FINANCIAL REVIEW
Company Overview
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West Pharmaceutical Services, Inc. (the Company) applies value-added
technologies to the process of bringing pharmaceutical, healthcare and consumer
products to global markets. The Company's operations are organized into two
segments: Pharmaceutical Systems and Drug Delivery Systems.
The Pharmaceutical Systems segment focuses on the design, manufacture and
sale of stoppers, closures, medical device components and assemblies made from
elastomers, metals and plastics. Several hundred proprietary rubber formulations
are molded from natural rubber and synthetic elastomers into a variety of
stopper sizes, shapes and colors. The stoppers are used in packaging serums,
vaccines, antibiotics, anesthetics, intravenous solutions and other drugs and
solutions to assure the integrity of these solutions during the product's
approved shelf life. The Pharmaceutical Systems segment also offers a broad line
of aluminum seals that help customers differentiate and distinguish drug
solutions. Other products offered include plastic containers, bottles and
closures for the pharmaceutical, consumer, medical device and diagnostic markets
and plastic systems used for lyophilized drug reconstitution and delivery. The
Pharmaceutical Systems segment is composed of two operating divisions (the
Americas and Europe/Asia) consisting of four business units, which manufacture
and sell similar products in their respective regions.
The Drug Delivery Systems segment consists of a research and development unit
concentrating on the development and commercialization of the Company's patented
technologies, and a clinical services organization that conducts Phase I through
IV clinical trials. The Drug Delivery Systems segment allows clients to source
their projects through a supply chain product development process, starting with
initial feasibility studies and formulation optimization and moving through to
clinical development. The Company's patented technologies include ChiSysTM, a
transmucosal system for the delivery of small molecular weight drugs, proteins
and peptides, and TargitTM, an oral system for the specific delivery of
therapeutic agents to the colon.
Results of Operations
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In December 2002, the Company sold its consumer healthcare research unit
for $2 million. In November of 2001, the Company sold its contract manufacturing
and packaging operations for a total sale price of $29.8 million. These
transactions both involved the disposal of a component of the Company for which
operations and cash flows were clearly distinguished from the rest of the
Company, and accordingly, all periods have been restated to reflect the results
of these businesses as discontinued operations. The Financial Review of the
Company's operating results for the three years ended December 31, 2002, and its
financial position as of December 31, 2002, should be read in conjunction with
the accompanying consolidated financial statements appearing elsewhere in this
report.
Net Sales
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The following table summarizes the Company's sales by product group:
($ in millions) 2002 2001 2000
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Pharmaceutical packaging $ 291.4 $ 262.2 $ 236.1
Medical devices 85.9 83.9 91.1
Personal care/food packaging 30.3 26.9 27.4
Laboratory and other services 5.2 3.4 8.3
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Net sales - Pharmaceutical Systems 412.8 376.4 362.9
Clinical services 5.3 7.8 7.8
Development/licensing revenue 1.6 8.1 1.8
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Net sales - Drug Delivery Systems 6.9 15.9 9.6
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Net sales - consolidated $ 419.7 $ 392.3 $ 372.5
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Net sales were $419.7 million in 2002, 7% above the $392.3 million reported
in 2001. Sales in the Pharmaceutical Systems segment increased by almost 10% in
2002 versus 2001 levels. International sales grew by 15%, while domestic sales
grew by 5%. The Company's WestarR products are meeting an increasing demand for
pre-cleaned rubber stoppers and syringe components for the pharmaceutical
industry. Westar is a process for preparing rubber components for direct
introduction into customers' steam sterilizers. The conversion of customers to
higher-margin Westar products from standard products, as well as increased
volumes made possible by plant expansions in Europe, contributed to the strong
sales performance in 2002. Consistent sales increases were experienced in all
pharmaceutical packaging and processing products, led by serum and lyophilized
stoppers, and prefillable syringe components. Sales of medical device components
also increased, led by a 12% increase in sales of disposable syringe components.
Overall price increases accounted for 1.5% of the sales increase over 2001.
Foreign exchange rates did not impact comparisons, as the dollar's decline
against European currencies was largely offset by currency devaluation in South
America.
Revenues in the Drug Delivery Systems segment declined to $6.9 million in
2002, a $9 million decrease from 2001 results. Project delays and cancellations
led to lower licensing-related revenues from ChiSys and other technologies. In
addition, a decrease in the number of studies conducted in the pharmaceutical
outsourcing market contributed to lower sales for the clinical services unit.
Net sales of $392.3 million in 2001 compare with sales of $372.5 million in
2000. The strong U.S. dollar in 2001 reduced reported sales versus 2000 by
approximately $8 million. At constant exchange rates, sales in 2001 were 7%
higher than 2000 net sales. Pharmaceutical Systems segment sales increased by 6%
(measured at constant exchange rates) in 2001 versus 2000, with sales growing at
a 9% rate in international markets and at 4% domestically. Both sales volumes
and product mix were favorable in the Pharmaceutical Systems segment sales
comparison to the prior year. 2001 revenues in the Drug Delivery Systems segment
increased by $6.3 million over 2000 results, reflecting increased licensing
revenue from ChiSys technology-based development projects, including two Phase
II trials: one utilizing the Company's nasal morphine system and a second for a
nasal flu vaccine.
Operating Profit
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The following table summarizes the Company's operating profit by reportable
segment, including corporate administration, U.S. pension plan income and other
charges recorded in consolidated operating profit for the three years ended
December 31, 2002:
($ in millions) 2002 2001 2000
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Pharmaceutical Systems segment $ 65.4 $ 55.2 $ 55.8
Drug Delivery Systems segment (15.1) (4.3) (9.8)
Corporate costs (18.1) (16.2) (14.4)
Pension income 2.7 8.1 14.1
Restructuring costs (9.9) (2.9) (5.5)
Foreign exchange gain 1.7 - -
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Consolidated operating profit $ 26.7 $ 39.9 $ 40.2
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Operating profit in the Pharmaceutical Systems segment increased by $10.2
million over 2001, reflecting the increased gross profit resulting from the
sales volume increases addressed above. Gross margin was 28.5%, 28.4% and 28.9%
in 2002, 2001 and 2000, respectively. Costs associated with bringing new
production capacity on-line in Europe, production inefficiencies connected to
plant transfers and start-up plastic device manufacturing at plants in the U.K.,
and higher insurance costs offset the volume-related margin improvements. The
Company completed a plant expansion in France during 2002 and expects to
complete a German plant expansion project during 2003. Both projects should
result in improved gross margins in 2003. Selling, general and administrative
costs in the Pharmaceutical Systems segment were approximately 13% of net sales
in each period.
2002 operating losses in the Drug Delivery Systems segment were $10.8
million above those recorded in 2001, reflecting the $6.5 million decline in
licensing revenues described earlier and a $3.6 million increase in research and
development expense and business development costs in the drug delivery unit.
The increased research and development costs were incurred in funding studies
related to a near-term licensing opportunity for a generic version of a popular
nasally delivered allergy product. Gross profit in the clinical services unit
declined $1.5 million compared to 2001, reflecting the lower revenues in that
unit. Reduced incentive compensation costs partially offset the lower profits
generated by the Drug Delivery Systems segment. The Company anticipates that the
development work in 2002, together with increased focus on its ChiSys
technology, will lead to licensing opportunities in 2003.
Corporate administrative and other expenses increased $1.9 million in 2002
over 2001 levels. Higher executive compensation costs, increased funding of the
internal audit function and higher consulting charges for international tax
planning contributed to the increases. Corporate costs in 2001 exceeded 2000
spending by $1.8 million, principally as a result of an information systems
project. Certain costs previously reported as Corporate have been allocated to
the respective segment that they support. These costs consist principally of
rent, information services and human resource functions incurred at the North
American headquarters facility. All prior periods have been restated to reflect
these allocations.
Pension income related to the Company's pension plans has dramatically
decreased in each of the last two years. The decline in the performance of
global equity markets has decreased the fair market value of plan assets over
that period, resulting in lower pension plan income. The Company projects that
pension plans will generate pension expense of approximately $6.5 million in
2003 as a result of the closing asset values at December 31, 2002, and higher
post-retirement costs.
The following table summarizes the restructuring provisions and payments
for the three-year period ended December 31, 2002:
Severance
($ in millions) and benefits Other Totals
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Balance, December 31, 1999 $ .1 $ - $ .1
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2000 Restructuring expense 2.8 2.7 5.5
Non-cash write-offs - (2.7) (2.7)
Cash payments (0.2) - (0.2)
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Balance, December 31, 2000 2.7 - 2.7
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2001 Restructuring expense (credit) 4.9 (2.0) 2.9
Non-cash write-offs .2 2.0 2.2
Cash payments (5.7) - (5.7)
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Balance, December 31, 2001 2.1 - 2.1
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2002 Restructuring expense .8 9.1 9.9
Non-cash write-offs - (8.6) (8.6)
Cash payments (2.1) - (2.1)
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Balance, December 31, 2002 $ .8 $ .5 $ 1.3
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Restructuring charges of $9.9 million were recorded in 2002 associated with
the termination of an information systems implementation project ($6.9 million),
a write-down of a technology company investment ($2.8 million), the closure of a
sales office in Korea ($0.1 million) and employee terminations at the
Nottingham, U.K., drug delivery site ($0.1 million). In 2001, the Company
recorded a net $2.9 million restructuring charge consisting of a $4.9 million
provision for the termination of 35 mid- and senior-level management positions,
offset by a $2.0 million adjustment related to the carrying value of an asset
held for sale from the 2000 restructuring program. In 2000, the Company recorded
a $5.5 million provision principally related to the decision to close a plastic
device manufacturing facility in Puerto Rico.
During the first quarter of 2002, the Company's subsidiary in Argentina
recorded a foreign exchange gain of $1.7 million on assets denominated in
non-peso currencies due to the devaluation of the Argentine peso. The Company
maintains operations in Argentina, Brazil, Venezuela and Colombia, generating
annual sales of approximately $14 million. The region is currently beset by
political and social unrest, including the recent general strikes in Venezuela
that could destabilize local currencies. Although the Company has successfully
passed foreign currency costs on to customers through price increases, no
assurance can be given on its ability to do so in the future.
Interest Expense (net)
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The following table summarizes the Company's net interest expense for the
three-year period ended December 31, 2002:
($ in millions) 2002 2001 2000
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Interest expense $ 11.3 $ 14.3 $ 13.9
Capitalized interest (0.7) (0.8) (0.8)
Interest income (1.1) (1.5) (2.0)
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Interest expense (net) $ 9.5 $ 12.0 $ 11.1
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Net interest expense declined $2.5 million in 2002 versus 2001 levels due
to lower average debt levels and interest rates. The lower debt levels in 2002
were generated by the $28 million fourth quarter 2001 proceeds received from the
sale of the contract manufacturing and packaging operation (see "Discontinued
Operations"). Debt levels also benefited from a tax refund received in 2002
associated with the divestiture of the contract manufacturing and packaging
business and a production facility in Puerto Rico. The Company also increased
its global utilization of cash in order to reduce outstanding debt, resulting in
lower interest income and interest expense.
Net interest expense in 2001 increased over 2000 results, largely
reflecting the impact of fourth quarter 2000 sales results, which decreased 2001
operating cash flow and resulted in higher average debt levels during 2001.
Income Taxes
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The effective tax rate on consolidated income from continuing operations
was 24.0% in 2002, 30.7% in 2001 and 34.7% in 2000. The restructuring charges
incurred in the last three years generate specific tax consequences, which
affect the Company's effective tax rate. In addition, the 2002 foreign exchange
gain resulting from the currency devaluation in Argentina, a $2.4 million tax
benefit from a change in U.S. tax law in 2002 related to loss disallowance rules
and a $1.5 million tax benefit in 2000 connected with the reorganization of
operations in Germany also impacted the Company's effective tax rate.
