Item 7. 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 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-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. The constant-currency amounts are 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 incorporated into our discussion and analysis as management uses them in evaluating our results of operations, and believes that this information provides users a valuable insight into our results.

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 and analytical lab services. Our customers include the leading biologic, generic, pharmaceutical, diagnostic, and 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 excellence in manufacturing, scientific and technical expertise and management, so we can partner with our customers to deliver safe, effective drug products to patients quickly and efficiently. The Company was incorporated under the laws of the Commonwealth of Pennsylvania on July 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, 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 partnerships to share technologies and market products with affiliates in Japan and Mexico.

2018 Financial Performance Summary

Consolidated net sales increased by $118.3 million, or 7.4%, in 2018. Excluding foreign currency translation effects, consolidated net sales increased by $89.7 million, or 5.6%.

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. 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 of Argentina’s economy as highly inflationary under U.S. GAAP as of July 1, 2018, a net tax benefit of $2.5 million, or $0.03 per diluted share, for the impact of tax law changes, including the 2017 Tax Act, and a tax benefit of $14.3 million, or $0.19 per diluted share, associated with our adoption in 2017 of guidance issued by the FASB regarding share-based payment transactions. Net income in 2017 included the impact of a discrete tax charge of $48.8 million, or $0.64 per diluted share, 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, a tax benefit of $33.1 million, or $0.44 per diluted share, associated with our adoption of the guidance issued by the FASB regarding share-based payment transactions, and a charge of $11.1 million, or $0.15 per diluted share, related to the deconsolidation of our Venezuelan subsidiary.

On January 24, 2019, we issued a voluntary recall of our Vial2Bag® product line due to reports of potential unpredictable or variable dosing under certain conditions. Our 2018 results included an $11.3 million provision for product returns, recorded as a reduction of sales. Our inventory balance for these devices was $6.5 million at December 31, 2018, which included estimated in-transit inventory being returned by our customers. We are working to develop the support required to get the products back on the market, and we currently believe the returned inventory will be saleable in 2019.

At December 31, 2018, our cash and cash equivalents balance totaled $337.4 million and our available borrowing capacity under our $300.0 million multi-currency revolving credit facility (the “Credit Facility”) was $268.9 million.

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.

Net Sales

The following table presents net sales, consolidated and by reportable segment:

	Year Ended December 31,												% Change
($ in millions)	2018				2017				2016				2018/2017			2017/2016
Proprietary Products	$	1,308.6			$	1,236.9			$	1,189.9			5.8	%		3.9	%
Contract-Manufactured Products	409.1				362.5				320.2				12.9	%		13.2	%
Intersegment sales elimination	(0.3		)		(0.3		)		(1.0		)		—	%		—	%
Consolidated net sales	$	1,717.4			$	1,599.1			$	1,509.1			7.4	%		6.0	%

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 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.

2017 compared to 2016

Consolidated net sales increased by $90.0 million, or 6.0%, in 2017, including a favorable foreign currency translation impact of $12.2 million. Excluding foreign currency translation effects, consolidated net sales increased by $77.8 million, or 5.2%.

Proprietary Products – Proprietary Products net sales increased by $47.0 million, or 3.9%, in 2017, including a favorable foreign currency translation impact of $8.4 million. Excluding foreign currency translation effects, net sales increased by $38.6 million, or 3.2%. Proprietary Products sales growth in 2017 was slower than in 2016,

as customers continued to work down inventory purchased in 2016 mostly to address long production lead-times for

high-value products. Additional production capacity and staffing improved our lead-times, and we began to see

positive growth for customers in the Biologics and Generics market units. Higher sales volume contributed 2.2

percentage points of the increase, and sales price increases contributed 1.0 percentage points of the increase.

