# WEST PHARMACEUTICAL SERVICES INC (WST) FY 2023 MD&A

Verbatim Item 7 Management's Discussion and Analysis from WEST PHARMACEUTICAL SERVICES INC's 10-K for fiscal year 2023.

SEC filing source: https://www.sec.gov/Archives/edgar/data/105770/000010577024000015/wst-20231231.htm
Accession: 0000105770-24-000015
Filing date: 2024-02-20
Report date: 2023-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/WST/
All MD&A years: /company/WST/mda/
Previous year: /company/WST/mda/fy2022/ (FY 2022)
Next year: /company/WST/mda/fy2024/ (FY 2024)

ITEM 7.  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 the Company. It should be read in conjunction with our consolidated financial statements and the accompanying footnotes included in Part II, Item 8 of this Form 10-K. 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 this Form 10-K.

Non-U.S. GAAP Financial Measures

For the purpose of aiding the comparison of our year-over-year results, we may refer to net sales and other financial results excluding the effects of changes in foreign currency exchange rates. Organic net sales exclude the impact from acquisitions and/or divestitures and translate the current-period reported sales of subsidiaries whose functional currency is other than USD at the applicable foreign exchange rates in effect during the comparable prior-year period. We may also refer to adjusted consolidated operating profit and adjusted consolidated operating profit margin, which exclude the effects of unallocated items. The unallocated items are not representative of ongoing operations, and generally include restructuring and related charges, certain asset impairments, and other specifically-identified income or expense items. The re-measured results excluding effects from currency translation, the impact from acquisitions and/or divestitures, and excluding the effects of unallocated items are not in conformity with U.S. Generally Accepted Accounting Principles ("GAAP") and should not be used as a substitute for the comparable U.S. GAAP financial measures. The non-U.S. GAAP financial measures are incorporated in our discussion and analysis as management uses them in evaluating our results of operations and believes that this information provides users with a valuable insight into our overall performance and financial position.

Our Operations

We are a leading global manufacturer in the design and production of technologically advanced, high-quality, integrated containment and delivery systems for injectable drugs and healthcare products. Our products include a variety of primary proprietary packaging, containment solutions, reconstitution and transfer systems, and drug delivery systems, as well as contract manufacturing, analytical lab services and integrated solutions. Our customers include leading biologic, generic, pharmaceutical, diagnostic, and medical device companies around the world. Our top priority is delivering quality products that meet the exact product specifications and quality standards customers require and expect. This focus on quality includes a commitment to excellence in manufacturing, scientific and technical expertise and management, which enables us to partner with our customers in order to deliver safe, effective drug products to patients quickly and efficiently.

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

Other Macroeconomic Factors

Through the twelve months ended December 31, 2023, the war between Russia and Ukraine has not had a material impact on the Company’s business, financial condition or results of operations as we do not have manufacturing operations or significant commercial relationships in either country. However, the continuation of the Russia-Ukraine military conflict and/or an escalation of the conflict beyond its current scope may further weaken the global economy and could result in additional inflationary pressures and supply chain constraints, including the unavailability and cost of energy.

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We have operations based in Israel that conduct research and development activities and manufacture certain components for our devices. Our Israel-based facilities continue to substantially operate as they had prior to the conflict in Israel and surrounding area. We continue to monitor the impact of the conflict in Israel and surrounding areas on our operations and those of our suppliers, the possible expansion of such conflict and potential geopolitical consequences, if any, on our business and operations.

During 2023, we also experienced higher costs for raw materials. Due to the uncertainty that exists relative to the duration and overall impact of the macroeconomic factors discussed above, our future operating performance, particularly in the short-term, may be subject to volatility. The impacts of macroeconomic conditions on our business, results of operations, financial condition and cash flows are dependent on certain factors, including those discussed in Item 1A. Risk Factors.

Components of and Key Factors Influencing Our Results of Operations

In assessing the performance of our business, we consider a variety of performance and financial measures. We believe the items discussed below provide insight into the factors that affect these key measures.

Net Sales

Our net sales result from the sale of goods or services and reflect the net consideration which we expect to receive in exchange for those goods or services.

Several factors affect our reported net sales in any period, including product, payer and geographic sales mix, operational effectiveness, pricing realization, timing of orders and shipments, regulatory actions, competition, and business acquisitions that involve our customers or competitors.

Cost of goods and services sold and gross profit

Cost of goods and services sold includes personnel costs, manufacturing costs, raw materials and product costs, freight costs, depreciation, and facility costs associated with our manufacturing and warehouse facilities. Fluctuations in our cost of goods sold correspond with the fluctuations in sales units as well as inflationary and other market factors that influence our cost base.

