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 months ended
March 31, 2019
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, 2018
(the “
2018
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 15,
Other Expense
, to the consolidated financial statements in our 2018 Annual Report for further discussion.
Note 2: New Accounting Standards
Recently Adopted Standards
In August 2018, the SEC adopted a final release which would eliminate or modify certain disclosure requirements that are redundant, outdated, or duplicative of U.S. GAAP or other regulatory requirements. Among other changes, the amendments provide that disclosure requirements related to the analysis of shareholders’ equity are expanded for interim purposes. An analysis of the changes in each caption of shareholders’ equity presented in the balance sheet must be provided in a note or separate statement, as well as the amount of dividends per share for each class of shares. We provided this disclosure beginning in the first quarter of 2019. Please refer to Note 12,
Shareholders
’
Equity
.
In June 2018, the Financial Accounting Standards Board (“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 was permitted. We adopted this guidance as of January 1, 2019, on a prospective basis. The adoption did not have a material impact on our financial statements.
In February 2018, the FASB issued guidance to address a specific consequence of the Tax Cuts and Jobs Acts (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 was permitted. We adopted this guidance as of January 1, 2019, on a prospective basis, but elected to not reclassify from accumulated other comprehensive income (loss) to retained earnings the stranded tax effects resulting from the 2017 Tax Act’s reduction of the U.S. federal corporate income tax rate.
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 was permitted. We adopted this guidance as of January 1, 2019, on a prospective basis. The adoption did not have a material impact on our financial statements.
In February 2016, the FASB issued guidance on the accounting for leases, Accounting Standards Codification (“ASC”) Topic 842 (“ASC 842”). 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. Early adoption was permitted. We adopted this guidance as of January 1, 2019, using the modified retrospective approach that allows companies to apply ASC 842 as of the effective date and on a prospective basis. Please refer to Note 6,
Leases
, 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.
Note 3: Revenue
The following table presents the approximate percentage of our net sales by market group:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
2019
|
|
2018
|
|
Biologics
|
26
|
%
|
|
21
|
%
|
|
Generics
|
20
|
%
|
|
21
|
%
|
|
Pharma
|
31
|
%
|
|
36
|
%
|
|
Contract-Manufactured Products
|
23
|
%
|
|
22
|
%
|
|
|
100
|
%
|
|
100
|
%
|
The following table presents the approximate percentage of our net sales by product category:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
2019
|
|
2018
|
|
High-Value Components
|
43
|
%
|
|
41
|
%
|
|
Standard Packaging
|
30
|
%
|
|
34
|
%
|
|
Delivery Devices
|
4
|
%
|
|
3
|
%
|
|
Contract-Manufactured Products
|
23
|
%
|
|
22
|
%
|
|
|
100
|
%
|
|
100
|
%
|
The following table presents the approximate percentage of our net sales by geographic location:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
2019
|
|
2018
|
|
Americas
|
46
|
%
|
|
45
|
%
|
|
Europe, Middle East, Africa
|
47
|
%
|
|
47
|
%
|
|
Asia Pacific
|
7
|
%
|
|
8
|
%
|
|
|
100
|
%
|
|
100
|
%
|
Contract Assets and Liabilities
The following table summarizes our contract assets and liabilities, excluding contract assets included in accounts receivable, net:
|
|
|
|
|
|
|
|
|
($ in millions)
|
|
Contract assets, December 31, 2018
|
$
|
9.1
|
|
|
Contract assets, March 31, 2019
|
11.9
|
|
|
Change in contract assets - increase (decrease)
|
$
|
2.8
|
|
|
|
|
|
Deferred income, December 31, 2018
|
$
|
(33.4
|
)
|
|
Deferred income, March 31, 2019
|
(36.5
|
)
|
|
Change in deferred income - decrease (increase)
|
$
|
(3.1
|
)
|
The increase in deferred income during the
three months ended
March 31, 2019
was primarily due to additional cash payments of
$30.6 million
received in advance of satisfying future performance obligations, partially offset by the recognition of revenue of
$25.8 million
, including
$11.1 million
of revenue that was included in deferred income at the beginning of the year, and
$1.7 million
in other adjustments.
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
March 31, 2019
, there was
$6.3 million
of unearned income related to this payment, of which
$0.9 million
was included in other current liabilities and
$5.4 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.
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
March 31, 2019
, we derecognized
$1.8 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 months ended
March 31, 2019
were not material.
Voluntary Recall
On January 24, 2019, we issued a voluntary recall of our Vial2Bag
®
product line due to reports of potential unpredictable or variable dosing under certain conditions. Our 2018 results included an
$11.3 million
provision for product returns, recorded as a reduction of sales, partially offset by a reduction in cost of goods sold reflecting our inventory balance for these devices at December 31, 2018. During the three months ended March 31, 2019, following the completion of certain tests and studies related to the voluntary recall, we recorded a
$4.5 million
provision for potential inventory returns from our customers and related in-house inventory, partially offset by a reduction in our provision for product returns. We continue to work to get the products back on the market.
