock option plan and restricted stock units of approximately
0.5 million
shares each because they are anti-dilutive.
|
|
8
.
|
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
|
Risk Management Objective of Using Derivatives
The Company is exposed to fluctuations in the applicable exchange rate on its investments in foreign operations. While the Company does not actively hedge against changes in foreign currency, the Company has mitigated the exposure of its investments in its European operations by denominating a portion of its debt in euros. At
June 30, 2016
, the Company had euro-denominated debt outstanding of
$345.2 million
that qualifies as a hedge of a net investment in foreign operations. For non-derivatives designated and qualifying as net investment hedges, the effective portion of the translation gains or losses are reported in accumulated other comprehensive income/(loss) as part of the cumulative translation adjustment. The ineffective portions of the translation gains or losses are reported in the statement of operations. The following table includes net investment hedge activity during fiscal year ended
June 30, 2016
and
June 30, 2015
:
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
June 30,
2016
|
|
June 30,
2015
|
Unrealized foreign exchange gain/(loss) within other comprehensive income
|
$
|
1.8
|
|
|
$
|
30.0
|
|
Unrealized foreign exchange gain/(loss) within statement of operations
|
$
|
3.9
|
|
|
$
|
47.7
|
|
The net accumulated gain of this net investment as of
June 30, 2016
within other comprehensive income/(loss) was approximately
$81.3 million
. Amounts are reclassified out of accumulated other comprehensive income/(loss) into earnings when the entity to which the gains and losses reside is either sold or substantially liquidated.
Earnings/(loss) from continuing operations before income taxes and discontinued operations are as follows for the fiscal years ended
2016
,
2015
, and
2014
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
June 30,
|
(Dollars in millions)
|
2016
|
|
2015
|
|
2014
|
U.S. Operations
|
$
|
60.0
|
|
|
$
|
25.8
|
|
|
$
|
(75.6
|
)
|
Non-U.S. Operation
|
$
|
84.9
|
|
|
$
|
86.7
|
|
|
$
|
143.0
|
|
|
$
|
144.9
|
|
|
$
|
112.5
|
|
|
$
|
67.4
|
|
The provision /(benefit) for income taxes consists of the following for the fiscal years ended
2016
,
2015
, and
2014
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
June 30,
|
(Dollars in millions)
|
2016
|
|
2015
|
|
2014
|
Current:
|
|
|
|
|
|
Federal
|
$
|
(0.6
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
State and local
|
(0.2
|
)
|
|
(0.8
|
)
|
|
(1.2
|
)
|
Non-U.S.
|
26.3
|
|
|
31.9
|
|
|
55.7
|
|
Total
|
$
|
25.5
|
|
|
$
|
31.1
|
|
|
$
|
54.5
|
|
Deferred:
|
|
|
|
|
|
Federal
|
$
|
19.6
|
|
|
$
|
(125.3
|
)
|
|
$
|
5.3
|
|
State and local
|
(4.8
|
)
|
|
(1.1
|
)
|
|
0.4
|
|
Non-U.S.
|
(6.6
|
)
|
|
(2.4
|
)
|
|
(10.7
|
)
|
Total
|
8.2
|
|
|
(128.8
|
)
|
|
(5.0
|
)
|
|
|
|
|
|
|
Total provision/(benefit)
|
$
|
33.7
|
|
|
$
|
(97.7
|
)
|
|
$
|
49.5
|
|
A reconciliation of the provision/(benefit) based on the federal statutory income tax rate to the Company’s effective income tax rate is as follows for the fiscal years ended
2016
,
2015
, and
2014
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
June 30,
|
(Dollars in millions)
|
2016
|
|
2015
|
|
2014
|
Provision at U.S. federal statutory tax rate
|
$
|
50.7
|
|
|
$
|
39.4
|
|
|
$
|
23.6
|
|
State and local income taxes
|
(3.0
|
)
|
|
(2.4
|
)
|
|
0.6
|
|
Foreign tax rate differential
|
(21.7
|
)
|
|
(23.9
|
)
|
|
(25.5
|
)
|
Permanent items
|
(2.3
|
)
|
|
1.7
|
|
|
24.6
|
|
Unrecognized tax positions
|
5.6
|
|
|
14.7
|
|
|
34.2
|
|
Tax valuation allowance
|
7.2
|
|
|
(133.2
|
)
|
|
(9.5
|
)
|
Withholding tax and other foreign taxes
|
0.6
|
|
|
1.4
|
|
|
6.2
|
|
Change in tax rate
|
(3.2
|
)
|
|
1.3
|
|
|
(5.0
|
)
|
Foreign currency impact on permanently reinvested loans
|
—
|
|
|
2.7
|
|
|
—
|
|
R&D Tax Credit
|
(1.4
|
)
|
|
(1.3
|
)
|
|
(0.8
|
)
|
Other
|
1.2
|
|
|
1.9
|
|
|
1.1
|
|
|
$
|
33.7
|
|
|
$
|
(97.7
|
)
|
|
$
|
49.5
|
|
The income tax benefit for the current period is not comparable to the same period of the prior year due to changes in pretax income over many jurisdictions and the impact of discrete items. Generally, fluctuations in the effective tax rate are primarily due to changes in the geographic mix of pretax income and changes in the tax impact of permanent differences and other discrete tax items, which may have unique tax implications depending on the nature of the item. The effective tax rate at June 30, 2015 reflects the release of the U.S. federal valuation allowance and an increase in a tax reserve related to an adjustment to inter-company interest income in Germany, partially offset by a corresponding deduction in the United Kingdom due to enacted tax rate changes. The effective tax rate for the fiscal year ended June 30, 2016 reflects the impact of benefits of a valuation allowance release for utilized capital losses prior to expiration this year, a current year deduction related to stock compensation, as well as a deduction related to a further U.K. rate reduction enacted during the current year, countered by valuation allowance builds on current year losses.
As of
June 30, 2016
, the Company had
$471.9 million
of undistributed earnings from non-U.S. subsidiaries that are intended to be permanently reinvested in non-U.S. operations. As these earnings are considered permanently reinvested,
no
U.S. tax provision has been accrued related to the repatriation of these earnings. It is not feasible to estimate the amount of U.S. tax that might be payable on the eventual remittance of such earnings.
Deferred income taxes arise from temporary differences between financial reporting and tax reporting bases of assets and liabilities, and operating loss and tax credit carryforwards for tax purposes. The components of the deferred income tax assets and liabilities are as follows at
June 30, 2016
and
2015
:
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
June 30,
|
(Dollars in millions)
|
2016
|
|
2015
|
Deferred income tax assets:
|
|
|
|
|
Accrued liabilities
|
$
|
21.6
|
|
|
$
|
24.0
|
|
Equity compensation
|
10.7
|
|
|
8.4
|
|
Loss and tax credit carryforwards
|
155.0
|
|
|
204.0
|
|
Foreign currency
|
18.8
|
|
|
16.2
|
|
Pension
|
45.9
|
|
|
42.9
|
|
Property-related
|
9.3
|
|
|
9.7
|
|
Intangibles
|
8.0
|
|
|
10.5
|
|
Other
|
22.9
|
|
|
17.1
|
|
Total deferred income tax assets
|
292.2
|
|
|
332.8
|
|
Valuation allowance
|
(69.9
|
)
|
|
(82.4
|
)
|
Net deferred income tax assets
|
$
|
222.3
|
|
|
$
|
250.4
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
June 30,
|
(Dollars in millions)
|
2016
|
|
2015
|
Deferred income tax liabilities:
|
|
|
|
Accrued liabilities
|
(0.6
|
)
|
|
(0.6
|
)
|
Equity compensation
|
—
|
|
|
—
|
|
Foreign currency
|
(0.9
|
)
|
|
(0.4
|
)
|
Property-related
|
(53.9
|
)
|
|
(44.5
|
)
|
Goodwill and other intangibles
|
(142.2
|
)
|
|
(156.1
|
)
|
Other
|
(1.0
|
)
|
|
(1.8
|
)
|
Euro Denominated Debt
|
(27.6
|
)
|
|
(21.0
|
)
|
Total deferred income tax liabilities
|
$
|
(226.2
|
)
|
|
(224.4
|
)
|
|
|
|
|
Net deferred tax asset/(liability)
|
$
|
(3.9
|
)
|
|
$
|
26.0
|
|
Deferred tax assets and liabilities in the preceding table are in the following captions in the balance sheet at
June 30, 2016
and
2015
:
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
June 30,
|
(Dollars in millions)
|
2016
|
|
2015
|
Current deferred tax asset
|
$
|
—
|
|
|
$
|
19.7
|
|
Non-current deferred tax asset
|
37.5
|
|
|
64.1
|
|
Current deferred tax liability
|
—
|
|
|
1.5
|
|
Non-current deferred tax liability
|
41.4
|
|
|
56.3
|
|
Net deferred tax asset/(liability)
|
$
|
(3.9
|
)
|
|
$
|
26.0
|
|
The Company adopted ASU 2015-17 in the fourth quarter of fiscal 2016 on a prospective basis; accordingly, all deferred tax assets and liabilities as of
June 30, 2016
, are classified as noncurrent in the balance sheet, and the prior period balances were not retrospectively adjusted.
At
June 30, 2016
, the Company has federal net operating loss carryforwards of
$230.2 million
, all of which are subject to limitations under Section 382 of the Internal Revenue Code of 1986, as amended (the "Internal Revenue Code");
$13.2 million
of which, because they were generated in years prior to April 10, 2007, when the Company was owned by Cardinal, and the remainder due to a change in ownership event when Blackstone, Genstar Capital, and Aisling Capital completed a secondary offering of the Company’s stock in March 2015. The federal loss carryforwards will expire in fiscal years 2022 through 2033.
The Company adopted ASU 2016-09, during the fourth quarter of fiscal 2016 on a modified retrospective basis; accordingly, the Company recognized the previously unrecognized excess tax benefits, which resulted in a cumulative-effect adjustment tax benefit of $19.9 million recorded as part of accumulated deficit, with the tax effects recorded as deferred tax assets at the beginning of the 2016 fiscal year.
