NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 1: Summary of Significant Accounting Policies
Basis of Presentation
: The condensed consolidated financial statements included in this report are unaudited and have been prepared in accordance with United States (“U.S.”) generally accepted accounting principles (“U.S. GAAP”) for interim financial reporting and U.S. Securities and Exchange Commission (“SEC”) regulations. The year-end condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by U.S. GAAP. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with U.S. GAAP have been condensed or omitted. In the opinion of management, these financial statements include all adjustments, which are of a normal recurring nature, necessary for a fair statement of the financial position, results of operations, cash flows and the change in equity for the periods presented. The condensed consolidated financial statements for the three and
nine months ended
September 30, 2018
should be read in conjunction with the consolidated financial statements and notes thereto of West Pharmaceutical Services, Inc. and its majority-owned subsidiaries (which may be referred to as “West”, the “Company”, “we”, “us” or “our”) appearing in our Annual Report on Form 10-K for the year ended
December 31, 2017
(the “
2017
Annual Report”). The results of operations for any interim period are not necessarily indicative of results for the full year.
As of April 1, 2017, our consolidated financial statements exclude the results of our Venezuelan subsidiary. Please refer to Note 13,
Other (Income) Expense
, for further discussion.
Note 2: New Accounting Standards
Recently Adopted Standards
In March 2018, the Financial Accounting Standards Board (“FASB”) issued guidance which updates the income tax accounting in U.S. GAAP to reflect the SEC’s interpretive guidance released on December 22, 2017, when the Tax Cuts and Jobs Act (the “2017 Tax Act”) was signed into law. This guidance was effective immediately upon issuance. Please refer to Note 15,
Income Taxes
, to the consolidated financial statements in our
2017
Annual Report for additional information.
In May 2017, the FASB issued guidance which amends the scope of modification accounting for share-based payment arrangements. The guidance focuses on changes to the terms or conditions of share-based payment awards that would require the application of modification accounting and specifies that an entity would not apply modification accounting if its fair value, vesting conditions and classification of the awards are the same immediately before and after the modification. This guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. Early adoption is permitted. We adopted this guidance as of January 1, 2018, on a prospective basis. The adoption did not have a material impact on our financial statements.
In March 2017, the FASB issued guidance on the presentation of net periodic pension and postretirement benefit cost (net benefit cost). The guidance requires the bifurcation of net benefit cost. The service cost component will be presented with other employee compensation costs in operating income (or capitalized in assets) and the other components will be reported separately outside of operations, and will not be eligible for capitalization. This guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. Early adoption is permitted. We adopted this guidance as of January 1, 2018, on a retrospective basis. As a result of this adoption, we reclassified net benefit cost components other than service cost from operating income to outside of operations. Net periodic benefit cost for the
three months ended
September 30, 2018
and
2017
was
$0.8 million
and
$1.4 million
, respectively, of which
$2.6 million
and
$2.5 million
, respectively, related to service cost and
$1.8 million
and
$1.1 million
, respectively, related to net benefit cost components other than service cost. Net periodic benefit cost for the
nine months ended
September 30, 2018
and
2017
was
$3.0 million
and
$5.3 million
, respectively, of which
$8.1 million
and
$7.8 million
, respectively, related to service cost and
$5.1 million
and
$2.5 million
, respectively, related to net benefit cost components other than service cost. The adoption of this guidance had no impact on net income.
In November 2016, the FASB issued guidance on the classification and presentation of restricted cash in the statement of cash flows. This guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. Early adoption is permitted. We adopted this guidance as of January 1, 2018, on a retrospective basis. As of September 30, 2018 and December 31, 2017, we had
no
restricted cash.
In August 2016, the FASB issued guidance to reduce the diversity in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. This guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. Early adoption is permitted. We adopted this guidance as of January 1, 2018, on a retrospective basis. The adoption did not have a material impact on our financial statements.
In January 2016, the FASB issued guidance that addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. This guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. We adopted this guidance as of January 1, 2018, on a prospective basis. The adoption did not have a material impact on our financial statements.
In May 2014, the FASB issued guidance on the accounting for revenue from contracts with customers, Accounting Standards Codification (“ASC”) Topic 606 (“ASC 606”), that supersedes most existing revenue recognition guidance, including industry-specific guidance. The core principle requires an entity to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, ASC 606 requires enhanced disclosures regarding the nature, timing and uncertainty of revenue and cash flows arising from an entity’s contracts with customers. The FASB subsequently issued additional clarifying standards to address issues arising from implementation of ASC 606. We adopted ASC 606 as of January 1, 2018, on a modified retrospective basis. Please refer to Note 3,
Revenue
, for additional information.
Standards Issued Not Yet Adopted
In August 2018, the FASB issued guidance to align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). The accounting for the service element of a hosting arrangement that is a service contract is not affected by this update. This guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2019. Early adoption is permitted, including adoption in any interim period. We are currently evaluating our adoption timing and the impact that this guidance may have on our financial statements.
In August 2018, the FASB issued guidance which modifies the disclosure requirements for defined benefit pension plans and other postretirement plans. The guidance removes disclosures that no longer are considered cost beneficial, clarifies the specific requirements of disclosures, and adds disclosure requirements identified as relevant. This guidance is effective for fiscal years ending after December 15, 2020. Early adoption is permitted. We are currently evaluating our adoption timing and the impact that this guidance may have on our financial statements.
In August 2018, the FASB issued guidance which modifies the disclosure requirements on fair value measurements by removing, modifying, or adding certain disclosures. This guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2019. Early adoption is permitted. We are currently evaluating our adoption timing and the impact that this guidance may have on our financial statements.
In June 2018, the FASB issued guidance which expands the scope of accounting for share-based payment arrangements to include share-based payment transactions for acquiring goods and services from nonemployees. This guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018. Early adoption is permitted. We are currently evaluating our adoption timing and the impact that this guidance may have on our financial statements.
In February 2018, the FASB issued guidance to address a specific consequence of the 2017 Tax Act by allowing a reclassification from accumulated other comprehensive income (loss) to retained earnings for stranded tax effects resulting from the 2017 Tax Act’s reduction of the U.S. federal corporate income tax rate. This guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018. Early adoption is permitted. We are currently evaluating our adoption timing and the impact that this guidance may have on our financial statements.
In August 2017, the FASB issued guidance which expands and refines hedge accounting for both nonfinancial and financial risk components and aligns the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements. This guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018. Early adoption is permitted. We are currently evaluating our adoption timing and the impact that this guidance will have on our financial statements.
In February 2016, the FASB issued guidance on the accounting for leases. This guidance requires lessees to recognize lease assets and lease liabilities on the balance sheet and to expand disclosures about leasing arrangements, both qualitative and quantitative. In terms of transition, the guidance requires adoption based upon a modified retrospective approach. This guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018. We are currently evaluating the impact that this guidance will have on our financial statements. As of
September 30, 2018
and December 31, 2017, future minimum rental payments under non-cancelable operating leases were
$67.0 million
and
$79.1 million
, respectively.
Note 3: Revenue
Adoption of ASC 606
On January 1, 2018, we adopted ASC 606, on a modified retrospective basis, applied to those contracts which were not completed as of January 1, 2018. As a result of our adoption, we recorded a cumulative-effect adjustment of
$11.4 million
within retained earnings in our condensed consolidated balance sheet as of January 1, 2018, to reflect a change in the timing of revenue recognition under ASC 606, from point in time to over time, on our Contract-Manufactured Products product sales, certain Proprietary Products product sales, development and tooling agreements, as well as an acceleration on a portion of the remaining unearned income from a nonrefundable customer payment.
