West Pharmaceutical Services Announces Second Quarter 2011 Results

LIONVILLE, Pa., July 28, 2011 /PRNewswire/ -- West Pharmaceutical Services, Inc. (NYSE: WST) today announced its financial results for the second quarter of 2011. Summary comparative results were as follows:

Second-quarter 2011 net sales grew 9.3% from the same period last year, primarily as a result of foreign currency translation. Sales grew 2.8% at constant exchange rates. Both of the Company’s business units reported modest sales improvements excluding the comparative effects of currency. In Pharmaceutical Packaging Systems, stronger sales in Europe and Asia more than compensated for customer and product-specific sales declines in North America. Pharmaceutical Delivery Systems growth was due to increased contract manufacturing business and sales of reconstitution devices. The Company’s order backlog was significantly higher at the end of the quarter, 9% above the June 30, 2010 backlog when measured at constant exchange rates.

Consolidated gross profit margin decreased to 27.5% from 29.5% in the same prior-year period as a result of higher material costs and a less profitable product sales mix in the quarter. R&D increased to 2.4% of sales, on a $1.6 million cost increase, mostly for increased development of the Company’s electronic-patch-injector system, now branded SmartDose. SG&A costs decreased 1.2 percentage points, to 15.1% of sales, on a $0.6 million increase in costs, excluding $2.1 million of executive separation costs described in “Restructuring and Other Items.” Adjusted operating profit was $30.5 million in the quarter, compared to $30.9 million during the prior-year period.

The Company also issued revised full-year 2011 financial guidance, increasing sales estimates to between $1.17 and $1.20 billion and narrowing Adjusted Diluted EPS expectations to between $2.30 and $2.40 per share.

Executive Commentary

“Second quarter revenues were in line with our expectations excluding the added positive effect of currency translation,” said Donald E. Morel Jr., PhD, West’s Chairman and Chief Executive Officer. “Escalating material and energy costs combined with an unfavorable product mix to lower our consolidated gross margin. We are implementing a number of pricing actions that, along with scheduled contract price adjustments and lean manufacturing initiatives, should mitigate the cost increases that we expect to see in the second half of the year. Based on our year-to-date results and the ongoing fluctuations in currency and commodity markets, we have adjusted our full year sales and earnings guidance, and expect year-on-year earnings growth of between 4% and 9% at constant exchange rates.”

“Market interest continues to grow for the Daikyo CZ® resin products in a range of formats, including standard vials, syringes and cartridges, as well as custom configurations and sizes. We believe this interest reflects increasing awareness of breakage and potential compatibility issues with existing packaging materials and silicone oil. In the near term, we expect sales to be driven by pre-commercial sampling as customers advance their evaluation of CZ systems and conduct necessary stability and filling trials on the path to commercialization.”

“During the second quarter, we signed our first development agreement for the SmartDose system, which could enter late-stage clinical trials as soon as 2013. The system offers customers dosing flexibility by eliminating volume constraints associated with current delivery modalities. We are also seeing interest in the Confidose® auto-injector system using a CZ container for delivering larger volumes and higher viscosity formulations.”

“We remain confident that these programs, combined with our next-generation packaging components, emerging market expansions, and improved operating efficiency in our primary packaging lines, will continue to fuel growth in the near- and long-term.”

Pharmaceutical Packaging Systems

Pharmaceutical Packaging Systems sales were $222.2 million, an increase of 10.6% from the $200.9 million reported in the second quarter of 2010. Excluding foreign currency translation, sales improved 2.4% due primarily to increased sales of pharmaceutical packaging components, while sales of disposable device components were substantially unchanged and development and laboratory service revenues were lower. A change in a product format by one customer and a regulatory action at another’s production facility reduced North American sales by $3.6 million, which was more than offset by combined sales increases of other, lower-margin products.

Regionally, Europe contributed most of the sales increase, and Asian sales again grew more rapidly than those in any other region. North American sales were slightly lower than in the prior-year period, primarily due to the product-format change and regulatory issue noted above.

