-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, E9XGkQEYvWTbw7FQcA7/rdicHeJu7ZFlWU6z5dVW7i1PfVWi7ghdkLps0BXg/xfP 1fwuYxoQ4nk37Q5MSthMTQ== 0000105770-99-000023.txt : 19990518 0000105770-99-000023.hdr.sgml : 19990518 ACCESSION NUMBER: 0000105770-99-000023 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990517 FILER: COMPANY DATA: COMPANY CONFORMED NAME: WEST PHARMACEUTICAL SERVICES INC CENTRAL INDEX KEY: 0000105770 STANDARD INDUSTRIAL CLASSIFICATION: FABRICATED RUBBER PRODUCTS, NEC [3060] IRS NUMBER: 231210010 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-08036 FILM NUMBER: 99625991 BUSINESS ADDRESS: STREET 1: 101 GORDON DR STREET 2: P O BOX 645 CITY: LIONVILLE STATE: PA ZIP: 19341-0645 BUSINESS PHONE: 6105942900 MAIL ADDRESS: STREET 1: 101 GORDON DRIVE STREET 2: PO BOX 645 CITY: LIONVILLE STATE: PA ZIP: 19341-0645 10-Q 1 10Q1-1999 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For The Quarterly Period Ended March 31, 1999 --------------- Commission File Number 1-8036 ------ WEST PHARMACEUTICAL SERVICES, INC. ----------------------------------------------------------------- (Exact name of registrant as specified in its charter) Pennsylvania 23-1210010 ------------------------------------- ---------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 101 Gordon Drive, PO Box 645, Lionville, PA 19341-0645 ------------------------------------- ---------------------- (Address of principal executive (Zip Code) offices) Registrant's telephone number, including area code 610-594-2900 -------------- N/A ----------------------------------------------------------------- Former name, former address and former fiscal year, if changed since last report. Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months, and (2) has been subject to such filing requirements for the past 90 days. Yes X . No . --- --- March 31, 1999 -- 15,033,072 ----------------------------------------------------------------- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Page 2 Index Form 10-Q for the Quarter Ended March 31, 1999 Page Part I - Financial Information Item 1. Financial Statements Consolidated Statements of Operations for the Three Months ended March 31, 1999 and March 31, 1998 3 Condensed Consolidated Balance Sheets at March 31, 1999 and December 31, 1998 5 Condensed Consolidated Statements of Cash Flows for the Three Months ended March 31, 1999 and March 31, 1998 7 Notes to Consolidated Financial Statements 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 12 Item 3. Quantitative and Qualitative Disclosure about Market Risk 16 Part II - Other Information Item 1. Legal Proceedings 17 Item 6. Exhibits and reports on Form 8-K 17 SIGNATURES 18 Index to Exhibits F-1 Page 4 Part I - Financial Information Item 1. Financial Statements West Pharmaceutical Services, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (in thousands, except per share data)
Quarter Ended March 31, 1999 March 31, 1998 --------------- -------------- Net sales $ 114,200 100 % $105,200 100 % Cost of goods sold 79,800 70 73,900 70 --------------------------------------------------------------------------------------------------- Gross profit 34,400 30 31,300 30 Selling, general and administrative expenses 17,000 15 16,800 16 Acquired research and development - - 28,200 27 Other income, net - - (600) - --------------------------------------------------------------------------------------------------- Operating profit (loss) 17,400 15 (13,100) (13) Interest expense 2,000 2 1,200 1 --------------------------------------------------------------------------------------------------- Income (loss) before income taxes and minority interests 15,400 13 (14,300) (14) Provision for income taxes 5,900 5 5,400 5 Minority interests 100 - - --------------------------------------------------------------------------------------------------- Income (loss) from consolidated operations 9,400 8 % (19,700) (19) % ---- ---- Equity in net income of affiliated companies 100 - --------------------------------------------------------------------------------------------------- Net income (loss) $ 9,500 $ (19,700) --------------------------------------------------------------------------------------------------- Net income (loss) per share: Basic $ .63 $ (1.19) Assuming dilution $ .63 $ (1.19) Average common shares outstanding 15,082 16,603 Average shares assuming dilution 15,133 16,603
Page 5 See accompanying notes to consolidated financial statements. Page 6 West Pharmaceutical Services, Inc. and Subsidiaries CONSOLIDATED BALANCE SHEETS (Unaudited) (in thousands)
March 31, 1999 Dec. 31, 1998 ASSETS -------------- ------------- Current assets: Cash, including equivalents $ 33,000 $ 31,300 Accounts receivable 68,100 64,400 Inventories 41,200 43,500 Current deferred income tax benefits 9,600 9,700 Other current assets 10,600 10,800 -------------------------------------------------------------------------- Total current assets 162,500 159,700 -------------------------------------------------------------------------- Net property, plant and equipment 212,900 220,300 Investments in affiliated companies 15,800 15,700 Goodwill 58,100 61,200 Deferred charges and other assets 51,000 48,700 -------------------------------------------------------------------------- Total Assets $500,300 $ 505,600 -------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current portion of long-term debt $ 700 $ 800 Notes payable - 35,300 Accounts payable 18,400 20,800 Salaries, wages, benefits 12,700 17,100 Income taxes payable 13,000 8,500 Other current liabilities 22,800 21,700 -------------------------------------------------------------------------- Total current liabilities 67,600 104,200 -------------------------------------------------------------------------- Long-term debt, excluding current portion 139,600 105,000 Deferred income taxes 39,000 39,100 Other long-term liabilities 26,300 26,600 Minority interests 500 600 -------------------------------------------------------------------------- Shareholders' equity 227,300 230,100 -------------------------------------------------------------------------- Total Liabilities and Shareholders' Equity $500,300 $ 505,600 Page 7 --------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. Page 8 West Pharmaceutical Services, Inc. and Subsidiaries CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (in thousands)
Quarter Ended March 31, 1999 March 31, 1998 ---------------- ------------------- Cash flows from operating activities: Net income, plus net non-cash items $ 16,600 $ 14,400 Changes in assets and liabilities (3,200) (6,000) ----------------------------------------------------------------------------------------- Net cash provided by operating activities 13,400 8,400 ---------------------------------------------------------------------------------------- Cash flows from investing activities: Property, plant and equipment acquired (7,700) (7,600) Proceeds from sale of assets - 800 Payment for acquisition, net of cash acquired - (6,900) Customer advances, net of repayments 100 (900) ---------------------------------------------------------------------------------------- Net cash used in investing activities (7,600) (14,600) ---------------------------------------------------------------------------------------- Cash flows from financing activities: Repayment of long-term debt (800) (2,400) Notes payable, net 2,400 23,900 Dividend payments (2,400) (2,500) Sale of common stock, net 1,400 1,400 Purchase of common stock (2,900) - ---------------------------------------------------------------------------------------- Net cash provided by (used in) financing activities (2,300) 20,400 ---------------------------------------------------------------------------------------- Effect of exchange rates on cash (1,800) (100) ---------------------------------------------------------------------------------------- Net increase in cash, including equivalents $ 1,700 $ 14,100 ----------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. Page 9 West Pharmaceutical Services, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Unaudited) The interim consolidated financial statements for the quarter ended March 31, 1999 should be read in conjunction with the consolidated financial statements and notes thereto of West Pharmaceutical Services, Inc., appearing in the Company's 1998 Annual Report on Form 10-K. The year-end condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by generally accepted accounting principles. Interim results are based on the Company's accounts without audit. 1. Interim Period Accounting Policy --------------------------------- In the opinion of management, the unaudited Condensed Consolidated Balance Sheet as of March 31, 1999 and the related unaudited Consolidated Statement of Operations and the unaudited Condensed Consolidated Statement of Cash Flows for the three month period then ended and for the comparative period in 1998 contain all adjustments, consisting only of normal recurring accruals, necessary to present fairly the financial position as of March 31, 1999 and the results of operations and cash flows for the respective periods. The results of operations for any interim period are not necessarily indicative of results for the full year. Operating Expenses ------------------ To better relate costs to benefits received or activity in an interim period, certain operating expenses have been annualized for interim reporting purposes. Such expenses include certain employee benefit costs, annual quantity discounts and advertising. Income Taxes ------------- The tax rate used for interim periods is the estimated annual effective consolidated tax rate, based on the current estimate of full year results (excluding the charge for acquired research and development in 1998), except that taxes applicable to operating results in Brazil and prior year adjustments, if any, are recorded as identified. Net Loss Per Share --------------------- In the first quarter 1998 because of the reported net loss, the incremental shares from potential issuance of common stock under the Company's stock option and award plan are not included in average shares assuming dilution. Page 10 West Pharmaceutical Services, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Unaudited) (continued) 2. Inventories at March 31, 1999 and December 31, 1998 are summarized as follows:
(in thousands) 1999 1998 -------- -------- Finished goods $ 16,100 $ 15,700 Work in process 11,400 13,700 Raw materials 13,700 14,100 -------- -------- $ 41,200 $ 43,500 -------- -------- -------- --------
3. The carrying value of property, plant and equipment at March 31, 1999 and December 31, 1998 is determined as follows:
