SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For The Quarterly Period Ended March 31,June 30, 2002
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Commission File Number 1-8036
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WEST PHARMACEUTICAL SERVICES, INC.
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(Exact name of registrant as specified in its charter)
Pennsylvania 23-1210010
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number
101 Gordon Drive, PO Box 645,
Lionville, PA 19341-0645
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(Address of principal executive (Zip Code)
offices)
Registrant's telephone number, including area code 610-594-2900
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N/A
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Former name, former address and former fiscal year, if changed
since last report.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve months, and (2) has been subject to such filing
requirements for the past 90 days. Yes X . No .
--- ---
March 31,June 30, 2002 -- 14,422,57314,462,107
- --------------------------------------------------------------------------------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Page 2
Index
Form 10-Q for the
Quarter Ended March 31,June 30, 2002
Page
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Part I - Financial Information
Item 1. Financial Statements
Consolidated Statements of Income for the
Three Months and Six Months ended March 31,June 30, 2002
and March 31,June 30, 2001 3
Condensed Consolidated Balance Sheets at
March 31,June 30, 2002 and December 31, 2001 4
Consolidated Statement of Shareholders' Equity
at March 31,June 30, 2002 and December 31, 2001 5
Condensed Consolidated Statements of Cash Flows
for the ThreeSix Months ended March 31,June 30, 2002
and March 31,June 30, 2001 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 1213
Item 3. Quantitative and Qualitative Disclosure
about Market Risk 1517
Part II - Other Information
Item 1. Legal Proceedings 1618
Item 6. Exhibits and Reports on Form 8-K 1618
SIGNATURES 1719
Index to Exhibits F-1,
F-2
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 March 31,Six Months Ended
June 30, 2002 March 31,June 30, 2001 June 30, 2002 June 30, 2001
-------------- -------------- -------------- -------------
Net sales ........................................ $103,700$107,700 100% $ 99,300$100,500 100% $211,400 100% $199,800 100%
Cost of goods and services sold .................. 72,30076,700 71 70,900 71 149,000 70 69,800140,700 70
-------------- -------------- -------------- -------------
Gross profit .................................. 31,40031,000 29 29,600 29 62,400 30 29,50059,100 30
Selling, general and administrative expenses ..... 20,50021,800 20 18,20018,000 18 42,300 20 36,200 18
Restructuring charge.............................. - - 4,500 4 - - 4,500 2
Other (income) expense, net ...................... (1,800) (2) 100(600) - 400 - (2,400) 1 500 -
-------------- -------------- -------------- --------------
Operating profit .............................. 12,700 12 11,2009,800 9 6,700 7 22,500 11 17,900 9
Interest expense, net............................. 2,400 2 3,3003,000 3 4,800 2 6,300 3
-------------- -------------- -------------- --------------
Income before income taxes
and minority interests ....................... 10,300 10 7,900 87,400 7 3,700 4 17,700 9 11,600 6
Provision for income taxes ....................... 4,000 4 2,8002,200 2 1,100 1 6,200 3 3,900 2
Minority interests ............................... --- - - - - - 100 -
-------------- -------------- -------------- --------------
Income from consolidated operations............ 6,3005,200 5% 2,600 3% 11,500 6% 5,000 5%7,600 4%
--- --- --- ---
Equity in net income of affiliated companies ..... 100 200 300 500
--------- -------- -------- --------
Income from continuing operations.............. 6,500 5,300 2,800 11,800 8,100
Earnings (loss) from discontinued operations,
net of tax..................................... -- 100
Loss on disposal of discontinued operations,
net of tax.....................................- 300 (400) --400
--------- -------- -------- --------
Net income .................................... $ 6,1005,300 $ 5,4003,100 $ 11,400 $ 8,500
--------- -------- -------- --------
Net income per share:
Basic
Continuing operations....................... $ 0.450.37 $ 0.370.20 $ 0.82 $ 0.57
Discontinued operations..................... $ - $ 0.02 $ (0.03) $ 0.010.03
--------- -------- -------- --------
$ 0.420.37 $ 0.380.22 $ 0.79 $ 0.60
Assuming Dilution
Continuing operations....................... $ 0.450.37 $ 0.370.20 $ 0.82 $ 0.57
Discontinued operations..................... $ - $ 0.02 $ (0.03) $ 0.010.03
--------- -------- -------- --------
$ 0.420.37 $ 0.380.22 $ 0.79 $ 0.60
Average common shares outstanding................. 14,366 14,32014,430 14,336 14,398 14,328
Average shares assuming dilution.................. 14,397 14,32314,507 14,356 14,450 14,342
See accompanying notes to consolidated financial statements.
