Exhibit 13
FINANCIAL REVIEW
--------------------
West Pharmaceutical Services (the Company) applies value-added
services to the process of bringing new drug therapies and
healthcare products to global markets. West s technologies
include the design and manufacture of packaging components for
pharmaceutical, healthcare and consumer products (device product
development); research and development of drug delivery systems;
and contract laboratory services and other services that support
the manufacturing, filling and packaging of pharmaceutical,
healthcare and consumer products (contract services).
The following is management's discussion and analysis of the
Company's operating results for the three years ended December
31, 1998 and its financial position as of year-end 1998. The
information should be read in conjunction with the financial
statements and accompanying notes appearing elsewhere in this
report.
RESULTS OF OPERATIONS
---------------------
The Company's 1998 net income was $6.7 million, or $.41 per
share. Net income includes a charge of $28.2 million related to
in-process research and development associated with the 1998
acquisition of DanBioSyst UK Ltd. (DanBioSyst) and a $2.5 million
net restructuring charge to income in the third quarter of 1998
related to staff reductions. In 1997, net income was $44.4
million, or $2.69 per share, and includes a $7.9 million net tax
benefit associated mainly with the tax reorganization of the
Company s German subsidiaries. The 1996 net income of $16.4
million, or $1.00 per share, reflects a $15 million net charge to
income in the first quarter of 1996 related to a restructuring
plan. Excluding the in-process research and development charge
in 1998, the tax benefit in 1997 and restructuring charges in
1998 and 1996, the Company s 1998 net income was $37.4 million,
or $2.28 per share, which compares with 1997 net income of $36.5
million, or $2.21 per share, and 1996 net income of $31.3
million, or $1.91 per share.
During 1996 and 1997, the Company implemented a major
restructuring plan. The plan included downsizing or closing
manufacturing facilities. Three manufacturing facilities in
Argentina, Puerto Rico and Germany were closed and the machinery
business was sold. Facilities in Brazil and Pennsylvania were
downsized and a development facility in Colorado was closed. An
approximate 5% reduction in the workforce was completed. The
total restructuring charge was $21.5 million, approximately $7.3
million of which represented severance and benefits. The
remaining charge covered the facility closing costs and the
reduction to net realizable value of the facilities and equipment
made excess by the restructuring actions. Part of an overall
strategy to enhance technical capabilities and assure the quality
of products, the restructuring plan created focused, more
efficient factories and shifted certain production to lower-cost
locations. In the third quarter of 1998, a further restructuring
charge was recorded related to staff reductions which reduced
headcount by 1%.
Net Sales
---------
Net sales were $449.7 million in 1998, as compared with $452.5
million for 1997. Lower comparable sales in the first half of
1998 were nearly offset by sales growth in the second half of the
year, particularly in contract services and in packaging
components for European markets. Reported consolidated sales
comparisons were negatively impacted by about $2.6 million due to
the stronger U.S. dollar versus most European and Asian
currencies.
Sales of manufactured device products for the healthcare and
consumer markets decreased 1% (measured at constant exchange
rates) in 1998 compared with 1997. Sales declined in all markets
with the exception of Europe, where sales increased 9% partially
due to the mid-1998 acquisition of Betraine Limited. Sales in
domestic markets decreased 6% with lower sales to both healthcare
and consumer markets, mainly reflecting lower sales to several
key customers. These declines resulted in part from reductions
in customers inventory levels, and a combination of lower resin
prices and loss of business at three accounts to competitors.
The Company is working on new or improved product offerings to
regain lost business.
Sales in Asian and South American markets were lower primarily
due to the impact on demand of local financial crises. Continued
consumer and government pressure to control and even reduce the
cost of healthcare delivery is transforming the healthcare
markets. Customers have responded by establishing aggressive
cost reduction programs and in certain instances reducing
inventory levels. The Company s ability to increase prices is
becoming more limited and competitive activity is increasing.
Part of the Company s continuing strategy to combat this
environment is to focus on the needs of its customers with
planned introductions of new services and products.
Contract manufacturing and packaging services sales increased
by 3% for the full year, but excluding the impact of the lower
level of company-supplied materials for 1998 production, sales
increased by 8%. Demand in the last half of the year was strong
with sales of these services increasing by 16% compared with
1997. The Company is investing in the capability of its contract
manufacturing and packaging facilities and is leveraging its
sales effort to offer customers the full supply chain capability
of its business units.
Revenues attributable to drug delivery research and development
totaled $1.5 million in 1998.
Net sales were $452.5 million in 1997, a decrease of $6.3
million, or 1%, compared with net sales of $458.8 million in
1996. Without the effect of the strong U.S. dollar, which
reduced reported sales by about $12.9 million, and without the
1996 machinery sales, a business sold in 1996, sales in 1997 were
2% higher compared with 1996.
Contract manufacturing and packaging service sales increased 13%
in 1997 compared with 1996, largely as a result of stronger
demand and because the Company supplied a larger portion of the
materials used in 1997 production.
Sales of manufactured device products were flat in 1997
compared with 1996. Sales in domestic markets increased by 2%.
Domestic healthcare market sales growth of about 3% reflects the
modest growth rate of the market and a favorable product mix.
Domestic consumer market sales decreased 4% compared with 1996.
The decline occurred in the fourth quarter, in part due to lower
demand for Spout-pak , a fitment for gable-carton juice
containers, low demand for certain customers' products and the
loss of customers replacement products to other suppliers. Sales
in international markets were lower and the product mix was
unfavorable.
Gross Profit
------------
The consolidated gross margin in 1998 was 30.1% and gross
profit was $135.2 million. These results compare with a 29.2%
gross margin and gross profit of $132.1 million in 1997.
Margins on contract manufacturing and packaging services sales
increased significantly due to sales volumes, price increases, a
shift to higher margin, longer-running jobs and improved
efficiencies.
Margins on manufactured device product sales were slightly
lower than 1997 due to the inclusion of Betraine Limited, a
company acquired in 1998. The Company is working to improve the
cost structure and product mix at this subsidiary. Excluding
Betraine, gross margins for this operating segment increased
slightly due to cost savings and efficiency programs. These cost
reductions offset the combined negative impact of lower volumes,
a less favorable product mix and price competition.
The gross margin of 29.2% in 1997 represented an increase from
the 27.5% gross margin in 1996, and gross profit increased from
$126.1 million to $132.1 million
Contract services' gross margin doubled in 1997 compared with
1996 due to sales volumes and efficiencies achieved. Margins on
manufactured device product sales increased by more than one
percentage point due to the combined impact of cost savings
initiatives, a more profitable product mix in domestic markets
and lower resin raw material costs which are passed through to
customers.
Expenses
--------
Selling, general and administrative expenses as a percentage of
sales were 15.7% in 1998, 15.5% in 1997 and 15.9% in 1996.
Selling, general and administrative expenses totaled $70.5
million in 1998, $70.2 million in 1997 and $72.8 million in 1996.
The $.3 million increase in these expenses in 1998 compared with
1997 was primarily the result of expenses associated with
acquisitions. These increases more than offset the following
favorable factors: lower pension costs due to higher income on
U.S. pension plan assets, the impact of the stronger U.S. dollar
and lower U.S. employee fringe benefit costs.
The 4% decrease in these expenses in 1997 compared with 1996
was primarily the result of lower pension costs due to higher
income on U.S. pension plan assets and the impact of the stronger
U.S. dollar. These decreases more than offset the following
factors: inflationary cost increases, increased bad debt expense
primarily related to the bankruptcy of a domestic customer and
higher expenses in Asia/Pacific due to the financial crisis in
that market, an increase in estimated expenses associated with
environmental remediation activity, and higher spending related
to drug delivery system development.
Included in the other income category is interest income
totaling $2.7 million in 1998, $2.0 million in 1997 and $1.3
million in 1996, a result of higher cash balances available for
investment, due to strong cash flow from operations. Foreign
currency gains and losses were not significant in the last three
years. In 1998, the Company s subsidiary in Brazil was no longer
accounted for as operating in a hyperinflationary economy because
the cumulative inflation rate has declined dramatically. Net
losses on real estate and investments totaled $.3 million in
1998, $.7 million in 1997, and $.2 million in 1996. Losses on
disposition of obsolete equipment were lower in both 1998 and
1997 compared with the prior year.
Interest
---------
Interest costs totaled $7.5 million in 1998 compared with $6.0
million in 1997 and $7.3 million in 1996, of which $.3 million in
1998 and $.4 million in 1997 and 1996 were capitalized as part of
the cost of capital asset acquisitions.
The average consolidated debt level increased in 1998 after
having decreased in 1997. Higher debt levels in 1998 reflect the
1998 acquisitions of DanBioSyst and Betraine and the Company s
Dutch Auction self tender for two million shares at $30 per
share, completed in the fourth quarter of 1998.
Income Taxes
------------
The effective tax rate on consolidated income was 76.1% in 1998,
23.2% in 1997 and 41.8% in 1996. Unusual events have impacted the
effective tax rate in each of these years. Excluding the impact
of these unusual items would result in comparative tax rates of
37.8% for 1998, 37% for 1997 and 36.6% for 1996.