At
June 30, 2016
, the Company has state tax loss carryforwards of
$376.2 million
. Approximately
$181.5 million
of these losses are state tax losses generated in periods prior to the period ending June 30, 2007. Substantially all state carryforwards have a
twenty
-year carryforward period. At
June 30, 2016
, the Company has international tax loss carryforwards of
$129.8 million
. Substantially all of these carryforwards are available for at least
three
years or have an indefinite carryforward period.
The Company had valuation allowances of
$69.9 million
and
$82.4 million
as of June 30, 2016 and 2015, respectively, against our deferred tax assets.
The Company considered all available evidence, both positive and negative, in assessing the need for a valuation allowance for deferred tax assets. Three possible sources of taxable income were evaluated when assessing the realization of deferred tax assets:
|
|
•
|
Future reversals of existing taxable temporary differences;
|
|
|
•
|
Tax planning strategies; and
|
|
|
•
|
Future taxable income exclusive of reversing temporary differences and carryforwards.
|
The Company considered the need to maintain a valuation allowance on deferred tax assets based on management’s assessment of whether it is more likely than not that deferred tax assets would be realized based on future reversals of existing taxable temporary differences and the ability to generate sufficient taxable income within the carryforward period available under the applicable tax law. The deferred tax liabilities are expected to reverse in the same period and jurisdiction and are of the same character as the temporary differences giving rise to a portion of the deferred tax assets.
During the fiscal year ended June 30, 2015, the Company released the majority of its U.S. federal valuation allowance of
$136.7 million
based on projected U.S. future earnings in excess of the
$294.1 million
required to realize its net U.S. federal deferred tax assets. Of the
$294.1 million
,
$329.5 million
relates to the federal net operating loss carryforward (NOL) which expires in the years 2028 to 2032. The remaining
$35.4 million
relates to other net deferred tax liabilities. A valuation allowance of
$10.4 million
was retained on U.S. federal deferred tax assets for capital losses, which have expired in the current period.
The reversal of the valuation allowance was the result of a continuing trend of U.S. taxable income and the expectation that this trend will continue, rather than relying on tax planning strategies to support the realization of deferred tax assets. We had experienced three consecutive years of positive U.S. taxable earnings as of the current quarter and expect to sustain this position in the future, due to the positive impact on U.S. earnings from reduced interest expense resulting from a reduction in our external debt, among other factors.
While the U.S. federal valuation allowance was reversed, the U.S. state valuation allowance on
$375.7 million
of pre-apportioned state net operating losses were maintained. Due to uncertainty around earnings, apportionment, certain restrictions at the state level, and the history of tax losses, anticipated utilization rates were not sufficient to overcome the negative evidence and allow a release.
As part of the 2007 acquisition from Cardinal, the Company has been indemnified by Cardinal for tax liabilities that may arise in the future that relate to tax periods prior to April 10, 2007 (the “Formation Date”). The indemnification agreement includes, among other taxes, any and all Federal, state and international income based taxes as well as any interest and penalties that may be related thereto.
Similarly, as part of the 2012 purchase of the CTS business from Aptuit, Inc., the Company has been indemnified by Aptuit, Inc. for tax liabilities relating to the CTS business that may arise in the future that relate to tax periods prior to February 17, 2012. The indemnification agreement includes, among other taxes, any and all Federal, state and international income based taxes as well as any interest and penalties that may be related thereto.
The amount of income taxes the Company may pay is subject to ongoing audits by federal, state and foreign tax authorities, which may result in proposed assessments. The Company’s estimate for the potential outcome for any uncertain tax issue is highly judgmental. The Company assesses its income tax positions and record benefits for all years subject to examination based upon management’s evaluation of the facts, circumstances and information available at the reporting date. For those tax positions for which it is more likely than not that a tax benefit will be sustained, the Company records the amount that has a greater than 50% likelihood of being realized upon settlement with a taxing authority that has full knowledge of all relevant information. Interest and penalties are accrued, where applicable.
ASC 740 includes guidance on the accounting for uncertainty in income taxes recognized in the financial statements. This standard also provides that a tax benefit from an uncertain tax position may be recognized when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits. As of
June 30, 2016
, the Company had a total of
$61.5 million
of unrecognized tax benefits. A reconciliation of our unrecognized tax benefits, excluding accrued interest, for
June 30, 2016
,
June 30, 2015
and
June 30, 2014
are as follows:
|
|
|
|
|
(Dollars in millions)
|
Balance at June 30, 2014
|
$
|
60.6
|
|
Additions based on tax positions related to the current year
|
7.3
|
|
Additions for tax positions of prior years
|
5.5
|
|
Reductions for tax positions of prior years
|
(5.4
|
)
|
Settlements
|
(0.5
|
)
|
Lapse of the applicable statute of limitations
|
(0.6
|
)
|
Balance at June 30, 2015
|
$
|
66.9
|
|
Additions based on tax positions related to the current year
|
6.2
|
|
Additions for tax positions of prior years
|
—
|
|
Reductions for tax positions of prior years
|
(11.0
|
)
|
Settlements
|
—
|
|
Lapse of the applicable statute of limitations
|
(0.6
|
)
|
Balance at June 30, 2016
|
$
|
61.5
|
|
Of this amount,
$45.7 million
and
$46.7 million
represent the amount of unrecognized tax benefits that, if recognized, would favorably impact the effective income tax rate as of
June 30, 2016
and
June 30, 2015
, respectively. An additional
$15.8 million
represents the amount of unrecognized tax benefits that, if recognized, would not impact the effective income tax rate due to a full valuation allowance.
In the normal course of business, the Company is subject to examination by taxing authorities throughout the world, including major jurisdictions such as Germany, United Kingdom, France, the United States, and various states. The Company is no longer subject to examinations by the relevant tax authorities for years prior to fiscal 2005.
The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. As of
June 30, 2016
, the Company has approximately
$5.6 million
of accrued interest related to uncertain tax positions, a decrease of
$0.7 million
from the prior year. The Company had approximately
$6.3 million
and
$5.1 million
of accrued interest related to uncertain tax positions as of June 30, 2015 and 2014, respectively. The portion of such interest and penalties subject to indemnification by Cardinal is
$2.1 million
, a decrease of
$0.2 million
from the prior year.
|
|
10
.
|
EMPLOYEE RETIREMENT BENEFIT PLANS
|
The Company sponsors various retirement plans, including defined benefit pension plans and defined contribution plans. Substantially all of the Company’s domestic non-union employees are eligible to participate in employer-sponsored retirement savings plans, which include plans covered under Section 401(k) of the Internal Revenue Code, and provide for company matching contributions. The Company’s contributions to the plans are discretionary but are subject to certain minimum requirements as specified in the plans under law. The Company uses a measurement date of June 30 for all of its retirement and postretirement benefit plans.
In addition, the Company has recorded obligations related to its withdrawal from
a
multi-employer pension plan related to a former commercial packaging site, a clinical services site and a former printed components operation. The Company’s withdrawal from these multi-employer pension plans has been classified as a mass withdrawal under the Multiemployer Pension Plan Amendments Act of 1980, and, as amended, under the Pension Protection Act of 2006. The withdrawal from the
plan resulted in the recognition of liabilities associated with the Company’s long-term obligations in prior year periods not presented, which were primarily recorded as an expense within discontinued operations. The estimated discounted value of the projected contributions related to these plans is
$39.3 million
and
$39.5 million
as of
June 30, 2016
and
June 30, 2015
, respectively. The annual cash impact associated with the Company’s long-term obligation approximates
$1.7 million
per year.
