Notes to Unaudited Consolidated Financial Statements for the Three and Six Months Ended April 30, 2017
(Dollar information in tabular form is expressed in millions of U.S. dollars, except share data)
1. THE COMPANY
Patheon N.V. (“Patheon” or "the Company") was formed on December 24, 2013, as Patheon Coöperatief U.A., a Dutch cooperative with excluded liability for its members (
coöperative met uitgesloten aansparkelijkheid
) and a wholly owned indirect subsidiary of JLL/Delta Patheon Holdings, L.P. (the “Partnership”), which in turn is owned
51%
by JLL Patheon Co-Investment Fund L.P. ("JLL") and
49%
by Koninklijke DSM N.V. ("DSM"). On June 3, 2016, the Company was converted into a Dutch limited liability company (
naamloze vennootschap
) and changed its name to Patheon N.V.
On July 21, 2016, the Company amended its articles of association, resulting in a split of the Company's ordinary shares and a
$1.2 million
contribution by the Partnership to the Company's equity capital in connection with the share split. This share split and capital contribution resulted in a total of
115,609,756
ordinary shares outstanding at a par value of
€0.01
per share.
On July 21, 2016, the Company commenced an initial public offering ("IPO") of an additional
29,464,286
ordinary shares at a public offering price of
$21.00
per share, which included
4,464,286
ordinary shares sold pursuant to the option granted to the underwriters to purchase additional ordinary shares from the Company. As part of the IPO, DSM sold
4,761,905
ordinary shares to the public that were distributed to them in connection to their ownership in the Partnership. A total of
34,226,191
ordinary shares were sold in connection to the IPO. The Company did not receive any proceeds from the ordinary shares sold by DSM. The IPO was completed on July 26, 2016.
The Company received total net proceeds of approximately
$584.8 million
from the IPO, after deducting underwriting discounts and commissions, but before deducting estimated offering expenses. The shares offered and sold in the IPO were registered under the Securities Act pursuant to the Company's Registration Statement on Form S-1, which was declared effective by the SEC on July 18, 2016. The Company's ordinary shares began trading on the New York Stock Exchange under the symbol "PTHN" as of July 21, 2016.
As of
April 30, 2017
, the Company had
145,136,214
ordinary shares outstanding with a par value of
€0.01
per share. Ordinary shares owned by the public constitute approximately
24%
of the outstanding ordinary shares. JLL, DSM and the Partnership own approximately
38%
,
34%
and
4%
of the Company through their ownership of outstanding ordinary shares, respectively. In accordance with the Company's articles of association, each ordinary share shall have
one
vote in the Company's general meeting. The Partnership's ownership comprises of shares held for the benefit of certain employees. See Note 9 for further discussion.
2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation
Patheon consists of
three
reportable segments: Drug Product Services ("DPS"), Pharmaceutical Development Services ("PDS"), and Drug Substance Services ("DSS"). Drug Product Services provides manufacturing and packaging for approved prescription, over-the-counter, and nutritional products. Pharmaceutical Development Services provides a wide spectrum of advanced formulation, production, and technical services from the early stages of a product's development to regulatory approval and beyond, as well as for new formulations of approved products for life cycle extension. Drug Substance Services provides development and manufacturing for the biologically active component of a pharmaceutical product from early development through commercial production.
The accompanying unaudited consolidated financial statements have been prepared by the Company in accordance with accounting principles generally accepted in the United States ("U.S. GAAP"). Operating results for the
three and six months ended April 30, 2017
are not necessarily indicative of the results that may be expected for the fiscal year ending
October 31, 2017
("fiscal
2017
"). These consolidated financial statements do not include all the information and footnotes required by U.S. GAAP for annual financial statements and therefore should be read in conjunction with the audited consolidated financial statements and notes for the fiscal year ended
October 31, 2016
("fiscal
2016
").
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany transactions have been eliminated.
The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect: the reported amounts of assets and liabilities; the disclosure of contingent assets and liabilities at the date of the consolidated financial statements; and the reported amounts of revenue and expenses in the reporting period. Management believes that the estimates and assumptions used in preparing its consolidated financial statements are reasonable and prudent; however, actual results could differ from those estimates.
Notes to Unaudited Consolidated Financial Statements for the Three and Six Months Ended April 30, 2017
(Dollar information in tabular form is expressed in millions of U.S. dollars, except share data)
Changes in significant accounting policies
As a result of early adopting Accounting Standards Update 2016-09, 'Improvements to Employee Share-Based Payment Accounting', the Company is electing to account for forfeitures on stock based compensation awards as they occur. No adjustment is required to comply with the early adoption. The Company was previously not estimating forfeitures on stock based compensation awards since the impact of potential forfeiture was immaterial to the consolidated financial statements.
Segment information
U.S. GAAP requires segmentation based on an entity’s internal organization and reporting of revenue and operating income (loss) based upon internal accounting methods commonly referred to as the “management approach.” Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker (“CODM”), or decision making group, in deciding how to allocate resources and in assessing performance. The Company’s CODM is its Chief Executive Officer.
The Company’s
four
operating segments are: North America Drug Product Services, or North America DPS, Europe Drug Product Services, or Europe DPS, Pharmaceutical Development Services, or PDS and Drug Substance Services, or DSS. The North America DPS and Europe DPS operating segments meet the aggregation criteria to be presented as
one
reportable segment referred to as DPS. As a result, the Company has determined it has
three
reportable segments: DPS, PDS, and DSS. Corporate is not an individually reportable segment because the quantitative thresholds have not been met and as such has been reported in Other.
Recently adopted accounting pronouncements
|
|
|
|
|
|
|
Accounting Standards Update ("ASU")
|
Description
|
Date Adopted
|
|
Improvements to Employee Share-Based Payment Accounting (ASU 2016-09)
|
This update simplifies several aspects of the accounting for
share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities,
and classification on the statement of cash flows.
The Company early-adopted ASU 2016-09 during the second quarter of fiscal 2017, which had no effect on the Company's financial statements.
|
February 1, 2017
|
|
Simplifying the Accounting for Measurement-Period Adjustment (ASU 2015-16)
|
This update eliminated the requirement to an acquirer in a business combination to retrospectively adjust provisional amounts recognized at the acquisition date with a corresponding adjustment to goodwill. Instead, the update requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The impact will be dependent on future transactions.
|
November 1, 2016
|
|
Simplifying the Presentation of Debt Issuance Costs (ASU 2015-03)
|
The pronouncement requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of the debt liability, consistent
with that of debt discounts. The pronouncement is being applied retrospectively and the Company's October 31, 2016 balance sheet has been adjusted. The April 30, 2017 and October 31, 2016 balance sheets were adjusted to decrease the deferred financing cost asset and decrease the long term debt liability by $45.2 million and $50.3 million, respectively.
|
November 1, 2016
|
Recently issued accounting pronouncements
Notes to Unaudited Consolidated Financial Statements for the Three and Six Months Ended April 30, 2017
(Dollar information in tabular form is expressed in millions of U.S. dollars, except share data)
|
|
|
|
|
|
|
|
Accounting Standards Update ("ASU")
|
Description
|
Expected Impact
|
Effective Date
|
|
Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost (ASU 2017-07)
|
This update requires that an employer disaggregate the service cost component from the other components of net periodic benefit cost. In addition, only the service cost component will be eligible for capitalization. The amendment is applied retrospectively with earlier application permitted.
|
We are assessing the impact to the individual line items to the Statements of Operations. The Company does not expect there to be a material impact to net income.
|
November 1, 2018
|
|
Simplifying the Test for Goodwill Impairment (ASU 2017-04)
|
This update simplified the subsequent measurement of goodwill by eliminating Step 2 of the goodwill impairment test. Instead, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. The amendment also eliminated the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. The amendment is applied prospectively with earlier application permitted.
|
We do not expect to have a material impact on the Company’s financial statements.
|
November 1, 2020
|
|
Clarifying the Definition of a Business (ASU 2017-01)
|
This update narrows the definition of outputs and aligns it with how outputs are described in Topic 606. The amendment also provides a more robust framework to use in determining when a set of assets and activities is a business. The amendment is applied prospectively with earlier application permitted.
|
The impact on the consolidated financial statements from the adoption of this guidance is dependent on future business combinations.
|
November 1, 2018
|
|
Revenue from Contracts with Customers and related standards (ASU's 2014-09, 2016-08, 2016-10, 2016-12, 2016-20)
|
This update supersedes the existing revenue recognition guidance and provides a new framework for recognizing revenue. These updates identified practical expedients and clarified various aspects of the new revenue recognition standard outlined in Accounting Standards Update 2014-09. This standard may be adopted using either a retrospective or modified retrospective method. Early adoption is permitted.
|
We are currently in the process of evaluating the impact of this standard. It is still too early in our process to determine the magnitude of the potential impact. However, based on our preliminary assessment, we believe the timing of revenue recognition for commercial and development contracts may differ from our current revenue recognition policies. The Company is determining the magnitude of this potential change. We plan to adopt the standard on November 1, 2018, and we have not yet selected a transition method.
|
November 1, 2018
|
From time to time, new accounting pronouncements are issued by the FASB or other standard setting bodies that are adopted by the Company as of the specified effective date or, in some cases where early adoption is permitted, in advance of the specified effective date. The Company has assessed the recently issued standards that are not yet effective and, unless otherwise discussed above or in our audited consolidated financial statements and notes for fiscal
2016
, believes these standards will not have a material impact on the Company’s results of operations, cash flows, or financial position. A more detailed listing of recently issued accounting pronouncements are included in our audited consolidated financial statements and notes for fiscal
2016
.
3. BUSINESS COMBINATIONS
The acquisition activity referenced below has been accounted for using the acquisition method of accounting in accordance with ASC Subtopic 805-10, "Business Combinations," and the fair value concepts set forth in ASC Subtopic 820-10, "Fair Value Measurements and Disclosures". The total purchase price for each acquisition was allocated to the assets acquired and liabilities assumed based on their respective fair values as of the acquisition date. The allocation of the purchase price is based
Notes to Unaudited Consolidated Financial Statements for the Three and Six Months Ended April 30, 2017
(Dollar information in tabular form is expressed in millions of U.S. dollars, except share data)
on estimates and assumptions that are subject to change within the measurement period. The excess of the fair values of the assets acquired and liabilities assumed over the consideration transferred was recorded as a bargain purchase gain.
RCI Acquisition
Background
On February 1, 2017, the Company acquired the Roche Carolin, Inc. active pharmaceutical ingredients (API) facility located in Florence, South Carolina ("RCI Acquisition") from Roche Holdings, Inc. (Roche). Through the acquisition, the Company entered into a stock purchase agreement in which Roche provided amounts to satisfy certain capital expenditures and other liabilities of the facility and the Company provided an upfront payment of
$1.0 million
to acquire the stock of Roche Carolina Inc. (RCI) and approximately
$9.3 million
to acquire inventory, spare parts, prepaid expense and accounts payable and certain transaction expenses of Roche. The RCI Acquisition is included in the DSS segment.
As part of the transaction, the parties entered into (i) a supply agreement for the production of certain pharmaceutical intermediates by the Company for Roche and (ii) a toll manufacturing agreement where the Company will assume the manufacturing of certain products produced by the facility.
The toll manufacturing agreement has a five-year initial term. During the first four years of the term, Roche is subject to a minimum annual purchasing commitment. The Company will manufacture certain existing Roche products and sell the products back to Roche at fiscal year 2016 standard costs. Annual volumes above the minimum annual commitment will be rolled into the subsequent year. If applicable, Roche will pay true-up payments for amounts below the minimum purchase requirement. A liability from this unfavorable product supply contract has been recognized as deferred revenue in order to reflect this liability at fair value as of the acquisition date.
Purchase Price Allocation
The preliminary purchase price allocation for the RCI Acquisition is as follows:
|
|
|
|
|
|
|
|
$
|
|
Assets
|
|
|
Inventories
|
9.4
|
|
|
Prepaid expenses and other
|
0.1
|
|
|
Capital assets
|
155.6
|
|
|
Total assets acquired
|
165.1
|
|
|
|
|
|
Liabilities
|
|
|
Accounts payable and accrued liabilities
|
2.0
|
|
|
Deferred revenue
|
67.0
|
|
|
Deferred tax liabilities
|
59.4
|
|
|
Total liabilities assumed
|
128.4
|
|
|
|
|
|
Total net assets
|
36.7
|
|
|
Bargain purchase gain
|
(26.4
|
)
|
|
Total purchase price
|
10.3
|
|
The bargain purchase gain, net of taxes, is reflected in income before taxes in the statements of operations. In late 2015, Roche analyzed strategic alternatives for the facility, including potentially closing or divesting the facility. The cost to close the facility or continue operating an under utilized facility contributed to the bargain purchase gain noted above.
Financial results
The revenues and net income from continuing operations from the RCI Acquisition for the period from February 1, 2017 to April 30, 2017 included in the consolidated statement of operations are as follows:
Notes to Unaudited Consolidated Financial Statements for the Three and Six Months Ended April 30, 2017
(Dollar information in tabular form is expressed in millions of U.S. dollars, except share data)
|
|
|
|
|
|
|
|
February 1, 2017 to April 30, 2017
|
|
|
$
|
|
Revenues
|
8.1
|
|
|
Net income from continuing operations
(1)
|
25.9
|
|
(1) Net income from continuing operations includes the $
26.4 million
of the bargain purchase gain.
Pro forma financial information
The following unaudited supplemental pro forma information presents the financial results as if the acquisition had occurred on November 1, 2015. The unaudited supplemental pro forma information does not purport to be indicative of what would have occurred had the acquisition been completed on November 1, 2015, nor is it indicative of any future results.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended April 30,
|
|
Six months ended April 30,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
|
$
|
|
$
|
|
$
|
|
$
|
|
Revenues
|
483.4
|
|
|
484.0
|
|
|
999.1
|
|
|
904.9
|
|
|
Net income from continuing operations
|
1.2
|
|
|
(6.0
|
)
|
|
11.4
|
|
|
(258.8
|
)
|
(1) Net income from continuing operations for the six months ended April 30, 2016 includes
$257.8 million
of impairment expense related to Roche's strategic realignment of the facility. This is not part of the acquisition transaction and as such is not removed from the pro forma financial information.
