FINANCIAL REVIEW
--------------------
The Company operates in one industry segment: manufacturing and marketing
specialized products that satisfy the unique filling, sealing, dispensing and
delivery needs of the health care and consumer products industries. Over 85% of
the Company's revenues are generated by the health care market. The Company's
products include stoppers, closures, containers, medical device components and
assemblies made from elastomers, metal, plastic and glass. The Company also
manufacturers related packaging machinery.
The following is management's discussion and analysis of the Company's
operating results for the three years ended December 31, 1994 and its financial
position as of year-end 1994. 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 1994 net income was $27.3 million, or $1.70 per share, compared
with net income of $23.5 million, or $1.48 per share, in 1993 and $19.7 million,
or $1.26 per share, in 1992. In 1993, the Company standardized December 31 as
the reporting year end for all consolidated subsidiaries. This change required
all international subsidiaries to report December 1993 results in the reporting
year 1993, resulting in the inclusion of 13 months of operating results in 1993
for these subsidiaries. Also in 1993 the Company lengthened the life of certain
production equipment, which reduced depreciation expense. The depreciable life
of this equipment now corresponds to its historical pattern of use and more
closely matches industry practice. These two changes added approximately $.07
per share to 1993 earnings compared with 1992 and about $.01 per share to 1993
earnings compared with 1994. In 1993, the Company also adopted Statement of
Financial Accounting Standards (SFAS) No. 109, which changed the Company's
accounting for income taxes to the liability method. The cumulative impact of
this method of income tax accounting was to reduce deferred tax liabilities
recorded as of January 1, 1993, adding $.06 per share to 1993 net income.
NET SALES
----------
Net sales were $365.1 million in 1994, an increase of 5% compared with
reported sales in 1993, which included $8.8 million of international
subsidiaries' sales attributable to December 1992 operations. Adjusting for that
extra month would improve the annual sales increase to 7%. This improvement
reflects increased sales to international health care markets, including the
acquisition of a subsidiary in Europe, and increased domestic consumer product
demand.
Increased health care market sales were generated by continued market
penetration in the Asia/Pacific region, acquisitions and volume increases in
European and domestic health care markets. The volume increases were the result
of new product offerings by customers and increased demand. Acquisitions during
1994 included Senetics, Inc., a domestic company specializing in innovative
closure systems for oral and inhalation drug delivery, and a 51%
1
interest in Schubert Seals A/S, a Danish manufacturer of metal seals for the
European pharmaceutical industry. The acquired companies added $8.4 million to
1994 sales. Sales in domestic and European markets have been negatively impacted
by price reductions on certain products due to government and consumer pressure
to reduce health care costs and by competition. The weaker U.S. dollar compared
with European and Asia/Pacific currencies added $2.3 million to reported 1994
sales amounts. Demand in Brazil for health care products increased during the
later part of year as a result of that country's economic plan, which has
stabilized the currency, but sales in South American health care markets were
lower for the year. Measured at consistent currency exchange rates, health care
sales increased by 5% over the comparable 12 months of 1993.
Domestic consumer products sales rose 18% in 1994. This increase reflects
primarily the increased demand for Spout-Pak(R) for gable carton juice
containers manufactured by International Paper Company and for the SAFETY
SQUEASE TM product manufactured for The Procter & Gamble Company's Scope(R) and
Aleve(R) products. Also machinery sales increased by $2.4 million, returning to
1992 levels, following 1993 delays in customers' capital spending programs.
In 1993, net sales increased by 3%, or $10.5 million, over 1992 levels.
Compared with 1992, this reported sales increase was reduced by $10.6 million
because of translation rate differences caused by the stronger U.S. dollar, but
increased by $8.1 million due to the inclusion of December 1993 operating
results of international subsidiaries. The inclusion of that additional month's
results in 1993 standardized the reporting year end for all consolidated
entities. Taking these two factors into account shows that worldwide health care
market sales grew at more than 5% in 1993. The growth was evident in all markets
served and came mainly from additional value-added products and services.
Especially notable was market penetration in the Asia/Pacific region. Sales to
consumer products markets declined by 8% compared with 1992, reflecting the
combined impact of product and customer rationalization and delays in customers'
new product market introductions. Sales of machinery declined in 1993 by $3
million as health care reform proposals caused customers to delay their capital
spending programs.
GROSS PROFIT
------------
The consolidated gross margin improved in 1994 to 31.8%, and gross profit
grew to $116.1 million, an 11% increase over 1993. This 1.8 percentage point
improvement in the gross margin compared with 1993 was the result, in part, of
higher sales volume, but a significant portion of the increase reflects the use
of Total Quality Management Technique, Manufacturing Resource Planning systems
and new technologies, which combined to improve productivity, yields and
logistics. These factors were evident in a 8% increase in the gross profit
earned on sales to the health care markets, with higher contributions generated
from sales to all market regions served. Margin increases in domestic and South
American operations improved significantly, while Asia/Pacific and European
markets generated margins comparable to 1993.
2
Gross profit on consumer products market sales more than doubled in 1994
compared with 1993. This reflects the significant increase in volume, the higher
value-added product sales made possible through the product rationalization
programs begun several years ago and the productivity improvements generated
through the programs discussed above. Gross profit related to machinery
operations increased primarily due to the volume of orders and higher sales in
the year.
The Company began installing Manufacturing Resource Planning systems in 1993.
In addition, more than 90% of the Company's employees have been trained in Total
Quality Management principles during 1993 and 1994. The remaining employees,
most of whom are located at international manufacturing facilities, will be
trained in 1995. The intent of these initiatives is to make the Company more
responsive to customer requirements and to improve shareholder value. The
continued benefits of these programs are expected to be evident in greater
efficiencies and customer satisfaction.
The gross margin in 1993 was 30%, and gross profit was $104.6 million, an 8%
increase over 1992. The gross margin was 1.4 percentage points higher than in
1992. The reduction in depreciation expense caused by the extension of the
useful life of certain production equipment was responsible for a .5 percentage
point increase in the 1993 margin. The remaining improvement reflected the
higher sales of value-added products, the benefits of restructuring activities
and the Total Quality Management and Manufacturing Resource Planning initiatives
begun in 1993. Gross profit on health care industry sales increased 7%,
reflecting these factors. Margins improved in all regions served except Europe.
European operations were adversely impacted by turbulent foreign exchange
markets, recession in Germany, and the closing of a low-cost manufacturing
facility in Serbia due to the United Nations embargo. Consumer products markets
generated a lower gross profit in 1993 due to a volume decline, although
mitigated by cost-savings programs. Consumer products operations continued to
focus on leading consumer products manufacturers, such as Procter & Gamble and
International Paper, and their need for innovative packaging systems that result
in value-added products. New product introduction delays by such companies
impacted 1993 negatively. Machinery operations achieved a higher gross margin on
1993 sales, although gross profit was down 15% due to lower volume.
EXPENSES
--------
Selling, general and administrative expenses have absorbed a higher
percentage of the sales dollar in each of the past three years. These expenses,
as a percentage of sales, were 18.9% in 1994, 18.2% in 1993 and 16.9% in 1992.
Selling, general and administrative expenses increased by $5.5 million in 1994,
or 9%, over 1993 levels. The increase is attributable in part to severance costs
related to a global reorganization and to productivity improvements. The
reorganization established global functional responsibilities and anticipated
the year-end 1994 buyout of the minority owners of five European subsidiaries.