The following table provides a reconciliation of the change in projected benefit obligation and fair value of plan assets for the defined benefit retirement and other retirement plans, excluding the multi-employer pension plan liability:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At June 30,
|
Retirement Benefits
|
|
Other Post-Retirement Benefits
|
(Dollars in millions)
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Accumulated Benefit Obligation
|
$
|
328.1
|
|
|
$
|
316.0
|
|
|
$
|
3.6
|
|
|
$
|
3.7
|
|
|
|
|
|
|
|
|
|
Change in Benefit Obligation
|
|
|
|
|
|
|
|
Benefit obligation at beginning of year
|
323.7
|
|
|
333.8
|
|
|
3.7
|
|
|
4.4
|
|
Company service cost
|
2.8
|
|
|
2.7
|
|
|
—
|
|
|
—
|
|
Interest cost
|
10.4
|
|
|
11.4
|
|
|
0.1
|
|
|
0.2
|
|
Employee contributions
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Plan amendments
|
(0.7
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Curtailments
|
—
|
|
|
(1.6
|
)
|
|
—
|
|
|
—
|
|
Settlements
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Special termination benefits
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Divestitures
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Business combinations
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Benefits paid
|
(11.6
|
)
|
|
(9.6
|
)
|
|
(0.2
|
)
|
|
(0.2
|
)
|
Actual expenses
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Actuarial (gain)/loss
|
40.5
|
|
|
20.8
|
|
|
—
|
|
|
(0.7
|
)
|
Exchange rate gain/(loss)
|
(28.5
|
)
|
|
(33.8
|
)
|
|
—
|
|
|
—
|
|
Benefit obligation at end of year
|
336.6
|
|
|
323.7
|
|
|
3.6
|
|
|
3.7
|
|
|
|
|
|
|
|
|
|
Change in Plan Assets
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year
|
222.0
|
|
|
222.2
|
|
|
—
|
|
|
—
|
|
Actual return on plan assets
|
33.8
|
|
|
18.4
|
|
|
—
|
|
|
—
|
|
Company contributions
|
9.2
|
|
|
9.0
|
|
|
0.2
|
|
|
0.2
|
|
Employee contributions
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Settlements
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Special company contributions to fund termination benefits
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Divestitures
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Business combinations
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Benefits paid
|
(11.6
|
)
|
|
(9.6
|
)
|
|
(0.2
|
)
|
|
(0.2
|
)
|
Actual expenses
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Exchange rate gain/(loss)
|
(25.8
|
)
|
|
(18.0
|
)
|
|
—
|
|
|
—
|
|
Fair value of plan assets at end of year
|
227.6
|
|
|
222.0
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Funded Status
|
|
|
|
|
|
|
|
Funded status at end of year
|
(109.0
|
)
|
|
(101.7
|
)
|
|
(3.6
|
)
|
|
(3.7
|
)
|
Employer contributions between measurement date and reporting date
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Net pension asset (liability)
|
(109.0
|
)
|
|
(101.7
|
)
|
|
(3.6
|
)
|
|
(3.7
|
)
|
The following table provides a reconciliation of the net amount recognized in the Consolidated Balance Sheets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At June 30,
|
Retirement Benefits
|
|
Other Post-Retirement Benefits
|
(Dollars in millions)
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Amounts Recognized in Statement of Financial Position
|
|
|
|
|
|
|
|
Noncurrent assets
|
$
|
—
|
|
|
$
|
0.6
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Current liabilities
|
(0.8
|
)
|
|
(0.9
|
)
|
|
—
|
|
|
(0.8
|
)
|
Noncurrent liabilities
|
(108.2
|
)
|
|
(101.4
|
)
|
|
(3.6
|
)
|
|
(2.9
|
)
|
Total asset/(liability)
|
(109.0
|
)
|
|
(101.7
|
)
|
|
(3.6
|
)
|
|
(3.7
|
)
|
|
|
|
|
|
|
|
|
Amounts Recognized in Accumulated Other Comprehensive Income
|
|
|
|
|
|
|
|
Transition (asset)/obligation
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Prior service cost
|
(0.5
|
)
|
|
0.1
|
|
|
—
|
|
|
—
|
|
Net (gain)/loss
|
76.9
|
|
|
63.2
|
|
|
(1.5
|
)
|
|
(1.6
|
)
|
Total accumulated other comprehensive income at the end of the year
|
76.4
|
|
|
63.3
|
|
|
(1.5
|
)
|
|
(1.6
|
)
|
|
|
|
|
|
|
|
|
Additional Information for Plan with ABO in Excess of Plan Assets
|
|
|
|
|
|
|
|
Projected benefit obligation
|
321.0
|
|
|
309.6
|
|
|
3.6
|
|
|
3.7
|
|
Accumulated benefit obligation
|
315.7
|
|
|
304.1
|
|
|
3.6
|
|
|
3.7
|
|
Fair value of plan assets
|
213.3
|
|
|
207.3
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Additional Information for Plan with PBO in Excess of Plan Assets
|
|
|
|
|
|
|
|
Projected benefit obligation
|
336.6
|
|
|
309.6
|
|
|
3.6
|
|
|
3.7
|
|
Accumulated benefit obligation
|
328.1
|
|
|
304.1
|
|
|
3.6
|
|
|
3.7
|
|
Fair value of plan assets
|
227.6
|
|
|
207.3
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Components of Net Periodic Benefit Cost
|
|
|
|
|
|
|
|
Service Cost
|
2.8
|
|
|
2.7
|
|
|
—
|
|
|
—
|
|
Interest Cost
|
10.4
|
|
|
11.4
|
|
|
0.1
|
|
|
0.2
|
|
Expected return on plan assets
|
(9.8
|
)
|
|
(10.5
|
)
|
|
—
|
|
|
—
|
|
Amortization of unrecognized:
|
|
|
|
|
|
|
|
Transition (asset)/obligation
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Prior service cost
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Net (gain)/loss
|
2.9
|
|
|
1.8
|
|
|
(0.1
|
)
|
|
(0.1
|
)
|
Ongoing periodic cost
|
6.3
|
|
|
5.4
|
|
|
—
|
|
|
0.1
|
|
Settlement/curtailment expense/(income)
|
—
|
|
|
(0.2
|
)
|
|
—
|
|
|
—
|
|
Net periodic benefit cost
|
6.3
|
|
|
5.2
|
|
|
—
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At June 30,
|
Retirement Benefits
|
|
Other Post-Retirement Benefits
|
(Dollars in millions)
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Other Changes in Plan Assets and Benefit Obligations Recognized in Other Comprehensive Income
|
|
|
|
|
|
|
|
Net (gain)/loss arising during the year
|
$
|
16.4
|
|
|
$
|
13.0
|
|
|
—
|
|
|
(0.7
|
)
|
Prior service cost (credit) during the year
|
(0.7
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Transition asset/(obligation) recognized during the year
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Prior service cost recognized during the year
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Net gain/(loss) recognized during the year
|
(2.8
|
)
|
|
(3.2
|
)
|
|
0.1
|
|
|
0.1
|
|
Exchange rate gain/(loss) recognized during the year
|
0.2
|
|
|
(0.6
|
)
|
|
—
|
|
|
—
|
|
Total recognized in other comprehensive income
|
$
|
13.1
|
|
|
$
|
9.2
|
|
|
$
|
0.1
|
|
|
$
|
(0.6
|
)
|
Total Recognized in Net Periodic Benefit Cost and Other Comprehensive Income
|
|
|
|
|
|
|
|
Total recognized in net periodic benefit cost and other comprehensive income
|
$
|
19.3
|
|
|
$
|
14.4
|
|
|
$
|
0.1
|
|
|
$
|
(0.5
|
)
|
Estimated Amounts to be Amortized from Accumulated Other Comprehensive Income into Net Periodic Benefit Cost
|
|
|
|
|
|
|
|
Amortization of:
|
|
|
|
|
|
|
|
Transition (asset)/obligation
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Prior service cost/(credit)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Net (gain)/loss
|
4.5
|
|
|
2.9
|
|
|
(0.1
|
)
|
|
(0.1
|
)
|
Financial Assumptions Used to Determine Benefit Obligations at the Balance Sheet Date
|
|
|
|
|
|
|
|
Discount rate (%)
|
2.33
|
%
|
|
3.38
|
%
|
|
2.89
|
%
|
|
3.69
|
%
|
Rate of compensation increases (%)
|
2.10
|
%
|
|
2.06
|
%
|
|
n/a
|
|
|
n/a
|
|
Financial Assumptions Used to Determine Net Periodic Benefit Cost for Financial Year
|
|
|
|
|
|
|
|
Discount rate (%)
|
3.38
|
%
|
|
3.73
|
%
|
|
3.69
|
%
|
|
3.67
|
%
|
Rate of compensation increases (%)
|
2.10
|
%
|
|
2.10
|
%
|
|
n/a
|
|
|
n/a
|
|
Expected long-term rate of return (%)
|
4.93
|
%
|
|
5.11
|
%
|
|
n/a
|
|
|
n/a
|
|
Expected Future Contributions
|
|
|
|
|
|
|
|
Financial Year
|
|
|
|
|
|
|
|
2017
|
$
|
8.4
|
|
|
|
|
$
|
0.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At June 30,
|
Retirement Benefits
|
|
Other Post-Retirement Benefits
|
(Dollars in millions)
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Expected Future Benefit Payments
|
|
|
|
|
|
|
|
Financial Year
|
|
|
|
|
|
|
|
2017
|
9.0
|
|
|
10.5
|
|
|
0.8
|
|
|
0.8
|
|
2018
|
9.4
|
|
|
9.5
|
|
|
0.3
|
|
|
0.3
|
|
2019
|
10.8
|
|
|
11.1
|
|
|
0.3
|
|
|
0.3
|
|
2020
|
11.1
|
|
|
11.2
|
|
|
0.2
|
|
|
0.3
|
|
2021
|
12.0
|
|
|
13.9
|
|
|
0.2
|
|
|
0.3
|
|
2022-2026
|
67.4
|
|
|
72.0
|
|
|
1.0
|
|
|
1.1
|
|
|
|
|
|
|
|
|
|
Actual Asset Allocation (%)
|
|
|
|
|
|
|
|
Equities
|
23.6
|
%
|
|
34.2
|
%
|
|
—
|
%
|
|
—
|
%
|
Government Bonds
|
29.9
|
%
|
|
28.2
|
%
|
|
—
|
%
|
|
—
|
%
|
Corporate Bonds
|
12.3
|
%
|
|
17.3
|
%
|
|
—
|
%
|
|
—
|
%
|
Property
|
2.5
|
%
|
|
3.1
|
%
|
|
—
|
%
|
|
—
|
%
|
Insurance Contracts
|
9.0
|
%
|
|
8.5
|
%
|
|
—
|
%
|
|
—
|
%
|
Other
|
22.7
|
%
|
|
8.7
|
%
|
|
—
|
%
|
|
—
|
%
|
Total
|
100.0
|
%
|
|
100.0
|
%
|
|
—
|
%
|
|
—
|
%
|
|
|
|
|
|
|
|
|
Actual Asset Allocation (Amount)
|
|
|
|
|
|
|
|
Equities
|
53.7
|
|
|
75.7
|
|
|
—
|
|
|
—
|
|
Government Bonds
|
68.1
|
|
|
62.7
|
|
|
—
|
|
|
—
|
|
Corporate Bonds
|
28.0
|
|
|
38.5
|
|
|
—
|
|
|
—
|
|
Property
|
5.8
|
|
|
6.9
|
|
|
—
|
|
|
—
|
|
Insurance Contracts
|
20.4
|
|
|
18.9
|
|
|
—
|
|
|
—
|
|
Other
|
51.6
|
|
|
19.3
|
|
|
—
|
|
|
—
|
|
Total
|
227.6
|
|
|
222.0
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Target Asset Allocation (%)
|
|
|
|
|
|
|
|
Equities
|
24.1
|
%
|
|
34.5
|
%
|
|
—
|
%
|
|
—
|
%
|
Government Bonds
|
29.8
|
%
|
|
24.8
|
%
|
|
—
|
%
|
|
—
|
%
|
Corporate Bonds
|
12.3
|
%
|
|
22.1
|
%
|
|
—
|
%
|
|
—
|
%
|
Property
|
2.7
|
%
|
|
3.5
|
%
|
|
—
|
%
|
|
—
|
%
|
Insurance Contracts
|
8.9
|
%
|
|
6.3
|
%
|
|
—
|
%
|
|
—
|
%
|
Other
|
22.2
|
%
|
|
8.8
|
%
|
|
—
|
%
|
|
—
|
%
|
Total
|
100.0
|
%
|
|
100.0
|
%
|
|
—
|
%
|
|
—
|
%
|
The Company employs a building block approach in determining the long-term rate of return for plan assets, with proper consideration of diversification and rebalancing. Historical markets are studied and long-term historical relationships between equities and fixed income are preserved consistent with the widely accepted capital market principle that assets with higher volatility generate a greater return over the long run. Current market factors such as inflation and interest rates are evaluated before long-term capital market assumptions are determined. Peer data are reviewed to check for reasonability and appropriateness.