Gross profit is calculated as net sales less cost of goods and services sold. Our gross profit is affected by product and geographic sales mix, realized pricing of our products, the efficiency of our manufacturing operations and the costs of materials used to make our products.

Research and development expenses

Research and development expenses relate to our investments in improvements to our manufacturing processes, product enhancements, and additional investments in our elastomeric packaging components, formulation development, integrated drug containment systems, self-injection systems and drug administration consumables.

We expense research and development costs as incurred. Our research and development expenses fluctuate from period to period primarily based on the ongoing improvements to our manufacturing processes and product enhancements.

Selling, general and administrative expenses

Selling, general and administrative expenses primarily include personnel costs, incentive compensation, insurance, professional fees, and depreciation.

30

Financial Performance Summary

The following tables present a reconciliation from U.S. GAAP to non-U.S. GAAP financial measures:

[[GREPCENT_TABLE]]
[["($ in millions)","Operating profit","","Income tax expense","","Net income","","Diluted EPS"],["Year ended December 31, 2023 GAAP","$","676.0","","","$","122.3","","","$","593.4","","","$","7.88"],["Unallocated items:"],["Loss on disposal of plant (1)","11.6","","","(0.7)","","","12.3","","","0.16"],["Cost investment activity (2)","4.3","","","\u2014","","","4.3","","","0.06"],["Restructuring and other charges (3)","(2.0)","","","(0.9)","","","(1.1)","","","(0.02)"],["Amortization of acquisition-related intangible assets (4)","0.7","","","0.1","","","2.8","","","0.04"],["Legal settlement (5)","\u2014","","","(0.9)","","","(2.9)","","","(0.04)"],["Year ended December 31, 2023 adjusted amounts (non-U.S. GAAP)","$","690.6","","","$","119.9","","","$","608.8","","","$","8.08"]]
[[/GREPCENT_TABLE]]

During 2023, we recorded a tax benefit of $32.0 million associated with stock-based compensation.

[[GREPCENT_TABLE]]
[["($ in millions)","Operating profit","","Income tax expense","","Net income","","Diluted EPS"],["Year ended December 31, 2022 GAAP","$","734.0","","","$","114.7","","","$","585.9","","","$","7.73"],["Unallocated items:"],["Restructuring and other charges (3)","23.8","","","2.0","","","21.8","","","0.29"],["Pension settlement (6)","\u2014","","","20.6","","","31.6","","","0.42"],["Amortization of acquisition-related intangible assets (4)","0.7","","","0.1","","","2.8","","","0.04"],["Cost investment activity (2)","3.5","","","\u2014","","","3.5","","","0.05"],["Royalty acceleration (7)","\u2014","","","1.3","","","(1.3)","","","(0.02)"],["Tax law changes (8)","\u2014","","","(5.7)","","","5.7","","","0.07"],["Year ended December 31, 2022 adjusted amounts (non-U.S. GAAP)","$","762.0","","","$","133.0","","","$","650.0","","","$","8.58"]]
[[/GREPCENT_TABLE]]

During 2022, we recorded a tax benefit of $16.5 million associated with stock-based compensation.

[[GREPCENT_TABLE]]
[["($ in millions)","Operating profit","","Income tax expense","","Net income","","Diluted EPS"],["Year ended December 31, 2021 GAAP","$","752.3","","","$","107.2","","","$","661.8","","","$","8.67"],["Unallocated items:"],["Restructuring and other charges (3)","2.2","","","0.4","","","1.8","","","0.02"],["Pension settlement (6)","\u2014","","","0.5","","","1.5","","","0.02"],["Amortization of acquisition-related intangible assets (4)","0.8","","","0.1","","","2.8","","","0.04"],["Asset impairment (1)","2.8","","","\u2014","","","2.8","","","0.04"],["Cost investment activity (2)","4.3","","","(0.1)","","","4.4","","","0.06"],["Royalty acceleration (7)","\u2014","","","18.5","","","(18.5)","","","(0.25)"],["Tax law changes (8)","\u2014","","","1.4","","","(1.4)","","","(0.02)"],["Year ended December 31, 2021 adjusted amounts (non-U.S. GAAP)","$","762.4","","","$","128.0","","","$","655.2","","","$","8.58"]]
[[/GREPCENT_TABLE]]

31

During 2021, we recorded a tax benefit of $31.5 million associated with stock-based compensation.

(1)During 2023, the Company recorded expense of $11.6 million as a result of the sale of one of the Company’s manufacturing facilities within the Proprietary Products segment. The transaction closed during the second quarter of 2023. During 2021, the Company recorded a $2.8 million impairment charge for certain long-lived and intangible assets related to the Company's manufacturing facility within the Proprietary Products segment that was sold during the second quarter of 2023, as it determined the carrying value was not fully recoverable. $1.9 million of this charge was recorded within cost of goods and services sold and $0.9 million of the charge is recorded in selling, general, and administrative expense, due to the nature of the impaired assets.