Pretax earnings for 1998 were reduced by a non-deductible $28.2
million charge for acquired in-process research and development.
Excluding this charge, the effective tax rate of 37.8% reflects
the higher proportion of pretax earnings generated in non-U.S.
subsidiaries with higher tax rates.
Significantly impacting the tax accrual for 1997 were two events
which produced a net tax benefit of $7.9 million. The events
were: 1) a tax reorganization of the German subsidiaries which
both increased the tax basis for the assets of these entities and
resulted in tax credit refunds, and 2) repatriation of cash
dividends from certain foreign subsidiaries. Excluding this net
benefit , the effective tax rate was 37%, which included an
increase in the statutory tax rate in France, enacted in 1997.
The low tax benefit on certain components of the 1996
restructuring charge increased the 1996 effective tax rate.
Excluding the restructuring charge and the applicable tax
benefits, the 1996 effective tax rate would have been 36.6%.
Equity in Affiliates
--------------------
The contribution to earnings from a 25% ownership interest in
Daikyo Seiko,Ltd. and a 49% ownership interest in three
associated companies in Mexico has declined in each of the past
three years. Daikyo s contribution to earnings has steadily
decreased due to a combination of higher expenses related to
introduction of a new product line, Resin CZ vials, lower sales
due to reduced government reimbursements of healthcare costs and
a three-year weakening of the Japanese yen versus the U.S.
dollar. The decrease in earnings contributions from the
affiliates in Mexico is also due to declining sales over the
three years in part as a result of more aggressive competition.
The lower contributions from these affiliates also reflect
currency exchange rate losses. In 1997, expenses related to the
Company's 30% ownership interest in DanBioSyst also reduced
comparisons to 1996.
FINANCIAL POSITION
--------------------
The Company believes that its financial position and current
capitalization indicate an ability to finance substantial future
growth. Cash flow from operations totaled $71.0 million in 1998.
Working capital at December 31, 1998, totaled $55.5 million, a
ratio of current assets to current liabilities of 1.5 to 1, and
includes a cash balance of $31.3 million. Debt to total invested
capital (total debt, minority interests and shareholders' equity)
was 37.9%; the outstanding debt balance was $141.1 million at
December 31, 1998, compared with $89 million at year-end 1997.
Available cash and record cash flow from 1998 operations
combined with cash from stock option exercises and borrowings
under available credit lines to fund the following:$41.8 million
of 1998 capital expenditures, the $34.9 million cash portion of
the purchase price for two acquisitions, the $60.4 million cost
of repurchasing two million common shares following a Dutch
Auction self tender offer, and $9.4 million of cash dividends to
shareholders ($.61 per share).
The Company has two revolving credit facilities which provide
for borrowings up to $70 million for a term of 364 days,
renewable at the lender's option, and borrowings up to $55
million through August 2000. At year-end 1998, the Company had
$35 million and $2.8 million available under the short-term and
long-term facilities, respectively. The Company is in
negotiations with a group of insurance companies for a
substantial long-term debt facility. Agreement is expected to be
reached in the second quarter 1999.
1999 REQUIREMENTS
------------------
Capital Expenditures: Cash requirements for capital projects in
1999 are estimated at $50 million. These projects focus on new
business opportunities as well as cost reduction and quality
improvements through technology upgrades and product and process
standardization. New device product tooling and equipment and
facilities to support the development of drug delivery systems
are planned. Acquisition and implementation of new information
management systems to address the year 2000 issue continues , as
does maintenance and improvements to the existing production
capacity.
Year 2000 Costs: The year 2000 issue relates to computer
programs which use two digits, rather than four, to specify the
year. Such programs will recognize a date using "00" as the year
1900 rather than the year 2000, resulting in potential system
failure or miscalculations.
The Company has developed a comprehensive, corporate-wide project
plan designed to address the year 2000 issue. The Company's
project implementation team includes representatives from staff
functions and each of the Company's locations. The plan calls
for the Company to have completed required modifications to
address the year 2000 issue by June 30, 1999. The progress of
these efforts is closely monitored by senior management and
periodic reports are provided to the Board of Directors.
The Company plan is based on a risk assessment, which identified
and prioritized critical business processes and plant locations,
and an inventory of all computer hardware and software and
computer-controlled manufacturing and facility equipment. Based
on these results, remediation or replacement plans were
developed. The project began in April 1997.
The Company has made significant progress in remediating or
replacing critical information systems which support business
functions. Due to multiple geographical locations, discrete
computer systems exist in the U.S., Europe, South America and
Asia regions. The U.S. and European-based manufacturing
(excluding West's contract services operations in Lakewood),
financial reporting and payroll application systems have been
completed, and other systems, including West Lakewood's
manufacturing systems, are at various stages of completion, but
are on schedule to be completed during the first half of 1999.
Desktop computer hardware and software inventory and assessment
are complete and required remedial activity is scheduled to be
essentially completed by June 30, 1999.
Remediation or replacement of software-dependent research and
development, manufacturing process and facility management
systems and equipment is progressing well at all locations. These
activities, a combination of testing, replacement and
certification from equipment and system vendors, are expected to
be completed by June 30, 1999.
The Company has received year 2000 compliance certifications
from all of its major raw materials suppliers and major service
providers indicating that delivery of required supplies and
services will continue uninterrupted. The Company recently
initiated a program of on-site audits of key suppliers.
Although management is satisfied with the progress of the plan,
the Company is in the process of preparing a contingency plan
which will be further detailed in the coming months. The
Company's year 2000 project schedule is expected to be
substantially completed by June 30, 1999. The Company believes
adequate time will be available in the last half of 1999 to
address deficiencies without a material impact on the critical
business functions.
Internal and external resources are being used to execute the
year 2000 plan. The pretax costs incurred to date for this effort
were approximately $3.7 million and $1.0 million in 1998 and
1997,respectively. Purchases and implementation costs for
compliant software which also improves functionality is being
capitalized. As a result, $3.3 million and $1.0 million have
been capitalized in 1998 and 1997, respectively. The Company
does not separately track the incidental costs and time that its
own internal employees spend on the year 2000 project. Such
costs principally relate to salary, employee benefits and
facility costs. The Company expects costs of approximately $5.0
million will be incurred in 1999 to substantially complete the
effort, much of which will represent new equipment and computer
hardware and software, which will be capitalized.
The cost of the year 2000 project and the date on which the
Company believes it will substantially complete modifications are
based on management's best estimates. The estimates are based on
numerous assumptions of future events, including the continued
availability of certain resources and other factors. Because
none of these estimates can be guaranteed, actual time and cost
to complete modifications could differ materially from those
anticipated. Specific factors that might cause such differences
include, but are not limited to, the reliability and timely
receipt of vendor certifications, the appropriateness and
effectiveness of testing and validation methods, the availability
and cost of trained personnel and the timely availability of
replacement computer hardware, software and equipment and similar
uncertainties.
Foreign exchange exposure: In accordance with the Company's
foreign exchange management policy, the adverse consequences
resulting from foreign currency exposure are mitigated by
engaging in certain hedging activities. Foreign exchange forward
contracts are used to minimize exposure related to foreign
currency transactions and commitments for raw material purchases.
The Company has entered into interest rate swap agreements to
minimize risk to interest rate increases. The Note "Financial
Instruments" to the Consolidated Financial Statements explains
the impact of such hedges and interest rate swaps on the
Company's results of operations and financial position.
Remedial activities: Cash requirements for remedial activity
related to environmental cleanup are expected to approximate 1998
expenditures of $.4 million. The Company has been indemnified by
other financially responsible parties against future government
claims relating to groundwater contamination at a Puerto Rico
site, and the Company does not anticipate any remedial expenses
with respect to this site.
In 1999, management believes cash generated from operations and
option exercises, available credit facilities and the Company's
current capitalization will provide sufficient flexibility to
meet future cash flow requirements, pursue its stated strategy
and implement its recently announced stock repurchase program for
up to one million shares.
CONSOLIDATED STATEMENTS OF INCOME
WEST PHARMACEUTICAL SERVICES, INC.
AND SUBSIDIARIES FOR THE YEARS
ENDED DECEMBER 31, 1998, 1997 AND 1996
(in thousands, except per share data)
1998 1997 1996
--------------------------------------------------------------
Net sales $449,700 100% $452,500 100% $458,800 100%
Cost of goods sold 314,500 70 320,400 71 332,700 73
--------------------------------------------------------------
Gross profit 135,200 30 132,100 29 126,100 27
Selling, general and
administrative expenses 70,500 16 70,200 16 72,800 16
Restructuring charge 4,000 1 - - 21,500 5
Acquired research and development 28,200 6 - - - -
Other income, net (2,500) (1) (1,100) (1) (900) (1)
--------------------------------------------------------------
Operating profit 35,000 8 63,000 14 32,700 7
Interest expense 7,200 2 5,600 1 6,900 1
--------------------------------------------------------------
Income before income taxes and
minority interests 27,800 6 57,400 13 25,800 6
Provision for income taxes 21,200 5 13,300 3 10,800 2
Minority interests 100 - 200 - 100 -
--------------------------------------------------------------
Income from consolidated operations 6,500 1% 43,900 10% 14,900 4%
Equity in net income of --- ---
affiliated companies 200 500 1,500
--------------------------------------------------------------
Net income $ 6,700 $ 44,400 $ 16,400
--------------------------------------------------------------
Net income per share:
Basic $ .41 $ 2.69 $ 1.00
Assuming Dilution $ .40 $ 2.68 $ .99
--------------------------------------------------------------
Average common shares outstanding 16,435 16,475 16,418
Average shares assuming dilution 16,504 16,572 16,500
The accompanying notes are an integral
part of the financial statements.