Results for reporting periods beginning after January 1, 2018 are presented under ASC 606, while prior period amounts are not adjusted and continue to be reported under the accounting standards in effect for those periods.
The cumulative effect of the changes made to our condensed consolidated January 1, 2018 balance sheet for the adoption of ASC 606 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
Balance at December 31, 2017
|
|
Adjustments Due to ASC 606
|
|
Balance at January 1, 2018
|
Assets:
|
|
|
|
|
|
Accounts receivable, net
|
$
|
253.2
|
|
|
$
|
25.0
|
|
|
$
|
278.2
|
|
Inventories
|
215.2
|
|
|
(20.8
|
)
|
|
194.4
|
|
Other current assets
|
39.2
|
|
|
(8.4
|
)
|
|
30.8
|
|
|
|
|
|
|
|
Liabilities and Equity:
|
|
|
|
|
|
Other current liabilities
|
$
|
77.0
|
|
|
$
|
(13.7
|
)
|
|
$
|
63.3
|
|
Deferred income taxes
|
10.4
|
|
|
3.0
|
|
|
13.4
|
|
Other long-term liabilities
|
42.6
|
|
|
(4.9
|
)
|
|
37.7
|
|
Retained earnings
|
1,178.2
|
|
|
11.4
|
|
|
1,189.6
|
|
The impact of the adoption of ASC 606 on our condensed consolidated income statement for the
three months ended
September 30, 2018
was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
As Reported
|
|
Balances without Adoption of ASC 606
|
|
Effects of Change Higher/(Lower)
|
Net sales
|
$
|
431.7
|
|
|
$
|
423.5
|
|
|
$
|
8.2
|
|
Cost of goods and services sold
|
296.1
|
|
|
290.3
|
|
|
5.8
|
|
Research and development
|
10.1
|
|
|
10.0
|
|
|
0.1
|
|
Other (income) expense
|
(0.2
|
)
|
|
(0.4
|
)
|
|
0.2
|
|
Income tax expense
|
8.0
|
|
|
7.8
|
|
|
0.2
|
|
Net income
|
$
|
55.2
|
|
|
$
|
53.2
|
|
|
$
|
2.0
|
|
The impact of the adoption of ASC 606 on our condensed consolidated income statement for the
nine months ended
September 30, 2018
was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
As Reported
|
|
Balances without Adoption of ASC 606
|
|
Effects of Change Higher/(Lower)
|
Net sales
|
$
|
1,294.9
|
|
|
$
|
1,294.4
|
|
|
$
|
0.5
|
|
Cost of goods and services sold
|
882.7
|
|
|
878.9
|
|
|
3.8
|
|
Research and development
|
30.5
|
|
|
30.5
|
|
|
—
|
|
Other expense
|
4.0
|
|
|
3.5
|
|
|
0.5
|
|
Income tax expense
|
26.5
|
|
|
27.5
|
|
|
(1.0
|
)
|
Net income
|
$
|
154.9
|
|
|
$
|
157.6
|
|
|
$
|
(2.7
|
)
|
The impact of the adoption of ASC 606 on our condensed consolidated balance sheet as of
September 30, 2018
was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
As Reported
|
|
Balances without Adoption of ASC 606
|
|
Effects of Change Higher/(Lower)
|
Assets:
|
|
|
|
|
|
Accounts receivable, net
|
$
|
302.9
|
|
|
$
|
277.6
|
|
|
$
|
25.3
|
|
Inventories
|
206.8
|
|
|
228.5
|
|
|
(21.7
|
)
|
Other current assets
|
43.1
|
|
|
54.2
|
|
|
(11.1
|
)
|
|
|
|
|
|
|
Liabilities and Equity:
|
|
|
|
|
|
Other current liabilities
|
$
|
76.4
|
|
|
$
|
90.2
|
|
|
$
|
(13.8
|
)
|
Deferred income taxes
|
11.7
|
|
|
9.7
|
|
|
2.0
|
|
Other long-term liabilities
|
43.8
|
|
|
48.2
|
|
|
(4.4
|
)
|
Retained earnings
|
1,312.7
|
|
|
1,304.0
|
|
|
8.7
|
|
Revenue Recognition
Our revenue results from the sale of goods or services and reflects the consideration to which we expect to be entitled to in exchange for those goods or services. We record revenue based on a five-step model, in accordance with ASC 606. Following the identification of a contract with a customer, we identify the performance obligations (goods or services) in the contract, determine the transaction price, allocate the transaction price to the performance
obligations in the contract, and recognize the revenue when (or as) we satisfy the performance obligations by transferring the promised goods or services to our customers. A good or service is transferred when (or as) the customer obtains control of that good or service.
We recognize the majority of our revenue, primarily relating to Proprietary Products product sales, at a point in time, following the transfer of control of our products to our customers, which typically occurs upon shipment or delivery, depending on the terms of the related agreements.
We recognize revenue relating to our Contract-Manufactured Products product sales and certain Proprietary Products product sales over time, as our performance does not create an asset with an alternative use to us and we have an enforceable right to payment for performance completed to date.
We recognize revenue relating to our development and tooling agreements over time, as our performance creates or enhances an asset that the customer controls as the asset is created or enhanced.
For revenue recognized over time, revenue is recognized by applying a method of measuring progress toward complete satisfaction of the related performance obligation. When selecting the method for measuring progress, we select the method that best depicts the transfer of control of goods or services promised to our customers.
Revenue for our Contract-Manufactured Products product sales, certain Proprietary Products product sales, and our development and tooling agreements is recorded under an input method, which recognizes revenue on the basis of our efforts or inputs to the satisfaction of a performance obligation (for example, resources consumed, labor hours expended, costs incurred, time elapsed, or machine hours used) relative to the total expected inputs to the satisfaction of that performance obligation. The input method that we use is based on costs incurred.
The majority of the performance obligations within our contracts are satisfied within one year or less. Performance obligations satisfied beyond one year include those relating to a nonrefundable customer payment of
$20.0 million
received in June 2013 in return for the exclusive use of the SmartDose
®
technology platform within a specific therapeutic area. As of
September 30, 2018
, there was
$6.7 million
of unearned income related to this payment, of which
$0.9 million
was included in other current liabilities and
$5.8 million
was included in other long-term liabilities. The unearned income is being recognized as income on a straight-line basis over the remaining term of the agreement. The agreement does not include a future minimum purchase commitment from the customer.
Our revenue can be generated from contracts with multiple performance obligations. When a sales agreement involves multiple performance obligations, each obligation is separately identified and the transaction price is allocated based on the amount of consideration we expect to be entitled to in exchange for transferring the promised good or service to the customer.
Some customers receive pricing rebates upon attaining established sales volumes. We record rebate costs when sales occur based on our assessment of the likelihood that the required volumes will be attained. We also maintain an allowance for product returns, as we believe that we are able to reasonably estimate the amount of returns based on our substantial historical experience.
