UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 ______________________________

FORM 10-Q

______________________________ 

ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 31, 2022

or

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

001-36587

(Commission File Number)

 _____________________________

Catalent, Inc.

(Exact name of registrant as specified in its charter)

_____________________________ 

Delaware		20-8737688
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
14 Schoolhouse Road
Somerset,	New Jersey	08873
(Address of principal executive offices)_______		(Zip code)

(732) 537-6200

Registrant's telephone number, including area code

____________________________________ 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   ☒ Yes ¨  No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).       ☒ Yes ¨  No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	☒	Accelerated filer	¨
Non-accelerated filer	¨	Smaller reporting company	¨
		Emerging growth company	¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).       ¨ Yes    ☒ No 

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading symbols(s)	Name of each exchange on which registered
Common Stock	CTLT	New York Stock Exchange

On January 31, 2023, there were 180,090,483 shares of the Registrant's common stock, par value $0.01 per share, issued and outstanding.

CATALENT, INC.

Index to Form 10-Q

For the Three and Six Months Ended December 31, 2022

 

Item		Page
Part I.	Financial Information
Item 1.	Financial Statements (unaudited)	5
	Consolidated Statements of Operations for the Three and Six Months Ended December 31, 2022 and December 31, 2021	5
	Consolidated Statements of Comprehensive Income for the Three and Six Months Ended December 31, 2022 and December 31, 2021	6
	Consolidated Balance Sheets as of December 31, 2022 and June 30, 2022	7
	Consolidated Statement of Changes in Shareholders' Equity for the Three and Six Months Ended December 31, 2022 and December 31, 2021	8
	Consolidated Statements of Cash Flows for the Six Months Ended December 31, 2022 and December 31, 2021	10
	Notes to Unaudited Consolidated Financial Statements	11
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	30
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	45
Item 4.	Controls and Procedures	46
Part II.	Other Information	47
Item 1.	Legal Proceedings	47
Item 1A.	Risk Factors	47
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	47
Item 3.	Defaults Upon Senior Securities	47
Item 4.	Mine Safety Disclosures	47
Item 5.	Other Information	47
Item 6.	Exhibits	48
Signatures		49

2

Special Note Regarding Forward-Looking Statements

In addition to historical information, this Quarterly Report on Form 10-Q of Catalent, Inc. (“Catalent” or the “Company”) contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which are subject to the “safe harbor” created by those sections. All statements, other than statements of historical facts, included in this Quarterly Report on Form 10-Q are forward-looking statements. In some cases, you can identify these forward-looking statements by the use of words such as “outlook,” “believes,” “expects,” “potential,” “continues,” “may,” “will,” “should,” “could,” “seeks,” “approximately,” “predicts,” “intends,” “plans,” “estimates,” “anticipates” or the negative version of these words or other comparable words.

These statements are based on assumptions and assessments made by our management in light of their experience and their perception of historical trends, current conditions, expected future developments, and other factors they believe to be appropriate. Any forward-looking statement is subject to various risks and uncertainties. Accordingly, there are or will be important factors that could cause actual outcomes or results to differ materially from those indicated in these statements.

Some of the factors that may cause actual results, developments and business decisions to differ materially from those contemplated by such forward-looking statements include, but are not limited to, those described under the section entitled “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended June 30, 2022 (the “Fiscal 2022 10-K”) and others, which are summarized below:

Risks Relating to Our Business and the Industry in Which We Operate

•Our business, financial condition, and operations may be adversely affected by global health developments, including the pandemic resulting from the SARS-Co-V-2 strain of coronavirus and its variants (“COVID-19”).

•The continually evolving nature of the COVID-19 pandemic and the resulting public health response, including the changing demand for various COVID-19 vaccines and treatments from both patients and governments around the world, may affect sales of our products and services, including the COVID-19 products we manufacture.

•We participate in a highly competitive market, and increased competition may adversely affect our business.

•The demand for our offerings depends in part on our customers’ research and development and the clinical and market success of their products.

•We are subject to product and other liability risks that could exceed our anticipated costs or adversely affect our results of operations, financial condition, liquidity, and cash flows.

•We are a part of the highly regulated healthcare industry, subject to stringent regulatory standards and other applicable laws and regulations, which can change unexpectedly and may adversely impact our business.

•Any failure to implement fully, monitor, and improve our quality management strategy could lead to quality or safety issues and expose us to significant costs, potential liability, and adverse publicity.

•If we cannot keep pace with rapid technological advances, our services may become uncompetitive or obsolete.

•Any failure to protect or maintain our intellectual property may adversely affect our competitive edge and result in loss of revenue and reputation.

•Future price fluctuations, material shortages of raw materials, or changes in healthcare policies may have an adverse effect on our results of operations and financial conditions.

•Our ability to use our net operating loss carryforwards and certain other tax attributes may be limited.

•We may be unable to attract or retain key personnel.

•We may be unsuccessful in integrating our acquisitions, and we may expend substantial amounts of cash and incur debt in making acquisitions.

•Our global operations are subject to economic and political risks, including risks resulting from continuing inflation, from disruptions to global supply chains, or from the Ukrainian-Russian war, which could affect the profitability of our operations or require costly changes to our procedures.