Plan assets are recognized and measured at fair value in accordance with the accounting standards regarding fair value measurements. The following are valuation techniques used to determine the fair value of each major category of assets:
|
|
•
|
Short-term investments, equity securities, fixed-income securities, and real estate are valued using quoted market prices or other valuation methods, and thus are classified within Level 1 or Level 2.
|
|
|
•
|
Insurance contracts and other types of investments include investments with some observable and unobservable prices that are adjusted by cash contributions and distributions, and thus are classified within Level 2 or Level 3.
|
|
|
•
|
Other assets as of
June 30, 2016
include
$28.0 million
of investments in hedge funds related to our U.K. pension plan and are classified as Level 2.
|
The following table provides a summary of plan assets that are measured in fair value as of
June 30, 2016
, aggregated by the level in the fair value hierarchy within which those measurements fall:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
Total Assets
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
|
Equity Securities
|
$
|
53.7
|
|
|
$
|
—
|
|
|
$
|
53.7
|
|
|
—
|
|
|
Debt Securities
|
96.1
|
|
|
—
|
|
|
96.1
|
|
|
—
|
|
|
Real Estate
|
5.8
|
|
|
—
|
|
|
5.8
|
|
|
—
|
|
|
Other
|
72.0
|
|
|
—
|
|
|
52.4
|
|
|
19.6
|
|
|
Total
|
$
|
227.6
|
|
|
$
|
—
|
|
|
$
|
208.0
|
|
|
$
|
19.6
|
|
Level 3 other assets consist of an insurance contract in the UK to fulfill the benefit obligations for a portion of the participant benefits. The value of this commitment is determined using the same assumptions and methods used to value the UK Retirement & Death Benefit Plan pension liability. Level 3 other assets also include the partial funding of a pension liability relating to current and former employees of the Company’s Eberbach facility through a Company promissory note or loan with an annual rate of interest of
5%
. The value of this commitment fluctuates due to contributions and benefit payments in addition to loan interest.
The following table provides a summary of plan assets that are measured in fair value as of
June 30, 2015
, aggregated by the level in the fair value hierarchy within which those measurements fall:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
Total Assets
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
|
Equity Securities
|
$
|
75.7
|
|
|
$
|
—
|
|
|
$
|
75.7
|
|
|
—
|
|
|
Debt Securities
|
101.2
|
|
|
—
|
|
|
101.2
|
|
|
—
|
|
|
Real Estate
|
6.9
|
|
|
—
|
|
|
0.3
|
|
|
6.6
|
|
|
Other
|
38.2
|
|
|
—
|
|
|
17.3
|
|
|
20.9
|
|
|
Total
|
$
|
222.0
|
|
|
$
|
—
|
|
|
$
|
194.5
|
|
|
$
|
27.5
|
|
Level 3 real estate assets consist of a U.K. Property fund ("UBS Life Triton Property Fund") that directly invests in properties that are held in the U.K. The funds are priced using the Net Asset Value ("NAV") of the fund and investors also get Bid and Offer prices on a monthly basis. Investment properties are measured at fair value as determined by third-party independent appraisers. Their value is ascertained by reference to the market value, having regard to whether they are let or un-let at the date of valuation, in accordance with the Appraisal and Valuation Manual issued by the Royal Institution of Chartered Surveyors.
The following table provides a reconciliation of the beginning and ending balances of level 3 assets as well as the changes during the period attributable to assets held and those purchases, sales, settlements, contributions and benefits that were paid:
Asset Category Allocations -
June 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
Total (Level 3)
|
Fair Value Measurement
|
|
Fair Value Measurement
|
|
Fair Value Measurement
|
(Dollars in millions)
|
Using Significant
|
|
Using Significant
|
|
Using Significant
|
|
Unobservable Inputs
|
|
Unobservable Inputs
|
|
Unobservable Inputs
|
|
Total (Level 3)
|
|
Insurance Contracts
|
|
Other
|
Beginning Balance at June 30, 2015
|
$
|
27.5
|
|
|
$
|
4.7
|
|
|
$
|
22.8
|
|
Actual return on plan assets:
|
|
|
|
|
|
Relating to assets still held at the reporting date
|
(0.9
|
)
|
|
(1.3
|
)
|
|
0.4
|
|
Relating to assets sold during the period
|
—
|
|
|
—
|
|
|
—
|
|
Purchases, sales, settlements, contributions and benefits paid
|
(7.0
|
)
|
|
(0.2
|
)
|
|
(6.8
|
)
|
Transfers in and/or out of Level 3
|
—
|
|
|
—
|
|
|
—
|
|
Ending Balance at June 30, 2016
|
$
|
19.6
|
|
|
$
|
3.2
|
|
|
$
|
16.4
|
|
The investment policy reflects the long-term nature of the plans’ funding obligations. The assets are invested to provide the opportunity for both income and growth of principal. This objective is pursued as a long-term goal designed to provide required benefits for participants without undue risk. It is expected that this objective can be achieved through a well-diversified asset portfolio. All equity investments are made within the guidelines of quality, marketability and diversification mandated by the Employee Retirement Income Security Act of 1974, as amended (“ERISA”) (for plans subject to ERISA) and other relevant legal requirements. Investment managers are directed to maintain equity portfolios at a risk level approximately equivalent to that of the specific benchmark established for that portfolio. Assets invested in fixed income securities and pooled fixed-income portfolios are managed actively to pursue opportunities presented by changes in interest rates, credit ratings or maturity premiums.
|
|
|
|
|
|
|
|
|
At June 30,
|
Other Post-Retirement Benefits
|
(Actual dollar amounts)
|
2016
|
|
2015
|
|
|
|
|
Assumed Healthcare Cost Trend Rates at the Balance Sheet Date
|
|
|
|
Healthcare cost trend rate – initial (%)
|
|
|
|
Pre-65
|
n/a
|
|
|
n/a
|
|
Post-65
|
10.35
|
%
|
|
11.35
|
%
|
Healthcare cost trend rate – ultimate (%)
|
|
|
|
Pre-65
|
n/a
|
|
|
n/a
|
|
Post-65
|
4.84
|
%
|
|
4.64
|
%
|
Year in which ultimate rates are reached
|
|
|
|
Pre-65
|
n/a
|
|
|
n/a
|
|
Post-65
|
2022
|
|
|
2022
|
|
Effect of 1% Change in Healthcare Cost Trend Rate
|
|
|
|
Healthcare cost trend rate up 1%
|
|
|
|
on APBO at balance sheet date
|
$
|
169,433
|
|
|
$
|
171,309
|
|
on total service and interest cost
|
5,721
|
|
|
8,181
|
|
Effect of 1% Change in Healthcare Cost Trend Rate
|
|
|
|
Healthcare cost trend rate down 1%
|
|
|
|
on APBO at balance sheet date
|
$
|
(151,184
|
)
|
|
$
|
(152,189
|
)
|
on total service and interest cost
|
(5,106
|
)
|
|
(7,282
|
)
|
Expected Future Contributions
|
|
|
|
Financial Year
|
|
|
|
2017
|
$
|
259,942
|
|
|
|
|
|
11
.
|
RELATED PARTY TRANSACTIONS
|
Advisor Transaction and Management Fees
Prior to the IPO, the Company was party to a transaction and advisory fee agreement with affiliates of Blackstone and certain other investors in BHP PTS Holdings L.L.C. (the “Investors”), pursuant to which the Company historically paid an annual sponsor advisory fee to Blackstone and the other Investors for certain monitoring, advisory and consulting services to the Company. In connection with the IPO, the Company paid the Investors an advisory agreement termination fee of
$29.8 million
in August 2014, which was recorded within other (income)/expense, net in the Consolidated Statements of Operations, and terminated the agreement. As a result, the Company did not have management fees for the fiscal years ended
June 30, 2016
and 2015. For the fiscal year ended June 30, 2014, this management fee was approximately
$12.9 million
. This fee was recorded within selling, general and administrative expenses in the Consolidated Statements of Operations.
In connection with each of the secondary offerings of our common stock demanded by Blackstone during fiscal 2015 and 2016 following the IPO, we entered into underwriting agreements with Blackstone, the other shareholders selling in the offerings, and the underwriters managing the offerings setting forth the terms of the offerings and making various representations to the underwriters regarding various facts and circumstances relating to the offerings. The underwriting agreements required us to pay certain expenses relating to the offerings and to indemnify Blackstone, the other sellers, and the underwriters for the offerings against liabilities arising from breaches of our representations and certain other matters relating to the offerings.
Other Related Party Transactions
The Company participates in an employer health program agreement with Equity Healthcare LLC (“Equity Healthcare”). Equity Healthcare negotiates with providers of standard administrative services for health benefit plans and other related services for cost discounts and quality of service monitoring capability by Equity Healthcare. Because of the combined purchasing power of its client participants, Equity Healthcare is able to negotiate pricing terms for providers that are believed to be more favorable than the companies could obtain for themselves on an individual basis. In consideration for these services, the Company paid Equity Healthcare a fee of
$3.00
and
$2.80
per participating employee per month in calendar years
2016
and
2015
, respectively. As of
June 30, 2016
, the Company had approximately
2,700
employees enrolled in its health benefit plans in the United States. Equity Healthcare is an affiliate of Blackstone.
|
|
12
.
|
EQUITY AND ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
|
Description of Capital Stock and Initial Public Offering
The Company is authorized to issue
1,000,000,000
shares of common stock, par value
$0.01
per share, and
100,000,000
shares of preferred stock, par value
$0.01
per share. In accordance with the Company’s amended and restated certificate of incorporation, each share of common stock has
one
vote, and the common stock votes together as a single class. In July 2014, the Company’s board of directors and holders of the requisite number of outstanding shares of its capital stock approved an amendment to the Company’s amended and restated certificate of incorporation to effect a
70
-for-1 stock split. The stock split became effective on July 17, 2014 upon the filing with the Delaware Secretary of State of the amendment. Refer to Note
1
for further discussion of the Company’s July 2014 recapitalization and discussion of the Company’s public offerings of common stock.
