Document

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549
FORM 10-Q

(Mark One)
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2018
or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from            to

Commission File Number 1-8036
WEST PHARMACEUTICAL SERVICES, INC.
(Exact name of registrant as specified in its charter)
Pennsylvania
23-1210010
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer Identification Number)
 
 
530 Herman O. West Drive, Exton, PA
19341-0645
(Address of principal executive offices)
(Zip Code)

Registrant’s telephone number, including area code: 610-594-2900

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
þ
 
Accelerated filer
o
Non-accelerated filer
o
(Do not check if a smaller reporting company)
Smaller reporting company
o
 
 
 
Emerging growth company
o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No þ

As of September 30, 2018, there were 74,079,671 shares of the Registrant’s common stock outstanding.


Table of Contents

TABLE OF CONTENTS

 
 
Page
 
FINANCIAL STATEMENTS (UNAUDITED)
 
 
 
 
 
 
 
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
CONTROLS AND PROCEDURES
 
 
 
 
LEGAL PROCEEDINGS
RISK FACTORS
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
EXHIBITS
 
 
 
 
 
 
 
 

2

Table of Contents

PART I. FINANCIAL INFORMATION

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
September 30,
 
Nine Months Ended
September 30,
 
2018
 
2017
 
2018
 
2017
Net sales
$
431.7

 
$
398.2

 
$
1,294.9

 
$
1,183.5

Cost of goods and services sold
296.1

 
273.1

 
882.7

 
799.2

Gross profit
135.6

 
125.1

 
412.2

 
384.3

Research and development
10.1

 
9.1

 
30.5

 
29.4

Selling, general and administrative expenses
64.9

 
62.6

 
203.2

 
186.4

Other (income) expense (Note 13)
(0.2
)
 
(9.5
)
 
4.0

 
3.1

Operating profit
60.8

 
62.9

 
174.5

 
165.4

Interest expense
2.0

 
1.4

 
6.1

 
5.7

Interest income
(0.5
)
 
(0.3
)
 
(1.4
)
 
(0.9
)
Other nonoperating income
(1.8
)
 
(1.1
)
 
(5.1
)
 
(2.5
)
Income before income taxes
61.1

 
62.9

 
174.9

 
163.1

Income tax expense
8.0

 
14.0

 
26.5

 
19.1

Equity in net income of affiliated companies
(2.1
)
 
(2.1
)
 
(6.5
)
 
(6.7
)
Net income
$
55.2

 
$
51.0

 
$
154.9

 
$
150.7

 
 
 
 
 
 
 
 
Net income per share:
 
 
 

 
 

 
 

Basic
$
0.75

 
$
0.69

 
$
2.10

 
$
2.04

Diluted
$
0.73

 
$
0.67

 
$
2.05

 
$
1.99

 
 
 
 
 
 
 
 
Weighted average shares outstanding:
 

 
 

 
 

 
 

Basic
73.9

 
74.2

 
73.9

 
73.8

Diluted
75.7

 
75.9

 
75.4

 
75.8

 
 
 
 
 
 
 
 
Dividends declared per share
$
0.15

 
$
0.14

 
$
0.43

 
$
0.40


See accompanying notes to condensed consolidated financial statements.

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Table of Contents

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
West Pharmaceutical Services, Inc. and Subsidiaries
(in millions)

 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2018
 
2017
 
2018
 
2017
Net income
$
55.2

 
$
51.0

 
$
154.9

 
$
150.7

Other comprehensive (loss) income, net of tax:
 

 
 
 
 

 
 

Foreign currency translation adjustments
(9.5
)
 
22.5

 
(39.1
)
 
64.7

Defined benefit pension and other postretirement plan adjustments, net of tax of $0, $(0.3), $0.1 and $(0.7), respectively
(0.2
)
 
(0.7
)
 
0.1

 
(1.6
)
Net loss on investment securities, net of tax of $(2.9)

 

 

 
(5.1
)
Net (loss) gain on derivatives, net of tax of $(0.1), $(0.2), $1.0 and $(0.5), respectively
(0.4
)
 
(0.6
)
 
2.5

 
(1.8
)
Other comprehensive (loss) income, net of tax
(10.1
)
 
21.2

 
(36.5
)
 
56.2

Comprehensive income
$
45.1

 
$
72.2

 
$
118.4

 
$
206.9


See accompanying notes to condensed consolidated financial statements.

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Table of Contents

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
West Pharmaceutical Services, Inc. and Subsidiaries
(in millions, except per share data)
 
September 30,
2018
 
December 31,
2017
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
297.3

 
$
235.9

Accounts receivable, net
302.9

 
253.2

Inventories
206.8

 
215.2

Other current assets
43.1

 
39.2

Total current assets
850.1

 
743.5

Property, plant and equipment
1,745.8

 
1,745.8

Less: accumulated depreciation and amortization
923.8

 
890.8

Property, plant and equipment, net
822.0

 
855.0

Investments in affiliated companies
90.5

 
85.8

Goodwill
106.3

 
107.7

Deferred income taxes
34.5

 
25.7

Intangible assets, net
21.0

 
21.7

Other noncurrent assets
21.7

 
23.4

Total Assets
$
1,946.1

 
$
1,862.8

 
 
 
 
LIABILITIES AND EQUITY
 

 
 

Current liabilities:
 

 
 

Accounts payable
$
125.2

 
$
138.1

Pension and other postretirement benefits
2.2

 
2.2

Accrued salaries, wages and benefits
67.3

 
56.2

Income taxes payable
17.7

 
6.0

Other current liabilities
76.4

 
77.0

Total current liabilities
288.8

 
279.5

Long-term debt
196.2

 
197.0

Deferred income taxes
11.7

 
10.4

Pension and other postretirement benefits
53.8

 
53.4

Other long-term liabilities
43.8

 
42.6

Total Liabilities
594.3

 
582.9

 
 
 
 
Commitments and contingencies (Note 15)


 


 
 
 
 
Equity:
 
 
 
Preferred stock, 3.0 million shares authorized; 0 shares issued and outstanding

 

Common stock, par value $0.25 per share; 100.0 million shares authorized; shares issued: 75.3 million and 75.2 million; shares outstanding: 74.1 million and 73.9 million
18.8

 
18.8

Capital in excess of par value
282.8

 
309.3

Retained earnings
1,312.7

 
1,178.2

Accumulated other comprehensive loss
(153.8
)
 
(117.3
)
Treasury stock, at cost (1.2 million and 1.3 million shares)
(108.7
)
 
(109.1
)
Total Equity
1,351.8

 
1,279.9

Total Liabilities and Equity
$
1,946.1

 
$
1,862.8


See accompanying notes to condensed consolidated financial statements.