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
March 31,
|
|
(in millions)
|
2019
|
|
2018
|
|
Net income
|
$
|
55.4
|
|
|
$
|
43.6
|
|
|
Weighted average common shares outstanding
|
74.1
|
|
|
73.9
|
|
|
Dilutive effect of equity awards, based on the treasury stock method
|
1.2
|
|
|
1.6
|
|
|
Weighted average shares assuming dilution
|
75.3
|
|
|
75.5
|
|
During the
three months ended
March 31, 2019
and
2018
, there were
0.6 million
and
0.7 million
shares, respectively, from stock-based compensation plans not included in the computation of diluted net income per share because their impact was antidilutive.
In February 2019, we announced a share repurchase program for calendar-year 2019 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. During the
three months ended
March 31, 2019
, we purchased
800,000
shares of our common stock under the now-completed program at a cost of
$83.1 million
, or an average price of
$103.89
per share.
Note 5: Inventories
Inventories are valued at the lower of cost (on a first-in, first-out basis) and net realizable value. Inventory balances were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
March 31,
2019
|
|
December 31,
2018
|
|
Raw materials
|
$
|
100.1
|
|
|
$
|
90.4
|
|
|
Work in process
|
39.0
|
|
|
42.2
|
|
|
Finished goods
|
87.0
|
|
|
81.9
|
|
|
|
$
|
226.1
|
|
|
$
|
214.5
|
|
Note 6: Leases
Adoption of ASC 842
On January 1, 2019, we adopted ASC 842, using the modified retrospective approach that allows companies to apply ASC 842 as of the effective date and on a prospective basis. As a result, we were not required to adjust our comparative period financial information for effects of ASC 842 or present the new required lease disclosures for periods prior to the date of adoption. As of March 31, 2019, we had operating leases primarily related to land, buildings, and machinery and equipment, with lease terms through 2047. Certain of our operating leases include options to extend the lease term for up to five years, and certain of our operating leases include options to terminate the leases within one year. We had no finance leases as of
March 31, 2019
.
As a result of our adoption of ASC 842, we recorded operating lease right-of-use assets of
$71.0 million
and operating lease liabilities of
$73.1 million
for operating leases where we are the lessee in our condensed consolidated balance sheet as of January 1, 2019. The operating lease right-of-use assets are initially measured at cost, which comprises the initial amount of the lease liability adjusted for lease payments made at or before the lease commencement date, plus any initial direct costs incurred less any lease incentives received. The operating lease right-of-use assets are subsequently measured throughout the lease term at the carrying amount of the lease liability, plus initial direct costs, plus (minus) any prepaid (accrued) lease payments, less the unamortized balance of lease incentives received. Lease expense for lease payments is recognized on a straight-line basis over the lease term. The operating lease liabilities are initially measured at the present value of the unpaid lease payments at the lease commencement date.
Judgments used in applying ASC 842 include determining: i) whether a contract is, or contains, a lease; ii) the discount rate to be used to discount the unpaid lease payments to present value; iii) the lease term; and iv) the lease payments. We determine if a contract is, or contains, a lease at contract inception. A lease exists when a contract conveys to the customer the right to control the use of identified property, plant, or equipment for a period of time in exchange for consideration. The definition of a lease embodies two conditions: 1) there is an identified asset in the contract that is land or a depreciable asset (i.e., property, plant, and equipment); and 2) the customer has the right to control the use of the identified asset. ASC 842 requires a lessee to discount its unpaid lease payments using the interest rate implicit in the lease or, if that rate cannot be readily determined, its incremental borrowing rate. As all of our operating leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. Our incremental borrowing rate for a lease is the rate of interest we would have to pay on a collateralized basis to borrow an amount equal to the lease payments under similar terms. The lease term for all of our operating leases includes the noncancellable period of the lease plus any additional periods covered by either a lessee option to extend (or not to terminate) the lease that the lessee is reasonably certain to exercise, or an option to extend (or not to terminate) the lease controlled by the lessor. Lease payments included in the measurement of the operating lease right-of-use assets and lease liabilities are comprised of fixed payments (including in-substance fixed payments), variable payments
that depend on an index or rate, and the exercise price of a lessee option to purchase the underlying asset if the lessee is reasonably certain to exercise.
The components of lease expense were as follows:
|
|
|
|
|
|
|
|
($ in millions)
|
Three Months Ended
March 31, 2019
|
|
Operating lease cost
|
$
|
3.2
|
|
|
Short-term lease cost
|
0.2
|
|
|
Variable lease cost
|
0.6
|
|
|
Total lease cost
|
$
|
4.0
|
|
Lease expense for the three months ended March 31, 2018 was
$3.7 million
.