9
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
WEST PHARMACEUTICAL SERVICES, INC. AND
SUBSIDIARIES FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(in thousands)
Unrealized
Foreign gains Total other Total
currency (losses) comprehensive Net comprehensive
items on securities income income income
------------------------------------------------------------------------------
Cumulative Balance,
January 1, 1996 $20,100 $ 300 $20,400
Comprehensive
income 1996 (3,800) 100 (3,700) $16,400 $12,700
------------------------------------------------------------------------------
Balance,
December 31, 1996 16,300 400 16,700
Comprehensive
income 1997 (12,900) (300) (13,200) $44,400 $31,200
-----------------------------------------------------------------------------
Balance,
December 31, 1997 3,400 100 3,500
Comprehensive
income 1998 4,100 (400) 3,700 $ 6,700 $10,400
------------------------------------------------------------------------------
Balance,
December 31, 1998 $7,500 $(300) $7,200
------------------------------------------------
------------------------------------------------
The accompanying notes are an integral part of the financial statements.
10
CONSOLIDATED BALANCE SHEETS
WEST PHARMACEUTICAL SERVICES, INC. AND SUBSIDIARIES
AT DECEMBER 31, 1998 AND 1997
(in thousands)
1998 1997
ASSETS ----------------------
Current assets:
Cash, including equivalents (1998--$13,700; 1997--$41,700) $ 31,300 $ 52,300
Accounts receivable, less allowance (1998--$1,900; 1997--$3,000) 64,400 60,400
Inventories 43,500 38,300
Current deferred income tax benefit 9,700 9,400
Other current assets 10,800 10,300
----------------------
Total current assets 159,700 170,700
----------------------
Property, plant and equipment 472,200 428,600
Less accumulated depreciation and amortization 251,900 226,400
----------------------
220,300 202,200
Investments in affiliated companies 15,700 22,700
Goodwill 61,200 51,600
Deferred charges and other assets 48,700 30,700
---------------------
$505,600 $477,900
----------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 800 $ 700
Notes payable 35,300 900
Accounts payable 20,800 18,600
Accrued expenses:
Salaries, wages and benefits 17,100 13,400
Income taxes payable 8,500 5,400
Other 21,700 19,000
----------------------
Total current liabilities 104,200 58,000
----------------------
Long-term debt, excluding current portion 105,000 87,400
11
Deferred income taxes 39,100 30,100
Other long-term liabilities 26,600 24,300
Minority interests 600 400
Shareholders' equity:
Preferred stock, shares authorized: 3,000;
shares issued and outstanding: 1998-0; 1997-0
Common stock, par value $.25 per share; shares authorized: 50,000;
shares issued: 1998--17,165; 1997--16,845;
shares outstanding: 1998--15,026; 1997--16,568 4,300 4,200
Capital in excess of par value 32,900 24,000
Retained earnings 249,300 252,500
Accumulated other comprehensive income 7,200 3,500
----------------------
293,700 284,200
Less treasury stock (1998--2,139 shares; 1997--277 shares) 63,600 6,500
----------------------
Total shareholders' equity 230,100 277,700
----------------------
$505,600 $477,900
----------------------
The accompanying notes are an integral part of the financial statements.
12
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
WEST PHARMACEUTICAL SERVICES, INC. AND
SUBSIDIARIES FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(in thousands, except per share data)
Capital in Other
Common excess of Retained comprehensive Treasury
stock par value earnings income stock Total
----------------------------------------------------------------
Balance, January 1, 1996 $4,200 $23,500 $210,200 $20,400 $(4,200) $254,100
----------------------------------------------------------------
Net income 16,400 16,400
Shares issued under stock plans 400 3,200 3,600
Shares issued for acquisition 100 400 500
Shares repurchased (10,000) (10,000)
Cash dividends declared
($.54 per share) (8,900) (8,900)
Changes-other comprehensive income (3,700) (3,700)
----------------------------------------------------------------
Balance, December 31, 1996 4,200 24,000 217,700 16,700 (10,600) 252,000
----------------------------------------------------------------
Net income 44,400 44,400
Shares issued under stock plans 4,100 4,100
Cash dividends declared ($.58 per share) (9,600) (9,600)
Changes-other comprehensive income (13,200) (13,200)
----------------------------------------------------------------
Balance, December 31, 1997 4,200 24,000 252,500 3,500 (6,500) 277,700
----------------------------------------------------------------
Net income 6,700 6,700
Shares issued under stock plans 300 3,300 3,600
Shares issued for acquisition 100 8,600 8,700
Shares repurchased (60,400) (60,400)
Cash dividends declared ($.62 per share) (9,900) (9,900)
Changes-other comprehensive income 3,700 3,700
----------------------------------------------------------------
Balance, December 31, 1998 $4,300 $32,900 $249,300 $7,200 $(63,600) $230,100
----------------------------------------------------------------
The accompanying notes are an integral part of the financial statements.
13
CONSOLIDATED STATEMENTS OF CASH FLOWS
WEST PHARMACEUTICAL SERVICES, INC. AND SUBSIDIARIES
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(in thousands) 1998 1997 1996
-------------------------------
Cash flows from operating activities:
Net income $6,700 $44,400 $16,400
Adjustments to reconcile net income to net cash
from operating activities:
Depreciation and amortization 32,300 31,900 30,700
Acquired research and development 28,200 - -
Restructuring charge 4,000 - 21,500
Loss on sales of real estate and invest 300 700 200
Deferred income taxes 5,900 (7,500) (5,700)
Pension and other retirement plans (6,000) (4,100) (600)
Equity in undistributed earnings of affiliated
companies, net (100) (100) (1,100)
Decrease (increase) in accounts receiva (700) 1,000 (3,400)
Decrease (increase) in inventories (2,400) 2,700 (2,700)
Decrease (increase) in other current as 800 400 (300)
(Decrease) increase in other current lia 500 (1,300) 5,900
Other operating items 1,500 (400) 2,500
-----------------------------
Net cash provided by operating activities 71,000 67,700 63,400
-------------------------------
Cash flows from investing activities:
Property, plant and equipment acquired (41,800) (34,400) (31,700)
Proceeds from sales of assets 1,200 1,700 7,200
Payments for acquisitions, net of cash (34,900) - (1,600)
Customer advances, net of repayments 1,700 (300) 1,600
------------------------------
Net cash used in investing activities (73,800) (33,000) (24,500)
------------------------------
Cash flows from financing activities:
Borrowings under revolving
credit agreements, net 65,000 200 1,500
Proceeds from other long-te 1,500 - -
Repayment of long-term debt (19,100) (1,200) (9,000)
Other notes payable, net 800 (700) (6,200)
14
Issuance of common stock, net 2,600 4,000 3,500
Dividend payments (9,400) (9,400) (8,700)
Purchase of treasury stock (60,400) - (10,000)
-------------------------------
Net cash used in financing activities (19,000) (7,100) (28,900)
-------------------------------
Effect of exchange rates on cash 800 (2,600) (100)
-------------------------------
Net (decrease) increase in cash and
cash equivalents (21,000) 25,000 9,900
Cash and cash equivalents at
beginning of year 52,300 27,300 17,400
-------------------------------
Cash and cash equivalents at end of year $31,300 $52,300 $27,300
-------------------------------
Supplemental cash flow information:
Interest paid, net of amounts capitalized$ 5,100 $ 5,700 $ 6,200
Income taxes paid $14,700 $20,000 $14,300
------------------------------
The accompanying notes are an integral part of the financial statements.
15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
Summary of Significant Accounting Policies
------------------------------------------
Basis of Presentation: The financial statements are prepared in
conformity with generally accepted accounting principles in the
United States. These principles require management to make
estimates and assumptions that affect the reported amounts of
assets and liabilities and revenue and expenses and the
disclosure of contingencies in the financial statements. Actual
amounts realized may differ from these estimates.
Principles of Consolidation: The consolidated financial
statements include the accounts of the Company and all majority-
owned subsidiaries. Material intercompany transactions and
accounts are eliminated in consolidation. Investments in
affiliated companies in which ownership exceeds 20% are accounted
for on the equity method.
Statement of Cash Flows: Cash flows from operating activities are
reported under the indirect method; cash equivalents include time
deposits, certificates of deposit and all highly liquid debt
instruments with original maturities of three months or less.
