FINANCIAL REVIEW
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West Pharmaceutical Services (the Company) supports global pharmaceutical
and healthcare markets with products and technologies that enhance the safety
and effectiveness of drug delivery and product dispensing. The Company's
technologies include drug formulation research and development, clinical
research and laboratory services, and the design, development and manufacture of
components and systems for dispensing and delivering pharmaceutical, healthcare
and consumer products.
On November 30, 2001, the Company sold all of the assets of its contract
manufacturing and packaging unit, which comprised the largest part of the former
Contract Services segment. The disposition of the contract manufacturing and
packaging unit represents the disposal of a business segment. Accordingly, all
periods have been restated to reflect the results of the contract manufacturing
and packaging unit as a discontinued operation. Following the sale, the Company
announced that it had consolidated its operations into two segments:
Pharmaceutical Systems and Drug Delivery Systems.
The Pharmaceutical Systems segment focuses on the development, manufacture
and sale of components and devices for injectable, transmucosal, oral and
pulmonary drug delivery, including those used for parenteral delivery of serum
and lyophilized drugs, IV sets, pre-filled syringes, sample collection and
diagnostics, and disposable syringes. The Company's contract laboratory business
(formerly part of the Contract Services segment) has been integrated into the
Pharmaceutical Systems segment.
The Drug Delivery Systems segment combines the Company's proprietary
formulated drug delivery group with the clinical services business unit
(formerly part of the Contract Services segment). The drug delivery business
unit concentrates on the development and commercialization of the Company's
patented drug delivery technologies. These include: ChiSys, a transmucosal
system for the delivery of proteins, peptides, chemical entities and vaccines;
Hi-Load, a controlled release microsphere technology for proteins, and TARGIT,
an oral system for the site-specific delivery of therapeutic agents to the
colon. The clinical services business unit consists of the clinical trial
research organization which conducts Phase I and II clinical trials and the
consumer healthcare research group which provides specialized research services
supporting client applications for marketing over-the-counter versions of
prescription drugs.
The following is management's discussion and analysis of the Company's
operating results for the three years ended December 31, 2001, and its financial
position as of year-end 2001. The information should be read in conjunction with
the financial statements and accompanying notes appearing elsewhere in this
report.
RESULTS OF OPERATIONS
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The Company's 2001 net income from continuing operations was $19.6 million,
or $1.37 per share. Results include a pre-tax restructuring charge of $2.9
million ($1.3 million net of tax) resulting from a $4.9 million provision for
the termination of approximately 25 mid- and senior level management positions,
and a $2.0 million adjustment related to the sale of a plastic device
manufacturing facility held for sale from the 2000 restructuring program.
Net income from continuing operations for 2000 was $12.7 million, or $0.88
per share. Results in 2000 included a pre-tax restructuring charge of $15.0
million ($11.2 million net of tax) and a one-time tax benefit of $1.6 million
due to the favorable resolution of tax issues related to the 1997 reorganization
of the Company's German subsidiaries.
Net income from continuing operations for 1999 was $35.9 million, or $2.41
per share, and included net tax benefits totaling $2.3 million from a
combination of a foreign tax refund and the favorable settlement of a prior
years' tax appeal, and a $0.7 million pre-tax restructuring charge.
Excluding the restructuring and unusual tax items noted in all three years,
the Company's 2001 net income from continuing operations was $20.9 million, or
$1.46 per share, as compared with $22.3 million, or $1.55 per share, for 2000
and $33.6 million, or $2.25 per share, for 1999.
Net Sales
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Net sales were $396.9 million in 2001 compared with $378.6 million in 2000.
The strong U.S. dollar reduced reported sales by approximately $8 million
compared with 2000. At constant exchange rates, sales in 2001 were 7% higher
than 2000 net sales.
Sales in the Pharmaceutical Systems segment increased 6% (measured at
constant exchange rates) in 2001 compared with 2000. International sales grew by
almost 9%, while domestic sales grew by approximately 4%. The resolution of
regulatory issues at certain customer facilities and the attainment of customer
inventory reduction goals contributed to a positive return to more traditional
sales levels. In addition, the Company's investment in value- added technologies
that meet advanced regulatory and customer requirements has allowed it to
differentiate its products and facilities from competitors. Consistent sales
increases were experienced in all pharmaceutical packaging and processing
products (stoppers, seals, prefilled injection metal and rubber products),
partially offset by declining sales of disposable medical devices. Both sales
volumes and product mix were favorable in the Pharmaceutical Systems segment
sales comparisons to the prior year.
Revenues in the Drug Delivery Systems segment also demonstrated solid
improvement, increasing 31% to $20.5 million in 2001 as compared to $15.7
million in 2000. The improved results stemmed mostly from increased licensing
revenue related to the Company's patented chitosan-based nasal delivery system
technology (ChiSys). During the year, the Company completed five clinical trials
either independently or in conjunction with licensing partners. Two of these
were Phase II trials by the Company's licensees: one for the treatment of
post-surgical pain utilizing the Company's nasal morphine system and the second
for a nasal flu vaccine. The increased licensing revenue was partially offset by
lower revenues from the clinical services business unit, largely as a result of
exiting the low-margin site management business in early 2001.
Net sales of $378.6 million in 2000 compare with $395.8 million in 1999.
The impact of the strong U.S. dollar reduced 2000 reported sales by $19 million
compared with 1999, while an accounting change for reporting freight cost
reimbursements increased sales by $3.6 million. At constant exchange rates,
sales in 2000 were one-half percent above 1999 levels.
Sales in the Pharmaceutical Systems segment decreased almost 1% (measured
at constant exchange rates) in 2000 compared with 1999. Sales increased in
international markets by 5% due to higher volume. This increase was offset by
low demand in domestic markets where sales decreased 6% largely due to the
combined impact of customers' inventory adjustments related to aggressive supply
chain management programs and year 2000 contingency build-ups, a lower-value
product mix and delays due to customers' regulatory activity. Pricing also
negatively affected sales in this business segment due to competition and
continued pressure to drive down healthcare costs.
Revenues attributable to the Drug Delivery Systems segment totaled $15.7
million in 2000 compared with $11.3 million in 1999. The majority of the sales
increase was due to having a full year of clinical services revenues in 2000.
The clinical services unit was purchased in April 1999. In 2000, this segment
was focused on further development of proprietary formulations of morphine and
leuprolide, both using the Company's patented chitosan-based nasal delivery
system (ChiSys), and on the development of a proprietary formulation of
budesonide using the Company's TARGIT system. During the third quarter of 2000,
the Company completed agreements with Innovative Drug Delivery Systems, Inc.
(IDDS) granting IDDS exclusive rights to the Company's transmucosal drug
delivery technologies for the delivery of morphine and fentanyl, both well-known
pain medications, and midazolam, an anti-anxiety drug frequently administered
prior to surgery. IDDS returned the rights to midazolam to the Company during
2001. The remaining in-force agreements provide for IDDS to make license, option
and milestone payments to the Company that could total up to $15 million through
year 2004. The Company would also be entitled to royalties on the sale of any
licensed products that proceed through to commercialization.
Gross Profit
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Consolidated gross profit was $116.1 million in 2001 compared with $109.2
million in 2000. The gross margin percentage in both years was 29%.
The Pharmaceutical Systems segment's gross profit increased $2.6 million,
although margins declined slightly from prior year levels, primarily due to
production inefficiencies at several European plants resulting from increased
sales volumes, as well as increases in labor and material costs. The Company has
initiated plant expansion projects at two European plants that should alleviate
the capacity constraints. The expansion projects will be completed in phases
during 2002 and 2003. Drug Delivery Systems' gross profit levels increased $4.6
million, reflecting the recognition of the higher margin licensing revenues.
The 2000 consolidated gross margin of 29% compared unfavorably to 1999's
34% gross margin. Margins on Pharmaceutical Systems sales decreased sharply due
to the combined impact of several factors: 1) lower volume and a less favorable
product mix in domestic markets; 2) higher material costs due largely to the
increased cost of dollar-based raw materials to international operations; 3)
losses in the U.K. plastics device facility; 4) lower pricing; and 5) major
expansion or start-up/development costs at several plants that affected
efficiencies.
Selling, General and Administrative Expenses
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Selling, general and administrative expenses as a percent of sales were 18%
in 2001, 17% in 2000 and 18% in 1999.
Selling, general and administrative expenses totaled $73.4 million in 2001,
$62.9 million in 2000 and $73.0 million in 1999. The $10.5 million increase in
these expenses in 2001 compared with 2000 primarily relates to a $6 million
decline in pension income as well as higher incentive compensation and
information systems costs associated with the preliminary project stage of an
enterprise resource planning system. Pension income is expected to continue to
decrease in 2002, due to the decrease in 2001 plan asset fair market values.
The $10.1 million decrease in these expenses in 2000 compared with 1999
primarily related to higher income on U.S. pension plan assets, lower incentive
compensation, the impact of the stronger U.S. dollar, lower severance costs and
a smaller adjustment to the estimated cost for environmental remediation
activities. These favorable factors more than offset increased spending on drug
delivery research and development and the expenses of acquired companies.
Restructuring Charges
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In 2001, the Company recorded a net restructuring charge of $2.9 million.
The charge consisted of a restructuring provision of $4.9 million relating
principally to the termination of approximately 25 mid- and senior level
management positions, and a $2.0 million adjustment related to the sale of a
Puerto Rico plastic device manufacturing facility held for sale from the 2000
restructuring program. At December 31, 2001, total severance and related
benefits paid as part of the $4.9 million charge totaled $3.8 million. Remaining
payments will be largely completed within two years.
In 2000, the Company recorded a restructuring charge of $15.0 million. This
charge covered a $9.2 million goodwill write-down to the site management
organization of the clinical services business unit, a $2.7 million reduction to
estimated net realizable value of a Puerto Rico plastic device manufacturing
plant, and $3.1 million of accrued severance, benefit and asset disposal costs.
Cash payments connected with the termination of 104 employees and costs incurred
to exit the Puerto Rico plant totaled $2.4 million as of December 31, 2001. The
Company expects to finalize the payments connected with these charges during
2002.