Supplemental information related to leases was as follows:
|
|
|
|
|
|
|
|
($ in millions)
|
Three Months Ended
March 31, 2019
|
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
Operating cash flows from operating leases
|
$
|
3.1
|
|
|
|
|
|
Right-of-use assets obtained in exchange for new operating lease liabilities
|
6.8
|
|
As of
March 31, 2019
, the weighted average remaining lease term for operating leases was
12.1
years, and the weighted average discount rate was
3.74%
.
Maturities of lease liabilities as of
March 31, 2019
were as follows:
|
|
|
|
|
|
|
|
($ in millions)
|
Operating
|
|
Year
|
Leases
|
|
2019 (remaining nine months)
|
$
|
9.6
|
|
|
2020
|
11.5
|
|
|
2021
|
9.8
|
|
|
2022
|
8.1
|
|
|
2023
|
7.6
|
|
|
Thereafter
|
49.0
|
|
|
|
95.6
|
|
|
Less: imputed lease interest
|
(18.0
|
)
|
|
Total lease liabilities
|
$
|
77.6
|
|
Maturities of future minimum rental payments under non-cancelable operating leases as of December 31, 2018 were as follows:
|
|
|
|
|
|
|
|
($ in millions)
|
Operating
|
|
Year
|
Leases
|
|
2019
|
$
|
13.0
|
|
|
2020
|
10.5
|
|
|
2021
|
7.8
|
|
|
2022
|
6.9
|
|
|
2023
|
5.5
|
|
|
Thereafter
|
37.8
|
|
|
Total
|
$
|
81.5
|
|
Practical Expedients and Exemptions
We have elected to adopt the leasing package of practical expedients, which allow us to not retroactively reassess: i) any expired or existing contracts containing leases under the new definition of a lease; ii) the lease classification for any expired or existing leases; and iii) initial direct costs for any expired or existing leases. We have also elected to adopt practical expedients around land easements, the combination of lease and non-lease components, and the portfolio approach relating to discount rates. These practical expedients were applied consistently to all leases.
We have elected not to recognize operating lease right-of-use assets and lease liabilities for all short-term leases (leases with an initial lease term of
12
months or less). We recognize the lease payments associated with our short-term leases as an expense over the lease term.
Note 7: Affiliated Companies
At
March 31, 2019
and
December 31, 2018
, the aggregate carrying amount of our investment in affiliated companies that are accounted for under the equity method was
$81.5 million
and
$77.8 million
, respectively, and the aggregate carrying amount of our investment in affiliated companies that are not accounted for under the equity method was
$13.4 million
at both period-ends. We have elected to record these investments, for which fair value was not readily determinable, at cost, less impairment, adjusted for subsequent observable price changes. We test these investments for impairment whenever circumstances indicate that the carrying value of the investments may not be recoverable.
Our purchases from, and royalty payments made to, affiliates totaled
$24.6 million
for the three months ended March 31, 2019, as compared to
$23.1 million
for the same period in 2018. As of March 31, 2019 and December 31, 2018, the payable balance due to affiliates was
$17.2 million
and
$12.9 million
, respectively. The majority of these transactions related to a distributorship agreement with Daikyo that allows us to purchase and re-sell Daikyo products. Sales to affiliates were
$2.2 million
for the three months ended March 31, 2019, as compared to
$2.4 million
for the same period in 2018. As of March 31, 2019 and December 31, 2018, the receivable balance due from affiliates was
$1.4 million
and
$1.6 million
, respectively.
Please refer to Note 6,
Affiliated Companies
, to the consolidated financial statements in our
2018
Annual Report for additional details.
Note 8: Debt
The following table summarizes our long-term debt obligations, net of unamortized debt issuance costs and current maturities. The interest rates shown in parentheses are as of
March 31, 2019
.
