West Pharmaceutical Services, Inc. (NYSE: WST) today announced its results for the fourth quarter and full year of 2009. Summary comparative results for the fourth quarter were as follows:
Consolidated quarterly sales grew 19.9% compared to the prior year period, including $16.3 million, or 6.7 percentage points, of favorable effects of foreign currency translation. Excluding currency translation effects, consolidated sales were $32.2 million, or 13.2%, higher than in the prior year quarter. The overall increase reflected strong Pharmaceutical Systems sales growth, including $12.3 million of sales for H1N1 flu vaccinations, and Tech Group sales that were largely unchanged from the prior year despite including $6.2 million in sales from a business acquired in 2009.
The consolidated gross profit margin was 28.6% in the fourth quarter, 0.2% higher than in the fourth quarter of 2008. Gross profit was $83.9 million in the current quarter compared to $69.6 million reported in the prior year period. The $14.3 million increase in gross profit and slight increase in margin was the result of the disproportionate growth in Pharmaceutical Systems sales and $4.1 million of favorable foreign currency translation.
Overall SG&A costs were higher than the fourth quarter of 2008, primarily due to market value-driven increases in U.S. pension and stock-based compensation costs, and foreign currency translation. Other SG&A costs increased $1.8 million, or 5.4%, from the prior- year period, and R&D spending increased by $2.0 million. Resulting Adjusted Operating Profit of $32.0 million was 14.3% higher than the prior-year period, including the net $1.8 million positive effect of foreign currency translation. Reported Operating Profit in each of the current and prior year periods included restructuring, impairment, tax and other items described in "Restructuring and Other Items."
Executive Commentary
"The fourth quarter was a terrific finish to a difficult year and is consistent with our view that the worst of the effects of inventory contraction are behind us," said Donald E. Morel Jr., Ph.D., the Company's Chairman and Chief Executive Officer. "The Company experienced significant growth in higher quality pharmaceutical components, which helped us to grow both overall revenues and profitability, even without the significant contributions from H1N1 vaccines, currency, and acquired business."
"Looking ahead, there are tremendous opportunities for West to convert its new technologies and products into incremental sales, in addition to delivering improved operating results from our current product lines" continued Dr. Morel. "As we previously announced, at the outset of 2010 we have realigned our management structure to better focus relevant resources on the growth opportunities in the new business units. Packaging Systems will focus on West's traditional business of providing primary and secondary packaging. Delivery Systems will focus on the further development and commercialization of our technologies and products primarily involved in safe, effective and efficient injectable drug delivery. The unit will rely mostly on the plastic injection molding and assembly capabilities existing in The Tech Group businesses, which remain as a part of the newly constituted business unit."
"Looking to 2010, we expect historic seasonality to return to Packaging Systems' order pattern, an improved product mix, and improving profit margins. Delivery Systems will be focused on commercialization of new products and restoring growth to the contract manufacturing businesses. We expect the reconstitution and fluid transfer businesses to continue to grow and the needle safety and auto-injector products to begin generating revenue. Daikyo Crystal Zenith® development will continue to be a priority, with expanded production capacity coming on-line to support customers' development. Overall, we expect sales growth to be between 3% and 5% excluding currency, and estimate 2010 Adjusted Diluted earnings per share of between $2.19 and $2.39."
Pharmaceutical Systems Segment
Pharmaceutical Systems segment sales of $229.5 million in the quarter were 26.4% higher than the fourth quarter of 2008, including $14.1 million of favorable foreign currency translation. Excluding the effects of currency translation, sales grew by $33.8 million, or 18.7%.
Pharmaceutical components for H1N1 flu vaccination products accounted for $12.3 million of the sales increase and pricing contributed $6.2 million of the increase. Other notable product-type increases included $7.5 million of prefillable syringe components and $7.1 million of metal seals. Revenue growth was strong for both standard components and those employing the Company's Westar® processing and coating technologies, which typically generate higher prices and margins than standard products. Geographically and excluding the effects of currency translation, sales growth was strongest in North America, followed by Asia, Europe and South America.
