0000105770-01-500059.txt : 20011026
0000105770-01-500059.hdr.sgml : 20011026
ACCESSION NUMBER: 0000105770-01-500059
CONFORMED SUBMISSION TYPE: 10-Q
PUBLIC DOCUMENT COUNT: 2
CONFORMED PERIOD OF REPORT: 20010930
FILED AS OF DATE: 20011019
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: 1934 Act
SEC FILE NUMBER: 001-08036
FILM NUMBER: 1762636
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
FORMER COMPANY:
FORMER CONFORMED NAME: WEST CO INC
DATE OF NAME CHANGE: 19990405
10-Q
1
file10q32001.txt
10 Q 3RD QTR 2001
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 September 30, 2001
---------------
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 .
--- ---
September 30, 2001 -- 14,345,405
--------------------------------------------------------------------------------
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 September 30, 2001
Page
-----
Part I - Financial Information
Item 1. Financial Statements
Consolidated Statements of Income for the
Three and Nine Months ended September 30, 2001
and September 30, 2000 3
Condensed Consolidated Balance Sheets at
September 30, 2001 and December 31, 2000 4
Consolidated Statement of Shareholders' Equity
at September 30, 2001 and December 31, 2000 5
Condensed Consolidated Statements of Cash Flows
for the Nine Months ended September 30, 2001
and September 30, 2000 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosure
about Market Risk 18
Part II - Other Information
Item 1. Legal Proceedings 19
Item 6. Exhibits and Reports on Form 8-K 19
SIGNATURES 20
Index to Exhibits F-1
Page 3
Part I. Financial Information
Item 1. Financial Statements
West Pharmaceutical Services, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(in thousands, except per share data)
Quarter Ended Nine Months Ended
Sept. 30, 2001 Sept, 30, 2000 Sept. 30, 2001 Sept. 30, 2000
-------------- -------------- -------------- ---------------
Net sales ........................ $112,900 100% $105,300 100% $346,300 100% $327,600 100%
Cost of goods and services sold .. 84,900 75 80,700 76 256,000 74 246,600 75
-------------- --------------- --------------- ---------------
Gross profit .................. 28,000 25 24,600 24 90,300 26 81,000 25
Selling, general and
administrative expenses ....... 19,400 17 16,500 16 57,700 16 50,900 16
Restructuring (credit) charge..... (1,700) (1) -- -- 2,800 1 -- --
Other (income) expense, net ...... (600) (1) (200) -- (900) -- 200 --
-------------- -------------- -------------- --------------
Operating profit .............. 10,900 10 8,300 8 30,700 9 29,900 9
Interest expense ................. 3,300 3 3,200 3 10,400 3 9,600 3
-------------- -------------- -------------- --------------
Income before income taxes
and minority interests ....... 7,600 7 5,100 5 20,300 6 20,300 6
Provision for income taxes ....... 1,700 2 500 1 6,300 2 6,200 2
Minority interests ............... -- -- -- -- 100 -- 200 --
-------------- -------------- --------------- --------------
Income from consolidated operations 5,900 5% 4,600 4% 13,900 4% 13,900 4%
--- --- --- ---
Equity in net income of
affiliated companies .......... -- -- 500 800
-------- -------- --------- --------
Net income .................. $ 5,900 $ 4,600 $ 14,400 $ 14,700
-------- -------- --------- --------
Net income per share:
Basic ...................... $ .41 $ 0.32 $ 1.00 $ 1.02
Assuming dilution ........... $ .41 $ 0.32 $ 1.00 $ 1.02
-------- -------- --------- --------
Average common shares outstanding 14,343 14,337 14,333 14,437
Average shares assuming dilution 14,353 14,337 14,346 14,439
See accompanying notes to consolidated financial statements.
