Item 1. FINANCIAL STATEMENTS

85K characters. Original on sec.gov · Markdown

Item 1. FINANCIAL STATEMENTS

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

West Pharmaceutical Services, Inc. and Subsidiaries

(in millions, except per share data)


	Three Months Ended March 31,
	2022		2021
Net sales	$	720.0	$	670.7
Cost of goods and services sold	435.4		398.8
Gross profit	284.6		271.9
Research and development	14.6		12.2
Selling, general and administrative expenses	83.4		80.2
Other (income) expense (Note 15)	(3.1)		3.9
Operating profit	189.7		175.6
Interest expense	2.2		1.9
Interest income	(0.3)		(0.1)
Other nonoperating (income) expense	—		(1.1)
Income before income taxes	187.8		174.9
Income tax expense	21.2		28.7
Equity in net income of affiliated companies	(7.2)		(5.0)
Net income	$	173.8	$	151.2

Net income per share:
Basic	$	2.34	$	2.04
Diluted	$	2.29	$	1.99

Weighted average shares outstanding:
Basic	74.4		73.9
Diluted	76.0		75.8

See accompanying notes to condensed consolidated financial statements.

Table of Contents

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

West Pharmaceutical Services, Inc. and Subsidiaries

(in millions)


	Three Months Ended March 31,
	2022		2021
Net income	$	173.8	$	151.2
Other comprehensive loss, net of tax:
Foreign currency translation adjustments	(22.1)		(28.4)
Defined benefit pension and other postretirement plan adjustments, net of tax of $0.3 and $0.2	0.9		0.6

Net loss on derivatives, net of tax of $(0.8) and $(0.7)	(1.6)		(1.8)
Other comprehensive loss, net of tax	(22.8)		(29.6)
Comprehensive income	$	151.0	$	121.6

See accompanying notes to condensed consolidated financial statements.

Table of Contents

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

West Pharmaceutical Services, Inc. and Subsidiaries

(in millions, except per share data)


	March 31, 2022		December 31, 2021
ASSETS
Current assets:
Cash and cash equivalents	$	667.7	$	762.6
Accounts receivable, net	498.7		489.0
Inventories	416.5		378.4
Other current assets	107.6		112.0
Total current assets	1,690.5		1,742.0
Property, plant and equipment	2,237.0		2,215.0
Less: accumulated depreciation and amortization	1,171.1		1,157.5
Property, plant and equipment, net	1,065.9		1,057.5
Operating lease right-of-use assets	75.6		69.3
Investments in affiliated companies	208.1		207.7
Goodwill	108.8		109.9
Intangible assets, net	21.8		23.0
Deferred income taxes	66.4		48.5
Pension and other postretirement benefits	17.1		16.7
Other noncurrent assets	40.5		39.2
Total Assets	$	3,294.7	$	3,313.8

LIABILITIES AND EQUITY
Current liabilities:
Notes payable and other current debt	$	44.2	$	44.2
Accounts payable	248.2		232.2
Pension and other postretirement benefits	2.4		2.4
Accrued salaries, wages and benefits	77.5		116.3
Income taxes payable	34.7		26.3
Operating lease liabilities	9.8		9.3
Other current liabilities	168.0		163.4
Total current liabilities	584.8		594.1
Long-term debt	208.3		208.8
Deferred income taxes	3.3		4.9
Pension and other postretirement benefits	38.7		40.5
Operating lease liabilities	68.9		63.0
Deferred compensation benefits	26.3		28.9
Other long-term liabilities	38.2		38.2
Total Liabilities	968.5		978.4

Commitments and contingencies (Note 17)

Equity:
Preferred stock, 3.0 million shares authorized; 0 shares issued and outstanding	—		—
Common stock, par value $0.25 per share; 200.0 million shares authorized; shares issued: 75.3 million in 2022 and 2021; shares outstanding: 74.1 million and 74.2 million	18.8		18.8
Capital in excess of par value	219.9		249.0
Retained earnings	2,617.3		2,456.7
Accumulated other comprehensive loss	(182.4)		(159.6)
Treasury stock, at cost (1.2 million and 1.1 million shares)	(347.4)		(229.5)
Total Equity	2,326.2		2,335.4
Total Liabilities and Equity	$	3,294.7	$	3,313.8

See accompanying notes to condensed consolidated financial statements.

Table of Contents

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

West Pharmaceutical Services, Inc. and Subsidiaries

(in millions)


	Three Months Ended March 31,
	2022		2021
Cash flows from operating activities:
Net income	$	173.8	$	151.2
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation	28.7		28.0
Amortization	0.9		1.1
Stock-based compensation	5.5		5.9

Pension settlement charge	0.6		0.6

Contingent consideration payments in excess of acquisition-date liability	(0.4)		(0.4)
Other non-cash items, net	(7.7)		(2.8)
Changes in assets and liabilities	(50.2)		(94.9)
Net cash provided by operating activities	151.2		88.7

Cash flows from investing activities:
Capital expenditures	(65.8)		(54.7)





Other, net	(2.5)		0.2
Net cash used in investing activities	(68.3)		(54.5)

Cash flows from financing activities:



Repayments of long-term debt	(0.6)		(0.6)
Debt issuance costs	(1.1)		—
Dividend payments	(13.4)		(12.6)
Proceeds from stock-based compensation awards	6.3		5.8
Employee stock purchase plan contributions	2.0		1.8
Shares purchased under share repurchase program	(147.1)		(137.1)
Shares repurchased for employee tax withholdings	(18.8)		(13.7)
Net cash used in financing activities	(172.7)		(156.4)
Effect of exchange rates on cash	(5.1)		(9.6)
Net decrease in cash and cash equivalents	(94.9)		(131.8)

Cash, including cash equivalents at beginning of period	762.6		615.5
Cash, including cash equivalents at end of period	$	667.7	$	483.7

See accompanying notes to condensed consolidated financial statements.

