Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

55K characters. Original on sec.gov · Markdown

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

The following discussion is intended to further the reader’s understanding of the consolidated financial condition and results of operations of our Company. It should be read in conjunction with our condensed consolidated financial statements and accompanying notes elsewhere in this Quarterly Report on Form 10-Q (“Form 10-Q”) as well as Management’s Discussion and Analysis of Financial Condition and Results of Operations and the consolidated financial statements and accompanying notes included in our 2020 Annual Report. Our historical financial statements may not be indicative of our future performance. This Management’s Discussion and Analysis of Financial Condition and Results of Operations contains a number of forward-looking statements, all of which are based on our current expectations and could be affected by the uncertainties and risks discussed in Part I, Item 1A of our 2020 Annual Report and in Part II, Item 1A of this Form 10-Q.

Throughout this section, references to “Notes” refer to the notes to our condensed consolidated financial statements (unaudited) in Part I, Item 1 of this Form 10-Q, unless otherwise indicated.

Non-U.S. GAAP Financial Measures

For the purpose of aiding the comparison of our year-over-year results, we may refer to net sales and other financial results excluding the effects of changes in foreign currency exchange rates. Organic net sales exclude the impact from acquisitions and/or divestitures and translate the current-period reported sales of subsidiaries whose functional currency is other than USD at the applicable foreign exchange rates in effect during the comparable prior-year period. We may also refer to adjusted consolidated operating profit and adjusted consolidated operating profit margin, which exclude the effects of unallocated items. The unallocated items are not representative of ongoing operations, and generally include restructuring and related charges, certain asset impairments, and other specifically-identified income or expense items. The re-measured results excluding effects from currency translation, the impact from acquisitions and/or divestitures, and excluding the effects of unallocated items are not in conformity with U.S. GAAP and should not be used as a substitute for the comparable U.S. GAAP financial measures. The non-U.S. GAAP financial measures are incorporated in our discussion and analysis as management uses them in evaluating our results of operations and believes that this information provides users with a valuable insight into our overall performance and financial position.

Our Operations

We are a leading global manufacturer in the design and production of technologically advanced, high-quality, integrated containment and delivery systems for injectable drugs and healthcare products. Our products include a variety of primary packaging, containment solutions, reconstitution and transfer systems, and drug delivery systems, as well as contract manufacturing, analytical lab services and integrated solutions. Our customers include the leading biologic, generic, pharmaceutical, diagnostic, and additional medical device companies in the world. Our top priority is delivering quality products that meet the exact product specifications and quality standards customers require and expect. This focus on quality includes a commitment to excellence in manufacturing, scientific and technical expertise and management, which enables us to partner with our customers in order to deliver safe, effective drug products to patients quickly and efficiently.

Table of Contents

Our business operations are organized into two reportable segments, Proprietary Products and Contract-Manufactured Products. Our Proprietary Products reportable segment offers proprietary packaging, containment and drug delivery products, along with analytical lab services and other integrated services and solutions, primarily to biologic, generic and pharmaceutical drug customers. Our Contract-Manufactured Products reportable segment serves as a fully integrated business, focused on the design, manufacture, and automated assembly of complex devices, primarily for pharmaceutical, diagnostic, and medical device customers. We also maintain collaborations to share technologies and market products with affiliates in Japan and Mexico.

Impact of COVID-19

West has been actively monitoring the COVID-19 situation and its impact globally. Our primary objectives have remained the same throughout the pandemic: to support the safety of our team members and their families and continue to support patients around the world. Throughout the COVID-19 pandemic, our production facilities have continued to operate as they had prior to the pandemic, other than for enhanced safety measures intended to prevent the spread of the virus and higher levels of production at certain plant locations to meet additional customer demand. Our capital and financial resources, including overall liquidity, remain strong. The remote working arrangements and travel restrictions imposed by various governments have had limited impact on our ability to maintain operations, as our manufacturing operations have generally been exempted from stay-at-home orders. However, we cannot predict the impact of the progression of the COVID-19 pandemic on future results due to a variety of factors, including the continued good health of our employees, the ability of suppliers to continue to operate and deliver, the ability of West and its customers to maintain operations, continued access to transportation resources, the changing needs and priorities of customers, any further government and/or public actions taken in response to the pandemic and ultimately the length of the pandemic. We will continue to closely monitor the COVID-19 pandemic in order to ensure the safety of our people and our ability to serve our customers and patients worldwide.

