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, 2004
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 1934 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 X No .
--- ---
March 31, 2004 - 14,824,408
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, 2004
Part I -Financial Information
Item 1. Financial Statements (Unaudited) Page
Consolidated Statements of Income for the Three Months ended March 31,
2004 and 2003 3
Condensed Consolidated Balance Sheets at March 31, 2004 and December 31,
2003 4
Consolidated Statement of Shareholder's Equity for the Three Months ended
March 31, 2004 5
Condensed Consolidated Statements of Cash Flows for the Three Months ended
March 31, 2004 and 2003 6
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations 13
Item 3. Quantitative and Qualitative Disclosures about Market Risk 19
Item 4. Controls and Procedures 19
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K 20
SIGNATURES 21
Index to Exhibits F-1
Page 3
Part I. Financial Information
Item 1. Financial Statements
West Pharmaceutical Services, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(in thousands, except per share data)
Three Months Ended
March 31, 2004 March 31, 2003
- --------------------------------------------------------------------------------
Net sales $ 133,600 $ 117,800
Cost of goods and services sold 93,000 81,400
- --------------------------------------------------------------------------------
Gross profit 40,600 36,400
Selling, general and administrative expenses 29,000 24,400
Costs associated with plant explosion - 5,100
Other expense, net 800 400
- --------------------------------------------------------------------------------
Operating profit 10,800 6,500
Interest expense, net 1,900 1,900
- --------------------------------------------------------------------------------
Income before income taxes 8,900 4,600
Provision for income taxes 2,900 1,300
- --------------------------------------------------------------------------------
Income from consolidated operations 6,000 3,300
Equity in net income of affiliated companies 1,000 500
- --------------------------------------------------------------------------------
Net income $ 7,000 $ 3,800
================================================================================
Net income per share:
Basic $ 0.47 $ 0.26
Assuming dilution $ 0.46 $ 0.26
Average common shares outstanding 14,722 14,480
Average shares assuming dilution 15,067 14,480
Dividends declared per common share $ 0.21 $ 0.20
See accompanying notes to condensed consolidated financial statements.
Page 4
West Pharmaceutical Services, Inc. and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
(in thousands)
March 31, December 31,
2004 2003
- ----------------------------------------------------------------------------------
ASSETS
Current assets:
Cash, including cash equivalents $ 40,600 $ 37,800
Accounts receivable 83,700 73,900
Inventories 52,200 48,000
Insurance receivable - 41,000
Deferred income taxes 6,000 6,100
Other current assets 12,300 9,900
- ----------------------------------------------------------------------------------
Total current assets 194,800 216,700
- ----------------------------------------------------------------------------------
Property, plant and equipment 572,700 563,600
Less accumulated depreciation and amortization 313,000 307,900
- ----------------------------------------------------------------------------------
259,700 255,700
Investments in and advances to affiliated companies 22,900 22,200
Goodwill 41,200 41,500
Pension asset 49,800 50,500
Deferred income taxes 20,700 20,500
Patents 7,000 6,900
Other assets 8,700 9,600
- ----------------------------------------------------------------------------------
Total Assets $ 604,800 $ 623,600
==================================================================================
LIABILITES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable $ 3,600 $ 8,000
Accounts payable 26,600 29,400
Accrued expenses:
Salaries, wages and benefits 19,900 24,500
Income taxes payable 11,800 8,400
Restructuring costs 1,400 1,400
Deferred income taxes 16,600 16,600
Other current liabilities 29,900 30,600
- ----------------------------------------------------------------------------------
Total current liabilities 109,800 118,900
- ----------------------------------------------------------------------------------
Long-term debt 148,600 167,000
Deferred income taxes 45,100 44,800
Other long-term liabilities 38,200 35,300
Shareholders' equity 263,100 257,600
- ----------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $ 604,800 $ 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, 2003 $ 4,300 $ 30,100 $ 281,200 $ 18,900 $ (76,900) $ 257,600
Net income 7,000 7,000
Shares issued under stock plans (500) 5,500 5,000
Dividends declared (3,200) (3,200)
Foreign currency translation
adjustment (3,200) (3,200)
Minimum pension liability
translation adjustment (100) (100)
- --------------------------------------------------------------------------------------------------------
Balance, March 31, 2004 $ 4,300 $ 29,600 $ 285,000 $ 15,600 $ (71,400) $ 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
- ------------------------------------------------------------------------------------
Cash flows provided by (used in) operating activities:
Net income $ 7,000 $ 3,800
Depreciation and amortization 8,300 8,100
Other non-cash items, net 1,000 900
Changes in assets and liabilities (8,200) 1,300
- ------------------------------------------------------------------------------------
Net cash provided by operating activities 8,100 14,100