Accumulated other comprehensive income/(loss)
Accumulated other comprehensive income/(loss) by component and changes for the fiscal years
June 30, 2016
,
June 30, 2015
and June 30, 2014 consists of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
Foreign Currency Translation Adjustments
|
|
Deferred Compensation
|
|
Pension Liability Adjustments
|
|
Other Comprehensive Income/(Loss)
|
Balance at June 30, 2013
|
$
|
(18.4
|
)
|
|
$
|
1.5
|
|
|
$
|
(25.9
|
)
|
|
$
|
(42.8
|
)
|
Activity, net of tax
|
32.4
|
|
|
1.7
|
|
|
(15.5
|
)
|
|
18.6
|
|
Balance at June 30, 2014
|
14.0
|
|
|
3.2
|
|
|
(41.4
|
)
|
|
(24.2
|
)
|
Activity, net of tax
|
(144.0
|
)
|
|
0.6
|
|
|
(6.4
|
)
|
|
(149.8
|
)
|
Balance at June 30, 2015
|
(130.0
|
)
|
|
3.8
|
|
|
(47.8
|
)
|
|
(174.0
|
)
|
Activity, net of tax
|
(118.8
|
)
|
|
(3.8
|
)
|
|
(9.1
|
)
|
|
(131.7
|
)
|
Balance at June 30, 2016
|
$
|
(248.8
|
)
|
|
$
|
—
|
|
|
$
|
(56.9
|
)
|
|
$
|
(305.7
|
)
|
Current year activity within deferred compensation includes realized gains associated with the sale of available for sale investments. The components of the changes in the cumulative translation adjustment and minimum pension liability for the fiscal years ended
June 30, 2016
,
June 30, 2015
and June 30, 2014 consists of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30,
|
|
2016
|
|
2015
|
|
2014
|
Foreign currency translation adjustments:
|
|
|
|
|
|
Net investment hedge
|
$
|
1.8
|
|
|
$
|
30.0
|
|
|
$
|
(13.6
|
)
|
Long term inter-company loans
|
(65.0
|
)
|
|
(9.0
|
)
|
|
28.3
|
|
Translation adjustments
|
(54.9
|
)
|
|
(152.7
|
)
|
|
17.7
|
|
Total foreign currency translation adjustments, pretax
|
(118.1
|
)
|
|
(131.7
|
)
|
|
32.4
|
|
Tax
(1)
|
(0.7
|
)
|
|
(12.3
|
)
|
|
—
|
|
Total foreign currency translation adjustments, net of tax
|
$
|
(118.8
|
)
|
|
$
|
(144.0
|
)
|
|
$
|
32.4
|
|
|
|
|
|
|
|
Net change in minimum pension liability
|
|
|
|
|
|
Net gain/(loss) arising during the year
|
$
|
(16.4
|
)
|
|
$
|
(12.3
|
)
|
|
$
|
(20.4
|
)
|
Net (gain)/loss recognized during the year
|
3.4
|
|
|
3.1
|
|
|
1.5
|
|
Foreign Exchange Translation and Other
|
(0.2
|
)
|
|
0.6
|
|
|
(0.5
|
)
|
Total Pension, pretax
|
(13.2
|
)
|
|
(8.6
|
)
|
|
(19.4
|
)
|
Tax
|
4.1
|
|
|
2.2
|
|
|
3.9
|
|
Net change in minimum pension liability, net of tax
|
$
|
(9.1
|
)
|
|
$
|
(6.4
|
)
|
|
$
|
(15.5
|
)
|
|
|
(1)
|
Tax related to foreign currency translation adjustments primarily relates to the Net investment hedge activity.
|
|
|
13
.
|
EQUITY-BASED COMPENSATION
|
The Company’s stock-based compensation is comprised of stock options and restricted stock units.
2007 Stock Incentive Plan
Awards issued under the Company’s pre-IPO incentive compensation plan, known as the 2007 PTS Holdings Corp. Stock Incentive Plan, as amended (the “2007 Plan”), were generally issued for the purpose of retaining key employees and directors.
2014 Omnibus Incentive Plan
In connection with the IPO, the Company’s Board of Directors adopted, and the holder of a majority of the shares approved, the 2014 Omnibus Incentive Plan effective July 31, 2014 (the “2014 Plan”). The 2014 Plan provides certain members of management, employees and directors of the Company and its subsidiaries with the opportunity to obtain various incentives, including grants of stock options and restricted stock units. A maximum of
6,700,000
shares of common stock may be issued under the 2014 Plan.
Stock Compensation Expense
Stock compensation expense recognized in the consolidated statements of income was
$10.8 million
,
$9.0 million
and
$4.5 million
in fiscal
2016
,
2015
and
2014
, respectively. All stock compensation expense is classified in selling, general and administrative expenses along with the wages and benefits of the option participants. Stock compensation expense was based on awards expected to vest, and therefore was reduced by estimated forfeitures in fiscal years 2015 and 2014 prior to the adoption of ASU 2016-09
,
whereby the Company elected to account for forfeitures as they occur. The Company recognized a cumulative-effect adjustment charge relating to prior periods of approximately
$0.7 million
, net of income taxes to accumulated deficit for the impact of electing to account for a forfeiture as it occurs. The Company recorded
$0.3 million
related to the first nine months of fiscal 2016 to adjust for previously estimated forfeitures for the interim periods. See Note
1
.
Stock Options
The Company adopted two forms of non-qualified stock option agreements (each, a “Form Option Agreement”) for awards granted under the 2007 Plan. Under the Company’s Form Option Agreement adopted in 2009, a portion of the stock option awards vest in equal annual installments over a five -year period contingent solely upon the participant’s continued employment with the Company, or one of its subsidiaries, another portion of the stock option awards vest over a specified performance period upon achievement of pre-determined operating performance targets over time and the remaining portion of the stock option awards vest upon realization of certain internal rates of return or multiple of investment goals. Under the Company’s other Form Option Agreement, adopted in 2013, a portion of the stock option awards vest over a specified performance period upon achievement of pre-determined operating performance targets over time while the other portion of the stock option awards vest upon realization of a specified multiple of investment goal. The Form Option Agreements include certain forfeiture provisions upon a participant’s separation from service with the Company. Following the IPO, the Company decided not to grant any further awards under the 2007 Plan; however, all outstanding awards granted prior to the IPO remained outstanding in accordance with the terms of the 2007 Plan.
Stock options were also granted under the 2014 Plan during fiscal
2016
and fiscal
2015
for selected executives of the Company, with an aggregate intrinsic value of
$0
and
$2.3 million
, which represents approximately
369,000
and
509,000
shares of common stock for the fiscal
2016
and
2015
grants, respectively. Each stock option vests in equal annual installments over a four-year period from the date of grant, contingent upon the participant’s continued employment with the Company.
Methodology and Assumptions
Stock options are granted with an exercise price equal to the fair market value on the date of grant. Stock options granted generally vest in equal annual installments over
four
or
five
years from the grant date. All outstanding stock options have a contractual term of
10
years, subject to forfeiture under certain conditions upon separation of employment. The grant-date fair value, adjusted for estimated forfeitures, is recognized as expense on a graded-vesting basis over the vesting period. The fair value of stock options is determined using the Black-Scholes-Merton option pricing model for service and performance based awards, and an adaptation of the Black-Scholes-Merton option valuation model, which takes into consideration the internal rate of return thresholds, for market-based awards. This model adaptation is essentially equivalent to the use of path dependent-lattice model.
The weighted average of assumptions used in estimating the fair value of stock options granted during each year were as follows:
|
|
|
|
|
|
|
|
Year Ended June 30,
|
|
2016
|
|
2015
|
|
2014
|
Expected volatility
|
28% - 31%
|
|
32%
|
|
31%
|
Expected life (in years)
|
6.25
|
|
6.25
|
|
5.66 - 6.50
|
Risk-free interest rates
|
1.5% - 1.7%
|
|
2%
|
|
0.3% - 2.2%
|
Dividend yield
|
None
|
|
None
|
|
None
|
The Company ended fiscal
2016
in its second year of being public, and as a result has limited relevant historical volatility experience; therefore, the expected volatility assumption is based on the historical volatility of the closing share prices of a comparable peer group. The Company selected peer companies from the pharmaceutical industry with similar characteristics, including market capitalization, number of employees and product focus. In addition, since the Company does not have a pattern of exercise behavior of option holders, the Company used the simplified method to determine the expected life of each option, which is the mid-point between the vesting date and the end of the contractual term. The risk-free interest-rate for the expected life of the option is based on the comparable U.S. Treasury yield curve in effect at the time of grant. The weighted-average grant-date fair value of stock options in fiscal
2016
,
2015
, and
2014
was
$10.68
per share,
$7.23
per share and
$5.41
per share, respectively.
