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 effectuated a
70
-for-1 stock split of its outstanding common stock (the "stock split"). 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 consolidated financial statements and accompanying notes have been retroactively adjusted to reflect the stock split.
On July 31, 2014, the Company commenced an initial public offering (the "IPO") of its common stock (the "Common Stock"), in which it 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's proceeds from the IPO, including the underwriters’ over-allotment option, were
$952.2 million
, which it used to fully redeem the outstanding 9.75% senior subordinated notes due 2017, redeem the outstanding 7.85% senior notes due 2018, repay portions of the Company’s unsecured term loan, and pay certain pre-IPO shareholders an advisory agreement termination fee of
$29.8 million
(recorded within other income/(expense), net on the consolidated statement of operations), and pursue 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.
On March 9, 2015, three pre-IPO shareholders (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. On September 6, 2016, two of the selling stockholders completed a final secondary offering of their remaining shares totaling approximately
19.0 million
shares, at a price of
$23.85
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.
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 approximately
72 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
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.
Softgel Technologies
Through our Softgel Technologies segment, the Company provide 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 plant-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 our 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 participates in the softgel vitamin, mineral and supplement business in selected regions around the world. With the 2001 introduction of our plant-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 our OptiShell offering. Our Vegicaps and OptiShell capsules are protected by patents in most major global markets. Physician and patient studies we have 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. Representative customers of Softgel Technologies include Pfizer, Novartis, Bayer, GlaxoSmithKline, Teva, Johnson & Johnson and Allergan.
On February 14, 2017, the Company acquired Accucaps, a Canada-based developer and manufacturer of over-the-counter, high potency and conventional pharmaceutical softgels. The acquisition complements Catalent's global consumer health and prescription pharmaceutical softgel capabilities and capacity with the addition of a portfolio of products and two state-of-the-art facilities offering integrated softgel development and manufacturing and packaging, strengthening its ability to offer customers turnkey solutions.
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. Representative customers of Drug Delivery Solutions include Pfizer, GlaxoSmithKline, Roche, Teva, Eli Lilly, Johnson & Johnson and Allergan.
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, 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 the Company's 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 Company believes that the complexity of the manufacturing process, the importance of experience and know-how, regulatory compliance, and high start-up capital requirements provide the Company with a substantial competitive advantage 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. The Company's sterile blow-fill-seal manufacturing has significant capacity and flexibility with regard to 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 plans to continue to expand our 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 our advanced and patented GPEx technology, which is used to develop stable, high-yielding mammalian cell lines for both innovator and biosimilar biologic compounds. The Company's GPEx technology can provide rapid cell-line development, high biologics production yields, flexibility and versatility. The Companys 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 current capability and capacity to produce clinical-scale biologic supplies, with a commercial-capable suite under construction; 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. The Company's 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. The Company 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, distribution 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 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. The Company supports trials in all regions of the world through our facilities and distribution network. In fiscal 2016, the Company commenced an expansion of its Singapore facility by building new flexible cGMP space, and the Company introduced clinical supply services at its 100,000 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.
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 (income)/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.
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
2017
,
2016
and
2015
or 10% of accounts receivable as of the years ended
2017
and
2016
.
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,
2017
. 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 leasehold improvements and 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
$102.2 million
for the fiscal year ended
June 30, 2017
,
$94.2 million
for the fiscal year ended
June 30, 2016
, and
$94.3 million
for the fiscal year ended
June 30, 2015
. 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
$9.8 million
,
$2.7 million
and
$4.7 million
, for the fiscal years ended
June 30, 2017
,
June 30, 2016
and
June 30, 2015
, 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). The Company uses the corridor approach to amortize actuarial gains and losses.
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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Certain investments that are measured at fair value using the net asset value per share (NAV) (or its equivalent) practical expedient have not been classified in the fair value hierarchy.
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 losses incurred but not reported.
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
$7.0 million
,
$7.6 million
and
$12.2 million
for the fiscal years ended
June 30, 2017
,
June 30, 2016
and
June 30, 2015
, 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
$45.8 million
,
$47.4 million
and
$41.3 million
for the fiscal years ended
June 30, 2017
,
June 30, 2016
and
June 30, 2015
, 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, and the expense is recorded over the applicable requisite service period. Forfeitures are recognized as and when they occur. 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.
Marketable Securities
Marketable securities consist of investments that have a readily determinable fair value based on quoted market price of the investment, which is considered a Level 1 fair value measurement. Under
ASC 320, Investments—Debt and Equity Securities
, these investments are classified as available-for-sale and are reported at fair value in other current assets on the Company's consolidated balance sheet. Unrealized holding gains and losses are reported within accumulated other comprehensive income. Under the Company's accounting policy, a decline in the fair value of marketable securities is deemed to be "other than temporary" and such marketable securities are generally considered to be impaired if their fair value is less than the Company's cost basis for a period based on the particular facts and circumstances surrounding the investment. If a decline in the fair value of a marketable security below the Company's cost basis is determined to be other than temporary, such marketable security is written down to its estimated fair value as a new cost basis and the amount of the write-down is included in earnings as an impairment charge.
Recent Financial Accounting Standards
Recently Adopted Accounting Standards
In January 2017, the Financial Accounting Standards Board (the "FASB") issued
Accounting Standards Update ("ASU") 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment
, which eliminates Step 2 of the current goodwill impairment test, the requirement to calculate the implied fair value of goodwill in measuring the goodwill impairment charge. Instead, under this update, the impairment charge will be measured based on the excess of a reporting unit's carrying value over its fair value. The ASU will be effective for public reporting entities in fiscal years beginning after December 15, 2019 and interim periods within those fiscal years. The Company early adopted this guidance during the fourth quarter of fiscal 2017 and applied the guidance prospectively. The adoption of this guidance did not have a material impact on the Company's consolidated financial statements.
In October 2016, the FASB issued
ASU 2016-16, Accounting for Income Taxes: Intra-Entity Asset Transfers of Assets Other than Inventory
, which reduces the complexity in accounting for income taxes by requiring the recognition of current and deferred income taxes for an intra-entity asset transfer, other than inventory, when the transfer occurs. Historically, the income tax consequence of these transactions was not recognized until the asset was sold to an outside party. The guidance will be applied on a modified retrospective basis with a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. The ASU will be effective for publicly reporting entities in fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted only in the first interim period of a fiscal year. The Company elected to adopt ASU 2016-16 effective July 1, 2016, which resulted in a cumulative-effect adjustment of
$29.4 million
charged to the opening balance of the accumulated deficit, reduction to other non-current and current assets of
$45.6 million
and
$6.6 million
, respectively, increase in deferred tax assets of
$19.6 million
, and reduction of deferred tax liabilities of
$3.2 million
. The impact on net earnings and earnings per share in the current period was not material.
In May 2015, the FASB issued
ASU No. 2015-07
Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent),
which removes the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value per share practical expedient. This guidance also removes the requirement to make certain disclosures for all investments that are eligible to be measured at fair value using the net asset value per share practical expedient. Rather, such disclosures are limited to investments for which the entity has elected to measure the fair value using that practical expedient. This guidance is effective retrospectively for fiscal years, and interim periods within those years, beginning after December 15, 2015. The Company has adopted ASU 2015-07 effective July 1, 2016, the beginning of its fiscal year ending June 30, 2017, in accordance with the FASB's disclosure simplification initiatives. The adoption did not have a material impact on the Company's consolidated financial statements.
In August 2014, the FASB issued
ASU No. 2014-15
Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern,
which requires management to evaluate, for each annual and interim reporting period, whether there are conditions and events, considered in the aggregate, that raise substantial doubt about an entity’s ability to continue as a going concern within one year after the date the financial statements are issued or are available to be issued. If substantial doubt is raised, additional disclosures around management’s plan to alleviate these doubts are required. This update will become effective for all annual periods ending after December 15, 2016 and interim periods within annual periods beginning after December 15, 2016. The adoption of the standard did not have any impact on current disclosures in the Company's consolidated financial statements.
New Accounting Standards Not Adopted as of June 30, 2017
In May 2017, the FASB issued ASU 2017-09,
Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting
, which clarifies when an entity will apply modification accounting for changes to stock based compensation arrangements. Modification accounting applies if the value, vesting conditions or classification of the awards changes. The ASU will be effective for annual periods beginning after December 15, 2017 and interim periods within those annual periods. Early adoption is permitted. The Company is currently evaluating the impact of adopting this guidance on its consolidated financial statements.
In March 2017, the FASB issued
ASU 2017-07, Compensation—Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost
, which requires entities to report the service cost component of the net periodic benefit cost in the same income statement line as other compensation costs arising from services rendered by employees during the reporting period. The other components of the net benefit costs will be presented in the income statement separately from the service cost and below the income from operations subtotal. The ASU will be effective for public reporting entities in fiscal years beginning after December 15, 2017, and interim periods within those years. Early adoption is permitted in the first interim period of a fiscal year. The Company is currently evaluating the impact of adopting this guidance on its consolidated financial statements.
In January 2017, the FASB issued
ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business
, which provides additional guidance on the definition of a business to assist entities with evaluating whether transactions should be accounted for as acquisitions of assets or businesses. The ASU will be effective for public reporting entities in fiscal years beginning after December 15, 2017 and interim periods within those fiscal years. The Company is currently evaluating the impact of adopting this guidance on its consolidated financial statements.
In August 2016, the FASB issued
ASU 2016-15 Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments
, which provides clarification on the presentation and classification of certain cash receipts and cash payments in the statement of cash flows. The guidance will be effective for publicly reporting entities in fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted in any interim or annual period. The Company is currently evaluating the impact of adopting this guidance on its consolidated financial statements.
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 guidance is required to be adopted using the modified retrospective approach. The Company anticipates that most of its operating lease will result in the recognition of additional assets and corresponding liabilities on its Consolidated Balance Sheets. The Company continues to evaluate the impact of adopting this guidance and its implication on its consolidated financial statements.