Table of Contents

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 1: Basis of Presentation and Summary of Significant Accounting Policies

Basis of Presentation: The condensed consolidated financial statements included in this report are unaudited and have been prepared in accordance with United States (“U.S.”) generally accepted accounting principles (“U.S. GAAP”) for interim financial reporting and U.S. Securities and Exchange Commission (“SEC”) regulations. The year-end condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by U.S. GAAP. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with U.S. GAAP have been condensed or omitted. In the opinion of management, these financial statements include all adjustments, which are of a normal recurring nature, necessary for a fair statement of the financial position, results of operations, cash flows and the change in equity for the periods presented. The condensed consolidated financial statements for the three months ended March 31, 2022, should be read in conjunction with the consolidated financial statements and notes thereto of West Pharmaceutical Services, Inc. and its majority-owned subsidiaries (which may be referred to as “West,” the “Company,” “we,” “us” or “our”) appearing in our Annual Report on Form 10-K for the year ended December 31, 2021 (the “2021 Annual Report”). The results of operations for any interim period are not necessarily indicative of results for the full year.

West has been actively monitoring the coronavirus (“COVID-19”) situation and its impact globally. Our production facilities continue to operate as they had prior to the COVID-19 pandemic, other than for enhanced safety measures intended to prevent the spread of the virus. The remote working arrangements and travel restrictions imposed by various governments had limited impact on our ability to maintain operations, as our manufacturing operations have generally been exempted from stay-at-home orders.

Note 2: New Accounting Standards

Recently Adopted Standards

In November 2021, the Financial Accounting Standards Board ("FASB") issued guidance that seeks to improve the transparency of financial disclosures for government assistance received by business entities. The amendment requires disclosures for transactions with a government accounted for by applying a grant or contribution accounting model by analogy, including (1) the types of transactions, (2) the accounting for those transactions, and (3) the effect of those transactions on an entity’s financial statements. This guidance is effective for fiscal years beginning after December 15, 2021. We adopted this guidance as of January 1, 2022, on a prospective basis. The adoption did not have a material impact on our financial statements.

Standards Issued Not Yet Adopted

In March 2020, the FASB issued guidance which provides optional expedients and exceptions to address the impact of reference rate reform where contracts, hedging relationships and other transactions that reference the London Interbank Offered Rate ("LIBOR") or another reference rate need to be discontinued. This guidance was effective upon issuance and generally can be applied through December 31, 2022. We have identified the contracts impacted by reference rate reform, and have executed certain amendments to replace the use of LIBOR. The Company does not expect such adoption to cause a material impact to the consolidated financial statements.

Table of Contents

Note 3: Revenue

Our revenue results from the sale of goods or services and reflects the consideration to which we expect to be entitled in exchange for those goods or services. We record revenue based on a five-step model, in accordance with ASC Topic 606. Following the identification of a contract with a customer, we identify the performance obligations (goods or services) in the contract, determine the transaction price, allocate the transaction price to the performance obligations in the contract, and recognize the revenue when (or as) we satisfy the performance obligations by transferring the promised goods or services to our customers. A good or service is transferred when (or as) the customer obtains control of that good or service.

The following table presents the approximate percentage of our net sales by market group:


	Three Months Ended March 31,
	2022	2021
Biologics	43 %	39 %
Generics	17 %	18 %
Pharma	24 %	24 %
Contract-Manufactured Products	16 %	19 %
	100 %	100 %

The following table presents the approximate percentage of our net sales by product category:


	Three Months Ended March 31,
	2022	2021
High-Value Product Components	56 %	52 %
High-Value Product Delivery Devices	5 %	5 %
Standard Packaging	23 %	24 %
Contract-Manufactured Products	16 %	19 %
	100 %	100 %

The following table presents the approximate percentage of our net sales by geographic location:


	Three Months Ended March 31,
	2022	2021
Americas	45 %	46 %
Europe, Middle East, Africa	45 %	44 %
Asia Pacific	10 %	10 %
	100 %	100 %

Table of Contents

Contract Assets and Liabilities

The following table summarizes our contract assets and liabilities, excluding contract assets included in accounts receivable, net:


	($ in millions)
Contract assets, December 31, 2021	$	14.6
Contract assets, March 31, 2022	14.8
Change in contract assets - increase (decrease)	$	0.2

Deferred income, December 31, 2021	$	(61.3)
Deferred income, March 31, 2022	(56.8)
Change in deferred income - decrease (increase)	$	4.5

During the three months ended March 31, 2022, $9.7 million of revenue was recognized that was included in deferred income at the beginning of the year.

