WEST PHARMACEUTICAL SERVICES, INC. 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 consolidated financial statements and the accompanying footnotes included in Part II, Item 8 of this Form 10-K. These 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 this Form 10-K.
Non-
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. The constant-currency amounts are
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calculated by translating the current year's functional currency results at the
prior-year period's exchange rate. We may also refer to consolidated operating
profit and consolidated operating profit margin excluding the effects of
unallocated items. The re-measured results excluding effects from currency
translation 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 included 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, and enables us to partner with our customers in order to deliver safe, effective drug products to patients quickly and efficiently. The Company was incorporated under the laws of theCommonwealth of Pennsylvania onJuly 27, 1923 . 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 integrated 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 inJapan andMexico .
2019 Financial Performance Summary
Consolidated net sales increased by$122.5 million , or 7.1%, in 2019. Excluding foreign currency translation effects of$52.2 million , as well as incremental sales of$3.3 million from our recent acquisition, consolidated net sales increased by$171.4 , or 10.0%. Net income in 2019 was$241.7 million , or$3.21 per diluted share, compared to$206.9 million , or$2.74 per diluted share, in 2018. Net income in 2019 included the impact of restructuring and related charges of$3.7 million (net of$1.2 million in tax), or$0.04 per diluted share, a gain on the sale of fixed assets as a result of our restructuring plan of$1.3 million (net of$0.4 million in tax), or$0.02 per diluted share, a pension settlement charge of$2.7 million (net of$0.8 million in tax), or$0.04 per diluted share, a charge of$1.0 million related to the continued devaluation ofArgentina's currency, or$0.01 per diluted share, a tax recovery related to previously-paid international excise taxes of$2.9 million (net of$1.5 million in tax), or$0.04 per diluted share, a net tax benefit of$0.3 million related to the impact of federal law changes enacted during the year, and a tax benefit of$10.3 million , or$0.14 per diluted share, associated with stock-based compensation. Net income in 2018 included the impact of restructuring and related charges of$7.2 million (net of$1.9 million in tax), or$0.09 per diluted share, a gain on the sale of fixed assets as a result of our restructuring plans of$0.9 million (net of$0.2 million in tax), or$0.01 per diluted share, a charge of$1.1 million , or$0.02 per diluted share, related to the classification ofArgentina's economy as highly inflationary underU.S. GAAP as ofJuly 1, 2018 , a net tax benefit of$2.5 million , or$0.03 per diluted share, for the estimated impact of the 2017 Tax Act, and a tax benefit of$14.3 million , or$0.19 per diluted share, associated with stock-based compensation.
At
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--------------------------------------------------------------------------------RESULTS OF OPERATIONS
We evaluate the performance of our segments based upon, among other things, segment net sales and operating profit. Segment operating profit excludes general corporate costs, which include executive and director compensation, stock-based compensation, adjustments to annual incentive plan expense for over- or under-attainment of targets, certain pension and other retirement benefit costs, and other corporate facilities and administrative expenses not allocated to the segments. Also excluded are items that we consider not representative of ongoing operations. Such items are referred to as other unallocated items and generally include restructuring and related charges, certain asset impairments and other specifically-identified income or expense items.
Percentages in the following tables and throughout this Results of Operations section may reflect rounding adjustments.
The following table presents net sales, consolidated and by reportable segment:
Year Ended December 31, % Change
($ in millions) 2019 2018 2017 2019/2018 2018/2017
Proprietary Products $ 1,398.6 $ 1,308.6 $ 1,236.9 6.9 % 5.8 %
Contract-Manufactured Products 441.5 409.1 362.5 7.9 % 12.9 %
Intersegment sales elimination (0.2) (0.3) (0.3) (33.3) % - %
Consolidated net sales $ 1,839.9 $ 1,717.4 $ 1,599.1 7.1 % 7.4 %
2019 compared to 2018
Consolidated net sales increased by $122.5 million , or 7.1%, in 2019, including
an unfavorable foreign currency translation impact of $52.2 million . Excluding
foreign currency translation effects, as well as incremental sales of $3.3
million from our recent acquisition, consolidated net sales increased by $171.4
million , or 10.0%.
Proprietary Products - Proprietary Products net sales increased by $90.0
million , or 6.9%, in 2019, including an unfavorable foreign currency translation
impact of $43.1 million . Excluding foreign currency translation effects, as well
as incremental sales of $3.3 million from our recent acquisition, net sales
increased by $129.8 million , or 9.9%, primarily due to growth in our high-value
product offerings, including our Daikyo components, our ready-to-use seals,
stoppers, and plungers, our NovaPure® components and Crystal Zenith products,
and our self-injection systems and FluroTec-coated components.
Contract-Manufactured Products - Contract-Manufactured Products net sales
increased by $32.4 million , or 7.9%, in 2019, including an unfavorable foreign
currency translation impact of $9.1 million . Excluding foreign currency
translation effects, net sales increased by $41.5 million , or 10.1%, due to an
increase in the sale of healthcare-related injection and diagnostic devices.