Contract-Manufactured Products – Contract-Manufactured Products net sales increased by $42.3 million, or 13.2%, in 2017, including a favorable foreign currency translation impact of $3.8 million. Excluding foreign

currency translation effects, net sales increased by $38.5 million, or 12.0%, primarily due to the initial commercial

ramp-up of projects that commenced in the latter half of 2016. Higher sales volume contributed 10.8 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)	2018				2017				2016				2018/2017			2017/2016
Proprietary Products:
Gross profit	$	485.4			$	449.3			$	448.3			8.0	%		0.2	%
Gross profit margin	37.1		%		36.3		%		37.7		%
Contract-Manufactured Products:
Gross profit	$	60.0			$	63.6			$	53.1			(5.7	)%		19.8	%
Gross profit margin	14.7		%		17.5		%		16.5		%
Consolidated gross profit	$	545.4			$	512.9			$	501.4			6.3	%		2.3	%
Consolidated gross profit margin	31.8		%		32.1		%		33.2		%

2018 compared to 2017

Consolidated gross profit increased by $32.5 million, or 6.3%, in 2018, including a favorable foreign currency translation impact of $9.3 million. Consolidated gross profit margin decreased by 0.3 margin points in 2018.

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 in Waterford, Ireland and the deconsolidation of our Venezuelan subsidiary as of April 1, 2017, as well as increased labor and depreciation costs and higher raw material costs.

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.

2017 compared to 2016

Consolidated gross profit increased by $11.5 million, or 2.3%, in 2017, including a favorable foreign currency translation impact of $3.3 million. Consolidated gross profit margin decreased by 1.1 margin points in 2017.

Proprietary Products – Proprietary Products gross profit increased by $1.0 million, or 0.2%, in 2017, including a favorable foreign currency translation impact of $2.6 million. Proprietary Products gross profit margin decreased by 1.4 margin points in 2017, as production efficiencies and modest price increases were more than offset by increased material labor and overhead costs.

Contract-Manufactured Products – Contract-Manufactured Products gross profit increased by $10.5 million, or 19.8%, in 2017, including a favorable foreign currency translation impact of $0.7 million. Contract-Manufactured Products gross profit margin increased by 1.0 margin points in 2017, as sales price increases, a favorable mix of products sold, higher sales volume, and production efficiencies were partially offset by increased labor, overhead, and depreciation costs.

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)	2018				2017				2016				2018/2017			2017/2016
Proprietary Products	$	40.3			$	39.1			$	36.8			3.1	%		6.3	%
Contract-Manufactured Products	—				—				—				—			—
Consolidated R&D costs	$	40.3			$	39.1			$	36.8			3.1	%		6.3	%

2018 compared to 2017

Consolidated R&D costs increased by $1.2 million, or 3.1%, in 2018. Efforts remain focused on the continued investment in self-injection systems development, elastomeric packaging components, and formulation development.

2017 compared to 2016

Consolidated R&D costs increased by $2.3 million, or 6.3%, in 2017, due to continued investment in self-injection systems development and formulation development.

All of the R&D costs incurred during 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)	2018				2017				2016				2018/2017			2017/2016
Proprietary Products	$	185.0			$	175.3			$	167.4			5.5	%		4.7	%
Contract-Manufactured Products	16.5				15.4				15.2				7.1	%		1.3	%
Corporate	61.4				55.3				57.0				11.0	%		(3.0	)%
Consolidated SG&A costs	$	262.9			$	246.0			$	239.6			6.9	%		2.7	%
SG&A as a % of net sales	15.3		%		15.4		%		15.9		%

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 $1.1 million, or 7.1%, in 2018, due to increases in compensation and miscellaneous costs.

Corporate – Corporate SG&A costs increased by $6.1 million, or 11.0%, in 2018, primarily due to the impact of higher achievement levels on incentive compensation costs and increased personnel costs.

2017 compared to 2016

Consolidated SG&A costs increased by $6.4 million, or 2.7%, in 2017, including the impact of foreign currency

translation, which increased SG&A costs by $1.2 million.

Proprietary Products – Proprietary Products SG&A costs increased by $7.9 million, or 4.7%, in 2017, due to

increases in compensation costs, primarily related to headcount and merit increases. Foreign currency translation

increased Proprietary Products SG&A costs by $1.2 million.

Contract-Manufactured Products – Contract-Manufactured Products SG&A costs increased by $0.2 million, or

1.3%, in 2017, due to an increase in incentive compensation and travel costs.

Corporate – Corporate SG&A costs decreased by $1.7 million, or 3.0%, in 2017, due to decreases in U.S.

pension costs and stock-based compensation expense, partially offset by increases in headcount and outside services.

Other Expense

The following table presents other income and expense items, consolidated and by reportable segment and unallocated items:

Expense (income)	Year Ended December 31,
($ in millions)	2018				2017				2016
Proprietary Products	$	(6.3	)		$	(8.9	)		$	1.0
Contract-Manufactured Products	(0.8		)		(0.1		)		(0.3		)
Corporate	(0.1		)		(0.1		)		—
Unallocated items	9.1				11.1				29.1
Consolidated other expense	$	1.9			$	2.0			$	29.8

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.

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 in Europe in 2018. Please refer to Note 15, Other 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 $0.7 million in 2018, due to gains on the sale of fixed assets.

Corporate – Corporate other income remained constant at $0.1 million in 2018.

Unallocated items – 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 of Argentina’s economy as highly inflationary under U.S. GAAP as of July 1, 2018. Once fully

completed, we expect that our 2018 restructuring plan will provide annualized savings in the range of $13.5 million to $14.5 million. Please refer to Note 15, Other Expense, for further discussion of these items.

2017 compared to 2016

Consolidated other expense decreased by $27.8 million in 2017.

Proprietary Products – Proprietary Products other (income) expense changed by $9.9 million in 2017, 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.

Contract-Manufactured Products – Contract-Manufactured Products other income decreased by $0.2 million in 2017, due to gains on the sale of fixed assets recorded in 2016, partially offset by foreign exchange transaction gains recorded in 2017.

Corporate – Corporate other income increased by $0.1 million in 2017.

Unallocated items – During 2017, as a result of the continued deterioration of conditions in Venezuela as well as our continued reduced access to USD settlement controlled by the Venezuelan government, we recorded a charge of $11.1 million related to the deconsolidation of our Venezuelan subsidiary, following our determination that we no longer met the U.S. GAAP criteria for control of that subsidiary. Please refer to Note 15, Other 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)	2018				2017				2016				2018/2017			2017/2016
Proprietary Products	$	266.4			$	243.8			$	243.1			9.3	%		0.3	%
Contract-Manufactured Products	44.3				48.3				38.2				(8.3	)%		26.4	%
Corporate	(61.3		)		(55.2		)		(57.0		)		11.1	%		(3.2	)%
Adjusted consolidated operating profit	$	249.4			$	236.9			$	224.3			5.3	%		5.6	%
Adjusted consolidated operating profit margin	14.5		%		14.8		%		14.9		%
Unallocated items	(9.1		)		(11.1		)		(29.1		)
Consolidated operating profit	$	240.3			$	225.8			$	195.2			6.4	%		15.7	%
Consolidated operating profit margin	14.0		%		14.1		%		12.9		%

2018 compared to 2017

Consolidated operating profit increased by $14.5 million, or 6.4%, in 2018, including a favorable foreign currency translation impact of $6.6 million.

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 $4.0 million, or 8.3%, in 2018, including a favorable foreign currency translation impact of $0.7 million, due to the factors described above.

Corporate – Corporate costs increased by $6.1 million, or 11.1%, in 2018, due to the factors described above.

Unallocated items – Please refer to the Other Expense section for details.

Excluding the unallocated items, our adjusted consolidated operating profit margin decreased by 0.3 margin points in 2018.

2017 compared to 2016

Consolidated operating profit increased by $30.6 million, or 15.7%, in 2017, including a favorable foreign currency translation impact of $1.6 million.

Proprietary Products – Proprietary Products operating profit increased by $0.7 million, or 0.3%, in 2017, including a favorable foreign currency translation impact of $0.9 million, due to the factors described above.

Contract-Manufactured Products – Contract-Manufactured Products operating profit increased by $10.1 million, or 26.4%, in 2017, including a favorable foreign currency translation impact of $0.7 million, due to the factors described above.

Corporate – Corporate costs decreased by $1.8 million, or 3.2%, in 2017, due to the factors described above.

Unallocated items – Please refer to the Other Expense section for details.

Excluding the unallocated items, our adjusted consolidated operating profit margin decreased by 0.1 margin points in 2017.

Interest Expense, Net

The following table presents interest expense, net, by significant component:

	Year Ended December 31,												% Change
($ in millions)	2018				2017				2016				2018/2017			2017/2016
Interest expense	$	9.3			$	10.5			$	11.7			(11.4	)%		(10.3	)%
Capitalized interest	(0.9		)		(2.7		)		(3.6		)		(66.7	)%		(25.0	)%
Interest income	(2.1		)		(1.3		)		(1.1		)		61.5	%		18.2	%
Interest expense, net	$	6.3			$	6.5			$	7.0			(3.1	)%		(7.1	)%

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.

2017 compared to 2016

Interest expense, net, decreased by $0.5 million, or 7.1%, in 2017, due to lower interest expense resulting from less average debt outstanding during 2017, as compared to 2016, partially offset by a decrease in capitalized interest.

Other Nonoperating Income

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. Please refer to Note 2, New Accounting Standards, and Note 14, Benefit Plans, for information on guidance issued by the FASB on the presentation of net periodic

pension and postretirement benefit cost (net benefit cost) that we adopted as of January 1, 2018, on a retrospective basis.

2017 compared to 2016

Other nonoperating income increased by $1.5 million in 2017, primarily due to an increase in the expected return on pension plan assets for 2017.

Income Taxes

The provision for income taxes was $41.4 million, $80.9 million, and $54.4 million for the years 2018, 2017, and 2016, respectively, and the effective tax rate was 17.2%, 36.4%, and 28.7%, respectively.

During 2018, we recorded a net tax benefit of $2.5 million for the impact of tax law changes, including the 2017 Tax Act, and a tax benefit of $14.3 million associated with our adoption in 2017 of guidance issued by the FASB regarding share-based payment transactions. Please refer to Note 16, 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 our adoption of the guidance issued by the FASB regarding share-based payment transactions.

During 2016, we recorded a tax benefit of $9.0 million in connection with restructuring and related charges of $26.4 million, a discrete tax charge of $0.8 million related to the pension curtailment gain of $2.1 million, and a discrete tax charge of $1.0 million resulting from the impact of changes in enacted tax rates on our previously-recorded deferred tax asset and liability balances.

Please refer to Note 16, 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 in Daikyo and our 49% ownership interest in four companies in Mexico. Equity in net income of affiliated companies was $7.6 million, $9.2 million, and $8.2 million for the years 2018, 2017, and 2016, respectively. 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 by Daikyo in 2017. Equity in net income of affiliated companies increased by $1.0 million, or 12.2%, in 2017, due to the impact of gains on the sale of investment securities by Daikyo, partially offset by foreign exchange transaction losses in Mexico.

Net Income

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 of Argentina’s economy as highly inflationary under U.S. GAAP as of July 1, 2018, a net tax benefit of $2.5 million for the impact of tax law changes, including the 2017 Tax Act, and a tax benefit of $14.3 million associated with our adoption in 2017 of guidance issued by the FASB regarding share-based payment transactions.

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 liability balances, as well as a tax benefit of $33.1 million associated with our adoption of the guidance issued by the

FASB regarding share-based payment transactions and a charge of $11.1 million related to the deconsolidation of our Venezuelan subsidiary.

Net income in 2016 was $143.6 million, or $1.91 per diluted share, compared to $95.6 million, or $1.30 per diluted share, in 2015. Our 2016 results included the impact of restructuring and related charges of $17.4 million (net of $9.0 million in tax), a charge related to the devaluation of the Venezuelan Bolivar of $2.7 million, a pension curtailment gain of $1.3 million (net of $0.8 million in tax), and a discrete tax charge of $1.0 million.

FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

Cash Flows

The following table presents cash flow data for the years ended December 31:

($ in millions)	2018				2017				2016
Net cash provided by operating activities	$	288.6			$	263.3			$	219.4
Net cash used in investing activities	$	(100.8	)		$	(133.6	)		$	(175.8	)
Net cash used in financing activities	$	(80.7	)		$	(109.0	)		$	(113.9	)

Net Cash Provided by Operating Activities

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.

2017 compared to 2016

Net cash provided by operating activities increased by $43.9 million in 2017, due to improved operating results.

Net Cash Used in Investing Activities

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 in Waterford, Ireland.

2017 compared to 2016

Net cash used in investing activities decreased by $42.2 million in 2017, mostly due to a $39.4 million decrease in capital spending due to the completion of several major projects, including certain components of our new facility in Waterford, Ireland.

Net Cash Used in Financing Activities

2018 compared to 2017

Net cash used in financing activities decreased by $28.3 million in 2018, primarily due to lower debt repayment activity in 2018.

2017 compared to 2016

Net cash used in financing activities decreased by $4.9 million in 2017, due to a decrease in net debt repayments, partially offset by an increase in purchases under our share repurchase programs.

We paid cash dividends totaling $42.1 million ($0.57 per share), $39.1 million ($0.53 per share), and $35.8 million ($0.49 per share) during 2018, 2017, and 2016, respectively.

Liquidity and Capital Resources

The table below presents selected liquidity and capital measures as of:

($ in millions)	December 31, 2018				December 31, 2017
Cash and cash equivalents	$	337.4			$	235.9
Working capital	$	610.7			$	464.0
Total debt	$	196.1			$	197.0
Total equity	$	1,396.3			$	1,279.9
Net debt-to-total invested capital	N/A				N/A

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. Net debt is defined as total debt less cash and cash equivalents, and total invested capital is defined as the sum of net debt and total equity. Net debt and total invested capital are non-U.S. GAAP financial measures that should not be used as a substitute for the comparable U.S. GAAP financial measures. The non-U.S. GAAP financial measures are incorporated into our discussion and analysis as management believes that this information provides users with a valuable insight into our overall performance and financial position.

Cash and cash equivalents – Our cash and cash equivalents balance at December 31, 2018 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 December 31, 2018 included $174.6 million of cash held by subsidiaries within the U.S., and $162.8 million of cash held by subsidiaries outside of the U.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 of China and Mexico) and decided that those profits were no longer permanently reinvested. As of January 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 $79.7 million of undistributed earnings from foreign subsidiaries to the U.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 at December 31, 2018 increased by $146.7 million, or 31.6%, as compared to December 31, 2017, including a decrease of $16.5 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 $107.1 million, $43.8 million, $7.0 million, and $11.3 million, respectively. The increase in accounts receivable was due to increased sales activity, longer customer payment terms, and our adoption of the new revenue recognition guidance. The increase in current liabilities was due to an increase in accrued salaries, wages and benefits.

Debt and credit facilities - The $0.9 million decrease in total debt at December 31, 2018, as compared to December 31, 2017, primarily resulted from foreign currency rate fluctuations.

Our sources of liquidity include our Credit Facility. At December 31, 2018, we had $28.6 million in outstanding long-term borrowings under this facility, of which $4.6 million was denominated in Yen and $24.0 million was denominated in Euro. These borrowings, together with outstanding letters of credit of $2.5 million, resulted in a borrowing capacity available under our Credit Facility of $268.9 million at December 31, 2018. We do not expect

any significant limitations on our ability to access this source of funds. Please refer to Note 9, 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, 2018, 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 2019.

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 at December 31, 2018. These obligations are not expected to have a material impact on liquidity.