The unaudited pro forma financial information was prepared using the acquisition method of accounting and is based on the historical financial information of the Company and RCI, reflecting the Company's and RCI's combined results of operations for the
three and six months ended April 30, 2017
and
2016
. The historical financial information has been adjusted to give effect to the pro forma events that are (i) directly attributable to the RCI Acquisition, (ii) factually supportable and (iii) expected to have a continuing impact on the combined results of the Company and RCI. The unaudited pro forma consolidated results reflect primarily the following pro forma adjustments:
|
|
|
|
•
|
additional revenue related to the amortization of deferred revenue on the unfavorable product supply contract;
|
|
|
|
|
•
|
additional cost of goods sold resulting from increases in depreciation expense relating to the fair values of acquired property and equipment;
|
|
|
|
|
•
|
removal of repositioning costs related to the acquisition; and
|
|
|
|
|
•
|
the effect of the bargain purchase gain
|
4. DISCONTINUED OPERATIONS
Banner Pharmacaps
On May 12, 2015, the Company sold its Banner Pharmacaps entity in Mexico, previously included within the DPS and BLS segments, to the Perrigo Company plc for approximately
$36.4 million
in cash. The Banner Pharmacaps entity in Mexico produced over-the-counter and nutritional products for consumption in Mexico. The Company acquired the entity in fiscal 2012 and subsequent to this acquisition, the Company shifted its business strategy, focusing more on technological innovation and R&D. The Company recognized a gain on sale of $
2.6 million
, which included adjustments in the second quarter of 2016 primarily related to working capital adjustments.
Biosolutions Operations in Capua, Italy
On July 31, 2015, the Company sold its Biosolutions facility in Capua, Italy, previously included within the Biosolutions segment, for approximately
€0.3 million
in cash. The sale occurred as a result of a strategic shift in the Company’s long term business strategy. The Company recognized a loss on sale of $
24.0 million
, which included an adjustment in the second quarter of 2016 for future retention bonuses at the facility.
DPx Fine Chemicals
On August 31, 2015, the Company sold its DPx Fine Chemicals ("DFC") division, which previously comprised the DFC operating segment. DFC was sold for a cash purchase price of
€179.0 million
, which included a
€3.0 million
working capital payment made in the first quarter of 2016. The Company recognized a gain on sale of $
107.0 million
, which included an
Notes to Unaudited Consolidated Financial Statements for the Three and Six Months Ended April 30, 2017
(Dollar information in tabular form is expressed in millions of U.S. dollars, except share data)
adjustment in the first quarter of 2016 for estimated taxes on the sale. The DPx Fine Chemicals division, which was acquired through the DPP Acquisition, developed chemicals that are not in line with the Company’s long term business strategy.
The results of the above dispositions have been presented as discontinued operations, the results of which for the three and six months ended April 30, 2016 are as follows:
|
|
|
|
|
|
|
|
|
|
|
Three months ended April 30,
|
|
Six months ended April 30,
|
|
|
2016
|
|
2016
|
|
|
$
|
|
$
|
|
Revenues
|
—
|
|
|
2.1
|
|
|
Cost of goods sold
|
—
|
|
|
1.9
|
|
|
Gross profit
|
—
|
|
|
0.2
|
|
|
Selling, general and administrative expenses
|
—
|
|
|
0.4
|
|
|
Loss on disposals, net
|
0.9
|
|
|
2.8
|
|
|
Operating loss
|
(0.9
|
)
|
|
(3.0
|
)
|
|
Foreign exchange income, net
|
(0.1
|
)
|
|
(0.1
|
)
|
|
Loss before income taxes
|
(0.8
|
)
|
|
(2.9
|
)
|
|
Provision for income taxes
|
0.2
|
|
|
0.2
|
|
|
Net loss
|
(1.0
|
)
|
|
(3.1
|
)
|
The Company did not record any discontinued operations activity for the three and six months ended April 30, 2017.
5. SUPPLEMENTAL BALANCE SHEET INFORMATION
Inventories
Inventories consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
April 30, 2017
|
|
October 31, 2016
|
|
|
$
|
|
$
|
|
Raw materials, packaging components and spare parts
|
228.7
|
|
|
192.1
|
|
|
Work-in-process
|
92.3
|
|
|
80.9
|
|
|
Finished goods
|
130.6
|
|
|
122.2
|
|
|
Balance, end of period
|
451.6
|
|
|
395.2
|
|
Accounts payable and accrued liabilities
Accounts payable and accrued liabilities consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
April 30, 2017
|
|
October 31, 2016
|
|
|
$
|
|
$
|
|
Trade payables
|
277.1
|
|
|
279.3
|
|
|
Interest payable
|
9.8
|
|
|
14.0
|
|
|
Accrued salaries and related expenses
|
78.8
|
|
|
81.8
|
|
|
Customer deposits
|
4.1
|
|
|
4.3
|
|
|
Repositioning
|
4.9
|
|
|
5.4
|
|
|
Other accruals
|
7.5
|
|
|
8.8
|
|
|
Balance, end of period
|
382.2
|
|
|
393.6
|
|
Intangible assets
The following table summarizes gross carrying amounts, accumulated amortization, and accumulated impairments related to the Company's identifiable intangible assets as of
April 30, 2017
:
Notes to Unaudited Consolidated Financial Statements for the Three and Six Months Ended April 30, 2017
(Dollar information in tabular form is expressed in millions of U.S. dollars, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Definite-lived intangible assets
|
Gross carrying value
|
|
Accumulated amortization
|
|
Net carrying value
|
|
Weighted Average Useful Life (in Years)
|
|
|
$
|
|
$
|
|
$
|
|
|
|
Favorable agreements
|
1.0
|
|
|
(1.0
|
)
|
|
—
|
|
|
—
|
|
|
Trade names
|
1.6
|
|
|
(0.9
|
)
|
|
0.7
|
|
|
5.6
|
|
|
Developed technology
|
54.1
|
|
|
(19.4
|
)
|
|
34.7
|
|
|
10.8
|
|
|
Trade secrets and patents
|
2.5
|
|
|
(0.4
|
)
|
|
2.1
|
|
|
14.5
|
|
|
Customer relationships
|
248.8
|
|
|
(49.5
|
)
|
|
199.3
|
|
|
14.2
|
|
|
Non-compete agreements
|
2.6
|
|
|
(2.2
|
)
|
|
0.4
|
|
|
3.0
|
|
|
Subtotal
|
310.6
|
|
|
(73.4
|
)
|
|
237.2
|
|
|
|
|
Foreign exchange
|
|
|
|
|
(3.3
|
)
|
|
|
|
Balance, end of period
|
|
|
|
|
233.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indefinite-lived intangible assets
|
Gross carrying value
|
|
Accumulated impairment
|
|
Net carrying value
|
|
|
$
|
|
$
|
|
$
|
|
In-process research and development
|
2.2
|
|
|
(0.9
|
)
|
|
1.3
|
|
|
Regulatory permits
|
0.2
|
|
|
—
|
|
|
0.2
|
|
|
Subtotal
|
2.4
|
|
|
(0.9
|
)
|
|
1.5
|
|
|
Foreign exchange
|
|
|
|
|
(0.2
|
)
|
|
Balance, end of period
|
|
|
|
|
1.3
|
|
In-process research and development (“IPR&D”) is classified as definite-lived or indefinite-lived depending on whether the product has been approved and if commercialization has begun. IPR&D for products that have been approved is classified as a definite-lived intangible asset and is amortized over the life of the asset. IPR&D for products that have not been approved is classified as an indefinite-lived intangible asset and either begins to be amortized upon approval and product commercialization or is written-off if the product is not approved.
In the first quarter of fiscal 2016, the Company sold an IPR&D asset to Banner Life Sciences for cash consideration equal to its net carrying value of
$3.6 million
. At the time of the sale, the asset had a gross carrying value of
$7.9 million
and had incurred
$4.3 million
in impairments.
Goodwill
The following table summarizes the changes in the carrying amount of goodwill for the
six months ended April 30, 2017
:
|
|
|
|
|
|
|
|
Total
|
|
|
$
|
|
Balance at October 31, 2016
(1)
|
281.6
|
|
|
Foreign currency translation adjustments
|
(0.2
|
)
|
|
Balance at April 30, 2017
|
281.4
|
|
(1) The opening cumulative goodwill balance is reflective of historical impairment charges of the full value of goodwill.
6. LONG-TERM DEBT
Long-term debt in the accompanying consolidated balance sheets at
April 30, 2017
and
October 31, 2016
consists of the following:
Notes to Unaudited Consolidated Financial Statements for the Three and Six Months Ended April 30, 2017
(Dollar information in tabular form is expressed in millions of U.S. dollars, except share data)
|
|
|
|
|
|
|
|
|
|
|
As of April 30, 2017
|
|
As of October 31, 2016
|
|
|
$
|
|
$
|
|
USD Term Loan at LIBOR with a floor of 1% plus 3.25% rate and maturity date of April 20, 2024 (the "Credit Agreement")
|
1,133.1
|
|
|
—
|
|
|
Euro Term Loan at LIBOR with a floor of 1% plus 3.00% rate and maturity date of April 20, 2024 (the "Credit Agreement")
|
504.5
|
|
|
—
|
|
|
USD Term Loan with a base rate plus 2.25% or LIBOR with a floor of 1% plus 3.25% rate and maturity date of March 10, 2021 (the "Credit Agreement")
|
—
|
|
|
1,138.9
|
|
|
Euro Term Loan with a base rate plus 2.50% or LIBOR with a floor of 1% plus 3.50% rate and maturity date of March 10, 2021 (the "Credit Agreement")
|
—
|
|
|
511.0
|
|
|
7.50% Senior Notes due February 1, 2022 (the "Notes")
|
450.0
|
|
|
450.0
|
|
|
Secured Revolving Facility balance at LIBOR plus 3.25% rate and maturity terms on a rolling basis
|
50.0
|
|
|
20.0
|
|
|
Government of Austria research and development loans with annual interest rates ranging from 1.56% to 2.00% and maturities through March 2020
|
2.7
|
|
|
3.5
|
|
|
Italian subsidized loan with annual interest rate of 0.5%, and maturity date of June 30, 2020
|
3.6
|
|
|
4.1
|
|
|
Italian bank loan with Euribor 6-month + 7.1% rate, and maturity date of June 30, 2020
|
0.7
|
|
|
0.7
|
|
|
Capital lease obligations
|
1.6
|
|
|
0.7
|
|
|
Total long-term debt outstanding
|
2,146.2
|
|
|
2,128.9
|
|
|
Less original issue discount, net of accumulated amortization of $7.1 million and $6.2 million, respectively
|
(12.2
|
)
|
|
(9.9
|
)
|
|
Less deferred financing costs
|
(45.2
|
)
|
|
(50.3
|
)
|
|
Less current portion
|
(19.4
|
)
|
|
(19.5
|
)
|
|
Balance, end of the period
|
2,069.4
|
|
|
2,049.2
|
|
2017 Term Loans and Revolving Line
On April 20, 2017, the Company completed the refinancing of its term loans and amended the existing revolving credit facility (the "Refinancing'") by entering into Amendment No. 4 of the original credit facility agreement dated as of March 11, 2014 (the "Credit Facility"). Under Amendment No. 4, the existing term loans were refinanced with new term loans ("Tranche B Term Loans"). The Tranche B Term Loans consisted of (i) Tranche B US Dollar Term Loans in the amount of
$1.133 billion
and (ii) Tranche B Euro Term Loans in the amount of
€463.1 million
, or
$496.3 million
. The Tranche B Term Loans will mature on April 20, 2024.
Under Amendment No. 4, the Company increased the size of the revolver facility (the "Revolving Facility") to
$250.0 million
, of which up to
$75.0 million
is available for letters of credit. Of the total revolving commitments,
$87.1 million
will terminate on March 11, 2019 (the "Tranche A Commitments") and the remaining commitments (the "Tranche B Commitments") will terminate on April 20, 2022.
The US Dollar denominated Tranche B Term Loans bear interest at a rate per annum equal to, at the option of the Company, a base rate plus
2.25%
or LIBOR with a floor of
1%
plus
3.25%
. The margin applied to the base rate will be reduced to
2.0%
and the margin applied to LIBOR will be reduced to
3.0%
if the Company achieves, and as long as the Company maintains, a B2/Stable credit rating or better from Moody's Inventors Service, Inc.
The Euro denominated Tranche B Term Loans bear interest at a rate per annum equal to LIBOR with a floor of
1%
plus
3.00%
.
Borrowings under the Revolving Facility bear interest at a rate per annum equal to, at the option of the Company, a base rate plus
2.25%
or LIBOR plus an applicable margin of
3.25%
. The Company will also pay a commitment fee of
0.50%
per annum on the unused portion of the Revolving Facility with a step down to
0.375%
when the First Lien Leverage Ratio (as defined below) is less than or equal to
3.00
to 1.00.
As of
April 30, 2017
, the Company borrowed
$50.0 million
against the Revolving Facility, which will renew until paid.
Under the Revolving Facility, the Company is required to maintain a First Lien Leverage Ratio below a certain amount for each of the Testing Periods as set forth in the Credit Agreement if the Company has borrowed
25%
of the available credit on the Revolving Facility, or
$62.5 million
. For purposes of the Credit Agreement, a Testing Period means a single period consisting of the most recent four consecutive fiscal quarters ending on the covenant determination date. As of
April 30, 2017
, the
Notes to Unaudited Consolidated Financial Statements for the Three and Six Months Ended April 30, 2017
(Dollar information in tabular form is expressed in millions of U.S. dollars, except share data)
Company was not required to calculate the First Lien Leverage Ratio as the Company has not borrowed
25%
or
$62.5 million
under the Secured Revolving Facility. The following table discloses the maximum First Lien Leverage Ratios permitted under the Credit Agreement:
|
|
|
|
|
|
Testing Period Ending
|
Maximum Ratio
|
|
April 30, 2014 through October 31, 2014
|
6.75 to 1.00
|
|
November 1, 2014 through October 31, 2015
|
6.50 to 1.00
|
|
November 1, 2015 through October 31, 2016
|
6.25 to 1.00
|
|
November 1, 2016 through October 31, 2017
|
6.00 to 1.00
|
|
November 1, 2017 and thereafter
|
5.75 to 1.00
|
"First Lien Leverage Ratio" is generally defined in the Credit Agreement as the ratio of (i) the sum of the aggregate principal amount of the Company's and its restricted subsidiaries' indebtedness for borrowed money, principal amount of capital lease obligations and debt obligations evidenced by bonds, promissory notes, debentures or debt securities that is secured by a first priority lien on the collateral minus unrestricted cash and cash equivalents held by the Company and its restricted subsidiaries in each case set forth in the Credit Agreement to (ii) Consolidated EBITDA. Consolidated EBITDA is generally defined in the Credit Agreement as income (loss) from continuing operations before repositioning expenses, interest expense, foreign exchange losses reclassified from other comprehensive income (loss), refinancing expenses, acquisition-related costs, gains and losses on sale of capital assets, income taxes, asset impairment charges, depreciation and amortization, stock-based compensation expense, consulting costs related to the Company's operational initiatives, purchase accounting adjustments, other income and expenses, non-cash charges, expenses related to the DPP Acquisition, pro forma cost savings from operational excellence initiatives and plant consolidations, pro forma synergies from the DPP Acquisition, and proceeds from business interruption insurance, among other adjustments. Consolidated EBITDA is not equivalent to Adjusted EBITDA, which as discussed in Note 11, is the Company's measure of segment performance.
The Company is required to make the following mandatory prepayments in respect of the Tranche B Term Loans: (i)
50%
of Excess Cash Flow (as defined in the Credit Agreement) when the Company maintains a First Lien Leverage Ratio of greater than
4.00
to 1.00, with step downs to (a)
25%
when the Company maintains a First Lien Leverage Ratio of less than or equal to
4.00
to 1.00 but greater than
3.50
to 1.00 and (b)
0%
when the Company maintains a First Lien Leverage Ratio of less than or equal to
3.50
to 1.00; (ii)
100%
of the net cash proceeds of certain asset sales (including insurance and condemnation proceeds), subject to thresholds, reinvestment rights and certain other exceptions; and (iii)
100%
of the net cash proceeds of issuances of debt obligations, subject to certain exceptions and thresholds. "Excess Cash Flow" is generally defined as Consolidated EBITDA (as defined in the Credit Agreement) plus, (i) decreases in working capital, (ii) extraordinary or nonrecurring income or gains and (iii) certain other adjustments, minus, (a) increases in working capital, (b) cash interest, (c) cash taxes, (d) cash capital expenditures (e) scheduled debt amortization and (f) certain other adjustments. As the Excess Cash Flow calculation is performed annually,
no
payment is due for the
six
months ended
April 30, 2017
. No Excess Cash Flow payment was required for fiscal 2016. The Company may voluntarily repay borrowings under the Credit Facility at any time.
If the Company has failed to maintain the applicable First Lien Leverage Ratio, it may nevertheless avoid a default by (i) repaying outstanding borrowings under the Revolving Facility in an amount sufficient to avoid triggering the First Lien Leverage Ratio for that fiscal quarter or (ii) accepting a cash contribution of qualified equity in an amount which, if treated as Consolidated EBITDA, would bring the Company into compliance with the applicable First Lien Leverage Ratio for that fiscal quarter, in each case during the
11
business days following the deadline for delivery of the Company’s compliance certificate for that fiscal quarter. In addition, maintenance of the First Lien Leverage Ratio is required only with respect to the Revolving Line; the Term Loans do not directly benefit from the financial covenant and, until the Revolving Line is terminated and all outstanding borrowings thereunder are accelerated, will remain unaffected by a default under the Revolving Line that arises from the Company’s failure to maintain the applicable First Lien Coverage Ratio.
The Credit Agreement contains other customary terms, including (i) representations, warranties and affirmative covenants, (ii) negative covenants (in addition to the limitation on distributions and the requirement to maintain the First Lien Leverage Ratio levels as described above), such as limitations on indebtedness, liens, mergers, acquisitions, asset sales, investments, prepayments of subordinated debt, and transactions with affiliates, in each case subject to baskets, thresholds and other exceptions, and (iii) events of default, such as for non-payment, breach of other covenants, misrepresentations, cross default to other debt, change in control, bankruptcy events, ERISA events, unsatisfied judgments and actual or asserted invalidity of guarantees or security documents.
As of
April 30, 2017
, the Company was in compliance with the covenants in the Credit Facility.
Notes to Unaudited Consolidated Financial Statements for the Three and Six Months Ended April 30, 2017
(Dollar information in tabular form is expressed in millions of U.S. dollars, except share data)
Provided that the Company is in compliance with the First Lien Leverage Ratio test and no default under the Credit Agreement is continuing or would result therefrom, the covenant in the Credit Agreement that limits the Company's ability to pay dividends or make other distributions to its shareholders generally permits (with certain exceptions and qualifications) the Company to pay dividends or make such distributions in an aggregate amount, when taken together with the aggregate amount of any prepayment, repurchase, redemption or defeasance of subordinated indebtedness, not to exceed the greater of (x)
3.00%
of Consolidated Total Assets and (y)
$65.0 million
and (ii) in aggregate amount not to exceed the available amount (as defined in the Credit Agreement) at such time.
The Credit Facility is guaranteed by the Company and certain subsidiaries, and is secured by a first priority pledge on substantially all of the assets of the Company and the subsidiary guarantors, in each case subject to certain exceptions.
2014 Senior Unsecured Notes
In February 2014, the Company issued
$450.0 million
in aggregate principal amount of
7.50%
senior unsecured notes due February 1, 2022 (the "Notes") in a private placement, pursuant to which it entered into an indenture (the “Indenture”) with a commercial bank acting as trustee.
Interest on the Notes accrues at a rate of
7.50%
per annum and is payable semiannually in arrears on each February 1 and August 1, commencing on August 1, 2014. Interest is computed on the basis of a 360-day year comprised of twelve 30-day months. The Notes are generally required to be guaranteed by each of the Company’s restricted subsidiaries that guarantees the Credit Facility or that guarantees other material indebtedness of the Company or other Note guarantors.
Except for offers to purchase Notes upon certain asset sales or a change in control of the Company, no mandatory redemption or sinking fund payment is required with respect to the Notes.
On and after February 1, 2017, the Company may redeem all or a portion of the Notes at the applicable redemption prices set forth below (expressed as percentages of principal amount redeemed), plus unpaid interest accruing on the principal amount redeemed to the Redemption Date:
|
|
|
|
|
|
Year
|
%
|
|
2017
|
105.625
|
|
2018
|
103.750
|
|
2019
|
101.875
|
|
2020 and thereafter
|
100.000
|
In addition, we may redeem all of the Notes at a redemption price equal to the principal amount redeemed, plus unpaid interest accruing to the Redemption Date, upon certain adverse changes in applicable tax laws.
The Notes are guaranteed by the Company and the Indenture does not require the Company to maintain compliance with any financial covenants. The Indenture does contain customary affirmative and negative covenants, including with respect to mergers, asset sales, restricted payments, restricted investments, issuance of debt and equity, liens, and affiliate transactions, subject to baskets and other exceptions. However, the Company will be exempt from many of the negative covenants if the Notes receive investment grade ratings from both Moody’s and S&P. The Indenture also contains customary events of default, such as for non-payment, breach of other covenants, misrepresentation, cross default to other material debt, bankruptcy events, unsatisfied judgments, and actual or asserted invalidity of guarantees.
As of
April 30, 2017
, the Company was in compliance with the covenants in the Indenture.
Other Financing Arrangements
During the third quarter of fiscal 2013, the Company received assistance from the Italian government in the form of
two
loans. One loan is a subsidized loan for approximately
€6.0 million
, of which the Company received
€5.4 million
during the third quarter of 2013 and the remaining
€0.6 million
in the second quarter of 2016. The subsidized loan has an annual interest rate of
0.5%
, a maturity date of June 30, 2020 and amortizes in fixed semi-annual installments. The second loan is a bank loan of approximately
€0.7 million
, of which the Company received
€0.6 million
during the third quarter of 2013 and the remaining
€0.1 million
in the second quarter of 2016. The bank loan bears interest at a 6-month Euribor rate plus
7.1%
, has a maturity date of June 30, 2020 and amortizes in
six
variable semi-annual installments beginning in December 2017.
Notes to Unaudited Consolidated Financial Statements for the Three and Six Months Ended April 30, 2017
(Dollar information in tabular form is expressed in millions of U.S. dollars, except share data)
The Company receives research and development loans from the Austrian government. The loans hold various interest rates and have maturity dates through March 31, 2020. The aggregate current balance of these loans as of
April 30, 2017
is $
2.7 million
.
In May 2011, Gallus entered into an agreement with St. Louis County under the county's Chapter 100 program. Under the program, Gallus transferred title of the St. Louis location's buildings and property to St. Louis County in exchange for St. Louis County, Missouri Taxable Industrial Revenue Bonds (Chapter 100 Bonds) of equal value. Gallus then simultaneously leased back the land and facility from St. Louis County. The proceeds of principal and interest on the Chapter 100 Bonds are equal to the lease payment obligations on the Loan. This arrangement was acquired by the Company through the acquisition of Gallus Pharmaceuticals in September 2014.
In August 2015, the agreement with St. Louis County was amended by the Company to extend through December 21, 2029 (originally December 21, 2021), which is consistent with the maturity date of the Chapter 100 Bonds. The Company has determined that it has a legal right of offset for the obligations under the lease agreement with the proceeds receivable from the Chapter 100 Bonds and intends to offset the balance. As a result, the offsetting amounts have not been recorded in the financial statements. The bonds require the Company to maintain a minimum level of employment throughout the term of the loan and an additional investment in the St. Louis facility of at least
$47.0 million
by December 31, 2019.
In addition to the terms of the bonds indicated above, the Company also entered into an agreement under which it makes "Payments In Lieu Of Taxes" (PILOT) fee payments in lieu of property taxes, which is equal to
50%
of the property taxes that would have otherwise been payable on the property. The PILOT fees will increase in years which the Company has not maintained the minimum number of employees as required by the agreement on a prospective basis.
The Company has possessory and equitable title to the property, and at any time can purchase legal title for a nominal fee. In addition, as the holder of the bonds, the Company can waive any default on the lease payments. As the Company retains all benefits of ownership and can take title at any time, at which point the bonds it holds would be redeemed to settle its obligations under the lease agreement, the Company has concluded the land and personal property continue to be assets and are recorded on the consolidated balance sheets.
7. PENSION AND POST-RETIREMENT BENEFITS
Employee future benefits
The components of net periodic benefit cost from continuing operations for the defined benefit plans and other benefit plans for the
three and six months ended April 30, 2017
and
2016
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended April 30,
|
|
|
2017
|
|
2016
|
|
|
Defined benefit
pension plans
|
|
Other benefit
plans
|
|
Defined benefit
pension plans
|
|
Other benefit
plans
|
|
|
$
|
|
$
|
|
$
|
|
$
|
|
Service cost
|
0.6
|
|
|
—
|
|
|
0.4
|
|
|
—
|
|
|
Interest cost
|
1.0
|
|
|
—
|
|
|
1.3
|
|
|
—
|
|
|
Expected return on plan assets
|
(1.0
|
)
|
|
—
|
|
|
(1.2
|
)
|
|
—
|
|
|
Amortization of actuarial loss
|
0.7
|
|
|
—
|
|
|
0.4
|
|
|
—
|
|
|
Net periodic benefit costs
|
1.3
|
|
|
—
|
|
|
0.9
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended April 30,
|
|
|
2017
|
|
2016
|
|
|
Defined benefit
pension plans
|
|
Other benefit
plans
|
|
Defined benefit
pension plans
|
|
Other benefit
plans
|
|
|
$
|
|
$
|
|
$
|
|
$
|
|
Service cost
|
1.2
|
|
|
—
|
|
|
0.9
|
|
|
—
|
|
|
Interest cost
|
2.0
|
|
|
0.1
|
|
|
2.6
|
|
|
0.1
|
|
|
Expected return on plan assets
|
(2.0
|
)
|
|
—
|
|
|
(2.5
|
)
|
|
—
|
|
|
Amortization of actuarial loss
|
1.4
|
|
|
—
|
|
|
0.8
|
|
|
—
|
|
|
Net periodic benefit costs
|
2.6
|
|
|
0.1
|
|
|
1.8
|
|
|
0.1
|
|
Notes to Unaudited Consolidated Financial Statements for the Three and Six Months Ended April 30, 2017
(Dollar information in tabular form is expressed in millions of U.S. dollars, except share data)
Based on current information available from actuarial estimates, the Company anticipates that contributions required under its defined benefit pension plans and other benefit plans for
fiscal 2017
will be approximately $
3.9 million
compared to contributions of
$5.2 million
that were made in
fiscal 2016
. The decrease in the expected fiscal 2017 contributions compared to fiscal 2016 are primarily the result of decreased obligations on a pension plan for the Bourgoin, France facility due to a workforce reduction in fiscal 2016. Required contributions to defined benefit pension plans in future years may vary and will be dependent upon a number of variables, including the long-term rate of return on plan assets.
