Financial Review
--------------------
West Pharmaceutical Services (the Company) applies value-added
services to the process of bringing new drug therapies and
healthcare products to global markets. West's technologies
include the design and manufacture of packaging components for
pharmaceutical, healthcare and consumer products (device product
development); research and development of drug delivery systems
(drug delivery research and development); contract laboratory
services, clinical services and other services that support the
manufacturing, filling and packaging of pharmaceutical and
healthcare products (contract services).
The following is management's discussion and analysis of the
Company's operating results for the three years ended December
31, 1999, and its financial position as of year-end 1999. The
information should be read in conjunction with the financial
statements and accompanying notes appearing elsewhere in this
report.
Results of Operations
---------------------
The Company's 1999 net income was $38.7 million, or $2.59 per
share. This result includes net tax benefits totaling $2.3
million from a combination of a foreign tax refund related to a
dividend resulting from a fourth quarter tax reorganization of
European subsidiaries and the favorable settlement of a prior
years' tax appeal; a $4.2 million charge associated with the
write-off of a plastic product line that has not gained market
acceptance; and the reversal of $3.5 million of the 1996
restructuring charge related to the Company's operation in Puerto
Rico due to a change in the business plan for that operation. In
1998, net income was $6.7 million, or $.41 per share, and
included a charge of $28.2 million related to in-process research
and development associated with the 1998 acquisition of
DanBioSyst UK Ltd. (DBS) and a $2.5 million net restructuring
charge related to staff reductions. Net income in 1997 was $44.4
million, or $2.69 per share, and includes a $7.9 million net tax
benefit associated mainly with the tax reorganization of the
Company's German subsidiaries.
Excluding the items noted in all three years, the Company's
1999 net income of $36.3 million, or $2.44 per share, compares
with 1998 net income of $37.4 million, or $2.28 per share, and
1997 net income of $36.5 million, or $2.21 per share.
Restructuring charges apply to the device product development
segment and the in-process research and development charge
applies to the drug delivery segment.
Net Sales
---------
Net sales were $469.1 million in 1999 compared with $449.7
million for 1998. The impact of the strong U.S. dollar reduced
reported sales by about $10 million. At constant exchange rates,
sales in 1999 were 6.5% higher than 1998 net sales.
Sales of manufactured device products for the healthcare and
consumer markets increased 7.8% (measured at constant exchange
rates) in 1999 compared with 1998, with all geographic regions
showing growth. The primary growth driver for this segment is
demand for packaging components for pharmaceutical products. A
number of factors contributed to this increase: 1) increased
customer demand for higher value components for insulin and
vaccines; 2) a switch by certain customers to higher value
components to improve their production efficiencies; and 3)
increased customer inventories of some products related to year
2000 contingency planning. Sales in European markets increased
9.8%, and in domestic markets sales increased 5.9%. In domestic
markets, the sales increase to healthcare markets was offset in
part by a decline in sales to consumer markets, mainly due to the
loss of customers replacement products to other suppliers.
Also, sales increased significantly in Asia/Pacific markets due
to higher volume.
Future sales growth in this segment will be achieved by
focusing on the needs of customers with planned introductions of
new products and by providing new services and products. The
competitive environment for the products in this business segment
is growing and, when combined with government pressures to drive
healthcare costs down, limit our ability to increase pricing.
Contract services sales increased by 1.4% for the full year.
The acquisition of the clinical services business units in April
1999 added $10.1 million to 1999 sales, although this sales level
was below expectations due to project postponements and
cancellations. Sales of contract manufacturing and packaging
services decreased by 11% compared with 1998. A number of
factors contributed to the sales decline for this business unit:
1) a loss of sales related to two product lines that customers
converted to in-house production; 2) low demand for certain
customers' products; 3) postponements of customers' new product
launches; and 4) customer product cancellations due to regulatory
issues. The impact of these events has prompted management to
increase the size of the dedicated sales force while continuing
to leverage other sales resource efforts to offer customers the
full supply chain capability of all its business units.
Management is also reviewing the need for additional production
capabilities and has implemented changes in management for this
business unit.
Revenues attributable to drug delivery research and development
totaled $1.3 million in 1999 compared with $1.5 million in 1998.
In 1999, this segment was focused on the preparation of
Investigational New Drug (IND) applications using proprietary
delivery systems. Late in 1999, two INDs were filed with the
U.S. Food and Drug Administration (FDA) for nasal delivery of
morphine and leuprolide using the Company's proprietary chitosan-
based system. These two products are now entering Phase I
clinical trials and the Company is seeking licensees for these
products.
The Company currently expects a decline in earnings in the first
half of 2000, with a significant decline in first quarter
earnings, versus the same periods in 1999. The time required to
secure additional projects for the Company's contract services
coupled with device product development sales growth (at constant
exchange rates) at close to market rates and no significant
revenue from drug delivery research and development, will cause
this decline.
In 1998, net sales at $449.7 million were 1% below 1997 net
sales of $452.5 million. Reported sales were reduced by about
$2.6 million compared with 1997 due to the strong U.S. dollar
versus most European and Asian currencies.
Sales of manufactured device products for the healthcare and
consumer markets decreased 1% (measured at constant exchange
rates) in 1998 compared with 1997. Sales declined in all markets
with the exception of Europe where sales increased 9% partially
due to the acquisition of Betraine Limited. Sales in domestic
markets decreased 6% mainly reflecting lower sales to several key
healthcare and consumer customers. These reductions resulted in
part from reductions in customers' inventory levels, and a
combination of lower resin prices and loss of business at three
accounts to competitors. Lower demand in Asian and South
American markets reflected local financial crises.
Contract manufacturing and packaging service sales increased 3%
in 1998 compared with 1997, but excluding the impact of the lower
level of Company-supplied materials for 1998 production, sales
increased by 8% as several customers prepared for product
introductions.
Gross Profit
------------
The consolidated gross margin in 1999 was 30.8% and gross
profit was $144.3 million. These results compare with a 30.1%
gross margin and gross profit of $135.2 million in 1998.
Margins on manufactured device product sales increased by more
than one percentage point due to the combined impact of increased
demand, a more profitable product mix in all markets and cost
savings and efficiency programs.
Margins on contract manufacturing and packaging services sales
declined due to the combined impact of lower volume in the last
half of 1999 and the loss of two profitable contracts, which
customers converted to in-house production. The margin decline
was mitigated by the higher-margin services of the clinical
services business units.
The 1998 consolidated gross margin of 30.1% compared favorably
with the 29.2% gross margin in 1997, with gross profit increasing
from $132.1 million in 1997 to $135.2 million in 1998.
Margins on contract manufacturing and packaging service sales
increased significantly due to sales volume, price increases,
more high-margin longer-running jobs and improved efficiencies.
Margins on manufactured device product sales were marginally
lower than 1997 due to the inclusion of Betraine Limited, a
company acquired in 1998. Excluding Betraine, gross margin for
this operating segment increased slightly due to cost savings and
efficiency programs. These cost reductions offset the combined
negative impact of lower volumes, a less favorable product mix
and price competition.
Expenses
--------
Selling, general and administrative expenses as a percent of
sales were 16.6% in 1999, 15.7% in 1998 and 15.5% in 1997.
Selling, general and administrative expenses totaled $77.9
million in 1999, $70.5 million in 1998 and $70.2 million in 1997.
The $7.4 million increase in these expenses in 1999 compared with
1998 primarily relates to expenses of acquired companies,
spending on drug delivery research and development, management
information systems costs (in part related to year 2000
remediation and contingency planning), severance and revised
estimates of costs for environmental remediation activities.
These increases more than offset the following favorable factors:
lower pension costs due to higher income on U.S. pension plan
assets and the impact of the stronger U.S. dollar.
The $.3 million increase in these expenses in 1998 compared
with 1997 was also primarily associated with acquisitions. The
increase more than offset the following favorable factors: lower
pension costs due to higher income on U.S. pension plan assets,
the impact of the stronger U.S. dollar and lower U.S. employee
fringe benefit costs.
Transactions included in the other income category netted to
income of $1.2 million in 1999, compared to income of $2.5
million in 1998 and $1.1 million in 1997. Interest income,
included therein, totaled $2.5 million in 1999, $2.7 million in
1998 and $2.0 million in 1997, a result of cash flow from
operations available for investment. Foreign currency losses
were $.9 million in 1999 compared with $.2 million of foreign
exchange gains in 1998. The strong U.S. dollar compared with
Euro-based currencies was responsible for the 1999 losses.
Beginning in 1998, accounts of the Company's subsidiary in Brazil
were translated using the Brazilian real as the functional
currency, since inflation in that country had declined
significantly. Net losses on real estate and investments totaled
$.3 million in 1998 and $.7 million in 1997. Losses on
disposition of obsolete equipment totaled $.6 million in 1999 and
1997 and were immaterial in 1998.
Interest
---------
Interest costs totaled $11.0 million in 1999 compared with $7.5
million in 1998 and $6.0 million in 1997, of which $.6 million in
1999, $.3 million in 1998 and $.4 million in 1997 were
capitalized as part of the cost of capital asset acquisitions.