(2)During 2023, the Company recorded a cost investment impairment charge of $4.3 million. During 2022, the Company recorded a cost investment impairment charge of $3.5 million. During 2021, the net cost investment activity was equal to $4.3 million, inclusive of an impairment charge of $4.6 million partially offset by a $0.3 million gain on the sale of a cost investment.

(3)During 2023, the Company recorded a benefit to restructuring and other charges of $2.0 million, which represents the net impact of a $2.8 million benefit within other expense (income) for revised severance estimates in connection with its 2022 restructuring plan and an inventory write down of $0.8 million within cost of goods and services sold. During 2022, the Company recorded expense to restructuring and other charges of $23.8 million, which primarily included a charge of $8.7 million in net severance and post-employment benefits primarily in connection with our plan to adjust our operating cost base and $15.3 million in asset-related charges associated with this plan. During 2021, the Company recorded expense to restructuring and other charges of $2.2 million to optimize certain organizational structures within the Company.

(4)During 2023, 2022 and 2021, the Company recorded $0.7 million, $0.7 million and $0.8 million, respectively, of amortization expense within operating profit associated with an acquisition of an intangible asset during the second quarter of 2020. Additionally, during 2023, 2022 and 2021, the company recorded $2.1 million of amortization expense in association with an acquisition of increased ownership interest in Daikyo.

(5)During 2023, the Company recorded a benefit of $3.8 million within other nonoperating (income) expense as a result of a favorable legal settlement related to a matter not included in our normal operations.

(6)During 2022, we recorded a gross pension settlement charge of $52.2 million within other nonoperating (income) expense, which primarily relates to the full settlement of the U.S. qualified defined benefit plan (the "U.S. pension plan"). In 2021, we recorded a pension settlement charge within other nonoperating (income) expense, as it was determined that normal-course lump-sum payments for our U.S. pension plan exceeded the threshold for settlement accounting. Please refer to Note 15, Benefit Plans, for further discussion of these items.

(7)During 2022, the Company increased its expected tax benefit related to the prepayment of future royalties from one of its subsidiaries by $1.3 million. During 2021, the Company prepaid future royalties from one of its subsidiaries, which resulted in a $18.5 million tax benefit.

(8)During 2022, the Company incurred additional tax expense of $5.7 million due to the impact of a tax law change in the state of Pennsylvania enacted during the period. During 2021, the Company recorded a tax benefit of $1.4 million due to the impact of a United Kingdom tax law change enacted during the period.

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RESULTS OF OPERATIONS

We evaluate the performance of our segments based upon, among other things, segment net sales and operating profit. Segment operating profit excludes general corporate costs, which include executive and director compensation, stock-based compensation, certain pension and other retirement benefit costs, and other corporate facilities and administrative expenses not allocated to the segments. Also excluded are items that we consider not representative of ongoing operations. Such items are referred to as other unallocated items for which further information can be found above in the reconciliation from U.S. GAAP to non-U.S. GAAP financial measures. Discussion of the year-over-year changes for the fiscal year ended December 31, 2022 compared to the fiscal year ended December 31, 2021 and the results of operations and cash flows for the fiscal year ended December 31, 2021 is included in Item 7, Management’s Discussion and Analysis of Financial Condition and Result of Operations of our Annual Report on Form 10-K for the fiscal year ended December 31, 2022, filed with the SEC on February 21, 2023, and is incorporated herein by reference.

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

Net Sales

The following table presents net sales, consolidated and by reportable segment:

[[GREPCENT_TABLE]]
[["","Year Ended December 31,","","% Change"],["($ in millions)","2023","","2022","","2021","","2023/2022","","2022/2021"],["Proprietary Products","$","2,397.3","","","$","2,406.8","","","$","2,317.3","","","(0.4","%)","","3.9","%"],["Contract-Manufactured Products","552.5","","","480.4","","","514.7","","","15.0","%","","(6.7","%)"],["Intersegment sales elimination","\u2014","","","(0.3)","","","(0.4)","","","(100.0","%)","","(25.0","%)"],["Consolidated net sales","$","2,949.8","","","$","2,886.9","","","$","2,831.6","","","2.2","%","","2.0","%"]]
[[/GREPCENT_TABLE]]

Consolidated net sales increased by $62.9 million, or 2.2%, in 2023, including a favorable foreign currency translation impact of $27.9 million. Excluding foreign currency translation effects and the impact related to the disposal of one of our plants of $11.5 million, consolidated net sales increased by $46.5 million, or 1.6%.

Proprietary Products – Proprietary Products net sales decreased by $9.5 million, or 0.4%, in 2023, including a favorable foreign currency translation impact of $22.1 million. Excluding foreign currency translation effects and the impact related to the disposal of one of our plants of $11.5 million, net sales decreased by $20.1 million, or 0.8%, primarily due to a decline in COVID-related sales of approximately $320 million, offset by growth in our high-value components, primarily Westar®, Daikyo® and Envision®, as well as growth in high-value devices, such as self-injection systems and administration systems, and sales price increases.

Contract-Manufactured Products – Contract-Manufactured Products net sales increased by $72.1 million, or 15.0%, in 2023, including a favorable foreign currency translation impact of $5.8 million. Excluding foreign currency translation effects, net sales increased by $66.3 million, or 13.8%, primarily due to an increase in the volume of sales of components associated with injection-related devices and healthcare diagnostic devices, as well as sales price increases.

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

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Gross Profit

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

[[GREPCENT_TABLE]]
[["","Year Ended December 31,","","% Change"],["($ in millions)","2023","","2022","","2021","","2023/2022","","2022/2021"],["Proprietary Products:"],["Gross profit","$","1,034.0","","","$","1,053.3","","","$","1,093.9","","","(1.8","%)","","(3.7","%)"],["Gross profit margin","43.1","%","","43.8","%","","47.2","%"],["Contract-Manufactured Products:"],["Gross profit","$","96.0","","","$","82.9","","","$","83.8","","","15.8","%","","(1.1","%)"],["Gross profit margin","17.4","%","","17.3","%","","16.3","%"],["Unallocated items","$","(0.8)","","","$","\u2014","","","$","(1.9)"],["Consolidated gross profit","$","1,129.2","","","$","1,136.2","","","$","1,175.8","","","(0.6","%)","","(3.4","%)"],["Consolidated gross profit margin","38.3","%","","39.4","%","","41.5","%"]]
[[/GREPCENT_TABLE]]

Consolidated gross profit decreased by $7.0 million, or 0.6%, in 2023, including a favorable foreign currency translation impact of $13.3 million. Consolidated gross profit margin decreased by 1.1 margin points in 2023.

Proprietary Products – Proprietary Products gross profit decreased by $19.3 million, or 1.8%, in 2023, including a favorable foreign currency translation impact of $12.3 million. Proprietary Products gross profit margin decreased by 0.7 margin points in 2023. The decrease is driven by a decline in higher margin COVID-related sales, a decrease of approximately $21 million, net, in fees received from COVID-19 supply agreements, and inflationary pressures, primarily within compensation costs. These items were offset by increased sales prices.

Contract-Manufactured Products – Contract-Manufactured Products gross profit increased by $13.1 million, or 15.8%, in 2023, including a favorable foreign currency translation impact of $1.0 million. Contract-Manufactured Products gross profit margin increased by 0.1 margin points in 2023, due to sales price increases and a favorable mix of products sold, offset by inflationary pressures, primarily within compensation costs.

Research and Development (“R&D”) Costs

The following table presents consolidated R&D costs:

[[GREPCENT_TABLE]]
[["","Year Ended December 31,","","% Change"],["($ in millions)","2023","","2022","","2021","","2023/2022","","2022/2021"],["Consolidated R&D costs","$","68.4","","","$","58.5","","","$","52.8","","","16.9","%","","10.8","%"]]
[[/GREPCENT_TABLE]]

Consolidated R&D costs increased by $9.9 million, or 16.9%, in 2023, as compared to 2022, due to higher annual incentive compensation and additional research performed to identify new product opportunities. The increase in cost includes $3.5 million of incremental spend on research performed on glass systems. Efforts remain focused on the continued investment in elastomeric packaging components, formulation development, drug containment systems, self-injection systems and drug administration consumables.

All of the R&D costs incurred during 2023, 2022 and 2021 related to Proprietary Products.

34

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

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

[[GREPCENT_TABLE]]
[["","Year Ended December 31,","","% Change"],["($ in millions)","2023","","2022","","2021","","2023/2022","","2022/2021"],["Proprietary Products","$","240.6","","","$","212.6","","","$","244.8","","","13.2","%","","(13.2","%)"],["Contract-Manufactured Products","24.4","","","20.9","","","15.9","","","16.7","%","","31.4","%"],["Corporate and unallocated items","88.4","","","83.4","","","102.1","","","6.0","%","","(18.3","%)"],["Consolidated SG&A costs","$","353.4","","","$","316.9","","","$","362.8","","","11.5","%","","(12.7","%)"],["SG&A as a % of net sales","12.0","%","","11.0","%","","12.8","%"]]
[[/GREPCENT_TABLE]]

Consolidated SG&A costs increased by $36.5 million, or 11.5%, in 2023, primarily due to higher annual incentive compensation, increased compensation costs, an increase in fees related to professional services and an unfavorable foreign currency translation impact of $1.6 million.

Proprietary Products – Proprietary Products SG&A costs increased by $28.0 million, or 13.2%, in 2023, primarily due to higher annual incentive compensation, an increase in compensation costs and an unfavorable foreign currency translation impact of $1.3 million.

Contract-Manufactured Products – Contract-Manufactured Products SG&A costs increased by $3.5 million, or 16.7%, in 2023, primarily due to a higher allocation of corporate function spend and higher annual incentive compensation.

Corporate and unallocated items – Corporate SG&A costs increased by $5.0 million, or 6.0%, in 2023, primarily due to an increase in fees related to professional services and higher annual incentive compensation.

Other Expense (Income)

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

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["($ in millions)","2023","","2022","","2021"],["Proprietary Products","$","14.9","","","$","(2.2)","","","$","0.2"],["Contract-Manufactured Products","(0.5)","","","1.6","","","0.7"],["Corporate and unallocated items","17.0","","","27.4","","","7.0"],["Consolidated other expense (income)","$","31.4","","","$","26.8","","","$","7.9"]]
[[/GREPCENT_TABLE]]

Other expense and income items consist of a loss on disposal of plant, asset impairments, foreign exchange transaction gains and losses, contingent consideration and miscellaneous income and charges.

Consolidated other expense (income) changed by $4.6 million in 2023 as compared to 2022, due to the factors described below.

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Proprietary Products – Proprietary Products other expense (income) changed by $17.1 million in 2023 as compared to 2022, primarily due to a loss on foreign exchange transactions being recorded in 2023, while a gain on foreign exchange transactions was recorded during the same period in 2022. The losses on foreign exchange transactions in 2023 were primarily driven by a highly inflationary environment in Argentina. Additionally, the Company recorded a loss of $1.3 million related to oil hedges during 2023, while a gain of $1.5 million was recorded in the same period in 2022. This was offset by $2.3 million of expense related to contingent consideration being recorded during 2023, while expense of $3.0 million was recorded in the same period in 2022.

Contract-Manufactured Products – Contract-Manufactured Products other expense (income) changed by $2.1 million in 2023 as compared to 2022, primarily due to increased losses on foreign exchange transactions recorded in 2022, as compared to 2023.

Corporate and unallocated items – Corporate and unallocated items changed by $10.4 million in 2023 as compared to 2022. During 2022, we recorded $23.8 million in restructuring and other charges, while during 2023 we recorded a benefit to restructuring and other charges of $2.8 million. This was offset by the Company recording expense of $11.6 million as a result of the sale of one of the Company’s manufacturing facilities within the Proprietary Products segment in 2023 and additional cost investment impairments being recorded within Corporate in 2023, as compared to 2022.

Operating Profit

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

[[GREPCENT_TABLE]]
[["","Year Ended December 31,","","% Change"],["($ in millions)","2023","","2022","","2021","","2023/2022","","2022/2021"],["Proprietary Products","$","710.1","","","$","784.4","","","$","796.1","","","(9.5","%)","","(1.5","%)"],["Contract-Manufactured Products","72.1","","","60.4","","","67.2","","","19.4","%","","(10.1","%)"],["Corporate and unallocated","(106.2)","","","(110.8)","","","(111.0)","","","(4.2","%)","","(0.2","%)"],["Consolidated operating profit","$","676.0","","","$","734.0","","","$","752.3","","","(7.9","%)","","(2.4","%)"],["Consolidated operating profit margin","22.9","%","","25.4","%","","26.6","%"],["Unallocated items","14.6","","","28.0","","","10.1"],["Adjusted consolidated operating profit","$","690.6","","","$","762.0","","","$","762.4","","","(9.4","%)","","(0.1","%)"],["Adjusted consolidated operating profit margin","23.4","%","","26.4","%","","26.9","%"]]
[[/GREPCENT_TABLE]]

Consolidated operating profit decreased by $58.0 million, or 7.9%, in 2023, including a favorable foreign currency translation impact of $10.9 million, due to the factors described above.

Proprietary Products – Proprietary Products operating profit decreased by $74.3 million, or 9.5%, in 2023, including a favorable foreign currency translation impact of $10.1 million, due to the factors described above, most notably the decline in COVID-related sales.

Contract-Manufactured Products – Contract-Manufactured Products operating profit increased by $11.7 million, or 19.4%, in 2023, including a favorable foreign currency translation impact of $0.8 million, due to the factors described above, most notably an increase in sales of components associated with medical devices and diagnostic products.

Corporate and unallocated – Excluding the unallocated items, Corporate costs increased by $8.8 million, or 10.6%, in 2023, due to the factors described above.

For unallocated items, please refer to the Financial Performance Summary section above for details.

36

Interest Expense, Net and Interest Income

The following table presents interest expense, net, by significant component:

[[GREPCENT_TABLE]]
[["","Year Ended December 31,","","% Change"],["($ in millions)","2023","","2022","","2021","","2023/2022","","2022/2021"],["Interest expense","$","14.8","","","$","11.6","","","$","10.2","","","27.6","%","","13.7","%"],["Capitalized interest","(5.8)","","","(3.7)","","","(2.0)","","","56.8","%","","85.0","%"],["Interest expense, net","$","9.0","","","$","7.9","","","$","8.2","","","13.9","%","","(3.7)","%"],["Interest income","$","(28.0)","","","$","(5.1)","","","$","(1.0)","","","449.0","%","","410.0","%"]]
[[/GREPCENT_TABLE]]

Interest expense, net, increased by $1.1 million, or 13.9%, in 2023, primarily due to higher interest rates in 2023, as compared to 2022.

Interest income increased by $22.9 million in 2023, due primarily from 2023 investments in highly liquid low-risk money market funds in the U.S., Europe, and South America yielding higher interest rates compared to 2022.

Other Nonoperating (Income) Expense

Other nonoperating (income) expense was $(3.0) million, $51.3 million and $(3.8) million for the years 2023, 2022, and 2021, respectively. Other nonoperating (income) expense changed by $54.3 million in 2023, primarily due to the recording of a $52.2 million pension settlement charge in 2022, which relieved the historical balance sheet position, inclusive of accumulated other comprehensive income, of the U.S. pension plan. This charge was not repeated in 2023.

Income Taxes

The provision for income taxes was $122.3 million, $114.7 million, and $107.2 million for the years 2023, 2022, and 2021, respectively, and the effective tax rate was 17.5%, 16.9%, and 14.3%, respectively.

The increase in the effective tax rate in 2023 of 0.6%, or $7.6 million greater tax expense, is primarily due to a tax benefit of $20.3 million related to the termination of the U.S. pension plan recorded in 2022 and a $5.9 million tax benefit recorded as the result of a state tax valuation allowance reversal in 2022 that were not repeated in the same period in 2023. This was offset by an increase in the tax benefit related to stock-based compensation in 2023 of $32.0 million, as compared to the same period in 2022, which had a tax benefit related to stock-based compensation of $16.5 million.

Please refer to Note 17, Income Taxes, for further discussion of our income taxes.

Equity in Net Income of Affiliated Companies

Equity in net income of affiliated companies was $17.7 million, $20.7 million, and $20.1 million for the years 2023, 2022, and 2021, respectively. Equity in net income of affiliated companies decreased by $3.0 million, or 14.5%, in 2023, primarily due to less favorable operating results at the Mexico affiliates.

37

FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

Cash Flows

The following table presents cash flow data for the years ended December 31:

[[GREPCENT_TABLE]]
[["($ in millions)","2023","","2022","","2021"],["Net cash provided by operating activities","$","776.5","","","$","724.0","","","$","584.0"],["Net cash used in investing activities","$","(368.7)","","","$","(288.2)","","","$","(253.1)"],["Net cash used in financing activities","$","(459.6)","","","$","(293.6)","","","$","(168.1)"]]
[[/GREPCENT_TABLE]]

Net Cash Provided by Operating Activities

Net cash provided by operating activities increased by $52.5 million in 2023, primarily due to favorable working capital management in 2023, as compared to 2022.

Net Cash Used in Investing Activities

Net cash used in investing activities increased by $80.5 million in 2023, due to an increase in capital expenditures for additional manufacturing capacity in 2023 to meet customer demand and improve manufacturing lead times.

Net Cash Used in Financing Activities

Net cash used in financing activities increased by $166.0 million in 2023, primarily due to increases in purchases under our share repurchase program in 2023, as compared to 2022. This was partially offset by reduced debt repayments and increased proceeds from stock-based compensation awards in 2023, as compared to 2022.

Liquidity and Capital Resources

The table below presents selected liquidity and capital measures as of:

[[GREPCENT_TABLE]]
[["($ in millions)","December 31, 2023","","December 31, 2022"],["Cash and cash equivalents","$","853.9","","","$","894.3"],["Accounts receivable, net","$","512.0","","","$","507.4"],["Inventories","$","434.7","","","$","414.8"],["Accounts payable","$","242.4","","","$","215.4"],["Debt","$","206.8","","","$","208.9"],["Equity","$","2,881.0","","","$","2,684.9"],["Working capital","$","1,264.6","","","$","1,400.5"]]
[[/GREPCENT_TABLE]]

Cash and cash equivalents include all instruments that have maturities of ninety days or less when purchased. Working capital is defined as current assets less current liabilities.

Cash and cash equivalents – Our cash and cash equivalents balance at December 31, 2023 consisted of cash held in depository accounts with banks around the world and cash invested in high-quality, short-term investments. The cash and cash equivalents balance at December 31, 2023 included $368.8 million of cash held by subsidiaries within the U.S. and $485.1 million of cash held by subsidiaries outside of the U.S. For further information on our position regarding permanent reinvestment of foreign subsidiary earnings and profits refer to Note 17, Income Taxes.

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Working capital - Working capital at December 31, 2023 decreased by $135.9 million, or 9.7%, as compared to December 31, 2022, which includes a favorable foreign currency translation impact of $25.4 million. Excluding the impact of currency exchange rates, inventories, other current assets and total current liabilities increased by $13.5 million, $30.4 million and $145.1 million, respectively, while cash and cash equivalents and accounts receivable decreased by $56.1 million and $4.0 million, respectively. The increase in other current assets was driven by net investment hedge assets, which moved from long-term to short-term during the period, and an increase in short-term income tax receivables. The increase in total current liabilities was driven primarily by a portion of long-term debt moving to short-term based on the stated maturity during the period, increases in accounts payable and a higher annual incentive compensation accrual. These increases were offset by a decrease in other current liabilities due to declines in deferred income and accrued commissions, rebates and royalties. The decrease in cash and cash equivalents was due to capital expenditures and share repurchases in 2023, offset by cash collections driven by positive operating results during the period.

Debt and credit facilities - The $2.1 million decrease in total debt at December 31, 2023, as compared to December 31, 2022, resulted primarily from debt repayments under our Term Loan.

Our sources of liquidity include our Credit Facility. At December 31, 2023, we had no outstanding borrowings under the Credit Facility. At December 31, 2023, the borrowing capacity available under the Credit Facility, including outstanding letters of credit of $2.4 million, was $497.6 million. We do not expect any significant limitations on our ability to access this source of funds. Please refer to Note 10, Debt, for further discussion of our Credit Facility.

Pursuant to the financial covenants in our debt agreements, we are required to maintain established interest coverage ratios and to not exceed established leverage ratios. In addition, the agreements contain other customary covenants, none of which we consider restrictive to our operations. At December 31, 2023, we were in compliance with all of our debt covenants, and we expect to continue to be in compliance with the terms of these agreements throughout 2024.

We believe that cash on hand and cash generated from operations, together with availability under our Credit Facility, will be adequate to address our foreseeable liquidity needs based on our current expectations of our business operations, capital expenditures and scheduled payments of debt obligations to continue to meet customer demand.

Commitments and Contractual Obligations

Contractual obligations associated with ongoing business activities are expected to result in cash payments in future periods, and include the following material items:

•Our business creates a need to enter into various commitments with suppliers, including for the purchase of raw materials and finished goods. In accordance with U.S. GAAP, these purchase obligations are not reflected in the accompanying consolidated balance sheets. At December 31, 2023, our outstanding unconditional contractual commitments, including for the purchase of raw materials and finished goods, amounted to $298.3 million, of which $76.8 million is due to be paid in 2024. These purchase commitments are in the normal course of business. The Company previously entered into a material supply agreement for butyl polymers used as a principal raw material in a broad range of the Company’s polymer-based pharmaceutical packaging products.

•Our long-term debt obligations, net of unamortized debt issuance costs including fixed and variable-rate debt, is further discussed in Note 10, Debt.

•Our operating lease obligations primarily related to land, buildings, and machinery and equipment, with lease terms through 2047 further discussed in Note 6, Leases.

•Our various tax-qualified and non-qualified defined benefit pension plan obligations in the U.S. and other countries that cover employees and former employees who meet eligibility requirements is further discussed in Note 15, Benefit Plans.

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CRITICAL ACCOUNTING ESTIMATES

Management’s discussion and analysis addresses consolidated financial statements that are prepared in accordance with U.S. GAAP. The application of these principles requires management to make estimates and assumptions, some of which are subjective and complex, that affect the amounts reported in the consolidated financial statements. We believe the following accounting policies and estimates are critical to understanding and evaluating our results of operations and financial position:

Impairment of Long-Lived Assets: Long-lived assets, including property, plant and equipment, operating lease right-of-use assets and finance lease right-of-use assets, are tested for impairment whenever circumstances, such as a deterioration in general macroeconomic conditions or a change in company strategy, increased competition, declining product demand, plans to dispose of an asset or asset group, or recent financial or legal factors that could impact the expected cash flows, indicate that the carrying value of these assets may not be recoverable. An asset is considered impaired if the carrying value of the asset exceeds the sum of the future expected undiscounted cash flows to be derived from the asset. Impairment reviews are based on an estimated future cash flow approach that requires significant judgment with respect to future revenue and expense growth rates, selection of appropriate discount rate, asset groupings, and other assumptions and estimates. The Company uses estimates that are consistent with its business plans and a market participant view of the assets being evaluated. Once an asset is considered impaired, an impairment loss is recorded within other expense (income) for the difference between the asset’s carrying value and its fair value. For assets held and used in the business, management determines fair value using estimated future cash flows to be derived from the asset, discounted to a net present value using an appropriate discount rate. For assets held for sale or for investment purposes, management determines fair value by estimating the proceeds to be received upon sale of the asset, less disposition costs.

Impairment of Goodwill and Other Intangible Assets: Goodwill is tested for impairment at least annually, following the completion of our annual budget and long-range planning process, or whenever circumstances indicate that the carrying value of these assets may not be recoverable. Goodwill is tested for impairment at the reporting unit level, which is the same as, or one level below, our operating segments. A goodwill impairment charge represents the amount by which a reporting unit’s carrying amount exceeds its fair value, not to exceed the total amount of goodwill allocated to that reporting unit. Considerable management judgment is necessary to estimate fair value. Amounts and assumptions used in our goodwill impairment test, such as future sales, future cash flows and long-term growth rates, are consistent with internal projections and operating plans. Amounts and assumptions used in our goodwill impairment test are also largely dependent on the continued sale of drug products delivered by injection and the packaging of drug products, as well as our timeliness and success in new-product innovation or the development and commercialization of proprietary multi-component systems. Changes in the estimate of fair value, including the estimate of future cash flows, could have a material impact on our future results of operations and financial position. Accounting guidance also allows entities to first assess qualitative factors, including macroeconomic conditions, industry and market considerations, cost factors, and overall financial performance, to determine whether it is necessary to perform the quantitative goodwill impairment test. If, based upon our qualitative assessment, we determined that it was not more likely than not that the fair value of each of our reporting units was less than its carrying amount, then it would not be necessary to perform the quantitative goodwill impairment test. We elected to follow this guidance for our annual impairment test in the prior year, however in the current year, 2023, we performed a quantitative analysis to support our historical qualitative assessments. No impairment in the carrying value of our reporting units was evident as a result of the quantitative assessment performed.

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Valuing identifiable intangible assets requires judgment. For example, for recent identifiable customer relationship intangible asset acquisitions, we applied an excess earnings model, which is a form of the income approach. This approach includes projecting revenues and expenses attributable to the existing customers over the remaining economic life of the customer relationships and then subtracting the required return on net tangible assets and any intangible assets used in the business to estimate any residual excess earnings attributable to the customer relationships. The after-tax excess earnings are then discounted to present value using the respective discount rates.

Intangible assets with finite lives are amortized using the straight-line method over their estimated useful lives, and reviewed for impairment whenever circumstances indicate that the carrying value of these assets may not be recoverable. Factors that could trigger an impairment review include the following: 1) significant under-performance relative to historical or projected future operating results; 2) significant changes in the manner or use of the acquired assets or the strategy of the overall business; 3) significant negative industry or economic trends; and 4) recognition of goodwill impairment charges. If we determine that the carrying value of identifiable intangibles may not be recoverable based on the existence of one or more of the above indicators of impairment, we measure recoverability of assets by comparing the respective carrying value of the assets to the current and expected future cash flows, on an undiscounted basis, to be generated from such assets. If such analysis indicates that the carrying value of these assets is not recoverable, we measure an impairment based on the amount in which the net carrying amount of the assets exceeds the fair values of the assets.

Income Taxes: We estimate income taxes payable based upon current domestic and international tax legislation. In addition, deferred income taxes are recognized by applying enacted statutory tax rates to tax loss carryforwards and temporary differences between the tax basis and financial statement carrying values of our assets and liabilities. The enacted statutory tax rate applied is based on the rate expected to be applicable at the time of the forecasted utilization of the loss carryforward or reversal of the temporary difference. Valuation allowances on deferred tax assets are established when it is more likely than not that all or a portion of a deferred tax asset will not be realized. The realizability of deferred tax assets is subject to our estimates of future taxable income, generally at the respective subsidiary company and country level. Changes in tax legislation, business plans and other factors may affect the ultimate recoverability of tax assets or final tax payments, which could result in adjustments to tax expense in the period such change is determined.

When accounting for uncertainty in income taxes recognized in our financial statements, we apply a more-likely-than-not threshold for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.

Please refer to Note 1, Basis of Presentation and Summary of Significant Accounting Policies to our consolidated financial statements for additional information on our significant accounting policies.

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