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Registrant’s telephone number, including area code: i610-i594-2900
Securities registered pursuant
to Section 12(b) of the Act:
Title of each class
Trading Symbol
Name of each exchange on which registered
iCommon Stock, par value $0.25 per share
iWST
iNew
York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. iYes☑No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). iYes☑No ☐
Indicate
by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,”“accelerated filer,”“smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
iLarge
accelerated filer
☑
Accelerated filer
☐
Non-accelerated filer
☐
Smaller reporting company
i☐
Emerging
growth company
i☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Preferred
stock, ii3.0/ million shares
authorized; iiii0///
shares issued and outstanding
i—
i—
Common
stock, par value $ii0.25/ per share; ii200.0/
million shares authorized; shares issued: i75.3 million and i75.3 million, respectively; shares outstanding: i74.1 million
and i74.0 million, respectively
i18.8
i18.8
Capital
in excess of par value
i251.2
i267.3
Retained
earnings
i2,335.8
i1,846.7
Accumulated
other comprehensive loss
(i155.7)
(i110.6)
Treasury
stock, at cost (i1.2 million and i1.3 million shares, respectively)
(i247.8)
(i167.7)
Total
Equity
i2,202.3
i1,854.5
Total
Liabilities and Equity
$
i3,142.6
$
i2,793.8
See
accompanying notes to condensed consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 1: iBasis
of Presentation and Summary of Significant Accounting Policies
i
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, 2021, 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, 2020 (the “2020 Annual Report”). The results of operations for any interim period are not necessarily indicative of results for the full year.
West has been actively monitoring the novel coronavirus (“COVID-19”) situation and its impact globally. Throughout the COVID-19 pandemic, production facilities have continued to operate as they had prior to the pandemic, other than for enhanced safety measures intended to prevent the spread of the virus and higher levels of production at certain plant locations to meet additional customer demand. The remote working arrangements and travel restrictions imposed by various
governments have had limited impact on our ability to maintain operations, as our manufacturing operations have generally been exempted from stay-at-home orders.
Note 2: iiNew
Accounting Standards/
Standards Issued Not Yet Adopted
In March 2020, the FASB issued guidance which provides optional expedients and exceptions to address the impact of reference rate reform where contracts, hedging relationships and other transactions that reference the London Interbank Offered Rate (“LIBOR”) or another reference rate need to be discontinued. This guidance was effective upon issuance and generally can be applied through December 31, 2022. We are currently evaluating the impact to our financial statements,
the transition, and disclosure requirements of this guidance, and where applicable, the Company has made contract amendments to reflect the removal of the LIBOR rate.
Note 3: iRevenue
Our
revenue results from the sale of goods or services and reflects the consideration to which we expect to be entitled in exchange for those goods or services. We record revenue based on a five-step model, in accordance with ASC Topic 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.
Starting in the third quarter of 2020, the
Company entered into new capacity reservation agreements, which include the receipt of up-front cash. The decrease in the deferred income balance is primarily due to the revenue recognition associated with the capacity reservation agreements, which is to be recognized over the next i1 to i2
years.
During the nine months ended September 30, 2021, $i30.0 million of revenue was recognized that was included in deferred income at the beginning of the year.
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 $i20.0 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, 2021, there
was $i4.1 million of unearned income related to this payment, of which $i0.9 million was included in other current liabilities and $i3.2
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.
Note 4: iNet Income Per Share
i
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)
2021
2020
2021
2020
Net
income
$
i175.6
$
i82.3
$
i514.1
$
i247.8
Weighted
average common shares outstanding
i74.1
i73.9
i74.0
i73.9
Dilutive
effect of equity awards, based on the treasury stock method
i1.9
i1.9
i1.8
i1.7
Weighted
average shares assuming dilution
i76.0
i75.8
i75.8
i75.6
/
During
the three months ended September 30, 2021 and 2020, there were i0.0 million and i0.0
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 i0.0 million and i0.2
million antidilutive shares outstanding during the nine months ended September 30, 2021 and 2020, respectively.
In December 2020, we announced a share repurchase program for calendar-year 2021 authorizing the repurchase of up to i631,000 shares of our common stock from time to time on the open market or in privately-negotiated transactions
as permitted under Exchange Act Rule 10b-18. The number of shares to be repurchased and the timing of such transactions will depend on a variety of factors, including market conditions. There were ino shares purchased during the three months ended September 30, 2021. During the nine months ended September 30, 2021, we purchased i479,000
shares of our common stock under the program at a cost of $i137.1 million, or an average price of $i286.23 per share. This share repurchase
program is expected to be completed by December 31, 2021.
Note 5: iInventories
i
Inventories
are valued at the lower of cost (on a first-in, first-out basis) and net realizable value. Inventory balances were as follows:
A lease exists when a contract conveys to the customer the right to control the use of identified property, plant, or equipment for a period of time in exchange for consideration. The definition of a lease embodies two conditions: 1) there is an identified asset in the contract
that is land or a depreciable asset (i.e., property, plant, and equipment); and 2) the customer has the right to control the use of the identified asset. Lease payments included in the measurement of the operating lease right-of-use assets and lease liabilities are comprised of fixed payments (including in-substance fixed payments), variable payments that depend on an index or rate, and the exercise price of a lessee option to purchase the underlying asset if the lessee is reasonably certain to exercise.
i
The components of lease expense were as follows:
Three
Months Ended September 30,
Nine Months Ended September 30,
($ in millions)
2021
2020
2021
2020
Operating lease cost
$
i3.3
$
i3.1
$
i9.5
$
i9.3
Short-term
lease cost
i0.4
i0.3
i0.9
i0.6
Variable
lease cost
i1.1
i1.2
i3.3
i2.8
Total
lease cost
$
i4.8
$
i4.6
$
i13.7
$
i12.7
Supplemental
cash flow information related to leases were as follows:
Three Months Ended September 30,
Nine Months Ended September 30,
($ in millions)
2021
2020
2021
2020
Cash
paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases
$
i2.9
$
i3.2
$
i9.2
$
i9.6
Right-of-use
assets obtained in exchange for new operating lease liabilities
$
i—
$
i0.3
$
i0.8
$
i4.6
/
As
of September 30, 2021 and December 31, 2020, the weighted average remaining lease term for operating leases was i10.9 and i11.1
years, respectively.
iMaturities of operating lease liabilities were as follows:
($
in millions)
September 30,
December 31,
Year
2021
2020
2021 (remaining period as of )
$
i3.0
$
i12.4
2022
i10.3
i10.4
2023
i9.3
i9.3
2024
i8.5
i8.7
2025
i6.8
i6.9
Thereafter
i36.2
i37.5
i74.1
i85.2
Less:
imputed lease interest
(i12.6)
(i14.7)
Total
lease liabilities
$
i61.5
$
i70.5
/
Note
7: iAffiliated Companies
At September 30, 2021 and December 31, 2020, the aggregate carrying amount of our investment in affiliated companies that are accounted for under the equity method was $i207.1
million and $i201.9 million, respectively, and the aggregate carrying amount of our investment in affiliated companies that are not accounted for under the equity method was $i8.6
million and $i12.8 million, respectively. 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 $i34.0
million and $i119.6 million for the three and nine months ended September 30, 2021, respectively, as compared to $i36.6
million and $i97.0 million, respectively, for the same periods in 2020. As of September 30, 2021 and December 31, 2020, the payable balance due to affiliates was $i13.8
million and $i33.6 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 $i2.8
million and $i8.8 million, respectively, for the three and nine months ended September 30, 2021, as compared to $i2.7 million and $i7.7
million, respectively, for the same periods in 2020. As of September 30, 2021 and December 31, 2020, the receivable balance due from affiliates was $i2.2 million and $i1.4
million, respectively.