Management believes that a better indication of the Company's tax rate on
continuing operations can be determined by excluding the effect of the specific
tax consequences of the restructuring charges, tax refunds and foreign exchange
gain discussed above. The following table reconciles the effective tax rate to
the comparative tax rate excluding the items mentioned above:
2002 2001 2000
---------------------------------
Effective tax rate (as reported) 24.0% 30.7% 34.7%
Impact of:
Restructuring charges (4.1%) 2.3% (4.6%)
Foreign exchange gain (2.3%) - -
Tax refunds 14.4% - 5.2%
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Comparative tax rate 32.0% 33.0% 35.3%
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Excluding the impact of restructuring and other items noted above, the
comparative tax rates would have been 32.0% for 2002, 33.0% for 2001 and 35.3%
for 2000. These tax rates reflect the changes in the geographic mix of earnings
and changes in the statutory rate in several countries during the three-year
period.
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 a $0.3
million loss in 2002, following income of $0.5 million and $1.2 million for 2001
and 2000, respectively. The loss in 2002 was mainly due to the restructuring of
plant operations in Mexico. Equity in net income (loss) of affiliated companies
includes $0.8 million related to this restructuring. Excluding the
restructuring, affiliate income was equal to 2001 levels, with slightly improved
Daikyo results offsetting losses in Mexico.
Company purchases from all affiliates totaled approximately $11.5 million
in 2002 and $12.6 million in 2001, the majority of which relates to a
non-exclusive distributorship agreement allowing the Company to purchase and
re-sell Daikyo products. Sales to affiliates were $1.0 million and $0.5 million
in 2002 and 2001, respectively.
Income from Continuing Operations
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The Company's 2002 net income from continuing operations was $12.8 million,
or $0.89 per share. These results included restructuring charges of $9.9 million
($7.4 million, net of tax), or $0.51 per share, primarily related to the
termination of an information systems project and a write-down of an investment
in a genetic research technology company. Results also included $0.8 million, or
$0.06 per share, of severance and plant shutdown costs from the Company's
affiliates in Mexico, of which it owns 49%. Offsetting these costs were a $1.7
million ($0.8 million, net of tax), or $0.05 per share, foreign exchange gain
associated with the devaluation of the Argentine peso and a $2.4 million, or
$0.17 per share, tax benefit associated with the 2001 sale of a manufacturing
facility in Puerto Rico.
Net income from continuing operations in 2001 was $19.7 million, or $1.38
per share. Results in 2001 included a restructuring charge of $2.9 million ($1.3
million, net of tax), or $.08 per share. The charge consisted of a $4.9 million
($3.3 million, net of tax) employee severance provision, offset by a $2.0
million adjustment to the carrying value of a plastic device manufacturing
facility held for sale from the 2000 restructuring program.
Net income from continuing operations in 2000 was $20.0 million, or $1.39
per share. Results for 2000 included $5.5 million ($4.9 million, net of tax), or
$0.34 per share of restructuring costs connected principally to the decision to
close a plastic device manufacturing facility located in Puerto Rico. The
Company also realized a $1.5 million, or $0.11 per share, tax benefit connected
with the reorganization of operations in Germany.
Discontinued Operations
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On December 4, 2002, the Company sold its consumer healthcare research unit
for $2 million to Concentrics Research, LLC, a company formed by the former
employee management team, and Bindley Capital Partners, LLC. As a result of
receiving an offer to purchase the business, the Company reduced the carrying
value of the assets to fair market value in the third quarter of 2002, resulting
in a pre-tax charge of $0.6 million.
In connection with the sale of the contract manufacturing and packaging
unit in 2001, 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 in
2002. The payment of these debentures resulted in a $0.4 million, or $0.03 per
share, loss recorded in discontinued operations in 2002.
The Company also recorded a $5.9 million, or $0.40 per share, tax benefit
in discontinued operations connected with the disposition of the contract
manufacturing and packaging business. This tax benefit and related refund
resulted from a change in U.S. tax law in 2002 related to loss disallowance
rules.
In 2001, the Company sold all the operating assets of its contract
manufacturing and packaging business unit to DPT Lakewood, Inc. for a sale price
of $29.8 million, consisting of cash of $28 million 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.
Liquidity and Capital Resources
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The cash balance at December 31, 2002, was $33.2 million and working
capital totaled $73.6 million, a ratio of current assets to current liabilities
of 1.8 to 1. Consolidated debt totaled $175 million at December 31, 2002,
compared with $193 million at year-end 2001. Debt to total invested capital
(total debt and shareholders' equity) was 46.5% at December 31, 2002.
Cash flows generated from operations totaled $45.7 million in 2002, as
compared to $37.5 million in 2001. The increase in cash flow largely resulted
from tax refunds and lower restructuring payments.
Capital spending for 2002 totaled $37.7 million, with the majority of the
spending on manufacturing equipment and plant expansion activity in France and
Germany. The Company anticipates that 2003 capital spending will be
approximately $45 million, with significant projects scheduled to increase
Westar product capacity at its Jersey Shore, Pa., plant and the expansion of the
Stolberg, Germany, metal and plastics facility.
Cash provided by investing activities in 2002 includes the receipt of a
$4.3 million deposit held in trust from the sale of the contract manufacturing
and packaging business, proceeds of $2.0 million from the sale of the consumer
healthcare research unit and $0.4 million of proceeds from surplus equipment
sales. Cash used in investing activities in 2002 includes a $1 million advance
to the Company's affiliate in Mexico to fund restructuring activities and $0.3
million of net advances to customers for development of molds and tools to be
used in the production of customer products.
Financing cash flows include proceeds from stock option exercises of $3.3
million and dividends paid to shareholders totaling $11.1 million ($0.77 per
share). Discontinued operations provided cash flow of $8.2 million, principally
from the receipt of a tax refund. The remaining cash flow was used to reduce the
Company's outstanding debt.
The following table summarizes the Company's contractual obligations at
December 31, 2002, and the effect the obligations are expected to have on its
liquidity and cash flow in future periods:
Payments Due by Period
Less
than 1 1 to 3 4 to 5 After 5
($ in millions) year years years years Total
--------------------------------------------------
Unconditional purchase
obligations $ 4.9 $ - $ - $ - $ 4.9
Notes payable 4.1 - - - 4.1
Long-term debt 11.7 59.2 - 100.0 170.9
Operating lease
obligations 6.4 11.6 10.3 30.1 58.4
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Total contractual
obligations $ 27.1 $ 70.8 $ 10.3 $ 130.1 $ 238.3
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The Company also has a $0.5 million letter of credit supporting the payment
of insurance obligations assumed by the acquirer of the contract manufacturing
and packaging business.
The Company's principal source of short- and medium-term liquidity is a
$114.5 million multi-currency revolving credit facility 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 $70.0 million
committed revolving credit facility maturing in July 2005. Interest cost on
these facilities is charged at the applicable London Inter-Bank Offering Rates
(LIBOR) plus a margin dependent on the Company's debt to total capital ratio.
Commitment fees on these 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 not to exceed a 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 believes that its financial condition, capitalization structure
and expected income from operations will be sufficient to meet the Company's
future expected cash requirements, at least through July 2005, at which time the
Company's revolving credit facility expires. The Company fully expects to obtain
similar credit facilities at that time.
Critical Accounting Policies and Estimates
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The Financial Review discusses consolidated financial statements that are
prepared in accordance with accounting principles generally accepted in the
United States. The application of these principles requires management to make
estimates and assumptions, some of which are subjective and complex, that affect
the amounts reported in the consolidated financial statements. Management
believes the following accounting policies and estimates are critical to
understanding and evaluating the results of operations and financial position of
the Company:
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. 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 Assets: Effective January 1, 2002, the Company adopted
Financial Accounting Standards Statement No. 142, "Goodwill and Other Intangible
Assets" (SFAS 142). SFAS 142 eliminated the requirement to amortize goodwill and
other indefinite-lived intangible assets. Instead, goodwill is tested for
impairment as part of the reporting unit to which it belongs. The Company has
determined its reporting units to be the geographic regions in the
Pharmaceutical Systems segment, and the drug delivery and clinical services
units of the Drug Delivery Systems segment. As required by the statement, the
Company did not record goodwill amortization expense in 2002. Goodwill expense
was $1.2 million and $1.3 million in 2001 and 2000, respectively. The Company
reviews goodwill and long-lived assets (principally property, plant and
equipment and patents) on an annual basis and whenever circumstances indicate
that the carrying value of these assets may not be recoverable. For assets to be
held and used in the business, management estimates the future cash flow to be
derived from the related asset or business unit. For other assets held for sale,
management determines fair value by estimating the anticipated proceeds to be
received upon the sale of the asset. Changes in management's estimate of fair
value, including management's estimate of future cash flows, could have a
material impact on the Company's future results of operations and financial
position.
The majority of the Company's assets are associated with profitable
operations within the Pharmaceutical Systems division; however, the Company's
plastics unit in the United Kingdom has generated consecutive years of operating
losses. The principal customer for this unit has recently completed a
manufacturing and distribution agreement with a major pharmaceutical company for
a multi-component metered dose inhaler. The Company's fair value projections
significantly rely on the achievement of sales projected from these agreements.
In the drug delivery unit, the Company's revenue projections include
estimated licensing revenues, primarily dependent on the success of the
Company's ChiSys technology. A key milestone for 2003 will be the advancement of
one of the Company's products to Phase III clinical trials. While the Company
expects improved performance in this unit in 2003, it does not project operating
profit until 2004.
The Company has also reviewed the operating projections for the clinical
services unit, which generated an operating loss in 2002 following several years
of positive performance. The Company views the 2002 performance to be a
temporary condition caused by unexpected project cancellations; however, it does
note a decline in the number of studies out-sourced by the pharmaceutical
industry. The Company will monitor industry demand during 2003 to determine if
these trends are expected to continue.
Employee Benefits: The measurement of the obligations under the Company's
defined benefit pension and post-retirement medical plans are subject to a
number of assumptions. These include the rate of return on plan assets and the
rate at which the future obligations are discounted to present value. The
Company's plan assets have decreased from $206.6 million at December 31, 2000,
to $142.2 million at December 31, 2002, largely as a result of the recent
performance of global equity markets. The unrecognized loss on plan assets
resulting from the difference between expected and actual asset returns,
together with the impact of other changes in actuarial assumptions, totaled
$60.8 million at December 31, 2002. This actuarial loss is amortized into future
pension expense over a 13-year period. For U.S. plans, which account for over
90% of global plan assets, the Company has reduced its long-term rate of return
assumption from 9.5% to 9%. This return assumption was determined by reviewing
the expected mix of plan assets (approximately 65% equity and 35% debt
securities) and the projected return over a 10-year period. The Company has also
reduced its discount rate to 6.5% to reflect current market conditions. As a
result of the asset performance and the decline in rate of return and discount
rate assumptions, the Company estimates that 2003 pension plan expense will be
approximately $6.5 million, as compared with net pension income of $3 million in
2002. Changes in these estimates, including the market performance of plan
assets and other actuarial assumptions, could have a material impact on the
Company's future results of operations and financial position.
Income Taxes: 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 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: The Company has subsidiaries outside the United States
accounting for approximately 46% of consolidated net sales. Virtually all of
these sales and related operating costs are denominated in the currency of the
local country and translated into U.S. dollars at the average exchange rate for
the period. The assets and liabilities of these subsidiaries are translated at
the exchange rate in effect at the end of the period. As a result, the Company's
results of operations and financial position are exposed to changing exchange
rates. In addition, at any point in time, the Company's foreign subsidiaries may
hold assets or liabilities not denominated in their local currency. These items
may give rise to foreign currency transaction gains and losses. The Company
periodically uses forward contracts to hedge certain transactions, but generally
does not hedge foreign currency exposures.
