filings.toolsItem 1. FINANCIAL STATEMENTS
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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 June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| Net sales | $ | 702.1 | $ | 753.8 | $ | 1,397.5 | $ | 1,470.4 | |||||||||||||||
| Cost of goods and services sold | 472.1 | 462.4 | 937.3 | 907.7 | |||||||||||||||||||
| Gross profit | 230.0 | 291.4 | 460.2 | 562.7 | |||||||||||||||||||
| Research and development | 17.5 | 16.5 | 35.1 | 33.6 | |||||||||||||||||||
| Selling, general and administrative expenses | 83.0 | 88.4 | 169.7 | 174.4 | |||||||||||||||||||
| Other expense (income) (Note 14) | 3.3 | 4.0 | 6.4 | 16.9 | |||||||||||||||||||
| Operating profit | 126.2 | 182.5 | 249.0 | 337.8 | |||||||||||||||||||
| Interest expense, net | 1.5 | 2.7 | 3.1 | 4.9 | |||||||||||||||||||
| Interest income | (4.0) | (5.0) | (10.2) | (9.8) | |||||||||||||||||||
| Other nonoperating (income) expense | — | (0.1) | — | (0.1) | |||||||||||||||||||
| Income before income taxes and equity in net income of affiliated companies | 128.7 | 184.9 | 256.1 | 342.8 | |||||||||||||||||||
| Income tax expense | 21.9 | 34.8 | 38.3 | 58.4 | |||||||||||||||||||
| Equity in net income of affiliated companies | (4.5) | (5.0) | (8.8) | (10.7) | |||||||||||||||||||
| Net income | $ | 111.3 | $ | 155.1 | $ | 226.6 | $ | 295.1 | |||||||||||||||
| Net income per share: | |||||||||||||||||||||||
| Basic | $ | 1.52 | $ | 2.08 | $ | 3.09 | $ | 3.96 | |||||||||||||||
| Diluted | $ | 1.51 | $ | 2.06 | $ | 3.06 | $ | 3.91 | |||||||||||||||
| Weighted average shares outstanding: | |||||||||||||||||||||||
| Basic | 73.0 | 74.3 | 73.3 | 74.4 | |||||||||||||||||||
| Diluted | 73.7 | 75.4 | 74.0 | 75.5 | |||||||||||||||||||
See accompanying notes to condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
West Pharmaceutical Services, Inc. and Subsidiaries
(in millions)
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| Net income | $ | 111.3 | $ | 155.1 | $ | 226.6 | $ | 295.1 | |||||||||||||||
| Other comprehensive (loss) income, net of tax: | |||||||||||||||||||||||
| Foreign currency translation adjustments, net of tax of $0.7, $1.3, $1.7 and $1.5, respectively | (21.7) | (11.3) | (68.0) | 4.0 | |||||||||||||||||||
| Defined benefit pension and other postretirement plan adjustments, net of tax of $(0.1), $(0.3), $(0.1), and $(0.5), respectively | (0.2) | (0.9) | (0.4) | (1.4) | |||||||||||||||||||
| Net loss on equity affiliate accumulated other comprehensive income, net of tax of $0.0, $0.0, $0.0 and $0.0, respectively | (0.1) | (0.1) | (0.2) | (0.1) | |||||||||||||||||||
| Net loss on derivatives, net of tax of $0.3, $(1.0), $(0.4) and $(1.1), respectively | (2.6) | (2.8) | (4.5) | (3.0) | |||||||||||||||||||
| Other comprehensive (loss) income, net of tax | (24.6) | (15.1) | (73.1) | (0.5) | |||||||||||||||||||
| Comprehensive income | $ | 86.7 | $ | 140.0 | $ | 153.5 | $ | 294.6 |
See accompanying notes to condensed consolidated financial statements.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
West Pharmaceutical Services, Inc. and Subsidiaries
| (in millions, except per share data) | June 30, 2024 | December 31, 2023 | |||||||||
| ASSETS | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | 446.2 | $ | 853.9 | |||||||
| Accounts receivable, net | 479.4 | 512.0 | |||||||||
| Inventories | 419.2 | 434.7 | |||||||||
| Other current assets | 138.2 | 135.8 | |||||||||
| Total current assets | 1,483.0 | 1,936.4 | |||||||||
| Property, plant and equipment | 2,863.6 | 2,738.0 | |||||||||
| Less: accumulated depreciation and amortization | 1,369.9 | 1,324.7 | |||||||||
| Property, plant and equipment, net | 1,493.7 | 1,413.3 | |||||||||
| Operating lease right-of-use assets | 110.3 | 99.2 | |||||||||
| Investments in affiliated companies | 198.2 | 210.0 | |||||||||
| Goodwill | 107.3 | 108.5 | |||||||||
| Intangible assets, net | 12.9 | 15.1 | |||||||||
| Deferred income taxes | 33.9 | 25.7 | |||||||||
| Other noncurrent assets | 50.1 | 21.3 | |||||||||
| Total Assets | $ | 3,489.4 | $ | 3,829.5 | |||||||
| LIABILITIES AND EQUITY | |||||||||||
| Current liabilities: | |||||||||||
| Notes payable and other current debt | $ | 132.9 | $ | 134.0 | |||||||
| Accounts payable | 211.7 | 242.4 | |||||||||
| Accrued salaries, wages and benefits | 82.9 | 105.9 | |||||||||
| Income taxes payable | 16.9 | 16.6 | |||||||||
| Operating lease liabilities | 20.3 | 17.7 | |||||||||
| Other current liabilities | 169.0 | 155.2 | |||||||||
| Total current liabilities | 633.7 | 671.8 | |||||||||
| Long-term debt | 72.9 | 72.8 | |||||||||
| Deferred income taxes | 13.7 | 12.7 | |||||||||
| Pension and other postretirement benefits | 29.1 | 29.6 | |||||||||
| Operating lease liabilities | 84.6 | 84.5 | |||||||||
| Deferred compensation benefits | 15.5 | 18.6 | |||||||||
| Other long-term liabilities | 63.1 | 58.5 | |||||||||
| Total Liabilities | 912.6 | 948.5 | |||||||||
| Commitments and contingencies (Note 16) | |||||||||||
| 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 and 75.3 million as of June 30,2024 and December 31, 2023, respectively; shares outstanding: 72.6 million and 73.5 million as of June 30, 2024 and December 31, 2023, respectively | 18.8 | 18.8 | |||||||||
| Capital in excess of par value | 33.5 | 120.2 | |||||||||
| Retained earnings | 3,720.9 | 3,523.4 | |||||||||
| Accumulated other comprehensive loss | (216.9) | (143.8) | |||||||||
| Treasury stock, at cost (2.7 million and 1.8 million shares) | (979.5) | (637.6) | |||||||||
| Total Equity | 2,576.8 | 2,881.0 | |||||||||
| Total Liabilities and Equity | $ | 3,489.4 | $ | 3,829.5 |
See accompanying notes to condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
West Pharmaceutical Services, Inc. and Subsidiaries
(in millions)
| Six Months Ended June 30, | |||||||||||