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Table of Contents

CONDENSED CONSOLIDATED STATEMENT OF EQUITY (UNAUDITED)
West Pharmaceutical Services, Inc. and Subsidiaries
(in millions)


 
Common Shares Issued
 
Common Stock
 
Capital in Excess of Par Value
 
Number of Treasury Shares
 
Treasury Stock
 
Retained earnings
 
Accumulated other comprehensive loss
 
Total
 
 
 
 
 
 
 
 
Balance, December 31, 2017
75.2

 
$
18.8

 
$
309.3

 
1.3

 
$
(109.1
)
 
$
1,178.2

 
$
(117.3
)
 
$
1,279.9

Effect of modified retrospective application of a new accounting standard (see Note 3)

 

 

 

 

 
11.4

 

 
11.4

Net income

 

 

 

 

 
154.9

 

 
154.9

Stock-based compensation

 

 
6.1

 

 
9.3

 

 

 
15.4

Shares issued under stock plans
0.1

 

 
(32.8
)
 
(0.9
)
 
66.5

 

 

 
33.7

Shares purchased under share repurchase program

 

 

 
0.8

 
(70.8
)
 

 

 
(70.8
)
Shares repurchased for employee tax withholdings

 

 
0.2

 

 
(4.6
)
 

 

 
(4.4
)
Dividends declared

 

 

 

 

 
(31.8
)
 

 
(31.8
)
Other comprehensive income, net of tax

 

 

 

 

 

 
(36.5
)
 
(36.5
)
Balance, September 30, 2018
75.3

 
$
18.8

 
$
282.8

 
1.2

 
$
(108.7
)
 
$
1,312.7

 
$
(153.8
)
 
$
1,351.8


See accompanying notes to condensed consolidated financial statements.

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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
West Pharmaceutical Services, Inc. and Subsidiaries
(in millions)
 
Nine Months Ended
September 30,
 
2018
 
2017
Cash flows from operating activities:
 
 
 
Net income
$
154.9

 
$
150.7

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation
76.1

 
69.9

Amortization
2.0

 
1.9

Stock-based compensation
14.7

 
13.6

Non-cash restructuring charges
0.8

 

Venezuela deconsolidation

 
11.1

Contingent consideration payments in excess of acquisition-date liability
(0.5
)
 

Other non-cash items, net
(4.0
)
 
(3.2
)
Changes in assets and liabilities
(28.6
)
 
(62.2
)
Net cash provided by operating activities
215.4

 
181.8

 
 
 
 
Cash flows from investing activities:
 

 
 

Capital expenditures
(74.7
)
 
(101.3
)
Cash related to deconsolidated Venezuelan subsidiary

 
(6.0
)
Other, net
2.5

 
3.1

Net cash used in investing activities
(72.2
)
 
(104.2
)
 
 
 
 
Cash flows from financing activities:
 

 
 

Repayments of long-term debt

 
(1.8
)
Dividend payments
(31.0
)
 
(28.7
)
Contingent consideration payments up to amount of acquisition-date liability

 
(0.5
)
Proceeds from exercise of stock options and stock appreciation rights
30.1

 
36.0

Employee stock purchase plan contributions
3.6

 
3.2

Shares purchased under share repurchase programs
(70.8
)
 
(26.9
)
Shares repurchased for employee tax withholdings
(4.4
)
 
(3.8
)
Net cash used in financing activities
(72.5
)
 
(22.5
)
Effect of exchange rates on cash
(9.3
)
 
11.2

Net increase in cash and cash equivalents
61.4

 
66.3

 
 
 
 
Cash, including cash equivalents at beginning of period
235.9

 
203.0

Cash, including cash equivalents at end of period
$
297.3

 
$
269.3


See accompanying notes to condensed consolidated financial statements.

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Table of Contents

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 nine months ended September 30, 2018 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, 2017 (the “2017 Annual Report”). The results of operations for any interim period are not necessarily indicative of results for the full year.

As of April 1, 2017, our consolidated financial statements exclude the results of our Venezuelan subsidiary. Please refer to Note 13, Other (Income) Expense, for further discussion.

Note 2:  New Accounting Standards

Recently Adopted Standards

In March 2018, the Financial Accounting Standards Board (“FASB”) issued guidance which updates the income tax accounting in U.S. GAAP to reflect the SEC’s interpretive guidance released on December 22, 2017, when the Tax Cuts and Jobs Act (the “2017 Tax Act”) was signed into law. This guidance was effective immediately upon issuance. Please refer to Note 15, Income Taxes, to the consolidated financial statements in our 2017 Annual Report for additional information.

In May 2017, the FASB issued guidance which amends the scope of modification accounting for share-based payment arrangements. The guidance focuses on changes to the terms or conditions of share-based payment awards that would require the application of modification accounting and specifies that an entity would not apply modification accounting if its fair value, vesting conditions and classification of the awards are the same immediately before and after the modification. This guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. Early adoption is permitted. We adopted this guidance as of January 1, 2018, on a prospective basis. The adoption did not have a material impact on our financial statements.

In March 2017, the FASB issued guidance on the presentation of net periodic pension and postretirement benefit cost (net benefit cost). The guidance requires the bifurcation of net benefit cost. The service cost component will be presented with other employee compensation costs in operating income (or capitalized in assets) and the other components will be reported separately outside of operations, and will not be eligible for capitalization. This guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. Early adoption is permitted. We adopted this guidance as of January 1, 2018, on a retrospective basis. As a result of this adoption, we reclassified net benefit cost components other than service cost from operating income to outside of operations. Net periodic benefit cost for the three months ended September 30, 2018 and 2017 was $0.8 million and $1.4 million, respectively, of which $2.6 million and $2.5 million, respectively, related to service cost and $1.8 million and $1.1 million, respectively, related to net benefit cost components other than service cost. Net periodic benefit cost for the nine months ended September 30, 2018 and 2017 was $3.0 million and $5.3 million, respectively, of which $8.1 million and $7.8 million, respectively, related to service cost and $5.1 million and $2.5 million, respectively, related to net benefit cost components other than service cost. The adoption of this guidance had no impact on net income.

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In November 2016, the FASB issued guidance on the classification and presentation of restricted cash in the statement of cash flows. This guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. Early adoption is permitted. We adopted this guidance as of January 1, 2018, on a retrospective basis. As of September 30, 2018 and December 31, 2017, we had no restricted cash.