New Accounting Standards
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In July 2002, the Financial Accounting Standards Board (FASB) issued
Statement No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities" (SFAS 146). SFAS 146 requires that a liability for costs associated
with a disposal activity, including those related to employee termination
benefits, be recognized when the liability is incurred, and not necessarily at
the date of an entity's commitment to an exit plan as had been the practice
under the prior accounting guidance. The Company adopted SFAS 146 on January 1,
2003.
In November 2002, FASB Interpretation No. 45, "Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others" (FIN 45) was issued. FIN 45 elaborates on the
disclosures to be made by a guarantor about its obligations under certain
guarantees that it has issued. The disclosure requirements of FIN 45 are
effective for financial statements ending after December 15, 2002. FIN 45 also
clarifies that a guarantor is required to recognize, at the inception of a
guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee. The recognition provisions apply on a prospective basis
to guarantees issued or modified after December 31, 2002. The Company believes
that FIN 45 will not have a material effect on its consolidated financial
position or results of operations.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure." This statement provides alternative
methods of transition for an entity that voluntarily changes to the fair value
based method of accounting for stock-based employee compensation. It also amends
the disclosure provisions for entities that retain the intrinsic value method of
accounting. The Company intends to continue the intrinsic value method of
accounting. The Company will disclose the pro-forma effect on net income and
earnings per share of applying the fair value method to all stock-based
compensation awards in the notes to its interim and annual financial statements
as required by the statement.
Subsequent Event
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On January 29, 2003, an explosion and fire occurred at the Company's
Kinston, N.C., plant. Six people lost their lives and many others were injured
in the accident, which caused substantial damage to the building, machinery,
equipment and inventories. The Company is aggressively implementing a
manufacturing recovery plan to restore production to pre-accident levels using
resources and capacity at other plant locations, as well as selected third-party
vendors. Management is also working with customers and the Food and Drug
Administration to satisfy critical product requirements while minimizing the
effects on customers' production plans and inventories.
At this time, the Company has identified items associated with the Kinston
accident that are likely to have financial implications and has estimated
certain of those items. Management expects that, as a result of capacity
limitations, up to $5 million of sales that would otherwise have occurred in the
first and second quarters of 2003 will be delayed, but that the revenue is
substantially recoverable in the second half of the year. The Company maintains
business interruption insurance under which it expects to recover lost profits
attributable to lost sales or additional costs associated with the recovery
plan.
The Company currently expects to incur pre-tax costs of between $4.0
million and $6.0 million, net of insurance recoveries during the first half of
2003. The estimated costs are for retained risk, or deductibles, under
applicable insurance policies, for costs not normally or fully compensable by
insurance, and the cost of reinstating or replacing insurance coverage in the
wake of the loss. Management is confident that, except for these costs, the
property and business interruption losses are fully insured.
The Company is not able, at this time, to estimate the ultimate impact of
any liability claims and related costs that may arise as a result of the
accident.
Forward-Looking Information
- ---------------------------
The Private Securities Litigation Reform Act of 1995 (the Act) provides a
safe harbor for forward-looking statements made by or on behalf of the Company.
The Company and its representatives may from time to time make certain
forward-looking statements in publicly released materials, both written and
oral, including statements contained in this report and filings with the
Securities and Exchange Commission.
Forward-looking statements may be identified by the use of words such as
"estimate," "expect," "intend," "believe" and similar expressions.
Forward-looking statements are based on current expectations of future events.
The forward-looking statements are and will be based on management's
then-current views and assumptions about future events and operation
performance, and speak only as of their dates.
Investors should realize that if underlying assumptions prove inaccurate or
unknown risks or uncertainties materialize, actual results could vary materially
from our expectations and projections. Investors are therefore cautioned not to
place undue reliance on any forward-looking statements.
In addition, we undertake no obligation to update or revise any
forward-looking statements whether as a result of new information, future events
and developments or otherwise.
Some of the factors that could cause the Company's actual results to differ
materially from those expressed in any forward- looking statement include, but
are not limited to: sales demand; timing of customers' projects; successful
development of proprietary drug delivery technologies and systems; regulatory,
licensee and/or market acceptance of products based on those technologies;
competitive pressures; the strength or weakness of the U.S. dollar; inflation;
the cost of raw materials; the availability of credit facilities; and statutory
tax rates.
With respect to the explosion and fire at the Company's Kinston, N.C.,
plant, the following risks and uncertainties should also be taken into
consideration: the timely replacement of production capacity; the adequacy and
timing of insurance recoveries for property losses and/or liability to third
parties and related costs; the ability of the Company to successfully shift
production and compounding capacity to other plant sites in a timely manner,
including the successful integration of experienced personnel to other
production sites; and regulatory approvals and customer acceptance of goods from
alternate sites.
CONSOLIDATED STATEMENTS OF INCOME
WEST PHARMACEUTICAL SERVICES, INC. AND SUBSIDIARIES
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000.
(in thousands, except per share data)
2002 2001 2000
-----------------------------------------------------------
Net sales ........................... $419,700 100% $392,300 100% $372,500 100%
Cost of goods and services sold ..... 302,100 72 277,500 71 265,000 71
-----------------------------------------------------------
Gross profit...................... 117,600 28 114,800 29 107,500 29
Selling, general and
administrative expenses .......... 82,600 20 72,000 18 59,500 16
Restructuring charge, net............ 9,900 2 2,900 1 5,500 1
Other (income)expense, net........... (1,600) - - - 2,300 1
-----------------------------------------------------------
Operating profit ................. 26,700 6 39,900 10 40,200 11
Interest expense, net................ 9,500 2 12,000 3 11,100 3
-----------------------------------------------------------
Income before income
taxes and minority interests.... 17,200 4 27,900 7 29,100 8
Provision for income taxes .......... 4,100 1 8,600 2 10,100 3
Minority interests .................. - - 100 - 200 -
-----------------------------------------------------------
Income from consolidated operations 13,100 3% 19,200 5% 18,800 5%
-- -- --
Equity in net income (loss) of
affiliated companies ............. (300) 500 1,200
---------- --------- ---------
Income from continuing operations. 12,800 19,700 20,000
Discontinued operations, net of tax.. 5,600 (24,900) (18,400)
---------- --------- ---------
Net income (loss)................. $ 18,400 $ (5,200) $ 1,600
---------- --------- ---------
Net income (loss) per share:
Basic
Continuing operations............... $ 0.89 $ 1.38 $ 1.39
Discontinued operations............. 0.39 (1.74) (1.28)
---------- --------- ---------
$ 1.28 $ (0.36) $ 0.11
---------- --------- ---------
Assuming dilution
Continuing operations............... $ 0.89 $ 1.37 $ 1.39
Discontinued operations............. 0.39 (1.73) (1.28)
---------- --------- ---------
$ 1.28 $ (0.36) $ 0.11
---------- --------- ---------
Average common shares outstanding ... 14,434 14,336 14,407
Average shares assuming dilution .... 14,434 14,348 14,409
Dividends declared per common share.. $ 0.78 $ 0.74 $ 0.70
The accompanying notes are an integral part of the financial statements.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
WEST PHARMACEUTICAL SERVICES, INC. AND SUBSIDIARIES
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000.
(in thousands)
2002 2001 2000
--------------------------------------
Net income (loss)............................................ $18,400 $ (5,200) $ 1,600
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments................... 16,500 (9,700) (8,200)
Unrealized losses on securities of affiliates.............. (300) (100) (700)
Minimum pension liability adjustments...................... (2,300) (2,800) (300)
Cumulative effect of change in accounting principle for
derivatives and hedging activities........................ -- (200) --
Net realized losses on derivative instruments.............. 200 100 --
Unrealized losses on derivatives........................... (100) (200) --
-------------------------------------
Comprehensive income (loss).................................. $32,400 $(18,100) $ (7,600)
-------------------------------------
-------------------------------------
The accompanying notes are an integral part of the financial statements.
CONSOLIDATED BALANCE SHEETS
WEST PHARMACEUTICAL SERVICES, INC. AND SUBSIDIARIES
AT DECEMBER 31, 2002 AND 2001.
(in thousands, except per share data)
2002 2001
ASSETS ----------------------
Current assets:
Cash, including cash equivalents....................................... $ 33,200 $ 42,100
Accounts receivable, less allowance (2002--$800; 2001--$500)........... 66,200 59,500
Inventories ........................................................... 41,300 34,300
Income tax refundable.................................................. 3,600 5,700
Deferred income tax benefits .......................................... 5,200 2,400
Other current assets .................................................. 11,800 14,500
----------------------
Total current assets ................................................... 161,300 158,500
----------------------
Property, plant and equipment .......................................... 499,600 458,800
Less accumulated depreciation and amortization ......................... 276,300 248,700
----------------------
223,300 210,100
Investments in and advances to affiliated companies .................... 18,000 20,800
Goodwill ............................................................... 35,500 30,700
Pension asset........................................................... 53,000 48,300
Deferred income tax benefits............................................ 27,600 21,400
Patents................................................................. 7,300 7,600
Other intangibles....................................................... 1,700 200
Other assets ........................................................... 9,100 13,700
----------------------
Total Assets............................................................ $536,800 $511,300
----------------------
----------------------
2002 2001
-----------------------
LIABILITIES AND SHAREHOLDERS' EQUITY ...................................
Current liabilities:
Current portion of long-term debt ..................................... $ 11,700 $ 4,300
Notes payable ......................................................... 4,100 4,400
Accounts payable ...................................................... 19,200 22,200
Accrued expenses:
Salaries, wages and benefits ......................................... 17,000 15,800
Income taxes payable ................................................. 9,400 5,400
Restructuring costs................................................... 1,400 2,200
Deferred income taxes................................................. 2,400 1,600
Other ................................................................ 22,500 19,400
----------------------
Total current liabilities .............................................. 87,700 75,300
----------------------
Long-term debt, excluding current portion .............................. 159,200 184,300
Deferred income taxes .................................................. 56,200 46,800
Other long-term liabilities ............................................ 32,200 28,100
----------------------
Total liabilities....................................................... 335,300 334,500
----------------------
Commitments and contingencies..........................................
Shareholders' equity:
Preferred stock, shares authorized: 3,000;
shares issued and outstanding: 2002--0; 2001--0
Common stock, par value $.25 per share; shares authorized: 50,000;
shares issued: 2002--17,165; 2001--17,165;
shares outstanding: 2002--14,480; 2001--14,344........................ 4,300 4,300
Capital in excess of par value ........................................ 30,900 31,600
Retained earnings ..................................................... 261,200 254,000
Accumulated other comprehensive (loss)................................. (13,400) (27,400)
----------------------
283,000 262,500
Less treasury stock (2002--2,685 shares; 2001--2,821 shares)........... (81,500) (85,700)
----------------------
Total shareholders' equity ............................................. 201,500 176,800
----------------------
Total Liabilities and Shareholders' Equity.............................. $536,800 $511,300
----------------------
----------------------
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, 2002, 2001 AND 2000.
(in thousands, except per share data)
Accumulated
Capital in other
Common excess of Retained comprehensive Treasury
stock par value earnings (loss) stock Total
----------------------------------------------------------------------
Balance, January 1, 2000.. ................ $ 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 ($.74 per share) .. (10,600) (10,600)
Changes-other comprehensive (loss)......... (12,900) (12,900)
----------------------------------------------------------------------
Balance, December 31, 2001 ................ 4,300 31,600 254,000 (27,400) (85,700) 176,800
----------------------------------------------------------------------
Net income ................................ 18,400 18,400
Shares issued under stock plans ........... (700) 4,300 3,600
Shares repurchased ........................ (100) (100)
Cash dividends declared ($.78 per share) .. (11,200) (11,200)
Changes-other comprehensive (loss)......... 14,000 14,000
----------------------------------------------------------------------
Balance, December 31, 2002 ................ $ 4,300 $ 30,900 $261,200 $(13,400) $(81,500) $201,500
----------------------------------------------------------------------
----------------------------------------------------------------------
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, 2002, 2001 AND 2000.