Inventories: Inventories are valued at the lower of cost or
market. The cost of inventories located in the United States is
determined on the last-in, first-out (LIFO) method, except for
the cost of inventories of West Pharmaceutical Services Lakewood,
Inc. (West Lakewood), a wholly owned subsidiary, which is
determined on the first-in, first-out (FIFO) method. The cost of
inventories located outside the United States is determined
principally on the average cost method.
Foreign Currency Translation: Foreign currency transaction gains
and losses and translation gains and losses of subsidiaries
operating in high-inflation economies are recognized in the
determination of net income. Foreign currency translation
adjustments of other subsidiaries and affiliates operating
outside the United States are accumulated in other comprehensive
income, a separate component of shareholders' equity.
Financial Instruments: The Company uses interest rate swaps and
forward exchange contracts to minimize the economic exposure
related to fluctuating interest and foreign exchange rates.
Amounts to be paid or received under interest rate swaps are
accrued as interest expense, and presented in the financial
statements on a net basis. Gains and losses on hedges of existing
assets and liabilities are recognized monthly and offset gains
and losses on the underlying transaction. Gains and losses
related to firm commitments, primarily raw material purchases
including local needs in foreign subsidiaries, are deferred and
recognized as part of the underlying transaction.
In 1998, Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities", was issued. This
standard, which will be adopted by the Company in the year 2000,
requires derivatives to be recorded on the balance sheet as
16
assets or liabilities, measured at fair value. Gains or losses
resulting from changes in the value of those derivatives would be
accounted for depending on the use of the derivative and whether
it qualifies for hedge accounting. The impact of adopting this
standard cannot be determined at this time.
Marketable Securities: Investments in debt and marketable
securities are classified under one of three categories: held-to-
maturity, available-for-sale and trading, based on management's
intentions. Investments in marketable securities are stated at
fair market value. Unrealized gains and losses on trading
securities are included in income. Unrealized gains and losses on
securities available-for-sale are accumulated in other
comprehensive income, a separate component of shareholders'
equity. Cost of marketable securities is determined on the
moving average method.
Revenue Recognition: Sales are recorded at the time title
passes, which generally occurs when the goods are shipped.
Revenue associated with drug delivery systems development is
recognized when earned in accordance with the terms of the
customer agreement.
Property, Plant And Equipment: Property, plant and equipment are
carried at cost. Maintenance and minor repairs and renewals are
charged to expense as incurred. Upon sale or retirement of
depreciable assets, costs and related depreciation are
eliminated, and gains or losses are recognized in the
determination of net income. The Company continually evaluates
the appropriateness of the remaining estimated useful life and
the carrying value of its operating assets, goodwill and other
intangible assets. Carrying values in excess of undiscounted
estimates of related cash flows are expensed when such
determination is made.
Depreciation And Amortization: For financial reporting purposes,
depreciation is computed principally on the straight-line method
over the estimated useful lives of the assets, or the remaining
term of the lease, if shorter. For income tax purposes,
depreciation is computed using accelerated methods. Goodwill is
being amortized on the straight-line method over periods ranging
from 13 to 40 years.
Research and Development: Research, development and engineering
expenditures for the creation and application of new or improved
products and processes, and drug delivery systems, the total of
which amounted to $14,500 in 1998, $12,000 in 1997 and $11,200 in
1996, are expensed as incurred, net of customer reimbursements.
Environmental Remediation and Compliance Costs: Environmental
remediation costs are accrued when such costs are probable and
reasonable estimates are determinable. Cost estimates are not
discounted and include investigation, cleanup and monitoring
activities; such estimates are adjusted, if necessary, based on
additional findings. In general, environmental compliance costs
are expensed. Environmental compliance costs at current operating
sites are capitalized if they increase the value of the property
and/or prevent environmental hazards from occurring.
17
Income Taxes: Deferred income taxes are recognized by applying
enacted statutory tax rates, applicable to future years, to
temporary differences between the tax bases and financial
statement carrying values of the Company's assets and
liabilities. Valuation allowances are recorded to reduce deferred
tax assets to amounts that are more likely than not to be
realized. United States income taxes and withholding taxes are
accrued on the portion of earnings of international subsidiaries
and affiliates (which qualify as joint ventures) intended to be
remitted to the parent company.
Stock-Based Compensation: The Company accounts for stock-based
compensation using the intrinsic value method prescribed in
Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees," and related interpretations. Accordingly,
compensation cost for stock options is measured as the excess, if
any, of the quoted market price of the Company s stock at the
date of the grant over the amount an employee must pay to acquire
the stock.
Net Income Per Share: Basic net income per share is computed by
dividing net income by the weighted-average number of shares of
common stock outstanding during each period. Net income per
share, assuming dilution, considers the potential issuance of
common shares under the Company s stock option and award plans,
based on the treasury stock method. The treasury stock method
assumes use of exercise proceeds to repurchase common stock at
the average fair market value in the period.
Other Income (Expense)
----------------------
1998 1997 1996
-----------------------------
Interest income $ 2,700 $ 2,000 $1,300
Foreign exchange gains (losses) 200 - (100)
Loss on sales of real estate
and investments (300) (700) (200)
Other (100) (200) (100)
-----------------------------
$ 2,500 $ 1,100 $ 900
-----------------------------
Restructuring Charges
---------------------
On September 8, 1998, the Company recorded a pre-tax charge of
$4,000. The charge is related to employee reductions associated
with identified manufacturing and other operating efficiencies.
The charge includes severance and benefits for 90 employees
including manufacturing and staff positions and other related
charges. At December 31, 1998, the total payout of severance and
benefits to date associated with this charge was $1,700.
On March 29, 1996, the Company approved a major restructuring
18
plan that included the closing or substantial downsizing of six
manufacturing facilities, disposition of related excess equipment
and properties and an approximate 5% reduction of the workforce.
The total estimated charge related to these actions was $15,000,
net of $6,500 of income tax benefits, which was accrued in the
first quarter of 1996. Approximately one-third of the net charge
related to reduction in personnel, including manufacturing and
staff positions, and covered severance pay and other benefits to
be provided to terminated employees. At December 31, 1998, all
employees affected by the plan have been terminated and total
payout of severance and benefits to date is $6,900; the remaining
liability for these costs is $400. The remaining net charge
covered facility closing costs and the reduction of the carrying
value of equipment and facilities made excess by the
restructuring plan to net realizable value. Facilities in Puerto
Rico, Colorado, Germany and Argentina were closed; three of four
buildings idled have been sold to date. Facilities in Brazil and
Pennsylvania were downsized and the machinery manufacturing
operations were sold.
Restructuring activities, except for the sale of one building and
certain excess equipment and payout of remaining benefit costs
for terminated employees, have been completed.
Acquisitions and Investments
-----------------------------
On July 1, 1998 the Company acquired Betraine Limited for BPS
7,200 ($11,800 at July 1, 1998). Betraine manufactures precision
injection molded plastic components for the healthcare and
consumer products industries. The acquisition was accounted for
as a purchase and Betraine operating results were consolidated
beginning July 1, 1998. The acquisition was financed with
existing cash. The excess of the purchase price over the net
assets acquired will be amortized on a straight line basis over
20 years.
On March 31, 1998, the Company acquired for BPS 20,000 ($33,500
at March 31, 1998) the remaining 70% interest in DanBioSyst UK
Ltd. (DBS), making DBS a wholly-owned subsidiary. DBS is engaged
in drug delivery system research and development. This
transaction was accounted for by the purchase method and was
financed with cash of $9,400, 320,406 shares of restricted common
stock valued at $8,700, and short-term notes of $15,400.
Operating results of DBS were consolidated beginning on April 1,
1998. The allocation of the purchase price, determined by an
independent appraiser using the income approach, follows:
Current assets $ 1,300
Equipment and leasehold improvements 800
In-process research and development 28,200
Patents 2,800
Other intangibles 400
In-process research and development was written off at the date
19
of acquisition. This value relates to various drug delivery
platforms which DBS has in different stages of the development
process. The appraisal was based on licensing of such delivery
systems with significant revenues generated beginning in 2003. A
discount rate of 32% was used.
The initial 30% interest in DBS was acquired in 10% increments,
the last of these purchases occurring in 1996. The cost of the
1996 acquisition was $2,100, paid $1,600 in cash and $500 in the
Company's common stock.
Income Taxes
------------
Income before income taxes and minority interests was derived as
follows:
1998 1997 1996
---------------------------
Domestic operations $ 8,600 $39,500 $11,500
International operations 19,200 17,900 14,300
---------------------------
$27,800 $57,400 $25,800
---------------------------
The related provision for income taxes consists of:
1998 1997 1996
---------------------------
Currently payable:
Federal $ 8,800 $16,000 $ 8,000
State 900 600 700
International 5,600 4,200 7,800
---------------------------
15,300 20,800 16,500
---------------------------
Deferred:
Federal 4,200 1,800 (3,600)
State - - (200)
International 1,700 (9,300) (1,900)
---------------------------
5,900 (7,500) (5,700)
---------------------------
$21,200 $13,300 $10,800
---------------------------
A reconciliation of the United States statutory corporate tax
rate to the Company's effective consolidated tax rate on income
before income taxes and minority interests is as follows:
1998 1997 1996
--------------------------
Statutory corporate tax rate 35.0% 35.0% 35.0%
20
Tax on international operations
in excess of
United States tax rate 1.2 4.7 2.4
German tax reorganization benefit - (21.7) -
Acquired in-process
research and development 35.5 - -
United States tax on repatriated
international earnings .8 4.3 1.0
State income taxes, net of Federal
tax benefit 2.3 .7 1.8
Other 1.3 .2 1.6
--------------------------
Effective tax rate 76.1% 23.2% 41.8%
--------------------------
In the third quarter of 1997, the Company completed a tax
reorganization of certain German subsidiaries. The benefit of
this reorganization was reduced in 1997's fourth quarter due to a
tax law change and completion of a tax audit.