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
March 31,
2019
|
|
December 31,
2018
|
|
Note payable, due December 31, 2019
|
$
|
—
|
|
|
$
|
0.1
|
|
|
Credit Facility, due October 15, 2020 (1.00%)
|
—
|
|
|
28.6
|
|
|
Credit Facility, due March 28, 2024 (0.875%)
|
28.1
|
|
|
—
|
|
|
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
|
|
|
|
196.1
|
|
|
196.7
|
|
|
Less: unamortized debt issuance costs
|
0.6
|
|
|
0.6
|
|
|
Total debt
|
195.5
|
|
|
196.1
|
|
|
Less: current portion of long-term debt
|
—
|
|
|
0.1
|
|
|
Long-term debt, net
|
$
|
195.5
|
|
|
$
|
196.0
|
|
In March 2019, we entered into a new senior unsecured, multi-currency revolving credit facility agreement (the “Credit Agreement”) that replaced our prior revolving credit facility, which was scheduled to expire in October 2020. The Credit Agreement, which expires in
March 2024
, contains a senior unsecured, multi-currency revolving credit facility (the “Credit Facility”) of
$300.0 million
, with sublimits of up to
$30.0 million
for swing line loans for domestic borrowers in U.S. Dollars (“USD”) and a
$20.0 million
swing line loan for our German Holding Company and up to
$30.0 million
for the issuance of standby letters of credit, which Credit Facility may be increased from time-to-time by the greater of
$350.0 million
and earnings before interest, taxes, depreciation and amortization (“EBITDA”) for the preceding twelve month period in the aggregate through an increase in the Credit Facility, subject to the satisfaction of certain conditions. Borrowings under the Credit Facility bear interest at either the base rate (the per annum interest rate of the highest of the Prime Rate, the Federal Funds Rate plus
50
basis points or the daily London Interbank Offered Rate (“LIBOR”), plus
1.00%
) or at the applicable LIBOR rate, plus a tiered margin based on the ratio of our net consolidated debt to our modified EBITDA, ranging from
0
to
37.5
basis points for base rate loans and
87.5
to
137.5
basis points for LIBOR rate loans. The Credit Agreement contains financial covenants providing that we shall not permit the ratio of our net consolidated debt to our modified EBITDA to be greater than
3.5
to 1; provided that, no more than three times during the term of the Credit Agreement, upon the occurrence of a qualified acquisition for each of our four fiscal quarters immediately following such qualified acquisition, the ratio shall be increased to
4.0
to 1. The Credit Agreement also contains customary limitations on liens securing our indebtedness, fundamental changes (mergers, consolidations, liquidations and dissolutions), asset sales, distributions and acquisitions. As of March 31, 2019 and December 31, 2018, total unamortized debt issuance costs of
$1.1 million
and
$0.6 million
, respectively, were recorded in other noncurrent assets and are being amortized as additional interest expense over the term of the Credit Facility. A portion of these costs relate to our prior revolving credit facility.
At
March 31, 2019
, we had
$28.1 million
in outstanding long-term borrowings under the Credit Facility, of which
$4.5 million
was denominated in Japanese Yen (“Yen”) and
$23.6 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
$269.4 million
at March 31, 2019. Please refer to Note 9,
Derivative Financial Instruments
, for a discussion of the foreign currency hedges associated with the Credit Facility.
Please refer to Note 9,
Debt
, to the consolidated financial statements in our
2018
Annual Report for additional details regarding our debt agreements.
Note 9: Derivative Financial Instruments
Our ongoing business operations expose us to various risks, such as fluctuating interest rates, foreign currency 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
March 31, 2019
, the total amount of these forward exchange contracts was Singapore Dollar (“SGD”)
601.5 million
and
$13.4 million
. As of
December 31, 2018
, the total amount of these forward exchange contracts was
€10.0 million
, SGD
601.5 million
and
$13.4 million
. During the three months ended March 31, 2019, we recognized foreign exchange transaction gains of
$4.8 million
within other (income) expense in our condensed consolidated statements of income related to these fair value hedges. We recognize in earnings the initial value of forward point components on a straight-line basis over the life of the fair value hedge.
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
March 31, 2019
, we had outstanding foreign currency contracts to purchase and sell certain pairs of currencies, as follows:
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
|
Sell
|
|
Currency
|
Purchase
|
|
USD
|
Euro
|
|
USD
|
31.5
|
|
|
—
|
|
26.8
|
|
|
Yen
|
5,232.0
|
|
|
24.4
|
|
20.5
|
|
|
SGD
|
44.0
|
|
|
25.1
|
|
6.4
|
|
At
March 31, 2019
, a portion of our debt consisted of borrowings denominated in currencies other than USD. We have designated our
€21.0 million
(
$23.6 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 less than
$0.1 million
for both pre- and after tax on this debt was recorded within accumulated other comprehensive loss as of
March 31, 2019
. We have also designated our
¥500.0 million
(
$4.5 million
) Yen-denominated borrowings under our Credit Facility as a hedge of our net investment in Daikyo Seiko, Ltd. (“Daikyo”). At
March 31, 2019
, there was a cumulative foreign currency translation loss of
$0.4 million
pre-tax (
$0.3 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. In January 2019, we purchased a series of call options for a total of
81,459
barrels of crude oil from February 2019 through May 2020.
During the three months ended
March 31, 2019
, the loss recorded in cost of goods and services sold related to these call options was less than
$0.1 million
.
As of
March 31, 2019
, we had outstanding contracts to purchase
108,891
barrels of crude oil from April 2019 to May 2020 at a weighted-average strike price of
$66.22
per barrel.
Effects of Derivative Instruments on Financial Position and Results of Operations
Please refer to Note 10,
Fair Value Measurements
, for the balance sheet location and fair values of our derivative instruments as of
March 31, 2019
and
December 31, 2018
.