(in thousands)
2002 2001 2000
---------------------------------------
Cash flows provided by operating activities:
Net income (loss)........................................... $ 18,400 $ (5,200) $ 1,600
Adjustments to reconcile net income (loss) to net cash
provided by operating activities of continuing operations:
(Income) loss from discontinued operations................ (5,600) (300) 18,400
Loss on disposal of discontinued operations............... -- 25,200 --
Depreciation and amortization ............................ 33,000 31,900 30,200
Restructuring charge, net................................. 9,900 2,900 5,500
Loss on sales of equipment and other assets............... 600 600 1,000
Deferred income taxes .................................... 1,500 1,400 4,200
Pension and other retirement plans ....................... (4,800) (10,000) (15,800)
Loss (equity) in undistributed earnings of affiliated
companies, net .......................................... 200 (300) (1,000)
Changes in assets and liabilities, net of effects of
businesses sold:
(Increase) decrease in accounts receivable ............... (3,700) (7,500) 2,600
(Increase) decrease in inventories ....................... (4,700) (900) (800)
(Increase) decrease in other current assets .............. (2,800) 700 (700)
(Decrease) increase in other current liabilities.......... 4,700 (2,100) 2,600
Other operating items .................................... (1,000) 1,100 (500)
--------------------------------------
Net cash provided by operating activities of continuing
operations.................................................. 45,700 37,500 47,300
--------------------------------------
Cash flows used in investing activities:
Property, plant and equipment acquired ..................... (37,700) (45,200) (47,700)
Proceeds from sales of assets .............................. 2,400 31,300 300
Deposit held in trust from sale of assets................... 4,300 (4,300) --
Advance to affiliate........................................ (1,000) -- --
Payments for acquisitions................................... -- (1,100) (3,400)
Customer advances, net of repayments ....................... (300) (1,500) (100)
--------------------------------------
Net cash used in investing activities of continuing operations (32,300) (20,800) (50,900)
--------------------------------------
2002 2001 2000
--------------------------------------
Cash flows (used in) provided by financing activities:
Borrowings (repayments) under
revolving credit agreements, net .......................... (10,400) (2,400) 70,000
Repayment of industrial revenue bond........................ (6,100) -- --
Repayment of subordinated debenture......................... (4,300) -- --
Repayment of other long-term debt .......................... (800) (5,200) (16,200)
Other notes payable, net ................................... (3,500) 1,700 (23,500)
Issuance of common stock.................................... 3,300 700 1,500
Dividend payments .......................................... (11,100) (10,500) (9,800)
Purchase of treasury stock ................................. (100) (100) (10,800)
--------------------------------------
Net cash (used in) provided by financing activities
of continuing operations................................... (33,000) (15,800) 11,200
--------------------------------------
Net cash provided by (used in) discontinued operations....... 8,200 600 (8,300)
Effect of exchange rates on cash ............................ 2,500 (2,100) (1,900)
--------------------------------------
Net decrease in cash and cash equivalents.................... (8,900) (600) (2,600)
Cash and cash equivalents at beginning of year............... 42,100 42,700 45,300
--------------------------------------
Cash and cash equivalents at end of year .................... $ 33,200 $ 42,100 $ 42,700
--------------------------------------
--------------------------------------
Supplemental cash flow information:
Interest paid, net of amounts capitalized .................. $ 10,600 $ 13,500 $ 12,900
Income taxes (refunded) paid ............................... $ (4,700) $ 5,700 $ 2,100
--------------------------------------
The accompanying notes are an integral part of the financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
Note 1: Summary of Significant Accounting Policies
- --------------------------------------------------
Basis of Presentation: The financial statements are prepared in conformity with
accounting principles generally accepted 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). Investments in affiliated companies in which
ownership exceeds 20% are accounted for on the equity method. Investments in
which ownership is less than 20% are accounted for on the cost method. Material
intercompany transactions and accounts are eliminated in consolidation. Certain
items have been reclassified to conform with current classifications.
Cash and Cash Equivalents: 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.
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. The Company also
engages in hedges of its net investment in foreign operations in order to
minimize the economic exposure to fluctuating foreign exchange rates. Fair value
adjustments for hedges of the net investment in foreign operations are reported
in other comprehensive income as foreign currency translation adjustments and
are released to earnings upon disposal of the investment.
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. Clinical service revenue and related direct
costs are recognized as specific contract terms are fulfilled under the
percentage of completion method. Fees for individual contract clinical services
are fixed upon execution of the contract and provide for payment for all work
performed. 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. 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.
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 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 and Other Intangibles: Effective January 1, 2002, the Company adopted
SFAS No. 142, "Goodwill and Other Intangible Assets." Accordingly, goodwill and
indefinite-lived intangible assets are no longer amortized. Instead, goodwill
and intangible assets with indefinite lives are tested for impairment on at
least an annual basis or more frequently if an event occurs that indicates that
there could be an impairment. The first step of the impairment test compares the
fair value of a reporting unit to its carrying amount, including goodwill. If
the carrying amount of the reporting unit exceeds its fair value, the second
step is performed. The second step compares the carrying amount of the goodwill
to its implied fair value. The implied fair value is determined by allocating
the fair value of the reporting unit to all of the assets and liabilities of
that unit as if the reporting unit had been acquired in a business combination
and the fair value of the reporting unit was the purchase price paid to acquire
the reporting unit. The excess of the fair value of the reporting unit over the
amounts assigned to its assets and liabilities is the implied fair value of
goodwill. If the fair value of the goodwill is less than the carrying amount, an
impairment loss is recorded.
Other intangible assets, including patents and licensed technology, are recorded
at cost and are amortized on a straight-line method over their useful lives. The
Company capitalizes patent application costs and expenses other costs incurred
in patent development.
Tooling: The Company builds tools, molds and dies for certain customers. The
tooling is built and paid for by the Company and reimbursed by the customer
based upon the tooling agreement. Reimbursement is either in lump sum or as
units are produced under long-term supply agreements. At December 31, 2002 and
2001, other noncurrent assets included $5,000 and $4,700, respectively, of
unreimbursed tooling costs. During 2002 and 2001, the Company received
reimbursements of $7,300 and $12,600, respectively.
Impairment of Long-Lived Assets: Long-lived assets including property, plant and
equipment, and intangible assets subject to amortization 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 an asset is considered impaired, an
impairment loss is recorded for the difference between the asset's 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 determines 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 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.
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. Expenditures primarily include salaries and outside
services for those directly involved in research and development activities.
Research and development costs of $21,500 in 2002, $17,800 in 2001 and $17,100
in 2000, were 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 are corporate 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.
The Company did not record compensation cost related to stock option and stock
purchase plans for the years ended 2002, 2001 and 2000, because grants are at
100% of fair market value on the grant date. If the fair value based method
prescribed in SFAS No. 123, "Accounting for Stock-Based Compensation," had been
applied to stock option grants in the most recent three years, the Company's net
income (loss) and basic and diluted net income (loss) per share would have been
reduced as summarized below:
2002 2001 2000
---------------------------------------
Net income (loss), as reported...... $18,400 $(5,200) $ 1,600
Deduct: Total stock-based
compensation expense determined
under fair value based method
for all awards, net of tax........ (1,300) (1,500) (1,100)
---------------------------------------
Pro forma net income (loss)......... $17,100 $(6,700) $ 500
---------------------------------------
---------------------------------------
Net income (loss) per share:
Basic, as reported ................ $ 1.28 $ (0.36) $ 0.11
Basic, pro forma .................. $ 1.19 $ (0.46) $ 0.03
Diluted, as reported............... $ 1.28 $ (0.36) $ 0.11
Diluted, pro forma................. $ 1.19 $ (0.46) $ 0.03
---------------------------------------
Net Income (Loss) Per Share: Basic net income (loss) per share is computed by
dividing net income (loss) by the weighted average number of shares of common
stock outstanding during each period. Net income (loss) 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.
Note 2: Discontinued Operations
- --------------------------------
In December 2002, the Company sold its consumer healthcare research
business located in Indianapolis, Ind. This business unit was previously a part
of the Drug Delivery Systems segment. The sales price, which is subject to a
final working capital adjustment, totaled $2,000, consisting of $1,900 cash and
$100 in escrow. Cash proceeds from the sale were used to repay the Company's
debt. During 2002 but prior to the sale of the business, the Company recorded a
goodwill impairment charge of $600; as a result, there was no gain or loss
recorded on the sale of the business. The results of this business have been
reflected as discontinued operations in the accompanying consolidated financial
statements for all periods presented.
In 2001, the Company sold its contract manufacturing and packaging business
located in Lakewood, N.J. The sales price totaled $29,800, consisting of $28,000
of cash and a $1,800 note due in 2003. The proceeds, excluding $4,300 held in
trust for the repayment of debentures, were used to repay outstanding debt. As a
result of the transaction, the Company recorded a $25,200, net of tax, loss in
2001. The results of this business have been reflected as discontinued
operations in the accompanying consolidated financial statements for all periods
presented.
+
At December 31, 2001, the Company was required to hold $4,300 of the
proceeds from the contract manufacturing and packaging sale in trust for the
payment of debentures that became due and payable upon the sale. These
debentures were repaid in the first quarter of 2002 resulting in a $400, net of
tax, charge that was included in discontinued operations in 2002.
During 2002, the Company recorded a $5,900 tax benefit in income from
discontinued operations. The tax benefit and the related tax refund were
associated with the 2001 disposition of the contract manufacturing and packaging
business and was due to a change in U.S. tax law in 2002 related to loss
disallowance rules.
Net sales and income from discontinued operations were as follows:
2002 2001 2000
-----------------------------------------
Net sales.......................... $5,400 $ 66,000 $ 57,600
-----------------------------------------
Pretax (loss) income
from discontinued operations...... (700) 800 (27,000)
Pretax loss on disposal
of business segment............... - (29,600) -
Income tax benefit................. 6,300 3,900 8,600
-----------------------------------------
Net income (loss) from
discontinued operations........... $5,600 $(24,900) $(18,400)
-----------------------------------------
-----------------------------------------
Assets and liabilities of the discontinued operations included in other
current assets, other assets and other current liabilities were as follows:
2001
--------
Accounts receivable..................... $ 2,300
Property, plant and equipment, net...... 200
Goodwill................................ 1,900
Accounts payable........................ (300)
Accrued expenses........................ (600)
--------
$ 3,500
--------
--------
Net cash provided by (used in) discontinued operations were as follows:
2002 2001 2000
---------------------------------
Operating activities...................... $ 8,300 $1,900 $ 1,300
Property, plant and equipment acquired.... (100) (1,300) (9,600)
---------------------------------
Net cash provided by (used in) discontinued
operations................................ $ 8,200 $ 600 $(8,300)
---------------------------------
---------------------------------
Note 3: Acquisitions and Investments
- ------------------------------------
In September 2002, the Company advanced $1,000 to its 49% owned affiliates
in Mexico in connection with a plant shutdown (see "Affiliated Companies"). The
note is denominated in U.S. dollars at a 4% annual interest rate with repayment
due in three years.
In 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
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, bringing the cumulative investment in this firm to $3,300,
representing an 18.53% ownership interest. In 2002, the firm discontinued
development activities and began marketing the technology for license or sale.
In connection with the change in strategy, the Company determined the fair value
of its investment to be $500, resulting in a $2,800 impairment charge recorded
in 2002 (see "Restructuring Charges").
