Catalent announced financial results for the second quarter of fiscal 2018, which ended December 31, 2017.
Second quarter 2018 revenue of $606.3 million increased 25% as reported and 22% in constant currency from $483.7 million reported in the second quarter a year ago. For the first six months of fiscal year 2018, revenue was $1,150.2 million and increased 24% as reported and 22% in constant currency, compared to the $925.9 million recorded in the prior-year period. All three of the company’s reporting segments posted constant-currency revenue growth for the second quarter and year-to-date period when compared to the prior year.
Second quarter 2018 net loss was $21.9 million, or $0.16 per diluted share, compared to net earnings of $17.4 million, or $0.14 per diluted share, in the second quarter a year ago. For the first six months of fiscal year 2018, net loss was $18.1 million, or $0.14 per diluted share, compared to net earnings of $22.0 million, or $0.17 per diluted share, in the same period of the prior year. During the second quarter, the company recorded a one-time net tax charge of $46.0 million as a provisional estimate of the net accounting impact of the recently enacted U.S. tax law changes.
Second quarter 2018 EBITDA from continuing operations of $102.0 million, as referenced in the GAAP to non-GAAP reconciliation provided later in this release, increased 20% from $85.2 million in the second quarter a year ago. For the first six months of fiscal year 2018, EBITDA from continuing operations was $167.2 million, an increase of 13% compared to the $147.9 million recorded in the prior-year period.
Second quarter 2018 Adjusted EBITDA (see the non-GAAP reconciliation for a discussion of this metric) was $139.3 million, or 23.0% of revenue, compared to $98.1 million, or 20.3% of revenue, in the second quarter a year ago. This represents an increase of 42% as reported, and an increase of 39% on a constant-currency basis.
Second quarter 2018 Adjusted Net Income (see the non-GAAP reconciliation) was $60.7 million, or $0.45 per diluted share, compared to Adjusted Net Income of $34.7 million, or $0.27 per diluted share, in the second quarter a year ago.
“We’re pleased with our performance during the second quarter, where we recorded strong revenue growth on a constant-currency basis across all three of our reporting segments,” said John Chiminski, Chairman, President and Chief Executive Officer of Catalent. “The integration of the Cook Pharmica acquisition, which closed during the second quarter, is progressing according to plan and builds upon the successful integration of softgel developer Accucaps last year. The acquisition of Cook Pharmica significantly strengthened our position as a leader in biologics development and manufacturing, and the growth prospects for Catalent's biologics business remain extremely attractive."
New Chief Financial Officer
The company also announced the appointment of senior executive Wetteny Joseph as its Senior Vice President and Chief Financial Officer, effective February 6, 2018, succeeding Matt Walsh, who has announced his desire to leave the company to assume the position of Chief Financial Officer of Allergan.
Joseph has over 20 years of managerial, finance, accounting, and strategic experience, most recently as the President of Catalent’s Clinical Supply Services business unit. He joined the company in 2008 as its Vice President and Corporate Controller, and held senior finance positions through 2015, when he was chosen to lead Clinical Supply Services. Before joining Catalent, he held a variety of senior financial positions at the industrial distribution company HD Supply, including as CFO of its $1.2 billion plumbing and HVAC business unit, and as corporate controller for Hughes Supply, a publicly traded, Fortune 500 company that was acquired by HD Supply. He earned both his master’s and bachelor degrees in accounting from Florida Atlantic University and is a Certified Public Accountant.
Revenue Highlights by Business Segment
Revenue from the Softgel Technologies segment was $228.1 million for the second quarter of fiscal 2018, an increase of 13% as reported, or 9% in constant currency, compared to the second quarter a year ago. The constant-currency growth was attributable to the February 2017 Accucaps acquisition, which contributed 12 percentage points to the segment’s constant-currency revenue growth during the quarter. Excluding the Accucaps acquisition, Softgel revenue declined 3% due to a decrease in product participation revenue and lower end-market volume demand for consumer health and prescription products in Europe and Asia Pacific.
