West Pharmaceutical Services Announces Fourth Quarter 2011 Results, Provides 2012 Guidance

LIONVILLE, PA--(Marketwire - February 16, 2012) - West Pharmaceutical Services, Inc. (NYSE: WST) today announced its financial results for the fourth quarter and full year of 2011.

Highlights

• Fourth-quarter 2011 Adjusted Diluted EPS of $0.59, sharply higher than $0.42 reported in the prior-year.
• Reports 6.8% sales growth in the quarter, net of unfavorable currency effects.
• Pricing, sales mix, and production efficiencies mitigated cost pressures felt in earlier 2011 quarters.
• 2012 Sales expected to grow to between $1,215 million and $1,245 million despite $30 million to $35 million in estimated adverse currency translation.
• 2012 Adjusted Diluted EPS expected to be between $2.37 to $2.55(1)(2), net of $0.09 to $0.11 of adverse currency.
• Ongoing restructuring items are expected to reduce 2012 reported diluted EPS to between $2.32 and $2.52(2).

Summary comparative results for the quarter were as follows:

 ($ millions, except per-share data) Three Months Ended December 31, 2011 2010 Net Sales $ 295.4 $ 276.8 Gross Profit 85.3 78.0 Reported Operating Profit 26.9 5.9 Adjusted Operating Profit (1) 28.9 20.6 Reported Diluted EPS $ 0.54 $ 0.18 Adjusted Diluted EPS(1) $ 0.59 $ 0.42 

(1) These are Non-GAAP measurements. See “Restructuring and Other Items” section of the release and “Supplemental Information and Notes to Non-GAAP Financial Measures” in the tables following the text of this release for a reconciliation and explanation of items excluded from “Adjusted” amounts.
(2) The principal currency assumption used in preparing these estimates is the translation of the Euro at $1.32 for the remainder of 2012.

Net sales grew 6.8% over the fourth quarter of 2010, 7.2% when the unfavorable effects of currency translation are excluded. Pharmaceutical Packaging Systems sales generated most of the increase, growing 9.1% excluding currency effects. Pharmaceutical Delivery Systems sales were 1.6% higher than in the prior-year period excluding currency effects as a result of growth in its contract manufacturing business.

Consolidated gross profit increased 9.3% to $85.3 million, and gross margin percentage increased 0.7 points to 28.9%, compared to the same 2010 period. Overall margin improvement was primarily a result of stronger results in Pharmaceutical Delivery Systems’ contract manufacturing operations. Gross margin in Pharmaceutical Packaging Systems declined slightly, where higher raw material and other production costs were substantially mitigated by pricing actions, an improving sales mix and operating efficiencies. When compared to the prior year period, SG&A costs declined by $2.1 million, primarily due to lower stock-based compensation and information technology depreciation, and R&D spending increased by $0.3 million. As a result, Adjusted Operating Profit increased by $8.3 million and the Adjusted Operating Margin improved from 7.4% to 9.8%, yielding Adjusted Diluted EPS of $0.59, an increase of over 40%.from the $0.42 reported in the prior-year period.

Executive Commentary
“In the fourth quarter we achieved significant growth in revenue and earnings per share, as well as continued growth in our book of firm orders,” said Donald E. Morel Jr., PhD, West’s Chairman and Chief Executive Officer. “It is encouraging that our growth was once again led by high-value pharmaceutical packaging products, reaffirming our conviction that pharmaceutical and biotechnology customers recognize the enhanced value that products like Westar® RU and Envision™ deliver. We also benefited from operating improvements in the contract manufacturing operations within Delivery Systems.

“As a result of our growing sales backlog and recent order patterns, we expect 2012 revenue growth to be in the range of 4% to 7% excluding currency. We believe that the growth will be led by continued demand for our high-value Pharmaceutical Packaging Systems components, by notable increases in Pharmaceutical Delivery Systems sales of proprietary products and by a strengthening mix in contract manufacturing businesses. We will continue to pursue positive pricing actions in response to the higher costs and volatility in key currency and commodity markets, and believe that 2012 Adjusted Diluted EPS will be between $2.37 and $2.55 despite the expected effects of currency.