The net current and noncurrent components of deferred income
taxes recognized in the balance sheet at December 31 are as
follows:
1998 1997
------------------------------
Net current assets $ 7,800 $ 9,000
Net noncurrent liabilities $27,900 $19,500
------------------------------
The following is a summary of the significant components of the
Company's deferred tax assets and liabilities as of December 31:
1998 1997
-------------------------------
Deferred tax assets:
Loss on asset dispositions
and plant closings $ 2,400 $ 2,500
Severance and deferred
compensation 9,900 9,200
German tax reorganization 7,800 8,300
Net operating loss carryovers 1,100 2,300
Foreign tax credit carryovers 800 900
Restructuring charge 1,400 1,200
Other 4,500 4,000
Valuation allowance (1,700) (2,500)
-------------------------------
Total $26,200 $25,900
-------------------------------
21
1998 1997
-------------------------------
Deferred tax liabilities:
Accelerated depreciation $32,200 $26,900
Severance and deferred compensation 7,600 4,300
Other 6,500 5,200
-------------------------------
Total $46,300 $36,400
-------------------------------
At December 31, 1998, subsidiaries' had operating tax loss
carryovers of $20,000, which will be available to apply against
the future taxable income of such subsidiaries. The carryover
periods expire beginning with $1,500 in 1999 and continue through
2001.
In 1997, the Company repatriated $12,000 of undistributed
earnings of international subsidiaries and $2,400 of tax was
recorded. At December 31, 1998, undistributed earnings of
international subsidiaries, on which deferred income taxes have
not been provided, amounted to $73,800. 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,
1998, the Company had available foreign tax credit carryovers of
approximately $800 expiring in 1999 through 2003.
Net Income Per Share
--------------------
The following table reconciles shares used in basic income
per share to the shares used in income per share assuming
dilution. There is no adjustment to the net income of the
Company in the calculation of net income per share assuming
dilution.
1998 1997 1996
------ ------ ------
Net Income $ 6,700 $44,400 $16,400
----------------------------------------------------------------
Basic average common
shares outstanding 16,435 16,475 16,418
Assumed stock options exercised
and awards vested 69 97 82
-----------------------------------------------------------------
Average common shares
assuming dilution 16,504 16,572 16,500
Comprehensive Income
--------------------
In 1998, the Company adopted Financial Accounting Standards No.
22
130, "Reporting Comprehensive Income," requiring the reporting
and display of comprehensive income. Comprehensive income
consists of reported net income and other comprehensive income
which reflects revenue, expenses and gains and losses which
generally accepted accounting principles exclude from net income.
For the Company the items excluded from current net income are
unrealized gains or losses on available-for-sale securities and
cumulative foreign currency adjustments. Comprehensive income
and the cumulative balance of each item of other comprehensive
income is displayed in the accompanying Consolidated Statements
of Comprehensive Income.
Inventories
-----------
1998 1997
---------------------------
Finished goods $15,700 $15,800
Work in process 13,700 8,100
Raw materials 14,100 14,400
---------------------------
$43,500 $38,300
---------------------------
Included above are inventories located in the United States that
are valued on the LIFO basis, amounting to $10,200 and $12,600 at
December 31, 1998 and 1997, respectively, which are approximately
$7,200 and $7,600, respectively, lower than replacement value.
Property, Plant and Equipment
------------------------------
A summary of property, plant and equipment at December 31 is
presented in the following table:
Years of
expected
useful
life 1998 1997
----------------------------------------
Land $ 3,400 $ 3,500
Buildings and improvements 7-50 104,200 97,000
Machinery and equipment 3-20 291,100 261,800
Molds and dies 4-7 55,600 52,600
Construction in progress 17,900 13,700
----------------------------------------
$472,200 $428,600
----------------------------------------
Affiliated Companies
--------------------
At December 31, 1998, the following affiliated companies were
23
accounted for under the equity method:
Fiscal
year Ownership
Location end interest
--------------------------------------
The West Company de Mexico S.A. Mexico Dec. 31 49%
Aluplast S.A. de C.V. Mexico Dec. 31 49%
Pharma-Tap S.A. de C.V. Mexico Dec. 31 49%
Daikyo Seiko, Ltd. Japan Oct. 31 25%
--------------------------------------
A summary of the financial information for these companies is
presented below:
1998 1997
------------------------
Balance Sheets:
Current assets $ 83,400 $ 78,500
Noncurrent assets 99,600 91,700
------------------------
Total assets $183,000 $170,200
------------------------
Current liabilities $ 45,000 $ 46,500
Noncurrent liabilities 79,800 66,500
Owners' equity 58,200 57,200
------------------------
Total liabilities and owners' equity $183,000 $170,200
------------------------
1998 1997 1996
---------------------------
Income Statements:
Net sales $69,500 $77,200 $80,800
Gross profit 14,500 18,700 25,500
Net income 1,000 2,900 5,900
----------------------------
Unremitted income of affiliated companies included in
consolidated retained earnings amounted to $11,100, $11,100 and
$11,000 at December 31, 1998, 1997 and 1996, respectively.
Dividends received from affiliated companies were $200 in 1998,
$400 in 1997 and $400 in 1996.
The Company's equity in unrealized gains and losses of Daikyo
Seiko, Ltd.'s investment in securities available for sale
included in other comprehensive income, a separate component of
shareholders' equity, was $(300), $100 and $400 at December 31,
1998, 1997 and 1996, respectively. The 1998 loss is net of
24
income tax benefit of $300.
Debt
----
Short-Term: Notes payable in the amounts of $35,300 and $900 at
December 31, 1998 and 1997, respectively, are payable within one
year and bear interest at a weighted-average interest rate of
6% and 4%, respectively. At December 31, 1998, short-term debt
of $2,800 (under a revolving credit line) was classified as long-
term because of the Company's intent to renew the borrowings
using an available long-term credit facility.
Long-term:
At December 31, 1998 1997
-------------------
Unsecured:
Revolving credit facility,
due 2000 (5.51%) $55,000 $22,100
Tax-exempt industrial revenue bonds,
due 2005 (4.2% to 5.95%) (a) 11,100 11,100
Subordinated debentures, due 2007 (6.5%) 3,300 3,200
Other notes, due 1999 to 2006 (3.5% to 8.17%) 29,800 42,400
Collateralized:
Mortgage notes, due 1999 to 2016 (6.8% to
6.94%) (b) 6,600 9,300
-------------------
Total long-term debt 105,800 88,100
Less current portion 800 700
-------------------
$ 105,000 $ 87,400
-------------------
(a) The proceeds of industrial revenue bonds that were not
required for the respective construction projects have been
invested by the Company. Use of these excess funds and earnings
thereon is restricted to servicing the debt. The aggregate of
unexpended proceeds and earnings thereon of $1,400 is reflected
as a reduction of the principal outstanding on the bonds.
(b) Real estate, machinery and equipment with a carrying value of
$12,100 at December 31, 1998, are pledged as collateral.
The Company's revolving credit agreement provides for borrowings
up to $70,000 and $55,000 with a term of 364 days and five years
through August 2000, respectively, renewable at the lenders'
option. Interest is charged at a floating rate based on LIBOR,
and a commitment fee ranging up to 3/20% per annum is payable on
the facility.
At December 31, 1998, $4,300 at par value of West Lakewood's
subordinated debentures were outstanding. The subordinated
debentures are reflected in the balance sheet net of discount,
which is being amortized through the maturity date of the
subordinated debentures, March 1, 2007. The unamortized discount
totaled $1,000 and $1,100 at December 31, 1998 and 1997,
25
respectively. The holders have the right to convert such
subordinated debentures into cash for an amount approximating 50%
of the par value of the subordinated debentures converted.
Interest is payable semiannually.
Long-term debt maturing in the years following 1999 is: $67,300
in 2000, $800 in 2001, $3,200 in 2002 and $12,400 in 2003.
Certain of the financing agreements, among other things, require
the maintenance of certain working capital, interest coverage and
debt-to-capitalization ratios and tangible net worth; restrict
the sale of assets; and limit the payment of dividends.
Interest costs incurred during 1998, 1997 and 1996 were $7,500,
$6,000 and $7,300, respectively, of which $300, $400 and $400,
respectively, were capitalized as part of the cost of acquiring
certain assets.