Page 4
West Pharmaceutical Services, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(in thousands)
Unaudited
Sept. 30, Dec. 31,
2001 2000
--------- --------
ASSETS
Current assets:
Cash, including equivalents ................ $ 41,600 $ 42,700
Accounts receivable ........................ 75,000 60,900
Inventories ................................ 42,400 41,000
Income tax refundable....................... 4,500 7,700
Current deferred income tax benefits ....... 8,800 7,700
Other current assets ....................... 10,900 13,100
-------- --------
Total current assets ........................... 183,200 173,100
-------- --------
Net property, plant and equipment .............. 241,400 235,800
Investments in affiliated companies ............ 20,200 22,000
Goodwill ....................................... 50,000 52,400
Prepaid pension asset........................... 46,500 40,200
Deferred charges and other assets .............. 17,700 18,000
Other assets.................................... 17,500 15,900
-------- --------
Total Assets ................................... $576,500 $557,400
-------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt .......... $ 500 $ 500
Notes payable .............................. 24,000 3,100
Accounts payable ........................... 24,000 27,600
Accrued expenses:
Salaries, wages, benefits ................ 16,400 11,300
Income taxes payable ..................... 5,900 7,200
Restructuring costs....................... 3,900 4,200
Deferred income taxes..................... 1,900 1,900
Other .................................... 24,100 23,500
-------- --------
Total current liabilities ...................... 100,700 79,300
-------- --------
Long-term debt, excluding current portion 195,400 195,800
Deferred income taxes .......................... 51,000 51,000
Other long-term liabilities .................... 24,300 25,500
Minority interests ............................. 1,000 1,000
Shareholders' equity ........................... 204,100 204,800
-------- --------
Total Liabilities and Shareholders' Equity $576,500 $557,400
-------- --------
See accompanying notes to consolidated financial statements
Page 5
West Pharmaceutical Services, Inc. and Subsidiaries
Consolidated Statement of Shareholders' Equity (unaudited)
(in thousands)
Capital in Other
Common excess of Retained comprehensive Treasury
Stock par value Earnings income (loss) stock Total
-------------------------------------------------------------------
Balance, December 31, 2000 $ 4,300 $ 32,100 $269,800 $ (14,500) $ (86,900) $ 204,800
Net income 14,400 14,400
Shares issued under stock plans (500) 1,300 800
Shares repurchased (100) (100)
Cash dividends declared (7,900) (7,900)
Foreign currency translation adjustment (7,500) (7,500)
Fair value of financial instruments adjustment (400) (400)
--------------------------------------------------------------------
Balance, September 30, 2001 $ 4,300 $ 31,600 $276,300 $ (22,400) $ (85,700) $ 204,100
--------------------------------------------------------------------
The accompanying notes are an integral part of the financial statements
Page 6
West Pharmaceutical Services, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(in thousands)
Nine Months Ended
Sept. 30, Sept. 30,
2001 2000
-------- --------
Cash flows from operating activities:
Net income........................ .......... $ 14,400 $ 14,700
Depreciation and amortization................ 27,800 28,000
Other non-cash items, net.................... (6,700) (11,200)
Changes in assets and liabilities ........... (14,800) 4,600
-------- --------
Net cash provided by operating activities ...... 20,700 36,100
-------- --------
Cash flows from investing activities:
Property, plant and equipment acquired ........ (34,900) (42,300)
Proceeds from sale of assets .................. 3,100 400
Payment for acquisitions, net of cash acquired. -- (2,000)
Customer advances, net of repayments .......... (2,600) (800)
-------- --------
Net cash used in investing activities ............. (34,400) (44,700)
-------- --------
Cash flows from financing activities:
Net borrowings under revolving
credit agreements ............................ 21,200 40,700
Repayment of other long-term debt .............. (300) (15,500)
Dividend payments .............................. (7,700) (7,400)
Sale of common stock, net ...................... 800 600
Purchase of treasury stock ..................... (100) (10,700)
-------- --------
Net cash provided by financing activities.......... 13,900 7,700
-------- --------
Effect of exchange rates on cash .................. (1,300) (2,800)
-------- --------
Net(decrease)in cash, including equivalents........ $(1,100) $ (3,700)
-------- --------
See accompanying notes to consolidated financial statements
Page 7
West Pharmaceutical Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
(In thousands, except share and per share data)
The interim consolidated financial statements for the nine-month period ended
September 30, 2001 should be read in conjunction with the consolidated financial
statements and notes thereto of West Pharmaceutical Services, Inc.(The Company),
appearing in the Company's 2000 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 and Consolidated Statement of Shareholders Equity as of September 30,
2001 and the related unaudited Consolidated Statements of Income for the
three and nine-month periods then ended, and the unaudited Condensed
Consolidated Statement of Cash Flows for the nine-month period then ended
and for the comparative period in 2000 contain all adjustments, consisting
only of normal recurring accruals, necessary to present fairly the
financial position as of September 30, 2001 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.
Reclassification
----------------
Certain items have been reclassified to conform to current classifications.
In particular, freight charge reimbursements are reported as net sales and
freight expenses are reported as costs of goods and services sold, rather
than reported on a net basis. The impact of the reclassification of the
freight expenses increased previously reported third quarter and
nine-months 2000 sales and cost of goods and services sold by $800 and
$2,700, respectively, with no impact on gross profit.
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,
except that taxes applicable to prior year adjustments, if any, are
recorded as identified.
Page 8
West Pharmaceutical Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
(continued)
In the third quarter of 2001, the Company recorded a net restructuring
credit of $1.7 million related to the sale of a Puerto Rico manufacturing
plant held for sale from the 2000 restructuring program. Excluding the
restructuring item, the effective tax rate for the third quarter of 2001
was 30.6%.
The estimated 2001 full-year effective tax rate is 34.5% compared to the
36% used in the first six months of 2001. Full year 2001 includes a $1.6
million tax benefit resulting from the restructuring charge taken in the
second quarter 2001.
In the third quarter of 2000, a net $1.6 million tax benefit was recorded
in response to a change in German tax laws. Excluding this non-recurring
tax benefit, the effective tax rate for the third quarter of 2000 was
41.5%, which included the impact of increasing the estimated full-year tax
rate to 38.5%.
The change in estimated tax rates in both years was made in response to the
Company's then current projected geographic mix of income. Excluding
unusual items, the full year effective tax rate in 2000 was 36.4%.