Note 4: Restructuring Charges
- -----------------------------
The following table details activity related to the Company's restructuring
obligations:
Severance Continuing Discontinued
and benefits Other operations operations Total
----------------------------------- ------------- --------
Balance, December 31, 1999............ $ 100 $ - $ 100 $ - $ 100
----------------------------------- ------------- --------
2000 Restructuring expense ........... 2,800 2,700 5,500 15,300 20,800
Non-cash write-offs .................. - (2,700) (2,700) (13,700) (16,400)
Cash payments......................... (200) - (200) (100) (300)
----------------------------------- -------------- --------
Balance, December 31, 2000............ 2,700 - 2,700 1,500 4,200
----------------------------------- -------------- --------
2001 Restructuring expense (credit)... 4,900 (2,000) 2,900 - 2,900
Non-cash write-offs .................. 200 2,000 2,200 (500) 1,700
Cash payments......................... (5,700) - (5,700) (900) (6,600)
----------------------------------- -------------- --------
Balance, December 31, 2001............ 2,100 - 2,100 100 2,200
----------------------------------- -------------- --------
2002 Restructuring expense ........... 800 9,100 9,900 600 10,500
Non-cash write-offs .................. - (8,600) (8,600) (600) (9,200)
Cash payments......................... (2,100) - (2,100) - (2,100)
----------------------------------- -------------- --------
Balance, December 31, 2002............ $ 800 $ 500 $ 1,300 $ 100 $ 1,400
----------------------------------- -------------- --------
----------------------------------- -------------- --------
In 2002, the Company's continuing operations included a $9,900
restructuring charge connected with the termination of an information systems
implementation project, an impairment of a technology company investment (see
"Acquisitions and Investments"), the closure of a sales office in Korea and
employee terminations at the Nottingham, U.K., drug delivery site. The $800
severance provision covered 19 employee terminations connected with these
actions that were completed in the fourth quarter of 2002. In addition to
severance, the restructuring charge included a $5,800 write-off of construction
in progress, $500 for contract termination fees related to the information
systems project and a $2,800 impairment of the technology company investment.
The Company also recorded a $600 goodwill impairment charge based on an offer to
purchase the consumer healthcare research business (see "Discontinued
Operations").
In 2001, the Company's continuing operations included a net restructuring
charge of $2,900. The charge consisted of a restructuring provision of $4,900
relating to the termination of mid- and senior-level management positions and a
$2,000 adjustment to the carrying value of the plastic device manufacturing
facility held for sale from the 2000 restructuring program. Final terminations
completed under this program totaled 35 positions.
In 2000, the Company's continuing operations included $5,500 of
restructuring charges, principally related to the decision to close and divest a
plastic device manufacturing facility located in Puerto Rico. The charge
consisted of severance and other costs totaling $2,800 and a $2,700 adjustment
to the property, plant and equipment carrying values to reflect the estimated
net realizable value of the facility. Restructuring charges included in
discontinued operations included a $9,200 goodwill write-down to the site
management organization of the clinical services business unit, a $5,000
reduction to the estimated realizable value of assets to be sold in the former
contract manufacturing and packaging business and $1,100 of severance, benefit
and asset disposal costs. Terminations under all 2000 restructuring programs are
complete and totaled 180 positions.
The remaining accrual balances at December 31, 2002, include $800 for labor
claims in South America and post-employment medical obligations, the $500
contract termination fee accrual and $100 of remaining obligations connected to
the formerly owned contract manufacturing and packaging business. The majority
of these obligations will be paid within the next year.
Note 5: Other Income (Expense)
- -------------------------------
2002 2001 2000
---------------------------------
Foreign exchange gains (losses)....... $ 2,300 $ 100 $(1,100)
Loss on sales of equipment
and other assets..................... (600) (600) (1,000)
Other ................................ (100) 500 (200)
---------------------------------
$ 1,600 $ -- $(2,300)
---------------------------------
---------------------------------
In March 2002, the Company's subsidiary in Argentina recorded a pre-tax
foreign currency exchange gain of $1,700 on net assets denominated in non-peso
currencies due to the devaluation of the Argentine peso.
Note 6: Income Taxes
- --------------------
Income before income taxes and minority interests was derived as follows:
2002 2001 2000
---------------------------------
Domestic operations ................ $(8,900) $ 17,400 $ 32,400
International operations............ 26,100 10,500 (3,300)
---------------------------------
$17,200 $ 27,900 $ 29,100
---------------------------------
---------------------------------
The related provision for income taxes consists of:
2002 2001 2000
--------------------------------
Current provision:
Federal ........................... $ (5,600) $ 1,900 $ 2,500
State ............................. (200) 100 100
International ..................... 8,400 5,200 3,300
--------------------------------
2,600 7,200 5,900
--------------------------------
Deferred provision:
Federal ........................... (800) 3,300 5,500
International ..................... 2,300 (1,900) (1,300)
--------------------------------
1,500 1,400 4,200
--------------------------------
Provision for income taxes.......... $ 4,100 $ 8,600 $10,100
--------------------------------
--------------------------------
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:
2002 2001 2000
-----------------------------
Statutory corporate tax rate ............. 35.0% 35.0% 35.0%
Tax on international operations (less than)
in excess of United States tax rate..... (3.8) (6.4) 1.3
Restructuring ............................ 5.8 (2.1) 4.6
German tax reorganization................. -- -- (5.2)
Foreign exchange gain..................... 2.0 -- --
Loss disallowance adjustment.............. (14.4) -- --
United States tax on repatriated
foreign earnings ........................ 1.6 .8 1.3
State income taxes, net
of federal tax benefit .................. (1.3) .5 .3
Other .................................... (.9) 2.9 (2.6)
-----------------------------
Effective tax rate ....................... 24.0% 30.7% 34.7%
-----------------------------
-----------------------------
In the third quarter of 2002, the Company recorded a tax benefit associated
with the 2001 disposition of its contract manufacturing and packaging business
and the shutdown of a plastic device manufacturing facility. Of the total
benefit, $5,900 was recorded in discontinued operations and $2,400 was reflected
in continuing operations. The tax benefit and the related tax refund were a
result of a change in U.S. tax law in 2002 related to loss disallowance rules.
Results for 2000 include a $1,500 tax benefit realized upon the favorable
resolution of tax issues connected to the 1997 reorganization of the Company's
German subsidiaries.
The net current and noncurrent components of deferred income taxes
recognized in the balance sheet at December 31 are as follows:
2002 2001
-------------------------
Current assets.............................. $ 5,200 $ 2,400
Noncurrent assets........................... 27,600 21,400
Current liabilities......................... (2,400) (1,600)
Noncurrent liabilities...................... (56,200) (46,800)
---------------------------
$(25,800) $(24,600)
---------------------------
---------------------------
The following is a summary of the significant components of the Company's
deferred tax assets and liabilities as of December 31:
2002 2001
-------------------------
Deferred tax assets:
Severance and deferred compensation ....... $ 8,800 $ 6,700
Net operating loss carryforwards........... 6,400 11,900
Foreign tax credit carryforwards........... 5,800 1,500
Restructuring charges...................... 2,100 2,100
Capital loss carryforwards................. 1,100 --
Other ..................................... 8,200 9,200
Valuation allowance ....................... (9,800) (10,700)
-------------------------
Total deferred tax assets................... $ 22,600 $ 20,700
-------------------------
Deferred tax liabilities:
Accelerated depreciation .................. $ 24,700 $ 25,900
Severance and deferred compensation........ 19,700 18,200
Other ..................................... 4,000 1,200
-------------------------
Total deferred tax liabilities.............. $ 48,400 $ 45,300
-------------------------
Total deferred taxes........................ $(25,800) $(24,600)
-------------------------
-------------------------
At December 31, 2002, subsidiaries had state and foreign operating tax loss
carryforwards of $78,100 and $25,100, respectively. These loss carryforwards are
available to apply against the future taxable income of the subsidiaries.
Management estimates that of the total state and foreign operating tax loss
carryforwards, $66,100 and $10,800, respectively, are unlikely to be utilized
and therefore have been fully reserved. State loss carryforwards expire as
follows: $2,300 in 2003, $5,200 in 2005, $4,300 in 2007 and $66,300 after 2007.
Foreign loss carryforwards will expire as follows: $300 in 2004, $14,200 in 2005
and $10,600 has no expiration date.
At December 31, 2002, undistributed earnings of foreign subsidiaries, on
which deferred income taxes have not been provided, amounted to $148,900. 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, 2002, the
Company had available foreign tax credit carryforwards of approximately $5,800
expiring as follows: $300 in 2003, $300 in 2004, $400 in 2005, $300 in 2006 and
$4,500 in 2007. Based upon current estimates, management estimates that
approximately $3,300 may not be utilized and therefore has been fully reserved
for.
The Internal Revenue Service (IRS) has completed and closed its audits of
the Company's U.S. tax returns through 1997. The IRS is currently conducting
audits of the 1998 and 1999 tax returns.
Note 7: Segment Information
- ---------------------------
The Company's operations are comprised of two reportable 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. The Pharmaceutical Systems segment is composed of two regional
operating segments (the Americas and Europe/Asia) which have been aggregated.
These operating segments manufacture and sell similar products in their
respective regions. The Drug Delivery Systems segment consists of a research and
development unit concentrating on the commercialization of the Company's
patented drug delivery technologies, and a clinical services unit that conducts
Phase I through IV clinical trials. The Company has aggregated these two
operating segments into a single reportable segment as neither meets the
quantitative thresholds for a reportable segment, and they meet the majority of
the aggregation criteria.
The Company's executive management evaluates the performance of these
operating segments based on operating profit and cash flow generation. Certain
costs, including rent, information services and human resource functions
previously reported as Corporate expenses, have been allocated to the respective
segment that they support. All prior periods have been restated to reflect these
allocations. General Corporate expenses, restructuring charges and other unusual
items, are not reflected in operating profit reviewed by segment management.
Corporate segment assets include pension assets, investments in affiliated
companies and net assets of discontinued operations. The accounting policies of
the segments are the same as those described in the summary of significant
accounting policies.
The following table provides summarized financial information for the
Company's segments:
Pharmaceutical Drug Delivery
Systems Systems Corporate Consolidated
---------------------------------------------------------------
2002
- ----
Net sales................... $412,800 $ 6,900 $ -- $419,700
Operating profit (loss)..... 65,400 (15,100) (23,600) 26,700
Segment assets.............. 405,400 16,800 114,600 536,800
Capital expenditures........ 31,600 1,700 4,400 37,700
Depreciation and
amortization expense....... 28,700 1,800 2,500 33,000
2001
- ----
Net sales................... $376,400 $ 15,900 $ -- $392,300
Operating profit (loss)..... 55,200 (4,300) (11,000) 39,900
Segment assets.............. 375,800 19,800 115,700 511,300
Capital expenditures........ 39,400 1,200 4,600 45,200
Depreciation and
amortization expense....... 27,300 1,800 2,800 31,900
2000
- ----
Net sales................... $362,900 $ 9,600 $ -- $372,500
Operating profit (loss)..... 55,800 (9,800) (5,800) 40,200
Segment assets.............. 360,000 18,800 178,600 557,400
Capital expenditures........ 44,900 800 2,000 47,700
Depreciation and
amortization expense....... 25,400 1,900 2,900 30,200
The following tables provide information on sales by significant product
groups:
Sales by product group 2002 2001 2000
-------- -------- --------
Pharmaceutical packaging...... $291,400 $262,200 $236,100
Medical devices............... 85,900 83,900 91,100
Personal care/food packaging.. 30,300 26,900 27,400
Laboratory & other services... 5,200 3,400 8,300
-------- -------- --------
Pharmaceutical Systems....... $412,800 $376,400 $362,900
Clinical services............. 5,300 7,800 7,800
Development/licensing revenue. 1,600 8,100 1,800
-------- -------- --------
Drug Delivery Systems........ $ 6,900 $ 15,900 $ 9,600
-------- -------- --------
Net sales..................... $419,700 $392,300 $372,500
-------- -------- --------
-------- -------- --------
The Pharmaceutical Systems segment includes sales to one customer of
approximately $54,600, $50,600 and $55,200 in 2002, 2001 and 2000, respectively.
The following table presents sales by the country in which the legal
subsidiary is domiciled and assets are located. Long-lived assets include
property, plant and equipment, patents and licensed technology.
Sales Long-lived assets
---------------------------------------------------------------
2002 2001 2000 2002 2001 2000
-------- -------- -------- -------- -------- --------
United States .......... $225,000 $218,300 $209,300 $111,300 $118,700 $115,400
Germany ................ 45,200 36,600 37,200 38,700 29,200 26,700
Other European countries 115,300 103,400 92,300 64,700 52,500 50,200
Other .................. 34,200 34,000 33,700 15,900 17,300 17,600
-------- -------- -------- -------- -------- --------
$419,700 $392,300 $372,500 $230,600 $217,700 $209,900
-------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- --------
Note 8: Net Income (Loss) Per Share
- -----------------------------------
The following table reconciles shares used in the calculation of basic net
income (loss) per share to the shares used in the calculation of net income
(loss) per share assuming dilution. There is no adjustment to the net income
(loss) of the Company in the calculation of net income (loss) per share assuming
dilution.
2002 2001 2000
-----------------------------------
Income from continuing operations.......... $12,800 $19,700 $20,000
Discontinued operations, net of tax........ 5,600 (24,900) (18,400)
-----------------------------------
Net income (loss).......................... $18,400 $(5,200) $ 1,600
-----------------------------------
Average common shares outstanding ......... 14,434 14,336 14,407
Assumed stock options
exercised and awards vested............... - 12 2
-----------------------------------
Average shares assuming dilution .......... 14,434 14,348 14,409
-----------------------------------
Note 9: Comprehensive Income (Loss)
- -----------------------------------
Comprehensive income (loss) consists of reported net income (loss) and
other comprehensive income (loss), which reflects revenue, expenses and gains
and losses which generally accepted accounting principles exclude from net
income (loss). For the Company, the items excluded from current net income
(loss) are cumulative foreign currency translation adjustments, unrealized gains
or losses on available-for-sale securities of affiliates, fair value adjustments
on derivative financial instruments and additional minimum pension liability
adjustments.
The components of accumulated other comprehensive income (loss) are as
follows:
2002 2001
--------------------------
Foreign currency translation................... $ (7,500) $ (24,000)
Unrealized gains (losses)
on securities of affiliates................... (300) --
Minimum pension liability...................... (5,400) (3,100)
Derivative financial instruments............... (200) (300)
--------------------------
$ (13,400) $ (27,400)
--------------------------
--------------------------
Note 10: Inventories
- --------------------
2002 2001
--------------------
Finished goods............. $18,900 $15,700
Work in process............ 7,400 6,300
Raw materials.............. 15,000 12,300
--------------------
$41,300 $34,300
--------------------
--------------------
Included in the amounts above are inventories located in the United States
that are valued on the LIFO basis, amounting to $15,200 and $12,300 at December
31, 2002 and 2001, respectively, which are approximately $7,100 and $6,900,
respectively, lower than replacement value.
Note 11: Goodwill and Intangibles
- ---------------------------------
Effective January 1, 2002, the Company adopted SFAS No. 142, "Goodwill and
Other Intangible Assets." SFAS 142 eliminated the previous requirement to
amortize goodwill and indefinite-lived intangible assets. Instead, goodwill and
intangible assets with indefinite lives are tested for impairment on at least an
annual basis or more frequently if an event occurs that indicates that there
could be an impairment.
The Company performed an impairment test of its goodwill at adoption and
determined that no impairment of the recorded goodwill existed. The Company has
since performed the annual impairment test required by SFAS 142 and determined
that there is no impairment. As required by the statement, the Company did not
record amortization expense for goodwill in 2002 as compared to the $1,200, net
of tax, recorded in 2001 and 2000.
The goodwill balance as of December 31, 2002, was $35,500 compared to
$30,700 as of December 31, 2001. The increase in the balance is due solely to
foreign currency translation adjustments.
The goodwill balance as of December 31, 2001, excludes $1,900 of goodwill
related to the consumer healthcare research business. This business was sold in
December 2002, therefore goodwill has been included in non-current assets held
for sale. In September 2002, the Company recorded a $600 goodwill impairment
charge, included in discontinued operations, based on a third party offer to
purchase the business. Upon the final sale in December 2002, the remaining
goodwill balance of $1,300 was included in the disposal.
Goodwill by reportable segment as of December 31, 2002 and 2001, was as
follows:
2002 2001
-------- --------
Pharmaceutical Systems $ 33,500 $ 28,700
Drug Delivery Systems 2,000 2,000
-------- --------
$ 35,500 $ 30,700
-------- --------
-------- --------
The following table reconciles the reported net income (loss) and earnings
(loss) per share to that which would have resulted had the non-amortization
provisions of SFAS 142 been applied to the periods ended December 31, 2001 and
2000:
2001 2000
--------- ---------
As reported
Income from continuing operations $ 19,700 $ 20,000
Discontinued operations (24,900) (18,400)
--------- ---------
Net (loss) income $ (5,200) $ 1,600
Goodwill amortization, net of tax 1,200 1,200
--------- ---------
As adjusted $ (4,000) $ 2,800
--------- ---------
--------- ---------
As reported basic earnings (loss) per share
Continuing operations $ 1.38 $ 1.39
Discontinued operations (1.74) (1.28)
--------- ---------
$ (0.36) $ 0.11
--------- ---------
--------- ---------
As adjusted $ (0.28) $ 0.19
--------- ---------
--------- ---------
As reported diluted earnings (loss) per share
Continuing operations $ 1.37 $ 1.39
Discontinued operations (1.73) (1.28)
--------- ---------
$ (0.36) $ 0.11
--------- ---------
--------- ---------
As adjusted $ (0.28) $ 0.19
--------- ---------
--------- ---------
The cost and respective accumulated amortization for the Company's patents,
was $11,400 and $4,100, respectively, as of December 31, 2002, and $10,900 and
$3,300, respectively, as of December 31, 2001. The cost basis of patents
includes the effects of foreign currency translation adjustments. There were no
intangibles purchased or acquired during 2002. The weighted average life of
patents purchased or acquired in 2001 and 2000 was 17 years and 15 years,
respectively. Amortization expense for the years ended December 31, 2002, 2001,
and 2000 was $800, $600 and $700, respectively. Estimated amortization for each
of the next five years is approximately $700 per year.
Note 12: 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 2002 2001
----------------------------------------
Land ........................... $ 3,000 $ 2,700
Buildings and improvements...... 5-50 120,100 105,700
Machinery and equipment ........ 2-15 301,900 272,900
Molds and dies ................. 2-7 56,900 54,600
Construction in progress........ 17,700 22,900
----------------------------------------
$499,600 $458,800
----------------------------------------
----------------------------------------
Note 13: Affiliated Companies
- ------------------------------
At December 31, 2002, the following affiliated companies were accounted for
under the equity method:
Ownership
Location interest
---------------------------------------
West Pharmaceutical
Services Mexico, S.A. de C.V... Mexico 49%
Aluplast S.A. de C.V. ......... Mexico 49%
Pharma-Tap S.A. de C.V. ....... Mexico 49%
Daikyo Seiko, Ltd. ............ Japan 25%
---------------------------------------
The Company records equity in net income (loss) of affiliated companies for
the period ended October 31.
A summary of the financial information for these companies is presented
below:
2002 2001
------------------------
Balance Sheets:
Current assets ................................ $ 80,100 $ 86,200
Noncurrent assets ............................. 126,200 136,900
------------------------
Total assets ................................ $206,300 $223,100
------------------------
------------------------
Current liabilities ........................... $ 62,400 $ 64,900
Noncurrent liabilities ........................ 80,100 93,400
Owners' equity ................................ 63,800 64,800
------------------------
Total liabilities and owners' equity......... $206,300 $223,100
------------------------
------------------------
2002 2001 2000
-----------------------------------
Income Statements:
Net sales ............................... $81,800 $81,500 $87,200
Gross profit ............................ 18,100 18,500 21,800
Net income .............................. 1,200 2,500 4,800
-----------------------------------
During 2002, the Company's Mexican affiliates recorded a restructuring
charge related to the consolidation of two of its rubber molding operations.
Equity in net income (loss) of affiliated companies includes $800 related to
this restructuring. The amount represents severance charges for approximately
114 employees. As of December 31, 2002, all employees have been terminated and
all related payments have been made.
In connection with the plant consolidation, the Company advanced $1,000 to
its Mexican affiliate. The note, which is denominated in U.S. dollars, is at a
4% interest rate and is due in 2005.
Unremitted income of affiliated companies included in consolidated retained
earnings amounted to $12,700, $12,900 and $12,600 at December 31, 2002, 2001 and
2000, respectively. Dividends received from affiliated companies were $100 in
2002, $200 in 2001 and $200 in 2000.
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 $(300),
$0 and $100 at December 31, 2002, 2001 and 2000, respectively. The unrealized
losses in 2002, 2001 and 2000 are net of income tax benefits of $200, $100 and
$500, respectively.
Company purchases and royalty payments to affiliates totaled approximately
$11,500 and $12,600, respectively, in 2002 and 2001, of which $1,800 and $400
was due and payable as of December 31, 2002 and 2001, respectively. These
transactions primarily relate to a non-exclusive distributorship agreement
allowing the Company to purchase and re-sell Daikyo products. Sales to
affiliates were $1,000 and $500, respectively, in 2002 and 2001, of which $200
and $0 were receivable as of December 31, 2002 and 2001.
Note 14: 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
-----------------------------------------------------------------------
2002 2001 2000 2002 2001 2000
-----------------------------------------------------------------------
Service cost ............... $ 3,300 $ 3,500 $ 3,400 $ 400 $ 300 $ 300
Interest cost .............. 9,700 9,600 9,200 600 600 500
Expected return
on assets ................ (16,000) (19,100) (21,300) -- -- --
Amortization of
unrecognized
transition asset.......... (700) (700) (700) -- -- --
Amortization of
prior service cost......... 600 500 500 (1,400) (1,400) (1,500)
Recognized actuarial
losses (gains)............. 100 (1,900) (5,100) -- (100) (100)
-----------------------------------------------------------------------
Pension (income) ........... $ (3,000) $ (8,100) $(14,000) $ (400) $ (600) $ (800)
-----------------------------------------------------------------------
-----------------------------------------------------------------------
The following tables provide a reconciliation of the benefit obligation,
plan assets and funded status of the plans:
Other
Pension benefits retirement benefits
-----------------------------------------------------
2002 2001 2002 2001
-----------------------------------------------------
Change in benefit obligation:
Benefit obligation,
January 1 .................... $(141,900) $(132,000) $ (8,100) $ (7,200)
Service cost .................. (3,300) (3,500) (400) (300)
Interest cost ................. (9,700) (9,600) (600) (600)
Participants' contributions.... (300) (300) (300) (200)
Actuarial loss................. (13,300) (5,200) (900) (400)
Amendments/transfers in ....... (2,400) (400) (500) --
Benefits/expenses paid ........ 8,800 10,000 700 600
Curtailment loss .............. -- (1,300) -- --
Foreign currency translation... (2,000) 400 -- --
Benefit obligation, -----------------------------------------------------
December 31 .................. $(164,100) $(141,900) $(10,100) $ (8,100)
-----------------------------------------------------
Change in plan assets:
Fair value of
assets, January 1 ............ $ 173,700 $ 206,600 $ -- $ --
Actual return
on assets .................... (24,800) (23,700) -- --
Employer contribution ......... 1,000 800 400 400
Participants' contributions.... 300 300 300 200
Benefits/expenses paid ........ (8,800) (10,000) (700) (600)
Foreign currency translation... 800 (300) -- --
-----------------------------------------------------
Fair value of plan
assets, December 31 .......... $ 142,200 $ 173,700 $ -- $ --
-----------------------------------------------------
Funded status:
Assets (less than)
in excess benefits............ $ (21,900) $ 31,800 $(10,100) $ (8,100)
Unrecognized net
actuarial loss (gain)......... 60,800 6,200 (200) (1,100)
Unrecognized
transition asset ............. 1,200 400 -- --
Unrecognized
prior service cost............ 5,200 3,300 800 (1,100)
-----------------------------------------------------
$ 45,300 $ 41,700 $ (9,500) $(10,300)
-----------------------------------------------------
December 31:
Prepaid asset.................. $ 53,000 $ 48,300 $ -- $ --
Other long-term liabilities.... (17,200) (11,200) (9,500) (10,300)
Accumulated other
comprehensive income.......... 7,800 4,400 -- --
Other intangibles.............. 1,700 200 -- --
----------------------------------------------------
$ 45,300 $ 41,700 $ (9,500) $(10,300)
----------------------------------------------------
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 $1,300.
