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EX-32.2 - EXHIBIT 32.2 - WEST PHARMACEUTICAL SERVICES INCex322q32015.htm
EX-31.2 - EXHIBIT 31.2 - WEST PHARMACEUTICAL SERVICES INCex312q32015.htm
EX-32.1 - EXHIBIT 32.1 - WEST PHARMACEUTICAL SERVICES INCex321q32015.htm
EX-31.1 - EXHIBIT 31.1 - WEST PHARMACEUTICAL SERVICES INCex311q32015.htm
EX-10.1 - EXHIBIT 10.1 - WEST PHARMACEUTICAL SERVICES INCex101amendment.htm

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, 2015
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, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting 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

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, 2015, there were 72,087,677 shares of the Registrant’s common stock outstanding.



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


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,
 
2015
 
2014
 
2015
 
2014
Net sales
$
344.5

 
$
355.9

 
$
1,040.1

 
$
1,071.6

Cost of goods and services sold
236.2

 
246.0

 
703.9

 
733.5

Gross profit
108.3

 
109.9

 
336.2

 
338.1

Research and development
8.5

 
9.6

 
24.1

 
29.5

Selling, general and administrative expenses
54.6

 
56.0

 
170.6

 
169.9

Other expense (Note 11)
48.7

 
0.3

 
58.1

 
1.3

Operating (loss) profit
(3.5
)
 
44.0

 
83.4

 
137.4

Interest expense
3.7

 
4.5

 
11.2

 
12.7

Interest income
0.5

 
1.8

 
1.3

 
2.7

(Loss) income before income taxes
(6.7
)
 
41.3

 
73.5

 
127.4

Income tax (benefit) expense
(6.6
)
 
11.7

 
15.1

 
35.5

Equity in net income of affiliated companies
1.6

 
1.4

 
3.8

 
3.8

Net income
$
1.5

 
$
31.0

 
$
62.2

 
$
95.7

 
 
 
 
 
 
 
 
Net income per share:
 
 
 

 
 

 
 

Basic
$
0.02

 
$
0.44

 
$
0.86

 
$
1.35

Diluted
$
0.02

 
$
0.43

 
$
0.85

 
$
1.32

 
 
 
 
 
 
 
 
Weighted average shares outstanding:
 

 
 

 
 

 
 

Basic
72.2

 
71.0

 
71.9

 
70.8

Diluted
73.9

 
72.6

 
73.6

 
72.5

 
 
 
 
 
 
 
 
Dividends declared per share
$
0.12

 
$
0.11

 
$
0.34

 
$
0.31


See accompanying notes to condensed consolidated financial statements.

3


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,
 
2015
 
2014
 
2015
 
2014
Net income
$
1.5

 
$
31.0

 
$
62.2

 
$
95.7

Other comprehensive (loss) income, net of tax:
 

 
 
 
 

 
 

Foreign currency translation adjustments
(13.5
)
 
(38.9
)
 
(58.0
)
 
(42.2
)
Defined benefit pension and other postretirement plan adjustments, net of tax of $11.4, $0.5, $12.3 and $0.7 respectively
19.7

 
1.2

 
21.3

 
1.5

Net (losses) gains on derivatives, net of tax of $(0.1), $0.4, $0.7 and $0.8, respectively
(0.4
)
 
1.1

 
1.5

 
1.8

Other comprehensive income (loss), net of tax
5.8

 
(36.6
)
 
(35.2
)
 
(38.9
)
Comprehensive income (loss)
$
7.3

 
$
(5.6
)
 
$
27.0

 
$
56.8


See accompanying notes to condensed consolidated financial statements.

4


CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
West Pharmaceutical Services, Inc. and Subsidiaries
(In millions)
 
September 30,
2015
 
December 31,
2014
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
256.8

 
$
255.3

Accounts receivable, net
194.6

 
179.0

Inventories
187.7

 
181.5

Deferred income taxes
8.3

 
7.8

Other current assets
33.5

 
35.7

Total current assets
680.9

 
659.3

Property, plant and equipment
1,398.3

 
1,390.8

Less accumulated depreciation and amortization
708.8

 
685.0

Property, plant and equipment, net
689.5

 
705.8

Investments in affiliated companies
59.2

 
60.6

Goodwill
105.7

 
108.6

Deferred income taxes
66.9

 
66.1

Intangible assets, net
38.6

 
42.0

Other noncurrent assets
25.7

 
28.5

Total Assets
$
1,666.5

 
$
1,670.9

 
 
 
 
LIABILITIES AND EQUITY
 

 
 

Current liabilities:
 

 
 

Notes payable and other current debt
$
71.0

 
$
27.2

Accounts payable
93.6

 
103.1

Pension and other postretirement benefits
2.5

 
2.6

Accrued salaries, wages and benefits
56.2

 
52.9

Income taxes payable
19.0

 
14.9

Other current liabilities
57.6

 
51.8

Total current liabilities
299.9

 
252.5

Long-term debt
231.5

 
309.5

Deferred income taxes
9.4

 
15.7

Pension and other postretirement benefits
81.5

 
83.7

Other long-term liabilities
48.9

 
52.6

Total Liabilities
671.2

 
714.0

 
 
 
 
Commitments and contingencies (Note 13)


 


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

 

Common stock, $0.25 par value; 100.0 million shares authorized; issued: 72.2 million and 71.4 million; outstanding: 72.1 million and 71.3 million
18.0

 
17.8

Capital in excess of par value
195.8

 
160.2

Retained earnings
939.9

 
902.2

Accumulated other comprehensive loss
(154.4
)
 
(119.2
)
Treasury stock, at cost (0.1 million and 0.1 million shares)
(4.0
)
 
(4.1
)
Total Equity
995.3

 
956.9

Total Liabilities and Equity
$
1,666.5

 
$
1,670.9


See accompanying notes to condensed consolidated financial statements.

5


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


 
Common Stock
 
Capital in Excess of Par Value
 
Treasury Stock
 
Retained earnings
 
Accumulated other comprehensive loss
 
Total
 
Shares
 
Amount
 
 
 
 
 
Balance, December 31, 2014
71.4

 
$
17.8

 
$
160.2

 
$
(4.1
)
 
$
902.2

 
$
(119.2
)
 
$
956.9

Net income

 

 

 

 
62.2

 

 
62.2

Stock-based compensation

 
0.1

 
23.2

 
0.2

 

 

 
23.5

Shares issued under stock plans
0.9

 
0.1

 
13.7

 

 

 

 
13.8

Shares repurchased for employee tax withholdings
(0.1
)
 

 
(5.5
)
 
(0.1
)
 

 

 
(5.6
)
Excess tax benefit from employee stock plans

 

 
4.2

 

 

 

 
4.2

Dividends declared

 

 

 

 
(24.5
)
 

 
(24.5
)
Other comprehensive loss, net of tax

 

 

 

 

 
(35.2
)
 
(35.2
)
Balance, September 30, 2015
72.2

 
$
18.0

 
$
195.8

 
$
(4.0
)
 
$
939.9

 
$
(154.4
)
 
$
995.3


See accompanying notes to condensed consolidated financial statements.