2. Inventories at September 30, 2001 and December 31, 2000 are
summarized as follows:
9/30/01 12/31/00
------- --------
Finished goods $15,500 $17,300
Work in process 10,400 9,400
Raw materials 16,500 14,300
------- -------
$42,400 $41,000
------- -------
------- -------
Page 9
West Pharmaceutical Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
(Continued)
3. The summary of property, plant and equipment at
September 30, 2001 and December 31, 2000 is presented in the
following table:
9/30/01 12/31/00
-------- --------
Property, plant and equipment $531,000 $521,400
Less accumulated depreciation
and amortization .......... 289,600 285,600
-------- --------
Net property, plant
and equipment ............. $241,400 $235,800
-------- --------
-------- --------
4. For the three and nine months ended September 30, 2001 and
2000, the Company's comprehensive income (loss) is as follows:
Three Months Ended Nine Months Ended
9/30/01 9/30/00 9/30/01 9/30/00
-------- -------- -------- --------
Net income ............. $ 5,900 $ 4,600 $ 14,400 $ 14,700
Foreign currency
translation adjustments 6,900 (5,100) (7,500) (9,300)
Fair value adjustment on
derivative financial
instruments (200) -- (400) --
-------- -------- -------- --------
Comprehensive (loss)income $12,600 $ (500) $ 6,500 $ 5,400
-------- -------- -------- --------
-------- -------- -------- --------
The Company adopted Financial Accounting Standards Statement No. 133,
"Accounting for Derivative Financial Instruments and Hedging Activities",
as amended, on January 1, 2001. This accounting standard requires the
Company to recognize all derivatives as either assets or liabilities and
measure those instruments at fair value as of the balance sheet date. The
change in fair value of a derivative designated and qualified as part of a
hedging transaction is generally matched with the recognition of the item
or risk being hedged. At the adoption date the Company had four interest
rate swap agreements in effect and recorded a $300 charge to other
comprehensive income. The swaps hedge cash flow risk associated with
interest payments on variable rate debt. This charge increased to $400 at
September 30, 2001 reflecting the maturity of three of the swap agreements
and current market valuations on the remaining swap. Amounts recorded in
comprehensive income are recognized in net income in the period when the
hedged interest payment affects net income.
Page 10
West Pharmaceutical Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
(Continued)
5. Net sales to external customers and operating profit (loss) by
operating segment for the three and nine months ended September 30,
2001 and September 30, 2000 are as follows:
Three Months Ended Nine Months Ended
September 30 September 30
Net Sales: 2001 2000 2001 2000
---------- -------- -------- -------- --------
Device product development $ 91,700 $ 87,600 $281,500 $276,100
Contract services ........ 19,400 17,400 59,800 50,800
Drug delivery research
and development ........ 1,800 300 5,000 1,000
Corporate and unallocated. - - - (300)
-------- -------- -------- --------
Consolidated Total ....... $112,900 $105,300 $346,300 $327,600
-------- -------- -------- --------
-------- -------- -------- --------
Three Months Ended Nine Months Ended
September 30 September 30
Operating Profit (Loss): 2001 2000 2001 2000
-------------------------- -------- -------- -------- --------
Device product development $ 15,800 $ 16,000 $ 52,300 $ 56,200
Contract services ........ 300 (2,000) 600 (9,400)
Drug delivery research
and development ........ (1,400) (2,600) (4,000) (7,300)
Corporate and unallocated (3,800) (3,100) (18,200) (9,600)
-------- -------- -------- --------
Consolidated Total ....... $ 10,900 $ 8,300 $ 30,700 $ 29,900
-------- -------- -------- --------
-------- -------- -------- --------
Corporate and unallocated items include a third quarter 2001
restructuring credit of $1,700 resulting from the sale of a facility
held for sale from the 2000 restructuring. For the nine months ended
September 2001 corporate and unallocated items include net
restructuring charges totaling $2.8 million.
Compared with December 31, 2000, there were no material changes in the
amount of assets as of September 30, 2001 for any operating segment.
Page 11
West Pharmaceutical Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
(Continued)
6. Common stock issued at September 30, 2001 was 17,165,141 shares, of
which 2,819,736 shares were held in treasury. Dividends of $.18 per
common share were paid in the third quarter of 2001 and a dividend of
$.19 per share payable November 7, 2001 to holders of record on
October 24, 2001 was declared on October 5, 2001.
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 $1,500 at September 30, 2001
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. In the third quarter of 2001, the Company recorded a pre-tax
restructuring credit of $1,700 related to the sale of a Puerto Rico
manufacturing facility held for sale from the 2000 restructuring
program.
In the second quarter of 2001, the Company recorded a pre-tax
restructuring charge of $4,500. The charge consists of severance,
post-employment medical coverage and outplacement costs, resulting
from the elimination of 25 senior and mid-level management positions.
The remaining balance of this accrual at September 30, 2001 was
$1,900. Under the restructuring plan, cash payments for severance and
outplacement costs will be completed within two years and medical
coverage for select members will continue through 2008.
In 2000, the Company recorded a pre-tax restructuring charge of
$20,800, consisting of $16,900 of goodwill and asset write-downs to
estimated net realizable value and a $3,900 accrual for severance,
benefits and asset disposal costs. The restructuring initiatives
included personnel reductions affecting approximately 180 employees.
