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, 2000
---------------
Commission File Number 1-8036
------
WEST PHARMACEUTICAL SERVICES, INC.
-----------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Pennsylvania
-------------------------------------
(State or other jurisdiction of
incorporation or organization)
101 Gordon Drive, PO Box 645,
Lionville, PA
-------------------------------------
(Address of principal executive
offices)
23-1210010
----------------------
(I.R.S. Employer
Identification Number)
19341-0645
----------------------
(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 .
--- ---
March 31, 2000 -- 14,497,080
-----------------------------------------------------------------
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, 2000
Part I - Financial Information
Item 1. Financial Statements
Consolidated Statements of Income for the
Three Months ended March 31, 2000 and March 3
31, 1999
Condensed Consolidated Balance Sheets at March 31,
2000 and December 31, 1999 4
Condensed Consolidated Statements of Cash Flows
for the Three Months ended March 31, 2000 and
March 31, 1999 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosure about Market Risk 12
Part II - Other Information
Item 1. Legal Proceedings 13
Item 6. Exhibits and reports on Form 8-K 13
SIGNATURES 14
Index to Exhibits F-1
Page 3
Part I - Financial Information
Item 1. Financial Statements
West Pharmaceutical Services, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(in thousands, except per share data)
Quarter Ended
March 31, 2000 March 31, 1999
--------------- --------------
Net sales .................................. $107,700 100% $114,200 100%
Cost of goods and services sold ............ 79,500 74 79,800 70
---------------------------------
Gross profit ...................... 28,200 26 34,400 30
Selling, general and administrative expenses 17,400 16 17,000 15
Other expense, net ......................... 400 -- -- --
---------------------------------
Operating profit .................. 10,400 10 17,400 15
Interest expense ........................... 3,000 3 2,000 2
---------------------------------
Income before income taxes
and minority interests ......... 7,400 7 15,400 13
Provision for income taxes ................. 2,700 3 5,900 5
Minority interests ......................... 100 -- 100 --
---------------------------------
Income from consolidated operations 4,600 4% 9,400 8%
Equity in net income of affiliated companies 500 100
---------------------------------
Net income ........................ $ 5,100 $ 9,500
---------------------------------
Net income per share:
Basic ............................. $ .35 $ .63
Assuming dilution ................. $ .35 $ .63
Average common shares outstanding .......... 14,546 15,082
Average shares assuming dilution ........... 14,562 15,133
See accompanying notes to consolidated financial statements.
Page 4
West Pharmaceutical Services, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS (Unaudited)
(in thousands)
March 31, December 31,
2000 1999
---------- -----------
ASSETS ...................................
Current assets:
Cash, including equivalents ..... $ 55,000 $ 45,300
Accounts receivable ............. 69,300 74,600
Inventories ..................... 43,100 42,100
Deferred income tax benefits .... 7,200 7,300
Other current assets ............ 18,800 15,400
---------------------
Total current assets ..................... 193,400 184,700
---------------------
Net property, plant and equipment ........ 228,700 227,600
Investments in affiliated companies ...... 20,600 20,200
Goodwill ................................. 64,400 66,500
Deferred charges and other assets ........ 55,700 52,800
---------------------
Total Assets ............................. $562,800 $551,800
---------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 11,500 $ 2,200
Notes payable ................... 52,800 27,400
Accounts payable ................ 22,400 25,500
Salaries, wages, benefits ....... 11,600 15,600
Income taxes payable ............ 6,400 5,500
Other current liabilities ....... 28,800 27,800
----------------------
Total current liabilities ................ 133,500 104,000
----------------------
Long-term debt, excluding current portion 130,700 141,500
Deferred income taxes .................... 47,500 48,000
Other long-term liabilities .............. 25,600 26,300
Minority interests ....................... 800 800
Shareholders' equity ..................... 224,700 231,200
----------------------
Total Liabilities and Shareholders' Equity $562,800 $551,800
----------------------
See accompanying notes to consolidated financial statements.
Page 5
West Pharmaceutical Services, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(in thousands)
Quarter Ended
March 31, March 31,
2000 1999
-------- --------
Cash flows from operating activities:
Net income, plus net non-cash items ......... $ 10,400 $ 16,600
Changes in assets and liabilities ........... 100 (3,200)
-----------------------
Net cash provided by operating activities ............ 10,500 13,400
-----------------------
Cash flows from investing activities:
Property, plant and equipment acquired ...... (14,200) (7,700)
Payment for acquisition (1,000) --
Customer advances, net of repayments ........ (1,400) 100
-----------------------
Net cash used in investing activities ................ (16,600) (7,600)
-----------------------
Cash flows from financing activities:
Repayment of long-term debt ................. (300) (800)
Notes payable, net .......................... 25,200 2,400
Dividend payments ........................... (2,500) (2,400)
Sale of common stock, net ................... 600 1,400
Purchase of common stock .................... (6,000) (2,900)
-----------------------
Net cash provided by (used in) financing activities .. 17,000 (2,300)
-----------------------
Effect of exchange rates on cash ..................... (1,200) (1,800)
-----------------------
Net increase in cash, including equivalents .......... $ 9,700 $ 1,700
-----------------------
See accompanying notes to consolidated financial statements
Page 6
West Pharmaceutical Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
The interim consolidated financial statements for the quarter ended March 31,
2000 should be read in conjunction with the consolidated financial statements
and notes thereto of West Pharmaceutical Services, Inc., appearing in the
Company's 1999 Annual Report on Form 10-K. The year-end condensed consolidated
balance sheet data was derived from audited financial statements, but does not
include all disclosures required by generally accepted accounting principles.