6


CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
West Pharmaceutical Services, Inc. and Subsidiaries
(In millions)

 
Nine Months Ended
September 30,
 
2015
 
2014
Cash flows from operating activities:
 
 
 
Net income
$
62.2

 
$
95.7

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation
63.6

 
63.9

Amortization
3.0

 
4.1

Stock-based compensation
24.4

 
12.5

Pension settlement charge
49.0

 

Other non-cash items, net
(2.7
)
 
(3.1
)
Changes in assets and liabilities
(55.1
)
 
(36.2
)
Net cash provided by operating activities
144.4

 
136.9

 
 
 
 
Cash flows from investing activities:
 

 
 

Capital expenditures
(86.8
)
 
(84.8
)
Purchases of short-term investments

 
(9.3
)
Sales and maturities of short-term investments

 
16.8

Other, net
1.2

 
(0.4
)
Net cash used in investing activities
(85.6
)
 
(77.7
)
 
 
 
 
Cash flows from financing activities:
 

 
 

Borrowings under revolving credit agreements
57.4

 
222.4

Repayments under revolving credit agreements
(57.4
)
 
(242.4
)
Repayments of long-term debt
(26.7
)
 
(1.7
)
Dividend payments
(23.7
)
 
(21.2
)
Excess tax benefit from employee stock plans
4.2

 
5.5

Shares repurchased for employee tax withholdings
(5.6
)
 
(4.1
)
Proceeds from exercise of stock options and stock appreciation rights
9.7

 
10.5

Employee stock purchase plan contributions
2.3

 
2.2

Contingent consideration payments
(0.1
)
 
(0.2
)
Net cash used in financing activities
(39.9
)
 
(29.0
)
Effect of exchange rates on cash
(17.4
)
 
(13.4
)
Net increase in cash and cash equivalents
1.5

 
16.8

 
 
 
 
Cash and cash equivalents at beginning of period
255.3

 
230.0

Cash and cash equivalents at end of period
$
256.8

 
$
246.8


See accompanying notes to condensed consolidated financial statements.

7


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 U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial reporting and 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, 2015 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, 2014 (“2014 Annual Report”). The results of operations for any interim period are not necessarily indicative of results for the full year.

Note 2:  New Accounting Standards

Recently Adopted Standards

In April 2014, the Financial Accounting Standards Board ("FASB") issued guidance for the reporting of discontinued operations, which also contained new disclosure requirements for both discontinued operations and other disposals that do not meet the definition of a discontinued operation. We adopted this guidance as of January 1, 2015, on a prospective basis. The adoption did not have a material impact on our financial statements.

Standards Issued Not Yet Adopted

In September 2015, the 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. This guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2015. 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 April 2015, the FASB issued guidance on the accounting for fees paid by a customer in a cloud computing arrangement. This guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2015. Management is currently evaluating the impact that this guidance will have on our financial statements, if any.

In April 2015, the FASB issued guidance which changes the classification of debt issuance costs, from an asset on the balance sheet to netting the costs against the carrying value of the debt. This guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2015. Management believes that the adoption of this guidance will not have a material impact on our financial statements.


8


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. This guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2015. 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 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. This guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2015. 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. 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, if any, including which transition method it will adopt.

Note 3:  Net Income Per Share

The following table reconciles net income and 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)
2015
 
2014
 
2015
 
2014
Net income
$
1.5

 
$
31.0

 
$
62.2

 
$
95.7

Denominator:
 
 
 
 
 
 
 
Weighted average common shares outstanding
72.2

 
71.0

 
71.9

 
70.8

Dilutive effect of stock options, stock appreciation rights and performance share awards, based on the treasury stock method
1.7

 
1.6

 
1.7

 
1.7

Weighted average shares assuming dilution
73.9

 
72.6

 
73.6

 
72.5


During the three months ended September 30, 2015 and 2014, there were 0.8 million and 0.6 million shares, respectively, not included in the computation of diluted net income per share because their impact was antidilutive. There were 0.6 million and 0.5 million antidilutive shares outstanding during the nine months ended September 30, 2015 and 2014, respectively.

9



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:
($ in millions)
September 30,
2015
 
December 31,
2014
Raw materials
$
78.0

 
$
79.9

Work in process
31.1

 
25.6

Finished goods
78.6

 
76.0

 
$
187.7

 
$
181.5


Note 5:  Debt

The following table summarizes our long-term debt obligations, net of current maturities:

($ in millions)
September 30,
2015
 
December 31,
2014
Series B floating rate notes, due July 28, 2015
$

 
$
25.0

Euro note B, due February 27, 2016
68.7

 
74.3

Capital leases, due January 1, 2016
0.1

 
0.2

Revolving credit facility, due April 26, 2017
27.8

 
29.7

Term loan, due January 1, 2018
37.7

 
39.2

Note payable, due January 1, 2020
0.2

 
0.3

Series A notes, due July 5, 2022
42.0

 
42.0

Series B notes, due July 5, 2024
53.0

 
53.0

Series C notes, due July 5, 2027
73.0

 
73.0

 
302.5

 
336.7

Less: current portion of long-term debt
71.0

 
27.2

 
$
231.5

 
$
309.5


Please refer to Note 8, Debt, to the consolidated financial statements in our 2014 Annual Report for additional details regarding our debt agreements.

At September 30, 2015, we had $27.8 million in outstanding borrowings under our multi-currency revolving credit facility, of which $4.2 million was denominated in Yen and $23.6 million was denominated in Euro. The total amount outstanding under this facility at September 30, 2015 and December 31, 2014 was classified as long-term.

In addition, at September 30, 2015, we had $37.7 million outstanding under our five-year term loan due January 2018, of which $2.2 million was classified as current. Please refer to Note 6, Derivative Financial Instruments, for a discussion of the interest-rate swap agreement associated with this loan.

10



Note 6:  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 September 30, 2015, we had a $37.7 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 related to the purchase of our corporate office and research building. 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

During 2015 and 2014, we entered into several foreign currency hedge contracts that were designated as cash flow hedges of forecasted transactions denominated in foreign currencies, which are described in more detail below.

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 €5.3 million ($6.4 million).

We also entered into a series of foreign currency contracts 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 €4.7 million ($5.6 million).

In addition, we entered into several contracts which involve both a written and a purchased option to hedge the currency risk associated with a portion of our forecasted Yen-denominated inventory purchases made by West in the U.S. The notional amounts of these contracts include ¥396.4 million of a derivative asset and ¥396.4 million of a derivative liability, or $3.3 million each.

Lastly, we entered into several contracts which involve both a written and a purchased option to hedge the currency risk associated with a portion of our forecasted Yen-denominated inventory purchases made by certain European subsidiaries. The notional amounts of these contracts include ¥214.1 million of a derivative asset and ¥214.1 million of a derivative liability, or $1.8 million each.