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 control of a 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 has identified its revenue streams, reviewed the initial impacts of adopting of the new standard on those revenue streams, and appointed a governance committee and project management leader. While the Company is continuing to assess all potential impacts of the standard, it has preliminarily assessed that the most significant impact relates to revenue recognition in certain contractual arrangements containing minimum volume commitments where the price is not fixed or determinable pursuant to the terms of the agreement. Under the current standard, revenue recognition for such arrangements is deferred until the price is fixed and determinable, while, under the new standard, such price will be accounted for as a variable consideration and might be recognized earlier provided that the Company can reliably estimate the amount expected to be realized. The Company does not expect the timing of revenue recognition for other arrangements to significantly change.
|
|
2
.
|
BUSINESS COMBINATIONS
|
During the year ended June 30, 2017, 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 September 2016, the Company acquired 100% of the shares of Pharmatek Laboratories, Inc. ("Pharmatek"), a contract drug development and clinical manufacturing company. The acquired business is based in the U.S. and is included in the Drug Delivery Solutions segment. Additionally, in February 2017, the Company acquired 100% of the shares of Accucaps Industries Limited ("Accucaps"), a company that develops and manufactures over-the-counter, high potency and conventional pharmaceutical softgels. The acquired business is based in Canada and is included in the Softgel Technologies segment.
The Company’s consolidated balance sheet as of June 30, 2017 includes the fair value allocations for these acquisitions, which were completed in the fiscal year. Aggregate purchase consideration, net of cash acquired, for both acquisitions totaled
$169.9 million
. As a result of the preliminary fair value allocations, the Company recognized intangible assets of
$30.9 million
of customer relationships. The remainder of the preliminary fair value was allocated to tangible assets acquired and goodwill. The fair value allocation for each acquisition is expected to be completed upon finalization of an independent appraisal over the next few months, but no later than one year from its acquisition date.
The following table summarizes the changes from
June 30, 2015
, to
June 30, 2016
and then to
June 30, 2017
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, 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
|
|
Additions/(impairments)
|
5.8
|
|
|
48.3
|
|
|
—
|
|
|
54.1
|
|
Foreign currency translation adjustments
|
3.5
|
|
|
(6.2
|
)
|
|
(3.8
|
)
|
|
(6.5
|
)
|
Balance at June 30, 2017
|
$
|
415.2
|
|
|
$
|
477.2
|
|
|
$
|
151.7
|
|
|
$
|
1,044.1
|
|
No goodwill impairment charge was necessary 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
16
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, 2017
and
June 30, 2016
, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
Weighted Average Life
|
|
Gross
Carrying
Value
|
|
Accumulated
Amortization
|
|
Net
Carrying
Value
|
June 30, 2017
|
|
|
|
|
|
|
|
Amortized intangibles:
|
|
|
|
|
|
|
|
Core technology
|
18 years
|
|
$
|
170.3
|
|
|
$
|
(74.8
|
)
|
|
$
|
95.5
|
|
Customer relationships
|
14 years
|
|
253.0
|
|
|
(106.1
|
)
|
|
146.9
|
|
Product relationships
|
12 years
|
|
206.9
|
|
|
(176.2
|
)
|
|
30.7
|
|
Total intangible assets
|
|
|
$
|
630.2
|
|
|
$
|
(357.1
|
)
|
|
$
|
273.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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
|
|
Amortization expense was
$44.3 million
,
$46.4 million
, and
$46.5 million
for the fiscal year ended
June 30, 2017
,
June 30, 2016
, and
June 30, 2015
, respectively. Future amortization expense for the next five years is estimated to be:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
2018
|
|
2019
|
|
2020
|
|
2021
|
|
2022
|
Amortization expense
|
$
|
44.8
|
|
|
$
|
39.2
|
|
|
$
|
25.5
|
|
|
$
|
25.5
|
|
|
$
|
25.5
|
|
The Company impaired definite lived intangible assets of
$3.4 million
,
$0.7 million
and
$3.4 million
in the fiscal years ended June 30, 2017, 2016 and 2015, respectively.
|
|
5
.
|
RESTRUCTURING AND OTHER COSTS
|
Restructuring 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. Employee-related costs consist primarily of severance costs and also include outplacement services provided to employees who have been involuntarily terminated. 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.
Other Costs
Other costs include settlement charges for claim amounts that the Company deemed to be both probable and reasonably estimable, but is not currently in a position to record under U.S. GAAP any insurance recovery with respect to such costs related to the temporary suspension of operations at a softgel manufacturing facility. Refer to Note
14
Commitments and Contingencies for further discussions of such claims.
The following table summarizes the significant costs recorded within restructuring and other costs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended June 30,
|
(Dollars in millions)
|
2017
|
|
2016
|
|
2015
|
Restructuring costs:
|
|
|
|
|
|
Employee-related reorganization
|
$
|
7.9
|
|
|
$
|
3.7
|
|
|
$
|
11.5
|
|
Asset impairments
|
—
|
|
|
0.4
|
|
|
—
|
|
Facility exit and other costs
|
(1.7
|
)
|
|
4.9
|
|
|
1.9
|
|
Total restructuring costs
|
$
|
6.2
|
|
|
$
|
9.0
|
|
|
$
|
13.4
|
|
Other - Temporary suspension customer claims
|
$
|
1.8
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Total restructuring and other costs
|
$
|
8.0
|
|
|
$
|
9.0
|
|
|
$
|
13.4
|
|
|
|
6
.
|
LONG-TERM OBLIGATIONS AND OTHER SHORT-TERM BORROWINGS
|
Long-term obligations and other short-term borrowings consist of the following at
June 30, 2017
and
June 30, 2016
:
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
Maturity
|
|
June 30,
2017
|
|
June 30,
2016
|
Senior Secured Credit Facilities
|
|
|
|
|
|
Term loan facility dollar-denominated
|
May 2021
|
|
$
|
1,244.2
|
|
|
$
|
1,454.2
|
|
Term loan facility euro-denominated
|
May 2021
|
|
352.0
|
|
|
345.2
|
|
Euro-denominated 4.75% Senior Notes due 2024
|
December 2024
|
|
424.3
|
|
|
—
|
|
Capital lease obligations
|
2020 to 2032
|
|
53.3
|
|
|
51.4
|
|
Other obligations
|
2017 to 2018
|
|
5.9
|
|
|
9.7
|
|
Total
|
|
|
2,079.7
|
|
|
1,860.5
|
|
Less: Current portion of long-term obligations and other short-term
borrowings
|
|
|
24.6
|
|
|
27.7
|
|
Long-term obligations, less current portion
|
|
|
$
|
2,055.1
|
|
|
$
|
1,832.8
|
|
Senior Secured Credit Facilities and Second Amendment
In May 2014, Operating Company entered into the Amended and Restated Credit Agreement, dated as of May 20, 2014 (as subsequently amended, the "Credit Agreement") governing the senior secured credit facilities that provide for U.S. dollar-denominated term loans, euro-denominated term loans and a revolving credit facility. On December 9, 2016, the Company completed Amendment No. 2 (the "Second Amendment") to the Credit Agreement in order to lower interest rates on its U.S. dollar-denominated and euro-denominated term loans, dated as of May 20, 2104, governing all term loans and revolving credit facilities (as amended, the "Credit Agreement"). The new applicable rate for the U.S. dollar-denominated term loans is based on the London Interbank Offered Rate ("LIBOR") (subject to a floor of
1.00%
) plus
2.75%
, which is
0.50%
lower than the previous rate, and the new applicable rate for the euro-denominated term loans is LIBOR (subject to a floor of
1.00%
) plus
2.50%
, which is
0.75%
lower than the previous rate. The Second Amendment further eliminates "step" pricing based on a measure of Operating Company's total leverage ratio. The Second Amendment also includes a prepayment of 1.0% in the event of another repricing event on or before the six months anniversary of the Second Amendment. There is no change to maturities, including the May 2019 maturity of the revolving credit facility, as a result of the Second Amendment. In connection with the Amendment, Operating Company incurred
$1.7 million
of associated fees, which were expensed in other (income) / expense, net in the consolidated statement of operations.
As of
June 30, 2017
, there were
$12.0 million
in outstanding letters of credit that reduced the borrowing capacity under the Revolving Credit Facility.
Euro-denominated 4.75% Senior Notes due 2024
On December 9, 2016, Operating Company completed a private offering of
€380.0 million
aggregate principal amount of
4.75%
Senior Notes due 2024 (the "Notes"). The Notes are fully and unconditionally guaranteed, jointly and severally, by all of the wholly owned U.S. subsidiaries of Operating Company that guarantee its senior secured credit facilities. The Notes were offered in the U.S. to qualified institutional buyers in reliance on Rule 144A under the Securities Act of 1933, as amended (the "Securities Act") and outside the U.S. only to non-U.S. investors pursuant to Regulation S under the Securities Act. The Notes will mature on December 15, 2024, bear interest at the rate of
4.75%
per annum and are payable semi-annually in arrears on June 15 and December 15 of each year. The proceeds of the Notes were used to repay
$200 million
of outstanding borrowings on the U.S. dollar-denominated term loan, pay the
$81.0 million
then outstanding under the revolving credit facility, pay accrued and unpaid interest and certain fees and expenses associated with the offering, fund a previously announced pending acquisition, and provide cash for general corporate purposes. In connection with the Notes offering and subsequent payment of the U.S. dollar-denominated term loan, Operating Company incurred
$6.9 million
of third-party financing costs, of which
$0.6 million
was expensed, and a
$2.0 million
expense related to unamortized debt discount and deferred financing costs, both recorded in other (income) / expense, net in the Consolidated Statement of Operations.
