West Pharmaceutical Services, Inc. — Form 10-Q Summary
Business Context and Reporting Period
Quarterly report for the three and six months ended June 30, 2015, filed August 3, 2015. West develops and manufactures pharmaceutical packaging components, drug-delivery systems, safety and administration systems, and contract-manufactured healthcare products. Reportable segments are Packaging Systems and Delivery Systems.
Financial Results and Position
| Metric | Q2 2015 | Q2 2014 | Six Months 2015 | Six Months 2014 |
|---|---|---|---|---|
| Net sales | $359.7 million | $368.9 million | $695.6 million | $715.7 million |
| Gross profit | $118.2 million | $121.8 million | $227.9 million | $228.2 million |
| Gross margin | 32.8% | 33.0% | 32.8% | 31.9% |
| Operating profit | $39.1 million | $54.1 million | $86.9 million | $93.4 million |
| Operating margin | 10.9% | 14.7% | 12.5% | 13.1% |
| Net income | $27.8 million | $37.6 million | $60.7 million | $64.7 million |
| Diluted EPS | $0.38 | $0.52 | $0.83 | $0.89 |
- Six-month operating cash flow was $75.6 million, compared with $73.0 million in the prior-year period. Capital expenditures were $57.1 million, resulting in approximately $18.5 million of operating cash flow before capital expenditures.
- Cash and cash equivalents were $252.0 million at June 30, 2015, compared with $255.3 million at December 31, 2014. Working capital was $366.2 million.
- Total debt was $326.7 million, consisting of $95.0 million of current debt and $231.7 million of long-term debt. Net debt-to-total invested capital was 7.0%, compared with 7.8% at year-end 2014.
- The company had $269.6 million of available borrowing capacity under its $300.0 million multi-currency revolving credit facility, after borrowings and letters of credit. Debt covenants were satisfied.
- Dividends declared were $0.11 per share in the quarter and $0.22 per share for the first six months, versus $0.10 and $0.20, respectively, in the comparable periods.
Material Changes Versus the Prior Comparable Period
- Reported sales declined 2.5% in the quarter and 2.8% year to date, primarily because foreign currency translation reduced sales by $36.5 million and $69.9 million, respectively. Excluding currency effects, sales increased 7.4% in the quarter and 7.0% year to date.
- Packaging Systems sales declined on a reported basis but increased 8.5% in the quarter and 7.8% year to date excluding currency. Its six-month gross margin increased to 38.6% from 36.6%, supported by product mix, pricing and production efficiencies.
- Delivery Systems sales increased 4.8% in the quarter and 5.0% year to date excluding currency. Its six-month gross margin declined to 17.6% from 19.2%, reflecting greater lower-margin service revenue and higher overhead and depreciation.
- Operating profit decreased 27.7% in the quarter and 7.0% year to date. Results included an unfavorable currency impact of $8.8 million and $18.6 million, respectively, and a $10.9 million executive retirement and related charge.
- Net income declined 26.1% in the quarter and 6.2% year to date. Management stated that, excluding currency effects and the executive retirement charge, six-month net sales and diluted EPS increased 7.0% and 23.0%, respectively.
- R&D expense declined 18.2% in the quarter and 21.6% year to date, while SG&A increased 5.7% and 1.8%, respectively. Stock-based compensation increased substantially, partly because of executive transition-related awards and higher share prices.
Outlook, Commentary, Risks and Unusual Items
- Management anticipates long-term revenue and margin improvement from increased demand for higher-quality Packaging Systems products and a growing mix of higher-margin proprietary Delivery Systems products. The filing does not provide specific quantitative full-year guidance.
- Eric M. Green became CEO on April 24, 2015. Former CEO Donald E. Morel remained chairman through June 30 and retired July 1, 2015. The transition generated the $10.9 million charge noted above.
- The company began construction in July 2015 on a new Waterford, Ireland facility for high-value packaging components.
- Foreign exchange remains a significant risk, particularly the stronger U.S. dollar relative to the Euro and other currencies. Accumulated other comprehensive loss increased to $160.2 million, primarily because of foreign currency translation.
- At June 30, 2015, West had $223.2 million of cash held outside the United States. Repatriation could create additional U.S. tax obligations.
- West uses the official exchange rate for its Venezuelan subsidiary. If that rate becomes unavailable or is materially devalued, the company estimated a potential pre-tax charge of up to $6.2 million.
- The company had $16.7 million of unearned income remaining from a $20.0 million SmartDose customer payment; recognition is occurring on a straight-line basis, and the agreement has no future minimum purchase commitment.
- SmartDose contingent consideration was $5.2 million at June 30, 2015. Its valuation depends on sales projections, probability of success and discount rates and could change materially.
- There were no material changes to previously disclosed legal proceedings, commitments, contingencies or risk factors. Management stated that current legal matters are not expected to have a material adverse effect.
- An authorized $100.0 million share repurchase program remained unused during the quarter; it was expected to be completed by December 31, 2015.
Important Facts for Investors to Verify
- Assess underlying operating growth using constant-currency results and determine whether Packaging Systems mix and pricing gains offset Delivery Systems margin pressure.
- Separate recurring earnings from the $10.9 million executive retirement charge and related stock-based compensation effects.
- Monitor foreign exchange exposure, especially the Euro, and the potential Venezuelan currency charge.
- Review debt maturities, including the $25.0 million Series B floating-rate notes that matured July 28, 2015, and the $67.8 million Euro note due February 2016.
- Verify the sustainability of cash generation after $57.1 million of first-half capital expenditures and planned Ireland expansion spending.
- Track SmartDose commercialization, contingent consideration remeasurement and the timing of recognition of the remaining customer payment.