West Pharmaceutical Services, Inc. — Q2 2021 Form 10-Q Summary
Business context and reporting period
West designs and manufactures containment, packaging, drug-delivery and contract-manufactured products for biologic, generic, pharmaceutical, diagnostic and medical-device customers. The filing covers the three and six months ended June 30, 2021, compared with the corresponding 2020 periods. Reportable segments are Proprietary Products and Contract-Manufactured Products.
Key financial metrics
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net sales | $723.6 million | $527.2 million | $1,394.3 million | $1,018.7 million |
| Gross profit | $315.1 million | $195.1 million | $587.0 million | $362.1 million |
| Gross margin | 43.5% | 37.0% | 42.1% | 35.5% |
| Operating profit | $211.3 million | $103.6 million | $386.9 million | $191.6 million |
| Operating margin | 29.2% | 19.7% | 27.7% | 18.8% |
| Net income | $187.3 million | $91.2 million | $338.5 million | $165.5 million |
| Diluted EPS | $2.47 | $1.21 | $4.47 | $2.19 |
| Operating cash flow | Not separately provided | Not separately provided | $233.1 million | $205.2 million |
Q2 net sales increased 37.3% year over year, including a favorable $35.2 million foreign-currency translation effect; organic growth was 30.6%. Six-month sales increased 36.9%, or 30.8% organically. Proprietary Products represented the primary growth driver, with Q2 sales of $587.3 million, up 47.0% reported and 39.3% organically. Contract-Manufactured Products sales increased 6.7% reported and 3.2% organically.
Management reported approximately $117 million of COVID-19-related Q2 activity and approximately $220 million for the six months, compared with approximately $19 million in the 2020 comparable periods. High-value products, including Westar, NovaPure, Daikyo and FluroTec-coated components, were key contributors.
Adjusted operating profit was $211.2 million in Q2 and $390.4 million for the six months, with adjusted operating margins of 29.2% and 28.0%, respectively. Adjusted diluted EPS was $2.46 in Q2 and $4.51 for the six months.
Cash flow, debt and liquidity
- Cash and equivalents were $576.2 million at June 30, 2021, down from $615.5 million at December 31, 2020.
- Working capital was $1,004.4 million, compared with $870.3 million at year-end 2020.
- Operating cash flow was $233.1 million for the six months, while capital expenditures were $111.6 million, up from $69.2 million in the prior-year period.
- Cash used in financing was $156.1 million, including $137.1 million for repurchases, $25.2 million of dividends and $1.1 million of debt repayment.
- Total debt was $254.1 million, including $251.8 million of long-term debt. The $300.0 million revolving facility had no borrowings and $297.6 million of available capacity, including outstanding letters of credit.
- Management stated that cash, operating cash flow and available credit capacity should cover foreseeable liquidity needs. The company was in compliance with its debt covenants.
Material changes versus the prior comparable period
- Gross margin expanded 6.5 percentage points in Q2 and 6.6 points for the six months, primarily from favorable product mix, price increases and production efficiencies in Proprietary Products.
- Operating profit more than doubled, increasing 104.0% in Q2 and 101.9% for the six months.
- Contract-Manufactured Products remained comparatively weaker: Q2 gross margin declined to 16.7% from 19.0%, and operating profit declined 8.8%, due to higher overhead and unfavorable product mix.
- SG&A increased 19.3% in Q2 and 15.7% for the six months, but declined as a percentage of sales to 12.8% and 12.4%, respectively, from 14.7% in both prior periods.
- Capital spending increased substantially to support customer demand. Receivables and inventories also increased as sales expanded and management built inventory to support customers.
- The company repurchased 479,000 shares during the six months at a total cost of $137.1 million, or $286.23 per share. No shares were repurchased in Q2.
Guidance, outlook, risks and unusual items
The filing does not provide clear full-year revenue or earnings guidance. Management characterized liquidity and capital resources as strong and stated that production facilities continued operating through COVID-19 with enhanced safety measures and increased production at certain locations.
- COVID-19-related demand, particularly for vaccine and antiviral products, materially benefited results; the duration and sustainability of that demand are uncertain.
- Risks include supply-chain interruptions, raw-material and petroleum-based cost inflation, labor availability, customer inventory changes, foreign-currency movements, competition, regulatory approval and commercialization of customer drugs, and dependence on suppliers and partners including Daikyo.
- The 2020 restructuring plan is expected to require total charges of approximately $15 million to $17 million; $6.8 million had been recorded through June 30, 2021, including $2.2 million in the first six months.
- Other unusual items included a $2.2 million cost-investment impairment, a $1.3 million gain on a cost-investment sale, a $0.7 million pension settlement charge and a $1.4 million tax benefit from United Kingdom law changes during the six-month period.
- Outstanding crude-oil call options covered 171,634 barrels from July 2021 through December 2022, with a weighted-average strike price of $65.77 per barrel, providing partial protection against petroleum-related surcharges.
- Legal proceedings were described as ordinary-course matters, with no material changes to previously disclosed contingencies. No material changes were reported to risk factors, market risk exposure or off-balance-sheet arrangements.
Investor verification priorities
- Verify the extent to which 2021 growth and margin expansion depend on COVID-19-related demand and whether high-value product demand remains durable.
- Review the company’s full-year guidance, if issued subsequently, because this filing does not provide numerical annual guidance.
- Monitor capital expenditures, working-capital absorption and cash conversion as production capacity expands.
- Assess exposure to raw-material inflation, labor constraints, supply-chain disruptions and foreign-currency volatility.
- Review the remaining restructuring charges, SmartDose contingent consideration and customer capacity-reservation revenue recognized over the next one to two years.
- Confirm the timing and funding of the $42.0 million Series A notes due July 5, 2022 and continued compliance with debt covenants.