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
$53.3 million
, and other short-term borrowings for future fiscal years are:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
2018
|
2019
|
2020
|
2021
|
2022
|
Thereafter
|
Total
|
Maturities of long-term and other obligations
|
$
|
24.6
|
|
23.4
|
|
21.4
|
|
1,557.1
|
|
3.3
|
|
469.7
|
|
$
|
2,099.5
|
|
Debt Issuance Costs
Debt issuance costs associated with Operating Company's term loans and Notes 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
$11.5 million
and
$7.7 million
as of
June 30, 2017
and
June 30, 2016
, respectively. Amortization of debt issuance costs totaled
$2.3 million
and
$1.8 million
for the fiscal years ended
June 30, 2017
and
June 30, 2016
, respectively.
Guarantees and Security
Senior Secured Credit Facilities
All obligations under the Credit Agreement, and the guarantees of those obligations, are secured by substantially all of the following assets of Operating Company and each guarantor, subject to certain exceptions:
|
|
•
|
a pledge of
100%
of the capital stock of Operating Company and
100%
of the equity interests directly held by Operating Company 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 Operating Company and of each guarantor, subject to certain limited exceptions.
|
The Notes
All obligations under the Notes are general, unsecured and subordinated to all existing and future secured indebtedness of the guarantors to the extent of the value of the asset securing such indebtedness. The Notes are guaranteed by all of Operating Company's wholly owned U.S. subsidiaries that guarantee the senior secured credit facilities. The Notes are not guaranteed by either PTS Intermediate Holdings LLC or Catalent.
Debt Covenants
Senior Secured Credit Facilities
The Credit Agreement contains a number of covenants that, among other things, restrict, subject to certain exceptions, Operating Company’s (and Operating 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; repay subordinated indebtedness; engage in certain transactions with affiliates; make investments, loans or advances; make certain acquisitions; enter into sale and leaseback transactions; amend material agreements governing Operating Company's subordinated indebtedness and change Operating Company's 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, 2017
, the Company was in compliance with all material covenants related to its long-term obligations.
Subject to certain exceptions, the Credit Agreement permits Operating Company and its restricted subsidiaries to incur certain additional indebtedness, including secured indebtedness. None of Operating Company’s non-U.S. subsidiaries nor its dormant Rico subsidiary is a guarantor of the loans.
Under the Credit Agreement, Operating 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 is not defined under U.S. GAAP, and is subject to important limitations.
The Notes
The indenture governing the Notes (the "Indenture") contains covenants that, among other things, limit the ability of Operating Company and its restricted subsidiaries to incur or guarantee more debt or issue certain preferred shares, pay dividends on, repurchase or make distributions in respect of their capital stock or make other restricted payments, make certain investments, sell certain assets, create liens, consolidate, merge, sell or otherwise dispose of all or substantially all of their assets, enter into certain transactions with their affiliates, and designate their subsidiaries as unrestricted subsidiaries. These covenants are subject to a number of exceptions, limitations and qualifications as set forth in the Indenture. The Indenture also contains customary events of default including, but not limited to, nonpayment, breach of covenants, and payment or acceleration defaults in certain other indebtedness of Operating Company or certain of its subsidiaries. Upon an event of default, either the holders of at least 30% in principal amount of the then-outstanding Notes or the Trustee under the Indenture may declare the Notes immediately due and payable, or in certain circumstances, the Notes will automatically become due and immediately payable. As of
June 30, 2017
, Operating Company was in compliance with all material covenants under the Notes.
Fair Value of Debt Measurements
The estimated fair value of the senior secured credit facilities, which is considered a Level 2 fair value estimate, 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 estimated fair value of the Notes, a Level 1 fair value estimate, is based on the quoted market prices of the instrument. The carrying amounts and the estimated fair values of financial instruments as of
June 30, 2017
and
June 30, 2016
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
June 30, 2016
|
(Dollars in millions)
|
Fair Value Measurement
|
Carrying
Value
|
|
Estimated Fair
Value
|
|
Carrying
Value
|
|
Estimated Fair
Value
|
Euro-denominated 4.75% Senior Notes
|
Level 1
|
$
|
424.3
|
|
|
$
|
454.0
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Senior Secured Credit Facilities & Other
|
Level 2
|
1,655.4
|
|
|
1,653.1
|
|
|
1,860.5
|
|
|
1,868.8
|
|
Total
|
|
$
|
2,079.7
|
|
|
$
|
2,107.1
|
|
|
$
|
1,860.5
|
|
|
$
|
1,868.8
|
|
The reconciliations between basic and diluted earnings per share attributable to Catalent common shareholders for the fiscal years ended
June 30, 2017
,
2016
and
2015
are as follows (in millions, except share and per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended June 30,
|
|
2017
|
|
2016
|
|
2015
|
Earnings from continuing operations less net income / (loss) attributable to noncontrolling interest
|
$
|
109.8
|
|
|
$
|
111.5
|
|
|
$
|
212.1
|
|
Earnings / (loss) from discontinued operations
|
—
|
|
|
—
|
|
|
0.1
|
|
Net earnings attributable to Catalent
|
$
|
109.8
|
|
|
$
|
111.5
|
|
|
$
|
212.2
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
124,954,248
|
|
|
124,787,819
|
|
|
119,575,568
|
|
Dilutive securities issuable-stock plans
|
1,783,537
|
|
|
1,082,275
|
|
|
1,773,068
|
|
Total weighted average diluted shares outstanding
|
126,737,785
|
|
|
125,870,094
|
|
|
121,348,636
|
|
|
|
|
|
|
|
Basic earnings per share of common stock:
|
|
|
|
|
|
|
|
Net earnings attributable to Catalent
|
$
|
0.88
|
|
|
$
|
0.89
|
|
|
$
|
1.77
|
|
|
|
|
|
|
|
Diluted earnings per share of common stock-assuming dilution:
|
|
|
|
|
|
|
|
Net earnings attributable to Catalent
|
$
|
0.87
|
|
|
$
|
0.89
|
|
|
$
|
1.75
|
|
The computation of diluted earnings per share for the years ended
June 30, 2017
,
2016
and 2015 excludes the effect of potential shares issuable under pre-IPO employee stock options of
0.4 million
,
2.2 million
and
2.1 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 years ended
June 30, 2017
and
2016
excludes the effect of potential shares issuable under the employee-held stock options and restricted stock units of approximately
0.8 million
and
1.0 million
shares, respectively, 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, 2017
, the Company had euro-denominated debt outstanding of $
776.3 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, 2017
and
June 30, 2016
:
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
June 30,
2017
|
|
June 30,
2016
|
Unrealized foreign exchange gain/(loss) within other comprehensive income
|
$
|
(21.3
|
)
|
|
$
|
1.8
|
|
Unrealized foreign exchange gain/(loss) within statement of operations
|
$
|
(21.3
|
)
|
|
$
|
3.9
|
|
The net accumulated gain of this net investment as of
June 30, 2017
within accumulated other comprehensive income/(loss) was approximately
$60.1 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 are as follows for the fiscal years ended
2017
,
2016
, and
2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
June 30,
|
(Dollars in millions)
|
2017
|
|
2016
|
|
2015
|
U.S. Operations
|
$
|
5.0
|
|
|
$
|
60.0
|
|
|
$
|
25.8
|
|
Non-U.S. Operations
|
$
|
130.6
|
|
|
$
|
84.9
|
|
|
$
|
86.7
|
|
|
$
|
135.6
|
|
|
$
|
144.9
|
|
|
$
|
112.5
|
|
The provision /(benefit) for income taxes consists of the following for the fiscal years ended
2017
,
2016
, and
2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
June 30,
|
(Dollars in millions)
|
2017
|
|
2016
|
|
2015
|
Current:
|
|
|
|
|
|
Federal
|
$
|
2.1
|
|
|
$
|
(0.6
|
)
|
|
$
|
—
|
|
State and local
|
(0.4
|
)
|
|
(0.2
|
)
|
|
(0.8
|
)
|
Non-U.S.
|
22.7
|
|
|
26.3
|
|
|
31.9
|
|
Total
|
$
|
24.4
|
|
|
$
|
25.5
|
|
|
$
|
31.1
|
|
Deferred:
|
|
|
|
|
|
Federal
|
$
|
1.9
|
|
|
$
|
19.6
|
|
|
$
|
(125.3
|
)
|
State and local
|
1.4
|
|
|
(4.8
|
)
|
|
(1.1
|
)
|
Non-U.S.
|
(1.9
|
)
|
|
(6.6
|
)
|
|
(2.4
|
)
|
Total
|
1.4
|
|
|
8.2
|
|
|
(128.8
|
)
|
|
|
|
|
|
|
Total provision/(benefit)
|
$
|
25.8
|
|
|
$
|
33.7
|
|
|
$
|
(97.7
|
)
|
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
2017
,
2016
, and
2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
June 30,
|
(Dollars in millions)
|
2017
|
|
2016
|
|
2015
|
Provision at U.S. federal statutory tax rate
|
$
|
47.4
|
|
|
$
|
50.7
|
|
|
$
|
39.4
|
|
State and local income taxes
|
(1.5
|
)
|
|
(3.0
|
)
|
|
(2.4
|
)
|
Foreign tax rate differential
|
(25.7
|
)
|
|
(21.7
|
)
|
|
(23.9
|
)
|
Permanent items
|
2.9
|
|
|
(2.3
|
)
|
|
1.7
|
|
Unrecognized tax positions
|
(0.3
|
)
|
|
5.6
|
|
|
14.7
|
|
Tax valuation allowance
|
3.1
|
|
|
7.2
|
|
|
(133.2
|
)
|
Withholding tax and other foreign taxes
|
(0.2
|
)
|
|
0.6
|
|
|
1.4
|
|
Change in tax rate
|
2.0
|
|
|
(3.2
|
)
|
|
1.3
|
|
Foreign currency impact on permanently reinvested loans
|
—
|
|
|
—
|
|
|
2.7
|
|
R&D Tax Credit
|
(1.2
|
)
|
|
(1.4
|
)
|
|
(1.3
|
)
|
Other
|
(0.7
|
)
|
|
1.2
|
|
|
1.9
|
|
|
$
|
25.8
|
|
|
$
|
33.7
|
|
|
$
|
(97.7
|
)
|
The income tax provision 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 for the fiscal year ended June 30, 2017 reflects the impact of an increase in foreign earnings taxed at rates lower than the U.S. statutory rate. This benefit is offset by an increase in the valuation allowance and the impact of permanent differences including disallowed transaction costs and deemed dividends offset by the benefit from the stock compensation deduction and dividend income exempt from tax under local law. 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, a current year deduction related to stock compensation, as well as a deduction related to a further U.K. rate reduction enacted during the year, countered by valuation allowance builds on current year losses.