“Our new product development initiatives made important progress in the quarter, highlighted by our partnership with a leading contract filler of specialized biologics, where we have established a dedicated filling facility that will enable customers to complete their pre-commercial development work on the Daikyo Crystal Zenith® products. CZ systems provide a viable solution to many of the primary packaging and delivery challenges faced by our customers and although we do not control the rate at which customers will undertake or complete these critical development efforts, the level of customer interest and pace of pre-commercial activity remain high. We believe that our customers will make significant progress toward commercial use of CZ products in 2012, keeping our longer-term proprietary business development plans on track.”

Pharmaceutical Packaging Systems
Pharmaceutical Packaging Systems sales of $210.3 million were 8.6% higher than the $193.7 million reported in the fourth quarter of the prior year, 9.1% higher excluding the adverse effects of foreign currency translation. High-value packaging products comprised just over one-third of Pharmaceutical Packaging Systems’ sales, but contributed approximately half of the overall revenue growth. High-value products incorporate one or more performance and quality-enhancing features, including coatings, automated vision inspection, washing, sterilization and specialized bulk packaging, and are marketed under several West brand names, including Westar, Envision, and FluroTec®. Certain regulatory actions and reimbursement changes that had reduced demand for packaging components from affected customers through the first three quarters of 2011, primarily in North America, had a smaller impact on current quarter comparisons to the prior year. Those contributed relatively slow growth in domestic sales compared to the increases recorded in the rest of the world.

Gross profit of $68.1 million was 8.4% higher than the $62.8 million recorded in the prior-year period, while gross profit margin was slightly lower at 32.4%. Year-over-year increases in raw material and other production costs had compressed margins in earlier 2011 quarters, but were substantially offset in the current quarter by production efficiencies and higher selling prices, including a mid-2011 surcharge on non-contract sales, and annual cost-based price adjustments under long-term customer contracts.

Packaging Systems’ SG&A costs were $0.8 million lower than in the prior year period, and were 12.8% of sales, a 1.5 percentage point improvement that was a result of lower non-US pension and depreciation costs. R&D costs were $2.7 million and unchanged from the prior-year period. As a result, Adjusted Operating Profit improved by 16.0% to $37.7 million, compared to $32.5 million in the fourth quarter of 2010. Operating margin percentage improved by 1.1 points, to 17.9%.

Pharmaceutical Delivery Systems
Pharmaceutical Delivery Systems sales were $85.3 million in the quarter, up slightly from $84.2 million in the prior-year quarter. Contract-manufactured healthcare product sales showed solid gains compared to other contract-business categories, and together with pricing improvements, mitigated the $1.7 million adverse effect of price reductions that occurred under certain manufacturing agreements that took effect in 2011. Sales of proprietary products were substantially unchanged from the prior-year period. Contract manufacturing revenues comprised 79% of sales in the quarter, and proprietary products accounted for 21% of revenues.

Gross profit was $17.2 million in the quarter, compared to $15.2 million in the 2010 period, and gross margin improved to 20.1%, 2.1 percentage points higher than the prior-year period. Increased profitability in the contract manufacturing business accounted for substantially all of the improvement and included the benefits of prior restructurings. Increases in raw material costs were largely passed through to contract customers.

R&D spending grew $0.3 million, to $4.5 million or 5.3% of revenue, as a result of the continuing development effort for the SmartDose™ electronic-patch-injector system. SG&A costs declined $0.7 million, to $9.0 million, primarily as a result of restructuring. Operating profit of $3.8 million was $2.6 million ahead of the prior year quarter, primarily as a result of the improved profitability in contract manufacturing.

Corporate and Other
Corporate SG&A costs declined as a result of $1.6 million in lower stock-based compensation costs, net of a $1.1 million increase in other SG&A, primarily as a result of the impact of improved operating results on incentive compensation costs. Stock-based compensation is sensitive to changes in the market price for the Company’s shares, which increased modestly in the current quarter and sharply during the prior-year period.

Net interest expense of $3.9 million was $0.5 million lower than in the prior-year period as a result of increases in interest income and project-related interest cost capitalization. Income tax expense on income excluding the items described in “Restructuring and Other Items” reflects an annual effective tax rate of 24.9%, compared to 22.9% in 2010. The increase was primarily due to changes in the geographic distribution of earnings and in foreign tax laws.

Net income included $1.4 million of equity in earnings of affiliated companies, a $0.6 million increase over the prior year, which is attributed to the improvements in results at Daikyo Seiko, Ltd., the Company’s 25% owned affiliate in Japan.

Restructuring and Other Items
Restructuring charges of $1.0 million were incurred in the quarter pursuant to the plan announced in the fourth quarter of 2010, primarily for severance. That plan included, among other changes, the closing of the Company’s Montgomery, Pennsylvania facility, and a reduction of operations at its Cornwall, England facility, as well as the elimination of operations and administrative positions at other locations. During the fourth quarter of 2010, the Company recognized $14.7 million of pre-tax charges associated with that restructuring plan.

A pre-tax charge of $0.8 million was recognized for the costs of a settlement of a pension obligation that was triggered by a year-end benefit election by the Company’s former President and Chief Operating Officer, who retired earlier in 2011.

Discrete tax charges of $0.6 million in the quarter are primarily due to the impact of changes in international statutory tax rates on deferred tax assets and liabilities. The 2010 quarter included $1.1 million in net discrete tax benefits, primarily for the resolution of tax contingencies relating to other periods.

For further information, please see “Supplemental Information and Notes to Non-GAAP Financial Measures” in the tables following the text of this release.

Financial Guidance
The Company provided full-year 2012 revenue earnings per share guidance, which are summarized as follows:

 (in millions, except EPS) 2012 Estimated 2011 Results ---------------- ---------------- Guidance(2) ---------------- Consolidated Net Sales $1,215 to $1,245 $1,192.3 Consolidated Gross Profit Margin (% of Sales) 29.6% 28.5% Pharmaceutical Packaging Systems Sales $875 to $895 $857.4 Pharmaceutical Packaging Systems Gross Profit Margin (% of Sales) 33.3% 32.2% Pharmaceutical Delivery Systems Sales $340 to $350 $336.7 Pharmaceutical Delivery Systems Gross Profit Margin (% of Sales) 20.1% 18.6% Full-Year Diluted EPS $2.32 to $2.52 $2.16 Full-Year Adjusted Diluted EPS(1)(2) $2.37 to $2.55 $2.33 

(1) These are Non-GAAP measurements. See “Restructuring and Other Items” section of the release and “Supplemental Information and Notes to Non-GAAP Financial Measures” in the tables following the text of this release for a reconciliation and explanation of items excluded from “Adjusted” amounts.
(2) The principal currency assumption used in preparing these estimates is the translation of the Euro at $1.32 for the remainder of 2012.

The 2012 consequences of those items described in “Supplemental Information and Notes to Non-GAAP Financial Measures,” which were excluded from the calculation of Adjusted Diluted EPS for the fourth-quarter and year 2011, and any similar items that may be incurred during 2012 are excluded from the Adjusted Diluted EPS guidance for 2012.

Currency translation has a significantly negative impact on comparisons of 2012 estimated results to 2011 actual results, reducing expected 2012 sales by between $30 million and $35 million and Adjusted Diluted EPS by between $0.09 and $0.11. The Company indicated that its estimates for 2012 include between $10 million and $15 million of expected sales growth for CZ products and other proprietary safety and administration devices, which are expected to yield Adjusted Diluted EPS of between $0.08 and $0.15. Expected sales of those products are for non- and pre-commercial use by customers, which involves an increased risk that those sales may be lower than expected.

The Company expects 2012 capital spending to be between $135 million and $155 million, including an estimated $40 million of construction costs for a new corporate headquarters and research facility that is expected to be completed in late 2012 or early 2013.

Fourth-Quarter Conference Call
The Company will host a conference call to discuss the results and business expectations at 9:00 a.m. Eastern Time today. To participate on the call please dial 800-299-6183 (U.S.) or 617-801-9713 (International). The passcode is 96457871.

A live broadcast of the conference call and the accompanying slide presentation will be available at the Company’s web site, www.westpharma.com, in the “Investors” section. Please allow extra time prior to the call to visit the site and download the streaming media software required to view the slide presentation and listen to the Internet broadcast. The slides are in “PDF” format and can be downloaded by selecting “Presentations” in the “Investors” section of the Company’s website. The website includes a link to a free download of software that will enable viewing of the PDF presentation.

An online archive of the broadcast will be available at the site two hours after the live call and will be available through Thursday, February 23, 2012, by dialing 888-286-8010 (U.S.) or 617-801-6888 (International) and entering passcode 36003666.

Daikyo Crystal Zenith® is a registered trademark of Daikyo Seiko, Ltd.
Daikyo Crystal Zenith® technologies are licensed from Daikyo Seiko, Ltd.