As of September 30, 2001, the severance accrual balance was $1,400,
reflecting the closure of the site management office, the closure of a
packaging plant in Puerto Rico, and other personnel reductions. The
remaining accrual relates primarily to the Company's plastic
manufacturing plant in Puerto Rico, which ceased operations and began
severance payments in the third quarter of 2001.
Page 12
Item 2.
Management's Discussion and Analysis of Financial Condition and
----------------------------------------------------------------
Results of Operations for the Three and Nine Months ended September 30, 2001
----------------------------------------------------------------------------
versus Comparable 2000 periods.
-------------------------------
Net Sales
---------
Net Sales for the third quarter of 2001 were $112.9 million compared to $105.3
million reported in the third quarter of 2000. At constant exchange rates, sales
for the third quarter 2001 increased 9% versus the prior year quarter.
Third quarter 2001 sales for the Device Product Development segment, which
represents 81% of total revenue, were $91.7 million, a $4.1 million or 5%
increase from prior year reported sales of $87.6 million. At constant exchange
rates, sales increased by 6%. Continued strength in international markets
resulted in 7% sales growth at constant exchange rates. Domestic markets also
had a strong quarter with sales increasing 6% from the prior year quarter.
Contract Services segment sales were $19.4 million, $2 million, or 12% above
third quarter 2000 levels. The sales increases for this segment were driven
primarily by new customers in the contract manufacturing and packaging unit, as
this unit continues to recover from the prior year's lower demand for outsourced
services.
The Drug Delivery Research and Development segment had revenues of $1.8 million,
a $1.5 million increase from the prior year quarter. The increased revenues
resulted primarily from the licensing of West's Chysis TM technology for use in
a nasal flu vaccine.
Net sales for the nine months of 2001 were $346.3 million, 6% higher than sales
in the same period of 2000 and 8% higher at constant exchange rates. Excluding
exchange rate variances, Device Product Development sales were 5% higher led by
strong results in international markets. Year-to-date Contract Services segment
sales increased by 18% over the prior year, reflecting the recovery of the
contract manufacturing and packaging unit. Drug Delivery segment revenues
increased to $5.0 million in the nine month 2001 period, as compared to $1.0
million in the prior year period, benefiting primarily from the Chysis TM
technology license and progress on the nasal morphine project.
Gross Profit
------------
The third quarter 2001 consolidated gross margin was 24.8%, compared with 23.5%
in 2000. The improvement in margins reflects the recovery of the contract
manufacturing and packaging unit of the Contract Services segment, which is
generating positive gross margins in 2001 versus below breakeven results in
2000. Increased revenues in the Drug Delivery segment were also a factor in the
gross margin improvement. These factors were partially offset by decreased
margins in the Device Product Development segment reflecting higher labor costs
and production inefficiencies, primarily in Europe, resulting from strained
product capacity levels and plant expansion activities. The plant expansion
activities are scheduled to be completed in phases during 2002 through 2003 and
should alleviate these production inefficiencies.
Page 13
Management's Discussion and Analysis of Financial Condition and
----------------------------------------------------------------
Results of Operations for the Three and Nine Months ended September 30, 2001
----------------------------------------------------------------------------
versus Comparable 2000 periods(continued).
------------------------------------------
The consolidated gross profit margin for the nine-month period was 26.1%
compared with 24.7% in the same period of 2000. The same factors that influenced
the quarter comparisons affect the nine-month comparisons.
Selling, General and Administrative Expenses
--------------------------------------------
Selling, general and administrative expenses increased $2.9 million (18%) as
compared with the third quarter of 2000. The major contributors to the increase
include a reduction of income from pension assets, higher incentive compensation
costs, and the costs associated with the Company's e-West business systems
initiative.
For the nine-month period ending September 30 2001, selling, general and
administrative expenses increased by $6.8 million versus the prior year. Lower
pension income, higher stock-price and incentive based compensation expenses
resulting from improved earnings, costs associated with the Company's e-West
business systems initiative, and strategic review costs more than offset the
positive benefits of the restructuring cost savings achieved in the Contract
Services segment and the favorable impact of foreign exchange rates on non-U.S.
dollar expenses.
Restructuring charge
--------------------
In the third quarter of 2001, the Company recorded a pre-tax restructuring
credit of $1.7 million related to the sale of a Puerto Rico manufacturing
facility held for sale from the 2000 restructuring program.
In the second quarter of 2001, the Company recorded a pre-tax restructuring
charge of $4.5 million, resulting in the elimination of approximately 25 mid-and
senior level management positions in the global salaried workforce. The charge
consists of severance, post-employment medical coverage and outplacement costs.
Cash payments under the restructuring plan will be largely completed within two
years.
Other (income) expense
----------------------
Other (income) expense consists principally of interest income on investments,
foreign exchange transaction items, and miscellaneous equipment sales. Third
quarter 2001 other income exceeded the prior year quarter, principally due to a
prior year equipment loss and current period foreign exchange transaction gains
versus prior period losses. The nine-month 2000 period contains higher foreign
exchange losses connected with the tax reorganization of the Company's European
affiliates, the equipment loss, and costs related to a one-time environmental
action in Brazil.
Page 14
Management's Discussion and Analysis of Financial Condition and
----------------------------------------------------------------
Results of Operations for the Three and Nine Months ended September 30, 2001
----------------------------------------------------------------------------
versus Comparable 2000 periods(continued).
