West Pharmaceutical Services, Inc. — 2015 Form 10-K Summary
Business context and reporting period
The filing covers the fiscal year ended December 31, 2015, with quarterly data also provided for the fourth quarter. West manufactures packaging components and delivery systems for injectable drugs, pharmaceuticals, medical devices, healthcare and consumer products. The 2015 reportable segments were Packaging Systems and Delivery Systems. Beginning in 2016, the Company planned to report Proprietary Products and Contract-Manufactured Products.
International operations generated 52.0% of 2015 consolidated sales. The ten largest customers represented 42.0% of sales, although no individual customer exceeded 10%.
Key financial metrics
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Net sales | $1,399.8 million | $1,421.4 million | Down 1.5% |
| Gross profit | $455.8 million | $447.8 million | Up 1.8% |
| Gross margin | 32.6% | 31.5% | Up 1.1 points |
| Operating profit | $128.6 million | $182.0 million | Down 29.3% |
| Operating margin | 9.2% | 12.8% | Down 3.6 points |
| Net income | $95.6 million | $127.1 million | Down 24.8% |
| Diluted EPS | $1.30 | $1.75 | Down $0.45 |
| Operating cash flow | $212.4 million | $182.9 million | Up $29.5 million |
Fourth-quarter 2015 sales were $359.7 million, gross profit was $119.6 million, net income was $33.4 million and diluted EPS was $0.45.
- Packaging Systems: Sales were $1,000.7 million, down 1.9% as reported but up 8.5% excluding currency effects. Operating profit increased 5.7% to $235.7 million, and gross margin improved to 38.1% from 36.2%.
- Delivery Systems: Sales were $400.2 million, down 0.5% as reported but up 4.1% excluding currency effects. Operating profit declined 11.1% to $12.0 million, while gross margin decreased to 18.5% from 19.6%.
- Currency: The stronger U.S. dollar reduced reported 2015 sales by $123.9 million, operating profit by $29.3 million, net income by $21.4 million and diluted EPS by $0.29 versus 2014.
- Adjusted performance: Excluding currency effects, the pension settlement charge, executive retirement costs and the discrete tax charge, sales increased 7.2% and diluted EPS increased 21.1%. Adjusted operating profit was $189.9 million, or 13.6% of sales, versus $183.2 million and 12.9% in 2014. These are non-U.S. GAAP measures.
Cash flow, liquidity and capital structure
| Metric at or for year-end | 2015 | 2014 |
|---|---|---|
| Cash and cash equivalents | $274.6 million | $255.3 million |
| Working capital | $359.4 million | $406.6 million |
| Total debt | $298.2 million | $335.5 million |
| Total equity | $1,023.9 million | $956.9 million |
| Net debt-to-total invested capital | 2.3% | 7.7% |
| Capital expenditures | $131.6 million | $111.9 million |
Operating cash flow was $212.4 million; investing cash flow was negative $129.5 million, primarily reflecting capital expenditures; and financing cash flow was negative $41.5 million. The Company paid $32.4 million in dividends during 2015 and declared $0.46 per share in dividends for the year.
West had $269.9 million of available borrowing capacity under its $300.0 million revolving credit facility at December 31, 2015. The facility expires in October 2020. The Company reported compliance with all debt covenants and stated that cash, operating cash flow and available credit should meet foreseeable liquidity needs.
Material changes versus the prior comparable period
- Reported sales declined because of currency translation, while underlying sales increased across both segments.
- Gross margin improved, led by Packaging Systems product mix, pricing and production efficiencies.
- Operating profit and net income were materially reduced by a $50.4 million pension settlement charge and $10.9 million of executive retirement and related costs. The after-tax effects were $32.0 million and $6.9 million, respectively.
- The pension transaction included a group annuity contract that transferred $139.4 million of pension obligations covering approximately 1,750 retirees and beneficiaries to MetLife; it was funded directly by plan assets.
- R&D expense decreased to $34.1 million from $37.3 million, while capital expenditures increased to $131.6 million. Construction began on a new Waterford, Ireland facility for high-value packaging components.
- Packaging Systems backlog increased to $413.2 million from $339.7 million and was expected to be fulfilled during 2016. Management attributed the increase primarily to customer ordering patterns and longer lead times.
- Workforce and leadership changes included a new CEO and president, Eric M. Green, and new senior legal and human resources leadership.
Guidance, outlook, risks and unusual items
Management did not provide a clear consolidated earnings or revenue forecast in the filing. It expected continued investment in new products, capacity expansion, advanced quality systems and emerging markets, and cited strong operating results and liquidity as a platform for growth.
On February 15, 2016, the Board approved a restructuring plan to repurpose facilities and realign operations. The expected 2016 charge was $23.0 million to $28.0 million, primarily in the first quarter, including $17.0 million to $20.0 million of non-cash asset write-downs and $6.0 million to $8.0 million of cash severance. Expected cost reductions were $4.0 million to $5.0 million in 2016 and $8.0 million to $10.0 million in 2017.
Following a February 2016 Venezuelan currency devaluation, West expected a $2.3 million pretax charge in the first quarter of 2016. Further devaluations or currency changes could result in an additional charge of up to $7.6 million.
- Key operating risks include foreign-exchange volatility, pricing pressure, pharmaceutical and healthcare industry consolidation, regulatory approvals, product liability and recalls, manufacturing disruption, cybersecurity, raw-material availability and commodity costs.
- Many critical raw materials are sourced from single suppliers, creating supply interruption risk.
- Important technologies, including Daikyo CZ, FluroTec and B2-coating, are licensed from Daikyo under agreements expected to expire in 2017; renewal was expected but not assured.
- SmartDose contingent consideration was valued at $6.0 million at year-end and could range from zero to $6.0 million over the next five years based on product sales and commercialization outcomes.
- Unrecognized tax benefits totaled $5.9 million, and contractual obligations totaled $452.1 million, including debt, interest, leases and other commitments.
Important facts for investors to verify
- Reconcile reported results with management’s non-GAAP, constant-currency and adjusted measures.
- Assess whether Packaging Systems backlog converted to sales during 2016 and whether high-value products continued to expand.
- Review the actual timing and amount of restructuring charges, asset write-downs and cost savings.
- Monitor the February 2016 Venezuela charge and any subsequent currency-related exposure.
- Evaluate debt maturities, including the $69.3 million of 2016 maturities, and the renewal or repayment of the $66.8 million Euro note due February 2016.
- Confirm the renewal status and economic terms of the Daikyo license arrangements.
- Track SmartDose commercialization, contingent consideration and the Delivery Systems segment’s margin recovery.