The following table summarizes stock option activity and shares subject to outstanding options for the year ended
June 30, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time
|
Performance
|
Market
|
|
Weighted
|
|
Weighted
|
|
|
Weighted
|
|
|
Weighted
|
|
|
Average
|
Number
|
Average
|
Aggregate
|
Number
|
Average
|
Aggregate
|
Number
|
Average
|
Aggregate
|
|
Exercise
|
of
|
Contractual
|
Intrinsic
|
of
|
Contractual
|
Intrinsic
|
of
|
Contractual
|
Intrinsic
|
|
Price
|
shares
|
Term
|
Value
|
shares
|
Term
|
Value
|
shares
|
Term
|
Value
|
Outstanding as of June 30, 2015
|
$
|
15.62
|
|
2,007,699
|
|
6.83
|
$
|
25,979,873
|
|
1,097,250
|
|
6.87
|
$
|
14,296,090
|
|
2,073,610
|
|
5.81
|
$
|
30,739,825
|
|
Granted
|
$
|
31.80
|
|
368,995
|
|
9.17
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
Exercised
|
$
|
12.64
|
|
(416,183
|
)
|
—
|
|
7,700,424
|
|
(261,042
|
)
|
—
|
|
4,450,531
|
|
—
|
|
—
|
|
—
|
|
Forfeited
|
$
|
17.26
|
|
(135,656
|
)
|
—
|
|
—
|
|
(39,690
|
)
|
—
|
|
—
|
|
(287,910
|
)
|
—
|
|
—
|
|
Expired / Canceled
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
Outstanding as of June 30, 2016
|
$
|
17.26
|
|
1,824,855
|
|
6.75
|
8,841,470
|
|
796,518
|
|
6.46
|
4,323,349
|
|
1,785,700
|
|
5.07
|
15,130,345
|
|
Vest and expected to vest as of June 30, 2016
|
$
|
17.57
|
|
1,824,855
|
|
6.75
|
8,841,470
|
|
382,706
|
|
5.95
|
2,528,446
|
|
693,440
|
|
4.08
|
7,387,124
|
|
Vested and exercisable as of June 30, 2016
|
$
|
15.23
|
|
851,749
|
|
5.04
|
$
|
7,056,933
|
|
382,706
|
|
5.95
|
$
|
2,528,446
|
|
—
|
|
—
|
|
—
|
|
In fiscal
2016
, participants exercised options to purchase
212 thousand
net settled shares, resulting in
$6.4 million
of cash paid on behalf of participants for withholding taxes. The intrinsic value of the options exercised in fiscal
2016
was
$12.2 million
. The total fair value of options vested during the period was
$3.1 million
.
In fiscal
2015
, participants exercised options to purchase
623 thousand
net settled shares, resulting in
$10.3 million
of cash paid on behalf of participants for withholding taxes. The intrinsic value of the options exercised in fiscal
2015
was
$26.8 million
. The total fair value of options vested during the period was
$3.6 million
.
As of
June 30, 2016
,
$3.3 million
of unrecognized compensation cost related to stock options is expected to be recognized as expense over a weighted-average period of approximately
2.7
years.
Restricted Stock Units
Restricted stock units under the 2014 Plan may be granted to members of management and directors. The Company has granted to members of management restricted stock units that vest over specified periods of time as well as restricted stock units that have certain performance-related vesting requirements (“performance share units”). The performance share units granted for fiscal 2016 and 2015 had a grant date fair value of
$19.8
million and
$14.7
million, respectively, which represents approximately
607,000
and
692,000
shares of common stock, respectively. Under the 2014 Plan, the performance share units vest based on achieving Company financial performance metrics established at the outset of each
three
-year performance period. The metrics for the fiscal 2015 grant are a mix of cumulative revenue growth and cumulative EBITDA growth targets. The metrics for the fiscal 2016 grant are a mix of earnings-per-share ("EPS") targets and relative total shareholder return ("RTSR") targets. The performance share units vest following the end of the three-year performance period on the third anniversary of the date of grant based on achievement of the targets which are reviewed quarterly to determine the probability of vesting. The time-based restricted stock units awards vest on the third anniversary of the date of grant subject to the participant’s continued employment with the Company.
Methodology and Assumptions
The grant-date fair value of restricted stock units is recognized as expense on a graded vesting schedule over the vesting period of
three
to
five
years. This fair value is determined based on the number of shares subject to the grant and the fair value of the Company’s common stock on the date of grant, as determined by the closing market price.
Time-Based Restricted Stock Units
The following table summarizes non-vested activity in time-based restricted stock units for the year ended
June 30, 2016
:
|
|
|
|
|
|
|
|
|
Time-Based Units
|
|
Weighted Average Grant-Date Fair Value
|
Non-vested as of June 30, 2015
|
354,153
|
|
|
$
|
20.75
|
|
Granted
|
283,976
|
|
|
31.12
|
|
Vested
|
57,543
|
|
|
21.20
|
|
Forfeited
|
76,490
|
|
|
24.57
|
|
Non-vested as of June 30, 2016
|
504,096
|
|
|
$
|
25.96
|
|
EPS Performance Share Units
The following table summarizes non-vested EPS performance share unit activity for the year ended
June 30, 2016
:
|
|
|
|
|
|
|
|
|
EPS Units
|
|
Weighted Average Grant-Date Fair Value
|
Non-vested as of June 30, 2015
|
419,147
|
|
|
$
|
22.16
|
|
Granted
|
174,031
|
|
|
31.8
|
|
Vested
|
—
|
|
|
—
|
|
Forfeited
|
87,753
|
|
|
23.99
|
|
Non-vested as of June 30, 2016
|
505,425
|
|
|
$
|
25.16
|
|
RTSR Performance Share Units
The fair value of the RTSR performance share units is determined using the Monte Carlo pricing model because the number of shares to be awarded is subject to a market condition. The Monte Carlo simulation is a generally accepted statistical technique used to simulate a range of possible future unit prices. Compensation cost is recognized regardless if the market condition is actually satisfied.
The assumptions used in estimating the fair value of the RTSR performance share units granted for the year ended
June 30, 2016
are as follows:
|
|
|
Expected volatility
|
25%
|
Expected life (in years)
|
2.84
|
Risk-free interest rates
|
0.94%
|
Dividend yield
|
None
|
The following table summarizes non-vested RTSR unit activity for the year ended
June 30, 2016
:
|
|
|
|
|
|
|
|
|
RTSR Units
|
|
Weighted Average Grant-Date Fair Value
|
Non-vested as of June 30, 2015
|
—
|
|
|
$
|
—
|
|
Granted
|
148,982
|
|
|
37.21
|
|
Vested
|
—
|
|
|
—
|
|
Forfeited
|
16,326
|
|
|
37.61
|
|
Non-vested as of June 30, 2016
|
132,656
|
|
|
$
|
37.17
|
|
In fiscal
2016
, participants vested and settled
181 thousand
net settled shares, resulting in
$2.3 million
of cash paid on behalf of participants for withholding taxes.
As of
June 30, 2016
,
$17.2 million
of unrecognized compensation cost related to restricted stock units is expected to be recognized as expense over a weighted-average period of approximately
1.9
years. The weighted-average grant-date fair value of restricted stock units in fiscal years
2016
,
2015
and
2014
was
$32.82
,
$21.49
and
$21.64
, respectively. The fair value of restricted stock units vested in fiscal
2016
,
2015
and
2014
was
$1.2 million
,
$0.6 million
and
$0.6 million
, respectively.
|
|
14
.
|
OTHER (INCOME) / EXPENSE, NET
|
The components of Other (Income) / Expense, net for the
twelve months ended
June 30, 2016
,
2015
and
2014
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended
June 30,
|
(Dollars in millions)
|
2016
|
|
2015
|
|
2014
|
Other (Income) / Expense, net
|
|
|
|
|
|
Debt extinguishment costs
|
$
|
—
|
|
|
$
|
21.8
|
|
|
$
|
11.1
|
|
Gain on acquisition, net
(1)
|
—
|
|
|
(8.9
|
)
|
|
—
|
|
Sponsor advisory agreement termination fee
(2)
|
—
|
|
|
29.8
|
|
|
—
|
|
Foreign currency (gains) and losses
|
(12.6
|
)
|
|
(2.4
|
)
|
|
(2.5
|
)
|
Other
(3)
|
(3.0
|
)
|
|
2.1
|
|
|
1.8
|
|
Total Other (Income) / Expense
|
$
|
(15.6
|
)
|
|
$
|
42.4
|
|
|
$
|
10.4
|
|
|
|
(1)
|
Included within Other (income) / expense, net are gains associated with acquisitions completed during the respective periods. Such income events are non-standard in nature and not reflective of the Company’s core operating results. During the
twelve months ended
June 30,
2015
, the Company recorded a gain of
$3.2 million
on the re-measurement of a cost investment in an entity that became a wholly owned subsidiary as of October 2014, a
$7.0 million
bargain purchase gain for an acquisition completed in July
2014
, and a
$1.3 million
loss on the redeemable noncontrolling interest in June
2015
.
|
|
|
(2)
|
The Company paid a sponsor advisory agreement termination fee of
$29.8 million
in connection with its IPO.
|
|
|
(3)
|
Included within Other (income) / expense, net are realized gains associated with the sale of available for sale investments of approximately
$3.8 million
during the fiscal year ended
June 30, 2016
.
|
|
|
15
.
|
REDEEMABLE NONCONTROLLING INTEREST
|
In July 2013, the Company acquired a
67%
controlling interest in a softgel manufacturing facility located in Haining, China. The noncontrolling interest shareholders had the right to jointly sell the remaining
33%
interest to Catalent during the 30-day period following the third anniversary of closing for a price based on the greater of (1) an amount that would provide the noncontrolling interest shareholders a return on their investment of a predetermined amount per annum on their pro rata share of the initial valuation or (2) a multiple of the sum of the target
’s
earnings before interest, taxes, depreciation and amortization less net debt for the four quarters immediately preceding such sale. Noncontrolling interest with redemption features, such as the arrangement described above, that are not solely within the Company’s control are considered redeemable noncontrolling interests, which is considered temporary equity and is therefore reported outside of permanent equity on the Company
’
s consolidated balance sheet at the greater of the initial carrying amount adjusted for the noncontrolling interest
’
s share of net income/(loss) or its redemption value.
In June 2015, the Company reached an agreement to acquire the remaining 33% from the noncontrolling interest shareholders for purchase consideration of
$5.8 million
. As a result of the purchase agreement, the Company recorded a
$1.3 million
loss in Other Income/Expense, net to reflect the current redemption value as of June 30, 2015. The transaction closed in December 2015.
|
|
16
.
|
COMMITMENTS AND CONTINGENCIES
|
Rental Payments and Expense
The future minimum rental payments for operating leases having initial or remaining non-cancelable lease terms in excess of one year at
June 30, 2016
are:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
2017
|
2018
|
2019
|
2020
|
2021
|
Thereafter
|
Total
|
Minimum rental payments
|
$
|
9.2
|
|
$
|
6.6
|
|
$
|
6.0
|
|
$
|
4.2
|
|
$
|
3.7
|
|
$
|
4.4
|
|
$
|
34.1
|
|
Rental expense relating to operating leases was approximately
$9.5 million
,
$10.0 million
, and
$9.5 million
for the fiscal years ended
June 30, 2016
, 2015 and 2014, respectively. Sublease rental income was not material for any period presented.
