ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company
We are the leading global provider of advanced delivery technologies, development, and manufacturing solutions for drugs, protein, nucleic acid, cell, and gene therapy biologics, and consumer health products. Our oral, injectable, cell and gene therapy, and respiratory delivery technologies address the full diversity of the pharmaceutical industry, including small molecules; protein, cell, and gene therapy biologics; and consumer health products. Through our extensive capabilities and deep expertise in product development, we help our customers take products to market faster, including nearly half of new drug products approved by the U.S. Food and Drug Administration in the last decade. Our advanced delivery technology platforms, which include those in our Softgel and Oral Technologies, Biologics, and Oral and Specialty Delivery segments, our proven formulation, manufacturing, and regulatory expertise, and our broad and deep intellectual property enable our customers to develop more products and better treatments for patients and consumers. Across both development and delivery, our commitment to reliably supply our customers’ and their patients' needs is the foundation for the value we provide; annually, we produce approximately 74 billion doses for nearly 7,000 customer products, or approximately 1 in every 20 doses of such product taken each year by patients and consumers around the world. We believe that, through our investments in growth-enabling capacity and capabilities, our ongoing focus on operational and quality excellence, the sales of existing and introduction of new customer products, our innovation activities and patents, and our entry into new markets, we will continue to benefit from attractive and differentiated margins and realize the growth potential from these areas.
The COVID-19 Pandemic
The COVID-19 pandemic has spread across the globe and is affecting economic activity worldwide, including in the countries in which we, our customers, our suppliers, and our other business partners conduct business. Governments in affected regions have implemented, and may continue to implement, measures to protect public health, including quarantines, travel restrictions, business closures, cancellations of public gatherings, and measures that affect the flow of goods, services, and people between different regions. We have taken and continue to take steps to avoid or reduce infection or contamination and otherwise protect our employees and our business, in line with guidelines issued by the U.S. Centers for Disease Control and Prevention (CDC), the World Health Organization (WHO), and local authorities where we operate, to re-emphasize good hygiene practices, severely restrict non-employee access to our sites, reorganize our workflows where permitted to maximize social distancing, limit our employees to only business-critical travel (where permitted by local law), facilitate safer alternatives to travel to and from work, and employ remote-working strategies. In addition, to address the multiple dimensions of the pandemic, senior, multi-disciplinary teams reporting directly to our Chief Executive Officer have been continuously monitoring the global situation, executing mitigation activities whenever and wherever required, and planning for a phased and structured return to our facilities as circumstances will permit for those employees who have been remote-working.
We have reviewed and will continue to analyze our supply chain to identify any risk, delay, or concern that may have an impact on our ability to deliver our services and products. To date, we have not identified any significant risk, delay, or concern that would have a substantial effect on such delivery. We have adopted various procedures to minimize and manage any future disruption to our ongoing operations. These include procuring expanded safety stocks of raw materials and personal protective equipment across our network, as well as ongoing monitoring of our suppliers’ stock levels to assure future deliveries. Our existing procedures, which are consistent with cGMP and other regulatory standards, are intended to assure the integrity of our supply, including against any contamination. We have a detailed response plan to manage any impact of the virus on employee health, site operations, and product supply, including immediate assessment of the health of employees reporting symptoms, comprehensive risk assessment of any impact to quality, additional cleaning protocols, and alternative shift patterns to compensate should fewer employees be available.
The COVID-19 pandemic has not had a material adverse impact on our business, financial condition, or results of operations to date, but, at this point, the extent to which the COVID-19 pandemic may affect our future financial condition or results of operations remains uncertain and will depend on future developments that are highly uncertain, including the duration of the pandemic, new information that may emerge concerning the severity of the virus, and the actions governments, the pharmaceutical industry, competitors, suppliers, customers, patients, and others may take to contain or address its direct and indirect effects. The COVID-19 pandemic and associated mitigation measures may also have an adverse impact on healthcare systems, global economic conditions, or economic conditions in one or more regions where we, our suppliers, or our customers operate, which could have an adverse effect on our business and financial condition. We have observed some increases in customer delays and cancellations, occasional increases in absenteeism of production employees in our facilities in certain affected regions, and a small percentage of our customers expecting a reduction in demand and a larger percentage expecting an increase in demand, in each case due to circumstances relating to the COVID-19 pandemic and the responsive measures. We have also seen revenue increases and the potential for further revenue increases related to projects seeking to address the
COVID-19 pandemic or its effects. Future financial periods may reflect greater effects of the pandemic on the results of our operations.