•As a global enterprise, fluctuations in the exchange rates of the United States ("U.S.") dollar, our reporting currency, against other currencies could have a material adverse effect on our financial performance and results of operations.

•Tax legislative or regulatory initiatives, new interpretations or developments concerning existing tax laws, or challenges to our tax positions could adversely affect our results of operations and financial condition.

3

•We use advanced information and communication systems to run our operations, compile and analyze financial and operational data, and communicate among our employees, customers, and counter-parties, and the risks generally associated with information and communications systems could adversely affect our results of operations. We continuously work to install new, and upgrade existing systems and provide employee awareness training around phishing, malware, and other cyber security risks to enhance the protections available to us, but such protections may be inadequate to address malicious attacks or inadvertent compromises affecting data security or the operability of such systems.

•We provide services incorporating various advanced modalities, including protein and plasmid production and cell and gene therapies, and these modalities relate to relatively new modes of treatment that may be subject to changing public opinion, continuing research, and increased regulatory scrutiny, each of which may affect our customers' ability to conduct their businesses, or obtain regulatory approvals for their therapies, and thereby adversely affect these offerings.

Risks Relating to Our Indebtedness

•The size of our indebtedness and the obligations associated with it could limit our ability to operate our business and to finance future operations or acquisitions that would enhance our growth.

•Our interest expense on our variable-rate debt may continue to increase as policymakers combat inflation through interest-rate increases on benchmark financial products.

•Our debt agreements contain restrictions that may limit our flexibility in conducting certain current and future operations.

•We may not be able to pay our indebtedness when it becomes due.

•Our current and potential future use of derivative financial instruments may expose us to economic losses in the event of price or currency fluctuations.

Risks Relating to Ownership of Our Common Stock

•Our stock price has historically been and may continue to be volatile.

•Because we have no plan to pay cash dividends on our common stock, par value $0.01 (the “Common Stock”) for the foreseeable future, receiving a return on an investment in our Common Stock may require a sale for a net price greater than was paid for it.

•Provisions in our organizational documents could delay or prevent a change of control.

We caution you that the risks, uncertainties, and other factors referenced above may not contain all of the risks, uncertainties, and other factors that are important to you. In addition, we cannot assure you that we will realize the results, benefits, or developments that we expect or anticipate or, even if substantially realized, that they will result in the consequences or affect us or our business in the way expected. There can be no assurance that (i) we have correctly measured or identified all of the factors affecting our business or the extent of these factors’ likely impact, (ii) the available information with respect to these factors on which such analysis is based is complete or accurate, (iii) such analysis is correct, or (iv) our strategy, which is based in part on this analysis, will be successful. All forward-looking statements in this report apply only as of the date of this report or as of the date they were made and we undertake no obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments, or otherwise, except as required by law.

Social Media

We use our website (catalent.com), our corporate Facebook page (https://facebook.com/CatalentPharmaSolutions), and our corporate Twitter account (@catalentpharma) as channels for the distribution of information. The information we post through these channels may be deemed material. Accordingly, investors should monitor these channels, in addition to following our press releases, Securities and Exchange Commission (“SEC”) filings, and public conference calls and webcasts. The contents of our website and social media channels are not, however, a part of this report.

4

PART I.    FINANCIAL INFORMATION

ITEM 1.     FINANCIAL STATEMENTS

Catalent, Inc.

Consolidated Statements of Operations

(Unaudited; dollars in millions, except per share data)

	Three Months Ended   December 31,				Six Months Ended   December 31,
	2022		2021		2022		2021
Net revenue	$	1,149	$	1,217	$	2,171	$	2,242
Cost of sales	762		812		1,526		1,513
Gross margin	387		405		645		729
Selling, general, and administrative expenses	226		228		422		411
Gain on sale of subsidiary	—		—		—		(1)
Other operating expense, net	23		16		25		20
Operating earnings	138		161		198		299
Interest expense, net	47		32		79		58
Other (income) expense, net	(23)		14		2		23
Earnings before income taxes	114		115		117		218
Income tax expense	33		18		36		28
Net earnings	81		97		81		190
Less: Net earnings attributable to preferred shareholders	—		(4)		—		(13)
Net earnings attributable to common shareholders	$	81	$	93	$	81	$	177
Earnings per share:
Basic
Net earnings	$	0.45	$	0.53	$	0.45	$	1.02
Diluted
Net earnings	$	0.44	$	0.52	$	0.45	$	1.01

The accompanying notes are an integral part of these unaudited consolidated financial statements.

5

Catalent, Inc.

Consolidated Statements of Comprehensive Income

(Unaudited; dollars in millions)

	Three Months Ended   December 31,				Six Months Ended   December 31,
	2022		2021		2022		2021
Net earnings	$	81	$	97	$	81	$	190
Other comprehensive (loss) income, net of tax
Foreign currency translation adjustments	118		(18)		(17)		(32)
Pension and other post-retirement adjustments	—		—		—		1
Net change in marketable securities	1		(1)		2		(1)
Derivatives and hedges	—		3		14		4
Other comprehensive income (loss), net of tax	119		(16)		(1)		(28)
Comprehensive income	$	200	$	81	$	80	$	162

The accompanying notes are an integral part of these unaudited consolidated financial statements.

6

Catalent, Inc.