As of
June 30, 2017
, the Company had
$569.5 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, 2017
and
2016
:
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
June 30,
|
(Dollars in millions)
|
2017
|
|
2016
|
Deferred income tax assets:
|
|
|
|
|
Accrued liabilities
|
$
|
27.4
|
|
|
$
|
21.6
|
|
Equity compensation
|
16.4
|
|
|
10.7
|
|
Loss and tax credit carryforwards
|
141.0
|
|
|
155.0
|
|
Foreign currency
|
11.5
|
|
|
18.8
|
|
Pension
|
39.4
|
|
|
45.9
|
|
Property-related
|
9.4
|
|
|
9.3
|
|
Intangibles
|
26.3
|
|
|
8.0
|
|
Other
|
25.7
|
|
|
17.1
|
|
Euro Denominated Debt
|
22.8
|
|
|
—
|
|
Total deferred income tax assets
|
319.9
|
|
|
286.4
|
|
Valuation allowance
|
(78.8
|
)
|
|
(69.9
|
)
|
Net deferred income tax assets
|
$
|
241.1
|
|
|
$
|
216.5
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
June 30,
|
(Dollars in millions)
|
2017
|
|
2016
|
Deferred income tax liabilities:
|
|
|
|
Accrued liabilities
|
(0.8
|
)
|
|
(0.6
|
)
|
Foreign currency
|
(1.3
|
)
|
|
(0.9
|
)
|
Property-related
|
(57.6
|
)
|
|
(48.1
|
)
|
Goodwill and other intangibles
|
(151.1
|
)
|
|
(142.2
|
)
|
Other
|
(8.1
|
)
|
|
(1.0
|
)
|
Euro Denominated Debt
|
—
|
|
|
(27.6
|
)
|
Total deferred income tax liabilities
|
$
|
(218.9
|
)
|
|
(220.4
|
)
|
|
|
|
|
Net deferred tax asset/(liability)
|
$
|
22.2
|
|
|
$
|
(3.9
|
)
|
Deferred tax assets and liabilities in the preceding table are in the following captions in the balance sheet at
June 30, 2017
and
2016
:
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
June 30,
|
(Dollars in millions)
|
2017
|
|
2016
|
Non-current deferred tax asset
|
53.9
|
|
|
37.5
|
|
Non-current deferred tax liability
|
31.7
|
|
|
41.4
|
|
Net deferred tax asset/(liability)
|
$
|
22.2
|
|
|
$
|
(3.9
|
)
|
At
June 30, 2017
, the Company has federal net operating loss carryforwards of
$154.7 million
, all of which are subject to limitations under Section 382 of the Internal Revenue Code of 1986, as amended (the "Internal Revenue Code"). Of this amount
$1.4 million
of net operating loss carryforwards were generated in years prior to April 10, 2007, when the Company was owned by Cardinal. The remaining amount of carryforwards are 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 2023 through 2036.
At
June 30, 2017
, the Company has state tax loss carryforwards of
$390.8 million
. Approximately
$49.5 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, 2017
, the Company has international tax loss carryforwards of
$152.6 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
$78.8 million
and
$69.9 million
as of
June 30, 2017
and 2016, respectively, against its 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.
The Company maintained a state valuation allowance on
$386.3 million
of apportioned net operating losses. Due to uncertainty around earnings, apportionment, certain restrictions at the state level, and a 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 recorded 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, 2017
, the Company had a total of
$52.5 million
of unrecognized tax benefits. A reconciliation of unrecognized tax benefits, excluding accrued interest, for
June 30, 2017
,
June 30, 2016
and
June 30, 2015
is 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
|
|
Additions based on tax positions related to the current year
|
3.3
|
|
Additions for tax positions of prior years
|
0.1
|
|
Reductions for tax positions of prior years
|
(6.8
|
)
|
Settlements
|
(5.4
|
)
|
Lapse of the applicable statute of limitations
|
(0.2
|
)
|
Balance at June 30, 2017
|
$
|
52.5
|
|
Of this amount,
$41.4 million
and
$45.7 million
represent the amount of unrecognized tax benefits that, if recognized, would favorably affect the effective income tax rate as of
June 30, 2017
and
June 30, 2016
, respectively. An additional
$11.1 million
represents the amount of unrecognized tax benefits that, if recognized, would not affect 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 2008.
The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. As of
June 30, 2017
, the Company has approximately
$5.0 million
of accrued interest related to uncertain tax positions, a decrease of
$0.6 million
from the prior year. The Company had approximately
$5.6 million
and
$6.3 million
of accrued interest related to uncertain tax positions as of June 30, 2016 and 2015, respectively. The portion of such interest and penalties subject to indemnification by Cardinal is
$1.7 million
, a decrease of
$0.4 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 this multi-employer pension plan has been classified as a mass withdrawal under the Multiemployer Pension Plan Amendments Act of 1980, as amended, and 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
$39.1 million
and
$39.3 million
as of
June 30, 2017
and
June 30, 2016
, 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)
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Accumulated Benefit Obligation
|
$
|
322.4
|
|
|
$
|
328.1
|
|
|
$
|
2.8
|
|
|
$
|
3.6
|
|
|
|
|
|
|
|
|
|
Change in Benefit Obligation
|
|
|
|
|
|
|
|
Benefit obligation at beginning of year
|
336.6
|
|
|
323.7
|
|
|
3.6
|
|
|
3.7
|
|
Company service cost
|
3.2
|
|
|
2.8
|
|
|
—
|
|
|
—
|
|
Interest cost
|
6.6
|
|
|
10.4
|
|
|
0.1
|
|
|
0.1
|
|
Employee contributions
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Plan amendments
|
—
|
|
|
(0.7
|
)
|
|
—
|
|
|
—
|
|
Curtailments
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Settlements
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Special termination benefits
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Divestitures
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Other
|
5.5
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Benefits paid
|
(11.0
|
)
|
|
(11.6
|
)
|
|
(0.8
|
)
|
|
(0.2
|
)
|
Actual expenses
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Actuarial (gain)/loss
|
(6.4
|
)
|
|
40.5
|
|
|
(0.1
|
)
|
|
—
|
|
Exchange rate gain/(loss)
|
(3.9
|
)
|
|
(28.5
|
)
|
|
—
|
|
|
—
|
|
Benefit obligation at end of year
|
330.6
|
|
|
336.6
|
|
|
2.8
|
|
|
3.6
|
|
|
|
|
|
|
|
|
|
Change in Plan Assets
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year
|
227.6
|
|
|
222.0
|
|
|
—
|
|
|
—
|
|
Actual return on plan assets
|
18.4
|
|
|
33.8
|
|
|
—
|
|
|
—
|
|
Company contributions
|
10.6
|
|
|
9.2
|
|
|
0.7
|
|
|
0.2
|
|
Employee contributions
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Settlements
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Special company contributions to fund termination benefits
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Divestitures
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Other
|
4.5
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Benefits paid
|
(11.0
|
)
|
|
(11.6
|
)
|
|
(0.7
|
)
|
|
(0.2
|
)
|
Actual expenses
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Exchange rate gain/(loss)
|
(5.5
|
)
|
|
(25.8
|
)
|
|
—
|
|
|
—
|
|
Fair value of plan assets at end of year
|
244.6
|
|
|
227.6
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Funded Status
|
|
|
|
|
|
|
|
Funded status at end of year
|
(86.0
|
)
|
|
(109.0
|
)
|
|
(2.8
|
)
|
|
(3.6
|
)
|
Employer contributions between measurement date and reporting date
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Net pension asset (liability)
|
(86.0
|
)
|
|
(109.0
|
)
|
|
(2.8
|
)
|
|
(3.6
|
)
|
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)
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Amounts Recognized in Statement of Financial Position