At September 30, 2015, a portion of our debt consisted of borrowings denominated in currencies other than USD. We have designated our €61.1 million ($68.7 million) Euro note B and our €21.0 million ($23.6 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 $15.0 million pre-tax ($9.5 million after tax) on this debt was recorded within accumulated other comprehensive loss as of September 30, 2015. We have also designated our ¥500.0 million ($4.2 million) Yen-denominated borrowings under our multi-currency revolving credit facility as a hedge of our net investment in Daikyo. At September 30, 2015, there was a cumulative foreign currency translation gain on this Yen-denominated debt of $1.2 million pre-tax ($0.8 million after tax) which was also included within accumulated other comprehensive loss.


11


Commodity Price Risk

Many of our Packaging Systems 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 2014, we purchased a series of call options for a total of 134,700 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 2015. With these contracts we may benefit from a decline in crude oil prices, as there is no downward exposure other than the $0.1 million premium that we paid to purchase the contracts.

During the three and nine months ended September 30, 2015, the loss recorded in cost of goods and services sold related to these call options was less than $0.1 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:

 
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
 
Three Months Ended
September 30,
 
Three Months Ended
September 30,
 
($ in millions)
2015
 
2014
 
2015
 
2014
 
 
Cash Flow Hedges:
 
 
 
 
 
 
 
 
 
Foreign currency hedge contracts
$

 
$
0.5

 
$
(0.4
)
 
$
(0.2
)
 
Net sales
Foreign currency hedge contracts
(0.3
)
 
0.2

 

 

 
Cost of goods and services sold
Interest rate swap contracts
(0.1
)
 
0.1

 
0.3

 
0.4

 
Interest expense
Forward treasury locks

 

 
0.1

 
0.1

 
Interest expense
Total
$
(0.4
)
 
$
0.8

 
$

 
$
0.3

 
 
Net Investment Hedges:
 

 
 

 
 

 
 

 
 
Foreign currency-denominated debt
$
(0.8
)
 
$
5.1

 
$

 
$

 
Other expense
Total
$
(0.8
)
 
$
5.1

 
$

 
$

 
 


12


 
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
 
Nine Months Ended
September 30,
 
Nine Months Ended
September 30,
 
($ in millions)
2015
 
2014
 
2015
 
2014
 
 
Cash Flow Hedges:
 
 
 
 
 
 
 
 
 
Foreign currency hedge contracts
$
1.4

 
$
0.4

 
$
(1.1
)
 
$
(0.1
)
 
Net sales
Foreign currency hedge contracts
0.3

 
0.3

 

 

 
Cost of goods and services sold
Interest rate swap contracts
(0.4
)
 
(0.2
)
 
1.1

 
1.2

 
Interest expense
Forward treasury locks

 

 
0.2

 
0.2

 
Interest expense
Total
$
1.3

 
$
0.5

 
$
0.2

 
$
1.3

 
 
Net Investment Hedges:
 

 
 

 
 

 
 

 
 
Foreign currency-denominated debt
$
4.7

 
$
5.6

 
$

 
$

 
Other expense
Total
$
4.7

 
$
5.6

 
$

 
$

 
 

For the three and nine months ended September 30, 2015 and 2014, there was no material ineffectiveness related to our hedges.

Note 7:  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,
2015
 
Level 1
 
Level 2
 
Level 3
Assets:
 
 
 
 
 
 
 
Deferred compensation assets
$
6.4

 
$
6.4

 
$

 
$

Foreign currency contracts
1.0

 

 
1.0

 

 
$
7.4

 
$
6.4

 
$
1.0

 
$

Liabilities:
 

 
 

 
 

 
 

Contingent consideration
$
5.7

 
$

 
$

 
$
5.7

Deferred compensation liabilities
8.2

 
8.2

 

 

Interest rate swap contracts
2.5

 

 
2.5

 

 
$
16.4

 
$
8.2

 
$
2.5

 
$
5.7


13



 
Balance at
 
Basis of Fair Value Measurements
($ in millions)
December 31,
2014
 
Level 1
 
Level 2
 
Level 3
Assets:
 
 
 
 
 
 
 
Deferred compensation assets
$
6.6

 
$
6.6

 
$

 
$

Foreign currency contracts
0.2

 

 
0.2

 

 
$
6.8

 
$
6.6

 
$
0.2

 
$

Liabilities:
 

 
 

 
 

 
 

Contingent consideration
$
5.0

 
$

 
$

 
$
5.0

Deferred compensation liabilities
8.7

 
8.7

 

 

Interest rate swap contracts
3.6

 

 
3.6

 

 
$
17.3

 
$
8.7

 
$
3.6

 
$
5.0


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, 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. Interest rate swap contracts, included within other current and long-term liabilities, are 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 6, 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 SmartDoseTM 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:

 
Nine Months Ended
September 30,
 
2015
 
2014
Beginning Balance
$
5.0

 
$
4.3

Increase in fair value recorded in earnings
0.8

 
1.0

Payments
(0.1
)
 
(0.2
)
Ending Balance
$
5.7

 
$
5.1



14


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, 2015, the estimated fair value of long-term debt was $231.3 million compared to a carrying amount of $231.5 million. At December 31, 2014, the estimated fair value of long-term debt was $311.4 million and the carrying amount was $309.5 million.

Note 8:  Stock-Based Compensation

The 2011 Omnibus Incentive Compensation Plan (the "2011 Plan") provides for the granting of stock options, stock appreciation rights, restricted stock awards and performance awards to employees and non-employee directors. The terms and conditions of awards to be granted are determined by our Board's nominating and corporate governance and compensation committees. Vesting requirements vary by award. At September 30, 2015, there were 2,639,265 shares remaining in the 2011 Plan for future grants.

During the nine months ended September 30, 2015, we granted 905,028 stock options at a weighted average exercise price of $55.63 per share based on the grant-date fair value of our stock to key employees under the 2011 Plan, including shares issued in conjunction with the Chief Executive Officer ("CEO") succession. The weighted average grant date fair value of options granted was $10.50 per share as determined by the Black-Scholes option valuation model using the following weighted average assumptions: a risk-free interest rate of 1.61%; expected life of 5.8 years based on prior experience; stock volatility of 19.2% based on historical data; and a dividend yield of 0.9%. Stock option expense is recognized over the vesting period, net of forfeitures.

During the nine months ended September 30, 2015, we granted 140,369 performance vesting share (“PVS”) awards at a weighted grant-date fair value of $55.26 per share to key employees under the 2011 Plan, including shares issued in conjunction with the CEO succession. 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.

In addition, during the nine months ended September 30, 2015, we granted 30,499 restricted share awards at a grant-date fair value of $57.38 per share to the new CEO under the 2011 Plan. The fair value of the award is based on the market price of our stock at the grant date and is recognized as expense over the vesting period.

Total stock-based compensation expense was $3.6 million and $24.4 million for the three and nine months ended September 30, 2015, respectively. Included in the amount for the nine months ended September 30, 2015 was a $10.4 million charge related to executive retirements, which was recorded within other expense, with the remainder of the balance recorded in selling, general and administrative expenses. Please refer to Note 11, Other Expense, for further discussion of this charge. For the three and nine months ended September 30, 2014, total stock-based compensation expense was $3.6 million and $12.5 million, respectively.

15



Note 9:  Benefit Plans

The components of net periodic benefit cost for the three months ended September 30 were as follows ($ in millions):

 
Pension benefits
 
Other retirement benefits
 
Total
 
2015
 
2014
 
2015
 
2014
 
2015
 
2014
Service cost
$
2.5

 
$
2.3

 
$
0.1

 
$
0.1

 
$
2.6

 
$
2.4

Interest cost
3.4

 
4.2

 
0.1

 
0.1

 
3.5

 
4.3

Expected return on assets
(4.9
)
 
(4.7
)
 

 

 
(4.9
)
 
(4.7
)
Amortization of prior service credit
(0.3
)
 
(0.3
)
 

 

 
(0.3
)
 
(0.3
)
Recognized actuarial losses (gains)
1.6

 
1.3

 
(0.4
)
 
(0.5
)
 
1.2

 
0.8

Settlements
49.0

 

 

 

 
49.0

 

Net periodic benefit cost
$
51.3

 
$
2.8

 
$
(0.2
)
 
$
(0.3
)
 
$
51.1

 
$
2.5


 
Pension benefits
 
Other retirement benefits
 
Total
 
2015
 
2014
 
2015
 
2014
 
2015
 
2014
U.S. plans
$
50.7

 
$
2.0

 
$
(0.2
)
 
$
(0.3
)
 
$
50.5

 
$
1.7

International plans
0.6

 
0.8

 

 

 
0.6

 
0.8

Net periodic benefit cost
$
51.3

 
$
2.8

 
$
(0.2
)
 
$
(0.3
)
 
$
51.1

 
$
2.5



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
 
2015
 
2014
 
2015
 
2014
 
2015
 
2014
Service cost
$
8.0

 
$
7.4

 
$
0.4

 
$
0.3

 
$
8.4

 
$
7.7

Interest cost
11.2

 
12.7

 
0.3

 
0.3

 
11.5

 
13.0

Expected return on assets
(16.3
)
 
(14.4
)
 

 

 
(16.3
)
 
(14.4
)
Amortization of transition obligation
0.1

 
0.1

 

 

 
0.1

 
0.1

Amortization of prior service credit
(1.0
)
 
(1.0
)
 

 

 
(1.0
)
 
(1.0
)
Recognized actuarial losses (gains)
4.8

 
3.6

 
(1.1
)
 
(1.2
)
 
3.7

 
2.4

Settlements
49.0

 

 

 

 
49.0

 

Net periodic benefit cost
$
55.8

 
$
8.4

 
$
(0.4
)
 
$
(0.6
)
 
$
55.4

 
$
7.8


16



 
Pension benefits
 
Other retirement benefits
 
Total
 
2015
 
2014
 
2015
 
2014
 
2015
 
2014
U.S. plans
$
53.8

 
$
6.1

 
$
(0.4
)
 
$
(0.6
)
 
$
53.4

 
$
5.5

International plans
2.0

 
2.3

 

 

 
2.0

 
2.3

Net periodic benefit cost
$
55.8

 
$
8.4

 
$
(0.4
)
 
$
(0.6
)
 
$
55.4

 
$
7.8


During the third quarter of 2015, we recorded a $49.0 million pension settlement charge within other expense, in connection with our purchase of a group annuity contract from Metropolitan Life Insurance Company (“MetLife”) to settle $139.4 million of our $313.6 million outstanding pension benefit obligation under our U.S. qualified pension plan. MetLife will assume the obligation to pay future pension benefits and provide administrative services beginning November 1, 2015 for approximately 1,750 retirees and surviving beneficiaries who retired prior to January 1, 2015 and are currently receiving payments from this plan. The purchase was funded directly by plan assets.

In addition, we made contributions to the U.S. qualified pension plan in the amount of $1.3 million in September 2015 and $13.7 million in October 2015, in order to maintain the plan's funded status as of the transaction date.

Note 10:  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, 2015:

($ 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, 2014
$
(4.3
)
 
$
4.7

 
$
(64.6
)
 
$
(55.0
)
 
$
(119.2
)
Other comprehensive income (loss) before reclassifications
1.3

 

 
(11.4
)
 
(58.0
)
 
(68.1
)
Amounts reclassified out
0.2

 

 
32.7

 

 
32.9

Other comprehensive income (loss), net of tax
1.5

 

 
21.3

 
(58.0
)
 
(35.2
)
Balance, September 30, 2015
$
(2.8
)
 
$
4.7

 
$
(43.3
)
 
$
(113.0
)
 
$
(154.4
)

During the third quarter of 2015, in connection with our purchase of a group annuity contract from MetLife, we recorded a $49.0 million pension settlement charge related to the acceleration of a portion of our unrecognized actuarial losses. Please refer to Note 9, Benefit Plans, for additional details.



17


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
 
2015
 
2014
 
2015
 
2014
 
Gains (losses) on cash flow hedges:
 
 
 
 
 
 
 
 
 
 
Foreign currency contracts
 
$
0.4

 
$
0.2

 
$
1.3

 
$
0.2

 
Cost of goods and services sold
Interest rate swap contracts
 
(0.4
)
 
(0.7
)
 
(1.7
)
 
(2.0
)
 
Interest expense
Forward treasury locks
 
(0.1
)
 
(0.1
)
 
(0.3
)
 
(0.3
)
 
Interest expense
Total before tax
 
(0.1
)
 
(0.6
)
 
(0.7
)
 
(2.1
)
 
 
Tax expense
 
0.1

 
0.3

 
0.5

 
0.8

 
 
Net of tax
 
$

 
$
(0.3
)
 
$
(0.2
)
 
$
(1.3
)
 
 
Amortization of defined benefit pension and other postretirement plans:
 
 
 
 
 
 
 
 
 
 
Transition obligation
 
$

 
$

 
$
(0.1
)
 
$
(0.1
)
 
(a)
Prior service cost
 
0.3

 
0.3

 
1.0

 
1.0

 
(a)
Actuarial losses
 
(50.2
)
 
(0.8
)
 
(52.7
)
 
(2.4
)
 
(a)
Total before tax
 
(49.9
)
 
(0.5
)
 
(51.8
)
 
(1.5
)
 
 
Tax expense
 
18.5

 
0.2

 
19.1

 
0.5

 
 
Net of tax
 
$
(31.4
)
 
$
(0.3
)
 
$
(32.7
)
 
$
(1.0
)
 
 
Total reclassifications for the period, net of tax
 
$
(31.4
)
 
$
(0.6
)
 
$
(32.9
)
 
$
(2.3
)
 
 

(a)     These components are included in the computation of net periodic benefit cost. Please refer to Note 9, Benefit Plans, for additional details.