The following table presents the approximate percentage of our net sales by market group:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
2018
|
|
2017
(1)
|
|
2018
|
|
2017
(1)
|
Biologics
|
21
|
%
|
|
23
|
%
|
|
21
|
%
|
|
23
|
%
|
Generics
|
21
|
%
|
|
22
|
%
|
|
21
|
%
|
|
21
|
%
|
Pharma
|
34
|
%
|
|
33
|
%
|
|
35
|
%
|
|
35
|
%
|
Contract-Manufactured Products
|
24
|
%
|
|
22
|
%
|
|
23
|
%
|
|
21
|
%
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
(1) As noted above, prior period amounts have not been adjusted under the modified retrospective method.
|
The following table presents the approximate percentage of our net sales by product category:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
2018
|
|
2017
(1)
|
|
2018
|
|
2017
(1)
|
High-Value Components
|
41
|
%
|
|
42
|
%
|
|
42
|
%
|
|
42
|
%
|
Standard Packaging
|
31
|
%
|
|
32
|
%
|
|
32
|
%
|
|
33
|
%
|
Delivery Devices
|
4
|
%
|
|
4
|
%
|
|
3
|
%
|
|
4
|
%
|
Contract-Manufactured Products
|
24
|
%
|
|
22
|
%
|
|
23
|
%
|
|
21
|
%
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
(1) As noted above, prior period amounts have not been adjusted under the modified retrospective method.
|
The following table presents the approximate percentage of our net sales by geographic location:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
2018
|
|
2017
(1)
|
|
2018
|
|
2017
(1)
|
Americas
|
51
|
%
|
|
50
|
%
|
|
48
|
%
|
|
51
|
%
|
Europe, Middle East, Africa
|
41
|
%
|
|
42
|
%
|
|
44
|
%
|
|
41
|
%
|
Asia Pacific
|
8
|
%
|
|
8
|
%
|
|
8
|
%
|
|
8
|
%
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
(1) As noted above, prior period amounts have not been adjusted under the modified retrospective method.
|
Contract Assets and Liabilities
Contract assets or liabilities result from transactions with revenue recorded over time. If the measure of remaining rights exceeds the measure of the remaining performance obligations, we record a contract asset. Contract assets are recorded on the condensed consolidated balance sheet in accounts receivable, net, and other assets (current and noncurrent portions, respectively). Contract assets included in accounts receivable, net, relate to the unbilled amounts of our product sales for which we have recognized revenue over time. Contract assets included in other assets represent the remaining performance obligations of our development and tooling agreements. Conversely, if the measure of the remaining performance obligations exceeds the measure of the remaining rights, we record a contract liability. Contract liabilities are recorded on the condensed consolidated balance sheet in other liabilities (current and noncurrent portions, respectively) and represent cash payments received in advance of our performance.
The following table summarizes our contract assets and liabilities, excluding contract assets included in accounts receivable, net:
|
|
|
|
|
|
($ in millions)
|
Contract assets, December 31, 2017
|
$
|
7.5
|
|
Contract assets, September 30, 2018
|
7.6
|
|
Change in contract assets - increase (decrease)
|
$
|
0.1
|
|
|
|
Deferred income, December 31, 2017
|
$
|
(33.6
|
)
|
Deferred income, September 30, 2018
|
(30.0
|
)
|
Change in deferred income - decrease (increase)
|
$
|
3.6
|
|
The decrease in deferred income during the
nine months ended
September 30, 2018
was primarily due to the recognition of revenue of
$67.0 million
, including
$34.5 million
of revenue that was included in deferred income at the beginning of the year (of which
$18.6 million
was recognized in the cumulative-effect adjustment as of January
1, 2018), partially offset by additional cash payments of
$62.3 million
received in advance of satisfying future performance obligations along with
$1.1 million
in other adjustments.
Practical Expedients and Exemptions
We have elected to disregard the effects of a significant financing component, as we expect, at the inception of our contracts, that the period between when we transfer a promised good or service to the customer and when the customer pays for that good or service will be one year or less.
In addition, we have elected to omit the disclosure of the majority of our remaining performance obligations, which are satisfied within one year or less.
Supply Chain Financing
We have entered into supply chain financing agreements with certain banks, pursuant to which we offer for sale certain accounts receivable to such banks from time to time, subject to the terms of the applicable agreements. These transactions result in a reduction in accounts receivable, as the agreements transfer effective control over, and credit risk related to, the receivables to the banks. These agreements do not allow for recourse in the event of uncollectibility, and we do not retain any interest in the underlying accounts receivable once sold. As of
September 30, 2018
, we derecognized
$2.3 million
of accounts receivable under these agreements. Discount fees related to the sale of such accounts receivable on our condensed consolidated income statements for the
three
and
nine months ended
September 30, 2018
were not material.
Note 4: Net Income Per Share
The following table reconciles the shares used in the calculation of basic net income per share to those used for diluted net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
(in millions)
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Net income
|
$
|
55.2
|
|
|
$
|
51.0
|
|
|
$
|
154.9
|
|
|
$
|
150.7
|
|
Weighted average common shares outstanding
|
73.9
|
|
|
74.2
|
|
|
73.9
|
|
|
73.8
|
|
Dilutive effect of equity awards, based on the treasury stock method
|
1.8
|
|
|
1.7
|
|
|
1.5
|
|
|
2.0
|
|
Weighted average shares assuming dilution
|
75.7
|
|
|
75.9
|
|
|
75.4
|
|
|
75.8
|
|
During the
three months ended
September 30, 2018
and
2017
, there were
0.1 million
and
0.5 million
shares, respectively, from stock-based compensation plans not included in the computation of diluted net income per share because their impact was antidilutive. There were
0.4 million
antidilutive shares outstanding during both the
nine months ended
September 30, 2018
and
2017
.
In February 2018, we announced a share repurchase program for calendar-year 2018 authorizing the repurchase of up to
800,000
shares of our common stock from time to time on the open market or in privately-negotiated transactions as permitted under the Securities Exchange Act of 1934 Rule 10b-18. The number of shares repurchased and the timing of such transactions depended on a variety of factors, including market conditions. There were
no
shares purchased during the
three months ended
September 30, 2018
. During the
nine months ended
September 30, 2018
, we purchased
800,000
shares of our common stock under the program at a cost of
$70.8 million
, or an average price of
$88.51
per share.
Note 5: Inventories
Inventories are valued at the lower of cost (on a first-in, first-out basis) and net realizable value. Inventory balances were as follows:
|
|
|
|
|
|
|
|
|
($ in millions)
|
September 30,
2018
|
|
December 31,
2017
|
Raw materials
|
$
|
93.3
|
|
|
$
|
88.6
|
|
Work in process
|
38.0
|
|
|
31.8
|
|
Finished goods
|
75.5
|
|
|
94.8
|
|
|
$
|
206.8
|
|
|
$
|
215.2
|
|
Note 6: Affiliated Companies
At
September 30, 2018
and
December 31, 2017
, the aggregate carrying amount of investments in equity-method affiliates was
$77.1 million
and
$72.4 million
, respectively, and the aggregate carrying amount of cost-method investments, for which fair value was not readily determinable, was
$13.4 million
at both period-ends. We test our cost-method investments for impairment whenever circumstances indicate that the carrying value of the investments may not be recoverable. Please refer to Note 5,
Affiliated Companies
, to the consolidated financial statements in our
2017
Annual Report for additional details.
