Exhibit 13
FINANCIAL REVIEW
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The West Company (the Company) manufactures and markets specialized products
that satisfy the unique filling, sealing, dispensing and delivery needs of the
healthcare and consumer products industries. Over 85% of the Company's revenues
are generated by the healthcare markets. The Company's products include
stoppers, closures, containers, medical device components and assemblies made
from elastomers, metal and plastic. The Company also provides contract packaging
and contract manufacturing services.
The following is management's discussion and analysis of the Company's operating
results for the three years ended December 31, 1997 and its financial position
as of year-end 1997. The information should be read in conjunction with the
financial statements and accompanying notes appearing elsewhere in this report.
RESULTS OF OPERATIONS
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The Company's 1997 net income was $44.4 million, or $2.69 per share. This net
income includes a $7.9 million net tax benefit associated mainly with the tax
reorganization of the Company's German subsidiaries in 1997. 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 tax benefit in 1997 and restructuring charge in 1996, the Company's 1997 net
income was $36.5 million, or $2.21 per share, which compares with 1996 net
income of $31.3 million, or $1.91 per share, and 1995 net income of $28.7
million, or $1.73 per share.
In May 1995, the Company acquired Paco Pharmaceutical Services, Inc. (Paco), a
provider of contract manufacturing and contract packaging services to
pharmaceutical and consumer products companies in the United States and Puerto
Rico. Paco's operating results have been consolidated since May 1, 1995. In
December 1995, the Company purchased the remaining 49% minority interest in
Schubert Seals A/S (Schubert). The terms of these transactions are described in
the Note "Acquisitions and Investments" to the Consolidated Financial
Statements.
During 1996 and 1997, the Company implemented a major restructuring plan
adopted in the first quarter of 1996. The plan included downsizing or closing
manufacturing
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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 reduction to net realizable value of the facilities and
equipment made excess by the restructuring actions. The restructuring plan is
part of an overall strategy that includes enhanced technical capabilities and
product offerings for customers. Specifically, the actions created focused, more
efficient factories, and shifted certain production to lower-cost locations
so that the Company can meet the demands of the healthcare industry for high
quality, cost-effective products.
NET SALES
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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. Contract service sales increased 13% in 1997 compared with 1996 largely
as a result of stronger demand for Paco's contract packaging and manufacturing
services, and because Paco supplied a larger portion of the materials used in
1997 production.
Sales of core products manufactured for the healthcare markets increased 1%
(measured at constant exchange rates) in 1997 compared with 1996. Sales in
domestic markets increased at modest growth rates reflective of the market, and
the product mix was favorable. Sales in international markets were lower, and
the product mix was unfavorable. 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. Future results are becoming more difficult to predict in
these circumstances, but the current forecast indicates that soft sales demand
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will continue in the first half of 1998. The Companycontinues to focus on the
needs of its customers with planned introductions of new services and products.
Sales to consumer markets decreased 4% compared with 1996. The decline occurred
in the last quarter of 1997. The decrease in consumer sales is in part due to
lower demand for Spout-Pak(R), a fitment for gable-carton juice containers, low
demand for certain customers' products, and the loss of customers' replacement
products to other suppliers. Spout-Pak' demand has been declining since mid-1997
when a competitive fitment was introduced. The Company is currently working with
its customer on expansion into additional markets with a new fitment.
In 1996, net sales increased by 11%, or $45.9 million, compared with 1995.
Paco's sales were responsible for the majority of this sales increase. Reported
Paco sales increased 84%, a combination of full year ownership and strong
demand.
Sales of core healthcare products increased 7% (measured at constant exchange
rates) in 1996 compared with 1995 due to a combination of price increases and
higher demand. Volume increases were especially strong in European markets,
although the product mix was less profitable. In domestic markets, volume
increases were smaller, although the product mix showed a slight improvement. In
other international markets served, increased sales mainly reflect higher
demand.
Lower demand in certain consumer products markets, especially in the first half
of 1996, resulted in a 10% decline in product sales to these markets compared to
1995. However, the Company did experience strong demand for Spout-Pak', with a
volume increase of 10% compared with 1995. Machinery sales were flat compared
with 1995, despite the sale of this business in the third quarter of 1996.
Reported consolidated sales were reduced by about $4.4 million due to the
stronger U.S. dollar compared with most European currencies.
GROSS PROFIT
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The consolidated gross margin in 1997 was 29.2%, and gross profit was $132.1
million. These results compare with a 27.5% gross margin and gross profit of
$126.1 million in 1996.
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Margins on core healthcare product sales increased again by more than one
percentage point. Margins in domestic markets improved significantly due to cost
savings initiatives, which more than offset inflation, and to a more profitable
product mix. However, margins in international markets were lower due to lower
sales volume and a less profitable product mix.
Paco gross margins doubled due to sales volumes and efficiencies achieved. The
management of Paco was strengthened, and Paco's equipment is being upgraded to
attract higher-margin, longer-running sales opportunities.
Margins on consumer product sales increased, despite the lower sales volume, due
to lower resin raw material costs which are passed through to the customer in
lower prices and cost savings initiatives.
The gross margin of 27.5% in 1996 represented a decline from the 28.6% margin
achieved in 1995. However, gross profit increased 4.8% to $126.1 million. The
margin decline reflected the impact of the full year consolidation of the
lower-margin service operations provided by Paco. Margins on core health care
product sales increased by more than one percentage point due primarily to price
increases. Excluding price increase impacts, margins on health care product
sales were about equal to 1995. Volume increases and programs to create centers
of manufacturing excellence to improve the cost structure and increase
efficiencies offset inflation and the less favorable product mix.
Margins on Paco sales declined year-over-year due in part to low-priced
contracts that had been negotiated prior to acquisition and to inefficient
operations especially in the first half of the year.
Margins on consumer plastic sales increased, despite the lower volume, due to
cost saving initiatives, lower U.S. employee fringe benefit costs and product
mix. The machinery business generated a small gross profit in 1996 compared with
a loss in 1995.
EXPENSES
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Selling, general and administrative expenses as a percentage of sales were 15.5%
in 1997, 15.9% in 1996, and 16.9% in 1995.
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Selling, general and administrative expenses totaled $70.2 million in 1997,
$72.8 million in 1996, and $69.9 million in 1995. The 4% decrease in these
expenses in 1997 compared with 1996 was primarily the result of lower pension
costs due to higher income on 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 customer and higher expenses in Asia Pacific due to the recent
financial crisis in that market, an increase in estimated expenses associated
with environmental remediation activity, and higher spending related to
drug delivery system development.
The 4% increase in these expenses in 1996 compared with 1995 were primarily the
result of the following three factors: the accrual of 1996 incentive
compensation compared with no incentive compensation payment being earned for
1995, the consolidation of four additional months of operations of Paco, and
inflationary cost increases. These increases were offset, in part, by a
reduction in headcount related to the 1996 restructuring plan, lower U.S.
employee fringe benefit costs, lower claim costs and the impact of a stronger
U.S. dollar.