Note 11:  Other Expense

Other expense consists of:

 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
($ in millions)
2015
 
2014
 
2015
 
2014
Pension settlement charge
$
49.0

 
$

 
$
49.0

 
$

Executive retirement and related costs

 

 
10.9

 

License costs

 
1.2

 

 
1.2

Development income
(0.3
)
 
(0.3
)
 
(1.1
)
 
(1.2
)
Contingent consideration costs
0.5

 
0.3

 
0.8

 
1.0

Other items
(0.5
)
 
(0.9
)
 
(1.5
)
 
0.3

 
$
48.7

 
$
0.3

 
$
58.1

 
$
1.3


During the third quarter of 2015, we recorded a $49.0 million pension settlement charge in connection with our purchase of a group annuity contract from MetLife. Please refer to Note 9, Benefit Plans, for additional details regarding this purchase.

18



In addition, during the nine months ended September 30, 2015, we recorded a $10.9 million charge for executive retirement and related costs, which included $2.4 million for a long-term incentive plan award for the Company’s previous CEO, $8.0 million for the revaluation of modified outstanding awards to provide for continued vesting for the Company’s 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.

During the three and nine months ended September 30, 2014, we recorded a $1.2 million charge for license costs associated with acquired in-process research.

Development income of $0.3 million and $1.1 million was recognized within our Pharmaceutical Delivery Systems segment ("Delivery Systems") during the three and nine months ended September 30, 2015, respectively, 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 September 30, 2015, there was $16.3 million of unearned income related to this payment, of which $1.5 million was included in other current liabilities and $14.8 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. During the three and nine months ended September 30, 2014, we recorded development income of $0.3 million and $1.2 million, respectively, within Delivery Systems, most of which related to the nonrefundable customer payment described above.

Contingent consideration costs represent changes in the fair value of the SmartDose contingent consideration. Please refer to Note 7, 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 12:  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.

During the three months ended September 30, 2015, we recorded a tax benefit of $6.6 million, as compared to tax expense of $11.7 million that was recorded during the three months ended September 30, 2014. Our third quarter 2015 results include a tax benefit of $17.9 million in connection with the $49.0 million pension settlement charge discussed in Note 9, Benefit Plans.

The provision for income taxes was $15.1 million and $35.5 million for the nine months ended September 30, 2015 and 2014, respectively. In addition to the tax benefit on the pension settlement charge, our 2015 year-to-date results include a $4.0 million tax benefit in connection with the $10.9 million charge for the executive retirement and related costs discussed in Note 11, Other Expense.

Note 13:  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 2014 Annual Report.


19


Note 14:  Segment Information

Our business operations are organized into two reportable segments, which are aligned with the underlying markets and customers they serve. Our reportable segments are the Pharmaceutical Packaging Systems segment (“Packaging Systems”) and Delivery Systems. Packaging Systems develops, manufactures and sells primary packaging components and systems for injectable drug delivery, including stoppers and seals for vials, closures and other components used in syringe, intravenous and blood collection systems, and prefillable syringe components. Delivery Systems develops, manufactures and sells safety and administration systems, multi-component systems for drug administration, and a variety of custom contract-manufacturing solutions targeted to the healthcare and consumer-products industries. In addition, Delivery Systems is responsible for the continued development and commercialization of our line of proprietary, multi-component systems for injectable drug administration and other healthcare applications.

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
September 30,
 
Nine Months Ended
September 30,
($ in millions)
2015
 
2014
 
2015
 
2014
Net sales:
 
 
 
 
 
 
 
Packaging Systems
$
247.2

 
$
251.7

 
$
749.3

 
$
772.6

Delivery Systems
97.6

 
104.4

 
291.7

 
299.5

Intersegment sales elimination
(0.3
)
 
(0.2
)
 
(0.9
)
 
(0.5
)
Total net sales
$
344.5

 
$
355.9

 
$
1,040.1

 
$
1,071.6

Operating profit (loss):
 
 
 
 
 
 
 
Packaging Systems
$
56.5

 
$
52.8

 
$
179.2

 
$
167.1

Delivery Systems
1.3

 
4.8

 
4.8

 
8.3

Corporate
(12.3
)
 
(12.4
)
 
(40.7
)
 
(36.8
)
Other unallocated items
(49.0
)
 
(1.2
)
 
(59.9
)
 
(1.2
)
Total operating (loss) profit
$
(3.5
)
 
$
44.0

 
$
83.4

 
$
137.4

Interest expense
3.7

 
4.5

 
11.2

 
12.7

Interest income
0.5

 
1.8

 
1.3

 
2.7

(Loss) income before income taxes
$
(6.7
)
 
$
41.3

 
$
73.5

 
$
127.4


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

During the third quarter of 2015, we recorded a $49.0 million pension settlement charge related to our purchase of a group annuity contract from MetLife. Please refer to Note 9, Benefit Plans, for additional details. In addition, the nine month period ended September 30, 2015 includes a $10.9 million charge for executive retirement and related costs. Please refer to Note 11, Other Expense, for additional details regarding this charge.


20


During the three and nine months ended September 30, 2014, we recorded a $1.2 million charge for license costs associated with acquired in-process research.
 
Note 15:  Subsequent Event

On October 15, 2015, we entered into a senior unsecured, multi-currency revolving credit facility agreement (the "New Credit Agreement") that replaced our prior $300.0 million revolving credit facility, which was scheduled to expire in April 2017. The New Credit Agreement, which expires in October 2020, contains a $300.0 million credit facility, which may be increased from time to time by up to $100.0 million in the aggregate, subject to the satisfaction of certain conditions and upon approval by the banks. Up to $30.0 million of the credit facility is available for swing-line loans and up to $30.0 million is available for the issuance of standby letters of credit. Borrowings under the revolving credit facility bear interest at either the base rate or at the applicable LIBOR rate, plus a tiered margin based on the ratio of our total debt to modified earnings before interest, taxes, depreciation and amortization ("EBITDA"), ranging from 0 to 75 basis points for base rate loans and 100 to 175 basis points for LIBOR rate loans. Consistent with our previous revolving credit facility, the New Credit Agreement contains representations and covenants that require compliance with, among other restrictions, a maximum leverage ratio and a minimum interest coverage ratio. The New Credit Agreement also contains usual and customary default provisions, and limitations on liens securing indebtedness, asset sales, distributions and acquisitions.

21


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

OVERVIEW

The following discussion is intended to further the reader’s understanding of the consolidated financial condition and results of operations of our Company. It should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations and the consolidated financial statements and accompanying notes included in our 2014 Annual Report. These historical financial statements may not be indicative of our future performance. This Management’s Discussion and Analysis of Financial Condition and Results of Operations contains a number of forward-looking statements, all of which are based on our current expectations and could be affected by the uncertainties and risks discussed in Part I, Item 1A of our 2014 Annual Report and in Part II, Item 1A of this Quarterly Report on Form 10-Q.

Throughout this section, references to “Notes” refer to the footnotes to our condensed consolidated financial statements (unaudited) in Part I, Item 1 of this Quarterly Report on Form 10-Q, unless otherwise indicated.

Non-GAAP Financial Measures

For the purpose of aiding the comparison of our year-over-year results, we may refer to net sales and other financial results excluding the effects of changes in foreign currency exchange rates. The constant-currency amounts are calculated by translating the current year’s functional currency results at the prior-year period’s exchange rate. We may also refer to consolidated operating (loss) profit excluding the effects of unallocated items. The re-measured results excluding effects from currency translation and excluding the effects of unallocated items are not in conformity with U.S. GAAP and should not be used as a substitute for the comparable U.S. GAAP financial measures. The non-U.S. GAAP financial measures are incorporated into our discussion and analysis as management uses them in evaluating our results of operations, and believes that this information provides users a valuable insight into our results.

Our Operations

Our business operations are organized into two reportable segments, which are aligned with the underlying markets and customers they serve. Our reportable segments are Packaging Systems and Delivery Systems. Packaging Systems develops, manufactures and sells primary packaging components and systems for injectable drug delivery, including stoppers and seals for vials, closures and other components used in syringe, intravenous and blood collection systems, and prefillable syringe components. Delivery Systems develops, manufactures and sells safety and administration systems, multi-component systems for drug administration, and a variety of custom contract-manufacturing solutions targeted to the healthcare and consumer-products industries. In addition, Delivery Systems is responsible for the continued development and commercialization of our line of proprietary, multi-component systems for injectable drug administration and other healthcare applications. We also maintain global partnerships to share technologies and market products with affiliates in Japan and Mexico.

2015 Financial Performance Summary

Our 2015 results continue to be affected by the weakening of the Euro and other foreign currencies in relation to USD. Foreign currency translation reduced our third quarter 2015 net income and net income per diluted share by $4.2 million and $0.06, respectively, as compared to the same period in 2014. For the nine months ended September 30, 2015, foreign currency translation lowered net income and net income per diluted share by $17.6 million and $0.24, respectively, as compared to the same period in 2014.

Our 2015 results also include a $49.0 million pension settlement charge, which reduced net income and net income per diluted share by $31.1 million and $0.42, respectively, as compared to the same period in 2014, and a $10.9 million charge for executive retirement and related costs, which lowered net income and net income per diluted share by $6.9 million and $0.09, respectively, as compared to the same period in 2014.

22


Excluding foreign currency effects, the pension settlement charge, and the executive retirement charge, our net sales and net income per diluted share increased by 6.4% and 21.2%, respectively, for the nine months ended September 30, 2015, as compared to the same period in 2014. At September 30, 2015, our cash and cash equivalents balance totaled $256.8 million and our borrowing capacity under our multi-currency revolving credit facility was $269.4 million. In addition, in October 2015, we entered into the New Credit Agreement that replaced our prior revolving credit facility, which was scheduled to expire in April 2017. The New Credit Agreement expires in October 2020.

We appointed Eric M. Green to serve as our Chief Executive Officer, effective April 24, 2015, succeeding Donald E. Morel, Jr., Ph.D., who previously served as Chairman of our Board of Directors and Chief Executive Officer. Dr. Morel continued to serve as Chairman of our Board of Directors until June 30, 2015, and retired effective as of July 1, 2015.

RESULTS OF OPERATIONS

We evaluate the performance of our segments based upon, among other things, segment net sales and operating profit. Segment operating profit excludes general corporate costs, which include executive and director compensation, stock-based compensation, 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.

Percentages in the following tables and throughout the Results of Operations section may reflect rounding adjustments.

Net Sales

The following table presents net sales, consolidated and by reportable segment, for the three months ended September 30, 2015 and 2014:

 
Three Months Ended
September 30,
 
% Change
($ in millions)
2015
 
2014
 
As-Reported
 
Ex-Currency
Packaging Systems
$
247.2

 
$
251.7

 
(1.8
)%
 
8.5
 %
Delivery Systems
97.6

 
104.4

 
(6.5
)%
 
(2.6
)%
Intersegment sales elimination
(0.3
)
 
(0.2
)
 

 

Consolidated net sales
$
344.5

 
$
355.9

 
(3.2
)%
 
5.2
 %

Consolidated net sales decreased by $11.4 million, or 3.2%, for the three months ended September 30, 2015, as compared to the same period in 2014, including an unfavorable foreign currency impact of $30.0 million. Excluding foreign currency effects, net sales for the three months ended September 30, 2015 increased by $18.7 million, or 5.2%, as compared to the same period in 2014. Consolidated net sales originating in the United States for the three months ended September 30, 2015 were $168.8 million, an increase of 3.5% from the same period in 2014. Consolidated net sales generated outside of the United States (mainly in Europe) for the three months ended September 30, 2015 were $175.7 million, a decrease of 8.9% from the same period in 2014 primarily due to an unfavorable foreign currency impact. Excluding foreign currency effects, consolidated net sales generated outside of the United States for the three months ended September 30, 2015 increased by 6.7% from the same period in 2014. The average Euro to USD exchange rate decreased from $1.33 for the three months ended September 30, 2014 to $1.11 for the three months ended September 30, 2015.


23


Packaging Systems – Packaging Systems’ net sales decreased by $4.5 million, or 1.8%, for the three months ended September 30, 2015, as compared to the same period in 2014, including an unfavorable foreign currency impact of $26.0 million. Excluding foreign currency effects, net sales for the three months ended September 30, 2015 increased by $21.5 million, or 8.5%, as compared to the same period in 2014, due to continued growth in our high-value product offerings. An improvement in product mix and higher sales volumes contributed 6.8 percentage points of the increase, and sales price increases contributed 1.7 percentage points of the increase. Our high-value product offerings represented 45.9% of Packaging Systems' net sales for the three months ended September 30, 2015, as compared to 43.8% for the same period in 2014.

Delivery Systems – Delivery Systems’ net sales decreased by $6.8 million, or 6.5%, for the three months ended September 30, 2015, as compared to the same period in 2014, including an unfavorable foreign currency impact of $4.0 million. Excluding foreign currency effects, net sales for the three months ended September 30, 2015 decreased by $2.8 million, or 2.6%, as compared to the same period in 2014, due to decreases in sales of administration systems for drug reconstitution and SmartDose, as well as the sale of a contract services business during the three months ended September 30, 2014. Contract manufacturing sales, particularly sales of glucose monitoring devices, and CZ product sales increased during the three months ended September 30, 2015, as compared to the same period in 2014. Proprietary net sales represented 22.4% of Delivery Systems' net sales for the three months ended September 30, 2015, as compared to 27.5% for the same period in 2014.

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

The following table presents net sales, consolidated and by reportable segment, for the nine months ended September 30, 2015 and 2014:

 
Nine Months Ended
September 30,
 
% Change
($ in millions)
2015
 
2014
 
As-Reported
 
Ex-Currency
Packaging Systems
$
749.3

 
$
772.6

 
(3.0
)%
 
8.0
%
Delivery Systems
291.7

 
299.5

 
(2.6
)%
 
2.3
%
Intersegment sales elimination
(0.9
)
 
(0.5
)
 

 

Consolidated net sales
$
1,040.1

 
$
1,071.6

 
(2.9
)%
 
6.4
%

Consolidated net sales decreased by $31.5 million, or 2.9%, for the nine months ended September 30, 2015, as compared to the same period in 2014, including an unfavorable foreign currency impact of $100.0 million. Excluding foreign currency effects, net sales for the nine months ended September 30, 2015 increased by $68.5 million, or 6.4%, as compared to the same period in 2014. Consolidated net sales originating in the United States for the nine months ended September 30, 2015 were $492.5 million, an increase of 5.0% from the same period in 2014. Consolidated net sales generated outside of the United States (mainly in Europe) for the nine months ended September 30, 2015 were $547.6 million, a decrease of 9.1% from the same period in 2014 primarily due to an unfavorable foreign currency impact. Excluding foreign currency effects, consolidated net sales generated outside of the United States for the nine months ended September 30, 2015 increased by 7.5% from the same period in 2014. The average Euro to USD exchange rate decreased from $1.36 for the nine months ended September 30, 2014 to $1.12 for the nine months ended September 30, 2015.


24


Packaging Systems – Packaging Systems’ net sales decreased by $23.3 million, or 3.0%, for the nine months ended September 30, 2015, as compared to the same period in 2014, including an unfavorable foreign currency impact of $85.3 million. Excluding foreign currency effects, net sales for the nine months ended September 30, 2015 increased by $62.0 million, or 8.0%, as compared to the same period in 2014, due to continued growth in our high-value product offerings. An improvement in product mix and higher sales volumes contributed 6.7 percentage points of the increase, and sales price increases contributed 1.3 percentage points of the increase. Our high-value product offerings represented 46.1% of Packaging Systems' net sales for the nine months ended September 30, 2015, as compared to 43.4% for the same period in 2014.

Delivery Systems – Delivery Systems’ net sales decreased by $7.8 million, or 2.6%, for the nine months ended September 30, 2015, as compared to the same period in 2014, including an unfavorable foreign currency impact of $14.7 million. Excluding foreign currency effects, net sales for the nine months ended September 30, 2015 increased by $6.9 million, or 2.3%, as compared to the same period in 2014, due to an increase in contract manufacturing sales, particularly sales of glucose monitoring devices, as well as increased sales of safety systems and CZ products, all of which were partially offset by the impact of the sale of a contract services business during the nine months ended September 30, 2014 and decreases in sales of administration systems for drug reconstitution and SmartDose. Sales volumes contributed the entirety of the increase. Proprietary net sales represented 25.1% of Delivery Systems' net sales for the nine months ended September 30, 2015, as compared to 25.8% for the same period in 2014.

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

Gross Profit

The following table presents gross profit and related gross margins, consolidated and by reportable segment:

 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
($ in millions)
2015
 
2014
 
2015
 
2014
Packaging Systems:
 
 
 
 
 
 
 
Gross Profit
$
91.3

 
$
88.8

 
$
285.0

 
$
279.5

Gross Margin
37.0
%
 
35.3
%
 
38.0
%
 
36.2
%
Delivery Systems:
 

 
 

 
 
 
 

Gross Profit
$
17.0

 
$
21.1

 
$
51.2

 
$
58.6

Gross Margin
17.3
%
 
20.3
%
 
17.5
%
 
19.6
%
Consolidated Gross Profit
$
108.3

 
$
109.9

 
$
336.2

 
$
338.1

Consolidated Gross Margin
31.4
%
 
30.9
%
 
32.3
%
 
31.5
%

Consolidated gross profit decreased by $1.6 million, or 1.5%, and $1.9 million, or 0.6%, for the three and nine months ended September 30, 2015, respectively, as compared to the same periods in 2014, including an unfavorable foreign currency impact of $9.0 million and $34.4 million for the three and nine months ended September 30, 2015, respectively. Consolidated gross margin increased by 0.5 margin points and 0.8 margin points for the three and nine months ended September 30, 2015, respectively, as compared to the same periods in 2014.


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Packaging Systems – Packaging Systems’ gross profit increased by $2.5 million, or 2.8%, and $5.5 million, or 2.0%, for the three and nine months ended September 30, 2015, respectively, as compared to the same periods in 2014, despite an unfavorable foreign currency impact of $8.3 million and $30.3 million for the three and nine months ended September 30, 2015, respectively. Packaging Systems’ gross margin increased by 1.7 margin points and 1.8 margin points for the three and nine months ended September 30, 2015, respectively, as compared to the same periods in 2014, as product mix improvements, sales price increases and lower raw material costs were partially offset by increased labor and overhead costs.

Delivery Systems – Delivery Systems’ gross profit decreased by $4.1 million, or 19.4%, for the three months ended September 30, 2015, as compared to the same period in 2014, including an unfavorable foreign currency impact of $0.7 million. Delivery Systems’ gross margin decreased by 3.0 margin points for the three months ended September 30, 2015, as compared to the same period in 2014, as a result of an unfavorable mix of products sold and increased overhead and depreciation related to new capabilities supporting both proprietary and contract manufacturing programs, partially offset by lower raw material costs.

Delivery Systems’ gross profit decreased by $7.4 million, or 12.6%, for the nine months ended September 30, 2015, as compared to the same period in 2014, including an unfavorable foreign currency impact of $4.1 million. Delivery Systems’ gross margin decreased by 2.1 margin points for the nine months ended September 30, 2015, as compared to the same period in 2014, as a result of increased overhead and depreciation related to new capabilities supporting both proprietary and contract manufacturing programs and the impact of foreign currency.

Research and Development ("R&D") Costs

The following table presents R&D costs, consolidated and by reportable segment:

 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
($ in millions)
2015
 
2014
 
2015
 
2014
Packaging Systems
$
3.6

 
$
4.5

 
$
9.8

 
$
12.9

Delivery Systems
4.9

 
5.1

 
14.3

 
16.6

Consolidated R&D Costs
$
8.5

 
$
9.6

 
$
24.1

 
$
29.5


Consolidated R&D costs decreased by $1.1 million, or 11.5%, and $5.4 million, or 18.3%, for the three and nine months ended September 30, 2015, respectively, as compared to the same periods in 2014, including the impact of foreign currency, which decreased R&D costs by $0.2 million and $0.7 million for the three and nine months ended September 30, 2015, respectively.

Packaging Systems – Packaging Systems' R&D costs decreased by $0.9 million, or 20.0%, and $3.1 million, or 24.0%, for the three and nine months ended September 30, 2015, respectively, as compared to the same periods in 2014, due to project cancellation costs incurred during the three months ended September 30, 2014, the reallocation of resources to commercial projects during the three and nine months ended September 30, 2015, and the impact of foreign currency, which decreased R&D costs by $0.2 million and $0.6 million for the three and nine months ended September 30, 2015, respectively.