|
|
|
|
|
|
|
|
Noncurrent assets
|
$
|
2.7
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Current liabilities
|
(0.8
|
)
|
|
(0.8
|
)
|
|
(0.3
|
)
|
|
—
|
|
Noncurrent liabilities
|
(87.9
|
)
|
|
(108.2
|
)
|
|
(2.5
|
)
|
|
(3.6
|
)
|
Total asset/(liability)
|
(86.0
|
)
|
|
(109.0
|
)
|
|
(2.8
|
)
|
|
(3.6
|
)
|
|
|
|
|
|
|
|
|
Amounts Recognized in Accumulated Other Comprehensive Income
|
|
|
|
|
|
|
|
Transition (asset)/obligation
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Prior service cost
|
(0.5
|
)
|
|
(0.5
|
)
|
|
—
|
|
|
—
|
|
Net (gain)/loss
|
58.2
|
|
|
76.9
|
|
|
(1.5
|
)
|
|
(1.5
|
)
|
Total accumulated other comprehensive income at the end of the year
|
57.7
|
|
|
76.4
|
|
|
(1.5
|
)
|
|
(1.5
|
)
|
|
|
|
|
|
|
|
|
Additional Information for Plan with ABO in Excess of Plan Assets
|
|
|
|
|
|
|
|
Projected benefit obligation
|
153.1
|
|
|
321.0
|
|
|
2.8
|
|
|
3.6
|
|
Accumulated benefit obligation
|
147.5
|
|
|
315.7
|
|
|
2.8
|
|
|
3.6
|
|
Fair value of plan assets
|
64.5
|
|
|
213.3
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Additional Information for Plan with PBO in Excess of Plan Assets
|
|
|
|
|
|
|
|
Projected benefit obligation
|
153.1
|
|
|
336.6
|
|
|
2.8
|
|
|
3.6
|
|
Accumulated benefit obligation
|
147.5
|
|
|
328.1
|
|
|
2.8
|
|
|
3.6
|
|
Fair value of plan assets
|
64.5
|
|
|
227.6
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Components of Net Periodic Benefit Cost
|
|
|
|
|
|
|
|
Service Cost
|
3.2
|
|
|
2.8
|
|
|
—
|
|
|
—
|
|
Interest Cost
|
6.6
|
|
|
10.4
|
|
|
0.1
|
|
|
0.1
|
|
Expected return on plan assets
|
(11.0
|
)
|
|
(9.8
|
)
|
|
—
|
|
|
—
|
|
Amortization of unrecognized:
|
|
|
|
|
|
|
|
Transition (asset)/obligation
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Prior service cost
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Net (gain)/loss
|
4.4
|
|
|
2.9
|
|
|
(0.2
|
)
|
|
(0.1
|
)
|
Net periodic benefit cost
|
3.2
|
|
|
6.3
|
|
|
(0.1
|
)
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At June 30,
|
Retirement Benefits
|
|
Other Post-Retirement Benefits
|
(Dollars in millions)
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Other Changes in Plan Assets and Benefit Obligations Recognized in Other Comprehensive Income
|
|
|
|
|
|
|
|
Net (gain)/loss arising during the year
|
$
|
(13.8
|
)
|
|
$
|
16.4
|
|
|
(0.1
|
)
|
|
—
|
|
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
|
(4.4
|
)
|
|
(2.8
|
)
|
|
0.1
|
|
|
0.1
|
|
Exchange rate gain/(loss) recognized during the year
|
(0.5
|
)
|
|
0.2
|
|
|
—
|
|
|
—
|
|
Total recognized in other comprehensive income
|
$
|
(18.7
|
)
|
|
$
|
13.1
|
|
|
$
|
—
|
|
|
$
|
0.1
|
|
Total Recognized in Net Periodic Benefit Cost and Other Comprehensive Income
|
|
|
|
|
|
|
|
Total recognized in net periodic benefit cost and other comprehensive income
|
$
|
(15.5
|
)
|
|
$
|
19.3
|
|
|
$
|
(0.1
|
)
|
|
$
|
0.1
|
|
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
|
2.3
|
|
|
4.5
|
|
|
(0.1
|
)
|
|
(0.1
|
)
|
Financial Assumptions Used to Determine Benefit Obligations at the Balance Sheet Date
|
|
|
|
|
|
|
|
Discount rate (%)
|
2.49
|
%
|
|
2.33
|
%
|
|
3.28
|
%
|
|
2.89
|
%
|
Rate of compensation increases (%)
|
2.09
|
%
|
|
2.10
|
%
|
|
n/a
|
|
|
n/a
|
|
Financial Assumptions Used to Determine Net Periodic Benefit Cost for Financial Year
|
|
|
|
|
|
|
|
Discount rate (%)
|
2.33
|
%
|
|
3.38
|
%
|
|
2.89
|
%
|
|
3.69
|
%
|
Rate of compensation increases (%)
|
2.09
|
%
|
|
2.10
|
%
|
|
n/a
|
|
|
n/a
|
|
Expected long-term rate of return (%)
|
5.46
|
%
|
|
4.93
|
%
|
|
n/a
|
|
|
n/a
|
|
Expected Future Contributions
|
|
|
|
|
|
|
|
Financial Year
|
|
|
|
|
|
|
|
2018
|
$
|
10.3
|
|
|
|
|
$
|
0.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At June 30,
|
Retirement Benefits
|
|
Other Post-Retirement Benefits
|
(Dollars in millions)
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Expected Future Benefit Payments
|
|
|
|
|
|
|
|
Financial Year
|
|
|
|
|
|
|
|
2017
|
10.8
|
|
|
9.0
|
|
|
0.3
|
|
|
0.8
|
|
2018
|
10.6
|
|
|
9.4
|
|
|
0.3
|
|
|
0.3
|
|
2019
|
12.3
|
|
|
10.8
|
|
|
0.3
|
|
|
0.3
|
|
2020
|
11.6
|
|
|
11.1
|
|
|
0.2
|
|
|
0.2
|
|
2021
|
12.1
|
|
|
12.0
|
|
|
0.2
|
|
|
0.2
|
|
2022-2026
|
73.7
|
|
|
67.4
|
|
|
0.9
|
|
|
1.0
|
|
|
|
|
|
|
|
|
|
Actual Asset Allocation (%)
|
|
|
|
|
|
|
|
Equities
|
22.9
|
%
|
|
23.6
|
%
|
|
—
|
%
|
|
—
|
%
|
Government Bonds
|
27.0
|
%
|
|
29.9
|
%
|
|
—
|
%
|
|
—
|
%
|
Corporate Bonds
|
12.5
|
%
|
|
12.3
|
%
|
|
—
|
%
|
|
—
|
%
|
Property
|
2.5
|
%
|
|
2.5
|
%
|
|
—
|
%
|
|
—
|
%
|
Insurance Contracts
|
9.2
|
%
|
|
9.0
|
%
|
|
—
|
%
|
|
—
|
%
|
Other
|
25.9
|
%
|
|
22.7
|
%
|
|
—
|
%
|
|
—
|
%
|
Total
|
100.0
|
%
|
|
100.0
|
%
|
|
—
|
%
|
|
—
|
%
|
|
|
|
|
|
|
|
|
Actual Asset Allocation (Amount)
|
|
|
|
|
|
|
|
Equities
|
56.0
|
|
|
53.7
|
|
|
—
|
|
|
—
|
|
Government Bonds
|
66.0
|
|
|
68.1
|
|
|
—
|
|
|
—
|
|
Corporate Bonds
|
30.5
|
|
|
28.0
|
|
|
—
|
|
|
—
|
|
Property
|
6.2
|
|
|
5.8
|
|
|
—
|
|
|
—
|
|
Insurance Contracts
|
22.5
|
|
|
20.4
|
|
|
—
|
|
|
—
|
|
Other
|
63.4
|
|
|
51.6
|
|
|
—
|
|
|
—
|
|
Total
|
244.6
|
|
|
227.6
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Target Asset Allocation (%)
|
|
|
|
|
|
|
|
Equities
|
23.8
|
%
|
|
24.1
|
%
|
|
—
|
%
|
|
—
|
%
|
Government Bonds
|
29.6
|
%
|
|
29.8
|
%
|
|
—
|
%
|
|
—
|
%
|
Corporate Bonds
|
12.1
|
%
|
|
12.3
|
%
|
|
—
|
%
|
|
—
|
%
|
Property
|
2.7
|
%
|
|
2.7
|
%
|
|
—
|
%
|
|
—
|
%
|
Insurance Contracts
|
10
|
%
|
|
8.9
|
%
|
|
—
|
%
|
|
—
|
%
|
Other
|
21.8
|
%
|
|
22.2
|
%
|
|
—
|
%
|
|
—
|
%
|
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, 2017
and June 30, 2016, including
$36.6 million
and $28.0 million of investments in hedge funds related to the Company's U.K. pension plan, are classified as Level 2.
|
The following table provides a summary of plan assets that are measured in fair value as of
June 30, 2017
, aggregated by the level in the fair value hierarchy within which those measurements fall:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Investments Measured at Net Asset Value (a)
|
|
Total Assets
|
|
|
Equity Securities
|
$
|
—
|
|
|
$
|
56.0
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
56.0
|
|
|
Debt Securities
|
—
|
|
|
96.5
|
|
|
—
|
|
|
—
|
|
|
96.5
|
|
|
Real Estate
|
—
|
|
|
4.5
|
|
|
—
|
|
|
1.7
|
|
|
6.2
|
|
|
Other
|
—
|
|
|
65.8
|
|
|
20.1
|
|
|
—
|
|
|
85.9
|
|
|
Total
|
$
|
—
|
|
|
$
|
222.8
|
|
|
$
|
20.1
|
|
|
$
|
1.7
|
|
|
$
|
244.6
|
|
(a) Per adoption of ASU 2015-07, certain investments are measured at fair value using the net asset value per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the total retirement plan assets.
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, Germany 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, 2016
, aggregated by the level in the fair value hierarchy within which those measurements fall:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Investments Measured at Net Asset Value (a)
|
|
Total Assets
|
|
|
Equity Securities
|
$
|
—
|
|
|
$
|
53.7
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
53.7
|
|
|
Debt Securities
|
—
|
|
|
96.1
|
|
|
—
|
|
|
—
|
|
|
96.1
|
|
|
Real Estate
|
—
|
|
|
4.1
|
|
|
—
|
|
|
1.7
|
|
|
5.8
|
|
|
Other
|
—
|
|
|
52.4
|
|
|
19.6
|
|
|
—
|
|
|
72.0
|
|
|
Total
|
$
|
—
|
|
|
$
|
206.3
|
|
|
$
|
19.6
|
|
|
$
|
1.7
|
|
|
$
|
227.6
|
|
(a) The prior year amounts have been reclassified to conform to the current year presentation due to the adoption of ASU 2015-07.