| 2024 | 2023 | ||||||||||
| Cash flows from operating activities: | |||||||||||
| Net income | $ | 226.6 | $ | 295.1 | |||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||
| Depreciation | 72.7 | 64.3 | |||||||||
| Amortization | 1.8 | 1.4 | |||||||||
| Stock-based compensation | 9.3 | 16.0 | |||||||||
| Loss on disposal of plant | — | 11.6 | |||||||||
| Asset impairments | 0.9 | 3.4 | |||||||||
| Other non-cash items, net | (7.6) | (12.4) | |||||||||
| Changes in assets and liabilities | (20.5) | (72.1) | |||||||||
| Net cash provided by operating activities | 283.2 | 307.3 | |||||||||
| Cash flows from investing activities: | |||||||||||
| Capital expenditures | (190.8) | (157.5) | |||||||||
| Other, net | (1.0) | (6.7) | |||||||||
| Net cash used in investing activities | (191.8) | (164.2) | |||||||||
| Cash flows from financing activities: | |||||||||||
| Borrowings of long-term debt | 35.0 | — | |||||||||
| Repayments of long-term debt | (36.1) | (1.1) | |||||||||
| Principal repayments on finance leases | (22.9) | — | |||||||||
| Dividend payments | (29.3) | (28.2) | |||||||||
| Proceeds from stock-based compensation awards | 19.9 | 24.0 | |||||||||
| Employee stock purchase plan contributions | 3.7 | 3.5 | |||||||||
| Shares purchased under share repurchase programs | (454.1) | (233.5) | |||||||||
| Shares repurchased for employee tax withholdings | (5.5) | (12.5) | |||||||||
| Net cash used in financing activities | (489.3) | (247.8) | |||||||||
| Effect of exchange rates on cash | (9.8) | 6.7 | |||||||||
| Net decrease in cash and cash equivalents | (407.7) | (98.0) | |||||||||
| Cash, including cash equivalents at beginning of period | 853.9 | 894.3 | |||||||||
| Cash, including cash equivalents at end of period | $ | 446.2 | $ | 796.3 |
See accompanying notes to condensed consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 1: Basis of Presentation
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 and six months ended June 30, 2024, 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, 2023 (the “2023 Annual Report”). The results of operations for any interim period are not necessarily indicative of results for the full year.
Note 2: New Accounting Standards
Standards Issued Not Yet Adopted
In November 2023, the Financial Accounting Standards Board ("FASB") issued guidance that seeks to improve reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses. The amendment enhances interim disclosure requirements, clarifies circumstances in which an entity can disclose multiple segment measures of profit or loss, provides new segment disclosure requirements for entities with a single reportable segment, and contains other disclosure requirements. This guidance is effective for fiscal years beginning after December 15, 2023 and interim periods beginning after December 15, 2024. We are currently evaluating the impact of this guidance on our financial statements and disclosures. The Company does not expect the adoption to have a material impact on the consolidated financial statements and disclosures.
In December 2023, the FASB issued guidance that seeks to enhance income tax disclosures to provide information to better assess how an entity's operations and related tax risks affect its tax rate and prospects for future cash flows. Within the income tax rate reconciliation, the amendment requires disclosure of additional categories and greater detail about individual reconciling items over a specified threshold. It also requires information pertaining to taxes paid to be disaggregated for federal, state, and foreign taxes and further disaggregated for specific jurisdictions over a specified threshold. This guidance is effective for fiscal years beginning after December 15, 2024. We are currently evaluating the impact of this guidance on our financial statements and disclosures, but we do not expect the adoption to have a material impact on the consolidated financial statements other than the expanded footnote disclosure.
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 Accounting Standards Codification (“ASC”) 606. Following the identification of a contract with a customer, we identify the performance obligations (goods or services) in the contract, determine the transaction price, allocate the transaction price to the performance obligations in the contract, and recognize the revenue when (or as) we satisfy the performance obligations by transferring the promised goods or services to our customers. A good or service is transferred when (or as) the customer obtains control of that good or service.
The following table presents the approximate percentage of our net sales by market group:
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| Biologics | 36 % | 37 % | 37 % | 36 % | |||||||||||||||||||
| Generics | 18 % | 20 % | 18 % | 20 % | |||||||||||||||||||
| Pharma | 26 % | 25 % | 25 % | 26 % | |||||||||||||||||||
| Contract-Manufactured Products | 20 % | 18 % | 20 % | 18 % | |||||||||||||||||||
| 100 % | 100 % | 100 % | 100 % |
The following table presents the approximate percentage of our net sales by product category:
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| High-Value Product Components | 46 % | 49 % | 46 % | 50 % | |||||||||||||||||||
| High-Value Product Delivery Devices | 11 % | 12 % | 11 % | 10 % | |||||||||||||||||||
| Standard Packaging | 23 % | 21 % | 23 % | 22 % | |||||||||||||||||||
| Contract-Manufactured Products | 20 % | 18 % | 20 % | 18 % | |||||||||||||||||||
| 100 % | 100 % | 100 % | 100 % |
Due to the Company's reassessment of product categories, beginning in the second quarter of 2023 certain product types have been moved from High-Value Product Components to High-Value Product Delivery Devices. No adjustments were made to the product categorization prior to the second quarter of 2023.