				Payments Due By Period
($ in millions)	Total			Less than 1 year			1 - 3 years			3 - 5 years			More than 5 years
Purchase obligations (1)	$	72.7		$	14.0		$	18.7		$	18.5		$	21.5
Debt (excluding unamortized debt issuance costs)	196.7			0.1			28.6			42.0			126.0
Interest on debt and interest rate swaps (2)	42.0			6.8			13.2			10.7			11.3
Operating lease obligations	81.5			13.0			18.3			12.4			37.8
Other long-term liabilities (3)	3.3			0.4			0.8			0.9			1.2
Total contractual obligations (4)	$	396.2		$	34.3		$	79.6		$	84.5		$	197.8

(1)	Our business creates a need to enter into various commitments with suppliers. In accordance with U.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 $3.9 million in 2019. Please refer to Note 14, Benefit Plans, for estimated benefit payments over the next ten years.

Reserves for uncertain tax positions - The table above does not include $3.9 million of total gross unrecognized tax benefits as of December 31, 2018. 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.

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

$3.4 million at December 31, 2018, of which $0.9 million is in excess of our deductible and, therefore, is reimbursable by the insurance company.

OFF-BALANCE SHEET ARRANGEMENTS

At December 31, 2018, we had no off-balance sheet financing arrangements other than operating leases, unconditional purchase obligations incurred in the ordinary course of business, and outstanding letters of credit related to various insurance programs.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Management’s discussion and analysis addresses consolidated financial statements that are prepared in accordance with U.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 Accounting Standards Codification (“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 in June 2013 in return for the exclusive use of the SmartDose® technology platform within a specific therapeutic area. As of December 31, 2018, there was $6.5 million of unearned income related to this payment, of which $0.9 million was included in other current liabilities and $5.6 million was included in other long-term liabilities. The unearned income is being recognized as income on a straight-line basis over the remaining term of the agreement. The agreement does not include a future minimum purchase commitment from the customer.

Our revenue can be generated from contracts with multiple performance obligations. When a sales agreement involves multiple performance obligations, each obligation is separately identified and the transaction price is allocated based on the amount of consideration we expect to be entitled 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 or liabilities result from transactions with revenue recorded over time. If the measure of remaining rights exceeds the measure of the remaining performance obligations, we record a contract asset. Contract assets are recorded on the 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, 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. During 2018, as part of our 2018 restructuring plan, we recorded within other expense a $2.2 million non-cash asset write-down associated with the discontinued use of certain equipment. During 2016, as part of our 2016 restructuring plan, we recorded within other expense a $4.5 million non-cash asset write-down associated with the discontinued use of certain equipment.

Impairment of Goodwill and Other Intangible Assets: Goodwill and indefinite-lived intangible assets are 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. In January 2017, the FASB issued guidance which removes the second step of the goodwill impairment test. A goodwill impairment charge will now be 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. This guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2019. Early adoption is permitted. We adopted this guidance as of January 1, 2017, on a prospective basis. 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. Recent 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. As each of our reporting units had a fair value in excess of its carrying value of at least 180% within our 2016 annual impairment test, we elected to follow this guidance for our 2017 and 2018 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 and 2018.

At December 31, 2015, a trademark had been determined to have an indefinite life and, therefore, was not subject to amortization. During 2016, as part of our 2016 restructuring plan, we recorded within other expense a $10.0 million non-cash asset write-down associated with the discontinued use of this trademark.

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. During 2016, as part of our 2016 restructuring plan, we recorded within other expense a $2.8 million non-cash asset write-down associated with the discontinued use of a patent.

Employee Benefits: We maintain funded and unfunded defined benefit pension plans in the U.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. 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 our U.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. Under U.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 $0.5 million, and every 25-basis point reduction in our discount rate would increase pension expense by $0.5 million. A decrease in the discount rate increases the present value of benefit obligations. Our net pension underfunded balance at December 31, 2018 was $52.5 million, compared to $48.5 million at December 31, 2017. Our underfunded balance for other postretirement benefits was $6.0 million at December 31, 2018, compared to $7.1 million at December 31, 2017.

Income Taxes: We estimate income taxes payable based upon current domestic and international tax legislation. In addition, deferred income tax assets and liabilities are established to recognize differences between the tax basis and financial statement carrying values of assets and liabilities. We maintain valuation allowances where it is more likely than not that all or a portion of a deferred tax asset will not be realized. The recoverability of tax assets is subject to our estimates of future profitability, 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.