See also “Risk Factors — Risks Related to Our Business and Industry — Our business, financial condition, and results of operations may be adversely affected by global health epidemics, including the COVID-19 pandemic” in our Fiscal 2020 10-K.
Critical Accounting Policies and Estimates
We prepare our financial statements in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”). Management made certain estimates and assumptions during the preparation of the consolidated financial statements in accordance with U.S. GAAP. These estimates and assumptions affect the reported amount of assets and liabilities and disclosures of contingent assets and liabilities in the consolidated financial statements. These estimates also affect the reported amount of net earnings during the reporting periods. Actual results could differ from those estimates. Because of the size of the financial statement elements to which they relate, some of our accounting policies and estimates have a more significant impact on the consolidated financial statements than others.
There was no material change to our critical accounting policies or in the underlying accounting assumptions and estimates from those described in our Fiscal 2020 10-K, other than recently adopted accounting principles disclosed in Note 1 to the unaudited consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q (the “Consolidated Financial Statements”), which adoptions had no material impact on net earnings.
Non-GAAP Metrics
EBITDA from operations
Management measures operating performance based on consolidated earnings from operations before interest expense, expense/(benefit) for income taxes, and depreciation and amortization, adjusted for the income or loss attributable to non-controlling interests (“EBITDA from operations”). EBITDA from operations is not defined under U.S. GAAP, is not a measure of operating income, operating performance, or liquidity presented in accordance with U.S. GAAP, and is subject to important limitations.
We believe that the presentation of EBITDA from operations enhances an investor’s understanding of our financial performance. We believe this measure is a useful financial metric to assess our operating performance from period to period by excluding certain items that we believe are not representative of our core business and use this measure for business planning purposes. In addition, given the significant investments that we have made in the past in property, plant, and equipment, depreciation and amortization expenses represent a meaningful portion of our cost structure. We believe that EBITDA from operations will provide investors with a useful tool for assessing the comparability between periods of our ability to generate cash from operations sufficient to pay taxes, to service debt, and to undertake capital expenditures because it eliminates depreciation and amortization expense. We present EBITDA from operations in order to provide supplemental information that we consider relevant for the readers of our Consolidated Financial Statements, and such information is not meant to replace or supersede U.S. GAAP measures. Our definition of EBITDA from operations may not be the same as similarly titled measures used by other companies. The most directly comparable measure to EBITDA from operations defined under U.S. GAAP is net earnings/(loss). Included in this Management’s Discussion and Analysis is a reconciliation of net earnings/(loss) to EBITDA from operations.
In addition, we evaluate the performance of our segments based on segment earnings before non-controlling interests, other (income)/expense, impairments, restructuring costs, interest expense, income tax expense/(benefit), and depreciation and amortization (“Segment EBITDA”).
Use of Constant Currency
As exchange rates are an important factor in understanding period-to-period comparisons, we believe the presentation of results on a constant-currency basis in addition to reported results helps improve investors’ ability to understand our operating results and evaluate our performance in comparison to prior periods. Constant-currency information compares results between periods as if exchange rates had remained constant period-over-period. We use results on a constant-currency basis as one measure to evaluate our performance. In this Quarterly Report on Form 10-Q, we compute constant currency by calculating current-year results using prior-year foreign currency exchange rates. We generally refer to such amounts calculated on a constant-currency basis as excluding the impact of foreign exchange. These results should be considered in addition to, not as a substitute for, results reported in accordance with U.S. GAAP. Results on a constant-currency basis, as we present them, may not be comparable to similarly titled measures used by other companies and are not measures of performance presented in accordance with U.S. GAAP.