Also in 2000, the Company recorded $5.8 million of restructuring charges in
connection with its contract manufacturing and packaging operations. This charge
consisted of a $5.0 million reduction to estimated realizable value of assets to
be sold and $0.8 million of accrued severance, benefit and asset disposal costs.
These costs are reported as part of discontinued operations.
In 1999, the Company revised its business plan related to its plastics
component manufacturing operations. The 1999 plan included 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 reported in 1996. In
addition, the Company wrote off the $4.2 million carrying value of a proprietary
plastic product line that had not gained market acceptance.
Other (income) expense
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Other (income) expense netted to income of $1.5 million in 2001 and $0.9
million in 1999, respectively, while 2000 results netted to an expense of $0.3
million. Interest income, included therein, totaled $1.5 million in 2001, $2.1
million in 2000 and $2.2 million in 1999. The decline in 2001 interest income
reflects lower average interest rates in 2001. Foreign currency produced a $0.1
million gain in 2001, as compared to losses of $1.1 million and $0.9 million in
2000 and 1999, respectively. The decline in foreign exchange losses reflects the
settlement of several temporary intercompany loans created in the 1999 European
tax reorganization, as well as a less volatile U.S. dollar to Euro exchange
rate. Other (income) expense also includes losses on equipment sales and
miscellaneous insurance recoveries; these categories are in a net favorable
position in comparing 2001 to the prior year periods.
Interest Expense
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Interest costs, net of amounts capitalized, totaled $13.5 million in 2001
compared with $13.1 million in 2000 and $10.4 million in 1999. The Company
capitalized interest costs related to long-term construction projects of $0.8
million in each of the years 2001 and 2000 and $0.4 million in 1999.
Although year-end 2001 debt levels declined $6.4 million from year-end 2000
levels as a result of the proceeds from the sale of the contract manufacturing
and packaging unit, the average consolidated debt level increased during the
year. Operating cash flow was $14.7 million lower in 2001 as compared to 2000,
largely reflecting the impact of fourth quarter 2000 sales results which
affected 2001 cash flows. Despite the higher average debt levels, interest
expense rose only marginally in 2001 due to lower average interest rates on the
Company's variable rate revolving credit facilities. Interest expense in 2000
was $2.7 million higher than in 1999, reflecting higher average debt levels
connected with the completion of an open-market share repurchase program in
2000.
Income Taxes
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The effective tax rate on consolidated income was 30.7% in 2001, 34.6% in
2000 and 31.3% in 1999. Restructuring charges and other unusual items have
impacted the effective tax rate in each of these years. Excluding the impact of
restructuring and other unusual items, the comparative tax rates would be 33.0%
for 2001, 35.3% for 2000 and 36.7% for 1999. These tax rates reflect changes in
the geographic mix of earnings and changes in the statutory tax rate in several
countries during the three-year period.
In addition to the specific tax benefit of the restructuring charges
recorded in each period, the other unusual items that impacted the reported
effective tax rates included a $1.6 million tax benefit realized in 2000 upon
the favorable resolution of German trade tax issues, a 1999 net tax benefit of
$2.3 million associated with the tax reorganization of the Company's European
subsidiaries and a favorable settlement of a prior years' tax appeal.
Equity in Affiliates
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The contribution to earnings from a 25% ownership interest in Daikyo Seiko,
Ltd. and a 49% ownership interest in three companies in Mexico was $0.5 million,
$1.2 million and $0.8 million for the years 2001, 2000 and 1999, respectively.
The strength of the U.S. dollar relative to the Japanese yen in 2001 negatively
affects prior year comparisons. In addition, costs connected with bringing a new
plant into operation at Daikyo affected 2001 results. Operations in Mexico
produced a net loss in 2001 as gross margins for these affiliates decreased
substantially from prior year levels.
Company purchases from all affiliates totaled approximately $12.6 million
in 2001, the majority of which is connected to a technology transfer and
cross-marketing agreement in effect with Daikyo allowing the introduction of
advanced technologies to Company manufacturing sites in North America and
Europe. Sales to affiliates in 2001 were $0.5 million.
Discontinued Operations
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On November 30, 2001, the Company sold all the operating assets of its
contract manufacturing and packaging business unit to DPT Lakewood, Inc., an
affiliate of DPT Laboratories, Ltd., and DFB Pharmaceuticals, Inc. The sales
price totaled $29.8 million, consisting of $28 million of cash and a $1.8
million note due in 2003. The sale resulted in a net loss of $25.2 million, or
$1.76 per share. The Company was required to hold $4.3 million of the proceeds
in a trust account at December 31, 2001, for the payment of certain debentures
that became due upon the sale of the contract manufacturing and packaging unit.
These debentures will be repaid during the first quarter of 2002. The balance of
the proceeds received was used to repay debt in 2001.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
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The cash balance at December 31, 2001, was $42.1 million and working
capital totaled $83.2 million, a ratio of current assets to current liabilities
of 2.1 to 1. Consolidated debt totaled $193 million at December 31, 2001,
compared with $199.4 million at year-end 2000. Debt to total invested capital
(total debt, minority interests and shareholders' equity) was 52.2% at December
31, 2001.
For the year, cash flows generated from operations totaled $31.1 million
versus $45.8 million in 2000 as low fourth quarter 2000 sales negatively
impacted 2001 cash flow. Capital spending for 2001 totaled $44.1 million, with
approximately half the spending focused on new products and plant expansion
activity, particularly in Europe. Cash requirements for capital projects in 2002
are projected to be approximately $40 million. Capital projects will focus on
completion of the capacity expansion at two European plants, new product
development and technology upgrades to reduce cost and improve quality. In
addition, the Company's program to install an enterprise resource system will
continue in 2002. This program is intended to drive internal efficiencies and
improve business processes.
Investing cash flows include the $28 million cash proceeds received on the
sale of the contract manufacturing and packaging facility, $3 million from the
sale of the Puerto Rico plastic device manufacturing plant, and $0.3 million
from miscellaneous equipment sales. Other investment activity in 2001 included
the purchase of the minority shareholder interest in the Company's subsidiary in
Spain for $1.1 million in cash and $0.4 million in notes payable. Cash dividends
totaled $10.5 million ($.73 per share). The remaining cash flow was used to
reduce outstanding debt.
The following table summarizes the Company's contractual obligations at
December 31, 2001, and the effect such obligations are expected to have on its
liquidity and cash flow in future periods.
Contractual Obligations:
($ in millions)
Total Less than 1 -3 After 3
1 year years years
----------------------------------------------------------
Unconditional purchase obligations $ 8.9 $ 8.9 $ - $ -
Notes payable 4.4 4.4 - -
Long-term debt 188.6 4.3 84.3 100.0
Non-cancelable operating lease obligations 61.8 6.0 16.5 39.3
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Total contractual obligations $ 263.7 $ 23.6 $ 100.8 $ 139.3
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The Company's principal source of short- and medium-term liquidity is a
$114.5 million revolving credit agreement with a group of six banks. The credit
agreement consists of a $44.5 million 364-day line of credit renewable annually
each July at the option of the banks and a $70 million committed revolving
credit facility maturing in July 2005. Interest cost on these facilities is
charged at London Inter-Bank Offering Rates (LIBOR) plus a margin dependent on
the Company's debt to total capital ratio. Commitment fees on these credit
agreements also fluctuate according to the Company's debt to total capital ratio
with a maximum commitment fee of 20 basis points on the 364-day facility and 25
basis points on the five-year facility. The credit agreement contains several
compliance covenants, the most restrictive of which is the requirement to
maintain a minimum debt to total capital ratio of 55%. Failure to meet this or
other debt covenants would cause all borrowings under the revolving credit
facility to become immediately due and payable.
The Company is currently completing an international financing structure
that will utilize existing cash balances to pay down debt levels in 2002. The
Company believes its financial condition and current capitalization provide
sufficient flexibility to meet cash flow requirements in the future.
CRITICAL ACCOUNTING POLICIES
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The discussion and analysis of the Company's results of operations and
financial condition are based upon consolidated financial statements that have
been prepared in accordance with generally accepted accounting principles. In
applying these principles, management uses its judgment to determine the
appropriate assumptions to be used in the determination of certain estimates.
Management believes that the following accounting policies are critical to the
preparation of its financial statements:
Revenue Recognition
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Sales of manufactured components are recorded at the time title passes,
which generally occurs when the goods are shipped. Some customers receive
pricing rebates upon attaining established sales volumes. Management records
rebate costs based on its assessment of the likelihood that these volumes will
be attained. The Company also establishes product return liabilities for
customer quality claims when such amounts are deemed probable and can be
reasonably estimated. Revenue associated with drug delivery systems development
is recognized as services are provided. The timing of non-refundable licensing
fee recognition is subject to management's estimate of future costs to be
incurred on the related development agreement.
Impairment of Long-Lived Assets
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Long-lived assets including property, plant and equipment, intangible
assets and investments are reviewed for impairment whenever circumstances
indicate that the carrying value of these assets may not be recoverable. An
asset is considered impaired if the carrying value of the asset exceeds the sum
of the future expected undiscounted cash flows to be derived from the asset.
Once impairment is determined, an impairment loss is recorded for the difference
between the asset's carrying value and its fair value. For assets to be held and
used in the business, management estimates fair value by estimating the future
cash flows to be derived from the asset and discounts these flows to a net
present value using an appropriate discount rate. For other assets held for sale
or for investment purposes, management determines fair value by estimating the
anticipated proceeds to be received upon sale of the asset.
Income Taxes
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The Company estimates income taxes payable based upon current domestic and
international tax legislation. In addition, deferred income tax assets and
liabilities are established to recognize 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. The recoverability of tax assets is
subject to the Company's estimates of future profitability, generally at the
local subsidiary company and country level. Changes in tax legislation, business
plans and other factors may affect the ultimate recoverability of tax assets or
final tax payments, which could result in adjustments to tax expense in the
period such change is determined.