Note 7: Debt
The following table summarizes our long-term debt obligations, net of unamortized debt issuance costs and current maturities. The interest rates shown in parentheses are as of
September 30, 2018
.
|
|
|
|
|
|
|
|
|
($ in millions)
|
September 30,
2018
|
|
December 31,
2017
|
Note payable, due December 31, 2019
|
$
|
0.1
|
|
|
$
|
0.1
|
|
Credit Facility, due October 15, 2020 (1.00%)
|
28.7
|
|
|
29.6
|
|
Series A notes, due July 5, 2022 (3.67%)
|
42.0
|
|
|
42.0
|
|
Series B notes, due July 5, 2024 (3.82%)
|
53.0
|
|
|
53.0
|
|
Series C notes, due July 5, 2027 (4.02%)
|
73.0
|
|
|
73.0
|
|
|
196.8
|
|
|
197.7
|
|
Less: unamortized debt issuance costs
|
0.6
|
|
|
0.7
|
|
Total debt
|
196.2
|
|
|
197.0
|
|
Less: current portion of long-term debt
|
—
|
|
|
—
|
|
Long-term debt, net
|
$
|
196.2
|
|
|
$
|
197.0
|
|
Please refer to Note 8,
Debt
, to the consolidated financial statements in our
2017
Annual Report for additional details regarding our debt agreements.
At
September 30, 2018
, we had
$28.7 million
in outstanding long-term borrowings under our
$300.0 million
multi-currency revolving credit facility (the “Credit Facility”), of which
$4.4 million
was denominated in Japanese Yen (“Yen”) and
$24.3 million
was denominated in Euro. These borrowings, together with outstanding letters of credit of
$2.5 million
, resulted in a borrowing capacity available under the Credit Facility of
$268.8 million
at
September 30, 2018
. Please refer to Note 8,
Derivative Financial Instruments
, for a discussion of the foreign currency hedges associated with the Credit Facility.
Note 8: Derivative Financial Instruments
Our ongoing business operations expose us to various risks such as fluctuating interest rates, foreign exchange rates and increasing commodity prices. To manage these market risks, we periodically enter into derivative financial instruments such as interest rate swaps, options and foreign exchange contracts for periods consistent with, and for notional amounts equal to or less than, the related underlying exposures. We do not purchase or hold any derivative financial instruments for investment or trading purposes. All derivatives are recorded in our condensed consolidated balance sheet at fair value.
Foreign Exchange Rate Risk
We have entered into forward exchange contracts, designated as fair value hedges, to manage our exposure to fluctuating foreign exchange rates on cross-currency intercompany loans. As of
September 30, 2018
, the total amount of these forward exchange contracts was
€10.0 million
, Singapore Dollar (“SGD”)
601.5 million
and
$13.4 million
. As of
December 31, 2017
, the total amount of these forward exchange contracts was
€12.0 million
, SGD
171.0 million
and
$13.4 million
.
In addition, we have entered into several foreign currency contracts, designated as cash flow hedges, for periods of up to eighteen months, intended to hedge the currency risk associated with a portion of our forecasted transactions denominated in foreign currencies. As of
September 30, 2018
, we had outstanding foreign currency contracts to purchase and sell certain pairs of currencies, as follows:
|
|
|
|
|
|
|
|
|
(in millions)
|
|
|
Sell
|
Currency
|
Purchase
|
|
U. S. Dollar (
“
USD
”
)
|
Euro
|
USD
|
19.9
|
|
|
—
|
|
16.3
|
|
Yen
|
3,601.4
|
|
|
18.9
|
|
12.0
|
|
SGD
|
21.5
|
|
|
10.7
|
|
4.5
|
|
At
September 30, 2018
, a portion of our debt consisted of borrowings denominated in currencies other than USD. We have designated our
€21.0 million
(
$24.3 million
) Euro-denominated borrowings under our Credit Facility as a hedge of our net investment in certain European subsidiaries. A cumulative foreign currency translation loss of
$0.5 million
pre-tax (
$0.4 million
after tax) on this debt was recorded within accumulated other comprehensive loss as of
September 30, 2018
. We have also designated our
¥500.0 million
(
$4.4 million
) Yen-denominated borrowings under our Credit Facility as a hedge of our net investment in Daikyo Seiko, Ltd. (“Daikyo”). At
September 30, 2018
, there was a cumulative foreign currency translation loss of
$0.2 million
pre-tax (
$0.2 million
after tax) on this Yen-denominated debt, which was also included within accumulated other comprehensive loss.
Commodity Price Risk
Many of our proprietary products are made from synthetic elastomers, which are derived from the petroleum refining process. We purchase the majority of our elastomers via long-term supply contracts, some of which contain clauses that provide for surcharges related to fluctuations in crude oil prices. The following economic hedges did not qualify for hedge accounting treatment since they did not meet the highly effective requirement at inception.
In November 2017, we purchased a series of call options for a total of
125,166
barrels of crude oil to mitigate our exposure to such oil-based surcharges and protect operating cash flows with regards to a portion of our forecasted elastomer purchases through May 2019. In April 2018, we purchased a series of call options for a total of
30,612
barrels of crude oil from December 2018 through August 2019.
During the three months ended
September 30, 2018
, the gain recorded in cost of goods and services sold related to these call options was less than
$0.1 million
. During the
nine months ended
September 30, 2018
, the gain recorded in cost of goods and services sold related to these call options was
$0.5 million
.
As of
September 30, 2018
, we had outstanding contracts to purchase
72,699
barrels of crude oil from October 2018 to August 2019 at a weighted-average strike price of
$74.21
per barrel.
Effects of Derivative Instruments on Financial Position and Results of Operations
Please refer to Note 9,
Fair Value Measurements
, for the balance sheet location and fair values of our derivative instruments as of
September 30, 2018
and
December 31, 2017
.
The following table summarizes the effects of derivative instruments designated as hedges on other comprehensive income (“OCI”) and earnings, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Gain (Loss) Recognized in OCI for the
|
|
Amount of Loss (Gain) Reclassified from Accumulated OCI into Income for the
|
|
Location of Loss (Gain) Reclassified from Accumulated OCI into Income
|
|
Three Months Ended
September 30,
|
|
Three Months Ended
September 30,
|
|
($ in millions)
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
|
Cash Flow Hedges:
|
|
|
|
|
|
|
|
|
|
Foreign currency hedge contracts
|
$
|
0.1
|
|
|
$
|
(0.7
|
)
|
|
$
|
—
|
|
|
$
|
0.4
|
|
|
Net sales
|
Foreign currency hedge contracts
|
(0.5
|
)
|
|
(0.9
|
)
|
|
(0.1
|
)
|
|
0.3
|
|
|
Cost of goods and services sold
|
Interest rate swap contracts
|
—
|
|
|
—
|
|
|
—
|
|
|
0.2
|
|
|
Interest expense
|
Forward treasury locks
|
—
|
|
|
—
|
|
|
0.1
|
|
|
0.1
|
|
|
Interest expense
|
Total
|
$
|
(0.4
|
)
|
|
$
|
(1.6
|
)
|
|
$
|
—
|
|
|
$
|
1.0
|
|
|
|
Net Investment Hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency-denominated debt
|
$
|
0.2
|
|
|
$
|
(0.5
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Other expense
|
Total
|
$
|
0.2
|
|
|
$
|
(0.5
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Gain (Loss) Recognized in OCI for the
|
|
Amount of Loss (Gain) Reclassified from Accumulated OCI into Income for the
|
|
Location of Loss (Gain) Reclassified from Accumulated OCI into Income
|
|
Nine Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
($ in millions)
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
|
Cash Flow Hedges:
|
|
|
|
|
|
|
|
|
|
Foreign currency hedge contracts
|
$
|
0.2
|
|
|
$
|
(1.6
|
)
|
|
$
|
0.8
|
|
|
$
|
0.7
|
|
|
Net sales
|
Foreign currency hedge contracts
|
0.9
|
|
|
(2.0
|
)
|
|
0.4
|
|
|
0.4
|
|
|
Cost of goods and services sold
|
Interest rate swap contracts
|
—
|
|
|
—
|
|
|
—
|
|
|
0.5
|
|
|
Interest expense
|
Forward treasury locks
|
—
|
|
|
—
|
|
|
0.2
|
|
|
0.2
|
|
|
Interest expense
|
Total
|
$
|
1.1
|
|
|
$
|
(3.6
|
)
|
|
$
|
1.4
|
|
|
$
|
1.8
|
|
|
|
Net Investment Hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency-denominated debt
|
$
|
0.7
|
|
|
$
|
(1.7
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Other expense
|
Total
|
$
|
0.7
|
|
|
$
|
(1.7
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
For the three and
nine months ended
September 30, 2018
and
2017
, there was no material ineffectiveness related to our hedges.