Consolidated Balance Sheets

(Unaudited; in millions, except share and per share data)

 

	December 31, 2022		June 30, 2022
ASSETS
Current assets:
Cash and cash equivalents	$	442	$	449
Trade receivables, net of allowance for credit losses of $26 and $29, respectively	916		1,051
Inventories	818		702
Prepaid expenses and other	714		625
Marketable securities	28		89
Total current assets	2,918		2,916
Property, plant, and equipment, net of accumulated depreciation of $1,465 and $1,347, respectively	3,579		3,127
Other assets:
Goodwill	3,215		3,006
Other intangibles, net	1,045		1,060
Deferred income taxes	55		49
Other long-term assets	335		349
Total assets	$	11,147	$	10,507
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term obligations and other short-term borrowings	$	632	$	31
Accounts payable	367		421
Other accrued liabilities	527		620
Total current liabilities	1,526		1,072
Long-term obligations, less current portion	4,221		4,171
Pension liability	103		103
Deferred income taxes	221		202
Other liabilities	164		164
Commitment and contingencies (see Note 14)	—		—
Total liabilities	6,235		5,712
Shareholders' equity:
Common stock, $0.01 par value; 1.00 billion shares authorized at December 31 and June 30, 2022; 180 million and 179 million issued and outstanding at December 31 and June 30, 2022, respectively	2		2
Preferred stock, $0.01 par value; 100 million shares authorized at December 31 and June 30, 2022;0 shares issued and outstanding at December 31 and June 30, 2022	—		—
Additional paid in capital	4,686		4,649
Retained earnings	619		538
Accumulated other comprehensive loss	(395)		(394)
Total shareholders' equity	4,912		4,795
Total liabilities and shareholders' equity	$	11,147	$	10,507

The accompanying notes are an integral part of these unaudited consolidated financial statements.

7

Catalent, Inc.

Consolidated Statement of Changes in Shareholders' Equity

(Unaudited; dollars in millions, except share data in thousands)

Three Months Ended December 31, 2022

	Shares of Common Stock	Common Stock		Additional Paid in Capital		Retained Earnings		Accumulated Other Comprehensive Loss		Total Shareholders' Equity		Redeemable Preferred Stock
Balance at September 30, 2022	179,901	$	2	$	4,674	$	538	$	(514)	$	4,700	$	—
Share issuances related to stock-      based compensation	87	—		—		—		—		—		—
Stock-based compensation	—	—		10		—		—		10		—
Cash paid, in lieu of    equity, for tax withholding    obligations	—	—		(2)		—		—		(2)		—
Employee stock purchase plan	—	—		4		—		—		4		—
Net earnings	—	—		—		81		—		81		—
Other comprehensive income, net of tax	—	—		—		—		119		119		—
Balance at December 31, 2022	179,988	$	2	$	4,686	$	619	$	(395)	$	4,912	$	—

Three Months Ended December 31, 2021

	Shares of Common Stock	Common Stock		Additional Paid in Capital		Retained Earnings		Accumulated Other Comprehensive Loss		Total Shareholders' Equity		Redeemable Preferred Stock
Balance at September 30, 2021	171,033	$	2	$	4,234	$	114	$	(329)	$	4,021	$	359
Share issuances related to stock-      based compensation	199	—		—		—		—		—		—
Conversion of redeemable      preferred stock	7,818	—		362		—		—		362		(359)
Stock-based compensation	—	—		11		—		—		11		—
Cash paid, in lieu of equity, for      tax withholding obligations	—	—		(5)		—		—		(5)		—
Exercise of stock options	—	—		11		—		—		11		—
Employee stock purchase plan	—	—		2		—		—		2		—
Preferred dividend ($12.50 per      share of redeemable preferred      stock)	—	—		—		(2)		—		(2)		—
Net earnings	—	—		—		97		—		97		—
Other comprehensive loss, net        of tax	—	—		—		—		(16)		(16)		—
Balance at December 31, 2021	179,050	$	2	$	4,615	$	209	$	(345)	$	4,481	$	—

The accompanying notes are an integral part of these unaudited consolidated financial statements.

8

Catalent, Inc.

Consolidated Statement of Changes in Shareholders' Equity

(Unaudited; dollars in millions, except share data in thousands)

Six months ended December 31, 2022

	Shares of Common Stock	Common Stock		Additional Paid in Capital		Retained Earnings		Accumulated Other Comprehensive Loss		Total Shareholders' Equity		Redeemable Preferred Stock
Balance at June 30, 2022	179,302	$	2	$	4,649	$	538	$	(394)	$	4,795	$	—
Share issuances related to stock-      based compensation	686	—		—		—		—		—		—
Stock-based compensation	—	—		29		—		—		29		—
Exercise of stock options	—	—		1		—		—		1		—
Employee stock purchase plan	—	—		7		—		—		7		—
Net earnings	—	—		—		81		—		81		—
Other comprehensive loss, net of tax	—	—		—		—		(1)		(1)		—
Balance at December 31, 2022	179,988	$	2	$	4,686	$	619	$	(395)	$	4,912	$	—