The average consolidated debt level increased despite strong
cash flow from operations in both 1999 and 1998. Higher debt
levels reflect the acquisition of the Clinical Services Division
in April 1999, DBS in March 1998 and Betraine in July 1998. Also
in 1999 the Company purchased 530,800 shares of its common stock
on the open market at an average cost of $34.10 per share, after
having acquired two million shares at $30.00 per share in a Dutch
Auction self-tender in October 1998.
Income Taxes
------------
The effective tax rate on consolidated income was 32.5% in 1999,
76.1% in 1998 and 23.2% in 1997. Unusual events have impacted the
effective tax rate in each of these years. Excluding the impact
of these unusual items would result in comparative tax rates of
37.5% for 1999, 37.8% for 1998 and 37% for 1997. These
comparative tax rates reflect changes in the geographic mix of
earnings and changes in the statutory tax rate in several
countries in the three-year span.
The unusual items impacting the actual reported rates are as
follows: In 1999, two events produced a net tax benefit of $2.3
million: namely, a foreign dividend made possible by a tax
reorganization of the Company s European subsidiaries late in the
year which triggered the refund of taxes previously paid and the
favorable settlement of a prior years tax appeal. The tax
reorganization of the European subsidiaries will reduce the
effective tax rate, excluding any unforeseen unusual items, by
approximately one percentage point in future years.
In 1998, the reported effective tax rate was increased by a non-
deductible $28.2 million charge for acquired in-process research
and development.
In 1997, two events produced a net tax benefit of $7.9 million.
The events were: 1) a tax reorganization of German subsidiaries,
which both increased the tax basis for the assets of these
entities and resulted in tax credit refunds, and 2) repatriation
of cash dividends from certain foreign subsidiaries.
Equity in Affiliates
--------------------
The contribution to earnings from a 25% ownership interest in
Daikyo Seiko, Ltd. and a 49% ownership interest in three
companies in Mexico increased in 1999 after having declined in
both 1998 and 1997. Daikyo's contribution to earnings increased
in 1999 due to a combination of higher sales volumes and margins,
the benefit of a legal settlement of a patent infringement, and a
stronger Japanese yen versus the U.S. dollar. In 1998 and 1997,
Daikyo s results were impacted by high expenses related to the
introduction of a new product line, Resin CZ vials, lower sales
due to reduced government reimbursements of healthcare costs and
a weaker Japanese yen versus the U.S. dollar. Contributions from
Mexican operations rose slightly after having decreased in the
previous two years. In 1997, equity in losses of DBS related to
the Company s then 30% ownership interest. DBS was consolidated
beginning in April 1998 when it became a wholly owned subsidiary.
Financial Position
--------------------
The Company believes that its financial position and current
capitalization will enable it to finance substantial future
growth. Cash flow from operations totaled $69.4 million in 1999.
Working capital at December 31, 1999, totaled $80.7 million, a
ratio of current assets to current liabilities of 1.8 to 1, and
includes a cash balance of $45.3 million. Debt to total invested
capital (total debt, minority interests and shareholders' equity)
was 42.5%. The outstanding debt balance was $171.1 million at
December 31, 1999, compared with $141.1 million at year-end 1998.
Available cash plus cash flow from 1999 operations, combined
with cash from stock option exercises and a $100 million, 10-
year, private debt placement were used to fund the following: the
paydown of revolving credit lines; $46.2 million of 1999 capital
expenditures; the $17.2 million purchase price for acquisitions;
the repurchase of 530,800 common shares at an average cost of
$34.10 per share; and $10.3 million of cash dividends to
shareholders ($.65 per share).
2000 Requirements
------------------
Capital expenditures:
---------------------
Cash requirements for capital projects in 2000 are projected to
be $50 million. These projects focus on new business
opportunities, technology upgrades and product and process
standardization for the device product development facilities to
reduce cost and improve quality. Projects at the contract
manufacturing and packaging business unit are mainly for
additional high-speed equipment to improve service to customers
and become more competitive. Continued implementation of new
information management systems software to remain efficient and
competitive is also planned.
Year 2000 costs:
----------------
The Company developed and implemented a comprehensive corporate-
wide project designed to address the year 2000 issue. The Company
did not experience any difficulties related to the year 2000
compliance on December 31, 1999 or to date, nor has the Company
experienced difficulties due to its suppliers or customers in
connection with year 2000 compliance.
The pretax costs incurred for this effort were approximately $1.9
million in 1999, $3.7 million 1998 and $1.0 million in 1997.
Purchases and implementation costs for compliant software which
also improves functionality were capitalized. As a result, $1.1
million in 1999, $3.3 million in 1998 and $1.0 million in 1997
have been capitalized. The Company did not separately track
incidental costs and time that its own internal employees spent
on the year 2000 project.
Foreign exchange exposure:
-------------------------
In accordance with the Company's foreign exchange management
policy, the adverse consequences resulting from foreign currency
exposure are mitigated by engaging in certain hedging activities.
Foreign exchange forward contracts are used to minimize exposure
related to foreign currency transactions and commitments for raw
material purchases. The Company has entered into interest rate
swap agreements to minimize risk to interest rate increases. The
Note "Financial Instruments" to the Consolidated Financial
Statements explains the impact of such hedges and interest rate
swaps on the Company's results of operations and financial
position.
Remedial activities:
-------------------
Cash requirements for remedial activity related to environmental
cleanup are expected to be relatively small in 2000 as the
Company works with local environmental authorities to finalize
the remediation plan at a U.S. manufacturing site. The Company
has been indemnified by other financially responsible parties
against future government claims relating to groundwater
contamination at a Puerto Rico site, and the Company does not
anticipate any remedial expenses with respect to this site.
In 2000, management believes cash generated from operations and
option exercises, credit facilities and the Company's current
capitalization will provide sufficient flexibility to meet future
cash flow requirements and pursue its stated strategy. The
Company s current revolving credit agreement expires in August
2000, but the Company has begun discussions for a replacement
facility to balance cash flow requirements.
Statements concerning forecasted results, financial or
otherwise, which are contained in the above material, constitute
"forward looking statements" that involve risks and
uncertainties. The Company's actual results may differ
materially from those expressed in any forward-looking statement
and are dependent on a number of factors including but not
limited to, sales demand, timing of customers' projects,
competitive pressures, the strength or weakness of the U.S.
dollar, inflation, the cost of raw materials, successful
continuance of cost-improvement programs and statutory tax rates.
CONSOLIDATED STATEMENTS OF INCOME
WEST PHARMACEUTICAL SERVICES, INC. AND SUBSIDIARIES
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997.
(in thousands, except per share data)
1999 1998 1997
--------------------------------------------------------------
Net sales $469,100 100% $449,700 100% $452,500 100%
Cost of goods and services sold 324,800 69 314,500 70 320,400 71
--------------------------------------------------------------
Gross profit 144,300 31 135,200 30 132,100 29
Selling, general and
administrative expenses 77,900 17 70,500 16 70,200 16
Restructuring charge 700 - 4,000 1 - -
Acquired research and development - - 28,200 6 - -
Other (income), net (1,200) - (2,500) (1) (1,100) (1)
--------------------------------------------------------------
Operating profit 66,900 14 35,000 8 63,000 14
Interest expense 10,400 2 7,200 2 5,600 1
--------------------------------------------------------------
Income before income
taxes and minority interests 56,500 12 27,800 6 57,400 13
Provision for income taxes 18,400 4 21,200 5 13,300 3
Minority interests 200 - 100 - 200 -
--------------------------------------------------------------
Income from consolidated operations 37,900 8% 6,500 1% 43,900 10%
Equity in net income of --- --- ---
affiliated companies 800 200 500
--------------------------------------------------------------
Net income $ 38,700 $ 6,700 $ 44,400
--------------------------------------------------------------
Net income per share:
Basic $ 2.59 $ .41 $ 2.69
Assuming dilution $ 2.57 $ .40 $ 2.68
--------------------------------------------------------------
Average common shares outstanding 14,914 16,435 16,475
Average shares assuming dilution 15,048 16,504 16,572
The accompanying notes are an integral part of the financial
statements.
9
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
WEST PHARMACEUTICAL SERVICES, INC. AND SUBSIDIARIES
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997.
(in thousands)
Unrealized
Foreign gains Total other Total
currency (losses) comprehensive Net comprehensive
items on securities income(loss) income income
------------------------------------------------------------------------------
Cumulative balance,
January 1, 1997 $16,300 $ 400 $16,700
Comprehensive
income 1997 (12,900) (300) (13,200) $44,400 $31,200
-----------------------------------------------------------------------------
Cumulative balance,
December 31, 1997 3,400 100 3,500
Comprehensive
income 1998 4,100 (400) 3,700 $ 6,700 $10,400
------------------------------------------------------------------------------
Cumulative balance,
December 31, 1998 7,500 (300) 7,200
Comprehensive
income 1999 (13,600) 1,100 (12,500) $38,700 $26,200
------------------------------------------------------------------------------
Cumulative balance,
December 31, 1999 $(6,100) $800 $(5,300)
----------------------------------------------
The accompanying notes are an integral part of the financial statements.
10
CONSOLIDATED BALANCE SHEETS
WEST PHARMACEUTICAL SERVICES, INC. AND SUBSIDIARIES
AT DECEMBER 31, 1999 AND 1998.