2021 Financial Performance Summary

The following tables present a reconciliation from U.S. GAAP to non-U.S. GAAP financial measures for the three and nine months ended September 30, 2021:


($ in millions, except per share data)	Operating Profit		Income tax expense		Net income		Diluted EPS
Three months ended September 30, 2021 GAAP	$	181.4	$	12.0	$	175.6	$	2.31
Unallocated items:
Restructuring and related charges	0.3		0.1		0.2		—
Amortization of acquisition-related intangible assets (2)	0.2		—		0.7		0.01
Cost investment activity (3)	0.9		0.2		0.7		0.01
Royalty acceleration (5)	—		20.4		(20.4)		(0.27)
Three months ended September 30, 2021 adjusted amounts (non-U.S. GAAP)	$	182.8	$	32.7	$	156.8	$	2.06

Table of Contents


($ in millions, except per share data)	Operating Profit		Income tax expense		Net income		Diluted EPS
Nine months ended September 30, 2021 GAAP	$	568.3	$	73.0	$	514.1	$	6.78
Unallocated items:
Restructuring and related charges	2.5		0.6		1.9		0.02
Pension settlement (1)	—		0.2		0.6		0.01
Amortization of acquisition-related intangible assets (2)	0.6		0.1		2.1		0.03
Cost investment activity (3)	1.8		(0.1)		1.9		0.02
Tax law changes (4)	—		1.4		(1.4)		(0.02)
Royalty acceleration (5)	—		20.4		(20.4)		(0.27)
Nine months ended September 30, 2021 adjusted amounts (non-U.S. GAAP)	$	573.2	$	95.6	$	498.8	$	6.57

During the three and nine months ended September 30, 2021, we recorded a tax benefit of $8.4 million and $26.9 million, respectively, associated with stock-based compensation.

The following tables present a reconciliation from U.S. GAAP to non-U.S. GAAP financial measures for the three and nine months ended September 30, 2020:


($ in millions, except per share data)	Operating Profit		Income tax expense		Net income		Diluted EPS
Three months ended September 30, 2020 GAAP	$	99.2	$	21.1	$	82.3	$	1.09
Unallocated items:
Pension settlement (1)	—		0.3		0.8		0.01
Restructuring and severance related charges	4.5		1.1		3.4		0.04
Amortization of acquisition-related intangible assets (2)	0.2		—		0.7		0.01
Three months ended September 30, 2020 adjusted amounts (non-U.S. GAAP)	$	103.9	$	22.5	$	87.2	$	1.15


($ in millions, except per share data)	Operating Profit		Income tax expense		Net income		Diluted EPS
Nine months ended September 30, 2020 GAAP	$	290.8	$	52.1	$	247.8	$	3.28
Unallocated items:
Pension settlement (1)	—		0.8		2.6		0.03
Restructuring and severance related charges	6.7		1.7		5.0		0.06
Amortization of acquisition-related intangible assets (2)	0.4		0.1		2.9		0.04
Nine months ended September 30, 2020 adjusted amounts (non-U.S. GAAP)	$	297.9	$	54.7	$	258.3	$	3.41

During the three and nine months ended September 30, 2020, we recorded a tax benefit of $2.0 million and $14.0 million, respectively, associated with stock-based compensation.

Table of Contents

(1)The Company recorded a pension settlement charge within other nonoperating (income) expense, as it determined that normal-course lump-sum payments for our U.S. qualified, and in 2020 our non-qualified, defined benefit pension plan exceeded the threshold for settlement accounting.

(2)During the three and nine months ended September 30, 2021, the Company recorded $0.2 million and $0.6 million, respectively, of amortization expense within operating profit associated with an intangible asset acquired during the second quarter of 2020. During the three and nine months ended September 30, 2021, the Company recorded $0.5 million and $1.6 million, respectively, or amortization expense in association with an acquisition of increased ownership interest in Daikyo. During the three and nine months ended September 30, 2020 the Company recorded $0.2 million and $0.4 million, respectively, of amortization expense within operating profit associated with an intangible asset acquired during the second quarter of 2020. During the three and nine months ended September 30, 2020, the Company recorded $0.5 million and $2.5 million, respectively, of amortization expense in association with an acquisition of increased ownership interest in Daikyo.

(3)During the three months ended September 30, 2021, we recorded a net loss on the sale of one of the Company's cost investments. During the nine months ended September 30, 2021, we recorded an impairment charge on one of our cost investments, partially offset by the gain on the sale of a cost investment.

(4)During the nine months ended September 30, 2021, the Company recorded a tax benefit of $1.4 million due to the impact of a United Kingdom tax law change enacted during the period.

(5)During the three and nine months ended September 30, 2021, the Company prepaid future royalties from one of its subsidiaries, which resulted in a $20.4 million tax benefit.