Six Months Ended December 31, 2021

	Shares of Common Stock	Common Stock		Additional Paid in Capital		Accumulated Deficit		Accumulated Other Comprehensive Loss		Total Shareholders' Equity		Redeemable Preferred Stock
Balance at June 30, 2021	170,549	$	2	$	4,205	$	25	$	(317)	$	3,915	$	359
Share issuances related to stock-      based compensation	683	—		—		—		—		—		—
Conversion of redeemable      preferred stock	7,818	—		362		—		—		362		(359)
Stock-based compensation	—	—		32		—		—		32		—
Cash paid, in lieu of equity, for      tax withholding obligations	—	—		(9)		—		—		(9)		—
Exercise of stock options	—	—		19		—		—		19		—
Employee stock purchase plan	—	—		6		—		—		6		—
Preferred dividend ($12.50 per      share of redeemable preferred      stock)	—	—		—		(6)		—		(6)		—
Net earnings	—	—		—		190		—		190		—
Other comprehensive income, net of tax	—	—		—		—		(28)		(28)		—
Balance at December 31, 2021	179,050	$	2	$	4,615	$	209	$	(345)	$	4,481	$	—

The accompanying notes are an integral part of these unaudited consolidated financial statements.

9

Catalent, Inc.

Consolidated Statements of Cash Flows

(Unaudited; dollars in millions)

	Six Months Ended December 31,
	2022		2021
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings	$	81	$	190
Adjustments to reconcile net earnings to net cash from operations:
Depreciation and amortization	202		179
Non-cash foreign currency transaction loss, net	1		25
Non-cash restructuring charges	7		—
Amortization of debt issuance costs	4		4
Impairments charges and loss/gain on sale of assets, net	(1)		19
Gain on sale of subsidiary	—		(1)
Financing-related charges	—		4
Gain on derivative instrument	—		(2)
Stock-based compensation	29		32
Provision for deferred income taxes	13		1
Provision for bad debts and inventory	67		9
Change in operating assets and liabilities:
Decrease in trade receivables	148		131
Increase in inventories	(180)		(148)
(Decrease) increase in accounts payable	(68)		3
Other assets/accrued liabilities, net—current and non-current	(181)		(214)
Net cash provided by operating activities	122		232
CASH FLOWS USED IN INVESTING ACTIVITIES:
Acquisition of property, equipment, and other productive assets	(317)		(277)
Proceeds from sale of marketable securities	61		4
Proceeds from sale of property and equipment	7		—
Settlement on sale of subsidiaries, net	—		(3)
Payment for acquisitions, net of cash acquired	(474)		(1,020)
Payment for investments	(1)		(3)
Net cash used in investing activities	(724)		(1,299)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowing	625		1,100
Payments related to long-term obligations	(32)		(64)
Financing fees paid	(4)		(15)
Dividends paid	—		(4)
Cash paid, in lieu of equity, for tax-withholding obligations	—		(9)
Exercise of stock options	1		19
Other financing activities	7		6
Net cash provided by financing activities	597		1,033
Effect of foreign currency exchange on cash and cash equivalents	(2)		(13)
NET DECREASE IN CASH AND CASH EQUIVALENTS	(7)		(47)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD	449		896
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	442	$	849
SUPPLEMENTARY CASH FLOW INFORMATION:
Interest paid	$	83	$	50
Income taxes paid, net	$	38	$	27

The accompanying notes are an integral part of these unaudited consolidated financial statements.

10

Catalent, Inc.

Notes to Unaudited Consolidated Financial Statements

1.    BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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. (“Operating Company”). The financial results of Catalent are comprised of the financial results of Operating Company and its subsidiaries on a consolidated basis.

Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the six months ended December 31, 2022 are not necessarily indicative of the results that may be expected for the year ending June 30, 2023. The consolidated balance sheet at June 30, 2022 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by U.S. GAAP for complete financial statements. For further information on the Company's accounting policies and footnotes, refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended June 30, 2022 filed with the Securities and Exchange Commission (the “SEC”).

Reportable Segments

Effective July 1, 2022, in connection with the appointment of a new President and Chief Executive Officer, the Company changed its operating structure and reorganized its executive leadership team accordingly. This new organizational structure includes a shift from the four operating and reportable segments the Company disclosed during fiscal 2022 to two segments: (i) Biologics and (ii) Pharma and Consumer Health. Set forth below is a summary description of the Company's two current operating and reportable segments.

Biologics—The Biologics segment provides the same services as the Biologics segment the Company reported in fiscal 2022, with some organizational adjustments and the addition of analytical development and testing services for large molecules that were previously disclosed as part of the Company's prior Oral and Specialty Delivery segment. The Biologics segment as reorganized provides development and manufacturing for biologic proteins; cell, gene, and other nucleic acid therapies; plasmid DNA; induced pluripotent stem cells (iPSCs); and vaccines. It also provides formulation, development, and manufacturing for parenteral dose forms, including vials, prefilled syringes, and cartridges; and, as noted above, analytical development and testing services for large molecules.

Pharma and Consumer Health—The Pharma and Consumer Health segment encompasses, except as noted above, the offerings of three of the Company's prior reportable segments—Softgel and Oral Technologies, Oral and Specialty Delivery, and Clinical Supply Services—and comprises the Company’s market-leading capabilities for complex oral solids, softgel formulations, Zydis® fast-dissolve technologies, and gummy, soft chew, and lozenge dosage forms; formulation, development, and manufacturing platforms for oral, nasal, inhaled, and topical dose forms; and clinical trial development and supply services.