At December 31, 1998, the Company has three interest rate swap
contracts outstanding, with notional value of $3,000 each, to fix
the interest rates at 6.51%, 6.54% and 6.775% through August
2001. Under the terms of these agreements, the Company makes
periodic interest payments based on these fixed rates of interest
on the notional principal amounts to a counterparty that makes
payments based on a market interest rate. The net interest
expense recognized in connection with these agreements was less
than $100 in the past three years.
Financial Instruments
---------------------
The following disclosure reflects the estimated fair value of
financial instruments of the Company as of December 31.
Carrying value Estimated fair value
--------------------------------------
1998 1997 1998 1997
-------------------------------------
Cash and cash equivalents $31,300 $52,300 $31,300 $52,300
Short-and long-term debt 141,100 89,000 135,000 88,400
Interest rate swaps(a) - - - -
Forward exchange contracts(a) - -
-------------------------------------
(a) The estimated fair value of the interest rate swaps was less
than $100 at December 31, 1998 and 1997. The estimated fair value
of forward exchange contracts was less than $100 at December 31,
1997. There were no forward exchange contracts in effect at
December 31, 1998.
Methods used to estimate the fair market values of the above
listed financial instruments are as follows: cash and cash
equivalents due to their short maturity are estimated at carrying
values that approximate market; debt is estimated based on
current market quotes for instruments of similar maturity;
interest rate swaps (see preceding Note" Debt") and forward
26
exchange contracts are valued at published market prices, market
prices of comparable instruments or quotes.
Notional amounts upon which current interest rate swap contracts
are based do not represent amounts exchanged and are not a
measure of the Company s exposure. Failure by the contract
counterparty to make interest payments under an interest swap
contract would result in an accounting loss to the Company only
if interest rates exceeded the fixed rate to be paid by the
Company. The accounting loss corresponds to the cost to replace
the swap contract.
Benefit Plans
-------------
The Company and certain domestic and international subsidiaries
sponsor defined benefit pension plans. In addition, the Company
provides minimal life insurance benefits for certain United
States retirees and pays a portion of healthcare (medical and
dental) costs for retired United States salaried employees and
their dependents. Benefits for participants are coordinated with
medicare and the plan mandates medicare risk (HMO) coverage
wherever possible and caps the total contribution for non-HMO
coverage.
Total (income) expense for 1998, 1997 and 1996 of these plans
includes the following:
Pension benefits Other retirement benefits
1998 1997 1996 1998 1997 1996
- -------------------------------------------------------------------------
Service cost $ 3,600 $ 3,600 $ 3,900 $500 $400 $500
Interest cost 8,500 8,000 7,700 500 500 600
Expected return
on assets (15,400) (13,400) (11,300) - - -
Amortization of
unrecognized
transition asset (800) (800) (800) - - -
Amortization of
prior service cost 400 200 100 (1,500) (1,400)(1,200)
Recognized actuarial
gains (1,800) (1,200) (100) - - -
--------------------------- ----------------------
Pension (income) $(5,500) $(3,600) $(500) $(500) $(500) $(100)
--------------------------- ----------------------
The following tables provide a reconciliation of the benefit obligation,
plan assets and funded status of the plans:
Pension benefits Other retirement benefits
--------------------- -------------------------
Change in 1998 1997 1998 1997
benefit
obligation: ---------------------- ----------------------
Benefit obligation,
27
January 1 $(120,400) $(108,800) $(7,400) $(6,600)
Service cost (3,600) (3,600) (500) (400)
Interest cost (8,500) (8,000) (500) (500)
Plan participants'
contributions 200 200 100 100
Actuarial gain (5,500) (6,200) (400) (300)
Benefits/
expenses paid 6,200 5,400 300 300
Foreign exchange
impact (300) 600 - -
--------------------- ----------------------
Benefit obligation,
December 31 $(131,900) $(120,400) $(8,400) $(7,400)
--------------------- ----------------------
Change in plan assets:
Fair value of plan
assets, January 1 $165,900 $144,200 $ - $ -
Actual return on
plan assets 28,600 26,500 - -
Employer contribution 900 600 200 200
Plan participants'
contributions 200 200 100 100
Benefits/expenses
paid (6,200) (5,400) (300) (300)
Foreign exchange
impact - (200) - -
--------------------- ----------------------
Fair value of plan
assets, December 31 $189,400 $165,900 $ - $ -
--------------------- ----------------------
Assets in excess
(less than)
benefits: $57,500 $45,500 $(8,400) $(7,400)
Unrecognized net
actuarial gain (47,800) (38,100) 1,100 900
Unrecognized
transition asset (3,300) (4,100) - -
Unrecognized prior
service cost 3,300 200 (6,000) (7,500)
-------- -------- -------- --------
December 31:
Prepaid benefit
cost $16,700 $9,900 - -
Accrued liability $(7,000) $(6,400) $(13,300) $(14,000)
-------- -------- -------- --------
The aggregate projected benefit obligation and aggregate fair
value of plan assets for pension plans with obligation in excess
of plan assets were $8,500 and $600, respectively, as of December
31, 1998, and $12,900 and $4,700, respectively, at December 31,
1997.
28
Other retirement
Pension benefits benefits
1998 1997 1998 1997
---------------------------------------------
Weighted average assumptions
as of December 31:
Discount rate 6.7% 7.0% 6.75% 7.0%
Rate of compensation
increase 5.5% 5.9% - -
Long-term
rate of return on assets 9.3% 9.2% - -
The assumed healthcare cost trend used is 8.5% in 1999,
decreasing to 5.5% by 2006. Increasing or decreasing the assumed
trend rate for healthcare costs by one percentage point would
result in a $500 increase and decrease, respectively, in the
accumulated postretirement benefit obligation. The related
change in the aggregate service and interest cost components of
the 1998 plan expense is a $100 increase and decrease,
respectively.
The Company provides certain post-employment benefits for
terminated and disabled employees, including severance pay,
disability-related benefits and healthcare benefits. These costs
are accrued over the employee s active service period under
certain circumstances or at the date of the event triggering the
benefit.
The Company also sponsors a defined contribution savings plan for
certain salaried and hourly United States employees. Company
contributions are equal to 50% of each participant s contribution
up to 6% of the participant s base compensation. Total expense of
$1,200, $900 and $900 was incurred for Company contributions in
1998, 1997 and 1996, respectively.
Capital Stock
-------------
Purchases (sales) of common stock held in treasury during the
three years ended December 31, 1998, are as follows:
1998 1997 1996
-------------------------------------
Shares held, January 1 277,200 462,200 224,000
Purchases, net at
fair market value 2,026,300 40,200 507,200
Shares issued for
acquisition - - (19,600)
Stock option
exercises (164,000) (225,200) (249,400)
-------------------------------------
Shares held,
December 31 2,139,500 277,200 462,200
-------------------------------------
In October 1998, the Company purchased 2,000,000 shares of its
common stock in a Dutch Auction self-tender at a price of $30.00
29
per share.
In 1996, the Company purchased, in accordance with an agreement
approved by a majority of non-interested members of the Board of
Directors, 440,000 shares of its common stock owned by a director
who retired from the Board of Directors. The aggregate purchase
price was $10,000.
The Company's Shareholders Rights Plan entitles a shareholder to
purchase 1/1000 of a share of a newly designated series of the
Company s preferred stock at a price of $75.00 with each Right. A
Right becomes exercisable if a person or group (acquiror)
acquires 15% or more of the common stock or commences a tender
offer that would result in the acquiror owning 18% or more of the
common stock. After the Rights become exercisable, and in the
event the Company is involved in a merger or other business
combination, sale of 50% or more of its assets or earning power,
or if an acquiror purchases 18% or more of the common stock or
engages in self-dealing transactions, a Right will entitle its
holder to purchase common stock of the surviving company having a
market value twice the exercise price of the Right. The Rights
may be redeemed by the Company at $.001 per Right at any time
before certain events occur. Two Rights are attached to each
share of common stock, and such Rights will not trade separately
unless they become exercisable. All Rights expire on January 15,
2000.
In 1992, the Company made an offering under an employee stock
purchase plan, which provides for the sale of the Company s
common stock to substantially all employees at 85% of fair market
value. The offer has been extended to December 31, 1999. An
employee's purchases are limited annually to 10% of base
compensation. Shares are purchased in the open market, or
treasury shares are used.
Stock Option and Award Plans
----------------------------
The Company has two long-term incentive plans for officers and
key management employees of the Company and its subsidiaries.
Options may no longer be granted under one of the plans. The
plans provide for the grant of stock options, stock appreciation
rights, restricted stock awards and performance awards. At
December 31, 1998, 1,364,700 shares of common stock are available
for future grants. A committee of the Board of Directors
determines the terms and conditions of grants, except that the
exercise price of certain options cannot be less than 100% of the
fair market value of the stock on the date of grant. All stock
options and stock appreciation rights are exercisable at the date
indicated in connection with their issuance, but not later than
10 years after the date of grant. Option activity is summarized
in the following table.
