Business Context and Reporting Period
West Pharmaceutical Services, Inc. filed its Form 10-K for the fiscal year ended December 31, 2010. The company manufactures packaging components and delivery systems for injectable pharmaceuticals, medical devices, healthcare products and consumer products. Operations are reported through Pharmaceutical Packaging Systems and Pharmaceutical Delivery Systems, with historical periods restated for the January 1, 2010 reorganization.
Approximately 52% of consolidated sales originated outside the United States. West acquired La Model Ltd. in July 2010, adding an electronic patch-injector system.
Key Financial Metrics
| Metric | 2010 | 2009 | Change |
|---|---|---|---|
| Net sales | $1,104.7 million | $1,055.7 million | +4.6% |
| Gross profit | $318.1 million | $303.6 million | +4.8% |
| Gross margin | 28.8% | 28.8% | Flat |
| Operating profit | $90.7 million | $97.5 million | −7.0% |
| Net income | $65.3 million | $72.6 million | −10.1% |
| Diluted EPS | $1.89 | $2.12 | −$0.23 |
| Operating cash flow | $138.3 million | $137.7 million | +$0.6 million |
| Capital expenditures | $71.1 million | $104.9 million | −$33.8 million |
| Cash and equivalents | $110.2 million | $83.1 million | +$27.1 million |
| Total debt | $358.4 million | $379.6 million | −$21.2 million |
| Working capital | $266.9 million | $226.1 million | +$40.8 million |
- Packaging Systems revenue was $785.0 million, up 1.2%; operating profit was $139.3 million, up $1.0 million.
- Delivery Systems revenue was $324.1 million, up 13.7%; operating profit was $9.7 million, compared with $9.9 million in 2009.
- Net debt-to-total invested capital declined to 28.4% from 33.9%; return on invested capital declined to 7.6% from 8.9%.
- Research and development expense increased to $23.9 million from $19.9 million. SG&A increased to $187.7 million, or 17.0% of sales.
- The effective tax rate was 18.3%, compared with 16.2% in 2009. Management expected approximately 24% for 2011, excluding discrete items or legislative changes.
- The quarterly dividend increased from $0.16 to $0.17 per share beginning in the fourth quarter. Dividends declared for the year were $0.66 per share.
Material Changes Versus the Prior Comparable Period
- Revenue increased despite a $13.7 million unfavorable foreign-currency translation impact and the absence of approximately $22.0 million of non-recurring H1N1 vaccination-related sales recorded in 2009.
- Constant-currency sales increased 5.9%, driven by volume and mix, price increases and Delivery Systems acquisitions.
- Gross margin remained stable because price management, favorable mix and manufacturing efficiencies offset higher raw-material, labor and depreciation costs.
- Operating profit and net income declined primarily because restructuring and related charges increased to $15.9 million from $8.7 million, along with higher corporate costs and R&D spending.
- Operating cash flow was stable, while investing cash usage declined because of lower capital spending and reduced acquisition spending.
- Foreign-currency movements reduced reported revenue and operating profit by approximately $13.7 million and $2.5 million, respectively.
Guidance, Outlook, Risks and Unusual Items
- Management described the 2011 outlook as positive but tempered by slow global economic recovery, pharmaceutical-customer consolidation and uncertainty regarding U.S. healthcare reform.
- Management anticipated continued revenue improvement from advanced packaging products, safety and administration systems, emerging-market expansion and higher-value products.
- 2011 capital spending was expected to be between $110 million and $130 million.
- A December 2010 restructuring plan includes closure of the Montgomery, Pennsylvania plant, reduced operations in St. Austell, England, and approximately 367 position eliminations. Total charges are expected to be $19.0 million to $21.0 million through 2012, with expected annual savings of $12.0 million beginning in 2013.
- West recorded $14.5 million of charges under the new restructuring plan in 2010. Fourth-quarter 2010 net income included $9.4 million of restructuring, impairment and related charges, or $0.27 per diluted share.
- The company had $210.2 million of available borrowing capacity under a $225.0 million revolving credit facility, expandable to $275.0 million. It reported compliance with debt covenants.
- Long-term debt included $161.5 million of 4% convertible debentures due 2047, $75.0 million of floating-rate notes and $108.0 million of Euro-denominated notes. Debt maturities include $50.1 million in 2012 and $27.4 million in 2013.
- Contractual obligations totaled $787.2 million, including debt, interest, leases, purchase obligations and acquisition-related contingencies. The company expected $13.5 million of minimum pension and postretirement contributions in 2011.
- West committed to a new headquarters project. The February 2011 purchase-option exercise implied an estimated purchase price of approximately $39.0 million, plus $20.0 million to $22.0 million of building improvements.
- Key risks include foreign-exchange volatility, raw-material and energy costs, dependence on injectable drug markets, customer pricing pressure and consolidation, regulatory requirements, product defects or recalls, manufacturing disruption, supply-chain concentration, pension underfunding and healthcare-reform effects.
- No legal proceedings were reported as material, and the filing stated that there were no unresolved SEC staff comments or material off-balance-sheet financing arrangements.
Important Facts for Investors to Verify
- Verify the sustainability of Delivery Systems growth and whether its proprietary products generate improved operating profitability.
- Assess the timing, cash costs and savings realization of the restructuring plan through 2012 and beyond.
- Review 2011 capital spending, headquarters construction and related liquidity requirements against projected operating cash flow.
- Examine debt maturities, variable-rate exposure, convertible-debt terms and compliance with leverage and interest-coverage covenants.
- Evaluate the impact of foreign-exchange movements, raw-material inflation and customer pricing pressure on margins.
- Monitor pension and other postretirement underfunding, estimated at $71.2 million and $18.1 million, respectively, at year-end 2010.
- Review contingent acquisition consideration, Brazilian tax obligations, unrecognized tax benefits and the $7.2 million Brazilian tax-related accrual.
- Confirm that reported earnings comparisons appropriately reflect restructuring charges, tax benefits, acquisition-related adjustments and the prior-year H1N1 sales benefit.