NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 1: Summary of Significant Accounting Policies
Basis of Presentation
: The condensed consolidated financial statements included in this report are unaudited and have been prepared in accordance with United States (“U.S.”) generally accepted accounting principles (“U.S. GAAP”) for interim financial reporting and U.S. Securities and Exchange Commission (“SEC”) regulations. The year-end condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by U.S. GAAP. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with U.S. GAAP have been condensed or omitted. In the opinion of management, these financial statements include all adjustments, which are of a normal recurring nature, necessary for a fair statement of the financial position, results of operations, cash flows and the change in equity for the periods presented. The condensed consolidated financial statements for the
three and six months ended
June 30, 2016
should be read in conjunction with the consolidated financial statements and notes thereto of West Pharmaceutical Services, Inc. (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, 2015
(“
2015
Annual Report”). The results of operations for any interim period are not necessarily indicative of results for the full year.
Segment Reporting:
Beginning in 2016, we changed our organization and reporting structure for our next phase of growth and development, which resulted in a change to Proprietary Products and Contract-Manufactured Products as our reportable segments. Segment results presented in the accompanying condensed consolidated financial statements and related notes have been retroactively adjusted to reflect the impact of this change. Please refer to Note 15,
Segment Information
, for additional details.
Note 2: New Accounting Standards
Recently Adopted Standards
In September 2015, the Financial Accounting Standards Board (“FASB”) issued guidance that simplifies the accounting for measurement-period adjustments in business combinations, by eliminating the requirement to account for those adjustments retrospectively. Instead, the acquirer will be required to recognize measurement-period adjustments in the reporting period in which the amounts are determined. We adopted this guidance as of January 1, 2016, on a prospective basis. The adoption did not have a material impact on our financial statements.
In April 2015, the FASB issued guidance on the accounting for fees paid by a customer in a cloud computing arrangement. We adopted this guidance as of January 1, 2016, on a prospective basis. The adoption did not have a material impact on our financial statements.
In February 2015, the FASB issued amended guidance that changes the analysis that a reporting entity must perform to determine whether it should consolidate certain types of legal entities. We adopted this guidance as of January 1, 2016, on a prospective basis. The adoption did not have a material impact on our financial statements.
In January 2015, the FASB issued guidance which removes the concept of extraordinary items from U.S. GAAP. This guidance eliminates the requirement for companies to spend time assessing whether items meet the criteria of being both unusual and infrequent. We adopted this guidance as of January 1, 2016. The adoption did not have a material impact on our financial statements.
In June 2014, the FASB issued guidance that clarifies the accounting for share-based payments in which the terms of the award provide that a performance target that affects vesting could be achieved after the requisite service period. In this case, the performance target would be required to be treated as a performance condition, and should not be reflected in estimating the grant-date fair value of the award. The guidance also addresses when to recognize the related compensation cost. We adopted this guidance as of January 1, 2016. The adoption did not have a material impact on our financial statements.
Standards Issued Not Yet Adopted
In March 2016, the FASB issued guidance that simplifies several aspects of the accounting for share-based payment transactions, including income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. This guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016. Early adoption is permitted. Management is currently evaluating the impact that this guidance will have on our financial statements.
In March 2016, the FASB issued guidance that simplifies the transition to equity method of accounting. This guidance eliminates the requirement to retroactively adopt the equity method of accounting when there is an increase in the level of ownership interest or degree of influence. This guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016. Management believes that the adoption of this guidance will not have a material impact on our financial statements.
In February 2016, the FASB issued guidance on the accounting for leases. This guidance requires lessees to recognize lease assets and lease liabilities on the balance sheet and to expand disclosures about leasing arrangements, both qualitative and quantitative. In terms of transition, the guidance requires adoption based upon a modified retrospective approach. This guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018. Management is currently evaluating the impact that this guidance will have on our financial statements.
In January 2016, the FASB issued guidance that addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. This guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. Management believes that the adoption of this guidance will not have a material impact on our financial statements.
In July 2015, the FASB issued guidance regarding the subsequent measurement of inventory. This guidance requires inventory measured using any method other than last-in, first-out or the retail inventory method to be measured at the lower of cost and net realizable value. Net realizable value represents estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. This guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016. Management believes that the adoption of this guidance will not have a material impact on our financial statements.
In August 2014, the FASB issued guidance which defines management's responsibility to evaluate whether there is substantial doubt about an entity's ability to continue as a going concern and to provide related footnote disclosures. This guidance is effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. Early adoption is permitted. Management believes that the adoption of this guidance will not have a material impact on our financial statements.
In May 2014, the FASB issued guidance on the accounting for revenue from contracts with customers that will supersede most existing revenue recognition guidance, including industry-specific guidance. The core principle requires an entity to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, the guidance requires enhanced disclosures regarding the nature, timing and uncertainty of revenue and cash flows arising from an entity's contracts with customers. The FASB subsequently issued additional clarifying standards to address issues arising from implementation of the new revenue recognition standard. This guidance is effective for interim and annual reporting periods beginning on or after December 15, 2017. Early adoption is permitted as of one year prior to the current effective date. Entities can choose to apply the guidance using either a full retrospective approach or a modified retrospective approach. Management is currently evaluating the impact that this guidance will have on our financial statements.