30
1998 1997 1996
----------------------------------------------------------------
Options outstanding,
January 1 1,285,200 750,400 854,600
Granted 132,500 748,500 209,800
Exercised (144,100) (213,700) (249,400)
Forfeited (53,000) - (64,600)
-----------------------------------------------------------------
Options outstanding,
December 31 1,220,600 1,285,200 750,400
Options exercisable,
December 31 594,200 640,200 630,400
-----------------------------------------------------------------
Weighted-Average
Exercise Price 1998 1997 1996
-----------------------------------------------------------------
Options outstanding,
January 1 $27.23 $23.42 $22.60
Granted 30.46 28.82 22.45
Exercised 22.32 21.45 20.00
Forfeited 28.84 - 22.73
-----------------------------------------------------------------
Options outstanding,
December 31 28.08 27.23 23.42
Options exercisable,
December 31 27.67 27.04 22.13
-----------------------------------------------------------------
The range of exercise prices at December 31, 1998, is $15.13 to
$30.63 per share.
Under the Company's management incentive plan, participants are
paid cash bonuses on the attainment of certain financial goals.
Bonus participants are required to use 25% of their cash bonus,
after certain adjustments for taxes payable, to purchase common
stock of the Company at current fair market value. Bonus
participants are given a restricted stock award equal to one
share for each four shares of common stock purchased with bonus
awards. These stock awards vest at the end of four years
provided that the participant has not made a disqualifying
disposition of the stock purchased. Restricted stock awards were
granted for 3,800 shares in 1998 and 2,900 shares in 1997, and in
1998, 1997 and 1996, respectively, 300 shares, 300 shares and
1700 shares were forfeited. Compensation expense is being
recognized over the vesting period based on the fair market value
of common stock on the award date: $31.47 per share in 1998 and
$27.57 per share in 1997.
A nonqualified stock option plan for non-employee directors
provides for an annual grant to each eligible director of options
covering 1,500 shares at an option price equal to 100% of the
fair market value of the Company's common stock on the date of
grant. At December 31, 1998, 102,500 shares are available for
future grants. Option activity under this plan during the three
years ended December 31, 1998, is summarized below:
31
1998 1997 1996
-----------------------------------------------------------------
Options outstanding,
January 1 63,500 61,500 48,000
Granted 15,000 13,500 13,500
Exercised (12,000) (11,500) -
-----------------------------------------------------------------
Options outstanding, 66,500 63,500 61,500
December 31
Options exercisable,
December 31 51,500 63,500 61,500
-----------------------------------------------------------------
Weighted-Average
Exercise Price 1998 1997 1996
-----------------------------------------------------------------
Options outstanding,
January 1 $25.49 $24.18 $24.60
Granted 30.72 28.13 22.69
Exercised 23.81 22.28 -
-----------------------------------------------------------------
Options outstanding,
December 31 26.97 25.49 24.18
Options exercisable,
December 31 25.88 25.49 24.18
-----------------------------------------------------------------
The range of exercise prices at December 31, 1998, is $22.69 to
$30.72 per share. The weighted-average remaining contractual
life at December 31, 1998 for all plans is 5.2 years.
The Company has elected to measure compensation cost using the
intrinsic value method of accounting. Accordingly, no
compensation cost has been recognized related to stock option and
stock purchase plans because grants are at 100% of fair market
value on the grant date. If the fair-value based method of
accounting had been applied to stock option grants in the most
recent three years, the Company's net income and basic net income
per share would have been reduced as summarized below:
1998 1997 1996
------ ------- -------
Net income:
As reported $ 6,700 $44,400 $16,400
Pro forma 5,700 43,200 15,700
Net income per share:
As reported $ .41 $ 2.69 $ 1.00
Pro forma .35 2.62 .96
The following assumptions were used to compute the fair value of
the option grants in 1998, 1997 and 1996 using the Black-Scholes
option-pricing model: a risk-free interest rate of 5.75%, 6.15%
32
and 5.87%, respectively, stock volatility of 22.4%, 22.2% and
25.7%, respectively; dividend yield of 2% for all years; and
expected option lives of three years for the long-term plan and
two years for the non-employee directors plan.
Commitments and Contingencies
------------------------------
The Company announced on December 22, 1998, a definitive
agreement to acquire the assets of the Clinical Services Division
of Collaborative Clinical Research, Inc. for $15,000, subject to
post-closing adjustments.
At December 31, 1998, the Company was obligated under various
operating lease agreements with terms ranging from one month to
20 years. Rental expense in 1998, 1997 and 1996 was $7,300,
$7,600 and $7,900, respectively. Minimum rentals for
noncancelable operating leases with initial or remaining terms in
excess of one year are: 1999--$7,600; 2000--$6,700; 2001--$6,500;
2002--$6,000; 2003--$6,100 and thereafter $46,200. Minimum
operating lease payments have been reduced by related minimum
sublease income.
At December 31, 1998, outstanding contractual commitments
for the purchase of equipment and raw materials amounted to
$13,800, all of which is due to be paid in 1999.
The Company has accrued the estimated cost of environmental
compliance expenses related to soil or groundwater contamination
at current and former manufacturing facilities. The ultimate
cost to be incurred by the Company and the timing of such
payments cannot be fully determined. However, based on
consultants' estimates of the costs of remediation in accordance
with applicable regulatory requirements, the Company believes the
accrued liability of $1,300 at December 31, 1998, is sufficient
to cover the future costs of these remedial actions, which will
be carried out over the next several years. The Company has not
anticipated any possible recovery from insurance or other
sources.
Segment Information
--------------------
The Company adopted Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related
Information" at December 31, 1998. Prior years' data on segment
and geographic information has been restated. West
Pharmaceutical Services, Inc. serves the healthcare and consumer
products industries through design, manufacture and sales of
stoppers, closures, medical device components and assemblies made
from elastomers, metal and plastics. This segment is referred to
as Device Product Development and it consists of four regional
business units that manufacture and sell these products to
customers mainly in their respective regions. The Company also
provides contract services to healthcare and consumer companies
consisting of manufacture and/or packaging of drugs and personal
care items and laboratory testing. This segment is referred to
as Contract Services and consists of two business units.
Finally, the Company is engaged in research and development of
drug delivery systems for bio-pharmaceutical and other drugs to
33
improve their therapeutic performance and/or the method of
administration. This segment, consisting of two business units,
is referred to as Drug Delivery Research and Development.
The Company's executive management evaluates performance of these
segments based on operating profit, and allocates resources to
them based on the assessment for market growth and profitability.
Operating profit is income before interest expense, income taxes,
minority interests and equity in affiliates. Corporate expenses,
including global functional management costs, and unusual items
(restructuring charges in 1998 and 1996 and the 1998 acquired
research and development charge) are not allocated to segments.
The accounting policies of the segments are the same as those
reported in the Summary of Significant Accounting Policies on
page 22. Total net sales generated from the Device Product
Development segment include sales to one customer of
approximately $53,200, $50,500 and $48,300 in 1998, 1997 and
1996, respectively.
Summarized financial information concerning the Company's
segments is shown in the following table. The consolidated total
of operating profit corresponds to operating profit in the
accompanying Consolidated Statements of Income.
34
Device Drug delivery Corporate and
product Contract research and unallocated Consolidated
development services development items total
----------- -------- ----------- ------------ -------------
1998
-----
Net sales $365,600 $82,600 $1,500 $ - $449,700
Interest income 1,600 100 - 1,000 2,700
Operating profit 83,800 9,700 (5,300) (53,200) 35,000
Segment assets 337,300 80,500 13,400 74,400 505,600
Capital expenditures 31,500 6,700 1,400 2,200 41,800
Depreciation and
amortization expense 24,000 4,400 1,300 2,600 32,300
1997
-----
Net sales $371,900 $80,600 $ - $ - $452,500
Interest income 1,300 100 - 600 2,000
Operating profit 85,300 3,800 (3,200) (22,900) 63,000
Segment assets 324,200 73,300 2,800 77,600 477,900
Capital expenditures 25,200 4,300 1,200 3,700 34,400
Depreciation and
amortization expense 24,500 4,400 200 2,800 31,900
1996
-----
Net sales $387,300 $71,500 $ - $ - $458,800
Interest income 900 - - 400 1,300
Operating profit 83,700 (700) (2,300) (48,000) 32,700
Segment assets 344,200 77,600 2,000 53,600 477,400
Capital expenditures 25,500 4,500 400 1,300 31,700
Depreciation and
amortization expense 24,300 3,700 200 2,500 30,700
The following table presents sales by country in which the
legal subsidiary is domiciled and assets are located.