Delivery Systems – Delivery Systems' R&D costs decreased by $0.2 million, or 3.9%, and $2.3 million, or 13.9%, for the three and nine months ended September 30, 2015, respectively, as compared to the same periods in 2014, due to the reassignment of personnel to clinical trial production activities for SmartDose. The decrease for the nine months ended September 30, 2015, as compared to the same period in 2014, also reflects the completion of development work on the SelfDose self-injection system in 2014. Efforts remain focused on the further development of SmartDose and CZ products.


26


Selling, General and Administrative (“SG&A”) Costs

The following table presents SG&A costs, consolidated and by reportable segment and corporate:

 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
($ in millions)
2015
 
2014
 
2015
 
2014
Packaging Systems
$
31.8

 
$
31.9

 
$
97.8

 
$
98.5

Delivery Systems
10.5

 
11.7

 
32.1

 
34.6

Corporate
12.3

 
12.4

 
40.7

 
36.8

Consolidated SG&A costs
$
54.6

 
$
56.0

 
$
170.6

 
$
169.9

SG&A as a % of net sales
15.8
%
 
15.7
%
 
16.4
%
 
15.9
%

Consolidated SG&A costs decreased by $1.4 million, or 2.5%, for the three months ended September 30, 2015, as compared to the same period in 2014, including the impact of foreign currency, which decreased SG&A costs by $3.0 million. Consolidated SG&A costs were 15.8% and 15.7% of consolidated net sales for the three months ended September 30, 2015 and 2014, respectively.

Consolidated SG&A costs increased by $0.7 million, or 0.4%, for the nine months ended September 30, 2015, as compared to the same period in 2014, despite the impact of foreign currency, which decreased SG&A costs by $9.7 million. Consolidated SG&A costs were 16.4% and 15.9% of consolidated net sales for the nine months ended September 30, 2015 and 2014, respectively.

Packaging Systems – Packaging Systems' SG&A costs decreased by $0.1 million, or 0.3%, and $0.7 million, or 0.7%, for the three and nine months ended September 30, 2015, respectively, as compared to the same periods in 2014, due to the impact of foreign currency, which decreased SG&A costs by $2.8 million and $8.7 million for the three and nine months ended September 30, 2015, respectively, largely offset by increased incentive compensation costs and compensation costs related to merit increases, as well as increased consulting and sales costs.

Delivery Systems – Delivery Systems' SG&A costs decreased by $1.2 million, or 10.3%, and $2.5 million, or 7.2%, for the three and nine months ended September 30, 2015, respectively, as compared to the same periods in 2014, due to decreased sales costs.

Corporate – Corporate’s SG&A costs decreased by $0.1 million, or 0.8%, for the three months ended September 30, 2015, as compared to the same period in 2014, as decreases in outside services, compensation costs, and U.S. pension costs were mostly offset by increased incentive compensation costs.

Corporate’s SG&A costs increased by $3.9 million, or 10.6%, for the nine months ended September 30, 2015, as compared to the same period in 2014, due to increased incentive compensation costs and stock-based compensation expense, both of which were partially offset by a decrease in U.S. pension costs.












27


Other Expense

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

(Income) expense
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
($ in millions)
2015
 
2014
 
2015
 
2014
Packaging Systems
$
(0.6
)
 
$
(0.4
)
 
$
(1.8
)
 
$
1.0

Delivery Systems
0.3

 
(0.5
)
 

 
(0.9
)
Unallocated items
49.0

 
1.2

 
59.9

 
1.2

Consolidated other expense
$
48.7

 
$
0.3

 
$
58.1

 
$
1.3


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

Consolidated other expense increased by $48.4 million and $56.8 million for the three and nine months ended September 30, 2015, respectively, as compared to the same periods in 2014.

Packaging Systems – Packaging Systems' other income increased by $0.2 million and $2.8 million for the three and nine months ended September 30, 2015, respectively, as compared to the same periods in 2014, due to foreign exchange transaction gains.

Delivery Systems – Delivery Systems' other expense (income) changed by $0.8 million for the three months ended September 30, 2015, as compared to the same period in 2014, primarily due to a gain recorded as a result of the sale of a contract services business during the three months ended September 30, 2014.

Delivery Systems' other income decreased by $0.9 million for the nine months ended September 30, 2015, as compared to the same period in 2014, primarily due to gains recorded during the nine months ended September 30, 2014, including the gain recorded as a result of the sale of a contract services business.

Unallocated items – During the three and nine months ended September 30, 2015, we recorded a $49.0 million pension settlement charge in connection with our purchase of a group annuity contract from MetLife to settle $139.4 million of our $313.6 million outstanding pension benefit obligation under our U.S. qualified pension plan. MetLife will assume the obligation to pay future pension benefits and provide administrative services beginning November 1, 2015 for approximately 1,750 retirees and surviving beneficiaries who retired before January 1, 2015 and are currently receiving payments from this plan. The purchase was funded directly by plan assets. In addition, during the nine months ended September 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 the Company’s previous CEO, $8.0 million for the revaluation of modified outstanding awards to provide for continued vesting for the Company’s 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. During the three and nine months ended September 30, 2014, we recorded a $1.2 million charge for license costs associated with acquired in-process research.

Since February 2013, when the Venezuelan government announced a devaluation of the bolivar, we have used the official exchange rate of 6.3 bolivars to USD to re-measure our Venezuelan subsidiary's financial statements. From December 2013 through February 2015, the Venezuelan government announced a series of changes to the regulations governing its currency exchange market, which included the expanded use of one currency exchange mechanism and the creation of two additional currency exchange mechanisms. As the majority of our currency purchases are transacted at the official exchange rate of 6.3 bolivars per USD, we have continued to re-measure our Venezuelan subsidiary's financial statements using the official exchange rate. At September 30, 2015, we had $3.8

28


million in net monetary assets denominated in Venezuelan bolivars, including $2.2 million in cash and cash equivalents, and $2.8 million in non-monetary assets. Use of the official exchange rate has been restricted by the Venezuelan government to companies providing critical supplies, such as food and medicine. There is no guarantee that we will have access to the official exchange rate in the future. If we are no longer able to use the official exchange rate in the future, if we determine that we should use one of the other currency exchange mechanisms in Venezuela in the future, or if there is a significant devaluation in the official exchange rate, a pre-tax charge of up to $6.6 million could be required. We will continue to actively monitor the political and economic developments in Venezuela.

Operating Profit

The following table presents adjusted operating profit (loss), consolidated and by reportable segment, corporate and unallocated items:

 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
($ in millions)
2015
 
2014
 
2015
 
2014
Packaging Systems
$
56.5

 
$
52.8

 
$
179.2

 
$
167.1

Delivery Systems
1.3

 
4.8

 
4.8

 
8.3

Corporate
(12.3
)
 
(12.4
)
 
(40.7
)
 
(36.8
)
Adjusted consolidated operating profit
$
45.5

 
$
45.2

 
$
143.3

 
$
138.6

Unallocated items
(49.0
)
 
(1.2
)
 
(59.9
)
 
(1.2
)
Consolidated operating (loss) profit