Note 9: Fair Value Measurements
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The following fair value hierarchy classifies the inputs to valuation techniques used to measure fair value into one of three levels:
|
|
•
|
Level 1
: Unadjusted quoted prices in active markets for identical assets or liabilities.
|
|
|
•
|
Level 2
: Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.
|
|
|
•
|
Level 3
: Unobservable inputs that reflect the reporting entity’s own assumptions.
|
The following tables present the assets and liabilities recorded at fair value on a recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
Basis of Fair Value Measurements
|
($ in millions)
|
September 30,
2018
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Assets:
|
|
|
|
|
|
|
|
Deferred compensation assets
|
$
|
9.4
|
|
|
$
|
9.4
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Foreign currency contracts
|
2.8
|
|
|
—
|
|
|
2.8
|
|
|
—
|
|
|
$
|
12.2
|
|
|
$
|
9.4
|
|
|
$
|
2.8
|
|
|
$
|
—
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Contingent consideration
|
$
|
5.2
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
5.2
|
|
Deferred compensation liabilities
|
10.5
|
|
|
10.5
|
|
|
—
|
|
|
—
|
|
Foreign currency contracts
|
5.8
|
|
|
—
|
|
|
5.8
|
|
|
—
|
|
|
$
|
21.5
|
|
|
$
|
10.5
|
|
|
$
|
5.8
|
|
|
$
|
5.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
Basis of Fair Value Measurements
|
($ in millions)
|
December 31,
2017
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Assets:
|
|
|
|
|
|
|
|
Deferred compensation assets
|
$
|
8.9
|
|
|
$
|
8.9
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Foreign currency contracts
|
0.5
|
|
|
—
|
|
|
0.5
|
|
|
—
|
|
|
$
|
9.4
|
|
|
$
|
8.9
|
|
|
$
|
0.5
|
|
|
$
|
—
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Contingent consideration
|
$
|
4.9
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4.9
|
|
Deferred compensation liabilities
|
9.9
|
|
|
9.9
|
|
|
—
|
|
|
—
|
|
Foreign currency contracts
|
5.1
|
|
|
—
|
|
|
5.1
|
|
|
—
|
|
|
$
|
19.9
|
|
|
$
|
9.9
|
|
|
$
|
5.1
|
|
|
$
|
4.9
|
|
Deferred compensation assets are included within other noncurrent assets and are valued using a market approach based on quoted market prices in an active market. The fair value of our foreign currency contracts, included within other current assets and other current liabilities, is valued using an income approach based on quoted forward foreign exchange rates and spot rates at the reporting date. The fair value of our contingent consideration, included within other current and other long-term liabilities, is discussed further in the section related to Level 3 fair value measurements. The fair value of deferred compensation liabilities is based on quoted prices of the underlying employees’ investment selections and is included within other long-term liabilities.
Level 3 Fair Value Measurements
The fair value of the contingent consideration liability related to the SmartDose technology platform (the “SmartDose contingent consideration”) was initially determined using a probability-weighted income approach, and is revalued at each reporting date or more frequently if circumstances dictate. Changes in the fair value of this obligation are recorded as income or expense within other expense in our condensed consolidated statements of income. The significant unobservable inputs used in the fair value measurement of the SmartDose contingent consideration are the sales projections, the probability of success factors, and the discount rate. Significant increases or decreases in any of those inputs in isolation would result in a significantly lower or higher fair value measurement. As development and commercialization of the SmartDose technology platform progresses, we may need to update the sales projections, the probability of success factors, and the discount rate used. This could result in a material increase or decrease to the SmartDose contingent consideration.
The following table provides a summary of changes in our Level 3 fair value measurements:
|
|
|
|
|
|
($ in millions)
|
Balance, December 31, 2016
|
$
|
8.0
|
|
Decrease in fair value recorded in earnings
|
(2.4
|
)
|
Payments
|
(0.7
|
)
|
Balance, December 31, 2017
|
4.9
|
|
Increase in fair value recorded in earnings
|
0.8
|
|
Payments
|
(0.5
|
)
|
Balance, September 30, 2018
|
$
|
5.2
|
|
Other Financial Instruments
We believe that the carrying amounts of our cash and cash equivalents and accounts receivable approximate their fair values due to their near-term maturities.
The estimated fair value of long-term debt is based on quoted market prices for debt issuances with similar terms and maturities and is classified as Level 2 within the fair value hierarchy. At
September 30, 2018
, the estimated fair value of long-term debt was
$192.5 million
compared to a carrying amount of
$196.2 million
. At
December 31, 2017
, the estimated fair value of long-term debt was
$201.5 million
and the carrying amount was
$197.0 million
.
Note 10: Stock-Based Compensation
The West Pharmaceutical Services, Inc. 2016 Omnibus Incentive Compensation Plan (the “2016 Plan”) provides for the granting of stock options, stock appreciation rights, restricted stock awards and performance awards to employees and non-employee directors. A committee of the Board of Directors determines the terms and conditions of awards to be granted. Vesting requirements vary by award. At
September 30, 2018
, there were
3,734,129
shares remaining in the 2016 Plan for future grants.
During the
nine months ended
September 30, 2018
, we granted
485,313
stock options at a weighted average exercise price of
$90.05
per share based on the grant-date fair value of our stock to employees under the 2016 Plan.
The weighted average grant date fair value of options granted was
$20.06
per share as determined by the Black-Scholes option valuation model using the following weighted average assumptions: a risk-free interest rate of
2.7%
; expected life of
5.6
years based on prior experience; stock volatility of
19.7%
based on historical data; and a dividend yield of
0.7%
. Stock option expense is recognized over the vesting period, net of forfeitures.
During the
nine months ended
September 30, 2018
, we granted
99,886
stock-settled performance share unit (“PSU”) awards at a weighted average grant-date fair value of
$90.10
per share to eligible employees. These awards are earned based on the Company’s performance against pre-established targets, including annual growth rate of revenue and return on invested capital, over a specified performance period. Depending on the achievement of the targets, recipients of stock-settled PSU awards are entitled to receive a certain number of shares of common stock. Shares earned under PSU awards may vary from
0%
to
200%
of an employee’s targeted award. The fair value of stock-settled PSU awards is based on the market price of our stock at the grant date and is recognized as expense over the performance period, adjusted for estimated target outcomes and net of forfeitures.