- ------------------------------------------------------------------------------------
Cash flows provided by (used in) investing activities:
Property, plant and equipment acquired (16,500) (7,300)
Insurance proceeds received for property damage 31,800 500
Repayment of affiliate loan 600 -
Customer advances, net of repayments 600 100
Other (100) -
- ------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 16,400 (6,700)
- ------------------------------------------------------------------------------------
Cash flows (used in) provided by financing activities:
Net (repayments) borrowings under revolving
credit agreements (18,900) 1,200
Repayment of other long-term debt - (100)
Other notes payable, net (4,600) (2,600)
Dividend payments (3,100) (2,900)
Issuance of common stock 4,800 -
- ------------------------------------------------------------------------------------
Net cash used in financing activities (21,800) (4,400)
- ------------------------------------------------------------------------------------
Effect of exchange rates on cash 100 900
- ------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 2,800 3,900
Cash, including cash equivalents at beginning of period 37,800 33,200
- ------------------------------------------------------------------------------------
Cash, including cash equivalents at end of period $ 40,600 $ 37,100
====================================================================================
See accompanying notes to condensed consolidated financial statements.
Page 7
West Pharmaceutical Services, Inc. and Subsidiaries
Notes to the Unaudited Condensed Consolidated Financial Statements
(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, 2004 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 2003 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 Period Accounting Policy
--------------------------------
In the opinion of management, the unaudited condensed 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, 2004 and the results of operations and cash flows for
the 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.
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, if any, are recorded 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.
The Company has recorded stock-based compensation for employee restricted stock
awards and for director stock-based compensation. The Company did not record
compensation cost for stock options for the three months ended March 31, 2004
and 2003, because stock option grants are 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 Statement 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
-------------------------------------------------------------------------------------
Net income, as reported $ 7,000 $ 3,800
Add: Stock-based compensation expense included
in net income, net of tax 200 (200)
Deduct: Total stock-based compensation expense determined
under fair value based method for all awards, net of tax (500) -
-------------------------------------------------------------------------------------
Pro forma net income $ 6,700 $ 3,600
=====================================================================================
Net income per share:
Basic, as reported $ 0.47 $ 0.26
Basic, pro forma $ 0.45 $ 0.25
Diluted, as reported $ 0.46 $ 0.26
Diluted, pro forma $ 0.44 $ 0.25
=====================================================================================
2. Inventories at March 31, 2004 and December 31, 2003 were as follows:
3/31/04 12/31/03
--------------------------------------------------
Finished goods $ 22,800 $ 21,700
Work in process 10,700 8,600
Raw materials 18,700 17,700
--------------------------------------------------
$ 52,200 $ 48,000
==================================================
3. Comprehensive income (loss) for the three months ended March 31, 2004
and 2003 was as follows:
Three Months Ended
3/31/04 3/31/03
------------------------------------------------------------------------------
Net income $ 7,000 $ 3,800
Foreign currency translation adjustments (3,200) 4,500
Minimum pension liability translation adjustments (100) 100
------------------------------------------------------------------------------
Comprehensive income $ 3,700 $ 8,400
==============================================================================
Page 9
Notes to the Unaudited Condensed Consolidated Financial Statements
(continued)
4. Net sales to external customers and income before income taxes by reportable
segment for the three months ended March 31, 2004 and 2003 were as follows:
Three Months Ended
March 31
Net sales: 2004 2003
---------------------------------------------------------------
Pharmaceutical Systems $ 130,400 $ 116,200
Drug Delivery Systems 3,200 1,600
---------------------------------------------------------------
Total $ 133,600 $ 117,800
===============================================================
Three Months Ended
March 31
Operating profit (loss): 2004 2003
-------------------------------------------------------------------------
Pharmaceutical Systems $ 20,600 $ 20,900
Drug Delivery Systems (2,800) (3,500)
Corporate costs (5,800) (4,500)
U.S. pension expense (1,200) (1,300)
Costs associated with plant explosion - (5,100)
-------------------------------------------------------------------------
Operating profit 10,800 6,500
Interest expense, net (1,900) (1,900)
-------------------------------------------------------------------------
Income before income taxes $ 8,900 $ 4,600
=========================================================================
At December 31, 2003 Corporate assets included a $41,000 insurance receivable.