Other Non-GAAP Measures
Organic revenue growth and Segment EBITDA growth are measures we use to explain the underlying results and trends in the business. Organic revenue growth and Segment EBITDA growth are measures used to show current year sales and earnings from existing operations and include revenue from licensing related activities entered into within the year. Organic revenue growth and Segment EBITDA growth exclude the impact of foreign currency, acquisitions of operating or legal entities, and divestitures within the year. These measures should be considered in addition to, not as a substitute for, performance measures reported in accordance with U.S. GAAP. These measures, as we present them, may not be comparable to similarly titled measures used by other companies and are not measures of performance presented in accordance with U.S. GAAP.
Three Months Ended September 30, 2020 Compared to the Three Months Ended September 30, 2019
The below tables summarize several financial metrics we use to measure performance for the three months ended September 30, 2020 and three months ended September 30, 2019. Refer to the discussions below regarding performance and use of key financial metrics.
Results for the three months ended September 30, 2020 compared to the three months ended September 30, 2019 were as follows:
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Three Months Ended
September 30,
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FX Impact
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Constant Currency Increase/(Decrease)
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(Dollars in Millions)
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2020
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2019
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Change $
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Change %
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Net revenue
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$
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845.7
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$
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664.7
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$
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9.7
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$
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171.3
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26
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%
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Cost of sales
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596.8
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487.0
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5.8
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104.0
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21
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%
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Gross margin
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248.9
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177.7
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3.9
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67.3
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38
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%
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Selling, general, and administrative expenses
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164.7
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142.8
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0.9
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21.0
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15
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%
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Impairment charges and (gain)/loss on sale of assets
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1.8
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(0.2)
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—
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2.0
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(1,000)
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%
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Restructuring and other
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0.9
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0.7
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0.1
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0.1
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14
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%
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Operating earnings
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81.5
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34.4
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2.9
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44.2
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128
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%
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Interest expense, net
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25.3
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36.3
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0.2
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(11.2)
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(31)
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%
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Other (income)/expense, net
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(11.2)
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4.9
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1.5
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(17.6)
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(359)
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%
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Earnings/(loss) before income taxes
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67.4
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(6.8)
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1.2
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73.0
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(1,074)
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%
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Income tax benefit
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(15.0)
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(6.9)
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(0.1)
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(8.0)
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116
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%
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Net earnings
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$
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82.4
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$
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0.1
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$
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1.3
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$
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81.0
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81,000
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%
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Net Revenue
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2020 vs. 2019
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Factors Contributing to Year-Over-Year Change
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Three Months Ended September 30,
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Net Revenue
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Net revenue without acquisitions/divestitures
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20
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%
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Impact of acquisitions
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8
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%
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Impact of divestitures
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(2)
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%
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Constant currency change
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26
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%
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Foreign currency translation impact on reporting
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1
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%
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Total % change
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27
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%
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Net revenue increased $171.3 million, or 26%, excluding the impact of foreign exchange, compared to the three months ended September 30, 2019. Net revenue increased 8% as a result of acquisitions, which was partially offset by a 2% decrease in net revenue due to divestitures. We acquired a facility in Anagni, Italy (“Anagni”) in January 2020, and Masthercell Global Inc. (“MaSTherCell”) in February 2020 and divested a manufacturing site in Australia in October 2019. Net revenue increased 20% without the impact of acquisitions and divestitures on a constant-currency basis, primarily due to robust demand across all Biologics offerings, offset in part due to reduced demand in the Softgel and Oral Technologies Segment for certain prescription products in North America, as well as decreased demand for our consumer health products.
Gross Margin
Gross margin increased $67.3 million, or 38%, compared to the three months ended September 30, 2019, excluding the impact of foreign exchange, primarily as a result of the strong margin profile for all Biologics segment offerings, offset by decreased demand for our prescription and consumer health products in the Softgel and Oral Technologies segment and charges in the Oral and Specialty Delivery segment associated with the voluntary U.S. recall of a recently launched product within our respiratory and ophthalmic specialty platform. On a constant-currency basis, gross margin, as a percentage of revenue, increased 260 basis points to 29.3% in the three months ended September 30, 2020, compared to 26.7% in the prior-year period, primarily due to the factors described above.