The intersegment sales elimination, which is required for the presentation of
consolidated net sales, represents the elimination of components sold between
our segments.
2018 compared to 2017
Consolidated net sales increased by $118.3 million , or 7.4%, in 2018, including
a favorable foreign currency translation impact of $28.6 million . Excluding
foreign currency translation effects, consolidated net sales increased by $89.7
million , or 5.6%.
Proprietary Products - Proprietary Products net sales increased by $71.7
million , or 5.8%, in 2018, including a favorable foreign currency translation
impact of $23.8 million . Excluding foreign currency translation effects, net
sales increased by $47.9 million , or 3.9%, as growth in our high-value product
offerings, including our Westar® and
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FluroTec-coated components, our ready-to-use seals, stoppers, and plungers, and
our NovaPure products, as well as sales price increases, partially offset the
impact of the voluntary recall of Vial2Bag products and the deconsolidation of
our Venezuelan subsidiary as of April 1, 2017 .
Contract-Manufactured Products - Contract-Manufactured Products net sales
increased by $46.6 million , or 12.9%, in 2018, including a favorable foreign
currency translation impact of $4.8 million . Excluding foreign currency
translation effects, net sales increased by $41.8 million , or 11.6%, despite the
impact of the loss of a consumer-product customer in early 2018. Higher sales
volume, particularly in Ireland , contributed 10.4 percentage points of the
increase, and sales price increases contributed 1.2 percentage points of the
increase.
Gross Profit
The following table presents gross profit and related gross margins, consolidated and by reportable segment:
Year Ended December 31, % Change
($ in millions) 2019 2018 2017 2019/2018 2018/2017
Proprietary Products:
Gross profit $ 540.4 $ 485.4 $ 449.3 11.3 % 8.0 %
Gross profit margin 38.6 % 37.1 % 36.3 %
Contract-Manufactured Products:
Gross profit $ 65.5 $ 60.0 $ 63.6 9.2 % (5.7) %
Gross profit margin 14.8 % 14.7 % 17.5 %
Unallocated items $ (0.2) $ - $ -
Consolidated gross profit $ 605.7 $ 545.4 $ 512.9 11.1 % 6.3 %
Consolidated gross profit margin 32.9 % 31.8 % 32.1 %
2019 compared to 2018
Consolidated gross profit increased by $60.3 million , or 11.1%, in 2019,
including an unfavorable foreign currency translation impact of $15.7 million .
Consolidated gross profit margin increased by 1.1 margin points in 2019.
Proprietary Products - Proprietary Products gross profit increased by $55.0
million , or 11.3%, in 2019, including an unfavorable foreign currency
translation impact of $14.3 million . Proprietary Products gross profit margin
increased by 1.5 margin points in 2019, due to a favorable mix of products sold,
production efficiencies, and sales price increases, partially offset by
increased overhead costs.
Contract-Manufactured Products - Contract-Manufactured Products gross profit
increased by $5.5 million , or 9.2%, in 2019, including an unfavorable foreign
currency translation impact of $1.4 million . Contract-Manufactured Products
gross profit margin increased by 0.1 margin points in 2019, due to production
efficiencies and lower raw material costs, partially offset by increased
overhead costs and an unfavorable mix of products sold.
2018 compared to 2017
Consolidated gross profit increased by
Proprietary Products - Proprietary Products gross profit increased by$36.1 million , or 8.0%, in 2018, including a favorable foreign currency translation impact of$8.5 million . Proprietary Products gross profit margin increased by 0.8 margin points in 2018, as production efficiencies, a favorable mix of products sold, and sales price increases were partially offset by the impact of under-absorbed overhead costs from our new facility inWaterford, Ireland and the deconsolidation of our Venezuelan subsidiary as ofApril 1, 2017 , as well as increased labor and depreciation costs and higher raw material costs. 24 -------------------------------------------------------------------------------- Contract-Manufactured Products - Contract-Manufactured Products gross profit decreased by$3.6 million , or 5.7%, in 2018, including a favorable foreign currency translation impact of$0.8 million . Contract-Manufactured Products gross profit margin decreased by 2.8 margin points in 2018, due to unabsorbed overhead from plant consolidation activities, start-up costs associated with the launch of new programs, an unfavorable mix of product sales, and lower profitability on development and tooling agreements, and higher raw material costs, partially offset by sales price increases and production efficiencies.
Research and Development ("R&D") Costs
The following table presents R&D costs, consolidated and by reportable segment:
Year Ended December 31, % Change
($ in millions) 2019 2018 2017 2019/2018 2018/2017
Proprietary Products $ 38.9 $ 40.3 $ 39.1 (3.5) % 3.1 %
Contract-Manufactured Products - - - - -
Consolidated R&D costs $ 38.9 $ 40.3 $ 39.1 (3.5) % 3.1 %
2019 compared to 2018
Consolidated R&D costs decreased by $1.4 million , or 3.5%, in 2019, primarily
due to an increase in customer-funded R&D projects via customer development
agreements.