The increase also reflects rent and other expenses related to the Company's new
headquarters facility, which became occupied in
3
September 1993; consolidation of expenses of acquired companies; higher costs
related to self-insured claims and outside service costs; and exchange rate
differences. Training and systems development will continue to improve
productivity and reduce costs.
The increase in 1993 selling, general and administrative expenses was 11%,
amounting to a $6.4 million increase over 1992. Outside service costs, including
training and systems development, and the move to the new corporate headquarters
facility were the primary causes of the increase.
Other expenses, net, in 1994 totaled $1.7 million compared with $.5 million
in 1993 and $.9 million in 1992. Included in this item are foreign currency
losses totaling $2.3 million, $5.4 million and $5.1 million, respectively. These
translation losses are driven by the high inflation in Brazil, which has been
significantly reduced since mid-1994 as a result of Brazil's economic plan
designed to reduce inflation and stabilize the currency. Also included are
foreign currency transaction losses of $.5 million in 1994, $.2 million in 1993
and $.5 million in 1992. The higher transaction losses in 1994 and 1992 were due
primarily to the realignment of European currencies. Foreign exchange losses are
offset in part by interest income totaling $1.2 million, $2.3 million, and $2.9
million in 1994, 1993, and 1992, respectively. Interest income was generated
mainly in Brazil and has been reduced in 1994 due to the economic program that
reduced interest rates and in 1993 due to reduced cash balances. Increased cash
balances in other geographic areas have produced interest income, which
partially offset the Brazilian reduction in 1994. In 1994, losses on real estate
totaled $.5 million compared with $1.4 million of gains in 1993 from the
Company's sale of its former headquarters and research center facilities and its
ownership interest in Tri/West Systems, Inc.
INTEREST
---------
Interest costs totaled $3.5 million in 1994, $3.4 million in 1993 and $4.1
million in 1992. Interest capitalized as a part of capital asset acquisitions
was approximately the same in each of the three years. Interest expense
attributable to the consolidation of companies acquired in 1994, mainly
attributable to capitalized leases, masked the further reduction in 1994
interest expense. This reduction was attributable to lower average domestic debt
levels and lower average interest rates on European debt. In 1993, the lower
interest costs resulted from an approximate $13 million decline in average debt
levels during the year. Average interest rates were also lower in 1993 compared
with 1992; however, the net cost of interest rate swaps increased.
INCOME TAXES
-------------
The Company adopted the liability method of income tax accounting beginning in
1993 as mandated by SFAS No. 109 requirements. The effective tax rate in 1994
was 31.8% versus 38.2% in 1993. The unusually low 1994 tax rate reflects the
one-time impact of a net refund of foreign taxes paid by subsidiaries in prior
years. The refund was triggered by the payment of dividends. In addition,
4
foreign tax loss carryforwards were assured realization due to the tax
consolidation of several operating subsidiaries, thereby reducing the tax asset
valuation allowance previously recorded on these potential tax benefits. The
transactions were made possible by the acquisition of the minority ownership in
these subsidiaries at year-end 1994. Finally, the 1994 effective income tax rate
declined due to lower state income tax liabilities and due to the higher
proportion of earnings being generated in lower-tax jurisdictions.
The 1993 effective tax rate of 38.2% represented a 2.9 percentage point drop
in the effective tax rate compared with 1992. The decline in the effective tax
rate resulted from the favorable settlement of a foreign tax audit issue, the
larger proportion of earnings generated in low-tax countries and a significant
reduction in the effective tax rate in Brazil. The 1993 decrease in the
statutory tax rate in Germany and lower state taxes offset the impact of the
increase in the U.S. federal tax rate. Because these tax rate changes largely
offset each other, the adoption of SFAS No. 109 did not have a material impact
on the 1993 tax provision.
The tax provision in 1992 was determined using previously accepted income tax
accounting principles, and deferred taxes were provided on the differences in
income for financial reporting and tax return purposes. At 41.1%, the 1992
effective tax rate reflected the mix of earnings, with higher-taxed European and
Latin American earnings offset in part by lower-taxed operations in Singapore
and Puerto Rico. The resulting effective rate was 3.2 percentage points above
the rate on domestic operations.
MINORITY INTERESTS AND EQUITY IN AFFILIATES
-------------------------------------------
Minority interests increased to $1.9 million in 1994 compared with $1.7 million
in 1993 and 1992. The increase primarily reflects the acquisition of a majority
interest in Schubert Seals A/S in mid- 1994. The increase was offset in part by
the November 30, 1994 acquisition of the remaining minority ownership in five
European subsidiaries.
Income from affiliates decreased in 1994 to half of the 1993 level. The
reduction reflects the translation loss on net monetary assets of the Company's
affiliates in Mexico due to the devaluation of the Mexican peso in late
December. Offsetting these losses in part was continued improvement in the glass
manufacturing operations of Schott West Pharmaceutical Glass Company in which
the Company holds a 40% interest. After losses in 1992, this joint venture
produced near breakeven results in 1993, and in 1994 has produced profits. The
turnaround resulted from the technical expertise of the Company's joint venture
partner, which improved product quality and increased productivity. Sales
increased in each of the past three years. Operating results of the Company's
affiliates in Japan and Mexico were lower in both 1994 and 1993 due to lower
margins and sales.
5
CHANGES IN ACCOUNTING METHODS
------------------------------
The Company adopted SFAS No. 109 beginning in 1993. Prior financial statements
were not restated, and the cumulative impact to January 1, 1993 of applying SFAS
No. 109 principles was a $1.1 million reduction in the deferred tax liabilities
reported at December 31, 1992. This cumulative impact was reported separately in
the 1993 income statement, net of minority interest.
The Company also adopted SFAS No. 112, Employer's Accounting for Postemployment
Benefits. This accounting standard covers all types of benefit plans provided to
former or inactive employees and requires recognition of a liability under
certain circumstances during employees' active service or when an employee is
terminated. This accounting change did not have any significant impact on 1993
operating results.
FINANCIAL POSITION
--------------------
The Company's financial position continues to be strong. Working capital totaled
$50.4 million at December 31, 1994, with a ratio of current assets to current
liabilities of 1.6:1. That year-end level was reduced significantly by the
liability to the former minority owners of five European subsidiaries for the
final installment of the acquisition price, which was paid in early 1995.
Receivable balances were higher at year-end 1994 as a function of a much
stronger December sales period. Inventory levels, excluding inventories of
companies acquired in 1994, were close to year end 1993 positions. Better
production planning systems have aided the control of inventories while assuring
customer needs can be met. Implementation of these systems at additional
manufacturing sites is expected to further reduce inventory requirements.
Cash from operating activities totaled $49.8 million in 1994. In addition, the
Company sold three former manufacturing properties, generating additional cash
of $3.4 million. These available funds more than covered cash requirements in
1994 including $27.1 million of capital expenditures, $7.2 million of dividends
to shareholders ($.45 per share) and $13.9 million of cash payments for 1994
acquisitions. Cash from exercise of employee stock options totaled $3.4 million.
New debt increased the debt to invested capital (total debt, minority interests
and shareholders' equity) ratio to 20.1%. Debt stood at $57.8 million at
year-end 1994 compared with $32.3 million at year-end 1993. Cash balances also
increased $22 million from December 31, 1993, and totaled $27.2 million at
December 31, 1994. The increase in assets noted above decreased the asset
turnover ratio to 1.04. Return on shareholders' equity was 13.2% equal to 1993.