During the
nine months ended
September 30, 2018
, we granted
14,745
stock-settled restricted share unit (“RSU”) awards at a weighted average grant-date fair value of
$96.12
per share to eligible employees. These awards are earned over a specified performance period. The fair value of stock-settled RSU awards is based on the market price of our stock at the grant date and is recognized as expense over the performance period, net of forfeitures.
Total stock-based compensation expense was
$5.3 million
and
$14.7 million
for the
three
and
nine months ended
September 30, 2018
, respectively. For the
three
and
nine months ended
September 30, 2017
, stock-based compensation expense was
$4.6 million
and
$13.6 million
, respectively.
Note 11: Benefit Plans
The components of net periodic benefit cost for the
three months ended
September 30
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension benefits
|
|
Other retirement benefits
|
|
Total
|
($ in millions)
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Service cost
|
$
|
2.6
|
|
|
$
|
2.5
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2.6
|
|
|
$
|
2.5
|
|
Interest cost
|
2.3
|
|
|
2.4
|
|
|
0.1
|
|
|
—
|
|
|
2.4
|
|
|
2.4
|
|
Expected return on assets
|
(3.9
|
)
|
|
(3.4
|
)
|
|
—
|
|
|
—
|
|
|
(3.9
|
)
|
|
(3.4
|
)
|
Amortization of prior service credit
|
(0.3
|
)
|
|
(0.3
|
)
|
|
(0.2
|
)
|
|
(0.1
|
)
|
|
(0.5
|
)
|
|
(0.4
|
)
|
Recognized actuarial losses (gains)
|
0.9
|
|
|
1.2
|
|
|
(0.7
|
)
|
|
(0.9
|
)
|
|
0.2
|
|
|
0.3
|
|
Net periodic benefit cost
|
$
|
1.6
|
|
|
$
|
2.4
|
|
|
$
|
(0.8
|
)
|
|
$
|
(1.0
|
)
|
|
$
|
0.8
|
|
|
$
|
1.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension benefits
|
|
Other retirement benefits
|
|
Total
|
($ in millions)
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
U.S. plans
|
$
|
1.0
|
|
|
$
|
1.7
|
|
|
$
|
(0.8
|
)
|
|
$
|
(1.0
|
)
|
|
$
|
0.2
|
|
|
$
|
0.7
|
|
International plans
|
0.6
|
|
|
0.7
|
|
|
—
|
|
|
—
|
|
|
0.6
|
|
|
0.7
|
|
Net periodic benefit cost
|
$
|
1.6
|
|
|
$
|
2.4
|
|
|
$
|
(0.8
|
)
|
|
$
|
(1.0
|
)
|
|
$
|
0.8
|
|
|
$
|
1.4
|
|
The components of net periodic benefit cost for the
nine months ended
September 30
were as follows ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension benefits
|
|
Other retirement benefits
|
|
Total
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Service cost
|
$
|
8.1
|
|
|
$
|
7.8
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
8.1
|
|
|
$
|
7.8
|
|
Interest cost
|
7.0
|
|
|
7.3
|
|
|
0.2
|
|
|
0.2
|
|
|
7.2
|
|
|
7.5
|
|
Expected return on assets
|
(11.7
|
)
|
|
(10.1
|
)
|
|
—
|
|
|
—
|
|
|
(11.7
|
)
|
|
(10.1
|
)
|
Amortization of prior service credit
|
(1.1
|
)
|
|
(1.0
|
)
|
|
(0.5
|
)
|
|
(0.5
|
)
|
|
(1.6
|
)
|
|
(1.5
|
)
|
Recognized actuarial losses (gains)
|
2.8
|
|
|
3.6
|
|
|
(1.8
|
)
|
|
(2.0
|
)
|
|
1.0
|
|
|
1.6
|
|
Net periodic benefit cost
|
$
|
5.1
|
|
|
$
|
7.6
|
|
|
$
|
(2.1
|
)
|
|
$
|
(2.3
|
)
|
|
$
|
3.0
|
|
|
$
|
5.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension benefits
|
|
Other retirement benefits
|
|
Total
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
U.S. plans
|
$
|
3.5
|
|
|
$
|
5.5
|
|
|
$
|
(2.1
|
)
|
|
$
|
(2.3
|
)
|
|
$
|
1.4
|
|
|
$
|
3.2
|
|
International plans
|
1.6
|
|
|
2.1
|
|
|
—
|
|
|
—
|
|
|
1.6
|
|
|
2.1
|
|
Net periodic benefit cost
|
$
|
5.1
|
|
|
$
|
7.6
|
|
|
$
|
(2.1
|
)
|
|
$
|
(2.3
|
)
|
|
$
|
3.0
|
|
|
$
|
5.3
|
|
In March 2017, the FASB issued guidance on the presentation of net periodic pension and postretirement benefit cost (net benefit cost). We adopted this guidance as of January 1, 2018, on a retrospective basis. Please refer to Note 2,
New Accounting Standards
, for additional information.
During the
nine months ended
September 30, 2017
, we contributed
$20.0 million
to our U.S. qualified pension plan.
Effective January 1, 2019, except for interest crediting, benefit accruals under our U.S. qualified and non-qualified defined benefit pension plans will cease.
Note 12: Accumulated Other Comprehensive Loss
The following table presents the changes in the components of accumulated other comprehensive loss, net of tax, for the
nine months ended
September 30, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
Losses on
cash flow
hedges
|
|
Unrealized gains
on investment
securities
|
|
Defined benefit
pension and other
postretirement plans
|
|
Foreign
currency
translation
|
|
Total
|
Balance, December 31, 2017
|
$
|
(4.2
|
)
|
|
$
|
0.5
|
|
|
$
|
(39.0
|
)
|
|
$
|
(74.6
|
)
|
|
$
|
(117.3
|
)
|
Other comprehensive income (loss) before reclassifications
|
1.1
|
|
|
—
|
|
|
0.6
|
|
|
(39.1
|
)
|
|
(37.4
|
)
|
Amounts reclassified out
|
1.4
|
|
|
—
|
|
|
(0.5
|
)
|
|
—
|
|
|
0.9
|
|
Other comprehensive income (loss), net of tax
|
2.5
|
|
|
—
|
|
|
0.1
|
|
|
(39.1
|
)
|
|
(36.5
|
)
|
Balance, September 30, 2018
|
$
|
(1.7
|
)
|
|
$
|
0.5
|
|
|
$
|
(38.9
|
)
|
|
$
|
(113.7
|
)
|
|
$
|
(153.8
|
)
|
A summary of the reclassifications out of accumulated other comprehensive loss is presented in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
Location on Statement of Income
|
Detail of components
|
|
2018
|
|
2017
|
|
2018
|
|
|
2017
|
|
|
Losses on cash flow hedges:
|
|
|
|
|
|
|
|
|
|
|
Foreign currency contracts
|
|
$
|
0.1
|
|
|
$
|
(0.5
|
)
|
|
$
|
(0.8
|
)
|
|
$
|
(0.8
|
)
|
|
Net sales
|
Foreign currency contracts
|
|
—
|
|
|
(0.5
|
)
|
|
(0.7
|
)
|
|
(0.6
|
)
|
|
Cost of goods and services sold
|
Interest rate swap contracts
|
|
—
|
|
|
(0.2
|
)
|
|
—
|
|
|
(0.7
|
)
|
|
Interest expense
|
Forward treasury locks
|
|
(0.1
|
)
|
|
(0.1
|
)
|
|
(0.3
|
)
|
|
(0.3
|
)
|
|
Interest expense
|
Total before tax
|
|
—
|
|
|
(1.3
|
)
|
|
(1.8
|
)
|
|
(2.4
|
)
|
|
|
Tax expense
|
|
—
|
|
|
0.3
|
|
|
0.4
|
|
|
0.6
|
|
|
|
Net of tax
|
|
$
|
—
|
|
|
$
|
(1.0
|
)
|
|
$
|
(1.4
|
)
|
|
$
|
(1.8
|
)
|
|
|
Amortization of defined benefit pension and other postretirement plans:
|
|
|
|
|
|
|
|
|
|
|
Prior service credit
|
|
$
|
0.5
|
|
|
$
|
0.4
|
|
|
$
|
1.6
|
|
|
$
|
1.5
|
|
|
(a)
|
Actuarial losses
|
|
(0.2
|
)
|
|
(0.3
|
)
|
|
(1.0
|
)
|
|
(1.6
|
)
|
|
(a)
|
Total before tax
|
|
0.3
|
|
|
0.1
|
|
|
0.6
|
|
|
(0.1
|
)
|
|
|
Tax expense
|
|
—
|
|
|
(0.1
|
)
|
|
(0.1
|
)
|
|
(0.1
|
)
|
|
|
Net of tax
|
|
$
|
0.3
|
|
|
$
|
—
|
|
|
$
|
0.5
|
|
|
$
|
(0.2
|
)
|
|
|
Total reclassifications for the period, net of tax
|
|
$
|
0.3
|
|
|
$
|
(1.0
|
)
|
|
$
|
(0.9
|
)
|
|
$
|
(2.0
|
)
|
|
|
(a) These components are included in the computation of net periodic benefit cost. Please refer to Note 11,
Benefit Plans
, for additional details.