2018 compared to 2017
Consolidated R&D costs increased by
All of the R&D costs incurred during 2019, 2018 and 2017 related to Proprietary Products.
Selling, General and Administrative ("SG&A") Costs
The following table presents SG&A costs, consolidated and by reportable segment
and corporate:
Year Ended December 31, % Change
($ in millions) 2019 2018 2017 2019/2018 2018/2017
Proprietary Products $ 189.9 $ 185.0 $ 175.3 2.6 % 5.5 %
Contract-Manufactured Products 16.2 16.5 15.4 (1.8) % 7.1 %
Corporate and unallocated items 66.6 61.4 55.3 8.5 % 11.0 %
Consolidated SG&A costs $ 272.7 $ 262.9 $ 246.0 3.7 % 6.9 %
SG&A as a % of net sales 14.8 % 15.3 % 15.4 %
2019 compared to 2018
Consolidated SG&A costs increased by $9.8 million , or 3.7%, in 2019, including
the impact of foreign currency translation, which decreased SG&A costs by $0.3
million .
Proprietary Products - Proprietary Products SG&A costs increased by $4.9
million , or 2.6%, in 2019, primarily due to an increase in compensation costs
and incremental costs associated with our voluntary recall and the acquisition
of our distributor in South Korea , partially offset by ongoing cost control
measures. Foreign currency translation decreased Proprietary Products SG&A costs
by $0.3 million .
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Contract-Manufactured Products - Contract-Manufactured Products SG&A costs
decreased by
Corporate and unallocated items - Corporate SG&A costs increased by$5.2 million , or 8.5%, in 2019, primarily due to increases in stock-based compensation costs and incentive compensation costs, partially offset by a decrease inU.S. pension costs due to the cessation of ourU.S. qualified and non-qualified defined benefit pension plans as ofJanuary 1, 2019 (except for interest crediting) and ongoing cost control measures. 2018 compared to 2017 Consolidated SG&A costs increased by$16.9 million , or 6.9%, in 2018, including the impact of foreign currency translation, which increased SG&A costs by$2.4 million . Proprietary Products - Proprietary Products SG&A costs increased by$9.7 million , or 5.5%, in 2018, due to higher commercial sales compensation costs and legal costs. Foreign currency translation increased Proprietary Products SG&A costs by$2.3 million .
Contract-Manufactured Products - Contract-Manufactured Products SG&A costs
increased by
Corporate and unallocated items - Corporate SG&A costs increased by
Other (Income) Expense
The following table presents other income and expense items, consolidated and by reportable segment and unallocated items:
(Income) Expense Year Ended December 31, ($ in millions) 2019 2018 2017 Proprietary Products$ (2.0) $ (6.3) $ (8.9) Contract-Manufactured Products 0.2 (0.8) (0.1) Corporate and unallocated items (0.7) 9.0 11.0
Consolidated other (income) expense
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, and miscellaneous income and charges, are generally recorded within segment results.
2019 compared to 2018 Consolidated other (income) expense changed by$4.4 million in 2019.
Proprietary Products - Proprietary Products other income decreased by
Contract-Manufactured Products - Contract-Manufactured Products other expense (income) changed by$1.0 million in 2019, primarily due to a decrease in gains on the sale of fixed assets during 2019. Corporate and unallocated items - Corporate and unallocated items changed by$9.7 million in 2019. During 2019, we recorded$4.9 million in restructuring and related charges, a$1.9 million gain on the sale of fixed assets as a result of our restructuring plan, and a charge of$1.0 million as a result of the continued devaluation ofArgentina's currency. We expect that our 2018 restructuring plan, which is now considered complete, will provide annualized 26 -------------------------------------------------------------------------------- savings of approximately$14.0 million . In addition, during 2019, we recognized a tax recovery of$4.7 million related to previously-paid international excise taxes, following a favorable court ruling. Please refer to Note 16, Other (Income) Expense, for further discussion of these items. 2018 compared to 2017 Consolidated other expense decreased by$0.1 million in 2018. Proprietary Products - Proprietary Products other income decreased by$2.6 million in 2018, primarily as we recorded income of$9.1 million attributable to the reimbursement of certain costs related to a technology that we subsequently licensed to a third party in 2017, partially offset by foreign exchange transaction gains inEurope in 2018. Please refer to Note 16, Other (Income) Expense, for further discussion of the$9.1 million attributable to the reimbursement of certain costs.
