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OFFON

WEST PHARMACEUTICAL SERVICES, INC.

(WST)
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WEST PHARMACEUTICAL SERVICES INC MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-Q)

10/28/2021 | 04:06pm EST

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 our condensed consolidated financial
statements and accompanying notes elsewhere in this Quarterly Report on Form
10-Q ("Form 10-Q") as well as Management's Discussion and Analysis of Financial
Condition and Results of Operations and the consolidated financial statements
and accompanying notes included in our 2020 Annual Report. Our 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 2020 Annual Report and in Part II,
Item 1A of this Form 10-Q.

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

Non-U.S. GAAP Financial Measures


For the purpose of aiding the comparison of our year-over-year results, we may
refer to net sales and other financial results excluding the effects of changes
in foreign currency exchange rates. Organic net sales exclude the impact from
acquisitions and/or divestitures and translate the current-period reported sales
of subsidiaries whose functional currency is other than USD at the applicable
foreign exchange rates in effect during the comparable prior-year period. We may
also refer to adjusted consolidated operating profit and adjusted consolidated
operating profit margin, which exclude the effects of unallocated items. The
unallocated items are not representative of ongoing operations, and generally
include restructuring and related charges, certain asset impairments, and other
specifically-identified income or expense items. The re-measured results
excluding effects from currency translation, the impact from acquisitions and/or
divestitures, and excluding the effects of unallocated items are not in
conformity with U.S. GAAP and should not be used as a substitute for the
comparable U.S. GAAP financial measures. The non-U.S. GAAP financial measures
are incorporated in our discussion and analysis as management uses them in
evaluating our results of operations and believes that this information provides
users with a valuable insight into our overall performance and financial
position.

Our Operations


We are a leading global manufacturer in the design and production of
technologically advanced, high-quality, integrated containment and delivery
systems for injectable drugs and healthcare products. Our products include a
variety of primary packaging, containment solutions, reconstitution and transfer
systems, and drug delivery systems, as well as contract manufacturing,
analytical lab services and integrated solutions. Our customers include the
leading biologic, generic, pharmaceutical, diagnostic, and additional medical
device companies in the world. Our top priority is delivering quality products
that meet the exact product specifications and quality standards customers
require and expect. This focus on quality includes a commitment to excellence in
manufacturing, scientific and technical expertise and management, which enables
us to partner with our customers in order to deliver safe, effective drug
products to patients quickly and efficiently.
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Our business operations are organized into two reportable segments, Proprietary
Products and Contract-Manufactured Products. Our Proprietary Products reportable
segment offers proprietary packaging, containment and drug delivery products,
along with analytical lab services and other integrated services and solutions,
primarily to biologic, generic and pharmaceutical drug customers. Our
Contract-Manufactured Products reportable segment serves as a fully integrated
business, focused on the design, manufacture, and automated assembly of complex
devices, primarily for pharmaceutical, diagnostic, and medical device customers.
We also maintain collaborations to share technologies and market products with
affiliates in Japan and Mexico.

Impact of COVID-19


West has been actively monitoring the COVID-19 situation and its impact
globally. Our primary objectives have remained the same throughout the pandemic:
to support the safety of our team members and their families and continue to
support patients around the world. Throughout the COVID-19 pandemic, our
production facilities have continued to operate as they had prior to the
pandemic, other than for enhanced safety measures intended to prevent the spread
of the virus and higher levels of production at certain plant locations to meet
additional customer demand. Our capital and financial resources, including
overall liquidity, remain strong. The remote working arrangements and travel
restrictions imposed by various governments have had limited impact on our
ability to maintain operations, as our manufacturing operations have generally
been exempted from stay-at-home orders. However, we cannot predict the impact of
the progression of the COVID-19 pandemic on future results due to a variety of
factors, including the continued good health of our employees, the ability of
suppliers to continue to operate and deliver, the ability of West and its
customers to maintain operations, continued access to transportation resources,
the changing needs and priorities of customers, any further government and/or
public actions taken in response to the pandemic and ultimately the length of
the pandemic. We will continue to closely monitor the COVID-19 pandemic in order
to ensure the safety of our people and our ability to serve our customers and
patients worldwide.

2021 Financial Performance Summary

The following tables present a reconciliation from U.S. GAAP to non-U.S. GAAP financial measures for the three and nine months ended September 30, 2021:


                                                                        Income tax
($ in millions, except per share data)       Operating Profit            expense             Net income           Diluted EPS
 Three months ended September 30, 2021
GAAP                                       $           181.4          $      12.0$     175.6$       2.31
Unallocated items:
Restructuring and related charges                        0.3                  0.1                  0.2                     -
Amortization of acquisition-related
intangible assets (2)                                    0.2                    -                  0.7                  0.01
Cost investment activity (3)                             0.9                  0.2                  0.7                  0.01
Royalty acceleration (5)                                   -                 20.4                (20.4)                (0.27)
Three months ended September 30, 2021
adjusted amounts (non-U.S. GAAP)           $           182.8          $      32.7$     156.8$       2.06



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                                                                        Income tax
($ in millions, except per share data)       Operating Profit            expense             Net income           Diluted EPS
Nine months ended September 30, 2021 GAAP  $           568.3          $      73.0$     514.1$       6.78
Unallocated items:
Restructuring and related charges                        2.5                  0.6                  1.9                  0.02
Pension settlement (1)                                     -                  0.2                  0.6                  0.01
Amortization of acquisition-related
intangible assets (2)                                    0.6                  0.1                  2.1                  0.03
Cost investment activity (3)                             1.8                 (0.1)                 1.9                  0.02
Tax law changes (4)                                        -                  1.4                 (1.4)                (0.02)
Royalty acceleration (5)                                   -                 20.4                (20.4)                (0.27)
Nine months ended September 30, 2021
adjusted amounts (non-U.S. GAAP)           $           573.2          $     

95.6 $ 498.8$ 6.57

During the three and nine months ended September 30, 2021, we recorded a tax benefit of $8.4 million and $26.9 million, respectively, associated with stock-based compensation.

The following tables present a reconciliation from U.S. GAAP to non-U.S. GAAP financial measures for the three and nine months ended September 30, 2020:


                                                                        Income tax
($ in millions, except per share data)       Operating Profit            expense             Net income           Diluted EPS
Three months ended September 30, 2020 GAAP $            99.2          $      21.1$      82.3$       1.09
Unallocated items:
Pension settlement (1)                                     -                  0.3                  0.8                  0.01
Restructuring and severance related
charges                                                  4.5                  1.1                  3.4                  0.04
Amortization of acquisition-related
intangible assets (2)                                    0.2                    -                  0.7                  0.01
Three months ended September 30, 2020
adjusted amounts (non-U.S. GAAP)           $           103.9          $      22.5$      87.2$       1.15



                                                                        Income tax
($ in millions, except per share data)       Operating Profit            expense             Net income           Diluted EPS
Nine months ended September 30, 2020 GAAP  $           290.8          $      52.1$     247.8$       3.28
Unallocated items:
Pension settlement (1)                                     -                  0.8                  2.6                  0.03
Restructuring and severance related
charges                                                  6.7                  1.7                  5.0                  0.06
Amortization of acquisition-related
intangible assets (2)                                    0.4                  0.1                  2.9                  0.04
Nine months ended September 30, 2020
adjusted amounts (non-U.S. GAAP)           $           297.9          $     

54.7 $ 258.3$ 3.41

During the three and nine months ended September 30, 2020, we recorded a tax benefit of $2.0 million and $14.0 million, respectively, associated with stock-based compensation.

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(1)The Company recorded a pension settlement charge within other nonoperating
(income) expense, as it determined that normal-course lump-sum payments for our
U.S. qualified, and in 2020 our non-qualified, defined benefit pension plan
exceeded the threshold for settlement accounting.

(2)During the three and nine months ended September 30, 2021, the Company
recorded $0.2 million and $0.6 million, respectively, of amortization expense
within operating profit associated with an intangible asset acquired during the
second quarter of 2020. During the three and nine months ended September 30,
2021, the Company recorded $0.5 million and $1.6 million, respectively, or
amortization expense in association with an acquisition of increased ownership
interest in Daikyo. During the three and nine months ended September 30, 2020
the Company recorded $0.2 million and $0.4 million, respectively, of
amortization expense within operating profit associated with an intangible asset
acquired during the second quarter of 2020. During the three and nine months
ended September 30, 2020, the Company recorded $0.5 million and $2.5 million,
respectively, of amortization expense in association with an acquisition of
increased ownership interest in Daikyo.

(3)During the three months ended September 30, 2021, we recorded a net loss on
the sale of one of the Company's cost investments. During the nine months ended
September 30, 2021, we recorded an impairment charge on one of our cost
investments, partially offset by the gain on the sale of a cost investment.

(4)During the nine months ended September 30, 2021, the Company recorded a tax
benefit of $1.4 million due to the impact of a United Kingdom tax law change
enacted during the period.

(5)During the three and nine months ended September 30, 2021, the Company prepaid future royalties from one of its subsidiaries, which resulted in a $20.4 million tax benefit.

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, certain pension and other retirement benefit costs,
and other corporate facilities and administrative expenses not allocated to the
segments. Also excluded are items that we consider not representative of ongoing
operations. Such items are referred to as other unallocated items for which
further information can be found above in the reconciliation from U.S. GAAP to
non-U.S. GAAP financial measures.

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

Net Sales

The following table presents net sales, consolidated and by reportable segment, for the three months ended September 30, 2021 and 2020:

                                      Three Months Ended
                                         September 30,                   Percentage Change
($ in millions)                        2021            2020          As-Reported         Organic
Proprietary Products             $    577.0$ 421.5                 36.9  %      35.7  %
Contract-Manufactured Products        129.7            126.6                  2.4  %       2.1  %
Intersegment sales elimination         (0.2)            (0.1)                   -            -
Consolidated net sales           $    706.5$ 548.0                 28.9  %      27.9  %


Consolidated net sales increased by $158.5 million, or 28.9%, for the three months ended September 30, 2021, as compared to the same period in 2020, including a favorable foreign currency translation impact of $5.5 million.

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Excluding foreign currency translation effects, consolidated net sales for the
three months ended September 30, 2021 increased by $153.0 million, or 27.9%, as
compared to the same period in 2020.

Proprietary Products - Proprietary Products net sales increased by $155.5
million, or 36.9%, for the three months ended September 30, 2021, as compared to
the same period in 2020, including a favorable foreign currency translation
impact of $5.0 million. Excluding foreign currency translation effects, net
sales for the three months ended September 30, 2021 increased by $150.5 million,
or 35.7%, as compared to the same period in 2020, primarily due to growth in our
high-value product offerings, including Westar®, NovaPure®, and FluroTec®-coated
components. The three months ended September 30, 2021 included approximately
$115 million in COVID-19 related activity for vaccines, antiviral treatments and
treatment of underlying COVID-19 symptoms. The three months ended September 30,
2020 included approximately $32 million in COVID-19 related activity for
antiviral treatments and treatment of underlying COVID-19 symptoms.

Contract-Manufactured Products - Contract-Manufactured Products net sales
increased by $3.1 million, or 2.4%, for the three months ended September 30,
2021, as compared to the same period in 2020, including a favorable foreign
currency translation impact of $0.5 million. Excluding foreign currency
translation effects, net sales for the three months ended September 30, 2021
increased by $2.6 million, or 2.1%, as compared to the same period in 2020, due
to an increase in the sale of healthcare-related medical devices.

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

The following table presents net sales, consolidated and by reportable segment, for the nine months ended September 30, 2021 and 2020:

                                        Nine Months Ended
                                          September 30,                  Percentage Change
   ($ in millions)                     2021           2020           As-Reported         Organic
   Proprietary Products             $ 1,708.0$ 1,194.5                 43.0  %      38.1  %
   Contract-Manufactured Products       393.2          372.5                

5.6 % 3.1 %

   Intersegment sales elimination        (0.4)          (0.3)                   -            -
   Consolidated net sales           $ 2,100.8$ 1,566.7                 34.1  %      29.8  %



Consolidated net sales increased by $534.1 million, or 34.1%, for the nine
months ended September 30, 2021, as compared to the same period in 2020,
including a favorable foreign currency translation impact of $67.2 million.
Excluding foreign currency translation effects, consolidated net sales for the
nine months ended September 30, 2021 increased by $466.9 million, or 29.8%, as
compared to the same period in 2020.

Proprietary Products - Proprietary Products net sales increased by $513.5
million, or 43.0%, for the nine months ended September 30, 2021, as compared to
the same period in 2020, including a favorable foreign currency translation
impact of $57.9 million. Excluding foreign currency translation effects, net
sales for the nine months ended September 30, 2021 increased by $455.6 million,
or 38.1%, as compared to the same period in 2020, primarily due to growth in our
high-value product offerings, including Westar®, NovaPure®, Daikyo®, and
FluroTec®-coated components. The nine months ended September 30, 2021 included
approximately $335 million in COVID-19 related activity for vaccines, antiviral
treatments and treatment of underlying COVID-19 symptoms. The nine months ended
September 30, 2020 included approximately $52 million in COVID-19 related
activity for antiviral treatments and treatment of underlying COVID-19 symptoms.

Contract-Manufactured Products - Contract-Manufactured Products net sales
increased by $20.7 million, or 5.6%, for the nine months ended September 30,
2021, as compared to the same period in 2020, including a favorable foreign
currency translation impact of $9.3 million. Excluding foreign currency
translation effects, net sales for the nine months ended September 30, 2021
increased by $11.4 million, or 3.1%, as compared to the same period in 2020, due
to an increase in the sale of healthcare-related medical devices.
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Gross Profit

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

                                        Three Months Ended            Nine Months Ended
                                          September 30,                 September 30,
($ in millions)                         2021           2020          2021           2020
Proprietary Products:
Gross profit                        $   267.3$ 171.9$  811.5$ 492.8
Gross profit margin                      46.3  %       40.8  %        47.5  %       41.3  %
Contract-Manufactured Products:
Gross profit                        $    20.9$  22.7$   63.7$  63.9
Gross profit margin                      16.1  %       17.9  %        16.2  %       17.2  %
Consolidated gross profit           $   288.2$ 194.6$  875.2

$ 556.7 Consolidated gross profit margin 40.8 % 35.5 % 41.7 % 35.5 %




Consolidated gross profit increased by $93.6 million, or 48.1%, for the three
months ended September 30, 2021, as compared to the same period in 2020,
including a favorable foreign currency translation impact of $1.6 million for
the three months ended September 30, 2021, as compared to the same period in
2020. Consolidated gross profit margin increased by 5.3 margin points for the
three months ended September 30, 2021, as compared to the same period in 2020.

Consolidated gross profit increased by $318.5 million, or 57.2% for the nine
months ended September 30, 2021, as compared to the same period in 2020,
including a favorable foreign currency translation impact of $25.7 million for
the nine months ended September 30, 2021, as compared to the same period in
2020. Consolidated gross profit margin increased by 6.2 margin points for the
nine months ended September 30, 2021, as compared to the same period in 2020.

Proprietary Products - Proprietary Products gross profit increased by $95.4
million, or 55.5%, for the three months ended September 30, 2021, as compared to
the same period in 2020, including a favorable foreign currency translation
impact of $1.5 million. Proprietary Products gross profit margin increased by
5.5 margin points for the three months ended September 30, 2021, as compared to
the same periods in 2020, due to a favorable mix of products sold, sales price
increases and production efficiencies, partially offset by increased overhead
costs including compensation costs.

Proprietary Products gross profit increased by $318.7 million, or 64.7%, for the
nine months ended September 30, 2021, as compared to the same period in 2020,
including a favorable foreign currency translation impact of $23.9 million.
Proprietary Products gross profit margin increased by 6.2 margin points for the
nine months ended September 30, 2021, as compared to the same period in 2020,
due to a favorable mix of products sold, sales price increases and production
efficiencies, partially offset by increased overhead costs including
compensation costs.

Contract-Manufactured Products - Contract-Manufactured Products gross profit
decreased by $1.8 million, or 7.9%, for the three months ended September 30,
2021, as compared to the same period in 2020, including a favorable foreign
currency translation impact of $0.1 million. Contract-Manufactured Products
gross profit margin decreased by 1.8 margin points for the three months ended
September 30, 2021, as compared to the same period in 2020, due to unfavorable
mix of products sold and timing of the pass-through of raw material price
increases to customers.

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Contract-Manufactured Products gross profit decreased by $0.2 million, or 0.3%,
for the nine months ended September 30, 2021, as compared to the same period in
2020, including a favorable foreign currency translation impact of $1.8 million.
Contract-Manufactured Products gross profit margin decreased by 1.0 margin
points for the nine months ended September 30, 2021, as compared to the same
period in 2020, due to unfavorable mix of products sold and timing of the
pass-through of raw material price increases to customers, partially offset by
production efficiencies.

Research and Development ("R&D") Costs


The following table presents R&D costs, consolidated and by reportable segment:
                                       Three Months Ended                Nine Months Ended
                                         September 30,                     September 30,
($ in millions)                         2021             2020            2021             2020
Proprietary Products             $     13.1$ 12.5$     39.1$ 34.0
Contract-Manufactured Products            -                 -               -                -
Consolidated R&D costs           $     13.1$ 12.5$     39.1$ 34.0



Consolidated R&D costs increased by $0.6 million, or 4.8%, and $5.1 million, or
15.0%, for the three and nine months ended September 30, 2021, respectively, as
compared to the same period in 2020. Efforts remain focused on the continued
investment in self-injection systems development, fluid transfer admixture
devices, elastomeric packaging components, and formulation development.

All of the R&D costs incurred during the three and nine months ended September 30, 2021 related to Proprietary Products.

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


The following table presents SG&A costs, consolidated and by reportable segment
and corporate:
                                     Three Months Ended            Nine Months Ended
                                       September 30,                 September 30,
($ in millions)                      2021           2020          2021           2020
Proprietary Products             $    58.5$ 50.6$  180.0$ 144.7
Contract-Manufactured Products         3.9           3.7           11.4          11.4
Corporate                             29.5          21.9           73.4          69.6
Consolidated SG&A costs          $    91.9$ 76.2$  264.8$ 225.7
SG&A as a % of net sales              13.0   %      13.9  %        12.6  %       14.4  %



Consolidated SG&A costs increased by $15.7 million, or 20.6%, for the three
months ended September 30, 2021, as compared to the same period in 2020, due to
an increase in compensation costs, costs related to professional services and an
unfavorable foreign currency translation impact of $0.4 million.

Consolidated SG&A costs increased by $39.1 million, or 17.3%, for the nine months ended September 30, 2021, as compared to the same period in 2020, due to an increase in compensation costs and an unfavorable foreign currency translation impact of $4.5 million.


Proprietary Products - Proprietary Products SG&A costs increased by $7.9
million, or 15.6%, for the three months ended September 30, 2021, as compared to
the same period in 2020. Proprietary Products SG&A costs increased primarily due
to an increase in compensation costs and costs related to professional services.

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Proprietary Products SG&A costs increased by $35.3 million, or 24.4%, for the
nine months ended September 30, 2021, as compared to the same period in 2020.
Proprietary Products SG&A costs increased primarily due to an increase in
compensation costs, costs related to professional services and an unfavorable
foreign currency translation impact of $4.2 million.

Contract-Manufactured Products - Contract-Manufactured Products SG&A costs increased by $0.2 million, or 5.4% for the three months ended September 30, 2021, as compared to the same period in 2020, and remained consistent for the nine months ended September 30, 2021, as compared to the same period in 2020.


Corporate - Corporate SG&A costs increased by $7.6 million, or 34.7%, for the
three months ended September 30, 2021, as compared to the same period in 2020,
primarily due to an increase in compensation costs and costs related to
professional services.

Corporate SG&A costs increased by $3.8 million, or 5.5%, for the nine months
ended September 30, 2021, as compared to the same period in 2020, primarily due
to an increase in compensation costs and costs related to professional services.

© Edgar Online, source Glimpses

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