35
Sales Long lived assets
--------------------------------------------------------------------
1998 1997 1996 1998 1997 1996
---- ---- ---- ---- ---- ----
United States $282,300 $293,200 $283,900 $135,400 $127,700 $125,400
Germany 50,000 51,800 59,500 29,100 26,200 30,600
Other European countries 85,400 71,300 76,700 50,800 35,500 38,700
Other 32,000 36,200 38,700 17,300 17,100 20,200
------- ------- ------- ------- ------- -------
$449,700 $452,500 $458,800 $232,600 $206,500 $214,900
------- ------- ------- ------- ------- -------
36
QUARTERLY OPERATING AND PER SHARE DATA (UNAUDITED)
WEST PHARMACEUTICAL SERVICES, INC. AND SUBSIDIARIES
(in thousands of dollars, except per share data)
Net income (loss)
Net per share
Net Gross income Assuming
Quarter ended sales profit (loss) Basic dilution
-------------------------------------------------------------------------
March 31, 1998(1) $105,200 $ 31,300 $(19,700) $(1.19) $(1.19)
June 30, 1998 115,800 34,800 9,900 .58 .58
September 30, 1998(2) 113,900 33,400 6,500 .38 .38
December 31, 1998 114,800 35,700 10,000 .66 .66
-------- --------- --------- --------- ---------
$449,700 $135,200 $ 6,700 $ .41 $ .40
-------- --------- --------- --------- ---------
March 31, 1997 $114,700 $ 32,700 $ 8,400 $ .51 $ .51
June 30, 1997 123,100 36,300 10,100 .61 .61
September 30, 1997(3) 105,200 29,200 17,300 1.05 1.05
December 31, 1997(3) 109,500 33,900 8,600 .52 .51
-------- --------- --------- --------- ---------
$452,500 $132,100 $ 44,400 $ 2.69 $2.68
-------- --------- --------- --------- ---------
(1) First quarter 1998 results include a charge for acquired
research and development. See Note "Acquisitions and
Investments" on page 23.
(2) Third quarter 1998 results include a charge related to
staff reductions. See Note "Restructuring Charges" on
page 23.
(3) Third quarter 1997 results include net tax benefits
related mainly to the legal reorganization of subsidiaries
located in Germany; fourth quarter 1997 results include
adjustment to these net tax benefits related to changes
in the tax law and a tax audit. See Note "Income Taxes"
on page 24.
37
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE SHAREHOLDERS AND THE BOARD OF DIRECTORS OF
WEST PHARMACEUTICAL SERVICES, INC.:
In our opinion, the accompanying consolidated balance sheets
and the related consolidated statements of income, comprehensive
income, shareholders' equity and cash flows present fairly, in
all material respects, the financial position of West
Pharmaceutical Services, Inc. and its subsidiaries at December
31, 1998 and 1997, and the results of their operations and their
cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted
accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is
to express an opinion on these financial statements based on our
audits. We conducted our audits in accordance with generally
accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant
estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
February 26, 1999
38
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, 1998, have been
prepared in conformity with generally accepted accounting
principles 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 executed in accordance with management's
authorization and recorded properly, allowing for preparation of
reliable financial statements. There are inherent limitations in
the effectiveness of all internal control systems. The design of
the Company's system recognizes that errors or irregularities may
occur and that estimates and 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/ William G. Little
--------------------------------------------
William G. Little
Chairman and Chief Executive Officer
/s/ Steven A. Ellers
---------------------------------------------
Steven A. Ellers
Senior Vice President and Chief Financial Officer
39
TEN-YEAR SUMMARY
WEST PHARMACEUTICAL SERVICES, INC. AND SUBSIDIARIES
(in thousands, except per share data)
1998 1997 1996
--------------------------------------
SUMMARY OF OPERATIONS
Net sales $ 449,700 452,500 458,800
Operating profit (loss) $ 35,000 63,000 32,700
Income (loss) before income taxes and minority interests $ 27,800 57,400 25,800
Provision for income taxes $ 21,200 13,300 10,800
Minority interests $ 100 200 100
--------------------------------------
Income (loss) from consolidated operations $ 6,500 43,900 14,900
Equity in net income of affiliated companies $ 200 500 1,500
--------------------------------------
Income (loss)before change in accounting method $ 6,700 44,400 16,400
--------------------------------------
Income (loss) before change in accounting method per share:
Basic (a) $ .41 2.69 1.00
Assuming dilution (b) $ .40 2.68 .99
Average common shares outstanding 16,435 16,475 16,418
Average shares, assuming dilution 16,504 16,572 16,500
Dividends paid per common share $ .61 .57 .53
--------------------------------------
Research, development and engineering expenses $ 14,500 12,000 11,200
Capital expenditures $ 41,800 34,400 31,700
--------------------------------------
YEAR-END FINANCIAL POSITION
Working capital $ 55,500 112,700 91,100
Total assets $ 505,600 477,900 477,400
Total invested capital:
Total debt $ 141,100 89,000 98,400
Minority interests $ 600 400 300
Shareholders' equity $ 230,100 277,700 252,000
--------------------------------------
Total $ 371,800 367,100 350,700
--------------------------------------
PERFORMANCE MEASUREMENTS
Gross margin (c) % 30.1 29.2 27.5
Operating profitability (d) % 7.8 13.9 7.1
40
Tax rate % 76.1 23.2 41.8
Asset turnover ratio (e) .91 .95 .96
Return on average shareholders' equity % 2.6 16.7 6.5
Total debt as a percentage of total invested capital % 37.9 24.2 28.1
--------------------------------------
Shareholders' equity per share $ 15.31 16.76 15.39
Stock price range $3511/16-25 351/16-27 30-22
--------------------------------------
(a) Based on average common shares outstanding.
(b) Based on average shares, assuming dilution.
(c) Net sales minus cost of goods sold, including applicable
depreciation and amortization, divided by net sales.
(d) Operating profit (loss) divided by net sales.
(e) Net sales divided by average total assets; 1993 asset
turnover ratio is based on 12 months' sales for
international subsidiaries.
1998 includes a charge for acquired research and development
and a restructuring charge that reduced operating
results by $1.72 per share and $.15 per share, respectively,
and 1998 includes for the first time the results of two
companies acquired in 1998.
1997 includes the net tax benefit mainly from a German tax
reorganization which increased net income per share by $.48.
1996 includes a restructuring charge that reduced
operating results by $.91 per share.
1995 includes for the first time the net operating results of
Paco from May 1.
1994 includes for the first time the results of two companies
in which majority ownership was acquired in 1994.
1993 includes 13 months of operating results for international
subsidiaries.
Beginning in 1992 the Company's ownership interest in glass
manufacturing operating results is reported as equity in net
income of affiliates. Prior to the 1992 sale of a majority
interest in such operation, operating results were fully
consolidated.
1991 includes a restructuring charge that reduced operating
results by $1.37 per share.
1990 includes a restructuring charge that reduced operating
results by $.45 per share, and 1990 included for the first
time the results of two companies in which controlling
41
ownership was acquired in 1989.
TEN YEAR SUMMARY
WEST PHARMACEUTICAL SERVICES, INC. AND SUBSIDIARIES
(in thousands, except per share data)
1995 1994 1993 1992 1991 1990 1989
-------------------------------------------------------------------------------------
412,900 365,100 348,700 337,500 328,900 323,200 308,700
49,800 45,400 40,600 38,700 (1,600) 15,600 38,700
42,500 42,100 37,500 34,800 (7,700) 9,600 34,400
13,900 13,400 14,300 14,300 4,700 6,400 13,200
800 1,900 1,700 1,700 (2,400) 300 2,100
-------------------------------------------------------------------------------------
27,800 26,800 21,500 18,800 (10,000) 2,900 19,100
900 500 1,000 900 1,500 1,400 1,600
-------------------------------------------------------------------------------------
28,700 27,300 22,500 19,700 (8,500) 4,300 20,700
-------------------------------------------------------------------------------------
1.73 1.70 1.42 1.26 (.55) .27 1.28
1.71 1.69 1.41 1.25 (.55) .27 1.27
16,557 16,054 15,838 15,641 15,527 15,793 16,235
16,718 16,215 16,010 15,776 15,527 15,816 16,301
.49 .45 .41 .40 .40 .40 .31
-------------------------------------------------------------------------------------
12,000 12,000 11,400 11,100 10,800 10,900 11,900
31,300 27,100 33,500 22,400 25,600 33,200 34,300
-------------------------------------------------------------------------------------
86,600 50,400 46,400 37,700 26,500 36,500 50,400
480,100 397,400 309,200 304,400 313,200 343,500 313,000
114,300 57,800 32,300 42,000 58,400 78,500 58,100
200 1,900 10,900 10,100 8,400 11,700 9,100
254,100 227,300 188,100 168,600 152,600 176,100 179,700
-------------------------------------------------------------------------------------
368,600 287,000 231,300 220,700 219,400 266,300 246,900
-------------------------------------------------------------------------------------
42
28.6 32.1 30.2 28.8 25.6 24.4 26.5
12.1 12.4 11.7 11.5 (.5) 4.8 12.5
32.8 31.8 38.2 41.1 61.7 66.5 38.5
.94 1.04 1.11 1.10 1.00 .98 1.01
11.9 13.2 13.2 12.3 (8.9) 2.4 11.8
31.0 20.1 14.0 19.1 26.6 29.5 23.5
-------------------------------------------------------------------------------------
15.29 13.81 11.82 10.71 9.81 11.37 11.15
305/8-225/8 291/8-211/4 251/4-197/8 241/8-163/4 183/4-111/8 20-101/2 225/8 -147/8
-------------------------------------------------------------------------------------
44