1995 REQUIREMENTS
------------------
On January 2, 1995, the remaining 25.5 million deutsche marks due for the
acquisition of the minority owners' interests in five European subsidiaries was
paid using available cash and new debt facilities. Cash requirements for capital
projects in 1995 are estimated at $44 million. These projects focus on new
product tooling, cost reduction and quality improvements through
6
technological upgrades. Acquisition and implementation of new information
management systems will continue as will maintenance and improvements to the
existing production capacity. The 1986 currency and interest rate swap agreement
covering a DM20 million liability and a $7.2 million receivable expired early in
1995. The excess liability was funded with available cash and new debt
facilities. Cash requirements for remedial activity related to environmental
cleanup are not expected to exceed $1 million in 1995. In 1994, payments related
to environmental cleanup totaled $.8 million. Included in these payments are
amounts paid by the Company to perform testing and remedial work in Puerto Rico.
These payments complete the Company's obligation under a settlement agreement
with other potentially responsible parties signed in 1993 related to this site.
The Company has been indemnified by other financially responsible parties
against future government claims relating to groundwater contamination at the
site. All of the payments made in 1994 were covered by the estimated liability
recorded in prior years.
In 1995, in addition to cash flow from operations, the Company expects proceeds
from sale of stock arising from the exercise expiring employee stock options to
generate proceeds of $3.1 million. Management believes that this cash, available
credit facilities ($30 million short-term and DM35 million long-term at year-end
1994) and the Company's current capitalization provide sufficient flexibility to
meet cash flow requirements in the future.
7
CONSOLIDATED STATEMENTS OF INCOME
THE WEST COMPANY, INCORPORATED AND SUBSIDIARIES
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
(in thousands, except per share data)
1994 1993 1992
------------------------------------------------------------------------------
Net sales $365,100 100% $348,700 100% $338,200 100%
Cost of goods sold 249,000 68 244,100 70 241,500 71
--------------------------------------------------------------------------------
Gross profit 116,100 32 104,600 30 96,700 29
Selling, general and administrative expenses 69,000 19 63,500 18 57,100 17
Other expense, net 1,700 1 500 - 900 1
--------------------------------------------------------------------------------
Operating profit 45,400 12 40,600 12 38,700 11
Interest expense 3,300 1 3,100 1 3,900 1
--------------------------------------------------------------------------------
Income before income taxes and minority interests 42,100 11 37,500 11 34,800 10
Provision for income taxes 13,400 3 14,300 4 14,300 4
Minority interests 1,900 1 1,700 1 1,700 1
--------------------------------------------------------------------------------
Income from consolidated operations 26,800 7% 21,500 6% 18,800 5%
Equity in net income of affiliated companies 500 1,000 900
--------------------------------------------------------------------------------
Income before cumulative effect of change in
accounting method 27,300 22,500 19,700
Cumulative effect to January 1, 1993 of the change
in accounting for income taxes - 1,000 -
--------------------------------------------------------------------------------
Net income $ 27,300 $ 23,500 $ 19,700
--------------------------------------------------------------------------------
Net income per share:
Income before cumulative effect of change in
accounting method $ 1.70 $ 1.42 $ 1.26
Cumulative effect of change in accounting method - .06 -
--------------------------------------------------------------------------------
$ 1.70 $ 1.48 $ 1.26
--------------------------------------------------------------------------------
Average shares outstanding 16,054 15,838 15,641
--------------------------------------------------------------------------------
8
The accompanying notes are an integral part of the financial statements.
9
CONSOLIDATED BALANCE SHEETS
THE WEST COMPANY, INCORPORATED AND SUBSIDIARIES AT DECEMBER 31, 1994 AND 1993
(in thousands, except per share data)
1994 1993
------------------------------
ASSETS
Current assets:
Cash, including equivalents (1994--$15,900; 1993--$1,700) $ 27,200 $ 5,200
Accounts receivable, less allowance (1994--$1,000; 1993--$1,100) 57,800 43,300
Inventories 38,100 34,500
Other current assets 13,600 12,000
------------------------------
Total current assets 136,700 95,000
------------------------------
Property, plant and equipment 366,800 322,800
Less accumulated depreciation and amortization 174,600 150,000
------------------------------
192,200 172,800
Investments in affiliated companies 21,900 17,800
Goodwill 33,900 12,700
Assets held for disposition 1,400 5,200
Deferred charges and other assets 11,300 5,700
------------------------------
$397,400 $309,200
------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 19,200 $ 5,400
Notes payable 2,700 2,300
Accounts payable 19,300 14,100
Accrued expenses:
Salaries, wages and benefits 11,700 10,000
Deferred revenue and deposits 3,700 3,700
Other 29,700 13,100
------------------------------
Total current liabilities 86,300 48,600
------------------------------
Long-term debt, excluding current portion 35,900 24,600
Deferred income taxes 24,400 18,400
10
Other long-term liabilities 21,600 18,600
Minority interests 1,900 10,900
Shareholders' equity:
Common Stock, par value $.25 per share; shares authorized: 50,000
shares issued: 1994--16,845; 1993--16,845
shares outstanding: 1994--16,464; 1993--15,915 4,200 4,200
Capital in excess of par value 23,200 20,000
Cumulative foreign currency translation adjustments 17,100 11,000
Retained earnings 189,800 169,900
------------------------------
234,300 205,100
Less Treasury Stock (1994--381 shares; 1993--930 shares) 7,000 17,000
------------------------------
Total shareholders' equity 227,300 188,100
------------------------------
$397,400 $309,200
------------------------------
Certain items have been reclassified for 1993 to conform with 1994
classifications. The accompanying notes are an integral part of the financial
statements.
11
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
THE WEST COMPANY, INCORPORATED AND SUBSIDIARIES
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
Cumulative
foreign
Capital in currency
Common excess of translation Retained Treasury
(in thousands, except per share) Stock par value adjustments earnings Stock Total
------------------------------------------------------------------------------------------
Balance, January 1, 1992 $4,100 $14,000 $11,900 $139,700 $(17,100) $152,600
------------------------------------------------------------------------------------------
Net income 19,700 19,700
Shares issued under stock option plans 100 5,300 200 5,600
Cash dividends declared ($.40 per share) (6,300) (6,300)
Translation adjustments 300 300
Repurchase of Common Stock (3,300) (3,300)
------------------------------------------------------------------------------------------
Balance, December 31, 1992 4,200 19,300 12,200 153,100 (20,200) 168,600
------------------------------------------------------------------------------------------
Net income 23,500 23,500
Shares issued under stock plans 700 3,200 3,900
Cash dividends declared ($.42 per share) (6,700) (6,700)
Translation adjustments (1,200) (1,200)
------------------------------------------------------------------------------------------
Balance, December 31, 1993 4,200 20,000 11,000 169,900 (17,000) 188,100
------------------------------------------------------------------------------------------
Net income 27,300 27,300
Shares issued under stock plans 300 3,400 3,700
Shares issued for acquisition 2,900 6,600 9,500
Cash dividends declared ($.46 per share) (7,400) (7,400)
Translation adjustments 6,100 6,100
------------------------------------------------------------------------------------------
Balance, December 31, 1994 $4,200 $23,200 $17,100 $189,800 $ (7,000) $227,300
------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the financial statements.
12
CONSOLDIATED STATEMENTS OF CASH FLOWS
THE WEST COMPANY, INCORPORATED AND SUBSIDIARIES
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
(in thousands) 1994 1993 1992
------------------------------------------------
Cash flows from operating activities:
Income before accounting change $ 27,300 $ 22,500 $ 19,700
Adjustments to reconcile income before accounting
change to net cash from operating activities:
Depreciation and amortization 23,100 22,000 23,600
Loss (gain) on sales of real estate and investments 500 (1,400) -
Deferred income taxes (2,700) 2,500 500
Minority interests 1,900 1,700 1,700
Equity in undistributed earnings of affiliated companies, net (200) (500) (100)
(Increase) in accounts receivable (8,900) (4,900) (600)
(Increase) decrease in inventories (700) 2,700 (4,400)
(Increase) decrease in other current assets 2,500 3,000 (4,800)
Increase (decrease) in other current liabilities 3,000 (7,100) (2,900)
Other operating items 4,000 (2,000) 1,300
------------------------------------------------
Net cash provided by operating activities 49,800 38,500 34,000
------------------------------------------------
Cash flows from investing activities:
Property, plant and equipment acquired (27,100) (33,500) (22,400)
Proceeds from sales of assets 3,700 8,000 7,500
Payments for acquisitions, net of cash acquired (13,900) - -
------------------------------------------------
Net cash used in investing activities (37,300) (25,500) (14,900)
------------------------------------------------
Cash flows from financing activities:
New long-term debt 18,100 1,600 5,500
Repayment of long-term debt (3,000) (6,500) (26,700)
Notes payable, net (3,000) (2,700) 5,900
Issuance of Common Stock, net 3,400 3,900 5,600
Repurchase of Treasury Stock - - (3,300)
Capital contribution by minority owner 400 - 500
Dividend payments (7,200) (7,000) (6,300)
------------------------------------------------
Net cash provided by (used in) financing activities 8,700 (10,700) (18,800)
------------------------------------------------
13
Effect of exchange rates on cash 800 (100) -
------------------------------------------------
Net increase in cash and cash equivalents 22,000 2,200 300
Cash and cash equivalents at beginning of year 5,200 3,000 2,700
------------------------------------------------
Cash and cash equivalents at end of year $ 27,200 $ 5,200 $ 3,000
------------------------------------------------
Supplemental cash flow information:
Interest paid (net of amounts capitalized) $ 3,000 $ 3,000 $ 4,600
Income taxes paid $ 13,700 $ 11,900 $ 10,300
------------------------------------------------
Certain items have been reclassified for 1993 to conform with 1994
classifications. The accompanying notes are an integral part of the financial
statements.
14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the
accounts of the Company and all significant majority-owned subsidiaries. For
years ending prior to 1993, international subsidiaries are included in
consolidated financial statements based on fiscal years ending November 30. In
1993, international subsidiaries are included in consolidated financial
statements based on the 13 months ended December 31. The inclusion of the
additional month in 1993 added $8,100 to revenues, $2,100 to gross profit and
net income per share of approximately $.01. Material intercompany transactions
and accounts are eliminated in consolidation. An affiliated company reports on
the basis of the fiscal year ending October 31. Investments in affiliated
companies in which ownership exceeds 20% are accounted for on the equity method.
STATEMENT OF CASH FLOWS: Cash flows from operating activities are reported under
the indirect method; cash equivalents include time deposits, certificates of
deposit and all highly liquid debt instruments with original maturities of three
months or less.
INVENTORIES: Inventories are valued at the lower of cost or market. The cost of
inventories located in the United States is determined on the last-in, first-out
(LIFO) method; the cost of inventories located outside the United States is
determined principally on the average cost method.
FOREIGN CURRENCY TRANSLATION: Foreign currency transaction gains and losses and
translation gains and losses of subsidiaries operating in high-inflation
economies are recognized in the determination of net income. Foreign currency
translation adjustments of other subsidiaries and affiliates operating outside
the United States are accumulated as a separate component of shareholders'
equity.
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.
DEPRECIATION AND AMORTIZATION: For financial reporting purposes, depreciation is
computed principally on the straight-line method over the estimated useful lives
of the assets. For income tax purposes, depreciation is computed using
accelerated methods. Goodwill is being amortized on the straight-line method
over periods ranging from 30 to 40 years.
RESEARCH AND DEVELOPMENT: Research, development and engineering expenditures for
the creation and application of new or improved products and processes, which
amounted to $12,000, $11,400 and $11,100 in 1994, 1993 and 1992, respectively,
are expensed as incurred.
INCOME TAXES: Beginning in 1993, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 109, Accounting for Income Taxes, which
provides that income taxes be accounted for under the liability method.
Under the liability method, deferred income taxes are recognized by applying
enacted statutory tax rates, applicable to future years, to temporary
15
differences between the tax bases and financial statement carrying values of the
Company's assets and liabilities. Prior-year financial statements have not been
restated. The cumulative effect of adopting SFAS No. 109 is reported in the 1993
Consolidated Statement of Income net of applicable minority interests. In 1992,
the provision for deferred income taxes is applicable to timing differences
between taxable income and income for financial reporting purposes.
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.
NET INCOME PER SHARE: Net income per share is based on the weighted average
number of shares of Common Stock outstanding during each period. Common Stock
equivalents are not material.
OTHER INCOME (EXPENSE)
Other income (expense) includes the following:
1994 1993 1992
--------------------------------------------
Interest income $ 1,200 $ 2,300 $2,900
Foreign exchange losses (2,800) (5,600) (5,600)
Gain (loss) on sales of real estate
and investments (500) 1,400 -
Other 400 1,400 1,800
--------------------------------------------
$ (1,700) $ (500) $ (900)
--------------------------------------------
ACQUISITIONS AND INVESTMENTS
On November 30, 1994, the Company acquired the remaining minority ownership
interests in five European subsidiary companies. The total purchase price for
the minority interests in these subsidiaries was DM45,000. The cash portion of
the purchase price totaled DM30,000 of which DM4,500 was paid at closing and
DM25,500 on January 2, 1995; the balance of the consideration, DM15,000, was
paid through delivery of 363,214 shares of the Company's Common Stock at
closing.
On May, 20, 1994, the Company acquired a 51% ownership interest in Schubert
Seals A/S, a Danish manufacturer of metal seals and related products mainly for
the pharmaceutical industry. The total purchase was 31,000 kroner. The cash
portion of the purchase price for these acquisitions was financed principally
using new debt facilities. The acquisitions are being accounted for as
purchases, and Schubert Seals A/S has been consolidated from June 1, 1994. The
excess of the purchase price over the net assets acquired and minority interests
acquired approximates $20,000 and is being amortized over 40 years.
The following table presents selected financial information for the years ended
December 31, 1994 and 1993 on a pro forma (unaudited) basis assuming the
acquisitions noted above had occurred on January 1, 1994 and 1993:
16
1994 1993
--------------------------
Net sales $369,300 $359,900
Income before taxes 40,100 35,700
Income from consolidated
operations 27,200 21,800
Net income 27,700 23,800
Net income per share $ 1.72 $ 1.50
--------------------------
In 1994, the Company acquired Senetics, Inc., a company specializing in
the development of innovative delivery technologies for oral and inhalation drug
delivery markets and a 10% ownership interest in DANBIOSYST UK LIMITED, a
company specializing in noninvasive drug delivery methods. The total
consideration for these acquisitions was $5,600, all of which was paid in cash.