Contract-Manufactured Products - Contract-Manufactured Products other income
increased by
Corporate and unallocated items - Corporate and unallocated items changed by$2.0 million in 2018. During 2018, we recorded$9.1 million in restructuring and related charges, a$1.1 million gain on the sale of fixed assets as a result of our restructuring plans, and a charge of$1.1 million related to the classification ofArgentina's economy as highly inflationary underU.S. GAAP as ofJuly 1, 2018 . Please refer to Note 16, Other (Income) Expense, for further discussion of these items. Operating Profit
The following table presents adjusted operating profit, consolidated and by reportable segment, corporate and unallocated items:
Year Ended December 31, % Change
($ in millions) 2019 2018 2017 2019/2018 2018/2017
Proprietary Products $ 313.6 $ 266.4 $ 243.8 17.7 % 9.3 %
Contract-Manufactured Products 49.1 44.3 48.3 10.8 % (8.3) %
Corporate (66.3) (61.3) (55.2) 8.2 % 11.1 %
Adjusted consolidated operating profit
$ 236.9 18.8 % 5.3 % Adjusted consolidated operating profit margin 16.1 % 14.5 % 14.8 % Unallocated items 0.2 (9.1) (11.1) Consolidated operating profit$ 296.6 $ 240.3 $ 225.8 23.4 % 6.4 %
Consolidated operating profit margin 16.1 % 14.0 %
14.1 %
2019 compared to 2018
Consolidated operating profit increased by $56.3 million , or 23.4%, in 2019,
including a favorable foreign currency translation impact of $0.6 million .
Proprietary Products - Proprietary Products operating profit increased by $47.2
million , or 17.7%, in 2019, including a favorable foreign currency translation
impact of $0.6 million , due to the factors described above.
Contract-Manufactured Products - Contract-Manufactured Products operating profit
increased by
Corporate - Corporate costs increased by
Unallocated items - Please refer to the Other (Income) Expense section for details.
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--------------------------------------------------------------------------------Excluding the unallocated items, our adjusted consolidated operating profit margin increased by 1.6 margin points in 2019.
2018 compared to 2017
Consolidated operating profit increased by
Proprietary Products - Proprietary Products operating profit increased by$22.6 million , or 9.3%, in 2018, including a favorable foreign currency translation impact of$5.9 million , due to the factors described above.
Contract-Manufactured Products - Contract-Manufactured Products operating profit
decreased by
Corporate - Corporate costs increased by
Unallocated items - Please refer to the Other (Income) Expense section for details.
Excluding the unallocated items, our adjusted consolidated operating profit margin decreased by 0.3 margin points in 2018.
Interest Expense, Net
The following table presents interest expense, net, by significant component:
Year Ended December 31, % Change
($ in millions) 2019 2018 2017 2019/2018 2018/2017
Interest expense $ 9.4 $ 9.3 $ 10.5 1.1 % (11.4) %
Capitalized interest (0.9) (0.9) (2.7) - % (66.7) %
Interest income (3.8) (2.1) (1.3) 81.0 % 61.5 %
Interest expense, net $ 4.7 $ 6.3 $ 6.5 (25.4) % (3.1) %
2019 compared to 2018
Interest expense, net, decreased by $1.6 million , or 25.4%, in 2019, due to an
increase in interest income in 2019 resulting from higher interest rates on our
deposit accounts and higher average cash and cash equivalents balances.
2018 compared to 2017
Interest expense, net, decreased by $0.2 million , or 3.1%, in 2018, due to lower
interest expense resulting from less average debt outstanding during 2018, as
compared to 2017, and an increase in interest income, partially offset by a
decrease in capitalized interest due to the completion of several major projects
in 2017, including certain components of our new facility in Waterford, Ireland .
The Waterford facility began commercial production during the second half of
2018.
Other Nonoperating Expense (Income)
2019 compared to 2018 Other nonoperating expense (income) changed by$6.8 million in 2019, primarily due to a decrease in the expected return on pension plan assets and a pension settlement charge of$3.5 million recorded in 2019, as we determined that normal-course lump-sum payments for each of ourU.S. qualified and non-qualified defined benefit pension plans exceeded the threshold for settlement accounting underU.S. GAAP for the year. EffectiveJanuary 1, 2019 , except for interest crediting, benefit accruals under these defined benefit pension plans ceased. 28 -------------------------------------------------------------------------------- 2018 compared to 2017 Other nonoperating income increased by$3.6 million in 2018, due to an increase in the expected return on pension plan assets and a decrease in recognized actuarial losses for 2018.
Income Taxes
The provision for income taxes was
During 2019, we recorded a net tax benefit of$0.3 million due to the impact of federal law changes enacted during the year, as well as a tax benefit of$10.3 million associated with stock-based compensation. During 2018, we recorded a net tax benefit of$2.5 million for the estimated impact of the 2017 Tax Act and a tax benefit of$14.3 million associated with stock-based compensation. Please refer to Note 17, Income Taxes, for further discussion of the 2017 Tax Act. During 2017, we recorded a discrete tax charge of$48.8 million related to the 2017 Tax Act and the impact of changes in enacted international tax rates on previously-recorded deferred tax asset and liability balances, as well as a tax benefit of$33.1 million associated with stock-based compensation.
Please refer to Note 17, Income Taxes, for further discussion of our income taxes.