Transactions included in the other income category netted to income of $1.1
million in 1997, $.9 million in 1996, and $1.5 million in 1995. Interest income,
included therein, totaled $2.0 million in 1997, $1.3 million in 1996, and $2.0
million in 1995. In the most recent two years, cash balances available for
investment have increased significantly. Historically, interest income was
generated mainly in Brazil but has declined since mid-1994 when Brazil adopted
an economic plan designed to reduce inflation and stabilize the currency,
consequently reducing interest rates. Beginning in 1998, the Company's
subsidiary in Brazil will no longer be accounted for as operating in a
hyperinflationary economy since its cumulative inflation rate has dropped
dramatically over the past three years. In addition, in 1995 the Company had a
high level of advances to customers, related to new product programs, which have
been repaid. Also included in this category are foreign currency translation and
transaction losses totaling $.1 million in both 1997 and 1996, and $1.4 million
in 1995. The large loss in 1995 reflects accounting in the higher-inflation
countries of South America, mainly Brazil where the economic plan noted earlier
has reduced translation losses. Foreign currency transaction gains in 1997 of
$.1 million, $.2 million in 1996, and $.6 million in 1995
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reflect realignment of European currencies. Net losses on real estate and
investments totaled $.7 million in 1997, and $.2 million in both 1996 and 1995.
Losses on disposition of obsolete equipment were lower in 1997 after having
increased in 1996.
INTEREST
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Interest costs totaled $6.0 million in 1997 compared with $7.3 million in 1996
and $7.8 million in 1995, of which $.4 million, in 1997 and 1996 and $.5 million
in 1995 were capitalized as part of the cost of capital asset acquisitions.
The average consolidated debt level decreased in both 1997 and 1996. Higher debt
levels in 1995 reflect the acquisitions made in 1995 and 1994. Interest rates
also were lower in both 1997 and 1996 compared with the prior year.
INCOME TAXES
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The effective tax rate on consolidated income was 23.2% in 1997, 41.8% in
1996 and 32.8% in 1995.
The low tax rate for 1997 was significantly affected by two events; 1) a tax
reorganization of the Company's German subsidiaries which resulted in a
significant increase in tax basis for the assets of these entities and resulted
in tax credit refunds, and 2)repatriation of cash dividends from certain
subsidiaries. The net impact of these events was a net $7.9 million tax benefit.
The net benefit was originally recorded in the third quarter at the time of the
events. Subsequent tax law changes and completion of a tax audit in December
1997 reduced the benefit recorded in the third quarter. Excluding this benefit,
the 1997 effective tax rate is 37%, which includes the impact of an increase in
the statutory tax rate of France, enacted in the fourth quarter.
The higher 1996 tax rate reflects the low tax benefit on certain components of
the restructuring charge. Excluding the restructuring charge and the applicable
tax benefits, the 1996 effective tax rate would have been 36.6%.
Two factors were the primary cause of the low tax rate in 1995. First, the
Company changed its tax accounting method for Puerto Rico operations in
accordance with a U.S. Internal Revenue Service Procedure released late in 1994.
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The change related to the calculation of transfer pricing and applied
retroactively as well as prospectively. The impact of the tax change resulted in
a 3.3 percentage point decline in the effective tax rate. Second, the Company
recorded the benefit of tax credits which were assured realization, reducing the
tax rate by 1.7 percentage points. These benefits were offset somewhat by an
increase in the statutory tax rate in France, requiring adjustment of deferred
tax balances and increasing the effective rate by .6 of a percentage point.
Excluding the impacts of these adjustments associated mainly with prior year tax
accruals, the 1995 effective tax rate would have been approximately 36%.
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MINORITY INTERESTS AND EQUITY IN AFFILIATES
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Minority interests in net income of subsidiaries are insignificant since the
Company's late 1995 purchase of the remaining minority interest in Schubert.
Only a small minority ownership interest in a subsidiary in Spain remains.
Income from investments in affiliated companies totaled $.5 million in 1997,
$1.5 million in 1996, and $.9 million in 1995. The decrease in 1997 mainly
reflects much lower operating margins at Daikyo Seiko, Ltd., a Japanese company
in which the Company owns a 25% equity stake, and net expenses related to the
Company's investment in DanBioSyst UK Ltd., a contract research firm
specializing in drug delivery systems. The decline in Daikyo's contribution
reflects significant new plant investment and higher administrative costs
related to a newly-introduced product line, Resin CZ(R) vials, and a weaker
Japanese yen. The investment in DanBioSyst was recognized on an equity basis for
the first time in 1997.
The increase in affiliate contributions in 1996 was mainly the result of higher
sales and improved margins for Daikyo. The 1996 improvements were offset, in
part, by the September 30, 1995 sale of the Company's 40% partnership interest
in Schott West Pharmaceutical Glass Company and a weaker Japanese yen. Results
of the Company's investment in affiliates in Mexico were lower in 1997 due to
sales declines but were improved in 1996 compared with 1995 due to lower
currency translation losses.
FINANCIAL POSITION
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The Company believes that its financial position and current capitalization
indicate an ability to finance substantial future growth. Cash flow from
operations totaled $67.7 million in 1997. Working capital at December 31, 1997,
totaled $112.7 million, a ratio of current assets to current liabilities of 2.9
to 1, and includes a cash balance of $52.3 million. Debt to total invested
capital (total debt, minority interests and shareholders' equity) was 24.2%; the
outstanding debt balance was $89 million at December 31, 1997, compared with
$98.4 million at year-end 1996.
The cash flow from operations of $67.7 million, combined with cash from exercise
of employee stock options totaling $4 million, funded $34.4 million of 1997
capital
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expenditures, $1.7 million of debt reduction and $9.4 million of cash
dividends to shareholders ($.57 per share). The balance is reflected in a $25
million increase in cash and cash investments.
The Company has two revolving credit facilities which were amended and increased
in 1997. The first facility now provides for borrowings up to $70 million and
has a term of 364 days, renewable at the lender's option. The second facility
provides for borrowings up to $55 million through August 2002. At year-end 1997,
the Company had $70 million and $32.9 million available under the short-term and
long-term facilities, respectively. In addition, unused short-term committed
credit facilities totaling $21 million and unused long-term credit facilities
totaling $9 million at December 31, 1997, were available to subsidiaries.
The asset turnover ratio declined slightly to .95 in 1997 due to the sales
decrease. Return on average shareholders' equity was 16.7% for 1997, increasing
significantly over the 1996 return of 6.5%. The unusual restructuring charge and
tax benefit recorded in 1996 and 1997, respectively, are the reasons for the
significant difference.
1998 REQUIREMENTS
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Cash requirements for capital projects in 1998 are estimated at $45 million.
These projects focus on cost reduction and quality improvements through
technology upgrades and product and process standardization. New product tooling
and equipment and facilities to support the development of drug delivery
systems also are planned. Acquisition and implementation of new information
management systems will continue, as will maintenance and improvements to the
existing production capacity.
The Company is in the process of addressing the impact of the Year 2000 on the
conduct of the business. The Company has been implementing a plan over the past
two years and expects the work to continue into 1999. New software applications
have been installed or are in implementation stage which address Year 2000
compliance in the Company's information systems. Other potential exposure areas
are being addressed throughout the Company. Equipment is being reviewed with
vendors and internal tests are being conducted on critical items of equipment.