Other Matters
During the period November 2015 through April 2016, the primary French drug regulatory agency (the “ANSM”) temporarily suspended operations at the Company’s softgel manufacturing facility in Beinheim, France, subject to exemptions for certain types of operations. Due to the temporary suspension, the Company was unable to use certain raw materials, work in process and finished goods, and took a charge of
$1.0 million
, net of insurance recoveries, during the year ended June 30, 2016, in connection with such loss of use and recorded remediation associated costs of
$6.0 million
. Further, certain of the customers of the facility have presented claims against the Company for losses they have allegedly suffered due to the temporary suspension or have reserved their right to do so subsequently. The Company is unable to estimate at this time either the total value of these claims or the likely cost to resolve them. Changes to the operations at the facility to address the issues leading to the suspension have increased and may in the future additionally increase the cost and therefore decrease the profitability of its operation and may also require the Company to incur additional costs.
From time to time, we may be involved in legal proceedings arising in the ordinary course of business, including, without limitation, inquiries and claims concerning environmental contamination as well as litigation and allegations in connection with acquisitions, product liability, manufacturing or packaging defects, claims for reimbursement for the cost of lost or damaged active pharmaceutical ingredients and employment-related claims, the cost of any of which could be significant. We intend to vigorously defend ourselves against any such litigation and do not currently believe that the outcome of any such litigation will have a material adverse effect on our financial condition or result of operation. In addition, the healthcare industry is highly regulated and government agencies continue to scrutinize certain practices affecting government programs and otherwise.
From time to time, we receive subpoenas or requests for information from private parties and various governmental agencies, including from state attorneys general and the U.S. Department of Justice, relating to the business practices of customers or suppliers. We generally respond to such subpoenas and requests in a timely and thorough manner, which responses sometimes require considerable time and effort and can result in considerable costs being incurred by us. We expect to incur costs in the future in connection with future requests.
As discussed in Note
1
, the Company conducts its business within the following operating segments: Softgel Technologies, Drug Delivery Solutions, and Clinical Supply Services. The Company evaluates the performance of its segments based on segment earnings before noncontrolling interest, other (income) expense, impairments, restructuring costs, interest expense, income tax (benefit)/expense, and depreciation and amortization (“Segment EBITDA”). EBITDA from continuing operations is consolidated earnings from continuing operations before interest expense, income tax (benefit)/expense, depreciation and amortization and is adjusted for the income or loss attributable to noncontrolling interest. The Company’s presentation of Segment EBITDA and EBITDA from continuing operations may not be comparable to similarly titled measures used by other companies.
All prior period comparative segment information has been restated to reflect the current reportable segments in accordance with
ASC 280 Segment Reporting
as discussed in Note 1
.
The following tables include net revenue and Segment EBITDA during the fiscal years ended
June 30, 2016
,
June 30, 2015
, and
June 30, 2014
:
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
Fiscal Year Ended
June 30,
|
2016
|
|
2015
|
|
2014
|
Softgel Technologies
|
|
|
|
|
|
Net revenue
|
$
|
775.0
|
|
|
$
|
787.5
|
|
|
$
|
857.5
|
|
Segment EBITDA
|
$
|
163.8
|
|
|
$
|
173.6
|
|
|
$
|
214.8
|
|
Drug Delivery Solutions
|
|
|
|
|
|
Net revenue
|
806.4
|
|
|
798.3
|
|
|
719.2
|
|
Segment EBITDA
|
215.2
|
|
|
230.7
|
|
|
182.2
|
|
Clinical Supply Services
|
|
|
|
|
|
Net revenue
|
307.5
|
|
|
288.4
|
|
|
291.7
|
|
Segment EBITDA
|
53.2
|
|
|
56.7
|
|
|
59.5
|
|
Inter-segment revenue elimination
|
(40.8
|
)
|
|
(43.4
|
)
|
|
(40.7
|
)
|
Unallocated costs
(1)
|
(57.9
|
)
|
|
(100.8
|
)
|
|
(82.1
|
)
|
Combined Total
|
|
|
|
|
|
Net revenue
|
$
|
1,848.1
|
|
|
$
|
1,830.8
|
|
|
$
|
1,827.7
|
|
|
|
|
|
|
|
EBITDA from continuing operations
|
$
|
374.3
|
|
|
$
|
360.2
|
|
|
$
|
374.4
|
|
|
|
(1)
|
Unallocated costs include restructuring and special items, equity-based compensation, impairment charges, certain other corporate directed costs, and other costs that are not allocated to the segments as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
Fiscal Year Ended
June 30,
|
2016
|
|
2015
|
|
2014
|
Impairment charges and gain/(loss) on sale of assets
|
$
|
(2.7
|
)
|
|
$
|
(4.7
|
)
|
|
$
|
(3.2
|
)
|
Equity compensation
|
(10.8
|
)
|
|
(9.0
|
)
|
|
(4.5
|
)
|
Restructuring and other items
(2)
|
(27.2
|
)
|
|
(27.2
|
)
|
|
(29.4
|
)
|
Sponsor advisory fee
|
—
|
|
|
—
|
|
|
(12.9
|
)
|
Noncontrolling interest
|
0.3
|
|
|
1.9
|
|
|
1.0
|
|
Other income/(expense), net
(3)
|
15.6
|
|
|
(42.4
|
)
|
|
(10.4
|
)
|
Non-allocated corporate costs, net
|
(33.1
|
)
|
|
(19.4
|
)
|
|
(22.7
|
)
|
Total unallocated costs
|
$
|
(57.9
|
)
|
|
$
|
(100.8
|
)
|
|
$
|
(82.1
|
)
|
|
|
(2)
|
Segment results do not include restructuring and certain acquisition-related costs.
|
|
|
(3)
|
Refer to Note
14
for details.
|
Provided below is a reconciliation of earnings/(loss) from continuing operations to EBITDA from continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
Fiscal Year Ended
June 30,
|
2016
|
|
2015
|
|
2014
|
Earnings/(loss) from continuing operations
|
$
|
111.2
|
|
|
$
|
210.2
|
|
|
$
|
17.9
|
|
Depreciation and amortization
|
140.6
|
|
|
140.8
|
|
|
142.9
|
|
Interest expense, net
|
88.5
|
|
|
105.0
|
|
|
163.1
|
|
Income tax (benefit)/expense
|
33.7
|
|
|
(97.7
|
)
|
|
49.5
|
|
Noncontrolling interest
|
0.3
|
|
|
1.9
|
|
|
1.0
|
|
EBITDA from continuing operations
|
$
|
374.3
|
|
|
$
|
360.2
|
|
|
$
|
374.4
|
|
The following table includes total assets for each segment, as well as reconciling items necessary to total the amounts reported in the Consolidated Financial Statements:
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
June 30,
2016
|
|
June 30,
2015
|
Assets
|
|
|
|
Softgel Technologies
|
$
|
1,446.4
|
|
|
$
|
1,438.8
|
|
Drug Delivery Solutions
|
1,475.7
|
|
|
1,254.0
|
|
Clinical Supply Services
|
578.9
|
|
|
575.7
|
|
Corporate and eliminations
|
(409.9
|
)
|
|
(130.2
|
)
|
Total assets
|
$
|
3,091.1
|
|
|
$
|
3,138.3
|
|
The following tables include depreciation and amortization expense and capital expenditures for the fiscal years ended
June 30, 2016
,
June 30, 2015
and
June 30, 2014
for each segment, as well as reconciling items necessary to total the amounts reported in the Consolidated Financial statements:
Depreciation and Amortization Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
Fiscal Year Ended
June 30,
|
2016
|
|
2015
|
|
2014
|
Softgel Technologies
|
$
|
36.7
|
|
|
$
|
42.8
|
|
|
$
|
48.3
|
|
Drug Delivery Solutions
|
72.9
|
|
|
66.9
|
|
|
63.7
|
|
Clinical Supply Services
|
21.1
|
|
|
24.1
|
|
|
22.3
|
|
Corporate
|
9.9
|
|
|
7.0
|
|
|
8.6
|
|
Total depreciation and amortization expense
|
$
|
140.6
|
|
|
$
|
140.8
|
|
|
$
|
142.9
|
|
Capital Expenditures
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
Fiscal Year Ended
June 30,
|
2016
|
|
2015
|
|
2014
|
Softgel Technologies
|
$
|
20.6
|
|
|
$
|
29.6
|
|
|
$
|
24.9
|
|
Drug Delivery Solutions
|
92.4
|
|
|
86.2
|
|
|
68.7
|
|
Clinical Supply Services
|
5.1
|
|
|
6.4
|
|
|
15.7
|
|
Corporate
|
21.5
|
|
|
18.8
|
|
|
13.1
|
|
Total capital expenditure
|
$
|
139.6
|
|
|
$
|
141.0
|
|
|
$
|
122.4
|
|
The following table presents revenue and long-lived assets by geographic area:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Revenue
|
|
Long-Lived Assets
(1)
|
(Dollars in millions)
|
Fiscal Year Ended
June 30,
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
|
June 30,
2016
|
|
June 30,
2015
|
United States
|
$
|
858.6
|
|
|
$
|
799.3
|
|
|
$
|
682.3
|
|
|
$
|
538.9
|
|
|
$
|
479.0
|
|
Europe
|
733.2
|
|
|
795.4
|
|
|
888.8
|
|
|
280.2
|
|
|
314.6
|
|
International Other
|
313.5
|
|
|
268.6
|
|
|
278.8
|
|
|
86.7
|
|
|
91.6
|
|
Eliminations
|
(57.2
|
)
|
|
(32.5
|
)
|
|
(22.2
|
)
|
|
—
|
|
|
—
|
|
Total
|
$
|
1,848.1
|
|
|
$
|
1,830.8
|
|
|
$
|
1,827.7
|
|
|
$
|
905.8
|
|
|
$
|
885.2
|
|
|
|
(1)
|
Long-lived assets include property and equipment, net of accumulated depreciation.
|
|
|
18
.
|
SUPPLEMENTAL BALANCE SHEET INFORMATION
|
Supplementary balance sheet information at
June 30, 2016
and
June 30, 2015
is detailed in the following tables.