The receivable was collected in the first quarter of 2004 and proceeds of $23,500
were used to repay debt. Compared with December 31, 2003, there were no other
material changes in the amount of assets as of March 31, 2004 for any operating
segment.
5. Common stock issued at March 31, 2004 was 17,165,141 shares, of which 2,340,733
shares were held in treasury. Dividends of $.21 per common share were paid in the
first quarter of 2004 and a dividend of $.21 per share payable May 5, 2004 to
holders of record on April 21, 2004 was declared on March 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 $1,000 at March 31, 2004 is sufficient to cover the future
costs of these remedial actions. Although the Company cannot be certain, the
Company expects that remediation activities at all facilities will be completed
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 five years is approximately $800 per year.
Page 11
Notes to the Unaudited Condensed Consolidated Financial Statements
(continued)
8. There were no changes in the Company's restructuring reserve for the quarter
ended March 31, 2004. The Company expects to complete payments of $1,400 within
the next twelve months.
9. Other expense for the three months ended March 31, 2004 and 2003 was as follows:
Three Months Ended
3/31/2004 3/31/2003
---------------------------
Foreign exchange transaction losses $ 400 $ -
Loss on sales of equipment and other assets 400 300
Other - 100
---------------------------
$ 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 $ 900 $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 2004, the Company recorded a $600 gain, included in equity
in net income of affiliated companies, for its share of the gain on the 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 Unaudited Condensed Consolidated Financial Statements
(continued)
12. In the quarter ended March 31, 2004 and 2003, the Company 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 facility. The Company
also recorded an additional $500 in Kinston related legal costs in selling, general
and administrative expenses in the first quarter of 2004.
In addition, in the first quarter of 2003, the Company recognized $5,100 of direct
costs associated with the Kinston explosion. These uninsured costs included
insurance policy deductibles, legal and investigational costs, and environmental
response costs.
At December 31, 2003 the Company recorded a $41,000 receivable due from its
insurance provider in connection with the settlement of its insurance claim for
the Kinston accident. The Company received the $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. Because 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 incident.
13. In January 2003, the FASB released Interpretation No. 46, "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 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 13
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
- ---------
Consolidated net sales for the first quarter of 2004 were $133.6 million compared
to $117.8 million reported in the first quarter of 2003. Sales increased 13% from
the prior year quarter with 7% of the increase due to the impact of foreign currency
translation. Overall price increases accounted for 0.7% of the sales increase over
the quarter ended March 31, 2003.
First quarter 2004 sales for the Pharmaceutical Systems segment were $130.4 million,
a $14.2 million or 12% increase from prior year quarter reported sales of $116.2
million. Approximately 8% of the increase is the result of foreign currency
translation. Sales in Europe, Asia and South America increased 24% from the prior
year quarter with 16% of the increase due to foreign exchange, while sales in domestic
regions were essentially the same as prior year. Continued demand for prefilled
syringe components in Europe as well as increased sales 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 revenue is due primarily to improved demand in the clinical services
business unit.
Operating Profit
- ----------------
The Company recorded operating profit of $10.8 million in the first quarter ended
March 31, 2004, compared to operating profit of $6.5 million in the prior year
quarter. Operating profit (loss) for the three months ended March 31, 2004 and
2003 was as follows:
Three Months Ended
3/31/04 3/31/03
- -------------------------------------------------------------------------
Pharmaceutical Systems $20.6 $20.9
Drug Delivery Systems (2.8) (3.5)
Corporate costs (5.8) (4.5)
U.S. pension expense (1.2) (1.3)
Costs associated with plant explosion - (5.1)
- -------------------------------------------------------------------------
Operating profit $10.8 $6.5
=========================================================================
Pharmaceutical Systems' segment operating profit for the first quarter of 2004
decreased by $0.3 million from the prior year quarter. The loss of production
capacity due to the 2003 explosion at the Kinston plant was 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 quarters of 2004 and 2003,
Page 14
Management's Discussion and Analysis of Financial Condition and Results of Operations
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 the 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 an unfavorable sales mix in North America led to a decline in gross margins
for the 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 recognized $5.1 million of direct costs
associated with the Kinston plant 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 shut 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 transfer
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 costs related to the
Kinston incident, $0.3 million in FDA regulatory compliance costs and $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 both the first quarter ended March 31, 2004
and 2003. A decrease in interest expense of $0.3 million, resulting from decreased
debt levels in the current 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 ended March 31, 2004 was 32.8% compared
to 28.7% in the prior year quarter. The increase in the effective rate from the
prior year quarter is due 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,
decreased approximately $0.2 million from the prior year quarter as export sales were
down slightly from the prior year quarter.
Net Income
- ----------
Net income for the first quarter ended March 31, 2004 was $7.0 million, or $0.46 per
diluted share, compared to $3.8 million, or $0.26 per diluted share, in the first
quarter of 2003. Net income for the first quarter of 2004 included $3.7 million
($2.5 million, or $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 2004 also includes a $0.6 million,
or $0.04 per diluted share, gain on the sale of property by the Company's equity
affiliate in Mexico. 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 $14.1 million in the
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 16
Management's Discussion and Analysis of Financial Condition and Results of Operations
for the Three Months ended March 31, 2004 versus March 31, 2003
At December 31, 2003 the Company recorded a $41.0 million receivable due from its
insurance provider 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, $2.0 million for the expansion of the facility in Stolberg,
Germany and $1.1 million for the expansion at the Westar facility in Jersey Shore,
Pennsylvania. The remaining expenditures were for new equipment purchases and
equipment upgrades. Full year 2004 capital spending is projected to be approximately
$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 $3.1 million ($0.21 per share) during the
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, 2004 was 36.6% compared
to 40.5% at December 31, 2003. Debt was $152.2 million at March 31, 2004, versus
the $175.0 million at December 31, 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
employee stock option exercises, partially offset by dividend 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, capitalization structure and
expected income from operations will be sufficient to meet the Company's future cash
requirements, at least through July 2005, at which time the Company's revolving credit
facility expires. The Company anticipates refinancing the existing facilities 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."
Page 17
Management's Discussion and Analysis of Financial Condition and Results of Operations
for the Three Months ended March 31, 2004 versus March 31, 2003
New Accounting Standards
- ------------------------
In January 2003, the FASB released Interpretation No. 46, "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 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.
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.
The Company periodically uses forward contracts to hedge certain transactions or to
neutralize month-end balance sheet exposures on cross currency intercompany loans.
The Company has a number of forward contracts with fair values totaling $0.1 million
as of March 31, 2004 to purchase various currencies in Europe and Asia.
Page 18
Management's Discussion and Analysis of Financial Condition and Results of Operations
for the 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-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 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 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 completion
of the new production facility at Kinston and customers approval of the facility
and products produced there, and achieving cost efficient levels of production in the
new 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 continue to meet production requirements from other plant sites and third parties
in a timely 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 19
Item 3. Quantitative and Qualitative Disclosure about Market Risk.
---------------------------------------------------------
The information called for by this item is included in the text under the
caption "Market Risk" in Item 2. "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 for the year
ended December 31, 2003.
Item 4. Controls and Procedures.
------------------------
The Company has established disclosure controls and procedures (as defined
under SEC Rules 13a-15(e) and 15d-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, as appropriate, to allow timely decisions
regarding required disclosure.
The Company's management, with the participation of the Chief Executive
Officer and the Chief Financial Officer, has evaluated the effectiveness
of the Company's disclosure controls and procedures as of the end of the
period covered by this quarterly report, and based on such evaluation, have
concluded that such disclosure controls and procedures are effective.
Additionally, the Company's management, with the participation of the Chief
Executive Officer and the Chief Financial Officer, has evaluated the Company's
internal control over financial reporting, and based on such evaluation, has
concluded that there has been no change to the Company's internal control
over financial reporting that occurred during the quarter ended March 31, 2004
that has materially affected, or is reasonably likely to materially affect,
these internal controls.
Page 20
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) See Index to Exhibits on page F-1 of this Report.
(b) On February 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 February 17, 2004.
Page 21
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 5, 2004 /s/ William J. Federici
- ------------ ---------------------------------------------
Date William J. Federici
Vice President and Chief Financial Officer
INDEX TO EXHIBITS
Exhibit
Number
(2) None.
(3) (a) Amended and Restated Articles of Incorporation of the Company through
January 4, 1999 incorporated by reference to 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 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).
(4) (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) (c) Article I and V of the Bylaws of the Company, as amended through March 6, 2004.
(10) None.
(11) Non Applicable.
(15) None.
(18) None.
(19) None.
(22) None.
(23) Non Applicable.
(24) None.
(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.
(32) (b) Certification by William J. Federici, pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(99) None.
F - 1