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 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, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
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, 2016
|
$
|
19.6
|
|
|
$
|
3.2
|
|
|
$
|
16.4
|
|
Actual return on plan assets:
|
|
|
|
|
|
Relating to assets still held at the reporting date
|
1.3
|
|
|
0.1
|
|
|
1.2
|
|
Relating to assets sold during the period
|
—
|
|
|
—
|
|
|
—
|
|
Purchases, sales, settlements, contributions and benefits paid
|
(0.8
|
)
|
|
(0.3
|
)
|
|
(0.5
|
)
|
Transfers in and/or out of Level 3
|
—
|
|
|
—
|
|
|
—
|
|
Ending Balance at June 30, 2017
|
$
|
20.1
|
|
|
$
|
3.0
|
|
|
$
|
17.1
|
|
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.
|
|
|
|
|
|
|
|
|
|
Other Post-Retirement Benefits
|
|
2017
|
|
2016
|
|
|
|
|
Assumed Healthcare Cost Trend Rates at the Balance Sheet Date
|
|
|
|
Healthcare cost trend rate – initial (%)
|
|
|
|
Pre-65
|
n/a
|
|
|
n/a
|
|
Post-65
|
8.02
|
%
|
|
10.35
|
%
|
Healthcare cost trend rate – ultimate (%)
|
|
|
|
Pre-65
|
n/a
|
|
|
n/a
|
|
Post-65
|
4.81
|
%
|
|
4.84
|
%
|
Year in which ultimate rates are reached
|
|
|
|
Pre-65
|
n/a
|
|
|
n/a
|
|
Post-65
|
2026
|
|
|
2022
|
|
Effect of 1% Change in Healthcare Cost Trend Rate
|
|
|
|
Healthcare cost trend rate up 1%
|
|
|
|
on APBO at balance sheet date
|
$
|
122,687
|
|
|
$
|
169,433
|
|
on total service and interest cost
|
2,884
|
|
|
5,721
|
|
Effect of 1% Change in Healthcare Cost Trend Rate
|
|
|
|
Healthcare cost trend rate down 1%
|
|
|
|
on APBO at balance sheet date
|
$
|
(109,956
|
)
|
|
$
|
(151,184
|
)
|
on total service and interest cost
|
(2,583
|
)
|
|
(5,106
|
)
|
|
|
|
|
Expected Future Contributions
|
|
|
|
Financial Year
|
|
|
|
2018
|
$
|
277,080
|
|
|
|
|
|
11
.
|
EQUITY AND ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
|
Description of Capital Stock
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.
Accumulated other comprehensive income/(loss)
Accumulated other comprehensive income/(loss) by component and changes for the fiscal years
June 30, 2017
,
June 30, 2016
and
June 30, 2015
consists of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
Foreign Currency Translation Adjustments
|
|
Available for Sale Investment Adjustments
|
|
Deferred Compensation
|
|
Pension Liability Adjustments
|
|
Other Comprehensive Income/(Loss)
|
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
|
)
|
Activity, net of tax
|
(31.9
|
)
|
|
10.5
|
|
|
—
|
|
|
13.0
|
|
|
(8.4
|
)
|
Balance at June 30, 2017
|
$
|
(280.7
|
)
|
|
$
|
10.5
|
|
|
$
|
—
|
|
|
$
|
(43.9
|
)
|
|
$
|
(314.1
|
)
|
The Company held an investment in a specialty pharmaceutical company, which was treated as a cost method investment prior to the second quarter of fiscal 2017. In the second quarter of fiscal 2017, the specialty pharmaceutical company became publicly traded after an initial public offering and as a result the Company recognized an initial unrealized gain on the investment of
$15.3 million
, net of tax. This amount is reflected in accumulated other comprehensive income.
The components of the changes in the cumulative translation adjustment, minimum pension liability and available for sale investment for the fiscal years ended
June 30, 2017
,
June 30, 2016
and
June 30, 2015
consists of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30,
|
|
2017
|
|
2016
|
|
2015
|
Foreign currency translation adjustments:
|
|
|
|
|
|
Net investment hedge
|
$
|
(21.3
|
)
|
|
$
|
1.8
|
|
|
$
|
30.0
|
|
Long term inter-company loans
|
(14.3
|
)
|
|
(65.0
|
)
|
|
(9.0
|
)
|
Translation adjustments
|
(3.8
|
)
|
|
(54.9
|
)
|
|
(152.7
|
)
|
Total foreign currency translation adjustments, pretax
|
(39.4
|
)
|
|
(118.1
|
)
|
|
(131.7
|
)
|
Tax expense / (benefit)
(1)
|
(7.5
|
)
|
|
0.7
|
|
|
12.3
|
|
Total foreign currency translation adjustments, net of tax
|
$
|
(31.9
|
)
|
|
$
|
(118.8
|
)
|
|
$
|
(144.0
|
)
|
|
|
|
|
|
|
Net change in minimum pension liability
|
|
|
|
|
|
Net gain/(loss) arising during the year
|
$
|
13.9
|
|
|
$
|
(16.4
|
)
|
|
$
|
(12.3
|
)
|
Net (gain)/loss recognized during the year
|
4.3
|
|
|
3.4
|
|
|
3.1
|
|
Foreign Exchange Translation and Other
|
0.5
|
|
|
(0.2
|
)
|
|
0.6
|
|
Total minimum pension liability, pretax
|
18.7
|
|
|
(13.2
|
)
|
|
(8.6
|
)
|
Tax expense / (benefit)
|
5.7
|
|
|
(4.1
|
)
|
|
(2.2
|
)
|
Net change in minimum pension liability, net of tax
|
$
|
13.0
|
|
|
$
|
(9.1
|
)
|
|
$
|
(6.4
|
)
|
|
|
|
|
|
|
Net change in available for sale investment:
|
|
|
|
|
|
Net gain/(loss) arising during the year
|
$
|
16.2
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Net (gain)/loss recognized during the year
|
—
|
|
|
—
|
|
|
—
|
|
Foreign Exchange Translation and Other
|
—
|
|
|
—
|
|
|
—
|
|
Total available for sale investment, pretax
|
16.2
|
|
|
—
|
|
|
—
|
|
Tax expense / (benefit)
|
5.7
|
|
|
—
|
|
|
—
|
|
Net change in available for sale investment, net of tax
|
$
|
10.5
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
(1)
|
Tax related to foreign currency translation adjustments relates to the net investment hedge activity.
|
|
|
12
.
|
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
$20.9 million
,
$10.8 million
and
$9.0 million
in fiscal
2017
,
2016
and
2015
, respectively. All stock compensation expense is classified in selling, general and administrative expenses along with the wages and other benefits earned by option participants. Stock compensation expense is based on awards expected to vest, the Company has elected to account for forfeitures as they occur.
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
2017
,
2016
and 2015 for selected executives of the Company, with an aggregate intrinsic value of
$5.3
million,
$0
and
$2.3 million
, which represents approximately
516,000
,
369,000
and
509,000
shares of common stock for the fiscal
2017
,
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
All outstanding stock options have an exercise price equal to the fair market value on the date of grant. Stock options outstanding generally vest in equal annual installments over
four
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 a 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,
|
|
2017
|
|
2016
|
|
2015
|
Expected volatility
|
25% - 27%
|
|
28% - 31%
|
|
32%
|
Expected life (in years)
|
6.25
|
|
6.25
|
|
6.25
|
Risk-free interest rates
|
1.2% - 1.3%
|
|
1.5% - 1.7%
|
|
2%
|
Dividend yield
|
None
|
|
None
|
|
None
|
The Company commenced public trading of its common stock upon its IPO in July 2014 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
2017
,
2016
, and
2015
was
$7.13
per share,
$10.68
per share and
$7.23
per share, respectively.
The following table summarizes stock option activity and shares subject to outstanding options for the year ended
June 30, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, 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
|
|
Granted
|
$
|
24.42
|
|
515,671
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
Exercised
|
$
|
13.56
|
|
(448,477
|
)
|
—
|
|
6,707,436
|
|
(135,766
|
)
|
—
|
|
1,884,507
|
|
(344,101
|
)
|
—
|
|
6,291,098
|
|
Forfeited
|
$
|
16.46
|
|
(64,400
|
)
|
—
|
|
—
|
|
(37,030
|
)
|
—
|
|
—
|
|
(1,101,531
|
)
|
—
|
|
—
|
|
Expired / Canceled
|
$
|
18.78
|
|
(6,033
|
)
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
Outstanding as of June 30, 2017
|
$
|
20.15
|
|
1,821,616
|
|
7.13
|
23,380,986
|
|
623,722
|
|
5.72
|
10,587,364
|
|
340,068
|
|
3.21
|
7,661,773
|
|
Vest and expected to vest as of June 30, 2017
|
$
|
20.37
|
|
1,821,616
|
|
7.13
|
23,380,986
|
|
268,584
|
|
5.40
|
4,709,332
|
|
340,068
|
|
3.21
|
7,661,773
|
|
Vested and exercisable as of June 30, 2017
|
$
|
16.84
|
|
723,637
|
|
5.60
|
$
|
11,895,684
|
|
268,584
|
|
5.40
|
$
|
4,709,332
|
|
340,068
|
|
3.21
|
$
|
7,661,773
|
|
In fiscal
2017
, participants exercised options to purchase approximately
304,000
net settled shares, resulting in
$5.4 million
of cash paid on behalf of participants for withholding taxes. The intrinsic value of the options exercised in fiscal
2017
was
$14.9 million
. The total fair value of options vested during the period was
$4.0 million
.
In fiscal
2016
, participants exercised options to purchase approximately
212,000
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
.
As of
June 30, 2017
,
$2.7 million
of unrecognized compensation cost related to stock options is expected to be recognized as expense over a weighted-average period of approximately
2.5
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 restricted stock units granted for fiscal
2017
and
2016
had a grant date fair value of
$24.8 million
and
$19.8 million
, respectively, which represents approximately
984,000
and
607,000
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 and cumulative Adjusted EBITDA targets. The metrics for the fiscal 2016 and 2017 grants 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 upon a determination of achievement relative to the targets. Each quarter during the period in which the performance share units are outstanding, the Company estimates the likelihood of such achievement by the end of the performance period in order 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 cliff-vesting schedule over the vesting period of
two
to
three
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 activity in unvested time-based restricted stock units for the year ended
June 30, 2017
:
|
|
|
|
|
|
|
|
|
Time-Based Units
|
|
Weighted Average Grant-Date Fair Value
|
Unvested as of June 30, 2016
|
504,096
|
|
|
$
|
25.96
|
|
Granted
|
549,271
|
|
|
25.08
|
|
Vested
|
35,878
|
|
|
30.57
|
|
Forfeited
|
102,578
|
|
|
25.18
|
|
Unvested as of June 30, 2017
|
914,911
|
|
|
$
|
25.34
|
|
EPS Performance Share Units
The following table summarizes activity in unvested EPS performance share units for the year ended
June 30, 2017
:
|
|
|
|
|
|
|
|
|
EPS Units
|
|
Weighted Average Grant-Date Fair Value
|
Unvested as of June 30, 2016
|
505,425
|
|
|
$
|
25.16
|
|
Granted
|
224,097
|
|
|
24.61
|
|
Vested
|
—
|
|
|
—
|
|
Forfeited
|
68,922
|
|
|
26.74
|
|
Unvested as of June 30, 2017
|
660,600
|
|
|
$
|
24.81
|
|
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 outcomes. Because the valuation model considers a range of possible outcomes, compensation cost is recognized regardless of whether the market condition is actually satisfied.