The majority of the performance obligations within our contracts are satisfied within one year or less. Performance obligations satisfied beyond one year include those relating to a nonrefundable customer payment of $20.0 million received in June 2013 in return for the exclusive use of the SmartDose® technology platform within a specific therapeutic area. As of March 31, 2022, there was $3.7 million of unearned income related to this payment, of which $0.9 million was included in other current liabilities and $2.8 million was included in other long-term liabilities. The unearned income is being recognized as income on a straight-line basis over the remaining term of the agreement. The agreement does not include a future minimum purchase commitment from the customer.

Note 4: Net Income Per Share

The following table reconciles the shares used in the calculation of basic net income per share to those used for diluted net income per share:


	Three Months Ended March 31,
(in millions)	2022		2021
Net income	$	173.8	$	151.2
Weighted average common shares outstanding	74.4		73.9
Dilutive effect of equity awards, based on the treasury stock method	1.6		1.9
Weighted average shares assuming dilution	76.0		75.8

During the three months ended March 31, 2022 and 2021, there were 0.0 million and 0.1 million shares, respectively, from stock-based compensation plans not included in the computation of diluted net income per share because their impact was antidilutive.

In December 2021, our Board of Directors approved a share repurchase program for calendar-year 2022 authorizing the repurchase of up to 650,000 shares of our common stock from time to time on the open market as permitted under Exchange Act Rule 10b-18 or in privately-negotiated transactions. The number of shares to be repurchased and the timing of such transactions will depend on a variety of factors, including market conditions. This share repurchase program is expected to be completed by December 31, 2022.

During the three months ended March 31, 2022, we purchased 390,000 shares of our common stock under the program at a cost of $147.1 million, or an average price of $377.23 per share.

Table of Contents

Note 5: Inventories

Inventories are valued at the lower of cost (on a first-in, first-out basis) and net realizable value. Inventory balances were as follows:


($ in millions)	March 31, 2022		December 31, 2021
Raw materials	$	167.4	$	153.8
Work in process	70.2		63.5
Finished goods	178.9		161.1
	$	416.5	$	378.4

Note 6: Leases

A lease exists when a contract conveys to the customer the right to control the use of identified property, plant, or equipment for a period of time in exchange for consideration. The definition of a lease embodies two conditions: 1) there is an identified asset in the contract that is land or a depreciable asset (i.e., property, plant, and equipment); and 2) the customer has the right to control the use of the identified asset. Lease payments included in the measurement of the operating lease right-of-use assets and lease liabilities are comprised of fixed payments (including in-substance fixed payments), variable payments that depend on an index or rate, and the exercise price of a lessee option to purchase the underlying asset if the lessee is reasonably certain to exercise.

The components of lease expense were as follows:


	Three Months Ended March 31,
($ in millions)	2022		2021
Operating lease cost	$	3.3	$	3.1
Short-term lease cost	0.4		0.2
Variable lease cost	1.4		0.8
Total lease cost	$	5.1	$	4.1

Supplemental cash flow information related to leases was as follows:


	Three Months Ended March 31,
($ in millions)	2022		2021
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	3.2	$	3.2
Right-of-use assets obtained in exchange for new operating lease liabilities	$	9.7	$	0.5

As of March 31, 2022 and December 31, 2021, the weighted average remaining lease term for operating leases was 10.4 years and 10.7 years, respectively.

As of March 31, 2022 and December 31, 2021, the weighted average discount rate was 3.52% and 3.58%, respectively.

Table of Contents

Maturities of operating lease liabilities were as follows:


($ in millions)	March 31,		December 31,
Year	2022		2021
2022 (remaining period as of)	$	9.3	$	11.5
2023	11.7		10.7
2024	11.1		10.0
2025	9.4		8.2
2026	8.4		7.3
Thereafter	43.8		38.7
	93.7		86.4
Less: imputed lease interest	(15.0)		(14.1)
Total lease liabilities	$	78.7	$	72.3

Note 7: Affiliated Companies

At March 31, 2022 and December 31, 2021, the aggregate carrying amount of our investment in affiliated companies that are accounted for under the equity method was $198.0 million and $201.2 million, respectively, and the aggregate carrying amount of our investment in affiliated companies that are not accounted for under the equity method was $10.1 million and $6.5 million at March 31, 2022 and December 31, 2021, respectively. We have elected to record these investments, for which fair value was not readily determinable, at cost, less impairment, adjusted for subsequent observable price changes. We test these investments for impairment whenever circumstances indicate that the carrying value of the investments may not be recoverable.

Our purchases from, and royalty payments made to, affiliates totaled $58.5 million for the three months ended March 31, 2022, as compared to $38.0 million for the same period in 2021. As of March 31, 2022 and December 31, 2021, the payable balance due to affiliates was $45.1 million and $25.5 million, respectively. The majority of these transactions related to a distributorship agreement with Daikyo that allows us to purchase and re-sell Daikyo products.

Sales to affiliates were $4.0 million for the three months ended March 31, 2022, as compared to $2.9 million for the same period in 2021. As of March 31, 2022 and December 31, 2021, the receivable balance due from affiliates was $3.3 million and $2.3 million, respectively.

Please refer to Note 7, Affiliated Companies, to the consolidated financial statements in our 2021 Annual Report for additional details.

Table of Contents

Note 8: Debt

The following table summarizes our long-term debt obligations, net of unamortized debt issuance costs and current maturities. The interest rates shown in parentheses are as of March 31, 2022.


