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 JuneSeptember 30, 2000
---------------
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 offices)
23-1210010
----------------------
(I.R.S. Employer
Identification Number)
19341-0645
----------------------
(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 .
--- ---
JuneSeptember 30, 2000 -- 14,359,136
-------------------------------------------------------------------14,318,136
- --------------------------------------------------------------------------------
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 JuneSeptember 30, 2000
Page
-----
Part I - Financial Information
Item 1. Financial Statements
Consolidated Statements of Income for the
Three and SixNine Months ended JuneSeptember 30, 2000
and JuneSeptember 30, 1999 3
Condensed Consolidated Balance Sheets at
JuneSeptember 30, 2000 and December 31, 1999 4
Condensed Consolidated Statements of Cash Flows
for the SixNine Months ended JuneSeptember 30, 2000
and JuneSeptember 30, 1999 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 1011
Item 3. Quantitative and Qualitative Disclosure
about Market Risk 1416
Part II - Other Information
Item 1. Legal Proceedings 1417
Item 2. ChangeChanges in Securities and Use of Proceeds 1417
Item 3. Defaults Upon Senior Securities 1417
Item 4. Submission of Matters to a Vote of
Security Holders 1517
Item 6. Exhibits and Reports on Form 8-K 1617
SIGNATURES 1718
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 SixThree Months Ended JuneNine Months Ended
Sept. 30, 2000 JuneSept, 30, 1999 JuneSept. 30, 2000 JuneSept. 30, 1999
-------------- -------------- -------------- --------------- --------------- ------------- --------------
Net sales ............................ $112,700........................ $ 104,500 100% $124,400$115,100 100% $220,400$ 324,900 100% $238,600$353,700 100%
Cost of goods and services sold....... 84,500sold .. 79,900 76 80,800 70 243,900 75 84,600 68 164,000 74 164,400245,200 69
-------------- --------------- --------------- ------------- -----------------------------
Gross profit ...................... 28,200.................. 24,600 24 34,300 30 81,000 25 39,800 32 56,400 26 74,200108,500 31
Selling, general and
administrative expenses ........... 17,000 15 19,700....... 16,500 16 34,40019,200 17 50,900 16 36,700 1555,900 16
Other (income) expense, net....................net ...... (200) -- (300) -- 200 -- -- 300 --
400 -- 300 --
--------------- --------------- --------------------------- -------------- -------------- --------------
Operating profit .................. 11,200 10 19,800 16 21,600 10 37,200 16.............. 8,300 8 15,400 13 29,900 9 52,600 15
Interest expense ..................... 3,400................. 3,200 3 2,8002,900 2 6,4009,600 3 4,8007,700 2
--------------- --------------- --------------------------- -------------- -------------- --------------
Income before income taxes
and minority interests ........... 7,800 7 17,000 14 15,200 7 32,400 14....... 5,100 5 12,500 11 20,300 6 44,900 13
Provision for income taxes ........... 3,000 3 6,600....... 500 1 4,000 4 6,200 2 16,500 5 5,700 3 12,500 6
Minority interests ................... 100............... -- -- -- -- 200 -- 100 --
--------------- --------------- --------------------------- -------------- -------------- --------------
Income from consolidated operations 4,7004,600 4% 10,400 8% 9,3008,500 7% 13,900 4% 19,80028,300 8%
--- --- --- ---
Equity in net income of
affiliated companies ............. 300.......... -- 100 800 100200
-------- -------- ----------------- --------
Net income ......................................... $ 5,0004,600 $ 10,4008,600 $ 10,10014,700 $ 19,90028,500
-------- -------- ----------------- --------
Net income per share:
Basic .................................................... $ 0.350.32 $ 0.700.58 $ 0.701.02 $ 1.331.91
Assuming dilution ............................. $ 0.350.32 $ 0.690.57 $ 0.701.02 $ 1.321.89
-------- -------- ----------------- --------
Average common shares outstanding ....... 14,463 14,945 14,487 15,01714,337 14,898 14,437 14,972
Average shares assuming dilution ........ 14,465 15,043 14,49514,337 15,074 14,439 15,113
See accompanying notes to consolidated financial statementsstatements.