The acquisition of Senetics is being accounted for as a purchase, and the
company has been consolidated since the beginning of the year. Additional
consideration may be due depending on the sales of Senetics' products and other
conditions during the period from acquisition to January 5, 1999. Such
additional consideration would be accounted for as goodwill. Pro forma results
of the Senetics acquisition, assuming it had been made at beginning of 1993,
would not be materially different from the results reported.
INCOME TAXES
Income before income taxes and minority interests was derived as follows:
1994 1993 1992
--------------------------------------------
Domestic operations $26,500 $ 24,100 $22,100
International operations 15,600 13,400 12,700
--------------------------------------------
$42,100 $37,500 $34,800
--------------------------------------------
The related provision for income taxes consists of:
1994 1993 1992
--------------------------------------------
Currently payable:
Federal $9,500 $ 7,100 $ 7,100
State 600 2,000 2,000
International 6,000 2,700 4,700
--------------------------------------------
16,100 11,800 13,800
--------------------------------------------
17
Deferred:
Federal (300) 300 300
State - 100 -
International (2,400) 2,100 200
--------------------------------------------
(2,700) 2,500 500
--------------------------------------------
$13,400 $14,300 $14,300
--------------------------------------------
A reconciliation of the United States statutory corporate tax rate to the
Company's effective consolidated tax rate on income before income taxes and
minority interests is as follows:
1994 1993 1992
--------------------------------------------
Statutory corporate tax rate 35.0 % 35.0 % 34.0 %
Tax on international operations
(less than) in excess of
United States tax rate (3.4) (.3) 2.1
Prior-year international
tax adjustment - (1.1) 1.2
State income taxes, net of Federal
tax benefit .9 3.7 3.9
Other (.7) .9 (.1)
--------------------------------------------
Effective tax rate 31.8 % 38.2 % 41.1 %
--------------------------------------------
The net current and noncurrent components of deferred income taxes recognized in
the balance sheet at December 31, 1994 and 1993 are:
1994 1993
---------------------------
Net current assets $ 3,100 $ 3,000
Net noncurrent liabilities 24,400 18,400
---------------------------
The 1992 tax provision included deferred taxes related to the following timing
differences between income for tax and financial reporting purposes:
1992
-------
Accelerated depreciation $ 500
Loss on asset dispositions 400
Severance and deferred compensation (700)
Capitalized interest 100
Environmental compliance 200
-------
$ 500
-------
18
The following is a summary of the significant components of the Company's
deferred tax assets and liabilities as of December 31, 1994 and 1993 determined
in accordance with the provisions of SFAS No. 109. The adoption of SFAS No. 109
did not have a material impact on the tax provision in 1993.
1994 1993
--------------------------
Deferred tax assets:
Loss on asset dispositions
and plant closings $ 700 $ 1,800
Severance and deferred
compensation 7,900 7,200
Net operating loss carryovers 2,600 3,900
Foreign tax credit carryovers 1,900 2,300
Other 1,900 500
Valuation allowance (4,100) (5,700)
--------------------------
Total deferred tax assets $10,900 $10,000
--------------------------
Deferred tax liabilities:
Accelerated depreciation $29,600 $25,200
Severance and deferred compensation 600 -
Other 2,000 200
--------------------------
Total deferred tax liabilities $32,200 25,400
--------------------------
At December 31, 1994, subsidiaries had operating tax loss carryovers of
$8,700, which will be available to apply against the future taxable income of
such subsidiaries. The carryover periods expire beginning with $500 in 1995 and
continue through 1998. A valuation allowance has been recognized to offset the
related deferred tax asset to the extent realization is uncertain.
At December 31, 1994, unremitted earnings of international
subsidiaries, on which deferred income taxes have not been provided, amounted to
$51,000. 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, 1994, the Company had available foreign tax credit
carryovers of approximately $1,900 expiring in 1995 through 1999. A valuation
allowance has been recognized to offset the related deferred tax asset to the
extent realizations is uncertain.
INVENTORIES
Inventories at December 31 include the following:
1994 1993
-----------------------------------------
Finished goods $17,200 $14,100
Work in process 4,700 4,700
Raw materials 16,200 15,700
-----------------------------------------
$38,100 $34,500
-----------------------------------------
19
Included above are inventories located in the United States that are valued on
the LIFO basis, amounting to $16,200 and $14,300 at December 31, 1994 and 1993,
respectively, which are approximately $8,000 and $8,500, 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:
1994 1993
-------------------------------------------
Land $ 4,000 $ 3,400
Buildings and improvements 97,000 87,900
Machinery and equipment 196,400 170,400
Molds and dies 53,600 46,600
Construction in progress 15,800 14,500
-------------------------------------------
$ 366,800 $ 322,800
-------------------------------------------
Effective January 1, 1993, the Company changed the estimated life of its
elastomer molds and dies to six and four years, respectively, from three years.
The change allocates this equipment cost to better reflect expectations of
production service and is more consistent with industry practice. The effect of
the change was to reduce depreciation expense by $1,800 and increase net income
by $.06 per share in 1993.
AFFILIATED COMPANIES
At December 31, 1994, the following affiliated companies were accounted for
under the equity method:
Location Ownership
Interest
--------------------------------------------
West Rubber de Mexico S.A. Mexico 49%
Aluplast S.A. de C.V. Mexico 49%
Pharma-Tap S.A. de C.V. Mexico 49%
Schott West Pharmaceutical
Glass Company U.S.A. 40%
Daikyo Seiko, Ltd. Japan 25%
--------------------------------------------
20
A summary of the financial information for these companies is presented below:
1994 1993
-------------------------------------------
Balance Sheet:
Current assets $ 91,800 $ 72,900
Noncurrent assets 84,800 74,500
-------------------------------------------
Total assets $176,600 $147,400
-------------------------------------------
Current liabilities $ 46,400 $ 36,700
Noncurrent liabilities 64,400 49,600
Owners' equity 65,800 61,100
-------------------------------------------
Total liabilities and owners' equity $176,600 $147,400
-------------------------------------------
1994 1993 1992
-------------------------------------------
Income Statement:
Net sales $89,600 $83,500 $74,600
Gross profit 23,700 21,100 18,000
Net income 1,800 2,700 2,800
-------------------------------------------
Unremitted income of affiliated companies included in consolidated retained
earnings amounted to $9,100, $8,900 and $8,400 at December 31, 1994, 1993 and
1992, respectively. Dividends received from affiliated companies in 1994, 1993
and 1992 were $600 in each of the years.
DEBT
SHORT-TERM: At December 31, 1994, the Company had available unused short-term
lines of credit amounting to $30,000 and an unused long-term credit line of
DM35,000; a fee ranging from 1/12% to 1/8% per annum is payable on the available
credit lines. Other notes payable in the amounts of $2,700 and $2,300 at
December 31, 1994 and 1993, respectively, are payable within one year and bear
interest at weighted average interest rates of 7.4% and 8.2%, respectively.
