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WST > SEC Filings for WST > Form 10-Q on 5-Aug-2013All Recent SEC Filings

Show all filings for WEST PHARMACEUTICAL SERVICES INC

Form 10-Q for WEST PHARMACEUTICAL SERVICES INC


5-Aug-2013

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

The following discussion is intended to further the reader's understanding of the consolidated financial condition and results of operations of our Company. It should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations and the consolidated financial statements and accompanying notes included in our 2012 Annual Report. These historical financial statements may not be indicative of our future performance. This Management's Discussion and Analysis of Financial Condition and Results of Operations contains a number of forward-looking statements, all of which are based on our current expectations and could be affected by the uncertainties and risks discussed in Part I, Item 1A of our 2012 Annual Report and in Part II, Item 1A of this Quarterly Report on Form 10-Q.

Throughout this section, references to "Notes" refer to the footnotes to our condensed consolidated financial statements (unaudited) in Part I, Item 1 of this Quarterly Report on Form 10-Q, unless otherwise indicated.

Our Operations

Our business operations are organized into two reportable segments, which are aligned with the underlying markets and customers they serve. Our reportable segments are Packaging Systems and Delivery Systems. Packaging Systems develops, manufactures and sells primary packaging components and systems for injectable drug delivery, including stoppers and seals for vials, closures and other components used in syringe, intravenous and blood collection systems, and prefillable syringe components. Delivery Systems develops, manufactures and sells safety and administration systems, multi-component systems for drug administration, and a variety of custom contract-manufacturing solutions targeted to the healthcare and consumer-products industries. In addition, Delivery Systems is responsible for the continued development and commercialization of our line of proprietary, multi-component systems for injectable drug administration and other healthcare applications. We also maintain global partnerships to share technologies and market products with affiliates in Japan and Mexico.

Second Quarter 2013 Financial Performance Highlights

•         Net sales were $344.5 million, an increase of 6.1% from the same period
          in 2012 (5.7% excluding foreign currency effects).


•         Gross profit was $110.9 million, an increase of 12.4% from the same
          period in 2012, and our gross margin increased by 1.8 margin points to
          32.2%.


•         Operating profit was $42.5 million, an increase of 19.4% from the same
          period in 2012.


•         Net income was $30.2 million, an increase of 93.6% from the same period
          in 2012.

We achieved higher net sales in both the Packaging Systems and Delivery Systems segments during the three months ended June 30, 2013, as compared to the same period in 2012. Net sales originating in the United States were $157.1 million, an increase of 2.9% from the same period in 2012, primarily due to higher domestic demand for pharmaceutical packaging components and an increase in Daikyo Crystal Zenith® ("CZ") sales, partially offset by a decrease in contract manufacturing sales. Net sales generated outside of the United States were $187.4 million, an increase of 8.9% from the same period in 2012, reflecting continued growth and demand, particularly in Europe. Excluding the favorable effects from currency translation, our non-U.S. net sales increased 8.2% and our consolidated net sales increased 5.7% from the same period in 2012.


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Gross profit increased by $12.2 million during the three months ended June 30, 2013, as compared to the same period in 2012, primarily due to higher sales volumes and improved production efficiencies. Sales price increases also increased gross profit; however, this favorable item was offset by the impact of increased wages, benefits and other costs.

Operating profit increased by $6.9 million during the three months ended June 30, 2013, as compared to the same period in 2012, primarily due to the increase in consolidated gross profit described above and the change in restructuring and other items, partially offset by increases in R&D and SG&A costs.

Net income increased by $14.6 million, and diluted net income per share increased by $0.41 per diluted share, during the three months ended June 30, 2013, as compared to the same period in 2012. Net income and diluted net income per share for the three months ended June 30, 2012 included a loss on extinguishment of debt of $9.8 million (net of $1.8 million in tax), or $.27 per diluted share, restructuring, impairment and related charges of $2.3 million (net of $1.4 million in tax), or $0.06 per diluted share, and an increase in acquisition-related contingencies of $0.2 million, or $0.01 per diluted share.