The Company recognizes a termination liability for the Company's Italy operations. In accordance with Italian severance pay statutes, an employee benefit is accrued for service to date and is payable when the employee's employment with the Company ceases. The termination indemnity liability is calculated in accordance with local civil and labor laws based on each employee's length of service, employment category and remuneration. The Italian termination liability is adjusted annually by a cost-of-living index provided by the Italian government. Although there is no vesting period, the Italian government has established private accounts for these benefits and has required the Company to contribute
$3.9 million
and
$3.4 million
in fiscal
2017
and
2016
, respectively, to these accounts, with additional contributions in the future. The liability recorded in the consolidated balance sheets is the amount to which the employees would be entitled if their employment with the Company ceased. The related expenses for the
three months ended April 30, 2017
and
2016
was $
0.9 million
and
$0.7 million
, respectively, and the related expenses for the
six months ended April 30, 2017
and
2016
was $
1.8 million
and $
1.4 million
, respectively.
The employee future benefit expense recorded in continuing operations in connection with defined benefit pension plans, other post-retirement benefit plans and the unfunded termination indemnities for the
three months ended April 30, 2017
and
2016
was $
2.2 million
and $
1.6 million
, respectively. For the
six months ended April 30, 2017
and
2016
, the employee future benefit expense was
$4.5 million
and
$3.3 million
, respectively.
8. EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per ordinary share is computed by dividing net income (loss) available to the Company by the weighted-average number of ordinary shares outstanding during the period. Diluted earnings (loss) per ordinary share is computed by dividing net income (loss) available to the Company by the weighted-average number of ordinary shares outstanding adjusted to give effect to potentially dilutive securities.
The details of the computation of basic and diluted earnings (loss) per ordinary share are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended April 30,
|
|
Six months ended April 30,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
Numerator (in millions):
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
$
|
27.6
|
|
|
$
|
1.9
|
|
|
$
|
55.9
|
|
|
$
|
(18.1
|
)
|
|
Loss from discontinued operations
|
$
|
—
|
|
|
$
|
(1.0
|
)
|
|
$
|
—
|
|
|
$
|
(3.1
|
)
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted-average number of shares of ordinary shares - basic
|
145,136,214
|
|
|
115,609,756
|
|
|
145,132,349
|
|
|
115,609,756
|
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
Restricted stock units
|
1,092,951
|
|
|
—
|
|
|
1,116,435
|
|
|
—
|
|
|
Stock options
|
37,963
|
|
|
—
|
|
|
27,567
|
|
|
—
|
|
|
Weighted-average number of shares of ordinary shares - diluted
|
146,267,128
|
|
|
115,609,756
|
|
|
146,276,351
|
|
|
115,609,756
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per ordinary share - basic:
|
|
|
|
|
|
|
|
|
From continuing operations
|
$
|
0.19
|
|
|
$
|
0.02
|
|
|
$
|
0.39
|
|
|
$
|
(0.16
|
)
|
|
From discontinued operations
|
$
|
—
|
|
|
$
|
(0.01
|
)
|
|
$
|
—
|
|
|
$
|
(0.03
|
)
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per ordinary share - diluted:
|
|
|
|
|
|
|
|
|
From continuing operations
|
$
|
0.19
|
|
|
$
|
0.02
|
|
|
$
|
0.38
|
|
|
$
|
(0.16
|
)
|
|
From discontinued operations
|
$
|
—
|
|
|
$
|
(0.01
|
)
|
|
$
|
—
|
|
|
$
|
(0.03
|
)
|
Notes to Unaudited Consolidated Financial Statements for the Three and Six Months Ended April 30, 2017
(Dollar information in tabular form is expressed in millions of U.S. dollars, except share data)
9. STOCK BASED COMPENSATION
A summary of equity based compensation expense recognized during the
three and six months ended April 30, 2017
and
2016
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended April 30,
|
|
Six months ended April 30,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
|
$
|
|
$
|
|
$
|
|
$
|
|
Management Equity Incentive Plan (MEIP)
|
1.9
|
|
|
2.0
|
|
|
4.2
|
|
|
3.0
|
|
|
Restricted Stock Units
|
4.0
|
|
|
—
|
|
|
5.3
|
|
|
—
|
|
|
Stock Options
|
1.1
|
|
|
—
|
|
|
1.5
|
|
|
—
|
|
|
Stock Based Compensation Expense
|
7.0
|
|
|
2.0
|
|
|
11.0
|
|
|
3.0
|
|
Management Equity Incentive Plan (MEIP)
Prior to the IPO, the Company was a wholly-owned indirect subsidiary of the Partnership. The Partnership adopted the Management Equity Incentive Plan, or the MEIP, with an effective date of March 11, 2014. The purpose of the MEIP is to provide eligible participants with an opportunity to receive grants of profit interests in the Partnership designated as management units. The award of management units pursuant to this MEIP is intended to compensate employees of the Partnership and its subsidiaries, including the Company. The participants in the MEIP, as a group, are eligible to participate in the gain on the investment earned by JLL and DSM with respect to Patheon once certain specified distribution or return thresholds have been achieved. Upon issuance, MEIP units were subject to certain forfeiture (vesting) provisions which meant that if a holder's employment with Patheon terminated prior to the satisfaction of the applicable provision, the unvested MEIP units would be forfeited and the vested MEIP units could be converted into Class A Units in the Partnership on a cashless basis or by making an additional cash contribution in order to receive additional Class A Units ("Partnership Shares").
The aggregate number, class and tranche of management units that were issued under the MEIP was determined by the JLL/Delta Patheon GP Ltd., the general partner of the Partnership. The Partnership last issued MEIP units on December 9, 2015. As a result of the IPO and the adoption of the Patheon N.V. 2016 Omnibus Incentive Plan (the “Omnibus Plan”) described below, the Partnership will no longer grant awards under the MEIP to our employees.
The granted MEIP units consist of Class B, Class C, Class D, and Class E units. From June 24, 2014 to December 9, 2015, the Partnership granted units under
five
different valuation tranches, with each tranche issued at the most recent quarterly valuation of the Company at the time of the grant.
71.4%
of the Class B units have a
four
year service-based component for vesting ("Service-based Class B units") and the remaining Class B units ("Exit Event Class B units") vest if the holder is employed upon the occurrence of an Exit Event. An Exit Event is defined as the earliest to occur of (i) a change of control and (ii) in connection with or following an initial public offering, the sale or disposition by JLL of equity securities such that, immediately following such sale or disposition, JLL and its affiliates either (A) own less than
20%
of the equity securities then issued and outstanding, calculated on a fully diluted basis, or (B) have received, in the aggregate, distributions in respect of such sale or distribution (together with any sale or distribution occurring prior thereto) equal to or in excess of
250%
of its aggregate capital contributions made in respect of such equity securities prior to such sale or distribution.
Each of the Class C, D, and E units have a performance and service condition related to vesting. These units vest upon the earlier to occur of (i) JLL receiving distributions in the aggregate equal to return on capital thresholds of
2.0
x,
2.5
x and
3.0
x, respectively, or (ii) an Exit Event, as defined above, does not occur prior to the fifth anniversary of an IPO and the return thresholds in (i) are met based on the average price of the Company's publicly traded shares for any twenty day period following the fifth anniversary of an IPO.
If any employee is terminated for any reason prior the achievement of the above vesting conditions, all unvested units in any class are forfeited.
A summary of the MEIP activity for the
six months ended April 30, 2017
is as follows:
Notes to Unaudited Consolidated Financial Statements for the Three and Six Months Ended April 30, 2017
(Dollar information in tabular form is expressed in millions of U.S. dollars, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class B
|
Class C
|
Class D
|
Class E
|
Total
|
|
Weighted Average Fair Value
|
|
Outstanding as of October 31, 2016
|
59,290
|
|
8,470
|
|
8,470
|
|
8,470
|
|
84,700
|
|
|
$
|
687.27
|
|
|
Forfeited
|
(288
|
)
|
(50
|
)
|
(50
|
)
|
(50
|
)
|
(438
|
)
|
|
$
|
870.09
|
|
|
Outstanding as of April 30, 2017
|
59,002
|
|
8,420
|
|
8,420
|
|
8,420
|
|
84,262
|
|
|
$
|
686.32
|
|
Through the IPO, JLL and DSM received an aggregate return on capital of approximately 2.9x their invested capital, based on the value of ordinary shares of Patheon distributed by the Partnership to JLL and DSM at the IPO price and the value of cash and in-kind distributions made by the Partnership prior to the IPO.
In connection with the IPO, a total of
6,106,540
ordinary shares ("MEIP shares") were distributed to the Partnership to be held for the benefit of the MEIP participants until an Exit Event occurs or until MEIP participants are otherwise permitted to transfer such interests in accordance with the terms of the partnership agreement of the Partnership and respective MEIP unit award agreements, at which time MEIP participants will receive their allocable distribution of MEIP shares. These shares represent the value of the MEIP units, in the aggregate, as determined under the MEIP, as a result of the distribution of ordinary shares to the limited partners of the Partnership in connection with the IPO. MEIP shares were issued to the Partnership with respect to Class B, C and D units for the first three valuation tranches as the applicable distribution threshold was achieved. No MEIP shares were allocated to the Partnership with respect to the final two valuation tranches or the Class E units, as the distribution thresholds and the 3.0x capital return threshold, respectively, were not achieved as of the IPO.
Because no additional MEIP awards will be granted and because the ordinary shares were distributed to JLL and DSM prior to an Exit Event, the MEIP awards will not benefit from further appreciation of those shares. As such, the Company issued a total of
3,388,481
Restricted Share Units ("MEIP RSUs") under the Omnibus Plan in order to provide the MEIP participants with the opportunity to participate in the additional appreciation the MEIP awards could have generated if the Partnership had not distributed ordinary shares of the Company to JLL and DSM. MEIP RSUs were issued in relation to all unit classes and valuation tranches.
The MEIP shares issued with respect to the Class B Units remain subject to the same vesting conditions as the Class B Units. As a result, MEIP shares issued in relation to Service-based Class B units are vested to the extent of each original MEIP grant's four year vesting schedule. The MEIP shares issued in relation to Exit Event Class B units are still subject to the defined Exit Event and are not vested. Lastly, the MEIP shares issued in relation to Class C and D units are fully vested due to their respective return thresholds being achieved through the IPO. The fair value of the MEIP shares are
$21.00
, the price of the shares at the IPO.
The MEIP RSUs are subject to the same time-based vesting criteria as the original MEIP awards as well as the achievement of performance criteria, which is measured by the Company’s stock price at the earlier to occur of (i) an Exit Event, as defined above, or (ii) the 5-year anniversary of the IPO, at which time all or a percentage of RSUs would settle based upon the attainment of an share price target, with the remaining percentage of RSUs (if any) forfeited. The share price target is
$48.47
per share, at which 100% of the RSUs would settle on the applicable vesting date with the share price at or above the target. No RSUs would settle on the vesting date with the share price at or below the IPO price of
$21.00
, with the settlement amount for a share price between
$21.00
and
$48.47
calculated on a pro rata basis. The estimated fair value of the MEIP RSUs are
$8.41
per unit and was estimated using a Monte Carlo simulation model.
On December 8, 2016, the Company entered into a separation agreement with a senior officer ("Separation Agreement"). The agreement, in part, replaced the senior officer's
196,485
MEIP RSUs with an equal amount of MEIP RSUs with similar terms but with a provision that the MEIP RSUs will vest, and the performance criteria be measured, on December 31, 2017 (the "Separation Date"). The estimated fair value of these replacement MEIP RSUs was
$13.87
per unit and was estimated using a Monte Carlo simulation model.
The Monte Carlo simulation model incorporated the following weighted average assumptions:
|
|
|
|
|
|
|
Risk free interest rate
|
0.9
|
%
|
|
Expected volatility
|
41.6
|
%
|
|
Estimated years to exit event
|
2.98
|
|
The Company previously expensed the service-based Class B units using the graded vesting attribution method and is continuing to do so after the allocation of MEIP shares. In addition, the allocation of MEIP shares and MEIP RSUs in respect to
Notes to Unaudited Consolidated Financial Statements for the Three and Six Months Ended April 30, 2017
(Dollar information in tabular form is expressed in millions of U.S. dollars, except share data)
the MEIP units resulted in an increase in fair value from the value attributed to the service-based Class B units at the time of the IPO, which the Company will expense on a straight line basis over the five year period following the IPO date, which represents the requisite service period of the MEIP RSUs. In total, the Company recorded
$1.4 million
and
$2.9 million
of compensation expense for the
three and six months ended April 30, 2017
, respectively, relating to these units. The Company recorded
$2.0 million
and
3.0 million
of compensation expense for the
three and six months ended April 30, 2016
, respectively, relating to these units. The total unrecognized compensation expense for the Service-based Class B units is
$8.5 million
, which is expected to be recognized through fiscal 2021.
For the Exit Event Class B units, the allocation of MEIP shares and MEIP RSUs resulted in an increased fair value which will serve as the basis for recognizing compensation expense for these units. The fair value of the MEIP RSUs will be expensed on a straight line basis over
five
years, starting with the IPO date. The Company recognized
$0.2 million
and
$0.4 million
of compensation expense for the
three and six months ended April 30, 2017
, respectively. The fair value of the MEIP shares issued in respect of the Exit Event Class B units will remain unrecognized until an Exit Event occurs. The total unrecognized compensation expense for the MEIP shares and MEIP RSUs issued in respect of the Exit Event Class B units is
$31.9 million
, of which
$3.4 million
is expected to be recognized through fiscal 2021 and the remaining amount expensed on the occurrence of an Exit Event.
In the third quarter of fiscal 2016, the Company recorded two one time compensation expenses in relation to the allocation of MEIP shares and MEIP RSUs in respect of the C, D and E units. A
$9.0 million
expense was recorded to account for the fair value of MEIP units that fully vested as a result of their respective return thresholds being met through the IPO. Additionally, a
$1.5 million
expense was recorded to account for the unvested MEIP units that were allocated MEIP RSUs, in which requisite service requirements had already been partially met at the time of the IPO. The Company reversed
$0.1 million
of these expenses in the second quarter of fiscal 2017 due to the Separation Agreement.
