West Pharmaceutical Services second-quarter gross profit increases 5.8% to $83.2 million

West Pharmaceutical Services, Inc. (NYSE: WST) today announced its financial results for the second quarter of 2010.  

Summary comparative results were as follows:

Consolidated sales grew by $20.8 million, or 8.0%, in the second quarter compared to the 2009 period, and included $5.6 million of adverse foreign currency translation and $4.9 million of revenue from businesses acquired since the prior-year quarter. Excluding those items, sales increased $21.5 million, or 8.3%, from the second quarter of 2009, and revenue in both of the Company's business segments grew by 8% or more.  

Gross profit of $83.2 million increased $4.5 million, or 5.8%, from the second quarter of 2009, and the gross profit margin of 29.5% was 0.7 percentage points lower than in the prior-year period. The recently acquired businesses accounted for 0.5 percentage points of the decline in gross margin. Higher manufacturing costs were also a factor but were substantially offset by the benefits of an otherwise more profitable sales mix and production-related efficiencies.

Lower stock-based compensation and U.S. pension expenses limited the earnings impact of lower gross margins and other increases in SG&A and R&D costs. Adjusted Operating Profit improved by $1.8 million, to $30.9 million, yielding an operating margin of 11.0%, comparable to the 11.1% margin achieved in the same period last year.

Executive Commentary

"The Company's second quarter results were in line with our earlier guidance despite the adverse impact of currency on our international businesses," said Donald E. Morel Jr., PhD, the Company's Chairman and Chief Executive Officer. "Sales growth was particularly strong in higher-value Pharmaceutical Packaging Systems product lines and sales in Pharmaceutical Delivery Systems were also up on a "same store" basis, with additional sales gains generated by recently acquired businesses. The contract manufacturing business held its own in the face of some significant challenges, and we made substantial progress in our primary development programs."  

"In terms of our earnings expectations, we are revising our full-year guidance to between $2.08 and $2.20 of Adjusted Diluted EPS to reflect the anticipated impact of foreign currency exchange rates and related geographic mix, a planned increase in R&D spending, and a more cautious estimate of the composition of second-half sales."

"The order backlog for Pharmaceutical Packaging Systems remains strong, indicating that normal order patterns should fill in our sales and production plans for the remainder of 2010. However, the order book does not provide the same degree of confidence in fourth quarter sales as it might have in the past because customers continue to tightly manage inventories by taking advantage of our shortened lead-times. In Pharmaceutical Delivery Systems, sales of proprietary products are expected to increase, while scheduled price reductions on some mature business will limit growth on the contract business."

"Customer interest in our proprietary development programs is growing and we are accelerating our preparations for commercial-scale production. We booked our first large-scale order for Daikyo Crystal Zenith® one milliliter syringes and are on plan with validation of the new four-cavity production cell. In addition, we anticipate finalizing several significant, customer-funded development agreements this year for both the CZ syringe and the Confidose® Auto-injector."

Pharmaceutical Packaging Systems

Second-quarter Pharmaceutical Packaging Systems sales of $200.9 million were 5.7% higher than the second quarter of 2009, despite $4.4 million of unfavorable currency translation.  Excluding currency effects, sales grew 8.0% over the prior-year period.  Growth in sales of Westar®-processed and FluroTec®- and Teflon®-coated products accounted for most of the increase, with sales of Envision™-inspected products also contributing.  Lower sales of standard products were largely associated with specific customer inventory reductions.

Geographically, sales grew across all major regions, with currency effects dampening growth in European sales by $6.4 million, while adding approximately $1.0 million to reported sales in each of the smaller Asia-Pacific and South American markets.  

The growth in high-value products combined with production efficiencies to more than offset increases in other manufacturing costs. As a result, gross profit increased $4.6 million over the prior-year quarter, to $67.5 million, and gross margin improved by 0.5%, to 33.6% in the quarter.

R&D costs rose $0.5 million to $2.6 million on increased development work relating to high-value products, including Westar RU sterilized, ready-to-use components. Pharmaceutical Packaging Systems SG&A costs of $26.4 million were $0.8 million higher compared to the prior-year quarter, an increase of 3.1% (3.5% excluding currency translation), or less than half of the sales growth rate.  Increases in annual salaries and incentive compensation were partially offset by reduced external consulting costs.  Other expenses of $0.9 million were due primarily to net foreign currency transaction losses attributed to market volatility during the quarter. As a result, operating profit grew 6.2% compared to the second quarter of 2009, to $37.6 million.