Non-compliant equipment is expected to be repaired by year end 1998 or replaced
before year end 1999. All principal material, supply and equipment vendors have
been contacted to
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determine their progress. Government agencies, financial institutions and other
service providers are being contacted to determine the programs that are being
followed with certification sought from all providers indicating their
completion of Year 2000 programs. The Company believes that it is addressing all
of the areas critical to its ability to conduct business in the future without
interruption due to the Year 2000. Significant time is being spent to install
compliant software but in most instances the system is being implemented mainly
for its improved functionality. Internal resources are being used in other areas
to carry out the Year 2000 program and the Company does not anticipate any other
significant costs related to these activities.
In accordance with the Company's foreign exchange management policy, the adverse
consequences resulting from foreign currency exposure are mitigated in part 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.
Cash requirements for remedial activity related to environmental cleanup are not
expected to exceed $1 million in 1998. In 1997, payments related to
environmental cleanup totaled $.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 1998, in addition to cash flow from operations, the Company expects proceeds
from employee stock option exercises to equal the average of the past several
years. Management believes these sources of cash, available credit facilities
and the Company's current capitalization provide sufficient flexibility to meet
future cash flow requirements and pursue its stated acquisition strategy.
Statements about anticipated 1998 earnings and the timing and nature of
contributors to 1998 results are forward-looking statements that involve risks
and uncertainties. The following important factors have affected, and in
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the future could effect, the Company's actual results and could cause the
Company's results to differ materially from those expressed in any forward
looking statements made by, or on behalf of, the Company. These, include but are
not limited to, sales demand, the timing of customers' product introductions,
competitive pressures, the strength or weakness of the U.S. dollar, inflation,
the cost of raw materials, successful continuance of cost-improvement programs,
the potential dilution from acquisitions of other businesses, and the cost of
borrowing funds.
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CONSOLIDATED STATEMENTS OF INCOME
THE WEST COMPANY, INCORPORATED AND
SUBSIDIARIES FOR THE YEARS
ENDED DECEMBER 31, 1997, 1996 AND 1995
(in thousands, except per share data)
1997 1996 1995
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Net sales $452,500 100% $458,800 100% $412,900 100%
Cost of goods sold 320,400 71 332,700 73 294,700 71
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Gross profit 132,100 29 126,100 27 118,200 29
Selling, general and
administrative expenses 70,200 16 72,800 16 69,900 17
Restructuring charge -- -- 21,500 5 -- --
Other income, net (1,100) (1) (900) (1) (1,500) --
------------------------------------------------------------------
Operating profit 63,000 14 32,700 7 49,800 12
Interest expense 5,600 1 6,900 1 7,300 2
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Income before income taxes and
minority interests 57,400 13 25,800 6 42,500 10
Provision for income taxes 13,300 3 10,800 2 13,900 3
Minority interests 200 -- 100 -- 800 --
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Income from consolidated operations 43,900 10% 14,900 4% 27,800 7%
Equity in net income of -- -- --
affiliated companies 500 1,500 900
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Net income $ 44,400 $ 16,400 $ 28,700
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Net income per share:
Basic $ 2.69 $ 1.00 $ 1.73
Assuming Dilution $ 2.68 $ .99 $ 1.71
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Average Common Shares Outstanding 16,475 16,418 16,557
Average Shares Assuming Dilution 16,572 16,500 16,705
CONSOLIDATED BALANCE SHEETS
THE WEST COMPANY, INCORPORATED AND SUBSIDIARIES
AT DECEMBER 31, 1997 AND 1996
(in thousands, except per share data)
ASSETS 1997 1996
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Current assets:
Cash, including equivalents (1997--$41,700; 1996--$10,400) $ 52,300 $ 27,300
Accounts receivable, less allowance (1997--$3,000; 1996--$1,900) 60,400 69,300
Inventories 38,300 44,000
Current deferred income tax benefit 9,400 10,200
Other current assets 10,300 5,900
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Total current assets 170,700 156,700
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Property, plant and equipment 428,600 431,600
Less accumulated depreciation and amortization 226,400 221,300
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202,200 210,300
Investments in affiliated companies 22,700 24,100
Goodwill 51,600 58,900
Deferred charges and other assets 30,700 27,400
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$477,900 $477,400
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 700 $ 1,000
Notes payable 900 1,900
Accounts payable 18,600 23,900
Accrued expenses:
Salaries, wages and benefits 13,400 13,900
Income taxes payable 5,400 3,100
Other 19,000 21,800
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Total current liabilities 58,000 65,600
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Long-term debt, excluding current portion 87,400 95,500
Deferred income taxes 30,100 39,700
Other long-term liabilities 24,300 24,300
Minority interests 400 300
Shareholders' equity:
Preferred Stock, shares authorized: 3,000;
shares issued and outstanding: 1997-0; 1996-0
Common Stock, par value $.25 per share; shares authorized: 50,000;
shares issued: 1997--16,845; 1996--16,845;
shares outstanding: 1997--16,568; 1996--16,383 4,200 4,200
Capital in excess of par value 24,000 24,000
Cumulative foreign currency translation adjustments 3,400 16,300
Unrealized holding gains (losses) on securities, net 100 400
Retained earnings 252,500 217,700
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284,200 262,600
Less Treasury Stock (1997--277 shares; 1996--462 shares) 6,500 10,600
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Total shareholders' equity 277,700 252,000
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$477,900 $477,400
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The accompanying notes are an integral part of the financial statements.
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CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
THE WEST COMPANY, INCORPORATED AND SUBSIDIARIES FOR THE YEARS ENDED
DECEMBER 31, 1997, 1996 AND 1995
(in thousands, except per share data)
Capital in
Common excess of Retained Treasury
Stock par value Other earnings Stock Total
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Balance, January 1, 1995 $4,200 $23,200 $17,100 $189,800 $(7,000) $227,300
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Net income 28,700 28,700
Shares issued under stock plans 300 2,800 3,100
Cash dividends declared ($.50 per share) (8,300) (8,300)
Foreign currency translation adjustments 3,000 3,000
Unrealized gains (losses) on
securities, net 300 300
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Balance, December 31, 1995 4,200 23,500 20,400 210,200 (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 ($.54 per share) (8,900) (8,900)
Foreign currency translation adjustments (3,800) (3,800)
Unrealized gains (losses) on
securities, net 100 100
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Balance, December 31, 1996 4,200 24,000 16,700 217,700 (10,600) 252,000
---------------------------------------------------------------------------
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Net income 44,400 44,400
Shares issued under stock plans 4,100 4,100
Cash dividends declared ($.58 per share) (9,600) (9,000)
Foreign currency translation adjustments (12,900) (12,900)
Unrealized gains (losses) on
securities, net (300) (300)
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Balance, December 31, 1997 $ 4,200 $ 24,000 $ 3,500 $252,500 $ (6,500) $277,700
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The accompanying notes are an integral part of the financial statements.
