On October 25, 2018 West Pharmaceutical Services, Inc. (NYSE: WST) reported its financial results for the third-quarter 2018 and reaffirmed net sales and adjusted-diluted EPS guidance for full-year 2018 (Press release, West Pharmaceutical Services, OCT 25, 2018, View Source [SID1234530149]).
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Executive Summary
Third-quarter 2018 reported net sales of $431.7 million grew 8.4% over the prior-year quarter. At constant currency, organic sales growth was 9.6%.
Third-quarter 2018 reported-diluted EPS was $0.73, as compared to $0.67 in the same period last year. Excluding restructuring-related and other charges, third-quarter 2018 adjusted-diluted EPS was $0.76, a 13% increase over the same period last year.
The Company reaffirms full-year 2018 net sales and adjusted-diluted EPS guidance. The Company expects full-year 2018 capital spending to be in a new range of between $110 million and $120 million, compared to a prior range of between $120 million and $130 million.
"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
"We had solid third-quarter 2018 organic sales growth driven by a high-single digit Proprietary Products segment increase and a strong double-digit increase in the Contract-Manufactured Products segment," said Eric M. Green, President and Chief Executive Officer. "Our high-value product (HVP) portfolio continues to do well, led by strong double-digit sales growth in our Westar RS and RU, NovaPure and Crystal Zenith products.
"I am pleased with the performance of our Global Operations team, which is successfully executing on all of their planned initiatives. The Company continues to raise the bar on industry-leading quality and service targets, and the team is expanding capacity to support long-term demand forecasts by increasing plant utilization within our worldwide network. As a result, we are revising our capital spending guidance to be in a new range of between $110 million and $120 million, down from prior projections of $120 million to $130 million."
Mr. Green concluded, "We remain on track to achieve our full-year 2018 financial targets. Our markets are stable, and West continues to address the needs of our customers by providing the quality, availability and scientific excellence required to support their regulated injectable and diagnostic products."
Third-Quarter 2018 Financial Results (comparisons to prior-year period)
Third-quarter 2018 reported net sales of $431.7 million grew 8.4% over the prior-year quarter sales of $398.2 million. At constant currency, organic sales growth was 9.6%.
Proprietary Products segment organic sales growth was 6.6%. By market unit, third-quarter 2018 Proprietary Products segment sales growth was led by double-digit growth in the Pharma Market Unit. Generics Market Unit organic sales growth was mid-single digits, and Biologics Market Unit organic sales declined mid-single digits. Biologics sales were impacted by a decline in self-injection delivery device sales associated with lower than expected commercial sales of the underlying drug product. Contract-Manufactured Products segment organic sales growth was 20.1%. This growth was driven by continued escalation of demand for diabetes-related diagnostic and drug delivery devices.
Third-quarter 2018 gross profit margin was 31.4%, in line with the same period last year. Proprietary Products segment gross margin increased by 120 basis points, due to higher efficiencies, favorable volume/mix and increased sales prices, partially offset by increased labor costs, unabsorbed overhead from the start-up of our Waterford facility and higher raw material costs. Contract-Manufactured Products segment gross margin declined by 200 basis points mainly due to unabsorbed overhead from plant consolidation activities and start-up costs associated with the expediting of the launch of new programs. We expect margins in that segment to revert to more normal levels going forward.
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 allow year-over-year comparisons with 2018 performance.
Third-quarter 2018 reported operating profit margin was 14.1%, as compared to 15.8% in the same period last year. Excluding restructuring costs and other charges, third-quarter 2018 adjusted operating profit margin was 14.6%. In the third-quarter 2017, the Company had a benefit from reimbursed costs associated with a technology that was subsequently licensed to a third party, which increased other operating income in the period by $9.1 million. Excluding this prior year benefit, third-quarter 2018 adjusted operating profit margin would have expanded by 110 basis points.
For the third-quarter 2018, reported income tax expense was $8.0 million, representing a reported effective tax rate of 13.1%. Tax benefits from stock-based compensation were $7.7 million in the third-quarter 2018, as compared to $4.8 million in the same period last year. This amount was higher-than-expected for the quarter, as prior Company guidance anticipated $9 million for the second-half of 2018. The Company expects the remainder to come in the fourth-quarter 2018. Excluding the impact of tax benefits from stock-based compensation, the reported effective tax rate would have been 25.7%.
Full-Year 2018 Financial Guidance and Long-Term Outlook
The Company is reaffirming its full-year 2018 net sales guidance range of $1.720 billion to $1.730 billion. The Company assumes an expected translation exchange rate of $1.15 per euro for the remainder of the year.
The Company is also reaffirming its full-year 2018 adjusted-diluted EPS guidance to be in a range of between $2.80 to $2.90. The lower end of the guidance range reflects the Company’s expected performance and approximately $1 million of tax benefits from stock-based compensation in the fourth-quarter of 2018.
The Company is revising its full-year 2018 capital spending guidance. The new range is expected to be in a range of between $110 million and $120 million, which is below the prior range of between $120 million and $130 million.
For 2019 and beyond, the Company reiterates its long-term financial construct and expectations for above-market sales growth with expanding gross and operating profit margins. As has been its practice, the Company will provide full-year 2019 guidance on its Q4 2018 conference call.
Third-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 8341499.
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, November 1, 2018, by dialing 855-859-2056 (U.S.) or 404-537-3406 (International) and entering conference ID 8341499.