Business Context and Reporting Period
West Pharmaceutical Services, Inc. filed its Form 10-K for the fiscal year ended December 31, 2021. West manufactures containment, packaging, drug-delivery and contract-manufactured products for pharmaceutical, biologic, diagnostic and medical-device customers. Operations are organized into Proprietary Products and Contract-Manufactured Products.
International sales represented 57.7% of consolidated net sales. The ten largest customers represented 41.4% of sales, with no individual customer exceeding 10%. The company employed approximately 10,065 people at year-end.
Financial Performance and Position
| Metric | 2021 | 2020 | Change |
|---|---|---|---|
| Net sales | $2,831.6 million | $2,146.9 million | +31.9% |
| Gross profit | $1,175.8 million | $767.8 million | +53.1% |
| Gross margin | 41.5% | 35.8% | +5.7 points |
| Operating profit | $752.3 million | $406.9 million | +84.9% |
| Operating margin | 26.6% | 19.0% | +7.6 points |
| Net income | $661.8 million | $346.2 million | +91.1% |
| Diluted EPS | $8.67 | $4.57 | +89.7% |
| Income tax expense | $107.2 million | $72.5 million | Effective rate 14.3% vs. 18.1% |
- Proprietary Products sales increased 40.6% to $2,317.3 million, while operating profit increased 83.2% to $796.1 million. The segment benefited from high-value products, pricing, production efficiencies and COVID-19-related demand.
- Contract-Manufactured Products sales increased 3.2% to $514.7 million, but operating profit declined 2.0% to $67.2 million. Margin pressure reflected product mix and the timing of raw-material cost pass-throughs.
- Approximately $459 million of 2021 sales related to COVID-19 vaccines, antiviral treatments and treatment of COVID-19 symptoms, compared with approximately $99 million in 2020.
- Adjusted operating profit was $762.4 million, with an adjusted operating margin of 26.9%. Adjusted diluted EPS was $8.58. Management’s adjustments included restructuring, pension settlement, acquisition-related amortization, asset impairment, cost-investment activity, royalty acceleration and tax-law changes.
- Research and development expense increased 12.6% to $52.8 million. SG&A increased 20.1% to $362.8 million, but declined to 12.8% of sales from 14.1%.
Cash Flow, Liquidity and Capital Structure
| Metric | December 31, 2021 | December 31, 2020 |
|---|---|---|
| Cash and cash equivalents | $762.6 million | $615.5 million |
| Operating cash flow | $584.0 million | $472.5 million |
| Capital expenditures | $253.4 million | $174.4 million |
| Total debt | $253.0 million | $255.2 million |
| Working capital | $1,147.9 million | $870.3 million |
| Equity | $2,335.4 million | $1,854.5 million |
- Investing cash use was $253.1 million, primarily reflecting higher capital expenditures to support customer demand.
- Financing cash use was $168.1 million, including $137.1 million of share repurchases and $51.1 million of dividend payments.
- The company had no borrowings under its $300 million revolving credit facility and reported $297.6 million of available borrowing capacity, including letters of credit.
- Debt consisted principally of an $85.5 million term loan and $168.0 million of senior unsecured notes. The company was in compliance with all debt covenants.
- The Board authorized repurchases of up to 650,000 shares during 2022. The quarterly dividend increased to $0.18 per share in the fourth quarter of 2021.
Material Changes Versus the Prior Comparable Period
- Revenue growth accelerated substantially, driven primarily by Proprietary Products and COVID-19-related demand. Foreign currency translation added $53.5 million to reported sales growth.
- Gross and operating margins expanded materially, primarily from favorable product mix, price increases and production efficiencies in Proprietary Products.
- Contract-Manufactured Products experienced weaker profitability because of unfavorable mix and delayed recovery of higher raw-material costs.
- Operating cash flow increased by $111.5 million, although accounts receivable and inventories rose by $123.5 million and $86.5 million, respectively, due to higher sales and efforts to maintain customer supply.
- Capital expenditures increased $79.0 million to $253.4 million, predominantly in Proprietary Products.
- The effective tax rate declined due largely to a $31.5 million tax benefit from stock-based compensation and an $18.5 million benefit related to prepayment of future royalties.
- Other comprehensive income shifted to a $49.0 million loss, primarily because of a $59.3 million unfavorable foreign-currency translation adjustment.
Guidance, Outlook, Risks and Unusual Items
The filing states that management expected cash on hand, operating cash flow and available revolver capacity to meet foreseeable liquidity needs, including capital expenditures and scheduled debt payments. The filing text does not provide a clear numerical 2022 revenue or earnings guidance figure.
- Management reported that manufacturing operations generally continued during the COVID-19 pandemic, but identified ongoing uncertainty regarding employee health, suppliers, transportation, customer operations and future government actions.
- Supply-chain risk is significant because many critical elastomers, aluminum and plastic inputs rely on single-source suppliers. Raw-material and energy inflation may pressure margins if price increases cannot be passed through promptly.
- International operations expose West to foreign-exchange, political, tax, regulatory, tariff and economic risks.
- Variable-rate debt and derivatives reference LIBOR or successor rates; the transition away from LIBOR could increase borrowing costs or create contract and hedge-accounting complications.
- Future results depend on continued demand for injectable medicines, successful product innovation, regulatory approvals and customer adoption of new delivery systems.
- The company recorded $2.2 million of restructuring charges, $2.8 million of asset impairment charges and $4.3 million of net cost-investment activity in 2021. A 2020 restructuring plan was reduced to expected total charges of approximately $7 million to $8 million and expected annual savings of $0.9 million to $1.6 million.
- The Vial2Bag product recall disclosed in 2019 remained a notable historical product-risk matter; FDA market clearance for the Vial2BagAdvanced 20mm device was received in October 2020.
- Unrecognized tax benefits totaled $24.9 million at year-end, of which $16.7 million would favorably affect the effective tax rate if recognized. The company also permanently reinvested approximately $635.3 million of foreign undistributed earnings without providing deferred withholding taxes.
- Outstanding raw-material and finished-goods commitments totaled $93.6 million, including $48.3 million due in 2022. The company reported no legal proceedings and received an unqualified audit opinion; management and the auditor concluded internal control over financial reporting was effective.
Important Facts for Investors to Verify
- How much of 2022 growth and profitability depends on COVID-19-related sales and whether that demand is recurring, declining or shifting by product category.
- Whether Proprietary Products margins can remain elevated amid inflation, supply constraints, capacity expansion and compensation-cost increases.
- The timing and funding of the $44.2 million 2022 debt maturity and the $134.0 million of scheduled 2024 maturities.
- Actual 2022 capital-expenditure requirements, working-capital needs and cash conversion as inventories and receivables remain elevated.
- Potential effects of foreign-exchange movements, LIBOR replacement, commodity prices and the company’s hedging arrangements.
- Regulatory, product-liability and recall exposure, including the commercialization and performance of new drug-delivery products.
- The sustainability of the 14.3% effective tax rate given the unusual 2021 stock-compensation and royalty-related tax benefits.
- Future dividend and repurchase decisions, which remain subject to board approval, financial performance, liquidity and debt-covenant requirements.