Page 4
West Pharmaceutical Services, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(in thousands)
Unaudited
March 31,June 30, Dec. 31,
2002 2001
--------- --------
ASSETS
Current assets:
Cash, including equivalents ................... $ 28,90028,000 $ 42,100
Accounts receivable ........................... 70,90070,700 61,800
Inventories ................................... 36,50040,400 34,300
Income tax refundable.......................... 3,7003,400 5,700
Deferred income tax benefits .................. 2,3002,400 2,400
Other current assets .......................... 10,1008,600 12,200
-------- --------
Total current assets .............................. 152,400153,500 158,500
-------- --------
Property, plant and equipment ..................... 465,800491,800 459,500
Less accumulated depreciation and amortization..... 254,200269,300 249,200
-------- --------
211,600222,500 210,300
Investments in affiliated companies ............... 19,50019,800 20,800
Goodwill .......................................... 32,10035,600 32,600
Prepaid pension asset.............................. 49,40050,600 48,300
Deferred income tax benefits ...................... 22,10023,000 21,400
Intangible assets.................................. 7,800 7,900
Other assets....................................... 19,600 19,40012,300 11,500
-------- --------
Total Assets ...................................... $506,700$525,100 $511,300
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt ............. $ 11,3006,600 $ 4,300
Notes payable ................................. 3,7006,700 4,400
Accounts payable .............................. 22,00020,400 22,600
Accrued expenses:
Salaries, wages, benefits ................... 12,90016,700 16,000
Income taxes payable ........................ 11,00010,300 5,400
Restructuring costs.......................... 2,0001,200 2,200
Deferred income taxes........................ 1,500 1,600
Other ....................................... 19,30020,100 18,800
-------- --------
Total current liabilities ......................... 83,70083,500 75,300
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Long-term debt, excluding current portion.......... 171,400172,000 184,300
Deferred income taxes ............................. 46,80047,700 46,800
Other long-term liabilities ....................... 28,20028,100 28,100
Shareholders' equity............................... 176,600193,800 176,800
-------- --------
Total Liabilities and Shareholders' Equity......... $506,700$525,100 $511,300
-------- --------
See accompanying notes to consolidated financial statementsstatements.
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
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Balance, December 31, 2001 $ 4,300 $ 31,600 $254,000 $ (27,400) $ (85,700) $ 176,800
Net income 6,100 6,10011,400 11,400
Shares issued under stock plans (400) 2,400 2,0003,600 3,200
Cash dividends declared (2,800) (2,800)(5,500) (5,500)
Foreign currency translation adjustment (5,700) (5,700)8,100 8,100
Minimum pension liability adjustment 100 100
Fair value of financial instruments adjustment 100 100(200) (200)
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Balance, March 31,June 30, 2002 $ 4,300 $ 31,200 $257,300$259,900 $ (32,900)(19,500) $ (83,300)(82,100) $ 176,600193,800
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See accompanying notes to consolidated financial statements.
Page 6
West Pharmaceutical Services, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(in thousands)
ThreeSix Months Ended
March 31, March 31,June 30, June 30,
2002 2001
-------- --------
Cash flows provided by operating activities:
Income from continuing operations............ $ 6,50011,800 $ 5,3008,100
Depreciation and amortization................ 7,900 8,00016,200 16,000
Other non-cash items, net.................... (1,100) (2,200)(2,900) (4,300)
Changes in assets and liabilities ........... (6,300) (9,500)(4,300) (5,700)
-------- --------
Net cash provided by operating activities ...... 7,000 1,60020,800 14,100
-------- --------
Cash flows used in investing activities:
Property, plant and equipment acquired ........ (10,600) (11,800)(20,700) (22,600)
Customer advances, net of repayments .......... (1,100) (200)(1,300) (100)
-------- --------
Net cash used in investing activities ............. (11,700) (12,000)(22,000) (22,700)
-------- --------
Cash flows(used in)provided by financing activities:
Net borrowings under revolving
credit agreements ............................ (1,800) --(3,000) 12,600
Other long-term debt,net........................ (4,500) (100)(9,300) (200)
Other notes payable, net......... .............. (100) 11,800600 -
Dividend payments .............................. (2,800) (2,600)(5,500) (5,100)
Sale of common stock, net ...................... 2,1003,200 500
Purchase of treasury stock...................... - (100)
-------- --------
Net cash (used in) provided by financing activities. (7,100) 9,600activities (14,000) 7,700
-------- --------
Net cash used inprovided by discontinued operations............ -- (1,900)operations....... - 300
-------- --------
Effect of exchange rates on cash .................. (1,400) (2,200)1,100 (2,800)
-------- --------
Net(decrease)in cash, including equivalents........ $ (13,200) $ (4,900)$(14,100) $(3,400)
-------- --------
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 three-monthsix-month period ended
March 31,June 30, 2002 should be read in conjunction with the consolidated financial
statements and notes thereto of West Pharmaceutical Services, Inc.(Thethe Company),
appearing in the Company's 2001 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
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In the opinion of management, the unaudited Condensed Consolidated Balance
Sheet and Consolidated Statement of Shareholders Equity as of March 31,June 30, 2002
and the related unaudited Consolidated Statements of Income and the
unaudited Condensed Consolidated Statement of Cash Flows for the three month periodand
six-month periods then ended and for the comparative periodperiods in 2001
contain all adjustments, consisting only of normal recurring accruals,
necessary to present fairly the financial position as of March 31,June 30, 2002 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, interest expense is recorded net of interest income.
Interest income was previously recorded in other (income) expense. The
impact of the reclassification decreased previously reported firstsecond quarter
and six-months 2001 other (income) expense and decreased interest expense
by $400.$400 and $800, respectively.
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
and annual quantity discounts.
Income Taxes
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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.
InThe effective tax rate for the second quarter of 2002 was 30.7%. Excluding
the non-recurring foreign exchange gain in the first quarter of 2002, the
Company recordedestimated annual tax rate for 2002 is 33%, compared with a pre-tax36% estimated
rate used in the second quarter of 2001. The estimated annual rate for 2002
decreased from that of the first quarter due to expected benefits resulting
from the utilization of foreign exchange gaintax credits. The reduction in the annual
rate resulted in a tax benefit of $1,700. Excluding, this non-recurring item,$200 in the second quarter of 2002. The
2002 estimated annual tax rate of 33% is equal to 2001's full year
effective tax rate, for the first quarter 2002 was 35%.excluding unusual items.
Page 8
West Pharmaceutical Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
(continued)
2. Inventories at March 31,June 30, 2002 and December 31, 2001 are
summarized as follows:
3/31/6/30/02 12/31/01
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Finished goods $16,900$19,400 $15,700
Work in process 7,5007,600 6,300
Raw materials 12,10013,400 12,300
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$36,500$40,400 $34,300
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------- -------
3. Comprehensive income (loss) for the three monthsand six-months
ended March 31,June 30, 2002 and March 31,June 30, 2001 was as follows:
Three Months Ended 3/31/Six Months Ended
6/30/02 3/31/6/30/01 6/30/02 6/30/01
-------- -------- -------- --------
Net income ......................... $ 6,1005,300 $ 5,4003,100 $ 11,400 $ 8,500
Foreign currency
translation adjustments............ (5,700) (9,900)13,800 (4,500) 8,100 (14,400)
Minimum pension liability
adjustments........................ 100(300) - (200) -
Fair value adjustment on
derivative financial instruments... 100 (400)(100) 200 - (200)
-------- -------- -------- --------
Comprehensive income(loss).......... $ 600 $(4,900)18,700 $ (1,200) $ 19,300 $ (6,100)
-------- -------- -------- --------
-------- -------- -------- --------
Page 9
West Pharmaceutical Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
(Continued)
4. Net sales to external customers and operating profit (loss) by
operating segment for the three monthsand six-months ended March 31,June 30, 2002 and
March
31,June 30, 2001 are as follows:
Three Months Ended March 31Six Months Ended
June 30 June 30
Net Sales: 2002 2001 2002 2001
---------- -------- -------- -------- --------
Pharmaceutical Systems.......... $104,300 $ 99,100 $ 95,70094,900 $203,400 $190,600
Drug Delivery Systems........... 4,600 3,6003,400 5,600 8,000 9,200
-------- -------- -------- --------
Consolidated Total ............. $103,700 $ 99,300$107,700 $100,500 $211,400 $199,800
-------- -------- -------- --------
-------- -------- -------- --------
Three Months Ended March 31Six Months Ended
June 30 June 30
Operating Profit (Loss): 2002 2001 2002 2001
----------------------- -------- -------- -------- --------
Pharmaceutical Systems.......... $ 20,60021,600 $ 18,30017,300 $ 42,200 $ 35,600
Drug Delivery Systems........... (2,200) (2,300)(3,600) (900) (5,800) (3,200)
Corporate and unallocated....... (5,700) (4,800)(8,200) (9,700) (13,900) (14,500)
-------- -------- -------- --------
Consolidated Total ............. $ 12,7009,800 $ 11,2006,700 $ 22,500 $ 17,900
-------- -------- -------- --------
-------- -------- -------- --------
Corporate and unallocated items include a first quarter 2002
non-recurring foreign exchange gain of $1,700.$1,700 and a second quarter
2001 non-recurring restructuring charge of $4,500.
Compared with MarchDecember 31, 2001, there were no material changes in the
amount of assets as of March 31,June 30, 2002 for any operating segment.
5. Common stock issued at March 31,June 30, 2002 was 17,165,141 shares, of which
2,742,5682,703,034 shares were held in treasury. Dividends of $.19 per common
share were paid in the firstsecond quarter of 2002 and a dividend of $.19
per share payable May 1,August 7, 2002 to holders of record on April 17,July 24, 2002
was declared on March 11,June 18, 2002.
6. 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 $1,400 at March 31,June 30, 2002 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.
Page 10
West Pharmaceutical Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
(Continued)
7. The following table details the activity related to the Company's
restructuring reserve, which consists of accrued severance and benefit
costs:
Balance, December 31,2001 $ 2,200
Payments (200)(1,000)
-----
Balance, March 31,June 30, 2002 2,000
Reductions$ 1,200
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The remaining restructuring accrual balance relates principally to
restructuring programs announced in 2001 and 2000. Terminations under
these programs totaled 215 employees as of June 30, 2002. The final
severance actions under these plans commenced in the reserve balance represent severance and benefits
payments.second quarter of
2002. The Company expects to complete all remaining payments,
principally consisting of pre-retirement medical benefits, within the
next two years.
8. In November 2001, the Company sold its contract manufacturing and
packaging business located in Lakewood, NJ. The results of this
business have been reflected as discontinued operations in the
accompanying consolidated financial statements.
At December 31, 2001 the Company was required to hold $4.3 million of
the sales proceeds in trust for the repayment of certain debentures
issued by the contract manufacturing and packaging business, thatwhich
became due and payable upon the sale. These debentures were repaid in
the first quarter of 2002 resulting in a $400, net of tax, charge
which was included in the loss on disposal of discontinued operations.
9. Effective January 1, 2002, the Company adopted Financial Accounting
Standards Statement No. 142, "Goodwill and Other Intangible Assets."
SFAS 142 eliminated the previous requirement to amortize goodwill and
indefinite-lived intangible assets. Instead, goodwill and intangible
assets with indefinite lives are tested for impairment on at least an
annual basis or sooner if an event occurs which indicates that there
could be impairment. The SFAS 142 impairment test begins with an
estimate of the fair value of the reporting unit or intangible asset.
The Company has determined its reporting units to be each of the four
geographic regions in the Pharmaceutical Systems Segment, the drug
delivery business unit, and the clinical services business unit. If
the fair value of the reporting unit is less than the carrying value,
the goodwill or intangible asset is considered impaired. Once
impairment is determined, an impairment loss is recognized for the
amount that the carrying amount exceeds the fair value. The Company
performed an impairment test of its goodwill as of January 1, 2002 and
determined that no impairment of the recorded goodwill existed. As
required by the statement, the Company did not record amortization
expense for goodwill in the first quarter of 2002 as compared to the $300 and $600, net of
tax, recorded in the prior year quarter.three and six-month periods. The
goodwill balance as of March 31,June 30, 2002 was $32,100$35,600 as compared to
$32,600 as of December 31, 2001. The decreaseincrease of $500$3,000 is solely the
result of foreign currency translation adjustments.
Page 11
West Pharmaceutical Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
(Continued)
Goodwill by reportable segment as of June 30, 2002 and December 31,
2001 was as follows:
6/30/02 12/31/01
-------- --------
Pharmaceutical Systems 31,700 28,700
Drug Delivery Systems 3,900 3,900
-------- --------
35,600 32,600
The cost and respective accumulated amortization for the Company's
intangible assets, mainly patents, was $11,000$11,500 and $3,500,$3,700,
respectively, as of March 31,June 30, 2002, and $11,200 and $3,300,
respectively, as of December 31, 2001. The cost basis of intangibles
includes the effects of foreign currency translation adjustments.
There were no intangibles purchased or acquired during 2002.
Intangible amortization expense for the quarterthree and six-month periods
ended March 31,June 30, 2002 was $200 and $400, respectively, and is estimated
to be $700 for the full year. Estimated amortization for each of the
subsequent five fiscal years will be approximately $700 per year.
The following reconciles the reported net income and earnings per
share to that which would have resulted had SFAS No. 142 been applied
to the three-month periodthree and six-month periods ended March 31,June 30, 2001.
Three Months Six Months
Ended Ended
6/30/01 6/30/01
As reported
Income from continuing operations $5,300$ 2,800 $ 8,100
Discontinued operations 100
------300 400
------- -------
Net income $5,4003,100 8,500
Goodwill amortization, net of tax 300 ------600
------- -------
As adjusted $5,700$ 3,400 $ 9,100
------- -------
------- -------
As reported basic earningearnings per share
Continuing operations $ 0.370.20 $ 0.57
Discontinued operations 0.02 0.03
------- -------
$ 0.01
------0.22 $ 0.380.60
------- -------
------- -------
As adjusted $ 0.400.24 $ 0.64
------- -------
------- -------
As reported diluted earnings per share
Continuing operations $ 0.370.20 $ 0.57
Discontinued operations 0.02 0.03
------- -------
$ 0.01
------0.22 $ 0.380.60
------- -------
------- -------
As adjusted $ 0.400.24 $ 0.64
------- -------
------- -------
Page 12
West Pharmaceutical Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
(Continued)
10. During the first quarter of 2002, the Company's Argentina subsidiary
recorded a foreign currency translation gain of $1,700 on net assets
denominated in non-peso currencies due to the devaluation of the
Argentine peso and associated with a repatriation of funds to the
United States.peso. The foreign currency gain was subject to both
Argentine federal income taxes and US dividend withholding taxes. The
devaluation of assets denominated in the Argentine peso totaled $2,700$3,200
as of March 31,June 30, 2002 and is recorded as a cumulative translation
adjustment to shareholder's equity.
11. In July 2002, the Company announced that companies in which it has an
equity investment, will consolidate two rubber molding operations in
Mexico into a single facility. The Company therefore expects to take a
third quarter 2002 charge of $0.07 per share, representing its pro
rata share of the costs of consolidating the operations.
Page 1213
Item 2.
Management's Discussion and Analysis of Financial Condition and
- ----------------------------------------------------------------
Results of Operations for the Three Months and Six Months ended
March 31,- ---------------------------------------------------------------
June 30, 2002 - ----------------------------------------------------------------------
versus March 31,June 30, 2001
- ------------------------------------------------------------------
Net Sales
- ---------
Net sales for the firstsecond quarter of 2002 were $103.7$107.7 million a 4% increase over
the $99.3compared to $100.5
million reported in the firstsecond quarter of 2001. At constant exchange rates, sales for the
firstsecond quarter 2002 increased 7% from the prior year quarter.
FirstSecond quarter 2002 sales for the Pharmaceutical Systems segment were $99.1$104.3
million, a $3.4$9.4 million or 4% increase from prior year reported sales of $95.7$94.9
million. At constant exchange rates, sales increased by 6%10%. International
markets continued to grow significantly resulting in 8%13% sales growth at
constant exchange rates. Sales in domestic markets increased 4%6% from the prior
year quarter. The increase in both the international and domestic markets is
primarily led by demand fordue to volume increases in pharmaceutical packaging products,
including serum and lyo stoppers. This increase is offset slightly by a declinestoppers in sales of
disposable medical devicesdomestic markets and prefilled syringe
systems in domesticinternational markets.
The Drug Delivery Systems segment had second quarter 2002 revenues of $4.6$3.4
million, a $1.0$2.2 million or 28% increase39% decrease from the prior year quarter. Higher salesThe decline
in revenues is attributed to the lack of servicescurrent period licensing revenues in
the consumer healthcare researchdrug delivery business unit.
Net sales for the first half of 2002 were $211.4 million compared to $199.8
million in the first six months of 2001. At constant exchange rates, sales for
the first half of 2002 increased 7%. Excluding exchange rate variances,
Pharmaceutical Systems segment sales were 8% higher than the prior year led
primarily by increased sales in international markets. Drug Delivery Systems
revenues decreased $1.2 million due to lower licensing revenues in the drug
delivery business unit ofpartially offset by increased revenues in the clinical
services business unit
resulted in an increase in sales of $1.3 million from the prior year. After a
difficult year in 2001, the recovery of this business unit is due to increased
revenues from consumer response marketing studies. Drug delivery business unit
sales are $0.3 million below those in the first quarter of 2001. This decrease
is primarily the result of lower revenues from contract research services.unit.
Gross Profit
- ------------
The consolidated gross margin infor the second quarter was 30.3%28.8%, compared with
29.7% in
2001. The increase in margins is primarily the result of improvements29.4% in the second quarter of 2001. Pharmaceutical Systems division. Resultsmargins increased to
29.4% as compared to 28.8% in the prior year quarter. Margins in the North
America region improved due to positive sales mix, favorable manufacturing variances,material yields and
lower raw
materiallab and engineering costs. The favorable results in North America were
offset by decreased margins in Europe, primarily in the U.K., where the
Company's plastic device facility is experiencing production delays and lower
than anticipated demand for one of its principleprincipal products. Production
inefficiencies and capacity constraints at other plants also contributed to
decreased margins in Europe. Expansions at two European plants are expected to
come on-line during the fourth quarter 2002 and in mid 2003 providing additional
capacity. Drug Delivery Systems segment gross profit was
essentially equal to prior year levels, although margins declined slightlysignificantly from the
second quarter of 2001 mainly due to a lower volume of higher margin contract research serviceslicensing revenues in the drug
delivery business unit.
Selling, General and Administrative Expenses
- --------------------------------------------
Selling, general and administrative expenses increased $2.3 million (13%) asThe consolidated gross profit margin for the six-month period was 29.5% compared
with 29.6% in the first quartersame period of 2001. The major contributors tosame factors that influenced the
increase
include $1.3 million lower pension income, $1 million increase in information
systems costs associated withquarter comparisons affected the Company's e-West business systems initiative
and increased incentive compensation costs of $0.9 million.
Other (Income) Expense
- ----------------------
Other (income) expense consists principally of foreign exchange transaction
items and miscellaneous equipment sales. First quarter 2002 includes a $1.7
million non-recurring foreign exchange gain on the repatriation of funds from
operations in Argentina.six-month comparisons.
Page 1314
Management's Discussion and Analysis of Financial Condition and
- ----------------------------------------------------------------
Results of Operations for the Three Months and Six Months ended
March 31,- ---------------------------------------------------------------
June 30, 2002 - ----------------------------------------------------------------------
versus March 31,June 30, 2001, continued
- -----------------------------------------------------------------------------
Selling, General and Administrative Expenses
- --------------------------------------------
Selling, general and administrative expenses increased $3.8 million (21%) as
compared with the second quarter of 2001. The major contributors to the increase
include a $1.3 million decrease in pension income, a $1.1 million increase in
research and development expenses in the drug delivery business unit and a $0.4
million increase in information systems costs associated with the Company's
e-West business systems initiative.
For the six-month period ending June 30, 2002, selling, general and
administrative expenses increased by $6.1 million (17%). Lower pension income,
increased research and development costs in the drug delivery business unit,
higher information systems costs and higher incentive compensation costs
contributed to the increase.
Other (income) expense
- ----------------------------
Other (income) expense consists principally of foreign exchange transaction
items and miscellaneous equipment sales. Second quarter 2002 other income
exceeded the prior year quarter, primarily due to current period foreign
exchange transaction gains versus prior period losses in the Company's European
subsidiaries. The six-month period for 2002 contains the first quarter $1.7
million non-recurring foreign currency translation gain on net assets
denominated in non-peso currencies due to the devaluation of the Argentine peso.
Operating Profit (Loss)
- -----------------------------
Operating profit for the second quarter of 2002 was $9.8 million compared to
$6.7 million in the second quarter 2001. Excluding the non-recurring
restructuring charge, operating profit for the second quarter 2001 was $11.2
million. Pharmaceutical Systems operating profit was $21.6 million compared to
$17.3 million in 2001. The increase in operating profit is due to increased
sales in both the domestic and international markets and a slight shift in sales
mix to higher value products, partially offset by production inefficiencies in
Europe. Drug Delivery Systems had an operating loss of $3.6 million in the
second quarter of 2002 as compared to a loss of $0.9 million in 2001. The
absence of licensing revenues and increased research and development spending in
the drug delivery unit were the main contributors to the additional operating
losses. Corporate and unallocated operating losses were $8.2 million in 2002
compared to $9.7 million in 2001. Excluding the restructuring charge in the
second quarter of 2001, corporate and unallocated operating losses for 2001 were
$5.2 million. Additional losses are a result of decreased pension income and
increased information systems costs.
For the six-month period, 2002 operating profit was $22.5 million compared to
$17.9 million for the same period of 2001. Excluding the 2002 non-recurring
foreign exchange gain and the 2001 restructuring charge, operating profit was
$20.8 million in 2002 and $22.4 million in 2001. The same factors that
influenced the quarter comparisons affected the six-month comparisons.
Page 15
Management's Discussion and Analysis of Financial Condition and
- ----------------------------------------------------------------
Results of Operations for the Three Months and Six Months ended
- ---------------------------------------------------------------
June 30, 2002 versus June 30, 2001, continued
- ---------------------------------------------
Interest Expense,expense, net
- ------------------------------------------------
Net interest costs declined by $0.9$0.6 million (27%(18%). as compared to the second
quarter of 2001. The decrease is due to lower interest rates as well as lower
debt levels in the current year. For the six-month period, net interest expense
declined by $1.5 million. This decrease is mainly due to the decrease in 2002
debt levels. Debt levels decreased as a result of the Company formedCompany's formation of an
international financing structure. This structure in orderwas formed to utilizefacilitate the
use of existing cash balances to reducepay down outstanding debt.
Provision for Income Taxesincome taxes
- --------------------------
Including the effects of the $1.7 million foreign exchange gain theThe effective tax rate for the firstsecond quarter of 2002 was 38.4%30.7%. Excluding thisthe
non-recurring item,foreign exchange gain in the first quarter of 2002, the estimated
annual tax rate for 2002 is 35%33% compared with a 36% estimated rate used in the
firstsecond quarter of 2001. The estimated annual rate for 2002 decreased from the
rate used in the first quarter due to expected benefits resulting from the
utilization of foreign tax credits. The reduction in the annual rate resulted in
a tax benefit of $0.2 million in the second quarter of 2002. The 2002 estimated
annual tax rate of 33% is equal to 2001's full year 2001 effective tax rate,
excluding unusual items was 33%. The change in the estimated tax rate
was made in response to the Company's current projected geographic mix of
earnings.items.
Equity in Net Incomenet income of Affiliated Companiesaffiliated companies
- --------------------------------------------
Earnings in net income of affiliates decreased slightly from the prior year
quarter. Earnings from Daikyo Seiko, Ltd., a Japanese company in which the
Company has a 25% ownership interest, declined fromwere down for the prior yearsix-month period due to sales
decreases resulting from a loss of business from its European customers as well
as
increased depreciation and other costs connected with thea manufacturing plant
upgrade completed in 2001. Results from the Company's Mexican affiliates were
consistent with those reported in the firstsecond quarter and six-month periods of 2001. The
Company expects to take a third quarter charge of $0.07 per share for the
Company's pro rata share of the costs to consolidate two rubber molding
operations in Mexico.
Discontinued Operations
- ----------------------------------------------------
In November 2001, the Company sold its contract manufacturing and packaging
business located in Lakewood, NJ. The results of this business have been
reflected as discontinued operations in the accompanying consolidated financial
statements.
At December 31, 2001 the Company was required to hold $4.3 million of the sales
proceeds in trust for the repayment of certain debentures issued by the contract
manufacturing and packaging business, thatwhich became due and payable upon the
sale. These debentures were repaid in the first quarter of 2002 resulting in a
$0.4 million, net of tax, charge which was included in loss on disposal of
discontinued operations.
Net Income
- -----------
Net income for the first quarter of 2002 was $6.1 million, or $.42 per share,
compared to $5.4 million, or $.38 per share in the first quarter 2001. Net
income for the first quarter of 2002 included a $1.7 million non-recurring
foreign exchange gain ($0.8 million net of tax or $0.05 per share) on the
repatriation of funds from operations in Argentina. Also included was a loss on
disposal of discontinued operations of $0.4 million, net of tax, or $0.03 per
share. First quarter 2001 earnings included income from discontinued operations
of $0.1, net of tax. Excluding these non-recurring items, first quarter earnings
were $0.40 per share, in the 2002 quarter, compared to $.37 per share in the
prior year quarter. Average common shares outstanding were 14.4 million in the
first quarter compared to 14.3 million in the first quarter of 2000. The
increase in shares outstanding is the result of employee stock option exercises.
Page 1416
Management's Discussion and Analysis of Financial Condition and
- ----------------------------------------------------------------
Results of Operations for the Three Months and Six Months ended
March 31,- ---------------------------------------------------------------
June 30, 2002 - ----------------------------------------------------------------------
versus March 31,June 30, 2001, continued
- -----------------------------------------------------------------------------
Net Income
- --------------
Net income for the second quarter of 2002 was $5.3 million, or $.37 per share,
compared to $3.1 million, or $.22 per share, in the second quarter 2001. Second
quarter 2001 results included a non-recurring restructuring charge of $.20 per
share and earnings from discontinued operations of $0.02, net of tax. Excluding
these non-recurring items, second quarter 2001 earnings were $0.40 per share.
Average common shares outstanding were 14.4 million in the second quarter
compared to 14.3 million in the second quarter of 2001. The increase in shares
outstanding is the result of employee stock option exercises.
For the six-month period, 2002 net income was $11.4 million, or $0.79 per share.
2002 results include a non-recurring foreign exchange gain of $0.05 and a loss
on discontinued operations of $0.03. Net income for the first six months of 2001
was $8.5 million, or $0.60 per share. 2001 results include a restructuring
charge of $0.20 and earnings from discontinued operations of $0.03. Excluding
non-recurring items, earnings per share were $0.77 for both the 2002 and 2001
six-month periods. Average common shares outstanding for the first six months of
2002 were 14.4 million, compared to 14.3 million in 2001.
FINANCIAL CONDITION
- -------------------
Working capital at March 31,June 30, 2002 was $68.7$70.0 million compared withto $83.2 million at
December 31, 2001. The working capital ratio at March 31,June 30, 2002 was 1.8 to 1.
Accounts receivable increased significantly, reflecting the increase in MarchJune
2002 sales levels versus December 2001. Days sales outstanding remained
consistent with the fourth quarter of 2001.increased
slightly from 2001 due to increased sales in Europe where payment terms are
typically longer. Cash flows from operations for the six-month period increased
from the prior year first quarter due to improved earnings as well as to the receipt of tax
refunds related to 2001.
CapitalFor the six-month period, capital spending was $10.6$20.7 million, primarily for
facility expansions at two European plants, new equipment purchases and
equipment upgrades used in the production of new products and costs associated
with an enterprise resource planning initiative. Full year 2002 capital spending
is projected to be approximately $41$43.7 million. The Company paid cash dividends
totaling $2.8$5.5 million ($0.190.38 per share) during the first quartersix months of 2002.
Debt as a percentage of total invested capital at March 31,June 30, 2002 was 51.3%48.9%
compared withto 52.2% at December 31, 2001. Debt levels decreased by $6.6$7.7 million
asdue to the Company formedformation of an international financing structure in orderthe first
quarter of 2002 designed to utilize existing cash balances to reducepay down debt.
Total shareholder's equity was $176.6$193.8 million at March 31,June 30, 2002 compared to
$176.8 million at December 31, 2001. The increase in equity is due to current
year net income, positive currency translation adjustments and employee stock
option exercises.
The Company believes its financial condition and current capitalization provide
sufficient flexibility to meet future cash flow requirements.
Page 17
Management's Discussion and Analysis of Financial Condition and
- ----------------------------------------------------------------
Results of Operations for the Three Months and Six Months ended
- ---------------------------------------------------------------
June 30, 2002 versus June 30, 2001, continued
- ---------------------------------------------
Accounting Changes
- ------------------
Effective January 1, 2002, the Company adopted Financial Accounting Standards
Statement No. 142, "Goodwill and Other Intangible Assets." SFAS 142 eliminated
the previous requirement to amortize goodwill and indefinite-lived intangible
assets. Instead, goodwill and intangible assets with indefinite lives are tested
for impairment on at least an annual basis or sooner if an event occurs which
indicates that there could be impairment. The SFAS 142 impairment test begins
with an estimate of the fair value of the reporting unit or intangible asset.
The Company has determined its reporting units to be each of the four
geographic regions in the Pharmaceutical Systems Segment, the drug delivery
business unit and the clinical services business unit. If the fair value of the
reporting unit is less than the carrying value, the goodwill or intangible asset
is considered impaired. Once impairment is determined, an impairment loss is
recognized for the amount that the carrying amount exceeds the fair value. The
Company performed an impairment test of its goodwill as of January 1, 2002 and
determined that no impairment of the recorded goodwill existed. As required by
the statement, the Company did not record amortization expense for goodwill in
the first quarter of 2002 as compared to the $300$0.3 million and $0.6 million, net of tax, recorded in
the prior year quarter.quarter and six-month 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 15
Management's Discussion and Analysis of Financial Condition and
- ----------------------------------------------------------------
Results of Operations for the Three Months ended March 31, 2002
- ----------------------------------------------------------------------
versus March 31, 2001, continued
- --------------------------------
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.
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 1618
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 of this Report.
(b) No reportsA current report on Form 8-K have beenwas filed for the quarter
ended March 31, 2002.on May 1,2002.
Page 1719
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WEST PHARMACEUTICAL SERVICES,INC.
-----------------------------------
(Registrant)
May 8,August 7, 2002 Linda R. Altemus
- ---------------- /s/ ------------------------------------------------------------------------------
Date Vice President and Chief Financial Officer
Certification
To the extent required by the Sarbanes-Oxley Act of 2002, each of the
undersigned hereby certifies, to their knowledge, that (i) this report fully
complies with the requirements of Section 13(a) of the Securities Exchange Act
of 1934 and (ii) the information contained in this report fairly presents, in
all material respects, the financial condition and results of operations of the
registrant.
/s/ Donald E. Morel, Jr. Ph.D.
- ---------------------------------------------
Donald E. Morel, Jr., Ph.D.
President and Chief Executive Officer
/s/ Donald E. Morel, Jr. Ph.D.
- ----------------------------------------------
Linda R. Altemus
Vice President and Chief Financial Officer
August 7, 2002
INDEX TO EXHIBITS
Exhibit
Number
(2) None.
(3) (a) Amended and Restated Articles of Incorporation of the Company
through January 4, 1999 (the "Articles of Incorporation"), incorporated by reference to Exhibit
(3)(a)to of the Company's Annual Report on Form 10-K for the year
ended December 31, 1998 (File No. 1-8036).
(3) (b) ByLawsBylaws of the Company, as amended through October 27, 1998, (the
"ByLaws"),
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) Articles 5, 6, 8(c)Miscellaneous long term debt instruments and 9credit facility
agreements of the ArticlesCompany, under which the underlying authorized
debt is equal to less than ten percent of Incorporation,the total assets of the
Company and its subsidiaries on a consolidated basis, may not be
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 (File No. 1-8036).
(4) (a) Form of stock certificate for common stock incorporated by
reference to Exhibit (3)(4) (a) toof the Company's Annual Report on
Form 10-K for the year ended December 31, 1998 (File No. 1-8036).
(4) (b) Articles INote Purchase Agreement dated as of April 8, 1999 among
the Company and V of the ByLaws,insurance companies identified on a schedule
thereto, incorporated by reference to Exhibit 3
(4)(b) of the
Company's Form 10-Q for the quarter ended September 30, 2000
(File No. 1-8036).
(4) (c) Credit Agreement, dated as of July 26, 2000 among the Company,
the banks and other financial institutions identified on a
schedule thereto, and PNC Bank, N.A., as agent for the banks (the
"Credit Agreement"), incorporated by reference to Exhibit (4) (c)
of the Company's Form 10-Q for the quarter ended September 30,
2000 (File No. 1-8036).
(4) (c) (1) First Amendment dated as of September 14, 2000, to the Credit
Agreement, incorporated by reference to Exhibit(4) (c) (1) of the
Company's Annual Report on Form 10-K for the year ended December
31, 2001 (File No. 1-8036).
(4) (c) (2) Second Amendment dated as of November 17, 2000, to the Credit
Agreement, incorporated by reference to Exhibit (4) (c) (2) of
the Company's Annual Report on Form 10-K for the year ended
December 31, 2001 (File No. 1-8036).
(4) (c) (3) Joinder and Assumption Agreement dated as of February 28, 2001,
with respect to the Credit Agreement, incorporated by reference
to Exhibit (4) (c) (3) of the Company's Annual Report on Form
10-K for the year ended December 31, 2001 (File No. 1-8036).
(4) (c) (4) Third Amendment dated as of February 28, 2001 to the Credit
Agreement, incorporated by reference to Exhibit (4) (c) (4) of
the Company's Annual Report on Form 10-K for the year ended
December 31, 2001 (File No. 1-8036).
F - 1
INDEX TO EXHIBITS
Exhibit
Number
(4) (c) (5) Fourth Amendment dated as of July 13, 2001 to the Credit
Agreement, incorporated by reference to Exhibit (10) (a) of the
Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1998 (File No. 1-8036).2001.
(4) (c) Form(6) Extension Agreement dated as of stock certificate for common stock,January 5, 2001 to the Credit
Agreement, incorporated by reference to Exhibit (4) (a)(c) (6) of
the Company's Annual Report on Form 10-K for the year ended
December 31, 19982001 (File No. 1-8036).
(4) (c) (7) Fifth Amendment dated as of July 17, 2002 to the Credit
Agreement.
(10) (a) Change-In-Control Agreement dated as of June 3, 2002 Management Incentive Bonus Plan.between the
Company and Richard D. Luzzi.
(11) Not Applicable.
(15) None.
(18) None.
(19) None.
(22) None.
(23) Not Applicable.
(24) None.
(27) None.
(99) None.
F - 12