Note 13: Other (Income) Expense
Other (income) expense consists of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
($ in millions)
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Restructuring and related charges:
|
|
|
|
|
|
|
|
Severance and post-employment benefits
|
$
|
0.1
|
|
|
$
|
—
|
|
|
$
|
3.4
|
|
|
$
|
—
|
|
Asset-related charges
|
0.4
|
|
|
—
|
|
|
0.8
|
|
|
—
|
|
Other charges
|
0.7
|
|
|
—
|
|
|
2.5
|
|
|
—
|
|
Total restructuring and related charges
|
1.2
|
|
|
—
|
|
|
6.7
|
|
|
—
|
|
Argentina currency devaluation
|
1.1
|
|
|
—
|
|
|
1.1
|
|
|
—
|
|
Venezuela deconsolidation
|
—
|
|
|
—
|
|
|
—
|
|
|
11.1
|
|
Development and licensing income
|
(0.2
|
)
|
|
(9.5
|
)
|
|
(0.6
|
)
|
|
(10.3
|
)
|
Contingent consideration
|
0.2
|
|
|
(0.2
|
)
|
|
0.8
|
|
|
0.5
|
|
Other items
|
(2.5
|
)
|
|
0.2
|
|
|
(4.0
|
)
|
|
1.8
|
|
Total other (income) expense
|
$
|
(0.2
|
)
|
|
$
|
(9.5
|
)
|
|
$
|
4.0
|
|
|
$
|
3.1
|
|
Restructuring and Related Charges
In February 2018, our Board of Directors approved a restructuring plan designed to realign our manufacturing capacity with demand. These changes are expected to be implemented over the following twelve to twenty-four
months. The plan will require restructuring and related charges in the range of
$8.0 million
to
$13.0 million
and capital expenditures in the range of
$9.0 million
to
$14.0 million
. Once fully completed, we expect that the plan will provide us with annualized savings in the range of
$17.0 million
to
$22.0 million
.
During the
three months ended
September 30, 2018
, we recorded
$1.2 million
in restructuring and related charges associated with this plan, consisting of
$0.1 million
for severance charges,
$0.4 million
for non-cash asset write-downs associated with the discontinued use of certain equipment, and
$0.7 million
for other charges. During the
nine months ended
September 30, 2018
, we recorded
$6.7 million
in restructuring and related charges associated with this plan, consisting of
$3.4 million
for severance charges,
$0.8 million
for non-cash asset write-downs associated with the discontinued use of certain equipment, and
$2.5 million
for other charges.
The following table presents activity related to our restructuring obligations related to the 2018 restructuring plan:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
Severance
and benefits
|
|
Asset-related charges
|
|
Other charges
|
|
Total
|
Balance, December 31, 2017
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Charges
|
3.4
|
|
|
0.8
|
|
|
2.5
|
|
|
6.7
|
|
Cash payments
|
(0.2
|
)
|
|
—
|
|
|
—
|
|
|
(0.2
|
)
|
Non-cash asset write-downs
|
—
|
|
|
(0.8
|
)
|
|
(2.5
|
)
|
|
(3.3
|
)
|
Balance, September 30, 2018
|
$
|
3.2
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3.2
|
|
On February 15, 2016, our Board of Directors approved a restructuring plan designed to repurpose several of our production facilities in support of growing high-value proprietary products and to realign operational and commercial activities to meet the needs of our new market-focused commercial organization. Please refer to Note 14,
Other Expense
, to the consolidated financial statements in our
2017
Annual Report for further discussion of the 2016 Plan. Our remaining restructuring obligations related to the 2016 Plan as of
September 30, 2018
were
$1.0 million
.
Other Items
During the three and nine months ended September 30, 2018, we recorded a charge of
$1.1 million
related to the classification of Argentina’s economy as highly inflationary under U.S. GAAP as of July 1, 2018.
During the
nine months ended
September 30, 2017
, as a result of the continued deterioration of conditions in Venezuela as well as our continued reduced access to USD settlement controlled by the Venezuelan government, we recorded a charge of
$11.1 million
related to the deconsolidation of our Venezuelan subsidiary, following our determination that we no longer met the U.S. GAAP criteria for control of that subsidiary. This charge included the derecognition of the carrying amounts of our Venezuelan subsidiary’s assets and liabilities, as well as the write-off of our investment in our Venezuelan subsidiary, related unrealized translation adjustments and the elimination of intercompany accounts. As of April 1, 2017, our consolidated financial statements exclude the results of our Venezuelan subsidiary.
In addition, during the
three
and
nine months ended
September 30, 2018
, we recorded development income of
$0.2 million
and
$0.6 million
, respectively, related to a nonrefundable customer payment of
$20.0 million
received in June 2013 in return for the exclusive use of the SmartDose technology platform within a specific therapeutic area. During the
three
and
nine months ended
September 30, 2017
, we recorded income of
$0.4 million
and
$1.2 million
, respectively, related to this nonrefundable customer payment. Please refer to Note 3,
Revenue
, for additional information. In addition, during the
three
and
nine months ended
September 30, 2017
, we recorded income of
$9.1
million
attributable to the reimbursement of certain costs related to a technology that we subsequently licensed to a third party. The license of technology to the third party may result in additional income in the future, contingent on commercialization of the related product.
Contingent consideration represents changes in the fair value of the SmartDose contingent consideration. Please refer to Note 9,
Fair Value Measurements
, for additional details.
Other items consist of foreign exchange transaction gains and losses, gains and losses on the sale of fixed assets, and miscellaneous income and charges.
Note 14: Income Taxes
The tax provision for interim periods is determined using the estimated annual effective consolidated tax rate, based on the current estimate of full-year earnings before taxes, adjusted for the impact of discrete quarterly items.
The provision for income taxes was
$8.0 million
and
$14.0 million
for the
three months ended
September 30, 2018
and
2017
, respectively, and the effective tax rate was
13.1%
and
22.3%
, respectively. The provision for income taxes was
$26.5 million
and
$19.1 million
for the
nine months ended
September 30, 2018
and
2017
, respectively, and the effective tax rate was
15.1%
and
11.7%
, respectively.
During the
three
and
nine months ended
September 30, 2018
, we recorded a tax benefit of
$7.7 million
and
$13.2 million
, respectively, associated with our adoption in 2017 of guidance issued by the FASB regarding share-based payment transactions, as compared to a tax benefit of
$4.8 million
and
$30.3 million
for the same periods in
2017
.
During the three and nine months ended September 30, 2018, we recorded a net tax charge of
$0.4 million
and a net tax benefit of
$4.1 million
, respectively, to adjust our estimated impact of the 2017 Tax Act. During the year ended December 31, 2017, we had recorded a provisional charge for the estimated impact of the 2017 Tax Act, based upon our then-current understanding of the 2017 Tax Act and the guidance available at the time. We will continue to actively monitor the developments relating to the 2017 Tax Act, and will adjust our estimate as necessary during the one-year measurement period.
During the nine months ended September 30, 2017, we recorded a tax benefit of
$3.5 million
related to a planned repatriation of cash held by non-U.S. subsidiaries.
In response to the 2017 Tax Act, we reevaluated our position regarding permanent reinvestment of foreign subsidiary earnings and profits through 2017 (with the exception of China and Mexico) and elected to include in our provision for income taxes for the year ended December 31, 2017 an estimated liability of
$9.8 million
related to foreign withholding taxes and state income taxes that will be incurred upon the distribution of those foreign subsidiary earnings and profits to the U.S. at a future date. Following additional analysis of the 2017 Tax Act, we are asserting, as of January 1, 2018, indefinite reinvestment related to our investment in all of our controlled foreign subsidiaries.
Note 15: Commitments and Contingencies
From time to time, we are involved in product liability matters and other legal proceedings and claims generally incidental to our normal business activities. We accrue for loss contingencies when it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. While the outcome of current proceedings cannot be accurately predicted, we believe their ultimate resolution should not have a material adverse effect on our business, financial condition, results of operations or liquidity.
There have been no significant changes to the commitments and contingencies included in our
2017
Annual Report.
Note 16: Segment Information
Our business operations are organized into
two
reportable segments, Proprietary Products and Contract-Manufactured Products. Our Proprietary Products reportable segment offers proprietary packaging, containment and drug delivery products, along with analytical lab services, to biologic, generic and pharmaceutical drug customers. Our Contract-Manufactured Products reportable segment serves as a fully integrated business, focused on the design, manufacture, and automated assembly of complex devices, primarily for pharmaceutical, diagnostic, and medical device customers.
We evaluate the performance of our segments based upon, among other things, segment net sales and operating profit. Segment operating profit excludes general corporate costs, which include executive and director compensation, stock-based compensation, adjustments to annual incentive plan expense for over- or under-attainment of targets, certain pension and other retirement benefit costs, and other corporate facilities and administrative expenses not allocated to the segments. Also excluded are items that we consider not representative of ongoing operations. Such items are referred to as other unallocated items and generally include restructuring and related charges, certain asset impairments and other specifically-identified income or expense items.
The following table presents information about our reportable segments, reconciled to consolidated totals:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
($ in millions)
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Net sales:
|
|
|
|
|
|
|
|
Proprietary Products
|
$
|
325.2
|
|
|
$
|
308.9
|
|
|
$
|
997.4
|
|
|
$
|
930.5
|
|
Contract-Manufactured Products
|
106.7
|
|
|
89.3
|
|
|
297.7
|
|
|
253.3
|
|
Intersegment sales elimination
|
(0.2
|
)
|
|
—
|
|
|
(0.2
|
)
|
|
(0.3
|
)
|
Consolidated net sales
|
$
|
431.7
|
|
|
$
|
398.2
|
|
|
$
|
1,294.9
|
|
|
$
|
1,183.5
|
|
Operating profit (loss):
|
|
|
|
|
|
|
|
Proprietary Products
|
$
|
68.2
|
|
|
$
|
67.5
|
|
|
$
|
202.7
|
|
|
$
|
189.3
|
|
Contract-Manufactured Products
|
11.2
|
|
|
10.8
|
|
|
29.7
|
|
|
30.1
|
|
Corporate
|
(16.3
|
)
|
|
(15.4
|
)
|
|
(50.1
|
)
|
|
(42.9
|
)
|
Other unallocated items
|
(2.3
|
)
|
|
—
|
|
|
(7.8
|
)
|
|
(11.1
|
)
|
Total operating profit
|
$
|
60.8
|
|
|
$
|
62.9
|
|
|
$
|
174.5
|
|
|
$
|
165.4
|
|
Interest expense
|
2.0
|
|
|
1.4
|
|
|
6.1
|
|
|
5.7
|
|
Interest income
|
(0.5
|
)
|
|
(0.3
|
)
|
|
(1.4
|
)
|
|
(0.9
|
)
|
Other nonoperating income
|
(1.8
|
)
|
|
(1.1
|
)
|
|
(5.1
|
)
|
|
(2.5
|
)
|
Income before income taxes
|
$
|
61.1
|
|
|
$
|
62.9
|
|
|
$
|
174.9
|
|
|
$
|
163.1
|
|
The intersegment sales elimination, which is required for the presentation of consolidated net sales, represents the elimination of components sold between our segments.
Other unallocated items during the
three
and
nine months ended
September 30, 2018
, consisted of
$1.2 million
and
$6.7 million
, respectively, in restructuring and related charges. In addition, during the
three
and
nine months ended
September 30, 2018
, other unallocated items included a charge of
$1.1 million
related to the classification of Argentina’s economy as highly inflationary under U.S. GAAP as of July 1, 2018. Other unallocated items during the
nine months ended
September 30, 2017
consisted of a charge of
$11.1 million
related to the deconsolidation of our Venezuelan subsidiary. Please refer to Note 13,
Other (Income) Expense
, for further discussion of these items.
In March 2017, the FASB issued guidance on the presentation of net periodic pension and postretirement benefit cost (net benefit cost). We adopted this guidance as of January 1, 2018, on a retrospective basis. As a result of this adoption, we reclassified net benefit cost components other than service cost from operating income to outside of operations. Net periodic benefit cost for the
three months ended
September 30, 2018
and
2017
was
$0.8 million
and
$1.4 million
, respectively, of which
$2.6 million
and
$2.5 million
, respectively, related to service cost and
$1.8 million
and
$1.1 million
, respectively, related to net benefit cost components other than service cost. Net periodic benefit cost for the
nine months ended
September 30, 2018
and
2017
was
$3.0 million
and
$5.3 million
, respectively, of which
$8.1 million
and
$7.8 million
, respectively, related to service cost and
$5.1 million
and
$2.5 million
, respectively, related to net benefit cost components other than service cost. Please refer to Note 2,
New Accounting Standards
, for additional information.