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CONSOLIDATED STATEMENTS OF CASH FLOWS
THE WEST COMPANY, INCORPORATED AND SUBSIDIARIES
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(in thousands) 1997 1996 1995
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Cash flows from operating activities:
Net income $44,400 $16,400 $28,700
Adjustments to reconcile net income to net cash
from operating activities:
Depreciation and amortization 31,900 30,700 29,600
Restructuring charge - 21,500 -
Loss on sales of real estate and investments 700 200 200
Deferred income taxes (7,500) (5,700) 2,000
Pension and other retirement plans (4,100) (600) 1,400
Equity in undistributed earnings of affiliated
companies, net (100) (1,100) (700)
Decrease (increase) in accounts receivable 1,000 (3,400) 1,400
Decrease (increase) in inventories 2,700 (2,700) (4,500)
Decrease (increase) in other current assets 400 (300) 500
(Decrease) increase in other current liabilities (1,300) 5,900 (13,100)
Other operating items (400) 2,500 600
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Net cash provided by operating activities 67,700 63,400 46,100
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Cash flows from investing activities:
Property, plant and equipment acquired (34,400) (31,700) (31,300)
Proceeds from sales of assets 1,700 7,200 4,500
Payments for acquisitions, net of cash acquired - (1,600) (72,200)
Customer advances, net of repayments (300) 1,600 (1,600)
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Net cash used in investing activities (33,000) (24,500) (100,600)
----------------------------------------------
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Cash flows from financing activities:
Borrowings under long-term
revolving credit agreements, net 200 1,500 20,200
Proceeds from other long-term debt - - 50,800
Repayment of long-term debt (1,200) (9,000) (27,300)
Notes payable, net (700) (6,200) 5,500
Issuance of Common Stock, net 4,000 3,500 2,800
Dividend payments (9,400) (8,700) (8,100)
Purchase of treasury stock - (10,000) -
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Net cash (used in) provided by financing activities (7,100) (28,900) 43,900
-------------------------------------------------
Effect of exchange rates on cash (2,600) (100) 800
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Net increase (decrease) in cash and cash equivalents 25,000 9,900 (9,800)
Cash and cash equivalents at beginning of year 27,300 17,400 27,200
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Cash and cash equivalents at end of year $52,300 $27,300 $17,400
-------------------------------------------------
Supplemental cash flow information:
Interest paid net of amounts capitalized $ 5,700 $ 6,200 $ 6,300
Income taxes paid $20,000 $14,300 $12,800
-------------------------------------------------
The accompanying notes are an integral part of the financial statements.
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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 Paco Pharmaceutical
Services, Inc. (Paco), 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 as 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
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firm commitments, primarily raw material purchases including local needs in
foreign subsidiaries, are deferred and recognized as part of the underlying
transaction.
MARKETABLE SECURITIES: The Company classifies its investments in debt and
marketable securities under one of three categories: held-to-maturity,
available-for-sale and trading. Unrealized gains and losses on securities
available-for-sale are recorded in stockholders' equity and are not material.
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 15 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 in 1997 and $11,200 in 1996 and $12,000 in
1995, are expensed as incurred, and are 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.
INCOME TAXES: Deferred income taxes are recognized by applying enacted statutory
tax rates, applicable to future years, to
114
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 has elected to account 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 method. The treasury method assumes use of exercise
proceeds to repurchase Common Stock at the average fair market value in the
period.
OTHER INCOME (EXPENSE)
Other income (expense) includes the following:
1997 1996 1995
---- ---- ----
Interest income $ 2,000 $ 1,300 $ 2,000
Foreign exchange losses -- (100) (1,400)
Loss on sales of real estate
and investments (700) (200) (200)
Other (200) (100) 1,100
------- ------- -------
$ 1,100 $ 900 $ 1,500
------- ------- -------
RESTRUCTURING CHARGE
On March 29, 1996, the Company approved a major restructuring plan which
included the closing or substantial downsizing of six manufacturing facilities,
disposition of related excess equipment
115
and properties and an approximate 5% reduction of the workforce. The total
estimated charge related to these planned actions was $15,000, net of $6,500 of
income tax benefits, and 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, 1997, 225 employees have
been terminated and total payout of severance and benefits to date is $6,700.
The remaining accrued net charge covered facility close down costs and reduced
to estimated net realizable value the carrying value of equipment and
facilities made excess by the restructuring plan. Facilities in Puerto Rico,
Colorado, Germany and Argentina were closed; two 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 sale of two buildings and certain excess equipment and payout of remaining
severance have been completed.
ACQUISITIONS AND INVESTMENTS
On April 27, 1995, the Company completed its acquisition of Paco, a company
providing contract packaging and contract manufacturing services to
pharmaceutical and personal-care consumer companies in the United States and
Puerto Rico. Paco was a public company traded over-the-counter, and the merger
followed the completion of a cash tender offer for Paco common stock at $12.25
per share, for a total consideration of $52,400. The purchase was financed using
available cash of $22,400 and a long-term credit facility of $30,000. The excess
of the purchase price over the net assets acquired of $22,900 is being amortized
over 30 years. Paco has been consolidated since May 1, 1995.
On December 18, 1995, the Company acquired the remaining minority ownership
interest in Schubert Seals A/S (Schubert), a Danish manufacturer of metal seals
and related products mainly for the pharmaceutical industry. The purchase price
for the minority owner's interest was DK40,000 ($7,200 at December 18, 1995) and
was financed through new debt facilities. The excess of the purchase price over
the net assets acquired approximates $4,500 and is being amortized over 40
years.
These acquisitions were accounted for as purchases. The following table
presents selected financial information for the year ended December 31, 1995, on
a pro forma basis (unaudited) assuming the acquisitions noted above had occurred
on January 1, 1995:
1995
---------
Net sales $433,000
Income before taxes 40,000
Income from consolidated
operations 26,600
Net income 27,500
Basic net income per share $ 1.66
---------
The Company acquired in each of the years 1996 and 1995 a 10% ownership interest
in DanBioSyst UK Ltd.(DBS), a contract reseach company specializing in
noninvasive drug delivery methods. The total consideration for these
acquisitions was $1,600 in cash and $500 in Common Stock in 1996 and cash of
$2,500 in 1995. The Company currently holds a 30% ownership interest in DBS.
INCOME TAXES
Income before income taxes and minority interests was derived as follows:
1997 1996 1995
---- ---- ----
Domestic operations $39,500 $ 11,500 $ 26,700
International operations 17,900 14,300 15,800
------- -------- --------
$57,400 $ 25,800 $ 42,500
------- -------- --------
The related provision for income taxes consists of:
1997 1996 1995
-------- -------- --------
Currently payable:
Federal $ 16,000 $ 8,000 $ 5,600
State 600 700 600
International 4,200 7,800 5,700
-------- -------- --------
20,800 16,500 11,900
-------- -------- --------
116
Deferred:
Federal 1,800 (3,600) 1,200
State -- (200) 100
International (9,300) (1,900) 700
-------- -------- --------
(7,500) (5,700) 2,000
-------- -------- --------
13,300 $ 10,800 $ 13,900
-------- -------- --------
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:
1997 1996 1995
------- ------- ------
Statutory corporate tax rate 35.0% 35.0% 35.0%
Tax on international operations
in excess of
United States tax rate 4.7 2.4 1.6
German tax reorganization benefit (21.7) - -
U.S. tax on repatriated
international earnings 4.3 1.0 .1
Puerto Rico tax accounting change - - (1.9)
State income taxes, net of Federal
tax benefit .7 1.8 1.0
Other .2 1.6 (3.0)
------- ------- ------
Effective tax rate 23.2% 41.8% 32.8%
------- ------- ------
In the third quarter of 1997, the Company completed a tax reorganization of
certain German subsidiaries. The benefit of this reorganization was reduced in
the 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:
1997 1996
------- -------
Net current assets $ 9,000 $10,200
Net noncurrent liabilities 19,500 29,800
------- -------
117
The following is a summary of the significant components of the Company's
deferred tax assets and liabilities as of December 31:
1997 1996
------- -------
Deferred tax assets:
Loss on asset dispositions
and plant closings $2,500 $ 2,900
Severance and deferred
compensation 9,200 9,100
German tax reorganization 8,300 -
Net operating loss carryovers 2,300 2,300
Foreign tax credit carryovers 900 900
Restructuring charge 1,200 3,500
Other 4,000 3,000
Valuation allowance (2,500) (2,900)
------- -------
Total $25,900 $18,800
------- -------
1997 1996
------- -------
Deferred tax liabilities:
Accelerated depreciation $26,900 $31,500
Severance and deferred compensation 4,300 1,900
Other 5,200 5,000
------- -------
Total $36,400 $38,400
------- -------
At December 31, 1997, subsidiaries had operating tax loss carryovers of
$37,300, which will be available to apply against the future taxable income of
such subsidiaries. The carryover periods expire beginning with $400 in 1998 and
continue through 2002.
In 1997, the Company repatriated $12,000 of undistributed earnings of
international subsidiaries and $2,400 of tax was recorded. At December 31, 1997,
remaining undistributed earnings of international subsidiaries, on which
deferred income taxes have not been provided, amounted to $74,600. 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,
118
1997, the
Company had available foreign tax credit carryovers of approximately $900
expiring in 1998 through 2002.
Net Income Per Share
- --------------------
In 1997, the Financial Accounting Standards Board (FASB) issued a new
standard for calculating and presenting net income per share. The Note "Summary
of Significant Accounting Policies" describes the calculation of income per
share for the Company based on this new standard. Basic net income per share is
identical to the Company's historical presentation of net income per share,
which had been calculated using the weighted average number of common shares
outstanding, because dilution from the Company's common stock equivalents was
immaterial. The Company's income per share in all financial statements has been
amended to reflect the new standard.
The following table reconciles shares used in basic net income per share to
the shares used in net 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.
1997 1996 1995
------ ------ ------
Net Income $44,400 $16,400 $28,700
- --------------------------------------------------------------------------------
Basic Average Common
Shares outstanding 16,475 16,418 16,557
Assumed stock options exercised
and awards vested 97 82 161
------- ------- -------
Average common shares,
assuming dilution 16,572 16,500 16,718
- --------------------------------------------------------------------------------
In June 1997, the FASB issued Financial Accounting Standard No. 130, "Reporting
Comprehensive Income", that establishes rules for reporting and displaying
comprehensive income. The Company will display comprehensive income and its
components in the Consolidated Statement of Shareholders' Equity beginning in
1998. Comprehensive income includes the net income reported and other revenue,
expenses, gains and losses which generally accepted accounting principles
exclude from current net income. For the Company, the items
119
excluded from current net income are unrealized gains or losses on
available-for-sale securities and foreign currency adjustments.
INVENTORIES
Inventories at December 31 include the following:
1997 1996
----------------------------------
Finished goods $15,800 $18,000
Work in process 8,100 8,500
Raw materials 14,400 17,500
----------------------------------
$38,300 $44,000
----------------------------------
Included above are inventories located in the United States that are valued
on the LIFO basis, amounting to $12,600 and $11,000 at December 31, 1997 and
1996, respectively, which are approximately $7,600 and $8,600, 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 1997 1996
----------------------------------
Land $ 3,500 $ 4,300
Buildings and improvements 7-50 97,000 105,500
Machinery and equipment 3-20 261,800 249,200
Molds and dies 4-6 52,600 55,200
Construction in progress 13,700 17,400
-------------------------
$428,600 $431,600
-------------------------
AFFILIATED COMPANIES
At December 31, 1997, the following affiliated companies were accounted for
under the equity method:
120
Fiscal
Year Ownership
Location End Interest
-------------------------------------------
The West Company de Mexico S.A. Mexico December 31 49%
Aluplast S.A. de C.V. Mexico December 31 49%
Pharma-Tap S.A. de C.V. Mexico December 31 49%
Daikyo Seiko, Ltd. Japan October 31 25%
DanBioSyst U.K. Ltd. United Kingdom March 31 30%
-------------------------------------------
A summary of the financial information for these companies is presented below:
1997 1996
------------------------
Balance Sheet:
Current assets $ 80,500 $ 82,400
Noncurrent assets 91,900 77,500
------------------------
Total assets $172,400 $159,900
------------------------
Current liabilities $ 47,600 $ 36,800
Noncurrent liabilities 66,500 65,300
Owners' equity 58,300 57,800
------------------------
Total liabilities and owners' equity $172,400 $159,900
------------------------
1997 1996 1995
----------------------------------------------
Income Statement:
Net sales $79,300 $80,800 $80,400
Gross profit 19,800 25,500 23,600
Net income 3,300 5,900 3,400
-----------------------------------------------
121
Unremitted income of affiliated companies included in consolidated retained
earnings amounted to $11,100, $11,000 and $9,800 at December 31, 1997, 1996 and
1995, respectively. Dividends received from affiliated companies were $400 in
1997, $400 in 1996 and $200 in 1995.
Daikyo Seiko, Ltd. classifies its debt and equity securities in one of two
categories, trading or available-for-sale, and carries them at fair value.
Unrealized holding gains and losses on trading securities are included in
income. Unrealized holding gains and losses, net of the related tax effect, on
available-for-sale securities are reported as part of shareholders' equity until
realized. Cost of securities is determined on the moving average method. The
Company's equity in these unrealized gains and losses included in the Company's
shareholders' equity was $100, $400 and $300 at December 31, 1997, 1996 and
1995, respectively.
DEBT
SHORT-TERM: Notes payable in the amounts of $900 and $1,900 at December 31, 1997
and 1996, respectively, are payable within one year and bear interest at a
weighted-average interest rate of 4% and 5.7%, respectively. At December 31,
1996, short-term debt (under a credit line) of $15,800 and short-term debt of
BPS 6,950 ($11,900) were classified as long-term because of the Company's intent
to renew the borrowings using available long-term credit facilities.
LONG TERM:
At December 31 1997 1996
------- -------
Unsecured:
Revolving credit facility,
due 2002 (5.7% to 8.05%) $22,100 $15,800
Tax-exempt industrial revenue bonds,
due 2005 (4.2% to 5.95%) (a) 11,100 11,100
Subordinated debentures, due 2007 (6.5%) 3,200 3,100
Other notes, due 1998 to 2002 (3.93% to 9.5%) 40,300 52,300
Collateralized:
Mortgage notes, due 1998 to 2016 (3.5% to
12.5%) (b) 11,400 14,200
------- -------
Total long-term debt 88,100 96,500
Less current portion 700 1,000
------- -------
$87,400 $95,500
------- -------
122
(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 $11,900 at
December 31, 1997 are pledged as collateral.
In 1997, the Company amended an existing revolving credit facility, increasing
the amount available for borrowing and adjusting the interest rate and facility
fees. The amended agreement provides for borrowings up to $70,000 and $55,000
with a term of 364 days and five years through August 2002, respectively,
renewable at the lenders' option. At December 31, 1997, $70,000 is available
under the short-term facility. 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. Two subsidiaries have long-term lines of credit providing up to
FF47,100 ($7,800) at a floating rate based on PIBOR plus 2/5% and a commitment
fee up to 3/10% per annum. At December 31, 1997, FF37,100 ($6,200) is available
under these facilities. In addition, a subsidiary has a long term line of credit
providing up to DM35,000 ($19,500) at floating rates based on DM LIBOR plus
3/10% and a commitment fee of 1/10% per annum. At December 31, 1997, DM5,900
($3,300) is available under this facility.
At December 31, 1997, $4,300 at par value of Paco'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 $1,100
and $1,200 at December 31, 1997 and 1996, 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 1998 is: $700 in 1999, $41,200 in
2000, $700 in 2001 and $24,500 in 2002.
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. Under the most restrictive debt covenant at December 31, 1997
retained earnings free of restriction were $108,400.
123
Interest costs incurred during 1997, 1996 and 1995 were $6,000, $7,300 and
$7,800, respectively, of which $400, $400 and $500, respectively, were
capitalized as part of the cost of acquiring certain assets.
At December 31, 1997, 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% for a five-year period. 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 1997 and 1996.
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
-------------------------------------------
1997 1996 1997 1996
------- ------- ------- -------
Cash and cash equivalents $52,300 $27,300 $52,300 $27,300
Short-and long-term debt 89,000 98,400 88,400 98,100
Interest rate swaps(a) - -
Forward exchange contracts - 300
------- ------- ------- -------
(a) The estimated fair value of the interest rate swaps was less than $100
at December 31, 1997 and 1996. The estimated fair value of forward exchange
contracts was less than $100 at December 31, 1997.
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 exchange rate
contracts are valued at published market prices, market prices of comparable
instruments or quotes.
124
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.
Forward exchange contracts are used to hedge raw material and equipment
purchase commitments and foreign-currency-denominated receivables and payables.
At December 31, 1997 and 1996, the Company had forward exchange rate contracts
that totaled $600 and $5,300, respectively. Forward exchange contracts related
to equipment and raw material purchases are denominated in German marks and
Italian lira; generally, these contracts expire monthly through July 31, 1998.
BENEFIT PLANS
PENSION PLANS: The Company and certain domestic and 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 international subsidiary plans consist primarily of common and preferred
stocks, investment-grade corporate bonds, and United States government
obligations; other international subsidiary plans and the plan for directors are
not funded.
Total pension (income) expense for 1997, 1996 and 1995 includes the
following:
1997 1996 1995
-------------------------------------
Service cost $ 3,600 $ 3,900 $ 2,800
Interest cost 8,000 7,700 6,800
Actual return on assets (27,000) (20,100) (30,000)
Net amortization and deferral 11,800 8,000 20,600
-------------------------------------
Pension (income) expense $(3,600) $ (500) $ 200
-------------------------------------
125
The following sets forth the funded status of the employee pension plans
and the amounts included in the accompanying balance sheets at December 31:
United States Plans International Plans
------------------------- -------------------------
1997 1996 1997 1996
--------- --------- --------- ---------
Vested benefit
obligations (VBO) $ (90,900) $ (81,900) $ (6,700) $ (6,500)
--------- --------- --------- ---------
Accumulated benefit
obligations (ABO) $ (92,700) $ (83,300) $ (7,400) $ (7,300)
--------- --------- --------- ---------
Projected benefit
obligations (PBO) $(111,200) $ (99,800) $ (7,800) $ (7,700)
Plan assets at fair value 161,200 140,200 4,700 4,000
--------- --------- --------- ---------
Assets in excess of (less
than) PBO 50,000 40,400 (3,100) (3,700)
Unrecognized net
(gain) loss (38,100) (31,900) 200 300
Unrecognized prior
service cost -- (400) -- --
Unamortized transition
asset (4,100) (4,900) -- --
--------- --------- --------- ---------
Prepaid pension cost
(accrued liability) $ 7,800 $ 3,200 $ (2,900) $ (3,400)
--------- --------- --------- ---------
126
Information with respect to the unfunded pension plan for the Company's
non-employee directors is as follows:
1997 1996
------- -------
VBO $(1,100) $ (900)
------- -------
ABO $(1,200) $(1,000)
------- -------
PBO $(1,400) $(1,300)
Unrecognized net gain (200) (100)
Unrecognized prior service
cost 200 200
------- -------
Accrued liability $(1,400) $(1,200)
------- -------
United States Plans International Plans
-------------------------------------------
1997 1996 1997 1996
-------------------------------------------
Assumptions: --
Discount rate 7.0% 7.5% 6.5% 6.5%
Rate of increase in
compensation 6.0% 6.0% 5.0% 3.0%
Directors' retainer
increase 5.5% 5.5% -- --
Long-term rate of
return on assets 9.5% 9.5% 9.25% 9.25%
--- --- ---- ----
OTHER RETIREMENT BENEFITS: 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 plan participants age 65 and older are coordinated with Medicare.
In 1996, the Company changed the plan to mandate Medicare Risk (HMO) coverage
wherever possible, capped the total contribution for non-HMO coverage and
limited eligibility for the plan to active employees age 45 or older. These plan
changes reduced the accrued obligation and such reduction is being amortized as
a component of the benefit cost. Retirees' contributions to the cost of these
benefits may be adjusted from time to time. The Company's obligation is
unfunded.
127
Total (income) expense recognized with respect to these non-pension
retirement benefits includes:
1997 1996 1995
------- ------- -------
Service cost $ 400 $ 500 $ 400
Interest cost 500 600 900
Net amortization and deferral (1,400) (1,200) (100)
------- ------- -------
Total (income) expense $ (500) $ (100) $ 1,200
------- ------- -------
The accrued obligation included in the accompanying balance sheets at December
31, 1997 and 1996, applicable to each employee group for non-pension retirement
benefits is:
1997 1996
-------- --------
Retired employees $ (3,100) $ (3,400)
Active employees--fully eligible (1,900) (1,400)
Active employees--not fully eligible (2,400) (1,800)
-------- --------
Total (7,400) (6,600)
Unrecognized net loss 900 1,000
Unrecognized gain from plan changes (7,500) (9,000)
-------- --------
Accrued liability $(14,000) $(14,600)
-------- --------
The discount rates used were 7% for 1997 and 7.5% for 1996; the healthcare cost
trend used is 9% in 1998, decreasing to 5.5% by 2005. Increasing the assumed
trend rate for healthcare costs by one percentage point would result in an
accrued obligation of $7,800 at December 31, 1997, for these retirement benefits
and an increase of less than $100 in the related 1997 expense.
OTHER: The Company provides certain postemployment 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 $900 was incurred for Company contributions in
each of the last three years.
CAPITAL STOCK
Purchases (sales) of Common Stock held in treasury during
128
the three years ended December 31, 1997 are as follows:
1997 1996 1995
-------- -------- --------
Shares held at January 1 462,200 224,000 381,100
Purchases, net,
at fair market value 40,200 507,200 38,600
Shares issued for acquisition -- (19,600) --
Stock option exercises (225,200) (249,400) (195,700)
-------- -------- --------
Shares held at December 31 277,200 462,200 224,000
-------- -------- --------
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. An employee's purchases were limited
annually to 10% of base compensation. The offer has been extended to December
31, 1999. Shares are purchased in the open market, or treasury shares are used.
129
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 2,925,000 shares of common
stock or stock equivalents are available for issue under this plan, of which
107,900 shares are available as of December 31, 1997, 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, and all stock
options and stock appreciation rights must expire no later than 10 years after
the date of grant.
Option activity under this plan during the three years ended December 31, 1997,
is summarized below:
1997 1996 1995
---------- -------- --------
Options outstanding,
January 1 750,400 854,600 726,400
Granted 748,500 209,800 332,400
Exercised (213,700) (249,400) (191,200)
Forfeited -- (64,600) (13,000)
---------- -------- --------
Options outstanding,
December 31 1,285,200 750,400 854,600
---------- -------- --------
Options exercisable,
December 31 640,200 630,400 734,600
---------- -------- --------
Weighted-Average
Exercise Price 1997 1996 1995
---------- -------- --------
Options outstanding,
January 1 $ 23.42 $ 22.60 19.62
Granted 28.82 22.45 27.44
Exercised 21.45 20.00 19.28
Forfeited -- 22.73 18.80
---------- -------- --------
Options outstanding,
December 31 27.23 23.42 22.60
Options exercisable,
December 31 27.04 22.13 21.37
---------- -------- --------
130
The range of exercise prices at December 31, 1997 is $15.13 to $30.13 per share.
The weighted-average remaining contractual life at December 31, 1997, is 6
years.
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 2,900 shares in 1997 and 3,000 shares in 1995, and in 1997, 1996 and
1995, respectively, 300 shares, 1,700 shares and 200 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: $27.57 per share in 1997
and $25.31 per share in 1995.
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. Common Stock issued pursuant to the plan may not
exceed 200,000 shares of which 117,500 shares are available as of December 31,
1997, for future grants. Option activity under this plan during the three years
ended December 31, 1997, is summarized below:
1997 1996 1995
------ ------ ------
Options outstanding,
January 1 61,500 48,000 36,000
Granted 13,500 13,500 16,500
Exercised (11,500) -- (4,500)
------ ------ -----
Options outstanding and
exercisable, December 31 63,500 61,500 48,000
------ ------ ------
1997 1996 1995
------ ------ ------
Weighted-Average Price
Options outstanding,
January 1 $24.18 $24.60 $22.66
Granted 28.13 22.69 28.25
Exercised 22.28 -- 22.42
------ ------ ------
Options outstanding and
exercisable, December 31 25.49 24.18 24.60
------ ------ ------
131
The range of exercise prices at December 31, 1997 is $22.69 to $28.25 per share.
The weighted-average remaining contractual life at December 31, 1997 is 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 plans because grants are at 100% of fair market value on
the grant date. If the fair-value based method of accounting has been applied to
stock option grants in the most recent three years, the Company's net income and
basic net income per share would had been reduced as summarized below:
1997 1996 1995
------- ------- -------
Net income:
As reported $44,400 $16,400 $28,700
Pro forma 43,200 15,700 27,600
Net income per share:
As reported $ 2.69 $ 1.00 $ 1.73
Pro forma 2.62 .96 1.67
The following assumptions were used in 1997, 1996 and 1995 to compute the fair
value of the option grants in 1997, 1996 and 1995 using the Black-Scholes
option-pricing model: a risk-free interest rate of 6.15%, 5.87% and 6.57%,
respectively, stock volatility of 22.2%, 25.7% and 19.4%, 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.
132
COMMITMENTS AND CONTINGENCIES
At December 31, 1997, the Company was obligated under various operating lease
agreements with terms ranging from one month to 20 years. Rental expense in
1997, 1996 and 1995 was $7,600, $7,900 and $6,600, respectively. Minimum rentals
for noncancelable operating leases with initial or remaining terms in excess of
one year are: 1998--$6,800; 1999--$6,600; 2000--$5,600; 2001--$5,400;
2002--$5,600 and thereafter $54,200. Minimum operating lease payments have been
reduced by related minimum sublease income.
At December 31, 1997, outstanding contractual commitments for the purchase of
equipment and raw materials amounted to $7,800, all of which is due to be paid
in 1998.
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 $1,600 at December
31, 1997 is sufficient to cover the future costs of these remedial actions,
which will be carried out over the next two to five years. The Company has not
anticipated any possible recovery from insurance or other sources.
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 and
plastic, and provides contract packaging and contract manufacturing services for
the healthcare and consumer products markets. Total sales include sales to one
customer of approximately $50,500, $48,300 and $43,700 in 1997, 1996 and 1995,
respectively. Operating information and identifiable assets by geographic area
of manufacture are shown below:
133
1997 1996 1995
-------- -------- --------
Net sales:
United States $293,200 $283,900 $247,400
Europe 123,100 136,200 128,000
Other 36,200 38,700 37,500
-------- -------- --------
Total $452,500 $458,800 $412,900
-------- -------- --------
Net income from consolidated operations:
United States $ 20,500 $ 5,900 $ 19,000
Europe 19,000 6,800 5,000
Other 4,400 2,200 3,800
-------- -------- --------
Total $ 43,900 $ 14,900 $ 27,800
-------- -------- --------
Identifiable assets:
United States $268,100 $246,700 $251,900
Europe 145,100 153,800 158,500
Other 42,100 52,800 48,100
-------- -------- --------
$455,300 $453,300 $458,500
-------- -------- --------
Investments in affiliated companies:
United States $ 300 $ 700 $ 700
Europe 7,000 7,300 4,600
Other 15,400 16,100 16,300
-------- -------- --------
$ 22,700 $ 24,100 $ 21,600
-------- -------- --------
Total assets $477,900 $477,400 $480,100
-------- -------- --------
In June 1997, the [FASB Financial Accounting Standards Board] issued Financial
Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and
Related Information", which requires that the Company report financial and
descriptive information about its reportable operating segments beginning at
year end 1998. Operating segments are defined as components of a business about
which separate financial information is available and evaluated regularly by the
chief operating decision maker in deciding how to allocate resources and in
assessing performance. Management is still in process of evaluating the impact
this statement will have on its public reporting.