(in thousands) 1999 1998 -------- -------- Property, plant and equipment $464,500 $472,200 Less accumulated depreciation and amortization 251,600 251,900 -------- -------- Net property, plant and equipment $212,900 $220,300 -------- -------- -------- --------
4. For the three months ended March 31, 1999 and 1998, the Company's comprehensive income (loss) is as follows:
March 31, 1999 March 31, 1998 -------------- --------------- Net income (loss) $ 9,500 $ (19,700) Foreign currency translation adjustments (8,600) (2,600) -------- -------- Comprehensive income (loss) $ 900 $(22,300) -------- -------- -------- --------
Page 11 West Pharmaceutical Services, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Unaudited) (Continued) 5. Net sales to external customers and operating profit by operating segment for the three months ended March 31, 1999 and March 31, 1998 is as follows: Net Sales Operating Profit 1999 1998 1999 1998 ---- ---- ---- ---- Device product development $93,400 $86,100 $21,500 $19,900 Contract services 20,600 19,100 2,200 900 Drug delivery research & development 200 - (1,400) (800) Corporate and unallocated items - - (4,900) (33,100) ------- ------- ------- ------- Consolidated total $114,200 $105,200 $17,400 $(13,100) ------- ------- ------- ------- ------- ------- ------- ------- Compared with December 31, 1998, there were no material changes in the amount of assets as of March 31, 1999 for any operating segment. 6. Common stock issued at March 31, 1999 was 17,165,141 shares, of which 2,132,069 shares were held in treasury. Dividends of $.16 per common share were paid in the first quarter of 1999 and a dividend of $.16 per share payable to holders of record on April 21, 1999 was declared on March 6, 1999. 7. The Company has accrued the estimated cost of environmental compliance expenses related to soil or ground water contamination at current and former manufacturing facilities. The ultimate cost to be incurred by the Company and the timing of such payments cannot be fully determined. However, based on consultants' estimates of the costs of remediation in accordance with applicable regulatory requirements, the Company believes the accrued liability of $1.1 million at March 31, 1999 is sufficient to cover the future costs of these remedial actions, which will be carried out over the next several years. The Company has not anticipated any possible recovery from insurance or other sources. 8. On September 8, 1998, the Company recorded a pre-tax charge of $4.0 million. The charge is related to employee reductions associated with identified manufacturing and other efficiencies. The charge covers severance and benefits for 92 employees and other related charges. Through March 31, 1999, the total payout of severance and benefits associated with this charge was $2.4 million. Page 12 West Pharmaceutical Services, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Unaudited) (Continued) 9. On April 20, 1999, West Pharmaceutical Services, Inc. announced the closing of its acquisition of assets of the Clinical Services Division of Collaborative Clinical Research, Inc. (CSD). The total purchase price of approximately $17 million is subject to final adjustment. The acquisition of CSD will be accounted for as a purchase and CSD will be consolidated beginning on May 1, 1999. On a proforma basis this acquisition would not have materially affected historical sales or earnings in the financial statements presented, had the purchase been consummated at January 1, 1998. 10. On April 8, 1999 the Company entered into an agreement with five insurance companies to borrow a total of $100 million for ten years at a coupon rate of 6.81%, the effective interest rate is 6.91%. Interest is payable quarterly. The proceeds of the private placement were used to repay debt under existing lines of credit, for the acquisition of CSD and general corporate purposes. Page 13 Item 2. Management's Discussion and Analysis of Financial Condition and ---------------------------------------------------------------- Results of Operations for the Quarter Ended March 31, 1999 Versus ---------------------------------------------------------------- March 31, 1998. -------------- Net Sales ---------- Net Sales for the first quarter of 1999 were $114.2 million, an 8.5% increase compared with net sales of $105.2 million for the same quarter in 1998. In the device product development segment the sales increase was more than 8% driven by strong demand in Europe and Asia. This increase includes sales of $2.2 million in the first quarter generated from Betraine Limited acquired on July 1, 1998. The Company began consolidating Betraine operating results as of July 1, 1998. Sales also increased 7.6% in the contract services segment, and adjusting for the lower level of company supplied materials in 1999 revenues, the sales improvement is more than 17%. Revenue in our drug delivery research & development segment was not significant and as previously indicated is not anticipated to be significant for several years. Gross Profit ------------ Consolidated gross profit was $34.4 million, an increase of 9.9% compared with the first quarter 1998. The gross margin for the first quarter was 30.2% of net sales compared with 29.8% in 1998. Gross margins on device product development sales were virtually flat, excluding the impact of low-margin