West Pharmaceutical Services, Inc. (NYSE: WST) today announced its results for the first quarter of 2010. Summary comparative results were as follows:
Consolidated sales grew by $32.3 million, or 13.3%, in the first quarter versus the same prior year period, including $9.8 million, or 4.0 percentage points, due to the favorable effects of foreign currency translation. Excluding currency translation effects, consolidated sales were $22.5 million, or 9.3%, higher than in the prior-year quarter. The increase came on improvements in both business segments, as the broad-based increases in demand experienced in the fourth quarter of 2009 continued into the current period. Pharmaceutical Packaging Systems revenue improved on strong sales of high-value components, as well as residual sales of products for H1N1 flu vaccinations. Sales gains in Pharmaceutical Delivery Systems reflected an overall strengthening in contract manufacturing and the effects of a 2009 business acquisition.
Consolidated gross profit margin was 29.9% in the quarter, compared to 28.6% in the first quarter of 2009. The increase was driven by the improved sales volume, the composition of sales, production efficiencies, and higher prices, which together significantly outpaced higher material and depreciation costs. For the quarter, combined spending on R&D and SG&A was higher, but 0.5 percentage points lower as a percentage of sales than in the prior-year period, which contributed to the improvement in operating profit and Adjusted Diluted EPS. $1.1 million of higher research spending was attributed primarily to recent acquisitions and to key product development programs in Pharmaceutical Delivery Systems. Consolidated SG&A costs were $3.7 million higher than in the comparable 2009 quarter, primarily due to currency translation and higher incentive and stock-based compensation costs, net of $0.5 million in lower pension costs.
Executive Commentary
"Our strong finish in 2009 carried into the first quarter, with significantly improved sales and earnings growth when compared to the first quarter of 2009," said Donald E. Morel Jr., PhD, the Company's Chairman and Chief Executive Officer. "The sales improvements were broad-based, with both business units and virtually all product categories experiencing some growth. Our backlog strengthened despite many customers continuing inventory and working capital containment initiatives, resulting in shorter lead times and smaller individual order quantities for us. Ongoing efficiency projects within our operations, along with tight management of discretionary spending, also contributed to our improved earnings."
"Looking forward to the remainder of the year, we expect the changes we have seen in order patterns to become the norm, effectively reducing our visibility beyond 1-2 quarters. Taking into account our strong first quarter, the effects of a stronger dollar and current sales visibility, we are narrowing our 2010 Adjusted Diluted EPS guidance to between $2.19 and $2.35. Unlike 2009, we expect that our 2010 results will return to our historic seasonality, with the first six months showing stronger sales and earnings versus the second half of the year."
Pharmaceutical Packaging Systems Segment
Pharmaceutical Packaging Systems sales were 12.8% higher at $198.9 million and operating profit was $39.8 million, in the first quarter of 2010 compared to $176.4 million in sales and $28.9 million of operating profit in the comparable 2009 quarter. Favorable foreign currency translation accounted for $8.8 million, or 5.0 percentage points of the increase in sales, and contributed $1.5 million to the increase in operating profit. At constant exchange rates, domestic sales grew at 12.6% and international sales grew 4.7%, led by continued strong sales growth in the smaller Asian and South American businesses.
On a product basis and excluding currency effects, sales of high-value products, including those incorporating Westar® processing, Envision™ inspection, and FluroTec® and Teflon® coatings, contributed the largest share of the $13.7 million in overall growth compared to the first quarter of 2009. Those sales increases were for products supporting customers' non-seasonal vaccines, insulin, and associated diabetes therapies, and also included $2.8 million in H1N1-related sales. Increased IV component sales contributed to a modest $1.2 million increase in sales of disposable medical device components. The net effect of changing selling prices was $1.4 million of additional revenue.
Gross profit was $69.2 million in the first quarter, compared to $56.4 million in the same period in 2009, and gross profit margin improved 2.8 percentage points, to 34.8%, when compared to the 2009 period. Those improvements were most significantly driven by production cost efficiencies, improved profitability of the overall sales mix and higher prices, partially offset by higher depreciation costs. Changes in material costs were not a significant factor.
SG&A costs increased only $0.7 million compared to the prior-year quarter, to $26.3 million. $1.2 million of unfavorable currency translation effects and $0.5 million of higher depreciation costs were substantially offset by lower consulting and recruitment and training costs. R&D costs were higher at $2.2 million, compared to $2.0 million in the prior-year period. As a result, operating profit was $39.8 million, or 37.7% higher than the $28.9 million reported in the first 2009 quarter, or 32.5% higher excluding the effects of currency translation.