The assumptions used in estimating the fair value of the RTSR performance share units granted during each year were as follows:
|
|
|
|
|
|
Year Ended June 30,
|
|
2017
|
|
2016
|
Expected volatility
|
32 % - 35%
|
|
25%
|
Expected life (in years)
|
2.4 - 2.9
|
|
2.84
|
Risk-free interest rates
|
0.85% - 1.36%
|
|
0.94%
|
Dividend yield
|
None
|
|
None
|
The following table summarizes activity in unvested RTSR performance share units for the year ended
June 30, 2017
:
|
|
|
|
|
|
|
|
|
RTSR Units
|
|
Weighted Average Grant-Date Fair Value
|
Unvested as of June 30, 2016
|
132,656
|
|
|
$
|
37.17
|
|
Granted
|
210,971
|
|
|
26.14
|
|
Vested
|
—
|
|
|
—
|
|
Forfeited
|
36,993
|
|
|
31.17
|
|
Unvested as of June 30, 2017
|
306,634
|
|
|
$
|
30.30
|
|
In fiscal
2017
, participants vested and settled
33,000
net settled shares, resulting in
$0.0 million
of cash paid on behalf of participants for withholding taxes. In fiscal 2016, participants vested and settled
181,000
net settled shares, resulting in
$2.3 million
of cash paid on behalf of participants for withholding taxes.
As of
June 30, 2017
,
$20.6 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
2017
,
2016
and
2015
was
$25.20
,
$32.82
and
$21.49
, respectively. The fair value of restricted stock units vested in fiscal
2017
,
2016
and
2015
was
$1.1 million
,
$1.2 million
and
$0.6 million
, respectively.
|
|
13
.
|
OTHER (INCOME) / EXPENSE, NET
|
The components of Other (Income) / Expense, net for the
twelve months ended
June 30, 2017
,
2016
and
2015
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended
June 30,
|
(Dollars in millions)
|
2017
|
|
2016
|
|
2015
|
Other (Income) / Expense, net
|
|
|
|
|
|
Debt refinancing / extinguishment costs
|
$
|
4.3
|
|
|
$
|
—
|
|
|
$
|
21.8
|
|
Gain on acquisition, net
(1)
|
—
|
|
|
—
|
|
|
(8.9
|
)
|
Sponsor advisory agreement termination fee
(2)
|
—
|
|
|
—
|
|
|
29.8
|
|
Foreign currency (gains) and losses
|
4.2
|
|
|
(12.6
|
)
|
|
(2.4
|
)
|
Other
(3)
|
—
|
|
|
(3.0
|
)
|
|
2.1
|
|
Total Other (Income) / Expense
|
$
|
8.5
|
|
|
$
|
(15.6
|
)
|
|
$
|
42.4
|
|
|
|
(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 a 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.
|
|
|
14
.
|
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, 2017
are:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
2018
|
2019
|
2020
|
2021
|
2022
|
Thereafter
|
Total
|
Minimum rental payments
|
$
|
11.0
|
|
$
|
7.3
|
|
$
|
6.5
|
|
$
|
5.7
|
|
$
|
4.8
|
|
$
|
16.9
|
|
$
|
52.2
|
|
Rental expense relating to operating leases was approximately
$13.2 million
,
$9.5 million
, and
$10.0 million
for the fiscal years ended
June 30, 2017
, 2016 and 2015, respectively. Sublease rental income was not material for any period presented.
Other Matters
The Company continues to receive and resolve claims stemming from a prior, temporary. regulatory suspension of one of our manufacturing facilities. To date, more than 25 customers of the facility have presented claims against the Company for alleged losses, including lost profits and other types of indirect or consequential damages that 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 claims that are reasonably possible to be asserted with respect to this matter or the likely cost to resolve them, although (a) as of the end of fiscal 2017, the Company has settled 12 customer claims and recorded
$1.8 million
for claim amounts that the Company deemed to be both probable and reasonably estimable, but is not currently in a position to record under GAAP any insurance recovery with respect to such costs and (b) certain remaining customers have presented the Company with support for other claims having an aggregate claim value of approximately
$20 million
. To date, none of the asserted claims takes into account limitations of liability in the contracts governing these claims or any other defense that the Company may assert. In addition, the Company may have insurance for additional costs it may incur as a result of such claims, subject to various deductibles and other limitations, but there can be no assurance as to the aggregate amount or timing of insurance recoveries against any such costs.
From time to time, the Company 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 and claims for reimbursement for the cost of lost or damaged active pharmaceutical ingredients, the cost of any of which could be significant. The Company intends to vigorously defend itself against any such litigation and does not currently believe that the outcome of any such litigation will have a material adverse effect on the Company’s financial statements. 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, the Company receives subpoenas or requests for information relating to the business practices and activities of customers or suppliers from various governmental agencies or private parties, including from state attorneys general, the U.S. Department of Justice, and private parties engaged in patent infringement, antitrust, tort, and other litigation. The Company generally responds 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. The Company expects to incur costs in future periods in connection with future requests.
15
. SEGMENT AND GEOGRAPHIC INFORMATION
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"). The Company considers its reporting segments' results in the context of a similar Company-wide measure: 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. Neither Segment EBITDA nor EBITDA from continuing operations is defined under U.S. GAAP, and neither is a measure of operating income, operating performance or liquidity presented in accordance with U.S. GAAP. Each of these non-GAAP measures is subject to important limitations. This Note to the consolidated financial statements includes information concerning Segment EBITDA and EBITDA from continuing operations in order to provide supplemental information that the Company considers relevant for the readers of the consolidated financial statements, and such information is not meant to replace or supersede U.S. GAAP measures. The Company’s presentation of Segment EBITDA and EBITDA from continuing operations may not be comparable to similarly titled measures used by other companies. The most directly comparable U.S. GAAP measure to EBITDA from continuing
operations is earnings/(loss) from continuing operations. Included in this Note is a reconciliation of earnings/(loss) from continuing operations to EBITDA from continuing operations.
The following tables include net revenue and Segment EBITDA for each of the Company's reporting segments during the fiscal years ended
June 30, 2017
,
June 30, 2016
, and
June 30, 2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
Fiscal Year Ended
June 30,
|
2017
|
|
2016
|
|
2015
|
Softgel Technologies
|
|
|
|
|
|
Net revenue
|
$
|
855.3
|
|
|
$
|
775.0
|
|
|
$
|
787.5
|
|
Segment EBITDA
|
$
|
190.5
|
|
|
$
|
163.8
|
|
|
$
|
173.6
|
|
Drug Delivery Solutions
|
|
|
|
|
|
Net revenue
|
910.1
|
|
|
806.4
|
|
|
798.3
|
|
Segment EBITDA
|
242.4
|
|
|
215.2
|
|
|
230.7
|
|
Clinical Supply Services
|
|
|
|
|
|
Net revenue
|
348.8
|
|
|
307.5
|
|
|
288.4
|
|
Segment EBITDA
|
54.9
|
|
|
53.2
|
|
|
56.7
|
|
Inter-segment revenue elimination
|
(38.8
|
)
|
|
(40.8
|
)
|
|
(43.4
|
)
|
Unallocated costs
(1)
|
(115.6
|
)
|
|
(57.9
|
)
|
|
(100.8
|
)
|
Combined Total
|
|
|
|
|
|
Net revenue
|
$
|
2,075.4
|
|
|
$
|
1,848.1
|
|
|
$
|
1,830.8
|
|
|
|
|
|
|
|
EBITDA from continuing operations
|
$
|
372.2
|
|
|
$
|
374.3
|
|
|
$
|
360.2
|
|
|
|
(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,
|
2017
|
|
2016
|
|
2015
|
Impairment charges and gain/(loss) on sale of assets
|
$
|
(9.8
|
)
|
|
$
|
(2.7
|
)
|
|
$
|
(4.7
|
)
|
Equity compensation
|
(20.9
|
)
|
|
(10.8
|
)
|
|
(9.0
|
)
|
Restructuring and other items
(2)
|
(33.5
|
)
|
|
(27.2
|
)
|
|
(27.2
|
)
|
Noncontrolling interest
|
—
|
|
|
0.3
|
|
|
1.9
|
|
Other income/(expense), net
(3)
|
(8.5
|
)
|
|
15.6
|
|
|
(42.4
|
)
|
Non-allocated corporate costs, net
|
(42.9
|
)
|
|
(33.1
|
)
|
|
(19.4
|
)
|
Total unallocated costs
|
$
|
(115.6
|
)
|
|
$
|
(57.9
|
)
|
|
$
|
(100.8
|
)
|
|
|
(2)
|
Segment results do not include restructuring and certain acquisition-related costs.