Equity in Net Income of Affiliated Companies
Equity in net income of affiliated companies represents the contribution to earnings from our 25% ownership interest inDaikyo , which increased to 49% during the fourth quarter of 2019, and our 49% ownership interest in five companies majority-owned by a long-time partner located inMexico . Please refer to Note 7, Affiliated Companies, for further discussion. Equity in net income of affiliated companies was$8.9 million ,$7.6 million , and$9.2 million for the years 2019, 2018, and 2017, respectively. Equity in net income of affiliated companies increased by$1.3 million , or 17.1%, in 2019, primarily due to favorable operating results atDaikyo . Equity in net income of affiliated companies decreased by$1.6 million , or 17.4%, in 2018, primarily due to the impact of gains on the sale of investment securities byDaikyo in 2017.
Net Income
Net income in 2019 was$241.7 million , or$3.21 per diluted share, compared to$206.9 million , or$2.74 per diluted share, in 2018. Our 2019 results included the impact of restructuring and related charges of$3.7 million (net of$1.2 million in tax), a gain on the sale of fixed assets as a result of our restructuring plan of$1.3 million (net of$0.4 million in tax), a pension settlement charge of$2.7 million (net of$0.8 million in tax), a charge of$1.0 million related to the continued devaluation ofArgentina's currency, a tax recovery of$2.9 million (net of$1.5 million in tax) related to previously-paid international excise taxes, a net tax benefit of$0.3 million related to the impact of federal law changes enacted during the year, and a tax benefit of$10.3 million associated with stock-based compensation. Net income in 2018 was$206.9 million , or$2.74 per diluted share, compared to$150.7 million , or$1.99 per diluted share, in 2017. Our 2018 results included the impact of restructuring and related charges of$7.2 million (net of$1.9 million in tax), a gain on the sale of fixed assets as a result of our restructuring plans of$0.9 million (net of$0.2 million in tax), a charge of$1.1 million related to the classification ofArgentina's economy as highly inflationary underU.S. GAAP as ofJuly 1, 2018 , a net tax benefit of$2.5 million for the estimated impact of the 2017 Tax Act, and a tax benefit of$14.3 million associated with stock-based compensation. Net income in 2017 was$150.7 million , or$1.99 per diluted share, compared to$143.6 million , or$1.91 per diluted share, in 2016. Our 2017 results included the impact of a discrete tax charge of$48.8 million related to the 2017 Tax Act and the impact of changes in enacted international tax rates on previously-recorded deferred tax asset and 29 --------------------------------------------------------------------------------
liability balances, as well as a tax benefit of
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
The following table presents cash flow data for the years ended
($ in millions) 2019 2018
2017
Net cash provided by operating activities$ 367.2 $ 288.6 $ 263.3 Net cash used in investing activities$ (228.0) $ (100.8) $ (133.6) Net cash used in financing activities$ (36.8) $ (80.7) $ (109.0)
Net Cash Provided by Operating Activities
2019 compared to 2018 Net cash provided by operating activities increased by$78.6 million in 2019, primarily due to improved operating results and changes in assets and liabilities. 2018 compared to 2017 Net cash provided by operating activities increased by$25.3 million in 2018, primarily due to improved operating results and a decrease in pension plan contributions in 2018.
2019 compared to 2018 Net cash used in investing activities increased by$127.2 million in 2019, primarily due to the increase in our ownership interest inDaikyo , an increase in capital expenditures, and the acquisition of our distributor inSouth Korea . 2018 compared to 2017 Net cash used in investing activities decreased by$32.8 million in 2018, mostly due to a$26.1 million decrease in capital spending due to the completion of several major projects in 2017, including certain components of our new facility inWaterford, Ireland .
2019 compared to 2018 Net cash used in financing activities decreased by$43.9 million in 2019, primarily due to borrowings of$90.0 million under our Term Loan, partially offset by net repayments of our outstanding long-term borrowings under our Credit Facility and increases in purchases under our share repurchases programs and dividend payments.