Pharmaceutical Delivery Systems

Pharmaceutical Delivery Systems sales were $82.0 million in the quarter, $9.9 million, or 13.7%, higher than in the second quarter of 2009, net of $1.2 million, or 1.7 percentage points, of unfavorable currency translation.  The current quarter included $4.9 million of sales of businesses acquired since the second quarter of 2009, including $4.7 million of Eris™ safety syringe revenue. Excluding currency and acquisitions, revenue grew by $6.2 million, or 8.6%, reflecting increased sales of proprietary safety and administration systems, Daikyo Crystal Zenith containers and luer-lock syringes and modest gains in contract manufacturing revenue from healthcare, consumer and personal care products. Approximately 80% of segment revenues are from contract manufacturing, while 20% are from proprietary products, up from 15% in the immediately preceding quarter and primarily from drug reconstitution aids and safety and administration products, including the recently acquired safety syringe products.

Gross profit declined slightly to $15.7 million and gross profit margin declined 2.8 percentage points to 19.1% from the same period last year, reflecting $1.4 million of lower price under a mature manufacturing services agreement, and $4.7 million of sales that generated no gross profit under the terms of a pre-existing supply agreement for the Eris safety syringe.  These more than offset the positive effects of an otherwise stronger sales mix, primarily attributable to the increases in other proprietary product sales.

Research and development costs increased by $0.5 million on increasing development activity relating to proprietary products, including that associated with recently acquired businesses.  SG&A costs were $0.9 million higher than in the second quarter of 2009. $0.3 million of that increase was attributable to acquired businesses, and the balance to higher costs, including sales commissions, new product support and increased organizational costs following the January 2010 business segment realignment. Those increases were partially offset by employee benefit costs that were $0.5 million lower compared to the 2009 period.  As a result, second quarter operating profit of $3.6 million was $1.4 million lower than in the same period last year.

Corporate and Other

U.S. pension expense decreased by $0.5 million in the second quarter, to $3.6 million, as a result of 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 through the remainder of the year.

Stock-based compensation expense decreased $1.4 million compared to the prior-year quarter due primarily to the effects of changes in the Company's share price, which declined during the current quarter and had risen during the same period last year. Other unallocated corporate, general and administrative costs were $0.9 million higher in the quarter due to increased performance-based compensation costs for 2010 and higher external consulting service costs.

Net interest expense of $3.8 million was $0.4 million higher in the 2010 quarter primarily as result of lower capitalization of interest. Excluding items described in "Restructuring and Other Items", the quarterly effective tax rate was 23.0% in the current period, compared to 24.2% in the prior-year period, due primarily to the shifting geographic mix of earnings.

Net income includes $1.6 million of equity in earnings of affiliated companies in which the Company owns a minority interest.  The $1.0 million increase compared to the prior-year quarter was primarily attributed to improved operating results in Daikyo Seiko, Ltd., in which the Company holds a 25% equity ownership interest.

Restructuring and Other Items

In the fourth quarter of 2009, West announced a restructuring plan for certain U.S. businesses.  During the second quarter of 2010, $0.4 million of related restructuring costs were incurred ($0.2 million after-tax), and a total of $1.0 million of related charges have been incurred in the first six months of 2010.  The Company expects to incur a total of between $0.5 million and $0.7 million in related restructuring charges during the remainder of 2010. Also included in results for the second quarter of 2010 was $0.5 million of discrete tax costs resulting primarily from an increase in self-assessed taxes for an earlier year.

Financial Guidance

The Company's updated revenue and earnings expectations for calendar year 2010 are summarized as follows:

The Company's guidance has been revised to reflect its current expectations for 2010. Notable changes to earlier guidance include an approximately $0.11 per share increase in the adverse effects of foreign exchange on full-year operating results, and $0.04 per share of incremental R&D and marketing costs associated with new product development initiatives. The balance of the change reflects the more cautious forecast of product mix in the second half of 2010, net of other changes in estimates for the year.

The Company expects that comparisons of results for the remainder of 2010 to corresponding 2009 periods will be less favorable than in the first two quarters of the year. Atypical seasonality in the Company's sales during 2009 resulted in much stronger results in the second half of that year, an effect that was more pronounced because of the benefits of substantial non-recurring sales associated with the H1N1 pandemic, which contributed approximately $0.16 per share in the second half of 2009, and of a relatively weak U.S. dollar. At assumed exchange rates, currency will have an adverse impact of between $0.10 and $0.12 per share in the second half of 2010 compared to the 2009 period. The effects of these items on comparative results are expected to be more significant in the fourth quarter than in the third quarter of 2010.

The Company now expects that full-year 2010 capital spending will be between $100 million and $110 million.

The items described in "Supplemental Information and Notes to Non-GAAP Financial Measures", which are excluded from calculation of Adjusted Diluted EPS, and similar items that are incurred during the remainder of the year, are also excluded from the guidance for Adjusted Diluted EPS for the year 2010.