------------------------------------------
Interest Expense
----------------
Interest expense was approximately equal to the third quarter of 2000, as higher
debt levels were offset by decreases in the third quarter interest rates on the
Company's revolving credit facility. For the nine-month period, interest expense
exceeded the prior year by $.8 million. The increase in 2001 debt levels
reflects the high level of capital spending relative to lower cash flows from
operations.
Provision for income taxes
--------------------------
In the third quarter of 2001, the Company recorded a net restructuring credit of
$1.7 million related to the sale of a Puerto Rico manufacturing plant. Excluding
the restructuring item, the effective tax rate for the third quarter of 2001 was
30.6%.
The estimated 2001 full-year effective tax rate is 34.5% compared to the 36%
used in the first six months of 2001. Full year 2001 includes a $1.6 million tax
benefit resulting from the restructuring charge taken in the second quarter
2001.
In the third quarter of 2000, a net $1.6 million tax benefit was recorded in
response to a change in German tax laws. Excluding this non-recurring tax
benefit, the effective tax rate for the third quarter of 2000 was 41.5%, which
included the impact of increasing the estimated full-year tax rate to 38.5%.
The change in estimated tax rates in both years was made in response to the
Company's then current projected geographic mix of income. Excluding unusual
items, the full year effective tax rate in 2000 was 36.4%.
Equity in net income of affiliated companies
--------------------------------------------
The contribution to earnings from Daikyo Seiko, Ltd., a Japanese company in
which the Company has a 25% ownership interest, and the Company's Mexican
affiliates was negligible in both the current and prior year quarter. For the
nine-month period, Daikyo's results trail the prior year, principally due to
higher depreciation and other costs connected with a recently completed plant
upgrade.
Page 15
Management's Discussion and Analysis of Financial Condition and
----------------------------------------------------------------
Results of Operations for the Three and Nine Months ended September 30, 2001
----------------------------------------------------------------------------
versus Comparable 2000 periods(continued).
------------------------------------------
Net Income
----------
Net income for the third quarter of 2001 was $5.9 million, or $.41 per share,
compared to $4.6 million, or $.32 per share in the third quarter 2000. Net
income for the 2001 third quarter includes a $1.7 million or $.12 per share
restructuring credit on the sale of a Puerto Rico manufacturing plant held for
sale from the 2000 restructuring program. Third quarter 2000 net income includes
a $1.6 million, or $.11 per share, one-time tax benefit. Excluding these
non-recurring items, net income was $4.2 million, or $.29 per share, in the 2001
quarter, compared to $.21 per share in the prior year. Average common shares
outstanding were 14.3 million in both periods.
For the nine-month period, 2001 net income was $14.4 million, or $1.00 per share
compared to $14.7 million or $1.02 per share. Net income for the 2001 period
includes an $.08 per share net restructuring charge. In the 2000 period, net
income included an $.11 per share one-time tax benefit. Excluding these items,
net income per share was $1.08 per share, compared to $.91 per share in the
prior year. Average common shares outstanding for the nine-month period of 2001
were 14.3 million, compared with 14.4 million in 2000.
FINANCIAL CONDITION
-------------------
Working capital at September 30, 2001 was $82.5 million compared with $93.8
million at December 31, 2000. The working capital ratio at September 30, 2001
was 1.8 to 1. Accounts receivable increased significantly, reflecting the
increase in third quarter 2001 sales levels versus fourth quarter 2000. Days
sales outstanding increased slightly since the prior year. Cash flows from
operations are lower than prior year nine month results, largely as a result of
the lower fourth quarter 2000 sales levels.
For the nine-month period, capital spending was $34.9 million, primarily for
facility expansions at two European plants, equipment upgrades in the Device
Product Development segment, and costs associated with an enterprise resource
planning initiative. Full year 2001 capital spending is projected to be
approximately $53 million. The Company paid cash dividends totaling $7.7 million
($0.54 per share) during the nine months of 2001.
Debt as a percentage of total invested capital at September 30, 2001 was 51.7%
compared with 49.2% at December 31, 2000. Total debt increased $21 million to
$220 million. The increase in debt resulted from capital spending and dividend
payments in excess of operating cash flows. Total shareholder's equity was
$204.1 million at September 30, 2001 compared to $204.8 million at December 31,
2000.
Page 16
Management's Discussion and Analysis of Financial Condition and
----------------------------------------------------------------
Results of Operations for the Three and Nine Months ended September 30, 2001
----------------------------------------------------------------------------
versus Comparable 2000 periods(continued).
------------------------------------------
The Company believes its financial condition and current capitalization provide
sufficient flexibility to meet future cash flow requirements.
Accounting Changes
------------------
The Company adopted Statement of Financial Accounting Standards (SFAS) No. 133,
"Accounting for Derivative Financial Instruments and Hedging Activities", as
amended, on January 31, 2001. This accounting standard requires the Company to
recognize all derivatives as either assets or liabilities and measure those
instruments at fair value as of the balance sheet date. The change in fair value
of a derivative designated and qualified as part of a hedging transaction is
generally matched with the recognition of the items being hedged. At the
adoption date, the Company had four interest rate swap agreements in effect and
recorded a $0.3 million charge to other comprehensive income. The swaps hedge
cash flow risk associated with interest payments on variable rate debt. This
charge increased to $0.4 million at September 30, 2001 reflecting the maturity
of three of the swap agreements and current market valuations. Amounts recorded
in comprehensive income are recognized in net income in the period when the
hedged interest payment affects net income.
