West Pharmaceutical Services, Inc. — Fiscal 2012 Form 10-K
Reporting period: Year ended December 31, 2012. The filing also presents unaudited fourth-quarter results. West manufactures pharmaceutical packaging components and drug-delivery systems through its Packaging Systems and Delivery Systems segments. Approximately 53% of consolidated sales were generated outside the United States, and no customer represented more than 10% of sales.
Financial performance and key metrics
| Metric | 2012 | 2011 |
|---|---|---|
| Net sales | $1,266.4 million | $1,192.3 million |
| Gross profit / margin | $387.7 million / 30.6% | $339.3 million / 28.5% |
| Operating profit / margin | $135.1 million / 10.7% | $109.6 million / 9.2% |
| Net income | $80.7 million | $75.5 million |
| Diluted earnings per share | $2.30 | $2.16 |
| Operating cash flow | $187.4 million | $130.7 million |
| Capital expenditures | $131.3 million | $95.4 million |
| Cash and cash equivalents | $161.9 million | $91.8 million |
| Total debt | $411.5 million | $349.4 million |
| Net debt-to-total invested capital | 25.5% | 28.2% |
| Working capital | $295.5 million | $228.8 million |
- Packaging Systems sales increased 6.7% to $915.1 million; segment operating profit increased 22.9% to $187.5 million.
- Delivery Systems sales increased 4.6% to $352.1 million; segment operating profit increased 87.8% to $18.4 million.
- Fourth-quarter sales were $321.5 million and net income was $21.1 million, compared with fourth-quarter 2011 sales of $295.4 million and net income of $18.9 million.
- Research and development expense increased 14.1% to $33.2 million, primarily reflecting SmartDose and next-generation packaging development.
- The quarterly dividend increased from $0.18 to $0.19 per share beginning in the fourth quarter; full-year dividends declared were $0.74 per share.
Material changes versus the prior comparable period
- Reported sales rose 6.2%; excluding a $46.1 million unfavorable foreign-exchange effect, sales increased 10.1%. Product mix and volume contributed 7.1 percentage points, while pricing contributed 3.0 percentage points.
- Gross margin expanded by 2.1 percentage points, supported by pricing, favorable product mix, production efficiencies and volume. Higher raw-material, wage, benefit and other costs partially offset these benefits.
- Operating profit increased 23.3%, despite a $7.7 million unfavorable foreign-exchange impact. Lower restructuring and other charges also helped results.
- Net income benefited from operating improvement but was reduced by a $11.6 million pretax loss on extinguishment of debt, including premiums, write-off of debt issuance costs and transaction costs.
- In June 2012, West repurchased $158.4 million of convertible debentures, or 98.06% of the outstanding principal. In July, it issued $168.0 million of senior unsecured notes with maturities from 2022 to 2027.
- Operating cash flow increased $56.7 million, while capital spending increased $35.9 million. Property, plant and equipment, net, increased to $669.0 million from $593.6 million.
- The company completed the 2010 restructuring plan with $2.1 million of 2012 charges and does not expect further charges under that plan.
Liquidity, debt and commitments
- West had $161.9 million of cash and $12.4 million of short-term investments at year-end. Approximately $150.1 million of cash was held by non-U.S. subsidiaries.
- The $300.0 million revolving credit facility, expiring in April 2017, had $71.5 million drawn and $224.9 million of available capacity at year-end, including consideration of letters of credit.
- Management stated that cash on hand, operating cash flow and available credit were expected to cover foreseeable liquidity needs. The company was in compliance with all debt covenants.
- Contractual obligations totaled $644.9 million, including $410.8 million of long-term debt, $115.1 million of interest, $53.1 million of operating leases and $30.8 million of other long-term liabilities.
- Defined benefit pension and other postretirement plans were underfunded by $112.2 million and $26.0 million, respectively. Minimum expected 2013 contributions were approximately $7.7 million.
Guidance, outlook, risks and unusual items
- Management expected continued 2013 revenue improvement from higher-value Packaging Systems products, growth in proprietary Delivery Systems products and customers' pre-commercial activities.
- Planned 2013 capital spending was up to $150 million, excluding approximately $35 million for the new corporate office and research building, which settled in February 2013. The company also planned continued investment in China, India and proprietary products.
- Key risks include foreign-currency volatility, raw-material and energy-price inflation, pricing pressure, customer and industry consolidation, regulatory approval and customer adoption of new products, manufacturing or supply-chain disruptions, product defects and recalls, intellectual-property and licensing risks, and healthcare-reimbursement changes.
- Key licensed technologies from Daikyo Seiko, including Daikyo CZ, FluroTec and B2-coating, were subject to agreements expiring in 2017.
- West recorded a $3.4 million impairment charge for a Delivery Systems product line following delays and lower-than-expected demand. SmartDose contingent consideration increased to $3.3 million and remains sensitive to sales projections and discount rates.
- Subsequent events included the February 2013 completion and settlement of the corporate office and research building and an expected approximately $0.7 million first-quarter 2013 charge related to Venezuela's currency devaluation.
- No legal proceedings were reported as material, and management and the independent auditor concluded that internal control over financial reporting was effective as of December 31, 2012.
Investor verification checklist
- Verify whether sales growth and margin expansion are sustainable after removing favorable mix, pricing and restructuring effects.
- Assess the return expected from elevated capital spending, including the China and India facilities and proprietary Delivery Systems programs.
- Review debt maturities, variable-rate exposure, covenant headroom and the effect of refinancing on future interest expense and earnings.
- Monitor foreign-exchange exposure, especially Europe, Japan, Venezuela and other international operations.
- Evaluate the commercialization, regulatory status and customer adoption of SmartDose, Daikyo CZ and other proprietary systems.
- Assess pension funding requirements, unrecognized tax benefits, acquisition-related contingencies and the $663.8 million of undistributed foreign earnings intended to remain reinvested abroad.