Business Outlook

We anticipate continued revenue improvement driven by customers moving up the product quality and value scale in Packaging Systems and increasing growth in Delivery Systems' proprietary products, as customers accelerate their pre-commercial efforts. In particular, we continue to focus on the expansion of our high-value closure products and proprietary delivery systems, including CZ-based containment systems. We continue to believe that actions taken in recent years to increase capacity for certain products, reduce costs through restructuring and lean savings efforts, and expand into emerging markets will lead to improved profitability as global demand increases. We plan to continue funding capital projects related to new products, expansion activity, and emerging markets for Packaging Systems and for new, proprietary products within Delivery Systems. We believe that our operating results and financial position give us a platform for sustained growth, and will enable us to take advantage of opportunities to invest in our business as they arise.

RESULTS OF OPERATIONS

We evaluate the performance of our segments based upon, among other things, segment net sales and operating profit. Segment operating profit excludes general corporate costs, which include executive and director compensation, stock-based compensation, adjustments to annual incentive plan expense for over- or under-attainment of targets, certain pension and other retirement benefit costs, and other corporate facilities and administrative expenses not allocated to the segments. Also excluded are items that management considers not representative of ongoing operations. Such items are referred to as other unallocated items and generally include restructuring and related charges, certain asset impairments and other specifically-identified income or expense items.

For the purpose of aiding the comparison of our year-over-year results, we often refer to net sales and other financial results excluding the effects of changes in foreign currency exchange rates. The constant-currency amounts are calculated by translating the current year's functional currency results at the prior-year period's exchange rate. These re-measured results excluding effects from currency translation are not in conformity with U.S. GAAP and should not be used as a substitute for the related U.S. GAAP financial measures. The non-U.S. GAAP financial measures are incorporated into our discussion and analysis as management uses them in evaluating our results of operations, and believes that this information provides users a valuable insight into our results.

Percentages in the following tables and throughout the Results of Operations section may reflect rounding adjustments.


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Net Sales

The following table presents net sales, consolidated and by reportable segment:

                                  Three Months Ended         Six Months Ended
                                       June 30,                  June 30,
($ in millions)                    2013         2012         2013        2012
Packaging Systems              $   251.5      $ 235.8     $  503.0     $ 471.5
Delivery Systems                    93.3         89.2        181.5       169.9
Intersegment sales elimination      (0.3 )       (0.2 )       (0.6 )      (0.3 )
Consolidated net sales         $   344.5      $ 324.8     $  683.9     $ 641.1

Packaging Systems - Packaging Systems' net sales increased by $15.7 million, or 6.7%, for the three months ended June 30, 2013, as compared to the same period in 2012, including a favorable foreign exchange impact of $0.9 million. Excluding foreign exchange effects, net sales for the three months ended June 30, 2013 increased by $14.8 million, or 6.3%, as compared to the same period in 2012, primarily due to unit volume growth for our standard pharmaceutical components and continued growth in sales of our higher-quality product offerings that reduce particulate contamination and create efficiencies in our customer's manufacturing processes. Sales price increases contributed 2.1 percentage points of the increase.

Packaging Systems' net sales increased by $31.5 million, or 6.7%, for the six months ended June 30, 2013, as compared to the same period in 2012, including a favorable foreign exchange impact of $1.2 million. Excluding foreign exchange effects, net sales for the six months ended June 30, 2013 increased by $30.3 million, or 6.4%, as compared to the same period in 2012, primarily due to continued growth in sales of our higher-quality product offerings that reduce particulate contamination and create efficiencies in our customer's manufacturing processes and unit volume growth for our standard pharmaceutical components. Sales price increases contributed 2.2 percentage points of the increase.

Delivery Systems - Delivery Systems' net sales increased by $4.1 million, or 4.7%, for the three months ended June 30, 2013, as compared to the same period in 2012, including a favorable foreign exchange impact of $0.3 million. Excluding foreign exchange effects, net sales for the three months ended June 30, 2013 increased by $3.8 million, or 4.3%, as compared to the same period in 2012, primarily due to increases in CZ and administration systems sales, partially offset by a decrease in contract manufacturing sales. Proprietary net sales represented 25.6% of Delivery Systems' net sales for the three months ended June 30, 2013, as compared to 20.1% for the same period in 2012. Sales price increases contributed one percentage point of the increase.

Delivery Systems' net sales increased by $11.6 million, or 6.8%, for the six months ended June 30, 2013, as compared to the same period in 2012, including a favorable foreign exchange impact of $0.4 million. Excluding foreign exchange effects, net sales for the six months ended June 30, 2013 increased by $11.2 million, or 6.6%, as compared to the same period in 2012, primarily due to increases in CZ and administration systems sales. Proprietary net sales represented 25.4% of Delivery Systems' net sales for the six months ended June 30, 2013, as compared to 20.6% for the same period in 2012. Sales price increases contributed one percentage point of the increase.