Selling, General, and Administrative Expenses
Selling, general, and administrative expenses increased by $21.0 million, or 15%, compared to the three months ended September 30, 2019, excluding the impact of foreign exchange, due to incremental expenses from acquired companies of $5.6 million, which includes $1.1 million of incremental depreciation and amortization expense, $1.8 million of employee-related costs and $1.3 million related to various transitional services. Selling, general, and administrative expenses further increased by $2.0 million due to non-cash equity-based compensation and $7.7 million for employee-related costs primarily incurred for wages and bonuses, partially offset by savings in travel and entertainment expenses.
Interest Expense, net
Interest expense, net of $25.3 million for the three months ended September 30, 2020 decreased by $11.2 million, or 31%, compared to the three months ended September 30, 2019, excluding the impact of foreign exchange, driven by savings from repayment of Operating Company’s formerly outstanding euro-denominated term loan, euro-denominated 4.75% senior notes due 2024 and favorable interest rate movement on the U.S. dollar-denominated term loan, partially offset by interest expenses on Operating Company's euro-denominated 2.375% senior notes due 2028 (the “Euro 2028 Notes”). The savings also includes $6.2 million of capitalized interest costs for the three months ended September 30, 2020.
For additional information concerning our debt and financing arrangements, including the changing mix of debt and equity in our capital structure, see “—Liquidity and Capital Resources” and Note 6 to our Consolidated Financial Statements.
Other (Income)/Expense, net
Other income, net of $11.2 million for the three months ended September 30, 2020 was primarily driven by a gain of $9.0 million related to the change in the fair value of the derivative liability arising from the dividend-adjustment mechanism of our series A convertible preferred stock, par value $0.01 (the “Series A Preferred Stock”). See Notes 10 and 14 to our Consolidated Financial Statements for more details on the Series A Preferred Stock dividend-adjustment mechanism.
Other expense, net of $4.9 million for the three months ended September 30, 2019 was primarily driven by a loss of $8.9 million related to the change in the fair value of the derivative liability arising from the dividend-adjustment mechanism of the Series A Preferred Stock. The loss was partially offset by non-cash foreign currency translation gains.
Income Tax Expense (Benefit)
Our benefit for income taxes for the three months ended September 30, 2020 was $15.0 million relative to earnings before income taxes of $67.4 million. Our benefit for income taxes for the three months ended September 30, 2019 was $6.9 million relative to a loss before income taxes of $6.8 million. The income tax benefit for the current period is not comparable to the same period of the prior year due to changes in pretax income over many jurisdictions and the impact of discrete items, including a $22.2 million benefit for U.S. foreign tax credits resulting from amending a prior year return. Generally, fluctuations in the effective tax rate are primarily due to changes in the geographic distribution of our pretax income resulting from our business mix and changes in the tax impact of permanent differences, special items, certain equity related compensation, and other discrete tax items, which may have unique tax implications depending on the nature of the item.
Segment Review
The following charts depict the percentages of net revenue from each of our four reporting segments for the three months ended September 30, 2020 compared to the three months ended September 30, 2019. Refer below for discussions regarding each segment’s net revenue and EBITDA performance and to “—Non-GAAP Metrics” for a discussion of our use of Segment EBITDA, a measure that is not defined under U.S. GAAP.