Revenue from the Drug Delivery Solutions segment was $285.4 million for the second quarter of fiscal 2018, an increase of 33% as reported, or 30% in constant currency, over the second quarter a year ago. The growth was primarily attributable to the Cook Pharmica acquisition which contributed 21 percentage points to the segment's revenue growth. Excluding the impact of the acquisition, segment revenue increased 9% driven by favorable end-customer demand for certain higher margin offerings, primarily in our U.S. operations within our oral delivery solutions platform, and increased volume from our biologics offerings, partially offset by a decrease in product participation revenue.
Revenue from the Clinical Supply Services segment was $108.7 million for the second quarter of fiscal 2018, an increase of 41% as reported, or 36% in constant currency over the second quarter a year ago. This growth was due to higher volume related to core storage and distribution services, as well as due to increased lower-margin comparator sourcing activities.
Segment EBITDA Highlights
Softgel Technologies segment EBITDA (see the discussion of non-GAAP measures below) in the second quarter of fiscal 2018 was $50.1 million, an increase of 15% as reported, or 13% in constant currency, versus the second quarter a year ago. The increase was primarily driven by the acquisition of Accucaps, which contributed 9 percentage points of the constant-currency growth in the segment EBITDA during the quarter. Excluding the acquisition, segment EBITDA increased by 4% in constant currency, primarily related to a historical contractual settlement and to favorable product mix within North America.
Drug Delivery Solutions segment EBITDA in the second quarter of fiscal 2018 was $81.1 million, an increase of 62% as reported, or 58% in constant currency. The increase was driven in part by the acquisition of Cook Pharmica, which contributed 40 percentage points of the constant-currency growth in the segment EBITDA during the quarter. Excluding the acquisition, segment EBITDA increased by 18%, primarily driven by favorable end-customer demand for certain higher margin offerings, primarily in our U.S. operations within our oral delivery solutions platform, and increased volume from our biologics offerings; partially offset by operational inefficiencies with respect to products utilizing our blow-fill-seal technology platform and a reduction in profit related to product participation activities.
Clinical Supply Services segment EBITDA in the second quarter of fiscal 2018 was $19.0 million, an increase of 64% as reported, or 55% in constant currency. The increase was primarily attributable to higher demand for our core storage and distribution services, as well as improved capacity utilization across the network. Increased volume related to lower-margin comparator sourcing activities modestly contributed to the segment’s EBITDA growth.
Revenue Highlights by Business Segment
Revenue from the Softgel Technologies segment was $447.8 million for the first six months of fiscal 2018, an increase of 15% as reported, or 12% in constant currency, compared to the same period a year ago. The constant-currency growth was attributable to the February 2017 Accucaps acquisition, which contributed 13 percentage points to the segment’s constant-currency revenue growth during the period. Excluding the Accucaps acquisition, Softgel revenue declined 1% due to a decrease in product participation revenue.
Revenue from the Drug Delivery Solutions segment was $511.2 million for the first six months of fiscal 2018, an increase of 26% as reported, or 24% in constant currency, over the same period a year ago. The growth was partially attributable to the Cook Pharmica and Pharmatek acquisitions which contributed 13 percentage points to the segment's revenue growth. Excluding the impact of the acquisition, segment revenue increased 11% driven by favorable end-customer demand for certain higher margin offerings, primarily in our U.S. operations within our oral delivery solutions platform, and increased volume from our biologics offerings.
Revenue from the Clinical Supply Services segment was $218.4 million for the first six months of fiscal 2018, an increase of 44% as reported, or 41% in constant currency over the same period a year ago. This growth was due to higher volume related to core storage and distribution services, as well as due to increased lower-margin comparator sourcing activities.
Segment EBITDA Highlights
Softgel Technologies segment EBITDA in the first six months of fiscal 2018 was $85.2 million, an increase of 15% as reported, or 14% in constant currency, versus the same period a year ago. The increase was primarily driven by the acquisition of Accucaps, which contributed 13 percentage points of the constant-currency growth in the segment EBITDA during the period. Excluding the acquisition, segment EBITDA increased by 1% in constant currency, primarily related to a historical contractual settlement and to favorable product mix within North America; partially offset by lower product participation revenue.
