West Pharmaceutical Services, Inc. — Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2017. The unaudited statements are prepared under U.S. GAAP. West manufactures packaging components, drug-delivery systems, and contract-manufactured devices for pharmaceutical, biotechnology, diagnostic, and medical-device customers. Operations are reported through Proprietary Products and Contract-Manufactured Products.
Financial performance and liquidity
| Metric | Q3 2017 | Q3 2016 | 9M 2017 | 9M 2016 |
|---|---|---|---|---|
| Net sales | $398.2 million | $376.7 million | $1,183.5 million | $1,126.8 million |
| Gross profit | $125.0 million | $121.1 million | $384.1 million | $377.7 million |
| Gross margin | 31.4% | 32.1% | 32.5% | 33.5% |
| Operating profit | $63.9 million | $51.3 million | $167.9 million | $142.5 million |
| Operating margin | 16.1% | 13.6% | 14.2% | 12.6% |
| Net income | $51.0 million | $37.6 million | $150.7 million | $104.5 million |
| Diluted EPS | $0.67 | $0.50 | $1.99 | $1.40 |
| Operating cash flow | Not separately provided | Not separately provided | $181.8 million | $147.6 million |
- Q3 sales increased 5.7% as reported and 3.7% excluding currency. Nine-month sales increased 5.0% as reported and 5.4% excluding currency.
- Proprietary Products sales increased 3.6% in Q3 and 3.4% for nine months. Contract-Manufactured Products sales increased 13.1% in Q3 and 11.2% for nine months, driven primarily by commercial ramp-up of projects initiated in late 2016.
- Gross margin declined because of lower growth in high-value Proprietary Products and higher labor, overhead, and depreciation costs. Contract-Manufactured Products margin improved modestly.
- Operating profit benefited from $9.1 million of reimbursement income related to technology subsequently licensed to a third party. The nine-month result also reflected the absence of significant 2016 restructuring charges.
- Net income benefited from a $4.8 million Q3 and $30.3 million nine-month tax benefit from adoption of new share-based-payment accounting guidance. Effective tax rates were 22.3% in Q3 and 11.7% for nine months, versus 29.3% and 28.1%, respectively, in the prior-year periods.
- Capital expenditures were $101.3 million for nine months, including spending on new products, expansion, emerging markets, and the Waterford, Ireland facility.
- Cash and equivalents were $269.3 million at September 30, 2017, compared with $203.0 million at December 31, 2016. Working capital was $476.9 million versus $400.9 million.
- Total debt was $229.8 million, including $33.2 million classified as current. The company had $267.7 million of available borrowing capacity under its $300.0 million revolving credit facility and was in compliance with debt covenants.
- On October 2, 2017, the company repaid the $33.1 million term loan due January 2018 and terminated the related interest-rate swap without a material gain or loss.
Material changes versus the prior comparable periods
- Revenue growth accelerated in Contract-Manufactured Products, while Proprietary Products growth remained constrained by customer inventory reductions following elevated 2016 purchases.
- Consolidated operating profit increased 24.6% in Q3 and 17.8% for nine months, but the comparison was affected by unusual items, including 2017 licensing-related income and 2016 restructuring charges.
- 2017 included an $11.1 million charge for deconsolidation of the Venezuelan subsidiary. Consolidated financial statements exclude the subsidiary’s results beginning April 1, 2017.
- 2016 included $23.7 million of restructuring and related charges for nine months, a $2.7 million Venezuela currency-devaluation charge, and related tax effects.
- The company contributed $20.0 million to its U.S. qualified pension plan during the first nine months of 2017.
- The company repurchased 325,000 shares for $26.9 million during the first nine months, at an average price of $82.84 per share. No shares were repurchased under the program during Q3.
- Foreign currency translation increased comprehensive income by $64.7 million for nine months, contributing to a reduction in accumulated other comprehensive loss from $186.8 million to $130.6 million.
Outlook, commentary, risks, and unusual items
The filing does not provide explicit full-year revenue or EPS guidance. Management stated that cash on hand, operating cash generation, and available credit capacity should be adequate for foreseeable liquidity needs. Management expected to repatriate approximately $10.0 million of additional non-U.S. cash during the remainder of 2017 without additional tax costs.
- Management reported improving lead times and initial positive growth among Generics and Biologics customers, but noted that high-value Proprietary Products growth remained slower than in 2016.
- Development and licensing income totaled $10.3 million for nine months, including $9.1 million of reimbursement income. Additional future income is possible if the licensed technology is commercialized.
- The SmartDose contingent consideration liability was $8.0 million. Its valuation depends on sales projections, probability of success, and discount rates and could change materially.
- Key risks include customer inventory changes, regulatory approval and commercialization of customer products, competition and pricing pressure, production efficiency, skilled-labor availability, supply-chain disruptions, petroleum-based raw-material costs, foreign exchange, reliance on suppliers and partners, and global healthcare legislation.
- Venezuela remains a risk area because of political and economic deterioration and restricted access to U.S. dollars. The company continues to monitor developments.
- Operating leases had future minimum payments of $77.6 million at September 30, 2017. The filing reported no significant changes to other commitments or contingencies and no material legal proceedings.
- The Board approved revised change-in-control agreements for certain executives effective October 25, 2017, including changes to severance, equity vesting, benefits, and non-compete provisions.
Important facts for investors to verify
- Separate recurring operating performance from the $9.1 million technology reimbursement, licensing income, tax benefits, and Venezuela-related items.
- Assess whether Proprietary Products growth and margins recover as customer inventories normalize, particularly given higher labor, overhead, and depreciation costs.
- Confirm the post-quarter repayment of the $33.1 million term loan and its effect on interest expense, liquidity, and debt maturity exposure.
- Review the sustainability of the unusually low nine-month effective tax rate, including the $30.3 million share-based-payment tax benefit and $3.5 million repatriation-related benefit.
- Monitor capital spending, the Waterford facility ramp-up, pension funding, and working-capital growth in receivables and inventories.
- Evaluate exposure to foreign exchange, petroleum-linked elastomer costs, customer concentration or inventory reductions, supply-chain constraints, and Venezuela-related developments.