Our results on a segment basis for the three months ended September 30, 2020 compared to the three months ended September 30, 2019 were as follows:
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Three Months Ended
September 30,
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FX Impact
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Constant Currency Increase/(Decrease)
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(Dollars in Millions)
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2020
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2019
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Change $
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Change %
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Biologics
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Net revenue
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$
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377.1
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$
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188.6
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$
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3.4
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$
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185.1
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98
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%
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Segment EBITDA
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$
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106.5
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$
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35.8
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$
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1.2
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$
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69.5
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194
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%
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Softgel and Oral Technologies
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Net revenue
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221.1
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263.7
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2.0
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(44.6)
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(17)
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%
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Segment EBITDA
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37.8
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46.4
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0.8
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(9.4)
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(20)
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%
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Oral and Specialty Delivery
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Net revenue
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158.3
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132.6
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2.9
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22.8
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17
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%
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Segment EBITDA
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21.4
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27.7
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1.0
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(7.3)
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(26)
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%
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Clinical Supply Services
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Net revenue
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92.7
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84.6
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1.5
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6.6
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8
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%
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Segment EBITDA
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25.0
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21.6
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0.7
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2.7
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13
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%
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Inter-segment revenue elimination
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(3.5)
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(4.8)
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(0.1)
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1.4
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29
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%
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Unallocated Costs (1)
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(28.9)
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(41.4)
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(1.7)
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14.2
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34
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%
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Combined totals
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Net revenue
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$
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845.7
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$
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664.7
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$
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9.7
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$
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171.3
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26
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%
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EBITDA from operations
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$
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161.8
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$
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90.1
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$
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2.0
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$
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69.7
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77
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%
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(1) Unallocated costs include restructuring and special items, stock-based compensation, impairment charges, certain other corporate directed costs, and other costs that are not allocated to the segments as follows:
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Three Months Ended
September 30,
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(Dollars in millions)
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2020
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2019
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Impairment charges and gain/(loss) on sale of assets
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$
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(1.8)
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$
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0.2
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Stock-based compensation
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(18.7)
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(16.6)
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Restructuring and other special items (a)
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(4.9)
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(11.8)
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Other income/(expense), net (b)
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11.2
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(4.9)
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Unallocated corporate costs, net
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(14.7)
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(8.3)
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Total unallocated costs
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$
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(28.9)
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$
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(41.4)
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(a) Restructuring and other special items during the three months ended September 30, 2020 include transaction and integration costs associated with our Anagni and MaSTherCell acquisitions, the disposal of a site in Australia, and other restructuring initiatives across our network of sites. Restructuring and other special items during the three months ended September 30, 2019 include transaction and integration costs associated with our cell and gene therapy acquisitions.
(b) Refer to Note 8, Other (income)/expense, net, for details of financing charges and foreign currency translation adjustments recorded within other income/(expense), net in our Consolidated Financial Statements.
Provided below is a reconciliation of net earnings to EBITDA from operations:
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Three Months Ended
September 30,
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(Dollars in millions)
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2020
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2019
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Net earnings
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$
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82.4
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$
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0.1
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Depreciation and amortization
|
69.1
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60.6
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Interest expense, net
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25.3
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36.3
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Income tax benefit
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(15.0)
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(6.9)
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EBITDA from operations
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$
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161.8
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$
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90.1
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Biologics segment
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2020 vs. 2019
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Factors Contributing to Year-Over-Year Change
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Three Months Ended
September 30,
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|
Net Revenue
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Segment EBITDA
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Net revenue/Segment EBITDA without acquisitions
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83
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%
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|
179
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%
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Impact of acquisitions
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15
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%
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15
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%
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Constant currency change
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98
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%
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194
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%
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Foreign exchange fluctuation
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2
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%
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3
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%
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Total % change
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100
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%
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|
197
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%
|
Biologics net revenue increased by $185.1 million, or 98%, excluding the impact of foreign exchange, compared to the three months ended September 30, 2019. Net revenue increased 83%, compared to the three months ended September 30, 2019, excluding the impact of acquisitions. The increase was driven across all segment offerings with robust end-market demand for the global drug product, drug substance and cell and gene therapy offerings, in part related to demand for COVID-19 related programs.
Biologics Segment EBITDA increased by $69.5 million, or 194%, excluding the impact of foreign exchange, compared to the three months ended September 30, 2019. Segment EBITDA increased 179%, compared to the three months ended September 30, 2019, excluding the impact of acquisitions. The increase was driven across all segment offerings with robust end-market demand for the global drug product, drug substance, and cell and gene therapy offerings, in part related to demand for COVID-19 related programs.
Since September 30, 2019, we have acquired Anagni, part of which operates within the Biologics segment, and MaSTherCell, which together increased net revenue and Segment EBITDA on an inorganic basis in our Biologics segment by 15% and 15%, respectively, in the three months ended September 30, 2020 compared to the corresponding prior-year period.