The following table presents the approximate percentage of our net sales by geographic location:
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| Americas | 43 % | 44 % | 43 % | 44 % | |||||||||||||||||||
| Europe, Middle East, Africa | 48 % | 46 % | 48 % | 47 % | |||||||||||||||||||
| Asia Pacific | 9 % | 10 % | 9 % | 9 % | |||||||||||||||||||
| 100 % | 100 % | 100 % | 100 % |
Contract Assets and Liabilities
The following table summarizes our contract assets and liabilities:
| ($ in millions) | |||||
| Contract assets, December 31, 2023 | $ | 21.5 | |||
| Contract assets, June 30, 2024 | 22.6 | ||||
| Change in contract assets - increase (decrease) | $ | 1.1 | |||
| Deferred income, December 31, 2023 | $ | (53.9) | |||
| Deferred income, June 30, 2024 | (52.2) | ||||
| Change in deferred income - decrease (increase) | $ | 1.7 |
Contract assets are included within other current assets and deferred income is included within other current liabilities and other long-term liabilities. During the six months ended June 30, 2024, $24.2 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 are not material as of June 30, 2024.
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 June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| (in millions) | 2024 | 2023 | 2024 | 2023 | |||||||||||||||||||
| Net income | $ | 111.3 | $ | 155.1 | $ | 226.6 | $ | 295.1 | |||||||||||||||
| Weighted average common shares outstanding | 73.0 | 74.3 | 73.3 | 74.4 | |||||||||||||||||||
| Dilutive effect of equity awards, based on the treasury stock method | 0.7 | 1.1 | 0.7 | 1.1 | |||||||||||||||||||
| Weighted average shares assuming dilution | 73.7 | 75.4 | 74.0 | 75.5 |
During the three months ended June 30, 2024 and 2023, there were 0.3 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. There were 0.3 million and 0.1 million antidilutive shares outstanding during the six months ended June 30, 2024 and 2023, respectively.
In February 2023, the Board of Directors approved a share repurchase program under which we may repurchase up to $1.0 billion in shares of common stock. The share repurchase program does not have an expiration date under which we may repurchase common stock on the open market 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.
During the three months ended June 30, 2024, we purchased 509,336 shares of our common stock under the program at a cost of $187.1 million, or an average price of $367.48 per share. During the six months ended June 30, 2024, we purchased 1,239,015 shares of our common stock under the program at a cost of $454.1 million, or an average price of $366.53 per share.
During the three months ended June 30, 2023, we purchased 492,710 shares of our common stock under the program at a cost of $173.4 million, or an average price of $351.82 per share. During the six months ended June 30, 2023, we purchased 676,070 shares of our common stock under the program at a cost of $233.5 million, or an average price of $345.33 per share.
Note 5: Inventories
Inventories are valued at the lower of cost (on a first-in, first-out basis) or net realizable value. Inventory balances were as follows:
| ($ in millions) | June 30, 2024 | December 31, 2023 | |||||||||
| Raw materials | $ | 173.7 | $ | 172.3 | |||||||
| Work in process | 81.1 | 87.3 | |||||||||
| Finished goods | 164.4 | 175.1 | |||||||||
| $ | 419.2 | $ | 434.7 |
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 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 June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| ($ in millions) | 2024 | 2023 | 2024 | 2023 | |||||||||||||||||||
| Operating lease cost | $ | 6.1 | $ | 4.8 | $ | 11.7 | $ | 10.7 | |||||||||||||||
| Finance lease - amortization of right-of-use (ROU) assets | 0.3 | — | 0.3 | — | |||||||||||||||||||
| Short-term lease cost | 0.6 | 1.2 | 1.1 | 2.5 | |||||||||||||||||||
| Variable lease cost | 1.9 | 1.3 | 3.8 | 3.0 | |||||||||||||||||||
| Total lease cost | $ | 8.9 | $ | 7.3 | $ | 16.9 | $ | 16.2 |
The following table summarizes the finance lease amounts in the Consolidated Balance Sheets:
| Finance Leases | |||||||||||||||||
| ($ in millions) | Balance Sheet Classification | June 30, 2024 | |||||||||||||||
| ROU assets, net | Other noncurrent assets | $ | 31.0 | ||||||||||||||
| Lease liabilities (current) | Other current liabilities | $ | 0.9 | ||||||||||||||
| Lease liabilities (noncurrent) | Other long-term liabilities | $ | 2.4 |
Supplemental cash flow information related to leases were as follows:
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| ($ in millions) | 2024 | 2023 | 2024 | 2023 | |||||||||||||||||||
| Cash paid for amounts included in the measurement of lease liabilities: | |||||||||||||||||||||||
| Operating cash flows from operating leases | $ | 15.0 | $ | 5.0 | $ | 20.3 | $ | 9.9 | |||||||||||||||
| Financing cash flows from finance leases | $ | 22.9 | $ | — | $ | 22.9 | $ | — | |||||||||||||||
| Right-of-use assets obtained in exchange for new lease liabilities | |||||||||||||||||||||||
| Operating leases | $ | 29.9 | $ | 2.9 | $ | 34.1 | $ | 3.5 | |||||||||||||||
| Finance Leases | $ | 24.3 | $ | — | $ | 24.3 | $ | — |
As of June 30, 2024 and December 31, 2023, the weighted average remaining lease term for operating leases was 8.6 years and 9.8 years, respectively. As of June 30, 2024, the weighted average remaining lease term for finance leases was 7.6 years. As of December 31, 2023, finance leases were not material.
As of June 30, 2024 and December 31, 2023, the weighted average discount rate for operating leases was 3.96% and 3.55%, respectively. As of June 30, 2024, the weighted average discount rate for finance leases was 4.94%. As of December 31, 2023, finance leases were not material.
Maturities of operating lease liabilities were as follows:
| ($ in millions) | June 30, | December 31, | |||||||||||||||||||||||||||
| Year | 2024 | 2023 | |||||||||||||||||||||||||||
| 2024 (remaining period as of) | $ | 12.1 | $ | 20.9 | |||||||||||||||||||||||||
| 2025 | 22.7 | 18.7 | |||||||||||||||||||||||||||
| 2026 | 19.8 | 15.7 | |||||||||||||||||||||||||||
| 2027 | 15.3 | 11.2 | |||||||||||||||||||||||||||
| 2028 | 13.8 | 9.5 | |||||||||||||||||||||||||||
| Thereafter | 36.2 | 42.1 | |||||||||||||||||||||||||||
| 119.9 | 118.1 | ||||||||||||||||||||||||||||
| Less: imputed lease interest | (15.0) | (15.9) | |||||||||||||||||||||||||||
| Total lease liabilities | $ | 104.9 | $ | 102.2 |
Maturities of finance lease liabilities were as follows:
| ($ in millions) | June 30, | ||||
| Year | 2024 | ||||
| 2024 (remaining period as of) | $ | 0.4 | |||
| 2025 | 0.9 | ||||
| 2026 | 0.9 | ||||
| 2027 | 0.8 | ||||
| 2028 | 0.5 | ||||
| Thereafter | 0.1 | ||||
| 3.6 | |||||
| Less: imputed lease interest | (0.3) | ||||
| Total lease liabilities | $ | 3.3 |
As of December 31, 2023, finance leases were not material.
Note 7: Affiliated Companies
At June 30, 2024 and December 31, 2023, the aggregate carrying amount of our investment in affiliated companies that are accounted for under the equity method was $191.0 million and $203.2 million, respectively, and the aggregate carrying amount of our investment in affiliated companies that are not accounted for under the equity method was $7.2 million and $6.8 million, 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 $24.9 million and $53.5 million, respectively, for the three and six months ended June 30, 2024, as compared to $39.9 million and $84.1 million, respectively, for the same period in 2023. As of June 30, 2024 and December 31, 2023, the payable balance due to affiliates was $20.4 million and $25.9 million, respectively. The majority of these transactions related to a distributorship agreement with Daikyo Seiko, Ltd. ("Daikyo") that allows us to purchase and re-sell Daikyo products.
Sales to affiliates were $4.0 million and $7.2 million, respectively, for the three and six months ended June 30, 2024, as compared to $2.7 million and $6.0 million, respectively, for the same periods in 2023. As of June 30, 2024 and December 31, 2023, the receivable balance due from affiliates was $2.4 million and $1.6 million, respectively.
Note 8: Debt
The following table summarizes our long-term debt obligations, net of unamortized debt issuance costs and current maturities. The interest rates shown in parentheses are as of June 30, 2024.
| ($ in millions) | June 30, 2024 | December 31, 2023 | |||||||||
| Term Loan, due December 31, 2024 (8.50%) | $ | 79.9 | $ | 81.0 | |||||||
| 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 | |||||||||
| 205.9 | 207.0 | ||||||||||
| Less: unamortized debt issuance costs | 0.1 | 0.2 | |||||||||
| Total debt | 205.8 | 206.8 | |||||||||
| Less: current portion of long-term debt | 132.9 | 134.0 | |||||||||
| Long-term debt, net | $ | 72.9 | $ | 72.8 |
Credit Facility
At June 30, 2024, the borrowing capacity available under our $500.0 million multi-currency revolving credit facility (the “Credit Facility”), including outstanding letters of credit of $2.4 million, was $497.6 million.
Term Loan
At June 30, 2024, we had $79.9 million in borrowings under the Term Loan, of which $79.9 million was classified as current. Please refer to Note 9, Derivative Financial Instruments, for a discussion of the foreign currency hedge associated with the Term Loan.
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 June 30, 2024, we were in compliance with all of our debt covenants.
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 June 30, 2024 and December 31, 2023, the total amount of these forward exchange contracts was Singapore Dollar (“SGD”) 601.5 million and $13.4 million. We have also entered into forward exchange contracts, designated as fair value hedges, to manage our exposure to fluctuating foreign exchange rates on cross-currency intercompany demand notes which were executed at various times throughout 2023 and 2024. As of June 30, 2024, the total amount of these forward exchange contracts was Euro ("EUR") 290.2 million, SGD 98.1 million, $178.3 million, and EUR 23.5 million. As of December 31, 2023, the total amount of these forward exchange contracts was EUR 278.6 million and SGD 94.0 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 June 30, 2024, we had outstanding foreign currency contracts to purchase and sell certain pairs of currencies, as follows:
| (in millions) | Sell | ||||||||||||||||
| Currency | Purchase | USD | EUR | SGD | |||||||||||||
| EUR | 30.5 | 33.4 | — | — | |||||||||||||
| Yen | 5,750.0 | 27.6 | 11.2 | 1.4 | |||||||||||||
| SGD | 41.1 | 14.9 | 14.6 | — |
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 June 30, 2024, the notional amount of the cross-currency swap is ¥8.7 billion ($79.9 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 Secured Overnight Financing Rate ("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.
Additionally, we will periodically enter into forward exchange contracts to mitigate our exposure to fluctuating foreign exchange rates on assets and liabilities, other than the intercompany loans and demand notes referenced above, which are denominated in foreign currencies. The Company has elected not to designate these forward contracts in hedging relationships, and any change in the value of the contracts is recognized in income.
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 June 2024, we purchased several series of call options for a total of 1,079,145 barrels of crude oil to mitigate our exposure to such oil-based surcharges and protect operating cash flows with regard to a portion of our forecasted elastomer purchases.
As of June 30, 2024, we had outstanding contracts to purchase 201,801 barrels of crude oil from June 2024 to December 2025, at a weighted-average strike price of $86.26 per barrel.
Effects of Derivative Instruments on Financial Position and Results of Operations
Please refer to Note 10, Fair Value Measurements, for the balance sheet location and fair values of our derivative instruments as of June 30, 2024 and December 31, 2023.
The following table summarizes the effects of derivative instruments designated as fair value hedges on the condensed consolidated statements of income:
| Amount of Gain (Loss) Recognized in Income for the | Amount of Gain (Loss) Recognized in Income for the | ||||||||||||||||||||||||||||
| Three Months Ended June 30, | Six Months Ended June 30, | Location on Statement of Income | |||||||||||||||||||||||||||
| ($ in millions) | 2024 | 2023 | 2024 | 2023 | |||||||||||||||||||||||||
| Fair Value Hedges: | |||||||||||||||||||||||||||||
| Hedged item (intercompany loan) | $ | 2.9 | $ | 7.4 | $ | 10.4 | $ | 9.9 | Other expense (income) | ||||||||||||||||||||
| Derivative designated as hedging instrument | (2.9) | (8.2) | (10.4) | (10.7) | Other expense (income) | ||||||||||||||||||||||||
| Amount excluded from effectiveness testing | (1.7) | (0.1) | (3.5) | 1.1 | Other expense (income) | ||||||||||||||||||||||||
| Total | $ | (1.7) | $ | (0.9) | $ | (3.5) | $ | 0.3 |
We recognize in earnings the initial value of forward point components for hedges of intercompany loans on a straight-line basis over the life of the fair value hedge. The value of forward point components for hedges of intercompany demand notes is recognized currently in earnings using a market approach. The expense recognized in earnings, pre-tax, for forward point components for the three and six months ended June 30, 2024 was $1.7 million and $3.5 million, respectively. The income recognized in earnings, pre-tax, for forward point components for the three and six months ended June 30, 2023 was $0.2 million and $1.4 million, respectively.
The following tables summarize the effects of derivative instruments designated as fair value, cash flow, and net investment hedges on other comprehensive income (“OCI”) and earnings, net of tax:
| Amount of Gain (Loss) Recognized in OCI for the | Amount of (Gain) Loss Reclassified from Accumulated OCI into Income for the | Location of (Gain) Loss Reclassified from Accumulated OCI into Income | |||||||||||||||||||||||||||
| Three Months Ended June 30, | Three Months Ended June 30, | ||||||||||||||||||||||||||||
| ($ in millions) | 2024 | 2023 | 2024 | 2023 | |||||||||||||||||||||||||
| Fair Value Hedges | |||||||||||||||||||||||||||||
| Foreign currency hedge contracts | $ | 0.5 | $ | (2.2) | $ | (0.7) | $ | 1.9 | Other expense (income) | ||||||||||||||||||||
| Total | $ | 0.5 | $ | (2.2) | $ | (0.7) | $ | 1.9 | |||||||||||||||||||||
| Cash Flow Hedges: | |||||||||||||||||||||||||||||
| Foreign currency hedge contracts | $ | — | $ | (0.8) | $ | (0.1) | $ | 0.4 | Net sales | ||||||||||||||||||||
| Foreign currency hedge contracts | (3.7) | (2.6) | 1.4 | 0.4 | Cost of goods and services sold | ||||||||||||||||||||||||
| Forward treasury locks | — | — | — | 0.1 | Interest expense | ||||||||||||||||||||||||
| Total | $ | (3.7) | $ | (3.4) | $ | 1.3 | $ | 0.9 | |||||||||||||||||||||
| Net Investment Hedges: | |||||||||||||||||||||||||||||
| Cross-currency swap | $ | 3.8 | $ | 5.5 | $ | — | $ | — | Other expense (income) | ||||||||||||||||||||
| Total | $ | 3.8 | $ | 5.5 | $ | — | $ | — |
| Amount of Gain (Loss) 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 | |||||||||||||||||||||||||||
| Six Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||||||||
| ($ in millions) | 2024 | 2023 | 2024 | 2023 | |||||||||||||||||||||||||
| Fair Value Hedges | |||||||||||||||||||||||||||||
| Foreign currency hedge contracts | $ | 0.2 | $ | (2.0) | $ | (0.7) | $ | 1.9 | Other expense (income) | ||||||||||||||||||||
| Total | $ | 0.2 | $ | (2.0) | $ | (0.7) | $ | 1.9 | |||||||||||||||||||||
| Cash Flow Hedges: | |||||||||||||||||||||||||||||
| Foreign currency hedge contracts | $ | 0.1 | $ | (0.9) | $ | (0.2) | $ | 1.1 | Net sales | ||||||||||||||||||||
| Foreign currency hedge contracts | (6.6) | (3.6) | 2.6 | 0.4 | Cost of goods and services sold | ||||||||||||||||||||||||
| Forward treasury locks | — | — | 0.1 | 0.1 | Interest expense | ||||||||||||||||||||||||
| Total | $ | (6.5) | $ | (4.5) | $ | 2.5 | $ | 1.6 | |||||||||||||||||||||
| Net Investment Hedges: | |||||||||||||||||||||||||||||
| Cross-currency swap | $ | 8.4 | $ | 7.2 | $ | — | $ | — | Other expense (income) | ||||||||||||||||||||
| Total | $ | 8.4 | $ | 7.2 | $ | — | $ | — |
Refer to the above table which summarizes the effects of derivative instruments designated as fair value hedges within the other expense (income) line in our condensed consolidated statements of income for the three and six months ended June 30, 2024 and June 30, 2023. The following table summarizes the effects of derivative instruments designated as cash flow and net investment hedges by line item in our condensed consolidated statements of income:
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| ($ in millions) | 2024 | 2023 | 2024 | 2023 | |||||||||||||||||||
| Net sales | $ | (0.1) | $ | 0.4 | $ | (0.2) | $ | 1.1 | |||||||||||||||
| Cost of goods and services sold | 1.4 | 0.4 | 2.6 | 0.4 | |||||||||||||||||||
| Interest expense | — | 0.1 | 0.1 | 0.1 | |||||||||||||||||||
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 | Amount of Gain (Loss) Recognized in Income for the | ||||||||||||||||||||||||||||
| Three Months Ended June 30, | Six Months Ended June 30, | Location on Statement of Income | |||||||||||||||||||||||||||
| ($ in millions) | 2024 | 2023 | 2024 | 2023 | |||||||||||||||||||||||||
| Commodity call options | $ | (0.2) | $ | (0.4) | $ | (0.1) | $ | (1.0) | Other expense (income) | ||||||||||||||||||||
| Currency forwards | 0.1 | (0.2) | 0.5 | (0.2) | Other expense (income) | ||||||||||||||||||||||||
| Total | $ | (0.1) | $ | (0.6) | $ | 0.4 | $ | (1.2) |
For the three and six months ended June 30, 2024 and 2023, 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.
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) | June 30, 2024 | Level 1 | Level 2 | Level 3 | |||||||||||||||||||
| Assets: | |||||||||||||||||||||||
| Deferred compensation assets | $ | 10.4 | $ | 10.4 | $ | — | $ | — | |||||||||||||||
| Foreign currency contracts | 7.4 | — | 7.4 | — | |||||||||||||||||||
| Cross-currency swap | 25.7 | — | 25.7 | — | |||||||||||||||||||
| Commodity call options | 0.7 | — | 0.7 | ||||||||||||||||||||
| $ | 44.2 | $ | 10.4 | $ | 33.8 | $ | — | ||||||||||||||||
| Liabilities: | |||||||||||||||||||||||
| Contingent consideration | $ | 3.8 | $ | — | $ | — | $ | 3.8 | |||||||||||||||
| Deferred compensation liabilities | 10.6 | 10.6 | — | — | |||||||||||||||||||
| Foreign currency contracts | 14.7 | — | 14.7 | — | |||||||||||||||||||
| $ | 29.1 | $ | 10.6 | $ | 14.7 | $ | 3.8 |
| Balance at | Basis of Fair Value Measurements | ||||||||||||||||||||||
| ($ in millions) | December 31, 2023 | Level 1 | Level 2 | Level 3 | |||||||||||||||||||
| Assets: | |||||||||||||||||||||||
| Deferred compensation assets | $ | 10.2 | $ | 10.2 | $ | — | $ | — | |||||||||||||||
| Foreign currency contracts | 5.0 | — | 5.0 | — | |||||||||||||||||||
| Cross-currency swap | 18.4 | — | 18.4 | — | |||||||||||||||||||
| Commodity call options | 0.6 | — | 0.6 | — | |||||||||||||||||||
| $ | 34.2 | $ | 10.2 | $ | 24.0 | $ | — | ||||||||||||||||
| Liabilities: | |||||||||||||||||||||||
| Contingent consideration | $ | 3.6 | $ | — | $ | — | $ | 3.6 | |||||||||||||||
| Deferred compensation liabilities | 10.4 | 10.4 | — | — | |||||||||||||||||||
| Foreign currency contracts | 2.2 | — | 2.2 | — | |||||||||||||||||||
| $ | 16.2 | $ | 10.4 | $ | 2.2 | $ | 3.6 |
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 as of June 30, 2024, 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 current 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 expense (income) 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.
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 short-term and 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 June 30, 2024, the estimated fair value of short-term and long-term debt was $203.0 million compared to a carrying amount of $205.8 million. At December 31, 2023, the estimated fair value of short-term and long-term debt was $204.4 million and the carrying amount was $206.8 million.
Note 11: Accumulated Other Comprehensive Loss
The following table presents the changes in the components of accumulated other comprehensive income ("AOCI") (loss), net of tax, for the six months ended June 30, 2024:
| ($ in millions) | Derivatives | Change in equity affiliate investment AOCI | Defined benefit pension and other postretirement plans | Foreign currency translation | Total | ||||||||||||||||||||||||
| Balance, December 31, 2023 | $ | — | $ | 2.3 | $ | (10.1) | $ | (136.0) | $ | (143.8) | |||||||||||||||||||
| Other comprehensive (loss) income before reclassifications | (6.3) | (0.2) | — | (68.0) | (74.5) | ||||||||||||||||||||||||
| Amounts reclassified out from accumulated other comprehensive (loss) income | 1.8 | — | (0.4) | — | 1.4 | ||||||||||||||||||||||||
| Other comprehensive (loss) income, net of tax | (4.5) | (0.2) | (0.4) | (68.0) | (73.1) | ||||||||||||||||||||||||
| Balance, June 30, 2024 | $ | (4.5) | $ | 2.1 | $ | (10.5) | $ | (204.0) | $ | (216.9) |
The following table presents the changes in the components of accumulated other comprehensive income ("AOCI") (loss), net of tax, for the six months ended June 30, 2023:
| ($ in millions) | Derivatives | Change in equity affiliate investment AOCI | Defined benefit pension and other postretirement plans | Foreign currency translation | Total | ||||||||||||||||||||||||
| Balance, December 31, 2022 | $ | 0.2 | $ | 1.6 | $ | (9.4) | $ | (175.4) | $ | (183.0) | |||||||||||||||||||
| Other comprehensive (loss) income before reclassifications | (6.5) | (0.1) | (0.5) | 4.0 | (3.1) | ||||||||||||||||||||||||
| Amounts reclassified out from accumulated other comprehensive (loss) income | 3.5 | — | (0.9) | — | 2.6 | ||||||||||||||||||||||||
| Other comprehensive (loss) income, net of tax | (3.0) | (0.1) | (1.4) | 4.0 | (0.5) | ||||||||||||||||||||||||
| Balance, June 30, 2023 | $ | (2.8) | $ | 1.5 | $ | (10.8) | $ | (171.4) | $ | (183.5) |
A summary of the reclassifications out from accumulated other comprehensive loss is presented in the following table:
| ($ in millions) | Three Months Ended June 30, | Six Months Ended June 30, | Location on Statement of Income | |||||||||||||||||||||||||||||
| Detail of components | 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||||||||||
| (Losses) gains on derivatives: | ||||||||||||||||||||||||||||||||
| Foreign currency contracts | $ | 0.1 | $ | (0.6) | $ | 0.2 | $ | (1.3) | Net sales | |||||||||||||||||||||||
| Foreign currency contracts | (1.8) | (0.6) | (3.4) | (0.6) | Cost of goods and services sold | |||||||||||||||||||||||||||
| Foreign currency contracts | 1.0 | (2.8) | 1.0 | (2.8) | Other expense (income) | |||||||||||||||||||||||||||
| Forward treasury locks | — | — | (0.1) | (0.1) | Interest expense | |||||||||||||||||||||||||||
| Total before tax | (0.7) | (4.0) | (2.3) | (4.8) | ||||||||||||||||||||||||||||
| Tax benefit | 0.1 | 1.2 | 0.5 | 1.3 | ||||||||||||||||||||||||||||
| Net of tax | $ | (0.6) | $ | (2.8) | $ | (1.8) | $ | (3.5) | ||||||||||||||||||||||||
| Amortization of defined benefit pension and other postretirement plans: | ||||||||||||||||||||||||||||||||
| Actuarial gains | $ | 0.2 | $ | 0.4 | $ | 0.5 | $ | 0.8 | (a) | |||||||||||||||||||||||
| Other | — | 0.4 | — | 0.4 | ||||||||||||||||||||||||||||
| Total before tax | 0.2 | 0.8 | 0.5 | 1.2 | ||||||||||||||||||||||||||||
| Tax expense | — | (0.2) | (0.1) | (0.3) | ||||||||||||||||||||||||||||
| Net of tax | $ | 0.2 | $ | 0.6 | $ | 0.4 | $ | 0.9 | ||||||||||||||||||||||||
| Total reclassifications for the period, net of tax | $ | (0.4) | $ | (2.2) | $ | (1.4) | $ | (2.6) |
(a) This component is included in the computation of net periodic benefit cost.
Note 12: Shareholders’ Equity
The following table presents the changes in shareholders’ equity for the six months ended June 30, 2024:
| 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, 2023 | 75.3 | $ | 18.8 | $ | 120.2 | 1.8 | $ | (637.6) | $ | 3,523.4 | $ | (143.8) | $ | 2,881.0 | |||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | 115.3 | — | 115.3 | |||||||||||||||||||||||||||||||||||||||
| Activity related to stock-based compensation | — | — | (65.0) | (0.2) | 79.4 | — | — | 14.4 | |||||||||||||||||||||||||||||||||||||||
| Shares purchased under share repurchase program | — | — | — | 0.7 | (267.0) | — | — | (267.0) | |||||||||||||||||||||||||||||||||||||||
| Dividends declared ($0.20 per share) | — | — | — | — | — | (14.6) | — | (14.6) | |||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss, net of tax | — | — | — | — | — | — | (48.5) | (48.5) | |||||||||||||||||||||||||||||||||||||||
| Balance, March 31, 2024 | 75.3 | $ | 18.8 | $ | 55.2 | 2.3 | $ | (825.2) | $ | 3,624.1 | $ | (192.3) | $ | 2,680.6 | |||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | 111.3 | — | 111.3 | |||||||||||||||||||||||||||||||||||||||
| Activity related to stock-based compensation | — | — | (21.7) | (0.1) | 32.8 | — | — | 11.1 | |||||||||||||||||||||||||||||||||||||||
| Shares purchased under share repurchase program | — | — | — | 0.5 | (187.1) | — | — | (187.1) | |||||||||||||||||||||||||||||||||||||||
| Dividends declared ($0.20 per share) | — | — | — | — | — | (14.5) | — | (14.5) | |||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss, net of tax | — | — | — | — | — | — | (24.6) | (24.6) | |||||||||||||||||||||||||||||||||||||||
| Balance, June 30, 2024 | 75.3 | $ | 18.8 | $ | 33.5 | 2.7 | $ | (979.5) | $ | 3,720.9 | $ | (216.9) | $ | 2,576.8 | |||||||||||||||||||||||||||||||||
The following table presents the changes in shareholders’ equity for the six months ended June 30, 2023:
| 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, 2022 | 75.3 | $ | 18.8 | $ | 232.2 | 1.2 | $ | (370.9) | $ | 2,987.8 | $ | (183.0) | $ | 2,684.9 | |||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | 140.0 | — | 140.0 | |||||||||||||||||||||||||||||||||||||||
| Activity related to stock-based compensation | — | — | (50.8) | (0.3) | 61.8 | — | — | 11.0 | |||||||||||||||||||||||||||||||||||||||
| Shares purchased under share repurchase program | — | — | — | 0.2 | (60.1) | — | — | (60.1) | |||||||||||||||||||||||||||||||||||||||
| Dividends declared ($0.19 per share) | — | — | — | — | — | (14.2) | — | (14.2) | |||||||||||||||||||||||||||||||||||||||
| Other comprehensive income, net of tax | — | — | — | — | — | — | 14.6 | 14.6 | |||||||||||||||||||||||||||||||||||||||
| Balance, March 31, 2023 | 75.3 | $ | 18.8 | $ | 181.4 | 1.1 | $ | (369.2) | $ | 3,113.6 | $ | (168.4) | $ | 2,776.2 | |||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | 155.1 | — | 155.1 | |||||||||||||||||||||||||||||||||||||||
| Activity related to stock-based compensation | — | — | (23.2) | (0.2) | 41.2 | — | — | 18.0 | |||||||||||||||||||||||||||||||||||||||
| Shares purchased under share repurchase program | — | — | — | 0.5 | (173.4) | — | — | (173.4) | |||||||||||||||||||||||||||||||||||||||
| Dividends declared ($0.19 per share) | — | — | — | — | — | (14.1) | — | (14.1) | |||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss, net of tax | — | — | — | — | — | — | (15.1) | (15.1) | |||||||||||||||||||||||||||||||||||||||
| Balance, June 30, 2023 | 75.3 | $ | 18.8 | $ | 158.2 | 1.4 | $ | (501.4) | $ | 3,254.6 | $ | (183.5) | $ | 2,746.7 | |||||||||||||||||||||||||||||||||
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 June 30, 2024, there were 1,339,458 shares remaining in the 2016 Plan for future grants.
During the six months ended June 30, 2024, we granted 85,263 stock options at a weighted average exercise price of $350.28 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 $134.93 per share as determined by the Black-Scholes option valuation model using the following weighted average assumptions: a risk-free interest rate of 4.3%; expected life of 6.0 years based on prior experience; stock volatility of 32.0% based on historical data; and a dividend yield of 0.3%. Stock option expense is recognized over the vesting period, net of forfeitures.
During the six months ended June 30, 2024, we granted 32,876 stock-settled performance share unit (“PSU”) awards at a weighted average grant-date fair value of $350.28 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 number 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 six months ended June 30, 2024, we granted 7,019 stock-settled restricted share unit (“RSU”) awards at a weighted average grant-date fair value of $350.65 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 $4.3 million and $9.3 million for the three and six months ended June 30, 2024, respectively. For the three and six months ended June 30, 2023, stock-based compensation expense was $7.5 million and $16.0 million, respectively.
Note 14: Other Expense (Income)
Other expense (income) consists of:
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| ($ in millions) | 2024 | 2023 | 2024 | 2023 | |||||||||||||||||||
| Loss on disposal of plant | $ | — | $ | 2.2 | $ | — | $ | 11.6 | |||||||||||||||
| Foreign exchange transaction losses | 2.0 | 0.3 | 3.2 | 1.2 | |||||||||||||||||||
| Contingent consideration | 1.0 | 0.5 | 2.0 | 0.8 | |||||||||||||||||||
| Asset impairments | 0.3 | 1.5 | 0.9 | 3.4 | |||||||||||||||||||
| Restructuring and related charges | — | (0.8) | — | (0.8) | |||||||||||||||||||
| Other items | — | 0.3 | 0.3 | 0.7 | |||||||||||||||||||
| Total other expense (income) | $ | 3.3 | $ | 4.0 | $ | 6.4 | $ | 16.9 |
Loss on Disposal of Plant
During the three and six months ended June 30, 2023, the Company recorded expense of $2.2 million and $11.6 million, respectively, within other expense (income), as a result of the sale of one of the Company’s manufacturing facilities within the Proprietary Products segment. The transaction closed during the second quarter of 2023.
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.
Restructuring and Related Charges
In December 2022, the Company approved a restructuring plan to adjust our operating cost base to better respond to the macroeconomic factors influencing our business. 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 restructuring and related charges of approximately $22 million to $24 million, with annualized savings in the range of $22 million to $24 million.
The following table presents activity related to our restructuring obligations related to our 2022 restructuring plan:
| ($ in millions) | Severance and benefits | Other charges | Total | ||||||||||||||||||||
| Balance, December 31, 2023 | $ | 3.0 | $ | — | $ | 3.0 | |||||||||||||||||
| (Credits) Charges | — | — | — | ||||||||||||||||||||
| Cash payments | (0.3) | — | (0.3) | ||||||||||||||||||||
| Balance, June 30, 2024 | $ | 2.7 | $ | — | $ | 2.7 |
Note 15: 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 $21.9 million and $34.8 million for the three months ended June 30, 2024 and 2023, respectively, and the effective tax rate was 17.0% and 18.8%, respectively. The decrease in the effective tax rate is primarily due to a shift in the forecasted geographic earnings mix, offset by a decrease in the tax benefit related to stock-based compensation for three months ended June 30, 2024 as compared to the same period in 2023.
The provision for income taxes was $38.3 million and $58.4 million for the six months ended June 30, 2024 and 2023, respectively, and the effective tax rate was 15.0% and 17.0%, respectively. The decrease in the effective tax rate is primarily due to a shift in the forecasted geographic earnings mix, offset by a decrease in the tax benefit related to stock-based compensation for six months ended June 30, 2024, as compared to the same period in 2023.
The Company continues to address the change in tax laws enacted pursuant to the Organization for Economic Cooperation and Development (OECD)’s 15% global minimum tax initiative (Pillar 2). The 2024 forecasted impact of Pillar 2 is not expected to be material to the Company.
Note 16: 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 commitments and contingencies since December 31, 2023.
Note 17: 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 solutions 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 June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| ($ in millions) | 2024 | 2023 | 2024 | 2023 | |||||||||||||||||||
| Net sales: | |||||||||||||||||||||||
| Proprietary Products | $ | 559.7 | $ | 618.0 | $ | 1,119.2 | $ | 1,201.1 | |||||||||||||||
| Contract-Manufactured Products | 142.4 | 135.8 | 278.3 | 269.3 | |||||||||||||||||||
| Consolidated net sales | $ | 702.1 | $ | 753.8 | $ | 1,397.5 | $ | 1,470.4 |
The following table provides summarized financial information for our segments:
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| ($ in millions) | 2024 | 2023 | 2024 | 2023 | |||||||||||||||||||
| Operating profit (loss): | |||||||||||||||||||||||
| Proprietary Products | $ | 131.0 | $ | 194.2 | $ | 257.3 | $ | 364.9 | |||||||||||||||
| Contract-Manufactured Products | 17.2 | 14.9 | 34.3 | 32.3 | |||||||||||||||||||
| Total business segment operating profit | $ | 148.2 | $ | 209.1 | $ | 291.6 | $ | 397.2 | |||||||||||||||
| Corporate and Unallocated | |||||||||||||||||||||||
| Stock-based compensation expense | $ | (4.3) | $ | (7.5) | $ | (9.3) | $ | (16.0) | |||||||||||||||
| Corporate general costs (1) | (17.5) | (16.6) | (32.9) | (31.3) | |||||||||||||||||||
| Unallocated Items: | |||||||||||||||||||||||
| Amortization of acquisition-related intangible assets (2) | (0.2) | (0.2) | (0.4) | (0.4) | |||||||||||||||||||
| Loss on disposal of plant (3) | — | (2.2) | — | (11.6) | |||||||||||||||||||
| Restructuring and other charges (4) | — | (0.1) | — | (0.1) | |||||||||||||||||||
| Total Corporate and Unallocated | (22.0) | (26.6) | (42.6) | (59.4) | |||||||||||||||||||
| Total consolidated operating profit | $ | 126.2 | $ | 182.5 | $ | 249.0 | $ | 337.8 | |||||||||||||||
| Interest (income) expense, net and other nonoperating (income) expense, net | (2.5) | (2.4) | (7.1) | (5.0) | |||||||||||||||||||
| Income before income taxes and equity in net income of affiliated companies | $ | 128.7 | $ | 184.9 | $ | 256.1 | $ | 342.8 |
(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 and six months ended June 30, 2024, the Company recorded $0.2 million and $0.4 million, respectively, of amortization expense within operating profit associated with an intangible asset acquired during the second quarter of 2020. During the three and six months ended June 30, 2023, the Company recorded $0.2 million and $0.4 million, respectively, of amortization expense within operating profit associated with an intangible asset acquired during the second quarter of 2020.
(3) During the three and six months ended June 30, 2023, the Company recorded expense of $2.2 million and $11.6 million, respectively, within other expense (income), as a result of the sale of one of the Company’s manufacturing facilities within the Proprietary Products segment. The transaction closed during the second quarter of 2023.
(4) Restructuring and other charges of $0.1 million for both the three and six months ended June 30, 2023 represents the net impact of an inventory write down of $0.9 million within cost of goods and services sold and a $0.8 million benefit within other expense (income) for revised severance estimates in connection with its 2022 restructuring plan.
Please refer to Note 14, Other Expense (Income), for further discussion of certain unallocated items referenced above.
Note 18: Subsequent Events
On July 2, 2024, the Company entered into the Third Amendment to the Credit Facility Agreement, which amended the Existing Credit Facility Agreement. Among other changes to the existing credit agreement, the Third Amendment established an incremental term loan in the stated principal amount of $130.0 million (the “New Term Loan”), which was fully drawn at closing and matures on July 2, 2027. The entire stated principal amount of the New Term Loan is due at maturity and there is no scheduled amortization prior to such date. Together with cash on hand, proceeds from the New Term Loan were used to repay an outstanding term loan under the Existing Credit Facility Agreement in the principal amount of $79.9 million and to repay an aggregate principal amount of $53.0 million of the Company’s 3.82% Series B Senior Notes due July 5, 2024 issued under that certain Note Purchase Agreement dated as of July 5, 2012.
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