|
|
|
(3)
|
Refer to Note
13
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,
|
2017
|
|
2016
|
|
2015
|
Earnings/(loss) from continuing operations
|
$
|
109.8
|
|
|
$
|
111.2
|
|
|
$
|
210.2
|
|
Depreciation and amortization
|
146.5
|
|
|
140.6
|
|
|
140.8
|
|
Interest expense, net
|
90.1
|
|
|
88.5
|
|
|
105.0
|
|
Income tax (benefit)/expense
|
25.8
|
|
|
33.7
|
|
|
(97.7
|
)
|
Noncontrolling interest
|
—
|
|
|
0.3
|
|
|
1.9
|
|
EBITDA from continuing operations
|
$
|
372.2
|
|
|
$
|
374.3
|
|
|
$
|
360.2
|
|
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,
2017
|
|
June 30,
2016
|
Assets
|
|
|
|
Softgel Technologies
|
$
|
1,631.8
|
|
|
$
|
1,446.4
|
|
Drug Delivery Solutions
|
1,639.0
|
|
|
1,475.7
|
|
Clinical Supply Services
|
596.2
|
|
|
578.9
|
|
Corporate and eliminations
|
(412.7
|
)
|
|
(409.9
|
)
|
Total assets
|
$
|
3,454.3
|
|
|
$
|
3,091.1
|
|
The following tables include depreciation and amortization expense and capital expenditures for the fiscal years ended
June 30, 2017
,
June 30, 2016
and
June 30, 2015
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,
|
2017
|
|
2016
|
|
2015
|
Softgel Technologies
|
$
|
38.4
|
|
|
$
|
36.7
|
|
|
$
|
42.8
|
|
Drug Delivery Solutions
|
75.3
|
|
|
72.9
|
|
|
66.9
|
|
Clinical Supply Services
|
18.7
|
|
|
21.1
|
|
|
24.1
|
|
Corporate
|
14.1
|
|
|
9.9
|
|
|
7.0
|
|
Total depreciation and amortization expense
|
$
|
146.5
|
|
|
$
|
140.6
|
|
|
$
|
140.8
|
|
Capital Expenditures
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
Fiscal Year Ended
June 30,
|
2017
|
|
2016
|
|
2015
|
Softgel Technologies
|
$
|
27.6
|
|
|
$
|
20.6
|
|
|
$
|
29.6
|
|
Drug Delivery Solutions
|
83.5
|
|
|
92.4
|
|
|
86.2
|
|
Clinical Supply Services
|
7.2
|
|
|
5.1
|
|
|
6.4
|
|
Corporate
|
21.5
|
|
|
21.5
|
|
|
18.8
|
|
Total capital expenditure
|
$
|
139.8
|
|
|
$
|
139.6
|
|
|
$
|
141.0
|
|
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,
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
|
June 30,
2017
|
|
June 30,
2016
|
United States
|
$
|
996.4
|
|
|
$
|
858.6
|
|
|
$
|
799.3
|
|
|
$
|
588.0
|
|
|
$
|
538.9
|
|
Europe
|
797.4
|
|
|
733.2
|
|
|
795.4
|
|
|
281.6
|
|
|
280.2
|
|
International Other
|
345.0
|
|
|
313.5
|
|
|
268.6
|
|
|
126.3
|
|
|
86.7
|
|
Eliminations
|
(63.4
|
)
|
|
(57.2
|
)
|
|
(32.5
|
)
|
|
—
|
|
|
—
|
|
Total
|
$
|
2,075.4
|
|
|
$
|
1,848.1
|
|
|
$
|
1,830.8
|
|
|
$
|
995.9
|
|
|
$
|
905.8
|
|
|
|
(1)
|
Long-lived assets include property and equipment, net of accumulated depreciation.
|
|
|
16
.
|
SUPPLEMENTAL BALANCE SHEET INFORMATION
|
Supplementary balance sheet information at
June 30, 2017
and
June 30, 2016
is detailed in the following tables.
Inventories
Work-in-process and finished goods inventories include raw materials, labor and overhead. Total inventories consist of the following:
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
June 30,
2017
|
|
June 30,
2016
|
Raw materials and supplies
|
$
|
107.5
|
|
|
$
|
88.7
|
|
Work-in-process
|
42.8
|
|
|
30.7
|
|
Finished goods
|
56.7
|
|
|
55.2
|
|
Total inventory, gross
|
207.0
|
|
|
174.6
|
|
Inventory cost adjustment
|
(22.1
|
)
|
|
(19.8
|
)
|
Inventories
|
$
|
184.9
|
|
|
$
|
154.8
|
|
Prepaid expenses and other
Prepaid expenses and other current assets consist of the following:
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
June 30,
2017
|
|
June 30,
2016
|
Prepaid expenses
|
$
|
23.8
|
|
|
$
|
29.3
|
|
Spare parts supplies
|
11.8
|
|
|
10.8
|
|
Short term investments
|
—
|
|
|
7.0
|
|
Long term tax asset (current portion)
(1)
|
—
|
|
|
6.8
|
|
Available for sale investment
|
18.6
|
|
|
—
|
|
Other current assets
|
43.6
|
|
|
35.1
|
|
Prepaid expenses and other
|
$
|
97.8
|
|
|
$
|
89.0
|
|
(1) The Company transferred certain intellectual property assets between jurisdictions in the year ended June 30, 2016 resulting in a current deferred tax charge asset. This asset was subsequently adjusted as a result of the adoption of a new accounting standard on income tax accounting for intra-entity asset transfer other than inventory. Refer to Note 1 for further details on the adoption of ASU 2016-16.
Property, plant, and equipment, net
Property, plant, and equipment, net consist of the following:
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
June 30,
2017
|
|
June 30,
2016
|
Land, buildings and improvements
|
$
|
735.2
|
|
|
$
|
649.6
|
|
Machinery, equipment and capitalized software
|
825.0
|
|
|
757.1
|
|
Furniture and fixtures
|
10.1
|
|
|
9.9
|
|
Construction in progress
|
137.4
|
|
|
134.1
|
|
Property and equipment, at cost
|
1,707.7
|
|
|
1,550.7
|
|
Accumulated depreciation
|
(711.8
|
)
|
|
(644.9
|
)
|
Property, plant, and equipment, net
|
$
|
995.9
|
|
|
$
|
905.8
|
|
Other assets
Other assets consist of the following:
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
June 30,
2017
|
|
June 30,
2016
|
Long term tax asset
(1)
|
$
|
—
|
|
|
$
|
45.4
|
|
Deferred compensation investments
|
15.4
|
|
|
11.1
|
|
Deferred long-term debt financing costs
|
1.2
|
|
|
1.8
|
|
Other
|
10.9
|
|
|
8.8
|
|
Total other assets
|
$
|
27.5
|
|
|
$
|
67.1
|
|
(1) The Company transferred certain intellectual property assets between jurisdictions in the year ended June 30, 2016 resulting in a non-current deferred tax charge asset. This asset was subsequently adjusted as a result of the adoption of a new accounting standard on income tax accounting for intra-entity asset transfer other than inventory. Refer to Note 1 for further details on the adoption of ASU 2016-16.
Other accrued liabilities
Other accrued liabilities consist of the following:
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
June 30,
2017
|
|
June 30,
2016
|
Accrued employee-related expenses
|
$
|
96.4
|
|
|
$
|
82.8
|
|
Restructuring accrual
|
5.9
|
|
|
6.1
|
|
Accrued interest
|
0.9
|
|
|
—
|
|
Deferred revenue and fees
|
84.9
|
|
|
46.2
|
|
Accrued income tax
|
24.7
|
|
|
38.8
|
|
Other accrued liabilities and expenses
|
68.4
|
|
|
45.9
|
|
Other accrued liabilities
|
$
|
281.2
|
|
|
$
|
219.8
|
|
Allowance for doubtful accounts
Trade receivables allowance for doubtful accounts activity is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
June 30,
2017
|
|
June 30,
2016
|
|
June 30,
2015
|
Trade receivables allowance for doubtful accounts
|
|
|
|
|
|
Beginning balance
|
$
|
3.9
|
|
|
$
|
6.6
|
|
|
$
|
5.4
|
|
Charged to cost and expenses (recoveries)
|
1.0
|
|
|
(0.5
|
)
|
|
2.7
|
|
Deductions
|
(0.9
|
)
|
|
(1.8
|
)
|
|
(1.1
|
)
|
Impact of foreign exchange
|
—
|
|
|
(0.4
|
)
|
|
(0.4
|
)
|
Closing balance
|
$
|
4.0
|
|
|
$
|
3.9
|
|
|
$
|
6.6
|
|
|
|
17
.
|
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 2017, By Quarters
|
First
|
|
Second
|
|
Third
|
|
Fourth
|
Net revenue
|
$
|
442.2
|
|
|
$
|
483.7
|
|
|
$
|
532.6
|
|
|
$
|
616.9
|
|
Gross margin
|
124.1
|
|
|
147.9
|
|
|
167.4
|
|
|
215.2
|
|
Net earnings attributable to Catalent
|
$
|
4.6
|
|
|
$
|
17.4
|
|
|
$
|
26.0
|
|
|
$
|
61.8
|
|
|
|
|
|
|
|
|
|
Earnings per share attributable to Catalent:
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
Net earnings
|
$
|
0.04
|
|
|
$
|
0.14
|
|
|
$
|
0.21
|
|
|
$
|
0.49
|
|
Diluted
|
|
|
|
|
|
|
|
Net earnings
|
$
|
0.04
|
|
|
$
|
0.14
|
|
|
$
|
0.21
|
|
|
$
|
0.49
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions, except per share data)
|
Fiscal Year 2016, By Quarters
|
First
|
|
Second
|
|
Third
|
|
Fourth
|
Net revenue
|
$
|
423.0
|
|
|
$
|
454.9
|
|
|
$
|
438.0
|
|
|
$
|
532.2
|
|
Gross margin
|
121.5
|
|
|
152.1
|
|
|
126.2
|
|
|
187.8
|
|
Net earnings attributable to Catalent
|
$
|
11.9
|
|
|
$
|
30.8
|
|
|
$
|
10.7
|
|
|
$
|
58.1
|
|
|
|
|
|
|
|
|
|
Earnings per share attributable to Catalent:
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
Net earnings
|
$
|
0.10
|
|
|
$
|
0.25
|
|
|
$
|
0.09
|
|
|
$
|
0.47
|
|
Diluted
|
|
|
|
|
|
|
|
Net earnings
|
$
|
0.09
|
|
|
$
|
0.24
|
|
|
$
|
0.09
|
|
|
$
|
0.46
|
|