Softgel and Oral Technologies segment
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2020 vs. 2019
|
Factors Contributing to Year-Over-Year Change
|
Three Months Ended
September 30,
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|
Net Revenue
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Segment EBITDA
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Net revenue/Segment EBITDA without divestitures
|
(12)
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%
|
|
(21)
|
%
|
Impact of divestitures
|
(5)
|
%
|
|
1
|
%
|
Constant currency change
|
(17)
|
%
|
|
(20)
|
%
|
Foreign currency translation impact on reporting
|
1
|
%
|
|
2
|
%
|
Total % change
|
(16)
|
%
|
|
(18)
|
%
|
Softgel and Oral Technologies net revenue decreased by $44.6 million, or 17%, excluding the impact of foreign exchange, compared to the three months ended September 30, 2019. Net revenue decreased 12%, compared to the three months ended September 30, 2019, excluding the impact of divestitures. The decrease primarily relates to reduced demand for prescription products within North America, as well as lower demand in consumer health products, particularly in cough, cold, and over-the-counter pain relief products.
Softgel and Oral Technologies Segment EBITDA decreased $9.4 million, or 20%, excluding the impact of foreign exchange, compared to the three months ended September 30, 2019. Segment EBITDA decreased 21%, compared to the three months ended September 30, 2019, excluding the impact of divestitures. The decrease, similar to that of net revenue, is primarily driven by a decrease in demand in both the prescription and consumer health portfolio of products.
In October 2019, we divested a manufacturing site in Australia in order to better streamline our global operations. The site divestiture resulted in a decrease in net revenue of 5% and an increase in Segment EBITDA of 1%, in the three months ended September 30, 2020 compared to the three months ended September 30, 2019.
Oral and Specialty Delivery segment
|
|
|
|
|
|
|
|
|
|
|
|
|
2020 vs. 2019
|
Factors Contributing to Year-Over-Year Change
|
Three Months Ended
September 30,
|
|
Net Revenue
|
|
Segment EBITDA
|
Net revenue/Segment EBITDA without acquisitions
|
(1)
|
%
|
|
(61)
|
%
|
Impact of acquisitions
|
18
|
%
|
|
35
|
%
|
|
|
|
|
Constant currency change
|
17
|
%
|
|
(26)
|
%
|
Foreign currency translation impact on reporting
|
2
|
%
|
|
3
|
%
|
Total % change
|
19
|
%
|
|
(23)
|
%
|
Oral and Specialty Delivery net revenue increased by $22.8 million, or 17%, excluding the impact of foreign exchange, compared to the three months ended September 30, 2019. Net revenue decreased 1%, compared to the three months ended September 30, 2019, excluding the impact of acquisitions. Increased demand for orally delivered commercial products was more than offset by decreased demand for the segment’s early-phase development programs.
Oral and Specialty Delivery Segment EBITDA decreased by $7.3 million, or 26%, excluding the impact of foreign exchange, compared to the three months ended September 30, 2019. Segment EBITDA decreased 61% compared to the three months ended September 30, 2019, excluding the impact of acquisitions. The decrease from the prior-year period was primarily driven by the voluntary U.S. recall of a recently launched product in our respiratory and ophthalmic specialty platform, inclusive of one-time charges totaling $12 million, associated with the recall. Strong end-market demand for orally delivered commercial products within Europe and favorable manufacturing efficiencies within our respiratory and ophthalmic specialty platform partially offset the charges associated with this product recall.
On January 1, 2020, we acquired Anagni, and the portion of this facility allocated to our Oral and Specialty Delivery segment increased net revenue and Segment EBITDA on an inorganic basis by 18% and 35%, respectively, in the three months ended September 30, 2020, compared to the corresponding prior-year period.
Clinical Supply Services segment
|
|
|
|
|
|
|
|
|
|
|
|
|
2020 vs. 2019
|
Factors Contributing to Year-Over-Year Change
|
Three Months Ended
September 30,
|
|
Net Revenue
|
|
Segment EBITDA
|
Net revenue/Segment EBITDA
|
8
|
%
|
|
13
|
%
|
|
|
|
|
Constant currency change
|
8
|
%
|
|
13
|
%
|
Foreign currency translation impact on reporting
|
2
|
%
|
|
3
|
%
|
Total % change
|
10
|
%
|
|
16
|
%
|
Clinical Supply Services net revenue increased by $6.6 million, or 8%, excluding the impact of foreign exchange, compared to the three months ended September 30, 2019. The increase was driven by strong demand in our storage and distribution offerings across all regions, offset in part by a decrease in demand for our manufacturing and packaging business within North America.
Clinical Supply Services Segment EBITDA increased by $2.7 million, or 13%, excluding the impact of foreign exchange, compared to the three months ended September 30, 2019. The increase was driven by strong demand in our storage and distribution offerings across all regions, offset in part, by a decrease in demand for our manufacturing and packaging business within North America.
Liquidity and Capital Resources
Sources and Uses of Cash
Our principal sources of liquidity have been cash flows generated from operations and occasional capital market activities. The principal uses of cash are to fund operating and capital expenditures, business or asset acquisitions, interest payments on debt, the payment of deferred purchase consideration from the Cook Pharmica LLC (now named Catalent Indiana, LLC (“Catalent Indiana”)) acquisition, the payment of the quarterly dividend on the Series A Preferred Stock, and any mandatory or discretionary principal payment on our debt. At the current stated value of the Series A Preferred Stock outstanding as of September 30, 2020, the aggregate amount of each regular quarterly dividend, if paid in cash, is $8.1 million. As of September 30, 2020, the Operating Company had available a $550 million revolving credit facility that matures in May 2024, the capacity of which was reduced by $6.7 million in letters of credit outstanding as of September 30, 2020. The revolving credit facility includes borrowing capacity available for letters of credit and for short-term borrowings, referred to as swing-line borrowings.
We believe that our cash on hand, cash from operations, and available borrowings under our revolving credit facility will be adequate to meet our future liquidity needs for at least the next twelve months, including our quarterly regular dividend on the Series A Preferred Stock, if paid in cash, as well as the amounts expected to become due with respect to our pending capital projects. We have no significant maturity under any of our bank or note debt until the U.S. dollar-denominated 4.875% senior notes due 2026 (the “USD 2026 Notes”) mature in January 2026. As of September 30, 2020, we had only two remaining payments of $50.0 million each, due in October 2020 and 2021, on the deferred purchase consideration for the acquisition of Catalent Indiana, and one of those payments was made in October 2020.
Cash Flows
The following table summarizes our consolidated statements of cash flows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
|
(Dollars in millions)
|
2020
|
|
2019
|
|
$ Change
|
Net cash provided by/(used in):
|
|
|
|
|
|
Operating activities
|
$
|
149.7
|
|
|
$
|
25.2
|
|
|
$
|
124.5
|
|
Investing activities
|
$
|
(151.2)
|
|
|
$
|
(84.9)
|
|
|
$
|
(66.3)
|
|
Financing activities
|
$
|
49.6
|
|
|
$
|
(35.8)
|
|
|
$
|
85.4
|
|
Operating Activities
For the three months ended September 30, 2020, cash provided by operating activities was $149.7 million, compared to $25.2 million for the corresponding prior-year period. Cash flow from operating activities for the three months ended September 30, 2020 increased primarily due to an increase in operating earnings, which increased from $34.4 million in the corresponding prior-year period to $81.5 million for the three months ended September 30, 2020.
Investing Activities
For the three months ended September 30, 2020, cash used in investing activities was $151.2 million, compared to $84.9 million for the three months ended September 30, 2019. The higher level of cash use was primarily driven by an increase in cash used in the acquisition of property, plant, and equipment, which totaled $149.6 million in the three months ended September 30, 2020 compared to $73.5 million for the three months ended September 30, 2019.
Financing Activities
For the three months ended September 30, 2020, cash provided by financing activities was $49.6 million, compared to cash used in financing activities of $35.8 million for the three months ended September 30, 2019. The increase in cash from financing activities is primarily driven by the exercise of an over-allotment option on 1.2 million additional shares by the underwriter for the June 2020 Equity Offering on July 10, 2020, resulting in net proceeds of $81.8 million for the three months ended September 30, 2020.
Guarantees and Security
The Senior Notes
All obligations under Operating Company's Euro 2028 Notes, USD 2026 Notes, and U.S. dollar-denominated 5.00% senior notes due 2027 (collectively, the "Senior Notes") are general, unsecured, and subordinated to all existing and future secured indebtedness of the guarantors to the extent of the value of the assets securing such indebtedness. Each of the Senior Notes is separately guaranteed by all of Operating Company's wholly owned U.S. subsidiaries that guarantee the senior secured credit facilities. None of the Senior Notes is guaranteed by either PTS Intermediate Holdings LLC or Catalent, Inc.