Each segment reports through a separate management team and ultimately reports to the Company's President and Chief Executive Officer, who is designated as the Chief Operating Decision Maker for segment reporting purposes. The Company's operating segments are the same as its reportable segments. All prior-period comparative segment information has been restated to reflect the current reportable segments in accordance with Accounting Standards Codification (“ASC”) 280, Segment Reporting, promulgated by the Financial Accounting Standards Board (the “FASB”).

Reclassifications

Consequent to the reorganization noted above, certain prior-period amounts were reclassified to conform to the current period presentation.

Foreign Currency Translation

11

The financial statements of the Company’s operations are generally measured using the local currency as the functional currency. Adjustments to translate the assets and liabilities of operations outside the United States (“U.S.”) into U.S. dollars are accumulated as a component of other comprehensive income utilizing period-end exchange rates. Since July 1, 2018, the Company has accounted for its Argentine operations as highly inflationary.

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 consumer products industries. The Company does not normally 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. As of December 31, 2022, the Company had one customer that represented approximately 24% of its aggregate net trade receivables and current contract asset values, primarily associated with the Company's gene therapy offerings, and another customer that represented approximately 11% of its aggregate net trade receivables and current contract asset values. After performing a risk assessment of these customers, the Company has determined that a reserve is not warranted as of December 31, 2022. Additionally, the Company had one customer that represented approximately 13% of net revenue and another customer that represented approximately 10% of net revenue during the three months ended December 31, 2022, primarily in the Biologics segment.

Depreciation

Depreciation expense was $69 million and $64 million for the three months ended December 31, 2022 and 2021, respectively. Depreciation expense was $135 million and $122 million for the six months ended December 31, 2022 and 2021, respectively. Depreciation expense includes amortization of assets related to finance leases. The Company charges repairs and maintenance costs to expense as incurred.

Amortization

Amortization expense related to other intangible assets was $34 million and $34 million for the three months ended December 31, 2022 and 2021, respectively. Amortization expense related to other intangible assets was $67 million and $57 million for the six months ended December 31, 2022 and 2021, respectively.

Research and Development Costs

The Company expenses research and development costs as incurred. Research and development costs amounted to $4 million and $6 million for the three months ended December 31, 2022 and 2021, respectively. Research and development costs amounted to $9 million and $12 million for the six months ended December 31, 2022 and 2021, respectively.

Marketable Securities

The Company classifies its marketable securities as available-for-sale, because it may sell certain of its marketable securities prior to the stated maturity for various reasons, including management of liquidity, credit risk, duration, relative return, and asset allocation. The Company determines the fair value of each marketable security in its portfolio at each period end and recognizes gains and losses in the portfolio in other comprehensive income. As of December 31, 2022, the amortized cost basis of marketable securities approximates fair value and all outstanding marketable securities mature within one year.

Recent Financial Accounting Standards

New Accounting Standards Not Adopted as of December 31, 2022

In March 2020, the FASB issued Accounting Standards Update (“ASU”) 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides optional guidance to ease the potential burden in accounting for the discontinuation of a reference rate such as LIBOR, formerly known as the London Interbank Offered Rate, because of reference rate reform. In December 2022, the FASB issued ASU 2022-06, Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848, which delayed the effective date from December 31, 2022 to December 31, 2024. The Company is currently evaluating the impact of adopting this guidance on its consolidated financial statements.

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2.    REVENUE RECOGNITION

The Company recognizes revenue in accordance with ASC 606, Revenue from Contracts with Customers. The Company generally earns its revenue by supplying goods or providing services under contracts with its customers in two primary revenue streams: (i) manufacturing and commercial product supply, and (ii) development and clinical supply services. The Company measures the revenue from customers based on the consideration specified in its contracts, excluding any sales incentive or amount collected on behalf of a third party that the Company expects to be entitled in exchange for transferring the promised goods to and/or performing services for the customer (the “Transaction Price”). To the extent the Transaction Price includes variable consideration, the Company estimates the amount of variable consideration that should be included in the Transaction Price utilizing either the expected value method or the most likely amount method depending on which method is expected to better predict the amount of consideration to which the Company will be entitled. The value of variable consideration is included in the Transaction Price if, and to the extent, it is probable that a significant reversal of the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. These estimates are re-assessed each reporting period, as required, and any adjustments required are recorded on a cumulative catch-up basis, which affects revenue and net income in the period of adjustment.

The Company’s customer contracts generally include provisions entitling the Company to a termination penalty when the customer invokes its contractual right to terminate prior to the contract’s nominal end date. The termination penalties in the customer contracts vary but are generally considered substantive for accounting purposes and create enforceable rights and obligations throughout the stated duration of the contract. The Company accounts for a contract cancellation as a contract modification in the period in which the customer invokes the termination provision. The determination of the contract termination penalty is based on the terms stated in the relevant customer agreement. As of the modification date, the Company updates its estimate of the transaction price using the expected value method, subject to constraints, and to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. These estimates are re-assessed each reporting period, as required, and any adjustments required are recorded on a cumulative catch-up basis, which would affect revenue and net income in the period of adjustment.