In August 2016, the FASB issued guidance to reduce the diversity in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. This guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. Early adoption is permitted. We adopted this guidance as of January 1, 2018, on a retrospective basis. The adoption did not have a material impact 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. We adopted this guidance as of January 1, 2018, on a prospective basis. The adoption did 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, Accounting Standards Codification (“ASC”) Topic 606 (“ASC 606”), that supersedes 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, ASC 606 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 ASC 606. We adopted ASC 606 as of January 1, 2018, on a modified retrospective basis. Please refer to Note 3, Revenue, for additional information.

Standards Issued Not Yet Adopted

In August 2018, the FASB issued guidance to align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). The accounting for the service element of a hosting arrangement that is a service contract is not affected by this update. This guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2019. Early adoption is permitted, including adoption in any interim period. We are currently evaluating our adoption timing and the impact that this guidance may have on our financial statements.

In August 2018, the FASB issued guidance which modifies the disclosure requirements for defined benefit pension plans and other postretirement plans. The guidance removes disclosures that no longer are considered cost beneficial, clarifies the specific requirements of disclosures, and adds disclosure requirements identified as relevant. This guidance is effective for fiscal years ending after December 15, 2020. Early adoption is permitted. We are currently evaluating our adoption timing and the impact that this guidance may have on our financial statements.

In August 2018, the FASB issued guidance which modifies the disclosure requirements on fair value measurements by removing, modifying, or adding certain disclosures. This guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2019. Early adoption is permitted. We are currently evaluating our adoption timing and the impact that this guidance may have on our financial statements.

In June 2018, the FASB issued guidance which expands the scope of accounting for share-based payment arrangements to include share-based payment transactions for acquiring goods and services from nonemployees. This guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018. Early adoption is permitted. We are currently evaluating our adoption timing and the impact that this guidance may have on our financial statements.


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In February 2018, the FASB issued guidance to address a specific consequence of the 2017 Tax Act by allowing a reclassification from accumulated other comprehensive income (loss) to retained earnings for stranded tax effects resulting from the 2017 Tax Act’s reduction of the U.S. federal corporate income tax rate. This guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018. Early adoption is permitted. We are currently evaluating our adoption timing and the impact that this guidance may have on our financial statements.

In August 2017, the FASB issued guidance which expands and refines hedge accounting for both nonfinancial and financial risk components and aligns the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements. This guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018. Early adoption is permitted. We are currently evaluating our adoption timing and the impact that this guidance will have 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. We are currently evaluating the impact that this guidance will have on our financial statements. As of September 30, 2018 and December 31, 2017, future minimum rental payments under non-cancelable operating leases were $67.0 million and $79.1 million, respectively.

Note 3:  Revenue

Adoption of ASC 606
On January 1, 2018, we adopted ASC 606, on a modified retrospective basis, applied to those contracts which were not completed as of January 1, 2018. As a result of our adoption, we recorded a cumulative-effect adjustment of $11.4 million within retained earnings in our condensed consolidated balance sheet as of January 1, 2018, to reflect a change in the timing of revenue recognition under ASC 606, from point in time to over time, on our Contract-Manufactured Products product sales, certain Proprietary Products product sales, development and tooling agreements, as well as an acceleration on a portion of the remaining unearned income from a nonrefundable customer payment.
Results for reporting periods beginning after January 1, 2018 are presented under ASC 606, while prior period amounts are not adjusted and continue to be reported under the accounting standards in effect for those periods.
The cumulative effect of the changes made to our condensed consolidated January 1, 2018 balance sheet for the adoption of ASC 606 was as follows:
($ in millions)
Balance at December 31, 2017
 
Adjustments Due to ASC 606
 
Balance at January 1, 2018
Assets:
 
 
 
 
 
Accounts receivable, net
$
253.2

 
$
25.0

 
$
278.2

Inventories
215.2

 
(20.8
)
 
194.4

Other current assets
39.2

 
(8.4
)
 
30.8

 
 
 
 
 
 
Liabilities and Equity:
 
 
 
 
 
Other current liabilities
$
77.0

 
$
(13.7
)
 
$
63.3

Deferred income taxes
10.4

 
3.0

 
13.4

Other long-term liabilities
42.6

 
(4.9
)
 
37.7

Retained earnings
1,178.2

 
11.4

 
1,189.6


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The impact of the adoption of ASC 606 on our condensed consolidated income statement for the three months ended September 30, 2018 was as follows:
($ in millions)
As Reported
 
Balances without Adoption of ASC 606
 
Effects of Change Higher/(Lower)
Net sales
$
431.7

 
$
423.5

 
$
8.2

Cost of goods and services sold
296.1

 
290.3

 
5.8

Research and development
10.1

 
10.0

 
0.1

Other (income) expense
(0.2
)
 
(0.4
)
 
0.2

Income tax expense
8.0

 
7.8

 
0.2

Net income
$
55.2

 
$
53.2

 
$
2.0

The impact of the adoption of ASC 606 on our condensed consolidated income statement for the nine months ended September 30, 2018 was as follows:
($ in millions)
As Reported
 
Balances without Adoption of ASC 606
 
Effects of Change Higher/(Lower)
Net sales
$
1,294.9

 
$
1,294.4

 
$
0.5

Cost of goods and services sold
882.7

 
878.9

 
3.8

Research and development
30.5

 
30.5

 

Other expense
4.0

 
3.5

 
0.5

Income tax expense
26.5

 
27.5

 
(1.0
)
Net income
$
154.9

 
$
157.6

 
$
(2.7
)
The impact of the adoption of ASC 606 on our condensed consolidated balance sheet as of September 30, 2018 was as follows:
($ in millions)
As Reported
 
Balances without Adoption of ASC 606
 
Effects of Change Higher/(Lower)
Assets:
 
 
 
 
 
Accounts receivable, net
$
302.9

 
$
277.6

 
$
25.3

Inventories
206.8

 
228.5

 
(21.7
)
Other current assets
43.1

 
54.2

 
(11.1
)
 
 
 
 
 
 
Liabilities and Equity:
 
 
 
 
 
Other current liabilities
$
76.4

 
$
90.2

 
$
(13.8
)
Deferred income taxes
11.7

 
9.7

 
2.0

Other long-term liabilities
43.8

 
48.2

 
(4.4
)
Retained earnings
1,312.7

 
1,304.0

 
8.7

Revenue Recognition
Our revenue results from the sale of goods or services and reflects the consideration to which we expect to be entitled to in exchange for those goods or services. We record revenue based on a five-step model, in accordance with 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