2018 compared to 2017
Net cash used in financing activities decreased by
We paid cash dividends totaling$45.1 million ($0.61 per share),$42.1 million ($0.57 per share), and$39.1 million ($0.53 per share) during 2019, 2018, and 2017, respectively. 30 --------------------------------------------------------------------------------
Liquidity and Capital Resources
The table below presents selected liquidity and capital measures as of:
($ in millions) December 31, 2019 December 31, 2018 Cash and cash equivalents $ 439.1 $ 337.4 Accounts receivable, net $ 319.3 $ 288.2 Inventories $ 235.7 $ 214.5 Accounts payable $ 156.8 $ 130.4 Debt $ 257.3 $ 196.1 Equity$ 1,573.2 $ 1,396.3 Working Capital $ 717.1 $ 610.7 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 atDecember 31, 2019 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 atDecember 31, 2019 included$217.2 million of cash held by subsidiaries within theU.S. and$221.9 million of cash held by subsidiaries outside of theU.S. In response to the 2017 Tax Act, we reevaluated our position regarding permanent reinvestment of foreign subsidiary earnings and profits through 2017 (with the exception ofChina andMexico ) and decided that those profits were no longer permanently reinvested. As ofJanuary 1, 2018 , we reasserted indefinite reinvestment related to all post-2017 unremitted earnings in all of our foreign subsidiaries. In general, it is our practice and intention to permanently reinvest the earnings of our foreign subsidiaries and repatriate earnings only when the tax impact is de minimis, and that position has not changed subsequent to the one-time transition tax under the 2017 Tax Act, except as noted above. Accordingly, no deferred taxes have been provided for withholding taxes or other taxes that would result upon repatriation of approximately$214.2 million of undistributed earnings from foreign subsidiaries to theU.S. , as those earnings continue to be permanently reinvested. Further, it is impracticable for us to estimate any future tax costs for any unrecognized deferred tax liabilities associated with our indefinite reinvestment assertion, because the actual tax liability, if any, would be dependent on complex analysis and calculations considering various tax laws, exchange rates, circumstances existing when there is a repatriation, sale or liquidation, or other factors. Working capital - Working capital atDecember 31, 2019 increased by$106.4 million , or 17.4%, as compared toDecember 31, 2018 , including an increase of$11.3 million due to foreign currency translation. Excluding the impact of currency exchange rates, cash and cash equivalents, accounts receivable, inventories, and total current liabilities increased by$102.4 million ,$33.3 million ,$23.2 million , and$60.0 million , respectively. The increase in accounts receivable was due to increased sales activity and longer customer payment terms. The increase in total current liabilities was primarily due to increases in accounts payable, accrued salaries, wages and benefits, and other current liabilities, as well as our adoption of Accounting Standards Codification ("ASC") Topic 842 ("ASC 842"), which required us to record operating lease liabilities for operating leases where we are the lessee in our consolidated balance sheet as ofDecember 31, 2019 . Debt and credit facilities - The$61.2 million increase in total debt atDecember 31, 2019 , as compared toDecember 31, 2018 , primarily resulted from borrowings of$90.0 million under our Term Loan, partially offset by net repayments of our outstanding long-term borrowings under our Credit Facility, foreign currency rate fluctuations, and an increase in unamortized debt issuance costs.
Our sources of liquidity include our Credit Facility. At
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and December 2019 , respectively. There was no material gain or loss on the
repayment under the Credit Facility. At December 31, 2019 , the borrowing
capacity available under the Credit Facility, including outstanding letters of
credit of $2.5 million , was $297.5 million . We do not expect any significant
limitations on our ability to access this source of funds. Please refer to Note
10, Debt, for further discussion of our Credit Facility.
Pursuant to the financial covenants in our debt agreements, we are required to
maintain established interest coverage ratios and to not exceed established
leverage ratios. In addition, the agreements contain other customary covenants,
none of which we consider restrictive to our operations. At December 31, 2019 ,
we were in compliance with all of our debt covenants, and we expect to continue
to be in compliance with the terms of these agreements throughout 2020.
We believe that cash on hand and cash generated from operations, together with
availability under our Credit Facility, will be adequate to address our
foreseeable liquidity needs based on our current expectations of our business
operations, capital expenditures and scheduled payments of debt obligations.
Commitments and Contractual Obligations
The following table summarizes our commitments and contractual obligations atDecember 31, 2019 . These obligations are not expected to have a material impact on liquidity. Payments Due By Period More than 5 ($ in millions) Total Less than 1 year 1 - 3 years 3 - 5 years years Purchase obligations (1)$ 249.1 $ 61.3$ 113.6 $ 62.0 $ 12.2 Debt (excluding unamortized debt issuance costs) 258.0 2.3 46.6 136.1 73.0 Interest on debt and interest rate swaps (2) 37.4 7.0 13.2 9.8 7.4 Operating lease obligations 88.0 12.1 19.0 15.1 41.8 Other long-term liabilities (3) 6.6 0.9 1.3 1.5 2.9 Total contractual obligations (4)$ 639.1 $ 83.6
(1)Our business creates a need to enter into various commitments with suppliers, including for the purchase of raw materials and finished goods. In accordance withU.S. GAAP, these purchase obligations are not reflected in the accompanying consolidated balance sheets. These purchase commitments do not exceed our projected requirements and are in the normal course of business. (2)For fixed-rate long-term debt, interest was based on principal amounts and fixed coupon rates at year-end. Future interest payments on variable-rate debt were calculated using principal amounts and the applicable ending interest rate at year-end. Interest on fixed-rate derivative instruments was based on notional amounts and fixed interest rates contractually obligated at year-end. (3)Represents acquisition-related contingencies. In connection with certain business acquisitions, we agreed to make payments to the sellers if and when certain operating milestones are achieved, such as sales and operating income targets. (4)This table does not include obligations pertaining to pension and postretirement benefits because the actual amount and timing of future contributions may vary significantly depending upon plan asset performance, benefit payments, and other factors. Contributions to our plans are expected to be$1.4 million in 2020. Please refer to Note 15, Benefit Plans, for estimated benefit payments over the next ten years. Reserves for uncertain tax positions - The table above does not include$5.0 million of total gross unrecognized tax benefits as ofDecember 31, 2019 . Due to the high degree of uncertainty regarding the timing of potential cash flows, we cannot reasonably estimate the settlement periods for amounts which may be paid. 32 -------------------------------------------------------------------------------- Letters of credit - We have letters of credit totaling$2.5 million supporting the reimbursement of workers' compensation and other claims paid on our behalf by insurance carriers. Our accrual for insurance obligations was$3.2 million atDecember 31, 2019 , of which$0.9 million is in excess of our deductible and, therefore, is reimbursable by the insurance company.