Manufacturing & Commercial Product Supply Revenue

Manufacturing and commercial product supply revenue consists of revenue earned by manufacturing products supplied to customers under long-term commercial supply arrangements. In these arrangements, the customer typically owns and supplies the active pharmaceutical ingredient, or API, that is used in the manufacturing process. The contract generally includes the terms of the manufacturing services and related product quality assurance procedures to comply with regulatory requirements. Due to the regulated nature of the Company’s business, these contract terms are highly interdependent and, therefore, are considered to be a single combined performance obligation. The transaction price is generally stated in the agreement as a fixed price per unit, with no contractual provision for a refund or price concession. Control is transferred to the customer over time, creating a corresponding right to recognize the related revenue, because there is no alternative use to the Company for the asset created and the Company has an enforceable right to payment for performance completed as of that date. Progress is measured based on the units of product that have successfully completed the contractually required product quality assurance process, as the conclusion of that process generally defines the time when the applicable contract and the related regulatory requirements permit the customer to exercise control over the product’s disposition. The customer is typically responsible for arranging the shipping and handling of product following completion of the quality assurance process. Payment is typically due 30 to 45 days after the goods are delivered as requested by the customer, based on the payment terms set forth in the applicable customer agreement.

Development Services and Clinical Supply Revenue

Development services and clinical supply contracts generally take the form of short-term, fee-for-service arrangements. Performance obligations vary, but frequently include biologic cell-line development, performing formulation, analytical stability, or other services related to product development, and providing manufacturing services for products that are under development or otherwise not intended for commercial sale. They can also include a combination of the following services: the manufacturing, packaging, storage, distribution, destruction, inventory management of customer clinical trial material and the sourcing of comparator drug products on behalf of customers to be used in clinical trials to compare performance with the drug under clinical investigation. The transaction prices for these arrangements are fixed and include amounts stated in the contracts for each promised service, and each service is generally considered to be a separate performance obligation. In most instances, the Company recognizes revenue over time because there is no alternative use to the Company for the asset created and the Company has an enforceable right to payment for performance completed as of that date.

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The Company measures progress toward the completion of its performance obligations satisfied over time based on the nature of the services to be performed. For certain types of arrangements, revenue is recognized over time and measured using an output method based on the completion of tasks and activities that are performed to satisfy a performance obligation. For certain types of arrangements, revenue is recognized over time and measured using an input method based on effort expended. Each of these methods provides an appropriate depiction of the Company’s progress toward fulfilling its performance obligations for its respective arrangement. In certain development services arrangements that require a portion of the contract consideration to be received in advance at the commencement of the contract, such advance payment is initially recorded as a contract liability. In certain clinical supply arrangements, revenue is recognized at the point in time when control transfers, which occurs upon either the delivery of the related output of the service to the customer or the completion of quality testing with respect to the product, and the Company has an enforceable right to payment based on the terms of the arrangement.

The Company allocates consideration to each performance obligation using the “relative standalone selling price” as defined under ASC 606. Generally, the Company utilizes observable standalone selling prices in its allocations of consideration. If observable standalone selling prices are not available, the Company estimates the applicable standalone selling price using a cost-plus-margin approach or an adjusted market assessment approach, in each case, representing the amount that the Company believes the market is willing to pay for the applicable service. Payment is typically due 30 to 45 days following the completion of services provided to the customer, based on the payment terms set forth in the applicable customer agreement.

The Company records revenue for comparator sourcing arrangements on a net basis because it is acting as an agent that does not control the product or service before it is transferred to the customer. Payment for comparator sourcing activity is typically received in advance at the commencement of the contract and is initially recorded as a contract liability.

The Company generally expenses sales commissions as incurred because either the amortization period is one year or less, or the balance with an amortization period greater than one year is not material.

The following tables reflect net revenue for the three and six months ended December 31, 2022 and 2021, by type of activity and reportable segment (in millions):

Three Months Ended December 31, 2022	Biologics		Pharma and Consumer Health		Total
Manufacturing & commercial product supply	$	75	$	340	$	415
Development services & clinical supply	505		230		735
Total	$	580	$	570	$	1,150
Inter-segment revenue elimination					(1)
Combined net revenue					$	1,149

Three Months Ended December 31, 2021	Biologics		Pharma and Consumer Health		Total
Manufacturing & commercial product supply	$	169	$	359	$	528
Development services & clinical supply	472		218		690
Total	$	641	$	577	$	1,218
Inter-segment revenue elimination					(1)
Combined net revenue					$	1,217

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Six Months Ended December 31, 2022	Biologics		Pharma and Consumer Health		Total
Manufacturing & commercial product supply	$	169	$	632	$	801
Development services & clinical supply	934		437		1,371
Total	$	1,103	$	1,069	$	2,172
Inter-segment revenue elimination					(1)
Combined net revenue					$	2,171

Six Months Ended December 31, 2021	Biologics		Pharma and Consumer Health		Total
Manufacturing & commercial product supply	$	303	$	635	$	938
Development services & clinical supply	886		419		1,305
Total	$	1,189	$	1,054	$	2,243
Inter-segment revenue elimination					(1)
Combined net revenue					$	2,242

The following table allocates revenue by the location where the goods were made or the service performed:

	Three Months Ended   December 31,				Six Months Ended   December 31,
(Dollars in millions)	2022		2021		2022		2021
United States	$	734	$	793	$	1,432	$	1,423
Europe	356		370		630		722
Other	88		83		169		155
Elimination of revenue attributable to multiple locations	(29)		(29)		(60)		(58)
Total	$	1,149	$	1,217	$	2,171	$	2,242

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Contract Liabilities

Contract liabilities relate to cash consideration that the Company receives in advance of satisfying the related performance obligations. The contract liabilities balances (current and non-current) as of December 31, 2022 and June 30, 2022 are as follows:

(Dollars in millions)
Balance at June 30, 2022	$	194
Balance at December 31, 2022	$	186
Revenue recognized in the period from amounts included in contracts liability at the beginning of the period:	$	(113)

Contract liabilities that will be recognized within 12 months of December 31, 2022 are accounted for in Other accrued liabilities and those that will be recognized longer than 12 months after December 31, 2022 are accounted for within Other liabilities.