In July 2001, the Financial Accounting Standards Board issued SFAS No. 141
"Business Combinations", and SFAS No. 142, "Goodwill and Other Intangible
Assets".
SFAS 141 supercedes Accounting Principles Board Opinion No. 16, "Business
Combinations". SFAS 141 requires that the purchase method of accounting be used
for all business combinations initiated after June 30, 2001. In addition, SFAS
141 establishes specific criteria for identifying intangible assets that must be
recognized separately from goodwill and establishes disclosure requirements for
the primary reasons for a business combination and the allocation of the
purchase price paid to the assets acquired and liabilities assumed.
SFAS 142 supercedes APB 17, "Intangible Assets". SFAS 142 eliminates the current
requirement to amortize goodwill and indefinite-lived intangible assets.
Instead, goodwill and intangible assets with indefinite lives will be tested for
impairment on at least an annual basis. The SFAS 142 impairment test begins with
an estimate of the fair value of the reporting unit or intangible asset.
Previous accounting principles utilized undiscounted cash flows to determine if
an impairment had occurred. The Company will adopt SFAS 142 on January 1, 2002,
and expects an impairment loss associated with the contract services segment to
arise due to the initial application of this statement. Management is continuing
to assess the provisions of this statement to determine the ultimate impact on
the Company's consolidated results of operations and financial position. Annual
goodwill amortization in 2001 will be approximately $2 million.
Page 17
Management's Discussion and Analysis of Financial Condition and
----------------------------------------------------------------
Results of Operations for the Three and Nine Months ended September 30, 2001
----------------------------------------------------------------------------
versus Comparable 2000 periods(continued).
------------------------------------------
In August 2001, the Financial Accounting Standards Board issued SFAS 144,
"Accounting for the Impairment of Long-Lived Assets". SFAS 144 supercedes SFAS
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of" and APB Opinion No. 30, "Reporting the Results of
Operations - Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events". SFAS 144 retains the
requirements of SFAS 121 whereby an impairment loss should be recognized if the
carrying value of the asset is not recoverable from its undiscounted cash flows.
This loss is included in income from continuing operations before income taxes.
SFAS 144 eliminates goodwill from its scope, therefore it does not require, as
SFAS 121 does, goodwill to be allocated to the long-lived assets. SFAS 144
broadens the scope of APB 30 provisions for the presentation of discontinued
operations to include a component of an entity. The statement requires that a
component of an entity that is sold or is considered held for sale must be
presented as a discontinued operation. The statement is effective for fiscal
years beginning after December 15, 2001, with early adoption permitted.
Management is currently assessing the provisions of this statement to determine
their impact on the Company's consolidated results of operations and financial
position.
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.
Forward-Looking Information
---------------------------
Certain statements in this report, including management's discussion and
analysis, that are not historical are forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. The words
"estimate", "expect", "intend", "believe" and similar expressions are intended
to identify forward-looking statements. These forward-looking statements involve
known and unknown risks and uncertainties. Many factors could cause the actual
results, performance or achievements of the Company to be materially different
from any future results, performance or achievements that may be expressed or
implied by such forward-looking statements, including but not limited to
(1)sales demand, (2) the timing and success of customers' projects, (3)
competitive pressures, (4) the strength or weakness of the U.S. dollar, (5)
inflation, (6) the cost of raw materials, (7) continued cost-improvement
programs, (8) statutory tax rates and (9) significant asset dispositions. The
Company does not intend to update these forward-looking statements.
Page 18
Management's Discussion and Analysis of Financial Condition and
----------------------------------------------------------------
Results of Operations for the Three and Nine Months ended September 30, 2001
----------------------------------------------------------------------------
versus Comparable 2000 periods(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 19
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 September 30, 2001.
Page 20
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)
Linda R. Altemus
October 19, 2001 /s/ -------------------------------------
Date Vice President, Finance and Administration
INDEX TO EXHIBITS
Exhibit
Number
(2) None.
(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).
(10)(a) Fourth Amendment dated as of July 13, 2001 to a Credit Agreement dated
July 26, 2000 among the Company, the direct and indirect subsidiaries
of the Company listed on the signature pages thereto, the several
banks and other financial institutions parties to the Credit Agreement
and PNC Bank, National Association, as Agent for the Banks.
(11) Not Applicable.
(15) None.
(18) None.
(19) None.
(22) None.
(23) Not Applicable.
(24) None.
(27) None.
(99) None.