Foreign Currency Translation
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The financial position and results of operations of the Company's foreign
subsidiaries are measured using the functional currency of the subsidiary.
Revenues and expenses are translated at the average exchange rate for the
period. Assets and liabilities are translated at the rate of exchange in effect
at the end of the period. Changes in exchange rates due to market fluctuations,
governmental policies and other factors are accounted for in the period when
they occur. 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.
NEW ACCOUNTING STANDARDS
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The Company adopted Statement of Financial Accounting Standards (SFAS) No.
133, "Accounting for Derivative Financial Instruments and Hedging Activities,"
as amended, on January 1, 2001. This accounting standard requires the Company to
recognize all derivatives as either assets or liabilities and measure those
instruments at fair value as of the balance sheet date. The change in fair value
of a derivative designated and qualified as part of a hedging transaction is
generally matched with the recognition of the items being hedged. At the
adoption date, the Company had four interest rate swap agreements in effect and
recorded a $0.2 million, net of tax, charge to other comprehensive income. The
swaps hedge cash flow risk associated with interest payments on variable rate
debt. During 2001 three of the swaps matured, with the outstanding swap at
December 31, 2001, valued at a $0.3 million loss.
In July 2001, the Financial Accounting Standards Board issued SFAS No. 141,
"Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible
Assets."
SFAS 141 supercedes Accounting Principles Board Opinion No. 16, "Business
Combinations." SFAS 141 requires that the purchase method of accounting be used
for all business combinations initiated after June 30, 2001. In addition, SFAS
141 establishes specific criteria for identifying intangible assets that must be
recognized separately from goodwill and establishes disclosure requirements for
the primary reasons for a business combination and the allocation of the
purchase price paid to the assets acquired and liabilities assumed.
SFAS 142 supercedes APB 17, "Intangible Assets." SFAS 142 eliminates the
current requirement to amortize goodwill and indefinite-lived intangible assets.
Instead, goodwill and intangible assets with indefinite lives will be tested for
impairment on at least an annual basis. The SFAS 142 impairment test begins with
an estimate of the fair value of the reporting unit or intangible asset. If the
fair value is less than the carrying value, the goodwill or intangible asset is
considered impaired. Once impairment is determined, an impairment loss is
recognized for the amount that the carrying amount exceeds the fair value. The
Company will adopt SFAS 142 on January 1, 2002. The Company has identified its
reporting units and does not anticipate any impairment loss at application.
Annual goodwill amortization in 2001 was approximately $1.4 million.
In August 2001, the Financial Accounting Standards Board issued SFAS 144,
"Accounting for the Impairment of Long-Lived Assets." SFAS 144 supercedes SFAS
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of" and APB Opinion No. 30, "Reporting the Results of
Operations Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events." SFAS 144 retains the
requirements of SFAS 121 whereby an impairment loss should be recognized if the
carrying value of the asset is not recoverable from the sum of the future
expected undiscounted cash flows to be derived from the asset. SFAS 144
eliminates goodwill from its scope, therefore it does not require, as SFAS 121
does, goodwill to be allocated to the long-lived assets. SFAS 144 broadens the
scope of APB 30 provisions for the presentation of discontinued operations to
include a component of an entity. The statement requires that a component of an
entity that is sold or is considered held for sale must be presented as a
discontinued operation. The Company adopted SFAS 144 during 2001 and applied its
provisions to the sale of the contract manufacturing and packaging unit.
FORWARD-LOOKING INFORMATION
- ----------------------------
Certain statements in this Annual Report, including management's discussion
and analysis, that are not historical are forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. The words
"estimate," "expect," "intend," "believe" and similar expressions are intended
to identify forward-looking statements. These forward-looking statements involve
known and unknown risks and uncertainties. Many factors could cause the actual
results, performance or achievements of the Company to be materially different
from any future results, performance or achievements that may be expressed or
implied by such forward-looking statements, including but not limited to (1)
sales demand, (2) the timing and success of customers' projects, (3) competitive
pressures, (4) the strength or weakness of the U.S. dollar, (5) inflation, (6)
the cost of raw materials, (7) continued cost-improvement programs, (8)
statutory tax rates and (9) significant asset dispositions. The Company does not
intend to update these forward-looking statements.
CONSOLIDATED STATEMENTS OF INCOME
WEST PHARMACEUTICAL SERVICES, INC. AND SUBSIDIARIES
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999.
(in thousands, except per share data)
2001 2000 1999
-----------------------------------------------------------
Net sales ........................... $396,900 100% $378,600 100% $395,800 100%
Cost of goods and services sold ..... 280,800 71 269,400 71 261,200 66
-----------------------------------------------------------
Gross profit...................... 116,100 29 109,200 29 134,600 34
Selling, general and
administrative expenses .......... 73,400 18 62,900 17 73,000 18
Restructuring charge, net............ 2,900 1 15,000 4 700 -
Other (income)expense, net........... (1,500) - 300 - (900) -
-----------------------------------------------------------
Operating profit ................. 41,300 10 31,000 8 61,800 16
Interest expense .................... 13,500 3 13,100 3 10,400 3
-----------------------------------------------------------
Income before income
taxes and minority interests.... 27,800 7 17,900 5 51,400 13
Provision for income taxes .......... 8,600 2 6,200 2 16,100 4
Minority interests .................. 100 - 200 - 200 -
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Income from consolidated operations 19,100 5% 11,500 3% 35,100 9%
-- -- --
Equity in net income of
affiliated companies ............. 500 1,200 800
--------- --------- ---------
Income from continuing operations. 19,600 12,700 35,900
Earnings (loss) from discontinued
operations, net of tax............ 400 (11,100) 2,800
Loss on disposal of discontinued
operations, net of tax............ (25,200) - -
--------- --------- ---------
Net (loss) income ................ $ (5,200) $ 1,600 $ 38,700
--------- --------- ---------
Net (loss) income per share:
Basic
Continuing operations............... $ 1.37 $ 0.88 $ 2.41
Discontinued operations............. $ (1.73) $ (0.77) $ 0.18
--------- --------- ---------
$ (0.36) $ 0.11 $ 2.59
Assuming dilution
Continuing operations............... $ 1.37 $ 0.88 $ 2.39
Discontinued operations............. $ (1.73) $ (0.77) $ 0.18
--------- --------- ---------
$ (0.36) $ 0.11 $ 2.57
--------- --------- ---------
Average common shares outstanding ... 14,336 14,407 14,914
Average shares assuming dilution .... 14,348 14,409 15,048
The accompanying notes are an integral part of the financial statements.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
WEST PHARMACEUTICAL SERVICES, INC. AND SUBSIDIARIES
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999.
(in thousands)
2001 2000 1999
------------------------------------
Net (loss) income.......................................... $ (5,200) $ 1,600 $ 38,700
Foreign currency translation adjustments, net of tax....... (9,700) (8,200) (13,600)
Unrealized gains (losses) on securities, net of tax........ (100) (700) 1,100
Minimum pension liability adjustment, net of tax........... (2,800) (300) --
Cumulative effect of change in accounting principle for
derivatives and hedging activities, net of tax........... (200) -- --
Net realized losses on derivative instruments, net of tax.. 100 -- --
Unrealized losses on derivatives, net of tax............... (200) -- --
-----------------------------------
Comprehensive (loss) income................................ $(18,100) $ (7,600) $ 26,200
-----------------------------------
The accompanying notes are an integral part of the financial statements.
CONSOLIDATED BALANCE SHEETS
WEST PHARMACEUTICAL SERVICES, INC. AND SUBSIDIARIES
AT DECEMBER 31, 2001 AND 2000.
(in thousands, except per share data)
2001 2000
ASSETS ----------------------
Current assets:
Cash, including equivalents (2001--$11,300; 2000--$29,000) ............ $ 42,100 $ 42,700
Accounts receivable, less allowance (2001--$500; 2000--$900)........... 61,800 53,700
Inventories ........................................................... 34,300 34,800
Income tax refundable.................................................. 5,700 7,700
Deferred income tax benefits .......................................... 2,400 7,700
Other current assets .................................................. 12,200 12,200
----------------------
Total current assets ................................................... 158,500 158,800
----------------------
Property, plant and equipment .......................................... 459,500 451,000
Less accumulated depreciation and amortization ......................... 249,200 249,400
----------------------
210,300 201,600
Investments in affiliated companies .................................... 20,800 22,000
Goodwill ............................................................... 32,600 34,900
Prepaid pension asset................................................... 48,300 40,200
Deferred income tax benefits............................................ 21,400 18,000
Other assets ........................................................... 19,400 15,600
Net assets of discontinued operation.................................... - 58,000
----------------------
$511,300 $549,100
----------------------
2001 2000
----------------------
LIABILITIES AND SHAREHOLDERS' EQUITY ...................................
Current liabilities:
Current portion of long-term debt ..................................... $ 4,300 $ 500
Notes payable ......................................................... 4,400 3,100
Accounts payable ...................................................... 22,600 23,500
Accrued expenses:
Salaries, wages and benefits ......................................... 16,000 10,900
Income taxes payable ................................................. 5,400 7,200
Restructuring costs................................................... 2,200 4,200
Deferred income taxes................................................. 1,600 1,900
Other ................................................................ 18,800 19,700
----------------------
Total current liabilities .............................................. 75,300 71,000
----------------------
Long-term debt, excluding current portion .............................. 184,300 195,800
Deferred income taxes .................................................. 46,800 51,000
Other long-term liabilities ............................................ 28,100 25,500
Minority interests ..................................................... -- 1,000
Shareholders' equity:
Preferred stock, shares authorized: 3,000;
shares issued and outstanding: 2001--0; 2000--0
Common stock, par value $.25 per share; shares authorized: 50,000;
shares issued: 2001--17,165; 2000--17,165;
shares outstanding: 2001--14,344; 2000--14,310........................ 4,300 4,300
Capital in excess of par value ........................................ 31,600 32,100
Retained earnings ...................................................... 254,000 269,800
Accumulated other comprehensive (loss)................................. (27,400) (14,500)
----------------------
262,500 291,700
Less treasury stock (2001--2,821 shares; 2000--2,855 shares)............ 85,700 86,900
----------------------
Total shareholders' equity ............................................. 176,800 204,800
----------------------
$ 511,300 $ 549,100
----------------------
The accompanying notes are an integral part of the financial statements.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
WEST PHARMACEUTICAL SERVICES, INC. AND SUBSIDIARIES
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999.
(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, 1999...................$ 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 (loss)......... (12,500) (12,500)
----------------------------------------------------------------------
Balance, December 31, 1999 ................ 4,300 31,700 278,100 (5,300) (77,600) 231,200
----------------------------------------------------------------------
Net income ................................ 1,600 1,600
Shares issued under stock plans ........... 400 1,500 1,900
Shares repurchased......................... (10,800) (10,800)
Cash dividends declared ($.70 per share) .. (9,900) (9,900)
Changes-other comprehensive (loss)......... (9,200) (9,200)
----------------------------------------------------------------------
Balance, December 31, 2000 ................ 4,300 32,100 269,800 (14,500) (86,900) 204,800
----------------------------------------------------------------------
Net (loss) ................................ (5,200) (5,200)
Shares issued under stock plans ........... (500) 1,300 800
Shares repurchased ........................ (100) (100)
Cash dividends declared ($.74 per share) .. (10,600) (10,600)
Changes-other comprehensive (loss)......... (12,900) (12,900)
----------------------------------------------------------------------
Balance, December 31, 2001 ................ $ 4,300 $ 31,600 $254,000 $(27,400) $(85,700) $176,800
----------------------------------------------------------------------
The accompanying notes are an integral part of the financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
WEST PHARMACEUTICAL SERVICES, INC. AND SUBSIDIARIES
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999.
(in thousands)
2001 2000 1999
-------------------------------
Cash flows from operating activities:
Income from continuing operations.................. $ 19,600 $ 12,700 $ 35,900
Adjustments to reconcile income from continuing
operations to net cash from operating activities:
Depreciation and amortization ................... 32,000 30,900 30,800
Restructuring charge, net........................ 2,900 15,000 700
Loss on sales of equipment and other assets...... 600 1,000 600
Deferred income taxes ........................... 1,400 900 8,200
Pension and other retirement plans .............. (10,000) (15,800) (9,200)
Equity in undistributed earnings of affiliated
companies, net ................................. (300) (1,000) (500)
(Increase) decrease in accounts receivable ...... (9,400) 3,300 (9,600)
(Increase) decrease in inventories .............. (900) (800) (4,000)
(Increase) decrease in other current assets ..... (3,600) (600) (1,800)
(Decrease) increase in other current liabilities (2,300) 800 4,200
Other operating items ........................... 1,100 (600) 500
--------------------------------
Net cash provided by operating activities .......... 31,100 45,800 55,800
--------------------------------
Cash flows from investing activities:
Property, plant and equipment acquired ............ (44,100) (47,700) (39,300)
Proceeds from sales of assets ..................... 31,300 300 100
Payments for acquisitions.......................... (1,100) (3,400) (17,200)
Customer advances, net of repayments .............. (1,500) (100) 1,600
--------------------------------
Net cash used in investing activities .............. (15,400) (50,900) (54,800)
--------------------------------
2001 2000 1999
-------------------------------
Cash flows from financing activities:
Borrowings (repayments) under
revolving credit agreements, net ................. (2,400) 70,000 (46,000)
Proceeds from senior notes ........................ -- -- 100,000
Repayment of other long-term debt ................. (5,200) (16,200) (3,000)
Other notes payable, net .......................... 1,700 (23,500) (16,800)
Issuance of common stock, net ..................... 700 1,500 2,800
Dividend payments ................................. (10,500) (9,800) (10,300)
Purchase of treasury stock ........................ (100) (10,800) (18,100)
--------------------------------
Net cash (used in) provided by financing activities (15,800) 11,200 8,600
--------------------------------
Net cash provided by (used in) discontinued operations 1,600 (6,800) 6,700
Effect of exchange rates on cash ................... (2,100) (1,900) (2,300)
--------------------------------
Net (decrease) increase in cash and cash equivalents (600) (2,600) 14,000
Cash and cash equivalents at beginning of year ..... 42,700 45,300 31,300
--------------------------------
Cash and cash equivalents at end of year ........... $ 42,100 $ 42,700 $ 45,300
--------------------------------
Supplemental cash flow information:
Interest paid, net of amounts capitalized ......... $ 13,500 $ 12,900 $ 9,000
Income taxes paid ................................. $ 5,700 $ 2,100 $ 15,100
--------------------------------
The accompanying notes are an integral part of the financial statements.
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. 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. Foreign currency translation adjustments of
$24,000 and $14,300, respectively, were included as a reduction of accumulated
other comprehensive income at December 31, 2001 and 2000, respectively.
Financial Instruments: The Company adopted Statement of Financial Accounting
Standards (SFAS) No. 133, "Accounting for Derivative Financial Instruments and
Hedging Activities," as amended, on January 1, 2001. SFAS 133 requires the
Company to recognize all derivatives as either assets or liabilities and measure
those instruments at fair value as of the balance sheet date. The change in fair
value of a derivative designated and qualified as part of a hedging transaction
is recorded each period in earnings or other comprehensive income depending on
the type of hedging instrument. The change in fair value of a derivative
instrument with no hedging designation or purpose is recognized immediately into
earnings.
The Company uses interest rate swaps and forward exchange contracts to minimize
the economic exposure related to fluctuating interest and foreign exchange
rates. Interest rate swaps are designated as cash flow hedges; therefore,
unrealized gains and losses are recorded in other comprehensive income. As the
underlying transaction occurs, any unrealized gains or losses on the related
hedge are reclassified from other comprehensive income to the statement of
income (interest expense), offsetting the income effects of the transaction to
which they relate. Gains and losses on forward exchange contracts designated as
fair value hedges, primarily related to raw material purchase commitments, are
deferred and recognized as part of the underlying transaction.
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. The cost of marketable securities is
determined on the moving average method.
Revenue Recognition: Sales of manufactured components are recorded at the time
title passes, which generally occurs when the goods are shipped. Some customers
receive pricing rebates upon attaining established sales volumes. Management
records rebate costs based on its assessment of the likelihood that these
volumes will be attained. The Company also establishes product return
liabilities for customer quality claims when such amounts are deemed probable
and can be reasonably estimated. In 2000, the Company adopted Emerging Issues
Task Force Issue 00-10, "Accounting for Shipping and Handling Revenues and
Costs." Accordingly, as of January 1, 2000, freight charge reimbursements are
reported as net sales and freight expenses are reported as cost of goods and
services sold. Full-year freight expense for 2000 was $3,600. Freight revenues
and expenses were reported on a net basis in prior years.
Clinical service 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 contract research agreements with the
customer. Non-refundable license and milestone fees are recognized as revenue
when related services under the agreements are performed.
Property, Plant and Equipment: Property, plant and equipment assets are carried
at cost. Maintenance and minor repairs and renewals are charged to expense as
incurred. Costs incurred for computer software developed or obtained for
internal use are capitalized for application development activities and
immediately expensed for preliminary project activities or post-implementation
activities. 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.
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 18 to 40 years.
Effective January 1, 2002, the Company will adopt SFAS No. 142, "Goodwill and
Other Intangible Assets" and will, therefore, no longer amortize goodwill or
intangibles with indefinite lives.
Goodwill and Other Intangibles: In July 2001, the Financial Accounting Standards
Board issued SFAS No. 141, "Business Combinations" and SFAS No. 142, "Goodwill
and Other Intangible Assets." SFAS 141 requires that the purchase method of
accounting be used for all business combinations initiated after June 30, 2001.
In addition, SFAS 141 establishes specific criteria for identifying intangible
assets that must be recognized separately from goodwill and establishes
disclosure requirements for the primary reasons for a business combination and
the allocation of the purchase price paid to the assets acquired and liabilities
assumed. SFAS 142 eliminates the current requirement to amortize goodwill and
indefinite-lived intangible assets. Instead, goodwill and intangible assets with
indefinite lives will be tested for impairment on at least an annual basis. The
SFAS 142 impairment test begins with an estimate of the fair value of the
reporting unit or intangible asset. If the fair value is less than the carrying
value, the goodwill or intangible asset is considered impaired. Once impairment
is determined, an impairment loss is recognized for the amount that the carrying
amount exceeds the fair value. The Company will adopt SFAS 142 on January 1,
2002. The Company has identified its reporting units and does not anticipate any
impairment loss at application. Annual goodwill amortization in 2001 was
approximately $1.4 million.
Impairment of Long-Lived Assets: Long- lived assets including property, plant
and equipment, intangible assets and investments are reviewed for impairment
whenever circumstances indicate that the carrying value of these assets may not
be recoverable. In 2001, the Company adopted SFAS No. 144, "Accounting for the
Impairment of Long-Lived Assets." SFAS 144 states that an asset is considered
impaired if the carrying value of the asset exceeds the sum of the future
expected undiscounted cash flows to be derived from the asset. Once impairment
is determined, an impairment loss is recorded for the difference between the
assets carrying value and its fair value. This loss is included in income from
continuing operations before taxes. For assets to be held and used in the
business, management estimates fair value by estimating the future cash flows to
be derived from the asset and discounts these flows to a net present value using
an appropriate discount rate. For other assets held for sale or for investment
purposes, management determines fair value by estimating the anticipated
proceeds to be received upon sale of the asset.
SFAS 144 also broadens the provisions for the presentation of discontinued
operations to include a component of an entity. The statement requires that a
component of an entity that is sold or is considered held for sale must be
presented as a discontinued operation. The Company applied the provisions of
this statement to the 2001 sale of its contract manufacturing and packaging
unit. The accompanying financial statements have been restated to conform to
discontinued operations treatment for all historical periods presented.
Research and Development: Research, development and engineering expenditures are
for the creation and application of new or improved products and processes, and
drug delivery systems. Research and development costs of $17,800 in 2001,
$17,100 in 2000 and $14,200 in 1999, are expensed as incurred.
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.
Net (Loss) Income Per Share: Basic net (loss) income per share is computed by
dividing net (loss) income by the weighted average number of shares of common
stock outstanding during each period. Net (loss) 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.
Discontinued Operations
- -------------------------
In November 2001, the Company sold its contract manufacturing and packaging
business located in Lakewood, N.J. The sales price totaled $29.8 million,
consisting of $28.0 million of cash and a $1.8 million note due in 2003. The
selling price is subject to a final working capital adjustment. The Company was
required to hold $4.3 million of the proceeds in a trust account at December 31,
2001, for the payment of certain debentures that became due upon the sale. These
debentures will be repaid during the first quarter of 2002. The balance of the
proceeds received were used to repay outstanding debt. As a result of the
transaction, the Company recorded a $25.2 million loss, net of income tax
benefits. The results of this business have been reflected as Discontinued
Operations in the accompanying consolidated financial statements.
Net sales and income from the discontinued operation were as follows:
2001 2000 1999
---------------------------------
Net sales $ 61,400 $ 51,500 $ 73,300
Pretax income (loss)
from discontinued operation 900 (15,800) 5,100
Pretax loss on disposal
of business segment (29,600) - -
Income tax benefit (expense) 3,900 4,700 (2,300)
Net (loss) income from
discontinued operation $(24,800) $(11,100) $ 2,800
Assets and liabilities of the discontinued operation were as follows:
2000
---------
Current assets $ 14,300
Property, plant and equipment, net 34,200
Goodwill 17,500
Other long-term assets 300
Current liabilities (8,300)
---------
Net assets of discontinued operation $ 58,000
---------
Acquisitions and Investments
- -----------------------------
In October 2001, the Company purchased the remaining 17.9% minority
ownership of West Pharmaceutical Services Hispania, S.A. for approximately
$1,500. The purchase price consisted of $1,100 of cash and $400 of notes
payable. The notes are payable in $200 installments due in 2002 and 2003. The
purchase price exceeded the net book value of the minority interest liability,
resulting in goodwill of $500.
During 2000, the Company invested $2,000 in a firm involved with genotyping
technology. The Company's cumulative investment in this firm is $3,300 at
December 31, 2001, representing an 18.53% ownership interest. The Company is not
committed to make any further contributions to this investment.
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 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 follows:
Current assets ..................... $ 2,900
Equipment and leasehold improvements 800
Goodwill ........................... 14,500
The goodwill was assigned a 20-year useful life and amortized using the
straight-line method. Pro forma results assuming the acquisition of CSD as of
January 1, 1999, would not materially change reported sales or net income.
Restructuring Charges
- ---------------------
In 2001, the Company recorded a net restructuring charge of $2,900. The
charge consisted of a restructuring provision of $4,900 relating principally to
the termination of approximately 25 mid- and senior level management positions,
and a $2,000 adjustment related to the sale of a plastic device manufacturing
facility held for sale from the 2000 restructuring program. At December 31,
2001, total severance and related benefits paid as part of the $4,900 charge
totaled $3,800. Remaining payments will be largely completed within two years.
In 2000, the Company recorded a restructuring charge of $15,000. This
charge covered a $9,200 goodwill write-down to the site management organization
of the clinical services business unit, a $2,700 reduction to estimated net
realizable value of a Puerto Rico plastic device manufacturing plant, and $3,100
of accrued severance, benefit and asset disposal costs. Cash payments connected
with the termination of 104 employees and costs incurred to exit the Puerto Rico
plant totaled $2,400 as of December 31, 2001. The Company expects to finalize
the payments connected with these charges in 2002.
Also in 2000, the Company recorded $5,800 of restructuring charges in
connection with its contract manufacturing and packaging operations. This charge
consisted of a $5,000 reduction to estimated realizable value of assets to be
sold and $800 of accrued severance, benefit and asset disposal costs. These
costs are reported as part of discontinued operations.
In 1999, the Company revised its business plan related to its plastics
component manufacturing operations. The 1999 plan included investment in new
capacity and capabilities at the Company's Puerto Rico facility, which resulted
in a $3,500 adjustment of the restructuring charge reported in 1996. In
addition, the Company wrote off the $4,200 carrying value of a proprietary
plastic product line that had not gained market acceptance.
Other Income (Expense)
- ----------------------
2001 2000 1999
-----------------------------
Interest income ............... $1,500 $2,100 $ 2,200
Foreign exchange gains (losses) 100 (1,100) (900)
Loss on sales of equipment
and other assets.............. (600) (1,000) (600)
Other ......................... 500 (300) 200
-----------------------------
$1,500 $ (300) $ 900
-----------------------------
Income Taxes
- ------------
Income before income taxes and minority interests was derived as follows:
2001 2000 1999
------------------------------
Domestic operations .... $ 17,300 $ 21,200 $ 31,000
International operations 10,500 (3,300) 20,400
------------------------------
$ 27,800 $ 17,900 $ 51,400
------------------------------
The related provision for income taxes consists of:
2001 2000 1999
------------------------------
Current provision:
Federal ......... $ 1,900 $ 1,900 $ 1,600
State ........... 100 100 100
International ... 5,200 3,300 6,200
------------------------------
7,200 5,300 7,900
------------------------------
Deferred provision:
Federal ......... 3,300 2,200 6,900
International ... (1,900) (1,300) 1,300
------------------------------
1,400 900 8,200
------------------------------
Provision for income taxes $ 8,600 $ 6,200 $ 16,100
------------------------------
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 follows:
2001 2000 1999
--------------------------
Statutory corporate tax rate ............. 35.0% 35.0% 35.0%
Tax on international operations (less than)
in excess of United States tax rate..... (2.3) (1.6) 3.2
Restructuring costs without tax benefits.. (0.2) 11.1 --
German tax reorganization................. -- (8.5) (3.4)
United States tax on repatriated
international earnings .................. 0.8 2.2 0.6
State income taxes, net
of federal tax benefit .................. 0.5 0.5 0.1
Settlement of tax audit .................. -- -- (1.9)
Other .................................... (3.1) (4.1) (2.3)
--------------------------
Effective tax rate ....................... 30.7% 34.6% 31.3%
--------------------------
Results for 2000 include a tax benefit realized upon the favorable
resolution of tax issues connected to the 1997 reorganization of the Company's
German subsidiaries.
In the fourth quarter of 1999, the Company completed a reorganization of
its European subsidiaries. The reorganization made possible payment of a
dividend which triggered a refund of taxes previously paid.
The net current and noncurrent components of deferred income taxes
recognized in the balance sheet at December 31 are as follows:
2001 2000
-------------------------
Net current assets ........... $ 800 $ 5,800
Net noncurrent liabilities.... (25,400) (33,000)
-------------------------
$(24,600) $(27,200)
The following is a summary of the significant components of the Company's
deferred tax assets and liabilities as of December 31:
2001 2000
--------------------
Deferred tax assets:
Loss on asset dispositions
and plant closings...................... $ 100 $ 1,800
Severance and deferred
compensation ........................... 6,700 8,600
German tax reorganization ............... 3,300 3,800
Net operating loss carryovers ........... 9,700 8,000
Foreign tax credit carryovers ........... 1,500 1,400
Restructuring charge .................... 2,100 4,100
Other ................................... 5,800 3,000
Valuation allowance ..................... (8,500) (6,800)
-------------------
Total ................................ $ 20,700 $ 23,900
-------------------
Deferred tax liabilities:
Accelerated depreciation ................ $ 25,900 $ 28,200
Severance and deferred compensation...... 18,200 15,900
Other ................................... 1,200 7,000
-------------------
Total ............................... $ 45,300 $ 51,100
-------------------
At December 31, 2001, subsidiaries had state and foreign operating tax loss
carryovers of $43,000 and $32,500, respectively. These loss carryovers are
available to apply against the future taxable income of the subsidiaries. The
carryover periods expire beginning with $8,400 in 2002 and continue through
2008.
At December 31, 2001, undistributed earnings of international subsidiaries,
on which deferred income taxes have not been provided, amounted to $152,500. 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, 2001, the
Company had available foreign tax credit carryovers of approximately $1,500
expiring in 2002 through 2006.
Net (Loss) Income Per Share
- ---------------------------
The following table reconciles shares used in basic net (loss) income per
share to the shares used in net (loss) income per share assuming dilution. There
is no adjustment to the net (loss) income of the Company in the calculation of
net (loss) income per share assuming dilution.
2001 2000 1999
---------------------------
Income from continuing
operations................. $19,600 $12,700 $35,900
Discontinued operations,
net of tax................. (24,800) (11,100) 2,800
---------------------------
Net (loss) income .......... (5,200) 1,600 38,700
---------------------------
Average common
shares outstanding ........ 14,336 14,407 14,914
Assumed stock options
exercised and awards vested 12 2 134
---------------------------
Average shares
assuming dilution ......... 14,348 14,409 15,048
---------------------------
Comprehensive (Loss) Income
- ---------------------------
Comprehensive (loss) income consists of reported net (loss) income and
other comprehensive (loss) income, which reflects revenue, expenses and gains
and losses which generally accepted accounting principles exclude from net
(loss) income. For the Company, the items excluded from current net (loss)
income are cumulative foreign currency translation adjustments, unrealized gains
or losses on available-for-sale securities, fair value adjustments on derivative
financial instruments and additional minimum pension liability adjustments.
Segment Information
- --------------------
West Pharmaceutical Services (the Company) supports global pharmaceutical
and healthcare markets with products and technologies that enhance the safety
and effectiveness of drug delivery and product dispensing. During 2001, the
Company consolidated its operations into two segments: Pharmaceutical Systems
and Drug Delivery Systems. The Pharmaceutical Systems segment focuses on the
design, manufacture and distribution of stoppers, closures, medical device
components and assemblies made from elastomers, metals and plastics, and
laboratory services. This segment consists of four regional business units that
manufacture and sell these products to customers mainly in their respective
geographic markets. The Drug Delivery Systems segment consists of two business
units. The drug delivery unit concentrates on the research, development and
commercialization of the Company's patented drug delivery technologies. The
clinical services unit conducts Phase I and II clinical trials and provides
consumer healthcare research services supporting client applications for
marketing over-the-counter versions of prescription drugs.
The Company's executive management evaluates the performance of these
segments based on operating profit and cash flow generation, and allocates
resources to them based on an assessment of market growth and profitability
potential. 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 such as restructuring
charges, are not allocated to segments. Corporate segment assets include assets
held for sale and net assets of discontinued operations. The accounting policies
of the segments are the same as those reported in the Summary of Significant
Accounting Policies on page 18. Total net sales generated from the
Pharmaceutical Systems segment include sales to one customer of approximately
$50,600, $55,200, and $54,600 in 2001, 2000, and 1999, respectively.
Summarized financial information concerning the Company's segments is shown
in the following table. The consolidated total of operating profit corresponds
to operating profit in the accompanying Consolidated Statements of Income.
Pharmaceutical Drug Delivery
Systems Systems Corporate Consolidated
---------------------------------------------------------------
2001
- ----
Net sales................. $376,400 $ 20,500 $ -- $396,900
Interest income........... 1,400 -- 100 1,500
Operating profit (loss)... 69,200 (4,000) (23,900) 41,300
Segment assets............ 374,900 21,200 115,200 511,300
Capital expenditures...... 38,300 1,200 4,600 44,100
Depreciation and
amortization expense..... 28,300 900 2,800 32,000
2000
- ----
Net sales................. $362,900 $ 15,700 $ -- $378,600
Interest income........... 1,800 -- 300 2,100
Operating profit (loss)... 69,500 (10,600) (27,900) 31,000
Segment assets............ 360,800 22,000 166,300 549,100
Capital expenditures...... 44,800 900 2,000 47,700
Depreciation and
amortization expense..... 25,500 2,500 2,900 30,900
1999
- -----
Net sales ................ $384,500 $ 11,300 $ -- $395,800
Interest income .......... 1,200 -- 1,000 2,200
Operating profit(loss).... 87,100 (7,900) (17,400) 61,800
Segment assets ........... 357,000 28,800 157,100 542,900
Capital expenditures...... 34,200 1,000 4,100 39,300
Depreciation and
amortization expense..... 26,500 2,100 2,200 30,800
The following table presents sales by country in which the legal subsidiary is
domiciled and assets are located.
Sales Long-lived assets
---------------------------------------------------------------
2001 2000 1999 2001 2000 1999
-------- -------- -------- -------- -------- --------
United States .......... $222,900 $215,400 $222,800 $118,900 $115,700 $108,400
Germany ................ 36,600 37,200 52,100 29,500 26,900 25,400
Other European countries 103,400 92,300 89,900 52,500 50,200 50,500
Other .................. 34,000 33,700 31,000 17,300 17,600 16,800
-------- -------- -------- -------- -------- --------
$396,900 $378,600 $395,800 $218,200 $210,400 $201,100
-------- -------- -------- -------- -------- --------
Inventories
- -----------
2001 2000
------------------------
Finished goods $15,700 $17,300
Work in process 6,300 5,500
Raw materials 12,300 12,000
------------------------
$34,300 $34,800
------------------------
Included above are inventories located in the United States that are valued
on the LIFO basis, amounting to $12,300 and $11,900 at December 31, 2001 and
2000, respectively, which are approximately $6,900 and $6,700, respectively,
lower than replacement value.
Property, Plant and Equipment
- ------------------------------
A summary of property, plant and equipment at December 31 is presented in
the following table:
Years of
expected
useful life 2001 2000
----------------------------------
Land ..................... $ 2,700 $ 3,200
Buildings and improvements 5-50 105,900 102,900
Machinery and equipment .. 2-15 273,400 269,600
Molds and dies ........... 2-7 54,600 54,300
Construction in progress.. 22,900 21,000
----------------------------------
$459,500 $451,000
----------------------------------
Affiliated Companies
- --------------------
At December 31, 2001, the following affiliated companies were accounted for
under the equity method:
Fiscal Ownership
Locations year 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%
---------------------------------
A summary of the financial information for these companies is presented
below:
2001 2000
----------------------
Balance Sheets:
Current assets ................................ $ 86,200 $106,100
Noncurrent assets ............................. 136,900 127,600
----------------------
Total assets ................................ $223,100 $233,700
----------------------
Current liabilities ........................... $ 64,900 $ 59,100
Noncurrent liabilities ........................ 93,400 105,400
Owners' equity ................................ 64,800 69,200
----------------------
Total liabilities and owners' equity $ 223,100 $233,700
----------------------
2001 2000 1999
---------------------------
Income Statements:
Net sales ............................... $ 81,500 $87,200 $78,200
Gross profit ............................ 18,500 21,800 17,000
Net income .............................. 2,500 4,800 3,400
---------------------------
Unremitted income of affiliated companies included in consolidated retained
earnings amounted to $12,900, $12,600 and $11,600 at December 31, 2001, 2000 and
1999, respectively. Dividends received from affiliated companies were $200 in
2001, $200 in 2000 and $300 in 1999.
The Company's equity in unrealized gains and losses of Daikyo Seiko, Ltd.'s
investment in securities available for sale included in accumulated other
comprehensive income, a separate component of shareholders' equity, was $0, $100
and $800 at December 31, 2001, 2000 and 1999, respectively. The unrealized
losses in 2001 and 2000 are net of income tax benefits of $100 and $500,
respectively. The unrealized gain in 1999 is net of an income tax provision of
$1,000.
Company purchases from affiliates totaled approximately $12,600 in 2001,
the majority of which is connected to a technology transfer and cross-marketing
agreement in effect with Daikyo. Sales to affiliates in 2001 were $500. As of
December 31, 2001, $400 is due and payable to affiliates.
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
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
-------------------------------------------------------------------
2001 2000 1999 2001 2000 1999
-------------------------------------------------------------------
Service cost ...... $ 3,500 $ 3,400 $ 4,400 $ 300 $ 300 $ 400
Interest cost ..... 9,600 9,200 8,900 600 500 400
Expected return
on assets ....... (19,100) (21,300) (17,600) -- -- --
Amortization of
unrecognized
transition asset (700) (700) (700) -- -- --
Amortization of
prior service cost 500 500 400 (1,400) (1,500) (1,500)
Recognized
actuarial gains . (1,900) (5,100) (2,000) (100) (100) --
Curtailment gain .. -- -- (200) -- -- --
-------------------------------------------------------------------
Pension (income) .. $(8,100) $ (14,000) $ (6,800) $ (600) $ (800) $ (700)
-------------------------------------------------------------------
The following tables provide a reconciliation of the benefit obligation,
plan assets and funded status of the plans:
Other
Pension benefits retirement benefits
------------------------------------------------
2001 2000 2001 2000
------------------------------------------------
Change in benefit obligation:
Benefit obligation,
January 1 .................. $ (132,000) $ (122,300) $ (7,200) $ (5,800)
Service cost ................ (3,500) (3,400) (300) (300)
Interest cost ............... (9,600) (9,200) (600) (500)
Participants' contributions.. (300) (300) (200) (100)
Actuarial gain (loss) ....... (5,200) (3,500) (400) (100)
Amendments/transfers in ..... (400) (1,000) -- (600)
Benefits/expenses paid ...... 10,000 6,800 600 200
Curtailment loss ............ (1,300) -- -- --
Foreign exchange impact ..... 400 900 -- --
-----------------------------------------------
Benefit obligation,
December 31 ................ $ (141,900) $ (132,000) $ (8,100) $ (7,200)
-----------------------------------------------
Change in plan assets:
Fair value of
assets, January 1 .......... $ 206,600 $ 229,300 $ -- $ --
Actual return
on assets .................. (23,700) (16,200) -- --
Employer contribution ....... 800 700 400 100
Participants' contributions.. 300 300 200 100
Benefits/expenses paid ...... (10,000) (6,800) (600) (200)
Foreign exchange impact ..... (300) (700) -- --
-----------------------------------------------
Fair value of plan
assets, December 31 ........ $ 173,700 $ 206,600 $ -- $ --
-----------------------------------------------
Funded status:
Assets in excess
(less than) benefits........ $ 31,800 $ 74,600 $ (8,100) $ (7,200)
Unrecognized net
actuarial loss (gain)....... 6,200 (43,800) (1,100) (1,600)
Unrecognized
transition asset ........... 400 (700) -- --
Unrecognized
prior service cost.......... 3,300 3,500 (1,100) (2,500)
-----------------------------------------------
December 31:
Prepaid pension asset........ $ 48,300 $ 40,200 $ -- $ --
Other long-term liabilities.. (11,200) (7,300) (10,300) (11,300)
Accumulated other
comprehensive income........ 4,400 500 -- --
Intangible asset............. 200 200 -- --
-----------------------------------------------
In 2001, the Company paid termination benefits and severance pay from the
pension plan assets to employees terminated during the 2000 restructuring
program. These charges, which were included in the restructuring charge recorded
in 2000, increased the benefit obligation by $1.3 million.
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 $19,600
and $8,100, respectively, as of December 31, 2001, and $17,200 and $8,700,
respectively, as of December 31, 2000. Weighted average assumptions as of
December 31 follow:
(CAPTION>
Other retirement
Pension benefits benefits
-----------------------------------------
2001 2000 2001 2000
-----------------------------------------
Discount rate .............. 7.1% 7.6% 7.3% 7.8%
Rate of compensation
increase .................. 5.0% 5.2% -- --
Long-term rate of
return on assets .......... 9.4% 9.1% -- --
-----------------------------------------
The assumed healthcare cost trend used is 7% for all participants in 2001,
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 or
decrease, respectively, in the accumulated benefit obligation. The related
change in the aggregate service and interest cost components of the 2001 plan
expense would be a $100 increase or 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 or, under certain circumstances, 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. Company contributions were $1,300 in 2001, 2000 and 1999.
Debt
- ----
Short-Term: Notes payable in the amounts of $4,400 and $3,100 at December
31, 2001 and 2000, respectively, are payable within one year and bear interest
at a weighted average interest rate of 4% and 8%, respectively.
Long-Term:
At December 31, 2001 2000
---------------------
Unsecured:
Senior notes, due 2009 (6.81%) ................ $100,000 $100,000
Revolving credit facility, due 2005 (4.20%) ... 67,600 70,000
Tax-exempt industrial revenue bonds,
due 2005 (1.77%)(a) ......................... 6,100 10,800
Subordinated debentures, due 2002 (6.50%)...... 3,700 3,600
Other notes, due 2002 to 2003 (7.20% to 9.20%). 11,200 11,900
---------------------
Total long-term debt .......................... 188,600 196,300
Less current portion .......................... 4,300 500
---------------------
$184,300 $195,800
---------------------
(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 unexpended proceeds and earnings thereon of $1,400 is reflected as
a reduction of the principal outstanding on the bonds.
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 the clinical services business and for general corporate
purposes.
In July 2000, the Company signed a $135,000 revolving credit agreement with
a group of six banks. The credit agreement consisted of a $70,000, five-year
revolving credit facility and a $65,000, 364-day line of credit. In July 2001,
the 364-day line of credit was renewed at $44,500, making the total available
line at December 31, 2001, $114,500. Interest on these facilities is charged at
London Inter-Bank Offering Rates (LIBOR) plus a margin dependent on the
Company's debt to total capital ratio. Commitment fees on these credit
agreements also fluctuate according to the Company's debt to total capital ratio
with a maximum commitment fee of 20 basis points on the 364-day facility and 25
basis points on the five-year facility. As of December 31, 2001 and 2000, the
Company had borrowed $44,500 and $49,100, respectively, directly under the
five-year facility. These borrowings were recorded as long-term debt. Additional
notes payable of $23,100 and $20,900 at December 31, 2001 and 2000,
respectively, under uncommitted facilities were also classified as long-term
debt, as the Company has the intent and ability to refinance these obligations
on a long-term basis under the five-year facility.
At December 31, 2001, $4,300 par value subordinated debentures were
outstanding. The subordinated debentures are reflected in the balance sheet net
of discount.
The unamortized discount totaled $600 and $700 at December 31, 2001 and
2000, respectively. Interest is payable semi-annually. As a result of the sale
of the contract manufacturing and packaging business, the debentures became due
and payable at the date of the next scheduled interest payment, due in January
2002. The Company received $4,300 from the acquirer for the repayment of the
debentures. This amount is being held in trust at December 31, 2001.
Accordingly, an extraordinary loss of $600 will be recorded in 2002 as a result
of the early extinguishment of the debt.
Long-term debt maturing in the years following 2002 is: $10,600 in 2003, $0
in 2004, $73,700 in 2005, $0 in 2006 and $100,000 thereafter.
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 2001, 2000 and 1999 were $14,300, $13,900
and $10,800, respectively, of which $800, $800 and $400, respectively, were
capitalized as part of the cost of acquiring certain assets.
At December 31, 2001, the Company has one interest rate swap contract
outstanding with a notional value of British Pounds Sterling 6,950 at a fixed
interest rate of 7.23% through 2003. Three interest rate swaps with notional
values of $3,000 each, to fix the interest rates at 6.54%, 6.775% and 6.51%
matured in April, July and August 2001, respectively. Under the terms of the
agreement, the Company makes periodic interest payments based on the fixed rate
of interest on the notional principal amount 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 2001, 2000 and 1999.
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
---------------------------------------------------
Asset (liability) 2001 2000 2001 2000
- ----------------- ---------------------------------------------------
Cash and cash equivalents ... $ 42,100 $ 42,700 $ 42,100 $ 42,700
Short- and long-term debt ... (193,000) (199,400) (187,500) (197,900)
Interest rate swaps.......... (300) -- (300) (300)
Forward exchange contracts(a) -- -- -- --
----------------------------------------------------
(a) The estimated fair value of forward exchange contracts was less
than $100 at December 31, 2001 and 2000.
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 and forward exchange rate contracts are valued at published
market prices, market prices of comparable instruments or quotes.
On January 1, 2001, the Company adopted SFAS No. 133, "Accounting for
Derivative Financial Instruments and Hedging Activities," as amended. SFAS 133
requires the Company to recognize all derivatives as either assets or
liabilities and measure those instruments at fair value as of the balance sheet
date. The change in fair value is recorded each period in earnings or other
comprehensive income depending on the type of hedging instrument. At adoption of
the statement the Company recorded a charge to other comprehensive income of
$200, net of tax, to recognize the fair value of its derivative instruments.
The Company uses interest rate swaps and forward exchange contracts to
minimize the economic exposure related to fluctuating interest and foreign
exchange rates. Derivatives used by the Company are highly effective as all of
the critical terms of the derivative instruments match the hedged item.
Effectiveness is measured on a quarterly basis. The Company did not record any
amounts to the statement of income as a result of ineffectiveness for the year
ended December 31, 2001.
The Company has designated its interest rate swap, which matures in October
2003, as a cash flow hedge; therefore, unrealized gains and losses are recorded
in other comprehensive income. As the underlying transaction occurs, any
unrealized gains or losses on the related hedge are reclassified from other
comprehensive income to the statement of income (interest expense), offsetting
the income effects of the transaction to which they relate. Gains and losses on
forward exchange contracts designated as fair value hedges, primarily related to
raw material purchase commitments, are deferred and recognized in the statement
of income as part of the underlying transaction.
During the year ended December 31, 2001, unrealized losses of $200, net of
tax, were recorded to other comprehensive income and $100, net of tax, was
reclassified from other comprehensive income to the statement of income
(interest expense). As of December 31, 2001, net losses on derivatives of $300
were included in accumulated other comprehensive income, $200 of which is
expected to be reclassified to the statement of income within one year.
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 rate 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.
Capital Stock
- -------------
Purchases (sales) of common stock held in treasury during the three years
ended December 31, 2001, are as follows:
2001 2000 1999
---------------------------------------
Shares held, January 1 2,854,800 2,501,400 2,139,500
Purchases ............ 2,400 402,100 530,800
Stock option
exercises ........... (35,900) (48,700) (168,900)
---------------------------------------
Shares held,
December 31 ......... 2,821,300 2,854,800 2,501,400
---------------------------------------
In April 2000, the Company formed a nonqualified deferred compensation plan
for designated executive officers. Deferred amounts are invested in funds at the
executives' election. The plan requires that a portion of the deferred amount be
invested in the Company's stock. Purchases of the Company's stock by the plan
were 2,400 shares annually in both 2001 and 2000. As of December 31, 2001, there
were 4,800 shares of the Company's stock held by the plan.
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 399,700 shares in 2000
at an average price of $26.77 per share. In 1999, the Company acquired 530,800
shares at an average price of $34.10 per share. Cumulative purchases under the
plan total 930,500 shares.
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, which expired on December
31, 2001, will be renewed during 2002. 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, 2001, there were 262,100 shares of common stock
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:
2001 2000 1999
---------------------------------------------
Options outstanding,
January 1 ......... 1,667,000 1,059,600 1,220,600
Granted ............ 360,000 820,000 151,500
Exercised .......... (59,700) (47,800) (232,700)
Forfeited .......... (102,100) (164,800) (79,800)
---------------------------------------------
Options outstanding,
December 31 ....... 1,865,200 1,667,000 1,059,600
Options exercisable,
December 31 ....... 1,020,700 751,300 636,300
---------------------------------------------
---------------------------------------------
Weighted Average
Exercise Price
2001 2000 1999
---------------------------------------------
Options outstanding,
January 1 ......... $27.86 $29.15 $28.08
Granted ............ 26.02 25.98 33.26
Exercised .......... 22.26 24.56 24.09
Forfeited .......... 28.50 28.32 28.90
---------------------------------------------
Options outstanding,
December 31 ....... $27.65 $27.86 $29.15
Options exercisable,
December 31 ....... $28.77 $29.41 $28.09
---------------------------------------------
The range of exercise prices at December 31, 2001, is $23.66 to $32.84 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 award grants
were 4,500 shares in 2000 and 3,600 shares in 1999. Restricted stock forfeitures
of 1,300 shares, 1,500 shares and 3,900 shares occurred in 2001, 2000 and 1999,
respectively. Compensation expense is recognized over the vesting period based
on the fair market value of common stock on the award date: $26.06 per share in
2000 and $32.81 per share in 1999. There were no restricted stock awards granted
in 2001.
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, 2001, 84,500 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; 25,500 options granted under the former plan
remain outstanding at December 31, 2001. 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:
2001 2000 1999
------------------------------------
Options outstanding,
January 1 ......... 79,500 96,000 66,500
Granted ............ -- -- 45,000
Exercised........... (6,000) (3,000) (15,500)
Forfeited........... (7,500) (13,500) --
------------------------------------
Options outstanding,
December 31 ....... 66,000 79,500 96,000
Options exercisable,
December 31 ....... 52,500 49,500 51,000
------------------------------------
------------------------------------
Weighted Average
Exercise Price
2001 2000 1999
------------------------------------
Options outstanding,
January 1 ......... $30.62 $30.04 $26.97
Granted ............ -- -- 32.84
Exercised .......... 22.69 22.69 25.25
Forfeited........... 28.78 28.25 --
------------------------------------
Options outstanding,
December 31 ....... $31.55 $30.62 $30.04
Options exercisable,
December 31 ....... $31.22 $29.27 $27.57
-----------------------------------
The range of exercise prices at December 31, 2001, is $22.13 to $32.84 per
share.
Stock options outstanding under all plans totaled 1,931,200 at December 31,
2001. The weighted average remaining contractual life at December 31, 2001, for
all plans is 5.2 years. In 2001, 862,700 stock options were excluded from the
computation of diluted earnings per share due to their antidilutive effect.
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:
2001 2000 1999
---------------------------------
Net (loss) income:
As reported ................ $(5,200) $1,600 $ 38,700
Pro forma .................. $(6,100) $ 500 $ 37,800
Net (loss) income per share:
As reported ................ $ (0.36) $ .11 $ 2.59
Pro forma .................. $ (0.43) $ .03 $ 2.53
The following assumptions were used to compute the fair value of the option
grants in 2001, 2000 and 1999 using the Black-Scholes option-pricing model: a
risk-free interest rate of 4.4%, 6.0% and 6.5%, respectively; stock volatility
of 23.1%, 23.2% and 20.2%, respectively; and dividend yields of 3.0%, 2.8% and
2.2%, respectively. Expected lives averaged 5 years for options granted in 2001,
6 years for options granted in 2000 and 3 years for options granted in 1999
under the key management employee plan. Expected lives of 5 years were used for
1999 option grants under the directors' plans.
Commitments and Contingencies
- ------------------------------
At December 31, 2001, the Company was obligated under various operating
lease agreements with terms ranging from one month to 20 years. Rental expense
in 2001, 2000 and 1999 was $6,400, $6,300 and $6,000, respectively. Minimum
rentals for noncancelable operating leases with initial or remaining terms in
excess of one year are: 2002-$6,000; 2003-$5,700; 2004-$5,500; 2005-$5,300;
2006-$4,300 and thereafter $35,000. Minimum operating lease payments have been
reduced by related minimum sublease income.
At December 31, 2001, outstanding unconditional contractual commitments for
the purchase of software, equipment and raw materials amounted to $8,900, all of
which is due to be paid in 2002.
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, 2001, 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.
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, 2001, 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 recorded properly and executed in accordance with
management's authorization, 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/ Linda R. Altemus
- -------------------------------------
Linda R. Altemus
Vice President and Chief Financial Officer
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, 2001 and 2000, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 2001, in conformity
with accounting principles generally accepted in the United States of America.
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 of these statements in accordance with
auditing standards generally accepted in the United States of America, 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 our opinion.
As discussed in the Notes to the Consolidated Financial Statements, the
Company adopted Financial Accounting Standard No. 133, "Accounting for
Derivative Instruments and Hedging Activities", as amended, and Financial
Accounting Standard No. 144, "Accounting for Impairment or Disposal of
Long-Lived Assets", in 2001.
/s/ PricewaterhouseCoopers LLP
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PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
February 28, 2002
Five-Year Summary
West Pharmaceutical Services, Inc. and Subsidiaries
(in thousands of dollars, except per share data)
2001 2000 1999
-----------------------------------------
SUMMARY OF OPERATIONS
Net sales ................................................. $ 396,900 378,600 395,800
Operating profit .......................................... $ 41,300 31,000 61,800
Income from continuing operations ......................... $ 19,600 12,700 35,900
(Loss) income from discontinued operations................. $ (24,800) (11,100) 2,800
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Net (loss) income........................................... $ (5,200) 1,600 38,700
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Income per share from continuing operations:
Basic (a) ................................................ $ 1.37 .88 2.41
Assuming dilution (b) .................................... $ 1.37 .88 2.39
(Loss) income per share from discontinued operations:
Basic (a) ................................................ $ (1.73) (0.77) 0.18
Assuming dilution (b) .................................... $ (1.73) (0.77) 0.18
Average common shares outstanding ......................... 14,336 14,407 14,914
Average shares assuming dilution .......................... 14,348 14,409 15,048
Dividends paid per common share ........................... $ .73 .69 .65
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Research, development and engineering expenses ............ $ 17,800 17,100 14,200
Capital expenditures ...................................... $ 44,100 47,700 39,300
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YEAR-END FINANCIAL POSITION
Working capital ........................................... $ 83,200 87,800 68,100
Total assets .............................................. $ 511,300 549,100 542,900
Total invested capital:
Total debt ............................................... $ 193,000 199,400 171,100
Minority interests ....................................... $ -- 1,000 800
Shareholders' equity ..................................... $ 176,800 204,800 231,200
-----------------------------------------
Total invested capital..................................... $ 369,800 405,200 403,100
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PERFORMANCE MEASUREMENTS
Gross margin (c) .......................................... % 29.3 28.8 34.0
Operating profitability (d) ............................... % 10.4 8.2 15.6
Tax rate .................................................. % 30.7 34.6 31.3
Asset turnover ratio (e) .................................. .75 .69 .76
Return on average shareholders' equity .................... % (2.7) .7 16.8
Total debt as a percentage of total invested capital ...... % 52.2 49.2 42.5
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Shareholders' equity per share ............................ $ 12.33 14.31 15.77
Stock price range ........................................ $28.35-22.75 31.88-19.63 40.44-30.88
-----------------------------------------
Performance measurements represent performance indicators commonly used in the
financial community. They are not measures of financial performance under
generally accepted accounting principles.
(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.
2001 includes a net restructuring charge that reduced operating results by $.09
per share.
2000 includes tax benefits totaling $.11 per share realized upon the favorable
resolution of tax issues connected to the 1997 reorganization of the Company's
German subsidiaries, and 2000 includes a net restructuring charge that reduced
operating results by $.78 per share.
1999 includes net tax benefits totaling $.16 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.
Five-Year Summary
West Pharmaceutical Services, Inc. and Subsidiaries
(in thousands of dollars, except per share data)
1998 1997
SUMMARY OF OPERATIONS --------------------------
Net sales ................................................. $ 359,900 371,900
Operating profit .......................................... $ 25,300 59,200
Income from continuing operations ......................... $ 1,400 41,900
(Loss) income from discontinued operations................. $ 5,300 2,500
--------------------------
Net (loss) income...........................................$ 6,700 44,400
--------------------------
Income per share from continuing operations:
Basic (a) ................................................ $ .09 2.54
Assuming dilution (b) .................................... $ .08 2.53
(Loss) income per share from discontinued operations:
Basic (a) ................................................ $ .32 .15
Assuming dilution (b) .................................... $ .32 .15
Average common shares outstanding ......................... 16,435 16,475
Average shares assuming dilution .......................... 16,504 16,572
Dividends paid per common share ........................... $ .61 .57
-------------------------
Research, development and engineering expenses ............ $ 12,200 11,700
Capital expenditures ...................................... $ 35,100 30,100
-------------------------
YEAR-END FINANCIAL POSITION
Working capital ........................................... $ 37,000 105,500
Total assets .............................................. $ 500,000 467,600
Total invested capital:
Total debt ............................................... $ 141,100 89,000
Minority interests ....................................... $ 600 400
Shareholders' equity ..................................... $ 230,100 277,700
-------------------------
Total invested capital..................................... $ 371,800 367,100
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PERFORMANCE MEASUREMENTS
Gross margin (c) .......................................... % 33.5 33.2
Operating profitability (d) ............................... % 7.0 15.9
Tax rate .................................................. % 93.0 22.3
Asset turnover ratio (e) .................................. .74 .80
Return on average shareholders' equity .................... % 2.6 16.7
Total debt as a percentage of total invested capital ...... % 37.9 24.2
--------------------------
Shareholders' equity per share ............................ $ 15.31 16.76
Stock price range ........................................ $ 35.69-25.75 35.06-27.00
Quarterly Operating and Per Share Data (Unaudited)
(in thousands of dollars, except per share data)
First Second Third Fourth Full
2001 Quarter Quarter Quarter Quarter Year
- ---- ----------------------------------------------------
Net sales.............................. $ 99,300 $100,500 $ 96,500 $100,600 $396,900
Gross profit........................... 29,500 29,600 26,600 30,400 116,100
Income from continuing operations...... 5,300 2,800 5,700 5,800 19,600
Discontinued operations, net........... 100 300 200 (25,400) (24,800)
Net (loss)income....................... 5,400 3,100 5,900 (19,600) (5,200)
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Basic earnings per share...............
Continuing operations................. 0.37 0.20 0.40 0.41 1.37
Discontinued operations............... 0.01 0.02 0.01 (1.77) (1.73)
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0.38 0.22 0.41 (1.36) (0.36)
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Diluted earnings per share.............
Continuing operations................. 0.37 0.20 0.40 0.41 1.37
Discontinued operations............... 0.01 0.02 0.01 (1.77) (1.73)
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0.38 0.22 0.41 (1.36) (0.36)
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2000
- ----
Net sales............................. $ 96,000 $ 99,400 $ 92,700 $ 90,500 $378,600
Gross profit.......................... 29,800 30,300 26,300 22,800 109,200
Income from continuing operations..... 7,100 7,200 6,200 (7,800) 12,700
Discontinued operations, net.......... (2,000) (2,200) (1,600) (5,300) (11,100)
Net (loss)income...................... 5,100 5,000 4,600 (13,100) 1,600
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Basic earnings per share
Continuing operations................ 0.49 0.50 0.43 (0.54) 0.88
Discontinued operations.............. (0.14) (0.15) (0.11) (0.37) (0.77)
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0.35 0.35 0.32 (0.91) 0.11
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Diluted earnings per share
Continuing operations................ 0.49 0.50 0.43 (0.54) 0.88
Discontinued operations.............. (0.14) (0.15) (0.11) (0.37) (0.77)
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0.35 0.35 0.32 (0.91) 0.11
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Per common share amounts for the quarters and full years have each been
calculated separately. Accordingly, quarterly amounts may not add to the full
year amounts because of differences in the average common shares outstanding
during each period and, with regard to diluted per common share amounts only,
because of the inclusion of the effect of potentially dilutive securities only
in the periods in which such effect would have been dilutive.
Second quarter 2001 results include a charge related to the termination of
certain management positions. See Note "Restructuring Charges."
Third quarter 2001 results include an adjustment on the sale of a manufacturing
facility held for sale from restructuring. See Note "Restructuring Charges."
Fourth quarter 2001 results include a tax adjustment on the third quarter sale.
Third quarter 2000 results include a tax benefit realized upon the favorable
resolution of tax issues connected to the 1997 reorganization of the Company's
German subsidiaries.
Fourth quarter 2000 results include a charge related to initiatives taken to
streamline operations. See Note "Restructuring Charges."