West Announces Second-Quarter 2017 Results
EXTON, Pa., July 27, 2017 /PRNewswire/ -- West Pharmaceutical Services, Inc. (NYSE: WST) today announced its financial results for the second-quarter 2017 and updated financial guidance for the full-year 2017.
Second-Quarter 2017 Highlights
-- Reported net sales of $397.6 million, a record high, grew 2.5% over the
prior-year quarter. Net sales at constant currency (organic) grew by
3.9%.
-- Second-quarter 2017 reported-diluted EPS was $0.51, compared to $0.60 in
the prior-year quarter. Second-quarter 2017 adjusted diluted EPS was
$0.66, compared to $0.59 in the prior-year quarter. Second-quarter 2017
reported and adjusted-diluted EPS include the impact of a tax-related
EPS benefit of $0.13 regarding share-based payment transactions.
-- Revising full-year 2017 sales and adjusted-diluted EPS guidance.
Full-year 2017 sales guidance is expected to be in a range between
$1.585 billion and $1.600 billion, compared to the prior guidance range
between $1.585 billion and $1.610 billion. Full-year 2017
adjusted-diluted EPS guidance is expected to be in a range between $2.66
and $2.73, compared to the prior guidance range between $2.66 and $2.78.
Both current and prior guidance ranges include the favorable impact from
tax-related benefits associated with share-based payment transactions.
"Adjusted-diluted EPS" and "net sales at constant currency" are Non-GAAP measurements. See discussion under the heading "Non-GAAP Financial Measures" in this release.
Executive Commentary
"Following a strong start to the year, we generated approximately 4% organic sales growth in the second-quarter," said Eric M. Green, President and Chief Executive Officer. "However, due to an unfavorable sales mix in the quarter, our margins did not meet our expectations."
"Strong Contract-Manufactured Products sales growth and solid performance of the Pharma market unit did not offset the softness in the Generics market unit and, to a lesser extent, Biologics market unit, which were impacted by customer inventory management and delays in several new drug launches. In addition, our Generics unit experienced lower volumes from select customers that have had their production impacted by regulatory issues."
Mr. Green concluded, "We believe that we are taking the appropriate actions to bring our full-year 2017 results in-line with our updated guidance. We see no fundamental change in the markets we serve. We have confidence in our strategy and our long-term view of West's ability to grow organic sales 6% to 8% per year with expanding margins for the next several years. West has participated on 100% of the newly-approved biologic drugs in the U.S. this year, and we are encouraged by indications that a number of large customers are resuming their typical order patterns. We continue to invest in our business to fuel our long-term growth potential and are managing our costs. Based on market dynamics and customer order patterns, we expect sales performance to continue to build over the balance of the year, with normal seasonality trends for the third and fourth quarters."
Second-Quarter 2017 Financial Results (comparisons to prior-year period)
Reported net sales were $397.6 million, compared to $388.0 million. Reported net sales growth was 2.5%. On a constant-currency basis, sales growth was 3.9%.
Proprietary Products segment reported net sales were $312.8 million, compared to $311.0 million. Reported net sales growth was 0.6%. Organic sales growth was 2.2%, led by mid-single digit growth in the Pharma and Biologics market units. The Generics market unit organic sales declined mid-single digits. Weaker-than-expected Biologics and Generics market unit performance also resulted in low-single digit organic sales growth for high-value products.
Committed orders in the Proprietary Products segment at June 30, 2017 were $382 million, a decrease of 7% at constant currency compared to June 30, 2016, and a decrease of 0.8% at constant currency compared to December 31, 2016.
Contract-Manufactured Products segment reported net sales were $84.9 million, compared to $77.2 million. Reported net sales growth was 9.9%, and organic sales growth was 10.5%.
Gross profit margin was 31.4%, a decrease of 300 basis points. Proprietary Products segment gross profit margin was 35.4%, a decrease of 310 basis points due to weaker Generics and Biologics market unit sales growth and to higher labor costs and unabsorbed overhead. Contract-Manufactured Products segment gross profit margin was 16.8%, a decrease of 80 basis points due to increased labor and overhead costs, partially offset by sales price increases and production efficiencies.
Second-quarter 2017 reported operating profit was $42.7 million, which represented an operating profit margin of 10.7%. Excluding the impact of the deconsolidation of our Venezuelan subsidiary, second-quarter 2017 adjusted operating profit was $53.8 million, representing an adjusted operating profit margin of 13.5%, a year-over-year decrease of 190 basis points. The major driver for this decline is lower gross profit margins, partially offset by lower R&D and SG&A expense on a combined basis as a percentage of sales.
Income tax expense in the quarter was $2.9 million, which represented an effective tax rate of 7.1%. The effective tax rate reflects the impact of a tax benefit of $9.6 million associated with the previously-discussed adoption of FASB-issued guidance. Our estimated full-year 2017 effective tax rate, excluding this tax benefit and other discrete tax benefits, is 30.8%.
During the quarter, the Company did not repurchase any shares. For the first six months of 2017, the Company repurchased 325,000 shares for $26.9 million. There are 475,000 shares available to be repurchased in the program authorized by our Board of Directors in December 2016.
Full-Year 2017 Financial Guidance
The Company is revising its full-year 2017 constant-currency (organic) sales growth guidance to approximately 6%, compared to a prior guidance range of 7% to 9%.
West's expected full-year 2017 net sales, margin and EPS guidance are as follows:
(in
millions,
except
EPS) 2017 Updated Prior Guidance
Guidance
--- --------
Consolidated
net
sales $1,585 to $1,600 $1,585 to $1,610
------------ ---------------- ----------------
Consolidated
gross
profit
margin
(% of
net
sales) 32.7% to 33.3% 34.4% to 34.8%
------------ ------------- -------------
Proprietary
Products
net
sales $1,240 to $1,250 $1,245 to $1,260
----------- ---------------- ----------------
Contract-
Manufactured
Products
net
sales $345 to $350 $340 to $350
------------ ------------ ------------
Full-
Year
adjusted-
diluted
EPS* $2.66 to $2.73 $2.66 to $2.78
---------- -------------- --------------
*Includes the reported-diluted EPS impact of $0.34 for the
first-half 2017 tax benefit associated with the previously-
discussed adoption of FASB-issued guidance.
The principal currency assumption used in preparing these estimates is the translation of the euro at $1.14 for the remainder of 2017, compared to a prior assumption of $1.05 per euro.
Excluding the impact from tax benefits associated with the previously-discussed adoption of FASB-issued guidance, the Company expects that its annual effective tax rate will be approximately 30.7%. The Company does not plan on forecasting future benefits as they could vary quarter to quarter with the time and size of stock option exercises. Instead, the Company will include the impacts with each reported period. As a point of reference, the Company would have had $2 million of net income benefit in the second quarter of 2016 and would have had $18 million for the full-year 2016, resulting in an EPS benefit of $0.01 in the second-quarter 2016 and $0.24 for the full-year 2016.
The Company estimates its 2017 capital spending to be up to $150 million, compared to a prior guidance range between $150 million and $175 million.
Second-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 877-930-8295 (U.S.) or 253-336-8738 (International). The conference ID is 47244012.
A live broadcast of the conference call will be available at the Company's website, www.westpharma.com, in the "Investors" section. Management will refer to a slide presentation during the call, which will be made available on the day of the call. To view the presentation, select "Presentations" in the "Investors" section of the Company's website.
An online archive of the broadcast will be available at the website three hours after the live call and will be available through Thursday, August 3, 2017, by dialing 855-859-2056 (U.S.) or 404-537-3406 (International) and entering conference ID 47244012.
Forward-Looking Statements
Certain forward-looking statements are included in this release. They use such words as "expected," "reflects," "no fundamental change," "we are encouraged," "continue," "see," "increase," "remain," "may," "believe," "expects," "revising," "include," "estimates," and other similar terminology. These statements reflect management's current expectations regarding future events and operating performance and speak only as of the date of this release. There is no certainty that actual results will be achieved in-line with current expectations. These forward-looking statements involve a number of risks and uncertainties. The following are some of the factors that could cause our actual results to differ materially from those expressed in or underlying our forward-looking statements: customers' changing inventory requirements and manufacturing plans; customer decisions to move forward with our new products and product categories; average profitability, or mix, of the products we sell; dependence on third-party suppliers and partners; interruptions or weaknesses in our supply chain; increased raw material costs; fluctuations in currency exchange; and the ability to meet development milestones with key customers. This list of important factors is not all inclusive. For a description of certain additional factors that could cause the Company's future results to differ from those expressed in any such forward-looking statements, see Item 1A, entitled "Risk Factors," in the Company's Annual Report on Form 10-K for the years ended December 31, 2016.
Except as required by law or regulation, we undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events, or otherwise.
Non-GAAP Financial Measures
This press release and the preceding discussion of the Company's results, financial guidance, and the accompanying financial tables use the following financial measures that have not been calculated in accordance with U.S. generally accepted accounting principles (GAAP), and therefore are referred to as Non-GAAP financial measures:
-- Net sales at constant currency (organic sales growth)
-- Adjusted operating profit
-- Adjusted operating profit margin
-- Adjusted income tax expense
-- Adjusted net income
-- Adjusted diluted EPS
-- Net debt
-- Total invested capital
-- Net debt-to-total invested capital
The Company believes that these Non-GAAP measures of financial results provide useful information to management and investors regarding business trends, results of operations, and the Company's overall performance and financial position. The Company's executive management team uses these financial measures to evaluate the performance of the Company in terms of profitability and efficiency, to compare operating results to prior periods, to evaluate changes in the operating results of each segment, and to measure and allocate financial resources to its segments. The Company believes that the use of these Non-GAAP financial measures provides an additional tool for investors to use in evaluating ongoing operating results and trends in comparing its financial measures with other companies.
The Company's executive management does not consider such Non-GAAP measures in isolation or as an alternative to such measures determined in accordance with GAAP. The principal limitation of these financial measures is that they exclude significant expenses and income that are required by GAAP to be recorded. In addition, they are subject to inherent limitations as they reflect the exercise of judgment by management about which items are excluded. In order to compensate for these limitations, Non-GAAP financial measures are presented in connection with GAAP results. The Company urges investors and potential investors to review the reconciliations of its Non-GAAP financial measures to the comparable GAAP financial measures, and not to rely on any single financial measure to evaluate the Company's business.
Net sales at constant currency translates the current-period reported sales of subsidiaries whose functional currency is other than the U.S. dollar at the applicable foreign exchange rates in effect during the comparable prior-year period. In calculating adjusted operating profit, adjusted operating profit margin, adjusted income tax expense, adjusted net income and adjusted diluted EPS, the Company excludes the impact of items that are not considered representative of ongoing operations. Such items may include restructuring and related costs, certain asset impairments, other specifically-identified gains or losses, and discrete income tax items. A reconciliation of these adjusted Non-GAAP measures to the comparable GAAP financial measures is included in the accompanying tables.
The following is a description of the items excluded from adjusted operating profit, adjusted income tax expense, adjusted net income, and adjusted diluted EPS for the three and six months presented in the accompanying tables:
Venezuela deconsolidation - During the three and six months ended June 30, 2017, due to its continued reduced access to U.S. Dollar settlement controlled by the Venezuelan government, the Company recorded a charge of $11.1 million related to the deconsolidation of its Venezuelan subsidiary, following its determination that it no longer met the GAAP criteria for control of that subsidiary. Beginning with the three months ended June 30, 2017, the Company's consolidated financial statements exclude the results of our Venezuelan subsidiary.
Restructuring and related charges - During the three months ended June 30, 2016, the Company recorded $1.5 million in reversals of previously-recorded restructuring and related charges. During the six months ended June 30, 2016, the Company incurred $21.4 million in restructuring and related charges, including $6.4 million for severance charges and $15.0 million for non-cash asset write-downs associated with the discontinued use of certain trademarks and certain equipment.
Venezuela currency devaluation - During the six months ended June 30, 2016, the Company recorded a charge of $2.7 million related to the devaluation of the Venezuelan Bolivar from the previously-prevailing official exchange rate of 6.3 Bolivars to USD to 10.0 Bolivars to USD.
WEST PHARMACEUTICAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(in millions, except per share data)
Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
2017 2016 2017 2016
---- ---- ---- ----
Net sales $397.6 100% $388.0 100% $785.3 100% $750.1 100%
Cost of goods and services sold 272.6 69 254.7 66 526.2 67 493.5 66
----- --- ----- --- ----- --- ----- ---
Gross profit 125.0 31 133.3 34 259.1 33 256.6 34
Research and development 10.0 2 8.8 2 20.3 2 18.2 2
Selling, general and administrative expenses 60.6 15 62.5 16 122.2 16 120.6 16
Other expense, net 11.7 3 0.8 - 12.6 2 26.6 4
Operating profit 42.7 11 61.2 16 104.0 13 91.2 12
Interest expense, net 2.0 - 1.7 - 3.8 - 3.9 -
--- --- --- --- --- --- --- ---
Income before income taxes 40.7 11 59.5 16 100.2 13 87.3 12
Income tax expense 2.9 1 17.0 4 5.1 1 23.9 3
Equity in net income of affiliated companies 1.0 - 2.2 1 4.6 1 3.5 -
--- --- --- --- --- --- --- ---
Net income $38.8 10% $44.7 11% $99.7 13% $66.9 9%
Net income per share:
Basic $0.53 $0.61 $1.35 $0.92
Diluted $0.51 $0.60 $1.32 $0.90
Average common shares outstanding 73.9 73.3 73.6 72.9
Average shares assuming dilution 75.8 74.8 75.7 74.5
WEST PHARMACEUTICAL SERVICES
REPORTING SEGMENT INFORMATION
(UNAUDITED)
(in millions)
Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
Net Sales: 2017 2016 2017 2016
---- ---- ---- ----
Proprietary
Products $312.8 $311.0 $621.6 $601.8
Contract-
Manufactured
Products 84.9 77.2 164.0 148.8
Eliminations (0.1) (0.2) (0.3) (0.5)
---- ---- ---- ----
Consolidated
Total $397.6 $388.0 $785.3 $750.1
====== ====== ====== ======
Operating Profit (Loss):
Proprietary
Products $56.3 $66.2 $121.2 $128.1
Contract-
Manufactured
Products 10.5 9.7 19.3 16.7
US pension
expense (1.3) (2.2) (2.5) (4.4)
Stock-based
compensation
expense (5.5) (4.9) (9.0) (9.5)
General corporate
costs (6.2) (9.1) (13.9) (15.6)
---- ---- ----- -----
Adjusted
Operating Profit $53.8 $59.7 $115.1 $115.3
===== ===== ====== ======
Adjusted
Operating Profit
Margin 13.5% 15.4% 14.7% 15.4%
Venezuela
deconsolidation (11.1) - (11.1) -
Venezuela
currency
devaluation - - - (2.7)
Restructuring and
related charges - 1.5 - (21.4)
Reported
Operating Profit $42.7 $61.2 $104.0 $91.2
===== ===== ====== =====
Reported
Operating Profit
Margin 10.7% 15.8% 13.2% 12.2%
WEST PHARMACEUTICAL SERVICES
RECONCILIATION OF NON-GAAP MEASURES (UNAUDITED)
Please refer to "Non-GAAP Financial Measures" for more information
(in millions, except per share data)
Reconciliation of Reported and Adjusted Operating Profit, Net Income and Diluted EPS
Three months ended June 30, 2017 Operating Income Net Diluted
profit tax income EPS
expense
---
Reported (GAAP) $42.7 $2.9 $38.8 $0.51
Venezuela deconsolidation 11.1 - 11.1 0.15
---- --- ---- ----
Adjusted (Non-GAAP) $53.8 $2.9 $49.9 $0.66
----- ---- ----- -----
Six months ended June 30, 2017 Operating Income Net Diluted
profit tax income EPS
expense
---
Reported (GAAP) $104.0 $5.1 $99.7 $1.32
Venezuela deconsolidation 11.1 - 11.1 0.15
Adjusted (Non-GAAP) $115.1 $5.1 $110.8 $1.47
------ ---- ------ -----
Three months ended June 30, 2016 Operating Income Net Diluted
profit tax income EPS
expense
---
Reported (GAAP) $61.2 $17.0 $44.7 $0.60
Restructuring and related charges (1.5) (0.5) (1.0) (0.01)
Venezuela currency devaluation - (0.2) 0.2 -
--- ---- --- ---
Adjusted (Non-GAAP) $59.7 $16.3 $43.9 $0.59
----- ----- ----- -----
Six months ended June 30, 2016 Operating Income Net Diluted
profit tax income EPS
expense
---
Reported (GAAP) $91.2 $23.9 $66.9 $0.90
Restructuring and related charges 21.4 7.4 14.0 0.19
Venezuela currency devaluation 2.7 - 2.7 0.03
--- --- --- ----
Adjusted (Non-GAAP) $115.3 $31.3 $83.6 $1.12
------ ----- ----- -----
WEST PHARMACEUTICAL SERVICES
RECONCILIATION OF NON-GAAP MEASURES (UNAUDITED)
Please refer to "Non-GAAP Financial Measures" for more information
(in millions, except per share data)
Reconciliation of Net Sales to Net Sales at Constant Currency(1)
Three months ended June 30, 2017 Proprietary CM Eliminations Total
----------- --- ------------ -----
Reported net sales (GAAP) $312.8 $84.9 $(0.1) $397.6
Effect of changes in currency translation rates 5.1 0.5 - 5.6
--- --- --- ---
Net sales at constant currency (Non-GAAP)(1) $317.9 $85.4 $(0.1) $403.2
------ ----- ----- ------
Six months ended June 30, 2017 Proprietary CM Eliminations Total
----------- --- ------------ -----
Reported net sales (GAAP) $621.6 $164.0 $(0.3) $785.3
Effect of changes in currency translation rates 10.3 1.1 - 11.4
---- --- --- ----
Net sales at constant currency (Non-GAAP)(1) $631.9 $165.1 $(0.3) $796.7
------ ------ ----- ------
Three months ended June 30, 2016 Proprietary CM Eliminations Total
----------- --- ------------ -----
Reported net sales (GAAP) $311.0 $77.2 $(0.2) $388.0
Effect of changes in currency translation rates 1.5 (0.3) - 1.2
--- ---- --- ---
Net sales at constant currency (Non-GAAP)(1) $312.5 $76.9 $(0.2) $389.2
------ ----- ----- ------
Six months ended June 30, 2016 Proprietary CM Eliminations Total
----------- --- ------------ -----
Reported net sales (GAAP) $601.8 $148.8 $(0.5) $750.1
Effect of changes in currency translation rates 10.4 (0.2) - 10.2
---- ---- --- ----
Net sales at constant currency (Non-GAAP)(1) $612.2 $148.6 $(0.5) $760.3
------ ------ ----- ------
(1) Net sales at constant currency translates the current-period reported sales of subsidiaries whose functional currency is other than the U.S. dollar at the applicable foreign
exchange rates in effect during the comparable prior-year period.
WEST PHARMACEUTICAL SERVICES
RECONCILIATION OF NON-GAAP MEASURES (UNAUDITED)
Please refer to "Non-GAAP Financial Measures" for more
information
(in millions, except per share data)
Reconciliation of Reported Diluted EPS Guidance to Adjusted
Diluted EPS Guidance
Full Year 2017
Guidance(2) (3)
---------------
Reported diluted EPS guidance $2.51 to $2.58
Venezuela deconsolidation 0.15
Adjusted diluted EPS guidance $2.66 to $2.73
(2) See "Full-Year 2017 Financial Guidance" and "Non-
GAAP Financial Measures" in today's press release for
additional information regarding adjusted diluted EPS.
(3) Guidance includes various currency exchange rate
assumptions, most significantly the euro at $1.14 for the
remainder of 2017. Actual results will vary as a result of
exchange rate variability.
WEST PHARMACEUTICAL SERVICES
CASH FLOW ITEMS
(UNAUDITED)
(in millions)
Six Months
Ended June 30,
--------------
2017 2016
Depreciation and amortization $46.8 $45.0
Operating cash flow $106.0 $79.2
Capital expenditures $67.0 $74.0
----- -----
WEST PHARMACEUTICAL SERVICES
FINANCIAL CONDITION
(UNAUDITED)
(in millions)
As of As of
December 31, 2016
June 30, 2017
-------------
Cash and cash equivalents $226.6 $203.0
Debt $229.5 $228.6
Equity $1,242.4 $1,117.5
Net debt-to-total invested capital(4) 0.2% 2.2%
Working capital $428.8 $400.9
------ ------
(4) Net debt and total invested capital are Non-GAAP measures. Net debt is determined by reducing total debt by
the amount of cash and cash equivalents, and for purpose of measuring net debt to invested capital, total invested
capital is the sum of net debt and shareholders' equity. Please refer to "Non-GAAP Financial Measures" in this
release for additional information regarding those measures.
Trademark Notices
Trademarks and registered trademarks are the property of West Pharmaceutical Services, Inc., in the United States and other jurisdictions, unless noted otherwise.
Daikyo(®) Crystal Zenith(®) and Daikyo(® )are trademarks of Daikyo Seiko, Ltd. Daikyo Crystal Zenith(®) technologies are licensed from Daikyo Seiko, Ltd.
Investor Contact:
Quintin Lai
Vice President, Investor Relations
(610) 594-3318
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SOURCE West Pharmaceutical Services, Inc.