F - 1
EX-10
2
exhibit10a.txt
EXHIBIT 10A FOURTH AMENDMENT PNC BANK
EXHIBIT (10)(a)
FOURTH AMENDMENT
FOURTH AMENDMENT, dated as of July 13, 2001, among WEST PHARMACEUTICAL
SERVICES, INC., a Pennsylvania corporation (the "Company"), the direct and
indirect subsidiaries of the Company listed on the signature pages hereto
(together with the Company, collectively, the "Borrowers"), the several banks
and other financial institutions parties to the Credit Agreement (as hereinafter
defined) (collectively, the "Banks"), and PNC BANK, NATIONAL ASSOCIATION, as
Agent for the Banks (in such capacity, the "Agent").
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, the Borrowers, the Banks and the Agent are parties to a Credit
Agreement, dated as of July 26, 2000 (as heretofore amended, supplemented or
otherwise modified, the "Credit Agreement");
WHEREAS, pursuant to Section 2.14(d) of the Credit Agreement, the Borrowers
have requested an extension of the 364 Day Commitments under the Credit
Agreement from July 24, 2001 until July 22, 2002;
WHEREAS, each of the Banks other than those listed on Schedule II hereto
(those Banks listed on Schedule II hereto, collectively, the "Declining Banks"),
has agreed to extend its 364 Day Commitment until July 22, 2002 on the terms and
subject to the conditions set forth herein; and
WHEREAS, Banks holding more than 51% of the 364 Day Commitments have agreed
to extend their 364 Day Commitment on the terms described herein, including that
the Applicable Margin be amended as provided herein.
NOW, THEREFORE, in consideration of the foregoing and for other
consideration, the receipt and sufficiency of which is hereby acknowledged, the
parties hereto, intending to be legally bound, hereby agree as follows:
1. Defined Terms. Unless otherwise defined herein, terms defined in the
Credit Agreement are used herein as therein defined.
2. Extension of 364 Commitment. Effective on and as of July 25, 2001, the
364 Day Commitments of each of the Banks other than the Declining Banks shall be
extended until July 22, 2002. As provided in Section 2.14(d) of the Credit
Agreement, on July 24, 2001, the Borrowers shall pay to each Declining Bank the
principal amount of the 364 Day Loans and all interests, fees and other amounts
owed to such Declining Bank with respect to the 364 Day Facility.
3. Amendments to Credit Agreement.
------------------------------
(a) Effective on and as of July 25, 2001, the definition of Applicable
Margin contained in Section 1.1 of the Credit Agreement is hereby amended by
deleting the table set forth therein and inserting in lieu thereof the
following:
Level Leverage Ratio 364 Day Facility Five Year Facility
--------------------------------------------------------------------------------
I Less than or equal to 0.725% 0.675%
0.35 to 1.0
II Less than or equal to 0.45 0.825% 0.775%
to 1.0 but greater than
0.35 to 1.0
III Greater than 0.45 to 1.0 1.05% 1.0%
(b) Effective on and as of July 25, 2001, the definition of Facility Fee
Rate contained in Section 1.1 of the Credit Agreement is hereby amended by
deleting the table set forth therein and inserting in lieu thereof the
following:
Level Leverage Ratio 364 Day Facility Five Year Facility
--------------------------------------------------------------------------------
I Less than or equal to 0.15% 0.20%
0.35 to 1.0
II Less than or equal to 0.45 0.175% 0.225%
to 1.0 but greater than
0.35 to 1.0
III Greater than 0.45 to 1.0 0.20% 0.25%
(c) Effective on and as of July 25, 2001, Schedule I to the Credit
Agreement is hereby deleted in its entirety and the Schedule I attached hereto
is hereby inserted in lieu thereof.
4. Representations and Warranties. The Borrowers hereby represent and
warrant to the Banks and the Agent that:
(a) There exists no Default or Event of Default under the Credit Agreement
as amended hereby;
(b) The representations and warranties made in the Credit Agreement are
true and correct in all material respects on and as of the date hereof as if
made on and as of the date hereof; and
(c) ______ The execution and delivery of this Amendment by and on behalf of
the Borrowers has been duly authorized by all requisite action on behalf of the
Borrowers and this Amendment constitutes the legal, valid and binding obligation
of the Borrowers, enforceable against them in accordance with its terms, except
as enforceability may be limited by applicable bankruptcy, insolvency,
fraudulent conveyance, reorganization, moratorium or similar laws affecting the
enforcement of creditors' rights generally and by general equitable principles
(whether enforcement is sought by proceedings in equity or at law).
5. Effectiveness; Declining Banks. This Amendment shall become effective on
the date on which the Agent shall have received (a) counterparts hereof duly
executed by the Borrowers and each Bank that is extending its 364 Day
Commitment, (b) an extension fee for the benefit of each Bank that is extending
its 364 Day Commitment in the amount of 10 basis points (0.10%) on the amount of
such Bank's 364 Day Commitment and (c) for the account of PNC Capital Markets,
Inc., such arrangement fees as shall have been agreed to with the Borrowers.
6. Limited Effect. Except as expressly amended by this Amendment, the
Credit Agreement shall continue to be, and shall remain, unaltered and in full
force and effect in accordance with its terms and the Borrowers hereby confirm
all of the provisions of the Credit Agreement and the other Loan Documents.