OFF-BALANCE SHEET ARRANGEMENTS
At
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management's discussion and analysis addresses consolidated financial statements that are prepared in accordance withU.S. GAAP. The application of these principles requires management to make estimates and assumptions, some of which are subjective and complex, that affect the amounts reported in the consolidated financial statements. We believe the following accounting policies and estimates are critical to understanding and evaluating our results of operations and financial position: Revenue Recognition: 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 ("ASC 606"). Following the identification of a contract with a customer, we identify the performance obligations (goods or services) in the contract, determine the transaction price, allocate the transaction price to the performance obligations in the contract, and recognize the revenue when (or as) we satisfy the performance obligations by transferring the promised goods or services to our customers. A good or service is transferred when (or as) the customer obtains control of that good or service. We recognize the majority of our revenue, primarily relating to Proprietary Products product sales, at a point in time, following the transfer of control of our products to our customers, which typically occurs upon shipment or delivery, depending on the terms of the related agreements.
We recognize revenue relating to our Contract-Manufactured Products product sales and certain Proprietary Products product sales over time, as our performance does not create an asset with an alternative use to us and we have an enforceable right to payment for performance completed to date.
We recognize revenue relating to our development and tooling agreements over time, as our performance creates or enhances an asset that the customer controls as the asset is created or enhanced. For revenue recognized over time, revenue is recognized by applying a method of measuring progress toward complete satisfaction of the related performance obligation. When selecting the method for measuring progress, we select the method that best depicts the transfer of control of goods or services promised to our customers. Revenue for our Contract-Manufactured Products product sales, certain Proprietary Products product sales, and our development and tooling agreements is recorded under an input method, which recognizes revenue on the basis of our efforts or inputs to the satisfaction of a performance obligation (for example, resources consumed, labor hours expended, costs incurred, time elapsed, or machine hours used) relative to the total expected inputs to the satisfaction of that performance obligation. The input method that we use is based on costs incurred. The majority of the performance obligations within our contracts are satisfied within one year or less. Performance obligations satisfied beyond one year include those relating to a nonrefundable customer payment of$20.0 million received inJune 2013 in return for the exclusive use of the SmartDose® technology platform within a specific therapeutic area. As ofDecember 31, 2019 , there was$5.6 million of unearned income related to this payment, of which$0.9 million was included in other current liabilities and$4.7 million was included in other long-term 33 --------------------------------------------------------------------------------
liabilities. The unearned income is being recognized as income on a straight-line basis over the remaining term of the agreement. The agreement does not include a future minimum purchase commitment from the customer.
Our revenue can be generated from contracts with multiple performance obligations. When a sales agreement involves multiple performance obligations, each obligation is separately identified and the transaction price is allocated based on the amount of consideration we expect to be entitled in exchange for transferring the promised good or service to the customer.
Some customers receive pricing rebates upon attaining established sales volumes. We record rebate costs when sales occur based on our assessment of the likelihood that the required volumes will be attained. We also maintain an allowance for product returns, as we believe that we are able to reasonably estimate the amount of returns based on our substantial historical experience.