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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.
We recognize the majority of our revenue, primarily relating to Proprietary Products product sales, at a point in time, following the transfer of control of our products to our customers, which typically occurs upon shipment or delivery, depending on the terms of the related agreements.
We recognize revenue relating to our Contract-Manufactured Products product sales and certain Proprietary Products product sales over time, as our performance does not create an asset with an alternative use to us and we have an enforceable right to payment for performance completed to date.
We recognize revenue relating to our development and tooling agreements over time, as our performance creates or enhances an asset that the customer controls as the asset is created or enhanced.
For revenue recognized over time, revenue is recognized by applying a method of measuring progress toward complete satisfaction of the related performance obligation. When selecting the method for measuring progress, we select the method that best depicts the transfer of control of goods or services promised to our customers.
Revenue for our Contract-Manufactured Products product sales, certain Proprietary Products product sales, and our development and tooling agreements is recorded under an input method, which recognizes revenue on the basis of our efforts or inputs to the satisfaction of a performance obligation (for example, resources consumed, labor hours expended, costs incurred, time elapsed, or machine hours used) relative to the total expected inputs to the satisfaction of that performance obligation. The input method that we use is based on costs incurred.
The majority of the performance obligations within our contracts are satisfied within one year or less. Performance obligations satisfied beyond one year include those relating to a nonrefundable customer payment of $20.0 million received in June 2013 in return for the exclusive use of the SmartDose® technology platform within a specific therapeutic area. As of September 30, 2018, there was $6.7 million of unearned income related to this payment, of which $0.9 million was included in other current liabilities and $5.8 million was included in other long-term liabilities. The unearned income is being recognized as income on a straight-line basis over the remaining term of the agreement. The agreement does not include a future minimum purchase commitment from the customer.
Our revenue can be generated from contracts with multiple performance obligations. When a sales agreement involves multiple performance obligations, each obligation is separately identified and the transaction price is allocated based on the amount of consideration we expect to be entitled to in exchange for transferring the promised good or service to the customer.
Some customers receive pricing rebates upon attaining established sales volumes. We record rebate costs when sales occur based on our assessment of the likelihood that the required volumes will be attained. We also maintain an allowance for product returns, as we believe that we are able to reasonably estimate the amount of returns based on our substantial historical experience.
The following table presents the approximate percentage of our net sales by market group:
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2018
 
2017 (1)
 
2018
 
2017 (1)
Biologics
21
%
 
23
%
 
21
%
 
23
%
Generics
21
%
 
22
%
 
21
%
 
21
%
Pharma
34
%
 
33
%
 
35
%
 
35
%
Contract-Manufactured Products
24
%
 
22
%
 
23
%
 
21
%
 
100
%
 
100
%
 
100
%
 
100
%
(1) As noted above, prior period amounts have not been adjusted under the modified retrospective method.

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The following table presents the approximate percentage of our net sales by product category:
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2018
 
2017 (1)
 
2018
 
2017 (1)
High-Value Components
41
%
 
42
%
 
42
%
 
42
%
Standard Packaging
31
%
 
32
%
 
32
%
 
33
%
Delivery Devices
4
%
 
4
%
 
3
%
 
4
%
Contract-Manufactured Products
24
%
 
22
%
 
23
%
 
21
%
 
100
%
 
100
%
 
100
%
 
100
%
(1) As noted above, prior period amounts have not been adjusted under the modified retrospective method.
The following table presents the approximate percentage of our net sales by geographic location:
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2018
 
2017 (1)
 
2018
 
2017 (1)
Americas
51
%
 
50
%
 
48
%
 
51
%
Europe, Middle East, Africa
41
%
 
42
%
 
44
%
 
41
%
Asia Pacific
8
%
 
8
%
 
8
%
 
8
%
 
100
%
 
100
%
 
100
%
 
100
%
(1) As noted above, prior period amounts have not been adjusted under the modified retrospective method.
Contract Assets and Liabilities
Contract assets or liabilities result from transactions with revenue recorded over time. If the measure of remaining rights exceeds the measure of the remaining performance obligations, we record a contract asset. Contract assets are recorded on the condensed consolidated balance sheet in accounts receivable, net, and other assets (current and noncurrent portions, respectively). Contract assets included in accounts receivable, net, relate to the unbilled amounts of our product sales for which we have recognized revenue over time. Contract assets included in other assets represent the remaining performance obligations of our development and tooling agreements. Conversely, if the measure of the remaining performance obligations exceeds the measure of the remaining rights, we record a contract liability. Contract liabilities are recorded on the condensed consolidated balance sheet in other liabilities (current and noncurrent portions, respectively) and represent cash payments received in advance of our performance.
The following table summarizes our contract assets and liabilities, excluding contract assets included in accounts receivable, net:
 
($ in millions)
Contract assets, December 31, 2017
$
7.5

Contract assets, September 30, 2018
7.6

Change in contract assets - increase (decrease)
$
0.1

 
 
Deferred income, December 31, 2017
$
(33.6
)
Deferred income, September 30, 2018
(30.0
)
Change in deferred income - decrease (increase)
$
3.6

The decrease in deferred income during the nine months ended September 30, 2018 was primarily due to the recognition of revenue of $67.0 million, including $34.5 million of revenue that was included in deferred income at the beginning of the year (of which $18.6 million was recognized in the cumulative-effect adjustment as of January

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1, 2018), partially offset by additional cash payments of $62.3 million received in advance of satisfying future performance obligations along with $1.1 million in other adjustments.
Practical Expedients and Exemptions
We have elected to disregard the effects of a significant financing component, as we expect, at the inception of our contracts, that the period between when we transfer a promised good or service to the customer and when the customer pays for that good or service will be one year or less.
In addition, we have elected to omit the disclosure of the majority of our remaining performance obligations, which are satisfied within one year or less.
Supply Chain Financing
We have entered into supply chain financing agreements with certain banks, pursuant to which we offer for sale certain accounts receivable to such banks from time to time, subject to the terms of the applicable agreements. These transactions result in a reduction in accounts receivable, as the agreements transfer effective control over, and credit risk related to, the receivables to the banks. These agreements do not allow for recourse in the event of uncollectibility, and we do not retain any interest in the underlying accounts receivable once sold. As of September 30, 2018, we derecognized $2.3 million of accounts receivable under these agreements. Discount fees related to the sale of such accounts receivable on our condensed consolidated income statements for the three and nine months ended September 30, 2018 were not material.

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
September 30,
 
Nine Months Ended
September 30,
(in millions)
2018
 
2017
 
2018
 
2017
Net income
$
55.2

 
$
51.0

 
$
154.9

 
$
150.7

Weighted average common shares outstanding
73.9

 
74.2

 
73.9

 
73.8

Dilutive effect of equity awards, based on the treasury stock method
1.8

 
1.7

 
1.5

 
2.0

Weighted average shares assuming dilution
75.7

 
75.9

 
75.4

 
75.8


During the three months ended September 30, 2018 and 2017, there were 0.1 million and 0.5 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 0.4 million antidilutive shares outstanding during both the nine months ended September 30, 2018 and 2017.

In February 2018, we announced a share repurchase program for calendar-year 2018 authorizing the repurchase of up to 800,000 shares of our 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 repurchased and the timing of such transactions depended on a variety of factors, including market conditions. There were no shares purchased during the three months ended September 30, 2018. During the nine months ended September 30, 2018, we purchased 800,000 shares of our common stock under the program at a cost of $70.8 million, or an average price of $88.51 per share.


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Note 5:  Inventories

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

($ in millions)
September 30,
2018
 
December 31,
2017
Raw materials
$
93.3

 
$
88.6

Work in process
38.0

 
31.8

Finished goods
75.5

 
94.8

 
$
206.8

 
$
215.2


Note 6:  Affiliated Companies

At September 30, 2018 and December 31, 2017, the aggregate carrying amount of investments in equity-method affiliates was $77.1 million and $72.4 million, respectively, and the aggregate carrying amount of cost-method investments, for which fair value was not readily determinable, was $13.4 million at both period-ends. We test our cost-method investments for impairment whenever circumstances indicate that the carrying value of the investments may not be recoverable. Please refer to Note 5, Affiliated Companies, to the consolidated financial statements in our 2017 Annual Report for additional details.

Note 7:  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 September 30, 2018.

($ in millions)
September 30,
2018
 
December 31,
2017
Note payable, due December 31, 2019
$
0.1

 
$
0.1

Credit Facility, due October 15, 2020 (1.00%)
28.7

 
29.6

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

 
196.8

 
197.7

Less: unamortized debt issuance costs
0.6

 
0.7

Total debt
196.2

 
197.0

Less: current portion of long-term debt

 

Long-term debt, net
$
196.2

 
$
197.0


Please refer to Note 8, Debt, to the consolidated financial statements in our 2017 Annual Report for additional details regarding our debt agreements.

At September 30, 2018, we had $28.7 million in outstanding long-term borrowings under our $300.0 million multi-currency revolving credit facility (the “Credit Facility”), of which $4.4 million was denominated in Japanese Yen (“Yen”) and $24.3 million was denominated in Euro. These borrowings, together with outstanding letters of credit of $2.5 million, resulted in a borrowing capacity available under the Credit Facility of $268.8 million at September 30, 2018. Please refer to Note 8, Derivative Financial Instruments, for a discussion of the foreign currency hedges associated with the Credit Facility.

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Note 8:  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 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 September 30, 2018, the total amount of these forward exchange contracts was €10.0 million, Singapore Dollar (“SGD”) 601.5 million and $13.4 million. As of December 31, 2017, the total amount of these forward exchange contracts was €12.0 million, SGD 171.0 million and $13.4 million.

In addition, we have entered into several foreign currency contracts, designated as cash flow hedges, for periods of up to eighteen months, intended to hedge the currency risk associated with a portion of our forecasted transactions denominated in foreign currencies. As of September 30, 2018, we had outstanding foreign currency contracts to purchase and sell certain pairs of currencies, as follows:
(in millions)
 
 
Sell
Currency
Purchase
 
U. S. Dollar (USD)
Euro
USD
19.9

 

16.3

Yen
3,601.4

 
18.9

12.0

SGD
21.5

 
10.7

4.5


At September 30, 2018, a portion of our debt consisted of borrowings denominated in currencies other than USD. We have designated our €21.0 million ($24.3 million) Euro-denominated borrowings under our Credit Facility as a hedge of our net investment in certain European subsidiaries. A cumulative foreign currency translation loss of $0.5 million pre-tax ($0.4 million after tax) on this debt was recorded within accumulated other comprehensive loss as of September 30, 2018. We have also designated our ¥500.0 million ($4.4 million) Yen-denominated borrowings under our Credit Facility as a hedge of our net investment in Daikyo Seiko, Ltd. (“Daikyo”). At September 30, 2018, there was a cumulative foreign currency translation loss of $0.2 million pre-tax ($0.2 million after tax) on this Yen-denominated debt, 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 November 2017, we purchased a series of call options for a total of 125,166 barrels of crude oil to mitigate our exposure to such oil-based surcharges and protect operating cash flows with regards to a portion of our forecasted elastomer purchases through May 2019. In April 2018, we purchased a series of call options for a total of 30,612 barrels of crude oil from December 2018 through August 2019.

During the three months ended September 30, 2018, the gain recorded in cost of goods and services sold related to these call options was less than $0.1 million. During the nine months ended September 30, 2018, the gain recorded in cost of goods and services sold related to these call options was $0.5 million.

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As of September 30, 2018, we had outstanding contracts to purchase 72,699 barrels of crude oil from October 2018 to August 2019 at a weighted-average strike price of $74.21 per barrel.

Effects of Derivative Instruments on Financial Position and Results of Operations

Please refer to Note 9, Fair Value Measurements, for the balance sheet location and fair values of our derivative instruments as of September 30, 2018 and December 31, 2017.

The following table summarizes the effects of derivative instruments designated as hedges on other comprehensive income (“OCI”) and earnings, net of tax:
 
Amount of Gain (Loss) Recognized in OCI for the
 
Amount of Loss (Gain) Reclassified from Accumulated OCI into Income for the
 
Location of Loss (Gain) Reclassified from Accumulated OCI into Income
 
Three Months Ended
September 30,
 
Three Months Ended
September 30,
 
($ in millions)
2018
 
2017
 
2018
 
2017
 
 
Cash Flow Hedges:
 
 
 
 
 
 
 
 
 
Foreign currency hedge contracts
$
0.1

 
$
(0.7
)
 
$

 
$
0.4

 
Net sales
Foreign currency hedge contracts
(0.5
)
 
(0.9
)
 
(0.1
)
 
0.3

 
Cost of goods and services sold
Interest rate swap contracts

 

 

 
0.2

 
Interest expense
Forward treasury locks

 

 
0.1

 
0.1

 
Interest expense
Total
$
(0.4
)
 
$
(1.6
)
 
$

 
$
1.0

 
 
Net Investment Hedges:
 

 
 

 
 

 
 

 
 
Foreign currency-denominated debt
$
0.2

 
$
(0.5
)
 
$

 
$

 
Other expense
Total
$
0.2

 
$
(0.5
)
 
$

 
$

 
 
 
Amount of Gain (Loss) Recognized in OCI for the
 
Amount of Loss (Gain) Reclassified from Accumulated OCI into Income for the
 
Location of Loss (Gain) Reclassified from Accumulated OCI into Income
 
Nine Months Ended
September 30,
 
Nine Months Ended
September 30,
 
($ in millions)
2018
 
2017
 
2018
 
2017
 
 
Cash Flow Hedges:
 
 
 
 
 
 
 
 
 
Foreign currency hedge contracts
$
0.2

 
$
(1.6
)
 
$
0.8

 
$
0.7

 
Net sales
Foreign currency hedge contracts
0.9

 
(2.0
)
 
0.4

 
0.4

 
Cost of goods and services sold
Interest rate swap contracts

 

 

 
0.5

 
Interest expense
Forward treasury locks

 

 
0.2

 
0.2

 
Interest expense
Total
$
1.1

 
$
(3.6
)
 
$
1.4

 
$
1.8

 
 
Net Investment Hedges:
 

 
 

 
 

 
 

 
 
Foreign currency-denominated debt
$
0.7

 
$
(1.7
)
 
$

 
$

 
Other expense
Total
$
0.7

 
$
(1.7
)
 
$

 
$

 
 

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For the three and nine months ended September 30, 2018 and 2017, there was no material ineffectiveness related to our hedges.

Note 9:  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)
September 30,
2018
 
Level 1
 
Level 2
 
Level 3
Assets:
 
 
 
 
 
 
 
Deferred compensation assets
$
9.4

 
$
9.4

 
$

 
$

Foreign currency contracts
2.8

 

 
2.8

 

 
$
12.2

 
$
9.4

 
$
2.8

 
$

Liabilities:
 

 
 

 
 

 
 

Contingent consideration
$
5.2

 
$

 
$

 
$
5.2

Deferred compensation liabilities
10.5

 
10.5

 

 

Foreign currency contracts
5.8

 

 
5.8

 

 
$
21.5

 
$
10.5

 
$
5.8

 
$
5.2


 
Balance at
 
Basis of Fair Value Measurements
($ in millions)
December 31,
2017
 
Level 1
 
Level 2
 
Level 3
Assets:
 
 
 
 
 
 
 
Deferred compensation assets
$
8.9

 
$
8.9

 
$

 
$

Foreign currency contracts
0.5

 

 
0.5

 

 
$
9.4

 
$
8.9

 
$
0.5

 
$

Liabilities:
 

 
 

 
 

 
 

Contingent consideration
$
4.9

 
$

 
$

 
$
4.9

Deferred compensation liabilities
9.9

 
9.9

 

 

Foreign currency contracts
5.1

 

 
5.1

 

 
$
19.9

 
$
9.9

 
$
5.1

 
$
4.9



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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.

Level 3 Fair Value Measurements

The fair value of the contingent consideration liability 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 in our condensed consolidated statements of income. The significant unobservable inputs used in the fair value measurement of the SmartDose 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 the SmartDose technology platform 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 SmartDose contingent consideration.

The following table provides a summary of changes in our Level 3 fair value measurements:
 
($ in millions)
Balance, December 31, 2016
$
8.0

Decrease in fair value recorded in earnings
(2.4
)
Payments
(0.7
)
Balance, December 31, 2017
4.9

Increase in fair value recorded in earnings
0.8

Payments
(0.5
)
Balance, September 30, 2018
$
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 September 30, 2018, the estimated fair value of long-term debt was $192.5 million compared to a carrying amount of $196.2 million. At December 31, 2017, the estimated fair value of long-term debt was $201.5 million and the carrying amount was $197.0 million.

Note 10:  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 September 30, 2018, there were 3,734,129 shares remaining in the 2016 Plan for future grants.

During the nine months ended September 30, 2018, we granted 485,313 stock options at a weighted average exercise price of $90.05 per share based on the grant-date fair value of our stock to employees under the 2016 Plan.

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The weighted average grant date fair value of options granted was $20.06 per share as determined by the Black-Scholes option valuation model using the following weighted average assumptions: a risk-free interest rate of 2.7%; expected life of 5.6 years based on prior experience; stock volatility of 19.7% based on historical data; and a dividend yield of 0.7%. Stock option expense is recognized over the vesting period, net of forfeitures.

During the nine months ended September 30, 2018, we granted 99,886 stock-settled performance share unit (“PSU”) awards at a weighted average grant-date fair value of $90.10 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 nine months ended September 30, 2018, we granted 14,745 stock-settled restricted share unit (“RSU”) awards at a weighted average grant-date fair value of $96.12 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 performance period, net of forfeitures.

Total stock-based compensation expense was $5.3 million and $14.7 million for the three and nine months ended September 30, 2018, respectively. For the three and nine months ended September 30, 2017, stock-based compensation expense was $4.6 million and $13.6 million, respectively.

Note 11:  Benefit Plans

The components of net periodic benefit cost for the three months ended September 30 were as follows:

 
Pension benefits
 
Other retirement benefits
 
Total
($ in millions)
2018
 
2017
 
2018
 
2017
 
2018
 
2017
Service cost
$
2.6

 
$
2.5

 
$

 
$

 
$
2.6

 
$
2.5

Interest cost
2.3

 
2.4

 
0.1

 

 
2.4

 
2.4

Expected return on assets
(3.9
)
 
(3.4
)
 

 

 
(3.9
)
 
(3.4
)
Amortization of prior service credit
(0.3
)
 
(0.3
)
 
(0.2
)
 
(0.1
)
 
(0.5
)
 
(0.4
)
Recognized actuarial losses (gains)
0.9

 
1.2

 
(0.7
)
 
(0.9
)
 
0.2

 
0.3

Net periodic benefit cost
$
1.6

 
$
2.4

 
$
(0.8
)
 
$
(1.0
)
 
$
0.8

 
$
1.4


 
Pension benefits
 
Other retirement benefits
 
Total
($ in millions)
2018
 
2017
 
2018
 
2017
 
2018
 
2017
U.S. plans
$
1.0

 
$
1.7

 
$
(0.8
)
 
$
(1.0
)
 
$
0.2

 
$
0.7

International plans
0.6

 
0.7

 

 

 
0.6

 
0.7

Net periodic benefit cost
$
1.6

 
$
2.4

 
$
(0.8
)
 
$
(1.0
)
 
$
0.8

 
$
1.4



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Table of Contents

The components of net periodic benefit cost for the nine months ended September 30 were as follows ($ in millions):
 
Pension benefits
 
Other retirement benefits
 
Total
 
2018
 
2017
 
2018
 
2017
 
2018
 
2017
Service cost
$
8.1

 
$
7.8

 
$

 
$

 
$
8.1

 
$
7.8

Interest cost
7.0

 
7.3

 
0.2

 
0.2

 
7.2

 
7.5

Expected return on assets
(11.7
)
 
(10.1
)
 

 

 
(11.7
)
 
(10.1
)
Amortization of prior service credit
(1.1
)
 
(1.0
)
 
(0.5
)
 
(0.5
)
 
(1.6
)
 
(1.5
)
Recognized actuarial losses (gains)
2.8

 
3.6

 
(1.8
)
 
(2.0
)
 
1.0

 
1.6

Net periodic benefit cost
$
5.1

 
$
7.6

 
$
(2.1
)
 
$
(2.3
)
 
$
3.0

 
$
5.3

 
Pension benefits
 
Other retirement benefits
 
Total
 
2018
 
2017
 
2018
 
2017
 
2018
 
2017
U.S. plans
$
3.5

 
$
5.5

 
$
(2.1
)
 
$
(2.3
)
 
$
1.4

 
$
3.2

International plans
1.6

 
2.1

 

 

 
1.6

 
2.1

Net periodic benefit cost
$
5.1

 
$
7.6

 
$
(2.1
)
 
$
(2.3
)
 
$
3.0

 
$
5.3


In March 2017, the FASB issued guidance on the presentation of net periodic pension and postretirement benefit cost (net benefit cost). We adopted this guidance as of January 1, 2018, on a retrospective basis. Please refer to Note 2, New Accounting Standards, for additional information.

During the nine months ended September 30, 2017, we contributed $20.0 million to our U.S. qualified pension plan.

Effective January 1, 2019, except for interest crediting, benefit accruals under our U.S. qualified and non-qualified defined benefit pension plans will cease.

Note 12:  Accumulated Other Comprehensive Loss
 
The following table presents the changes in the components of accumulated other comprehensive loss, net of tax, for the nine months ended September 30, 2018:

($ 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, 2017
$
(4.2
)
 
$
0.5

 
$
(39.0
)
 
$
(74.6
)
 
$
(117.3
)
Other comprehensive income (loss) before reclassifications
1.1

 

 
0.6

 
(39.1
)
 
(37.4
)
Amounts reclassified out
1.4

 

 
(0.5
)
 

 
0.9

Other comprehensive income (loss), net of tax
2.5

 

 
0.1

 
(39.1
)
 
(36.5
)
Balance, September 30, 2018
$
(1.7
)
 
$
0.5

 
$
(38.9
)
 
$
(113.7
)
 
$
(153.8
)


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

($ in millions)
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
Location on Statement of Income
Detail of components
 
2018
 
2017
 
2018

 
2017

 
Losses on cash flow hedges:
 
 
 
 
 
 
 
 
 
 
Foreign currency contracts
 
$
0.1

 
$
(0.5
)
 
$
(0.8
)
 
$
(0.8
)
 
Net sales
Foreign currency contracts
 

 
(0.5
)
 
(0.7
)
 
(0.6
)
 
Cost of goods and services sold
Interest rate swap contracts
 

 
(0.2
)
 

 
(0.7
)
 
Interest expense
Forward treasury locks
 
(0.1
)
 
(0.1
)
 
(0.3
)
 
(0.3
)
 
Interest expense
Total before tax
 

 
(1.3
)
 
(1.8
)
 
(2.4
)
 
 
Tax expense
 

 
0.3

 
0.4

 
0.6

 
 
Net of tax
 
$

 
$
(1.0
)
 
$
(1.4
)
 
$
(1.8
)
 
 
Amortization of defined benefit pension and other postretirement plans:
 
 
 
 
 
 
 
 
 
 
Prior service credit
 
$
0.5

 
$
0.4

 
$
1.6

 
$
1.5

 
(a)
Actuarial losses
 
(0.2
)
 
(0.3
)
 
(1.0
)
 
(1.6
)
 
(a)
Total before tax
 
0.3

 
0.1

 
0.6

 
(0.1
)
 
 
Tax expense
 

 
(0.1
)
 
(0.1
)
 
(0.1
)
 
 
Net of tax
 
$
0.3

 
$

 
$
0.5

 
$
(0.2
)
 
 
Total reclassifications for the period, net of tax
 
$
0.3

 
$
(1.0
)
 
$
(0.9
)
 
$
(2.0
)
 
 

(a) These components are included in the computation of net periodic benefit cost. Please refer to Note 11, Benefit Plans, for additional details.

Note 13:  Other (Income) Expense

Other (income) expense consists of:

 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
($ in millions)
2018
 
2017
 
2018
 
2017
Restructuring and related charges:
 
 
 
 
 
 
 
Severance and post-employment benefits
$
0.1

 
$

 
$
3.4

 
$

Asset-related charges
0.4

 

 
0.8

 

Other charges
0.7

 

 
2.5

 

Total restructuring and related charges
1.2

 

 
6.7

 

Argentina currency devaluation
1.1

 

 
1.1

 

Venezuela deconsolidation

 

 

 
11.1

Development and licensing income
(0.2
)
 
(9.5
)
 
(0.6
)
 
(10.3
)
Contingent consideration
0.2

 
(0.2
)
 
0.8

 
0.5

Other items
(2.5
)
 
0.2

 
(4.0
)
 
1.8

Total other (income) expense
$
(0.2
)
 
$
(9.5
)
 
$
4.0

 
$
3.1


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Restructuring and Related Charges

In February 2018, our Board of Directors approved a restructuring plan designed to realign our manufacturing capacity with demand. These changes are expected to be implemented over the following twelve to twenty-four
months. The plan will require restructuring and related charges in the range of $8.0 million to $13.0 million and capital expenditures in the range of $9.0 million to $14.0 million. Once fully completed, we expect that the plan will provide us with annualized savings in the range of $17.0 million to $22.0 million.

During the three months ended September 30, 2018, we recorded $1.2 million in restructuring and related charges associated with this plan, consisting of $0.1 million for severance charges, $0.4 million for non-cash asset write-downs associated with the discontinued use of certain equipment, and $0.7 million for other charges. During the nine months ended September 30, 2018, we recorded $6.7 million in restructuring and related charges associated with this plan, consisting of $3.4 million for severance charges, $0.8 million for non-cash asset write-downs associated with the discontinued use of certain equipment, and $2.5 million for other charges.

The following table presents activity related to our restructuring obligations related to the 2018 restructuring plan:

($ in millions)
Severance
and benefits
 
Asset-related charges
 
Other charges
 
Total
Balance, December 31, 2017
$

 
$

 
$

 
$

Charges
3.4

 
0.8

 
2.5

 
6.7

Cash payments
(0.2
)
 

 

 
(0.2
)
Non-cash asset write-downs

 
(0.8
)
 
(2.5
)
 
(3.3
)
Balance, September 30, 2018
$
3.2

 
$

 
$

 
$
3.2


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. Please refer to Note 14, Other Expense, to the consolidated financial statements in our 2017 Annual Report for further discussion of the 2016 Plan. Our remaining restructuring obligations related to the 2016 Plan as of September 30, 2018 were $1.0 million.

Other Items

During the three and nine months ended September 30, 2018, we recorded a charge of $1.1 million related to the classification of Argentina’s economy as highly inflationary under U.S. GAAP as of July 1, 2018.

During the nine months ended September 30, 2017, as a result of the continued deterioration of conditions in Venezuela as well as our continued reduced access to USD settlement controlled by the Venezuelan government, we recorded a charge of $11.1 million related to the deconsolidation of our Venezuelan subsidiary, following our determination that we no longer met the U.S. GAAP criteria for control of that subsidiary. This charge included the derecognition of the carrying amounts of our Venezuelan subsidiary’s assets and liabilities, as well as the write-off of our investment in our Venezuelan subsidiary, related unrealized translation adjustments and the elimination of intercompany accounts. As of April 1, 2017, our consolidated financial statements exclude the results of our Venezuelan subsidiary.

In addition, during the three and nine months ended September 30, 2018, we recorded development income of $0.2 million and $0.6 million, respectively, related to a nonrefundable customer payment of $20.0 million received in June 2013 in return for the exclusive use of the SmartDose technology platform within a specific therapeutic area. During the three and nine months ended September 30, 2017, we recorded income of $0.4 million and $1.2 million, respectively, related to this nonrefundable customer payment. Please refer to Note 3, Revenue, for additional information. In addition, during the three and nine months ended September 30, 2017, we recorded income of $9.1

23

Table of Contents

million attributable to the reimbursement of certain costs related to a technology that we subsequently licensed to a third party. The license of technology to the third party may result in additional income in the future, contingent on commercialization of the related product.

Contingent consideration represents changes in the fair value of the SmartDose contingent consideration. Please refer to Note 9, 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 14:  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 $8.0 million and $14.0 million for the three months ended September 30, 2018 and 2017, respectively, and the effective tax rate was 13.1% and 22.3%, respectively. The provision for income taxes was $26.5 million and $19.1 million for the nine months ended September 30, 2018 and 2017, respectively, and the effective tax rate was 15.1% and 11.7%, respectively.

During the three and nine months ended September 30, 2018, we recorded a tax benefit of $7.7 million and $13.2 million, respectively, associated with our adoption in 2017 of guidance issued by the FASB regarding share-based payment transactions, as compared to a tax benefit of $4.8 million and $30.3 million for the same periods in 2017.

During the three and nine months ended September 30, 2018, we recorded a net tax charge of $0.4 million and a net tax benefit of $4.1 million, respectively, to adjust our estimated impact of the 2017 Tax Act. During the year ended December 31, 2017, we had recorded a provisional charge for the estimated impact of the 2017 Tax Act, based upon our then-current understanding of the 2017 Tax Act and the guidance available at the time. We will continue to actively monitor the developments relating to the 2017 Tax Act, and will adjust our estimate as necessary during the one-year measurement period.

During the nine months ended September 30, 2017, we recorded a tax benefit of $3.5 million related to a planned repatriation of cash held by non-U.S. subsidiaries.

In response to the 2017 Tax Act, we reevaluated our position regarding permanent reinvestment of foreign subsidiary earnings and profits through 2017 (with the exception of China and Mexico) and elected to include in our provision for income taxes for the year ended December 31, 2017 an estimated liability of $9.8 million related to foreign withholding taxes and state income taxes that will be incurred upon the distribution of those foreign subsidiary earnings and profits to the U.S. at a future date. Following additional analysis of the 2017 Tax Act, we are asserting, as of January 1, 2018, indefinite reinvestment related to our investment in all of our controlled foreign subsidiaries.

Note 15:  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 2017 Annual Report.

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Note 16:  Segment Information

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

We evaluate the performance of our segments based upon, among other things, segment net sales and operating profit. Segment operating profit excludes general corporate costs, which include executive and director compensation, stock-based compensation, 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 we consider 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
September 30,
 
Nine Months Ended
September 30,
($ in millions)
2018
 
2017
 
2018
 
2017
Net sales:
 
 
 
 
 
 
 
Proprietary Products
$
325.2

 
$
308.9

 
$
997.4

 
$
930.5

Contract-Manufactured Products
106.7

 
89.3

 
297.7

 
253.3

Intersegment sales elimination
(0.2
)
 

 
(0.2
)
 
(0.3
)
Consolidated net sales
$
431.7

 
$
398.2

 
$
1,294.9

 
$
1,183.5

Operating profit (loss):
 
 
 
 
 
 
 
Proprietary Products
$
68.2

 
$
67.5

 
$
202.7

 
$
189.3

Contract-Manufactured Products
11.2

 
10.8

 
29.7

 
30.1

Corporate
(16.3
)
 
(15.4
)
 
(50.1
)
 
(42.9
)
Other unallocated items
(2.3
)
 

 
(7.8
)
 
(11.1
)
Total operating profit
$
60.8

 
$
62.9

 
$
174.5

 
$
165.4

Interest expense
2.0

 
1.4

 
6.1

 
5.7

Interest income
(0.5
)
 
(0.3
)
 
(1.4
)