WST 10K 12.31.12

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

(Mark One)
þ
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2012
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

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Name of each exchange on which registered
Common Stock, par value $.25 per share
New York Stock Exchange
Securities registered pursuant to Section 12 (g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes þ No o

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No þ

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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. 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

The aggregate market value of the voting stock held by non-affiliates of the registrant as of June 30, 2012 was approximately $1,717,810,617 based on the closing price as reported on the New York Stock Exchange.

As of January 31, 2013, there were 34,357,445 shares of the registrant's common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE
Document
Parts Into Which Incorporated
Proxy Statement for the Annual Meeting of Shareholders to be held May 7, 2013
Part III




TABLE OF CONTENTS

 
Page
BUSINESS
RISK FACTORS
UNRESOLVED STAFF COMMENTS
PROPERTIES
LEGAL PROCEEDINGS
MINE SAFETY DISCLOSURES
 
 
 
 
 
MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
SELECTED FINANCIAL DATA
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
CONTROLS AND PROCEDURES
OTHER INFORMATION
 
 
 
 
 
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
EXECUTIVE COMPENSATION
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
PRINCIPAL ACCOUNTING FEES AND SERVICES
 
 
 
 
 
EXHIBITS, FINANCIAL STATEMENT SCHEDULES
 
 
 
 
 
 


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PART I

ITEM 1. BUSINESS
General

West Pharmaceutical Services, Inc. (which may be referred to as West, the Company, we, us or our) is a manufacturer of components and systems for the packaging and delivery of injectable drugs as well as delivery system components for the pharmaceutical, healthcare and consumer products industries. Our products include stoppers and seals for vials, prefillable syringe components and systems, components for intravenous and blood collection systems, safety and administration systems, advanced injection systems, and contract design and manufacturing services. Our customers include the leading global producers and distributors of pharmaceuticals, biologics, medical devices and personal care products. The Company was incorporated under the laws of the Commonwealth of Pennsylvania on July 27, 1923.

All trademarks and registered trademarks used in this report are the property of West Pharmaceutical Services, Inc., either directly or indirectly through its subsidiaries unless noted otherwise. Teflon® is a registered trademark of E.I. du Pont de Nemours and Company. Daikyo Crystal Zenith® (“CZ”) is a registered trademark of Daikyo Seiko, Ltd.

Throughout this report, references to “Notes” refer to the Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K ("Form 10-K"), unless otherwise indicated.

West Website

We maintain a website at www.westpharma.com. Our Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are available on our website under the Investors - SEC Filings caption as soon as reasonably practical after we electronically file the material with, or furnish it to, the Securities and Exchange Commission (“SEC”). These filings are also available to the public over the Internet at the SEC's website at www.sec.gov. You may also read and copy any document we file at the SEC's Public Reference Room at 100 F. Street, N.E., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the Public Reference Room.

Throughout this Form 10-K, we incorporate by reference certain information from parts of other documents filed with the SEC and from our Proxy Statement for the 2013 Annual Meeting of Shareholders (“2013 Proxy Statement”), which will be filed with the SEC within 120 days following the end of our 2012 fiscal year. Our 2013 Proxy Statement will be available on our website on or about March 31, 2013, under the caption Investors - Proxy Materials.

Information about our corporate governance, including our Corporate Governance Principles and Code of Business Conduct, as well as information about our Directors, Board Committees, Committee Charters, and instructions on how to contact the Board is available on our website under the Investors - Corporate Governance caption. We intend to make any required disclosures regarding any amendments of our Code of Business Conduct or waivers granted to any of our directors or executive officers under the heading Code of Business Conduct on our website. Information relating to the West Pharmaceutical Services Dividend Reinvestment Plan is also available on our website under the Investors - Transfer Agent/Dividend Reinvestment Program caption.

We will provide any of the foregoing information without charge upon written request to John R. Gailey III, Vice President, General Counsel and Secretary, West Pharmaceutical Services, Inc., 530 Herman O. West Drive, Exton, PA 19341.

Business Segments

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 the Pharmaceutical Delivery Systems segment (“Delivery Systems”).


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Packaging Systems Segment

Our Packaging Systems segment 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. The growth strategy for Packaging Systems includes organic growth through market segmentation, new-product innovation, strategic acquisitions and geographic expansion. We have manufacturing facilities in North and South America, Europe and Asia, with affiliated companies in Mexico and Japan. See Item 2, Properties, for additional information on our manufacturing and other sites.

Packaging Systems consists of three operating segments - Americas, Europe and Asia Pacific - which are aggregated for reporting purposes.

Packaging Systems' products generally consist of elastomeric components offered in a variety of standard and customer-specific configurations and formulations, which are available with advanced barrier films and coatings to enhance their performance. West FluroTec barrier film is applied using a patented molding process to reduce the risk of product loss by contamination and protect the shelf life of packaged drugs. We also apply a Teflon coating to the surface of stoppers and plungers to improve compatibility between the closure and the drug. B2-coating is a coating applied to the surface of stoppers and plungers using a patented process that eliminates the need for conventional silicone application. It helps manufacturers reduce product rejections due to trace levels of silicone molecules found in non-coated packaged drug compounds. FluroTec and B2-coating technologies are licensed from Daikyo Seiko, Ltd.

In addition, our Westar® RS and Westar RU post-manufacturing processes are documented and fully validated procedures for washing and siliconizing stoppers and syringe components to remove biological materials and endotoxins. The Westar RS process prepares components for introduction into the customer's sterilizer and the Westar RU process provides sterilized components. These processes increase the overall efficiency of injectable drug production by outsourcing component processing, thereby eliminating steps otherwise required in each of our customers' manufacturing processes, and help to assure compliance with the latest regulatory requirements for component preparation. We also offer Envision™ components that are inspected using automated vision inspection systems, ensuring that components (plungers and stoppers) meet enhanced quality specifications for visible and subvisible particulate and contamination.

Our recently-introduced NovaPure® components, which include serum and lyophilization stoppers and syringe plungers, incorporate quality by design principles and are manufactured utilizing advanced process technologies. The closures provide the highest levels of quality to the market, helping to ensure the safety, efficacy and purity of injectable drug products.

Our tamper-evident Flip-Off® seals are sold in a wide range of sizes and colors to meet customers' needs for product identification and differentiation. The seals can be provided using proprietary printing for cautionary statements and embossing technology that can serve as a counterfeiting deterrence.

As an adjunct to our Packaging Systems products, we offer contract analytical laboratory services for testing and evaluating primary drug-packaging components and their compatibility with the contained drug formulation. West Analytical Services provides us and our customers with in-depth knowledge and analysis of the interaction and compatibility of drug products with elastomer, glass and plastic packaging components. Our analytical laboratories also provide specialized testing for complete drug delivery systems.

See Note 5, Segment Information, for net sales information for Packaging Systems.

Delivery Systems Segment

Our Delivery Systems segment 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. Delivery Systems has expertise in product design and development, including in-house mold design and construction, an engineering center for developmental and prototype tooling, process design and validation and high-speed automated assemblies. In addition, Delivery Systems is responsible for the continued development and commercialization of our line of proprietary healthcare, administrative and advanced injection systems, including Daikyo CZ, SmartDose® and other systems. Delivery Systems has manufacturing operations in North America and Europe. See Item 2, Properties, for additional information on our manufacturing and other sites.


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Delivery Systems offers a variety of products and services, which are described below:

We offer customer contract-manufacturing and assembly solutions, which use such technologies as multi-component molding, in-mold labeling, ultrasonic welding and clean room molding and device assembly used to manufacture customer-owned components and devices used in surgical, diagnostic, ophthalmic, other drug delivery systems, personal care and consumer products.

Our administration systems include sterile devices for the administration of drug products, including patented products such as the MixJectTM transfer device, the Mix2VialTM needleless reconstitution system and vial adapters.

Examples of our safety systems that are designed to prevent needle sticks are érisTM and B.Safe® for prefilled syringes and NovaGuardTM for luer lock syringes.

The Daikyo CZ 1ml long Insert Needle syringe system is the market's first syringe system without silicone oil lubrication applied to the barrel or plunger and that incorporates an insert-molded needle to avoid the need for adhesive. The luer lock version of the Daikyo CZ syringe system was introduced previously, along with several sizes of sterile vials. Additional sizes of vials continue to be introduced. CZ technology is licensed from Daikyo Seiko, Ltd.

Our SmartDose electronic patch injector system was introduced during 2010 and is under evaluation by many biopharmaceutical companies. This system is designed for controlled, subcutaneous delivery of high volume and high viscosity drugs, using prefilled Daikyo CZ cartridges. The system is fully programmable, has a single push-button operation and a hidden needle for safety.

The ConfiDose® and SelfDoseTM auto-injector systems enhance patient compliance and safety. The needle remains shielded at all times and retracts automatically after the injection. These systems eliminate preparation steps and automate the injection of drugs, providing patients with a sterile, single-use disposable system that can be readily used at home.

See Note 5, Segment Information, for net sales information for Delivery Systems.

Restructuring Initiatives

In December 2010, our Board of Directors approved a restructuring plan (the "2010 plan") designed to reduce our cost structure and improve operating efficiency. The plan involved the 2011 closure of a plant in the United States, a reduction in operations at a manufacturing facility in England, and the elimination of certain operational and administrative functions in other locations. Under this plan, we incurred total restructuring and related charges of $21.9 million, including $2.1 million in 2012. We do not expect to incur any future charges related to the 2010 plan, and the remaining restructuring obligations at December 31, 2012, will be reduced to zero as payments are made.

See Note 3, Restructuring and Other Items, for further discussion.

International

We have significant operations outside of the United States. They are managed through the same business segments as our U.S. operations – Packaging Systems and Delivery Systems. Sales outside of the United States account for 53% of consolidated net sales. For a geographic breakdown of sales, see Note 5, Segment Information.

Although the general business processes are similar to the domestic business, international operations are exposed to additional risks. These risks include currency fluctuations relative to the U.S. dollar, multiple tax jurisdictions and, particularly in South America and Israel, political and social issues that could destabilize local markets and affect the demand for our products.

See further discussion of our international operations, the risks associated with our international operations, and our attempt to minimize some of these risks in Part I, Item 1A, Risk Factors; Part II, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations under the caption Financial Condition, Liquidity and Capital Resources; Part II, Item 7A, Quantitative and Qualitative Disclosures About Market Risk; Note 1 under the captions Financial Instruments and Foreign Currency Translation;and Note 12, Derivative Financial Instruments.


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Raw Materials

We use three basic raw materials in the manufacture of our products: elastomers, aluminum and plastic. Elastomers include both natural and synthetic materials. We have access to adequate supplies of these raw materials to meet our production needs through agreements with suppliers.
We employ a supply-chain management strategy in our business segments, which involves purchasing from integrated suppliers that control their own sources of supply. Due to regulatory control over our production processes, and the cost and time involved in qualifying suppliers, we rely on single-source suppliers for many critical raw materials. This strategy increases the risk that our supply chain may be interrupted in the event of a supplier production problem. These risks are managed, where possible, by selecting suppliers with multiple manufacturing sites, rigid quality control systems, surplus inventory levels and other methods of maintaining supply in case of an interruption in production.

Intellectual Property Rights
Patents and other proprietary rights are important to our business. We own or license numerous patents and have patent applications pending in the United States and in other countries that relate to various aspects of our products. In addition, key value-added and proprietary products and processes are licensed from Daikyo Seiko, Ltd. Our patents and other proprietary rights have been useful in establishing our market share and in the growth of our business, and are expected to continue to be of value in the future as we continue to develop proprietary products. Although important in the aggregate, we do not consider our business to be materially dependent on any individual patent or license.
We also rely on trade secrets, manufacturing know-how and continuing technological innovations, as well as in-licensing opportunities, to maintain and further develop our competitive position, particularly in the area of formulation development and tooling design.

Seasonality
Although our Packaging Systems business is not inherently seasonal, sales and operating profit in the second half of the year are typically lower than the first half primarily due to scheduled plant shutdowns in conjunction with our customers' production schedules and the year-end impact of holidays on production.
Working Capital
We are required to carry significant amounts of inventory to meet customer requirements. In addition, some of our supply agreements require us to purchase inventory in bulk orders, which increases inventory levels but decreases the risk of supply interruption. Levels of inventory are also influenced by the seasonal patterns addressed above. For a more detailed discussion of working capital, please see the discussion in Management's Discussion and Analysis of Financial Condition and Results of Operations under the caption Financial Condition, Liquidity and Capital Resources.
Marketing
Our Packaging Systems customers include practically every major branded pharmaceutical, generic and biopharmaceutical company in the world. Packaging Systems components and other products are sold to major pharmaceutical, biotechnology and hospital supply/medical device companies, which incorporate them into their products for distribution to the ultimate end-user.
Our Delivery Systems segment sells to many of the world's largest pharmaceutical, biopharmaceutical and medical device companies and to large customers within the personal care and food-and-beverage industries. Delivery Systems components generally are incorporated into our customers' manufacturing lines for further processing or assembly.
Our products and services are distributed primarily through our own sales force and distribution network, with limited use of contract sales agents and regional distributors.
Our ten largest customers accounted for 40.4% of our consolidated net sales in 2012, but none of these customers individually accounted for more than 10% of net sales.


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Order Backlog

At December 31, 2012, our order backlog was $354.0 million, all of which is expected to be filled during 2013. The order backlog was $289.8 million at the end of 2011. The increase is primarily due to a lengthening of the average lead-time for sales orders, as well as sales growth for higher value products. Order backlog includes firm orders placed by customers for manufacture over a period of time according to their schedule or upon confirmation by the customer. We also have contractual arrangements with a number of our customers. Products covered by these contracts are included in our backlog only as orders are received.
Competition
We compete with several companies across our Packaging Systems product lines. However, we believe that we supply a major portion of the U.S. market for pharmaceutical elastomer and metal packaging components and also have a significant share of the European market for these components. Because of the special nature of our pharmaceutical packaging components and our long-standing participation in the market, competition is based primarily on product design and performance, although total cost is becoming increasingly important as pharmaceutical companies continue with aggressive cost-control programs across their operations.
We differentiate ourselves from our competition as a "full-service, value-added" global supplier that can provide pre-sale formula and engineering development, analytical services, regulatory expertise and post-manufacturing technologies, as well as after-sale technical support. Customers also appreciate the global scope of West's manufacturing capability and our ability to produce many products at multiple sites.
Our Delivery Systems business competes in very competitive markets for both healthcare and consumer products. The markets we serve are also served by many competitors and, therefore, our market shares are generally less than 5% of the total global markets. The competition varies from smaller regional companies to large global molders that command significant market shares. There are extreme cost pressures and many of our customers look off-shore to reduce cost. We differentiate ourselves by leveraging our global capability and by employing new technologies such as high-speed automated assembly, insert-molding, multi-shot molding and expertise with multiple-piece closure systems.

Because of the more demanding regulatory requirements in the medical device component area, there are a smaller number of competitors, mostly large-scale companies. We compete for this market on the basis of our reputation for quality and reliability in engineering and project management, diverse contract manufacturing capabilities and knowledge of and experience in complying with FDA requirements. With our range of proprietary technologies, we compete with new and established companies in the area of drug delivery devices, including suppliers of prefillable syringes, auto-injectors, safety needles and other proprietary systems.
Research and Development Activities

We maintain our own research-scale production facilities and laboratories for developing new products, and offer contract engineering design and development services to assist customers with new product development. Our quality control, regulatory and laboratory testing capabilities are used to ensure compliance with applicable manufacturing and regulatory standards for primary and secondary pharmaceutical packaging components. The engineering departments are responsible for product and tooling design and testing, and for the design and construction of processing equipment. We continue to seek new innovative opportunities for acquisition, licensing, partnering or development within injectable packaging and delivery systems, most of which will be manufactured and marketed by our Delivery Systems segment. Research and development spending will continue to increase as we pursue innovative strategic platforms in prefillable syringe, injectable container, advanced injection and safety and administration systems.
Commercial development of our new products and services for medical and pharmaceutical applications commonly requires several years. New products that we develop may require separate approval as medical devices, and products that are intended to be used in packaging and delivery of pharmaceutical products will be subject to both customer acceptance of our products and regulatory approval of the customer's products following our development period.

We spent $12.7 million in 2012, $11.6 million in 2011 and $9.8 million in 2010 on research and development for the Packaging Systems segment. The Delivery Systems segment incurred research and development costs of $20.5 million, $17.5 million, and $14.1 million in the years 2012, 2011 and 2010, respectively.


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Environmental Regulations

We are subject to various federal, state and local provisions regulating the discharge of materials into the environment or otherwise relating to the protection of the environment. Our compliance with these laws and regulations has not had a material impact on our financial position, results of operations or cash flows. There were no material capital expenditures for environmental control facilities in 2012 and there are no material expenditures planned for such purposes in 2013.

Employees

As of December 31, 2012, we employed approximately 6,700 people in our operations throughout the world.

ITEM 1A. RISK FACTORS
The statements in this section describe major risks to our business and should be considered carefully. In addition, these statements constitute our cautionary statements under the Private Securities Litigation Reform Act of 1995.

Our disclosure and analysis in this Form 10-K contains some forward-looking statements that are based on management's beliefs and assumptions, current expectations, estimates and forecasts. We also provide forward-looking statements in other materials we release to the public as well as oral forward-looking statements. Such statements give our current expectations or forecasts of future events. They do not relate strictly to historical or current facts. We have attempted, wherever possible, to identify forward-looking statements by using words such as “estimate,” “expect,” “intend,” “believe,” “plan,” “anticipate” and other words and terms of similar meaning. In particular, these include statements relating to future actions, business plans and prospects, new products, future performance or results of current or anticipated products, sales efforts, expenses, interest rates, foreign-exchange rates, economic effects, the outcome of contingencies, such as legal proceedings, and financial results.

Many of the factors that will determine our future results are beyond our ability to control or predict. Achievement of future results is subject to known or unknown risks or uncertainties, and therefore, actual results could differ materially from past results and those expressed or implied in any forward-looking statement. You should bear this in mind as you consider forward-looking statements.

Unless required by applicable securities law, we undertake no obligation to publicly update forward-looking statements, whether as a result of new information, future events or otherwise. We also refer you to further disclosures we make on related subjects in our Quarterly Reports on Form 10-Q and 8-K reports to the SEC.

Our operating results may be adversely affected by unfavorable economic and market conditions.

The current uncertainty in the global economy, including the continuing effects of recession or slow economic growth in the United States and Europe, may negatively affect our operating results. Examples of the effects of these continuing global economic challenges include: our suppliers' and our customers' inability to access the credit markets at commercially reasonable rates; reduction in sales due to customers decreasing their inventories in the near-term or long-term or due to liquidity difficulties; reduction in sales due to shortages of materials we purchase from our suppliers; reduction in research and development efforts and expenditures by our customers; our inability to hedge our currency and raw material risks sufficiently or at commercially reasonable prices; insolvency of suppliers or customers; inflationary pressures on our supplies or our products; and increased expenses due to growing taxation of corporate profits or revenues. Our operating results in one or more geographic regions may also be affected by uncertain or changing economic conditions within that region. If economic and market conditions in the United States or Europe weaken further, we may experience material adverse impacts on our business, financial condition and results of operations.

Our sales and profitability are largely dependent on the sale of drug products delivered by injection and the packaging of drug products. If the products developed by our customers in the future use another delivery system, our sales and profitability could suffer.

Our business depends to a substantial extent on customers' continued sales and development of products that are delivered by injection. If our customers fail to continue to sell, develop and deploy new injectable products or we are unable to develop new products that assist in the delivery of drugs by alternative methods, our sales and profitability may suffer.


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If we are unable to provide comparative value advantages, timely fulfillment of customer orders or resist pricing pressure, we will have to reduce our prices, which may reduce our profit margins.

We compete with several companies across our major product lines. Because of the special nature of these products, competition is based primarily on product design and performance, although total cost is becoming increasingly important as pharmaceutical companies continue with aggressive cost control programs across their entire operations. Competitors often compete on the basis of price. We differentiate ourselves from our competition as a "full-service value-added" supplier that is able to provide pre-sale compatibility studies and other services and sophisticated post-sale technical support on a global basis. However, we face continued pricing pressure from our customers and competitors. If we are unable to resist or to offset the effects of continued pricing pressure through our value-added services, improved operating efficiencies and reduced expenditures, or if we have to reduce our prices, our sales and profitability may suffer.

Consolidation in the pharmaceutical and healthcare industries could adversely affect our future revenues and operating income.

The pharmaceutical and medical technology industries have experienced a significant amount of consolidation. As a result of this consolidation, competition to provide goods and services to customers has increased. In addition, group purchasing organizations and integrated health delivery networks have served to concentrate purchasing decisions for some customers, which has placed pricing pressure on suppliers. Further consolidation within the industries we serve could exert additional pressure on the prices of our products.

We are subject to regulation by governments around the world, and if these regulations are not complied with, existing and future operations may be curtailed, and we could be subject to liability.

The design, development, manufacturing, marketing and labeling of certain of our products and our customers' products that incorporate our products are subject to regulation by governmental authorities in the United States, Europe and other countries, including the FDA and the European Medicines Agency. Complying with governmental regulation can be costly and can result in required modification or withdrawal of existing products and a substantial delay in the introduction of new products. Failure to comply with applicable regulatory requirements or failure to obtain regulatory approval for a new product could result in expenses and actions that could adversely affect our business and financial performance.

Products incorporating our technologies are subject to regulations and extensive approval or clearance processes, which make the timing and success of new-product commercialization difficult to predict.

The process of obtaining FDA and other required regulatory approvals is expensive and time-consuming.  Historically, most medical devices incorporating our technologies have been subject to the FDA's 510(k) marketing approval process, which typically lasts from six to nine months.  Supplemental or full pre-market approval reviews require a significantly longer period, delaying commercialization. Pharmaceutical products incorporating our technologies are subject to the FDA's New Drug Application process, which typically takes a number of years to complete.  Additionally, biotechnology products incorporating our technologies are subject to the FDA's Biologics License Application process, which also typically takes a number of years to complete.  Outside of the United States, sales of medical devices and pharmaceutical or biotechnology products are subject to international regulatory requirements that vary from country to country. The time required to obtain approval for sale internationally may be longer or shorter than that required for FDA approval.

Changes in the regulation of drug products and devices may increase competitive pressure and adversely affect our business.

An effect of the governmental regulation of our customers' drug products, devices, and manufacturing processes is that compliance with regulations makes it costly and time-consuming for customers to substitute or replace components and devices produced by one supplier with those from another. The regulation of our customers' products that incorporate our components and devices has increased over time. If the applicable regulations were to be modified in a way that reduced the cost and time involved for customers to substitute one supplier's components or devices for those made by another, it is likely that the competitive pressure would increase and adversely affect our sales and profitability.


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If we are not successful in protecting our intellectual property rights, we may harm our ability to compete.

Our patents, trademarks and other intellectual property are important to our business. We rely on patent, trademark, copyright, trade secret, and other intellectual property laws, as well as nondisclosure and confidentiality agreements and other methods, to protect our proprietary information, technologies and process. We also have obligations with respect to the non-use and non-disclosure of third party intellectual property. We may need to engage in litigation or similar activities to enforce our intellectual property rights, to protect our trade secrets or to determine the validity and scope of proprietary rights of others. Any such litigation could require us to expend significant resources and divert the efforts and attention of our management and other personnel from our business operations. We cannot assure you that the steps we will take to prevent misappropriation, infringement or other violation of our intellectual property or the intellectual property of others will be successful. In addition, effective patent, copyright, trademark and trade secret protection may be unavailable or limited for some of our trademarks and patents in some countries. Failure to protect our intellectual property could harm our business and results of operations. In addition, we may not prevent competitors from independently developing products and services similar or duplicative to ours.

Disruption in our manufacturing facilities could have a material adverse effect on our ability to make and sell products and have a negative impact on our reputation, performance or financial condition.

We have manufacturing sites all over the world.  In addition, in some instances, the manufacturing of certain product lines is concentrated in one or more of our plants.  The functioning of our manufacturing and distribution assets and systems could be disrupted for reasons either within or beyond our control, including: extreme weather or longer-term climatic changes; natural disasters; pandemic; war; accidental damage; disruption to the supply of material or services; product quality and safety issues; systems failure; workforce actions; or environmental contamination. There is a risk that incident management systems in place may prove inadequate and that any disruption may materially adversely affect our ability to make and sell products and, therefore, materially adversely affect our reputation, performance or financial condition.

The medical technology industry is very competitive and new products may replace our products or cause a reduction in demand.

The medical technology industry is subject to rapid technological changes, and we face significant competition across our product lines and in each market in which our products are sold. We face this competition from a wide range of companies. These include large medical device companies, some of which have greater financial and marketing resources than we do. We also face competition from firms that are more specialized than we are with respect to particular markets. In some instances, competitors, including pharmaceutical companies, also offer, or are attempting to develop, alternative therapies for diseases that may be delivered without a medical device. The development of new or improved products, processes or technologies by other companies (such as needle-free injection technology) may render some of our products or proposed products obsolete or less competitive.

Risks associated with foreign operations, including changes in import/export duties, political or economic climates, or exchange rates may adversely affect our business.

We conduct business in most of the major pharmaceutical markets in the world. Virtually all of the international sales and related operating costs are denominated in the currency of the local country and translated into U.S. dollars, which can result in significant fluctuations in the amount of those sales or earnings. The exchange rates between these currencies and the U.S. dollar in recent years have fluctuated significantly and may continue to do so in the future. In addition to translation risks, we incur currency transaction gains or losses when we or one of our subsidiaries enters into a purchase or sales transaction in a currency other than that entity's local currency. The main currencies to which we are exposed, besides the U.S. dollar, are the Euro, British Pound, Danish Krone, Singapore Dollar, and Japanese Yen. In order to reduce our exposure to fluctuations in certain exchange rates, we have entered, and expect to enter, into hedging arrangements, including the use of financial derivatives. There can be no certainty that we will be able to enter into or maintain effective hedges of currency risks, which could have a significant effect on our financial condition and operating results.


10



Our international operations are also exposed to the following risks: transportation delays and interruptions; political and economic instability and disruptions; imposition of duties and tariffs; import and export controls; the risks of divergent business expectations or cultural incompatibility inherent in establishing and maintaining operations in foreign countries; difficulties in staffing and managing multi-national operations; labor strikes and/or disputes; and potentially adverse tax consequences. Limitations on our ability to enforce legal rights and remedies with third parties or our joint venture partners outside of the United States could also create exposure. In addition, we may not be able to operate in compliance with foreign laws and regulations, or comply with applicable customs, currency exchange control regulations, transfer pricing regulations or any other laws or regulations to which we may be subject, in the event that these laws or regulations change. Any of these events could have an adverse effect on our international operations in the future by reducing the demand for our products, decreasing the prices at which we can sell our products or otherwise have an adverse effect on our financial condition, results of operations and cash flows.
 
Disruptions in the supply of key raw materials and difficulties in the supplier qualification process could adversely impact our operations.

We employ a supply chain management strategy in our reporting segments, which involves purchasing from integrated suppliers that control their own sources of supply. This strategy has reduced the number of raw material suppliers we have used in recent years. This increases the risk that our supply lines may be interrupted in the event of a supplier production problem or financial difficulties. If one of our suppliers is unable to supply materials needed for our products or our strategies for managing these risks are unsuccessful, we may be unable to complete the process of qualifying new replacement materials for some programs in time to meet future production needs. Prolonged disruptions in the supply of any of our key raw materials, difficulty completing qualification of new sources of supply, or in implementing the use of replacement materials or new sources of supply could have a material adverse effect on our operating results, financial condition or cash flows.

Raw material and energy prices have a significant impact on our profitability. If raw material and/or energy prices increase, and we cannot pass those price increases on to our customers, our profitability and financial condition may suffer.

We use three basic raw materials in the manufacture of our products: elastomers (which include synthetic and natural material), aluminum and plastic. In addition, our manufacturing facilities consume a wide variety of energy products to fuel, heat and cool our operations. Supply and demand factors, which are beyond our control, generally affect the price of our raw materials and utility costs. If we are unable to pass along increased raw material prices and energy costs to our customers, our profitability, and thus our financial condition, may be adversely affected. The prices of many of these raw materials and utilities are cyclical and volatile. For example, the prices of certain commodities, particularly petroleum-based raw materials, have in the recent past exhibited rapid changes, affecting the cost of synthetic elastomers and plastic. While we generally attempt to pass along increased costs to our customers in the form of sales price increases, historically there has been a time delay between raw material and/or energy price increases and our ability to increase the prices of our products. In some circumstances, we may not be able to increase the prices of our products due to competitive pressure and other factors.

If we are not timely or successful in new-product innovation or the development and commercialization of proprietary multi-component systems, our future revenues and operating income could be adversely affected.

Our growth partly depends on new-product innovation and the development and commercialization of proprietary multi-component systems for injectable drug administration and other healthcare applications (such as the Daikyo CZ ready-to-use prefilled syringe system).  Product development and commercialization is inherently uncertain and is subject to a number of factors outside of our control, including any necessary regulatory approvals and commercial acceptance for the products.  The ultimate timing and successful commercialization of new products and systems requires substantial evaluations of the functional, operational, clinical and economic viability of the Company's products.  In addition, the timely and adequate availability of filling capacity is essential to both conducting definitive stability trials and the timing of first commercialization of customers' products in CZ prefilled syringes.  Delays, interruptions or failures in developing and commercializing new-product innovations or proprietary multi-component systems could adversely affect future revenues and operating income. In addition, adverse conditions may also result in future charges to recognize impairment in the carrying value of our goodwill and other intangible assets, which could have a material adverse effect on our financial results.


11



We may not succeed in finding and completing acquisition or other strategic transactions, if any, which could have an adverse effect on our business and results of operations.

We have historically engaged in acquisition activity and we may in the future engage in acquisitions or other strategic transactions, such as joint ventures or investments in other entities. We may be unable to identify suitable targets, opportunistic or otherwise, for acquisitions or other strategic transactions in the future. If we identify a suitable candidate, our ability to successfully implement the strategic transaction would depend on a variety of factors including our ability to obtain financing on acceptable terms, and to comply with the restrictions contained in our debt agreements. Strategic transactions involve risks, including those associated with integrating the operations or maintaining the operations as separate (as applicable), financial reporting, disparate technologies and personnel of acquired companies, joint ventures or related companies; managing geographically dispersed operations or other strategic investments; the diversion of management's attention from other business concerns; the inherent risks in entering markets or lines of business in which we have either limited or no direct experience; unknown risks; and the potential loss of key employees, customers and strategic partners of acquired companies, joint ventures or companies in which we may make strategic investments. We may not successfully integrate any businesses or technologies we may acquire or strategically develop in the future and may not achieve anticipated revenue and cost benefits relating to any such strategic transactions. Strategic transactions may be expensive, time consuming and may strain our resources. Strategic transactions may not be accretive to our earnings and may negatively impact our results of operations as a result of, among other things, the incurrence of debt, one-time write-offs of goodwill and amortization expenses of other intangible assets. In addition, strategic transactions that we may pursue could result in dilutive issuances of equity securities.

Product defects could adversely affect the results of our operations.

The design, manufacture and marketing of medical devices involve certain inherent risks. Manufacturing or design defects, unanticipated use of our products, or inadequate disclosure of risks relating to the use of our products can lead to injury or other adverse events. These events could lead to recalls or safety alerts relating to our products (either voluntary or required by the FDA or similar governmental authorities in other countries), and could result, in certain cases, in the removal of a product from the market. A recall could result in significant costs, as well as negative publicity and damage to our reputation that could reduce demand for our products. Personal injuries relating to the use of our products can also result in product liability claims being brought against us. In some circumstances, such adverse events could also cause delays in new product approvals.

Our operations must comply with environmental statutes and regulations, and any failure to comply could result in extensive costs which would harm our business.

The manufacture of some of our products involves the use, transportation, storage and disposal of hazardous or toxic materials and is subject to various environmental protection and occupational health and safety laws and regulations in the countries in which we operate. This has exposed us in the past, and could expose us in the future, to risks of accidental contamination and events of non-compliance with environmental laws. Any such occurrences could result in regulatory enforcement or personal injury and property damage claims or could lead to a shutdown of some of our operations, which could have an adverse effect on our business and results of operations. We currently incur costs to comply with environmental laws and regulations and these costs may become more significant.

A loss of key personnel or highly skilled employees could disrupt our operations.

Our executive officers are critical to the management and direction of our businesses. Our future success depends, in large part, on our ability to retain these officers and other key employees, including people in technical, marketing, sales and research positions. Competition for experienced employees, particularly for persons with specialized skills, can be intense. Our ability to recruit such talent will depend on a number of factors, including compensation and benefits, work location and work environment. If we cannot effectively recruit and retain qualified executives and employees, our business could be adversely affected. Although we believe that we will be able to attract and retain talented personnel and replace key personnel should the need arise, our inability to do so on a timely basis could disrupt the operations of the unit affected or our overall operations. In addition, because of the complex nature of many of our products and programs, we are generally dependent on an educated and highly skilled engineering staff and workforce. Our operations could be disrupted by a shortage of available skilled employees.


12



The uncertain effects of potential climate change legislation could lead to significantly increased costs.

If legislation or regulations are enacted or promulgated in the United States, Europe or Asia or any other jurisdictions in which we do business that limit or reduce allowable greenhouse gas emissions and other emissions, such restrictions could have a significant effect on our operating and financial decisions, including those involving capital expenditures to reduce emissions, and our results of operations. Our manufacturing operations may not be able to operate as planned if we are not able to comply with new legal and regulatory legislation around climate change, or it may become too costly to operate in a profitable manner. Additionally, suppliers' added expenses could be passed on to us in the form of higher prices and we may not be able to pass on such expenses to our customers through price increases.

Federal healthcare reform may adversely affect our results of operations.

The Patient Protection and Affordable Care Act (the “PPACA”) was enacted in March 2010. The PPACA reduces Medicare and Medicaid payments to hospitals, clinical laboratories and pharmaceutical companies, and could otherwise reduce the volume of medical procedures. The PPACA also imposes significant new taxes on medical device makers in the form of an excise tax on all U.S. medical device sales (as defined under the regulations). These factors, in turn, could result in reduced demand for our products and increased downward pricing pressure. It is also possible that the PPACA will result in lower reimbursements for our customers' products. While the PPACA is intended to expand health insurance coverage to uninsured persons in the United States, the impact of any overall increase in access to healthcare on sales of West's products is uncertain at this time.  Our sales depend, in part, on the extent to which pharmaceutical companies and healthcare providers and facilities are reimbursed by government authorities, private insurers and other third-party payers for the costs of our products. The coverage policies and reimbursement levels of third-party payers, which can vary among public and private sources, may affect which products customers purchase and the prices they are willing to pay for these products in a particular jurisdiction. Legislative or administrative reforms to reimbursement systems in the United States (as part of the PPACA) or abroad (for example, those under consideration in France, Germany, Italy and the United Kingdom) could significantly reduce reimbursement for our customers products, which could in turn reduce the demand for our products.

The full effects of the PPACA cannot be known until all of the provisions are implemented and the Centers for Medicare & Medicaid Services and other federal and state agencies issue applicable regulations or guidance. Moreover, in the coming years, additional changes could be made to governmental healthcare programs that could significantly impact the success of our products. We will continue to evaluate the PPACA, as amended, the implementation of regulations or guidance related to various provisions of the PPACA by federal agencies, as well as trends and changes that may be encouraged by the legislation and that may potentially impact our business over time.

No assurance can be given that we will continue to pay or declare dividends.

We have historically paid dividends. However, there can be no assurance that we will pay or declare dividends in the future. The actual declaration and payment of future dividends, the amount of any such dividends, and the establishment of record and payment dates, if any, are subject to determination by our Board of Directors each quarter after its review of our then-current strategy, applicable debt covenants and financial performance and position, among other things. Our declaration and payment of future dividends is subject to risks and uncertainties, including: deterioration of our financial performance or position; inability to declare a dividend in compliance with applicable laws or debt covenants; an increase in our cash needs or decrease in available cash; and the business judgment of the Board of Directors that a declaration of a dividend is not in the Company's best interests.

Our results of operations and earnings may not meet guidance or expectations.

We provide public guidance on our expected results of operations for future periods. This guidance is comprised of forward-looking statements subject to risks and uncertainties, including the risks and uncertainties described in this Form 10-K and in our other public filings and public statements, and is based necessarily on assumptions we make at the time we provide such guidance. Our guidance may not always be accurate. If, in the future, our results of operations for a particular period do not meet our guidance or the expectations of investment analysts or if we reduce our guidance for future periods, the market price of our common stock could decline significantly.


13



We are exposed to credit risk on accounts receivable and certain prepayments made in the normal course of business. This risk is heightened during periods when economic conditions worsen.

A substantial majority of our outstanding trade receivables are not covered by collateral or credit insurance. In addition, we have made prepayments associated with insurance premiums and other advances in the normal course of business. While we have procedures to monitor and limit exposure to credit risk on trade receivables and other current assets, there can be no assurance such procedures will effectively limit our credit risk and avoid losses, which could have a material adverse effect on our financial condition and operating results.

Unauthorized access to our or our customers' information and systems could negatively impact our business.

We face certain security threats, including threats to the confidentiality, availability and integrity of our data and systems. We maintain an extensive network of technical security controls, policy enforcement mechanisms and monitoring systems in order to address these threats. While these measures are designed to prevent, detect and respond to unauthorized activity in our systems, certain types of attacks could result in financial or information losses and/or reputational harm. If we cannot prevent the unauthorized access, release and/or corruption of our or our customers' confidential, classified or personally identifiable information, our reputation could be damaged, and/or we could face financial losses.

If we fail to comply with our obligations under our distributorship or license agreements with Daikyo or we are unable to renew these agreements on the same or substantially similar terms, we could lose license rights that are important to our business.

Key value-added and proprietary products and processes are licensed from our affiliate, Daikyo Seiko, Ltd., including but not limited to Daikyo CZ, FluroTec and B2-coating technologies. Our rights to these products and processes are licensed pursuant to agreements that expire in 2017. Part of our long-term strategy is dependent upon these rights. If we fail to renew these agreements, or if the agreements are terminated early because we fail to satisfy our obligations, our business could be adversely impacted.

ITEM IB. UNRESOLVED STAFF COMMENTS

As of the filing of this Form 10-K, there were no unresolved comments from the Staff of the SEC.


14



ITEM 2. PROPERTIES

Our corporate headquarters are located at 530 Herman O. West Drive, Exton, Pennsylvania. This building also houses our North American sales and marketing, administrative support and customer service functions, as well as laboratories.

The following table summarizes production facilities by segment and geographic region. All facilities shown are owned except where otherwise noted.
Packaging Systems
Contract Analytical Laboratory:
Manufacturing:
 
North American Operations
 
North American Operations
 
 
United States
 
 
United States
 
 
 
Exton, PA
 
 
 
Clearwater, FL   (1)
 
 
 
 
 
 
 
Jersey Shore, PA
Mold-and-Die Tool Shops:
 
 
 
Kearney, NE
 
North American Operations
 
 
 
Kinston, NC
 
 
United States
 
 
 
Lititz, PA
 
 
 
Upper Darby, PA (2)
 
 
 
St. Petersburg, FL (1)
 
 
 
 
 
 
 
 
 
European Operations
 
South American Operations
 
 
England
 
 
Brazil
 
 
 
Bodmin (2)
 
 
 
Sao Paulo
 
 
 
 
 
 
 
 
Delivery Systems
 
European Operations
Manufacturing:
 
 
Denmark
 
North American Operations
 
 
 
Horsens
 
 
United States
 
 
 
 
 
 
 
Frankfort, IN (2)
 
 
England
 
 
 
Grand Rapids, MI
 
 
 
St. Austell
 
 
 
Phoenix, AZ (2)
 
 
 
 
 
 
 
Scottsdale, AZ (2)(3)
 
 
France
 
 
 
Tempe, AZ (2)
 
 
 
Le Nouvion
 
 
 
Williamsport, PA
 
 
 
 
 
 
 
 
 
 
Germany
 
 
Puerto Rico
 
 
 
Eschweiler (1)
 
 
 
Cayey
 
 
 
Stolberg
 
 
 
 
 
 
 
 
 
European Operations
 
 
Serbia
 
 
France
 
 
 
Kovin
 
 
 
Le Vaudreuil (2)
 
 
 
 
 
 
 
 
 
Asia Pacific Operations
 
 
Ireland
 
 
China
 
 
 
Dublin (2)
 
 
 
Qingpu
 
 
 
 
 
 
 
 
Mold-and-Die Tool Shop:
 
 
Singapore
 
European Operations
 
 
 
Jurong
 
 
Denmark
 
 
 
 
 
 
 
Roskilde (2)
 
 
 
 
 
 
 
 

15




(1)
This manufacturing facility is also used for research and development activities.
(2)
This facility is leased in whole or in part.
(3)
This manufacturing facility is also used for mold and die production.

Our Delivery Systems segment leases facilities located in Israel and Athens, Texas for research and development, as well as other activities. Sales offices in various locations are leased under short-term arrangements.

During the last few years, we have increased our plant capacity. As part of this effort, we continue to move forward in establishing a manufacturing presence in the People's Republic of China. During 2009, we completed construction of our China plastic components facility and started commercial production. In June 2011, we commenced ground-breaking activities for our new compression-molding plant in China, with commercial production expected to begin in the second quarter of 2013. In August 2012, we hosted a ground-breaking ceremony for our new rubber and metal manufacturing facility in India, with commercial production of metal components expected to begin in the first quarter of 2014 and other products to follow in 2015 and 2016.

ITEM 3. LEGAL PROCEEDINGS
None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

EXECUTIVE OFFICERS OF THE COMPANY

The executive officers of the Company are set forth in this table. Executive officers are elected by the board of directors annually at the regular meeting of the board of directors following the Annual Meeting of Shareholders.

Name
Age
Position
Michael A. Anderson
57
Vice President and Treasurer since June 2001. He was Finance Director, Drug Delivery Systems Division from October 1999 to June 2001, Vice President, Business Development from April 1997 to October 1999 and Director of Taxes from July 1992 to April 1997.
Warwick Bedwell
53
President, Pharmaceutical Packaging Systems Asia Pacific Region since January 3, 2011. Previously, he served as Vice President and Commercial Director-Bone and Rheumatology for Roche Products (UK) Limited, a biotech company, from October 2008 to August 2010. From January 2007 to October 2008, he served as Vice President and Global Head of Business Development for Hoffman LaRoche Inc. (U.S.) and from June 2003 to December 2006, he served as President and General Manager of Roche Inc. in the Philippines. Prior thereto, he held numerous positions in commercial operations for Roche Products Pty Ltd. in Australia.
William J. Federici
53
Vice President and Chief Financial Officer since joining the Company in August 2003. He was National Industry Director for Pharmaceuticals of KPMG LLP (accounting firm) from June 2002 until August 2003 and prior thereto, an audit partner with Arthur Andersen, LLP.
John R. Gailey III
58
Vice President since December 1995, General Counsel since May 1994 and Secretary since December 1991. He served as Corporate Counsel from 1991 until his appointment as General Counsel.


16



Jeffrey C. Hunt
54
President, Pharmaceutical Packaging Systems since January 3, 2011. Previously, he served as Vice President, Strategic Planning and Business Development from July 2010 to January 2011. From August 2006 to July 2009, he served as President of the Patient Care and Safety Products Global Business Unit for Covidien. From August 2004 to August 2006, he was Vice President and General Manager of the SharpSafety Division of Tyco Healthcare/Kendall, Vice President of Marketing from June 2003 to August 2004 and Marketing Director from March 1998 to June 2003.
Heino Lennartz
47
President, Pharmaceutical Packaging Systems Europe Region since February 2010 and, prior thereto, President, Europe, Pharmaceutical Systems since July 2009. He was Vice President Finance, MIS & Purchasing for Europe & Asia Pacific from December 2006 until July 2009. Mr. Lennartz was Vice President Corporate Finance of AIXTRON AG, a leading semiconductor equipment company, from 2003 to 2006 and, prior thereto, held various positions, including Director Business Systems Europe, at GDX Automotive, a rubber and plastic car body sealing system supplier.
Richard D. Luzzi
61
Vice President, Human Resources since June 2002. He served as Vice President, Human Resources of GS Industries, a steel manufacturer, from 1998 to 2002, Vice President, Human Resources of Lukens Steel from 1993 to 1998, and Vice President, Human Resources of Rockwell International, from 1990 to 1993.
Daniel Malone
51
Vice President and Corporate Controller since August 2011. He was Vice President of Finance, Pharmaceutical Packaging Systems Americas Region from September 2008 to August 2011 and Director of Financial and Management Reporting from October 1999 to September 2008.
Karen A. Flynn
50
President, Pharmaceutical Packaging Systems Americas Region since June 2012. She was Vice President, Sales from May 2008 to June 2012. From 2000 to 2008, she worked in Sales Management, most recently as Vice President, Global Accounts, for Catalent (formerly known as Cardinal Health). Prior thereto, she held various positions at West, including Quality, Research and Development, and Sales.
Donald E. Morel, Jr., Ph.D.
55
Chairman of the Board of the Company since March 2003 and our Chief Executive Officer since April 2002. He was our President from April 2002 to June 2006 and Chief Operating Officer from May 2001 to April 2002. He was Division President, Drug Delivery Systems from October 1999 to May 2001, and prior thereto, Group President.
John Paproski
56
President, Pharmaceutical Delivery Systems since December 2009. He was Vice President of Innovation, from January 2005 to December 2009 and Vice President, Global Product Development from August 1996 to January 2005. He has held numerous other operations and engineering positions within the Company, including Vice President of Rubber Operations from August 1993 to January 2005 and Director of Manufacturing Engineering from 1991 to 1993.



17



PART II

ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Our common stock is listed on the New York Stock Exchange under the symbol “WST.” The high and low prices for our common stock as reported by the NYSE for the periods indicated were as follows:

 
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Year
 
High
Low
High
Low
High
Low
High
Low
High
Low
2012
43.01
37.35
50.49
39.30
53.48
46.87
56.02
50.50
56.02
37.35
2011
44.90
38.76
47.96
41.90
46.56
36.87
41.50
35.50
47.96
35.50

As of January 31, 2013, we had 987 shareholders of record, which excludes shareholders whose shares were held by brokerage firms, depositaries and other institutional firms in “street names” for their customers.

Dividends

Our common stock paid a quarterly dividend of $0.17 per share in each of the first three quarters of 2011; $0.18 per share in the fourth quarter of 2011 and each of the first three quarters of 2012; and $0.19 per share in the fourth quarter of 2012.

Issuer Purchases of Equity Securities

The following table shows information with respect to purchases of our common stock made during the three months ended December 31, 2012 by us or any of our “affiliated purchasers” as defined in Rule 10b-18(a)(3) under the Exchange Act:

Period
 
Total number of shares purchased
(1)(2)(3)
 
Average price paid per share
 
Total number of shares purchased as
part of publicly
announced plans or
programs
 
Maximum number
of shares that may
yet be purchased
under the plans or
programs
October 1 – 31, 2012
 
73

 
$
53.03

 

 

November 1 – 30, 2012
 
160,219

 
54.21

 

 

December 1 – 31, 2012
 
14,484

 
54.96

 

 

Total
 
174,776

 
$
54.28

 

 

(1)
Includes 522 shares purchased on behalf of employees enrolled in the Non-Qualified Deferred Compensation Plan for Designated Employees (Amended and Restated Effective January 1, 2008). Under the plan, Company match contributions are delivered to the plan’s investment administrator, who then purchases shares in the open market and credits the shares to individual plan accounts.
(2)
Includes 127,649 shares of common stock acquired from employees who tendered already-owned shares to satisfy the exercise price on option exercises, as part of the 2011 Omnibus Incentive Compensation Plan (the "2011 Plan").
(3)
Includes 46,605 shares of common stock acquired from employees who tendered already-owned shares to satisfy the withholding tax obligations on option exercises, as part of the 2011 Plan.


18



Performance Graph

The following graph compares the cumulative total return to holders of our common stock with the cumulative total return of the Standard & Poor's SmallCap 600 Index and the Standard & Poor's 600 Health Care Equipment & Supplies Industry for the five years ended December 31, 2012. Cumulative total return to shareholders is measured by dividing total dividends (assuming dividend reinvestment) plus the per-share price change for the period by the share price at the beginning of the period. The Company's cumulative shareholder return is based on an investment of $100 on December 31, 2007 and is compared to the cumulative total return of the SmallCap 600 Index and the 600 Health Care Equipment & Supplies Industry over the period with a like amount invested.


19




ITEM 6. SELECTED FINANCIAL DATA
FIVE-YEAR SUMMARY
West Pharmaceutical Services, Inc. and Subsidiaries

(in millions, except per share data)
2012

2011

2010

2009

2008

SUMMARY OF OPERATIONS
 
 
 
 
 
Net sales
$
1,266.4

$
1,192.3

$
1,104.7

$
1,055.7

$
1,051.1

Operating profit
135.1

109.6

90.7

97.5

124.1

Net income
80.7

75.5

65.3

72.6

86.6

Less: net income attributable to noncontrolling interests




0.6

Net income attributable to common shareholders
$
80.7

$
75.5

$
65.3

$
72.6

$
86.0

Net income per share attributable to common shareholders from continuing operations:
 
 
 
 
 
Basic (1)
$
2.37

$
2.24

$
1.96

$
2.21

$
2.65

Diluted (2)
2.30

2.16

1.89

2.12

2.50

Weighted average common shares outstanding
34.0

33.7

33.3

32.8

32.4

Weighted average shares assuming dilution
35.9

37.0

36.7

36.3

36.1

Dividends declared per common share
$
0.74

$
0.70

$
0.66

$
0.62

$
0.58

YEAR-END FINANCIAL POSITION
 
 
 
 
 
Cash and cash equivalents
$
161.9

$
91.8

$
110.2

$
83.1

$
87.2

Working capital
295.5

228.8

266.9

226.1

207.1

Total assets
1,564.0

1,399.1

1,294.3

1,271.0

1,168.7

Total invested capital:
 
 
 
 
 
Total debt
411.5

349.4

358.4

379.6

386.0

Total equity
728.9

654.9

625.7

579.1

487.1

Total invested capital
$
1,140.4

$
1,004.3

$
984.1

$
958.7

$
873.1

PERFORMANCE MEASUREMENTS (3)
 
 
 
 
 
Gross margin (a)
30.6
%
28.5
%
28.8
%
28.8
%
28.8
%
Operating profitability (b)
10.7
%
9.2
%
8.2
%
9.2
%
11.8
%
Effective tax rate
30.2
%
25.3
%
18.3
%
16.2
%
21.6
%
Return on invested capital (c)
8.8
%
8.2
%
7.6
%
8.9
%
11.1
%
Net debt-to-total invested capital (d)
25.5
%
28.2
%
28.4
%
33.9
%
38
%
Research and development expenses
$
33.2

$
29.1

$
23.9

$
19.9

$
18.7

Operating cash flow
187.4

130.7

138.3

137.7

135.0

Stock price range
$56.02-37.35

$47.96-35.50

$44.84-32.74

$41.77-27.85

$52.00-29.52


(1) Based on weighted average common shares outstanding.

(2) Based on weighted average shares, assuming dilution.

(3) Performance measurements represent indicators commonly used in the financial community. They are not measures of financial performance under U.S. generally accepted accounting principles ("U.S. GAAP").

(a) Net sales minus cost of goods and services sold, including applicable depreciation and amortization, divided by net sales.
(b) Operating profit divided by net sales.
(c) Operating profit multiplied by one minus the effective tax rate divided by average total invested capital.
(d) Net debt (total debt less cash and cash equivalents) divided by total invested capital net of cash and cash equivalents.


20



Factors affecting the comparability of the information reflected in the selected financial data:

Net income in 2012 included the impact of restructuring and related charges of $1.4 million (net of $0.7 million in tax), an impairment charge of $2.1 million (net of $1.3 million in tax), an increase in acquisition-related contingencies of $1.0 million (net of $0.2 million in tax), a loss on extinguishment of debt of $9.8 million (net of $1.8 million in tax) and discrete tax charges of $2.1 million.

Net income in 2011 included the impact of restructuring and related charges of $3.5 million (net of $1.8 million in tax), income from the reduction of acquisition-related contingencies of $0.2 million, special separation benefits related to the retirement of our former President and Chief Operating Officer of $1.8 million (net of $1.1 million in tax) and the recognition of income tax charges totaling $1.4 million, the majority of which resulted from changes in certain international tax rates, which changed the value of deferred tax assets and liabilities.

Net income in 2010 included the impact of restructuring charges and asset impairments of $10.2 million (net of $5.7 million in tax), income from the reduction of acquisition-related contingencies of $1.6 million (net of $0.2 million in tax) and the recognition of income tax benefits totaling $1.1 million, the majority of which resulted from the reversal of liabilities for unrecognized tax benefits.

Net income in 2009 included the impact of restructuring charges and asset impairments of $6.3 million (net of $3.2 million in tax) and income tax benefits totaling $6.1 million primarily relating to reversals of liabilities for unrecognized tax benefits and the identification of additional qualified R&D activities related to prior years.

Net income in 2008 included a net gain on contract settlement proceeds of $2.7 million (net of $1.5 million in tax), restructuring and related charges of $1.9 million (net of $1.1 million in tax) and income tax benefits of $3.5 million, the majority of which related to the reversal of liabilities for unrecognized tax benefits.

On December 29, 2008, we purchased the remaining 10% interest in our Medimop subsidiary for $8.5 million, which resulted in a $5.4 million reduction to the noncontrolling interest balance.

21




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 our 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.

Throughout this section, references to “Notes” refer to the footnotes included in Part II, Item 8 of this Form 10-K, unless otherwise indicated.

Our Operations

We are a manufacturer of components and systems for the packaging and delivery of injectable drugs as well as delivery system components for the pharmaceutical, healthcare and consumer products industries. Our products include stoppers and seals for vials, prefillable syringe components and systems, components for intravenous and blood collection systems, safety and administration systems, advanced injection systems, and contract design and manufacturing services. Our customers include the leading global producers and distributors of pharmaceuticals, biologics, medical devices and personal care products. We were incorporated under the laws of the Commonwealth of Pennsylvania on July 27, 1923.

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 the Pharmaceutical Delivery Systems segment (“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.

As a result of our global manufacturing and distribution presence, more than half of our revenues are generated outside of the United States in currencies other than the U.S. dollar, including 43% in Europe and 10% collectively in Asia, South America, and Israel. Fluctuations in foreign currency exchange rates, therefore, can have a significant effect on our consolidated financial results. Generally, our financial results are affected positively by a weaker U.S. dollar and negatively by a stronger U.S. dollar, as compared to the foreign currencies in which we conduct our business. In terms of net sales, the most significant foreign currencies are the Euro, the Danish Krone and the British Pound, with Euro-denominated sales representing the majority of sales transacted in foreign currencies. In addition, we are exposed to Japanese Yen, as we maintain a 25% ownership interest in, and we purchase finished goods and other materials from, Daikyo Seiko, Ltd. During 2012, average exchange rates were unfavorable versus the exchange rates realized in 2011, resulting in lower reported net sales and operating profit of $46.1 million and $7.7 million, respectively, versus 2011.

2012 Financial Performance Highlights

Net sales were $1,266.4 million, an increase of 6.2% from 2011. Excluding foreign currency effects, net sales increased by $120.2 million, or 10.1%.
Gross profit was $387.7 million, an increase of 14.3% from 2011, and our gross margin percentage increased by 2.1 percentage points to 30.6%.

22



We incurred restructuring and related charges of $2.1 million to complete the plan announced in December 2010.
Reported operating profit for 2012 was $135.1 million, an increase of 23.3% from 2011.
In June 2012, we repurchased $158.4 million in aggregate principal amount of our Convertible Debentures, representing 98.06% of the aggregate outstanding principal amount. The purchase price per $1,000 principal amount of the Convertible Debentures was $1,038.91. For future periods, we expect the refinancing of our Convertible Debentures to be accretive to earnings, as a result of the elimination of the dilution to earnings per share that would have occurred upon conversion.
Net income for 2012 was $80.7 million, or $2.30 per diluted share, compared to $75.5 million, or $2.16 per diluted share, in 2011.
Our financial position remains strong, with net cash provided by operating activities totaling $187.4 million in 2012.
Our Board of Directors approved an increase in the quarterly cash dividend from $0.18 to $0.19 per share, which began with the fourth quarter 2012 dividend.

2013 Business Outlook

Our business outlook for 2013 anticipates continued revenue improvement driven by customers moving up the product quality and value scale in Packaging Systems and increasing growth in Delivery Systems' proprietary products, as customers accelerate their pre-commercial efforts. In particular, we will continue to focus on the expansion of our high-value closure products and proprietary delivery systems, including CZ-based containment systems. We continue to believe that actions taken in recent years to increase capacity for certain products, reduce costs through restructuring and lean savings efforts, and expand into emerging markets will lead to improved profitability as global demand increases. We plan to continue funding capital projects in emerging markets for Packaging Systems and for new, proprietary products within Delivery Systems. During 2013, we expect our capital spending to be up to $150 million, for projects such as our new rubber and metal manufacturing facility in India. This amount excludes approximately $35 million associated with the construction of our new corporate office and research building, which began in 2011 and settled in February 2013. We believe that our strong financial position gives us a platform for sustained growth, and will enable us to take advantage of opportunities to invest in our business as they arise. See Part I, Item 1A, Risk Factors, of this Form 10-K for further discussion regarding the risks associated with our operations.

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.

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. These re-measured results excluding effects from currency translation are not in conformity with U.S. GAAP and should not be used as a substitute for the related 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.

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


23



Net Sales

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

 
Year Ended December 31,
 
% Change
($ in millions)
2012
 
2011
 
2010
 
2012/2011
 
2011/2010
Packaging Systems
$
915.1

 
$
857.4

 
$
785.0

 
6.7
%
 
9.2
%
Delivery Systems
352.1

 
336.7

 
324.1

 
4.6
%
 
3.9
%
Intersegment sales elimination
(0.8
)
 
(1.8
)
 
(4.4
)
 

 

Consolidated net sales
$
1,266.4

 
$
1,192.3

 
$
1,104.7

 
6.2
%
 
7.9
%

2012 compared to 2011
Consolidated net sales increased by $74.1 million, or 6.2%, in 2012, despite an unfavorable foreign exchange impact of $46.1 million. Excluding foreign currency effects, consolidated net sales increased by $120.2 million, or 10.1%. A favorable mix of products and unit volume growth contributed 7.1 percentage points of the increase and sales price increases contributed 3.0 percentage points.

Packaging Systems – Packaging Systems’ net sales increased by $57.7 million, or 6.7%, in 2012, despite an unfavorable foreign exchange impact of $40.1 million. Excluding foreign exchange effects, net sales increased by $97.8 million, or 11.4%. A favorable mix of products and unit volume growth contributed 7.5 percentage points of the increase, and sales price increases contributed 3.9 percentage points. In addition to increases in the sales of our standard pharmaceutical packaging components, there continued to be strong growth in sales of our higher-quality product offerings that reduce particulate contamination and create efficiencies in our customer's manufacturing processes, including Westar ready-to-use components, FluroTec-coated closures, and the Envision line of vision-inspected components.

Delivery Systems – Delivery Systems’ net sales increased by $15.4 million, or 4.6%, in 2012, despite an unfavorable foreign exchange impact of $6.0 million. Excluding foreign exchange effects, net sales increased by $21.4 million, or 6.4%. A favorable mix of products and unit volume growth contributed 5.8 percentage points of the increase, and sales price increases contributed 0.6 percentage points. Our sales increases during 2012 were led by an increase in healthcare-related contract manufacturing revenue and higher sales of our proprietary administration systems and éris safety syringe product lines, partially offset by a decline in consumer product sales.

2011 compared to 2010
Consolidated net sales increased by $87.6 million, or 7.9%, in 2011, including a favorable foreign exchange impact of $30.2 million. Excluding foreign currency effects, consolidated net sales increased by $57.4 million, or 5.2%. Sales volume contributed 3.9 percentage points of the increase and sales price increases contributed 1.3 percentage points of the increase.

Packaging Systems – Packaging Systems’ net sales increased by $72.4 million, or 9.2%, in 2011, including a favorable foreign exchange impact of $27.2 million. Excluding foreign exchange effects, net sales increased by $45.2 million, or 5.8%. Increased demand for pharmaceutical packaging components, primarily in our Europe and Asia regions, contributed 3.6 percentage points of the increase, and sales price increases contributed 2.2 percentage points of the increase. In 2011, there was strong growth in sales of our high-value pharmaceutical packaging products, including the recently-introduced Envision line of vision-inspected components, Daikyo and Daikyo RSV (ready-to-sterilize validated) products, and Westar-processed and coated closures.

Delivery Systems – Delivery Systems’ net sales increased by $12.6 million, or 3.9%, in 2011, including a favorable foreign exchange impact of $3.0 million. Excluding foreign exchange effects, net sales increased by $9.6 million, or 3.0%. A favorable mix of products and sales volume contributed 3.8 percentage points of the increase, partially offset by lower sales prices of 0.8 percentage points. The majority of the sales growth resulted from increased sales

24



of contract-manufactured healthcare devices and proprietary administration systems during 2011. Despite sales price increases to offset the increased cost of plastic resin, overall sales prices were lower, due to scheduled price reductions under certain contract-manufacturing agreements.

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:

 
Year Ended December 31,
 
% Change
($ in millions)
2012
 
2011
 
2010
 
2012/2011
 
2011/2010
Packaging Systems:
 
 
 
 
 
 
 
 
 
Gross Profit
$
318.4

 
$
276.5

 
$
258.0

 
15.2
%
 
7.2
%
Gross Margin
34.8
%
 
32.2
%
 
32.9
%
 
 
 
 
Delivery Systems:
 

 
 

 
 

 
 

 
 

Gross Profit
$
69.3

 
$
62.8

 
$
60.1

 
10.4
%
 
4.5
%
Gross Margin
19.7
%
 
18.6
%
 
18.5
%
 
 
 
 
Consolidated Gross Profit
$
387.7

 
$
339.3

 
$
318.1

 
14.3
%
 
6.7
%
Consolidated Gross Margin
30.6
%
 
28.5
%
 
28.8
%
 
 
 
 

2012 compared to 2011
Consolidated gross profit increased by $48.4 million, or 14.3%, in 2012, despite an unfavorable foreign exchange impact of $12.7 million. Consolidated gross margin increased by 2.1 percentage points in 2012, primarily as a result of sales price increases and a favorable mix of products sold, all of which increased the consolidated gross margin by 3.6 percentage points. Improved production and volume-related efficiencies also increased our consolidated gross margin by 0.6 percentage points. These favorable items were partially offset by the impact of increased raw material costs, which reduced our consolidated gross margin by 0.9 percentage points, and wage, benefit and other cost increases, which reduced our consolidated gross margin by 1.2 percentage points.

Packaging Systems – Packaging Systems’ gross profit increased by $41.9 million, or 15.2%, in 2012, despite an unfavorable foreign exchange impact of $12.1 million. Packaging Systems’ gross margin increased by 2.6 percentage points in 2012, primarily as a result of sales price increases and a favorable mix of products sold, all of which increased Packaging Systems’ gross margin by 4.4 percentage points. Improved production and volume-related efficiencies also increased Packaging Systems’ gross margin by 0.5 percentage points. These favorable items were partially offset by the impact of increased raw material costs and increased wages, benefits and other costs, which reduced Packaging Systems’ gross margin by 1.3 percentage points and 1.0 percentage points, respectively.

Delivery Systems – Delivery Systems’ gross profit increased by $6.5 million, or 10.4%, in 2012, despite an unfavorable foreign exchange impact of $0.6 million. Delivery Systems’ gross margin increased by 1.1 percentage points in 2012. Production efficiencies and favorable raw material prices contributed 1.0 percentage points and 0.4 percentage points of the increase, respectively, partially offset by the net impact of wage, benefit and other cost increases in excess of our sales price increases.


25



2011 compared to 2010
Consolidated gross profit increased by $21.2 million, or 6.7%, in 2011, including a favorable foreign exchange impact of $7.8 million. Consolidated gross margin decreased by 0.3 percentage points in 2011, primarily due to the impact of increased raw material costs, which reduced our consolidated gross margin by 2.2 percentage points. Sales price increases and product mix improvements increased our gross margin by 1.5 percentage points, but the impact was partially offset by wage and benefit increases, which reduced our consolidated gross margin by 0.6 percentage points. Improved production efficiencies and cost saving initiatives contributed 1.3 percentage points to our change in consolidated gross margin in 2011. The majority of the higher raw material costs related to natural rubber and materials linked to hydrocarbon prices, such as synthetic polymers and plastic resins.

Packaging Systems – Packaging Systems’ gross profit increased by $18.5 million, or 7.2%, in 2011, including a favorable foreign exchange impact of $7.5 million. Packaging Systems’ gross margin decreased by 0.7 percentage points in 2011, primarily due to the impact of increased raw material costs, which reduced Packaging Systems’ gross margin by 2.5 percentage points. Sales price increases and a temporary raw material surcharge partially offset the impact from higher raw material costs and other inflationary increases. Improved production efficiencies contributed 1.4 percentage points to the change in Packaging Systems’ gross margin.

Delivery Systems – Delivery Systems’ gross profit increased by $2.7 million, or 4.5%, in 2011, including a favorable foreign exchange impact of $0.3 million. Delivery System’s gross margin increased by 0.1 percentage points in 2011. Margin growth was constrained in 2011 due to the impact of contractually-mandated sales price decreases and increased raw material costs, which combined to reduce Delivery Systems’ gross margin by 2.0 percentage points. These factors were fully offset by an improved product mix, production efficiencies and lower overhead resulting from our restructuring initiatives.

Research and Development (“R&D”) Costs

 
Year Ended December 31,
 
% Change
($ in millions)
2012
 
2011
 
2010
 
2012/2011
 
2011/2010
R&D costs
$
33.2

 
$
29.1

 
$
23.9

 
14.1
%
 
21.8
%

2012 compared to 2011
R&D costs increased by $4.1 million, or 14.1%, in 2012, primarily as a result of development work on the SmartDose electronic patch injector system and increased investment in next-generation packaging components.

2011 compared to 2010
R&D costs increased by $5.2 million, or 21.8%, in 2011, primarily as a result of development work on the SmartDose electronic patch injector system, as well as continued development and validation activities for new advanced packaging and ready-to-use components and formulations.

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

 
Year Ended December 31,
 
% Change
($ in millions)
2012
 
2011
 
2010
 
2012/2011
 
2011/2010
SG&A costs
$
218.1

 
$
191.1

 
$
187.7

 
14.1
%
 
1.8
%
SG&A as a % of net sales
17.2
%
 
16.0
%
 
17.0
%
 
 
 
 


26



2012 compared to 2011
SG&A costs increased by $27.0 million, or 14.1%, in 2012, primarily due to increases in stock-based compensation expense, incentive compensation costs, information technology costs and U.S. pension expense, all of which were partially offset by foreign currency translation effects, which decreased SG&A costs by $4.6 million. The increase in stock-based compensation expense was primarily due to increased performance-based achievement levels and the impact of higher share prices on our deferred compensation plan liabilities, which are indexed to our share price. The increase in incentive compensation costs resulted from our current achievement expectations related to our incentive plans. In 2012, we also incurred incremental depreciation expense related to new information technology projects, as well as incremental depreciation expense and supply and utility costs related to our new corporate office and research building.

2011 compared to 2010
SG&A costs increased by $3.4 million, or 1.8%, in 2011, including foreign currency translation effects of $3.1 million and increased costs for outside services and information technology, partially offset by lower stock-based compensation expense resulting from the impact of lower share prices on our deferred compensation plan liabilities, which are indexed to our stock price.

Restructuring and Other Items

The following table presents restructuring charges and other income and expense items for our segments, and corporate and other unallocated items:

 
Year Ended December 31,
($ in millions) Expense (income)
2012
 
2011
 
2010
Segments
$
(5.1
)
 
$
1.6

 
$
1.9

Corporate and other unallocated items:
 
 
 
 
 
Corporate
(0.3
)
 
(0.1
)
 
(0.2
)
Restructuring and related charges
2.1

 
5.3

 
15.9

Impairment charge
3.4

 

 

Special separation benefits

 
2.9

 

Acquisition-related contingencies
1.2

 
(0.2
)
 
(1.8
)
Consolidated restructuring and other items
$
1.3

 
$
9.5


$
15.8


Other income and expense items, consisting primarily of gains and losses on the sale of fixed assets, foreign exchange transaction gains and losses, and miscellaneous income, are generally recorded within segment or corporate results. Certain restructuring, impairments and other specifically-identified gains and losses considered outside of the control of segment management are not allocated to our segments.

During 2012, segment results also included development income of $6.5 million primarily attributable to services provided to, and the reimbursement of certain costs from, a Delivery Systems’ customer.


27



Restructuring and related charges - During 2012, we incurred restructuring and related charges of $2.1 million to complete the 2010 plan. Charges incurred during 2012 included facility closure costs and employee severance and benefits associated with a reduction in operations at a manufacturing facility in England, as well as facility closure costs associated with the 2011 closure of a plant in the United States. During 2012, we finalized an agreement concerning future manufacturing and supply requirements at our manufacturing facility in England, which triggered an impairment review of the related assets. Our review concluded that the estimated fair value of these assets no longer exceeded their carrying value and therefore, an impairment charge of $1.5 million was recorded. We estimated the fair value of the assets using an income approach based on discounted cash flows. Offsetting the costs incurred during 2012 were reductions to certain previously-recorded obligations under the 2010 plan, including a reduction of $1.7 million following the cancellation of the restructuring initiative at one of our plants in Europe as a result of increased customer demand for products and related efficiency improvements at that plant. We do not expect to incur any future charges related to the 2010 plan, and the remaining restructuring obligations at December 31, 2012 will be reduced to zero as payments are made.

During 2011, we incurred restructuring and related charges of $5.3 million associated with the 2010 plan. Charges associated with the plan in 2011 were primarily associated with the 2011 closure of a plant in the United States, a reduction of operations at a manufacturing facility in England, and the elimination of certain operational and administrative functions in other locations.

During 2010, we incurred restructuring and related charges of $15.9 million, comprised of employee severance and benefits of $10.5 million, fixed asset impairment charges of $4.4 million, and fixed asset relocation costs and other related charges of $1.0 million. The majority of these charges related to the 2010 plan, which was designed to reduce our cost structure and improve operating efficiency.

Impairment charge – During 2012, as a result of continuing delays and lower-than-expected demand, we updated the sales projections related to one of our Delivery Systems’ product lines. The revised projections triggered an impairment review of the associated assets. Our review concluded that the estimated fair value of the product line no longer exceeded the carrying value of the related assembly equipment and intangible asset and, therefore, an impairment charge of $3.4 million was recorded. We estimated the fair value of the asset group using an income approach based on discounted cash flows.

Special separation benefits – During 2011, we incurred $2.9 million in special separation benefits related to the retirement of our former President and Chief Operating Officer. These costs consisted primarily of stock-based compensation expense and a settlement loss related to one of our non-qualified defined benefit pension plans. The respective equity compensation arrangements were amended to allow certain of his awards to continue to vest over the original vesting period instead of being forfeited upon separation, resulting in a revaluation of the awards and acceleration of expense.

Acquisition-related contingencies – During 2012 and 2011, we increased the liability for contingent consideration related to our 2010 acquisition of technology used in our SmartDose electronic patch injector system ("SmartDose contingent consideration") by $1.2 million and $0.5 million, respectively, due to fair value adjustments. During 2011 and 2010, we reduced the liability for contingent consideration related to our July 2009 acquisition of the eris safety syringe system (“éris contingent consideration”)by $0.8 million and $1.8 million, respectively, bringing the liability balance to zero. This reduction reflects our assessment that none of the contractual operating targets will be achieved over the earnout period, which ends in 2014.
 
See Note 3, Restructuring and Other Items, for further discussion.


28



Operating Profit

The following table presents operating profit (loss) by reportable segment, corporate and other unallocated costs:

 
Year Ended December 31,
($ in millions)
2012
 
2011
 
2010
Segments:
 
 
 
 
 
Packaging Systems
$
187.5

 
$
152.6

 
$
139.3

Delivery Systems
18.4

 
9.8

 
9.7

Corporate and other unallocated items:
 

 
 
 
 

Corporate
(64.1
)
 
(44.8
)
 
(44.2
)
Other unallocated expense
(6.7
)
 
(8.0
)
 
(14.1
)
Consolidated operating profit
$
135.1

 
$
109.6

 
$
90.7


2012 compared to 2011
Consolidated operating profit increased by $25.5 million, or 23.3%, in 2012, despite an unfavorable foreign exchange impact of $7.7 million. Consolidated operating profit increased primarily due to the increase in consolidated gross profit described above and the decrease in restructuring and other items previously described, both of which were partially offset by the increases in R&D and SG&A costs described above.

Packaging Systems – Packaging Systems’ operating profit increased by $34.9 million, or 22.9%, in 2012, despite an unfavorable foreign exchange impact of $7.5 million. Packaging Systems’ operating profit increased primarily due to the increase in Packaging Systems’ gross profit described above, partially offset by increases in R&D and SG&A costs.

Delivery Systems – Delivery Systems’ operating profit increased by $8.6 million, or 87.8%, in 2012, despite an unfavorable foreign exchange impact of $0.2 million. Delivery Systems’ operating profit increased primarily due to the increase in Delivery Systems’ gross profit described above and the recognition of development income primarily attributable to services provided to, and the reimbursement of certain costs from, a Delivery Systems' customer, both of which were partially offset by increases in R&D and SG&A costs.

Corporate – Corporate’s operating loss increased by $19.3 million, or 43.1%, in 2012, primarily due to increases in stock-based compensation expense, incentive compensation costs and U.S. pension expense. The increase in stock-based compensation expense was primarily due to increased performance-based achievement levels and the impact of higher share prices on our deferred compensation plan liabilities, which are indexed to our share price. The increase in incentive compensation costs resulted from our current achievement expectations related to our incentive plans. In 2012, we also incurred incremental depreciation expense related to new information technology projects, as well as incremental depreciation expense and supply and utility costs related to our new corporate office and research building.

2011 compared to 2010
Consolidated operating profit increased by $18.9 million, or 20.8%, in 2011, including a favorable foreign exchange impact of $4.5 million. Consolidated operating profit increased primarily due to the increase in consolidated gross profit described above and the decrease in restructuring and other items previously described, both of which were partially offset by the increases in R&D costs and SG&A costs described above.

Packaging Systems – Packaging Systems’ operating profit increased by $13.3 million, or 9.5%, in 2011, including a favorable foreign exchange impact of $4.3 million. Packaging Systems’ operating profit increased primarily due to the increase in Packaging Systems’ gross profit described above, partially offset by an increase in R&D costs primarily due to continued development and validation activities for new advanced packaging and ready-to-use components and formulations.

29



Delivery Systems – Delivery Systems’ operating profit increased by $0.1 million, or 1.0%, in 2011. Delivery Systems’ operating profit increased primarily due to the increase in Delivery Systems’ gross profit described above, while its R&D costs increased primarily as a result of development work on the SmartDose electronic patch injector system.

Loss on Debt Extinguishment

During the year ended December 31, 2012, we recognized a pre-tax loss on debt extinguishment of $11.6 million related to our repurchase of our Convertible Debentures, which consisted of a $6.2 million premium over par value, $4.4 million write-off of unamortized debt issuance costs and $1.0 million in transaction costs.

Interest Expense, Net

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

 
Year Ended December 31,
($ in millions)
2012
 
2011
 
2010
Interest expense
$
18.6

 
$
19.3

 
$
17.7

Capitalized interest
(1.9
)
 
(1.1
)
 
(0.9
)
Interest income
(1.8
)
 
(1.3
)
 
(0.6
)
Interest expense, net
$
14.9

 
$
16.9


$
16.2


2012 compared to 2011
Interest expense, net, decreased by $2.0 million, or 11.8%, in 2012, primarily due to increased capitalized interest resulting from recently-completed or ongoing capital projects, as well as the impact of the retirement at maturity of our $50.0 million Series A floating rate notes and the expiration of the related interest rate swap agreement, which we financed under our lower-rate senior unsecured, multi-currency revolving credit facility agreement (the "New Credit Agreement"). See Note 11, Debt, for further discussion of the New Credit Agreement.

2011 compared to 2010
Interest expense, net, increased by $0.7 million, or 4.3%, in 2011, primarily due to increased amortization of debt-issue costs resulting from the June 2010 refinancing of our revolving credit facility and bank fees related to the construction and acquisition of our new corporate office and research building.

Income Taxes

The provision for income taxes was $32.7 million, $23.5 million and $13.6 million for the years 2012, 2011 and 2010, respectively, resulting in effective tax rates of 30.2%, 25.3% and 18.3%, respectively. The increase in the effective tax rate for 2012 primarily reflects changes in our geographic mix of earnings, the impact of the discrete tax items discussed below, and the nondeductibility of the purchase premium paid in 2012 related to the extinguishment of our convertible debt. The increase in the effective tax rate for 2012 also reflects the absence of a Research and Development tax credit in 2012, as the tax credit expired in 2011 and was not reinstated until the enactment of the American Taxpayer Relief Act of 2012 (the “Act”) in January 2013. In accordance with U.S. GAAP, although the Act retroactively reinstated the tax credit for two years, from January 1, 2012 through December 31, 2013, the credit will not be taken into account for financial reporting purposes until the first quarter of 2013. Had the Act been signed prior to January 2013, our effective tax rate for 2012 would have been reduced by approximately 1.0%. The increase in the effective tax rate for 2011 primarily reflects the higher 2011 pretax income levels and geographic mix of earnings generated by the lower level of restructuring costs in the United States and our increased earnings in Europe and Asia, as well as the impact of the discrete tax items discussed below.
During 2012, as a result of the finalization of estimates of foreign tax credits available with respect to a dividend from one of our foreign subsidiaries, we reduced our foreign tax credit deferred tax asset by $1.0 million. We also

30



recorded a discrete tax charge of $0.8 million resulting from the impact of a change in the U.K. enacted tax rate on our deferred tax balances and recorded a $0.3 million reduction of our deferred tax assets associated with the legal restructuring of the ownership of our Puerto Rico operations.

During 2011, we recorded $1.4 million in net discrete tax charges from changes in international tax rates that affected our deferred tax carrying values.

During 2010, we recognized $1.1 million in net discrete tax benefits primarily from the resolution of tax contingencies due to the expiration of open periods in various jurisdictions and the closing of a tax audit.

As of December 31, 2012, we had $6.8 million of total gross unrecognized tax benefits, of which $6.6 million, if recognized, would favorably impact the effective income tax rate. It is reasonably possible that, due to the expiration of statutes and the closing of tax audits, the liability for unrecognized tax benefits may be reduced by approximately $2.0 million during the next twelve months, which would favorably impact our effective tax rate.

Equity in Net Income of Affiliated Companies

Equity in net income of affiliated companies represents the contribution to earnings from our 25% ownership interest in Daikyo and our 49% ownership interest in four companies in Mexico. Equity in net income of affiliated companies was $4.8 million, $6.3 million, and $4.4 million for the years 2012, 2011 and 2010, respectively. Equity in net income of affiliated companies decreased by $1.5 million, or 23.8%, in 2012, primarily due to start-up costs for a new production facility and increased SG&A costs at Daikyo. Equity in net income of affiliated companies increased by $1.9 million, or 43.2%, in 2011, primarily due to increased gross profit reported by Daikyo on higher sales of their pharmaceutical packaging products and specialty products.

Purchases from affiliates totaled $75.2 million in 2012, $66.4 million in 2011, and $49.3 million in 2010, the majority of which related to a distributorship agreement with Daikyo which allows us to purchase and re-sell Daikyo products. Sales to affiliates were $3.5 million, $4.5 million and $2.4 million in 2012, 2011, and 2010, respectively.

Net Income

Net income in 2012 was $80.7 million, or $2.30 per diluted share, compared to $75.5 million, or $2.16 per diluted share, in 2011. Our 2012 results included the impact of restructuring and related charges of $1.4 million (net of $0.7 million in tax), an impairment charge of $2.1 million (net of $1.3 million in tax), an increase in acquisition-related contingencies of $1.0 million (net of $0.2 million in tax), a loss on extinguishment of debt of $9.8 million (net of $1.8 million in tax) and discrete tax charges of $2.1 million.
Net income in 2011 was $75.5 million, or $2.16 per diluted share, compared to $65.3 million, or $1.89 per diluted share, in 2010. Our 2011 results included the impact of restructuring and related charges of $3.5 million (net of $1.8 million in tax), income from the reduction of acquisition-related contingencies of $0.2 million, special separation benefits related to the retirement of our former President and Chief Operating Officer of $1.8 million (net of $1.1 million in tax) and net discrete tax charges of $1.4 million.
Net income in 2010 was $65.3 million, or $1.89 per diluted share, compared to $72.6 million, or $2.12 per diluted share, in 2009. Our 2010 results included the impact of restructuring charges and asset impairments of $10.2 million (net of $5.7 million in tax), income from the reduction of acquisition-related contingencies of $1.6 million (net of $0.2 million in tax) and net discrete tax benefits of $1.1 million.


31



FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

Cash Flows

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

($ in millions)
2012
 
2011
 
2010
Net cash provided by operating activities
$
187.4

 
$
130.7

 
$
138.3

Net cash used in investing activities
(116.0
)
 
(120.5
)
 
(74.0
)
Net cash used in financing activities
(3.4
)
 
(24.7
)
 
(34.0
)

Net Cash Provided by Operating Activities

2012 compared to 2011
Net cash provided by operating activities was $187.4 million in 2012, an increase of $56.7 million from 2011. Net cash provided by operating activities increased in 2012 primarily due to the net sales and gross profit improvements achieved in both our Packaging Systems and Delivery Systems segments, lower restructuring payments, the collection of deposits and timing of other payments.

2011 compared to 2010
Net cash provided by operating activities was $130.7 million in 2011, a decrease of $7.6 million from 2010. Net cash provided by operating activities decreased in 2011 primarily due to increased payments made under our restructuring plans and a higher level of pension funding.

Net Cash Used in Investing Activities

2012 compared to 2011
Net cash used in investing activities was $116.0 million in 2012, a decrease of $4.5 million from 2011. Net cash used in investing activities decreased in 2012 primarily due to a $40.0 million net change in short-term investments, as we had net sales of short-term investments of $14.4 million in 2012, as compared to net purchases of short-term investments of $25.6 million in 2011. The short-term investments represent certificates of deposit, primarily in Israel, with maturities between three and nine months. The change related to short-term investments was partially offset by a $35.9 million increase in capital spending, to $131.3 million, in 2012. The majority of the increased capital spending was related to construction of our new corporate office and research building, which began in 2011 and settled in February 2013, information technology infrastructure improvements, and construction of our new compression-molding plant in China, for which validation activities began in January 2013 and commercial production is expected to begin in the second quarter of 2013.

2011 compared to 2010
Net cash used in investing activities was $120.5 million in 2011, an increase of $46.5 million from 2010. Net cash used in investing activities increased in 2011 primarily due to a $24.3 million increase in capital spending and a $23.9 million increase in net purchases of short-term investments. The short-term investments represent certificates of deposit, primarily in Israel, with maturities between three and nine months. The majority of the increased capital spending was related to the expansion in capacity for manufacturing Daikyo Crystal Zenith syringes at our Scottsdale, AZ facility, as well as construction on our new compression-molding plant in China and construction of our new corporate office and research building that began in 2011.


32



Net Cash Used in Financing Activities

2012 compared to 2011
Net cash used in financing activities was $3.4 million in 2012, a decrease of $21.3 million from 2011. On June 11, 2012, we repurchased $158.4 million in aggregate principal amount of our Convertible Debentures. The total cash payment was $165.6 million, which included the par value of the Convertible Debentures, the purchase premium, and related transaction costs. On July 5, 2012, we concluded a private placement issuance of $168.0 million in senior unsecured notes varying in maturities from 10 – 15 years (the “Notes”). On July 30, 2012, we used a portion of our New Credit Agreement to repay our $50.0 million Series A floating rate notes that matured on July 28, 2012.

Net cash used in financing activities for 2012 included an overall increase in net revolving credit facility borrowings from 2011 and debt issuance costs of $7.5 million, which primarily consisted of the settlement payment made by us for the two forward treasury lock agreements that we entered into, and subsequently terminated, during 2012. See Note 12, Derivative Financial Instruments, and Note 11, Debt, for further discussion. We used cash generated from operations and net borrowings to fund our repurchase of our Convertible Debentures, working capital needs, capital expenditures and pension obligations, and to pay dividends.

We paid cash dividends totaling $24.9 million ($0.73 per share) and $23.2 million ($0.69 per share) during 2012 and 2011, respectively.

2011 compared to 2010
Net cash used in financing activities was $24.7 million in 2011, a decrease of $9.3 million from 2010. Net cash used in financing activities decreased in 2011 primarily due to a reduction in net revolving credit facility repayments from 2010. In December 2011, through a series of intercompany dividends from our international subsidiaries to the United States, we repatriated cash, which was subsequently used to pay down some of our outstanding debt, for general corporate purposes, and to increase our U.S. cash reserves.

We paid cash dividends totaling $23.2 million ($0.69 per share) and $21.7 million ($0.65 per share) during the years ended December 31, 2011 and 2010, respectively.

Liquidity and Capital Resources

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

($ in millions)
December 31, 2012
 
December 31, 2011
Cash and cash equivalents
$
161.9

 
$
91.8

Short-term investments
$
12.4

 
$
26.5

Working capital
$
295.5

 
$
228.8

Total debt
$
411.5

 
$
349.4

Total equity
$
728.9

 
$
654.9

Net debt-to-total invested capital
25.5
%
 
28.2
%

Cash and cash equivalents include all instruments that have maturities of ninety days or less when purchased. Short-term investments include all instruments that have maturities between ninety-one days and one year when purchased. Working capital is defined as current assets less current liabilities. Net debt is defined as total debt less cash and cash equivalents, and total invested capital is defined as the sum of net debt and total equity.


33



Cash and cash equivalents – Our cash and cash equivalents balance at December 31, 2012 consisted of cash held in cash 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, 2012 included $150.1 million of cash held by subsidiaries outside of the United States, primarily in Germany, Israel, Singapore, and Ireland, which is available to fund operations and growth of non-U.S. subsidiaries. Bringing the cash into the United States could trigger U.S. federal, state and local income tax obligations, however, we may temporarily access cash held by our non-U.S. subsidiaries without becoming subject to U.S. income tax by entering into short-term intercompany loans.

Working capital - Working capital at December 31, 2012 increased by $66.7 million, or 29.2%, during 2012, including an increase of $2.5 million due to foreign currency translation. Excluding the impact of currency exchange rates, cash and cash equivalents, accounts receivable and inventories increased by $68.0 million, $25.7 million and $8.9 million, respectively, partially offset by an increase in total current liabilities of $15.9 million. The increased accounts receivable balance was primarily the result of the increase in net sales described above, particularly net sales outside of the United States, where payment cycles are typically longer, while the increase in current liabilities was primarily due to increases in accounts payable, accrued salaries, wages and benefits and other current liabilities, all of which were partially offset by a decrease in notes payable and other current debt. Working capital also increased during 2012 as a result of the reclassification of the obligations associated with our new corporate office and research building as of December 31, 2012 from current liabilities to long-term debt as of December 31, 2012, as described in more detail below.

Debt and credit facilities - The $62.1 million increase in total debt at December 31, 2012, as compared to December 31, 2011, resulted from net borrowings and related debt activity of $60.3 million and foreign exchange rate fluctuations of $1.8 million.

Our sources of liquidity include our New Credit Agreement entered into on April 27, 2012. This agreement replaces our prior $225.0 million revolving credit facility, which was scheduled to expire in June 2014. The New Credit Agreement, which expires in April 2017, contains a $300.0 million committed credit facility and an accordion feature allowing the maximum to be increased through a term loan to $350.0 million 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 letters of credit. Borrowings under the revolving credit facility bear interest at a rate equal to LIBOR plus a margin ranging from 1.25 to 2.25 percentage points, which is based on the ratio of our senior debt to modified EBITDA. At December 31, 2012, we had $71.5 million in outstanding borrowings under this facility, of which $5.7 million was classified as short-term based upon our intent to repay this portion within the next twelve months and $65.8 million was classified as long-term based upon our intent and ability to continue the loans beyond one year. On June 11, 2012, we used our revolving credit facility to fund our repurchase of our Convertible Debentures, which is discussed further in Note 11, Debt. We had $224.9 million of borrowing capacity available under this facility at December 31, 2012. We do not expect limitations on our ability to access this source of funds.

In addition, we have a $50.0 million revolving credit facility. In February 2013, we borrowed $42.8 million under this facility, primarily to finance the construction and acquisition of our new corporate office and research building. Construction was completed and settlement occurred in February 2013, at which point the revolving loan balance converted to a five-year term loan. Borrowings under the loan bear interest at a variable rate equal to one-month LIBOR plus a margin of 1.50 percentage points. In anticipation of this debt, in 2011, we entered into a forward-start interest rate swap which effectively fixes the interest rate at 5.41% for the five-year period beginning in the first quarter of 2013. As of December 31, 2012, there was $35.3 million in obligations related to the construction and acquisition of our new corporate office and research building. In accordance with U.S. GAAP, we reclassified these obligations from current liabilities to long-term debt as of December 31, 2012, as it was our intention at that time to refinance the short-term obligations on a long-term basis and we consummated the refinancing prior to the issuance of our Form 10-K.

On July 5, 2012, we concluded a private placement issuance of $168.0 million in Notes. The Notes rank pari passu with our other senior unsecured debt. The proceeds from the issuance reduced indebtedness under our New Credit Agreement that was incurred to finance our repurchase of our Convertible Debentures discussed above. The weighted average of the coupon interest rates on the Notes is 3.87%. In anticipation of this issuance, we entered into

34



two treasury lock agreements for a total notional amount of $160.0 million, which were designated as cash flow hedges. On June 19, 2012, the date the pricing for the Notes was finalized, both treasury locks were terminated, resulting in a $4.6 million loss, which was reflected in accumulated other comprehensive income and which will be expensed over the life of the Notes. This loss, in addition to transaction costs incurred, increased the annual effective rate of interest on the Notes to an estimated 4.16%.

On July 30, 2012, we used a portion of our New Credit Agreement to repay our $50.0 million Series A floating rate notes that matured on July 28, 2012.

Refer to Note 12, Derivative Financial Instruments, for further discussion of the interest-rate hedges mentioned above.

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, 2012, 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 2013.

We believe that cash on hand and cash generated from operations, together with availability under our New Credit Agreement, 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.

Contingent Consideration

The fair value of the SmartDose contingent consideration was determined at the acquisition date 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 restructuring and other items in our condensed consolidated statements of income. The significant unobservable inputs used in the fair value measurement of our contingent consideration are the sales projections and the discount rate used in the calculation. 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 our SmartDose electronic patch injector system progresses, we may need to update the sales projections and the discount rate used. This could result in an increase or decrease to the contingent consideration liability.

Commitments and Contractual Obligations

The following table summarizes our contractual obligations and commitments at December 31, 2012. These obligations are not expected to have a material impact on liquidity.

 
 
Payments Due By Period
($ in millions)
Total
Less than 1 year
1 - 3 years
3 - 5 years
More than 5 years
Purchase obligations (1)
$
34.4

$
26.6

$
5.3

$
2.5

$

Long-term debt
410.8

32.7

25.1

146.6

206.4

Interest on long-term debt and interest rate swaps (2)
115.1

14.9

28.7

19.2

52.3

Capital lease obligations
0.7



0.7


Operating lease obligations
53.1

9.1

15.5

10.0

18.5

Other long-term liabilities (3)
30.8

0.4

2.3

5.1

23.0

Total contractual obligations(4)
$
644.9

$
83.7

$
76.9

$
184.1

$
300.2


35




(1)
Our business creates a need to enter into various commitments with suppliers. In accordance with U.S. GAAP, these purchase obligations are not reflected in the accompanying consolidated balance sheets. These purchase commitments do not exceed our projected requirements and are in the normal course of business. In addition, we expect to incur $9.9 million in capital expenditures related to our new corporate office and research building during the first half of 2013.

(2)
For fixed-rate long-term debt, interest was based on principal amounts and fixed coupon rates at year end. Future interest payments on variable-rate debt were calculated using principal amounts and the applicable ending interest rate at year end. Interest on fixed-rate derivative instruments was based on notional amounts and fixed interest rates contractually obligated at year end.

(3)
Represents acquisition-related contingencies. In connection with certain business acquisitions, we agreed to make payments to the sellers when and if certain operating milestones are achieved such as sales and operating income targets.

(4)
This table does not include obligations pertaining to pension and postretirement benefits because the actual amount and timing of future contributions may vary significantly depending upon plan asset performance, benefit payments, and other factors. The minimum required contributions to our plans are expected to be $7.7 million in 2013. See Note 14, Benefit Plans, for estimated benefit payments over the next ten years.

Reserves for uncertain tax positions - The table above does not include $6.8 million of total gross unrecognized tax benefits as of December 31, 2012. Due to the high degree of uncertainty regarding the timing of potential cash flows, we cannot reasonably estimate the settlement periods for amounts which may be paid.

Letters of credit - We have letters of credit totaling $3.6 million supporting the reimbursement of workers' compensation and other claims paid on our behalf by insurance carriers. The accrual for insurance obligations was $9.5 million at December 31, 2012, of which $5.6 million is in excess of our deductible and, therefore, is reimbursable by the insurance company.

OFF-BALANCE SHEET ARRANGEMENTS

At December 31, 2012, we had no off-balance sheet financing arrangements other than operating leases, unconditional purchase obligations incurred in the ordinary course of business and outstanding letters of credit related to various insurance programs.

CRITICAL ACCOUNTING POLICIES AND 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:

Revenue Recognition: Revenue is recognized when persuasive evidence of a sales arrangement exists, title and risk of loss have transferred, the selling price is fixed or determinable, and collectability is reasonably assured. Generally, sales are recognized upon shipment or upon delivery to our customers' site, based upon shipping terms or legal requirements. Some customers receive pricing rebates upon attaining established sales volumes. We record rebate costs when sales occur based on our assessment of the likelihood that the required volumes will be attained. We also establish product return liabilities for customer quality claims, as we believe that we are able to reasonably estimate the amount of returns based on our substantial historical experience.


36



Impairment of Long-Lived Assets: Long-lived assets, including property, plant and equipment, are tested for impairment whenever circumstances 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. Once an asset is considered impaired, an impairment loss is recorded within restructuring and other items 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.

During 2012, as a result of continuing delays and lower-than-expected demand, we updated the sales projections related to one of our Delivery Systems' product lines. The revised projections triggered an impairment review of the associated assets. Our review concluded that the estimated fair value of the product line no longer exceeded the carrying value of the related assembly equipment and intangible asset and, therefore, an impairment charge of $3.4 million was recorded, $3.2 million of which was for the related assembly equipment. We estimated the fair value of the asset group using an income approach based on discounted cash flows.

Impairment of Goodwill and Other Intangible Assets: Goodwill and indefinite-lived intangible assets are 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 as part of the reporting unit to which it belongs. Our reporting units are the same as, or one level below, our operating segments. The goodwill impairment test first requires a comparison of the fair value of each reporting unit to its carrying amount, including goodwill. If the carrying amount exceeds fair value, a second step must be performed. The second step requires the comparison of the carrying amount of the goodwill to its implied fair value, which is calculated as if the reporting unit had just been acquired as of the testing date. Any excess of the carrying amount of goodwill over the implied fair value would represent an impairment loss. 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. No impairment in the carrying value of our reporting units was evident as a result of our annual review of goodwill. With the exception of our Delivery Systems' Americas reporting unit, which had a fair value in excess of its carrying value by 20% and which is largely dependent on the continued and anticipated demand for certain of its products, including Daikyo Crystal Zenith products, each of our reporting units whose assets included goodwill had a fair value in excess of its respective carrying value by at least 40%. At December 31, 2012, the goodwill associated with the Delivery Systems' Americas reporting unit equaled $31.9 million, or 28.4% of our total goodwill.

Certain trademarks and in-process R&D have been determined to have indefinite lives and, therefore, are not subject to amortization. Impairment testing for indefinite-lived intangible assets requires a comparison between the fair value and carrying value of the asset, and any excess carrying value would represent an impairment. Fair values are determined using discounted cash flow analyses. Changes in the estimate of fair value could have a material impact on our future results of operations and financial position. No impairment was evident as a result of our annual review of indefinite-lived intangible assets.

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.


37



As discussed above, during 2012, an impairment charge of $3.4 million was recorded as the estimated fair value of one of our Delivery Systems' product lines no longer exceeded the carrying value of the related assembly equipment and intangible asset. The impairment charge for the intangible asset was $0.2 million. See above for further discussion.

Employee Benefits: We maintain funded and unfunded defined benefit pension plans in the United States and a number of other countries that cover employees that meet eligibility requirements. In addition, we sponsor postretirement benefit plans which provide healthcare benefits for eligible employees who retire or become disabled. The measurement of annual cost and obligations under these defined benefit postretirement plans is subject to a number of assumptions, which are specific for each of our U.S. and foreign plans. The assumptions, which are reviewed at least annually, are relevant to both the plan assets (where applicable) and the obligation for benefits that will ultimately be provided to our employees. Two of the most critical assumptions in determining pension and retiree medical plan expense are the discount rate and expected long-term rate of return on plan assets. Other assumptions reflect demographic factors such as retirement age, rates of compensation increases, mortality and turnover and are evaluated periodically and updated to reflect our actual experience. For our funded plans, we consider the current and expected asset allocations of our plan assets, as well as historical and expected rates of return in estimating the long-term rate of return on plan assets. Under U.S. GAAP, differences between actual and expected results are generally accumulated in other comprehensive income (loss) as actuarial gains or losses and subsequently amortized into earnings over future periods.

Changes in key assumptions could have a material impact on our future results of operations and financial position. We estimate that every 25 basis point reduction in our long-term rate of return assumption would increase pension expense by $0.5 million, and every 25 basis point reduction in our discount rate would increase pension expense by $0.5 million. A decrease in the discount rate increases the present value of benefit obligations. Our net pension underfunded balance at December 31, 2012 was $112.2 million, compared to $106.6 million at December 31, 2011. Our underfunded balance for other postretirement benefits was $26.0 million at December 31, 2012, compared to $21.7 million at December 31, 2011.

Income Taxes: We estimate income taxes payable based upon current domestic and international tax legislation. In addition, deferred income tax assets and liabilities are established to recognize differences between the tax basis and financial statement carrying values of assets and liabilities. We maintain valuation allowances where it is more likely than not that all or a portion of a deferred tax asset will not be realized. The recoverability of tax assets is subject to our estimates of future profitability, 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.

See Note 1, Summary of Significant Accounting Policies and Note 17, New Accounting Standards, to our consolidated financial statements for additional information on accounting and reporting standards considered in the preparation and presentation of our financial statements.

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to various market risk factors such as fluctuating interest rates, foreign currency exchange rates and increasing commodity prices. These risk factors can impact our results of operations, cash flows and financial position. To manage these risks, we periodically enter into derivative financial instruments such as interest rate swaps, call options and forward exchange contracts for periods consistent with and for notional amounts equal to or less than the underlying exposures. In accordance with Company policy, derivative financial instruments are not used for speculation or trading purposes.


38



Foreign Currency Exchange Risk

We have subsidiaries outside the United States accounting for over 50% of consolidated net sales. Virtually all of these sales and related operating costs are denominated in the currency of the local country and translated into U.S. dollars for consolidated reporting purposes. Although the majority of the assets and liabilities of these subsidiaries are denominated in the functional currency of the subsidiary, they may also hold assets or liabilities denominated in other currencies. These items may give rise to foreign currency transaction gains and losses. As a result, our results of operations and financial position are exposed to changing currency exchange rates. We periodically use forward contracts to hedge certain transactions or to neutralize month-end balance sheet exposures on cross-currency intercompany loans.

We have designated our €81.5 million Euro-denominated notes as a hedge of our net investment in certain European subsidiaries. We also have a 500.0 million Yen-denominated note payable which has been designated as a hedge of our net investment in our Japanese affiliate. At December 31, 2012, a cumulative foreign currency translation loss on these net investment hedges of $4.9 million (net of tax of $3.1 million) was recorded within accumulated other comprehensive income.

Interest Rate Risk

As a result of our normal borrowing activities, we have long-term debt with both fixed and variable interest rates. Long-term debt consists of senior notes, convertible debentures, revolving credit facilities and capital lease obligations. Our exposures to fluctuations in interest rates are managed to the extent considered necessary by entering into interest rate swap agreements.

The following table summarizes our interest rate risk-sensitive instruments:
($ in millions)
2013
2014
2015
2016
2017
Thereafter
Carrying Value
Fair Value
Current Debt and Capital Leases:
 
 
 
 
 
 
 
 
Euro denominated
$
26.9






$
26.9

$
26.9

 Average interest rate - fixed
4.2
%
 
 
 
 
 
 
 
U.S. dollar denominated
0.1






0.1

0.1

Average interest rate - fixed
8.4
%
 
 
 
 
 
 
 
U.S. dollar denominated
5.7






5.7

5.7

Average interest rate - variable
1.7
%
 
 
 
 
 
 
 
Long-Term Debt and Capital Leases:
 
 
 
 
 
 
 
 
U.S. dollar denominated (1)


25.0


60.0

35.3

120.3

119.7

Average interest rate - variable
 
 
1.2
%
 
1.7
%
5.4
%
 
 
U.S. dollar denominated

0.1




171.1

171.2

172.4

Average interest rate - fixed
 
8.4
%
 
 
 
3.9
%
 
 
Euro denominated



81.5



81.5

88.1

Average interest rate - fixed
 
 
 
4.4
%
 
 
 
 
Yen denominated




5.8


5.8

5.8

Average interest rate - variable
 
 
 
 
1.6
%
 
 
 

(1) As of December 31, 2012, we have two interest rate swap agreements outstanding. The first agreement is designed to protect against volatility in variable interest rates payable on our $25.0 million senior floating rate notes maturing July 28, 2015 (“Series B Notes”). During the first quarter of 2013, we borrowed $42.8 million pursuant to a five-year term loan with a variable interest rate. In anticipation of this debt, in 2011, we entered into a forward-start interest rate swap to hedge the variability in cash flows due to changes in the applicable interest rate over the five-year period beginning in the first quarter of 2013. At December 31, 2012, these agreements had a fair value of $8.6 million, unfavorable to the Company, which was recorded as a noncurrent liability. Refer to Note 12, Derivative Financial Instruments, for additional information on these interest rate hedges.

39



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. In recent years, increases in raw material costs have had an adverse impact on us. We expect the volatility in raw material prices to continue. We will continue to pursue pricing and hedging strategies, and ongoing cost control initiatives to offset the effects on gross profit.

In May 2012, we purchased a series of call options intended to mitigate our exposure to such oil-based surcharges and protect operating cash flows with regard to a portion of our forecasted elastomer purchases during the months of July through October 2012, by capping our cost of the crude oil component of elastomer prices. This allows us to limit our exposure to increasing petroleum prices. These call options were not designated as hedging instruments. As of December 31, 2012, there were no options outstanding.

40




ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

CONSOLIDATED STATEMENTS OF INCOME
West Pharmaceutical Services, Inc. and Subsidiaries for the years ended December 31, 2012, 2011 and 2010
(In millions, except per share data)


 
 
2012
 
2011
 
2010
Net sales
 
$
1,266.4

 
$
1,192.3

 
$
1,104.7

Cost of goods and services sold
 
878.7

 
853.0

 
786.6

Gross profit
 
387.7

 
339.3

 
318.1

Research and development
 
33.2

 
29.1

 
23.9

Selling, general and administrative expenses
 
218.1

 
191.1

 
187.7

Restructuring and other items (Note 3)
 
1.3

 
9.5

 
15.8

Operating profit
 
135.1

 
109.6

 
90.7

Loss on debt extinguishment
 
11.6

 

 

Interest expense
 
16.7

 
18.2

 
16.8

Interest income
 
1.8

 
1.3

 
0.6

Income before income taxes
 
108.6

 
92.7

 
74.5

Income tax expense
 
32.7

 
23.5

 
13.6

Equity in net income of affiliated companies
 
4.8

 
6.3

 
4.4

Net income
 
$
80.7

 
$
75.5

 
$
65.3

 
 
 
 
 
 
 
Net income per share:
 
 

 
 

 
 
Basic
 
$
2.37

 
$
2.24

 
$
1.96

Diluted
 
$
2.30

 
$
2.16

 
$
1.89

 
 
 
 
 
 
 
Weighted average shares outstanding:
 
 

 
 

 
 
Basic
 
34.0

 
33.7

 
33.3

Diluted
 
35.9

 
37.0

 
36.7

 
 
 
 
 
 
 
Dividends declared per share
 
$
0.74

 
$
0.70

 
$
0.66


The accompanying notes are an integral part of the consolidated financial statements.

41



CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
West Pharmaceutical Services, Inc. and Subsidiaries for the years ended December 31, 2012, 2011 and 2010
(In millions)

 
2012
 
2011
 
2010
Net income
$
80.7

 
$
75.5

 
$
65.3

Other comprehensive income (loss), net of tax:
 

 
 

 
 
Foreign currency translation adjustments
7.0

 
(11.8
)
 
(13.0
)
Defined benefit pension and other postretirement plans:
 
 
 
 
 
Prior service credit arising during period, net of tax of $2.0

 

 
3.2

Net actuarial loss arising during period, net of tax of $(6.2), $(17.9) and $(2.6)
(13.2
)
 
(30.1
)
 
(5.0
)
Curtailment arising during period, net of tax of $(0.2)

 
(0.4
)
 

Settlement effects arising during period, net of tax of $0.3

 
0.5

 

Less: amortization of actuarial loss, net of tax of $2.8, $2.2 and $2.1
5.7

 
3.8

 
3.4

Less: amortization of prior service credit, net of tax of $(0.5), $(0.5) and $(0.4)
(0.8
)
 
(0.9
)
 
(0.6
)
Less: amortization of transition obligation
0.1

 
0.1

 
0.1

Net gains on investment securities, net of tax of $0.2, $0.2 and $0.4
0.4

 
0.3

 
0.6

Net losses on derivatives, net of tax of $(2.1), $(1.1) and $(0.2)
(3.6
)
 
(1.7
)
 
(0.3
)
Other comprehensive loss, net of tax
(4.4
)
 
(40.2
)
 
(11.6
)
Comprehensive income
$
76.3

 
$
35.3

 
$
53.7


The accompanying notes are an integral part of the consolidated financial statements.

42



CONSOLIDATED BALANCE SHEETS
West Pharmaceutical Services, Inc. and Subsidiaries at December 31, 2012 and 2011
(In millions, except per share data)
 
2012
 
2011
ASSETS
 
 
 
Current assets:
 
 
 
Cash, including cash equivalents
$
161.9

 
$
91.8

Short-term investments
12.4

 
26.5

Accounts receivable, net
175.0

 
147.2

Inventories
162.2

 
151.8

Deferred income taxes
7.7

 
7.9

Other current assets
38.1

 
46.8

Total current assets
557.3

 
472.0

Property, plant and equipment
1,274.8

 
1,136.8

Less accumulated depreciation and amortization
605.8

 
543.2

Property, plant and equipment, net
669.0

 
593.6

Investments in affiliated companies
59.8

 
56.2

Goodwill
112.5

 
111.5

Deferred income taxes
90.3

 
85.1

Intangible assets, net
50.6

 
52.0

Other noncurrent assets
24.5

 
28.7

Total Assets
$
1,564.0

 
$
1,399.1

 
 
 
 
LIABILITIES AND EQUITY
 

 
 

Current liabilities:
 

 
 

Notes payable and other current debt
$
32.7

 
$
50.1

Accounts payable
102.9

 
89.8

Pension and other postretirement benefits
2.8

 
2.3

Accrued salaries, wages and benefits
56.5

 
45.0

Income taxes payable
15.6

 
7.8

Taxes other than income
7.8

 
9.5

Other current liabilities
43.5

 
38.7

Total current liabilities
261.8

 
243.2

Long-term debt
378.8

 
299.3

Deferred income taxes
20.8

 
21.6

Pension and other postretirement benefits
135.4

 
126.0

Other long-term liabilities
38.3

 
54.1

Total Liabilities
835.1

 
744.2

 
 
 
 
Commitments and contingencies (Note 16)


 


 
 
 
 
Equity:
 
 
 
Preferred stock, 3.0 million shares authorized; 0 shares issued and 0 shares outstanding in 2012 and 2011

 

Common stock, par value $.25 per share; 50.0 million shares authorized; shares issued: 34.4 million in 2012 and 34.3 million in 2011; shares outstanding: 34.3 million in 2012 and 33.7 million in 2011
8.6

 
8.6

Capital in excess of par value
79.3

 
76.3

Retained earnings
719.9

 
664.5

Accumulated other comprehensive loss
(75.9
)
 
(71.5
)
Treasury stock, at cost (0.1 million shares in 2012; 0.6 million shares in 2011)
(3.0
)
 
(23.0
)
Total Equity
728.9

 
654.9

Total Liabilities and Equity
$
1,564.0

 
$
1,399.1


The accompanying notes are an integral part of the consolidated financial statements.

43



CONSOLIDATED STATEMENT OF EQUITY
West Pharmaceutical Services, Inc. and Subsidiaries for the years ended December 31, 2012, 2011 and 2010
(In millions)
 
Common Shares Issued
 
Common Stock
 
Capital in Excess of Par Value
 
Number of Treasury Shares
 
Treasury Stock
 
Retained earnings
 
Accumulated other comprehensive loss
 
Total
Balance, December 31, 2009
34.3

 
$
8.6

 
$
72.9

 
1.3

 
$
(52.1
)
 
$
569.4

 
$
(19.7
)
 
$
579.1

Net income
 
 
 
 
 
 
 
 
 
 
65.3

 
 
 
65.3

Stock-based compensation
 
 
 
 
6.7

 
 
 
 
 
 
 
 
 
6.7

Shares issued under stock plans
 
 
 
 
(4.4
)
 
(0.4
)
 
12.7

 
 
 
 
 
8.3

Shares repurchased for employee tax withholdings
 
 
 
 
 
 
0.1

 
(2.1
)
 
 
 
 
 
(2.1
)
Excess tax benefit from employee stock plans
 
 
 
 
2.1

 
 
 
 
 
 
 
 
 
2.1

Dividends declared
 
 
 
 
 
 
 
 
 
 
(22.1
)
 
 
 
(22.1
)
Other comprehensive loss, net of tax
 
 
 
 
 
 
 
 
 
 
 
 
(11.6
)
 
(11.6
)
Balance, December 31, 2010
34.3

 
8.6


77.3


1.0


(41.5
)

612.6


(31.3
)

625.7

Net income
 
 
 
 
 
 
 
 
 
 
75.5

 
 
 
75.5

Stock-based compensation
 
 
 
 
8.6

 
 
 
 
 
 
 
 
 
8.6

Shares issued under stock plans
 
 
 
 
(13.1
)
 
(0.5
)
 
22.0

 
 
 
 
 
8.9

Shares repurchased for employee tax withholdings
 
 
 
 
 
 
0.1

 
(3.5
)
 
 
 
 
 
(3.5
)
Excess tax benefit from employee stock plans
 
 
 
 
3.5

 
 
 
 
 
 
 
 
 
3.5

Dividends declared
 
 
 
 
 
 
 
 
 
 
(23.6
)
 
 
 
(23.6
)
Other comprehensive loss, net of tax
 
 
 
 
 
 
 
 
 
 
 
 
(40.2
)
 
(40.2
)
Balance, December 31, 2011
34.3

 
8.6

 
76.3

 
0.6

 
(23.0
)
 
664.5

 
(71.5
)
 
654.9

Net income
 

 
 

 
 

 
 

 
 

 
80.7

 
 

 
80.7

Stock-based compensation
 

 
 

 
10.9

 
 

 
 

 
 

 
 

 
10.9

Shares issued under stock plans
0.1

 
 

 
(12.5
)
 
(0.6
)
 
24.4

 
 

 
 

 
11.9

Shares repurchased for employee tax withholdings
 

 
 

 
(0.3
)
 
0.1

 
(4.4
)
 
 

 
 

 
(4.7
)
Excess tax benefit from employee stock plans
 

 
 

 
4.9

 
 

 
 

 
 

 
 

 
4.9

Dividends declared
 

 
 

 
 

 
 

 
 

 
(25.3
)
 
 

 
(25.3
)
Other comprehensive loss, net of tax
 

 
 

 
 

 
 

 
 

 
 

 
(4.4
)
 
(4.4
)
Balance, December 31, 2012
34.4

 
$
8.6

 
$
79.3

 
0.1

 
$
(3.0
)
 
$
719.9

 
$
(75.9
)
 
$
728.9


The accompanying notes are an integral part of the consolidated financial statements.

44



CONSOLIDATED STATEMENTS OF CASH FLOWS
West Pharmaceutical Services, Inc. and Subsidiaries for the years ended December 31, 2012, 2011 and 2010
(In millions)
 
2012
 
2011
 
2010
Cash flows from operating activities:
 
 
 
 
 
Net income
$
80.7

 
$
75.5

 
$
65.3

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
 
Depreciation
72.8

 
71.1

 
68.8

Amortization
4.1

 
4.6

 
4.4

Loss on debt extinguishment
11.6

 

 

Stock-based compensation
15.5

 
8.4

 
7.8

Loss (gain) on sales of equipment
1.7

 
(0.2
)
 
0.7

Asset impairments
6.2

 

 
4.4

Deferred income taxes
5.3

 
2.9

 
(1.8
)
Pension and other retirement plans, net
(2.7
)
 
(4.5
)
 
5.4

Equity in undistributed earnings of affiliates, net of dividends
(4.5
)
 
(6.0
)
 
(4.2
)
Changes in assets/liabilities, net of acquisitions:
 
 
 
 
 
(Increase) decrease in accounts receivable
(25.7
)
 
(25.5
)
 
9.4

Increase in inventories
(8.9
)
 
(9.3
)
 
(20.7
)
Decrease (increase) in other current assets
5.8

 
(3.1
)
 
(3.9
)
Increase (decrease) in accounts payable
5.8

 
24.6

 
(0.3
)
Changes in other assets and liabilities
19.7

 
(7.8
)
 
3.0

Net cash provided by operating activities
187.4

 
130.7

 
138.3

Cash flows from investing activities:
 

 
 

 
 
Capital expenditures
(131.3
)
 
(95.4
)
 
(71.1
)
Acquisition of patents and other long-term assets
(0.7
)
 
(1.4
)
 
(2.7
)
Acquisition of businesses, net of cash acquired

 

 
(3.7
)
Sales of investments
45.6

 
15.6

 
8.9

Purchases of investments
(31.2
)
 
(41.2
)
 
(7.2
)
Other, net
1.6

 
1.9

 
1.8

Net cash used in investing activities
(116.0
)
 
(120.5
)
 
(74.0
)
Cash flows from financing activities:
 

 
 

 
 
Borrowings under revolving credit agreements
568.3

 
193.4

 
26.6

Repayments under revolving credit agreements
(502.6
)
 
(199.9
)
 
(39.8
)
Debt issuance costs
(7.5
)
 
(0.3
)
 
(1.7
)
Payment of long-term debt
(165.5
)
 

 

Long-term debt borrowings
168.0

 

 

Changes in other debt
(50.3
)
 
(0.5
)
 
(1.1
)
Dividend payments
(24.9
)