RESULTS OF OPERATIONS

We evaluate the performance of our segments based upon, among other things, segment net sales and operating profit. Segment operating profit excludes general corporate costs, which include executive and director compensation, stock-based compensation, certain pension and other retirement benefit costs, and other corporate facilities and administrative expenses not allocated to the segments. Also excluded are items that we consider not representative of ongoing operations. Such items are referred to as other unallocated items for which further information can be found above in the reconciliation from U.S. GAAP to non-U.S. GAAP financial measures.

Percentages in the following tables and throughout the Results of Operations section may reflect rounding adjustments.

Net Sales

The following table presents net sales, consolidated and by reportable segment, for the three months ended September 30, 2021 and 2020:


	Three Months Ended September 30,				Percentage Change
($ in millions)	2021		2020		As-Reported		Organic
Proprietary Products	$	577.0	$	421.5	36.9	%	35.7	%
Contract-Manufactured Products	129.7		126.6		2.4	%	2.1	%
Intersegment sales elimination	(0.2)		(0.1)		—		—
Consolidated net sales	$	706.5	$	548.0	28.9	%	27.9	%

Consolidated net sales increased by $158.5 million, or 28.9%, for the three months ended September 30, 2021, as compared to the same period in 2020, including a favorable foreign currency translation impact of $5.5 million.

Table of Contents

Excluding foreign currency translation effects, consolidated net sales for the three months ended September 30, 2021 increased by $153.0 million, or 27.9%, as compared to the same period in 2020.

Proprietary Products – Proprietary Products net sales increased by $155.5 million, or 36.9%, for the three months ended September 30, 2021, as compared to the same period in 2020, including a favorable foreign currency translation impact of $5.0 million. Excluding foreign currency translation effects, net sales for the three months ended September 30, 2021 increased by $150.5 million, or 35.7%, as compared to the same period in 2020, primarily due to growth in our high-value product offerings, including Westar®, NovaPure®, and FluroTec®-coated components. The three months ended September 30, 2021 included approximately $115 million in COVID-19 related activity for vaccines, antiviral treatments and treatment of underlying COVID-19 symptoms. The three months ended September 30, 2020 included approximately $32 million in COVID-19 related activity for antiviral treatments and treatment of underlying COVID-19 symptoms.

Contract-Manufactured Products – Contract-Manufactured Products net sales increased by $3.1 million, or 2.4%, for the three months ended September 30, 2021, as compared to the same period in 2020, including a favorable foreign currency translation impact of $0.5 million. Excluding foreign currency translation effects, net sales for the three months ended September 30, 2021 increased by $2.6 million, or 2.1%, as compared to the same period in 2020, due to an increase in the sale of healthcare-related medical devices.

The intersegment sales elimination, which is required for the presentation of consolidated net sales, represents the elimination of components sold between our segments.

The following table presents net sales, consolidated and by reportable segment, for the nine months ended September 30, 2021 and 2020:



	Nine Months Ended September 30,				Percentage Change
($ in millions)	2021		2020		As-Reported		Organic
Proprietary Products	$	1,708.0	$	1,194.5	43.0	%	38.1	%
Contract-Manufactured Products	393.2		372.5		5.6	%	3.1	%
Intersegment sales elimination	(0.4)		(0.3)		—		—
Consolidated net sales	$	2,100.8	$	1,566.7	34.1	%	29.8	%

Consolidated net sales increased by $534.1 million, or 34.1%, for the nine months ended September 30, 2021, as compared to the same period in 2020, including a favorable foreign currency translation impact of $67.2 million. Excluding foreign currency translation effects, consolidated net sales for the nine months ended September 30, 2021 increased by $466.9 million, or 29.8%, as compared to the same period in 2020.

Proprietary Products – Proprietary Products net sales increased by $513.5 million, or 43.0%, for the nine months ended September 30, 2021, as compared to the same period in 2020, including a favorable foreign currency translation impact of $57.9 million. Excluding foreign currency translation effects, net sales for the nine months ended September 30, 2021 increased by $455.6 million, or 38.1%, as compared to the same period in 2020, primarily due to growth in our high-value product offerings, including Westar®, NovaPure®, Daikyo®, and FluroTec®-coated components. The nine months ended September 30, 2021 included approximately $335 million in COVID-19 related activity for vaccines, antiviral treatments and treatment of underlying COVID-19 symptoms. The nine months ended September 30, 2020 included approximately $52 million in COVID-19 related activity for antiviral treatments and treatment of underlying COVID-19 symptoms.

Contract-Manufactured Products – Contract-Manufactured Products net sales increased by $20.7 million, or 5.6%, for the nine months ended September 30, 2021, as compared to the same period in 2020, including a favorable foreign currency translation impact of $9.3 million. Excluding foreign currency translation effects, net sales for the nine months ended September 30, 2021 increased by $11.4 million, or 3.1%, as compared to the same period in 2020, due to an increase in the sale of healthcare-related medical devices.