LONG TERM:
1994 1993
-------------------------------------------
Unsecured:
Tax-exempt industrial revenue bonds, due 1995
to 2005 (3.67% to 3.97%) (a) $11,200 $11,600
Other notes, due 1995 to 1997
(6.0% to 10.13%) 27,500 14,500
Collateralized:
Mortgage notes, due 1995 to 2006 (3.5% to
11%) (b) 16,400 3,900
-------------------------------------------
Total long-term debt 55,100 30,000
Less current portion 19,200 5,400
-------------------------------------------
$35,900 $24,600
-------------------------------------------
21
(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 $1,300 is reflected as
a reduction of the principal outstanding on the bonds. (b) Real estate,
machinery and equipment with a carrying value of $22,000 at December 31, 1994
are pledged as collateral.
Long-term debt maturing in the years following 1995 is: $6,000 in 1996,
$11,600 in 1997, $600 in 1998 and $700 in 1999.
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. At December 31, 1994, under the most restrictive
debt agreement, retained earnings free of restriction were $67,000.
Interest costs incurred during 1994, 1993 and 1992 were $3,500, $3,400 and
$4,100, respectively, of which $200, $300 and $200, respectively, were
capitalized as part of the cost of acquiring certain assets.
To finance and hedge a portion of the 1986 purchase of ownership interests
in certain European subsidiaries, the Company entered into a currency and
interest rate swap agreement which matured early in 1995. Under the agreement,
the Company exchanged $7,200 bearing interest at LIBOR plus 1/8% for DM20,000
bearing interest at 7.5%. A swap agreement expired in 1994 under which the
Company agreed to swap $2,700 bearing interest at LIBOR for DM5,000 bearing
interest at 6.33%.
Principal and/or interest amounts due under swap agreements are presented in
the financial statements on a net basis.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of estimated fair value of financial instruments as
of December 31, 1994 is provided in accordance with the requirements of
Statement of Financial Accounting Standards No. 119. The estimated fair values
are based on methods appropriate to the circumstances:
Carrying Value Estimated Fair Value
------------------------ --------------------------
1994 1993 1994 1993
------------------------ --------------------------
Cash and cash equivalents $ 27,200 $5,200 $ 27,200 $5,200
Short- and long-term debt 57,800 32,300 56,200 32,600
Forward exchange contracts (400) 800
------------------------ --------------------------
Methods used to estimate the fair market values of the above listed financial
instrument are as follows: cash and cash equivalents are estimated at carrying
values that approximate market, due to the short-maturity of cash equivalents.
Debt is estimated based on current market quotes for instruments of similar
maturity. Interest rate swaps (see preceding Debt
22
Note) and forward exchange rate contracts are valued at published market prices,
market prices of comparable instruments or quotes.
Forward exchange contracts are used only to hedge raw material purchase
commitments and foreign-currency-denominated loans. At December 31, 1994, the
Company had $14,200 of forward exchange rate contracts to buy various foreign
currencies in 1995. Gains/losses on contracts used to hedge raw material
purchases are deferred and will adjust the cost of such inventory.
BENEFIT PLANS
PENSION PLANS: The Company and certain international subsidiaries sponsor
defined benefit pension plans. The United States plans cover substantially all
domestic employees and members of the Company's Board of Directors. The plans
call for benefits to be paid to eligible participants at retirement based on
compensation rates near retirement and/or on length of service. Contributions to
the United States employee plans reflect investment performance of plan assets,
benefits attributed to employees' service to date and service expected in the
future. Assets of the United States employee plans and one international
subsidiary plan consist primarily of common and preferred stocks,
investment-grade corporate bonds, guaranteed insurance contracts and United
States government obligations; other international subsidiary plans and the plan
for directors are not funded.
Total pension expense for 1994, 1993 and 1992 includes the following:
1994 1993 1992
-------------------------------------------------
Service cost $ 2,900 $ 2,600 $ 2,400
Interest cost 6,200 5,900 5,500
Actual return on assets (500) (12,600) (6,400)
Net amortization and deferral (8,500) 4,500 (1,800)
-------------------------------------------------
Pension expense (income) $ 100 $ 400 $ (300)
-------------------------------------------------
The following sets forth the funded status of the employee pension plans and the
amounts included in the accompanying balance sheets at December 31, 1994 and
1993:
United States Plans International Plans
---------------------------- --------------------------
1994 1993 1994 1993
---------------------------- --------------------------
Vested benefit obligations
(VBO) $(58,700) $(66,300) $(2,900) $(2,300)
---------------------------- --------------------------
Accumulated benefit
obligations (ABO) $(60,400) $(68,200) $(3,200) $(2,500)
---------------------------- --------------------------
Projected benefit
obligations (PBO) $(72,200) $(84,200) $(3,300) $(2,500)
Plan assets at fair value 92,900 96,500 - -
---------------------------- --------------------------
Assets in excess of (less
than) PBO 20,700 12,300 (3,300) (2,500)
Unrecognized net gain (11,300) (5,700) - (600)
Unrecognized prior
service cost (300) 1,700 - 600
Unamortized transition asset (6,400) (7,200) - -
---------------------------- --------------------------
Prepaid pension cost
(accrued liability)
included in the balance sheet $ 2,700 $ 1,100 $(3,300) $(2,500)
---------------------------- --------------------------
23
Information with respect to the unfunded pension plan for the Company's
nonemployee directors is as follows:
1994 1993
------------ ------------
VBO $(700) $(800)
------------ ------------
ABO $(800) $(800)
------------ ------------
PBO $(900) $(900)
Unrecognized net gain 200 -
Unrecognized prior service 200 300
cost
------------ ------------
Balance sheet liability $(900) $(600)
------------ ------------
United States Plans International Plans
---------------------------- --------------------------
1994 1993 1994 1993
---------------------------- --------------------------
Assumptions:
Discount rate 8.25% 7.0% 7.5% 7.5%
Rate of increase in
compensation 6.0% 5.75% 3.0% 3.0%
Directors' retainer
increase 5.5% 5.5% - -
Long-term rate of
return on assets 9.0% 9.0% - -
---------------------------- --------------------------
OTHER RETIREMENT BENEFITS: The Company provides minimal life insurance benefits
for certain United States retirees and pays a portion of health care (medical
and dental) costs for retired United States salaried employees and their
dependents. Benefits for plan participants age 65 and older are coordinated with
Medicare. Retirees' contributions to the cost of such benefits may be adjusted
from time to time. The Company's obligation is unfunded.
Total expense recognized for 1994, 1993 and 1992 with respect to these
nonpension retirement benefits includes the following:
24
1994 1993 1992
--------------------------------------------
Service Cost $ 500 $ 500 $ 500
Interest Cost 1,000 1,000 1,000
--------------------------------------------
$ 1,500 $ 1,500 $ 1,500
--------------------------------------------
The following sets forth the accrued obligation included in the accompanying
balance sheets at December 31, 1994 and 1993 applicable to each employee group
for nonpension retirement benefits:
1994 1993
---------------------------
Retired employees $(4,600) $ (6,000)
Active employees--fully eligible (1,700) (2,100)
Active employees--
not fully eligible (5,400) (6,600)
---------------------------
Total (11,700) (14,700)
Unrecognized (gain) loss from
assumption changes (2,900) 1,000
---------------------------
Balance sheet liability $(14,600) $(13,700)
---------------------------
The discount rates used were 8.25% for 1994 and 7% for 1993; the health care
cost trend was 14% in 1994 and 1993, decreasing to 5.5% by 2007. Increasing the
assumed trend rate for health care costs by one percentage point would result in
an accrued obligation of $12,200 at December 31, 1994 for these retirement
benefits and an increase of $100 in the related 1994 expense.
OTHER
The Company provides certain postemployment benefits for terminated and disabled
employees, including severance pay, disability-related benefits and health care
benefits. Statement of Financial Accounting Standards No. 112, Employer's
Accounting for Postemployment Benefits, requires these costs to be accrued over
the employee's active service period under certain circumstances or at the date
of the event triggering the benefit. The Company adopted this accounting
practice in 1993, and the impact was insignificant.
The Company also sponsors a defined contribution savings plan for
salaried and certain hourly United States employees. Company contributions are
equal to 50% of each participant's contribution up to 6% of their base
compensation. Total expense under the plan in 1994, 1993 and 1992 was $800, $800
and $600, respectively.
CAPITAL STOCK
The Company has 3,000,000 shares of Preferred Stock authorized, none of which
has been issued.
Through December 31, 1994, the Company has acquired 1,113,900 shares of
its Common Stock under a repurchase program covering up to 1,600,000 shares
announced in 1989. Purchases (sales) of Common Stock held in treasury during
the three years ended December 31, 1994 are as follows:
25
1994 1993 1992
------------------------------------------------
Shares held at
beginning of year 929,700 1,103,900 950,200
Purchases, net,
at fair market value 11,200 9,400 163,700
Shares issued for acquisition (363,200) - -
Stock option exercises (196,600) (183,600) (10,000)
------------------------------------------------
Shares held at end of year 381,100 929,700 1,103,900
------------------------------------------------
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 1990, 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. An employee's purchases are limited
annually to 10% of base compensation. The original offer expired on December 31,
1991, but was extended to December 31, 1995. Shares are purchased in the open
market, or Treasury shares are used.
STOCK OPTION AND AWARD PLANS
The Company has a long-term incentive plan for officers and key management
employees of the Company and its subsidiaries that provides for the grant
through March 8, 1998 of stock options, stock appreciation rights, restricted
stock awards and performance awards. A maximum of 2,125,000 shares of Common
Stock or stock equivalents are available for issue under this plan of which
568,600 shares are available at December 31, 1994 for future grant. 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, no stock options or stock
appreciation rights can be exercised during the six months immediately following
the date of grant and all stock options and stock appreciation rights must
expire no later than 10 years after the date of grant. All outstanding stock
option grants expire five years from date of grant.
Option activity under this plan during the three years ended December
31, 1994 is summarized below:
26
1994 1993 1992
------------------------------------------------
Options outstanding, January 1 737,600 735,900 859,600
Granted 197,400 187,900 177,900
Exercised ($13.25 to $24.94
per share) (193,600) (181,700) (290,600)
Forfeited (15,000) (4,500) (11,000)
------------------------------------------------
Options outstanding, December 31 726,400 737,600 735,900
------------------------------------------------
Average option price $19.62 $17.95 $17.02
------------------------------------------------
Under the Company's management incentive plan, participants are paid cash
bonuses on the attainment of certain financial goals. In 1993, bonus
participants were offered the opportunity to purchase Common Stock with up to
25% of their cash bonus award. Beginning in 1994, 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 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. In 1994 and 1993, restricted
stock awards for 3,000 shares and 1,900 shares, respectively, were granted, and
in 1994, 500 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: $24.94 per share in 1994 and $20.81 per share in 1993.
An executive stock compensation plan, which expired in 1989, provided
for the granting to key employees of shares without payment to the Company or
incentive stock options. Grants were at the discretion of a committee of the
Board of Directors, subject to certain conditions as to exercise price and time
period. Option activity under this plan for the year ended December 31, 1992 is
summarized below:
1992
----------
Options outstanding, January 1 68,200
Exercised ($14.00 to $19.25 per share) (64,800)
Forfeited (3,400)
----------
Options outstanding, December 31 -
----------
A nonqualified stock option plan for nonemployee directors was approved in 1992.
The plan provides for the annual granting 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. Common Stock issued pursuant
to the plan may not exceed 100,000 shares. Option activity under this plan
during the three years ended December 31, 1994 is summarized below:
27
1994 1993 1992
------------------------------------------------
Options outstanding, January 1 27,000 15,000 --
Granted 16,500 15,000 15,000
Exercised ($20.625) (3,000) -- --
Forfeited (4,500) (3,000) --
------------------------------------------------
Options outstanding, December 31 36,000 27,000 15,000
------------------------------------------------
Average option price $22.72 $21.875 $20.625
------------------------------------------------
COMMITMENTS AND CONTINGENCIES
At December 31, 1994, the Company was obligated under various operating lease
agreements with terms ranging from one month to 20 years. Rental expense in
1994, 1993 and 1992 was $5,000, $4,000 and $2,300, respectively. Minimum rentals
for noncancelable operating leases with initial or remaining terms in excess of
one year are: 1995--$5,100; 1996--$4,700; 1997--$4,300; 1998--$4,000;
1999--$3,800 and thereafter $55,000.
At December 31, 1994, outstanding contractual commitments for the
purchase of equipment and raw materials amounted to $13,300, all of which is due
to be paid in 1995.
The Company has accrued the estimated cost of environmental compliance
expenses related to current and former manufacturing facilities. The ultimate
cost to be incurred by the Company cannot be fully determined; however, based on
information currently available, the Company believes the accrued liability is
sufficient to cover the future costs of required remedial actions.
The Company guarantees 40% of the debt of Schott West Pharmaceutical
Glass Company under a $5,000 line of credit, of which $4,400 was outstanding at
December 31, 1994.
INDUSTRY SEGMENT AND OPERATIONS BY GEOGRAPHIC AREA The West Company and its
affiliated companies operate in one industry segment. The Company develops,
manufactures and markets stoppers, closures, containers, medical device
components and assemblies made from elastomers, metal, plastic and glass for the
health care and consumer products markets. The Company also manufactures related
packaging machinery. Total sales include sales to one customer of approximately
$40,200, $41,900 and $38,800 in 1994, 1993 and 1992, respectively. Operating
information and identifiable assets by geographic area of manufacture are shown
below:
1994 1993 1992
------------------------------------------------
Net sales:
United States $216,600 $207,500 $205,800
Europe 114,200 107,000 102,800
Other 34,300 34,200 29,600
------------------------------------------------
Total $365,100 $348,700 $338,200
------------------------------------------------
28
Income from consolidated
operations:
United States $ 16,400 $ 14,400 $ 12,800
Europe 5,500 3,700 3,600
Other 4,900 3,400 2,400
------------------------------------------------
$ 26,800 $ 21,500 $ 18,800
------------------------------------------------
Equity in net income (loss) of affiliated companies:
United States $ 200 $ - $ (500)
Other 300 1,000 1,400
------------------------------------------------
$ 500 $ 1,000 $ 900
------------------------------------------------
Income before cumulative effect
of change in accounting method $ 27,300 $ 22,500 $ 19,700
------------------------------------------------
Identifiable assets:
United States $ 179,000 $156,900 $147,800
Europe 151,000 97,600 106,200
Other 45,500 36,900 34,400
------------------------------------------------
$ 375,500 $291,400 $288,400
------------------------------------------------
Investments in affiliated companies:
United States $ 3,300 $ 2,800 $ 2,800
Europe 2,700 - -
Other 15,900 15,000 13,200
------------------------------------------------
$ 21,900 $ 17,800 $ 16,000
------------------------------------------------
Total assets $ 397,400 $309,200 $304,400
------------------------------------------------
29
QUARTERLY OPERATING AND PER SHARE DATA (UNAUDITED)
THE WEST COMPANY, INCORPORATED AND SUBSIDIARIES
(in thousands of dollars, except per share data)
1994 Three Months Ended 1993 Three Months Ended
---------------------------------------------------- ------------------------------------------------
Dec. 31 Sept. 30 June 30 March 31 Dec. 31 Oct. 3 July 4 April 4
---------------------------------------------------- ------------------------------------------------
Net sales 99,100 87,400 91,500 87,100 92,800 81,900 87,100 86,900
Gross profit 32,000 25,400 29,800 28,900 29,500 24,100 26,900 24,100
Income before change in
accounting method 7,200 5,600 7,500 7,000 5,900 4,800 6,200 5,600
Net income 7,200 5,600 7,500 7,000 5,900 4,800 6,200 6,600
Net income before change in
accounting method per share .44 .35 .47 .44 .37 .30 .39 .36
Net income per share .44 .35 .47 .44 .37 .30 .39 .42
Dividends paid per share .12 .11 .11 .11 .11 .10 .10 .10
Common Stock price:
High 29 1/8 25 3/4 24 3/4 25 3/4 24 7/8 25 1/4 23 1/2 24 3/8
Low 25 1/2 21 5/8 21 1/4 23 3/4 23 1/2 23 1/4 22 3/8 19 7/8
---------------------------------------------------- ------------------------------------------------
First quarter 1993 results include gains on sale of real estate amounting to
$.04 per share. Fourth quarter 1993 results include the full-year effect of a
change in the life of certain operating assets, which increased net income by
$.06 per share, and four months operating results for international
subsidiaries.
30
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE SHAREHOLDERS AND THE BOARD OF DIRECTORS OF THE WEST COMPANY,
INCORPORATED:
We have audited the accompanying consolidated balance sheets of The West
Company, Incorporated and Subsidiaries as of December 31, 1994 and 1993, and the
related consolidated statements of income, shareholders' equity, and cash flows
for each of the three years in the period ended December 31, 1994. 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. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of The
West Company, Incorporated and Subsidiaries as of December 31, 1994 and 1993,
and the consolidated results of their operations and their cash flows for each
of the three years in the period ended December 31, 1994 in conformity with
generally accepted accounting principles.
As discussed in the summary of Significant Accounting Policies Note to
the Consolidated Financial Statements, the Company changed its method of
accounting for income taxes in 1993.
Coopers and Lybrand, L.L.P.
600 Lee Road
Wayne, Pennsylvania
February 24, 1995
31
TEN YEAR SUMMARY
THE WEST COMPANY, INCORPORATED AND SUBSIDIARIES
(in thousands, except per share data)
1994 1993 1992
---------------------------------------------------
SUMMARY OF OPERATIONS
Net sales $ 365,100 348,700 338,200
Operating profit (loss) $ 45,400 40,600 38,700
Income (loss) before income taxes and minority interests $ 42,100 37,500 34,800
Provision for income taxes 13,400 14,300 14,300
Minority interests 1,900 1,700 1,700
---------------------------------------------------
Income (loss) from consolidated operations 26,800 21,500 18,800
Equity in net income of affiliated companies 500 1,000 900
---------------------------------------------------
Income (loss) before change in accounting method $ 27,300 22,500 19,700
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Income (loss) before change in accounting method per share (a)(b) $ 1.70 1.42 1.26
Average shares outstanding (b) 16,054 15,838 15,641
Dividends paid per common share (b) $ .45 .41 .40
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Research, development and engineering expenses $ 12,000 11,400 11,100
Capital expenditures $ 27,100 33,500 22,400
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YEAR-END FINANCIAL POSITION
Working capital $ 50,400 46,400 37,700
Total assets $ 397,400 309,200 304,400
Total invested capital:
Total debt $ 57,800 32,300 42,000
Minority interests 1,900 10,900 10,100
Shareholders' equity 227,300 188,100 168,600
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Total $ 287,000 231,300 220,700
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PERFORMANCE MEASUREMENTS
Gross margin (c) % 31.8 30.0 28.6
Operating profitability (d) % 12.4 11.7 11.5
Tax rate % 31.8 38.2 41.1
32
Asset turnover ratio (e) 1.04 1.11 1.10
Return on average shareholders' equity % 13.2 13.2 12.3
Total debt as % of total invested capital % 20.1 14.0 19.1
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Shareholders' equity per share $ 13.81 11.82 10.71
Stock price range (b) 29 1/8 - 21 1/4 25 1/4 - 19 7/8 24 1/8 - 16 3/4
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(a) Based on average shares outstanding.
(b) Adjusted for 2-for-1 stock split effective May 18, 1987.
(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.
1994 includes for the first time the results of two affiliates in which majority
ownership was acquired in 1994. 1993 includes 13 months of operating results in
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 ownership was
acquired in 1989. 1988 included for the first time the results of an affiliate
in which majority ownership was acquired in 1988. 1986 included for the first
time the results of five affiliates in which majority ownership was acquired in
1986.
33
TEN YEAR SUMMARY
THE WEST COMPANY, INCORPORATED AND SUBSIDIARIES
(in thousands, except per share data)
1991 1990 1989 1988 1987 1986 1985
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329,600 323,200 308,700 285,400 253,300 235,600 190,100
(1,600) 15,600 38,700 30,100 25,600 31,300 24,700
(7,700) 9,600 34,400 26,100 22,100 29,400 23,400
4,700 6,400 13,200 10,100 9,500 13,200 10,400
(2,400) 300 2,100 1,400 1,000 900 100
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(10,000) 2,900 19,100 14,600 11,600 15,300 12,900
1,500 1,400 1,600 2,800 2,100 1,700 2,100
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(8,500) 4,300 20,700 17,400 13,700 17,000 15,000
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(.55) .27 1.28 1.07 .85 1.06 .95
15,527 15,793 16,235 16,249 16,195 16,126 15,745
.40 .40 .31 .29 .27 .245 .225
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10,800 10,900 11,900 11,300 9,700 9,100 6,800
25,600 33,200 34,300 29,700 43,100 29,300 19,800
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26,500 36,500 50,400 53,000 45,200 36,200 40,300
313,200 343,500 313,000 298,900 280,100 238,200 179,200
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58,400 78,500 58,100 55,200 60,500 44,300 30,400
8,400 11,700 9,100 10,600 6,200 5,500 500
152,600 176,100 179,700 171,400 155,800 138,900 119,500
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219,400 266,300 246,900 237,200 222,500 188,700 150,400
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25.4 24.4 26.5 25.0 25.3 26.5 26.8
(.5) 4.8 12.5 10.5 10.1 13.3 13.0
61.7 66.5 38.5 38.6 42.9 45.0 44.5
1.00 .98 1.01 .99 .98 1.13 1.13
34
(8.9) 2.4 11.8 10.6 9.3 13.2 13.3
26.6 29.5 23.5 23.3 27.2 23.5 20.2
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9.81 11.37 11.15 10.53 9.61 8.61 7.54
18 3/4-11 1/8 20-10 1/2 22 5/8-14 7/8 17 1/2-12 1/4 22 1/8-12 1/2 17 1/8-12 1/4 13 5/8 - 8 3/4
35