($ in millions)	March 31, 2022		December 31, 2021




Term Loan, due December 31, 2024 (1.63%)	$	84.9	$	85.5
Series A notes, due July 5, 2022 (3.67%)	42.0		42.0
Series B notes, due July 5, 2024 (3.82%)	53.0		53.0
Series C notes, due July 5, 2027 (4.02%)	73.0		73.0
	252.9		253.5
Less: unamortized debt issuance costs	0.4		0.5
Total debt	252.5		253.0
Less: current portion of long-term debt	44.2		44.2
Long-term debt, net	$	208.3	$	208.8

Credit Facility

In March 2022, we amended and extended the existing credit facility (entered into in March 2019), which was scheduled to expire in March 2024, from $300.0 million to a $500.0 million senior unsecured revolving credit facility by entering into a Second Amendment and Joinder and Assumption Agreement (the "Amended Credit Agreement"), filed on Form 8-K dated March 31, 2022. The Amended Credit Agreement, which expires March 2027, contains a senior unsecured, multi-currency revolving credit facility of $500.0 million, with sublimits of up to $50.0 million for swing line loans for Domestic Borrowers in U.S. dollars and a $40.0 million swing line loan for West Pharmaceuticals Services Holding GmbH and up to $50.0 million for the issuance of standby letters of credit. The credit facility may be increased from time-to-time by the greater of (a) $929.0 million or (b) EBITDA for the preceding twelve month period in the aggregate through an increase in the revolving credit facility, subject to the satisfaction of certain conditions. Borrowings under the credit facility bear interest, at the Company’s option, at either: (a) the Term Secured Overnight Financing Rate (“SOFR”) plus 0.10% plus an applicable margin; or (b) a base rate defined as the highest of: (i) the Bank of America “prime rate”; (ii) the Federal Funds effective rate plus 0.50%; and (iii) Term SOFR plus 1.00%. The applicable margin is based on the ratio of the Company’s Net Consolidated Debt to its modified EBITDA, ranging from 0 to 37.5 basis points for base rate loans and 87.5 to 137.5 basis points for Term SOFR loans. The Amended Credit Agreement contains financial covenants providing that the Company shall not permit the ratio of the Company’s Net Consolidated Debt to its Modified EBITDA to be greater than 3.5 to 1; provided that, no more than three times during the term of the Amended Credit Agreement, upon the occurrence of a Qualified Acquisition for each of the four fiscal quarters of the Company immediately following such Qualified Acquisition, the ratio set forth above shall be increased to 4.0 to 1. The Amended Credit Agreement also contains customary limitations on liens securing indebtedness of the Company and its subsidiaries, fundamental changes (mergers, consolidations, liquidations and dissolutions), asset sales, distributions and acquisitions.

At March 31, 2022, the borrowing capacity available under our $500.0 million multi-currency revolving credit facility, including outstanding letters of credit of $2.4 million, was $497.6 million.

Term Loan

At March 31, 2022, we had $84.9 million in borrowings under the Term Loan, of which $2.2 million was classified as current and $82.7 million was classified as long-term. Please refer to Note 9, Derivative Financial Instruments, for a discussion of the foreign currency hedge associated with the Term Loan.

Please refer to Note 10, Debt, to the consolidated financial statements in our 2021 Annual Report for additional details regarding our debt agreements.

Table of Contents

Note 9: Derivative Financial Instruments

Our ongoing business operations expose us to various risks, such as fluctuating interest rates, foreign currency exchange rates and increasing commodity prices. To manage these market risks, we periodically enter into derivative financial instruments, such as interest rate swaps, options and foreign exchange contracts for periods consistent with, and for notional amounts equal to or less than, the related underlying exposures. We do not purchase or hold any derivative financial instruments for investment or trading purposes. All derivatives are recorded in our condensed consolidated balance sheet at fair value.

Foreign Exchange Rate Risk

We have entered into forward exchange contracts, designated as fair value hedges, to manage our exposure to fluctuating foreign exchange rates on cross-currency intercompany loans. As of both March 31, 2022 and December 31, 2021, the total amount of these forward exchange contracts was Singapore Dollar (“SGD”) 601.5 million and $13.4 million.

In addition, we have entered into several foreign currency contracts, designated as cash flow hedges, for periods of up to eighteen months, intended to hedge the currency risk associated with a portion of our forecasted transactions denominated in foreign currencies. As of March 31, 2022, we had outstanding foreign currency contracts to purchase and sell certain pairs of currencies, as follows:


(in millions)		Sell
Currency	Purchase	USD	EUR
USD	14.4	—	12.1
JPY	5,386.8	20.0	24.2
SGD	8.3	5.6	0.6

In December 2019, we entered into a cross-currency swap for $90 million, which we designated as a hedge of our net investment in Daikyo. As of March 31, 2022, the notional amount of the cross-currency swap was ¥9.3 billion ($84.9 million) and the swap termination date is December 31, 2024. Under the cross-currency swap, we receive floating interest rate payments based on USD compounded SOFR plus a margin, in return for paying floating interest rate payments based on Japanese Yen (“Yen”) Tokyo Overnight Average Rate ("TONAR") plus a margin.

Commodity Price Risk

Many of our proprietary products are made from synthetic elastomers, which are derived from the petroleum refining process. We purchase the majority of our elastomers via long-term supply contracts, some of which contain clauses that provide for surcharges related to fluctuations in crude oil prices. The following economic hedges did not qualify for hedge accounting treatment since they did not meet the highly effective requirement at inception.