Gross profit increased to $69.2 million in the current quarter from $67.5 million in the prior-year period, as the effects of improved sales and labor efficiencies were mostly offset by increased raw material and other production costs, including the impact of foreign exchange on certain costs. The gross profit margin of 31.1% was 2.5 percentage points lower than in the prior-year period, mainly due to the cost increases and the less profitable sales mix.

SG&A costs increased $1.4 million, primarily due to currency translation. R&D costs were $0.4 million higher than in the prior-year period. SG&A costs declined as a percentage of sales compared to the second quarter of 2010, while R&D costs were unchanged relative to sales. Operating profit was $38.1 million, compared to $37.6 million in the second quarter of 2010.

Pharmaceutical Delivery Systems

Pharmaceutical Delivery Systems sales were $86.4 million in the quarter, an increase of $4.4 million over the same period last year, or 5.4%, of which 2.3 percentage points was due to favorable currency translation. Stronger sales of proprietary reconstitution devices and net gains in contract manufacturing and other service revenues were partially offset by $2.1 million in price reductions under certain contract-manufacturing agreements. Proprietary products generated 20% of revenues in the quarter, unchanged from the same period last year and the first quarter of 2011, with increases in reconstitution devices offsetting other sales declines, primarily lower sales of eris passive safety syringes.

Gross profit of $15.4 million in the quarter, was $0.3 million lower than in the prior-year period. The gross profit margin in the quarter was 17.9% compared to 19.1% in the 2010 period. The lower profitability was primarily due to the effects of contracted price reductions, which more than offset the net positive effects of other pricing actions and production efficiencies, including the benefits of recent restructurings.

R&D costs grew $1.2 million, primarily as a result of increasing development activity for the SmartDose electronic-patchinjector system. SG&A costs were $0.7 million lower than in the second quarter of 2010 due mostly to lower compensation costs in contract manufacturing operations, net of increased sales commissions associated with the growth in proprietary reconstitution devices.

Corporate and Other

U.S. pension expense decreased by $0.3 million, to $3.3 million, in the second quarter compared to the same period last year as a result of revisions in the valuation of pension plan assets and liabilities at the beginning of the year. Stock-based compensation expense increased $0.8 million compared to the 2010 quarter due to the relatively large decline in the Company’s share price that occurred in the prior-year period, reducing expense in that period. Other unallocated corporate, general and administrative costs were marginally lower.

Net interest expense of $4.3 million was $0.5 million higher than in the 2010 quarter as a result of costs associated with the 2010 refinancing of the Company’s revolving credit facility and lower capitalization of interest costs. Income tax expense on income excluding the items described in “Restructuring and Other Items” is based on an estimated annual effective tax rate for 2011 of 24.7%, compared to an estimate of 23.9% used in the second quarter of 2010. The increase reflects changes in the year-over-year composition of international earnings, as well as interim changes in applicable tax rates and law.

Net income includes $1.9 million of equity in earnings of affiliated companies, a $0.3 million increase over the prior year. The increase was attributed primarily to operating results at Daikyo Seiko, Ltd., the Company’s 25% owned affiliate in Japan.

Restructuring and Other Items

Severance, facility closing costs and asset transfers resulted in $1.3 million in pre-tax restructuring costs in the quarter pursuant to plans announced in the fourth quarter of 2010. That plan included, among other changes, the now substantially completed closing of the Company’s Montgomery, Pennsylvania facility, and a reduction of operations at its Cornwall, England facility. Savings associated with the plan are still expected to be approximately $6 million in 2011 and are still expected to increase to $12 million annually following the expected 2012 completion of the plan. During the second quarter of 2010, the Company recognized $0.4 million of pre-tax charges associated with an earlier restructuring plan.

A net gain of $0.7 million was recognized in the quarter for adjustments to estimates of liabilities for contingent consideration, the majority of which relates to contingent consideration associated with the 2009 acquisition of the eris safety syringe system.

A pre-tax charge of $2.1 million was recognized for the costs of a covenant not-to-compete and changes to equity incentives previously awarded to the Company’s former President and Chief Operating Officer, who retired during the quarter.

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 an update to its full-year 2011 revenue and earnings per share financial guidance, which is summarized as follows: