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, 20032004
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 Identification Number)
incorporation or organization)
101 Gordon Drive, PO Box 645,
Lionville, PA 19341-0645
--------------------------------------------- ----------------------------------------------- --------------------------------------- -------------------------------------
(Address of principal executive offices) (Zip Code)
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 194341934 during
the preceding twelve months, and (2) has been subject to such filing requirements
for the past 90 days. Yes X. No .
--- ---
Indicate by check mark whether the registrant is an accelerated filer (as defined
in Rule 12b-2 of the Act). Yes__Yes X No X .
--- ---
March 31, 20032004 - 14,479,37914,824,408
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, 2003
Page2004
Part I -Financial Information
Item 1. Financial Statements (Unaudited) Page
Consolidated Statements of Income for the Three Months ended March 31,
20032004 and March 31, 20022003 3
Condensed Consolidated Balance Sheets at March 31, 20032004 and December 31,
20022003 4
Consolidated Statement of Shareholder's Equity for the Three Months ended
March 31, 20032004 5
Condensed Consolidated Statements of Cash Flows for the Three Months ended
March 31, 20032004 and March 31, 20022003 6
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations 1213
Item 3. Quantitative and Qualitative DisclosureDisclosures about Market Risk 1819
Item 4. Controls and Procedures 1819
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K 1920
SIGNATURES 20
CERTIFICATIONS 21 22
Index to Exhibits F-1
F-2,
F-3
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)
QuarterThree Months Ended
March 31, 20032004 March 31, 20022003
- ------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Net sales $ 117,800133,600 $ 101,700117,800
Cost of goods and services sold 93,000 81,400
70,900
- ------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Gross profit 40,600 36,400 30,800
Selling, general and administrative expenses 29,000 24,400 20,300
Costs associated with plant explosion net- 5,100
-
Other (income) expense, net 800 400
(1,800)
- ------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Operating profit 10,800 6,500 12,300
Interest expense, net 1,900 2,4001,900
- ------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 8,900 4,600 9,900
Provision for income taxes 2,900 1,300
3,800
- ------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Income from consolidated operations 6,000 3,300 6,100
Equity in net income of affiliated companies 1,000 500
200
- ----------------------------------------------------------------------------------------
Income from continuing operations 3,800 6,300
Discontinued operations, net of tax - (200)
- ------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Net income $ 7,000 $ 3,800
$ 6,100
========================================================================================================================================================================
Net income (loss) per share:
Basic Continuing operations$ 0.47 $ 0.26
Assuming dilution $ 0.44
Discontinued operations - (0.02)
- ----------------------------------------------------------------------------------------0.46 $ 0.26 $ 0.42
- ----------------------------------------------------------------------------------------
Assuming dilution
Continuing operations $ 0.26 $ 0.44
Discontinued operations - (0.02)
- ----------------------------------------------------------------------------------------
$ 0.26 $ 0.42
- ----------------------------------------------------------------------------------------
Average common shares outstanding 14,722 14,480 14,366
Average shares assuming dilution 15,067 14,480 14,397
Dividends declared per common share $ 0.200.21 $ 0.190.20
See accompanying notes to condensed consolidated financial statements.
Page 4
West Pharmaceutical Services, Inc. and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
(in thousands)
Unaudited
March 31, Dec.December 31,
2004 2003
2002
- ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash, including cash equivalents $ 37,10040,600 $ 33,20037,800
Accounts receivable 72,600 66,60083,700 73,900
Inventories 42,400 41,300
Income tax refundable 3,000 3,60052,200 48,000
Insurance receivable - 41,000
Deferred income tax benefits 5,100 5,200taxes 6,000 6,100
Other current assets 12,300 11,9009,900
- ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Total current assets 172,500 161,800194,800 216,700
- ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Property, plant and equipment 497,700 499,600572,700 563,600
Less accumulated depreciation and amortization (284,000) (276,300)313,000 307,900
- -----------------------------------------------------------------------------------------
213,700 223,300----------------------------------------------------------------------------------
259,700 255,700
Investments in and advances to affiliated companies 18,900 18,00022,900 22,200
Goodwill 36,300 35,50041,200 41,500
Pension asset 52,100 53,00049,800 50,500
Deferred income tax benefits 20,600 19,900
Insurance receivable 10,600 -taxes 20,700 20,500
Patents 7,000 7,300
Other intangibles 1,900 1,7006,900
Other assets 8,300 9,1008,700 9,600
- ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Total Assets $ 541,900604,800 $ 529,600
=========================================================================================
LIABILITIES623,600
==================================================================================
LIABILITES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 11,400 $ 11,700
Notes payable 1,500 4,100$ 3,600 $ 8,000
Accounts payable 21,600 19,20026,600 29,400
Accrued expenses:
Salaries, wages and benefits 15,800 17,00019,900 24,500
Income taxes payable 10,900 9,40011,800 8,400
Restructuring costs 1,0001,400 1,400
Deferred income taxes 2,400 2,40016,600 16,600
Other 28,100 23,000current liabilities 29,900 30,600
- ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Total current liabilities 92,700 88,200109,800 118,900
- ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Long-term debt excluding current portion 160,700 159,200148,600 167,000
Deferred income taxes 48,900 48,50045,100 44,800
Other long-term liabilities 32,600 32,20038,200 35,300
Shareholders' equity 207,000 201,500263,100 257,600
- ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $ 541,900604,800 $ 529,600
=========================================================================================623,600
==================================================================================
See accompanying notes to condensed consolidated financial statements.
Page 5
West Pharmaceutical Services, Inc. and Subsidiaries
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (Unaudited)
(in thousands)
Accumulated
Capital in other
Common excess of Retained comprehensive Treasury
stock par value earnings income (loss) stock Total
- ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 20022003 $ 4,300 $ 30,90030,100 $ 261,200281,200 $ (13,400)18,900 $ (81,500)(76,900) $ 201,500257,600
Net income 3,800 3,800
Cash dividends7,000 7,000
Shares issued under stock plans (500) 5,500 5,000
Dividends declared (2,900) (2,900)(3,200) (3,200)
Foreign currency translation
adjustment 4,500 4,500(3,200) (3,200)
Minimum pension liability
translation adjustment 100 100(100) (100)
- ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Balance, March 31, 20032004 $ 4,300 $ 30,90029,600 $ 262,100285,000 $ (8,800)15,600 $ (81,500)(71,400) $ 207,000
================================================================================================================================263,100
========================================================================================================
See accompanying notes to condensed consolidated financial statements.
Page 6
West Pharmaceutical Services, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(in thousands)
Three Months Ended
March 31, March 31,
2004 2003
2002
- -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Cash flows provided by (used in) operating activities:
Net income $ 3,8007,000 $ 6,100
Loss from discontinued operations - 2003,800
Depreciation and amortization 8,300 8,100 7,900
Other non-cash items, net 1,000 900 (1,100)
Changes in assets and liabilities net of effects of
discontinued operations(8,200) 1,300
(10,200)
- -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities of continuing operations8,100 14,100
2,900
- -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Cash flows provided by (used in) provided by investing activities:
Property, plant and equipment acquired (16,500) (7,300) (10,600)
Insurance proceeds received for explosion
destroyed equipmentproperty damage 31,800 500
-
Deposit held in trust from saleRepayment of assetsaffiliate loan 600 - 4,300
Customer advances, net of repayments 600 100
(1,100)Other (100) -
------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------
Net cash used inprovided by (used in) investing activities of continuing operations16,400 (6,700)
(7,400)
- -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Cash flows (used in) provided by financing activities:
Net (repayments) borrowings (repayments) under revolving
credit agreements (18,900) 1,200 (1,800)
Repayment of subordinated debenture - (4,300)
Repayment of other long-term debt - (100) (200)
Other notes payable, net (4,600) (2,600) (100)
Dividend payments (3,100) (2,900) (2,800)
Issuance of common stock 4,800 -
2,100
- -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Net cash used in financing activities of continuing operations(21,800) (4,400)
(7,100)
- -----------------------------------------------------------------------------------------------------
Net cash used in discontinued operations - (200)
- -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Effect of exchange rates on cash 100 900
(1,400)
- -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 2,800 3,900 (13,200)
Cash, including cash equivalents at beginning of period 37,800 33,200
42,100
- -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Cash, including cash equivalents at end of period $ 40,600 $ 37,100
$ 28,900
=========================================================================================================================================================================================
See accompanying notes to condensed consolidated financial statements.
Page 7
West Pharmaceutical Services, Inc. and Subsidiaries
Notes to the Unaudited Condensed Consolidated Financial Statements (Unaudited)
(in thousands, except share and per share data)
March 31, 2004
1. The interim consolidated financial statements for the three-month period ended
March 31, 20032004 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 20022003 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 unaudited accounts.
Interim Period Accounting Policy
--------------------------------
In the opinion of management, the unaudited Condensed Consolidated Balance Sheet, the unaudited Consolidated
Statement of Shareholders' Equity, the unaudited Consolidated Statements of Income and the unaudited
Condensed Consolidated Statements of Cash Flows as of and for the period ended March 31, 2003 and for the
comparative period in 2002condensed consolidated financial
statements, contain all adjustments, consisting only of normal recurring accruals
and adjustments, necessary for a fair presentation of the Company's financial
position as of March 31, 20032004 and the results of operations and cash flows for
the respective periods.periods ended March 31, 2004 and 2003. The results of operations for any
interim period are not necessarily indicative of results for the full year.
Reclassification
----------------
Certain reclassifications were made to prior period financial statements to be consistent with the current
period reporting presentation.
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
related to specific events, and taxes applicable to
prior year adjustments, if any, are recorded as identified.in the interim period in which
they occur.
Stock-Based Compensation
------------------------
The Company accounts for stock-based compensation using the intrinsic value method
prescribed in Accounting Principles Board (APB) Opinion No. 25, "Accounting for
Stock Issued to Employees," and related interpretations. Accordingly, compensation
cost for stock options is measured as the excess, if any, of the quoted market
price of the Company's stock at the date of the grant over the amount an employee
must pay to acquire the stock.
Page 8
West Pharmaceutical Services, Inc.The Company has recorded stock-based compensation for employee restricted stock
awards and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
(in thousands, except share and per share data)
(continued)for director stock-based compensation. The Company did not record
compensation cost related tofor stock option and stock purchase plansoptions for the three months ended March 31, 2004
and 2003, and 2002 because stock option grants are made at 100% of fair market value of the
stock on the grant date. The Company did not record compensation cost for shares
issued under the noncompensatory employee stock purchase plan. If the fair value
based method prescribed in SFASStatement of Financial Accounting Standards (SFAS)
No. 123, "Accounting for Stock-Based Compensation," had been applied to stock
option grants and shares issued under the employee stock purchase plan, the
Company's net income and basic and diluted net income per share would have been
reduced as summarized below:
Page 8
Notes to the Unaudited Condensed Consolidated Financial Statements
(continued)
Three Months Ended
3/31/04 3/31/03
3/31/02
---------------------------------------------------------------------------------------------------------------------------------------------------------------------
Net income, as reported:reported $ 7,000 $ 3,800
$ 6,100Add: Stock-based compensation expense included
in net income, net of tax 200 (200)
Deduct: Total stock-based compensation expense determined
under the fair value based method for all awards, net of tax (200) (400)
--------------------------------------------------------------------------------(500) -
-------------------------------------------------------------------------------------
Pro forma net income $ 6,700 $ 3,600
$ 5,700
=====================================================================================================================================================================
Net income per share:
Basic, as reported $ 0.260.47 $ 0.420.26
Basic, pro forma $ 0.250.45 $ 0.400.25
Diluted, as reported $ 0.260.46 $ 0.420.26
Diluted, pro forma $ 0.44 $ 0.25
$ 0.39
--------------------------------------------------------------------------------=====================================================================================
2. Inventories at March 31, 20032004 and December 31, 20022003 were as follows:
3/31/04 12/31/03
12/31/02
------------------------------------------------------------------------------------------------------------
Finished goods $ 18,80022,800 $ 18,90021,700
Work in process 8,700 7,40010,700 8,600
Raw materials 14,900 15,000
----------------------------------------------------------18,700 17,700
--------------------------------------------------
$ 42,40052,200 $ 41,300
==========================================================48,000
==================================================
3. Comprehensive income (loss) for the three months ended March 31, 20032004
and March 31, 20022003 was as follows:
Three Months Ended
3/31/04 3/31/03
3/31/02
--------------------------------------------------------------------------------------------------------------------------------------------------------------------
Net income $ 3,8007,000 $ 6,1003,800
Foreign currency translation adjustments (3,200) 4,500 (5,700)
Minimum pension liability translation adjustments (100) 100
100
Fair value adjustment on derivative
financial instruments - 100
--------------------------------------------------------------------------------------------------------------------------------------------------------------------
Comprehensive income (loss)$ 3,700 $ 8,400
$ 600
====================================================================================================================================================================
Page 9
West Pharmaceutical Services, Inc. and Subsidiaries
Notes to the Unaudited Condensed Consolidated Financial Statements (Unaudited)
(in thousands, except share and per share data)
(continued)
4. Net sales to external customers and operating profit (loss)income before income taxes by operatingreportable
segment for the three months ended March 31, 20032004 and March 31, 20022003 were as follows:
Three Months Ended
March 31
Net Sales:sales: 2004 2003
2002
---------------------------------------------------------------------------------------------------------------------------------------
Pharmaceutical Systems $ 116,200130,400 $ 99,100116,200
Drug Delivery Systems 3,200 1,600
2,600
------------------------------------------------------------------------
Consolidated---------------------------------------------------------------
Total $ 133,600 $ 117,800
$ 101,700
=======================================================================================================================================
Three Months Ended
March 31
Operating Profit (Loss)profit (loss): 2004 2003
2002
-------------------------------------------------------------------------------------------------------------------------------------------------
Pharmaceutical Systems $ 21,00020,600 $ 17,30020,900
Drug Delivery Systems (2,800) (3,500) (2,500)
Corporate costs (4,600) (4,900)
Pension income (expense)(5,800) (4,500)
U.S. pension expense (1,200) (1,300) 700
Costs associated with plant explosion - (5,100)
-
Argentina foreign exchange gain - 1,700
------------------------------------------------------------------------
Consolidated Total-------------------------------------------------------------------------
Operating profit 10,800 6,500
Interest expense, net (1,900) (1,900)
-------------------------------------------------------------------------
Income before income taxes $ 6,5008,900 $ 12,300
========================================================================
In4,600
=========================================================================
At December 31, 2003 Corporate assets included a $41,000 insurance receivable.
The receivable was collected in the first quarter of 2003 approximately $11,1002004 and proceeds of property, plant and equipment and $2,100 of inventory
in the Pharmaceutical Systems segment$23,500
were destroyed in a plant explosion (see footnote #10).used to repay debt. Compared with December 31, 2002,2003, there were no other
material changes in the amount of assets as of March 31, 20032004 for any
other operating
segment.
5. Common stock issued at March 31, 20032004 was 17,165,141 shares, of which 2,685,7622,340,733
shares were held in treasury. Dividends of $.20$.21 per common share were paid in the
first quarter of 20032004 and a dividend of $.20$.21 per share payable May 7, 20035, 2004 to
holders of record on April 23, 200321, 2004 was declared on March 24,26, 2004.
Below are the calculations of earnings per share for the three months ended
March 31, 2004 and 2003. Options to purchase 2,116,011 shares of common stock
that were outstanding during the quarter ended March 31, 2003, were not included
in the computation of diluted earnings per share since the options' exercise
prices were greater than the average market price of the common shares and,
therefore, the effect would be antidilutive. There were no antidilutive options
outstanding during the quarter ended March 31, 2004.
Page 10
Notes to the Unaudited Condensed Consolidated Financial Statements
(continued)
Three Months Ended
3/31/04 3/31/03
------------------------------------------------------------------
Net income $ 7,000 $ 3,800
Average common shares outstanding 14,722 14,480
Add: Dilutive stock options 345 -
------------------------------------------------------------------
Average shares assuming dilution 15,067 14,480
------------------------------------------------------------------
Basic net income per share $ 0.47 $ 0.26
Diluted net income per share $ 0.46 $ 0.26
------------------------------------------------------------------
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. Based on consultants' estimates of the costs of remediation in
accordance with applicable regulatory requirements, the Company believes the
accrued liability of $900$1,000 at March 31, 20032004 is sufficient to cover the future
costs of these remedial actions, whichactions. Although the Company cannot be certain, the
Company expects that remediation activities at all facilities will be carried out overcompleted
in 2004, with the exception of periodic groundwater compliance monitoring activity.
7. Goodwill by reportable segment as of March 31, 2004 and December 31, 2003 was
as follows:
3/31/04 12/31/03
------------------------------------------------------
Pharmaceutical Systems $ 39,200 $ 39,500 $
Drug Delivery Systems 2,000 2,000
------------------------------------------------------
$ 41,200 $ 41,500 $
======================================================
The decrease in the Pharmaceutical Systems segment goodwill balance from
December 31, 2003 is solely due to foreign currency translation adjustments.
The cost and respective accumulated amortization for the Company's patents,
was $12,100 and $5,100, respectively, as of March 31, 2004, and $11,800 and
$4,900, respectively, as of December 31, 2003. The cost basis of patents
includes foreign currency translation adjustments of $200 for the quarter ended
March 31, 2004. The Company recorded amortization expense of $200 for the three
months ended March 31, 2004 and 2003. Amortization for the full year 2004 is
estimated to be $800. The estimated annual amortization expense for each of the
next several years. The Company does not anticipate any
possible recovery from insurance or other sources.five years is approximately $800 per year.
Page 10
West Pharmaceutical Services, Inc. and Subsidiaries11
Notes to the Unaudited Condensed Consolidated Financial Statements
(Unaudited)
(in thousands, except share and per share data)
(continued)
7. The following table details the activity related to8. There were no changes in the Company's restructuring reserve which consists
of accrued severance, benefits, contract termination costs and non-cash write-offs:
Severance Continuing Discontinued
and benefits Other operations operations Total
-----------------------------------------------------------------------------------------------------
Balance, December 31, 2002 $ 800 $ 500 $ 1,300 $ 100 $ 1,400
Cash payments (200) (100) (300) (100) (400)
-----------------------------------------------------------------------------------------------------
Balance,for the quarter
ended March 31, 2003 $ 600 $ 400 $ 1,000 $ - $ 1,000 $
=====================================================================================================
Reductions to the reserve balance represent severance and benefits payments and monthly payments for a
terminated information systems contract.2004. The Company expects to complete all payments of $1,400 within
the next twelve months.
8. In December 2002, the Company sold its consumer healthcare research business located in Indianapolis,
Indiana. The results of this business have been reflected as discontinued operations in the accompanying
consolidated financial statements.
The Company was required to hold $4,300 of the proceeds from the 2001 sale of the contract manufacturing and
packaging business in trust for the repayment of certain debentures that became due and payable upon its
sale in 2001. These debentures were repaid in the first quarter of 2002 resulting in a $400, net of tax,
charge which was included in discontinued operations.
9. Other (income) expense for the three months ended March 31, 2004 and 2003 and March 31, 2002 werewas as follows:
Three Months Ended
3/31/20032004 3/31/20022003
---------------------------
Foreign exchange (gains)transaction losses $ -400 $ (1,600)-
Loss on sales of equipment and other assets 400 300
Other - Other 100 (200)
---------------------------
$ 800 $ 400
===========================
10. The components of net pension expense for domestic and international plans for
the three months ended March 31, 2004 and 2003 was as follows:
Other retirement
Pension benefits benefits
3/31/04 3/31/03 3/31/04 3/31/03
------------------------------------------------------------------------------------
Service cost $1,300 $1,000 $200 $100
Interest cost 2,900 2,600 100 200
Expected return on assets (3,600) (3,000) - -
Amortization of unrecognized transition asset - (100) - -
Amortization of prior service cost 200 200 - (100)
Recognized actuarial losses 700 800 - -
------------------------------------------------------------------------------------
Pension expense $1,500 $1,500 $300 $200
====================================================================================
Other retirement
Pension benefits benefits Total
3/31/04 3/31/03 3/31/04 3/31/03 3/31/04 3/31/03
--------------------------------------------------------------------------------------
Domestic plans $ (1,800)
===========================
During900 $1,100 $300 $200 $1,200 $1,300
International plans 600 400 - - 600 400
--------------------------------------------------------------------------------------
$ 1,500 $1,500 $300 $200 $1,800 $1,700
======================================================================================
11. In the first quarter of 2002,2004, the Company's Argentina subsidiaryCompany recorded a foreign exchange$600 gain, included in equity
in net income of $1,700affiliated companies, for its share of the gain on assets denominated in non-peso currencies duethe sale of
property owned by a Mexican affiliate. The facility was shut down during 2002
when the affiliate consolidated two of its rubber molding operations.
Page 12
Notes to the devaluation of the Argentine peso. The
foreign currency gain was subject to both Argentine federal income taxes and related U.S. dividend
withholding taxes.
Page 11
West Pharmaceutical Services, Inc. and Subsidiaries
Notes toUnaudited Condensed Consolidated Financial Statements
(Unaudited)
(continued)
10. On January 29,12. In the quarter ended March 31, 2004 and 2003, the Company'sCompany recorded in cost of
goods and services sold, $3,200 and $1,600, respectively, of additional production
costs, and in 2004, added start up costs at the new Kinston North Carolina plant sufferedfacility. The Company
also recorded an explosionadditional $500 in Kinston related legal costs in selling, general
and related fire
that resultedadministrative expenses in six deaths, a numberthe first quarter of injured personnel and substantial damage to2004.
In addition, in the building, machinery
and equipment and inventories. Thefirst quarter of 2003, the Company recognized $5,100 of direct
costs associated with the loss in
the first quarter of 2003, primarily forKinston explosion. These uninsured costs includingincluded
insurance policy deductibles, legal and investigational costs, and environmental
response costs.
In addition, at MarchAt December 31, 2003 the Company recorded a $10,600 insurance$41,000 receivable due from its
insurance provider. The receivable includes $11,100provider in connection with the settlement of its insurance claim for
the net book value ofKinston accident. The Company received the Kinston plant's property, plant and
equipment, $2,100 for the net book value of the inventory and $2,400 of other recoverable costs, offset by a
$5,000 cash advance from the Company's insurance provider.$41,000 in February 2004.
The Company has been named a defendant in a lawsuit filed in connection with
the explosion and related fire in which plaintiffs seek unspecified compensatory
and punitive damages. TheBecause this lawsuit is in its early stages, the Company
is unable to estimate these plaintiffs' alleged damages. The Company believes
that overall it has sufficient insurance to cover losses from expected litigation
associated with the possible rangeincident.
13. In January 2003, the FASB released Interpretation No. 46, "Consolidation of
lossVariable Interest Entities, an Interpretation of Accounting Research Bulletin
No. 51" (FIN 46). FIN 46 requires a company to consolidate a variable interest
entity if the company has a variable interest that will absorb the majority of
the entity's expected losses if they occur, receive a majority of the entity's
expected residual returns if they occur, or both. The new interpretation was
effective immediately at this time.the time of its release for variable interest entities
created after January 31, 2003 and effective in the first interim or annual period
beginning after December 15, 2003, for variable interest entities in which the
company holds a variable interest that it acquired before February 1, 2003. The
Company adopted FIN 46 on January 1, 2004. FIN 46 did not have an impact on the
Company's financial position or results of operations.
Page 1213
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations -------------------------------------------------------------------------------------for the Three Months ended March 31, 2004 versus March 31, 2003
Net Sales
- ---------
NetConsolidated net sales for the first quarter of 20032004 were $117.8$133.6 million compared
to $101.7$117.8 million reported in the first quarter of 2002.2003. Sales increased 16%13% from
the prior year quarter with 7% of the increase due to the impact of foreign exchange.currency
translation. Overall price increases accounted for 2.1%0.7% of the sales increase over
the first quarter of
2002.ended March 31, 2003.
First quarter 20032004 sales for the Pharmaceutical Systems segment were $116.2$130.4 million,
a $17.1$14.2 million or 17%12% increase from prior year quarter reported sales of $99.1$116.2
million. Approximately 7%8% of the increase is the result of foreign exchange. Segment sales increased in all geographic regions with significant increasescurrency
translation. Sales in Europe, mainly
in prefilled syringe components. European sales grew 38%Asia and South America increased 24% from the prior
year quarter with 25%16% of the increase resulting fromdue to foreign exchange, rates. Saleswhile sales in domestic
marketsregions were essentially the same as prior year. Continued demand for prefilled
syringe components in Europe as well as increased 8% fromsales of lyo and serum stoppers
in all international regions resulted in the increase in sales compared to the prior
year.
Revenues for the quarter ended March 31, 2004 for the Drug Delivery Systems segment,
which includes the clinical services business unit and the drug delivery business
unit, were $3.2 million, compared to $1.6 million in the prior year quarter. The
increase in domestic markets is
primarily led by demand for the Company's Westar(R) line of ready-to-sterilize components.
Drug Delivery Systems segment revenues were $1.6 million, compared to $2.6 million in the prior year quarter.
The decrease in revenue is due primarily to the continued weakness inimproved demand for clinical research in the contract researchclinical services
business unit. Drug delivery business unit revenues were consistent with those in the first quarter of 2002.
Operating Profit
- ----------------
The Company recorded operating profit of $6.5$10.8 million in the first quarter of 2003,ended
March 31, 2004, compared to $12.3operating profit of $6.5 million in the prior year
quarter. Operating profit (loss) by operating segment, including corporate costs, U.S. pension
plan income (expense) and other charges recorded in operating profit for the quarterthree months ended March 31, 2004 and
2003 and
March 31, 2002 werewas as follows:
QuarterThree Months Ended
($ in millions) March 31, 2003 March 31, 2002
---------------------------------------------------------------------------3/31/04 3/31/03
- -------------------------------------------------------------------------
Pharmaceutical Systems $ 21.0 $ 17.3$20.6 $20.9
Drug Delivery Systems (2.8) (3.5) (2.5)
Corporate costs (4.6) (4.9)
Pension income (expense)(5.8) (4.5)
U.S. pension expense (1.2) (1.3) 0.7
Argentina foreign
exchange gain - 1.7
Costs associated with plant explosion - (5.1)
- ---------------------------------------------------------------------------
Consolidated Total $ 6.5 $ 12.3
===========================================================================
Page 13
Management's Discussion and Analysis of Financial Condition and Results of Operations, continued
- -------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Operating profit $10.8 $6.5
=========================================================================
Pharmaceutical Systems' segment operating profit increased by $3.7 million, of which $1.7 million is due to the
strength of foreign currencies, particularly in Europe, versus the U.S. dollar. Improvements in 2003 resulted
from increased gross profit generated by sales volume increases. Gross margin in the Pharmaceutical Systems
segment increased to 31.2% compared to 30.6% in the prior year quarter, including the effects of improved
production efficiencies in Europe mostly relating to facility expansion projects in France and Germany. The
improvements in Europe were offset by higher domestic production costs resulting from the transfer of production
from Kinston to other manufacturing locations. Selling, general and administrative expenses were approximately
13% of net sales in both quarters.
In the Drug Delivery Systems' segment, lower clinical services revenues and higher research and development costs
on several near-term technology licensing opportunities contributed to an increased segment operating loss of
$1.0 million compared to 2002. Duringfor the first quarter of 2003, the Company completed a licensing agreement with
Chiron Corporation for the use of Chysis(TM) with a new vaccine product. West will conduct and receive reimbursement
for toxicology and other studies beginning in 2003, in addition to milestone payments connected to regulatory
filings and approvals, the majority of which are not expected to occur for two to three years.
Corporate costs were $4.62004
decreased by $0.3 million in 2003 down from the $4.9 million in 2002.prior year quarter. The decrease in Corporate costs is
the resultloss of a decrease in information systems project costs. Corporate other (income) expense for the first
quarter 2003 includes the impact of local rezoning activity which reduced the estimated fair value of a property
held for sale by $0.3 million.
U.S. pension plan expenses were $1.3 million in 2003 compared to income of $0.7 million in 2002. The additional
expense is mainly the result of declining pension plan asset values.
First quarter 2002 results include a $1.7 million foreign exchange gain recorded by the Company's subsidiary in
Argentina on net assets denominated in non-peso currenciesproduction
capacity due to the devaluation of the Argentine peso.
Costs Associated With Plant Explosion
- -------------------------------------
The Company recognized $5.1 million of direct costs associated with2003 explosion at the Kinston plant casualty losswas addressed by increasing
output at other Company facilities resulting in additional production costs and,
in 2004, added start up costs at a new Kinston facility, totaling $3.2 million and
$1.6 million in the first quarterquarters of 2003, primarily for uninsured costs, including deductibles, legal2004 and investigational costs, and
environmental response costs. Certain additional costs associated with operating under the Company's
manufacturing recovery plan, including production inefficiencies, additional freight and the use of overtime, are
included in the results of operations for the quarter. While the Company believes that these additional costs
will be subject to insurance recovery, it is unable to estimate the ultimate amount of the recovery at this time.2003,
Page 14
Management's Discussion and Analysis of Financial Condition and Results of Operations
continued
- ------------------------------------------------------------------------------------------------for the Three Months ended March 31, 2004 versus March 31, 2003
respectively. Related insurance recoveries were recognized only as those amounts
became reasonably estimable, in the second and third quarters of 2003, with a final
settlement recorded in the fourth quarter of 2003. As a result of higher than expected legalthe insurance
settlement in 2003, no additional amounts are recoverable with regard to continuing
business interruption losses that will be incurred in 2004. These increased production
costs and investigatory costs associated withan unfavorable sales mix in North America led to a decline in gross margins
for the accident,Pharmaceutical Systems segment to 30.3% in the first quarter of 2004 compared
to 31.2% in the prior year quarter. The decline in margins was largely offset by the
continued strength of the Euro and other currencies versus the U.S. dollar, resulting
in a $1.6 million favorable translation variance in comparing first quarter 2004
operating profit versus first quarter 2003. Selling, general and administrative
expenses were approximately 14% of net sales in the first quarter of 2004 compared
to 13% in the prior year quarter. The increase is due mainly to increased severance,
sales incentives and other compensation costs.
In the first quarter of 2003, the Company has
raised its full year 2003 estimaterecognized $5.1 million of uninsureddirect costs
associated with the Kinston lossplant explosion. These uninsured costs included insurance
policy deductibles, legal and investigational costs, and environmental response costs.
In the first quarter of 2004 the Company decided to approximately $10 million,
subjectshut down its plastic device plant
located in Lewes, England, for which an impairment charge was recorded in the fourth
quarter of 2003. The Company is currently working with its customers to continuing risks that the scope and costtransfer
portions of the remaining production to other plants and expects to cease all production
and finalize shut down of the facility by the end of the fourth quarter of 2004.
In the Drug Delivery Systems segment, operating losses for the quarter ended
March 31, 2004, decreased by $0.7 million from the prior year quarter. Significant
improvements in clinical services revenues resulted in increased operating profit
for the business unit. This was offset slightly by increased research and development
expense in the drug delivery business unit.
Corporate costs were $5.8 million in the first quarter ended March 31, 2004 up from
$4.5 million in 2003. The increase in the first quarter 2004 includes a $1.3 million
increase in outside services, including $0.5 million of legal responsecosts related to the
Kinston incident, $0.3 million in FDA regulatory compliance costs and investigation will increase.$0.2 million
of additional Sarbanes-Oxley compliance costs. Director stock-based compensation
increased $0.6 million resulting from the increase in the Company's stock price in
the first quarter of 2004, versus a decrease in the price in the first quarter of 2003.
These increases were slightly offset by a $0.3 million decrease in information systems
project costs.
U.S. pension plan expenses were $1.2 million in the first quarter ended March 31, 2004
compared to $1.3 million in the prior year quarter. The slight decrease in pension
expense is due to the 2003 recovery of the U.S. stock market which resulted in
unrealized gains that reduced current year expense. The Company expects full year
2004 U.S. pension expense to be $5.0 million.
Interest Expense, net
- -------------------------------------------
Net interest costs were $1.9 million in 2003 a decline of $0.5 million fromboth the prior year quarter. Thefirst quarter ended March 31, 2004
and 2003. A decrease is mainly due to increased interest income from customer advances as well as lowerin interest expense of $0.3 million, resulting from lowerdecreased
debt levels in the current year.year, was offset by a $0.3 million reduction in interest
income from customer advances.
Page 15
Management's Discussion and Analysis of Financial Condition and Results of Operations
for the Three Months ended March 31, 2004 versus March 31, 2003
Provision for Income Taxes
- --------------------------
The effective tax rate for the first quarter of 2003ended March 31, 2004 was 29%32.8% compared
to 39%28.7% in the first quarter of 2002.prior year quarter. The
costs related to the Kinston casualty loss in 2003 resulted in a 3% decrease in the effective tax rate from the
prior year. The foreign exchange gain in 2002 generated a 4% increase in the effective tax rate. The remaining
decrease in the effective tax rate from the
prior year quarter is a result of the utilization of foreign tax
credits anddue to a change in the geographic mix of earnings.
Equity in Net Income of Affiliated Companies
- --------------------------------------------
Earnings in net income of affiliated companies was $1.0 million in the first quarter
ended March 31, 2004, up from the $0.5 million in the first quarter of 2003. Earnings
from the Company's 49% owned Mexican affiliates were up $0.7 million from the prior
year quarter. In the first quarter of 2004, the Company recorded $0.6 million for
its share of the gain on the sale of property owned by its Mexican affiliate. The
facility was shut down during 2002 when the affiliate consolidated two of its rubber
molding operations. Results in the first quarter ended March 31, 2004 from Daikyo
Seiko, Ltd., a Japanese company in which the Company has a 25% ownership interest,
improveddecreased approximately $0.2 million from the prior year quarter due to increasedas export sales as well as decreases in manufacturing expenses. Resultswere
down slightly from the Company's 49% owned Mexican affiliates were consistent with those reported in the first quarter of 2002.
Discontinued Operations
- -----------------------
In December 2002, the Company sold its consumer healthcare research business located in Indianapolis, Indiana.
First quarter 2002 income for this business of $0.2 million has been reflected as discontinued operations in the
accompanying consolidated financial statements.
The Company was required to hold $4.3 million of the proceeds of the 2001 sale of the contract manufacturing and
packaging business in trust for the repayment of certain debentures that 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 discontinued operations.prior year quarter.
Net Income
- ----------
Net income for the first quarter of 2003ended March 31, 2004 was $7.0 million, or $0.46 per
diluted share, compared to $3.8 million, or $.26$0.26 per share, compared to $6.1 million, or $.42
perdiluted share, in the first
quarter of 2002.2003. Net income for the first quarter of 20032004 included $5.1$3.7 million
of
pre-tax costs ($3.32.5 million, or $0.23$0.17 per diluted share, net of tax) of additional production and
selling, general and administrative costs related to the explosion at the Kinston
facility. Net income for the first quarter of 2002 included2004 also includes a $1.7 million foreign exchange gain ($0.8$0.6 million,
or $0.05$0.04 per diluted share, netgain on the sale of tax) related toproperty by the devaluation of the Argentine peso. Also includedCompany's equity
affiliate in 2002 was a loss on
discontinued operations of $0.2 million, or $0.02 per share, net of tax. Average common shares outstanding were
14.5 million inMexico. Net income for the first quarter of 2003 included $5.1 million
of uninsured costs associated with the Kinston plant explosion and an additional
$1.6 million of business interruption losses, totaling $6.7 million ($4.3 million,
or $0.30 per diluted share, net of tax).
Liquidity and Capital Resources
- -------------------------------
Working capital at March 31, 2004 was $85.0 million compared with $97.8 million at
December 31, 2003. The working capital ratio at March 31, 2004 was 1.8 to 1.
Accounts receivable increased significantly, mostly due to the increase in March 2004
sales levels versus December 2003. Days sales outstanding was 52.8 days, increasing
slightly from the 51.3 days in 2003. Cash flows provided by operations were $8.1
million for the three months ended March 31, 2004 compared to 14.4$14.1 million in the
first quarter of 2002.prior year quarter. The decrease in operating cash flow resulted from increases in
accounts receivable, inventory and other assets which were mostly offset by the $9.2
million in operating cash flow provided by the Kinston insurance settlement.
Page 1516
Management's Discussion and Analysis of Financial Condition and Results of Operations
continued
- ------------------------------------------------------------------------------------------------
Liquidity and Capital Resources
- -------------------------------
Working capital atfor the Three Months ended March 31, 2004 versus March 31, 2003
was $79.8 million compared with $73.6 million atAt December 31, 2002. The
working capital ratio at March 31, 2003 was 1.9 to 1. Accountsthe Company recorded a $41.0 million receivable increased significantly, reflecting the
increase in March 2003 sales levels versus December 2002. Days sales outstanding remained consistent with 2002.
Cash flow from operations was $14.1 million in the first quarter of 2003, an increase of $11.2 million from the
prior year quarter. The increase is due to strong operating results in the Company's Pharmaceutical Systems
segment as well as the net impact of a cash advance from its
insurance carrierprovider in connection with the settlement of its insurance claim for the
Kinston accident. The Company received the $41.0 million in February 2004. Of the
$41.0 million received, $31.8 million was included in investing cash flows and
the remaining $9.2 million was included in operating cash flow as it related to
recoveries for business interruption and other out-of-pocket Kinston related costs.
Capital spending for the quarter ended March 31, 2004 was $16.5 million. Expenditures
included $8.1 million related to the construction of the new compression molding
facility in Kinston, casualty
loss. Low fourth quarter 2001 sales negatively impacted first quarter 2002 cash flows.
Capital spending was $7.3$2.0 million approximately half of which was focused on new products and expansion
activities, includingfor the expansion of the Company's primary production facility in Stolberg,
Germany and $1.1 million for the expansion at the Westar products.facility in Jersey Shore,
Pennsylvania. The remaining capital expenditures were for new equipment purchases and
equipment upgrades used in the production of
the Company's existing product lines.upgrades. Full year 20032004 capital spending is projected to be approximately
$45
million.$60 million, which includes $12 million related to the replacement of the Kinston
facility. The Company expects that the new Kinston facility will be completed by the
end of the third quarter of 2004.
Cash flows from investing activities also included the $0.6 million repayment of an
advance the Company had made to its equity affiliate in Mexico and $0.6 million in
collections of advances made to customers.
The Company paid cash dividends totaling $2.9$3.1 million ($0.200.21 per share) during the
first quarter of 2003.three month period ended March 31, 2004 and received $4.8 million in proceeds from
employee stock option exercises.
Debt as a percentage of total invested capital at March 31, 20032004 was 45.6%36.6% compared
with 46.5%to 40.5% at December 31, 2002. Total shareholder's equity2003. Debt was $207.0$152.2 million at March 31, 2003 compared to $201.52004, versus
the $175.0 million at December 31, 2002.2003. The decrease in debt was made possible
by the collection of the insurance receivable in the first quarter of 2004. Total
shareholders' equity was $263.1 million at March 31, 2004 compared to $257.6 million
at December 31, 2003. The increase in equity was due to current year net income and
positive foreign currency translation
adjustmentsemployee stock option exercises, partially offset by dividend payments.payments and negative
foreign currency translation adjustments.
The Company relies on operating cash flow, short-term lines of credit, and a long-term
revolving credit facility to provide for working capital needs and capital expenditures.
The Company's multi-currency revolving credit agreement consists of a $70.0 million
five year revolving credit facility and a $55.0 million 364-day line of credit. As
of March 31, 2004 the Company had borrowed $48.5 million under the five-year facility.
The Company believes that its financial condition, current capitalization structure and
expected income from operations will be sufficient to meet the Company's future expected cash
requirements, at least through July 2005, at which time the Company's revolving credit
facility expires. The Company fully expects to obtain similar creditanticipates refinancing the existing facilities at that time.in the
second quarter of 2004.
The Company is subject to certain risks and uncertainties connected with the explosion
at the Company's Kinston, NC plant. See the text under the caption "Cautionary
Statement Regarding Forward-Looking Information."
New Accounting Standards
- ------------------------
In June 2002, the Financial Accounting Standards Board (FASB) issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" (SFAS 146). SFAS 146 requires that a liability for costs associated
with a disposal activity, including those related to employee termination benefits, be recognized when the
liability is incurred, and not necessarily at the date of an entity's commitment to an exit plan as had been the
practice under the prior accounting guidance. SFAS 146, which was adopted on January 1, 2003, did not have an
impact on the Company's consolidated financial position or results of operations.
Page 1617
Management's Discussion and Analysis of Financial Condition and Results of Operations
continuedfor the Three Months ended March 31, 2004 versus March 31, 2003
New Accounting Standards
- ------------------------------------------------------------------------------------------------------------------------
In November 2002,January 2003, the FASB released Interpretation No. 45, "Guarantor's46, "Consolidation of Variable
Interest Entities, an Interpretation of Accounting Research Bulletin No. 51" (FIN 46).
FIN 46 requires a company to consolidate a variable interest entity if the company
has a variable interest that will absorb the majority of the entity's expected losses
if they occur, receive a majority of the entity's expected residual returns if they
occur, or both. The new interpretation was effective immediately at the time of its
release for variable interest entities created after January 31, 2003 and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others" (FIN 45) was issued. FIN 45 elaborates oneffective
in the disclosures to be made by a guarantor about its obligations under certain guarantees that it has issued. The
disclosure requirements of FIN 45 became effective for financial statements endingfirst interim or annual period beginning after December 15, 2002.2003, for variable
interest entities in which the company holds a variable interest that it acquired
before February 1, 2003. The Company adopted FIN 45 also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the
fair value of the obligation undertaken in issuing the guarantee. The recognition provisions apply46 on a
prospective basis to guarantees issued or modified after December 31, 2002.January 1, 2004. FIN 4546 did
not have a material
effectan impact on the Company's consolidated financial position or results of operations.
In November 2002, the Emerging Issues Task Force ("EITF") reached a consensus opinion on EITF 00-21, "Revenue
Arrangements with Multiple Deliverables." The consensus provides guidance on the timing of revenue recognition
for sales arrangements that deliver more than one product or service. EITF 00-21 is effective for revenue
arrangements entered into in fiscal periods beginning after June 15, 2003. The Company is currently analyzing
the impact, if any, the adoption of EITF 00-21 will have on its financial statements.
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.
In order to minimize the exposure to foreign currency fluctuations, theThe Company borrowed 10.0 million British
Pound Sterling (BPS) in 2002 and designated the borrowing as a hedge of the Company's net investment in its
U.K. subsidiaries. Due to unfavorable interest rates, the 10.0 million BPS debt was repaid in the first quarter
of 2003. The mark to market adjustments recorded as a cumulative translation adjustment to shareholders' equity
will remain there until the disposal of the investment.
Due to continuing fluctuations in the Japanese Yen, in January 2003, the Company entered into an arrangementperiodically uses forward contracts to hedge its net investment in Daikyo Seiko, Ltd., a Japanese company in which thecertain transactions or to
neutralize month-end balance sheet exposures on cross currency intercompany loans.
The Company has a 25% ownership
interest. The Company's strategy isnumber of forward contracts with fair values totaling $0.1 million
as of March 31, 2004 to minimize the exposure to foreign currency fluctuations by employing
borrowingspurchase various currencies in the functional currency of the investment. The Company borrowed 1.7 billion Yen under its
five-year revolving credit facilityEurope and has designated the borrowing as a hedge of its net investment in the
Company's investment in Daikyo.Asia.
Page 1718
Management's Discussion and Analysis of Financial Condition and Results of Operations
continued
- ------------------------------------------------------------------------------------------------
In March 2003, the Company entered into two forward contracts in order to hedge foreign currency exposure on
cross currency intercompany loans. Both forward contracts, which were designated as fair value hedges, terminate
in April 2003 when the intercompany loans will be repaid. The notional amounts for the two forward contracts
entered into by a subsidiary with a BPS functional currency were $3.0 million and 12.2 million Danish Krone.Three Months ended March 31, 2004 versus March 31, 2003
Cautionary Statement Regarding Forward-Looking Information
- ----------------------------------------------------------
Certain statements contained in this Report or in other company documents and certain
statements that may be made by management of the Company orally may contain
forward-looking statements as defined in the Private Securities Litigation Reform
Act of 1995. These statements can be identified by the fact that they do not relate
strictly to historic or current facts. They use words such as "estimate," "expect,"
"intend," "believe," "plan," "anticipate" and other words and terms of similar
meaning in connection with any discussion of future operating or financial
performance or condition. In particular, these include statements concerning future
actions, future performance or results of current and anticipated products, sales
efforts, expenses, the outcome of contingencies such as legal proceedings and
financial results.
Because actual results are affected by risks and uncertainties, the Company cautions
investors that actual results may differ materially from those expressed or implied
in any forward lookingforward-looking statement.
It is not possible to predict or identify all such risks and uncertainties, but
factors that could cause the actual results to differ materially from expected and
historical results include, but are not limited to: sales demand, timing of customers'
projects; successful development of proprietary drug delivery technologies, systems
and systems;products, including but not limited to risks associated with clinical trials and
with the creation, use and defense of intellectual property; regulatory, licensee
and/or market acceptance of products based on those technologies;technologies or generic versions
of commercial products; competitive pressures; the strength or weakness of the
U.S. dollar; inflation; the cost and availability of raw materials; the availability
of credit facilities; and, statutory tax rates.
With respect to the explosion and fire at the Company's Kinston, NC plant, the
following factors should also be taken into consideration: the timely replacementcompletion
of the new production facility at Kinston and customers approval of the facility
and products produced there, and achieving cost efficient levels of production capacity;in the
adequacy and timing of insurance recoveries for propertynew facility; the costs associated with business interruption losses; the
unpredictability of existing and future possible litigation related to the explosion
and the adequacy of insurance recoveries for costs associated with such litigation;
government actions or investigations affecting the Company; the ability of the Company
to successfully shiftcontinue to meet production and compounding capacity torequirements from other plant sites and third parties
in a timely manner,
including the successful integration of experienced personnel to other production sites;manner; the extent of uninsured costs for, among other things, legal
and investigation services and incremental insurance; and regulatory approvals and
customer acceptance of goods from alternate sites.
The Company assumes no obligation to update forward-looking statements as circumstances
change. Investors are advised, however, to consult any further disclosures the Company
makes on related subjects in the Company's 10-K, 10-Q and 8-K reports.
Page 1819
Item 3. Quantitative and Qualitative Disclosure about Market RiskRisk.
---------------------------------------------------------
The information called for by this item is included in the text under the
caption "Market Risk" in Item 2. Management's"Management's Discussion and Analysis of
Financial Condition and Results of Operations" and should be read in
conjunction with the Company's Annual Report on Form 10-K filed for the year
ended December 31, 2002.2003.
Item 4. Controls and ProceduresProcedures.
------------------------
In connection with the preparation and filing of the Company's Quarterly Report on Form 10-Q for the
third quarter of 2002, theThe Company has established disclosure controls and procedures (as defined
under SEC Rules 13a-1413a-15(e) and 15d-14). These controls and procedures15d-15(e)) that are designed to, among other
things, ensure that information required to be disclosed in the Company's
periodic reports is recorded, processed, summarized and reported on a timely
basis and that such information is made known to the Company's Chief Executive
Officer and Chief Financial Officer, (together, the "Certifying Officers")as appropriate, to allow timely decisions
regarding required disclosure.
As part of this process,The Company's management, with the Company also established a
Disclosure Committee of key management from a variety of functional areas. The Disclosure Committee
monitors the Company's disclosure controls and procedures, assists the Certifying Officers in evaluating
their effectiveness and supports the Certifying Officers' certificationparticipation of the Company's periodic
reports as required by SEC Rule 13a-14Chief Executive
Officer and 15d-14.
The Certifying Officers havethe Chief Financial Officer, has evaluated the effectiveness
of the Company's disclosure controls and procedures within 90 days prior toas of the filing dateend of the
period covered by this quarterly report, and based on such evaluation, have
concluded that such disclosure controls and procedures are effective.
There were no significant changes in internal controls or in other factors that could significantly
affectAdditionally, the Company's management, with the participation of the Chief
Executive Officer and the Chief Financial Officer, has evaluated the Company's
internal controls subsequentcontrol over financial reporting, and based on such evaluation, has
concluded that there has been no change to the date ofCompany's internal control
over financial reporting that occurred during the evaluation mentioned above. In
addition, no corrective actions were takenquarter ended March 31, 2004
that has materially affected, or required with regardis reasonably likely to significant deficiencies or
material weaknesses.materially affect,
these internal controls.
Page 1920
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) See Index to Exhibits on pagespage F-1 F-2 and F-3 of this Report.
(b) On February 5, 2003, the Company filed a Current Report on Form 8-K.
Under Item 5 of that Report, the Company furnished to the Commission
press releases dated January 29, January 30 and February 4, 2003.
On February 13, 2003, the Company filed a Current Report on Form 8-K.
Under Item 5 of that Report, the Company furnished to the Commission the
press release dated February 11, 2003.
On February 24, 2003, the Company filed a Current Report of Form 8-K.
Under Item 5 of that Report, the Company furnished to the Commission
the press release dated February 20, 2003.
On April 22, 2003,17, 2004, the Company filed a Current Report on Form 8-K.
Under Item 12 of that Report, the Company furnished to the Commission
the press release dated April 22, 2003.February 17, 2004.
Page 2021
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 13, 20035, 2004 /s/ Linda R. AltemusWilliam J. Federici
- ------------- --------------------------------------------------------------- ---------------------------------------------
Date Linda R. Altemus
Vice President and Chief Financial Officer
Page 21
CERTIFICATION
I, Donald E. Morel, Jr. Ph.D., certify that:
1. I have reviewed this quarterly report on Form 10-Q of West Pharmaceutical Services, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or
omit to state a material fact necessary to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial information included in this
quarterly report, fairly present in all material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within
90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls
and procedures based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to
the registrant's auditors and the audit committee of registrant's board of directors (or persons performing
the equivalent function):
a) all significant deficiencies in the design or operation of internal controls which could adversely
affect the registrant's ability to record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a significant
role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this quarterly report whether or not
there were significant changes in internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation, including any corrective actions
with regard to significant deficiencies and material weaknesses.
Date: May 13, 2003 /s/ Donald E. Morel, Jr. Ph.D
------------------------------------
Donald E. Morel, Jr. Ph.D.
Chairman of the Board,
President and Chief Executive Officer
Page 22
CERTIFICATION
I, Linda R. Altemus, certify that:
1. I have reviewed this quarterly report on Form 10-Q of West Pharmaceutical Services, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or
omit to state a material fact necessary to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial information included in this
quarterly report, fairly present in all material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within
90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls
and procedures based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to
the registrant's auditors and the audit committee of registrant's board of directors (or persons performing
the equivalent function):
a) all significant deficiencies in the design or operation of internal controls which could adversely
affect the registrant's ability to record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a significant
role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this quarterly report whether or not
there were significant changes in internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation, including any corrective actions
with regard to significant deficiencies and material weaknesses.
Date: May 13, 2003 /s/ Linda R. Altemus
-----------------------------------------
Linda R. AltemusWilliam J. Federici
Vice President and Chief Financial Officer
INDEX TO EXHIBITS
Exhibit
Number
(2) NoneNone.
(3) (a) Amended and Restated Articles of Incorporation of the Company through
January 4, 1999 incorporated by reference to Exhibit (3)(a) of 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, 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).March 6, 2004.
(4) (a) Form of stock certificate for common stock incorporated by reference to
Exhibit (4) (a) of the Company's Annual Report on Form 10-K for the year
ended December 31, 1998 (File No. 1-8036)No.1-8036).
(4)(a)(1) (b) Article 5, 6, 8(c) and 9 of the Amended and Restated Articles of Incorporation
of the Company, incorporated by reference to Exhibit (3)(a) of the Company's
Annual Report on Form 10-K for the year ended December 31, 1998
(File No. 1-8036).
(4)(a)(2) (c) Article I and V of the Bylaws of the Company, as amended 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) (b) Note Purchase Agreement dated as of April 8, 1999 among the Company and the insurance
companies identified on a schedule thereto, incorporated by reference to Exhibit (4)(b)
of the Company's Form 10-Q for the quarter ended September 30, 2000 (File No. 1-8036).
F - 1
INDEX TO EXHIBITS
Exhibit
Number
(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).
(4) (c) (5) Fourth Amendment dated as of July 13, 2001 to the Credit Agreement, incorporated
by reference to Exhibitthrough March 6, 2004.
(10) (a) of the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 2001 (File No 1-8036).
(4) (c) (6) Extension Agreement dated as of January 5, 2001 to the Credit Agreement, incorporated by
reference to Exhibit (4) (c) (6) of the Company's Annual Report on Form 10-K for the year
ended December 31, 2001 (File No. 1-8036).
(4) (c) (7) Fifth Amendment dated as of July 17, 2002 to the Credit Agreement, incorporated by
reference to Exhibit (4) ( c) (7) of the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 2002 (File No. 1-8036).
F - 2
INDEX TO EXHIBITS
Exhibit
Number
(10) Management Incentive Plan 2003.None.
(11) Non applicable.Applicable.
(15) None.
(18) None.
(19) None.
(22) None.
(23) Non Applicable.
(24) None.
(99)(31) (a) Section 302 Certification by Donald E. Morel, Jr., Ph.D.
(31) (b) Section 302 Certification by William J. Federici.
(32) (a) Certification by Donald E. Morel, Jr., Ph.D., pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
(99)(32) (b) Certification by Linda R. Altemus,William J. Federici, pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
F-3(99) None.
F - 1