7. Release. Recognizing and in consideration of certain of the Banks
extending their 364 Day Commitments, each of the Borrowers hereby waives and
releases all of the Banks and the Agent and their officers, attorneys, agents,
and employees from any liability, suit, damage, claim, loss or expense of any
kind or nature whatsoever and howsoever arising that such Borrower ever had or
now has against any of them arising out of or relating to any Bank's or the
Agent's acts or omissions with respect to this Amendment, the Credit Agreement,
the other Loan Documents or any other matters described or referred to herein or
therein.
8. Miscellaneous.
(a) Expenses. Each of the Borrowers agrees to pay all of the Agent's
reasonable out-of-pocket expenses incurred in connection with the preparation,
negotiation and execution of this Amendment and the other documents executed in
connection herewith, including, without limitation, the reasonable fees and
expenses of Ballard Spahr Andrews & Ingersoll, LLP.
(b) Governing Law. This Amendment shall be governed by and construed in
accordance with the laws of the Commonwealth of
Pennsylvania.
(c) Successor and Assigns. The terms and provisions of this Amendment shall
be binding upon and shall inure to the benefit of the Borrowers, the Agent and
the Banks and their respective successors and assigns.
(d) Counterparts. This Amendment may be executed in one or more
counterparts, each of which shall be deemed to be an original, and all of which
shall constitute one and the same instrument.
(e) Headings. The headings of any paragraph of this Amendment are for
convenience only and shall not be used to interpret any provision hereof.
(f) Modifications. No modification hereof or any agreement referred to
herein shall be binding or enforceable unless in writing and signed on behalf of
the party against whom enforcement is sought.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed and delivered by their proper and duly authorized officers as of
the day and year first above written.
WEST PHARMACEUTICAL SERVICES, INC.
By: ____________________________
Name: ____________________________
Title: ___________________________
WEST PHARMACEUTICAL SERVICES
OF FLORIDA, INC.
By: ____________________________
Name: ____________________________
Title: ___________________________
WEST PHARMACEUTICAL SERVICES
LAKEWOOD, INC.
By: ____________________________
Name: ____________________________
Title:____________________________
WEST PHARMACEUTICAL SERVICES
GROUP LIMITED
By: ____________________________
Name: ____________________________
Title:____________________________
PACO LABORATORIES, INC.
By: ____________________________
Name: ____________________________
Title:____________________________
WEST PHARMACEUTICAL SERVICES
CANOVANAS, INC.
By: ____________________________
Name: ____________________________
Title:____________________________
WEST PHARMACEUTICAL SERVICES
OF DELAWARE, INC.
By: ____________________________
Name: ____________________________
Title:____________________________
WEST PHARMACEUTICAL SERVICES
VEGA ALTA, INC.
By: ____________________________
Name: ____________________________
Title:____________________________
WEST PHARMACEUTICAL
CLEVELAND, INC.
By: ____________________________
Name: ____________________________
Title:____________________________
PNC BANK, NATIONAL ASSOCIATION,
as a Bank and as Agent
By: ____________________________
Name: ____________________________
Title:____________________________
FIRST UNION NATIONAL BANK
By: ____________________________
Name: ____________________________
Title:____________________________
DRESDNER BANK, AG, NEW YORK AND
GRAND CAYMAN BRANCHES
By: ____________________________
Name: ____________________________
Title:____________________________
By: ____________________________
Name: ____________________________
Title:____________________________
NATIONAL CITY BANK
By: ____________________________
Name: ____________________________
Title:____________________________
THE CHASE MANHATTAN BANK
By: _____________________________
Name:_____________________________
Title_____________________________
MELLON BANK, N.A.,
By: ____________________________
Name: ____________________________
Title:____________________________
SCHEDULE I
BANKS AND COMMITMENT INFORMATION
Bank and Lending Office(s) Commitments
364 Day Five Year Swing Line
----------------------------------------------
PNC Bank, National Association $14,444,444.45 $15,555,555.55 $15,000,000
1000 Westlakes Dr., Suite 200
Berwyn, PA 19312
Attention: Frank Pugliese
Facsimile: 610-725-5799
First Union National Bank $10,833,333.33 $11,666,666.67 $0
1339 Chestnut Street
12th Floor, PA 4830
Philadelphia, PA 19107
Attention: Jeanette Griffin
Facsimile: 215-973-4156
Dresdner Bank AG, New York $0 $11,666,666.67 $0
and Grand Cayman Branches
75 Wall Street
New York, NY 10005
Attention: Richard Morris
Facsimile: 212-429-2524
National City Bank $9,629,629.63 $10,370,370.37 $0
One South Board Street, 13th Floor
Philadelphia, PA 19107
Attention: Thomas McDowell
Facsimile: 267-256-40001
The Chase Manhattan Bank $0 $10,370,370.37 $0
One Riverfront Plaza, Second Floor
Newark, NJ 07102
Attention: Thomas Conroy
Facsimile: 973-353-6158
Mellon Bank, N.A. $9,629,629.63 $10,370,370.37 $0
610 W. Germantown Pike, Suite 200
Plymouth Meeting, PA 19462
Attention: Frank McGrane
Facsimile: 610-941-4136
------------------------------------------------
Total Commitments $44,537,037.04 $70,000,000 $15,000,000
SCHEDULE II
DECLINING BANKS
Dresdner Bank, AG, New York and Grand Cayman Branches
The Chase Manhattan Bank