Pharmaceutical Delivery Systems Segment
Segment sales for Pharmaceutical Delivery Systems were $76.9 million in the first quarter, or 13.9% higher than the $67.5 million recorded in the first quarter of 2009. Currency translation accounted for $1.0 million, or 1.6 percentage points, of the growth, and $3.9 million was attributed to the safety syringe business acquired in the third quarter of 2009. Excluding those changes, the remaining $4.5 million of sales increase was attributed to stronger contract manufacturing sales associated with a customer's new product launch of an auto-injector, increased demand for printer ink cartridges, and favorable trends in demand for several customers' over-the-counter medications and for disposable healthcare products. These were partially offset by revenue losses associated with a customer's withdrawal of an OTC product from the market in 2009 and continued lower demand for certain consumer products. Approximately 85% of segment sales are contract manufacturing sales and 15% are for proprietary products, primarily for safety and administration products, including drug reconstitution aids.
Gross profit was substantially unchanged at $13.0 million compared to the first quarter of 2009, and gross profit margin declined 2.1 percentage points, to 17.0%, from the same period last year. Approximately 1.4 percentage points of the decline in gross margin was due to the inclusion of the recently acquired safety syringe business, which contributed approximately $3.9 million of sales and no gross profit. Those sales are pursuant to a contract that was assumed in connection with the acquisition. Excluding that effect, gross margin would have been approximately 0.7 percentage points lower than the prior-year period, due primarily to a somewhat less profitable mix of contract manufacturing business.
Research and development costs increased by $0.9 million as investments in proprietary products continued to ramp up, including the $0.4 million of R&D spending associated with recently acquired businesses. Other SG&A costs were $1.4 million higher as a result of staffing associated with the organizational realignment, the 2009 business acquisition and costs associated with upgrading and centralizing certain human resources functions. As a result, operating profit was $1.9 million lower in the current quarter when compared to the prior-year period.
Corporate and Other
U.S. pension expense decreased by $0.5 million in the first quarter, to $3.6 million, as a result of the re-measurement of pension costs at the beginning of the year, including the effects of increased asset balances associated with improved 2009 investment returns, partially offset by increases in the present values of pension obligations associated with lower, market-based discount rates. Similar quarterly decreases are expected during the remainder of the year.
Stock-based compensation expense increased by $0.9 million compared to the prior-year quarter due primarily to the effects of changes in the Company's share price, which increased during the current quarter and had decreased during the same period last year. Other unallocated corporate general and administrative costs were $1.0 million higher in the quarter due to increased performance-based compensation costs for 2010, higher external consulting services, primarily relating to business development activities, and higher depreciation.
Net interest expense of $3.9 million was $0.3 million higher in the 2010 quarter as a result of reduced capitalization of interest and lower yields on cash balances. Excluding the tax effects of items described in "Restructuring and Other Items", the quarterly effective tax rate on Adjusted Earnings was 24.9% in the current period, compared to 24.6% on Adjusted Earnings in the prior-year period, due primarily to the 2009 expiration of the U.S. tax credit for research activities.
Restructuring and Other Items
In the fourth quarter of 2009, West announced a restructuring plan for certain U.S. businesses, including the expectation that costs of between $1.0 million and $2.0 million would be incurred during 2010. During the first quarter of 2010, $0.6 million of restructuring costs were incurred, or $0.4 million after-tax. The Company expects to incur between $1.0 million and $1.5 million in related restructuring charges during the remainder of 2010.
Included in the reported results for the prior-year quarter were pre-tax charges of $0.7 million, or $0.4 million after-tax, which were incurred pursuant to an operational restructuring plan, announced during the fourth quarter of 2007, for the then Tech Group segment, which is now part of the Pharmaceutical Delivery Systems Segment. Also included in results for the first quarter of 2009 was $1.7 million of after-tax benefits from the reduction in tax contingency reserves originating in other periods.
Financial Guidance
The Company's updated revenue and earnings expectations for calendar year 2010 are summarized as follows:
As a result of the atypical sales seasonality during 2009 calendar year results, the Company expects that second half 2010 comparisons to 2009 will be less favorable than comparative results in the first quarter and first half of 2010. The Company expects Adjusted Diluted EPS in the second calendar quarter of 2010 to be in the range of 8% to 10% higher than the $0.58 of Adjusted Diluted EPS in the second quarter of 2009.
During 2010, the Company expects to recognize pre-tax charges of between $1.5 million and $2.0 million pursuant to the restructuring plan announced in November 2009, including the $0.6 million reported in the first quarter and described in "Restructuring and Other Items." These charges are excluded from the guidance for 2010 Adjusted Diluted EPS.
The Company continues to expect that capital spending will be between $115 million and $130 million during 2010.
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