Betraine sales. Continued cost savings through efficiency programs offset the impact of a lower-margin product mix and price competition. In the contract services segment, improved efficiencies, a shift to higher-margin, longer-running jobs and price increases improved the gross margin on sales significantly. Selling, General and Administrative Expenses -------------------------------------------- Selling, general and administrative expenses increased $0.2 million compared with the same period in 1998, but represented only 14.9% as a percentage of sales compared with 15.9% for 1998. The 1998 acquisition of two U.K. companies added to expenses, but these increases were offset, in part, by higher income from pension plan assets and a favorable exchange rate impact. Page 14 Results of Operations for the Quarter Ended March 31, 1999 Versus ----------------------------------------------------------------- March 31, 1998, continued -------------------------- Other (income) expense ---------------------- Reduced cash investment income and foreign currency transaction losses in Europe were the primary factors contributing to the decline in the other income category from $0.6 million of income in 1998 to less than $0.1 million of expense in 1999. Interest Expense and Equity in Affiliates ----------------------------------------- Interest expense increased $.8 million in the first quarter comparisons, because of additional debt associated with the $60.0 million repurchase of shares in the fourth quarter of 1998, and the 1998 acquisitions. Equity in net income of affiliates increased by $0.1 million compared with first quarter 1998. The contribution to net income from Daikyo Seiko, Ltd. declined but was offset by a positive contribution versus losses from the Company's ownership interest in three Mexican companies. Taxes ----- The effective tax rate for the three months 1999 was 38.5%, slightly lower than the 39% rate for the same quarter in 1998, excluding the charge for the acquired research and development. The statutory rate reduction in Germany was the major contributor. The effective tax rate for the year 1998, excluding the impact of the charge for acquired research and development, was 37.8%. The estimated increase in the 1999 tax rate reflects the geographic mix of earnings. Net Income ---------- Net income for the first quarter 1999 was $9.5 million , or $.63 per share, compared to a loss of $19.7 million, or $1.19 per share, in the same period of 1998. Excluding the charge for acquired research and development, net income for 1998 would have been $8.5 million, or $.51 per share. Average common shares outstanding in the first quarter were 15.1 million compared with 16.6 million in the first quarter 1998. The reduction in average common shares outstanding is due to the Company's purchase of two million common shares following a Dutch Auction self-tender offer completed in October 1998. Financial Position ------------------ Working capital at March 31, 1999 was$94.9 million compared with Page 15 Results of Operations for the Quarter Ended March 31, 1999 Versus ----------------------------------------------------------------- March 31, 1998, continued -------------------------- $55.5 million at December 31, 1998. The working capital ratio at March 31, 1999 was 2.4 to 1. The primary reason for the increase in working capital is the Company's ability to finance $37.6 million of short-term notes payable on a long-term basis using proceeds from a $100 million, 10-year private debt placement closed on April 9, 1999. This private debt placement has a coupon rate of 6.81%, and an effective interest rate of 6.91%. Debt as a percentage of total invested capital at March 31, 1999 was 38.1% compared with 37.9% at December 31, 1998. In the quarter funds generated from operations more than covered capital spending of $7.7 million, cash dividends of $.16 per share and repurchase of 86,500 shares of common stock at an average price of $33.78 per share. The stock repurchases were made pursuant to a plan authorized by the Company's Board of Directors and announced on March 10, 1999. The plan provides for purchase of up to one million shares of the Company's common stock in open market or privately negotiated transactions. The Company believes its financial condition and current capitalization indicate an ability to finance substantial future growth. Market Risk ----------- The Company is exposed to various market risk factors such as fluctuating interest rates and foreign currency rate fluctuations. These risk factors can impact results of operations, cash flows and financial position. These risks are managed periodically with the use of derivative financial instruments such as interest rate swaps and forward exchange contracts. In accordance with Company policy, derivative financial instruments are not used for speculation or trading purposes. At March 31, 1999 and December 31, 1998 the Company had three interest rate swap agreements in effect, with an estimated fair value less than $0.1 million. There were no forward exchange contracts in effect at March 31, 1999. Year 2000 --------- The Company continues to execute its comprehensive, corporate- wide project plan designed to address the year 2000 issue using both internal and external resources. The plan is based on a risk assessment, which identified and prioritized critical Page 16 business processes and plant locations, and an inventory of all computer Results of Operations for the Quarter Ended March 31, 1999 Versus ----------------------------------------------------------------- March 31, 1998, continued -------------------------- hardware and software and computer-controlled manufacturing and facility equipment. Remediation or replacement plans were developed, and the project began in April 1997. Since year-end 1998, significant progress has been made in the remediation or replacement of critical information systems which support business functions. West-Lakewood's manufacturing systems have been completed and other systems are on schedule to meet the targeted first half completion dates. Desktop computer hardware and software remediation or replacement is in progress with expected early summer completion. Remediation or replacement of software dependent research and development, manufacturing process and facility management systems and equipment is progressing well at all locations. The Company has completed on-site audits of 10 key suppliers in follow-up to previously received readiness disclosures; this program continues. Pretax costs incurred in 1999 through March 31 are approximately $0.6 million, of which $0.5 million has been capitalized. The Company expects to spend approximately $4.0 million during the remainder of the year on the project. The Company anticipates that required modifications to address substantially all of the year 2000 issues will be completed by June 30, 1999. However, the Company is developing a contingency plan for the year 2000 issues which is in the final stage of development. The Company believes there is adequate time during the last half of 1999 to address any deficiencies without any significant impact on critical business functions. The cost of the year 2000 project and the date on which the Company believes it will substantially complete modifications are based on management's best estimates. The estimates are based on numerous assumptions of future events, including the continued availability of certain resources and other factors. Because none of these estimates can be guaranteed, actual time and cost to complete modifications could differ materially from those anticipated. Specific factors that might cause such differences include, but are not limited to, the reliability and timely receipt of vendor certifications, the appropriateness and effectiveness of testing and validation methods, the availability and cost of trained personnel and the timely availability of replacement computer hardware, software and equipment and similar uncertainties. Page 17 Results of Operations for the Quarter Ended March 31, 1999 Versus ----------------------------------------------------------------- March 31, 1998, continued -------------------------- Item 3. Quantitative and Qualitative Disclosure about Market Risk ---------------------------------------------- The information called for by this item is incorporated by reference to the text appearing in Item 2 "Management's Discussion and Analysis of Financial Condition and Results of Operations-Market Risk". Page 18 Part II - Other Information Item 1. Legal Proceedings ----------------- None. Item 6. Exhibits and Reports on Form 8-K -------------------------------- (a) See Index to Exhibits on pages F-1 and F-2 of this Report. (b) No reports on Form 8-K have been filed for the quarter ended March 31, 1999. Page 19 SIGNATURES ---------- Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. WEST PHARMACEUTICAL SERVICES,INC. ----------------------------------- (Registrant) May 17, 1999 /s/ Steven A. Ellers ------------- --------------------------------- Date (Signature) Steven A. Ellers Senior Vice President and Chief Financial Officer Page 20 INDEX TO EXHIBITS Exhibit Number (3) (a) Amended and Restated Articles of Incorporation of the Company through January 4, 1999, incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1998 (File No. 1- 8036). (3) (b) ByLaws of the Company, as amended through October 27, 1998, incorporated by reference to Exhibit (3)(b) to the Company's Form 10-Q for the quarter ended September 30, 1998 (File No. 1-8036). (4) (a) Form of stock certificate for common stock, incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1998 (File No. 1-8036). (4) (b) Flip-In Rights Agreement between the Company and American Stock Transfer & Trust Company, as Rights Agent, dated as of January 16, 1990, incorporated by reference to Exhibit 1 to the Company's Form 8-A Registration Statement (File No. 1-8036). (4) (c) Flip-Over Rights Agreement between the Company and American Stock Transfer & Trust Company, as Rights Agent, dated as of January 16, 1990, incorporated by reference to Exhibit 2 to the Company's Form 8-A Registration Statement (File No. 1-8036). (9) None. (10) None. (11) Not Applicable. (12) Not Applicable. (15) None. (16) Not applicable. (18) None. (19) None. (22) None. (23) None. (24) None. F - 1 Page 21 Exhibit Number (27) Financial Data Schedule (99) None. F - 2 EX-27 2 EXHIBIT 27
5 3-MOS DEC-31-1998 MAR-31-1999 33,000 0 68,100 0 41,200 20,200 464,500 251,600 500,300 67,600 139,600 0 0 4,300 223,000 500,300 114,200 114,200 79,800 79,800 0 0 2,000 15,400 5,900 9,400 0 0 0 9,500 .63 .63
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