In addition, the Company recognized
$0.4 million
and
$1.0 million
of compensation expense for the
three and six months ended April 30, 2017
, respectively, to account for the remaining fair value of the C, D and E MEIP units and the incremental fair value that resulted from the conversion to MEIP shares and MEIP RSUs. These amounts are inclusive of
$0.2 million
reversed relating to the senior officer's awards that were replaced in the Separation Agreement. The compensation expense will be recorded on a straight line basis over five years. The total unrecognized compensation expense for the C, D, and E units is
$8.9 million
, which will be recognized through fiscal 2021.
As a result of the Separation Agreement, the Company recorded
$1.0 million
of additional expense in the second quarter of fiscal 2017, not including a total of
$0.3 million
in expense reversals, as outlined above. The total unrecognized compensation expense for the replacement awards is
$1.7 million
, which will be recognized through the Separation Date.
Patheon N.V. 2016 Omnibus Incentive Plan
In July 2016, the Company adopted the Omnibus Plan in order to align the long-term financial interests of selected participants with those of our shareholders, strengthen the commitment of such persons to the Company and our affiliates, and attract and retain competent and dedicated persons whose efforts will result in our long-term growth and profitability. The Omnibus Plan provides for the issuance of options, share appreciation rights, restricted shares, restricted shares units, share bonuses, other share-based awards and cash awards to selected officers, employers, non-employee directors and consultants.
Restricted Stock Units
As of April 30, 2017, the Company has a total of (i)
1,366,383
restricted stock units outstanding to certain members of management and (ii)
41,635
restricted stock units to non-employee directors (collectively, the "Standard RSUs"), excluding the MEIP RSUs outlined above. The Standard RSUs granted to management vest in equal installments over three years and Standard RSUs granted to non-employee directors vest over one year or at the conclusion of the director's service to the Company. The Standard RSUs are not subject to performance based criteria and have a weighted average fair value of $
24.79
.
In the six months ended April 30, 2017, the Company issued
70,700
ordinary shares for vested restricted stock units. To satisfy certain tax withholding requirements, the Company purchased
8,528
of these shares at a weighted average vesting date fair value of
$27.15
. These shares are currently being held at cost as treasury shares on the balance sheet.
During the
three and six months ended April 30, 2017
,
$3.0 million
and
$4.3 million
of stock compensation expense was recognized in relation to the Standard RSUs. As of
April 30, 2017
, unrecognized stock compensation expense related to Standard RSUs was
$29.5 million
, which will be recognized through fiscal 2020.
A summary of Standard RSUs activity for the
six months ended April 30, 2017
is as follows:
Notes to Unaudited Consolidated Financial Statements for the Three and Six Months Ended April 30, 2017
(Dollar information in tabular form is expressed in millions of U.S. dollars, except share data)
|
|
|
|
|
|
|
|
|
|
Restricted Share Units
|
Weighted Average Grant Date Fair Value
|
|
|
|
$
|
|
Outstanding as of October 31, 2016
|
450,184
|
|
21.00
|
|
|
Granted
|
1,028,534
|
|
26.46
|
|
|
Vested
|
(70,700
|
)
|
21.00
|
|
|
Outstanding as of April 30, 2017
|
1,408,018
|
|
24.79
|
|
As of
April 30, 2017
,
no
Standard RSUs have been forfeited.
Stock Options
As of April 30, 2017, the Company has granted
1,747,750
stock options to certain members of management. The stock options were granted with a weighted average exercise price of
$23.28
per share, with
1,033,465
of the granted stock options ("Regular Options") vesting equally over
three
years. The remaining stock options ("EBITDA Options") were granted to a senior officer and vest based on performance based criteria, using Credit Agreement Adjusted EBITDA as the performance metric. Credit Agreement Adjusted EBITDA is defined as the Company's Adjusted EBITDA, as defined in Note 11, plus pro forma cost savings, synergies and pre-acquisition results.
The estimated weighted average fair value of stock options is
$9.08
per option and was estimated using a Black-Scholes valuation model, using the following weighted average assumptions:
|
|
|
|
|
|
|
Risk free interest rate
|
1.6
|
%
|
|
Expected volatility
|
38.1
|
%
|
|
Expected life of options (in years)
|
6.0
|
|
|
Dividend yield
|
—
|
%
|
During the
three and six months ended April 30, 2017
,
$0.8 million
and
$1.2 million
of stock compensation expense was recognized in relation to stock options. In the second quarter of fiscal 2017,
$0.3 million
of stock compensation expense was recognized for the EBITDA Options, due to a portion of the performance based criteria deemed probable as of
April 30, 2017
. As of
April 30, 2017
, total unrecognized compensation expense related to unvested Regular Options was
$8.1 million
, which is expected to be recognized through fiscal 2020, and total unrecognized compensation expense for the unvested EBITDA Options was
$5.6 million
, which will be recognized over the requisite service period when the performance based criteria is deemed probable to occur.
A summary of stock option activity for the
six months ended April 30, 2017
is as follows:
|
|
|
|
|
|
|
|
|
|
Stock Options
|
Weighted Average Fair Value
|
|
|
|
$
|
|
Outstanding as of October 31, 2016
|
1,021,584
|
|
8.29
|
|
|
Granted
|
726,166
|
|
10.18
|
|
|
Outstanding as of April 30, 2017
|
1,747,750
|
|
9.08
|
|
As of
April 30, 2017
,
no
stock options have been forfeited or exercised.
10. FINANCIAL INSTRUMENTS, FAIR VALUE AND RISK MANAGEMENT
The Company has determined the estimated fair values of its financial instruments based on appropriate valuation methodologies; however, considerable judgment is required to develop these estimates. The fair values of the Company's financial instruments are not materially different from their carrying values.
Fair value measurements
Notes to Unaudited Consolidated Financial Statements for the Three and Six Months Ended April 30, 2017
(Dollar information in tabular form is expressed in millions of U.S. dollars, except share data)
The Company classifies and discloses its fair value measurements using a fair value hierarchy that reflects the significance of the inputs used in making the measurements. The fair value hierarchy has the following levels: (a) quoted prices (unadjusted) in active markets for identical assets or liabilities (Level 1); (b) inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly (i.e., as prices) or indirectly (i.e., derived from prices) (Level 2); and (c) inputs for the asset or liability that are not based on observable market data (unobservable inputs) (Level 3).
The fair value is principally applied to financial assets and liabilities such as derivative instruments consisting of foreign exchange forward contracts, available-for-sale securities relating to Republic of Austria bonds, held-for-trading securities relating to the Company's U.S. deferred compensation plan, and a liability relating to an earnout payment on future Biologics operating results. The following table provides a summary of the financial assets and liabilities that are measured at fair value as of
April 30, 2017
and
October 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value measurement at April 30, 2017
|
|
Fair value measurement at October 31, 2016
|
|
Assets measured at fair value
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
Available-for-sale securities
|
1.4
|
|
|
—
|
|
|
—
|
|
|
1.4
|
|
|
1.4
|
|
|
—
|
|
|
—
|
|
|
1.4
|
|
|
Held-for-trading securities
|
—
|
|
|
1.5
|
|
|
—
|
|
|
1.5
|
|
|
—
|
|
|
1.4
|
|
|
—
|
|
|
1.4
|
|
|
Total assets
|
1.4
|
|
|
1.5
|
|
|
—
|
|
|
2.9
|
|
|
1.4
|
|
|
1.4
|
|
|
—
|
|
|
2.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value measurement at April 30, 2017
|
|
Fair value measurement at October 31, 2016
|
|
Liabilities measured at fair value
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
Foreign exchange forward contracts
|
—
|
|
|
1.8
|
|
|
—
|
|
|
1.8
|
|
|
—
|
|
|
2.7
|
|
|
—
|
|
|
2.7
|
|
|
Earnout liability
|
—
|
|
|
—
|
|
|
37.9
|
|
|
37.9
|
|
|
—
|
|
|
—
|
|
|
33.8
|
|
|
33.8
|
|
|
Total liabilities
|
—
|
|
|
1.8
|
|
|
37.9
|
|
|
39.7
|
|
|
—
|
|
|
2.7
|
|
|
33.8
|
|
|
36.5
|
|
Level 1 - Based on quoted market prices in active markets.
Level 2 - Inputs, other than quoted prices in active markets, that are observable, either directly or indirectly.
Level 3 - Unobservable inputs that are not corroborated by market data.
The following table presents the fair value of the Company's financial instruments and their classifications on the consolidated balance sheets as of
April 30, 2017
and
October 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets as of April 30, 2017
|
|
Assets as of October 31, 2016
|
|
|
Balance sheet location
|
Fair value
|
|
Balance sheet location
|
Fair value
|
|
|
|
$
|
|
|
$
|
|
Available-for-sale securities
|
Investments
|
1.4
|
|
|
Investments
|
1.4
|
|
|
Held-for-trade securities
|
Investments
|
1.5
|
|
|
Investments
|
1.4
|
|
|
Total
|
|
2.9
|
|
|
|
2.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities as of April 30, 2017
|
|
Liabilities as of October 31, 2016
|
|
|
Balance sheet location
|
Fair value
|
|
Balance sheet location
|
Fair value
|
|
|
|
$
|
|
|
$
|
|
Foreign exchange forward contracts
|
Accounts payable and accrued liabilities
|
1.8
|
|
|
Accounts payable and accrued liabilities
|
2.7
|
|
|
Earnout liability
|
Other long-term liabilities
|
37.9
|
|
|
Other long-term liabilities
|
33.8
|
|
|
Total
|
|
39.7
|
|
|
|
36.5
|
|
The Company has the option to net settle its derivatives with the counter party under the terms of its contracts and as such any unrealized positions are recorded net.
As of April 30, 2017
, the Company had gross unrealized losses of
$2.0 million
and gross unrealized gains of
$0.2 million
under its derivative contracts. As of
October 31, 2016
, the Company had gross unrealized losses of
$2.7 million
and gross unrealized gains of less than
$0.1 million
under its derivative contracts.
Notes to Unaudited Consolidated Financial Statements for the Three and Six Months Ended April 30, 2017
(Dollar information in tabular form is expressed in millions of U.S. dollars, except share data)
Long-term obligations
As of
April 30, 2017
, the fair values and carrying values of the Company’s long-term debt, including the current portion of long-term debt, are categorized in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value
|
|
|
|
|
Level 1
|
Level 2
|
Level 3
|
Total
|
|
Carrying Value
|
|
|
$
|
$
|
$
|
$
|
|
$
|
|
Long-term debt, including current portion
|
—
|
|
2,179.3
|
|
—
|
|
2,179.3
|
|
|
2,134.0
|
|
As of
October 31, 2016
, the fair values and carrying values of the Company’s long-term debt, including the current portion of long-term debt, are categorized in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value
|
|
|
|
|
Level 1
|
Level 2
|
Level 3
|
Total
|
|
Carrying Value
|
|
|
$
|
$
|
$
|
$
|
|
$
|
|
Long-term debt, including current portion
|
—
|
|
2,156.8
|
|
—
|
|
2,156.8
|
|
|
2,119.0
|
|
The fair value of the Company's long-term debt, including the current portion of long-term debt, is based on the quoted market prices for the same issues or on the current rates offered for debt of similar remaining maturities.
Foreign exchange forward contracts and other arrangements
The Company utilizes financial instruments to manage the risk associated with fluctuations in foreign exchange and interest rates. The Company formally documents all relationships between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking various hedge transactions.
As of
April 30, 2017
, the Company's Canadian operations had entered into foreign exchange forward contracts to sell a net aggregate amount of $
64.0 million
U.S. dollars. These contracts hedge the Canadian operations expected exposure to U.S. dollar denominated receivables and mature at the latest on
March 15, 2018
, at an average exchange rate of $
1.3254
Canadian dollars per U.S. dollar. The mark-to-market value of these financial instruments as of
April 30, 2017
was a net unrealized loss of $
1.8 million
, which has been recorded in accumulated other comprehensive income in shareholders' deficit, net of associated income tax.
The Company acquired a portion of its Biologics business from DSM ("the DPP acquisition") in March 2014. In connection with the DPP acquisition, DSM was entitled to receive certain additional future contingent payments based on the performance of the acquired biologics business (the "earnout"). Under the terms of the original contribution agreement, the earnout only related to the DSM biologics business acquired in March 2014 and the earnout liability was payable by the Partnership, the parent of the Company before the Company's IPO on July 21, 2016. The value of the earnout liability as of January 29, 2016 was
$36.0 million
.
On January 29, 2016, the Company, the Partnership, JLL, and DSM entered into an agreement (the "Earnout Agreement") whereby the Partnership’s earnout liability was legally assigned to the Company. The assignment of the liability from the Partnership to the Company was deemed a capital transaction with the Partnership of
$36.0 million
.
Concurrently, the calculation of the earnout consideration was revised to include the future earnings of the Company’s entire biologics business ("Biologics Adjusted EBITDA"), which includes biologics business acquired in connection with a September 2014 acquisition of Gallus Pharmaceuticals. As a result of executing this Earnout Agreement, the Company will pay additional consideration to DSM based on the achievement of certain Biologics Adjusted EBITDA targets, as defined in the Earnout Agreement, of the Company’s biologics business at the conclusion of the 2020 fiscal year. If the Company sells or disposes of the biologics business prior to the end of the 2020 fiscal year, Biologics Adjusted EBITDA will be calculated by applying a
10%
compounded annual growth rate through the remaining period ending October 31, 2020 to the Biologics Adjusted EBITDA for the twelve-month period ended on the last day of the month immediately preceding the date of such sale or disposition. The Company's maximum and minimum payments to DSM under the terms of the Earnout Agreement is
$60.0 million
and
$25.0 million
, respectively. Using the revised earnout definition, the value of the earnout liability as of January 31, 2016 was
$31.1 million
and resulted in the Company recognizing income of $
4.9 million
in the first quarter of fiscal 2016.
The Company estimated the value of the earnout by valuing the
three
payout tranches. The first tranche of the
$25.0 million
minimum earnout payment, which is not contingent to Biologics Adjusted EBITDA performance, was estimated by discounting
Notes to Unaudited Consolidated Financial Statements for the Three and Six Months Ended April 30, 2017
(Dollar information in tabular form is expressed in millions of U.S. dollars, except share data)
the
$25.0 million
using cost of debt of the Company. The values of the remaining two tranches, (i) an additional
$25.0 million
earnout payment which will be realized gradually as Biologics Adjusted EBITDA reaches
$98.0 million
, and (ii) an additional
$10.0 million
earnout payment which will be achieved gradually as Biologics Adjusted EBITDA approaches
$110.0 million
, were estimated using an option pricing framework, where the Company used a modified Black-Scholes model.
The Company adjusted the earnout value to its estimated fair value as of
April 30, 2017
to
$37.9 million
. The Company recorded $
0.5 million
and $
4.1 million
of expense in the
three and six months ended April 30, 2017
, respectively, relating to marking the liability to its estimated fair value. The Company recorded $
1.2 million
of expense and $
3.7 million
of income in the
three and six months ended April 30, 2016
, respectively, relating to marking the liability to its estimated fair value. The
April 30, 2017
earnout valuation applies an asset volatility of
30%
and an asset beta of
0.9
. A
1%
change in asset volatility would have an impact on the value of +/-
$0.3 million
while a
0.1
change in beta would have an impact on the value of +/-
$0.3 million
. Assumptions are Level 3 in nature.
The earnout liability activity is summarized as follows for the
six months ended April 30, 2017
:
|
|
|
|
|
|
|
|
Total
|
|
|
$
|
|
Balance at October 31, 2016
|
33.8
|
|
|
Change in fair value
|
4.1
|
|
|
Balance at April 30, 2017
|
37.9
|
|
The change in fair value relating to the earnout is recorded in other operating income on the consolidated statements of operations.
Risks arising from financial instruments and risk management
The Company's activities expose it to a variety of financial risks: market risk (including foreign exchange and interest rate), credit risk and liquidity risk. The Company's overall risk management program focuses on the unpredictability of financial markets and seeks to minimize potential adverse effects on the Company's financial performance. The Company uses derivative financial instruments to hedge certain risk exposures. The Company does not purchase any derivative financial instruments for speculative purposes.
Financial risk management is the responsibility of the Company's corporate treasury. The corporate treasury works with the Company's operational personnel to identify, evaluate and, where appropriate, hedge financial risks. The Company's corporate treasury also monitors material risks and discusses them with the Audit Committee of the Board of Directors.
Foreign exchange risk
As of
April 30, 2017
, the Company operated in Canada, the United States, Italy, France, the United Kingdom, The Netherlands, Australia, Germany, Austria, and Japan. Foreign exchange risk arises because the value of the local currency receivable or payable for transactions denominated in foreign currencies may vary due to changes in exchange rates ("transaction exposures") and because the non-U.S. dollar denominated financial statements of the Company may vary on consolidation into the reporting currency of U.S. dollars ("translation exposures").
The Company's most significant transaction exposure is from its Canadian operations. Approximately
90%
of the cash receipts and
15%
of the cash outflows relating to Canadian operations are transacted in U.S. dollars. As a result, the Company may experience transaction exposures because of volatility in the exchange rate between the Canadian and U.S. dollar. Based on the Company's current U.S. denominated net inflows, as of
April 30, 2017
, fluctuations of +/-
10%
would, everything else being equal, have an effect on year to date income before income taxes of approximately +/-
$5.8 million
, prior to hedging activities.
The objective of the Company's foreign exchange risk management activities is to minimize transaction exposures and the resulting volatility of the Company's earnings. The Company manages this risk by entering into foreign exchange contracts. As of
April 30, 2017
, the Company has entered into foreign exchange contracts to cover approximately
68%
of its Canadian-U.S. dollar cash flow exposures for the next twelve months.
The amount of the Company's Euro denominated debt designated as a hedge against its net investment in its subsidiaries in Austria, The Netherlands, Germany, France and Italy, is
€463.1 million
as of
April 30, 2017
. This hedge was originally designated in March 2014 as a part of the Company's acquisition of manufacturing sites from DSM and is re-designated on a quarterly basis. As of
April 30, 2017
, the balance of the net investment hedge was $
74.7 million
and is included in accumulated
Notes to Unaudited Consolidated Financial Statements for the Three and Six Months Ended April 30, 2017
(Dollar information in tabular form is expressed in millions of U.S. dollars, except share data)
other comprehensive income in shareholders' deficit. Any unrealized exchange losses are included in the consolidated statement of operations due to ineffectiveness.
The following table summarizes the net investment hedge foreign exchange activity for the
three and six months ended April 30, 2017
and
2016
since net investment hedge inception:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended April 30,
|
|
Six months ended April 30,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
|
$
|
|
$
|
|
$
|
|
$
|
|
Foreign exchange (loss) gain for the period from net investment hedge
|
(4.6
|
)
|
|
(29.0
|
)
|
|
4.0
|
|
|
(21.0
|
)
|
|
Release of ineffective portion of net investment hedge to consolidated statement of operations
|
—
|
|
|
3.3
|
|
|
—
|
|
|
2.2
|
|
|
Net (loss) gain to other comprehensive income for the period related to net investment hedge
|
(4.6
|
)
|
|
(25.7
|
)
|
|
4.0
|
|
|
(18.8
|
)
|
Translation gains and losses related to certain foreign currency denominated intercompany loans are included as part of the net investment in certain foreign subsidiaries, and are included in accumulated other comprehensive income in shareholders' deficit.
The following table summarizes the foreign currency activity on the intercompany loans that are included as part of the net investment in certain foreign subsidiaries for the
three and six months ended April 30, 2017
and
2016
since net investment hedge inception:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended April 30,
|
|
Six months ended April 30,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
|
$
|
|
$
|
|
$
|
|
$
|
|
Foreign exchange gain for the period from long-term intercompany loan revaluation
|
—
|
|
|
3.8
|
|
|
—
|
|
|
3.0
|
|
Credit risk
Credit risk arises from cash and cash equivalents held with banks and financial institutions, derivative financial instruments (foreign exchange contracts with positive fair values), and credit exposure to customers, including outstanding accounts receivable. The maximum exposure to credit risk is equal to the carrying value of the financial assets.
The objective of managing counterparty credit risk is to prevent losses in financial assets. The Company regularly assesses the credit quality of the counterparties, taking into account their financial position, past experience and other factors. Management also regularly monitors the utilization of credit limits. In cases where the credit quality of a customer does not meet the Company's requirements, a cash deposit is received before any services are provided. As of
April 30, 2017
and
October 31, 2016
, the Company held deposits of $
4.1 million
and $
4.3 million
, respectively.
Liquidity risk
Liquidity risk arises when financial obligations exceed financial assets available at a particular point in time. The Company's objective in managing liquidity risk is to maintain sufficient readily available reserves in order to meet its liquidity requirements at all times. The Company mitigates liquidity risk by maintaining cash and cash equivalents on-hand and through the availability of funding from credit facilities. As of
April 30, 2017
, the Company was holding cash and cash equivalents of $
92.7 million
and had undrawn lines of credit available to it of
$209.3 million
.
11. SEGMENT INFORMATION
The Company’s
four
operating segments are: North America DPS, Europe DPS, PDS and DSS. The North America DPS and Europe DPS operating segments meet the aggregation criteria to be presented as one DPS reportable segment. As a result, the Company has
three
reportable segments: DPS, PDS and DSS. Costs relating to Corporate operations are classified as Other.
The DPS segment includes commercial manufacturing outsourcing services, the PDS segment includes pharmaceutical development services, and the DSS segment includes active pharmaceutical ingredients and pharmaceutical intermediates. Corporate expenses primarily relate to general, administrative and sales and marketing expenses related to the corporate
Notes to Unaudited Consolidated Financial Statements for the Three and Six Months Ended April 30, 2017
(Dollar information in tabular form is expressed in millions of U.S. dollars, except share data)
organization. These expenses are centrally directed and controlled and are not included in internal measures of segment operating performance. The CODM does not evaluate its operating segments using discrete asset information.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended April 30, 2017
|
|
|
DPS
|
|
PDS
|
|
DSS
|
|
Other
|
|
Intersegment Eliminations
|
|
Total
|
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
Revenues
|
297.2
|
|
|
57.8
|
|
|
129.2
|
|
|
—
|
|
|
(0.8
|
)
|
|
483.4
|
|
|
Adjusted EBITDA
|
77.4
|
|
|
18.4
|
|
|
26.1
|
|
|
(27.5
|
)
|
|
(0.2
|
)
|
|
94.2
|
|
|
Depreciation and amortization
|
15.4
|
|
|
1.9
|
|
|
16.1
|
|
|
0.9
|
|
|
|
|
34.3
|
|
|
Capital expenditures
|
19.5
|
|
|
1.7
|
|
|
11.6
|
|
|
7.4
|
|
|
|
|
40.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended April 30, 2016
|
|
|
DPS
|
|
PDS
|
|
DSS
|
|
Other
|
|
Intersegment Eliminations
|
|
Total
|
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
Revenues
|
287.4
|
|
|
53.4
|
|
|
127.9
|
|
|
—
|
|
|
(0.1
|
)
|
|
468.6
|
|
|
Adjusted EBITDA
|
72.7
|
|
|
16.7
|
|
|
30.8
|
|
|
(22.2
|
)
|
|
|
|
98.0
|
|
|
Depreciation and amortization
|
14.9
|
|
|
1.3
|
|
|
10.2
|
|
|
0.6
|
|
|
|
|
27.0
|
|
|
Capital expenditures
|
11.7
|
|
|
5.9
|
|
|
9.0
|
|
|
4.3
|
|
|
|
|
30.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended April 30, 2017
|
|
|
DPS
|
|
PDS
|
|
DSS
|
|
Other
|
|
Intersegment Eliminations
|
|
Total
|
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
Revenues
|
572.4
|
|
|
110.1
|
|
|
259.1
|
|
|
—
|
|
|
(0.8
|
)
|
|
940.8
|
|
|
Adjusted EBITDA
|
138.8
|
|
|
34.7
|
|
|
58.1
|
|
|
(54.7
|
)
|
|
(0.2
|
)
|
|
176.7
|
|
|
Depreciation and amortization
|
30.7
|
|
|
3.7
|
|
|
25.8
|
|
|
1.7
|
|
|
|
|
61.9
|
|
|
Capital expenditures
|
56.4
|
|
|
3.1
|
|
|
29.5
|
|
|
10.2
|
|
|
|
|
99.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended April 30, 2016
|
|
|
DPS
|
|
PDS
|
|
DSS
|
|
Other
|
|
Intersegment Eliminations
|
|
Total
|
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
Revenues
|
545.9
|
|
|
101.9
|
|
|
226.8
|
|
|
—
|
|
|
(0.1
|
)
|
|
874.5
|
|
|
Adjusted EBITDA
|
127.8
|
|
|
30.5
|
|
|
45.6
|
|
|
(46.9
|
)
|
|
|
|
157.0
|
|
|
Depreciation and amortization
|
29.7
|
|
|
2.5
|
|
|
20.1
|
|
|
1.2
|
|
|
|
|
53.5
|
|
|
Capital expenditures
|
56.7
|
|
|
15.6
|
|
|
16.3
|
|
|
6.5
|
|
|
|
|
95.1
|
|
The Company evaluates the performance of its segments based on segment Adjusted EBITDA. The Company's Adjusted EBITDA is income (loss) from continuing operations before repositioning expenses (including certain product returns and
inventory write-offs recorded in gross profit), interest expense, foreign exchange losses reclassified from other comprehensive income (loss), refinancing expenses, acquisition and integration costs (including certain product returns and inventory write-offs recorded in gross profit), gains and losses on sale of capital assets, Biologics earnout income and expense, income taxes, impairment charges, remediation costs, depreciation and amortization, stock-based compensation expense, consulting costs related to our operational initiatives, purchase accounting adjustments, acquisition-related litigation expenses and other income and expenses. Adjusted EBITDA is one of several metrics used to measure segment operating performance and is also used to determine executive compensation. "Adjusted EBITDA margin" is Adjusted EBITDA as a percentage of revenues. The Company's presentation of Adjusted EBITDA may not be comparable to similarly-titled measures used by other companies and is not equivalent to "Consolidated EBITDA" as defined in the Credit Agreement (as discussed in Note 5).
Below is a reconciliation of Adjusted EBITDA to its most comparable U.S. GAAP measure.