Contract Assets

Contract assets primarily relate to the Company's conditional right to receive consideration for services that have been performed for customers as of December 31, 2022 relating to the Company's development services but had not yet been invoiced as of December 31, 2022. Contract assets are transferred to trade receivables, net when the Company’s right to receive the consideration becomes unconditional. Contract assets totaled $513 million and $441 million as of December 31, 2022 and June 30, 2022, respectively. Contract assets expected to transfer to trade receivables within 12 months are accounted for within Prepaid expenses and other. Contract assets expected to transfer to trade receivables longer than 12 months are accounted for within Other long-term assets.

3.    BUSINESS COMBINATIONS

Metrics Contract Services Acquisition

In October 2022, the Company acquired 100% of Metrics Contract Services (“Metrics”) from Mayne Pharma Group Limited for $474 million in cash, subject to customary adjustments. Metrics, based in Greenville, North Carolina, is an oral solids development and manufacturing business specializing in the manufacture of drugs containing highly potent active pharmaceutical ingredients. The operations and facility acquired have become part of the Company’s Pharma and Consumer Health segment.

The Company accounted for the Metrics transaction using the acquisition method in accordance with ASC 805, Business Combinations. The Company funded this acquisition with a portion of the proceeds of an October 2022 drawdown from its senior secured revolving credit facility. The Company estimated fair values at the date of acquisition for the preliminary allocation of consideration to the net tangible and intangible assets acquired and liabilities assumed. The Company has not completed its analysis regarding the assets acquired and liabilities assumed. Therefore, the allocation to property, plant, and equipment, intangible assets, goodwill, and income taxes are preliminary and subject to finalization. During the measurement period ending no later than one year after the acquisition date, the Company will continue to obtain information to assist in finalizing the fair values of the net assets acquired, which may differ materially from these preliminary estimates. If any measurement period adjustment is material, the Company will record such adjustment, including any related impact on net income, in the reporting period in which the adjustment is determined.

The preliminary purchase price allocation to assets acquired and liabilities assumed in the transaction, subject to finalization, is as follows:

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(Dollars in millions)	Preliminary Purchase Price Allocation
Trade receivables, net	$	15
Inventories	6
Property, plant, and equipment	192
Other intangibles, net	53
Other assets	2
Current liabilities	(9)
Goodwill	215
Total assets acquired and liabilities assumed	$	474

The carrying value of trade receivables, inventory, and trade payables, as well as certain other current and non-current assets and liabilities generally represented the fair value at the date of acquisition.

Other intangibles, net consists of customer relationships of $53 million, which were valued using the multi-period, excess-earnings method, a method that values the intangible asset using the present value of the after-tax cash flows attributable to the intangible asset only. The significant assumptions used in developing the valuation included the estimated annual net cash flows (including application of an appropriate margin to forecasted revenue, selling and marketing costs, return on working capital, contributory asset charges, and other factors), the discount rate that appropriately reflects the risk inherent in each future cash flow stream, and an assessment of the asset’s life cycle, as well as other factors. The assumptions used in the financial forecasts were based on historical data, supplemented by current and anticipated growth rates, management plans, and market-comparable information. Fair-value determinations require considerable judgment and are sensitive to changes in underlying assumptions and factors. Preliminary assumptions may change and may result in significant changes to the final valuation. The customer relationship intangible asset has a weighted average useful life of 12 years.

Property, plant, and equipment was valued using the cost approach, which is based on current replacement and/or reproduction cost of the asset as new, less depreciation attributable to physical, functional, and economic factors. The Company then determined the remaining useful life based on the anticipated life of the asset and Company policy for similar assets.

Goodwill has been allocated to the Pharma and Consumer Health segment as shown in Note 4, Goodwill. Goodwill is mainly comprised of the growth from an expected increase in capacity utilization and potential new customers. The goodwill resulting from the Metrics acquisition is not deductible for tax purposes.

Results of the business acquired were not material to the Company's consolidated statement of operations, financial position, or cash flows for the three and six months ended December 31, 2022.

Bettera Holdings, LLC Acquisition

In October 2021, the Company acquired 100% of the equity interest in Bettera Holdings, LLC (“Bettera Wellness”) for approximately $1 billion. Bettera Wellness is a manufacturer of nutraceuticals and nutritional supplements in gummy, soft chew, and lozenge delivery formats.

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4.    GOODWILL

The following table summarizes the changes between June 30, 2022 and December 31, 2022 in the carrying amount of goodwill in total and by segment:

(Dollars in millions)	Biologics		Pharma and Consumer Health		Total
Balance at June 30, 2022 (1)	$	1,535	$	1,471	$	3,006
Additions(2)	—		215		215
Reallocation	16		(16)		—
Foreign currency translation adjustments	1		(7)		(6)
Balance at December 31, 2022	$	1,552	$	1,663	$	3,215

(1) As of result of the organizational realignments which were effective July 1, 2022, (described in Note 1, Basis of Presentation and Summary of Significant Accounting Policies), beginning balances have been reclassified to conform with the current period presentation.

(2) The addition to goodwill is a result of the Metrics acquisition. For further details, see Note 3, Business Combinations.

As part of the business reorganization discussed in Note 1, Basis of Presentation and Summary of Significant Accounting Policies, the goodwill from the previous Biologics, Softgel and Oral Technologies, Oral and Specialty Delivery, and Clinical Supply Services segments was reallocated between the current Biologics and Pharma and Consumer Health segments.

As a result of this realignment, the Company performed an interim quantitative goodwill impairment test for all of its reporting units as of July 1, 2022, which did not result in any goodwill impairment charges.

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5.    LONG-TERM OBLIGATIONS AND SHORT-TERM BORROWINGS

Long-term obligations and short-term borrowings consisted of the following at December 31, 2022 and June 30, 2022:

(Dollars in millions)	Maturity	December 31, 2022		June 30, 2022
Senior secured credit facilities
Term loan facility B-3 (6.375% as of December 31)	February 2028	$	1,426	$	1,433
Revolving credit facility (1) (6.032% as of December 31)	November 2027	600		—
5.000% senior notes due 2027	July 2027	500		500
2.375% euro senior notes due 2028(2)	March 2028	879		874
3.125% senior notes due 2029	February 2029	550		550
3.500% senior notes due 2030	April 2030	650		650
Financing lease obligations	2022 to 2038	289		234
Other obligations	2022 to 2028	2		2
Unamortized discount and debt issuance costs		(43)		(41)
Total debt		$	4,853	$	4,202
Less: current portion of long-term obligations and other short-term      borrowings (1)		632		31
Long-term obligations, less current portion		$	4,221	$	4,171

(1) During the six months ended December 31, 2022, the Company drew down $625 million on its revolving credit facility to fund the acquisition of Metrics and supplement operating cash flows, of which $25 million was repaid during three months ended December 31, 2022. The Company has elected to classify the borrowing on its revolving credit facility as current as it intends to repay a portion of the borrowing using cash flow from operations and/or refinance the borrowing through a senior notes offering within the next twelve months.

(2) The change in euro-denominated debt was due to fluctuations in foreign currency exchange rates.

Seventh Amendment to the Credit Agreement

In November 2022, Operating Company entered into Amendment No. 7 (the “Seventh Amendment”) to its Amended and Restated Credit Agreement, dated May 20, 2014 (as subsequently amended, the “Credit Agreement”). Pursuant to the Seventh Amendment, Operating Company (i) terminated its existing revolving credit commitments (and the related outstanding revolving borrowings), which is part of its senior secured credit facilities, and (ii) obtained $1.10 billion aggregate amount of new revolving credit commitments, borrowing thereunder an amount equal to the previously outstanding borrowings under the terminated commitments (as amended, the “Revolving Credit Facility”). The Revolving Credit Facility has an interest rate margin, at Operating Company’s option, based on a (1) prime rate, plus a margin ranging from 0.75% to 1.25% based on Operating Company’s consolidated leverage ratio or (2) Secured Overnight Financing Rate, plus 0.10%, plus a margin ranging from 1.75% to 2.25% based on Operating Company’s consolidated leverage ratio. The Revolving Credit Facility has a maturity date that is the earlier of (A) five years after November 22, 2027, and (B) the 91st day prior to the maturity of Operating Company’s $500 million 5.000% senior unsecured notes due 2027 (the “2027 Notes”) or any permitted refinancing thereof, if on such 91st day, any of the 2027 Notes remains outstanding. Otherwise, the Revolving Credit Facility under the Seventh Amendment has the same principal terms as the previously existing revolving credit commitments under the Credit Agreement.

The availability of capacity under the Revolving Credit Facility is reduced by the aggregate value of all outstanding letters of credit under the Credit Agreement. As of December 31, 2022, Operating Company had $496 million of unutilized capacity under the Revolving Credit Facility due to $4 million of outstanding letters of credit.

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Measurement of the Estimated Fair Value of Debt

The estimated fair value of the Company’s senior secured credit facilities and other senior indebtedness is classified as a Level 2 determination (see Note 10, Fair Value Measurements, for a description of the method by which fair value classifications are determined) in the fair-value hierarchy and is calculated by using a discounted cash flow model with a market interest rate as a significant input. The carrying amounts and the estimated fair values of the Company’s principal categories of debt as of December 31, and June 30, 2022 are as follows:

		December 31, 2022				June 30, 2022
(Dollars in millions)	Fair Value Measurement	Carrying Value		Estimated Fair Value		Carrying Value		Estimated Fair Value
5.000% senior notes due 2027	Level 2	$	500	$	483	$	500	$	483
2.375% Euro senior notes due 2028	Level 2	879		755		874		744
3.125% senior notes due 2029	Level 2	550