The following table summarizes the effects of derivative instruments designated as hedges on other comprehensive income (“OCI”) and earnings, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Gain (Loss) Recognized in OCI for the
|
|
Amount of (Gain) Loss Reclassified from Accumulated OCI into Income for the
|
|
Location of (Gain) Loss Reclassified from Accumulated OCI into Income
|
|
|
Three Months Ended
March 31,
|
|
Three Months Ended
March 31,
|
|
|
($ in millions)
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
|
|
Cash Flow Hedges:
|
|
|
|
|
|
|
|
|
|
|
Foreign currency hedge contracts
|
$
|
0.5
|
|
|
$
|
(0.4
|
)
|
|
$
|
(0.2
|
)
|
|
$
|
0.5
|
|
|
Net sales
|
|
Foreign currency hedge contracts
|
(0.1
|
)
|
|
1.6
|
|
|
(0.1
|
)
|
|
0.4
|
|
|
Cost of goods and services sold
|
|
Forward treasury locks
|
—
|
|
|
—
|
|
|
—
|
|
|
0.1
|
|
|
Interest expense
|
|
Total
|
$
|
0.4
|
|
|
$
|
1.2
|
|
|
$
|
(0.3
|
)
|
|
$
|
1.0
|
|
|
|
|
Net Investment Hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency-denominated debt
|
$
|
0.1
|
|
|
$
|
(0.7
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Other (income) expense
|
|
Total
|
$
|
0.1
|
|
|
$
|
(0.7
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
For the
three months ended
March 31, 2019
and
2018
, there was no material ineffectiveness related to our hedges.
Note 10: 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)
|
March 31,
2019
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Assets:
|
|
|
|
|
|
|
|
|
Deferred compensation assets
|
$
|
9.2
|
|
|
$
|
9.2
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Foreign currency contracts
|
17.7
|
|
|
—
|
|
|
17.7
|
|
|
—
|
|
|
Commodity call options
|
0.2
|
|
|
—
|
|
|
0.2
|
|
|
—
|
|
|
|
$
|
27.1
|
|
|
$
|
9.2
|
|
|
$
|
17.9
|
|
|
$
|
—
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent consideration
|
$
|
1.7
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1.7
|
|
|
Deferred compensation liabilities
|
10.5
|
|
|
10.5
|
|
|
—
|
|
|
—
|
|
|
Foreign currency contracts
|
0.8
|
|
|
—
|
|
|
0.8
|
|
|
—
|
|
|
|
$
|
13.0
|
|
|
$
|
10.5
|
|
|
$
|
0.8
|
|
|
$
|
1.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
Basis of Fair Value Measurements
|
|
($ in millions)
|
December 31,
2018
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Assets:
|
|
|
|
|
|
|
|
|
Deferred compensation assets
|
$
|
8.7
|
|
|
$
|
8.7
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Foreign currency contracts
|
6.5
|
|
|
—
|
|
|
6.5
|
|
|
—
|
|
|
|
$
|
15.2
|
|
|
$
|
8.7
|
|
|
$
|
6.5
|
|
|
$
|
—
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent consideration
|
$
|
1.7
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1.7
|
|
|
Deferred compensation liabilities
|
9.8
|
|
|
9.8
|
|
|
—
|
|
|
—
|
|
|
Foreign currency contracts
|
0.2
|
|
|
—
|
|
|
0.2
|
|
|
—
|
|
|
|
$
|
11.7
|
|
|
$
|
9.8
|
|
|
$
|
0.2
|
|
|
$
|
1.7
|
|
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 and other noncurrent assets, as well as other current and other long-term 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 commodity call options, included within other current and other noncurrent assets, is valued using a market approach. 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. Please refer to Note 9,
Derivative Financial Instruments
, for further discussion of our derivatives.
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 (income) 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, 2017
|
$
|
4.9
|
|
|
Decrease in fair value recorded in earnings
|
(2.6
|
)
|
|
Payments
|
(0.6
|
)
|
|
Balance, December 31, 2018
|
1.7
|
|
|
Increase in fair value recorded in earnings
|
0.2
|
|
|
Payments
|
(0.2
|
)
|
|
Balance, March 31, 2019
|
$
|
1.7
|
|
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
March 31, 2019
, the estimated fair value of long-term debt was
$197.4 million
compared to a carrying amount of
$195.5 million
. At
December 31, 2018
, the estimated fair value of long-term debt was
$192.6 million
and the carrying amount was
$196.0 million
.
Note 11: Accumulated Other Comprehensive Loss
The following table presents the changes in the components of accumulated other comprehensive loss, net of tax, for the
three months ended
March 31, 2019
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
Losses on
derivatives
|
|
Unrealized gains
on investment
securities
|
|
Defined benefit
pension and other
postretirement plans
|
|
Foreign
currency
translation
|
|
Total
|
|
Balance, December 31, 2018
|
$
|
(0.4
|
)
|
|
$
|
0.4
|
|
|
$
|
(40.4
|
)
|
|
$
|
(113.8
|
)
|
|
$
|
(154.2
|
)
|
|
Other comprehensive (loss) income before reclassifications
|
(3.0
|
)
|
|
—
|
|
|
(0.2
|
)
|
|
4.4
|
|
|
1.2
|
|
|
Amounts reclassified out
|
(0.3
|
)
|
|
—
|
|
|
(0.1
|
)
|
|
—
|
|
|
(0.4
|
)
|
|
Other comprehensive (loss) income, net of tax
|
(3.3
|
)
|
|
—
|
|
|
(0.3
|
)
|
|
4.4
|
|
|
0.8
|
|
|
Balance, March 31, 2019
|
$
|
(3.7
|
)
|
|
$
|
0.4
|
|
|
$
|
(40.7
|
)
|
|
$
|
(109.4
|
)
|
|
$
|
(153.4
|
)
|
A summary of the reclassifications out of accumulated other comprehensive loss is presented in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
|
Three Months Ended
March 31,
|
|
Location on Statement of Income
|
|
Detail of components
|
|
2019
|
|
2018
|
|
|
Losses on derivatives:
|
|
|
|
|
|
|
|
Foreign currency contracts
|
|
$
|
0.2
|
|
|
$
|
(0.6
|
)
|
|
Net sales
|
|
Foreign currency contracts
|
|
0.2
|
|
|
(0.6
|
)
|
|
Cost of goods and services sold
|
|
Forward treasury locks
|
|
(0.1
|
)
|
|
(0.1
|
)
|
|
Interest expense
|
|
Total before tax
|
|
0.3
|
|
|
(1.3
|
)
|
|
|
|
Tax expense
|
|
—
|
|
|
0.3
|
|
|
|
|
Net of tax
|
|
$
|
0.3
|
|
|
$
|
(1.0
|
)
|
|
|
|
Amortization of defined benefit pension and other postretirement plans:
|
|
|
|
|
|
|
|
Prior service credit
|
|
$
|
0.2
|
|
|
$
|
0.5
|
|
|
(a)
|
|
Actuarial losses
|
|
—
|
|
|
(0.4
|
)
|
|
(a)
|
|
Total before tax
|
|
0.2
|
|
|
0.1
|
|
|
|
|
Tax expense
|
|
(0.1
|
)
|
|
—
|
|
|
|
|
Net of tax
|
|
$
|
0.1
|
|
|
$
|
0.1
|
|
|
|
|
Total reclassifications for the period, net of tax
|
|
$
|
0.4
|
|
|
$
|
(0.9
|
)
|
|
|
(a) These components are included in the computation of net periodic benefit cost. Please refer to Note 14,
Benefit Plans
, for additional details.
Note 12: Shareholders
’
Equity
The following table presents the changes in shareholders’ equity for the
three months ended
March 31, 2019
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Shares Issued
|
|
Common Stock
|
|
Capital in Excess of Par Value
|
|
Number of Treasury Shares
|
|
Treasury Stock
|
|
Retained earnings
|
|
Accumulated other comprehensive loss
|
|
Total
|
|
($ in millions)
|
|
|
|
|
|
|
|
|
Balance, December 31, 2018
|
75.3
|
|
|
$
|
18.8
|
|
|
$
|
282.0
|
|
|
1.2
|
|
|
$
|
(103.7
|
)
|
|
$
|
1,353.4
|
|
|
$
|
(154.2
|
)
|
|
$
|
1,396.3
|
|
|
Net income
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
55.4
|
|
|
—
|
|
|
55.4
|
|
|
Activity related to stock-based compensation
|
—
|
|
|
—
|
|
|
(3.5
|
)
|
|
(0.2
|
)
|
|
14.2
|
|
|
—
|
|
|
—
|
|
|
10.7
|
|
|
Shares purchased under share repurchase program
|
—
|
|
|
—
|
|
|
—
|
|
|
0.8
|
|
|
(83.1
|
)
|
|
—
|
|
|
—
|
|
|
(83.1
|
)
|
|
Dividends declared ($0.15 per share)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(10.6
|
)
|
|
—
|
|
|
(10.6
|
)
|
|
Other comprehensive income, net of tax
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
0.8
|
|
|
0.8
|
|
|
Balance, March 31, 2019
|
75.3
|
|
|
$
|
18.8
|
|
|
$
|
278.5
|
|
|
1.8
|
|
|
$
|
(172.6
|
)
|
|
$
|
1,398.2
|
|
|
$
|
(153.4
|
)
|
|
$
|
1,369.5
|
|
The following table presents the changes in shareholders’ equity for the
three months ended
March 31, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Shares Issued
|
|
Common Stock
|
|
Capital in Excess of Par Value
|
|
Number of Treasury Shares
|
|
Treasury Stock
|
|
Retained earnings
|
|
Accumulated other comprehensive loss
|
|
Total
|
|
($ in millions)
|
|
|
|
|
|
|
|
|
Balance, December 31, 2017
|
75.2
|
|
|
$
|
18.8
|
|
|
$
|
309.3
|
|
|
1.3
|
|
|
$
|
(109.1
|
)
|
|
$
|
1,178.2
|
|
|
$
|
(117.3
|
)
|
|
$
|
1,279.9
|
|
|
Effect of modified retrospective application of a new accounting standard
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
11.4
|
|
|
—
|
|
|
11.4
|
|
|
Net income
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
43.6
|
|
|
—
|
|
|
43.6
|
|
|
Activity related to stock-based compensation
|
0.1
|
|
|
—
|
|
|
(0.8
|
)
|
|
(0.1
|
)
|
|
8.0
|
|
|
—
|
|
|
—
|
|
|
7.2
|
|
|
Shares purchased under share repurchase program
|
—
|
|
|
—
|
|
|
—
|
|
|
0.5
|
|
|
(47.9
|
)
|
|
—
|
|
|
—
|
|
|
(47.9
|
)
|
|
Dividends declared ($0.14 per share)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(10.4
|
)
|
|
—
|
|
|
(10.4
|
)
|
|
Other comprehensive income, net of tax
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
21.5
|
|
|
21.5
|
|
|
Balance, March 31, 2018
|
75.3
|
|
|
$
|
18.8
|
|
|
$
|
308.5
|
|
|
1.7
|
|
|
$
|
(149.0
|
)
|
|
$
|
1,222.8
|
|
|
$
|
(95.8
|
)
|
|
$
|
1,305.3
|
|
Note 13: 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
March 31, 2019
, there were
3,162,428
shares remaining in the 2016 Plan for future grants.
During the
three months ended
March 31, 2019
, we granted
344,616
stock options at a weighted average exercise price of
$102.51
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
$24.51
per share as determined by the Black-Scholes option valuation model using the following weighted average assumptions: a risk-free interest rate of
2.3%
; expected life of
5.6
years based on prior experience; stock volatility of
22.5%
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
three months ended
March 31, 2019
, we granted
82,458
stock-settled performance share unit (“PSU”) awards at a weighted average grant-date fair value of
$102.51
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
three months ended
March 31, 2019
, we granted
7,266
stock-settled restricted share unit (“RSU”) awards at a weighted average grant-date fair value of
$102.51
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 vesting period, net of forfeitures.
Total stock-based compensation expense was
$6.2 million
and
$3.4 million
for the
three months ended
March 31, 2019
and
2018
, respectively.
Note 14: Benefit Plans
The components of net periodic benefit cost for the
three months ended
March 31
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension benefits
|
|
Other retirement benefits
|
|
Total
|
|
($ in millions)
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Service cost
|
$
|
0.4
|
|
|
$
|
2.8
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
0.4
|
|
|
$
|
2.8
|
|
|
Interest cost
|
2.4
|
|
|
2.3
|
|
|
0.1
|
|
|
0.1
|
|
|
2.5
|
|
|
2.4
|
|
|
Expected return on assets
|
(2.9
|
)
|
|
(3.9
|
)
|
|
—
|
|
|
—
|
|
|
(2.9
|
)
|
|
(3.9
|
)
|
|
Amortization of prior service credit
|
—
|
|
|
(0.3
|
)
|
|
(0.2
|
)
|
|
(0.2
|
)
|
|
(0.2
|
)
|
|
(0.5
|
)
|
|
Recognized actuarial losses (gains)
|
0.5
|
|
|
0.9
|
|
|
(0.5
|
)
|
|
(0.5
|
)
|
|
—
|
|
|
0.4
|
|
|
Net periodic benefit cost
|
$
|
0.4
|
|
|
$
|
1.8
|
|
|
$
|
(0.6
|
)
|
|
$
|
(0.6
|
)
|
|
$
|
(0.2
|
)
|
|
$
|
1.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension benefits
|
|
Other retirement benefits
|
|
Total
|
|
($ in millions)
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
U.S. plans
|
$
|
(0.1
|
)
|
|
$
|
1.3
|
|
|
$
|
(0.6
|
)
|
|
$
|
(0.6
|
)
|
|
$
|
(0.7
|
)
|
|
$
|
0.7
|
|
|
International plans
|
0.5
|
|
|
0.5
|
|
|
—
|
|
|
—
|
|
|
0.5
|
|
|
0.5
|
|
|
Net periodic benefit cost
|
$
|
0.4
|
|
|
$
|
1.8
|
|
|
$
|
(0.6
|
)
|
|
$
|
(0.6
|
)
|
|
$
|
(0.2
|
)
|
|
$
|
1.2
|
|
Effective January 1, 2019, except for interest crediting, benefit accruals under our U.S. qualified and non-qualified defined benefit pension plans ceased.
Note 15: Other (Income) Expense
Other (income) expense consists of:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
($ in millions)
|
2019
|
|
2018
|
|
Restructuring and related charges:
|
|
|
|
|
Severance and post-employment benefits
|
$
|
0.3
|
|
|
$
|
2.0
|
|
|
Asset-related charges
|
—
|
|
|
0.1
|
|
|
Other charges
|
0.3
|
|
|
1.2
|
|
|
Total restructuring and related charges
|
0.6
|
|
|
3.3
|
|
|
Development and licensing income
|
(0.2
|
)
|
|
(0.2
|
)
|
|
Contingent consideration
|
0.2
|
|
|
0.3
|
|
|
Other items
|
(2.9
|
)
|
|
(0.3
|
)
|
|
Total other (income) expense
|
$
|
(2.3
|
)
|
|
$
|
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 a period of up to twenty-four months from the date of approval. The plan will require restructuring and related charges of approximately
$15.0 million
.
During the
three months ended
March 31, 2019
, we recorded
$0.6 million
in restructuring and related charges associated with this plan, consisting of
$0.3 million
for severance charges and
$0.3 million
for other charges. During the
three months ended
March 31, 2018
, we recorded
$3.3 million
in restructuring and related charges associated with this plan, consisting of
$2.0 million
for severance charges,
$0.1 million
for non-cash asset write-downs associated with the discontinued use of certain equipment, and
$1.2 million
for other non-cash charges.
The following table presents activity related to our restructuring obligations related to our 2018 restructuring plan:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
Severance
and benefits
|
|
Asset-related charges
|
|
Other charges
|
|
Total
|
|
Balance, December 31, 2018
|
$
|
2.3
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2.3
|
|
|
Charges
|
0.3
|
|
|
—
|
|
|
0.3
|
|
|
0.6
|
|
|
Cash payments
|
(1.1
|
)
|
|
—
|
|
|
—
|
|
|
(1.1
|
)
|
|
Non-cash asset write-downs
|
—
|
|
|
—
|
|
|
(0.3
|
)
|
|
(0.3
|
)
|
|
Balance, March 31, 2019
|
$
|
1.5
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1.5
|
|
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. Our remaining restructuring obligations related to the 2016 restructuring plan as of
March 31, 2019
were
$0.3 million
.
Other Items
During both the
three months ended
March 31, 2019
and 2018, we recorded development income of
$0.2 million
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. Please refer to Note 3,
Revenue
, for additional information.
Contingent consideration represents changes in the fair value of the SmartDose contingent consideration. Please refer to Note 10,
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. Other items increased by
$2.6 million
for the three months ended March 31, 2019, as compared to the same period in 2018, primarily as a result of foreign exchange transaction gains of
$3.8 million
during the three months ended March 31, 2019, as compared to foreign exchange transaction losses of
$0.4 million
during the three months ended March 31, 2018.
Note 16: 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
$16.1 million
and
$12.5 million
for the
three months ended
March 31, 2019
and
2018
, respectively, and the effective tax rate was
23.1%
and
23.3%
, respectively.
During the three months ended March 31, 2018, we recorded a net tax charge of
$0.3 million
for the estimated impact of the 2017 Tax Act. Please refer to Note 16,
Income Taxes
, to the consolidated financial statements in our 2018 Annual Report for further discussion.
Note 17: 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
2018
Annual Report.
On January 1, 2019, we adopted ASC 842. Please refer to Note 6,
Leases
, for additional information.
Note 18: 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
March 31,
|
|
($ in millions)
|
2019
|
|
2018
|
|
Net sales:
|
|
|
|
|
Proprietary Products
|
$
|
340.4
|
|
|
$
|
326.2
|
|
|
Contract-Manufactured Products
|
103.1
|
|
|
89.5
|
|
|
Consolidated net sales
|
$
|
443.5
|
|
|
$
|
415.7
|
|
|
Operating profit (loss):
|
|
|
|
|
Proprietary Products
|
$
|
77.0
|
|
|
$
|
62.8
|
|
|
Contract-Manufactured Products
|
10.5
|
|
|
9.5
|
|
|
Corporate
|
(16.2
|
)
|
|
(15.6
|
)
|
|
Other unallocated items
|
(0.6
|
)
|
|
(3.3
|
)
|
|
Total operating profit
|
$
|
70.7
|
|
|
$
|
53.4
|
|
|
Interest expense
|
2.3
|
|
|
1.9
|
|
|
Interest income
|
(0.9
|
)
|
|
(0.6
|
)
|
|
Other nonoperating income
|
(0.6
|
)
|
|
(1.6
|
)
|
|
Income before income taxes
|
$
|
69.9
|
|
|
$
|
53.7
|
|
Other unallocated items during the
three months ended
March 31, 2019
and
2018
, consisted of
$0.6 million
and
$3.3 million
, respectively, in restructuring and related charges. Please refer to Note 15,
Other (Income) Expense
, for further discussion of these items.
Note 19: Subsequent Event
In April 2019, we acquired the business of our distributor in South Korea. We believe that the acquisition will not have a material impact on our financial statements.