Debt Covenants
Senior Secured Credit Facilities
The credit agreement governing Operating Company’s senior secured credit facilities (as amended, 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 September 30, 2020, Operating Company was in compliance with all material covenants under the Credit Agreement.
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 or its Puerto 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.
As market conditions warrant, we and our affiliates may from time to time seek to purchase our outstanding debt in privately negotiated or open-market transactions, by tender offer or otherwise. Subject to any applicable limitation contained in the Credit Agreement, any purchase made by us may be funded by the use of cash on hand or the incurrence of new secured or unsecured debt. The amounts involved in any such purchase transaction, individually or in the aggregate, may be material. Any
such purchase may be with respect to a substantial amount of a particular class or series of debt, with the attendant reduction in the trading liquidity of such class or series. In addition, any such purchase made at prices below the “adjusted issue price” (as defined for U.S. federal income tax purposes) may result in taxable cancellation of indebtedness income to us, which amounts may be material, or in related adverse tax consequences to us.
The Senior Notes
The several indentures governing each series of the Senior Notes (collectively, the “Indentures”) contain certain covenants that, among other things, limit 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 Indentures. The Indentures also contain customary events of default, including, but not limited to, nonpayment, breach of covenants, and payment or acceleration defaults in certain other indebtedness of Operating Company or certain of its subsidiaries. Upon an event of default, either the holders of at least 30% in principal amount of each of the then-outstanding series of Senior Notes, or the applicable Trustee under the Indentures, may declare the applicable Senior Notes immediately due and payable; or in certain circumstances, the applicable Senior Notes will become automatically immediately due and payable. As of September 30, 2020, Operating Company was in compliance with all material covenants under the Indentures.
Geographic Allocation of Cash
As of September 30, 2020 and June 30, 2020, our subsidiaries held cash and cash equivalents of $287.4 million and $228.0 million, respectively, out of the total consolidated cash and cash equivalents of $1,007.0 million and $953.2 million, respectively. These balances are dispersed across many locations around the world.
Interest Rate Risk Management
A portion of the debt used to finance our operations is exposed to interest-rate fluctuations. We may use various hedging strategies and derivative financial instruments to create an appropriate mix of fixed- and floating-rate assets and liabilities. In April 2020, we entered into an interest-rate swap agreement with Bank of America N.A. as a hedge against the economic effect of a portion of the variable-interest obligation associated with our U.S dollar-denominated term loans under our senior secured credit facilities, so that the interest payable on that portion of the debt becomes fixed at a certain rate, thereby reducing the impact of future interest-rate changes on future interest expense. The applicable rate for the U.S. dollar-denominated term loan is LIBOR (subject to a floor of 1.00%) plus 2.25%; however, as a result of entering into the interest-rate swap agreement, the floating portion of the applicable rate on $500.0 million of the term loan is now effectively fixed at 1.26% for a total fixed rate of 3.51%.
Currency Risk Management
We are exposed to fluctuations in the euro-U.S. dollar exchange rate on our investments in our foreign operations in Europe. While we do not actively hedge against changes in foreign currency, we have mitigated the exposure of our investments in our European operations by denominating a portion of our debt in euros. At September 30, 2020, we had $944.6 million of euro-denominated debt outstanding that qualifies as a hedge of a net investment in foreign operations. Refer to Note 10 to our Consolidated Financial Statements for further discussion of net investment hedge activity in the period
From time to time, we may use forward foreign currency exchange contracts to manage our exposure to the variability of cash flows primarily related to the foreign exchange rate changes of future foreign currency transaction costs. In addition, we may use such contracts to protect the value of existing foreign currency assets and liabilities. Currently, we do not use any forward foreign currency exchange contracts. We expect to continue to evaluate hedging opportunities for foreign currency in the future.
Contractual Obligations
There has been no significant change to our contractual obligations since our Fiscal 2020 10-K. Refer to Note 6 to our Consolidated Financial Statements for a further discussion regarding our long-term obligations.
Off-Balance Sheet Arrangements
Other than short-term operating leases and outstanding letters of credit as discussed above, we do not have any material off-balance sheet arrangement as of September 30, 2020.