Notes to Unaudited Consolidated Financial Statements for the Three and Six Months Ended April 30, 2017
(Dollar information in tabular form is expressed in millions of U.S. dollars, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended April 30,
|
|
Six months ended April 30,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
|
$
|
|
$
|
|
$
|
|
$
|
|
Total Adjusted EBITDA
|
94.2
|
|
|
98.0
|
|
|
176.7
|
|
|
157.0
|
|
|
Depreciation and amortization
|
(34.3
|
)
|
|
(27.0
|
)
|
|
(61.9
|
)
|
|
(53.5
|
)
|
|
Repositioning expenses
(1)
|
(2.2
|
)
|
|
(1.3
|
)
|
|
(3.5
|
)
|
|
(2.5
|
)
|
|
Acquisition and integration costs
|
(8.1
|
)
|
|
(7.6
|
)
|
|
(11.6
|
)
|
|
(10.2
|
)
|
|
Interest expense, net
|
(30.8
|
)
|
|
(42.6
|
)
|
|
(59.0
|
)
|
|
(86.4
|
)
|
|
Benefit from (provision for) income taxes
|
1.5
|
|
|
(0.7
|
)
|
|
22.8
|
|
|
—
|
|
|
Refinancing expenses
|
(6.3
|
)
|
|
—
|
|
|
(6.3
|
)
|
|
—
|
|
|
Operational initiatives related consulting costs
|
(1.4
|
)
|
|
(1.9
|
)
|
|
(2.5
|
)
|
|
(3.3
|
)
|
|
IPO costs
|
—
|
|
|
(0.4
|
)
|
|
—
|
|
|
(0.8
|
)
|
|
Acquisition related litigation expenses
|
(3.7
|
)
|
|
(0.9
|
)
|
|
(6.0
|
)
|
|
(1.9
|
)
|
|
Stock based compensation expense
|
(7.0
|
)
|
|
(2.0
|
)
|
|
(11.0
|
)
|
|
(3.0
|
)
|
|
FDA remediation costs
|
—
|
|
|
(10.1
|
)
|
|
—
|
|
|
(18.5
|
)
|
|
Environmental remediation costs
|
—
|
|
|
—
|
|
|
(3.7
|
)
|
|
—
|
|
|
Bargain purchase gain
|
26.4
|
|
|
—
|
|
|
26.4
|
|
|
—
|
|
|
Other
|
(0.7
|
)
|
|
(1.6
|
)
|
|
(4.5
|
)
|
|
5.0
|
|
|
Net income (loss) from continuing operations
|
27.6
|
|
|
1.9
|
|
|
55.9
|
|
|
(18.1
|
)
|
(1) Repositioning expenses for the three and six months ended April 30, 2017 includes
$0.4 million
and
$1.1 million
of inventory reserves related to the Swindon wind down recorded in cost of goods sold.
As illustrated in the table below, revenues are attributed to countries based on the location of the customer's billing address, capital assets are attributed to the country in which they are located and goodwill is attributed to the country in which the entity to which the goodwill pertains is located:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended April 30, 2017
|
|
|
Canada
|
|
US*
|
|
Europe
|
|
Other**
|
|
Total
|
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
Revenues
|
4.2
|
|
|
282.8
|
|
|
167.9
|
|
|
28.5
|
|
|
483.4
|
|
* Includes Puerto Rico
** Primarily includes Japan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended April 30, 2016
|
|
|
Canada
|
|
US*
|
|
Europe
|
|
Other**
|
|
Total
|
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
Revenues
|
5.1
|
|
|
317.6
|
|
|
124.8
|
|
|
21.1
|
|
|
468.6
|
|
* Includes Puerto Rico
** Primarily includes Japan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and for the six months ended April 30, 2017
|
|
|
Canada
|
|
US*
|
|
Europe
|
|
Other**
|
|
Total
|
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
Revenues
|
11.2
|
|
|
564.7
|
|
|
320.7
|
|
|
44.2
|
|
|
940.8
|
|
|
Capital Assets
|
100.1
|
|
|
687.6
|
|
|
367.5
|
|
|
14.1
|
|
|
1,169.3
|
|
|
Goodwill
|
2.5
|
|
|
269.4
|
|
|
7.4
|
|
|
2.1
|
|
|
281.4
|
|
* Includes Puerto Rico
** Other revenues primarily include Japan
Notes to Unaudited Consolidated Financial Statements for the Three and Six Months Ended April 30, 2017
(Dollar information in tabular form is expressed in millions of U.S. dollars, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and for the six months ended April 30, 2016
|
|
|
Canada
|
|
US*
|
|
Europe
|
|
Other**
|
|
Total
|
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
Revenues
|
12.4
|
|
|
589.4
|
|
|
236.7
|
|
|
36.0
|
|
|
874.5
|
|
|
Capital Assets
|
100.8
|
|
|
487.3
|
|
|
341.6
|
|
|
16.1
|
|
|
945.8
|
|
|
Goodwill
|
2.8
|
|
|
269.4
|
|
|
7.7
|
|
|
2.2
|
|
|
282.1
|
|
* Includes Puerto Rico
** Other revenues primarily include Japan
12. REPOSITIONING EXPENSES
During the
three and six months ended April 30, 2017
, the Company incurred
$1.8 million
and $
2.4 million
in repositioning expenses, respectively, primarily from severance payments resulting from operational initiatives. In addition, the Company recorded inventory reserves of
$0.4 million
and
$1.1 million
for the
three and six months ended April 30, 2017
relating to raw material and work in process inventory associated with the final phase of the winding down of the older section of the Swindon facility ("Swindon wind down") to allow us to re-purpose that area, which was expensed through cost of goods sold.
During the
three and six months ended April 30, 2016
, the Company incurred
$1.3 million
and $
2.5 million
in repositioning expenses, primarily from severance payments resulting from a realignment of DPS operations.
The following is a summary of these expenses and other charges associated with operational improvements as of and for the
three and six months ended April 30, 2017
and
2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and for the three months ended April 30, 2017
|
|
|
DPS
|
|
PDS
|
|
DSS
|
|
Other
|
|
Total
|
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
Total repositioning liability at January 31, 2017
|
|
|
|
|
|
|
|
|
4.6
|
|
|
Employee-related expenses
|
1.7
|
|
|
—
|
|
|
—
|
|
|
0.1
|
|
|
1.8
|
|
|
Repositioning expenses paid
|
|
|
|
|
|
|
|
|
(1.6
|
)
|
|
Foreign exchange
|
|
|
|
|
|
|
|
|
0.1
|
|
|
Total repositioning liability at April 30, 2017
|
|
|
|
|
|
|
|
|
4.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and for the three months ended April 30, 2016
|
|
|
DPS
|
|
PDS
|
|
DSS
|
|
Other
|
|
Total
|
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
Total repositioning liability at January 31, 2016
|
|
|
|
|
|
|
|
|
4.9
|
|
|
Employee-related expenses
|
1.6
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1.6
|
|
|
Consulting, professional and project management costs
|
(0.3
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(0.3
|
)
|
|
Total expenses
|
1.3
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1.3
|
|
|
Repositioning expenses paid
|
|
|
|
|
|
|
|
|
(3.1
|
)
|
|
Foreign exchange
|
|
|
|
|
|
|
|
|
0.3
|
|
|
Total repositioning liability at April 30, 2016
|
|
|
|
|
|
|
|
|
3.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and for the six months ended April 30, 2017
|
|
|
DPS
|
|
PDS
|
|
DSS
|
|
Other
|
|
Total
|
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
Total repositioning liability at October 31, 2016
|
|
|
|
|
|
|
|
|
5.4
|
|
|
Employee-related expenses
|
1.9
|
|
|
—
|
|
|
—
|
|
|
0.5
|
|
|
2.4
|
|
|
Repositioning expenses paid
|
|
|
|
|
|
|
|
|
(3.1
|
)
|
|
Foreign exchange
|
|
|
|
|
|
|
|
|
0.2
|
|
|
Total repositioning liability at April 30, 2017
|
|
|
|
|
|
|
|
|
4.9
|
|
Notes to Unaudited Consolidated Financial Statements for the Three and Six Months Ended April 30, 2017
(Dollar information in tabular form is expressed in millions of U.S. dollars, except share data)
The balance of repositioning liabilities as of
April 30, 2017
was recorded in accounts payable and accrued liabilities on the consolidated balance sheet. The Company does not have any long-term repositioning liabilities as of
April 30, 2017
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and for the six months ended April 30, 2016
|
|
|
DPS
|
|
PDS
|
|
DSS
|
|
Other
|
|
Total
|
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
Total repositioning liability at October 31, 2015
|
|
|
|
|
|
|
|
|
22.9
|
|
|
Employee-related expenses
|
2.8
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2.8
|
|
|
Consulting, professional and project management costs
|
(0.3
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(0.3
|
)
|
|
Total expenses
|
2.5
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2.5
|
|
|
Repositioning expenses paid
|
|
|
|
|
|
|
|
|
(21.8
|
)
|
|
Foreign exchange
|
|
|
|
|
|
|
|
|
(0.2
|
)
|
|
Total repositioning liability at April 30, 2016
|
|
|
|
|
|
|
|
|
3.4
|
|
The balance of repositioning liabilities as of
April 30, 2016
was recorded in accounts payable and accrued liabilities on the consolidated balance sheet. The Company does not have any long-term repositioning liabilities as of
April 30, 2016
.
13. RELATED PARTIES
Related Party Transactions
JLL Partners
The Company has a service agreement with JLL Partners Inc. and some JLL Partners affiliates whereby the Company will reimburse the parties for management, consulting, financial, and other business services provided under the agreement. The amounts spent on these services, as well as the amounts payable outstanding in relation to these services, are shown in the tables below.
DSM
The Company has transition service agreements ("TSAs") with DSM resulting from the DPP Acquisition whereby DSM performs certain shared service functions on behalf of the Company. Additionally, the Company performs certain services on behalf of DSM. The revenue and expenses relating to these services, as well as the accounts receivable and payable outstanding in relation to these services, are shown in the tables below.
BLS
The Company has a management service agreement with BLS whereby the Company will provide various management, financial, legal and other business services to BLS. The expenses relating to these services are charged to BLS and the related accounts receivable outstanding in relation to these services are shown in the tables below. We performed production services for BLS in the first quarter of fiscal 2016 before BLS sold their commercial business to a third party.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended April 30,
|
|
Six months ended April 30,
|
|
Revenues/Expenses
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
|
$
|
|
$
|
|
$
|
|
$
|
|
JLL Partners Expenses
|
0.1
|
|
|
0.1
|
|
|
0.1
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
DSM Revenues
|
0.1
|
|
|
0.8
|
|
|
0.3
|
|
|
0.9
|
|
|
DSM Expenses
|
1.9
|
|
|
2.5
|
|
|
5.1
|
|
|
5.2
|
|
|
|
|
|
|
|
|
|
|
|
Banner Life Sciences Revenues
|
0.7
|
|
|
1.4
|
|
|
0.7
|
|
|
7.9
|
|
Notes to Unaudited Consolidated Financial Statements for the Three and Six Months Ended April 30, 2017
(Dollar information in tabular form is expressed in millions of U.S. dollars, except share data)
|
|
|
|
|
|
|
|
|
|
|
Balances as of
|
|
Accounts Receivable/Payable Balances
|
April 30, 2017
|
|
October 31, 2016
|
|
|
$
|
|
$
|
|
JLL Partners Accounts Payable
|
0.1
|
|
|
—
|
|
|
|
|
|
|
|
DSM Accounts Receivable
|
0.1
|
|
|
0.4
|
|
|
DSM Accounts Payable
|
1.7
|
|
|
0.2
|
|
|
|
|
|
|
|
Banner Life Sciences Accounts Receivable
|
1.2
|
|
|
1.1
|
|
Equity Method Investments
Banner Life Sciences
In October 2015, the Company invested
$5.0 million
in Banner Life Sciences. The investment resulted in Banner Life Sciences becoming a variable interest entity, but the entity is not consolidated as the Company does not have the ability to control the entity and therefore does not have the power to direct Banner Life Sciences' activities. The Company's maximum exposure to loss relating to this variable interest entity is limited to the carrying value of the investment. The investment is presented within investments in the consolidated balance sheets. In March 2016, the Company received a
$2.4 million
cash distribution from Banner Life Sciences.
Percivia
The Company holds a
50.0%
interest in Percivia, a limited liability company for the purpose of performing research and development activities and licensing certain technology. In February 2016, the Company received a
$1.2 million
return of capital from Percivia in the form of a cash distribution.
Chemiepark
The Company holds a
47.5%
interest in Chemiepark, a company tasked with providing fire protection for the chemicals site in Linz, Austria.
|
|
|
|
|
|
|
|
|
|
|
Values as of
|
|
Equity Method Investment Values
|
April 30, 2017
|
|
October 31, 2016
|
|
|
$
|
|
$
|
|
Banner Life Sciences
|
2.5
|
|
|
2.9
|
|
|
Percivia
|
5.7
|
|
|
5.7
|
|
|
Chemiepark
|
0.1
|
|
|
0.1
|
|
|
Total
|
8.3
|
|
|
8.7
|
|
Investment carrying values are presented within investments in the consolidated balance sheets.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended April 30,
|
|
Six months ended April 30,
|
|
Equity Method (Loss)/Gain
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
|
$
|
|
$
|
|
$
|
|
$
|
|
Banner Life Sciences
|
(0.2
|
)
|
|
(0.5
|
)
|
|
(0.3
|
)
|
|
1.3
|
|
|
Percivia
|
—
|
|
|
0.1
|
|
|
—
|
|
|
0.2
|
|
|
Total
|
(0.2
|
)
|
|
(0.4
|
)
|
|
(0.3
|
)
|
|
1.5
|
|
Equity method earnings are presented within other income in the consolidated statement of operations.
14. INCOME TAXES
The Company accounts for income taxes under FASB ASC 740, Income Taxes ("ASC 740"). The Company calculates its quarterly tax provision consistent with the guidance provided by ASC 740-270, whereby the Company forecasts its estimated
Notes to Unaudited Consolidated Financial Statements for the Three and Six Months Ended April 30, 2017
(Dollar information in tabular form is expressed in millions of U.S. dollars, except share data)
annual effective tax rate then applies that rate to its year-to-date pre-tax book (loss) income. The effective tax rate may be subject to fluctuations during the year as new information is obtained, which may affect the assumptions used to estimate the annual effective rate, including factors such as the valuation allowances against deferred tax assets, the recognition or de-recognition of tax benefits related to uncertain tax positions, or changes in or the interpretation of tax laws in jurisdictions where the Company conducts business. The Company has recorded valuation allowances against certain Netherlands and other foreign jurisdictions due to insufficient evidence supporting the Company's ability to use these assets in the future.
For the
six months ended April 30, 2017
and
2016
, the Company recorded a benefit from income taxes in continuing operations of $
22.8 million
and $
0.0 million
, respectively. The increase in tax benefit for the
six months ended April 30, 2017
was primarily attributable to changes in the Company’s jurisdictional combination of pre-tax income, the Company’s change in tax classification of a United States subsidiary ("US subsidiary") and changes to other discrete tax items, which may have unique tax implications, depending on the nature of the item.