134
QUARTERLY OPERATING AND PER SHARE DATA (UNAUDITED)
THE WEST COMPANY, INCORPORATED AND SUBSIDIARIES
(in thousands of dollars, except per share data)
Net Income (Loss) Per Share
Net ---------------------------
Net Gross Income Assuming
Quarter Ended Sales Profit (Loss) Basic Dilution
- ------------- -------- -------- -------- ---------- ---------
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(1) 105,200 29,200 17,300 1.05 1.05
December 31, 1997(1) 109,500 33,900 8,600 .52 .51
-------- -------- -------- ----- -----
$452,500 $132,100 $ 44,400 $2.69 $2.68
-------- -------- -------- ----- -----
March 31, 1996 $113,900 $ 31,300 $ (8,200) $(.49) $(.49)
June 30, 1996 119,000 31,900 8,100 .50 .49
September 30, 1996 111,300 29,600 6,600 .40 .40
December 31, 1996 114,600 33,300 9,900 .60 .60
-------- -------- -------- ----- -----
$458,800 $126,100 $ 16,400 $1.00 $ .99
-------- -------- -------- ----- -----
- ----------
(1) Third quarter 1997 results include net tax benefits related mainly to the
tax reorganization of subsidiaries located in Germany; fourth quarter 1997
includes adjustment to these net tax benefits related to changes in the tax
law and a tax audit. See Note "Income Taxes" on page 23.
(2) First quarter 1996 results include charges related to restructuring actions
described in the Note "Restructuring Charge" on page 23.
135
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, 1997 and 1996, and the
related consolidated statements of income, shareholders' equity, and cash flows
for each of the three years in the period ended December 31, 1997. 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, 1997 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles.
Coopers & Lybrand L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
February 18, 1998
136
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, 1997, 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
judgements and estimates where necessary, with appropriate consideration given
to materiality.
In meeting its responsibility for preparing financial statements,
management maintains a system of internal accounting controls to assure the
safety of its assets against unauthorized acquisition, use or disposition. This
system is designed to provide reasonable assurance that assets are safeguarded
and transactions are 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 judgements are required to
assess the relative cost and expected benefits of the controls. Management
believes that the Company's accounting controls provide reasonable assurance
that errors or irregularities that could be material to the financial statements
are prevented or would be detected within a timely period.
The independent accountants are appointed by the Board of Directors, with
the approval of the shareholders. As part of their engagement, the independent
accountants audit the Company's financial statements, express their opinion
thereon, and review and evaluate selected systems, accounting procedures and
internal controls to the extent they consider necessary to support their report.
William G. Little
Chairman, President and Chief Executive Officer
137
TEN YEAR SUMMARY
THE WEST COMPANY, INCORPORATED AND SUBSIDIARIES
(in thousands, except per share data)
1997 1996 1995
---- ---- ----
SUMMARY OF OPERATIONS
Net sales $452,500 458,800 412,900
Operating profit (loss) $ 63,000 32,700 49,800
Income (loss) before income taxes and minority interests $ 57,400 25,800 42,500
Provision for income taxes $ 13,300 10,800 13,900
Minority interests $ 200 100 800
------------------------------------
Income (loss) from consolidated operations $ 43,900 14,900 27,800
Equity in net income of affiliated companies $ 500 1,500 900
------------------------------------
Income (loss) before change in accounting method $ 44,400 16,400 28,700
------------------------------------
Income (loss) before change in accounting method per share:
Basic (a) $ 2.69 1.00 1.73
Assuming dilution (b) $ 2.68 .99 1.71
Average common shares outstanding, $ 16,475 16,418 16,557
Average shares outstanding, assuming dilution $ 16,572 16,500 16,718
Dividends paid per common share $ .57 .53 .49
------------------------------------
Research, development and engineering expenses $ 12,000 11,200 12,000
Capital expenditures $ 34,400 31,700 31,300
------------------------------------
YEAR-END FINANCIAL POSITION
Working capital $112,700 91,100 86,600
Total assets $477,900 477,400 480,100
138
Total invested capital:
Total debt $ 89,000 98,400 114,300
Minority interests $ 400 300 200
Shareholders' equity $ 277,700 252,000 254,100
------------------------------------
Total $ 367,100 350,700 368,600
------------------------------------
PERFORMANCE MEASUREMENTS
Gross margin (c) % 29.2 27.5 28.6
Operating profitability (d) % 13.9 7.1 12.1
Tax rate % 23.2 41.8 32.8
Asset turnover ratio (e) .95 .96 .94
Return on average shareholders' equity % 16.7 6.5 11.9
Total debt as a percentage of total invested capital % 24.2 28.1 31.0
------------------------------------
Shareholders' equity per share $ 16.76 15.39 15.29
Stock price range $35-1/16-27 30-22-1/8 30-5/8-22-5/8
(a) Based on average common shares outstanding.
(b) Based on average common shares outstanding, 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.
1997 includes the net tax benefit mainly from a German tax reorganization which
increased basic 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.
139
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.
140
TEN YEAR SUMMARY
THE WEST COMPANY, INCORPORATED AND SUBSIDIARIES
(in thousands, except per share data)
1994 1993 1992 1991 1990 1989 1988
- ------------------------------------------------------------------------------------------------------------------
365,100 348,700 337,500 328,900 323,200 308,700 285,400
45,400 40,600 38,700 (1,600) 15,600 38,700 30,100
42,100 37,500 34,800 (7,700) 9,600 34,400 26,100
13,400 14,300 14,300 4,700 6,400 13,200 10,100
1,900 1,700 1,700 (2,400) 300 2,100 1,400
--------------------------------------------------------
26,800 21,500 18,800 (10,000) 2,900 19,100 14,600
500 1,000 900 1,500 1,400 1,600 2,800
--------------------------------------------------------
27,300 22,500 19,700 (8,500) 4,300 20,700 17,400
--------------------------------------------------------
1.70 1.42 1.26 (.55) .27 1.28 1.07
1.69 1.41 1.25 (.55) .27 1.27 1.07
16,054 15,838 15,641 15,527 15,793 16,235 16,249
16,215 16,010 15,776 15,527 15,816 16,301 16,261
.45 .41 .40 .40 .40 .31 .29
--------------------------------------------------------
12,000 11,400 11,100 10,800 10,900 11,900 11,300
27,100 33,500 22,400 25,600 33,200 34,300 29,700
--------------------------------------------------------
50,400 46,400 37,700 26,500 36,500 50,400 53,000
397,400 309,200 304,400 313,200 343,500 313,000 298,900
57,800 32,300 42,000 58,400 78,500 58,100 55,200
1,900 10,900 10,100 8,400 11,700 9,100 10,600
227,300 188,100 168,600 152,600 176,100 179,700 171,400
141
287,000 231,300 220,700 219,400 266,300 246,900 237,200
--------------------------------------------------------
32.1 30.2 28.8 25.6 24.4 26.5 25.0
12.4 11.7 11.5 (.5) 4.8 12.5 10.5
31.8 38.2 41.1 61.7 66.5 38.5 38.6
1.04 1.11 1.10 1.00 .98 1.01 .99
13.2 13.2 12.3 (8.9) 2.4 11.8 10.6
20.1 14.0 19.1 26.6 29.5 23.5 23.3
--------------------------------------------------------
13.81 11.82 10.71 9.81 11.37 11.15 10.53
29 1/8-21 1/4 25 1/4-19 7/8 24 1/8-16 3/4 18 3/4-11 1/8 20-10 1/2 22 5/8-14 7/8 17 1/2-12 1/4
--------------------------------------------------------
142