West Announces Fourth-Quarter and Full-Year 2018 Results

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EXTON, PA — West Pharmaceutical Services, Inc. (NYSEWST) recently announced its financial results for the fourth-quarter and full-year 2018 and provided financial guidance for full-year 2019.

Executive Summary

  • Fourth-quarter 2018 reported net sales were $422.5 million, representing growth of 1.7% over last year’s period and constant-currency, organic sales growth of 3.6%. Fourth-quarter 2018 reported net sales included a negative adjustment of $11.3 million associated with a voluntary recall of the Company’s Vial2Bag® hospital administration system devices. Excluding that impact, sales would have grown by 4.4% over the same period last year, with constant-currency, organic sales growth of 6.3% over last year.
  • Fourth-quarter 2018 reported-diluted EPS was $0.69, compared to $0.00 in the same period last year, which included a negative impact of $0.64 from 2017 tax law changes. Fourth-quarter 2018 adjusted-diluted EPS was $0.73, compared to $0.64 in the same period last year.
  • Full-year 2018 reported net sales were $1.717 billion, representing growth of 7.4% over the prior year and constant-currency, organic sales growth of 5.6%.
  • Full-year 2018 reported-diluted EPS was $2.74, compared to $1.99 last year. Full-year 2018 adjusted-diluted EPS was $2.81, compared to $2.78 in the prior year. Tax benefits from stock-based compensation contributed $0.19 to full-year 2018 adjusted-diluted EPS, compared to $0.44 to full-year 2017 adjusted-diluted EPS.
  • On January 24, 2019, the Company issued a voluntary recall of its Vial2Bag products due to reports of potential variable dosing associated with the Vial2Bag DC 13 mm device. The Company is recalling all its Vial2Bag products while continuing a root cause analysis. In 2018, Vial2Bag product sales, excluding the impact of the voluntary recall, would have been approximately $24 million.
  • The Company is introducing full-year 2019 financial guidance. Based on current foreign currency exchange rates, full-year 2019 net sales are expected to be in a range between $1.795 billion and $1.820 billion. Full-year 2019 adjusted-diluted EPS is expected to be in a range between $2.77 and $2.89. This EPS guidance includes the net impact from foreign currency exchange rates but does not include potential tax benefits from stock-based compensation.

“Adjusted-diluted EPS,” “net sales at constant currency” and “organic sales” are Non-GAAP measurements.  See discussion under the heading “Non-GAAP Financial Measures” in this release.

Executive Commentary

“Our teams have executed on our market-led strategy that focuses on the containment and delivery of injectable medicines and globalizing our operations.  I am pleased with the progress on our strategic priorities, which positions us well for 2019,” said Eric M. Green, President and Chief Executive Officer.  “We are developing next-generation, high-value components and self-injection devices, which are gaining momentum in customer uptake.  Entering its second full-year, our Global Operations team is successfully generating substantial efficiencies and greater plant utilization, while concurrently increasing our industry-leading quality metrics and lowering our capital spending requirements.

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“With respect to the voluntary Vial2Bag product recall, we strongly believe that these devices significantly advance the standard of care for medicines delivered by way of infusion.  Our teams are working to resupply the market as soon as is reasonably possible, in consultation with the United States Food and Drug Administration and other regulatory bodies.”

Mr. Green concluded, “Our diverse product portfolio of high-value products and services, as well as new products and line extensions to be launched this year, are addressing the needs of our distinct customer groups.  We expect to grow sales and expand profit margins in line with our long-term financial construct, with full-year 2019 constant-currency organic sales growth in a range between 6% and 8%, full-year 2019 operating profit margin expansion of approximately 100 basis points, and adjusted diluted EPS in a range between $2.77 and $2.89.”

Fourth-Quarter and Full-Year 2018 Financial Results (comparisons to prior-year periods)

Fourth-quarter 2018 reported net sales of $422.5 million grew 1.7% over the prior-year quarter.  At constant currency, organic sales growth was 3.6%.  Proprietary Products segment organic sales growth was 3.7%, led by mid-single-digit growth in both the Company’s Biologics and Generics market units.  Pharma market unit organic sales growth was flat, affected by the voluntary recall.  High-value product (HVP) sales growth was 1%, with mid-single-digit growth in HVP component sales, led by double-digit sales growth in NovaPure®, FluroTec® and Westar® RU components, partially offset by the impact from the voluntary recall.  Contract-Manufactured Products segment organic sales growth was 3.1%, as continued growth in diabetes-related diagnostic and delivery devices more than offset a year-over-year decline in consumer products and a strong tooling sales quarter in the prior-year period.

Full-year 2018 reported net sales of $1.717 billion grew 7.4% over the prior year.  At constant currency, organic sales growth was 5.6%.  Proprietary Products organic sales growth was 3.9% led by high-single-digit sales growth in the Generics market unit.  The Pharma market unit organic sales grew in the low-single digits, and the Biologics market unit had flat organic sales growth.  High-value product sales grew in the mid-single digits, led by NovaPure, FluroTec and Westar RU components.  Contract-Manufactured Products segment organic sales growth was 11.6% led by healthcare-related products, partially offset by a decline in consumer-related products.

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Fourth-quarter 2018 gross profit margin was 31.5%, an increase of 60 basis points from the prior-year period.  Proprietary Product segment gross profit margin increased by 220 basis points due to higher efficiencies and positive sales mix, more than offsetting the impact from the voluntary recall, unabsorbed overhead from the start-up of the Company’s Waterfordfacility and higher raw material costs.  Contract-Manufactured Products segment gross profit margin declined by 370 basis points due to unabsorbed overhead from plant consolidation activities, start-up costs associated with the launch of new programs and unfavorable sales mix.

Full-year 2018 gross profit margin was 31.8%, a 30-basis point decline from the prior year.  While Proprietary Products segment gross profit margin expanded by 80 basis points, Contract-Manufactured Products segment gross profit margin declined by 280 basis points due to unabsorbed overhead from plant consolidation activities, start-up costs associated with the launch of new programs and unfavorable sales mix.

As of January 1, 2018, the Company adopted new rules for pension accounting.  Instead of recognizing pension gains or losses in the “Selling, general and administrative expenses” line on the income statement, these gains or losses are now located “below the line” in nonoperating income.  The Company has restated all prior periods to enable more accurate year-over-year comparisons with 2018 performance.

Fourth-quarter 2018 reported operating profit margin was 15.6%.  Excluding restructuring costs and related charges, fourth-quarter 2018 adjusted operating profit margin was 15.9%, 140 basis points higher than in the prior-year period.

Full-year 2018 reported operating profit margin was 14.0%.  Excluding restructuring and related charges and other charges, full-year 2018 adjusted operating profit margin was 14.5%, a decline of 30 basis points compared to the prior-year period.

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Fourth-quarter 2018 reported tax rate was 22.7%.  Excluding restructuring and related charges and other charges, the adjusted tax rate was 20.1%.  This included $1.1 million of tax benefits associated with stock-based compensation.  Excluding these benefits, the adjusted tax rate would have been 21.7%.

Full-year 2018 reported tax rate was 17.2%.  On an adjusted basis, the tax rate was 18.2%.  This included $14.3 million of tax benefits associated with stock-based compensation.  Excluding these benefits, the adjusted effective tax rate would have been 24.0%.

Full-year 2018 operating cash flow was $288.6 million, representing a 9.6% increase over 2017 operating cash flow of $263.3 million.  Capital expenditures in 2018 were $104.7 million, a 20% reduction compared to 2017 capital expenditures of $130.8 million.

Full-Year 2019 Financial Guidance

The Company expects full-year 2019 net sales to be in a range between $1.795 billion and $1.820 billion, which includes an estimated negative impact of $30 million based on current foreign currency exchange rates.  This range represents an expected constant-currency organic sales growth of 6% to 8% over 2018 reported net sales.

Full-year 2019 adjusted-diluted EPS is expected to be in a range between $2.77 and $2.89, which includes an estimated negative impact of approximately $0.06 to full-year 2019 adjusted-diluted EPS based on current foreign currency exchange rates and excludes potential tax benefits from stock-based compensation.  This assumes operating profit margin expansion of approximately 100 basis points.

This adjusted-diluted EPS guidance range assumes a full-year tax rate of 25%, which does not include potential tax benefits from stock-based compensation.  The Company opted not to forecast 2019 tax benefits from stock-based compensation, as they are out of the Company’s control.   Any tax benefits associated with stock-based compensation that the Company receives in 2019 would provide a positive adjustment to its full-year EPS guidance.

Full-year 2019 capital spending is expected to be in a range between $120 million and $130 million.

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