Page 4
West Pharmaceutical Services, Inc. and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
Unaudited
JuneSept. 30, Dec. 31,
2000 1999
ASSETS --------- --------
ASSETS
Current assets:
Cash, including equivalents .................. $ 37,30041,600 $ 45,300
Accounts receivable ................ 69,800.................. 67,800 74,600
Inventories ........................ 43,700.......................... 41,600 42,100
Current deferred income tax benefits . 7,200 7,300
Other current assets ............... 20,100................. 24,700 15,400
-------- --------
Total current assets ........................ 178,100..................... 182,900 184,700
-------- --------
Net property, plant and equipment ........... 233,100........ 235,700 227,600
Investments in affiliated companies ......... 21,700...... 21,300 20,200
Goodwill .................................... 63,200................................. 60,500 66,500
Deferred charges and other assets ........... 59,700........ 61,600 52,800
-------- --------
Total Assets ................................ $555,800............................. $562,000 $551,800
-------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt ...... $ 2,100500 $ 2,200
Notes payable ...................... 9,800........................ -- 27,400
Accounts payable ................... 22,600..................... 25,700 25,500
Accrued expenses:
Salaries, wages, benefits ....... 12,600.......... 10,500 15,600
Income taxes payable ............ 11,900............... 10,800 5,500
Other ........................... 27,600.............................. 30,600 27,800
-------- --------
Total current liabilities ................... 86,600................ 78,100 104,000
-------- --------
Long-term debt, excluding current portion ... 172,600192,000 141,500
Deferred income taxes ....................... 47,200.................... 46,600 48,000
Other long-term liabilities ................. 25,100.............. 25,000 26,300
Minority interests .......................... 800....................... 900 800
Shareholders' equity ........................ 223,500..................... 219,400 231,200
-------- --------
Total Liabilities and Shareholders' Equity .. $555,800$562,000 $551,800
-------- --------
--------See accompanying notes to consolidated financial statements
See accompanying notes to consolidated financial statements.
Page 5
West Pharmaceutical Services, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(in thousands)
SixNine Months Ended
JuneSept. 30, JuneSept. 30,
2000 1999
-------- --------
Cash flows from operating activities:
Net income, plus net non-cash items ......................... $ 21,10031,500 $ 35,00048,100
Changes in assets and liabilities ................. 3,000 (4,700)........... 4,600 (5,100)
-------- --------
Net cash provided by operating activities .................. 24,100 30,300...... 36,100 43,000
-------- --------
Cash flows from investing activities:
Property, plant and equipment acquired ............ (29,500) (19,500)........ (42,300) (32,600)
Proceeds from sale of assets ...................... --.................. 400 100
Payment for acquisitions, net of cash acquired .... (1,000) (15,900)(2,000) (17,200)
Customer advances, net of repayments .............. (1,900) (1,400)............. (800) 100
-------- --------
Net cash used in investing activities ...................... (32,400) (36,700)............. (44,700) (49,600)
-------- --------
Cash flows from financing activities:
Proceeds from senior debt ............................................... -- 100,000
Net borrowings (repayments) under revolving
credit agreements ................................ 31,000 (71,600)............................ 40,700 (77,800)
Repayment of other long-term debt ................. (14,500) (900).............. (15,500) (1,300)
Notes payable, net ................................ (500) 1,600............................. -- 7,200
Dividend payments ................................. (5,000) (4,800).............................. (7,400) (7,200)
Sale of common stock, net ............................................... 600 1,6002,900
Purchase of treasury stock ........................ (9,900)..................... (10,700) (9,000)
-------- --------
Net cash provided by financing activities .................. 1,700 16,900activities.......... 7,700 14,800
-------- --------
Effect of exchange rates on cash ........................... (1,400) (2,200).................. (2,800) (2,000)
-------- --------
Net (decrease) Net(decrease)increase in cash, including equivalents ..... $ (8,000)(3,700) $ 8,3006,200
-------- --------
See accompanying notes to consolidated financial statements
Page 6
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 six-monthnine-month period ended
JuneSeptember 30, 2000 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 1999 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 JuneSeptember 30, 2000 and the related unaudited Consolidated
Statements of Income for the three and six-monthnine-month periods then ended, and
the unaudited Condensed Consolidated Statement of Cash Flows for the
six-monthnine-month period then ended and for the comparative period in 1999 contain
all adjustments, consisting only of normal recurring accruals, necessary to
present fairly the financial position as of JuneSeptember 30, 2000 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,
except that taxes applicable to operating results in Brazil and prior year
adjustments, if any, are recorded as identified.
The effective tax rate for 2000 is estimated at 37.5%38.5%, a .5%an increase of 1.0%
over the tax rate used for the first quartersix months of 2000. This change was
made in response to the currently projected geographic mix of earnings andearnings. The
1999 full year effective tax rate (excluding unusual items) was 37.5%.
In the potential eliminationthird quarter of 2000, a net $1,600 tax benefit was recorded in
response to a change in local tax laws in Germany that provided an
additional tax benefit from the 1997 reorganization of the German
subsidiaries. The 1999 third quarter included a $700 tax benefit from the
settlement of a U.S.prior years' tax benefit on foreign sales corporations.appeal.
Page 7
West Pharmaceutical Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
(continued)
2. Inventories at JuneSeptember 30, 2000 and December 31, 1999 are
summarized as follows:
6/30/00 12/31/99
------- -------
Finished goods $16,000 $14,000
Work in process 14,400 12,800
Raw materials . 13,300 15,300
------- -------
$43,700
9/30/00 12/31/99
------- --------
Finished goods $15,300 $14,000
Work in process 13,500 12,800
Raw materials 12,800 15,300
------- -------
$41,600 $42,100
------- -------
------- -------
3. A summaryThe carrying value of property, plant and equipment at
JuneSeptember 30, 2000 and December 31, 1999 is presented in the following table:
6/30/00 12/31/99
-------- --------
Property, plant and equipment $500,500 $489,200
Less accumulated depreciation
and amortization .......... 267,400 261,600
-------- --------
Net property, plant
and equipment ............. $233,100determined as
follows:
9/30/00 12/31/99
-------- --------
Property, plant and equipment $505,200 $489,200
Less accumulated depreciation
and amortization .......... 269,500 261,600
-------- --------
Net property, plant
and equipment ............. $235,700 $227,600
-------- --------
-------- --------
4. For the three and six months ended June 30, 2000 and 1999, the
Company's comprehensive income (loss) is as follows:
Three Months Ended Six Months Ended
6/30/00 6/30/99 6/30/00 6/30/99
-------- ------- ------- -------
Net income ............. $ 5,000 $10,400 $10,100 $ 19,900
Foreign currency
translation adjustments (500) (4,600) (4,200) (13,200)
-------- ------- -------- --------
Comprehensive income.... $ 4,500 $ 5,800 $ 5,900 $ 6,700
-------- ------- -------- --------
-------- ------- -------- --------
Page 8
West Pharmaceutical Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
(Continued)
4. For the three and nine months ended September 30, 2000 and
1999, the Company's comprehensive income (loss) is as follows:
Three Months Ended Nine Months Ended
9/30/00 9/30/99 9/30/00 9/30/99
-------- -------- -------- --------
Net income ............. $ 4,600 $ 8,600 $ 14,700 $ 28,500
Foreign currency
translation adjustments (5,100) 2,600 (9,300) (10,600)
-------- -------- -------- --------
Comprehensive (loss)income $ (500) $ 11,200 $ 5,400 $ 17,900
-------- -------- -------- --------
-------- -------- -------- --------
5. Net sales to external customers and operating profit (loss) by
operating segment for the three and sixnine months ended JuneSeptember 30,
2000 and JuneSeptember 30, 1999 are as follows:
Three Months Ended Six Months Ended
June 30 June 30
Net Sales: 2000 1999 2000 1999
- ---------- -------- -------- -------- --------
Device product development $ 94,600 $100,800 $186,700 $194,200
Contract services ........ 18,100 23,400 33,400 44,000
Drug delivery research
and development ........ 300 200 700 400
Corporate and unallocated (300) -- (400) --
-------- -------- -------- --------
Consolidated Total ....... $112,700 $124,400 $220,400 $238,600
Three Months Ended Nine Months Ended
September 30 September 30
Net Sales: 2000 1999 2000 1999
---------- -------- -------- -------- --------
Device product development $ 86,800 $ 92,700 $273,500 $286,900
Contract services ........ 17,300 21,900 50,700 65,900
Drug delivery research
and development ........ 300 500 1,000 900
Corporate and unallocated. 100 -- (300) --
-------- -------- -------- --------
Consolidated Total ....... $104,500 $115,100 $324,900 $353,700
-------- -------- -------- --------
-------- -------- -------- --------
Page 9
West Pharmaceutical Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
(Continued)
Three Months Ended Nine Months Ended
September 30 September 30
Operating Profit (Loss): 2000 1999 2000 1999
-------------------------- -------- -------- -------- --------
Device product development $ 16,000 $ 20,800 $ 56,200 $ 68,300
Contract services ........ (2,000) 1,400 (9,400) 5,400
Drug delivery research
and development ........ (2,600) (2,200) (7,300) (5,200)
Corporate and unallocated (3,100) (4,600) (9,600) (15,900)
-------- -------- -------- --------
Consolidated Total ....... $ 8,300 $ 15,400 $ 29,900 $ 52,600
-------- -------- -------- --------
-------- -------- -------- --------
Three Months Ended Six Months Ended
June 30 June 30
Operating Profit (Loss): 2000 1999 2000 1999
- ------------------------ -------- -------- -------- --------
Device product development $ 20,400 $ 26,000 $ 40,200 $ 47,500
Contract services ........ (3,800) 1,800 (7,400) 4,000
Drug delivery research
and development ........ (2,400) (1,600) (4,700) (3,000)
Corporate and unallocated
items .................. (3,000) (6,400) (6,500) (11,300)
-------- -------- -------- --------
Consolidated Total ....... $ 11,200 $ 19,800 $ 21,600 $ 37,200
-------- -------- -------- --------
-------- -------- -------- --------
Compared with December 31, 1999, there were no material changes in the
amount of assets as of JuneSeptember 30, 2000 for any operating segment.
6. Common stock issued at JuneSeptember 30, 2000 was 17,165,141 shares, of
which 2,806,0052,847,005 shares were held in treasury. Dividends of $.17 per
common share were paid in the secondthird quarter of 2000 and a dividend of
$.17$.18 per share payable August 1, 2000 to holders of record on July 19,October 18, 2000 was
declared on June 20,August 1, 2000.
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
Page 9
West Pharmaceutical Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
(Continued)
accordance with applicable regulatory requirements, the Company
believes the accrued liability of $1,400 at JuneSeptember 30, 2000 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 January 2000, the Company paid $1 million$1,000 to acquire additional
ownership in a firm involved in developing genotyping technology. As
of June 30, 2000 the Company's cumulative investment in this firm is
$2.3 million,$2,300 representing a 12.8% ownership interest. Upon the satisfaction
of certain future milestones, the Company is conditionally committed
to investing up to an additional $1.3
million,$1,300 which would result in a
cumulative ownership percentage of up to 19.95%.
Page 10
West Pharmaceutical Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
(Continued)
9. In July 2000, the Company signed a $135,000 revolving credit agreement
with a group of six banks. The credit agreement consists of a $70,000
five-year revolving credit facility and a $65,000 364-day line of
credit. Interest cost on these facilities will be charged at London
Inter-Bank Offering Rates (LIBOR) plus a margin dependent on the
Company's debt to total capital ratio. The interest rate on the
initial borrowings under these facilities was 7.4%. Commitment fees on
these credit agreements also fluctuate according to the Company's debt
to total capital ratio with a maximum commitment fee of 17.5 basis
points on the 364-day facility and 20.0 basis points on the five-year
facility.
As of September 30, 2000, the Company had borrowed $44,300 directly
under the five-year facility. These borrowings were recorded as
long-term debt. Additional notes payable of $20,800 under other
uncommitted facilities were also classified as long-term debt, as the
Company has the intent and ability to re-finance these obligations on
a long-term basis under the 5-year facility.
Page 11
Item 2.
Management's Discussion and Analysis of Financial Condition and
Results of Operations.
- -----------------------------------------------------------------------------------------------------------------------------------
Results of Operations for the Three and SixNine Months ended JuneSeptember
30, 2000 - ----------------------------------------------------------------------
versusVersus Comparable 1999 periods.Periods
- ---------------------------------------------------------------------------------------------------
Net Sales
- ------------
Net Sales for the secondthird quarter of 2000 were $112.7$104.5 million compared to $124.4$115.1
million reported in the secondthird quarter of 1999. At constant exchange rates, sales
for the secondthird quarter 2000 declined 5.9%5.2% versus the prior year quarter.
SecondThird quarter 2000 sales for the Device Product Development segment were $94.6$86.8
million, a decline of 1.9% at1.4% (at constant exchange rates, as compared to the second
quarterrates) from 1999 sales of 1999 which had an unusually high 10.5% growth rate.$92.7
million. Sales in domesticEuropean and Asian markets declinedgrew by approximately 6%10%, largely as a result of
increased demand in pre-filled syringe markets, the need for "clean products" in
Europe and economic recovery in certain Asian countries. This increase was
offset by low demand in domestic markets. Aggressive supply chain management,
including targeted inventory reductions, at
certain customers of some high margin products. Excludingand a lower-value product mix are the
plastic device
facilitylargest factors for the domestic decrease in the United Kingdom, sales to international markets increased by 4.5%
over the prior year quarter. The Company is transitioning its plastics
manufacturing plant in Lewes, England to a facility focused on producing medical
devices and multi-component consumer products. During the transition period,
this plant will be under-utilized.Device Product Development sales.
The Contract Services segment's resultssegment experienced another slow quarter. Third quarter
contract services sales were significantly below 1999's second
quarter. Sales were $18.1$17.3 million, $5.3down $4.6 million or 22.9% below secondcompared with the
third quarter 1999 levels.of 1999. The contract manufacturing and packaging unit continues
to experience a decline in volume over the prior yearyear. The current focus by
pharmaceutical companies on managing a reduced pipeline of new products, often
as a result of reducedmerger activities, has resulted in a reduction in the demand project cancellations and lower-than-anticipated market acceptance for
customers' products. Althoughoutsourcing, all of which directly impacts the contract services segment. The
Company is aggressively seeking new business, this segment operatesbut to date has not been
successful in extremely competitive markets. A returnconverting new customer contacts into orders. Competition is
aggressive and customers are often reluctant to profitability is not forecasted until at least the fourth quarter of 2000.change if their current supplier
has met their service needs.
Net sales for the first halfnine months of 2000 were $220.4$324.9 million, 7.6%8.1% lower than
reported net sales in the same period of 1999 and 4.1% lower1999. Measured at constant exchange
rates.rates, sales were 4.5% lower than in 1999. Excluding exchange rate variances,
Device Product Development sales were .4% higher.1% lower as strong resultsincreased demand in
international markets was offset by decreased sales in domestic markets.
Year-to-date Contract Services segment sales declined by 24.2%23.0% from the prior
year level, from the same causes as were stated above for the secondthird quarter
decrease.
Gross Profit
- ---------------
The secondthird quarter 2000 consolidated gross margin was 25.1%,23.5% compared with 32.0%29.8%
in third quarter 1999. Lower margins were reported in both the Device Product
Development and Contract Services segments. For the Device Product Development
segment, lower domestic sales volumes, lower-value product mix severance costs and low volume at the UK
plastic device facility, and the higher
cost of dollar-based raw materials to international operations negatively
impacted gross margins. LowFor the Contract Services segment, low demand and
contract cancellations and severance costs within the contract manufacturing and packaging unit
caused the Contract Services segment to operate below breakeven margins. The Company does not
expect the Contract Services segment to return to profitability in 2000.
Page 1112
Results of Operations and Financial Condition for the Three and SixNine Months Ended Juneended September
30, 2000 versusVersus Comparable 1999 periods, continuedPeriods
- ---------------------------------------------------------------------------------------------------------------------------------------
The consolidated gross profit margin for the six-month2000 nine-month period was 25.6%24.9%
compared with 31.1%30.7% in the same period of 1999. The year-to-date negative gross
margin of the Contract Services segment, largely from the contract manufacturing and packaging unit accounts forcaused the majority of
the decline in the profit margin. Year-to-date gross margins in the Device
Product Development segment also declined as a result of the lower demand for
high-value product mix in the domestic market and U.K. Plastics facility volume
reductions and severance costs, and the lower demand for high-value product mix in domestic
markets.costs.
Selling, General and Administrative Expenses
- --------------------------------------------------------
Selling, general and administrative expenses were down $2.7 million (13.1%(14.1%) as
compared with the secondthird quarter of 1999. HigherLower incentive based compensation
expenses, higher income on pension assets and the favorable impact of foreign
exchange rates on non-U.S. dollar expenses and
lower incentive based compensation expenses more than offset higher drug delivery
systemsystems research and development expenses, an additional month of
clinical services expenses,expenses. The research and severance costs in several segments. Drug
Delivery Systems costs were higher as the Company continues to advance the
development of several promising new products and interprets data from the Phase
I clinical trials for nasal morphine. The Company and a potential licensee are
in the due diligence process of negotiations which should leadeffort
has led to the Company's first
license agreement for several internally developed drug delivery products.system licensing agreement. This
agreement and related revenue recognition issues are discussed more fully under
the caption "Recently Issued Accounting Pronouncements".
For the six-monthnine-month period ending JuneSeptember 30, 2000, selling, general and
administrative expenses declined by $2.3$5.0 million versus the prior year. The same
factors that influenced the secondthird quarter comparisons also influenced the
year
to dateyear-to-date figures. In addition, 2000 results include a full 69 months of the
clinical services costsunit's expenses (acquired April 20, 1999), versus 2only 5 months
in 1999.
Other (income) expense
- ----------------------
For-----------------------------
In the secondthird quarter of 2000, foreign currency transaction losses and lossesan
equipment loss largely offset interest income on fixed asset disposals were offset by interest income.investments. The 1999 second quarter
contained higher fixed asset disposition losses as a resultnine-month
period of Y2K remediation
efforts. In addition, the six-month period for 2000 contains costs related to a one-time environmental action by
Brazilian customs which resulted in the destruction of raw material and finished
products which were imported into that country.
Interest Expense
and Equity in Affiliates
- -------------------------------------------------
Interest expense increased by $.6$.3 million over 1999 in the secondthird quarter
comparison ($1.61.9 million in the year-to-date comparison), largely due to
additional debt associated with stock repurchases under a one million share
buyback program announced in March of 1999. During 2000, 358,700399,700 shares have
been purchased at an average cost of $27.49$26.81 per share, bringing the total shares
repurchased under this program to 889,500.930,500. Higher interest rates and acquisition financingthe impact
of lower operating cash flow also contributed to the increase over the prior yearincreased interest expense,
for both the quarter and year-to-date periods.comparisons.
Page 1213
Results of Operations and Financial Condition for the Three and SixNine Months Ended Juneended September
30, 2000 versusVersus Comparable 1999 Periods
- -------------------------------------------------------------------
Taxes
- -------
In the third quarter of 2000, a net $1.6 million tax benefit was recorded in
response to a change in local tax laws in Germany that provided an additional
tax benefit from the 1997 reorganization of the German subsidiaries. The 1999
third quarter included a $0.7 million tax benefit from the settlement of a prior
years' tax appeal. Excluding the non-recurring benefit, the effective tax rate
for the third quarter of 2000 was 41.5%, which includes the impact of increasing
the estimated full-year tax rate to 38.5%. This increase is due to the change in
the expected geographic mix of estimated 2000 income. The tax rate in the third
quarter of 1999 was 37.4% excluding the non-recurring benefit. The effective tax
rate was 38.5% versus 38.2% for the nine-month periods continued
- --------------------------------------------------------------------ending September 30, 2000
and 1999, respectively, excluding these non-recurring benefits.
Equity in netNet income of affiliates increased by $0.3 million and by $0.7 million
versus the second quarter and six-month 1999 periods, respectively. These
increases were generatedAffiliated Companies
- -----------------------------------------------------------------
The contribution to earnings from increased sales and improved margins of Daikyo Seiko, Ltd., a Japanese company in
which the Company holds a 25% ownership interest.
Taxes
- -------
The tax rateinterest, and the Company's Mexican
affiliates was very small during the quarter. Daikyo reported lower sales and
profits during the quarter, after posting strong results in the quarter is 38% compared with 38.5% in the same periodfirst six months
of 1999. The estimated effective tax rate for 2000 is 37.5%, a .5% increase over
earlier estimates. The charge reflects expectations of the current geographic
mix of earnings and the potential elimination of a U.S. tax benefit on foreign
sales corporations. These factors largely offset the favorable impact of last
year's European tax reorganization. The 2000 estimated tax rate of 37.5% is
equal to 1999's full year rate on operations. Expected changes in the German tax
law will result in adjustment of deferred tax liabilities for subsidiaries in
that country in the period of enactment.2000.
Net Income
- ----------
Net income for the secondthird quarter 2000 was $5.0$4.6 million, or $.35$0.32 per share,
compared with net income of $10.4$8.6 million, or $.70$.58 per share, in the same period
of 1999. Excluding the non-recurring tax benefits noted above, third quarter
2000 earnings per share were $0.21 versus $0.53 in 1999. Average common shares
outstanding in the secondthird quarter of 2000 were 14.514.3 million compared with 14.9
million during secondthird quarter of 1999. The reduction in average common shares
outstanding is due to the Company's stock buyback program.
For the six-monthnine-month period, 2000 net income was $10.1$14.7 million, or $.70$1.02 per
share, compared with $19.9$28.5 million, or $1.33$1.91 per share, in 1999. Excluding the
non-recurring tax benefits, net income for the nine-month period was $13.1
million, or $0.91 per share, in 2000 versus $27.8 million, or $1.86 per share,
in 1999. Average common shares outstanding for the first sixnine months of 2000
were 14.514.4 million compared with 15.0 million in 1999.
Financial Position
- ------------------
Working capital at JuneSeptember 30, 2000 was $91.5$104.8 million compared with $80.7
million at December 31, 1999. The working capital ratio at JuneSeptember 30, 2000
was 2.12.3 to 1. The improvement in the working capital ratio is mostly due mostly to the
Company's completion of a new credit facility, replacingwhich provides the revolving credit agreement
expiring in August 2000 which allows itability to refinance
short-term notes payable on a long-term basis. In July 2000, the Company signed
a $135 million revolving credit agreement with a group of six banks. The credit
agreement consists of a $70 million five-year revolving credit facility and a
$65 million 364-day line of credit. Interest cost on these facilities will be
basedcharged on London Inter-Bank Offering Rates (LIBOR) plus a margin dependent on
Page 14
Results of Operations for the Three and Nine Months ended September
30, 2000 Versus Comparable 1999 Periods
- -------------------------------------------------------------------
the Company's debt to total capital ratio. The interest rate on the initial
borrowings under this facility was 7.4%. Commitment fees on these credit
agreements also fluctuate according to the Company's debt to total capital ratio
with a maximum commitment fee of 17.5 basis points on the 364-day facility and
20.0 basis points on the five-year facility. Debt as a percentage of total
invested capital at JuneSeptember 30, 2000 was 45.1%46.6% compared with 42.5% at December
31, 1999.
Page 13
Results of Operations and Financial Condition for the Three and Six
Months Ended June 30, 2000 versus Comparable 1999 periods, continued
- --------------------------------------------------------------------
For the six-monthnine-month period, funds generated from operations totaled $24.1$36.1 million
versus $30.3$43.0 million in the prior year period as a result of the lower net
income. Capital spending for the year-to-date 2000 period totaled $29.5increased to $42.3
million, coveringprimarily due to facility, maintenance and efficiency upgrades on
Device Product Development segment assets. Full year capital spending for 2000
is projected to be approximately $60.0 million. Other investment activity for
the six monthsnine-months of 2000 included a $1.0 million additional investment in a
genotyping technology company, and $1.9$1.0 million of spending on customer specific projects. Thepayment to acquire an exclusive
technology license, which will enable the Company paidto manufacture a patented
reconstitution device to deliver lyophilized drugs. Cash flow from financing
activities in the year-to-date 2000 period included cash dividends totaling $5.0$7.4
million ($0.340.51 per share) and repurchased$10.7 million of common stock at a total cost of $9.9 million (358,700repurchases (399,700
shares at an average price of $27.49$26.81 per share). These net cash outflows were
financed by $16.0through $25.2 million of increased net borrowings.
The Company believes its financial condition and current capitalization indicate
an abilityprovide
sufficient flexibility to finance substantial future growth.meet cash flow requirements in the future. On October
16, 2000, the Company announced that its Board of Directors had authorized
management to engage UBS Warburg LLC to review all of the Company's strategic
alternatives and identify opportunities to enhance shareholder value, which may
include disposition of assets or business combinations involving the Company.
Recently Issued Accounting Pronouncements
- -------------------------------------------------------------------------------------------------
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101, "Revenue Recognition in Financial Statements" (SAB 101). Among
other things, SAB 101 provides guidance for recording revenue related to
non-refundable, up-front fees received in connection with conveying licensing or
other intangible rights or for delivery of particular products or services. In
general, SAB 101 defers the recognition of revenue from such up-front payments
over any related service period. While SAB 101 has no impactDuring the third quarter of 2000, the Company
completed agreements with Innovative Drug Delivery Systems, Inc. ("IDDS")
granting IDDS exclusive rights to the Company's current year-to-date or historic earnings recognition fromtransmucosal drug delivery
technologies for the delivery of morphine and fentanyl, both well-known pain
medications, and midazolam, an anti-anxiety drug frequently administered prior
Page 15
Results of Operations for the Three and Nine Months ended September
30, 2000 Versus Comparable 1999 Periods
- -------------------------------------------------------------------
to surgery. In addition, the agreement grants an option on a fourth product,
morphine-6-glucuronide, for the treatment of pain and sedation. The agreements
provide for IDDS to make license, option and milestone payments to the Company
that could total up to $30 million through year 2004. West would also be
entitled to royalties on the sale of intangible rights, it may impactany licensed products that proceed through
commercialization. As of September 30, 2000 the Company had received
non-refundable license and option payments totaling $2.5 million from IDDS. In
compliance with SAB 101, the Company has deferred recognition of any up front licensingthe $2.5
million and other
fees that may result from licensingwill recognize this payment into income as the services under
related agreements currently being negotiated for
the Company's drug delivery technologies.are performed.
In July 2000, the Emerging Issues Task Force (EITF) of the Financial Accounting
Standards Board reached a final consensus on Issue 00-10 "Accounting for Shipping and
Handling Revenues and Costs". Issue 00-10 addresses the income statement
classificationpresentation of amounts charged to customers for shipping and handling. The EITF concluded that amounts billed to customers for shipping and
handling should be included in revenue, rather than netting the shipping revenue
against the related cost. For the Company, the reclassification of these
shipping costs will increase reported sales and cost of goods sold, with no
impact on reported gross profit amounts, however reported gross margin
percentages will decrease slightly. The
Company will adopt EITF 00-10 in the fourth quarter of 2000 and will restate prior periodsreclassify
shipping and handling costs to the cost of goods sold line. Currently the
Company nets these costs against sales. This reclassification will have no
impact on reported gross profit amounts.
In June 1998, the Financial Accounting Standards Board issued Statement No. 133
"Accounting for Derivative Financial Instruments and Hedging Activities".
Statement 133 was amended by Statement 137 in accordanceJuly 1999 and by Statement 138
issued in June 2000. Statement 133, as amended, 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. Derivative instruments
include interest rate swap agreements, forward exchange contracts and certain
options, including such items "embedded" within host contracts such as sales
agreements, leases, and supply contracts. The accounting for changes in the fair
value of a derivative depends on whether it has been designated and qualifies as
part of a hedging transaction. Generally, the timing of gain or loss recognition
in the income statement of such changes in fair value for a hedging instrument
is matched with the requirements.recognition of the item or risk being hedged. Changes in
fair value from derivative instruments with no hedging designation or purpose
are recognized immediately into earnings. The Company will adopt Statement 133,
as amended, as of January 1, 2001. Given the Company's current and anticipated
derivative activities, management does not believe the adoption of Statement 133
will have a material effect on the Company's consolidated financial position and
results of operations.
Page 16
Results of Operations for the Three and Nine Months ended September
30, 2000 Versus Comparable 1999 Periods
- -------------------------------------------------------------------
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.
Page 14
Results of Operations and Financial Condition for the Three and Six
Months Ended JuneAt September 30, 2000 versus Comparable 1999 periods, continued
- --------------------------------------------------------------------
At June 30, 2000 and December 31, 1999 the Company had threefour interest rate swap agreements in
effect, with an estimated fair value of less than $0.1 million. There
were noThe Company also
had two forward exchange contracts in effect at JuneSeptember 30, 2000. Statements concerning forecasted results, financial or otherwise, whichThe forward contracts
effectively hedge foreign currency commitments to purchase equipment. The fair
value of the forward contracts at September 30, 2000 was less than $0.1
million.
Certain statements in this report that are contained innot historical are forward-looking
statements within the above material, constitute "forward looking statements" thatmeaning 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.
The Company'sMany 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 differ
materially from thosebe expressed in anyor implied by such forward looking
statement and are
dependent on a number of factorsstatements, including but not limited to (1) sales demand, (2) the timing and
success of customers'customer's projects, (3) competitive pressures, (4) the strength or
weakness of the U.S. dollar, (5) inflation and (6) the cost of raw materials, successful
continuance of cost-improvement programs and statutory tax rates.materials.
The Company does not intend to update these forward-looking statements.
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 17
Part II - Other Information
Item 1. Legal Proceedings
-----------------
None.
Item 2. Changes in Securities and Use of Proceeds
-----------------------------------------
None.
Item 3. Defaults Upon Senior Securities
-------------------------------
None.
Page 15
Item. 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
(a) The Company held its annual meeting of
shareholders on April 25, 2000.
(c) Class I directors (with a term expiring in
2003) were elected by a vote of :
For Against
--- -------
William G. Little 9,950,719 86,736
William H. Longfield 9,960,808 76,648
Monroe E. Trout 9,960,102 77,353
Anthony Welters 9,960,966 76,491
Tenley E. Albright, John Conway, George W. Ebright, L.
Robert Johnson, John P. Neafsey, J. Roffe Wike, II and
Geoffrey F. Worden continued their term of office after the
meeting.
The appointment of PricewaterhouseCoopers LLP as the
Company's independent accountants for the year ending
December 31, 2000 was approved by a vote of 10,028,563 for
the appointment and 5,416 against, with 3,476 abstentions.None.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) See Index to Exhibits on pagepages F-1 and F-2 of this
Report.
(b) No reports on Form 8-K have been filed for the
quarter ended JuneSeptember 30, 2000.
Page 1618
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)
August 14,November 13, 2000 /s/ Anna Mae Papso
- --------------- --------------------------------------------------- -----------------------------------
Date (Signature)
Anna Mae Papso Corporate Vice President of Finance
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) Miscellaneous long term debt instruments and credit facility
agreements of the Company, under which the underlying authorized debt
is equal to less than ten percent of the total assets of the Company
and its subsidiaries on a consolidated basis, are not filed as
exhibits to this report pursuant to Section (b) (4) (iii) A of Item
601 of Reg S-K. The Company agrees to furnish to the Commission, upon
request, copies of any such unfiled instruments.
(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) Non-Qualified Deferred Compensation Plan(4) (b) Note Purchase Agreement dated as of April 8, 1999 among the Company
and several insurance companies.
(4) (c) Credit Agreement, dated as of July 26, 2000 among the Company, several
banks, and PNC Bank, N.A., as agent for Designated
Executive Officers, adopted August 30, 1994, reflecting
amendments effective on March 7, 1995, April 28, 1998 and
April 1, 2000.the banks.
(10)(b) Schedule of Agreements with Executive Officers. None.
(11) Not Applicable.
(12) Not Applicable.
(15) None.
(16) Not applicable.
(18) None.
(19) None.
(22) None.
(23) None.
(24) None.
(27) Financial Data ScheduleSchedule.
(99) None.
F - 1