Table of Contents

Gross Profit

The following table presents gross profit and related gross profit margins, consolidated and by reportable segment:


	Three Months Ended September 30,						Nine Months Ended September 30,
($ in millions)	2021			2020			2021			2020
Proprietary Products:
Gross profit	$	267.3		$	171.9		$	811.5		$	492.8
Gross profit margin	46.3		%	40.8		%	47.5		%	41.3		%
Contract-Manufactured Products:
Gross profit	$	20.9		$	22.7		$	63.7		$	63.9
Gross profit margin	16.1		%	17.9		%	16.2		%	17.2		%
Consolidated gross profit	$	288.2		$	194.6		$	875.2		$	556.7
Consolidated gross profit margin	40.8		%	35.5		%	41.7		%	35.5		%

Consolidated gross profit increased by $93.6 million, or 48.1%, for the three months ended September 30, 2021, as compared to the same period in 2020, including a favorable foreign currency translation impact of $1.6 million for the three months ended September 30, 2021, as compared to the same period in 2020. Consolidated gross profit margin increased by 5.3 margin points for the three months ended September 30, 2021, as compared to the same period in 2020.

Consolidated gross profit increased by $318.5 million, or 57.2% for the nine months ended September 30, 2021, as compared to the same period in 2020, including a favorable foreign currency translation impact of $25.7 million for the nine months ended September 30, 2021, as compared to the same period in 2020. Consolidated gross profit margin increased by 6.2 margin points for the nine months ended September 30, 2021, as compared to the same period in 2020.

Proprietary Products - Proprietary Products gross profit increased by $95.4 million, or 55.5%, for the three months ended September 30, 2021, as compared to the same period in 2020, including a favorable foreign currency translation impact of $1.5 million. Proprietary Products gross profit margin increased by 5.5 margin points for the three months ended September 30, 2021, as compared to the same periods in 2020, due to a favorable mix of products sold, sales price increases and production efficiencies, partially offset by increased overhead costs including compensation costs.

Proprietary Products gross profit increased by $318.7 million, or 64.7%, for the nine months ended September 30, 2021, as compared to the same period in 2020, including a favorable foreign currency translation impact of $23.9 million. Proprietary Products gross profit margin increased by 6.2 margin points for the nine months ended September 30, 2021, as compared to the same period in 2020, due to a favorable mix of products sold, sales price increases and production efficiencies, partially offset by increased overhead costs including compensation costs.

Contract-Manufactured Products - Contract-Manufactured Products gross profit decreased by $1.8 million, or 7.9%, for the three months ended September 30, 2021, as compared to the same period in 2020, including a favorable foreign currency translation impact of $0.1 million. Contract-Manufactured Products gross profit margin decreased by 1.8 margin points for the three months ended September 30, 2021, as compared to the same period in 2020, due to unfavorable mix of products sold and timing of the pass-through of raw material price increases to customers.

Table of Contents

Contract-Manufactured Products gross profit decreased by $0.2 million, or 0.3%, for the nine months ended September 30, 2021, as compared to the same period in 2020, including a favorable foreign currency translation impact of $1.8 million. Contract-Manufactured Products gross profit margin decreased by 1.0 margin points for the nine months ended September 30, 2021, as compared to the same period in 2020, due to unfavorable mix of products sold and timing of the pass-through of raw material price increases to customers, partially offset by production efficiencies.

Research and Development (“R&D”) Costs

The following table presents R&D costs, consolidated and by reportable segment:


	Three Months Ended September 30,				Nine Months Ended September 30,
($ in millions)	2021		2020		2021		2020
Proprietary Products	$	13.1	$	12.5	$	39.1	$	34.0
Contract-Manufactured Products	—		—		—		—
Consolidated R&D costs	$	13.1	$	12.5	$	39.1	$	34.0

Consolidated R&D costs increased by $0.6 million, or 4.8%, and $5.1 million, or 15.0%, for the three and nine months ended September 30, 2021, respectively, as compared to the same period in 2020. Efforts remain focused on the continued investment in self-injection systems development, fluid transfer admixture devices, elastomeric packaging components, and formulation development.

All of the R&D costs incurred during the three and nine months ended September 30, 2021 related to Proprietary Products.

Selling, General and Administrative (“SG&A”) Costs

The following table presents SG&A costs, consolidated and by reportable segment and corporate:


	Three Months Ended September 30,						Nine Months Ended September 30,
($ in millions)	2021			2020			2021			2020
Proprietary Products	$	58.5		$	50.6		$	180.0		$	144.7
Contract-Manufactured Products	3.9			3.7			11.4			11.4
Corporate	29.5			21.9			73.4			69.6
Consolidated SG&A costs	$	91.9		$	76.2		$	264.8		$	225.7
SG&A as a % of net sales	13.0		%	13.9		%	12.6		%	14.4		%

Consolidated SG&A costs increased by $15.7 million, or 20.6%, for the three months ended September 30, 2021, as compared to the same period in 2020, due to an increase in compensation costs, costs related to professional services and an unfavorable foreign currency translation impact of $0.4 million.

Consolidated SG&A costs increased by $39.1 million, or 17.3%, for the nine months ended September 30, 2021, as compared to the same period in 2020, due to an increase in compensation costs and an unfavorable foreign currency translation impact of $4.5 million.

Proprietary Products - Proprietary Products SG&A costs increased by $7.9 million, or 15.6%, for the three months ended September 30, 2021, as compared to the same period in 2020. Proprietary Products SG&A costs increased primarily due to an increase in compensation costs and costs related to professional services.

Table of Contents

Proprietary Products SG&A costs increased by $35.3 million, or 24.4%, for the nine months ended September 30, 2021, as compared to the same period in 2020. Proprietary Products SG&A costs increased primarily due to an increase in compensation costs, costs related to professional services and an unfavorable foreign currency translation impact of $4.2 million.

Contract-Manufactured Products - Contract-Manufactured Products SG&A costs increased by $0.2 million, or 5.4% for the three months ended September 30, 2021, as compared to the same period in 2020, and remained consistent for the nine months ended September 30, 2021, as compared to the same period in 2020.

Corporate - Corporate SG&A costs increased by $7.6 million, or 34.7%, for the three months ended September 30, 2021, as compared to the same period in 2020, primarily due to an increase in compensation costs and costs related to professional services.

Corporate SG&A costs increased by $3.8 million, or 5.5%, for the nine months ended September 30, 2021, as compared to the same period in 2020, primarily due to an increase in compensation costs and costs related to professional services.

Other Expense (Income)

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


Expense (Income)	Three Months Ended September 30,				Nine Months Ended September 30,
($ in millions)	2021		2020		2021		2020
Proprietary Products	$	0.2	$	1.3	$	(1.9)	$	1.2
Contract-Manufactured Products	0.2		0.2		0.4		0.4
Corporate and unallocated	1.4		5.2		4.5		4.6
Consolidated other expense	$	1.8	$	6.7	$	3.0	$	6.2

Other income and expense items, consisting of foreign exchange transaction gains and losses, gains and losses on the sale of fixed assets, development and licensing income, contingent consideration, fixed asset impairments and miscellaneous income and charges, are generally recorded within segment results.

Consolidated other expense (income) changed by $4.9 million for the three months ended September 30, 2021, as compared to the same period in 2020, due to a decrease in restructuring and related charges, and fixed asset impairments recorded within the Proprietary Products segment, offset by a net loss recorded in the three months ended September 30, 2021 as a result of the sale one of the Company's cost investments.

Consolidated other expense (income) changed by $3.2 million for the nine months ended September 30, 2021, as compared to the same period in 2020, due to a decrease in restructuring and related charges, and fixed asset impairments recorded within the Proprietary Products segment, offset by a net loss recorded in the nine months ended September 30, 2021 as a result of activity related to the Company's cost investments.

Table of Contents

Operating Profit

The following table presents adjusted operating profit, consolidated and by reportable segment, corporate and unallocated items:


	Three Months Ended September 30,						Nine Months Ended September 30,
($ in millions)	2021			2020			2021			2020
Proprietary Products	$	195.5		$	107.5		$	594.3		$	312.9
Contract-Manufactured Products	16.8			18.8			51.9			52.1
Corporate	(29.5)			(22.4)			(73.0)			(67.1)
Adjusted consolidated operating profit	$	182.8		$	103.9		$	573.2		$	297.9
Adjusted consolidated operating profit margin	25.9		%	19.0		%	27.3		%	19.0		%
Unallocated items	(1.4)			(4.7)			(4.9)			(7.1)
Consolidated operating profit	$	181.4		$	99.2		$	568.3		$	290.8
Consolidated operating profit margin	25.7		%	18.1		%	27.1		%	18.6		%

Consolidated operating profit increased by $82.2 million, or 82.9%, for the three months ended September 30, 2021, as compared to the same period in 2020, including a favorable foreign currency translation impact of $1.2 million for the three months ended September 30, 2021, as compared to the same period in 2020.

Consolidated operating profit increased by $277.5 million, or 95.4%, for the nine months ended September 30, 2021, as compared to the same period in 2020, including a favorable foreign currency translation impact of $20.8 million for the nine months ended September 30, 2021, as compared to the same period in 2020.

Proprietary Products - Proprietary Products operating profit increased by $88.0 million, or 81.9%, for the three months ended September 30, 2021, as compared to the same period in 2020, including a favorable foreign currency translation impact of $1.1 million, due to the factors described above, most notably the sales increase in our high-value product offerings, inclusive of COVID-19 related activity.

Proprietary Products operating profit increased by $281.4 million, or 89.9%, for the nine months ended September 30, 2021, as compared to the same period in 2020, including a favorable foreign currency translation impact of $19.3 million, due to the factors described above, most notably due to the sales increase in our high-value product offerings, inclusive of COVID-19 related activity.

Contract-Manufactured Products - Contract-Manufactured Products operating profit decreased by $2.0 million, or 10.6%, for the three months ended September 30, 2021, as compared to the same period in 2020, including a favorable foreign currency translation impact of $0.1 million, due to the factors described above, most notably due an unfavorable mix of products sold and timing of the pass-through of raw material price increases to customers.

Contract-Manufactured Products operating profit decreased by $0.2 million, or 0.4%, for the nine months ended September 30, 2021, respectively, as compared to the same period in 2020, including a favorable foreign currency translation impact of $1.5 million, due to the factors described above.

Corporate- Corporate costs increased by $7.1 million, or 31.7%, for the three months ended September 30, 2021, as compared to the same period in 2020, due to the factors described above.

Corporate costs increased by $5.9 million, or 8.8%, for the nine months ended September 30, 2021, respectively, as compared to the same period in 2020, due to the factors described above.

Table of Contents

Unallocated items – Other unallocated items during the three months ended September 30, 2021 consisted of $0.3 million in restructuring and related costs, $0.2 million of amortization expense associated with an acquisition of an intangible asset during the second quarter of 2020, and a net loss of $0.9 million on the sale of one of the Company's cost investments.

Other unallocated items during the nine months ended September 30, 2021 consisted of $2.5 million in restructuring and related costs, $0.6 million of amortization expense associated with an acquisition of an intangible asset during the second quarter of 2020, and a net loss in our cost investment activity of $1.8 million.

Other unallocated items during the three months ended September 30, 2020 consisted of $4.5 million in restructuring and related costs and $0.2 million of amortization expense associated with an acquisition of an intangible asset during the second quarter of 2020. Other unallocated items during the nine months ended September 30, 2020 consisted of $4.5 million in restructuring and related charges, $2.2 million in severance related costs, and $0.4 million of amortization expense associated with an acquisition of an intangible asset. Please refer to Note 15, Other Expense (Income)**, for further discussion of these items.

Interest Expense, Net

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


	Three Months Ended September 30,				Nine Months Ended September 30,
($ in millions)	2021		2020		2021		2020
Interest expense	$	2.7	$	2.4	$	7.6	$	7.1
Capitalized interest	(0.9)		(0.3)		(2.0)		(1.0)
Interest income	(0.4)		(0.2)		(0.7)		(1.2)
Interest expense, net	$	1.4	$	1.9	$	4.9	$	4.9

Interest expense, net, decreased by $0.5 million, or 26.3%, for the three months ended September 30, 2021, as compared to the same period in 2020, and remained consistent for the nine months ended September 30, 2021, as compared to the same period in 2020.

Other Nonoperating (Income) Expense

Other nonoperating (income) expense changed by $0.7 million for the three months ended September 30, 2021, as compared to the same period in 2020, primarily due to the pension settlement charge recorded in 2020. In the three months ended September 30, 2020, we determined that normal-course lump-sum payments for our U.S. qualified defined benefit pension plan exceeded the threshold for settlement accounting under U.S. GAAP for the year.

Other nonoperating (income) expense changed by $3.3 million for the nine months ended September 30, 2021, as compared to the same period in 2020, primarily due to a reduction in the pension settlement charge and by a decrease in U.S. pension interest cost. In each nine month period, we determined that normal-course lump-sum payments for our U.S. qualified, and non-qualified in 2020, defined benefit pension plan exceeded the threshold for settlement accounting under U.S. GAAP for the year.

Income Tax Expense

The provision for income taxes was $12.0 million and $21.1 million for the three months ended September 30, 2021 and 2020, respectively, and the effective tax rate was 6.6% and 21.6%, respectively.

The decrease in the effective tax rate is primarily due to the Company's prepayment of future royalties from one of its subsidiaries, which resulted in a $20.4 million tax benefit for the three months ended September 30, 2021.

Table of Contents

The provision for income taxes was $73.0 million and $52.1 million for the nine months ended September 30, 2021 and 2020, respectively, and the effective tax rate was 12.9% and 18.2%, respectively. The decrease in the effective tax rate is primarily due to the Company's prepayment of future royalties from one of its subsidiaries, which resulted in a $20.4 million tax benefit for the nine months ended September 30, 2021.

Equity in Net Income of Affiliated Companies

Equity in net income of affiliated companies represents the contribution to earnings from our 49% ownership interest in Daikyo, and our 49% ownership interest in five companies majority-owned by a long-time partner located in Mexico. Please refer to Note 7, Affiliated Companies, for further discussion. Equity in net income of affiliated companies increased by $0.8 million for the three months ended September 30, 2021, as compared to the same period in 2020, due to favorable operating results at Daikyo and the Mexico affiliates.

Equity in net income of affiliated companies increased by $6.4 million for the nine months ended September 30, 2021, as compared to the same period in 2020, due to favorable operating results at Daikyo and the Mexico affiliates and reduction in amortization expense related to our increase in ownership interest in Daikyo of $0.9 million.

FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

Cash Flows

The following table presents cash flow data for the nine months ended September 30:


($ in millions)	2021		2020
Net cash provided by operating activities	$	423.2	$	323.8
Net cash used in investing activities	$	(175.7)	$	(121.9)
Net cash used in financing activities	$	(161.9)	$	(128.4)

Net Cash Provided by Operating Activities – Net cash provided by operating activities increased by $99.4 million for the nine months ended September 30, 2021, as compared to the same period in 2020, primarily due to improved operating results, offset by increases in working capital and timing of tax payments in 2021.

Net Cash Used in Investing Activities – Net cash used in investing activities increased by $53.8 million for the nine months ended September 30, 2021, as compared to the same period in 2020, due to the increase in capital expenditures in 2021 to meet customer demand.

Net Cash Used in Financing Activities – Net cash used in financing activities increased by $33.5 million for the nine months ended September 30, 2021, as compared to the same period in 2020, primarily due to increases in purchases under our share repurchases.

Table of Contents

Liquidity and Capital Resources

The table below presents selected liquidity and capital measures:


($ in millions)	September 30, 2021		December 31, 2020
Cash and cash equivalents	$	688.0	$	615.5
Accounts receivable, net	$	476.4	$	385.3
Inventories	$	353.8	$	321.3
Accounts payable	$	207.7	$	213.1
Debt	$	254.1	$	255.2
Equity	$	2,202.3	$	1,854.5
Working capital	$	1,039.7	$	870.3

Cash and cash equivalents include all instruments that have maturities of ninety days or less when purchased. Working capital is defined as current assets less current liabilities.

Cash and cash equivalents – Our cash and cash equivalents balance at September 30, 2021 consisted of cash held in depository accounts with banks around the world and cash invested in high-quality, short-term investments. The cash and cash equivalents balance at September 30, 2021 included $234.2 million of cash held by subsidiaries within the U.S., and $453.8 million of cash held by subsidiaries outside of the U.S. During the nine months ended September 30, 2021, we purchased 479,000 shares of our common stock under the share repurchase program at a cost of $137.1 million, or an average price of $286.23 per share.

Working capital – Working capital at September 30, 2021 increased by $169.4 million, or 19.5%, as compared to December 31, 2020, which includes an unfavorable foreign currency translation impact of $18.9 million. Excluding the impact of currency exchange rates, cash and cash equivalents, accounts receivable, inventories, and total current liabilities increased by $85.5 million, $104.1 million, $42.1 million, and $66.4 million, respectively. The increase in accounts receivable was due to increased sales activity. The increase in inventories that occurred in the period was to ensure we have sufficient inventory on hand to support the needs of our customers. The increase in total current liabilities was primarily due to the reclassification of a portion of the Company's debt from long-term to short-term.

Debt and credit facilities – The $1.1 million decrease in total debt at September 30, 2021, as compared to December 31, 2020, resulted from debt repayments under our Term Loan.

Our sources of liquidity include our Credit Facility. At September 30, 2021, we had no outstanding borrowings under the Credit Facility. At September 30, 2021, the borrowing capacity available under the Credit Facility, including outstanding letters of credit of $2.4 million, was $297.6 million. We do not expect any significant limitations on our ability to access this source of funds.

Pursuant to the financial covenants in our debt agreements, we are required to maintain established interest coverage ratios and to not exceed established leverage ratios. In addition, the agreements contain other customary covenants, none of which we consider restrictive to our operations. At September 30, 2021, we were in compliance with all of our debt covenants.

We believe that cash on hand and cash generated from operations, together with availability under our Credit Facility, will be adequate to address our foreseeable liquidity needs based on our current expectations of our business operations, capital expenditures and scheduled payments of debt obligations.

Table of Contents

Commitments and Contractual Obligations

A table summarizing the amounts and estimated timing of future cash payments resulting from commitments and contractual obligations was provided in our 2020 Annual Report. During the three months ended September 30, 2021, there were no material changes outside of the ordinary course of business to our commitments and contractual obligations.