(in thousands, except per share data)
1999 1998
ASSETS ---------------------
Current assets:
Cash, including equivalents (1999--$26,100; 1998--$13,700) $ 45,300 $ 31,300
Accounts receivable, less allowance (1999--$1,800; 1998--$1,900) 74,600 64,400
Inventories 42,100 43,500
Deferred income tax benefits 7,300 9,700
Other current assets 15,400 10,800
----------------------
Total current assets 184,700 159,700
----------------------
Property, plant and equipment 489,200 474,700
Less accumulated depreciation and amortization 261,600 251,900
----------------------
227,600 222,800
Investments in affiliated companies 20,200 15,700
Goodwill 66,500 61,200
Deferred charges and other assets 52,800 48,700
----------------------
$551,800 $508,100
----------------------
11
1999 1998
LIABILITIES AND SHAREHOLDERS' EQUITY ---------------------
Current liabilities:
Current portion of long-term debt $ 2,200 $ 800
Notes payable 27,400 35,300
Accounts payable 25,500 20,800
Accrued expenses:
Salaries, wages and benefits 15,600 17,100
Income taxes payable 5,500 8,500
Other 27,800 24,200
----------------------
Total current liabilities 104,000 106,700
----------------------
Long-term debt, excluding current portion 141,500 105,000
Deferred income taxes 48,000 39,100
Other long-term liabilities 26,300 26,600
Minority interests 800 600
Shareholders' equity:
Preferred stock, shares authorized: 3,000;
shares issued and outstanding: 1999--0; 1998--0
Common stock, par value $.25 per share; shares authorized: 50,000;
shares issued: 1999--17,165; 1998--17,165;
shares outstanding: 1999--14,664; 1998--15,026 4,300 4,300
Capital in excess of par value 31,700 32,900
Retained earnings 278,100 249,300
Accumulated other comprehensive (loss) income (5,300) 7,200
----------------------
308,800 293,700
Less treasury stock (1999--2,501 shares; 1998--2,139 shares) 77,600 63,600
----------------------
Total shareholders' equity 231,200 230,100
----------------------
$551,800 $508,100
----------------------
The accompanying notes are an integral part of the financial statements.
12
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
WEST PHARMACEUTICAL SERVICES, INC. AND SUBSIDIARIES
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997.
(in thousands, except per share data)
Capital in Other
Common excess of Retained comprehensive Treasury
stock par value earnings income (loss) stock Total
----------------------------------------------------------------
Balance, January 1, 1997 $4,200 $24,000 $217,700 $16,700 $(10,600) $252,000
----------------------------------------------------------------
Net income 44,400 44,400
Shares issued under stock plans 4,100 4,100
Cash dividends declared ($.58 per share) (9,600) (9,600)
Changes-other comprehensive income (13,200) (13,200)
----------------------------------------------------------------
Balance, December 31, 1997 4,200 24,000 252,500 3,500 (6,500) 277,700
----------------------------------------------------------------
Net income 6,700 6,700
Shares issued under stock plans 300 3,300 3,600
Shares issued for acquisition 100 8,600 8,700
Shares repurchased (60,400) (60,400)
Cash dividends declared ($.62 per share) (9,900) (9,900)
Changes-other comprehensive income 3,700 3,700
----------------------------------------------------------------
Balance, December 31, 1998 4,300 32,900 249,300 7,200 (63,600) 230,100
----------------------------------------------------------------
Net income 38,700 38,700
Shares issued under stock plans (1,200) 4,100 2,900
Shares repurchased (18,100) (18,100)
Cash dividends declared ($.66 per share) (9,900) (9,900)
Changes-other comprehensive income (12,500) (12,500)
----------------------------------------------------------------
Balance, December 31, 1999 $4,300 $31,700 $278,100 $(5,300) $(77,600) $231,200
----------------------------------------------------------------
The accompanying notes are an integral part of the financial statements.
13
CONSOLIDATED STATEMENTS OF CASH FLOWS
WEST PHARMACEUTICAL SERVICES, INC. AND SUBSIDIARIES
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997.
(in thousands)
1999 1998 1997
-------------------------------
Cash flows from operating activities:
Net income $38,700 $6,700 $44,400
Adjustments to reconcile net income to
net cash from operating activities:
Depreciation and amortization 35,700 32,300 31,900
Acquired in-process research and development - 28,200 -
Restructuring charge 700 4,000 -
Loss on sales of real estate and investments - 300 700
Deferred income taxes 8,500 5,900 (7,500)
Pension and other retirement plans (9,200) (6,000) (4,100)
Equity in undistributed earnings of affiliated
companies, net (500) (100) (100)
Decrease (increase) in accounts receivable (10,200) (700) 1,000
Decrease (increase) in inventories (1,200) (2,400) 2,700
Decrease (increase) in other current assets (1,400) 800 400
(Decrease) increase in other current liabilities 6,900 500 (1,300)
Other operating items 1,400 1,500 (400)
-------------------------------
Net cash provided by operating activities 69,400 71,000 67,700
-------------------------------
Cash flows from investing activities:
Property, plant and equipment acquired (46,200) (41,800) (34,400)
Proceeds from sales of assets 100 1,200 1,700
Payments for acquisitions, net of cash acquired (17,200) (34,900) -
Customer advances, net of repayments 1,600 1,700 (300)
-------------------------------
Net cash used in investing activities (61,700) (73,800) (33,000)
-------------------------------
14
1999 1998 1997
-------------------------------
Cash flows from financing activities:
Proceeds from senior notes 100,000 - -
(Repayments) borrowings under
revolving credit agreements, net (46,000) 65,000 200
Proceeds from other long-term debt - 1,500 -
Repayment of other long-term debt (3,000) (19,100) (1,200)
Other notes payable, net (16,800) 800 (700)
Issuance of common stock, net 2,800 2,600 4,000
Dividend payments (10,300) (9,400) (9,400)
Purchase of treasury stock (18,100) (60,400) -
-------------------------------
Net cash provided by (used in) financing activities 8,600 (19,000) (7,100)
-------------------------------
Effect of exchange rates on cash (2,300) 800 (2,600)
-------------------------------
Net increase (decrease) in cash and cash equivalents 14,000 (21,000) 25,000
Cash and cash equivalents at beginning of year 31,300 52,300 27,300
-------------------------------
Cash and cash equivalents at end of year $45,300 $31,300 $52,300
-------------------------------
Supplemental cash flow information:
Interest paid, net of amounts capitalized $ 9,000 $ 5,100 $ 5,700
Income taxes paid $15,100 $14,700 $20,000
-------------------------------
The accompanying notes are an integral part of the financial statements.
15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
Summary of Significant Accounting Policies
------------------------------------------
Basis of Presentation: The financial statements are prepared in
conformity with generally accepted accounting principles in the
United States. These principles require management to make
estimates and assumptions that affect the reported amounts of
assets and liabilities and revenue and expenses and the
disclosure of contingencies in the financial statements. Actual
amounts realized may differ from these estimates.
Principles of Consolidation: The consolidated financial
statements include the accounts of West Pharmaceutical Services,
Inc. and all majority-owned subsidiaries ("the Company").
Material intercompany transactions and accounts are eliminated in
consolidation. Certain items have been reclassified to conform
with current classifications. Investments in affiliated companies
in which ownership exceeds 20% are accounted for on the equity
method.
Statement of Cash Flows: Cash flows from operating activities are
reported under the indirect method; cash equivalents include time
deposits, certificates of deposit and all highly liquid debt
instruments with original maturities of three months or less.
Inventories: Inventories are valued at the lower of cost or
market. The cost of inventories located in the United States is
determined on the last-in, first-out (LIFO) method, except for
the cost of inventories of West Pharmaceutical Services Lakewood,
Inc. ("West Lakewood"), a wholly owned subsidiary, which is
determined on the first-in, first-out (FIFO) method. The cost of
inventories located outside the United States is determined
principally on the average cost method.
Foreign Currency Translation: Foreign currency transaction gains
and losses and translation gains and losses of subsidiaries
operating in high-inflation economies are recognized in the
determination of net income. Foreign currency translation
adjustments of other subsidiaries and affiliates operating
outside the United States are accumulated in other comprehensive
income, a separate component of shareholders' equity.
Financial Instruments: The Company uses interest rate swaps and
forward exchange contracts to minimize the economic exposure
related to fluctuating interest and foreign exchange rates.
Amounts to be paid or received under interest rate swaps are
accrued as interest expense, and presented in the financial
statements on a net basis. Gains and losses on hedges of existing
assets and liabilities are recognized monthly and offset gains
and losses on the underlying transaction. Gains and losses
16
related to firm commitments, primarily raw material purchases
including local needs in foreign subsidiaries, are deferred and
recognized as part of the underlying transaction.
In 1998, Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities", was issued. This
standard, which will be adopted by the Company in the year 2001,
requires derivatives to be recorded on the balance sheet as
assets or liabilities, measured at fair value. Gains or losses
resulting from changes in the value of those derivatives would be
accounted for depending on the use of the derivative and whether
it qualifies for hedge accounting. The impact of adopting this
standard cannot be determined at this time.
Marketable Securities: Investments in debt and marketable
securities are classified under one of three categories: held-to-
maturity, available-for-sale and trading, based on management's
intentions. Investments in marketable securities are stated at
fair market value. Unrealized gains and losses on trading
securities are included in income. Unrealized gains and losses on
securities available-for-sale are accumulated in other
comprehensive income, a separate component of shareholders'
equity. Cost of marketable securities is determined on the
moving average method.
Revenue Recognition: Sales of manufactured components and
contract manufacturing and packaging services are recorded at the
time title passes, which generally occurs when the goods are
shipped. Clinical services revenue and related direct costs are
recognized as specific contract terms are fulfilled under the
percentage of completion method (the units of delivery method).
Fees for individual contract clinical services are fixed upon
execution of the contract and provide for payment for all work
performed. Pass-through costs that are paid directly by clients,
and for which the Company does not bear the risk of performance,
are excluded from revenue. The termination of a contract
typically results in no material adjustments to the revenue or
costs previously recognized. Revenue associated with drug
delivery systems development is recognized when earned in
accordance with the terms of the agreement with the customer.
Property, Plant and Equipment: Property, plant and equipment are
carried at cost. Maintenance and minor repairs and renewals are
charged to expense as incurred. Upon sale or retirement of
depreciable assets, costs and related depreciation are
eliminated, and gains or losses are recognized in the
determination of net income.
Impairment of Asset Value: The Company continually evaluates the
appropriateness of the remaining estimated useful life and the
carrying value of its operating assets, goodwill and other
intangible assets. Carrying values in excess of undiscounted
17
estimates of related cash flows are expensed when such
determination is made.
Depreciation and Amortization: For financial reporting purposes,
depreciation is computed principally on the straight-line method
over the estimated useful lives of the assets, or the remaining
term of the lease, if shorter. For income tax purposes,
depreciation is computed using accelerated methods. Goodwill is
being amortized on the straight-line method over periods ranging
from 13 to 40 years.
Research and Development: Research, development and engineering
expenditures for the creation and application of new or improved
products and processes, and drug delivery systems, the totals of
which amounted to $16,700 in 1999, $14,500 in 1998, and $12,000
in 1997, are expensed as incurred, net of customer
reimbursements.
Environmental Remediation and Compliance Costs: Environmental
remediation costs are accrued when such costs are probable and
reasonable estimates are determinable. Cost estimates are not
discounted and include investigation, cleanup and monitoring
activities; such estimates are adjusted, if necessary, based on
additional findings. In general, environmental compliance costs
are expensed. Environmental compliance costs at current operating
sites are capitalized if they increase the value of the property
and/or prevent environmental hazards from occurring.
Income Taxes: Deferred income taxes are recognized by applying
enacted statutory tax rates, applicable to future years, to
temporary differences between the tax bases and financial
statement carrying values of the Company's assets and
liabilities. Valuation allowances are recorded to reduce deferred
tax assets to amounts that are more likely than not to be
realized. United States income taxes and withholding taxes are
accrued on the portion of earnings of international subsidiaries
and affiliates (which qualify as joint ventures) intended to be
remitted to the parent company.
Stock-Based Compensation: The Company accounts for stock-based
compensation using the intrinsic value method prescribed in
Accounting Principles Board 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.
18
Net Income Per Share: Basic net income per share is computed by
dividing net income by the weighted-average number of shares of
common stock outstanding during each period. Net income per share
assuming dilution considers the potential issuance of common
shares under the Company's stock option and award plans, based on
the treasury stock method. The treasury stock method assumes use
of exercise proceeds to repurchase common stock at the average
fair market value in the period.
Other Income (Expense)
----------------------
1999 1998 1997
-----------------------------
Interest income $ 2,500 $ 2,700 $2,000
Foreign exchange (losses) gains (900) 200 -
Loss on sales of real
estate and investments - (300) (700)
Other (400) (100) (200)
-----------------------------
$ 1,200 $ 2,500 $1,100
-----------------------------
Restructuring Charges
---------------------
In 1999, the Company revised its business plan related to its
plastics component manufacturing operations. The new business
plan includes investment in new capacity and capabilities at the
Company's Puerto Rico facility, which resulted in a $3.5 million
adjustment of the restructuring charge recorded in 1996 related
to this operation. In addition, the Company wrote off the $4.2
million carrying value of equipment and intangibles related to a
proprietary plastic product line that has not gained market
acceptance.
In September 1998, the Company recorded a pre-tax charge of
$4,000. The charge related to employee reductions associated with
identified manufacturing and other operating efficiencies. The
charge includes severance and benefits for 90 employees including
manufacturing and staff positions and other related charges. At
December 31, 1999, the total payout of severance and benefits to
date associated with this charge was $3,610.
Acquisitions and Investments
-----------------------------
On April 20, 1999, the Company acquired the assets of the
Clinical Services Division ("CSD") of Collaborative Clinical
Research, Inc. CSD provides clinical research services to the
19
pharmaceutical and biotechnology industries. Its focus is on the
identification, placement, monitoring and management of clinical-
trial programs. The CSD purchase price was comprised of a
combination of $15,900 in cash, and the assumption of $2,300 of
current liabilities. The acquisition was accounted for as a
purchase and CSD was consolidated beginning May 1, 1999. The
allocation of the purchase price is as follows:
Current assets $2,900
Equipment and leasehold improvements 800
Goodwill 14,500
The excess of the purchase price over the net assets acquired is
being amortized on a straight-line basis over 20 years. Pro
forma results assuming the acquisition of CSD as of January 1,
1999 would not materially change reported sales or net income.
In the third quarter of 1999, the Company acquired a 7% interest
in a firm involved in genotyping technology for $1,300. Upon the
satisfaction of certain future milestones, the Company is
conditionally committed to investing up to an additional $2,300,
which would bring its cumulative ownership percentage up to
19.95%.
On July 1, 1998, the Company acquired Betraine Limited for BPS
7,200 ($11,800 at July 1, 1998). Betraine manufactures precision
injection molded plastic components for the healthcare and
consumer products industries. The acquisition was accounted for
as a purchase and Betraine was consolidated beginning July 1,
1998. The acquisition was financed with existing cash. The excess
of the purchase price over the net assets acquired is being
amortized on a straight-line basis over 20 years.
On March 31, 1998, the Company acquired for BPS 20,000 ($33,500
at March 31, 1998) the remaining 70% interest in DanBioSyst UK
Ltd. ("DBS"), making DBS a wholly owned subsidiary. DBS is
engaged in drug delivery system research and development. This
transaction was accounted for by the purchase method, and was
financed with cash of $9,400, 320,406 shares of restricted common
stock valued at $8,700, and short-term notes of $15,400. DBS was
consolidated beginning April 1, 1998. The allocation of the
purchase price, determined by an independent appraiser using the
income approach, follows:
20
Current assets $ 1,300
Equipment and leasehold improvements 800
In-process research and development 28,200
Patents 2,800
Other intangibles 400
In-process research and development was written off at the date
of acquisition. This value relates to various drug delivery
platforms which DBS had in different stages of the development
process. The appraisal was based on licensing of such delivery
systems with significant revenues generated beginning in 2003. A
discount rate of 32% was used.
The initial 30% interest in DBS was acquired in 10% increments
over the period 1994 through 1996.
Income Taxes
------------
Income before income taxes and minority interests was derived as
follows:
1999 1998 1997
---------------------------
Domestic operations $36,000 $ 8,600 $39,500
International operations 20,500 19,200 17,900
---------------------------
$56,500 $27,800 $57,400
---------------------------
The related provision for income taxes consists of:
1999 1998 1997
----------------------------
Currently payable:
Federal $ 3,300 $ 8,800 $ 16,000
State 300 900 600
International 6,300 5,600 4,200
---------------------------
9,900 15,300 20,800
---------------------------
21
Deferred:
Federal 7,200 4,200 1,800
International 1,300 1,700 (9,300)
---------------------------
8,500 5,900 (7,500)
---------------------------
$18,400 $21,200 $13,300
---------------------------
A reconciliation of the United States statutory corporate tax
rate to the Company's effective consolidated tax rate on income
before income taxes and minority interests is as follows:
1999 1998 1997
--------------------------
Statutory corporate tax rate 35.0% 35.0% 35.0%
Tax on international operations in
excess of United States tax rate 2.9 1.2 4.7
Tax reorganization benefit (3.1) - (21.7)
Acquired research and development - 35.5 -
United States tax on repatriated
international earnings .6 .8 4.3
State income taxes, net
of Federal tax benefit .4 2.3 .7
Settlement of tax audit (1.8) - -
Other (1.5) 1.3 .2
--------------------------
Effective tax rate 32.5% 76.1% 23.2%
--------------------------
In the fourth quarter of 1999, the Company completed a tax
reorganization of its European subsidiaries. The reorganization
made possible payment of a dividend which triggered refund of
taxes previously paid.
In the third quarter of 1997, the Company completed a tax
reorganization of certain German subsidiaries. The benefit of
this reorganization was reduced in 1997's fourth quarter due to a
tax law change and completion of a tax audit.
22
The net current and noncurrent components of deferred income
taxes recognized in the balance sheet at December 31 are as
follows:
1999 1998
-------------------------------
Net current assets $ 5,300 $ 7,800
Net noncurrent liabilities $36,200 $27,900
------------------------------
The following is a summary of the significant components of the
Company's deferred tax assets and liabilities as of December 31:
1999 1998
-------------------------------
Deferred tax assets:
Loss on asset dispositions
and plant closings $ 2,400 $ 2,400
Severance and deferred
compensation 9,200 9,900
German tax reorganization 4,900 7,800
Net operating loss carryovers 3,800 2,300
Foreign tax credit carryovers 1,100 800
Restructuring charge - 1,400
Other 3,800 4,500
Valuation allowance (4,900) (2,900)
-------------------------------
Total $20,300 $26,200
-------------------------------
Deferred tax liabilities:
Accelerated depreciation $34,400 $32,200
Severance and deferred compensation 11,900 7,600
Other 4,900 6,500
-------------------------------
Total $51,200 $46,300
-------------------------------
At December 31, 1999, subsidiaries had operating tax loss
carryovers of $35,200, which will be available to apply against
the future taxable income of such subsidiaries. The carryover
periods expire beginning with $7,900 in 2002 and continue through
2006.
In 1997, the Company repatriated $12,000 of undistributed
earnings of international subsidiaries and $2,400 of tax was
recorded. At December 31, 1999, undistributed earnings of
23
international subsidiaries, on which deferred income taxes have
not been provided, amounted to $151,000. It is the Company's
intention to reinvest these undistributed earnings of foreign
subsidiaries, and it is not practicable to determine the amount
of income or withholding tax that would be payable upon the
remittance of those earnings. Such earnings would become taxable
upon the sale or liquidation of foreign subsidiaries or upon the
remittance of dividends. Tax credits that would become available
upon distribution of such earnings could reduce income taxes then
payable at the United States statutory rate. As of December 31,
1999, the Company had available foreign tax credit carryovers of
approximately $1,100 expiring in 2000 through 2004.
Net Income Per Share
--------------------
The following table reconciles shares used in basic income
per share to the shares used in income per share assuming
dilution. There is no adjustment to the net income of the
Company in the calculation of net income per share assuming
dilution.
1999 1998 1997
------ ------ ------
Net income $38,700 $ 6,700 $44,400
----------------------------------------------------------------
Average common
shares outstanding 14,914 16,435 16,475
Assumed stock options
exercised and awards vested 134 69 97
-----------------------------------------------------------------
Average shares
assuming dilution 15,048 16,504 16,572
----------------------------------------------------------------
Comprehensive Income
--------------------
Comprehensive income consists of reported net income and other
comprehensive income which reflects revenue, expenses and gains
and losses which generally accepted accounting principles exclude
from net income. For the Company, the items excluded from
current net income are unrealized gains or losses on available-
for-sale securities and cumulative foreign currency adjustments.
Comprehensive income and the cumulative balance of each item of
other comprehensive income is displayed in the accompanying
Consolidated Statements of Comprehensive Income.
24
Inventories
-----------
1999 1998
---------------------------
Finished goods $14,000 $15,700
Work in process 12,800 13,700
Raw materials 15,300 14,100
---------------------------
$42,100 $43,500
---------------------------
Included above are inventories located in the United States that
are valued on the LIFO basis, amounting to $11,800 and $10,200 at
December 31, 1999 and 1998, respectively, which are approximately
$6,800 and $7,200, respectively, lower than replacement value.
Affiliated Companies
--------------------
At December 31, 1999, the following affiliated companies were
accounted for under the equity method:
Fiscal
year Ownership
Location end interest
--------------------------------------
West Pharmaceutical
Services Mexico S.A. de C.V. Mexico Dec. 31 49%
Aluplast S.A. de C.V. Mexico Dec. 31 49%
Pharma-Tap S.A. de C.V. Mexico Dec. 31 49%
Daikyo Seiko, Ltd. Japan Oct. 31 25%
--------------------------------------
25
A summary of the financial information for these companies is
presented below:
1999 1998
------------------------
Balance Sheets:
Current assets $ 95,400 $ 83,400
Noncurrent assets 111,100 99,600
------------------------
Total assets $206,500 $183,000
------------------------
Current liabilities $ 62,100 $ 45,000
Noncurrent liabilities 74,300 79,800
Owners' equity 70,100 58,200
------------------------
Total liabilities and owners' equity $206,500 $183,000
------------------------
1999 1998 1997
---------------------------
Income Statements:
Net sales $78,200 $69,500 $77,200
Gross profit 17,000 14,500 18,700
Net income 3,400 1,000 2,900
----------------------------
Unremitted income of affiliated companies included in
consolidated retained earnings amounted to $11,600, $11,100 and
$11,100 at December 31, 1999, 1998 and 1997, respectively.
Dividends received from affiliated companies were $300 in 1999,
$200 in 1998 and $400 in 1997.
The Company's equity in unrealized gains and losses of Daikyo
Seiko, Ltd.'s investment in securities available for sale
included in other comprehensive income, a separate component of
shareholders' equity, was $800, $(300) and $100 at December 31,
1999, 1998 and 1997, respectively. The 1999 gains and 1998
losses are net of income taxes of $1,000 and income tax benefits
of $300, respectively.
Property, Plant and Equipment
------------------------------
A summary of property, plant and equipment at December 31 is
presented in the following table:
26
Years of
expected
useful life 1999 1998
-----------------------------------------
Land $ 3,100 $ 3,400
Buildings and improvements 7-50 103,700 104,200
Machinery and equipment 3-20 304,700 293,600
Molds and dies 4-7 53,500 55,600
Construction in progress 24,200 17,900
----------------------------------------
$489,200 $474,700
----------------------------------------
Debt
----
Short-Term: Notes payable in the amounts of $27,400 and $35,300
at December 31, 1999 and 1998, respectively, are payable within
one year and bear interest at a weighted-average interest rate of
7% and 6%, respectively. At December 31, 1998, short-term debt
of $2,800 (under a revolving credit line) was classified as long-
term because of the Company's intent to renew the borrowings
using an available long-term credit facility.
Long-term:
At December 31, 1999 1998
-------------------
Unsecured:
Senior notes, due 2009 (6.81%) $100,000 $ -
Revolving credit facility, due 2000 (5.51%) - 55,000
Tax-exempt industrial revenue bonds,
due 2005 (4.2% to 5.95%) (a) 10,900 11,100
Subordinated debentures, due 2007 (6.5%) 3,400 3,300
Other notes, due 2000 to 2006 (4.0% to 7.23%) 25,900 29,800
Collateralized:
Mortgage notes, due 2016 (6.94%) (b) 3,500 6,600
-------------------
Total long-term debt 143,700 105,800
Less current portion 2,200 800
-------------------
$141,500 $105,000
-------------------
(a) The proceeds of industrial revenue bonds that were not
required for the respective construction projects have been
invested by the Company. Use of these excess funds and earnings
thereon is restricted to servicing the debt. The aggregate of
27
unexpended proceeds and earnings thereon of $1,600 is reflected
as a reduction of the principal outstanding on the bonds.
(b) Real estate, machinery and equipment with a carrying value of
$10,300 at December 31, 1999, are pledged as collateral.
In April 1999, the Company entered into an agreement with five
insurance companies to borrow a total of $100,000 for ten years
at a coupon rate of 6.81%; the effective interest rate is 6.91%.
Interest is payable quarterly. The proceeds were used to repay
debt under existing lines of credit, for the acquisition of CSD,
and for general corporate purposes.
The Company's revolving credit agreement provides for borrowings
up to $125,000 through August 2000, renewable at the lenders'
option. Interest is charged at a floating rate based on LIBOR,
and a commitment fee ranging up to 3/20% per annum is payable on
the facility.
At December 31, 1999, $4,300 at par value of West Lakewood's
subordinated debentures were outstanding. The subordinated
debentures are reflected in the balance sheet net of discount,
which is being amortized through the maturity date of the
subordinated debentures, March 1, 2007. The unamortized discount
totaled $900 and $1,000 at December 31, 1999 and 1998,
respectively. The holders have the right to convert such
subordinated debentures into cash for an amount approximating 50%
of the par value of the subordinated debentures converted.
Interest is payable semiannually.
Long-term debt maturing in the years following 2000 is: $10,000
in 2001, $0 in 2002, $11,200 in 2003 and $0 in 2004.
Certain of the financing agreements, among other things, require
the maintenance of working capital, interest coverage, debt-to-
capitalization and tangible net worth ratios and restrict the
sale of assets.
Interest costs incurred during 1999, 1998 and 1997 were $11,000,
$7,500 and $6,000, respectively, of which $600, $300 and $400,
respectively, were capitalized as part of the cost of acquiring
certain assets.
At December 31, 1999, the Company has three interest rate swap
contracts outstanding, with notional value of $3,000 each, to fix
the interest rates at 6.54%, 6.775% and 6.51% through April, July
and August 2001, respectively. Under the terms of these
agreements, the Company makes periodic interest payments based on
these fixed rates of interest on the notional principal amounts
to a counterparty that makes payments based on a market interest
rate. The net interest expense recognized in connection with
these agreements was less than $200 in 1999 and less than $100 in
28
the prior two years.
Financial Instruments
---------------------
The following disclosure reflects the estimated fair value of
financial instruments of the Company as of December 31.
Carrying value Estimated fair value
--------------------------------------
1999 1998 1999 1998
-------------------------------------
Cash and cash equivalent $45,300 $31,300 $45,300 $31,300
Short-and long-term de 171,100 141,100 167,100 135,000
Interest rate swaps(a) - - - -
Forward exchange contracts(a) - - - -
-------------------------------------
(a) The estimated fair value of the interest rate swaps was less
than $100 at December 31, 1999 and 1998. The estimated fair value
of forward exchange contracts was less than $100 at December 31,
1999. There were no forward contracts in effect at December 31,
1998.
Methods used to estimate the fair market values of the above
listed financial instruments are as follows: cash and cash
equivalents due to their short maturity are estimated at carrying
values that approximate market; debt is estimated based on
current market quotes for instruments of similar maturity;
interest rate swaps (see preceding Note "Debt") and forward
exchange rate contracts are valued at published market prices,
market prices of comparable instruments or quotes.
Notional amounts upon which current interest rate swap contracts
are based do not represent amounts exchanged and are not a
measure of the Company's exposure. Failure by the contract
counterparty to make interest payments under an interest swap
contract would result in an accounting loss to the Company only
if interest rates exceeded the fixed rate to be paid by the
Company. The accounting loss corresponds to the cost to replace
the swap contract.
Benefit Plans
-------------
The Company and certain domestic and international subsidiaries
sponsor defined benefit pension plans. In addition, the Company
provides minimal life insurance benefits for certain United
States retirees and pays a portion of healthcare (medical and
dental) costs for retired United States salaried employees and
their dependents. Benefits for participants are coordinated with
29
Medicare and the plan mandates Medicare risk (HMO) coverage
wherever possible and caps the total contribution for non-HMO
coverage.
The expense (income) components of net pension income are as
follows:
Pension benefits Other retirement benefits
1999 1998 1997 1999 1998 1997
-------------------------------------------------------------------------
Service cost $ 4,600 $ 3,600 $ 3,600 $ 400 $500 $400
Interest cost 8,900 8,500 8,000 400 500 500
Expected return
on assets (17,600) (15,400) (13,400) - - -
Amortization of
unrecognized
transition asset (700) (800) (800) - - -
Amortization of
prior service cost 400 400 200 (1,500) (1,500)(1,400)
Recognized
actuarial gains (2,000) (1,800) (1,200) - - -
Curtailment gain (200) - - - - -
-------------------------- ----------------------
Pension (income) $(6,600) $(5,500) $(3,600) $ (700) $(500) $(500)
-------------------------- ----------------------
30
The following tables provide a reconciliation of the benefit obligation,
plan assets and funded status of the plans:
Pension benefits Other retirement benefits
-------------------- -------------------------
1999 1998 1999 1998
--------------------- ----------------------
Change in benefit obligation:
Benefit obligation,
January 1 $(131,900) $(120,400) $(8,400) $(7,400)
Service cost (4,600) (3,600) (400) (500)
Interest cost (8,900) (8,500) (400) (500)
Plan participants'
contributions 200 200 100 100
Actuarial gain (loss) 17,900 (5,500) 3,100 (400)
Transfers in (3,300) - - -
Benefits/expenses paid 6,600 6,200 200 300
Curtailment gain 200 - - -
Settlement 900 - - -
Foreign exchange
impact 600 (300) - -
--------------------- ----------------------
Benefit obligation,
December 31 $(122,300) $(131,900) $(5,800) $(8,400)
--------------------- ----------------------
Change in plan assets:
Fair value of
assets, January 1 $189,400 $165,900 $ - $ -
Actual return
on assets 44,500 28,600 - -
Employer contribution 700 900 100 200
Plan participants'
contribution 200 200 100 100
Transfers in 1,400 - - -
Benefits/expenses
paid (6,600) (6,200) (200) (300)
Foreign exchange
impact (300) - - -
--------------------- ----------------------
Fair value of plan
assets, December 31 $229,300 $189,400 $ - $ -
--------------------- ----------------------
31
Pension benefits Other retirement benefits
-------------------- -------------------------
1999 1998 1999 1998
---------------------- ----------------------
Funded status:
Assets in excess
(less than) benefits $107,000 $57,500 $(5,800) $(8,400)
Unrecognized net
actuarial(gain)loss (90,300) (47,800) (2,000) 1,100
Unrecognized
transition asset (1,300) (3,300) - -
Unrecognized
prior service cost 2,900 3,300 (4,600) (6,000)
-------- -------- -------- --------
December 31:
Prepaid benefit cost $24,800 $16,700 - -
Accrued liability $(6,500) $(7,000) $(12,400) $(13,300)
-------- -------- -------- --------
In 1999, the Company curtailed its pension plan for active non-
employee directors. A gain of $200 was recognized on the
curtailment. The accrued pension obligation to the active
directors was settled by issuing common stock equivalent units.
The number of stock equivalent units was determined by dividing
each director's accrued pension liability by $33.60, the average
market price of the Company's stock over a 30-day period prior to
the settlement.
The aggregate projected benefit obligation and aggregate fair
value of plan assets for pension plans with obligations in excess
of plan assets were $15,800 and $9,300, respectively, as of
December 31, 1999, and $8,500 and $600, respectively, as of
December 31, 1998. Weighted average assumptions as of December
31 follow:
(CAPTION>
Other retirement
Pension Benefits benefits
1999 1998 1999 1998
-----------------------------------------
Discount rate 7.8% 6.7% 8% 6.75%
Rate of compensation
increase 5.3% 5.5% - -
Long-term rate of
return on assets 9.1% 9.3% - -
32
The assumed healthcare cost trend used is 8% for participants
under age 65 and 7% for participants age 65 and over in 2000,
decreasing to 5.5% by 2006. Increasing or decreasing the assumed
trend rate for healthcare costs by one percentage point would
result in a $400 increase and decrease, respectively, in the
accumulated benefit obligation. The related change in the
aggregate service and interest cost components of the 1999 plan
expense is a $100 increase and decrease, respectively.
The Company provides certain post-employment benefits for
terminated and disabled employees, including severance pay,
disability-related benefits and healthcare benefits. These costs
are accrued over the employee's active service period under
certain circumstances or at the date of the event triggering the
benefit.
The Company also sponsors a defined contribution savings plan for
certain salaried and hourly United States employees. Company
contributions are equal to 50% of each participant's contribution
up to 6% of the participant's base compensation. Total expense
of $1,300, $1,200 and $900 was incurred for Company contributions
in 1999, 1998 and 1997, respectively.
Capital Stock
-------------
Purchases (sales) of common stock held in treasury during the
three years ended December 31, 1999, are as follows:
1999 1998 1997
-------------------------------------
Shares held, January 1 2,139,500 277,200 462,200
Purchases 530,800 2,026,300 40,200
Stock option
exercises (168,900) (164,000) (225,200)
-------------------------------------
Shares held,
December 31 2,501,400 2,139,500 277,200
-------------------------------------
In March 1999, the Company's Board of Directors authorized the
purchase of up to one million shares of the Company's common
stock in open market or privately negotiated transactions. The
Company acquired 530,800 shares in 1999 under this plan at an
average price of $34.10 per share.
In October 1998, the Company purchased 2,000,000 shares of its
common stock in a Dutch Auction self-tender at a price of $30.00
per share.
33
In 1992, the Company made an offering under an employee stock
purchase plan, which provides for the sale of the Company's
common stock to substantially all employees at 85% of fair market
value. The offer has been extended to December 31, 2001. An
employee's purchases are limited annually to 10% of base
compensation. Shares are purchased in the open market, or
treasury shares are used.
Stock Option and Award Plans
----------------------------
The Company has two long-term incentive plans for officers and
key management employees of the Company and its subsidiaries.
Options may no longer be granted under one of the plans. The
plans provide for the grant of stock options, stock appreciation
rights, restricted stock awards and performance awards. At
December 31, 1999, 1,293,000 shares of common stock are available
for future grants. A committee of the Board of Directors
determines the terms and conditions of grants, except that the
exercise price of certain options cannot be less than 100% of the
fair market value of the stock on the date of grant. All stock
options and stock appreciation rights are exercisable at the date
indicated in connection with their issuance, but not later than
10 years after the date of grant. Option activity is summarized
in the following table.
1999 1998 1997
----------------------------------------------------------------
Options outstanding,
January 1 1,220,600 1,285,200 750,400
Granted 151,500 132,500 748,500
Exercised (232,700) (144,100) (213,700)
Forfeited (79,800) (53,000) -
-----------------------------------------------------------------
Options outstanding,
December 31 1,059,600 1,220,600 1,285,200
Options exercisable,
December 31 636,300 594,200 640,200
-----------------------------------------------------------------
Weighted-Average
Exercise Price 1999 1998 1997
-----------------------------------------------------------------
Options outstanding,
January 1 $28.08 $27.23 $23.42
Granted 33.26 30.46 28.82
Exercised 24.09 22.32 21.45
Forfeited 28.90 28.84 -
34
-----------------------------------------------------------------
Options outstanding,
December 31 29.15 28.08 27.23
Options exercisable,
December 31 28.09 27.67 27.04
-----------------------------------------------------------------
The range of exercise prices at December 31, 1999, is $22.31 to
$38.84 per share.
Under the Company's management incentive plan, participants are
paid cash bonuses on the attainment of certain financial goals.
Bonus participants are required to use 25% of their cash bonus,
after certain adjustments for taxes payable, to purchase common
stock of the Company at current fair market value. Bonus
participants are given a restricted stock award equal to one
share for each four shares of common stock purchased with bonus
awards. These stock awards vest at the end of four years
provided that the participant has not made a disqualifying
disposition of the stock purchased. Restricted stock awards were
granted for 3,600 shares in 1999, 3,800 shares in 1998 and 3,800
shares in 1997. Restricted stock forfeitures of 300 shares were
recorded in both 1998 and 1997. Compensation expense is being
recognized over the vesting period based on the fair market value
of common stock on the award date: $32.81 per share in 1999,
$31.47 per share in 1998 and $27.57 per share in 1997.
In 1999, the Company replaced its previously existing non-
qualified stock option plan for non-employee directors. The new
plan established 125,000 shares available for future grants to
plan participants. Options granted under the new plan vest over
a three-year period; 45,000 options were granted under the new
plan in 1999. At December 31, 1999, 80,000 options remain
available for future grants. The Company's former plan was
terminated in 1999 and no future grants will be made under that
plan; 51,000 options granted under the former plan remain
outstanding at December 31, 1999. The exercise price on all
options is established at the market value of the Company's
common stock on the date of grant. Option activity under the
non-employee directors' plan(s) is summarized below:
35
1999 1998 1997
-----------------------------------------------------------------
Options outstanding,
January 1 66,500 63,500 61,500
Granted 45,000 15,000 13,500
Exercised (15,500) (12,000) (11,500)
-----------------------------------------------------------------
Options outstanding,
December 31 96,000 66,500 63,200
Options exercisable,
December 31 51,000 51,500 63,500
-----------------------------------------------------------------
Weighted-Average
Exercise Price 1999 1998 1997
-----------------------------------------------------------------
Options outstanding,
January 1 $26.97 $25.49 $24.18
Granted 32.84 30.72 28.13
Exercised 25.25 23.81 22.28
-----------------------------------------------------------------
Options outstanding,
December 31 30.04 26.97 25.49
Options exercisable,
December 31 27.57 25.88 25.49
-----------------------------------------------------------------
The range of exercise prices at December 31, 1999, is $22.69 to
$32.84 per share. The weighted-average remaining contractual
life at December 31, 1999 for all plans is 4.9 years.
The Company has elected to measure compensation cost using the
intrinsic value method of accounting. Accordingly, no
compensation cost has been recognized related to stock option and
stock purchase plans because grants are at 100% of fair market
value on the grant date. If the fair-value based method of
accounting had been applied to stock option grants in the most
recent three years, the Company's net income and basic net income
per share would have been reduced as summarized below:
1999 1998 1997
------- ------- -------
Net income:
As reported $38,700 $6,700 $44,400
Pro forma 37,800 5,700 43,200
36
Net income per share:
As reported $ 2.59 $ .41 $ 2.69
Pro forma 2.53 .35 2.62
The following assumptions were used to compute the fair value of
the option grants in 1999, 1998 and 1997 using the Black-Scholes
option-pricing model: a risk-free interest rate of 6.50%, 5.75%
and 6.15%, respectively; stock volatility of 20.2%, 22.4% and
22.2%, respectively; dividend yield of 2% for all years; and
expected option lives of three years for the long-term incentive
and key management employees' plans and five years for the
revised non-employee directors' plan (two-year lives were used
under the former plan for 1998 and 1997).
Segment Information
--------------------
West Pharmaceutical Services, Inc. serves the healthcare and
consumer products industries through design, manufacture and
sales of stoppers, closures, medical device components and
assemblies made from elastomers, metal and plastics. This
segment is referred to as Device Product Development and it
consists of four regional business units that manufacture and
sell these products to customers mainly in their respective
regions. The Company also provides contract services to
healthcare and consumer companies consisting of manufacture
and/or packaging of drugs and personal care items, clinical
services and laboratory testing. This segment is referred to as
Contract Services and consists of four business units. Finally,
the Company is engaged in research and development of drug
delivery systems for biopharmaceutical and other drugs to improve
their therapeutic performance and/or the method of
administration. This segment, consisting of two business units,
is referred to as Drug Delivery Research and Development.
The Company's executive management evaluates performance of these
segments based on operating profit, and allocates resources to
them based on the assessment for market growth and profitability.
Operating profit is income before interest expense, income taxes,
minority interests and equity in affiliates. Corporate expenses,
including global functional management costs, and unusual items
(restructuring charges and the 1998 acquired in-process research
and development charge) are not allocated to segments. The
accounting policies of the segments are the same as those
reported in the Summary of Significant Accounting Policies on
page 8. Total net sales generated from the Device Product
Development segment include sales to one customer of
approximately $54,600, $53,200 and $50,500 in 1999, 1998 and
1997, respectively.
37
profit in the accompanying Consolidated Statements of Income.
Device Drug delivery Corporate and
product Contract research and unallocated Consolidated
development services development items total
----------- --------- ------------ ------------ -------------
1999
-----
Net sales $384,000 $ 83,800 $ 1,300 $ - $ 469,100
Interest income 1,200 300 - 1,000 2,500
Operating profit 93,400 4,300 (7,700) (23,100) 66,900
Segment assets 354,000 105,000 12,500 80,300 551,800
Capital expenditures 34,100 7,200 800 4,100 46,200
Depreciation and
amortization expense 26,500 5,700 1,300 2,200 35,700
1998
-----
Net sales $365,600 $82,600 $1,500 $ - $449,700
Interest income 1,600 100 - 1,000 2,700
Operating profit 83,800 9,700 (5,300) (53,200) 35,000
Segment assets 339,800 80,500 13,400 74,400 508,100
Capital expenditures 31,500 6,700 1,400 2,200 41,800
Depreciation and
amortization expense 24,000 4,400 1,300 2,600 32,300
1997
-----
Net sales $371,900 $80,600 $ - $ - $452,500
Interest income 1,300 100 - 600 2,000
Operating profit 85,300 3,800 (3,200) (22,900) 63,000
Segment assets 326,700 73,300 2,800 77,600 480,400
Capital expenditures 25,200 4,300 1,200 3,700 34,400
Depreciation and
amortization expense 24,500 4,400 200 2,800 31,900
38
The following table presents sales by country in which the
legal subsidiary is domiciled and assets are located.
Sales Long-lived assets
-------------------------------------------------------------
1999 1998 1997 1999 1998 1997
---- ---- ---- ---- ---- ----
United States $296,100 $282,300 $293,200 $143,400 $137,900 $130,200
Germany 52,100 50,000 51,800 25,400 29,100 26,200
Other European countries 89,900 85,400 71,300 50,500 50,800 35,500
Other 31,000 32,000 36,200 16,800 17,300 17,100
------- ------- ------- ------- ------- -------
$469,100 $449,700 $452,500 $236,100 $235,100 $209,000
------- ------- ------- ------- ------- -------
39
Commitments and Contingencies
------------------------------
At December 31, 1999, the Company was obligated under various
operating lease agreements with terms ranging from one month to
20 years. Rental expense in 1999, 1998 and 1997 was $7,800,
$7,300 and $7,600, respectively. Minimum rentals for
noncancelable operating leases with initial or remaining terms in
excess of one year are: 2000--$7,200; 2001--$6,500; 2002--$6,800;
2003--$6,900; 2004--$6,800 and thereafter $46,100. Minimum
operating lease payments have been reduced by related minimum
sublease income.
At December 31, 1999, outstanding contractual commitments
for the purchase of equipment and raw materials amounted to
$8,400, all of which is due to be paid in 2000.
The Company has accrued the estimated cost of environmental
compliance expenses related to soil or groundwater contamination
at current and former manufacturing facilities. The ultimate
cost to be incurred by the Company and the timing of such
payments cannot be fully determined. However, based on
consultants' estimates of the costs of remediation in accordance
with applicable regulatory requirements, the Company believes the
accrued liability of $1,500 at December 31, 1999 is sufficient to
cover the future costs of these remedial actions, which are
expected to be carried out over an extended period. The Company
has not anticipated any possible recovery from insurance or other
sources.
40
QUARTERLY OPERATING AND PER SHARE DATA (UNAUDITED)
(in thousands of dollars, except per share data)
Net income (loss)
Net per share
Net Gross Income Assuming
Quarter ended sales profit (loss) Basic dilution
-------------------------------------------------------------------
March 31, 1999 $114,200 $ 34,400 $ 9,500 $ .63 $ .63
June 30, 1999 124,400 39,800 10,400 .70 .69
September 30, 1999(1) 115,100 34,300 8,600 .58 .57
December 31, 1999(2) 115,400 35,800 10,200 .69 .68
-------- --------- --------- --------- ---------
$469,100 $144,300 $ 38,700 $ 2.59 $ 2.57
-------- --------- --------- --------- ---------
March 31, 1998(3) $105,200 $ 31,300 $(19,700) $(1.19) $(1.19)
June 30, 1998 115,800 34,800 9,900 .58 .58
September 30, 1998(4) 113,900 33,400 6,500 .38 .38
December 31, 1998 114,800 35,700 10,000 .66 .66
-------- --------- --------- --------- ---------
$449,700 $135,200 $ 6,700 $ .41 $ .40
-------- --------- --------- --------- ---------
(1) Third quarter 1999 results include the tax benefit realized
on the favorable settlement of a prior years' tax claim.
(2) Fourth quarter 1999 results include the net tax benefit
due mainly to a refund of foreign taxes triggered by a dividend
from a foreign subsidiary, a charge related to the write-off of a
plastic product line which had not gained market acceptance,
and the reversal of a portion of a 1996 restructuring charge
because of a change in the business plan. See Notes "Income Taxes"
and "Restructuring Charges".
(3) First quarter 1998 results include a charge for acquired
research and development. See Note "Acquisitions and
Investments".
(4) Third quarter 1998 results include a charge related to
staff reductions. See Note "Restructuring Charges".
41
Report of Independent Accountants
To the Shareholders and the Board of Directors of
West Pharmaceutical Services, Inc.:
In our opinion, the accompanying consolidated balance sheets
and the related consolidated statements of income, comprehensive
income, shareholders' equity and cash flows present fairly, in
all material respects, the financial position of West
Pharmaceutical Services, Inc. and its subsidiaries at December
31, 1999 and 1998, and the results of their operations and their
cash flows for each of the three years in the period ended
December 31, 1999, in conformity with accounting principles
generally accepted in the United States. These financial
statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits in
accordance with auditing standards generally accepted in the
United States which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the
opinion expressed above.
/s/ PricewaterhouseCoopers LLP
--------------------------------
PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
February 25, 2000
42
Report of Management
The Company's management is responsible for the integrity,
reliability and objectivity of publicly reported financial
information. Management believes that the financial statements
as of and for the year ended December 31, 1999, have been
prepared in conformity with accounting principles generally
accepted in the United States and that information presented in
this Annual Report is consistent with those statements. In
preparing the financial statements, management makes informed
judgements and estimates where necessary, with appropriate
consideration given to materiality.
In meeting its responsibility for preparing financial
statements, management maintains a system of internal accounting
controls to assure the safety of its assets against unauthorized
acquisition, use or disposition. This system is designed to
provide reasonable assurance that assets are safeguarded and
transactions are executed in accordance with management's
authorization and recorded properly, allowing for preparation of
reliable financial statements. There are inherent limitations in
the effectiveness of all internal control systems. The design of
the Company's system recognizes that errors or irregularities may
occur and that estimates and judgements are required to assess
the relative cost and expected benefits of the controls.
Management believes that the Company's accounting controls
provide reasonable assurance that errors or irregularities that
could be material to the financial statements are prevented or
would be detected within a timely period.
The independent accountants are appointed by the Board of
Directors, with the approval of the shareholders. As part of
their engagement, the independent accountants audit the Company's
financial statements, express their opinion thereon, and review
and evaluate selected systems, accounting procedures and internal
controls to the extent they consider necessary to support their
report.
/s/ William G. Little
-------------------------------------------------------
William G. Little
Chairman and Chief Executive Officer
/s/ Steven E. Ellers
--------------------------------------------------------
Steven A. Ellers
Senior Vice President and Chief Financial Officer
43
West Pharmaceutical Services, Inc. and Subsidiaries
(in thousands, except per share data)
1999 1998 1997
--------------------------------------
SUMMARY OF OPERATIONS
Net sales $ 469,100 449,700 452,500
Operating profit (loss) $ 66,900 35,000 63,000
Income (loss) before income taxes and minority interests $ 56,500 27,800 57,400
Provision for income taxes $ 18,400 21,200 13,300
Minority interests $ 200 100 200
--------------------------------------
Income (loss) from consolidated operations $ 37,900 6,500 43,900
Equity in net income of affiliated companies $ 800 200 500
--------------------------------------
Income (loss)before change in accounting method $ 38,700 6,700 44,400
--------------------------------------
Income (loss) before change in accounting method per share:
Basic (a) $ 2.59 .41 2.69
Assuming dilution (b) $ 2.57 .40 2.68
Average common shares outstanding 14,914 16,435 16,475
Average shares assuming dilution 15,048 16,504 16,572
Dividends paid per common share $ .65 .61 .57
--------------------------------------
Research, development and engineering expenses $ 16,700 14,500 12,000
Capital expenditures $ 46,200 41,800 34,400
--------------------------------------
YEAR-END FINANCIAL POSITION
Working capital $ 80,700 53,000 110,200
Total assets $ 551,800 508,100 480,400
Total invested capital:
Total debt $ 171,100 141,100 89,000
Minority interests $ 800 600 400
Shareholders' equity $ 231,200 230,100 277,700
--------------------------------------
Total $ 403,100 371,800 367,100
--------------------------------------
PERFORMANCE MEASUREMENTS
Gross margin (c) % 30.8 30.1 29.2
Operating profitability (d) % 14.3 7.8 13.9
44
Tax rate % 32.5 76.1 23.2
Asset turnover ratio (e) .89 .91 .94
Return on average shareholders' equity % 16.8 2.6 16.7
Total debt as a percentage of total invested capital % 42.5 37.9 24.2
--------------------------------------
Shareholders' equity per share $ 15.77 15.31 16.76
Stock price range $40 7/16-30 7/8 35 11/16-25 3/4 35 1/16-27
--------------------------------------
(a) Based on average common shares outstanding.
(b) Based on average shares, assuming dilution.
(c) Net sales minus cost of goods sold, including applicable
depreciation and amortization, divided by net sales.
(d) Operating profit (loss) divided by net sales.
(e) Net sales divided by average total assets; 1993 asset
turnover ratio is based on 12 months' sales for
international subsidiaries.
1999 includes net tax benefits totaling $.15 per
share related to a favorable determination of a prior
years' tax appeal and the refund of taxes paid
previously as a result of a dividend, and 1999 includes for
the first time results of the clinical service
business acquired on April 20, 1999.
1998 includes a charge for acquired research and development
and a restructuring charge that reduced operating
results by $1.72 per share and $.15 per share, respectively,
and 1998 includes for the first time the results of two
companies acquired in 1998.
1997 includes the net tax benefit mainly from a German tax
reorganization which increased net income per share by $.48.
1996 includes a restructuring charge that reduced
operating results by $.91 per share.
1995 includes for the first time the net operating results of
the contract manufacturing and packaging subsidiary from May 1.
1994 includes for the first time the results of two companies
in which majority ownership was acquired in 1994.
1993 includes 13 months of operating results for international
subsidiaries.
Beginning in 1992 the Company's ownership interest in glass
manufacturing operating results is reported as equity in net
income of affiliates. Prior to the 1992 sale of a majority
interest in such operation, operating results were fully
45
consolidated.
1991 includes a restructuring charge that reduced operating
results by $1.37 per share.
1990 includes a restructuring charge that reduced operating
results by $.45 per share, and 1990 included for the first
time the results of two companies in which controlling
ownership was acquired in 1989.
46
Ten Year Summary
West Pharmaceutical Services, Inc. and Subsidiaries
(in thousands, except per share data)
1996 1995 1994 1993 1992 1991 1990
-------------------------------------------------------------------------------------
458,800 412,900 365,100 348,700 337,500 328,900 323,200
32,700 49,800 45,400 40,600 38,700 (1,600) 15,600
25,800 42,500 42,100 37,500 34,800 (7,700) 9,600
10,800 13,900 13,400 14,300 14,300 4,700 6,400
100 800 1,900 1,700 1,700 (2,400) 300
-------------------------------------------------------------------------------------
14,900 27,800 26,800 21,500 18,800 (10,000) 2,900
1,500 900 500 1,000 900 1,500 1,400
-------------------------------------------------------------------------------------
16,400 28,700 27,300 22,500 19,700 (8,500) 4,300
-------------------------------------------------------------------------------------
1.00 1.73 1.70 1.42 1.26 (.55) .27
.99 1.71 1.69 1.41 1.25 (.55) .27
16,418 16,557 16,054 15,838 15,641 15,527 15,793
16,500 16,718 16,215 16,010 15,776 15,527 15,816
.53 .49 .45 .41 .40 .40 .40
-------------------------------------------------------------------------------------
11,200 12,000 12,000 11,400 11,100 10,800 10,900
31,700 31,300 27,100 33,500 22,400 25,600 33,200
-------------------------------------------------------------------------------------
88,600 86,600 50,400 46,400 37,700 26,500 36,500
479,900 480,100 397,400 309,200 304,400 313,200 343,500
98,400 114,300 57,800 32,300 42,000 58,400 78,500
300 200 1,900 10,900 10,100 8,400 11,700
252,000 254,100 227,300 188,100 168,600 152,600 176,100
-------------------------------------------------------------------------------------
350,700 368,600 287,000 231,300 220,700 219,400 266,300
-------------------------------------------------------------------------------------
27.5 28.6 32.1 30.2 28.8 25.6 24.4
7.1 12.1 12.4 11.7 11.5 (.5) 4.8
47
41.8 32.8 31.8 38.2 41.1 61.7 66.5
.96 .94 1.04 1.11 1.10 1.00 .98
6.5 11.9 13.2 13.2 12.3 (8.9) 2.4
28.1 31.0 20.1 14.0 19.1 26.6 29.5
-------------------------------------------------------------------------------------
15.39 15.29 13.81 11.82 10.71 9.81 11.37
30-221/8 30 -22 29 -211/4 251/4-19 24 -16 18 -11 20-101/2
-------------------------------------------------------------------------------------
49