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, 2021.
Please
refer to Note 8, Debt, to the consolidated financial statements in our 2020 Annual Report for additional details regarding our debt agreements.
Credit Agreement - Credit Facility
At September 30, 2021, the borrowing capacity available under our $i300.0 million
multi-currency revolving credit facility (the “Credit Facility”), including outstanding letters of credit of $i2.4 million, was $i297.6 million.
Credit
Agreement Amendment - Term Loan
At September 30, 2021, we had $i86.6 million in borrowings under the Term Loan, of which $i2.2
million was classified as current and $i84.4 million was classified as long-term. Please refer to Note 9, Derivative Financial Instruments, for a discussion of the foreign currency hedge associated with the Term Loan.
Note 9: iDerivative
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 both September 30, 2021 and December 31, 2020, the total amount of these forward exchange contracts was Singapore Dollar (“SGD”) ii601.5/
million and $ii13.4/ million.
In addition, we have entered into several foreign currency contracts, designated as cash flow hedges, for periods of up to ieighteen months, intended to hedge the currency risk associated with a portion of our forecasted transactions denominated in foreign currencies. iAs
of September 30, 2021, we had outstanding foreign currency contracts to purchase and sell certain pairs of currencies, as follows:
(in millions)
Sell
Currency
Purchase
USD
Euro
USD
i28.8
i—
i24.0
Yen
i6,131.7
i24.6
i27.7
SGD
i28.7
i17.8
i3.0
In
December 2019, we entered into a cross-currency swap for $i90 million, which we designated as a hedge of our net investment in Daikyo. The notional amount of the cross-currency swap is ¥i9.4 billion
($i86.1 million) and the swap termination date is December 31, 2024. Under the cross-currency swap, we receive floating interest rate payments based on three-month U.S. Dollar (“USD”) LIBOR plus a margin, in return for paying floating interest rate payments based on three-month Japanese Yen (“Yen”) LIBOR plus a margin.
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.
From November 2017 through September 2021, we purchased several series of call options for a total of i596,367
barrels of crude oil to mitigate our exposure to such oil-based surcharges and protect operating cash flows with regard to a portion of our forecasted elastomer purchases.
As of September 30, 2021, we had outstanding contracts to purchase i182,495 barrels of crude oil from October 2021 to March 2023, at a weighted-average strike price
of $i70.40 per barrel.
Effects of Derivative Instruments on Financial Position and Results of Operations
The following table summarizes the effects of derivative instruments designated
as fair value hedges on the condensed consolidated statements of income:
Amount of (Gain) Loss Recognized in Income for the
Amount of (Gain) Loss Recognized in Income for the
Three
Months Ended September 30,
Nine Months Ended September 30,
Location on Statement of Income
($ in millions)
2021
2020
2021
2020
Fair Value Hedges:
Hedged
item (intercompany loan)
$
(i5.9)
$
i9.3
$
(i11.0)
$
i25.1
Other
expense (income)
Derivative designated as hedging instrument
i5.9
(i9.3)
i11.0
(i25.1)
Other
expense (income)
Amount excluded from effectiveness testing
(i0.9)
(i1.9)
(i2.1)
(i5.9)
Other
expense (income)
Total
$
(i0.9)
$
(i1.9)
$
(i2.1)
$
(i5.9)
/
We
recognize in earnings the initial value of forward point components on a straight-line basis over the life of the fair value hedge. The amounts recognized in earnings, pre-tax, for forward point components for the three and nine months ended September 30, 2021 and 2020 were $i0.6 million, $i1.9
million, and $i1.3 million, $i5.0 million,
respectively.
The following tables summarize the effects of derivative instruments designated as fair value, cash flow, and net investment hedges on other comprehensive income (“OCI”) and earnings, net of tax:
Amount
of Gain (Loss) Recognized in OCI for the
Amount of (Gain) Loss Reclassified from Accumulated OCI into Income for the
Location of (Gain) Loss Reclassified from Accumulated OCI into Income
The
following table summarizes the effects of derivative instruments designated as fair value, cash flow, and net investment hedges by line item in our condensed consolidated statements of income:
Three Months Ended September 30,
Nine Months Ended September 30,
($ in
millions)
2021
2020
2021
2020
Net sales
$
i0.1
$
i0.2
$
i0.9
$
(i0.3)
Cost
of goods and services sold
(i0.3)
i0.1
i1.2
(i0.1)
Interest
expense
i0.1
i0.1
i0.2
i0.2
Other
expense (income)
i0.1
(i0.7)
i0.9
(i3.3)
The
following table summarizes the effects of derivative instruments not designated as hedges on the condensed consolidated statements of income:
Amount of Gain (Loss) Recognized in Income for the
Amount of Gain (Loss) Recognized
in Income for the
Three Months Ended September 30,
Nine Months Ended September 30,
Location on Statement of Income
($ in millions)
2021
2020
2021
2020
Commodity call options
$
i0.5
$
i0.1
$
i1.6
$
i0.3
Other
expense (income)
Total
$
i0.5
$
i0.1
$
i1.6
$
i0.3
For
the three and nine months ended September 30, 2021 and 2020, there was no material ineffectiveness related to our hedges.
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.
i
The following tables present the assets and liabilities recorded at fair value on a recurring basis:
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. The fair value of the cross-currency swap, included within other non-current assets and long-term liabilities, is valued using a market approach. Please refer to Note 9, Derivative Financial Instruments, for further discussion of our derivatives. All derivatives are recognized on a gross basis as either assets or liabilities in the balance sheet.
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 (income) 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. Sales projections were derived using upside, base and downside forecasted cases for each partnership and applying probability-weighted scenarios of i10%,
i50% and i40% to the three cases, respectively, to reflect the likelihood of West meeting the estimated sales projection targets. The
probability of success factors included the probabilities of successful FDA approval for each partnership drug, which was estimated in a range of i19% to i100%
based on the development phase of each respective drug, and the probability of the successful execution of supply agreements with each partnership, which was estimated in the range of i25% to i100%
based on historical, current, and future supply agreements with the respective partnerships. The fair value of this liability utilized a risk-adjusted discount rate of i19% to present value the cash flows. The discount rate is calculated by determining the after-tax required returns on debt and equity and weighting each return by the respective percent of debt and equity to total capital. Key inputs for the discount rate include the risk-free rate on the 20-Year United States Treasury maturity, equity risk premium, company-specific risk premium, pre-tax
cost of debt, and U.S. tax rate, among others. 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 an increase or decrease to the SmartDose® contingent consideration.
iThe following table provides a summary of
changes in our Level 3 fair value measurements:
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, 2021, the estimated fair value of long-term debt was $i220.3
million compared to a carrying amount of $i209.9 million. At December 31, 2020, the estimated fair value of long-term debt was $i265.7 million and
the carrying amount was $i252.9 million.
Note 11: iAccumulated
Other Comprehensive Loss
i
The following table presents the changes in the components of accumulated other comprehensive income ("AOCI") (loss), net of tax, for the nine months ended September 30, 2021:
($
in millions)
(Losses) gains on derivatives
Change in equity affiliate investment AOCI
Defined benefit pension and other postretirement plans
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, 2021, there were i2,485,724 shares remaining in the 2016 Plan for future grants.
During the nine months ended September 30, 2021, we granted i159,932
stock options at a weighted average exercise price of $i277.23 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 $i63.72
per share as determined by the Black-Scholes option valuation model using the following weighted average assumptions: a risk-free interest rate of i0.7%; expected life of i5.6
years based on prior experience; stock volatility of i23.9% based on historical data; and a dividend yield of i0.3%.
Stock option expense is recognized over the vesting period, net of forfeitures.
During the nine months ended September 30, 2021, we granted i36,902 stock-settled performance share unit (“PSU”) awards at a weighted average grant-date fair value of $i331.56
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 i0% to i200%
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, 2021, we granted i5,109
stock-settled restricted share unit (“RSU”) awards at a weighted average grant-date fair value of $i292.42 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.
Stock-based compensation expense was $i11.4 million and $i27.5
million for the three and nine months ended September 30, 2021, respectively. For the three and nine months ended September 30, 2020, stock-based compensation expense was $i10.0 million and $i27.6
million, respectively.
The
components of net periodic benefit cost for the three months ended September 30 were as follows:
Pension benefits
Other
retirement benefits
Total
($ in millions)
2021
2020
2021
2020
2021
2020
Service cost
$
i0.1
$
i0.4
$
i—
$
i—
$
i0.1
$
i0.4
Interest
cost
i1.6
i1.7
i—
i—
i1.6
i1.7
Expected
return on assets
(i2.9)
(i2.8)
i—
i—
(i2.9)
(i2.8)
Amortization
of prior service credit
i—
i0.1
(i0.1)
(i0.2)
(i0.1)
(i0.1)
Recognized
actuarial losses (gains)
i0.5
i0.4
(i0.3)
(i0.6)
i0.2
(i0.2)
Settlements
i—
i1.1
i—
i—
i—
i1.1
Net
periodic benefit cost
$
(i0.7)
$
i0.9
$
(i0.4)
$
(i0.8)
$
(i1.1)
$
i0.1
Pension
benefits
Other retirement benefits
Total
($ in millions)
2021
2020
2021
2020
2021
2020
U.S. plans
$
(i0.9)
$
i0.5
$
(i0.4)
$
(i0.8)
$
(i1.3)
$
(i0.3)
International
plans
i0.2
i0.4
i—
i—
i0.2
i0.4
Net
periodic benefit cost
$
(i0.7)
$
i0.9
$
(i0.4)
$
(i0.8)
$
(i1.1)
$
i0.1
The
components of net periodic benefit cost for the nine months ended September 30 were as follows:
Pension benefits
Other
retirement benefits
Total
($ in millions)
2021
2020
2021
2020
2021
2020
Service cost
$
i0.9
$
i1.0
$
i—
$
i—
$
i0.9
$
i1.0
Interest
cost
i4.5
i5.5
i0.1
i0.1
i4.6
i5.6
Expected
return on assets
(i9.0)
(i8.8)
i—
i—
(i9.0)
(i8.8)
Amortization
of prior service credit
i0.1
i0.1
(i0.3)
(i0.5)
(i0.2)
(i0.4)
Recognized
actuarial losses (gains)
i1.5
i1.4
(i1.2)
(i1.4)
i0.3
i—
Settlements
i0.7
i3.4
i—
i—
i0.7
i3.4
Net
periodic benefit cost
$
(i1.3)
$
i2.6
$
(i1.4)
$
(i1.8)
$
(i2.7)
$
i0.8
Pension
benefits
Other retirement benefits
Total
($ in millions)
2021
2020
2021
2020
2021
2020
U.S. plans
$
(i2.4)
$
i1.5
$
(i1.4)
$
(i1.8)
$
(i3.8)
$
(i0.3)
International
plans
i1.1
i1.1
i—
i—
i1.1
i1.1
Net
periodic benefit cost
$
(i1.3)
$
i2.6
$
(i1.4)
$
(i1.8)
$
(i2.7)
$
i0.8
/
During
the nine months ended September 30, 2021, we recorded a $i0.7 million pension settlement charge within other nonoperating (income) expense, as we determined that normal-course lump-sum payments for our U.S. qualified defined benefit pension plan exceeded the threshold for settlement accounting under U.S. GAAP for the year.
Fixed
asset impairments and loss (gain) on sale of equipment
i0.2
i0.9
i0.6
i7.2
Contingent
consideration
i0.1
i0.8
i0.9
i0.9
Foreign
exchange transaction losses (gains)
i0.4
i1.0
(i2.5)
(i4.5)
Other
items
i0.7
(i0.5)
i1.5
(i1.9)
Total
other expense (income)
$
i1.8
$
i6.7
$
i3.0
$
i6.2
/
Restructuring
and Related Charges
In July 2020, our Board of Directors approved a restructuring plan designed to optimize certain organizational structures within the Company to better support our continued growth and business priorities. These changes are expected to be implemented over a period of up to itwenty-four months from the date of approval. The plan was originally expected to require restructuring and related charges of approximately $i15 million
to $i17 million, with annualized savings being in the range of $i3.5 million to $i4.5 million.
Due to the recent increase in customer demand, the Company will no longer proceed with certain portions of the plan, thus reducing the total expected charges to be approximately $i9 million to $i11 million.
Similarly, annualized savings are now expected to be in the range of $i0.9 million to $i1.6 million. Since its approval, we recorded a net pre-tax amount
equal to $i7.1 million in restructuring and related charges associated with this plan.
i
The
following table presents activity related to our restructuring obligations related to our 2020 restructuring plan:
In
February 2018, our Board of Directors approved a restructuring plan designed to realign our manufacturing capacity with demand. These changes were expected to be implemented over a period of up to itwenty-four months from the date of approval. The plan was expected to require restructuring and related charges of approximately $i16 million.
Since its approval, we have recorded $i13.7 million in restructuring and related charges associated with this plan. The plan is now considered complete.
The following table presents activity related to our restructuring obligations related to our 2018 restructuring plan:
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
During the three months ended September 30, 2021, we recorded a net loss of $i0.9
million on the sale of one of the Company's cost investments. During the nine months ended September 30, 2021, we recorded a net loss in our cost investment activity of $i1.8 million, inclusive of an impairment charge of $i2.2
million for one of the Company's cost investments. For the three and nine months ended September 30, 2020, there was no activity related to our cost investments.
During both the three and nine months ended September 30, 2021 and 2020, we recorded development income of $ii0.2/
million and $ii0.6/ million, respectively, related to
a nonrefundable customer payment of $i20.0 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.
Note
16: iIncome 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 $i12.0
million and $i21.1 million for the three months ended September 30, 2021 and 2020, respectively, and the effective tax rate was i6.6%
and i21.6%, respectively. The provision for income taxes was $i73.0 million and $i52.1
million for the nine months ended September 30, 2021 and 2020, respectively, and the effective tax rate was i12.9% and i18.2%,
respectively. The reduction in effective tax rates for the three and nine months ended September 30, 2021 is the result of the Company's prepayment of future royalties from one of its subsidiaries, which resulted in a $ii20.4/ million
tax benefit.
Note 17: iCommitments 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 2020 Annual Report.
Note 18: iSegment
Information
Our business operations are organized into itwo 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 and other integrated services and solutions, primarily 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.
The Chief Operating Decision Maker ("CODM") evaluates 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, certain pension and other retirement benefit costs, and other corporate facilities and administrative expenses not allocated
to the segments. Also excluded are items that the CODM considers 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 segment operating profit metric is what the CODM uses in evaluating our results of operations and the financial measure that provides a valuable insight into our overall performance and financial position.
i
The
following table presents information about our reportable segments, reconciled to consolidated totals:
The
intersegment sales elimination, which is required for the presentation of consolidated net sales, represents the elimination of components sold between our segments.
The following table provides summarized financial information for our segments:
(1) Corporate general costs includes executive and director compensation, certain pension and other retirement benefit costs, and other corporate facilities and administrative expenses not allocated to the segments.
(2) During the three and nine months ended September 30, 2021, the Company recorded $i0.2 million
and $i0.6 million, respectively, of amortization expense within operating profit associated with an intangible asset acquired during the second quarter of 2020.
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The following discussion is intended to further the reader’s understanding of the consolidated financial condition and results of operations of our Company. It should be read in conjunction with our condensed consolidated financial statements and accompanying notes elsewhere in this Quarterly Report on Form 10-Q (“Form 10-Q”) as well as Management’s Discussion and Analysis of Financial Condition and Results of Operations and the consolidated financial statements and accompanying notes included in our 2020 Annual Report. Our historical financial statements may not be indicative of our future performance. This Management’s Discussion and Analysis of Financial
Condition and Results of Operations contains a number of forward-looking statements, all of which are based on our current expectations and could be affected by the uncertainties and risks discussed in Part I, Item 1A of our 2020 Annual Report and in Part II, Item 1A of this Form 10-Q.
Throughout this section, references to “Notes” refer to the notes to our condensed consolidated financial statements (unaudited) in Part I, Item 1 of this Form 10-Q, unless otherwise indicated.
Non-U.S. GAAP Financial Measures
For the purpose of aiding the comparison of our year-over-year results, we may refer to net sales and other financial results excluding the effects of changes in foreign currency exchange rates. Organic net sales exclude the impact from acquisitions and/or divestitures and
translate the current-period reported sales of subsidiaries whose functional currency is other than USD at the applicable foreign exchange rates in effect during the comparable prior-year period. We may also refer to adjusted consolidated operating profit and adjusted consolidated operating profit margin, which exclude the effects of unallocated items. The unallocated items are not representative of ongoing operations, and generally include restructuring and related charges, certain asset impairments, and other specifically-identified income or expense items. The re-measured results excluding effects from currency translation, the impact from acquisitions and/or divestitures, and excluding the effects of unallocated items are not in conformity with U.S. GAAP and should not be used as a substitute for the comparable U.S. GAAP financial measures. The non-U.S. GAAP financial measures
are incorporated in our discussion and analysis as management uses them in evaluating our results of operations and believes that this information provides users with a valuable insight into our overall performance and financial position.
Our Operations
We are a leading global manufacturer in the design and production of technologically advanced, high-quality, integrated containment and delivery systems for injectable drugs and healthcare products. Our products include a variety of primary packaging, containment solutions, reconstitution and transfer systems, and drug delivery systems, as well as contract manufacturing, analytical lab services and integrated solutions. Our customers include the leading biologic, generic, pharmaceutical, diagnostic, and additional
medical device companies in the world. Our top priority is delivering quality products that meet the exact product specifications and quality standards customers require and expect. This focus on quality includes a commitment to excellence in manufacturing, scientific and technical expertise and management, which enables us to partner with our customers in order to deliver safe, effective drug products to patients quickly and efficiently.
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 and other integrated services and solutions, primarily 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 also maintain collaborations to share technologies and market products with affiliates in Japan and Mexico.
Impact of COVID-19
West has been actively monitoring the COVID-19 situation and its impact globally. Our primary objectives have remained the same throughout the pandemic:
to support the safety of our team members and their families and continue to support patients around the world. Throughout the COVID-19 pandemic, our production facilities have continued to operate as they had prior to the pandemic, other than for enhanced safety measures intended to prevent the spread of the virus and higher levels of production at certain plant locations to meet additional customer demand. Our capital and financial resources, including overall liquidity, remain strong. The remote working arrangements and travel restrictions imposed by various governments have had limited impact on our ability to maintain operations, as our manufacturing operations have generally been exempted from stay-at-home orders. However, we cannot predict the impact of the progression of the COVID-19 pandemic on future results due to a variety of factors, including the continued good health of our employees, the ability of suppliers to continue to operate and deliver, the ability
of West and its customers to maintain operations, continued access to transportation resources, the changing needs and priorities of customers, any further government and/or public actions taken in response to the pandemic and ultimately the length of the pandemic. We will continue to closely monitor the COVID-19 pandemic in order to ensure the safety of our people and our ability to serve our customers and patients worldwide.
2021 Financial Performance Summary
The following tables present a reconciliation from U.S. GAAP to non-U.S. GAAP financial measures for the three and nine months ended September 30, 2021:
During the three and nine months endedSeptember 30, 2021, we recorded a tax benefit of $8.4 million and $26.9 million, respectively, associated
with stock-based compensation.
The following tables present a reconciliation from U.S. GAAP to non-U.S. GAAP financial measures for the three and nine months ended September 30, 2020:
During
the three and nine months endedSeptember 30, 2020, we recorded a tax benefit of $2.0 million and $14.0 million, respectively, associated with stock-based compensation.
(1)The Company recorded a pension settlement charge within other nonoperating (income) expense, as it determined that normal-course lump-sum payments for our U.S. qualified, and in 2020 our non-qualified, defined benefit pension plan exceeded the threshold
for settlement accounting.
(2)During the three and nine months endedSeptember 30, 2021, the Company recorded $0.2 million and $0.6 million, respectively, of amortization expense within operating profit associated with an intangible asset acquired during the second quarter of 2020. During the three and nine months ended September 30, 2021, the Company recorded $0.5 million and $1.6 million, respectively, or amortization expense in association with an acquisition of increased ownership interest in Daikyo. During the
three and nine months ended September 30, 2020the Company recorded $0.2 million and $0.4 million, respectively, of amortization expense within operating profit associated with an intangible asset acquired during the second quarter of 2020. During the three and nine months ended September 30, 2020, the Company recorded $0.5 million and $2.5 million, respectively, of amortization expense in association with an acquisition of increased ownership interest in Daikyo.
(3)During
the three months ended September 30, 2021, we recorded a net loss on the sale of one of the Company's cost investments. During the nine months ended September 30, 2021, we recorded an impairment charge on one of our cost investments, partially offset by the gain on the sale of a cost investment.
(4)During thenine months ended September 30, 2021, the Company recorded a tax benefit of $1.4 million due to the impact of a United Kingdom tax law
change enacted during the period.
(5)During the three and nine months endedSeptember 30, 2021, the Company prepaid future royalties from one of its subsidiaries, which resulted in a $20.4 million tax benefit.
RESULTS OF OPERATIONS
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, 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 for which further information can be found above in the reconciliation from U.S. GAAP to non-U.S. GAAP financial measures.
Percentages in the following tables and throughout the Results of Operations section may reflect rounding adjustments.
Net Sales
The following table presents net sales, consolidated and by reportable segment, for the three months ended September 30,
2021 and 2020:
Consolidated
net sales increased by $158.5 million, or 28.9%, for the three months ended September 30, 2021, as compared to the same period in 2020, including a favorable foreign currency translation impact of $5.5 million.
Excluding foreign currency translation effects, consolidated net sales for the three months ended September 30, 2021 increased by $153.0 million, or 27.9%, as compared to the same period in 2020.
Proprietary Products – Proprietary Products net sales increased by $155.5 million,
or 36.9%, for the three months ended September 30, 2021, as compared to the same period in 2020, including a favorable foreign currency translation impact of $5.0 million. Excluding foreign currency translation effects, net sales for the three months ended September 30, 2021 increased by $150.5 million, or 35.7%, as compared to the same period in 2020, primarily due to growth in our high-value product offerings, including Westar®, NovaPure®, and FluroTec®-coated components. The three months ended September 30, 2021 included approximately $115 million in COVID-19 related activity for vaccines, antiviral treatments and treatment of underlying COVID-19 symptoms. The three months ended
September 30, 2020 included approximately $32 million in COVID-19 related activity for antiviral treatments and treatment of underlying COVID-19 symptoms.
Contract-Manufactured Products –Contract-Manufactured Products net sales increased by $3.1 million, or 2.4%, for the three months ended September 30, 2021, as compared to the same period in 2020, including a favorable foreign currency translation impact of $0.5 million. Excluding foreign currency translation effects, net sales for the three months ended September 30, 2021 increased by $2.6 million, or 2.1%,
as compared to the same period in 2020, due to an increase in the sale of healthcare-related medical devices.
The intersegment sales elimination, which is required for the presentation of consolidated net sales, represents the elimination of components sold between our segments.
The following table presents net sales, consolidated and by reportable segment, for the nine months ended September 30, 2021 and 2020:
Consolidated net sales increased by $534.1 million, or 34.1%, for the nine months ended September 30, 2021, as compared to the same period in 2020, including a favorable foreign currency translation impact of $67.2 million. Excluding foreign currency translation effects, consolidated net sales for the nine months ended
September 30, 2021 increased by $466.9 million, or 29.8%, as compared to the same period in 2020.
Proprietary Products – Proprietary Products net sales increased by $513.5 million, or 43.0%, for the nine months ended September 30, 2021, as compared to the same period in 2020, including a favorable foreign currency translation impact of $57.9 million. Excluding foreign currency translation effects, net sales for the nine months ended September 30, 2021 increased by $455.6 million, or 38.1%, as compared to the same period in 2020, primarily due to growth in our high-value product offerings, including Westar®, NovaPure®, Daikyo®,
and FluroTec®-coated components. The nine months ended September 30, 2021 included approximately $335 million in COVID-19 related activity for vaccines, antiviral treatments and treatment of underlying COVID-19 symptoms. The nine months ended September 30, 2020 included approximately $52 million in COVID-19 related activity for antiviral treatments and treatment of underlying COVID-19 symptoms.
Contract-Manufactured Products – Contract-Manufactured Products net sales increased by $20.7 million, or 5.6%, for the nine months ended September 30,
2021, as compared to the same period in 2020, including a favorable foreign currency translation impact of $9.3 million. Excluding foreign currency translation effects, net sales for the nine months ended September 30, 2021 increased by $11.4 million, or 3.1%, as compared to the same period in 2020, due to an increase in the sale of healthcare-related medical devices.
Consolidated
gross profit increased by $93.6 million, or 48.1%, for the three months ended September 30, 2021, as compared to the same period in 2020, including a favorable foreign currency translation impact of $1.6 million for the three months ended September 30, 2021, as compared to the same period in 2020. Consolidated gross profit margin increased by 5.3 margin points for the three months ended September 30, 2021, as compared to the same period in 2020.
Consolidated gross profit increased by $318.5 million, or 57.2% for the nine months ended September 30, 2021, as compared to the same period in 2020, including a favorable foreign currency translation impact of $25.7 million for the nine months ended September 30,
2021, as compared to the same period in 2020. Consolidated gross profit margin increased by 6.2 margin points for the nine months ended September 30, 2021, as compared to the same period in 2020.
Proprietary Products - Proprietary Products gross profit increased by $95.4 million, or 55.5%, for the three months ended September 30, 2021, as compared to the same period in 2020, including a favorable foreign currency translation impact of $1.5 million. Proprietary Products gross profit margin increased by 5.5 margin points for the three months ended September 30, 2021, as compared to the same periods in 2020, due to a favorable mix of products sold, sales price increases and production efficiencies, partially offset
by increased overhead costs including compensation costs.
Proprietary Products gross profit increased by $318.7 million, or 64.7%, for the nine months ended September 30, 2021, as compared to the same period in 2020, including a favorable foreign currency translation impact of $23.9 million. Proprietary Products gross profit margin increased by 6.2 margin points for the nine months ended September 30, 2021, as compared to the same period in 2020, due to a favorable mix of products sold, sales price increases and production efficiencies, partially offset by increased overhead costs including compensation costs.
Contract-Manufactured Products
- Contract-Manufactured Products gross profit decreased by $1.8 million, or 7.9%, for the three months ended September 30, 2021, as compared to the same period in 2020, including a favorable foreign currency translation impact of $0.1 million. Contract-Manufactured Products gross profit margin decreased by 1.8 margin points for the three months ended September 30, 2021, as compared to the same period in 2020, due to unfavorable mix of products sold and timing of the pass-through of raw material price increases to customers.
Contract-Manufactured Products gross profit decreased by $0.2 million, or 0.3%, for the nine months ended September 30, 2021, as compared to the same period in 2020, including a favorable foreign currency translation impact of $1.8 million. Contract-Manufactured Products gross profit margin decreased by 1.0 margin points for the nine months ended September 30, 2021, as compared to the same period in 2020, due to unfavorable mix of products sold and timing of the pass-through of raw material price increases to customers, partially offset by production efficiencies.
Research and
Development (“R&D”) Costs
The following table presents R&D costs, consolidated and by reportable segment:
Consolidated
R&D costs increased by $0.6 million, or 4.8%, and $5.1 million, or 15.0%, for the three and nine months ended September 30, 2021, respectively, as compared to the same period in 2020. Efforts remain focused on the continued investment in self-injection systems development, fluid transfer admixture devices, elastomeric packaging components, and formulation development.
All of the R&D costs incurred during the three and nine months ended September 30, 2021 related to Proprietary Products.
Selling, General and Administrative (“SG&A”) Costs
The following table presents SG&A costs, consolidated and by reportable segment and corporate:
Consolidated SG&A costs increased by $15.7 million, or 20.6%, for the three months ended September 30, 2021, as compared to the same period in 2020, due to an increase in compensation costs, costs related to professional services and an unfavorable foreign currency translation impact of $0.4 million.
Consolidated
SG&A costs increased by $39.1 million, or 17.3%, for the nine months ended September 30, 2021, as compared to the same period in 2020, due to an increase in compensation costs and an unfavorable foreign currency translation impact of $4.5 million.
Proprietary Products - Proprietary Products SG&A costs increased by $7.9 million, or 15.6%, for the three months ended September 30, 2021, as compared to the same period in 2020. Proprietary Products SG&A costs increased primarily due to an increase in compensation costs and costs related to professional services.
Proprietary Products SG&A costs increased by $35.3 million, or 24.4%, for the nine months ended September 30, 2021, as compared to the same period in 2020. Proprietary Products SG&A costs increased primarily due to an increase in compensation costs, costs related to professional services and an unfavorable foreign currency translation impact of $4.2 million.
Contract-Manufactured Products - Contract-Manufactured Products SG&A costs increased by $0.2 million, or 5.4% for the three months ended September 30, 2021, as compared to the same period
in 2020, and remained consistent for the nine months ended September 30, 2021, as compared to the same period in 2020.
Corporate - Corporate SG&A costs increased by $7.6 million, or 34.7%, for the three months ended September 30, 2021, as compared to the same period in 2020, primarily due to an increase in compensation costs and costs related to professional services.
Corporate SG&A costs increased by $3.8 million, or 5.5%, for the nine months ended September 30, 2021, as compared to the same period in 2020, primarily due to an increase in compensation costs and costs related to professional services.
Other
Expense (Income)
The following table presents other income and expense items, consolidated and by reportable segment, corporate and unallocated items:
Other
income and expense items, consisting of foreign exchange transaction gains and losses, gains and losses on the sale of fixed assets, development and licensing income, contingent consideration, fixed asset impairments and miscellaneous income and charges, are generally recorded within segment results.
Consolidated other expense (income) changed by $4.9 million for the three months ended September 30, 2021, as compared to the same period in 2020, due to a decrease in restructuring and related charges, and fixed asset impairments recorded within the Proprietary Products segment, offset by a net loss recorded in the three months ended September 30, 2021 as a result of the sale one of the Company's cost investments.
Consolidated
other expense (income) changed by $3.2 million for the nine months ended September 30, 2021, as compared to the same period in 2020, due to a decrease in restructuring and related charges, and fixed asset impairments recorded within the Proprietary Products segment, offset by a net loss recorded in the nine months ended September 30, 2021 as a result of activity related to the Company's cost investments.
Consolidated operating profit increased by $82.2 million, or 82.9%, for the three months ended September 30, 2021, as compared to the same period in 2020, including a favorable foreign currency translation impact of $1.2 million for the three months ended September 30, 2021, as
compared to the same period in 2020.
Consolidated operating profit increased by $277.5 million, or 95.4%, for the nine months ended September 30, 2021, as compared to the same period in 2020, including a favorable foreign currency translation impact of $20.8 million for the nine months ended September 30, 2021, as compared to the same period in 2020.
Proprietary Products - Proprietary Products operating profit increased by $88.0 million, or 81.9%, for the three months ended September 30, 2021, as compared to the same period in 2020, including a favorable foreign currency translation impact of $1.1 million, due to the factors described above, most notably
the sales increase in our high-value product offerings, inclusive of COVID-19 related activity.
Proprietary Products operating profit increased by $281.4 million, or 89.9%, for the nine months ended September 30, 2021, as compared to the same period in 2020, including a favorable foreign currency translation impact of $19.3 million, due to the factors described above, most notably due to the sales increase in our high-value product offerings, inclusive of COVID-19 related activity.
Contract-Manufactured Products - Contract-Manufactured Products operating profit decreased by $2.0 million, or 10.6%,
for the three months ended September 30, 2021, as compared to the same period in 2020, including a favorable foreign currency translation impact of $0.1 million, due to the factors described above, most notably due an unfavorable mix of products sold and timing of the pass-through of raw material price increases to customers.
Contract-Manufactured Products operating profit decreased by $0.2 million, or 0.4%, for the nine months ended September 30, 2021, respectively, as compared to the same period in 2020, including a favorable foreign currency translation impact of $1.5 million, due to the factors described above.
Corporate- Corporate
costs increased by $7.1 million, or 31.7%, for the three months ended September 30, 2021, as compared to the same period in 2020, due to the factors described above.
Corporate costs increased by $5.9 million, or 8.8%, for the nine months ended September 30, 2021, respectively, as compared to the same period in 2020, due to the factors described above.
Unallocated items – Other unallocated items during the three months ended September 30,
2021 consisted of $0.3 million in restructuring and related costs, $0.2 million of amortization expense associated with an acquisition of an intangible asset during the second quarter of 2020, and a net loss of $0.9 million on the sale of one of the Company's cost investments.
Other unallocated items during the nine months ended September 30, 2021 consisted of $2.5 million in restructuring and related costs, $0.6 million of amortization expense associated with an acquisition of an intangible asset during the second quarter of 2020, and a net loss in our cost investment activity of $1.8 million.
Other unallocated items during the three months endedSeptember 30,
2020 consisted of $4.5 million in restructuring and related costs and $0.2 million of amortization expense associated with an acquisition of an intangible asset during the second quarter of 2020. Other unallocated items during the nine months ended September 30, 2020 consisted of $4.5 million in restructuring and related charges, $2.2 million in severance related costs, and $0.4 million of amortization expense associated with an acquisition of an intangible asset. Please refer to Note 15, Other Expense (Income), for further discussion of these items.
Interest Expense, Net
The following
table presents interest expense, net, by significant component:
Three Months Ended September 30,
Nine Months Ended September 30,
($ in millions)
2021
2020
2021
2020
Interest
expense
$
2.7
$
2.4
$
7.6
$
7.1
Capitalized interest
(0.9)
(0.3)
(2.0)
(1.0)
Interest
income
(0.4)
(0.2)
(0.7)
(1.2)
Interest expense, net
$
1.4
$
1.9
$
4.9
$
4.9
Interest expense, net, decreased by $0.5 million, or 26.3%, for the three months ended September 30, 2021, as compared to the same period in 2020, and remained consistent for the nine months ended September 30, 2021, as compared to the same period in 2020.
Other Nonoperating (Income) Expense
Other nonoperating (income) expense changed by $0.7 million for the three months ended September 30, 2021, as compared to the same period in 2020, primarily due to the pension settlement charge recorded in 2020. In the three months ended September 30, 2020,
we determined that normal-course lump-sum payments for our U.S. qualified defined benefit pension plan exceeded the threshold for settlement accounting under U.S. GAAP for the year.
Other nonoperating (income) expense changed by $3.3 million for the nine months ended September 30, 2021, as compared to the same period in 2020, primarily due to a reduction in the pension settlement charge and by a decrease in U.S. pension interest cost. In each nine month period, we determined that normal-course lump-sum payments for our U.S. qualified, and non-qualified in 2020, defined benefit pension plan exceeded the threshold for settlement accounting under U.S. GAAP for the year.
Income Tax Expense
The provision for income taxes was $12.0 million
and $21.1 million for the three months ended September 30, 2021 and 2020, respectively, and the effective tax rate was 6.6% and 21.6%, respectively.
The decrease in the effective tax rate is primarily due to the Company's prepayment of future royalties from one of its subsidiaries, which resulted in a $20.4 million tax benefit for the three months ended September 30, 2021.
The provision for income taxes was $73.0 million and $52.1 million for the nine months ended September 30, 2021 and 2020, respectively, and the effective tax rate was 12.9% and 18.2%, respectively. The decrease in the effective tax rate is primarily due to the Company's prepayment of future royalties from one of its subsidiaries, which resulted in a $20.4 million tax benefit for the nine months ended September 30, 2021.
Equity in Net Income of Affiliated Companies
Equity in
net income of affiliated companies represents the contribution to earnings from our 49% ownership interest in Daikyo, and our 49% ownership interest in five companies majority-owned by a long-time partner located in Mexico. Please refer to Note 7, Affiliated Companies, for further discussion. Equity in net income of affiliated companies increased by $0.8 million for the three months ended September 30, 2021, as compared to the same period in 2020, due to favorable operating results at Daikyo and the Mexico affiliates.
Equity in net income of affiliated companies increased by $6.4 million for the nine months ended September 30, 2021, as compared to the same period in 2020,
due to favorable operating results at Daikyo and the Mexico affiliates and reduction in amortization expense related to our increase in ownership interest in Daikyo of $0.9 million.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
The following table presents cash flow data for the nine months ended September 30:
($ in millions)
2021
2020
Net
cash provided by operating activities
$
423.2
$
323.8
Net cash used in investing activities
$
(175.7)
$
(121.9)
Net cash used in financing activities
$
(161.9)
$
(128.4)
Net
Cash Provided by Operating Activities – Net cash provided by operating activities increased by $99.4 million for the nine months ended September 30, 2021, as compared to the same period in 2020, primarily due to improved operating results, offset by increases in working capital and timing of tax payments in 2021.
Net Cash Used in Investing Activities – Net cash used in investing activities increased by $53.8 million for the nine months ended September 30, 2021, as compared to the same period in 2020, due to the increase in capital expenditures in 2021 to meet customer demand.
Net Cash Used in Financing Activities – Net cash used in financing activities increased by $33.5 million
for the nine months ended September 30, 2021, as compared to the same period in 2020, primarily due to increases in purchases under our share repurchases.
Cash and cash equivalents include all instruments that have maturities of ninety days or less when purchased. Working capital is defined as current assets less current liabilities.
Cash and cash equivalents – Our cash and cash equivalents balance at September 30, 2021 consisted of cash held in depository accounts with banks around the world and cash invested in high-quality, short-term investments. The cash and cash equivalents balance at September 30,
2021 included $234.2 million of cash held by subsidiaries within the U.S., and $453.8 million of cash held by subsidiaries outside of the U.S. During the nine months ended September 30, 2021, we purchased 479,000 shares of our common stock under the share repurchase program at a cost of $137.1 million, or an average price of $286.23 per share.
Working capital – Working capital at September 30, 2021 increased by $169.4 million, or 19.5%, as compared to December 31, 2020, which includes an unfavorable foreign currency translation impact of $18.9 million.
Excluding the impact of currency exchange rates, cash and cash equivalents, accounts receivable, inventories, and total current liabilities increased by $85.5 million, $104.1 million, $42.1 million, and $66.4 million, respectively. The increase in accounts receivable was due to increased sales activity. The increase in inventories that occurred in the period was to ensure we have sufficient inventory on hand to support the needs of our customers. The increase in total current liabilities was primarily due to the reclassification of a portion of the Company's debt from long-term to short-term.
Debt and credit facilities – The $1.1 million decrease in total debt at September 30, 2021, as compared to December 31,
2020, resulted from debt repayments under our Term Loan.
Our sources of liquidity include our Credit Facility. At September 30, 2021, we had no outstanding borrowings under the Credit Facility. At September 30, 2021, the borrowing capacity available under the Credit Facility, including outstanding letters of credit of $2.4 million, was $297.6 million. We do not expect any significant limitations on our ability to access this source of funds.
Pursuant to the financial covenants in our debt agreements, we are required to maintain established interest coverage ratios and to not exceed established leverage ratios. In addition, the agreements contain other customary covenants, none of which we consider restrictive to our operations. At September 30,
2021, we were in compliance with all of our debt covenants.
We believe that cash on hand and cash generated from operations, together with availability under our Credit Facility, will be adequate to address our foreseeable liquidity needs based on our current expectations of our business operations, capital expenditures and scheduled payments of debt obligations.
A table summarizing the amounts and estimated timing of future cash payments resulting
from commitments and contractual obligations was provided in our 2020 Annual Report. During the three months ended September 30, 2021, there were no material changes outside of the ordinary course of business to our commitments and contractual obligations.
OFF-BALANCE SHEET ARRANGEMENTS
At September 30, 2021, we had no off-balance sheet financing arrangements other than unconditional purchase obligations incurred in the ordinary course of business and outstanding letters of credit related to various insurance programs, as noted in our 2020 Annual Report.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
There have been no changes to
the Critical Accounting Policies and Estimates disclosed in Part II, Item 7 of our 2020 Annual Report.
NEW ACCOUNTING STANDARDS
For information on new accounting standards that were issued but not yet adopted, during the three months ended September 30, 2021, and the impact, if any, on our financial position or results of operations, see Note 2, New Accounting Standards.
Our disclosure and analysis in this Form 10-Q contains some forward-looking statements that are based on management’s
beliefs and assumptions, current expectations, estimates and forecasts. We also provide forward-looking statements in other materials we release to the public, as well as oral forward-looking statements. Such statements provide our current expectations or forecasts of future events. They do not relate strictly to historical or current facts. We have attempted, wherever possible, to identify forward-looking statements by using words such as “plan,”“expect,”“believe,”“intend,”“will,”“estimate,”“continue” and other words of similar meaning in conjunction with, among other things, discussions of future operations and financial performance, as well as our strategy for growth, product development, market position and expenditures. All statements that address operating performance or events or developments that we expect or anticipate will occur in the future - including statements relating to sales and earnings per share
growth, cash flows or uses, and statements expressing views about future operating results - are forward-looking statements.
Forward-looking statements are based on current expectations of future events. The forward-looking statements are, and will be, based on management’s then-current views and assumptions regarding future events and operating performance, and speak only as of their dates. Investors should realize that, if underlying assumptions prove inaccurate or unknown risks or uncertainties materialize, actual results could vary materially from our expectations and projections. Investors are therefore cautioned not to place undue reliance on any forward-looking statements.
The following are some important factors that could cause our actual results to differ from our expectations in any forward-looking statements:
•sales
demand and our ability to meet that demand;
•competition from other providers in our businesses, including customers’ in-house operations, and from lower-cost producers in emerging markets, which can impact unit volume, price and profitability;
•customers’ changing inventory requirements and manufacturing plans that alter existing orders or ordering patterns for the products we supply to them;
•interruptions or weaknesses in our supply chain, including from reasons beyond our control such as extreme
weather, longer-term climate changes, natural disasters, pandemic, war, accidental damage, or unauthorized access to our or our customers’ information and systems, which could cause delivery delays or restrict the availability of raw materials, key purchased components and finished products;
•the timing, regulatory approval and commercial success of customer products that incorporate our products and systems;
•whether customers agree to incorporate our products and delivery systems with their new and existing drug products, the ultimate timing and successful commercialization of those products and systems, which involves substantial evaluations of the functional, operational, clinical and economic viability of our products, and the rate, timing and success of regulatory approval for the drug products that incorporate our components and
systems;
•the timely and adequate availability of filling capacity, which is essential to conducting definitive stability trials and the timing of first commercialization of customers’ products in Crystal Zenith prefilled syringes;
•average profitability, or mix, of the products sold in any reporting period, including lower-than-expected sales growth of our high-value proprietary product offerings;
•maintaining or improving production efficiencies and overhead absorption;
•dependence on third-party suppliers and partners, some of which are single-source suppliers of critical materials and products, including our Japanese partner and affiliate, Daikyo;
•the
loss of key personnel or highly-skilled employees;
•the availability and cost of skilled employees required to meet increased production, managerial, research and other needs, including professional employees and persons employed under collective bargaining agreements;
•the successful and timely implementation of price increases necessary to offset rising production costs, including raw material prices, particularly petroleum-based raw materials;
•the cost and progress of development, regulatory approval and marketing of new products;
•our ability to obtain and maintain licenses in any jurisdiction in which we do business;
•the relative
strength of USD in relation to other currencies, particularly the Euro, SGD, the Danish Krone, Yen, Colombian Peso, Brazilian Real, and the South Korean Won; and
•the potential adverse effects of global healthcare legislation on customer demand, product pricing and profitability.
This list sets forth many, but not all, of the factors that could affect our ability to achieve results described in any forward-looking statements. Investors should understand that it is not possible to predict or identify all of the factors and should not consider this list to be a complete statement of all potential risks and uncertainties. For further discussion of these and other factors, see the risk factors disclosed in Part I, Item 1A of our 2020 Annual Report as well as Part II, section 1A of this quarterly report.
Except
as required by law or regulation, we undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in our exposure to market risk or the information provided in Part II, Item 7A of our 2020 Annual Report.
ITEM
4. CONTROLS AND PROCEDURES
Disclosure controls are controls and procedures designed to reasonably ensure that information required to be disclosed in our reports filed under the Exchange Act, such as this quarterly report, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934, as amended, is accumulated and communicated to our management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure. Our disclosure controls include some, but not all, components of
our internal control over financial reporting.
Evaluation of Disclosure Controls and Procedures
An evaluation was performed under the supervision and with the participation of our management, including our CEO and CFO, of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934), as of the end of the period covered by this quarterly report on Form 10-Q. Based on this evaluation, our CEO and CFO have concluded that, as of September 30, 2021, our disclosure controls and procedures are effective.
Changes in Internal Controls
During the quarter ended September 30, 2021, there have been no changes to our internal
control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 1A. RISK FACTORS
There are no material changes to the risk factors disclosed in Part
I, Item 1A of our 2020 Annual Report.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
During the three months ended September 30, 2021, there were no purchases of our common stock made by us or any of our “affiliated purchasers” as defined in Rule 10b-18(a)(3) under the Exchange Act.
Pursuant to the requirements of the Securities Exchange Act of 1934, West Pharmaceutical Services, Inc. has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Inline XBRL for the cover page of this Quarterly Report on Form 10-Q, included in the Exhibit 101 Inline XBRL Document Set.
(1) We agree
to furnish to the SEC, upon request, a copy of each instrument with respect to issuances of long-term debt of the Company and its subsidiaries.
* Furnished, not filed.
F-1
Dates Referenced Herein and Documents Incorporated by Reference