Inventories
Work-in-process and finished goods inventories include raw materials, labor and overhead. Total inventories consisted of the following:
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
June 30,
2016
|
|
June 30,
2015
|
Raw materials and supplies
|
$
|
88.7
|
|
|
$
|
76.9
|
|
Work-in-process
|
30.7
|
|
|
26.3
|
|
Finished goods
|
55.2
|
|
|
43.8
|
|
Total inventory, gross
|
174.6
|
|
|
147.0
|
|
Inventory reserve
|
(19.8
|
)
|
|
(14.1
|
)
|
Inventories
|
$
|
154.8
|
|
|
$
|
132.9
|
|
Prepaid expenses and other
Prepaid expenses and other current assets consist of the following:
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
June 30,
2016
|
|
June 30,
2015
|
Prepaid expenses
|
$
|
29.3
|
|
|
$
|
22.0
|
|
Spare parts supplies
|
10.8
|
|
|
11.5
|
|
Deferred income taxes
(1)
|
—
|
|
|
19.7
|
|
Long term tax asset (current portion)
(2)
|
6.8
|
|
|
—
|
|
Other current assets
|
42.1
|
|
|
27.7
|
|
Prepaid expenses and other
|
$
|
89.0
|
|
|
$
|
80.9
|
|
(1) The Company early adopted
ASU 2015-17
in the year ended June 30, 2016 and accordingly deferred income taxes are now presented as non-current. The prior period was not retrospectively adjusted based on the adoption method.
(2) The Company transferred certain intellectual property assets between jurisdictions in the year ended June 30, 2016 resulting in a deferred tax charge which will be amortized over the remaining 10-year useful life of the asset.
Property, plant, and equipment, net
Property, plant, and equipment, net consist of the following:
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
June 30,
2016
|
|
June 30,
2015
|
Land, buildings and improvements
|
$
|
649.6
|
|
|
$
|
637.6
|
|
Machinery, equipment and capitalized software
|
757.1
|
|
|
727.9
|
|
Furniture and fixtures
|
9.9
|
|
|
10.1
|
|
Construction in progress
|
134.1
|
|
|
97.6
|
|
Property and equipment, at cost
|
1,550.7
|
|
|
1,473.2
|
|
Accumulated depreciation
|
(644.9
|
)
|
|
(588.0
|
)
|
Property, plant, and equipment, net
|
$
|
905.8
|
|
|
$
|
885.2
|
|
Other assets
Other assets consist of the following:
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
June 30,
2016
|
|
June 30,
2015
|
Long term tax asset
(1)
|
$
|
45.4
|
|
|
$
|
—
|
|
Deferred compensation investments
|
11.1
|
|
|
10.1
|
|
Deferred long-term debt financing costs
|
1.8
|
|
|
2.4
|
|
Other
|
8.8
|
|
|
8.8
|
|
Total other assets
|
$
|
67.1
|
|
|
$
|
21.3
|
|
(1) The Company transferred certain intellectual property assets between jurisdictions in the year ended June 30, 2016 resulting in a deferred tax charge which will be amortized over the remaining 10-year useful life of the asset.
Other accrued liabilities
Other accrued liabilities consist of the following:
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
June 30,
2016
|
|
June 30,
2015
|
Accrued employee-related expenses
|
$
|
82.8
|
|
|
$
|
87.8
|
|
Restructuring accrual
|
6.1
|
|
|
7.3
|
|
Deferred income taxes
(1)
|
—
|
|
|
1.5
|
|
Accrued interest
|
0.1
|
|
|
0.2
|
|
Deferred revenue and fees
|
46.2
|
|
|
39.0
|
|
Accrued income tax
|
38.8
|
|
|
55.8
|
|
Other accrued liabilities and expenses
|
45.8
|
|
|
55.4
|
|
Other accrued liabilities
|
$
|
219.8
|
|
|
$
|
247.0
|
|
(1) The Company early adopted
ASU 2015-17
in the year ended June 30, 2016 and accordingly deferred income taxes are now presented as non-current. The prior period was not retrospectively adjusted based on the adoption method.
Allowance for doubtful accounts
Trade receivables allowance for doubtful accounts activity is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
June 30,
2016
|
|
June 30,
2015
|
|
June 30,
2014
|
Trade receivables allowance for doubtful accounts
|
|
|
|
|
|
Beginning balance
|
$
|
6.6
|
|
|
$
|
5.4
|
|
|
$
|
5.7
|
|
Charged to cost and expenses (recoveries)
|
(0.5
|
)
|
|
2.7
|
|
|
0.5
|
|
Deductions
|
(1.8
|
)
|
|
(1.1
|
)
|
|
(1.0
|
)
|
Impact of foreign exchange
|
(0.4
|
)
|
|
(0.4
|
)
|
|
0.2
|
|
Closing balance
|
$
|
3.9
|
|
|
$
|
6.6
|
|
|
$
|
5.4
|
|
Inventory reserve
Inventory reserve activity is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
June 30,
2016
|
|
June 30,
2015
|
|
June 30,
2014
|
Inventory reserve
|
|
|
|
|
|
Beginning balance
|
$
|
14.1
|
|
|
$
|
12.9
|
|
|
$
|
11.8
|
|
Charged to cost and expenses
|
13.6
|
|
|
9.5
|
|
|
10.2
|
|
Write offs
|
(7.2
|
)
|
|
(6.5
|
)
|
|
(9.5
|
)
|
Impact of foreign exchange
|
(0.7
|
)
|
|
(1.8
|
)
|
|
0.4
|
|
Closing balance
|
$
|
19.8
|
|
|
$
|
14.1
|
|
|
$
|
12.9
|
|
|
|
19
.
|
QUARTERLY FINANCIAL DATA (UNAUDITED)
|
The following table summarizes the Company’s unaudited quarterly results of operation.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions, except per share data)
|
Fiscal Year 2016, By Quarters (as adjusted)
(1)
|
First
|
|
Second
|
|
Third
|
|
Fourth
|
Net revenue
|
$
|
423.0
|
|
|
$
|
454.9
|
|
|
$
|
438.0
|
|
|
$
|
532.2
|
|
Gross margin
|
121.5
|
|
|
152.1
|
|
|
126.2
|
|
|
187.8
|
|
Earnings from continuing operations less net income (loss) attributable to noncontrolling interest
|
11.9
|
|
|
30.8
|
|
|
10.7
|
|
|
58.1
|
|
Net earnings from discontinued operations, net of tax
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Net earnings attributable to Catalent
|
$
|
11.9
|
|
|
$
|
30.8
|
|
|
$
|
10.7
|
|
|
$
|
58.1
|
|
|
|
|
|
|
|
|
|
Earnings per share attributable to Catalent:
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
Earnings from continuing operations
|
$
|
0.10
|
|
|
$
|
0.25
|
|
|
$
|
0.09
|
|
|
$
|
0.47
|
|
Net earnings
|
$
|
0.10
|
|
|
$
|
0.25
|
|
|
$
|
0.09
|
|
|
$
|
0.47
|
|
Diluted
|
|
|
|
|
|
|
|
Earnings from continuing operations
|
$
|
0.09
|
|
|
$
|
0.24
|
|
|
$
|
0.09
|
|
|
$
|
0.46
|
|
Net earnings
|
$
|
0.09
|
|
|
$
|
0.24
|
|
|
$
|
0.09
|
|
|
$
|
0.46
|
|
(1) With the adoption of ASU 2016-09
,
the previously filed quarterly data has been updated. The changes to Net Earnings/(loss) attributable to Catalent during the first, second and third quarter reflected above include additional income of $2.8 million, $0.1 million and $0.9 million, respectively. The changes to Basic and Diluted Earnings per share attributable to Catalent during the first, second and third quarter reflected above reflects a change of $0.02, $0, and $0.01, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions, except per share data)
|
Fiscal Year 2015, By Quarters
|
First
|
|
Second
|
|
Third
|
|
Fourth
|
Net revenue
|
$
|
418.3
|
|
|
$
|
455.8
|
|
|
$
|
446.6
|
|
|
$
|
510.1
|
|
Gross margin
|
125.3
|
|
|
156.1
|
|
|
152.2
|
|
|
181.7
|
|
Earnings/(loss) from continuing operations less net income (loss) attributable to noncontrolling interest
|
(19.9
|
)
|
|
46.7
|
|
|
31.5
|
|
|
153.8
|
|
Net earnings/(loss) from discontinued operations, net of tax
|
0.4
|
|
|
(0.2
|
)
|
|
—
|
|
|
(0.1
|
)
|
Net earnings/(loss) attributable to Catalent
|
$
|
(19.5
|
)
|
|
$
|
46.5
|
|
|
$
|
31.5
|
|
|
$
|
153.7
|
|
|
|
|
|
|
|
|
|
Earnings per share attributable to Catalent:
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
Earnings/(loss) from continuing operations
|
$
|
(0.19
|
)
|
|
$
|
0.38
|
|
|
$
|
0.25
|
|
|
$
|
1.23
|
|
Net earnings/(loss)
|
$
|
(0.18
|
)
|
|
$
|
0.37
|
|
|
$
|
0.25
|
|
|
$
|
1.23
|
|
Diluted
|
|
|
|
|
|
|
|
Earnings/(loss) from continuing operations
|
$
|
(0.19
|
)
|
|
$
|
0.37
|
|
|
$
|
0.25
|
|
|
$
|
1.22
|
|
Net earnings/(loss)
|
$
|
(0.18
|
)
|
|
$
|
0.37
|
|
|
$
|
0.25
|
|
|
$
|
1.22
|
|