Gross profit in the quarter was $77.5 million, compared to $61.4 million in the corresponding 2008 quarter, and gross margin was unchanged at 33.8%. Currency translation contributed $3.9 million of the increase. The increase in gross profit compared to the prior-year period was largely due to the $14.6 million combined effects of the greater sales volume gains and selling price increases. Significant increases in Westar sales of H1N1-related components increased the average selling price and margin for those sales, but did not significantly alter the segment's gross profit margin when compared to the prior year. Expected decreases in U.S. raw material costs associated with lower market prices for petroleum products were more than offset by other increases in production costs, including $1.4 million of depreciation.
Pharmaceutical Systems' SG&A costs were $3.2 million higher when compared to the fourth quarter of 2008, of which $1.7 million was attributed to foreign currency translation and $0.5 million related to business acquisition activities. As a percent of revenue, SG&A declined from 14.6% of sales in the prior year period to 12.9% in the current quarter. Other increases in SG&A in the quarter included external professional services and depreciation associated with information technology upgrades. These were partially offset by lower compensation costs associated with the completion of information technology projects and resulting from the restructuring. Research spending was $1.5 million higher than in the prior-year quarter, primarily as a result of increased spending on Daikyo Crystal Zenith development. Resulting operating profit increased by $12.9 million, to $42.7 million, including $1.9 million of net favorable currency translation effects. Excluding currency translation, operating profit was 36.9% higher than in the 2008 period.
Tech Group Segment
Tech Group segment sales were $66.3 million in the quarter, compared to $66.2 million in the fourth quarter of 2008. The third-quarter acquisition of the drug delivery assets of Plastef Investissements SA ("Plastef") contributed $6.2 million in sales of safety needle products in the quarter, while the fourth-quarter 2008 disposition of a facility and business in Mexico accounted for a decline of $2.6 million in sales, primarily of industrial products. Foreign currency translation contributed $2.2 million to reported revenue, which was partially offset by $1.7 million of contractually mandated price reductions associated with the pass-through of lower plastic resin costs. Customer legal and regulatory issues that affected sales of their products accounted for $2.4 million in lower sales, and the balance of the reduction was attributed to slower demand driven by lower end-market sales of customers' products and related inventory reductions, net of $1.6 million of higher tooling and development revenue.
Gross profit was $6.4 million in the quarter, or 9.6% of sales, compared to $8.2 million, or 12.3% of sales in the prior year, primarily due to the lower sales volume. SG&A costs were $0.3 million higher than in the fourth quarter of 2008, primarily due to foreign currency translation, and R&D costs were $0.5 million higher as a result of the July 2009 acquisition of additional safety needle device business and technology from Plastef. As a result, operating profit was reduced to $0.6 million, compared to $4.3 million in the prior year quarter.
Corporate and Other
U.S. pension expense was $4.2 million in the current quarter, compared to $1.5 million in the fourth quarter of 2008, primarily as a result of substantial investment losses incurred by the U.S. pension plan assets during 2008. Similar effects were reported in each of the earlier 2009 quarters.
Stock-based compensation expense was $2.1 million higher than in the 2008 quarter, largely due to the impact of changes in the Company's share price on the value of shares granted under incentive plans. Other corporate general and administrative costs were slightly higher compared to the prior-year quarter, with increases in compensation and benefit plan costs being partially offset by lower annual incentive plan costs.
Net interest expense was $0.4 million lower compared to the prior-year period. The Company's reported tax expense includes the tax effects of items described in "Restructuring and Other Items", together with a 2009 annual effective tax rate on remaining operating earnings of 23.4%. The comparable expected annual tax rate in the 2008 period was 24.8%. The primary reasons for the change were a more favorable distribution of international earnings in 2009 and increased US credits for research activity.
Reported net income included $1.4 million of equity in income of affiliated companies, which contributed no income in the prior year period. The improvement is attributed to stronger operating results in the Company's affiliate in Japan.
Restructuring and Other Items
In November 2009, the Company announced operational restructuring plans in both The Tech Group and Pharmaceutical Systems segments. The Tech Group plan will consolidate manufacturing operations and support functions to better align capacity to contract manufacturing activity. The Pharmaceutical Systems plan involves exiting certain specialized laboratory service offerings, retiring information technology applications and associated support functions and abandoning plans to expand its U.S. metals facility.
$7.6 million of pre-tax restructuring costs were incurred, and are reflected in the reported results for the fourth-quarter 2009, primarily for employee severance costs and fixed asset impairments. Separately, the Company also recognized the impairment of a cost-based investment, which resulted in a pre-tax charge of $0.8 million. Additional restructuring costs of between $1.0 million and $2.0 million are expected to be incurred during 2010. Reported fourth quarter results for the prior year included $0.5 million of pre-tax restructuring costs incurred pursuant to the 2007 Tech Group restructuring plan. The Company expects that the restructuring will result in cost savings of between $5 million and $6 million in 2010.
During the third quarter of 2009, the Company recognized $3.9 million in pre-tax ($1.7 million after-tax) benefits as a result of relief from penalties, administrative charges and interest associated with certain tax deficiencies in Brazil, originally recorded in 2007. The relief was recorded pursuant to an amnesty program initiated by the Brazilian government. During the fourth-quarter, an ordinance altered the relief to which the Company is entitled, resulting in a $1.9 million ($1.3 million after-tax) reduction in the amnesty benefit, which is now $2.0 million pre-tax ($0.4 million after-tax). No comparable item was recognized in the prior year period.
The Company recognized a $4.0 million reduction to tax expense in the current quarter from the resolution of prior-year tax contingencies and an estimate of additional tax credits to which it is entitled for prior years. The Company recognized $0.3 million of discrete tax benefits in the prior-year period.
Comparable 2008 fourth quarter results included $1.9 million of pre-tax charges for costs reimbursed under a contract settlement agreement with Nektar Therapeutics that funded the cost of converting the former Exubera® device production facility to other uses. The settlement had no impact on results in the fourth quarter of 2009.
Business Unit Realignment
In December 2009, the Company announced plans to realign its business units based on the products being developed and produced and by each of the new units. Effective January 1, 2010, the Company manages and reports its operations in two business segments: Packaging Systems and Delivery Systems.
Packaging Systems will continue the primary business of the former Pharmaceutical Systems business, focusing on packaging components, including vial and IV stoppers, liners, metal seals, and syringe plungers. It will include the Company's market-leading technologies for cleaner, better performing and more readily usable components, including Westar, FluroTec®, Teflon® and B-2 Coatings, and Envision™ products. It will also include the existing disposable medical device components business and be responsible for developing and acquiring new packaging products and related technologies that will meet the ever-increasing quality standards for pharmaceutical packaging and medical devices.
Delivery Systems incorporates The Tech Group businesses and now includes the Company's reconstitution and fluid transfer products business, which accounted for $32.7 million of Pharmaceutical Systems' revenue in 2009, and the development of delivery system products currently in development or early-stage marketing. These include the Plastef safety-syringe business acquired in 2009, the NovaGuard™ safety needle, Daikyo Crystal Zenith-based products, and the ConfiDose® auto-injector system. In addition, Delivery Systems is responsible for developing and acquiring products that complement the current product portfolio of safety and delivery systems.
Financial Guidance
The Company's revenue and earnings expectations for 2010 are presented reflecting the Company's new business segments.
The Company expects first quarter Adjusted Diluted EPS to be approximately 20% higher than that reported in the first quarter of 2009.
During 2010, the Company expects to recognize pre-tax charges described under "Restructuring and Other Items" of between $1.0 million and $2.0 million. These charges are excluded from the guidance for 2010 Adjusted Diluted EPS.
The Company expects that capital spending will be between $115 million and $130 million during 2010.
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