Interim results are based on the Company's accounts without audit.
1. Interim Period Accounting Policy
---------------------------------
In the opinion of management, the unaudited Condensed Consolidated Balance
Sheet as of March 31, 2000 and the related unaudited Consolidated
Statement of Income and the unaudited Condensed Consolidated Statement
of Cash Flows for the three month period then ended and for the
comparative period in 1999 contain all adjustments, consisting only of
normal recurring accruals, necessary to present fairly the financial
position as of March 31, 2000 and the results of operations and cash flows
for the respective periods. The results of operations for any interim
period are not necessarily indicative of results for the full year.
Operating Expenses
------------------
To better relate costs to benefits received or activity in an interim
period, certain operating expenses have been annualized for interim
reporting purposes. Such expenses include certain employee benefit costs,
annual quantity discounts and advertising.
Income Taxes
-------------
The tax rate used for interim periods is the estimated annual effective
consolidated tax rate, based on the current estimate of full year results,
except that taxes applicable to operating results in Brazil and prior year
adjustments, if any, are recorded as identified.
Page 7
West Pharmaceutical Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
(continued)
2. Inventories at March 31, 2000 and December 31, 1999 are
summarized as follows:
(in thousands) 2000 1999
------- -------
Finished goods....$14,200 $14,000
Work in process... 14,800 12,800
Raw materials..... 14,100 15,300
------- -------
$43,100 $42,100
------- -------
------- -------
3. The carrying value of property, plant and equipment at March
31, 2000 and December 31, 1999 is determined as follows:
(in thousands) 2000 1999
-------- --------
Property, plant and equipment............... $491,800 $489,200
Less accumulated depreciation
and amortization ......................... 263,100 261,600
-------- --------
Net property, plant and equipment .......... $228,700 $227,600
-------- --------
-------- --------
Page 8
West Pharmaceutical Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
(Continued)
4. For the three months ended March 31, 2000 and 1999, the
Company's comprehensive income is as follows:
March 31, 2000 March 31, 1999
-------------- ---------------
Net income .............. $ 5,100 $ 9,500
Foreign currency
translation adjustments (3,700) (8,600)
------- -------
Comprehensive income .... $ 1,400 $ 900
------- -------
------- -------
5. Net sales to external customers and operating profit by operating
segment for the three months ended March 31, 2000 and March 31, 1999
are as follows:
Net Sales Operating Profit
2000 1999 2000 1999
------- -------- --------- --------
Device product development $ 92,100 $ 93,400 $ 19,800 $ 21,500
Contract services ........ 15,300 20,600 (3,600) 2,200
Drug delivery research &
development ............ 400 200 (2,300) (1,400)
Corporate and unallocated
items .................. (100) -- (3,500) (4,900)
--------- -------- -------- --------
Consolidated total ....... $ 107,700 $114,200 $ 10,400 $ 17,400
--------- -------- -------- --------
--------- -------- -------- --------
Compared with December 31, 1999, there were no material changes in the
amount of assets as of March 31, 2000 for any operating segment.
6. Common stock issued at March 31, 2000 was 14,497,080 shares, of which
2,668,061 shares were held in treasury. Dividends of $.17 per common
share were paid in the first quarter of 2000 and a dividend of $.17
per share payable to holders of record on April 19, 2000 was declared
on March 27, 2000.
Page 9
West Pharmaceutical Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
(Continued)
7. The Company has accrued the estimated cost of environmental compliance
expenses related to soil or ground water contamination at current and
former manufacturing facilities. The ultimate cost to be incurred by
the Company and the timing of such payments cannot be fully
determined. However, based on consultants' estimates of the costs of
remediation in accordance with applicable regulatory requirements, the
Company believes the accrued liability of $1.4 million at March 31,
2000 is sufficient to cover the future costs of these remedial
actions, which will be carried out over the next several years. The
Company has not anticipated any possible recovery from insurance or
other sources.
8. In January 2000, the Company paid $1 million to acquire additional
ownership in a firm involved in developing genotyping technology. As
of March 31, 2000 the Company's cumulative investment in this firm is
$2.3 million, representing a 12.8% ownership interest. Upon the
satisfaction of certain future milestones, the Company is
conditionally committed to investing up to an additional $1.3 million,
which would result in a cumulative ownership percentage of up to
19.95%.
Page 10
Item 2.
Management's Discussion and Analysis of Financial Condition and
- ----------------------------------------------------------------
Results of Operations for the Quarter Ended March 31, 2000 versus
- ----------------------------------------------------------------
March 31, 1999.
- --------------
Net Sales
- ----------
Net Sales for the first quarter of 2000 were $107.7 million; a 5.6% decrease
compared with net sales of $114.2 million for the same quarter in 1999. The U.S.
dollar's continued strength accounted for $4 million, or 60%, of the drop in
sales with the remainder due to low volume in the contract services segment that
more than offset sales growth (at constant exchange rates) in the device product
development segment.
First quarter 2000 sales of the device product development segment were $92.1
million, an increase of 3% at constant exchange rates. Sales to domestic markets
increased by 2%; while sales to international markets grew at 4% (at constant
exchange rates) despite the low plastic medical device sales of a United Kingdom
(UK) operation. The product mix for this segment had a higher ratio of lower
margin medical device components compared with 1999, as some customers continued
to work-down year end inventories of higher margin pharmaceutical packaging
components.
The contract services segment's results were, as previously noted, significantly
below last year's first quarter. Both of the major business units - contract
manufacturing and packaging and clinical services - suffered from low volumes.
In total, sales for the contract services segment were $15.3 million; $5.3
million, or 26%, below first quarter 1999 levels. Both of these business units
have been experiencing low volumes since late in the second half of 1999 due to
customers' delays, cancellations or reduced orders for specific products or
projects. In response to these difficulties in the contract services segment,
management has increased the sales force, strengthened the management team and
is upgrading the equipment in the contract packaging area. Management now
projects an operating loss for this segment to extend through the second
quarter, with sales showing improvement compared with first quarter. Although
management anticipates operating profit for this segment in the later half of
the year, the slow recovery in the backlog for this segment has reduced full
year earnings expectations.
Gross Profit
- ------------
The consolidated gross margin was 26.2%, compared with 30.2% in 1999. The low
volumes in the contract manufacturing and packaging business unit were unable to
absorb plant overhead costs resulting in a negative gross margin for the
contract services segment. In addition, the lower value product mix experienced
mainly in domestic markets within the device product development segment coupled
with low utilization of a UK plastics medical device plant resulted in a lower
margin for this business segment.
Page 11
Results of Operations for the Quarter Ended March 31, 2000 versus
- -----------------------------------------------------------------
March 31, 1999, continued
- --------------------------
Selling, General and Administrative Expenses
- --------------------------------------------
Selling, general and administrative expenses were 2% higher compared with the
prior year. The added costs of the clinical services group acquired in April
1999, and the higher expenses incurred for drug delivery systems development
were essentially offset by increased income from pension plan assets and the
impact of favorable foreign exchange rates on non-U.S. dollar expenses. Drug
delivery systems costs were higher as the Company initiated clinical trials for
nasal delivery of morphine using the Company's proprietary chitosan-based
delivery system at its Evansville, Indiana clinical facility. The Company is in
active negotiations with several parties interested in licensing agreements
covering products utilizing the Company's chitosan-based nasal delivery system.
Other expense
- ----------------------
The line item "other expense, net" mainly reflects a foreign currency
transaction loss and a loss related to a one-time environmental action by
Brazilian customs that resulted in the destruction of raw material and finished
products that were imported into that country.
Interest Expense and Equity in Affiliates
- -----------------------------------------
Interest expense increased by $1.0 million in the first quarter comparison,
largely because of debt associated with the Company's stock buyback program. The
Company has purchased 727,500 shares at an average cost of $33.18 per share
under the one million share buyback program announced in March of 1999. In
2000's first quarter, 196,700 shares were purchased at an average cost of $30.67
per share. Higher interest rates and debt associated with acquisitions also
contributed to the increase in interest expense.
Equity in net income of affiliates increased by $0.4 million compared with first
quarter 1999. This increase reflects the improved operating results of Daikyo
Seiko, Ltd., a Japanese company in which the Company has a 25% ownership
interest. Daikyo's improved results were generated from increased sales and a
significant improvement in its gross margin.
Taxes
- -----
The estimated tax rate in the quarter was 37% compared with 38.5% in the same
period of 1999. The decrease in the effective tax rate is due to the European
tax reorganization completed in the fourth quarter of 1999. However, the current
expected geographic mix of earnings and the potential elimination of the U.S.
tax benefit of foreign sales corporations is raising the rate above management's
earlier expectation. The estimated 2000 tax rate of 37% is lower by half a
percentage point compared with 1999's full year rate on operations of 37.5%.