Drug Delivery Solutions segment EBITDA in the first six months of fiscal 2018 was $128.5 million, an increase of 40% as reported, or 37% in constant currency. The increase was primarily driven by the acquisitions of Cook Pharmica and Pharmatek, which contributed 23 percentage points of the constant-currency growth in the segment EBITDA during the period. Excluding the acquisition, segment EBITDA increased by 14%, primarily driven by favorable end-customer demand for certain higher margin offerings, primarily in our U.S. operations within our oral delivery solutions platform, and increased volume from our biologics offerings, partially offset by operational inefficiencies with respect to products utilizing our blow-fill-seal technology platform.
Clinical Supply Services segment EBITDA in the first six months of fiscal 2018 was $35.7 million, an increase of 62% as reported, or 57% in constant currency. The increase was primarily attributable to higher demand for our core storage and distribution services, as well as improved capacity utilization across the network. Increased volume related to lower-margin comparator sourcing activities modestly contributed to the segment’s EBITDA growth.
Additional Financial Highlights
Second quarter 2018 gross margin of 31.1% increased 50 basis points as-reported, from 30.6% in the second quarter a year ago. The increase was primarily attributable to favorable product mix within the Drug Delivery Solutions segment, and the Cook Pharmica acquisition, partially offset by a decrease in product participation revenue within the Drug Delivery Solutions and Softgel Technologies segments.
Second quarter 2018 selling, general and administrative expenses were $114.3 million and represented 18.9% of revenue, compared to $96.2 million, or 19.9% of revenue, in the second quarter a year ago.
Backlog for the Clinical Supply Services segment, defined as estimated future service revenues from work not yet completed under signed contracts, was $306.0 million as of December 31, 2017, a 8% decrease compared to the first quarter of fiscal year 2018. The segment also recorded net new business wins of $80.0 million during the second quarter, which represented a 26% decrease year over year. The segment’s trailing-twelve-month book-to-bill ratio was 0.9.
Balance Sheet and Liquidity
As of December 31, 2017, Catalent had $2.7 billion in total debt, and $2.4 billion in total debt net of cash and short-term investments, which is above the total debt and net debt as of September 30, 2017, due to the new debt issued to fund the Cook Pharmica acquisition. As of December 31, 2017, Catalent’s total net leverage ratio was 4.8x. On a pro forma basis for the acquisition of Cook Pharmica, Catalent’s total net leverage ratio as of December 31, 2017 would have been 4.4x; a sequential improvement compared to the pro forma total net leverage ratio of 4.8x as of September 30, 2017.
During the second quarter, on October 18, 2017, Catalent issued $450 million aggregate principal amount of 4.875% senior unsecured notes due January 2026. The net proceeds of these notes were used, along with cash on hand and the net proceeds of a primary offering of our common stock, to fund the $750 million, subject to customary adjustments and a previous deposit, due at the closing of the Cook Pharmica acquisition. The remaining portion of the purchase price, $200 million, will be paid in four equal installments over the first four anniversaries of the October 23 closing.
Concurrently, the company completed an amendment to its senior secured credit facilities to lower the interest rates on its U.S. dollar-denominated and euro-denominated term loans and on its revolving credit facility and extend their maturities. The new applicable rate for U.S. dollar-denominated term loans is LIBOR (subject to a floor of 1.00%) plus 2.25%, which is 0.50% lower than the previous rate, and the new applicable rate for euro-denominated term loans is LIBOR (subject to a floor of 1.00%) plus 1.75%, which is 0.75% lower than the previous rate. The new applicable rate for revolving loans under the facilities is initially LIBOR plus 2.25%, which is 1.25% lower than the previous rate, and such rate can additionally be reduced to LIBOR plus 2.00% in future periods based on a leverage ratio. The term loans and revolving loans were also extended and will now mature in May 2024 and May 2022, respectively. The amended credit agreement also includes a prepayment of 1.0% in the event of another repricing event on or before the six-month anniversary of the amendment completed in the second quarter.