The aggregate projected benefit obligation and aggregate fair value of plan
assets for pension plans with obligations in excess of plan assets were $164,100
and $142,200, respectively, as of December 31, 2002, and $19,600 and $8,100,
respectively, as of December 31, 2001. Weighted average assumptions as of
December 31 are as follows:
Other retirement
Pension benefits benefits
-----------------------------------------
2002 2001 2002 2001
-----------------------------------------
Discount rate .............. 6.4% 7.1% 6.5% 7.3%
Rate of compensation
increase .................. 4.8% 5.0% -- --
Long-term rate of
return on assets .......... 8.9% 9.4% -- --
-----------------------------------------
The assumed healthcare cost trend used is 6.5% for all participants in
2002, decreasing to 5.5% by 2005. Increasing or decreasing the assumed trend
rate for healthcare costs by one percentage point would result in a $500
increase or decrease, respectively, in the accumulated benefit obligation. The
related change in the aggregate service and interest cost components of the 2002
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 2002, 2001 and 2000.
Note 15: Debt
- -------------
Short-Term: Notes payable in the amounts of $4,100 and $4,400 at December
31, 2002 and 2001, respectively, are payable within one year and bear interest
at a weighted average interest rate of 5% and 4%, respectively.
Long-Term:
At December 31, 2002 2001
--------------------------
Unsecured:
Senior notes due 2009 (6.81%).................. $100,000 $100,000
Revolving credit facility, due 2005 (3.4%)..... 59,200 67,600
Tax-exempt industrial revenue bonds,
due 2005 (1.77%).............................. -- 6,100
Subordinated debentures, due 2002 (6.50%)....... -- 3,700
Other notes, due 2003 (6.8% to 9.2%)............ 11,700 11,200
--------------------------
Total long-term debt ........................... 170,900 188,600
Less current portion ........................... 11,700 4,300
--------------------------
$159,200 $184,300
--------------------------
--------------------------
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 multi-currency revolving credit
agreement. The credit agreement consisted of a $70,000, five-year revolving
credit facility and a $65,000, 364-day line of credit. In July 2002 and 2001,
the 364-day line of credit was renewed at $44,500, making the total available
line $114,500 at December 31, 2002 and 2001. Interest on these facilities is
charged at the applicable 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, 2002
and 2001, the Company had borrowed $59,200 and $44,500, respectively, directly
under the five-year facility. These borrowings were recorded as long-term debt.
Notes payable of $23,100 under uncommitted facilities were also classified as
long-term debt as of December 31, 2001, as the Company had 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 debentures were reflected in the balance sheet net of a $600
unamortized discount. These debentures were repaid during 2002 (see
"Discontinued Operations").
During 2002, the Company repaid the $6,100 industrial revenue bonds. The
bonds, which were not due until 2005, were repaid early. At issuance of the
bonds, proceeds that were not required for the respective construction projects
were invested by the Company. The excess funds and earnings were restricted to
servicing the debt.
Long-term debt maturing in the years following 2003 is: $0 in 2004, $59,200
in 2005, $0 in 2006, $0 in 2007 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 2002, 2001 and 2000 were $11,300, $14,300
and $13,900, respectively, of which $700, $800 and $800, respectively, were
capitalized as part of the cost of acquiring certain assets.
Interest expense, net in 2002, 2001, and 2000, included interest income of
$1,100, $1,500 and $2,000, respectively.
At December 31, 2002, 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
contract, 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 $300 in 2002 and $200 in both 2001 and
2000.
Note 16: 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) 2002 2001 2002 2001
- ----------------- --------------------------------------------------------
Cash and cash equivalents ... $ 33,200 $ 42,100 $ 33,200 $ 42,100
Short- and long-term debt ... (175,000) (193,000) (175,500) (187,500)
Interest rate swaps.......... (200) (300) (200) (300)
Forward exchange contracts(a) -- -- -- --
--------------------------------------------------------
(a) The estimated fair value of forward exchange contracts was less than $100 at
December 31, 2002 and 2001.
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 its hedging designation. At the 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, 2002.
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, 2002, unrealized losses of $100, net of
tax, were recorded to other comprehensive income and $200, net of tax, was
reclassified from other comprehensive income to the statement of income
(interest expense). As of December 31, 2002, net losses on derivatives of $200
were included in accumulated other comprehensive income. The remaining balance
will be reclassified to the statement of income during 2003 as the swap expires
in October 2003.
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.
In 2002, the Company entered into an arrangement to hedge the net
investment in a foreign operation. The Company's strategy was to minimize the
exposure to foreign currency fluctuations by employing borrowings in the
functional currency of the foreign operation to hedge the net assets denominated
in the operation's functional currency. The 10,000 British Pound Sterling
borrowed under the Company's five-year long-term revolving credit facility has
been designated as a hedge of the Company's investment in its U.K. subsidiaries.
As of December 31, 2002, a $1,500 loss is included in the cumulative foreign
currency translation adjustment related to this hedge.
Note 17: Capital Stock
- ----------------------
Purchases (sales) of common stock held in treasury during the three years
ended December 31, 2002, are as follows:
2002 2001 2000
---------------------------------------------
Shares held, January 1....... 2,821,300 2,854,800 2,501,400
Purchases ................... 2,900 2,400 402,100
Stock option exercises ...... (121,400) (35,900) (48,700)
Donation of shares........... (18,100) -- --
---------------------------------------------
Shares held, December 31 .... 2,684,700 2,821,300 2,854,800
---------------------------------------------
---------------------------------------------
In April 2002, the Company's Board of Directors authorized the donation of
up to 40,000 shares of the Company's stock over the next three years to a
related party charitable organization. During 2002, the Company donated 18,100
shares held in treasury to this organization.
In 2000, the Company established 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 2,900 shares in 2002 and 2,400 shares annually in both 2001 and 2000. As of
December 31, 2002, there were 7,700 shares of the Company's stock held by the
plan.
In 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. The Company has not acquired any shares under
this plan in 2001 and 2002. Cumulative purchases under the plan total 930,500
shares.
The Company maintains 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 plan expires on December 31, 2006. An employee's
purchases are limited annually to 10% of base compensation. Shares are purchased
in the open market.
Note 18: 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, 2002, there were 331,000 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:
2002 2001 2000
--------------------------------------------
Options outstanding,
January 1 ........... 1,865,200 1,667,000 1,059,600
Granted .............. 316,000 360,000 820,000
Exercised ............ (134,600) (59,700) (47,800)
Forfeited ............ (18,700) (102,100) (164,800)
--------------------------------------------
Options outstanding,
December 31 ......... 2,027,900 1,865,200 1,667,000
Options exercisable,
December 31 ......... 1,393,900 1,020,700 751,300
---------------------------------------------
---------------------------------------------
Weighted Average
Exercise Price
2002 2001 2000
---------------------------------------------
Options outstanding,
January 1 ........... $27.65 $27.86 $29.15
Granted .............. 28.35 26.02 25.98
Exercised ............ 27.20 22.26 24.56
Forfeited ............ 28.74 28.50 28.32
---------------------------------------------
Options outstanding,
December 31 ....... $27.78 $27.65 $27.86
Options exercisable,
December 31 ....... $28.04 $28.77 $29.41
---------------------------------------------
---------------------------------------------
The range of exercise prices at December 31, 2002, was $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 receive 25% of the value of their bonus, after certain adjustments
for taxes payable, in shares of the Company's common stock at current fair
market value. Bonus participants are given a restricted stock award equal to one
share for each four shares of common stock issued with bonus awards. The
restricted 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 4,100 shares in 2002 and 4,500 shares in
2000. Restricted stock forfeitures of 700 shares, 1,300 shares and 1,500 shares
occurred in 2002, 2001 and 2000, respectively. Compensation expense is
recognized over the vesting period based on the fair market value of common
stock on the award date: $28.83 per share in 2002 and $26.06 per share in 2000.
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 made 125,000 shares
available for future grants to plan participants. Options granted under the new
plan vest over a three-year period. At December 31, 2002, 47,000 options remain
available for future grants. The Company's former plan was terminated in 1999
and no future grants will be made under that plan; 12,000 options granted under
the former plan remain outstanding at December 31, 2002. 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:
2002 2001 2000
--------------------------------------------------
Options outstanding,
January 1 ......... 66,000 79,500 96,000
Granted ............ 37,500 -- --
Exercised........... (3,000) (6,000) (3,000)
Forfeited........... (10,500) (7,500) (13,500)
--------------------------------------------------
Options outstanding,
December 31 ....... 90,000 66,000 79,500
Options exercisable,
December 31 ....... 52,500 52,500 49,500
--------------------------------------------------
--------------------------------------------------
Weighted Average
Exercise Price
2002 2001 2000
--------------------------------------------------
Options outstanding,
January 1 ......... $31.55 $30.62 $30.04
Granted ............ 27.89 -- --
Exercised .......... 28.13 22.69 22.69
Forfeited........... 28.50 28.78 28.25
--------------------------------------------------
Options outstanding,
December 31 ....... $30.50 $31.55 $30.62
Options exercisable,
December 31 ....... $32.36 $31.22 $29.27
--------------------------------------------------
--------------------------------------------------
The range of exercise prices at December 31, 2002, was $25.73 to $32.84 per
share.
Stock options outstanding under all plans totaled 2,117,900 at December 31,
2002. The weighted average remaining contractual life at December 31, 2002, for
all plans is 5.4 years. For 2002, 2001 and 2000, stock options of 2,117,900,
862,700 and 1,677,000, respectively, were excluded from the computation of
diluted earnings per share due to their antidilutive effect.
The weighted average fair value per option granted in 2002, 2001 and 2000
using the Black-Scholes option-pricing model, was $5.04, $4.95 and $6.47,
respectively. The following assumptions were used to compute the fair value of
the option grants in 2002, 2001 and 2000: a risk-free interest rate of 3.3%,
4.4% and 6.0%, respectively; stock volatility of 26.8%, 23.1% and 23.2%,
respectively; and dividend yields of 4.4%, 3.0% and 2.8%, respectively. Expected
lives averaged 6 years for options granted in 2002, 5 years for options granted
in 2001 and 6 years for options granted in 2000 under the key management
employee plan.
Note 19: Commitments and Contingencies
- --------------------------------------
At December 31, 2002, the Company was obligated under various operating
lease agreements with terms ranging from one month to 20 years. Rental expense
in 2002, 2001 and 2000 was $6,500, $6,300 and $6,200, respectively. Minimum
rentals for noncancelable operating leases with initial or remaining terms in
excess of one year are: 2003-$6,400; 2004-$6,000; 2005-$5,600; 2006-$5,000;
2007-$5,300 and thereafter $30,100. Minimum operating lease payments have been
reduced by related minimum sublease income.
At December 31, 2002, outstanding unconditional contractual commitments for
the purchase of equipment and raw materials amounted to $4,900, all of which is
due to be paid in 2003.
The Company has accrued the undiscounted estimated cost of environmental
compliance expenses related to soil or groundwater contamination at current and
former manufacturing facilities. In 2002, the Company reduced its accrued
liability by $400 to reflect the acceptance of finalized remediation plans by
relevant state regulatory authorities at two sites. Based on consultants'
estimates of the costs of remediation in accordance with applicable regulatory
requirements, the Company believes the accrued liability of $900, included in
other current liabilities at December 31, 2002, is sufficient to cover the
future costs of these remedial actions, which are expected to be carried out
over the next several years. The Company has not anticipated any possible
recovery from insurance or other sources.
At December 31, 2002, the Company had outstanding letters of credit of
$500. The letters of credit act as a guarantee of payment to certain third
parties in accordance with specified terms and conditions.
Note 20: New Accounting Standards
- --------------------------------
In July 2002, the Financial Accounting Standards Board (FASB) issued SFAS
No. 146, "Accounting for Costs Associated with Exit or Disposal Activities."
SFAS 146 requires that a liability for costs associated with a disposal
activity, including those related to employee termination benefits, be
recognized when the liability is incurred, and not necessarily at the date of an
entity's commitment to an exit plan as had been the practice under the prior
accounting guidance. The Company adopted SFAS 146 on January 1, 2003.
In November 2002, FASB Interpretation No. 45, "Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others" (FIN 45) was issued. FIN 45 elaborates on the
disclosures to be made by a guarantor about its obligations under certain
guarantees that it has issued. The disclosure requirements of FIN 45 are
effective for financial statements ending after December 15, 2002. FIN 45 also
clarifies that a guarantor is required to recognize, at the inception of a
guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee. The recognition provisions apply on a prospective basis
to guarantees issued or modified after December 31, 2002. The Company believes
that FIN 45 will not have a material effect on its consolidated financial
position or results of operations.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure." This statement provides alternative
methods of transition for an entity that voluntarily changes to the fair value
based method of accounting for stock-based employee compensation. It also amends
the disclosure provisions for entities that retain the 'intrinsic value' method
of accounting. The Company intends to continue the intrinsic value method of
accounting. The Company will disclose the pro-forma effect on net income and
earnings per share of applying the fair value method to all stock-based
compensation awards in the notes to its interim and annual financial statements
as required by the statement.
Note 21: Subsequent Event
- -------------------------
On January 29, 2003, an explosion and fire occurred at the Company's
Kinston, N.C., plant. Six people lost their lives and many others were injured
in the accident, which caused substantial damage to the building, machinery,
equipment and inventories. The Company is aggressively implementing a
manufacturing recovery plan to restore production to pre-accident levels
utilizing resources and capacity at other plant locations, as well as selected
third-party vendors. Management is also working with customers and the Food and
Drug Administration to satisfy critical product requirements while minimizing
the effects on customers' production plans and inventories.
At this time, the Company has identified items associated with the Kinston
accident that are likely to have financial implications and has estimated
certain of those items. Management expects that, as a result of capacity
limitations, up to $5 million of sales that would otherwise have occurred in the
first and second quarters of 2003 will be delayed, but that the revenue is
substantially recoverable in the second half of the year. The Company maintains
business interruption insurance under which it expects to recover lost profits
attributable to lost sales or additional costs associated with the recovery
plan.
The Company currently expects to incur pre-tax costs of between $4.0
million and $6.0 million, net of insurance recoveries during the first half of
2003. The estimated costs are for retained risk, or deductibles, under
applicable insurance policies, for costs not normally or fully compensable by
insurance, and the cost of reinstating or replacing insurance coverage in the
wake of the loss. Management is confident that, except for these costs, the
property and business interruption losses are fully insured.
The Company is not able at this time to estimate the ultimate impact of any
liability claims and related costs that may arise as a result of the accident.
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, 2002, have
been prepared in conformity with accounting principles generally accepted in the
United States of America and that information presented in this Annual Report is
consistent with those statements. In preparing the financial statements,
management makes informed judgments 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 judgments 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/ Donald E. Morel, Jr., Ph.D.
- -------------------------------------
Donald E. Morel, Jr., Ph.D.
President 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, of comprehensive income, of
shareholders' equity and of cash flows present fairly, in all material respects,
the financial position of West Pharmaceutical Services, Inc. and its
subsidiaries at December 31, 2002 and 2001, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 2002, 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 Note 1 to the Consolidated Financial Statements, the
Company adopted Statement of Financial Accounting Standards No. 142, "Goodwill
and Other Intangible Assets" in 2002 and Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities," as amended, and
Financial Accounting Standards No.144, "Accounting for Impairment or Disposal of
Long-Lived Assets," in 2001.
/s/ PricewaterhouseCoopers LLP
- ------------------------------
PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
March 3, 2003
Five-Year Summary
West Pharmaceutical Services, Inc. and Subsidiaries
(in thousands of dollars, except per share data)
2002 2001 2000
-----------------------------------------
SUMMARY OF OPERATIONS
Net sales ................................................. $ 419,700 392,300 372,500
Operating profit .......................................... $ 26,700 39,900 40,200
Income from continuing operations ......................... $ 12,800 19,700 20,000
Income (loss) from discontinued operations................. $ 5,600 (24,900) (18,400)
-----------------------------------------
Net income (loss).......................................... $ 18,400 (5,200) 1,600
-----------------------------------------
Income per share from continuing operations:
Basic (a) ................................................ $ .89 1.38 1.39
Assuming dilution (b) .................................... $ .89 1.37 1.39
Income (loss) per share from discontinued operations:
Basic (a) ................................................ $ .39 (1.74) (1.28)
Assuming dilution (b) .................................... $ .39 (1.73) (1.28)
Average common shares outstanding ......................... 14,434 14,336 14,407
Average shares assuming dilution .......................... 14,434 14,348 14,409
Dividends paid per common share ........................... $ .77 .73 .69
-----------------------------------------
Research, development and engineering expenses ............ $ 21,500 17,800 17,100
Capital expenditures ...................................... $ 37,700 45,200 47,700
-----------------------------------------
YEAR-END FINANCIAL POSITION
Working capital ........................................... $ 73,600 83,200 93,800
Total assets .............................................. $ 536,800 511,300 557,400
Total invested capital:
Total debt ............................................... $ 175,000 193,000 199,400
Minority interests ....................................... $ -- -- 1,000
Shareholders' equity ..................................... $ 201,500 176,800 204,800
-----------------------------------------
Total invested capital..................................... $ 376,500 369,800 405,200
-----------------------------------------
PERFORMANCE MEASUREMENTS
Gross margin (c) .......................................... % 28.0 29.3 28.9
Operating profitability (d) ............................... % 6.4 10.2 10.8
Tax rate .................................................. % 24.0 30.7 34.7
Asset turnover ratio (e) .................................. .80 .73 .67
Return on average shareholders' equity .................... % 9.8 (2.7) .7
Total debt as a percentage of total invested capital ...... % 46.5 52.2 49.2
-----------------------------------------
Stock price range ........................................ $32.50-16.25 28.35-22.75 31.88-19.63
-----------------------------------------
Performance measurements represent 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 divided by net sales.
(e) Net sales divided by average total assets.
2002 includes a net restructuring charge of $.51 per share, tax benefits of $.17
per share resulting from a change in tax law, a $.06 per share charge related
to the restructuring of one of the Company's affiliates and a foreign currency
exchange gain of $.05 per share.
2001 includes a net restructuring charge that reduced operating results by $.08
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 includes a net restructuring charge that reduced
operating results by $.34 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 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 includes for the first time the results of two companies
acquired in 1998.
Five-Year Summary
West Pharmaceutical Services, Inc. and Subsidiaries
(in thousands of dollars, except per share data)
1999 1998
SUMMARY OF OPERATIONS -------------------------
Net sales ................................................. $ 390,200 367,200
Operating profit .......................................... $ 60,300 22,500
Income from continuing operations ......................... $ 36,400 1,400
Income (loss) from discontinued operations................. $ 2,300 5,300
-------------------------
Net income(loss) .......................................... $ 38,700 6,700
-------------------------
Income per share from continuing operations:
Basic (a) ................................................ $ 2.44 .09
Assuming dilution (b) .................................... $ 2.42 .08
Income (loss) per share from discontinued operations:
Basic (a) ................................................ $ .15 .32
Assuming dilution (b) .................................... $ .15 .32
Average common shares outstanding ......................... 14,914 16,435
Average shares assuming dilution .......................... 15,048 16,504
Dividends paid per common share ........................... $ .65 .61
-----------------------
Research, development and engineering expenses ............ $ 14,200 12,200
Capital expenditures ...................................... $ 39,300 35,100
-----------------------
YEAR-END FINANCIAL POSITION
Working capital ........................................... $ 80,700 53,000
Total assets .............................................. $ 551,800 508,100
Total invested capital:
Total debt ............................................... $ 171,100 141,100
Minority interests ....................................... $ 800 600
Shareholders' equity ..................................... $ 231,200 230,100
-----------------------
Total invested capital..................................... $ 403,100 371,800
-----------------------
PERFORMANCE MEASUREMENTS
Gross margin (c) .......................................... % 33.9 33.1
Operating profitability (d) ............................... % 15.5 6.1
Tax rate .................................................. % 31.4 93.1
Asset turnover ratio (e) .................................. .74 .74
Return on average shareholders' equity .................... % 16.8 2.6
Total debt as a percentage of total invested capital ...... % 42.5 37.9
-----------------------
Stock price range ........................................ $40.44-30.88 35.69-25.75
Quarterly Operating and Per Share Data (Unaudited)
West Pharmaceutical Services, Inc. and Subsidiaries
(in thousands of dollars, except per share data)
First Second Third Fourth Full
Quarter Quarter Quarter Quarter Year
----------------------------------------------------
2002
- ----
Net sales.................................... $101,700 $106,500 $104,100 $107,400 $419,700
Gross profit................................. 30,800 30,700 26,300 29,800 117,600
Income (loss) from continuing operations..... 6,300 5,200 (2,000) 3,300 12,800
Discontinued operations, net................. (200) 100 5,600 100 5,600
----------------------------------------------------
Net income................................... 6,100 5,300 3,600 3,400 18,400
----------------------------------------------------
Basic earnings (loss) per share
Continuing operations....................... 0.44 0.36 (0.14) 0.23 0.89
Discontinued operations..................... (0.02) 0.01 0.39 0.01 0.39
----------------------------------------------------
0.42 0.37 0.25 0.24 1.28
----------------------------------------------------
Diluted earnings (loss) per share
Continuing operations....................... 0.44 0.36 (0.14) 0.23 0.89
Discontinued operations..................... (0.02) 0.01 0.39 0.01 0.39
----------------------------------------------------
0.42 0.37 0.25 0.24 1.28
----------------------------------------------------
2001 (a)
- -----
Net sales.................................... $ 98,700 $ 99,900 $ 95,500 $ 98,200 $392,300
Gross profit................................. 29,400 29,500 26,400 29,500 114,800
Income from continuing operations............ 5,500 3,000 5,800 5,400 19,700
Discontinued operations, net................. (100) 100 100 (25,000) (24,900)
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Net income (loss)............................ 5,400 3,100 5,900 (19,600) (5,200)
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Basic earnings (loss) per share..............
Continuing operations....................... 0.39 0.20 0.40 0.38 1.38
Discontinued operations..................... (0.01) 0.02 0.01 (1.74) (1.74)
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0.38 0.22 0.41 (1.36) (0.36)
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Diluted earnings (loss) per share............
Continuing operations....................... 0.39 0.20 0.40 0.38 1.37
Discontinued operations..................... (0.01) 0.02 0.01 (1.74) (1.73)
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0.38 0.22 0.41 (1.36) (0.36)
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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.
(a) Results for 2001 include the amortization of goodwill. The Company adopted
SFAS 142 as of January 1, 2002, and therefore ceased the amortization of
goodwill in 2002.
First quarter 2002 results include a foreign currency exchange gain. See Note
"Other Income (Expense)."
Third quarter 2002 results include the write-off of the Company's information
systems implementation project, the writedown of an investment,the tax benefit
resulting from a change in tax law, and the restructuring of one of the
Company's affiliates. See Notes "Restructuring Charges," "Income Taxes," and
"Affiliated Companies."
Fourth quarter 2002 results include severance provisions primarily associated
with the termination of the information systems implementation project. See
Note "Restructuring Charges".
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.