Page 12
Results of Operations for the Quarter Ended March 31, 2000 versus
- -----------------------------------------------------------------
March 31, 1999, continued
- --------------------------
Net Income
- ----------
Net income for the first quarter 2000 was $5.1 million, or $.35 per share,
compared with net income of $9.5 million, or $.63 per share, in the same period
of 1999. Average common shares outstanding in the first quarter were 14.5
million compared with 15.1 million in the first quarter 1999. The reduction in
average common shares outstanding is due to the Company's stock buyback program
noted above.
Financial Position
- ------------------
Working capital at March 31, 2000 was $59.9 million compared with $80.7 million
at December 31, 1999. The working capital ratio at March 31, 2000 was 1.4 to 1.
The primary reason for the decrease in working capital is due to the increase in
current debt outstanding. The increase reflects maturities of long-term debt and
borrowings related to share repurchases and capital spending. The Company's
current revolving credit facility expires in August 2000. The Company is
currently negotiating a replacement long-term credit facility. Debt as a
percentage of total invested capital at March 31, 2000 was 46.4% compared with
42.5% at December 31, 1999.
Cash totaled $55 million at March 31, 2000. The net increase in cash for the
first quarter of 2000 of $9.7 million is expected to reverse in the second
quarter as certain loans resulting from the European tax reorganization are
repaid. In the quarter, cash flows from operations of $10.5 million and $25.2
million of short-term borrowings were used to fund $14.2 million of capital
spending primarily related to maintenance and efficiency upgrades on device
product development segment assets, a $1 million additional investment in a
genotyping technology company, and $1.4 million of advances for customer
projects. In addition, the Company paid cash dividends of $.17 per share and
purchased 196,700 of its common shares at an average cost of $30.67 per share.
The Company believes its financial condition and current capitalization indicate
an ability to finance substantial future growth.
Page 13
Results of Operations for the Quarter Ended March 31, 2000 versus
- -----------------------------------------------------------------
March 31, 1999, continued
- --------------------------
Recently Issued Accounting Pronouncements
- ------------------------------------------
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101, "Revenue Recognition in Financial Statements" (SAB 101). Among
other things, SAB 101 provides guidance for recording revenue related to
non-refundable, up-front fees received in connection with conveying licensing or
other intangible rights or for delivery of products or services. In general, SAB
101 requires the recognition of revenue from up-front payments over any
continuing service period. While the Company's historical revenue recognition
practices are in compliance with SAB 101, revenue recognition from up-front
licensing and other fees that may result from agreements currently being
negotiated for the Company's drug delivery technologies may be deferred
depending on final terms of such agreements.
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. At March 31, 2000 and December 31, 1999 the Company had three interest
rate swap agreements in effect, with an estimated fair value less than $0.1
million. There were no forward exchange contracts in effect at March 31, 2000.
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.
Item 3. Quantitative and Qualitative Disclosure about Market Risk
---------------------------------------------------------
The information called for by this item is incorporated by reference to the text
appearing in Item 2 "Management's Discussion and Analysis of Financial Condition
and Results of Operations-Market Risk".
Page 14
Part II - Other Information
Item 1. Legal Proceedings
-----------------
None.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) See Index to Exhibits on pages F-1 and F-2 of this
Report.
(b) No reports on Form 8-K have been filed for the
quarter ended March 31, 2000.
Page 15
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 15, 2000 /s/ Steven A. Ellers
- ------------ -----------------------------------
Date (Signature)
Steven A. Ellers
Senior Vice President and
Chief Financial Officer
INDEX TO EXHIBITS
Exhibit
Number
(3) (a) Amended and Restated Articles of Incorporation
of the Company through January 4, 1999,
incorporated by reference to the Company's
Annual Report on Form 10-K for the year ended
December 31, 1998 (File No. 1-8036).
(3) (b) ByLaws of the Company, as amended through
October 27, 1998, incorporated by reference to
Exhibit (3)(b) to the Company's Form 10-Q for
the quarter ended September 30, 1998 (File No.
1-8036).
(4) (a) Form of stock certificate for common stock,
incorporated by reference to the Company's
Annual Report on Form 10-K for the year ended
December 31, 1998 (File No. 1-8036).
(10)(a) Amended and Restated Employment Agreement dated as of
March 25, 2000 between the Company and William G. Little.
(10)(b) Form of second amended and restated agreement between the
Company and certain of its executive officers, dated as of
March 25, 2000.
(10)(c) Schedule of Agreements with Executive Officers.
(11) Not Applicable.
(12) Not Applicable.
(15) None.
(16) Not Applicable.
(18) None.
(19) None.
(22) None.
F - 1
Exhibit
Number
(23) None.
(24) None.
(27) Financial Data Schedule
(99) None.
F - 2