From November 2017 through March 2022, we purchased several series of call options for a total of 640,267 barrels of crude oil to mitigate our exposure to such oil-based surcharges and protect operating cash flows with regards to a portion of our forecasted elastomer purchases.

As of March 31, 2022, we had outstanding contracts to purchase 154,320 barrels of crude oil from March 2022 to June 2023, at a weighted-average strike price of $76.06 per barrel.

Effects of Derivative Instruments on Financial Position and Results of Operations

Please refer to Note 10, Fair Value Measurements, for the balance sheet location and fair values of our derivative instruments as of March 31, 2022 and December 31, 2021.

Table of Contents

The following table summarizes the effects of derivative instruments designated as fair value hedges on the condensed consolidated statements of income:


	Amount of Gain (Loss) Recognized in Income for the
	Three Months Ended March 31,				Location on Statement of Income
($ in millions)	2022		2021
Fair Value Hedges:
Hedged item (intercompany loan)	$	(9.6)	$	(9.9)		Other (income) expense
Derivative designated as hedging instrument	9.6		9.9			Other (income) expense
Amount excluded from effectiveness testing	0.8		0.6			Other (income) expense
Total	$	0.8	$	0.6

We recognize in earnings the initial value of forward point components on a straight-line basis over the life of the fair value hedge. The amounts recognized in earnings, pre-tax, for forward point components for the three months ended March 31, 2022 and 2021 were $0.8 million and $0.6 million, respectively.

The following tables summarize the effects of derivative instruments designated as fair value, cash flow, and net investment hedges on other comprehensive income (“OCI”) and earnings, net of tax:


	Amount of (Loss) Gain Recognized in OCI for the				Amount of (Gain) Loss Reclassified from Accumulated OCI into Income for the				Location of (Gain) Loss Reclassified from Accumulated OCI into Income
	Three Months Ended March 31,				Three Months Ended March 31,
($ in millions)	2022		2021		2022		2021
Fair Value Hedges:
Foreign currency hedge contracts	$	(1.2)	$	(0.6)	$	—	$	0.4	Other (income) expense
Total	$	(1.2)	$	(0.6)	$	—	$	0.4
Cash Flow Hedges:
Foreign currency hedge contracts	$	0.4	$	(0.1)	$	(0.3)	$	0.3	Net sales
Foreign currency hedge contracts	(1.1)		(1.9)		0.5		—		Cost of goods and services sold

Forward treasury locks	—		—		0.1		0.1		Interest expense
Total	$	(0.7)	$	(2.0)	$	0.3	$	0.4
Net Investment Hedges:

Cross-currency swap	$	3.3	$	5.0	$	—	$	—	Other (income) expense
Total	$	3.3	$	5.0	$	—	$	—

Table of Contents

The following table summarizes the effects of derivative instruments designated as fair value, cash flow, and net investment hedges by line item in our condensed consolidated statements of income:


	Three Months Ended March 31,
($ in millions)	2022		2021
Net sales	$	(0.3)	$	0.3
Cost of goods and services sold	0.5		—
Interest expense	0.1		0.1
Other (income) expense	—		0.4

The following table summarizes the effects of derivative instruments not designated as hedges on the condensed consolidated statements of income:


	Amount of Gain (Loss) Recognized in Income for the
	Three Months Ended March 31,				Location on Statement of Income
($ in millions)	2022		2021
Commodity call options	$	2.8	$	(0.5)		Other (income) expense
Total	$	2.8	$	(0.5)

For the three months ended March 31, 2022 and 2021, there was no material ineffectiveness related to our hedges.

Note 10: Fair Value Measurements

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The following fair value hierarchy classifies the inputs to valuation techniques used to measure fair value into one of three levels:

Level 1: Unadjusted quoted prices in active markets for identical assets or liabilities.
Level 2: Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.
Level 3: Unobservable inputs that reflect the reporting entity’s own assumptions.

Table of Contents

The following tables present the assets and liabilities recorded at fair value on a recurring basis:


	Balance at		Basis of Fair Value Measurements
($ in millions)	March 31, 2022		Level 1		Level 2		Level 3
Assets:
Deferred compensation assets	$	15.0	$	15.0	$	—	$	—
Foreign currency contracts	23.3		—		23.3		—
Cross-currency swap	8.7		—		8.7		—
Commodity call options	3.9		—		3.9		—
	$	50.9	$	15.0	$	35.9	$	—
Liabilities:
Contingent consideration	$	4.0	$	—	$	—	$	4.0
Deferred compensation liabilities	15.4		15.4		—		—

Foreign currency contracts	4.5		—		4.5		—
	$	23.9	$	15.4	$	4.5	$	4.0


	Balance at		Basis of Fair Value Measurements
($ in millions)	December 31, 2021		Level 1		Level 2		Level 3
Assets:
Deferred compensation assets	$	15.5	$	15.5	$	—	$	—
Foreign currency contracts	14.8		—		14.8		—
Cross-currency swap	4.4		—		4.4		—
Commodity call options	1.7		—		1.7		—
	$	36.4	$	15.5	$	20.9	$	—
Liabilities:
Contingent consideration	$	3.7	$	—	$	—	$	3.7
Deferred compensation liabilities	16.1		16.1		—		—
Foreign currency contracts	3.4		—		3.4		—
	$	23.2	$	16.1	$	3.4	$	3.7

