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

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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 2021 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 2021 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 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. For a reconciliation of each non-U.S. GAAP financial measure to the most directly comparable U.S. GAAP financial measure, refer to the "2022 Financial Performance Summary" section.

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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 medical device companies in the world.

Our top priority is delivering quality products that meet the exact product specifications and quality standards customers require and expect. This focus on quality includes a commitment to excellence in manufacturing, scientific and technical expertise and management, which enables us to partner with our customers in order to deliver safe, effective drug products to patients quickly and efficiently.

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

Impact of COVID-19 and other Macroeconomic Factors

West has been actively monitoring the COVID-19 pandemic 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. 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 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 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.

Through the nine months ended September 30, 2022, the war between Russia and Ukraine has not had a material impact on the Company’s business, financial condition or results of operations as we do not have manufacturing operations or significant commercial relationships in either country. However, the Company is closely monitoring the broader impact that this war has on availability of raw materials, logistics and access to European energy sources.

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2022 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, 2022:


($ in millions, except per share data)	Operating Profit		Income tax expense		Net income		Diluted EPS
Three months ended September 30, 2022 GAAP	$	186.2	$	20.4	$	120.6	$	1.59
Unallocated items:

Pension settlement (2)	—		20.0		29.6		0.39
Amortization of acquisition-related intangible assets (3)	0.2		0.1		0.7		0.01

Tax law changes (5)	—		(3.2)		3.2		0.04
Three months ended September 30, 2022 adjusted amounts (non-U.S. GAAP)	$	186.4	$	37.3	$	154.1	$	2.03


($ in millions, except per share data)	Operating Profit		Income tax expense		Net income		Diluted EPS
Nine months ended September 30, 2022 GAAP	$	604.3	$	85.8	$	482.9	$	6.36
Unallocated items:
Restructuring and severance related charges (1)	(1.6)		(0.4)		(1.2)		(0.01)
Pension settlement (2)	—		20.3		30.5		0.40
Amortization of acquisition-related intangible assets (3)	0.6		0.1		2.1		0.03
Royalty acceleration (4)	—		1.3		(1.3)		(0.02)
Tax law changes (5)	—		(3.2)		3.2		0.04


Nine months ended September 30, 2022 adjusted amounts (non-U.S. GAAP)	$	603.3	$	103.9	$	516.2	$	6.80

During the three and nine months ended September 30, 2022, we recorded a tax benefit of $2.1 million and $12.3 million, respectively, associated with stock-based compensation.

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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 severance related charges (1)	0.3		0.1		0.2		—
Amortization of acquisition-related intangible assets (3)	0.2		—		0.7		0.01
Royalty acceleration (4)	—		20.4		(20.4)		(0.27)
Cost investment activity (6)	0.9		0.2		0.7		0.01
Three months ended September 30, 2021 adjusted amounts (non-U.S. GAAP)	$	182.8	$	32.7	$	156.8	$	2.06


($ 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 severance related charges (1)	2.5		0.6		1.9		0.02
Pension settlement (2)	—		0.2		0.6		0.01
Amortization of acquisition-related intangible assets (3)	0.6		0.1		2.1		0.03
Royalty acceleration (4)	—		20.4		(20.4)		(0.27)
Tax law changes (5)	—		1.4		(1.4)		(0.02)
Cost investment activity (6)	1.8		(0.1)		1.9		0.02
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.

(1)During the nine months ended September 30, 2022, the Company recorded a benefit of $1.6 million in restructuring and severance related costs in connection with its 2020 plan related to revised severance estimates. During the three and nine months ended September 30, 2021, the Company recorded $0.3 million and $2.5 million, respectively, of restructuring and severance related costs.

(2)During the three and nine months ended September 30, 2022, we recorded a gross pension settlement charge of $49.6 million and $50.8 million, respectively, within other nonoperating expense (income), that fully settles the U.S. qualified defined benefit plan (the "U.S. pension plan"). During the nine months ended September 30, 2021, we recorded a pension settlement charge within other nonoperating expense (income), as it was determined that normal-course lump-sum payments for our U.S. pension plan exceeded the threshold for settlement accounting. Please refer to Note 14, Benefit Plans**, for further discussion of these items.

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(3)During the three and nine months ended September 30, 2022, 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, 2022, the Company recorded $0.6 million and $1.6 million, respectively, of amortization expense in association with an acquisition of increased ownership interest in Daikyo. 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, of amortization expense in association with an acquisition of increased ownership interest in Daikyo.

(4)During the nine months ended September 30, 2022, the Company increased its expected tax benefit related to the prepayment of future royalties from one of its subsidiaries by $1.3 million. 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.

(5)During the three and nine months ended September 30, 2022, the Company incurred additional tax expense of $3.2 million due to the impact of a tax law change in the state of Pennsylvania enacted during the period. 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.

(6)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 one of our cost investments.

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, 2022 and 2021:


	Three Months Ended September 30,				Percentage Change
($ in millions)	2022		2021		As-Reported		Organic
Proprietary Products	$	567.0	$	577.0	(1.7)	%	5.5	%
Contract-Manufactured Products	120.0		129.7		(7.5)	%	(1.2)	%
Intersegment sales elimination	(0.1)		(0.2)		—		—
Consolidated net sales	$	686.9	$	706.5	(2.8)	%	4.3	%

Consolidated net sales decreased by $19.6 million, or 2.8%, for the three months ended September 30, 2022, as compared to the same period in 2021, including an unfavorable foreign currency translation impact of $49.8 million.

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Excluding foreign currency translation effects, consolidated net sales for the three months ended September 30, 2022 increased by $30.2 million, or 4.3%, as compared to the same period in 2021.

Proprietary Products – Proprietary Products net sales decreased by $10.0 million, or 1.7%, for the three months ended September 30, 2022, as compared to the same period in 2021, including an unfavorable foreign currency translation impact of $41.7 million. Excluding foreign currency translation effects, net sales for the three months ended September 30, 2022 increased by $31.7 million, or 5.5%, as compared to the same period in 2021, primarily due to growth in our high-value product offerings, including our Westar® and NovaPure® products, and sales price increases, offset by a decline in COVID-19 related activity for COVID-19 vaccines and antiviral treatments.

Contract-Manufactured Products – Contract-Manufactured Products net sales decreased by $9.7 million, or 7.5%, for the three months ended September 30, 2022, as compared to the same period in 2021, including an unfavorable foreign currency translation impact of $8.1 million. Excluding foreign currency translation effects, net sales for the three months ended September 30, 2022 decreased by $1.6 million, or 1.2%, as compared to the same period in 2021, due to a decline in sales of components for diagnostic devices, offset by sales price increases.

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, 2022 and 2021:



	Nine Months Ended September 30,				Percentage Change
($ in millions)	2022		2021		As-Reported		Organic
Proprietary Products	$	1,822.0	$	1,708.0	6.7	%	12.7	%
Contract-Manufactured Products	356.5		393.2		(9.3)	%	(4.8)	%
Intersegment sales elimination	(0.3)		(0.4)		—		—
Consolidated net sales	$	2,178.2	$	2,100.8	3.7	%	9.5	%

Consolidated net sales increased by $77.4 million, or 3.7%, for the nine months ended September 30, 2022, as compared to the same period in 2021, including an unfavorable foreign currency translation impact of $121.3 million. Excluding foreign currency translation effects, consolidated net sales for the nine months ended September 30, 2022 increased by $198.7 million, or 9.5%, as compared to the same period in 2021.

Proprietary Products – Proprietary Products net sales increased by $114.0 million, or 6.7%, for the nine months ended September 30, 2022, as compared to the same period in 2021, including an unfavorable foreign currency translation impact of $103.3 million. Excluding foreign currency translation effects, net sales for the nine months ended September 30, 2022 increased by $217.3 million, or 12.7%, as compared to the same period in 2021, primarily due to growth in our high-value product offerings, including our NovaPure®, Westar® and Envision® products.

Contract-Manufactured Products – Contract-Manufactured Products net sales decreased by $36.7 million, or 9.3%, for the nine months ended September 30, 2022, as compared to the same period in 2021, including an unfavorable foreign currency translation impact of $18.0 million. Excluding foreign currency translation effects, net sales for the nine months ended September 30, 2022 decreased by $18.7 million, or 4.8%, as compared to the same period in 2021, due to a decline in sales of components for diagnostic devices, offset by sales price increases.

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

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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)	2022			2021			2022			2021
Proprietary Products:
Gross profit	$	247.3		$	267.3		$	810.3		$	811.5
Gross profit margin	43.6		%	46.3		%	44.5		%	47.5		%
Contract-Manufactured Products:
Gross profit	$	20.7		$	20.9		$	63.8		$	63.7
Gross profit margin	17.3		%	16.1		%	17.9		%	16.2		%
Consolidated gross profit	$	268.0		$	288.2		$	874.1		$	875.2
Consolidated gross profit margin	39.0		%	40.8		%	40.1		%	41.7		%

Consolidated gross profit decreased by $20.2 million, or 7.0%, for the three months ended September 30, 2022, as compared to the same period in 2021, including an unfavorable foreign currency translation impact of $17.1 million for the three months ended September 30, 2022, as compared to the same period in 2021. Consolidated gross profit margin decreased by 1.8 margin points for the three months ended September 30, 2022, as compared to the same period in 2021.

Consolidated gross profit decreased by $1.1 million, or 0.1% for the nine months ended September 30, 2022, as compared to the same period in 2021, including an unfavorable foreign currency translation impact of $46.4 million for the nine months ended September 30, 2022, as compared to the same period in 2021. Consolidated gross profit margin decreased by 1.6 margin points for the nine months ended September 30, 2022, as compared to the same period in 2021.

Proprietary Products - Proprietary Products gross profit decreased by $20.0 million, or 7.5%, for the three months ended September 30, 2022, as compared to the same period in 2021, including an unfavorable foreign currency translation impact of $15.6 million. Proprietary Products gross profit margin decreased by 2.7 margin points for the three months ended September 30, 2022, as compared to the same periods in 2021, due to product mix, including increased plant spend and production inefficiencies associated with the mix shift. Gross profit margin was also impacted by inflationary pressures on certain aspects of production, which includes raw material, labor, overhead and transportation costs. This was offset by increased sales prices and approximately $20.0 million, net, in one-time fees received due to COVID-19 supply agreements during the three months ended September 30, 2022 as compared to the same period in 2021.

Proprietary Products gross profit decreased by $1.2 million, or 0.1%, for the nine months ended September 30, 2022, as compared to the same period in 2021, including an unfavorable foreign currency translation impact of $42.9 million. Proprietary Products gross profit margin decreased by 3.0 margin points for the nine months ended September 30, 2022, as compared to the same period in 2021, due to increased plant spend to meet ongoing product demand increases and increased labor and overhead costs, primarily within transportation and compensation, that were driven by inflation. This was offset by increased sales prices in the nine months ended September 30, 2022 as compared to the same period in 2021.

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Contract-Manufactured Products - Contract-Manufactured Products gross profit decreased by $0.2 million, or 1.0%, for the three months ended September 30, 2022, as compared to the same period in 2021, including an unfavorable foreign currency translation impact of $1.5 million. Contract-Manufactured Products gross profit margin increased by 1.2 margin points for the three months ended September 30, 2022, as compared to the same period in 2021, due to increased sales prices and production efficiencies offset by an unfavorable mix of products sold and increased labor and overhead costs, primarily transportation and compensation, that were driven by inflation.

Contract-Manufactured Products gross profit increased by $0.1 million, or 0.2%, for the nine months ended September 30, 2022, as compared to the same period in 2021, including an unfavorable foreign currency translation impact of $3.5 million. Contract-Manufactured Products gross profit margin increased by 1.7 margin points for the nine months ended September 30, 2022, as compared to the same period in 2021, due to increased sales prices and production efficiencies offset by an unfavorable mix of products sold and increased labor and overhead costs, primarily transportation and compensation, that were driven by inflation.

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)	2022		2021		2022		2021
Proprietary Products	$	13.6	$	13.1	$	42.6	$	39.1
Contract-Manufactured Products	—		—		—		—
Consolidated R&D costs	$	13.6	$	13.1	$	42.6	$	39.1

Consolidated R&D costs increased by $0.5 million, or 3.8%, and $3.5 million, or 9.0%, for the three and nine months ended September 30, 2022, respectively, as compared to the same period in 2021, due to additional research performed to identify new product opportunities, offset by lower annual incentive compensation. Efforts remain focused on the continued investment in elastomeric packaging components, formulation development, drug containment systems, self-injection systems and drug administration consumables.

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)	2022			2021			2022			2021
Proprietary Products	$	44.3		$	58.5		$	155.6		$	180.0
Contract-Manufactured Products	4.7			3.9			14.4			11.4
Corporate	17.3			29.5			61.2			73.4
Consolidated SG&A costs	$	66.3		$	91.9		$	231.2		$	264.8
SG&A as a % of net sales	9.7		%	13.0		%	10.6		%	12.6		%

Consolidated SG&A costs decreased by $25.6 million, or 27.9%, for the three months ended September 30, 2022, as compared to the same period in 2021, due to lower incentive compensation, higher allocation of functional spend to Cost of Goods Sold and a favorable foreign currency translation impact of $3.0 million.

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Consolidated SG&A costs decreased by $33.6 million, or 12.7%, for the nine months ended September 30, 2022, as compared to the same period in 2021, due to lower incentive compensation, higher allocation of functional spend to Cost of Goods Sold and a favorable foreign currency translation impact of $7.4 million. This was offset by an increase in selling expenses, professional fees and salaries and fringe benefits.

Proprietary Products - Proprietary Products SG&A costs decreased by $14.2 million, or 24.3%, for the three months ended September 30, 2022, as compared to the same period in 2021. Proprietary Products SG&A costs decreased primarily due to lower annual incentive compensation, higher allocation of functional spend to Cost of Goods Sold and a favorable foreign currency translation impact of $2.6 million.

Proprietary Products SG&A costs decreased by $24.4 million, or 13.6%, for the nine months ended September 30, 2022, as compared to the same period in 2021. Proprietary Products SG&A costs decreased primarily due to lower annual incentive compensation, higher allocation of functional spend to Cost of Goods Sold and a favorable foreign currency translation impact of $6.4 million. This was offset by an increase in selling expenses, professional fees and salaries and fringe benefits.

Contract-Manufactured Products - Contract-Manufactured Products SG&A costs increased by $0.8 million, or 20.5%, for the three months ended September 30, 2022, as compared to the same period in 2021, and increased by $3.0 million, or 26.3%, for the nine months ended September 30, 2022, as compared to the same period in 2021, due to increased salaries and increased inflation on overhead costs, offset by lower annual incentive compensation

Corporate - Corporate SG&A costs decreased by $12.2 million, or 41.4%, for the three months ended September 30, 2022, as compared to the same period in 2021, primarily due to lower annual incentive compensation and a reduction in mark-to-market expense related to stock-based compensation.

Corporate SG&A costs decreased by $12.2 million, or 16.6%, for the nine months ended September 30, 2022, as compared to the same period in 2021, primarily due to lower annual incentive compensation and a reduction in mark-to-market expense related to stock-based compensation.

Other (Income) Expense

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


(Income) Expense	Three Months Ended September 30,				Nine Months Ended September 30,
($ in millions)	2022		2021		2022		2021
Proprietary Products	$	0.8	$	0.2	$	(3.8)	$	(1.9)
Contract-Manufactured Products	1.3		0.2		1.4		0.4
Corporate and unallocated	(0.2)		1.4		(1.6)		4.5
Consolidated other (income) expense	$	1.9	$	1.8	$	(4.0)	$	3.0

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

Consolidated other (income) expense changed by $0.1 million for the three months ended September 30, 2022, as compared to the same period in 2021 and changed by $7.0 million for the nine months ended September 30, 2022, as compared to the same period in 2021, due to the factors described below.

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Proprietary Products - Proprietary Products other (income) expense changed by $0.6 million for the three months ended September 30, 2022, as compared to the same period in 2021, primarily due to $1.5 million of losses related to oil hedges being recorded during the three months ended September 30, 2022, as compared to $0.5 million of gains related to oil hedges being recorded over the same period in 2021. Additionally, there was increased contingent consideration recorded in the three months ended September 30, 2022, as compared to the same period in 2021. This was offset by increased gains on foreign exchange transactions in the three months ended September 30, 2022, as compared to the same period in 2021.

Proprietary Products other (income) expense changed by $1.9 million for the nine months ended September 30, 2022, as compared to the same period in 2021, primarily due to increased gains on foreign exchange transactions being recorded during the nine months ended September 30, 2022, as compared to the same period in 2021. This was offset by increased contingent consideration recorded in the nine months ended September 30, 2022, as compared to the same period in 2021.

Contract-Manufa****ctured Products - Contract-Manufactured Products other (income) expense changed by $1.1 million for the three months ended September 30, 2022, as compared to the same period in 2021 due to increased fixed asset impairments in the three months ended September 30, 2022, as compared to the same period in 2021.

Contract-Manufactured Products other (income) expense changed by $1.0 million for the nine months ended September 30, 2022, as compared to the same period in 2021 due to increased fixed asset impairments in the nine months ended September 30, 2022, as compared to the same period in 2021.

Corporate and unallocated items - Corporate and unallocated items changed by $1.6 million for the three months ended September 30, 2022, as compared to the same period in 2021, primarily due to the Company recording a loss on the sale of one of the Company's cost investments of $0.9 million in the three months ended September 30, 2021 that did not recur in 2022 and additional expense related to restructuring and related costs being recorded in the three months ended September 30, 2021 as compared to the same period in 2022.

Corporate and unallocated items changed by $6.1 million for the nine months ended September 30, 2022, as compared to the same period in 2021, primarily due to the Company recording a benefit of $1.6 million in restructuring and related costs in connection with its 2020 plan related to revised severance estimates in the nine months ended September 30, 2022, while the Company recorded expense of $2.5 million of restructuring and related costs in the same period in 2021. Additionally, a loss of $1.8 million related to cost investment activity was recorded in the nine months ended September 30, 2021 that did not recur in 2022.

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)	2022			2021			2022			2021
Proprietary Products	$	188.6		$	195.5		$	615.9		$	594.3
Contract-Manufactured Products	14.7			16.8			48.0			51.9
Corporate	(16.9)			(29.5)			(60.6)			(73.0)
Adjusted consolidated operating profit	$	186.4		$	182.8		$	603.3		$	573.2
Adjusted consolidated operating profit margin	27.1		%	25.9		%	27.7		%	27.3		%
Unallocated items	(0.2)			(1.4)			1.0			(4.9)
Consolidated operating profit	$	186.2		$	181.4		$	604.3		$	568.3
Consolidated operating profit margin	27.1		%	25.7		%	27.7		%	27.1		%

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Consolidated operating profit increased by $4.8 million, or 2.6%, for the three months ended September 30, 2022, as compared to the same period in 2021, including an unfavorable foreign currency translation impact of $14.0 million for the three months ended September 30, 2022, as compared to the same period in 2021.

Consolidated operating profit increased by $36.0 million, or 6.3%, for the nine months ended September 30, 2022, as compared to the same period in 2021, including an unfavorable foreign currency translation impact of $38.7 million for the nine months ended September 30, 2022, as compared to the same period in 2021.

Proprietary Products - Proprietary Products operating profit decreased by $6.9 million, or 3.5%, for the three months ended September 30, 2022, as compared to the same period in 2021, including an unfavorable foreign currency translation impact of $12.8 million, due to the factors described above.

Proprietary Products operating profit increased by $21.6 million, or 3.6%, for the nine months ended September 30, 2022, as compared to the same period in 2021, including an unfavorable foreign currency translation impact of $35.9 million, due to the factors described above.

Contract-Manufactured Products - Contract-Manufactured Products operating profit decreased by $2.1 million, or 12.5%, for the three months ended September 30, 2022, as compared to the same period in 2021, including an unfavorable foreign currency translation impact of $1.2 million, due to the factors described above.

Contract-Manufactured Products operating profit decreased by $3.9 million, or 7.5%, for the nine months ended September 30, 2022, respectively, as compared to the same period in 2021, including an unfavorable foreign currency translation impact of $2.8 million, due to the factors described above.

Corporate - Corporate costs decreased by $12.6 million, or 42.7%, for the three months ended September 30, 2022, as compared to the same period in 2021, due to the factors described above.

Corporate costs decreased by $12.4 million, or 17.0%, for the nine months ended September 30, 2022, respectively, as compared to the same period in 2021, due to the factors described above.

Unallocated items – Other unallocated items during the three months ended September 30, 2022 consisted of $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 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, 2022 consisted of a credit of $1.6 million in restructuring and related costs in connection with the Company's 2020 plan related to revised estimates associated with severance and $0.6 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, 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.

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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)	2022		2021		2022		2021
Interest expense	$	2.8	$	2.7	$	8.4	$	7.6
Capitalized interest	(0.6)		(0.9)		(2.2)		(2.0)
Interest expense, net	$	2.2	$	1.8	$	6.2	$	5.6

Interest income	$	(1.5)	$	(0.4)	$	(2.2)	$	(0.7)

Interest expense, net, increased by $0.4 million, for the three months ended September 30, 2022, as compared to the same period in 2021, and increased by $0.6 million, for the nine months ended September 30, 2022, as compared to the same period in 2021.

Interest income increased by $1.1 million for the three months ended September 30, 2022, as compared to the same period in 2021, and $1.5 million for the nine months ended September 30, 2022, as compared to the same period in 2021 resulting from higher interest rates compared to the prior year.

Other Nonoperating Expense (Income)

Other nonoperating expense (income) changed by $50.4 million for the three months ended September 30, 2022, as compared to the same period in 2021, primarily due to the recording of a $49.6 million pension settlement charge during the three months ended September 30, 2022, which relieved the historical balance sheet position, inclusive of accumulated other comprehensive income, of the U.S. pension plan, while no such amounts were recorded in the same period in 2021.

Other nonoperating expense (income) changed by $52.7 million for the nine months ended September 30, 2022, as compared to the same period in 2021, primarily due to the recording of a $50.8 million pension settlement charge during the nine months ended September 30, 2022, which relieved the historical balance sheet position, inclusive of accumulated other comprehensive income, of the U.S. pension plan. During the nine months ended September 30, 2021, we recorded a $0.7 million pension settlement charge, as we determined that normal-course lump-sum payments for the U.S. pension plan exceeded the threshold for settlement accounting under U.S. GAAP for the year.

Please refer to Note 14, Benefit Plans**, for further discussion of these items.

Income Tax Expense

The provision for income taxes was $20.4 million and $12.0 million for the three months ended September 30, 2022 and 2021, respectively, and the effective tax rate was 15.0% and 6.6%, respectively. The increase in the effective tax rate is primarily due to the result of the Company's prepayment of future royalties from one of its subsidiaries in three months ended September 30, 2021, which resulted in a $20.4 million tax benefit that was not repeated in 2022, as well as a larger tax benefit related to stock-based compensation in 2021 when compared to 2022, offset by the tax benefit of $20.0 million recorded related to the termination of the U.S. pension plan recorded in 2022, as mentioned in Note 14, Benefit Plans. The company did not elect to reclassify to retained earnings the stranded tax effects on items within AOCI related to the Tax Cuts and Jobs Act of 2017, and therefore included within the $20.0 million benefit is a deferred tax benefit of $8.0 million. This is due to the reversal of stranded tax effects in AOCI for the historic accrual of deferred tax on pension AOCI at historic federal and state income tax rates while the related deferred tax asset was adjusted to the latest enacted income tax rates through net income.

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The provision for income taxes was $85.8 million and $73.0 million for the nine months ended September 30, 2022 and 2021, respectively, and the effective tax rate was 15.6% and 12.9%, respectively. The increase in the effective tax rate is primarily due to the result of the Company's prepayment of future royalties from one of its subsidiaries in nine months ended September 30, 2021, which resulted in a $20.4 million tax benefit that was not repeated in 2022, as well as a larger tax benefit related to stock-based compensation in 2021 when compared to 2022, offset by the tax benefit of $20.3 million recorded related to the termination of the U.S. pension plan recorded in 2022, as mentioned in Note 14, Benefit Plans. The company did not elect to reclassify to retained earnings the stranded tax effects on items within AOCI related to the Tax Cuts and Jobs Act of 2017, and therefore included within the $20.3 million benefit is a deferred tax benefit of $8.0 million. This is due to the reversal of stranded tax effects in AOCI for the historic accrual of deferred tax on pension AOCI at historic federal and state income tax rates while the related deferred tax asset was adjusted to the latest enacted income tax rates through net income.

Equity in Net Income of Affiliated Companies

Equity in net income of affiliated companies decreased by $1.7 million for the three months ended September 30, 2022, as compared to the same period in 2021, due primarily to the impact of foreign currency translation on the operating results of Daikyo.

Equity in net income of affiliated companies decreased by $2.6 million for the nine months ended September 30, 2022, as compared to the same period in 2021, due primarily to the impact of foreign currency translation on the operating results of Daikyo.

FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

Cash Flows

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


($ in millions)	2022		2021
Net cash provided by operating activities	$	493.2	$	423.2
Net cash used in investing activities	$	(193.4)	$	(175.7)
Net cash used in financing activities	$	(284.1)	$	(161.9)

Net Cash Provided by Operating Activities – Net cash provided by operating activities increased by $70.0 million for the nine months ended September 30, 2022, as compared to the same period in 2021, primarily due to decreases in the change in working capital.

Net Cash Used in Investing Activities – Net cash used in investing activities increased by $17.7 million for the nine months ended September 30, 2022, as compared to the same period in 2021, due to an increase in capital expenditures in 2022.

Net Cash Used in Financing Activities – Net cash used in financing activities increased by $122.2 million for the nine months ended September 30, 2022, as compared to the same period in 2021, primarily due to increases in purchases under our share repurchase program in 2022 and additional debt repayments in 2022.

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Liquidity and Capital Resources

The table below presents selected liquidity and capital measures:


($ in millions)	September 30, 2022		December 31, 2021
Cash and cash equivalents	$	729.0	$	762.6
Accounts receivable, net	$	485.3	$	489.0
Inventories	$	413.1	$	378.4
Accounts payable	$	188.9	$	232.2
Debt	$	209.4	$	253.0
Equity	$	2,470.8	$	2,335.4
Working capital	$	1,276.9	$	1,147.9

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, 2022 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, 2022 included $225.4 million of cash held by subsidiaries within the U.S., and $503.6 million of cash held by subsidiaries outside of the U.S. During the nine months ended September 30, 2022, we purchased 563,334 shares of our common stock under the share repurchase program at a cost of $202.9 million, or an average price of $360.03 per share.

Working capital – Working capital at September 30, 2022 increased by $129.0 million, or 11.2%, as compared to December 31, 2021, which includes an unfavorable foreign currency translation impact of $64.8 million. Excluding the impact of currency exchange rates, cash and cash equivalents, accounts receivable and inventories increased by $15.7 million, $32.6 million and $67.1 million, respectively, while total current liabilities decreased by $100.5 million. The increase in cash and cash equivalents was due to cash collections from operations, offset by share repurchases, debt repayments and payment of annual incentive compensation during the nine months ended September 30, 2022. 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 decrease in total current liabilities was caused by the decline in accrued salaries, wages and benefits and accounts payable.

Debt and credit facilities – The $43.6 million decrease in total debt at September 30, 2022, as compared to December 31, 2021, resulted primarily from debt repayments for our Series A notes.

Our sources of liquidity include our Credit Facility. At September 30, 2022, we had no outstanding borrowings under the Credit Facility. At September 30, 2022, the borrowing capacity available under the Credit Facility, including outstanding letters of credit of $2.4 million, was $497.6 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, 2022, 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.

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Commitments and Contractual Obligations

A summary of the amounts and estimated timing of future cash payments resulting from commitments and contractual obligations was provided in our 2021 Annual Report. During the three months ended September 30, 2022, 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, 2022, 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 2021 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 2021 Annual Report.

NEW ACCOUNTING STANDARDS

For information on new accounting standards that were adopted during the three months ended September 30, 2022, 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;
customers’ changing inventory requirements and manufacturing plans that alter existing orders or ordering patterns for the products we supply to them;

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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 2021 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.

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