In the first quarter of fiscal 2017, the Company filed an election to change the tax classification of a US subsidiary from a partnership to an association taxable as a corporation. As a result of the change in tax classification, the Company recognized a
$28.3 million
deferred tax benefit related to the change in its deferred tax assets and liabilities. The Company previously accounted for the deferred tax basis difference using outside basis of the partnership's investments. The Company derecognized the deferred tax liability for the outside basis difference and recognized deferred tax assets and liabilities for existing temporary differences between the tax basis and financial reporting basis of the assets and liabilities of the subsidiary.
In the second quarter of fiscal 2017, the Company amended prior year federal and state returns, originally filed by a predecessor owner, for a U.S. subsidiary. As a result of the amended returns, the Company recognized a $
3.5 million
deferred tax benefit for an increase in net operating losses.
Valuation allowances are provided to reduce the related deferred income tax assets to an amount which will, more likely than not, be realized.
As of April 30, 2017
, the Company has multiple subsidiaries that continue to maintain either full or a partial valuation allowances on their deferred tax assets as there is not sufficient evidence to support the reversal of all or some portion of these allowances. However, given current and anticipated future earnings in the Company's Austrian subsidiaries, the Company believes that within the next twelve months there is a reasonable possibility positive evidence will become available that would require the release of all or a portion of the valuation allowance recorded at the Company’s Austrian subsidiaries.
The Company evaluates uncertain tax positions on a quarterly basis and considers various factors, including, but not limited to, changes in tax law, the measurement of tax positions taken or expected to be taken in tax returns, the effective settlement of matters subject to audit, information obtained during in process audit activities and changes in facts or circumstances related to a tax position. The Company also accrues for potential interest and penalties related to unrecognized tax benefits within the provision for income taxes on the consolidated statement operations.
As of April 30, 2017
, the Company did not have a material change in the total amount of unrecognized tax positions and does not expect a material change over the next twelve months.
The Company early adopted ASU No. 2016-09 "Improvements to Employee Share-Based Payment Accounting" during the second quarter of fiscal 2017. ASU 2016-09 eliminates the requirement for additional paid in capital ("APIC") pools and requires excess tax benefits and tax deficiencies to be recorded in the income statement when the awards vest or are settled. The adoption of ASU 2016-09 had no financial statement impact on the Company.
15. OTHER INFORMATION
Foreign exchange
During the
three and six months ended April 30, 2017
, the Company recorded a foreign exchange loss of
$0.7 million
and $
5.5 million
, respectively. These amounts resulted from hedge and operating exposures. During the
three and six months ended April 30, 2016
, the Company recorded foreign exchange losses of
$7.1 million
and $
11.4 million
, respectively
Management Incentive Plan
On March 11, 2014, the Company adopted the Management Long-Term Incentive Plan (the "LTIP") to provide long-term incentives to select key management employees of Patheon and its subsidiaries who have contributed and are expected to contribute materially to the success of the Company, and to reward outstanding performance by such employees. Leadership, key positions or identified key talent may be invited to participate in the LTIP during an identified plan year. Compensation is payable under this plan upon an Exit Event by the controlling investors of the Company (JLL and DSM), if the participant is still employed by the Company, or a qualifying termination, as defined.
Notes to Unaudited Consolidated Financial Statements for the Three and Six Months Ended April 30, 2017
(Dollar information in tabular form is expressed in millions of U.S. dollars, except share data)
An Exit Event is defined as the earlier of: (a) a change of control, and (b) in connection with or following an Initial Public Offering ("IPO"), the sale or disposition by JLL or any of its affiliates of equity securities such that, immediately following such sale or disposition, either (i) JLL and its affiliates own less than
20%
of the outstanding equity securities of the Partnership or the Partnership offeror, calculated on a fully-diluted basis, or (ii) JLL and its affiliates have received, in the aggregate, distributions in respect of such sale or disposition (together with any sale or disposition occurring prior thereto) equal to or in excess of
250%
of the initial capital contributions and any additional capital contributions made by JLL and its affiliates for all equity securities of the Partnership or the Partnership offeror held by JLL and its affiliates prior to such sale or disposition.
Not later than
90
days following commencement of each applicable Company fiscal year that would end during the term of the LTIP, the compensation committee of the board of directors of the Company (the "Compensation Committee") will determine, in its sole and absolute discretion, with respect to such fiscal year, (i) the Participants (as defined in the LTIP) with respect to that fiscal year, (ii) the EBITDA Target (as defined in the LTIP), and (iii) the targeted amount of each Award. Each award shall be evidenced by a written notice and shall be deemed granted on the first day of the fiscal year with respect to which the Compensation Committee resolves to grant such award (the "Grant Date"). Awards are denominated as a percentage of the Participant’s base salary, with the target percentage based on the Participant’s level within the organization, as determined by the Compensation Committee in its sole and absolute discretion. All awards will be paid in the form of cash, or other property having a value equal to such cash payment, as determined by the Compensation Committee in its sole and absolute discretion.
Under the LTIP, the Company has granted
$9.6 million
in outstanding awards from March 11, 2014 through
April 30, 2017
, all of which vest over a
five
-year period. Through
April 30, 2017
, the Company has paid out
$0.2 million
in payments due to qualified terminations. The Company does not accrue for the overall payout as the Exit Event is deemed to not be probable until the actual occurrence of the event.
Contingencies
Procaps Antitrust Matter
On December 10, 2012, Procaps S.A. (‘‘Procaps’’) filed a complaint against the Company in the United States District Court for the Southern District of Florida (the ‘‘District Court’’) (Case No. 12-cv-24356-DLG). The complaint involves the Company’s collaboration agreement with Procaps, pursuant to which both companies agreed to work together with respect to the marketing of a line of certain prescription pharmaceutical soft-gel development and manufacturing services. Procaps alleges that the Company’s acquisition of Banner, a business that historically has generated less than
10%
of its revenues from softgel services for prescription pharmaceuticals, transformed the collaboration agreement into an anticompetitive restraint of trade and an agreement between direct competitors to set prices, divide markets and/or allocate geographic territories. Procaps seeks (i) a declaratory judgment that the collaboration agreement must cease and/or terminate; (ii) an injunction requiring that Patheon divest all of Banner’s soft-gel manufacturing capabilities; and (iii) monetary damages under federal and state antitrust and unfair competition laws, including treble damages for violations of the Sherman Act. Patheon subsequently answered Procaps’ complaint and filed its affirmative defenses to the complaint. In July 2014, upon Motion for Summary Judgment by Patheon, the court dismissed Procaps’ unfair competition claims, leaving only the antitrust claims in dispute. In March 2015, the court ordered trial to commence on November 16, 2015.
In October 2015, the court granted Patheon’s motion for summary judgment with respect to all of Procaps’ remaining claims in this matter. In November 2015, Procaps filed a notice of appeal with the United States Court of Appeals for the Eleventh Circuit (the ‘‘11th Circuit Court’’). Procaps filed its initial brief with the 11th Circuit Court in February 2016 and we filed our reply brief in May 2016. Procaps filed its reply to our reply brief in June 2016. The 11th Circuit Court heard oral argument in this matter in November 2016 and in December 2016 affirmed the District Court's decision in favor of Patheon.
In May 2016, Procaps filed a request for arbitration with the International Court of Arbitration of the International Chamber of Commerce. The request for arbitration involves the above-mentioned collaboration agreement. Procaps alleges that (i) Patheon’s acquisition of Banner violated the exclusivity provision of the collaboration agreement, (ii) Patheon failed to return or destroy confidential information of Procaps, (iii) Patheon was unjustly enriched by obtaining the benefit of such confidential information to which it was not entitled, and (iv) Patheon breached implied duties of good faith and fair dealing in carrying out the collaboration agreement. Procaps seeks (i) with respect to the alleged breaches, compensatory damages and (ii) with respect to the claim for unjust enrichment, (a) disgorgement of profits received by Patheon by using any confidential information of Procaps, (b) repayment for all payments made to Patheon pursuant to the collaboration agreement, and (c) payment for the value of any intellectual property associated with the collaboration agreement. The Company filed its answer to the request for arbitration with the International Court of Arbitration of the International Chamber of Commerce in June 2016. The arbitration hearing on the merits in this matter was held in March 2017 and final arguments were heard in May 2017.
Notes to Unaudited Consolidated Financial Statements for the Three and Six Months Ended April 30, 2017
(Dollar information in tabular form is expressed in millions of U.S. dollars, except share data)
The Company has not included any accrual in the consolidated financial statements as of April 30, 2017 related to these matters as a result of its assessment that the likelihood of a material loss in connection with these matters is not probable. However, an adverse outcome in this matter could have a material adverse effect on the Company’s business, results of operations and financial condition.
Oral Contraceptive Litigation
A civil action is pending in the Commonwealth of Pennsylvania against the Company and one of its customers in connection with the recall of certain lots of allegedly defective products manufactured by the Company for the customer. The customer has given the Company notice of its intent to seek indemnification from the Company for all damages, costs and expenses, pursuant to the manufacturing services agreement between the customer and the Company.
The action was filed in Court of Common Pleas of Philadelphia Country, in Philadelphia, Pennsylvania in November 2015 on behalf of
113
plaintiffs who were originally part of a putative class action commenced in state court in Georgia in October 2011 on behalf of
115
plaintiffs and removed by defendants to the United States District Court for the Northern District of Georgia ("Georgia District Court") under the Class Action Fairness Act ("CAFA"). Defendants opposed class certification and class certification was denied. The Georgia action was ordered to proceed as a
two
-plaintiff action in the Georgia District Court on behalf of the
two
named plaintiffs, whereupon plaintiffs' lawyers commenced a new action in the Court of Common Pleas in Philadelphia on behalf of the remaining
113
plaintiffs. The
two
-plaintiff action was dismissed by the Georgia District Court on October 28, 2016 on a motion for summary judgment brought by defendants.
Defendants removed the action to the United States District Court for the Eastern District of Pennsylvania ("Pennsylvania District Court"). In September 2016, the Pennsylvania District Court remanded the action back to the Court of Common Pleas in Philadelphia. Defendants appealed the order of remand and, in February 2017, the United States Court of Appeals for the Third Circuit reversed and vacated the Pennsylvania District Court's remand order and remanded the matter to the Pennsylvania District Court for further proceedings. As the litigation is at an early stage, the Company is unable to estimate the potential damages for which the Company may be directly or indirectly liable.
Italian Client Dispute
In November 2015, the largest client of Patheon Italia S.p.A.’s (‘‘Patheon Italia’’), Ferentino, Italy facility filed a motion for injunctive relief in a Milan court under Article 700 of the Italian Civil Code. The client claims that remediation actions implemented by the Ferentino facility in response to an FDA inspection in May 2015, including, among other things, the use of a third party to certify all production batches for release, caused a significant slowdown in the quality control testing and batch release processes for the client’s product, thereby impairing the client’s ability to supply product in the amounts needed to fulfill the client's needs. The client sought an injunction ordering the Ferentino facility to (i) deliver products set forth in an October 6-7, 2015 release plan discussed by the parties; (ii) transfer products and documentation to the client to enable the client to perform the necessary quality control testing and release the products; and (iii) continue manufacture of the products at the capacity levels set forth in the supply agreement between the parties. The client further asked the court to impose a penalty of
€0.2 million
per day for every day that the Ferentino facility failed to comply with the order.
On December 7, 2015, Patheon Italia filed a response to the motion, denying all the claims set forth in the client’s motion and asserting several defenses. In particular, Patheon Italia informed the court that the parties had in fact executed an amendment to the existing quality agreement agreeing to transfer the testing and release responsibilities to the client, such amendment was executed prior to the filing of the motion by the client and should have been disclosed to the court in the client’s motion.
On December 10, 2015, the court held a hearing in this matter and on December 18, 2015, denied the client’s motion. The client has filed an appeal to the court's decision, which was heard on February 11, 2016. On February 29, 2016, the appeals court denied the client's appeal. The supply agreement with the client includes an arbitration provision and in its initial motion, the client indicated its intention to file an arbitration claim seeking money damages in this matter. This matter is in the early stages and the Company is unable to estimate the potential damages for which Patheon Italia may be liable if the client files an arbitration claim and prevails in such proceeding.
Statements of cash flows non-cash investing and financing activities
Notes to Unaudited Consolidated Financial Statements for the Three and Six Months Ended April 30, 2017
(Dollar information in tabular form is expressed in millions of U.S. dollars, except share data)
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|
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|
|
|
|
|
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Six months ended April 30,
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|
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2017
|
|
2016
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Non-cash financing activities:
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$
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$
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|
Assumption of earnout liability from the Partnership
(1)
|
—
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|
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36.0
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|
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Treasury stock purchases to satisfy certain tax withholdings
(2)
|
0.1
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|
|
—
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|
|
Increase in capital lease obligations
|
1.0
|
|
|
—
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|
(1) Refer to Note 9 for further information
(2) Represents the tax payable held as of April 30, 2017 relating to a second quarter treasury stock purchase.
16. SUBSEQUENT EVENTS
On May 15, 2017, the Company and Thermo Fisher Scientific Inc. ("Thermo Fisher") and Thermo Fisher (CN) Luxembourg Sarl (the “Buyer”) entered into a Purchase Agreement pursuant to which the Buyer will commence a tender offer to all outstanding shares of the Company for
$35.00
per share (the "Offer Consideration"). The transaction represents a purchase price of approximately
$7.2 billion
, which includes the assumption of approximately
$2.0 billion
of net debt. The closing of the tender offer (the “Closing”) will constitute an Exit Event under the MEIP and the LTIP and, accordingly, (i) all management units under the MEIP that are unvested as of the Closing will vest in full, (ii) the MEIP RSUs will settle in accordance with their terms based on the Offer Consideration; and (iii) all outstanding awards under the LTIP will become payable. All remaining unvested equity awards under the Company's Omnibus Incentive Plan will convert into an equity award of Thermo Fisher with the same value and substantially similar other terms as the existing Company equity award.