OFF-BALANCE SHEET ARRANGEMENTS

At September 30, 2021, we had no off-balance sheet financing arrangements other than unconditional purchase obligations incurred in the ordinary course of business and outstanding letters of credit related to various insurance programs, as noted in our 2020 Annual Report.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

There have been no changes to the Critical Accounting Policies and Estimates disclosed in Part II, Item 7 of our 2020 Annual Report.

NEW ACCOUNTING STANDARDS

For information on new accounting standards that were issued but not yet adopted, during the three months ended September 30, 2021, and the impact, if any, on our financial position or results of operations, see Note 2, New Accounting Standards.

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

Our disclosure and analysis in this Form 10-Q contains some forward-looking statements that are based on management’s beliefs and assumptions, current expectations, estimates and forecasts. We also provide forward-looking statements in other materials we release to the public, as well as oral forward-looking statements. Such statements provide our current expectations or forecasts of future events. They do not relate strictly to historical or current facts. We have attempted, wherever possible, to identify forward-looking statements by using words such as “plan,” “expect,” “believe,” “intend,” “will,” “estimate,” “continue” and other words of similar meaning in conjunction with, among other things, discussions of future operations and financial performance, as well as our strategy for growth, product development, market position and expenditures. All statements that address operating performance or events or developments that we expect or anticipate will occur in the future - including statements relating to sales and earnings per share growth, cash flows or uses, and statements expressing views about future operating results - are forward-looking statements.

Forward-looking statements are based on current expectations of future events. The forward-looking statements are, and will be, based on management’s then-current views and assumptions regarding future events and operating performance, and speak only as of their dates. Investors should realize that, if underlying assumptions prove inaccurate or unknown risks or uncertainties materialize, actual results could vary materially from our expectations and projections. Investors are therefore cautioned not to place undue reliance on any forward-looking statements.

The following are some important factors that could cause our actual results to differ from our expectations in any forward-looking statements:

sales demand and our ability to meet that demand;
competition from other providers in our businesses, including customers’ in-house operations, and from lower-cost producers in emerging markets, which can impact unit volume, price and profitability;

Table of Contents

customers’ changing inventory requirements and manufacturing plans that alter existing orders or ordering patterns for the products we supply to them;
interruptions or weaknesses in our supply chain, including from reasons beyond our control such as extreme weather, longer-term climate changes, natural disasters, pandemic, war, accidental damage, or unauthorized access to our or our customers’ information and systems, which could cause delivery delays or restrict the availability of raw materials, key purchased components and finished products;
the timing, regulatory approval and commercial success of customer products that incorporate our products and systems;
whether customers agree to incorporate our products and delivery systems with their new and existing drug products, the ultimate timing and successful commercialization of those products and systems, which involves substantial evaluations of the functional, operational, clinical and economic viability of our products, and the rate, timing and success of regulatory approval for the drug products that incorporate our components and systems;
the timely and adequate availability of filling capacity, which is essential to conducting definitive stability trials and the timing of first commercialization of customers’ products in Crystal Zenith prefilled syringes;
average profitability, or mix, of the products sold in any reporting period, including lower-than-expected sales growth of our high-value proprietary product offerings;
maintaining or improving production efficiencies and overhead absorption;
dependence on third-party suppliers and partners, some of which are single-source suppliers of critical materials and products, including our Japanese partner and affiliate, Daikyo;
the loss of key personnel or highly-skilled employees;
the availability and cost of skilled employees required to meet increased production, managerial, research and other needs, including professional employees and persons employed under collective bargaining agreements;
the successful and timely implementation of price increases necessary to offset rising production costs, including raw material prices, particularly petroleum-based raw materials;
the cost and progress of development, regulatory approval and marketing of new products;
our ability to obtain and maintain licenses in any jurisdiction in which we do business;
the relative strength of USD in relation to other currencies, particularly the Euro, SGD, the Danish Krone, Yen, Colombian Peso, Brazilian Real, and the South Korean Won; and
the potential adverse effects of global healthcare legislation on customer demand, product pricing and profitability.

This list sets forth many, but not all, of the factors that could affect our ability to achieve results described in any forward-looking statements. Investors should understand that it is not possible to predict or identify all of the factors and should not consider this list to be a complete statement of all potential risks and uncertainties. For further discussion of these and other factors, see the risk factors disclosed in Part I, Item 1A of our 2020 Annual Report as well as Part II, section 1A of this quarterly report.

Except as required by law or regulation, we undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise.

Table of Contents

Previous: Item 1. FINANCIAL STATEMENTS · Next: Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK