Nov. 3, 2009 (PR Newswire) -- LIONVILLE, Pa., Nov. 3 /PRNewswire-FirstCall/ -- West Pharmaceutical Services, Inc. (NYSE: WST) today announced its results for the third quarter of 2009. Summary comparative results were as follows:

($millions, except per-share data)    Three Months Ended
September 30
2009      2008

Net Sales                             $258.9    $256.2
Gross Profit                            71.7      66.0
Reported Operating Profit               25.9      17.9
Adjusted Operating Profit (1)           22.0      19.7
Reported Diluted EPS                   $0.50     $0.40
Adjusted Diluted EPS(1)                $0.45     $0.37

(1) See "Restructuring and Other Items" section of the release and
"Supplemental Information and Notes to Non-GAAP Financial Measures" in the
tables following the text of this release.

Consolidated sales were 1.0% higher in the quarter when compared to the prior year period including $8.2 million, or 3.3 percentage points, of adverse effects of foreign currency translation. Excluding currency translation effects, consolidated sales were 4.3% higher than in the prior year quarter, with component sales for H1N1 flu vaccinations contributing substantially. The resulting growth in the Pharmaceutical Systems segment more than compensated for lower sales in the Tech Group segment.

Consolidated gross profit margin was 27.7% in the quarter, compared to 25.7% in the third quarter of 2008. The two margin point increase includes the combined effect of overall higher selling prices and lower raw material costs, net of higher depreciation charges. As a result of improved margins, gross profit increased $5.7 million, to $71.7 million in the current quarter, net of $1.8 million of adverse foreign currency translation.

Adjusted Operating Profit grew by 11.7% compared to the prior year period. The effect of the consolidated gross margin improvement was muted by $2.8 million in higher U.S. pension expense and $0.7 million of unfavorable foreign currency translation, net of $0.6 million in lower stock-based compensation expense.

The Company announced plans to restructure certain business operations, which will result in the elimination of approximately 100 jobs, and to re-evaluate certain business initiatives and assets. These will result in total charges in the range of $8.0 million to $10.0 million. Approximately $7.0 million of charges are expected to be included in the Company's reported results for the fourth quarter of 2009. The restructuring is expected to result in annual savings of approximately $6.0 million in 2010 and approximately $8.0 million annually thereafter.

Executive Commentary

"The growth that we are seeing in sales of packaging components and systems, excluding currency translation, is the best indicator we have that inventories in the supply chain are at or near the low point for this cycle," said Donald E. Morel Jr., Ph.D., the Company's Chairman and Chief Executive Officer. "Demand for flu vaccine added to that growth and should continue to contribute through the next two quarters, during which we expect overall demand to firm. In the Tech Group, sales under existing manufacturing contracts remain sluggish. The restructuring plan we announced today will improve operating efficiencies in both business segments, enhancing our strategic focus on maintaining and building our proprietary injectable drug delivery product portfolio. The Tech Group will continue to provide critical engineering and manufacturing support to those development efforts, which we believe will accelerate West's growth in the longer term."

"In revenue terms, this third quarter was relatively strong compared to the first half of the year. We expect the unusual seasonality of 2009 to continue and that fourth-quarter sales will be the strongest of the year, despite some continued weakness in the Tech Group. Our revised guidance is for 2009 Adjusted Diluted EPS of between $2.08 and $2.13. We expect the overall improvements we've seen during the last four months to continue through the fourth quarter and into 2010, and are forecasting revenue growth of between 3% and 5% for next year, excluding the effects of currency translation."

Pharmaceutical Systems Segment

Pharmaceutical Systems segment sales for the third quarter of 2009 were $198.1 million, $7.6 million higher than those reported in the third quarter of 2008. Unfavorable foreign currency translation reduced comparable quarterly sales by $7.2 million, or 3.8%. Excluding the effects of currency translation, sales grew by $14.8 million, or 7.8%.

H1N1 flu vaccination-related sales of $9.7 million, primarily for serum stoppers, were augmented by growth in components used in the processing and packaging of freeze-dried pharmaceutical products, and components for prefillable syringes and cartridges. In each of those categories, Westar® processing and West's component coating technologies contributed to the sales value of the incremental units. Geographically, and excluding the effects of currency translation, revenue growth was strongest in North America and Asia.

Gross profit in the quarter was $63.4 million, compared to $56.2 million in the 2008 quarter, and gross margin was 32.0%, 2.5 percentage points higher than in the prior-year period. Currency translation reduced gross profit by $1.6 million. The increase in gross profit compared to the prior-year period was primarily due to the $9.8 million combined effects of higher overall selling prices and a more profitable sales mix, as well as to $1.9 million in lower raw material costs. This is the first quarterly improvement in material costs in 2009 because the benefit of lower market prices for petroleum products through the first half of the year was delayed until the current quarter under the terms of West's purchase agreements for certain materials. Those improvements were partially offset by $2.5 million of higher depreciation costs and $1.2 million of increased labor costs.

Pharmaceutical Systems SG&A costs were substantially unchanged in the third quarter compared to the 2008 period, and as a result were lower as a percentage of the higher sales. Currency translation reduced reported costs of foreign operations by $1.0 million, with those lower reported costs offset by increases in compensation and depreciation expenses. Research spending was $0.4 million higher than in the prior-year quarter. Adjusted operating profit increased 29.4% to $29.9 million, an increase of $6.8 million, net of $0.5 million of adverse currency translation effects.

Tech Group Segment

Tech Group segment sales were $62.9 million in the third quarter, down from $68.3 million in the prior-year period. Foreign currency translation reduced reported revenue by $1.0 million and contractually mandated price reductions, associated with lower plastic resin costs, accounted for $1.6 million in lower revenue. Excluding those items, revenues were $2.8 million lower, on mixed, but generally lower, demand from customers for their custom-manufactured products. Launch-quantity orders from customers introducing new products contributed substantial revenue in the quarter but were more than offset by the lower demand for more mature products and by product withdrawals that have occurred since the 2008 period. Tooling and development revenues were $1.5 million lower than in the prior year.

Acquisitions and dispositions affect comparisons to the prior-year quarter. Third quarter results include for the first time the operations acquired from Plastef Investissements SA in July 2009, which contributed $4.0 million in sales of proprietary safety needle products. 2009 results do not include revenues from the Tech Group's former Mexico facility, which was sold in the fourth quarter of 2008. That facility generated $2.7 million of primarily industrial contract manufacturing revenue in the third quarter of 2008 that was not transferred to other West locations following the sale of the facility.

Gross profit was $8.3 million in the quarter, $1.5 million lower than the $9.8 million reported in third quarter of 2008, and gross profit margin was 13.2% compared to 14.4% in the prior year period. Acquisitions and dispositions had no material effect on gross profit. The decline was primarily the result of the negative marginal effect of reduced sales revenue and production throughput, which outpaced the net positive effects of lower raw material and energy costs. SG&A costs increased $0.7 million on higher information technology and compensation costs. Operating profit for the third quarter of 2009 was $2.6 million, compared to $5.1 million in the prior year quarter, reflecting the inefficiencies associated with the lower revenue and utilization.

Corporate and Other

U.S. pension expense was $4.3 million in the current quarter, a $2.8 million increase over the third quarter of 2008, primarily as a result of substantial investment losses incurred by the U.S. pension plan assets during 2008. Similar effects are being reported in each 2009 quarter.

Stock-based compensation expense decreased by $0.6 million compared to the prior year quarter, due primarily to a change in the estimated cost of the Company's long-term incentive plan. Other corporate general and administrative costs were substantially unchanged compared to the prior year quarter as increases in depreciation and short-term incentive plan costs were offset by reduced utilization of external service providers.

Net interest expense was $0.4 million lower compared to the prior-year period. The Company's reported tax expense reflects an expected 2009 annual effective tax rate of 23.8% on operating earnings, as well as the tax effects of "Restructuring and Other Items." The comparable expected annual tax rate in the 2008 period was 26.1%. The primary reason for the rate reduction is the expected distribution of international earnings for 2009.

Restructuring and Other Items

West today announced operational restructuring plans in both the Tech Group and Pharmaceutical Systems segments, a substantial part of which will be reflected in the fourth-quarter 2009 reported results.

The Tech Group plan will consolidate manufacturing operations and support functions to better align capacity to contract manufacturing activity. Approximately 65 positions will be eliminated by the plan, which is expected to cost between $2.0 million and $3.0 million. Approximately $1.0 million is expected to be included in the results of operations in the fourth quarter of 2009 and the balance will be expended in 2010. The Company expects that it will experience revenue losses of approximately $1.0 million per year of lower margin business, but expects to generate overall annual operating cost savings of approximately $2.0 million in 2010 and $4.0 million once the restructuring is complete.

The Pharmaceutical Systems plan includes: exiting certain specialized laboratory service offerings; retiring information technology applications and associated support; and abandoning plans to expand its U.S. metals facility. Approximately 35 positions are being eliminated. The costs of the plan are expected to be between $6.0 million and $7.0 million, of which approximately $6.0 million is expected to be included in the results of operations in the fourth quarter of 2009. The balance will be expended in 2010. The plan is expected to generate cost savings in the range of $4.0 million annually.

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 that were recorded in 2007. The relief is pursuant to an amnesty program initiated by the Brazilian government. In addition, the Company recognized a $0.4 million reduction to tax expense in the quarter from the resolution of prior-year tax contingencies. During the third quarter of 2008, the Company reduced certain prior-year tax contingency reserves, recognizing income of $2.2 million in that quarter.

2008 third quarter results included $1.8 million of pre-tax charges for costs that were reimbursed under a contract settlement agreement with Nektar Therapeutics for converting the former Exubera® device production facility. The settlement had no impact on results in the current quarter.

Financial Guidance

The Company revised its 2009 guidance and previewed revenue expectations for 2010. The changes are intended to reflect management's current expectations and include revisions to revenue, gross profit and Adjusted Diluted EPS(1) estimates.