Consolidated net sales increased by $19.7 million, or 6.1%, for the three months ended June 30, 2013, as compared to the same period in 2012, including a favorable foreign exchange impact of $1.2 million. Excluding foreign currency effects, net sales for the three months ended June 30, 2013 increased by $18.5 million, or 5.7%, as compared to the same period in 2012.


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Consolidated net sales increased by $42.8 million, or 6.7%, for the six months ended June 30, 2013, as compared to the same period in 2012, including a favorable foreign exchange impact of $1.6 million. Excluding foreign currency effects, net sales for the six months ended June 30, 2013 increased by $41.2 million, or 6.4%, as compared to the same period in 2012.

The intersegment sales elimination, which is required for the presentation of consolidated net sales, represents the elimination of components sold between our segments.

Gross Profit

The following table presents gross profit and related gross margins,
consolidated and by reportable segment:

                             Three Months Ended         Six Months Ended
                                  June 30,                  June 30,
($ in millions)               2013          2012        2013        2012
Packaging Systems:
Gross Profit              $     92.7      $ 82.7     $  187.5     $ 167.9
Gross Margin                    36.9 %      35.1 %       37.3 %      35.6 %
Delivery Systems:
Gross Profit              $     18.2      $ 16.0     $   35.1     $  31.9
Gross Margin                    19.5 %      17.9 %       19.3 %      18.8 %
Consolidated Gross Profit $    110.9      $ 98.7     $  222.6     $ 199.8
Consolidated Gross Margin       32.2 %      30.4 %       32.6 %      31.2 %

Packaging Systems - Packaging Systems' gross profit increased by $10.0 million, or 12.1%, and $19.6 million, or 11.7%, for the three and six months ended June 30, 2013, respectively, as compared to the same periods in 2012, including a favorable foreign exchange impact of $0.4 million and $0.6 million for the three and six months ended June 30, 2013, respectively. Packaging Systems' gross margin increased by 1.8 margin points and 1.7 margin points for the three and six months ended June 30, 2013, respectively, as compared to the same periods in 2012, primarily as a result of improved production efficiencies. Sales price increases also increased Packaging Systems' gross margin for the three and six months ended June 30, 2013, however, this favorable item was offset by the impact of increased wages, benefits and other costs.

Delivery Systems - Delivery Systems' gross profit increased by $2.2 million, or 13.8%, and $3.2 million, or 10.0%, for the three and six months ended June 30, 2013, respectively, as compared to the same periods in 2012. Delivery Systems' gross margin increased by 1.6 margin points and 0.5 margin points for the three and six months ended June 30, 2013, respectively, as compared to the same periods in 2012, primarily due to improved production efficiencies. Sales price increases also increased Delivery Systems' gross margin for the three and six months ended June 30, 2013, however, this favorable item was offset by the impact of increased wages, benefits and other costs.

Consolidated gross profit increased by $12.2 million, or 12.4%, and $22.8 million, or 11.4%, for the three and six months ended June 30, 2013, respectively, as compared to the same periods in 2012, including a favorable foreign exchange impact of $0.4 million and $0.6 million for the three and six months ended June 30, 2013, respectively. Consolidated gross margin increased by 1.8 margin points and 1.4 margin points for the three and six months ended June 30, 2013, respectively, as compared to the same periods in 2012.


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Research and Development ("R&D") Costs

                            Three Months Ended            Six Months Ended
                                 June 30,                     June 30,
($ in millions)               2013            2012         2013          2012
Packaging Systems      $     3.6             $ 3.3    $     7.0         $  6.5
Delivery Systems             5.9               4.9         11.6           10.0
Consolidated R&D Costs $     9.5             $ 8.2    $    18.6         $ 16.5

Packaging Systems' R&D costs increased by $0.3 million, or 9.1%, and $0.5 million, or 7.7%, for the three and six months ended June 30, 2013, respectively, as compared to the same periods in 2012, primarily as a result of increased investment in next-generation packaging components.

Delivery Systems' R&D costs increased by $1.0 million, or 20.4%, and $1.6 million, or 16.0%, for the three and six months ended June 30, 2013, respectively, as compared to the same periods in 2012, primarily as a result of development work on SmartDose and the SelfDose™ system.

Consolidated R&D costs increased by $1.3 million, or 15.9%, and $2.1 million, or 12.7%, for the three and six months ended June 30, 2013, respectively, as compared to the same periods in 2012.

Selling, General and Administrative ("SG&A") Costs

                            Three Months Ended         Six Months Ended
                                 June 30,                  June 30,
($ in millions)              2013          2012        2013        2012
Packaging Systems        $    32.4       $ 28.7     $   64.5     $  57.6
Delivery Systems              10.7          9.2         21.1        18.0
Corporate                     16.6         16.5         33.1        30.1
Consolidated SG&A costs  $    59.7       $ 54.4     $  118.7     $ 105.7
SG&A as a % of net sales      17.3 %       16.8 %       17.4 %      16.5 %

Packaging Systems' SG&A costs increased by $3.7 million, or 12.9%, and $6.9 million, or 12.0%, for the three and six months ended June 30, 2013, respectively, as compared to the same periods in 2012, primarily as a result of incremental costs related to outside services, such as supply chain initiatives, increased compensation costs primarily related to merit increases and headcount increases, primarily in Asia, and incremental costs related to information technology projects.

Delivery Systems' SG&A costs increased by $1.5 million, or 16.3%, and $3.1 million, or 17.2%, for the three and six months ended June 30, 2013, respectively, as compared to the same periods in 2012, primarily as a result of incremental costs related to outside services, such as patent-related legal fees and sales commissions, and increased compensation costs primarily related to merit and benefit increases.

Corporate's SG&A costs increased by $0.1 million, or 0.6%, for the three months ended June 30, 2013, as compared to the same period in 2012, primarily due to increases in stock-based compensation expense and other corporate costs being substantially offset by a decrease in incentive compensation costs. The increase in stock-based compensation expense of $0.7 million was due to increased performance-based achievement levels.


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Corporate's SG&A costs increased by $3.0 million, or 10.0%, for the six months ended June 30, 2013, as compared to the same period in 2012, primarily due to increases in stock-based compensation expense and intellectual property-related costs being partially offset by a decrease in incentive compensation costs. The increase in stock-based compensation expense of $3.0 million was due to increased performance-based achievement levels and the impact of higher share prices on our deferred compensation plan liabilities, which are indexed to our share price.

Consolidated SG&A costs increased by $5.3 million, or 9.7%, and $13.0 million, or 12.3%, for the three and six months ended June 30, 2013, respectively, as compared to the same periods in 2012.

Restructuring and Other Items

The following table presents restructuring charges and other income and expense
items for our segments, and corporate and other unallocated items:

                                              Three Months Ended         Six Months Ended
                                                   June 30,                  June 30,
($ in millions) Expense (income)               2013          2012        2013         2012
Packaging Systems                          $    (0.1 )     $  0.2     $    0.5      $ (0.3 )
Delivery Systems                                (0.7 )       (3.6 )       (1.1 )      (3.9 )
Corporate and other unallocated items:
Restructuring and related charges                  -          0.3            -         0.7
Impairment charge                                  -          3.4            -         3.4
Acquisition-related contingencies                  -          0.2            -         0.4
Consolidated restructuring and other items $    (0.8 )     $  0.5     $   (0.6 )    $  0.3

Other income and expense items, consisting primarily of foreign exchange transaction gains and losses, gains and losses on the sale of fixed assets, and miscellaneous income and charges, are generally recorded within segment or corporate results. Certain restructuring, impairments and other specifically-identified gains and losses considered outside of the control of segment management are not allocated to our segments.

During the six months ended June 30, 2013, we recorded a charge of approximately $0.7 million related to the devaluation of the Venezuelan bolivar within Packaging Systems.

During the three and six months ended June 30, 2013, we recorded development income of $0.5 million and $0.8 million, respectively, within Delivery Systems. Included in these amounts was $0.3 million of income related to a nonrefundable payment of $20.0 million received from a customer in June 2013 in return for the exclusive use of SmartDose within a specific therapeutic area. Unearned income related to this payment of $1.5 million and $18.2 million was included within other current liabilities and other long-term liabilities, respectively, at June 30, 2013. The unearned income is being recognized as development income on a straight-line basis over the remaining term of the agreement, which is thirteen years. The agreement does not include a future minimum purchase commitment from the customer.

During the three and six months ended June 30, 2012, we recorded development income of $3.8 million attributable to services and the reimbursement of certain costs.


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During the three and six months ended June 30, 2012, we incurred restructuring and related charges of $0.3 million and $0.7 million, respectively, associated with the 2010 plan. Charges incurred during the three and six months ended June 30, 2012 were primarily facility closure costs associated with a reduction of operations at a manufacturing facility in England and the 2011 closure of a plant in the United States. We do not expect to incur any future charges related to the 2010 plan, and the remaining restructuring obligations at June 30, 2013 will be reduced to zero as payments are made.

During the second quarter of 2012, as a result of continuing delays and lower-than-expected demand, we updated the sales projections related to one of our Delivery Systems' product lines. The revised projections triggered an impairment review of the associated assets. Our review concluded that the estimated fair value of the product line no longer exceeded the carrying value of the related assembly equipment and intangible asset and, therefore, an impairment charge of $3.4 million was recorded. We estimated the fair value of the asset group using an income approach based on discounted cash flows.

During the three and six months ended June 30, 2013, we increased the SmartDose contingent consideration by $0.2 million due to fair value adjustments. During the three and six months ended June 30, 2012, we increased the SmartDose contingent consideration by $0.2 million and $0.4 million, respectively, due to fair value adjustments. Since we consider the fair value adjustments to be within the control of segment management as of January 1, 2013 and on a prospective basis, they are included within segment results for the three and six months ended June 30, 2013.

Operating Profit

The following table presents operating profit (loss) by reportable segment,
corporate and other unallocated costs:

                                          Three Months Ended         Six Months Ended
                                               June 30,                  June 30,
($ in millions)                            2013          2012        2013        2012
Segments:
Packaging Systems                      $    56.8       $ 50.5     $  115.5     $ 104.1
Delivery Systems                             2.3          5.5          3.5         7.8
Corporate and other unallocated items:
Corporate                                  (16.6 )      (16.5 )      (33.1 )     (30.1 )
Other unallocated expense                      -         (3.9 )          -        (4.5 )
Consolidated operating profit          $    42.5       $ 35.6     $   85.9     $  77.3

Packaging Systems - Packaging Systems' operating profit increased by $6.3 million, or 12.5%, and $11.4 million, or 11.0%, for the three and six months ended June 30, 2013, respectively, as compared to the same periods in 2012, including a favorable foreign exchange impact of $0.3 million and $0.7 million, respectively, due to the factors described above.

Delivery Systems - Delivery Systems' operating profit decreased by $3.2 million, or 58.2%, and $4.3 million, or 55.1%, for the three and six months ended June 30, 2013, respectively, as compared to the same periods in 2012, due to the factors described above, including a reduction in development income.

Corporate - Corporate costs increased by $0.1 million, or 0.6%, and $3.0 million, or 10.0%, for the three and six months ended June 30, 2013, respectively, as compared to the same periods in 2012, due to the factors described above.


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Consolidated operating profit increased by $6.9 million, or 19.4%, and $8.6 million, or 11.1%, for the three and six months ended June 30, 2013, respectively, as compared to the same periods in 2012.

Loss on Debt Extinguishment

During the six months ended June 30, 2013, we repurchased $1.7 million in aggregate principal amount of our Convertible Debentures, resulting in a pre-tax loss on debt extinguishment of $0.2 million, the majority of which consisted of the premium over par value.

During the three and six months ended June 30, 2012, we recognized a pre-tax loss on debt extinguishment of $11.6 million related to our repurchase of $158.4 million of our Convertible Debentures, which consisted of a $6.2 million premium over par value, a $4.4 million write-off of unamortized debt issuance costs and $1.0 million in transaction costs.

Interest Expense, Net

The following table presents interest expense, net, by significant component:

                         Three Months Ended          Six Months Ended
                              June 30,                   June 30,
($ in millions)          2013           2012         2013         2012
Interest expense      $    4.7       $    4.9     $    9.5       $ 9.5
Capitalized interest      (0.6 )         (0.3 )       (0.8 )      (0.7 )
Interest income           (0.4 )         (0.6 )       (1.0 )      (1.0 )
Interest expense, net $    3.7       $    4.0     $    7.7       $ 7.8

Interest expense, net, decreased by $0.3 million, or 7.5%, for the three months ended June 30, 2013, as compared to the same period in 2012, primarily due to increased capitalized interest resulting from the commencement of certain capital projects during the three months ended June 30, 2013.

Interest expense, net, decreased by $0.1 million, or 1.3%, for the six months . . .

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