Note 3: 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:
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Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
(In millions)
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
Net income
|
$
|
44.7
|
|
|
$
|
27.8
|
|
|
$
|
66.9
|
|
|
$
|
60.7
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
73.3
|
|
|
72.0
|
|
|
72.9
|
|
|
71.9
|
|
|
Dilutive effect of equity awards, based on the treasury stock method
|
1.5
|
|
|
1.7
|
|
|
1.6
|
|
|
1.6
|
|
|
Weighted average shares assuming dilution
|
74.8
|
|
|
73.7
|
|
|
74.5
|
|
|
73.5
|
|
During the three months ended
June 30, 2016
and
2015
, there were
0.1 million
and
0.8 million
shares, respectively, not included in the computation of diluted net income per share because their impact was antidilutive. There were
0.4 million
and
0.5 million
antidilutive shares outstanding during the six months ended June 30, 2016 and 2015, respectively.
In December 2015, we announced a share repurchase program authorizing the repurchase of up to
700,000
shares of the Company’s common stock from time to time on the open market or in privately-negotiated transactions as permitted under the Securities Exchange Act of 1934 Rule 10b-18. The number of shares to be repurchased and the timing of such transactions will depend on a variety of factors, including market conditions. The program commenced on January 1, 2016 and is expected to be completed by December 31, 2016. During the
three months ended
June 30, 2016
, the Company purchased
110,700
shares of its common stock under this program at a cost of
$8.1 million
, or an average price of
$73.20
per share. During the
six months ended
June 30, 2016
, the Company purchased
253,500
shares of its common stock under this program at a cost of
$17.2 million
, or an average price of
$67.82
per share.
Note 4: Inventories
Inventories are valued at the lower of cost (on a first-in, first-out basis) or market. Inventory balances were as follows:
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($ in millions)
|
June 30,
2016
|
|
December 31,
2015
|
|
Raw materials
|
$
|
80.1
|
|
|
$
|
74.4
|
|
|
Work in process
|
32.2
|
|
|
30.1
|
|
|
Finished goods
|
85.4
|
|
|
76.6
|
|
|
|
$
|
197.7
|
|
|
$
|
181.1
|
|
Note 5: Affiliated Companies
During the second quarter of 2016, we made an
$8.4 million
cost-method investment in an intradermal drug delivery company. At
June 30, 2016
and
December 31, 2015
, the aggregate carrying amount of investments in equity-method affiliates was
$64.3 million
and
$56.3 million
, respectively, and the aggregate carrying amount of cost-method investments was
$13.4 million
and
$5.0 million
, respectively. Please refer to Note 5,
Affiliated Companies
, to the consolidated financial statements in our
2015
Annual Report for additional details.
Note 6: Debt
The following table summarizes our long-term debt obligations, net of current maturities and unamortized debt issuance costs:
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($ in millions)
|
June 30,
2016
|
|
December 31,
2015
|
|
Euro note B, due February 27, 2016 (4.38%)
|
$
|
—
|
|
|
$
|
66.8
|
|
|
Term loan, due January 1, 2018 (1.74%)
|
36.0
|
|
|
37.1
|
|
|
Note payable, due December 31, 2019
|
0.2
|
|
|
0.2
|
|
|
Revolving credit facility, due October 15, 2020 (1.71%)
|
28.1
|
|
|
27.1
|
|
|
Series A notes, due July 5, 2022 (3.67%)
|
42.0
|
|
|
42.0
|
|
|
Series B notes, due July 5, 2024 (3.82%)
|
53.0
|
|
|
53.0
|
|
|
Series C notes, due July 5, 2027 (4.02%)
|
73.0
|
|
|
73.0
|
|
|
Total debt
|
232.3
|
|
|
299.2
|
|
|
Less: current portion of long-term debt
|
2.5
|
|
|
69.3
|
|
|
Less: unamortized debt issuance costs
|
0.9
|
|
|
1.0
|
|
|
Long-term debt, net
|
$
|
228.9
|
|
|
$
|
228.9
|
|
Please refer to Note 8,
Debt
, to the consolidated financial statements in our
2015
Annual Report for additional details regarding our debt agreements.
At
June 30, 2016
, we had
$28.1 million
in outstanding borrowings under our
$300.0 million
multi-currency revolving credit facility, of which
$4.9 million
was denominated in Yen and
$23.2 million
was denominated in Euro. The total amount outstanding under this facility at
June 30, 2016
and
December 31, 2015
was classified as long-term. These borrowings, together with outstanding letters of credit of
$3.0 million
, resulted in a borrowing capacity available under this facility of
$268.9 million
at
June 30, 2016
.
In addition, at
June 30, 2016
, we had
$36.0 million
outstanding under our
five
-year term loan due January 2018, of which
$2.5 million
was classified as current. Please refer to Note 7,
Derivative Financial Instruments
, for a discussion of the interest-rate swap agreement associated with this loan.
Note 7: Derivative Financial Instruments
Our ongoing business operations expose us to various risks such as fluctuating interest rates, foreign 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 speculation or trading purposes. All derivatives are recorded on the balance sheet at fair value.
Interest Rate Risk
At
June 30, 2016
, we had a
$36.0 million
forward-start interest rate swap outstanding that hedges the variability in cash flows due to changes in the applicable interest rate of our variable-rate
five
-year term loan. Under this swap, we receive variable interest rate payments based on
one-month London Interbank Offered Rate (“LIBOR”)
plus a margin in return for making monthly fixed interest payments at
5.41%
. We designated this swap as a cash flow hedge.
Foreign Exchange Rate Risk
In 2015, we entered into a
€20.0 million
forward exchange contract, designated as a fair value hedge, to neutralize our exposure to fluctuating foreign exchange rates on a cross-currency intercompany loan. Changes in the fair value of this derivative are recognized within other expense and are offset by changes in the fair value of the underlying exposure being hedged.
In addition, in 2015, we entered into the following foreign currency hedge contracts that were designated as cash flow hedges of forecasted transactions denominated in foreign currencies.
We entered into a series of foreign currency contracts intended to hedge the currency risk associated with a portion of our forecasted U.S. dollar (“USD”)-denominated inventory purchases made by certain European subsidiaries, for a total notional amount of
€11.0 million
(
$12.1 million
).
We also entered into a series of foreign currency contracts in 2015 to hedge the currency risk associated with a portion of our forecasted Euro-denominated sales of finished goods by one of our USD functional-currency subsidiaries for a total notional amount of
€9.0 million
(
$9.9 million
).
In 2016, we entered into a series of foreign currency contracts to hedge the currency risk associated with a portion of our forecasted Yen-denominated inventory purchases made by West in the U.S., for a total notional amount of
¥710.2 million
(
$6.0 million
).
In addition, we entered into a series of foreign currency contracts to hedge the currency risk associated with a portion of our forecasted Yen-denominated inventory purchases made by certain European subsidiaries, for a total notional amount of
¥360.0 million
(
$3.1 million
).
At
June 30, 2016
, a portion of our debt consisted of borrowings denominated in currencies other than USD. We have designated our
€21.0 million
(
$23.2 million
) Euro-denominated borrowings under our multi-currency revolving credit facility as a hedge of our net investment in certain European subsidiaries. A cumulative foreign currency translation gain of
$0.6 million
pre-tax (
$0.3 million
after tax) on this debt was recorded within accumulated other comprehensive loss as of
June 30, 2016
. We have also designated our
¥500.0 million
(
$4.9 million
) Yen-denominated borrowings under our multi-currency revolving credit facility as a hedge of our net investment in Daikyo Seiko, Ltd. ("Daikyo"). At
June 30, 2016
, there was a cumulative foreign currency translation loss on this Yen-denominated debt of
$0.7 million
pre-tax (
$0.4 million
after tax), which was also included within accumulated other comprehensive loss.
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.
In February 2016, we purchased a series of call options for a total of
71,900
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 through December 2016. With these contracts we may benefit from a decline in crude oil prices, as there is no downward exposure other than the
$0.2 million
premium that we paid to purchase the contracts.
During the
three and six months ended
June 30, 2016
, the gain recorded in cost of goods and services sold related to these call options was
$0.2 million
.
Effects of Derivative Instruments on Financial Position and Results of Operations
The following tables summarize the effects of derivative instruments designated as hedges on other comprehensive income (“OCI”) and earnings, net of tax:
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Amount of Gain (Loss) Recognized in OCI for
|
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Amount of (Gain) Loss Reclassified from Accumulated OCI into Income for
|
|
Location of (Gain) Loss Reclassified from Accumulated OCI into Income
|
|
|
Three Months Ended
June 30,
|
|
Three Months Ended
June 30,
|
|
|
($ in millions)
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
|
|
Cash Flow Hedges:
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|
|
|
|
|
|
|
|
|
Foreign currency hedge contracts
|
$
|
0.3
|
|
|
$
|
(0.4
|
)
|
|
$
|
0.1
|
|
|
$
|
(0.4
|
)
|
|
Net sales
|
|
Foreign currency hedge contracts
|
0.9
|
|
|
(1.1
|
)
|
|
—
|
|
|
—
|
|
|
Cost of goods and services sold
|
|
Interest rate swap contracts
|
(0.1
|
)
|
|
—
|
|
|
0.2
|
|
|
0.4
|
|
|
Interest expense
|
|
Total
|
$
|
1.1
|
|
|
$
|
(1.5
|
)
|
|
$
|
0.3
|
|
|
$
|
—
|
|
|
|
|
Net Investment Hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency-denominated debt
|
$
|
—
|
|
|
$
|
(1.2
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Other expense
|
|
Total
|
$
|
—
|
|
|
$
|
(1.2
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Gain (Loss) Recognized in OCI for
|
|
Amount of (Gain) Loss Reclassified from Accumulated OCI into Income for
|
|
Location of (Gain) Loss Reclassified from Accumulated OCI into Income
|
|
|
Six Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
|
($ in millions)
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
|
|
Cash Flow Hedges:
|
|
|
|
|
|
|
|
|
|
|
Foreign currency hedge contracts
|
$
|
(0.3
|
)
|
|
$
|
1.4
|
|
|
$
|
0.1
|
|
|
$
|
(0.7
|
)
|
|
Net sales
|
|
Foreign currency hedge contracts
|
0.6
|
|
|
0.5
|
|
|
—
|
|
|
—
|
|
|
Cost of goods and services sold
|
|
Interest rate swap contracts
|
(0.2
|
)
|
|
(0.2
|
)
|
|
0.4
|
|
|
0.8
|
|
|
Interest expense
|
|
Forward treasury locks
|
—
|
|
|
—
|
|
|
0.1
|
|
|
0.1
|
|
|
Interest expense
|
|
Total
|
$
|
0.1
|
|
|
$
|
1.7
|
|
|
$
|
0.6
|
|
|
$
|
0.2
|
|
|
|
|
Net Investment Hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency-denominated debt
|
$
|
(1.1
|
)
|
|
$
|
5.5
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Other expense
|
|
Total
|
$
|
(1.1
|
)
|
|
$
|
5.5
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
For the
three and six months ended
June 30, 2016
and
2015
, there was no material ineffectiveness related to our hedges.
Note 8: 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:
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|
•
|
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:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
Basis of Fair Value Measurements
|
|
($ in millions)
|
June 30,
2016
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Assets:
|
|
|
|
|
|
|
|
|
Deferred compensation assets
|
$
|
6.4
|
|
|
$
|
6.4
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Foreign currency contracts
|
1.5
|
|
|
—
|
|
|
1.5
|
|
|
—
|
|
|
|
$
|
7.9
|
|
|
$
|
6.4
|
|
|
$
|
1.5
|
|
|
$
|
—
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent consideration
|
$
|
7.9
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
7.9
|
|
|
Deferred compensation liabilities
|
6.8
|
|
|
6.8
|
|
|
—
|
|
|
—
|
|
|
Interest rate swap contract
|
1.7
|
|
|
—
|
|
|
1.7
|
|
|
—
|
|
|
Foreign currency contracts
|
0.1
|
|
|
—
|
|
|
0.1
|
|
|
—
|
|
|
|
$
|
16.5
|
|
|
$
|
6.8
|
|
|
$
|
1.8
|
|
|
$
|
7.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
Basis of Fair Value Measurements
|
|
($ in millions)
|
December 31,
2015
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Assets:
|
|
|
|
|
|
|
|
|
Deferred compensation assets
|
$
|
6.8
|
|
|
$
|
6.8
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Foreign currency contracts
|
0.2
|
|
|
—
|
|
|
0.2
|
|
|
—
|
|
|
|
$
|
7.0
|
|
|
$
|
6.8
|
|
|
$
|
0.2
|
|
|
$
|
—
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent consideration
|
$
|
6.0
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
6.0
|
|
|
Deferred compensation liabilities
|
8.8
|
|
|
8.8
|
|
|
—
|
|
|
—
|
|
|
Interest rate swap contract
|
2.0
|
|
|
—
|
|
|
2.0
|
|
|
—
|
|
|
Foreign currency contracts
|
0.2
|
|
|
—
|
|
|
0.2
|
|
|
—
|
|
|
|
$
|
17.0
|
|
|
$
|
8.8
|
|
|
$
|
2.2
|
|
|
$
|
6.0
|
|
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 assets and other current liabilities, is valued using an income approach based on quoted forward foreign exchange rates and spot rates at the reporting date. The fair value of our contingent consideration, included within other current and other long-term liabilities, is discussed further in the section related to Level 3 fair value measurements. 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. Our interest rate swap, included within other long-term liabilities, is valued based on the terms of the contract and observable market inputs (i.e., LIBOR, Eurodollar synthetic forwards and swap spreads). Please refer to Note 7,
Derivative Financial Instruments
, for further discussion of our derivatives.
Level 3 Fair Value Measurements
The fair value of the contingent consideration liability related to our SmartDose® electronic patch injector system (“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 in our condensed consolidated statements of income. The significant unobservable inputs used in the fair value measurement of the contingent consideration are the sales projections, the probability of success factors, and the discount rate. Significant increases or decreases in any of those inputs in isolation would result in a significantly lower or higher fair value measurement. As development and commercialization of SmartDose progresses, we may need to update the sales projections, the probability of success factors, and the discount rate used. This could result in a material increase or decrease to the contingent consideration liability.
The following table provides a summary of changes in our Level 3 fair value measurements:
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
June 30,
|
|
|
2016
|
|
2015
|
|
Beginning balance
|
$
|
6.0
|
|
|
$
|
5.0
|
|
|
Increase in fair value recorded in earnings
|
1.9
|
|
|
0.3
|
|
|
Payments
|
—
|
|
|
(0.1
|
)
|
|
Ending balance
|
$
|
7.9
|
|
|
$
|
5.2
|
|
Other Financial Instruments
We believe that the carrying amounts of our cash and cash equivalents and accounts receivable approximate their fair values due to their near-term maturities.
The estimated fair value of long-term debt is based on quoted market prices for debt issuances with similar terms and maturities and is classified as Level 2 within the fair value hierarchy. At
June 30, 2016
, the estimated fair value of long-term debt was
$243.1 million
compared to a carrying amount of
$228.9 million
. At
December 31, 2015
, the estimated fair value of long-term debt was
$225.0 million
and the carrying amount was
$228.9 million
.
Note 9: Stock-Based Compensation
On May 3, 2016, at our 2016 Annual Meeting of Shareholders, our shareholders approved the adoption of the West Pharmaceutical Services, Inc. 2016 Omnibus Incentive Compensation Plan (the “2016 Plan”). All remaining shares available for issuance under the 2011 Omnibus Incentive Compensation Plan (the "2011 Plan") were extinguished upon adoption of the 2016 Plan. Awards granted under previous plans remain outstanding until expiration or settlement. 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 inception, there were
5,500,000
shares of common stock available for issuance under the 2016 Plan. Stock options and stock appreciation rights reduce the number of shares available by
one
share for each award granted. All other awards under the 2016 Plan will reduce the total number of shares available for grant by an amount equal to
2.5
times the number of shares awarded. If awards made under previous plans would entitle a plan participant to an amount of West stock in excess of the target amount, the additional shares (up to a maximum threshold amount) will be distributed under the 2016 Plan. At
June 30, 2016
, there were
5,441,195
shares remaining in the 2016 Plan for future grants.
During the
six
months ended
June 30, 2016
, we granted
589,428
stock options at a weighted average exercise price of
$61.55
per share based on the grant-date fair value of our stock to key employees under the 2011 and 2016 Plans. The weighted average grant date fair value of options granted was
$11.92
per share as determined by the Black-Scholes option valuation model using the following weighted average assumptions: a risk-free interest rate of
1.39%
; expected life of
5.9
years based on prior experience; stock volatility of
21.0%
based on historical data; and a dividend yield of
1.0%
. Stock option expense is recognized over the vesting period, net of forfeitures.
During the
six
months ended
June 30, 2016
, we granted
110,595
performance vesting share (“PVS”) awards at a weighted average grant-date fair value of
$59.93
per share to key employees under the 2011 and 2016 Plans. Each PVS award entitles the holder to
one
share of our common stock if the annual growth rate of revenue and return on invested capital targets are achieved over a
three
-year performance period. Shares earned under PVS awards may vary from
0%
to
200%
of an employee’s targeted award. The fair value of PVS 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.
Total stock-based compensation expense was
$4.9 million
and
$9.5 million
for the
three and six months ended
June 30, 2016
, respectively. For the
three and six months ended
June 30, 2015
, stock-based compensation expense was
$15.5 million
and
$20.8 million
, respectively. Included in the 2015 amounts was a
$10.4 million
charge related to executive retirements, which was recorded within other expense. Refer to Note 12,
Other Expense
, for further discussion of this charge. The remainder of 2015 stock-based compensation expense was recorded within selling, general and administrative expenses.
Note 10: Benefit Plans
The components of net periodic benefit cost for the three months ended
June 30
were as follows ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension benefits
|
|
Other retirement benefits
|
|
Total
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
Service cost
|
$
|
2.7
|
|
|
$
|
2.7
|
|
|
$
|
0.1
|
|
|
$
|
0.2
|
|
|
$
|
2.8
|
|
|
$
|
2.9
|
|
|
Interest cost
|
2.6
|
|
|
3.9
|
|
|
0.1
|
|
|
0.1
|
|
|
2.7
|
|
|
4.0
|
|
|
Expected return on assets
|
(3.2
|
)
|
|
(5.7
|
)
|
|
—
|
|
|
—
|
|
|
(3.2
|
)
|
|
(5.7
|
)
|
|
Amortization of prior service credit
|
(0.3
|
)
|
|
(0.3
|
)
|
|
—
|
|
|
—
|
|
|
(0.3
|
)
|
|
(0.3
|
)
|
|
Recognized actuarial losses (gains)
|
1.1
|
|
|
1.6
|
|
|
(0.3
|
)
|
|
(0.4
|
)
|
|
0.8
|
|
|
1.2
|
|
|
Net periodic benefit cost
|
$
|
2.9
|
|
|
$
|
2.2
|
|
|
$
|
(0.1
|
)
|
|
$
|
(0.1
|
)
|
|
$
|
2.8
|
|
|
$
|
2.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension benefits
|
|
Other retirement benefits
|
|
Total
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
U.S. plans
|
$
|
2.3
|
|
|
$
|
1.6
|
|
|
$
|
(0.1
|
)
|
|
$
|
(0.1
|
)
|
|
$
|
2.2
|
|
|
$
|
1.5
|
|
|
International plans
|
0.6
|
|
|
0.6
|
|
|
—
|
|
|
—
|
|
|
0.6
|
|
|
0.6
|
|
|
Net periodic benefit cost
|
$
|
2.9
|
|
|
$
|
2.2
|
|
|
$
|
(0.1
|
)
|
|
$
|
(0.1
|
)
|
|
$
|
2.8
|
|
|
$
|
2.1
|
|
The components of net periodic benefit cost for the six months ended
June 30
were as follows ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension benefits
|
|
Other retirement benefits
|
|
Total
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
Service cost
|
$
|
5.3
|
|
|
$
|
5.4
|
|
|
$
|
0.3
|
|
|
$
|
0.3
|
|
|
$
|
5.6
|
|
|
$
|
5.7
|
|
|
Interest cost
|
5.2
|
|
|
7.8
|
|
|
0.2
|
|
|
0.2
|
|
|
5.4
|
|
|
8.0
|
|
|
Expected return on assets
|
(6.3
|
)
|
|
(11.4
|
)
|
|
—
|
|
|
—
|
|
|
(6.3
|
)
|
|
(11.4
|
)
|
|
Amortization of prior service credit
|
(0.7
|
)
|
|
(0.6
|
)
|
|
—
|
|
|
—
|
|
|
(0.7
|
)
|
|
(0.6
|
)
|
|
Recognized actuarial losses (gains)
|
2.3
|
|
|
3.2
|
|
|
(0.7
|
)
|
|
(0.7
|
)
|
|
1.6
|
|
|
2.5
|
|
|
Net periodic benefit cost
|
$
|
5.8
|
|
|
$
|
4.4
|
|
|
$
|
(0.2
|
)
|
|
$
|
(0.2
|
)
|
|
$
|
5.6
|
|
|
$
|
4.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension benefits
|
|
Other retirement benefits
|
|
Total
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
U.S. plans
|
$
|
4.6
|
|
|
$
|
3.1
|
|
|
$
|
(0.2
|
)
|
|
$
|
(0.2
|
)
|
|
$
|
4.4
|
|
|
$
|
2.9
|
|
|
International plans
|
1.2
|
|
|
1.3
|
|
|
—
|
|
|
—
|
|
|
1.2
|
|
|
1.3
|
|
|
Net periodic benefit cost
|
$
|
5.8
|
|
|
$
|
4.4
|
|
|
$
|
(0.2
|
)
|
|
$
|
(0.2
|
)
|
|
$
|
5.6
|
|
|
$
|
4.2
|
|
Note 11: Accumulated Other Comprehensive Loss
The following table presents the changes in the components of accumulated other comprehensive loss, net of tax, for the
six months ended
June 30, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
Losses on
cash flow
hedges
|
|
Unrealized gains
on investment
securities
|
|
Defined benefit
pension and other
postretirement plans
|
|
Foreign
currency
translation
|
|
Total
|
|
Balance, December 31, 2015
|
$
|
(3.1
|
)
|
|
$
|
5.4
|
|
|
$
|
(39.6
|
)
|
|
$
|
(125.3
|
)
|
|
$
|
(162.6
|
)
|
|
Other comprehensive income before reclassifications
|
0.1
|
|
|
—
|
|
|
1.0
|
|
|
10.0
|
|
|
11.1
|
|
|
Amounts reclassified out
|
0.6
|
|
|
—
|
|
|
0.6
|
|
|
—
|
|
|
1.2
|
|
|
Other comprehensive income, net of tax
|
0.7
|
|
|
—
|
|
|
1.6
|
|
|
10.0
|
|
|
12.3
|
|
|
Balance, June 30, 2016
|
$
|
(2.4
|
)
|
|
$
|
5.4
|
|
|
$
|
(38.0
|
)
|
|
$
|
(115.3
|
)
|
|
$
|
(150.3
|
)
|
A summary of the reclassifications out of 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
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
|
Gains (losses) on cash flow hedges:
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency contracts
|
|
$
|
(0.1
|
)
|
|
$
|
0.5
|
|
|
$
|
(0.1
|
)
|
|
$
|
0.9
|
|
|
Cost of goods and services sold
|
|
Interest rate swap contracts
|
|
(0.3
|
)
|
|
(0.6
|
)
|
|
(0.6
|
)
|
|
(1.3
|
)
|
|
Interest expense
|
|
Forward treasury locks
|
|
(0.1
|
)
|
|
(0.1
|
)
|
|
(0.2
|
)
|
|
(0.2
|
)
|
|
Interest expense
|
|
Total before tax
|
|
(0.5
|
)
|
|
(0.2
|
)
|
|
(0.9
|
)
|
|
(0.6
|
)
|
|
|
|
Tax expense
|
|
0.2
|
|
|
0.2
|
|
|
0.3
|
|
|
0.4
|
|
|
|
|
Net of tax
|
|
$
|
(0.3
|
)
|
|
$
|
—
|
|
|
$
|
(0.6
|
)
|
|
$
|
(0.2
|
)
|
|
|
|
Amortization of defined benefit pension and other postretirement plans:
|
|
|
|
|
|
|
|
|
|
|
|
Prior service cost
|
|
$
|
0.3
|
|
|
$
|
0.3
|
|
|
$
|
0.7
|
|
|
$
|
0.6
|
|
|
(a)
|
|
Actuarial losses
|
|
(0.8
|
)
|
|
(1.2
|
)
|
|
(1.6
|
)
|
|
(2.5
|
)
|
|
(a)
|
|
Total before tax
|
|
(0.5
|
)
|
|
(0.9
|
)
|
|
(0.9
|
)
|
|
(1.9
|
)
|
|
|
|
Tax expense
|
|
0.2
|
|
|
0.3
|
|
|
0.3
|
|
|
0.7
|
|
|
|
|
Net of tax
|
|
$
|
(0.3
|
)
|
|
$
|
(0.6
|
)
|
|
$
|
(0.6
|
)
|
|
$
|
(1.2
|
)
|
|
|
|
Total reclassifications for the period, net of tax
|
|
$
|
(0.6
|
)
|
|
$
|
(0.6
|
)
|
|
$
|
(1.2
|
)
|
|
$
|
(1.4
|
)
|
|
|
(a) These components are included in the computation of net periodic benefit cost. Please refer to Note 10,
Benefit Plans
, for additional details.
Note 12: Other Expense
Other expense consists of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
($ in millions)
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
Restructuring and related charges:
|
|
|
|
|
|
|
|
|
Severance and post-employment benefits
|
$
|
(1.5
|
)
|
|
$
|
—
|
|
|
$
|
6.4
|
|
|
$
|
—
|
|
|
Asset-related charges
|
—
|
|
|
—
|
|
|
15.0
|
|
|
—
|
|
|
Total restructuring and related charges
|
(1.5
|
)
|
|
—
|
|
|
21.4
|
|
|
—
|
|
|
Executive retirement and related costs
|
—
|
|
|
10.9
|
|
|
—
|
|
|
10.9
|
|
|
Venezuela currency devaluation
|
—
|
|
|
—
|
|
|
2.7
|
|
|
—
|
|
|
Development income
|
(0.4
|
)
|
|
(0.4
|
)
|
|
(0.8
|
)
|
|
(0.8
|
)
|
|
Contingent consideration costs
|
1.7
|
|
|
0.1
|
|
|
1.9
|
|
|
0.3
|
|
|
Other items
|
1.0
|
|
|
(0.4
|
)
|
|
1.4
|
|
|
(1.0
|
)
|
|
Total other expense
|
$
|
0.8
|
|
|
$
|
10.2
|
|
|
$
|
26.6
|
|
|
$
|
9.4
|
|
Restructuring and Related Charges
On February 15, 2016, our Board of Directors approved a restructuring plan designed to repurpose several of our production facilities in support of growing high-value proprietary products and to realign operational and commercial activities to meet the needs of our new market-focused commercial organization.
We expect to incur total restructuring and related charges of
$25.0 million
to
$28.0 million
under this plan, which consists of approximately
$8.0 million
in severance charges for personnel reductions and
$17.0 million
to
$20.0 million
in non-cash asset write-downs. During the three months ended June 30, 2016, we recorded
$1.5 million
in reversals of previously-recorded restructuring and related charges. During the
six months ended
June 30, 2016
, we incurred
$21.4 million
in restructuring and related charges, consisting of
$6.4 million
for severance charges,
$10.0 million
for a non-cash asset write-down associated with the discontinued use of a trademark, and
$5.0 million
for non-cash asset write-downs associated with the discontinued use of a patent and certain equipment. The balance of the charges related to this plan will be recognized as incurred during the remainder of 2016 and in 2017.
The following table presents activity related to our restructuring obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
Severance
and benefits
|
Asset-related charges
|
Total
|
|
Balance, December 31, 2015
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
|
Charges
|
7.9
|
|
15.0
|
|
22.9
|
|
|
Reversals
|
(1.5
|
)
|
—
|
|
(1.5
|
)
|
|
Cash payments
|
(0.7
|
)
|
—
|
|
(0.7
|
)
|
|
Non-cash asset write-downs
|
—
|
|
(15.0
|
)
|
(15.0
|
)
|
|
Balance, June 30, 2016
|
$
|
5.7
|
|
$
|
—
|
|
$
|
5.7
|
|
Other Items
During the three and six months ended June 30, 2015, we recorded a
$10.9 million
charge for executive retirement and related costs, including
$2.4 million
for a long-term incentive plan award for our previous Chief Executive Officer ("CEO"),
$8.0 million
for the revaluation of modified outstanding awards to provide for continued vesting
for our previous CEO and Senior Vice President of Human Resources in conjunction with their retirement, and
$0.5 million
for other costs, including relocation and legal fees.
On February 17, 2016, the Venezuelan government announced a devaluation of the Bolivar, from the previously-prevailing official exchange rate of
6.3
Bolivars to USD to
10.0
Bolivars to USD, and streamlined the previous three-tiered currency exchange mechanism into a dual currency exchange mechanism. As a result, during the
six months ended
June 30, 2016
, we recorded a
$2.7 million
charge. After the remeasurement, as of
June 30, 2016
, we had
$3.8 million
in net monetary assets denominated in Venezuelan Bolivars, including
$3.4 million
in cash and cash equivalents, and
$1.1 million
in non-monetary assets. If there are further devaluations of the Bolivar or other changes in the currency exchange mechanisms in Venezuela in the future, a pre-tax charge of up to
$4.9 million
could be required. We will continue to actively monitor the political and economic developments in Venezuela.
In addition, during both the three and six months ended
June 30, 2016
and
2015
, we recognized development income of
$0.4 million
and
$0.8 million
, respectively, within our Proprietary Products segment, related to a nonrefundable customer payment of
$20.0 million
received in June 2013 in return for the exclusive use of SmartDose within a specific therapeutic area. As of
June 30, 2016
, there was
$15.2 million
of unearned income related to this payment, of which
$1.5 million
was included in other current liabilities and
$13.7 million
was included in other long-term liabilities. The unearned income is being recognized as development income on a straight-line basis over the remaining term of the agreement. The agreement does not include a future minimum purchase commitment from the customer.
Contingent consideration costs represent changes in the fair value of the SmartDose contingent consideration. Please refer to Note 8,
Fair Value Measurements
, for additional details. Other items consist of foreign exchange transaction gains and losses, gains and losses on the sale of fixed assets, and miscellaneous income and charges.
Note 13: 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
$17.0 million
and
$23.9 million
for the
three and six months ended
June 30, 2016
, respectively, and the effective tax rate was
28.6%
and
27.4%
, respectively. The provision for income taxes was
$9.2 million
and
$21.7 million
for the
three and six months ended
June 30, 2015
, respectively, and the effective tax rate was
25.5%
and
27.1%
, respectively. The increase in the effective tax rate for the
three months ended
June 30, 2016
, as compared to the same period in
2015
, primarily reflects the impact of unfavorable changes in our geographic mix of earnings and the impact of a tax benefit of
$4.0 million
recorded during the
three months ended
June 30, 2015
in connection with a
$10.9 million
charge for executive retirement and related costs. The increase in the effective tax rate for the
six months ended
June 30, 2016
, as compared to the same period in
2015
, reflects the impact of unfavorable changes in our geographic mix of earnings, offset by the impact of a tax benefit of
$7.4 million
recorded during the
six months ended
June 30, 2016
in connection with restructuring and related charges of
$21.4 million
. Please refer to Note 12,
Other Expense
, for further discussion of these items.
Note 14: Commitments and Contingencies
From time to time, we are involved in product liability matters and other legal proceedings and claims generally incidental to our normal business activities. We accrue for loss contingencies when it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. While the outcome of current proceedings cannot be accurately predicted, we believe their ultimate resolution should not have a material adverse effect on our business, financial condition, results of operations or liquidity.
There have been no significant changes to the commitments and contingencies included in our
2015
Annual Report.
Note 15: Segment Information
In 2015, our business operations consisted of
two
reportable segments, the Pharmaceutical Packaging Systems segment (“Packaging Systems”) and the Pharmaceutical Delivery Systems segment (“Delivery Systems”). Beginning in 2016, we changed our organization and reporting structure for our next phase of growth and development, which resulted in a change to Proprietary Products and Contract-Manufactured Products as our reportable segments. The Proprietary Products reportable segment, which is a combination of the previous Packaging Systems segment and the proprietary products portion of the previous Delivery Systems segment, develops commercial, operational, and innovation strategies across our global network, with specific emphasis on product offerings to biologic, generic, and pharmaceutical customers. The Contract-Manufactured Products reportable segment, which consists of the contract manufacturing portion of the previous Delivery Systems segment, serves as a fully integrated business focused on the design, manufacture, and automated assembly of complex assemblies for pharmaceutical, diagnostic, and medical device customers.
Segment operating profit excludes general corporate costs, which include executive and director compensation, stock-based compensation, adjustments to annual incentive plan expense for over- or under-attainment of targets, certain pension and other retirement benefit costs, and other corporate facilities and administrative expenses not allocated to the segments. Also excluded are items that management 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 following table presents information about our reportable segments, reconciled to consolidated totals:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
($ in millions)
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
Net sales:
|
|
|
|
|
|
|
|
|
Proprietary Products
|
$
|
311.0
|
|
|
$
|
286.9
|
|
|
$
|
601.8
|
|
|
$
|
552.2
|
|
|
Contract-Manufactured Products
|
77.2
|
|
|
73.2
|
|
|
148.8
|
|
|
143.9
|
|
|
Intersegment sales elimination
|
(0.2
|
)
|
|
(0.4
|
)
|
|
(0.5
|
)
|
|
(0.5
|
)
|
|
Total net sales
|
$
|
388.0
|
|
|
$
|
359.7
|
|
|
$
|
750.1
|
|
|
$
|
695.6
|
|
|
Operating profit (loss):
|
|
|
|
|
|
|
|
|
Proprietary Products
|
$
|
66.2
|
|
|
$
|
57.6
|
|
|
$
|
128.1
|
|
|
$
|
111.8
|
|
|
Contract-Manufactured Products
|
9.7
|
|
|
8.2
|
|
|
16.7
|
|
|
14.4
|
|
|
Corporate
|
(16.2
|
)
|
|
(15.8
|
)
|
|
(29.5
|
)
|
|
(28.4
|
)
|
|
Other unallocated items
|
1.5
|
|
|
(10.9
|
)
|
|
(24.1
|
)
|
|
(10.9
|
)
|
|
Total operating profit
|
$
|
61.2
|
|
|
$
|
39.1
|
|
|
$
|
91.2
|
|
|
$
|
86.9
|
|
|
Interest expense
|
2.0
|
|
|
3.4
|
|
|
4.5
|
|
|
7.5
|
|
|
Interest income
|
0.3
|
|
|
0.4
|
|
|
0.6
|
|
|
0.8
|
|
|
Income before income taxes
|
$
|
59.5
|
|
|
$
|
36.1
|
|
|
$
|
87.3
|
|
|
$
|
80.2
|
|
The intersegment sales elimination, which is required for the presentation of consolidated net sales, represents the elimination of components sold between our segments.
Other unallocated items, during the
three and six months ended
June 30, 2016
, consist of restructuring and related (reversals) charges of
$(1.5) million
and
$21.4 million
, respectively. In addition, during the
six months ended
June 30, 2016
, we recorded a charge of
$2.7 million
related to the devaluation of the Venezuelan Bolivar. During the second quarter of 2015, we recorded a
$10.9 million
charge for executive retirement and related costs. Please refer to Note 12,
Other Expense
, for additional details of these items.