Contract assets and liabilities result from transactions with revenue recorded over time. If the measure of remaining rights exceeds the measure of the remaining performance obligations, we record a contract asset. Contract assets are recorded on the consolidated balance sheet in accounts receivable, net, and other assets (current and noncurrent portions, respectively). Contract assets included in accounts receivable, net, relate to the unbilled amounts of our product sales for which we have recognized revenue over time. Contract assets included in other assets represent the remaining performance obligations of our development and tooling agreements. Conversely, if the measure of the remaining performance obligations exceeds the measure of the remaining rights, we record a contract liability. Contract liabilities are recorded on the consolidated balance sheet in other liabilities (current and noncurrent portions, respectively) and represent cash payments received in advance of our performance. Impairment of Long-Lived Assets: Long-lived assets, including property, plant and equipment and operating lease right-of-use assets, are tested for impairment whenever circumstances indicate that the carrying value of these assets may not be recoverable. An asset is considered impaired if the carrying value of the asset exceeds the sum of the future expected undiscounted cash flows to be derived from the asset. Once an asset is considered impaired, an impairment loss is recorded within other (income) expense for the difference between the asset's carrying value and its fair value. For assets held and used in the business, management determines fair value using estimated future cash flows to be derived from the asset, discounted to a net present value using an appropriate discount rate. For assets held for sale or for investment purposes, management determines fair value by estimating the proceeds to be received upon sale of the asset, less disposition costs. Impairment ofGoodwill and Other Intangible Assets:Goodwill is tested for impairment at least annually, following the completion of our annual budget and long-range planning process, or whenever circumstances indicate that the carrying value of these assets may not be recoverable.Goodwill is tested for impairment at the reporting unit level, which is the same as, or one level below, our operating segments. A goodwill impairment charge represents the amount by which a reporting unit's carrying amount exceeds its fair value, not to exceed the total amount of goodwill allocated to that reporting unit. Considerable management judgment is necessary to estimate fair value. Amounts and assumptions used in our goodwill impairment test, such as future sales, future cash flows and long-term growth rates, are consistent with internal projections and operating plans. Amounts and assumptions used in our goodwill impairment test are also largely dependent on the continued sale of drug products delivered by injection and the packaging of drug products, as well as our timeliness and success in new-product innovation or the development and commercialization of proprietary multi-component systems. Changes in the estimate of fair value, including the estimate of future cash flows, could have a material impact on our future results of operations and financial position. Accounting guidance also allows entities to first assess qualitative factors, including macroeconomic conditions, industry and market considerations, cost factors, and overall financial performance, to determine whether it is necessary to perform the quantitative goodwill impairment test. We elected to follow this guidance for our 2017, 2018, and 2019 annual impairment tests. Based upon our assessment, we determined that it was not more likely than not that the fair value of each of our reporting units was less than its carrying amount and determined that it was not necessary to perform the quantitative goodwill impairment tests in 2017, 2018, and 2019. 34 --------------------------------------------------------------------------------
Intangible assets with finite lives are amortized using the straight-line method over their estimated useful lives, and reviewed for impairment whenever circumstances indicate that the carrying value of these assets may not be recoverable.
Employee Benefits: We maintain funded and unfunded defined benefit pension plans in theU.S. and a number of other countries that cover employees who meet eligibility requirements. In addition, we sponsor postretirement benefit plans which provide healthcare benefits for eligible employees who retire or become disabled. Postretirement benefit plans are limited to only those active employees who met the eligibility requirements as ofJanuary 1, 2017 . The measurement of annual cost and obligations under these defined benefit postretirement plans is subject to a number of assumptions, which are specific for each of ourU.S. and foreign plans. The assumptions, which are reviewed at least annually, are relevant to both the plan assets (where applicable) and the obligation for benefits that will ultimately be provided to our employees. Two of the most critical assumptions in determining pension and retiree medical plan expense are the discount rate and expected long-term rate of return on plan assets. Other assumptions reflect demographic factors such as retirement age, rates of compensation increases, mortality and turnover and are evaluated periodically and updated to reflect our actual experience. For our funded plans, we consider the current and expected asset allocations of our plan assets, as well as historical and expected rates of return, in estimating the long-term rate of return on plan assets. UnderU.S. GAAP, differences between actual and expected results are generally accumulated in other comprehensive income (loss) as actuarial gains or losses and subsequently amortized into earnings over future periods. Changes in key assumptions could have a material impact on our future results of operations and financial position. We estimate that every 25-basis point reduction in our long-term rate of return assumption would increase pension expense by$0.4 million , and every 25-basis point reduction in our discount rate would decrease pension expense by$0.1 million . A decrease in the discount rate increases the present value of benefit obligations. Our net pension underfunded balance atDecember 31, 2019 was$43.8 million , compared to$52.5 million atDecember 31, 2018 . Our underfunded balance for other postretirement benefits was$6.6 million atDecember 31, 2019 , compared to$6.0 million atDecember 31, 2018 . Income Taxes: We estimate income taxes payable based upon current domestic and international tax legislation. In addition, deferred income taxes are recognized by applying enacted statutory tax rates to tax loss carryforwards and temporary differences between the tax basis and financial statement carrying values of our assets and liabilities. The enacted statutory tax rate applied is based on the rate expected to be applicable at the time of the forecasted utilization of the loss carryforward or reversal of the temporary difference. Valuation allowances on deferred tax assets are established when it is more likely than not that all or a portion of a deferred tax asset will not be realized. The realizability of deferred tax assets is subject to our estimates of future taxable income, generally at the respective subsidiary company and country level. Changes in tax legislation, business plans and other factors may affect the ultimate recoverability of tax assets or final tax payments, which could result in adjustments to tax expense in the period such change is determined. When accounting for uncertainty in income taxes recognized in our financial statements, we apply a more-likely-than-not threshold for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Please refer to Note 1, Summary of Significant Accounting Policies and Note 2, New Accounting Standards, to our consolidated financial statements for additional information on our significant accounting policies, recently adopted accounting standards, and accounting standards issued but not yet adopted.
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