Deferred compensation assets are included within other noncurrent assets and are valued using a market approach based on quoted market prices in an active market. The fair value of our foreign currency contracts, included within other current and other noncurrent assets, as well as other current and other long-term liabilities, is valued using an income approach based on quoted forward foreign exchange rates and spot rates at the reporting date. The fair value of the cross-currency swap, included within other noncurrent assets, is valued using a market approach. Please refer to Note 9, Derivative Financial Instruments, for further discussion of our derivatives. The fair value of our commodity call options, included within other current and other noncurrent assets, is valued using a market approach. The fair value of the contingent consideration liability, within current and long-term liabilities, related to the SmartDose® technology platform (the “SmartDose® contingent consideration”) was initially determined using a probability-weighted income approach, and is revalued at each reporting date or more frequently if circumstances dictate. Changes in the fair value of this obligation are recorded as income or expense within other (income) expense in our condensed consolidated statements of income. The fair value of deferred compensation liabilities is based on quoted prices of the underlying employees’ investment selections and is included within other long-term liabilities.

Table of Contents

Other Financial Instruments

We believe that the carrying amounts of our cash and cash equivalents and accounts receivable approximate their fair values due to their near-term maturities.

The estimated fair value of long-term debt is based on quoted market prices for debt issuances with similar terms and maturities and is classified as Level 2 within the fair value hierarchy. At March 31, 2022, the estimated fair value of long-term debt was $210.4 million compared to a carrying amount of $208.3 million. At December 31, 2021, the estimated fair value of long-term debt was $217.9 million and the carrying amount was $208.8 million.

Note 11: Accumulated Other Comprehensive Loss

The following table presents the changes in the components of accumulated other comprehensive income ("AOCI") (loss), net of tax, for the three months ended March 31, 2022:


($ in millions)	(Losses) gains on derivatives		Change in equity affiliate investment AOCI		Defined benefit pension and other postretirement plans		Foreign currency translation		Total
Balance, December 31, 2021	$	(1.2)	$	1.5	$	(31.8)	$	(128.1)	$	(159.6)
Other comprehensive (loss) income before reclassifications	(1.9)		—		0.4		(22.1)		(23.6)
Amounts reclassified out from accumulated other comprehensive (loss) income	0.3		—		0.5		—		0.8
Other comprehensive (loss) income, net of tax	(1.6)		—		0.9		(22.1)		(22.8)
Balance, March 31, 2022	$	(2.8)	$	1.5	$	(30.9)	$	(150.2)	$	(182.4)

The following table presents the changes in the components of accumulated other comprehensive income ("AOCI") (loss), net of tax, for the three months ended March 31, 2021:


($ in millions)	(Losses) gains on derivatives		Change in equity affiliate investment AOCI		Defined benefit pension and other postretirement plans		Foreign currency translation		Total
Balance, December 31, 2020	$	(1.9)	$	0.6	$	(40.5)	$	(68.8)	$	(110.6)
Other comprehensive (loss) income before reclassifications	(2.6)		—		0.1		(28.4)		(30.9)
Amounts reclassified out from accumulated other comprehensive (loss) income	0.8		—		0.5		—		1.3
Other comprehensive (loss) income, net of tax	(1.8)		—		0.6		(28.4)		(29.6)
Balance, March 31, 2021	$	(3.7)	$	0.6	$	(39.9)	$	(97.2)	$	(140.2)

Table of Contents

A summary of the reclassifications out of accumulated other comprehensive loss is presented in the following table:


($ in millions)	Three Months Ended March 31,				Location on Statement of Income
Detail of components	2022		2021
(Losses) gains on derivatives:
Foreign currency contracts	$	0.3	$	(0.3)		Net sales
Foreign currency contracts	(0.5)		—			Cost of goods and services sold
Foreign currency contracts	—		(0.6)			Other (income) expense
Forward treasury locks	(0.1)		(0.1)			Interest expense
Total before tax	(0.3)		(1.0)
Tax benefit	—		0.2
Net of tax	$	(0.3)	$	(0.8)
Amortization of defined benefit pension and other postretirement plans:
Prior service credit	$	—	$	0.1		(a)
Actuarial losses	—		(0.1)			(a)
Settlements	(0.6)		(0.6)			(a)
Total before tax	(0.6)		(0.6)
Tax benefit	0.1		0.1
Net of tax	$	(0.5)	$	(0.5)
Total reclassifications for the period, net of tax	$	(0.8)	$	(1.3)

(a) These components are included in the computation of net periodic benefit cost. Please refer to Note 14, Benefit Plans, for additional details.

Table of Contents

Note 12: Shareholders’ Equity

The following table presents the changes in shareholders’ equity for the three months ended March 31, 2022:


	Common Shares Issued	Common Stock		Capital in Excess of Par Value		Number of Treasury Shares	Treasury Stock		Retained earnings		Accumulated other comprehensive loss		Total
(in millions)
Balance, December 31, 2021	75.3	$	18.8	$	249.0	1.1	$	(229.5)	$	2,456.7	$	(159.6)	$	2,335.4
Net income	—	—		—		—	—		173.8		—		173.8
Activity related to stock-based compensation	—	—		(29.1)		(0.3)	29.2		—		—		0.1
Shares purchased under share repurchase program	—	—		—		0.4	(147.1)		—		—		(147.1)
Dividends declared ($0.18 per share)	—	—		—		—	—		(13.2)		—		(13.2)
Other comprehensive loss, net of tax	—	—		—		—	—		—		(22.8)		(22.8)
Balance, March 31, 2022	75.3	$	18.8	$	219.9	1.2	$	(347.4)	$	2,617.3	$	(182.4)	$	2,326.2

The following table presents the changes in shareholders’ equity for the three months ended March 31, 2021:


	Common Shares Issued	Common Stock		Capital in Excess of Par Value		Number of Treasury Shares	Treasury Stock		Retained earnings		Accumulated other comprehensive loss		Total
(in millions)
Balance, December 31, 2020	75.3	$	18.8	$	267.3	1.3	$	(167.7)	$	1,846.7	$	(110.6)	$	1,854.5
Net income	—	—		—		—	—		151.2		—		151.2
Activity related to stock-based compensation	—	—		(20.6)		(0.3)	23.1		—		—		2.5
Shares purchased under share repurchase program	—	—		—		0.5	(137.1)		—		—		(137.1)
Dividends declared ($0.17 per share)	—	—		—		—	—		(12.5)		—		(12.5)
Other comprehensive loss, net of tax	—	—		—		—	—		—		(29.6)		(29.6)
Balance, March 31, 2021	75.3	$	18.8	$	246.7	1.5	$	(281.7)	$	1,985.4	$	(140.2)	$	1,829.0

Table of Contents

Note 13: Stock-Based Compensation

The West Pharmaceutical Services, Inc. 2016 Omnibus Incentive Compensation Plan (the “2016 Plan”) provides for the granting of stock options, stock appreciation rights, restricted stock awards and performance awards to employees and non-employee directors. A committee of the Board of Directors determines the terms and conditions of awards to be granted. Vesting requirements vary by award. At March 31, 2022, there were 1,727,432 shares remaining in the 2016 Plan for future grants.

During the three months ended March 31, 2022, we granted 109,496 stock options at a weighted average exercise price of $369.13 per share based on the grant-date fair value of our stock to employees under the 2016 Plan. The weighted average grant date fair value of options granted was $96.50 per share as determined by the Black-Scholes option valuation model using the following weighted average assumptions: a risk-free interest rate of 1.8%; expected life of 5.6 years based on prior experience; stock volatility of 24.9% based on historical data; and a dividend yield of 0.2%. Stock option expense is recognized over the vesting period, net of forfeitures.

During the three months ended March 31, 2022, we granted 28,688 stock-settled performance share unit ("PSU") awards at a weighted average grant-date fair value of $369.13 per share to eligible employees. These awards are earned based on the Company's performance against pre-established targets, including annual growth rate of revenue and return on invested capital, over a specified performance period. Depending on the achievement of the targets, recipients of stock-settled PSU awards are entitled to receive a certain numbers of shares of common stock. Shares earned under PSU awards may vary from 0% to 200% of an employee's targeted award. The fair value of stock-settled PSU awards is based on the market price of our stock at the grant date and is recognized as expense over the performance period, adjusted for estimated target outcomes and net of forfeitures.

During the three months ended March 31, 2022, we granted 3,427 stock-settled restricted share unit (“RSU”) awards at a weighted average grant-date fair value of $369.13 per share to eligible employees. These awards are earned over a specified performance period. The fair value of stock-settled RSU awards is based on the market price of our stock at the grant date and is recognized as expense over the vesting period, net of forfeitures.

Stock-based compensation expense was $5.5 million and $5.9 million for the three months ended March 31, 2022 and 2021, respectively.

Table of Contents

Note 14: Benefit Plans

The components of net periodic benefit cost for the three months ended March 31 were as follows:


	Pension benefits				Other retirement benefits				Total
($ in millions)	2022		2021		2022		2021		2022		2021
Service cost	$	0.4	$	0.4	$	—	$	—	$	0.4	$	0.4
Interest cost	1.6		1.4		—		0.1		1.6		1.5
Expected return on assets	(2.2)		(3.1)		—		—		(2.2)		(3.1)

Amortization of prior service credit	—		—		—		(0.1)		—		(0.1)
Recognized actuarial losses (gains)	0.4		0.5		(0.4)		(0.4)		—		0.1

Settlements	0.6		0.6		—		—		0.6		0.6
Net periodic benefit cost	$	0.8	$	(0.2)	$	(0.4)	$	(0.4)	$	0.4	$	(0.6)


	Pension benefits				Other retirement benefits				Total
($ in millions)	2022		2021		2022		2021		2022		2021
U.S. plans	$	0.4	$	(0.6)	$	(0.4)	$	(0.4)	$	—	$	(1.0)
International plans	0.4		0.4		—		—		0.4		0.4
Net periodic benefit cost	$	0.8	$	(0.2)	$	(0.4)	$	(0.4)	$	0.4	$	(0.6)

During the three months ended March 31, 2022 and 2021, we recorded a pension settlement charge of $0.6 million and $0.6 million, respectively, within other nonoperating (income) expense, as we determined that normal-course lump-sum payments for our U.S. qualified defined benefit pension plan exceeded the threshold for settlement accounting under U.S. GAAP for the year.

Note 15: Other (Income) Expense

Other (income) expense consists of:


	Three Months Ended March 31,
($ in millions)	2022		2021
Restructuring and related charges	$	—	$	1.2




Fixed asset impairments and (gain) loss on sale of equipment	(0.1)		0.1
Contingent consideration	0.8		0.7
Foreign exchange transaction gains	(1.1)		(0.3)
Other items	(2.7)		2.2
Total other (income) expense	$	(3.1)	$	3.9

Restructuring and Related Charges

In July 2020, our Board of Directors approved a restructuring plan designed to optimize certain organizational structures within the Company to better support our continued growth and business priorities. These changes are expected to be implemented over a period of up to twenty-four months from the date of approval. The plan is expected to require charges to be approximately $7 million to $8 million, with annualized savings in the range of $0.9 million to $1.6 million. Since its approval, we recorded a net pre-tax amount equal to $6.8 million in restructuring and related charges associated with this plan.

Table of Contents

The following table presents activity related to our restructuring obligations related to our 2020 restructuring plan:


($ in millions)	Severance and benefits		Other charges		Total
Balance, December 31, 2021	$	2.8	$	0.5	$	3.3
Charges	—		—		—
Cash payments	(0.3)		(0.1)		(0.4)

Balance, March 31, 2022	$	2.5	$	0.4	$	2.9

Contingent Consideration

Contingent consideration represents changes in the fair value of the SmartDose® contingent consideration. Please refer to Note 10, Fair Value Measurements, for additional details.

Other Items

During the three months ended March 31, 2022 and 2021, we recorded a gain of $2.8 million and a loss of $0.5 million, respectively, related to oil hedges. Please refer to Note 9, Derivative Financial Instruments, for further discussion of our hedging activity.

During the three months ended March 31, 2021, we recorded an impairment charge of $2.2 million for one of the Company's cost investments.

Note 16: Income Taxes

The tax provision for interim periods is determined using the estimated annual effective consolidated tax rate, based on the current estimate of full-year earnings before taxes, adjusted for the impact of discrete quarterly items.

The provision for income taxes was $21.2 million and $28.7 million for the three months ended March 31, 2022 and 2021, respectively, and the effective tax rate was 11.3% and 16.4%, respectively. During the three months ended March 31, 2022 and 2021, we recorded a tax benefit of $8.9 million and $11.1 million, respectively, associated with stock-based compensation. The decrease in the effective tax rate is primarily due to a $5.9 million tax benefit recorded as a result of a state tax valuation allowance reversal for the three months ended March 31, 2022, as compared to the same period in 2021.

Note 17: Commitments and Contingencies

From time to time, we are involved in product liability matters and other legal proceedings and claims generally incidental to our normal business activities. We accrue for loss contingencies when it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. While the outcome of current proceedings cannot be accurately predicted, we believe their ultimate resolution should not have a material adverse effect on our business, financial condition, results of operations or liquidity.

There have been no significant changes to the commitments and contingencies included in our 2021 Annual Report.

Table of Contents

Note 18: Segment Information

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

The Chief Operating Decision Maker ("CODM") evaluates the performance of our segments based upon, among other things, segment net sales and operating profit. Segment operating profit excludes general corporate costs, which include executive and director compensation, stock-based compensation, certain pension and other retirement benefit costs, and other corporate facilities and administrative expenses not allocated to the segments. Also excluded are items that the CODM considers not representative of ongoing operations. Such items are referred to as other unallocated items and generally include restructuring and related charges, certain asset impairments and other specifically-identified income or expense items. The segment operating profit metric is what the CODM uses in evaluating our results of operations and the financial measure that provides a valuable insight into our overall performance and financial position.

The following table presents information about our reportable segments, reconciled to consolidated totals:


	Three Months Ended March 31,
( $ in millions)	2022		2021
Net sales:
Proprietary Products	$	601.3	$	543.7
Contract-Manufactured Products	118.7		127.1
Intersegment sales elimination	—		(0.1)
Consolidated net sales	$	720.0	$	670.7

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

Table of Contents

The following table provides summarized financial information for our segments:


	Three Months Ended March 31,
($ in millions)	2022		2021
Proprietary Products	$	193.4	$	182.6
Contract-Manufactured Products	19.1		16.4
Total business segment operating profit	$	212.5	$	199.0
Corporate and Unallocated
Stock-based compensation expense	$	(5.5)	$	(5.9)
Corporate general costs(1)	(17.1)		(13.9)
Unallocated Items:
Restructuring and related charges	—		(1.2)
Amortization of acquisition-related intangible assets(2)	(0.2)		(0.2)
Cost investment impairment	—		(2.2)
Total Corporate and Unallocated	(22.8)		(23.4)
Total consolidated operating profit	$	189.7	$	175.6
Other expense, net	1.9		0.7
Income before income taxes	$	187.8	$	174.9

(1) Corporate general costs includes executive and director compensation, certain pension and other retirement benefit costs, and other corporate facilities and administrative expenses not allocated to the segments.

(2) During the three months ended March 31, 2022 and 2021, we recorded $0.2 million of amortization expense within operating profit associated with an intangible asset acquired during the second quarter of 2020.

Please refer to Note 15, Other (Income) Expense, for further discussion of certain unallocated items referenced above.

Previous: Cover and table of contents · Next: Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS