West Pharmaceutical Services, Inc. — 2021 Q3 Form 10-Q Summary
Business context and reporting period
West is a global manufacturer of containment, packaging and drug-delivery systems for injectable drugs and healthcare products, with reportable segments consisting of Proprietary Products and Contract-Manufactured Products. This unaudited Form 10-Q covers the three and nine months ended September 30, 2021, compared with the corresponding 2020 periods.
Manufacturing operations continued during the COVID-19 pandemic, with enhanced safety measures and increased production at certain facilities. Management reported limited operational disruption but noted continuing uncertainty involving employees, suppliers, transportation, customers and government responses.
Financial performance and liquidity
| Metric | Q3 2021 | Q3 2020 | 9M 2021 | 9M 2020 |
|---|---|---|---|---|
| Net sales | $706.5 million | $548.0 million | $2,100.8 million | $1,566.7 million |
| Gross profit | $288.2 million | $194.6 million | $875.2 million | $556.7 million |
| Gross margin | 40.8% | 35.5% | 41.7% | 35.5% |
| Operating profit | $181.4 million | $99.2 million | $568.3 million | $290.8 million |
| Operating margin | 25.7% | 18.1% | 27.1% | 18.6% |
| Net income | $175.6 million | $82.3 million | $514.1 million | $247.8 million |
| Diluted EPS | $2.31 | $1.09 | $6.78 | $3.28 |
- Q3 net sales increased 28.9%; nine-month sales increased 34.1%. Excluding currency translation, growth was 27.9% and 29.8%, respectively.
- Proprietary Products drove performance, with Q3 sales up 36.9% and nine-month sales up 43.0% as reported. Contract-Manufactured Products sales increased 2.4% and 5.6%, respectively.
- COVID-19-related activity contributed approximately $115 million of Q3 sales and $335 million of nine-month sales in 2021, compared with approximately $32 million and $52 million in the comparable 2020 periods.
- Net cash provided by operating activities was $423.2 million for the first nine months, versus $323.8 million in 2020. Capital expenditures were $176.9 million, compared with $116.7 million.
- Cash and cash equivalents were $688.0 million at September 30, 2021, versus $615.5 million at December 31, 2020. Working capital was $1,039.7 million.
- Total debt was $254.1 million, including $44.2 million classified as current. The company had no borrowings under its $300.0 million revolving credit facility and $297.6 million of available capacity, including letters of credit.
- The company was in compliance with its debt covenants and stated that cash, operating cash flow and available credit should meet foreseeable liquidity needs.
Material changes versus the prior comparable period
- Gross margin expanded 5.3 percentage points in Q3 and 6.2 percentage points for the nine-month period, primarily due to favorable product mix, pricing and production efficiencies in Proprietary Products.
- Contract-Manufactured Products gross margin declined to 16.1% in Q3 from 17.9% and to 16.2% for nine months from 17.2%, reflecting unfavorable product mix and timing of raw-material price pass-throughs.
- Adjusted operating profit increased to $182.8 million in Q3 from $103.9 million and to $573.2 million for nine months from $297.9 million. Adjusted operating margin rose to 25.9% and 27.3%, respectively.
- The effective tax rate declined to 6.6% in Q3 and 12.9% for nine months, versus 21.6% and 18.2%, respectively, primarily because a prepayment of future royalties generated a $20.4 million tax benefit.
- Operating cash flow increased, but capital spending rose substantially to support customer demand. Financing cash outflows included $137.1 million for repurchases under the 2021 program and $37.8 million of dividends.
- The company revised its 2020 restructuring plan: expected total charges decreased to approximately $9 million to $11 million, while expected annualized savings decreased to $0.9 million to $1.6 million. Cumulative charges recorded under the plan were $7.1 million.
Guidance, outlook, risks and unusual items
The filing does not provide explicit full-year revenue or earnings guidance. Management stated that demand remained strong and that certain restructuring actions were reduced because of increased customer demand. The company continues to invest in capacity, self-injection systems, fluid-transfer devices, elastomeric components and formulation development.
- Results benefited materially from COVID-19-related vaccine, antiviral and symptom-treatment demand; the durability and timing of this demand are uncertain.
- Key risks include supply-chain interruptions, raw-material and petroleum-based cost inflation, labor availability, customer inventory changes, competition, regulatory approval and commercialization of customer drugs, foreign-exchange movements, and reliance on third-party suppliers and affiliates, including Daikyo.
- The company hedges foreign-currency, interest-rate and commodity exposures. At September 30, 2021, crude-oil call options covered 182,495 barrels through March 2023 at a weighted-average strike price of $70.40 per barrel.
- Other unusual items included the $20.4 million royalty-related tax benefit, $1.8 million of nine-month cost-investment losses and impairments, $2.5 million of restructuring charges, and a $0.7 million pension settlement charge.
- Deferred income from capacity reservation agreements declined to $38.1 million from $57.1 million at year-end 2020; $30.0 million of revenue recognized during the nine months had been included in beginning deferred income.
- Management reported no significant changes to legal contingencies or risk factors, no material off-balance-sheet financing arrangements, and no material changes in internal controls. No legal proceedings were listed in Part II, Item 1.
Investor verification checklist
- Verify the extent to which 2021 growth and margins depend on COVID-19-related demand, particularly the reported $335 million of nine-month activity.
- Reconcile GAAP results with adjusted results, especially the $20.4 million royalty-related tax benefit and other excluded items.
- Assess the sustainability of Proprietary Products pricing, mix and production-efficiency gains and the weaker Contract-Manufactured Products margin.
- Review capital-expenditure requirements, working-capital growth and the effect of increased inventories and receivables on future cash conversion.
- Monitor the $44.2 million current debt balance, scheduled maturities, covenant compliance and use of the revolving credit facility.
- Evaluate exposure to raw-material inflation, supply-chain constraints, labor availability, foreign currency and customer concentration or ordering changes.