West Pharmaceutical Services, Inc. — Form 10-Q Summary
Business context and reporting period
West Pharmaceutical Services, Inc. filed its unaudited Form 10-Q for the quarter and six months ended June 30, 2016. The company develops and manufactures proprietary packaging and delivery products and contract-manufactured products for pharmaceutical, diagnostic and medical-device customers. Beginning in 2016, reporting changed to the Proprietary Products and Contract-Manufactured Products segments, with prior periods retrospectively adjusted.
Financial performance and liquidity
| Metric | Three months ended June 30, 2016 | Three months ended June 30, 2015 | Six months ended June 30, 2016 | Six months ended June 30, 2015 |
|---|---|---|---|---|
| Net sales | $388.0 million | $359.7 million | $750.1 million | $695.6 million |
| Gross profit | $133.3 million | $118.2 million | $256.6 million | $227.9 million |
| Gross margin | 34.4% | 32.8% | 34.2% | 32.8% |
| Operating profit | $61.2 million | $39.1 million | $91.2 million | $86.9 million |
| Operating margin | 15.8% | 10.9% | 12.2% | 12.5% |
| Net income | $44.7 million | $27.8 million | $66.9 million | $60.7 million |
| Diluted EPS | $0.60 | $0.38 | $0.90 | $0.83 |
Second-quarter sales increased 7.9%, while six-month sales increased 7.8%. Excluding currency effects, sales growth was 8.2% and 9.3%, respectively. Proprietary Products drove performance, with sales up 8.4% in the quarter and 9.0% year to date; Contract-Manufactured Products sales increased 5.6% and 3.4%, respectively.
Management attributed growth primarily to high-value products, including Daikyo and Daikyo RSV products and Westar and FluroTec-coated components. Product mix, production efficiencies, price increases and lower raw-material costs improved margins, partly offset by higher labor and overhead costs.
Adjusted consolidated operating profit, excluding unallocated items, was $59.7 million in the second quarter and $115.3 million for the first six months, compared with $50.0 million and $97.8 million in the prior-year periods. Adjusted operating margin improved to 15.4% from 13.9% for the quarter and to 15.4% from 14.1% year to date.
Net cash provided by operating activities was $79.2 million for the six months, compared with $75.6 million in 2015. Investing cash outflows were $81.2 million, including $74.0 million of capital expenditures and an $8.4 million investment in an intradermal drug-delivery company. Financing cash outflows were $72.5 million, including $68.6 million of debt repayments, $17.5 million of dividends and $17.2 million of share repurchases.
At June 30, 2016, cash and equivalents were $202.7 million, working capital was $419.8 million, and total debt was approximately $231.4 million. The company had $268.9 million of available capacity under its $300.0 million multi-currency revolving credit facility and was in compliance with all debt covenants. Management stated that cash, operating cash flow and available credit should meet foreseeable liquidity needs.
Material changes versus the prior comparable period
- Gross margin expanded by 1.6 percentage points in the quarter and 1.4 percentage points for the six months.
- Second-quarter operating profit increased 56.5%, primarily because 2015 included a $10.9 million executive-retirement charge, while 2016 included a $1.5 million restructuring-charge reversal.
- Six-month operating profit increased only 4.9% because 2016 included $21.4 million of restructuring and related charges and a $2.7 million Venezuelan currency-devaluation charge.
- Interest expense, net declined 43.3% in the quarter and 41.8% year to date because of lower debt, lower rates and increased capitalized interest.
- Cash declined by $71.9 million during the first six months, reflecting capital investment, debt repayment, dividends and repurchases.
- Total debt declined by approximately $66.8 million from December 31, 2015, primarily following maturity of the Euro note B.
Guidance, outlook, risks and unusual items
The filing does not provide explicit full-year revenue or earnings guidance. Management continued to emphasize growth in high-value proprietary products, ongoing investment in new products and capacity, and construction of a new facility in Waterford, Ireland.
The February 2016 restructuring plan is expected to generate total charges of $25.0 million to $28.0 million, including approximately $8.0 million of severance and $17.0 million to $20.0 million of non-cash asset write-downs. The company expects remaining charges to be recognized during the remainder of 2016 and in 2017.
The Venezuelan currency devaluation produced a $2.7 million charge. Further devaluations or changes in currency controls could result in an additional pre-tax charge of up to $4.9 million. The company also recorded $1.9 million of SmartDose contingent-consideration expense in the first six months; the related liability was $7.9 million at June 30, 2016 and remains sensitive to sales projections, probability-of-success assumptions and discount rates.
Key risks include customer demand and inventory changes, competition and pricing pressure, regulatory approval and commercialization of customer products, reliance on selected suppliers and partners, production and supply-chain interruptions, labor and raw-material costs, foreign-exchange volatility, petroleum-based material surcharges, healthcare legislation and the potential loss of key personnel. The filing states that there were no material changes to previously disclosed risk factors, commitments or legal proceedings.
Important facts for investors to verify
- Whether sales growth in high-value proprietary products and related margin expansion is sustainable after currency effects and restructuring adjustments.
- The timing and total cost of the restructuring plan, including the remaining 2016 and 2017 charges.
- Capital-expenditure requirements and execution of the Waterford, Ireland facility and other expansion projects.
- Cash conversion, working-capital requirements and the effect of further debt repayment, dividends and share repurchases on liquidity.
- Exposure to foreign currency, particularly the Euro, Yen and Venezuelan Bolivar, and the potential additional Venezuelan charge.
- Future SmartDose commercialization, contingent-consideration remeasurement and related cash obligations.
- The effect of pending revenue-recognition, lease and share-based-payment accounting standards; management had not completed all impact evaluations at filing.