SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For The Quarterly Period Ended March 31, 1999
---------------
Commission File Number 1-8036
------
WEST PHARMACEUTICAL SERVICES, INC.
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(Exact name of registrant as specified in its charter)
Pennsylvania 23-1210010
------------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
101 Gordon Drive, PO Box 645,
Lionville, PA 19341-0645
------------------------------------- ----------------------
(Address of principal executive (Zip Code)
offices)
Registrant's telephone number, including area code 610-594-2900
--------------
N/A
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Former name, former address and former fiscal year, if changed
since last report.
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding twelve
months, and (2) has been subject to such filing requirements for
the past 90 days. Yes X . No .
--- ---
March 31, 1999 -- 15,033,072
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Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest practicable
date.
Page 2
Index
Form 10-Q for the
Quarter Ended March 31, 1999
Page
Part I - Financial Information
Item 1. Financial Statements
Consolidated Statements of Operations for the
Three Months ended March 31, 1999 and March
31, 1998 3
Condensed Consolidated Balance Sheets at March
31, 1999 and December 31, 1998 5
Condensed Consolidated Statements of Cash Flows
for the Three Months ended March 31, 1999 and
March 31, 1998 7
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 12
Item 3. Quantitative and Qualitative Disclosure
about Market Risk 16
Part II - Other Information
Item 1. Legal Proceedings 17
Item 6. Exhibits and reports on Form 8-K 17
SIGNATURES 18
Index to Exhibits F-1
Page 4
Part I - Financial Information
Item 1. Financial Statements
West Pharmaceutical Services, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(in thousands, except per share data)
<TABLE>
<CAPTION>
Quarter Ended
March 31, 1999 March 31, 1998
--------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Net sales $ 114,200 100 % $105,200 100 %
Cost of goods sold 79,800 70 73,900 70
---------------------------------------------------------------------------------------------------
Gross profit 34,400 30 31,300 30
Selling, general and administrative expenses 17,000 15 16,800 16
Acquired research and development - - 28,200 27
Other income, net - - (600) -
---------------------------------------------------------------------------------------------------
Operating profit (loss) 17,400 15 (13,100) (13)
Interest expense 2,000 2 1,200 1
---------------------------------------------------------------------------------------------------
Income (loss) before income taxes
and minority interests 15,400 13 (14,300) (14)
Provision for income taxes 5,900 5 5,400 5
Minority interests 100 - -
---------------------------------------------------------------------------------------------------
Income (loss) from consolidated operations 9,400 8 % (19,700) (19) %
---- ----
Equity in net income of affiliated companies 100 -
---------------------------------------------------------------------------------------------------
Net income (loss) $ 9,500 $ (19,700)
---------------------------------------------------------------------------------------------------
Net income (loss) per share:
Basic $ .63 $ (1.19)
Assuming dilution $ .63 $ (1.19)
Average common shares outstanding 15,082 16,603
Average shares assuming dilution 15,133 16,603
</TABLE>
Page 5
See accompanying notes to consolidated financial statements.
Page 6
West Pharmaceutical Services, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS (Unaudited)
(in thousands)
<TABLE>
<CAPTION>
<S> <C> <C>
March 31, 1999 Dec. 31, 1998
ASSETS -------------- -------------
Current assets:
Cash, including equivalents $ 33,000 $ 31,300
Accounts receivable 68,100 64,400
Inventories 41,200 43,500
Current deferred income tax benefits 9,600 9,700
Other current assets 10,600 10,800
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Total current assets 162,500 159,700
--------------------------------------------------------------------------
Net property, plant and equipment 212,900 220,300
Investments in affiliated companies 15,800 15,700
Goodwill 58,100 61,200
Deferred charges and other assets 51,000 48,700
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Total Assets $500,300 $ 505,600
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 700 $ 800
Notes payable - 35,300
Accounts payable 18,400 20,800
Salaries, wages, benefits 12,700 17,100
Income taxes payable 13,000 8,500
Other current liabilities 22,800 21,700
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Total current liabilities 67,600 104,200
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Long-term debt, excluding current portion 139,600 105,000
Deferred income taxes 39,000 39,100
Other long-term liabilities 26,300 26,600
Minority interests 500 600
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Shareholders' equity 227,300 230,100
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Total Liabilities and Shareholders' Equity $500,300 $ 505,600
Page 7
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</TABLE>
See accompanying notes to consolidated financial statements.
Page 8
West Pharmaceutical Services, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(in thousands)
<TABLE>
<CAPTION>
<S> <C> <C>
Quarter Ended
March 31, 1999 March 31, 1998
---------------- -------------------
Cash flows from operating activities:
Net income, plus net non-cash items $ 16,600 $ 14,400
Changes in assets and liabilities (3,200) (6,000)
-----------------------------------------------------------------------------------------
Net cash provided by operating activities 13,400 8,400
----------------------------------------------------------------------------------------
Cash flows from investing activities:
Property, plant and equipment acquired (7,700) (7,600)
Proceeds from sale of assets - 800
Payment for acquisition, net of cash acquired - (6,900)
Customer advances, net of repayments 100 (900)
----------------------------------------------------------------------------------------
Net cash used in investing activities (7,600) (14,600)
----------------------------------------------------------------------------------------
Cash flows from financing activities:
Repayment of long-term debt (800) (2,400)
Notes payable, net 2,400 23,900
Dividend payments (2,400) (2,500)
Sale of common stock, net 1,400 1,400
Purchase of common stock (2,900) -
----------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (2,300) 20,400
----------------------------------------------------------------------------------------
Effect of exchange rates on cash (1,800) (100)
----------------------------------------------------------------------------------------
Net increase in cash, including equivalents $ 1,700 $ 14,100
----------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
Page 9
West Pharmaceutical Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
The interim consolidated financial statements for the quarter
ended March 31, 1999 should be read in conjunction with the
consolidated financial statements and notes thereto of West
Pharmaceutical Services, Inc., appearing in the Company's 1998
Annual Report on Form 10-K. The year-end condensed consolidated
balance sheet data was derived from audited financial statements,
but does not include all disclosures required by generally
accepted accounting principles. Interim results are based on the
Company's accounts without audit.
1. Interim Period Accounting Policy
---------------------------------
In the opinion of management, the unaudited Condensed
Consolidated Balance Sheet as of March 31, 1999 and the
related unaudited Consolidated Statement of Operations and
the unaudited Condensed Consolidated Statement of Cash Flows
for the three month period then ended and for the comparative
period in 1998 contain all adjustments, consisting only of
normal recurring accruals, necessary to present fairly the
financial position as of March 31, 1999 and the results of
operations and cash flows for the respective periods. The
results of operations for any interim period are not
necessarily indicative of results for the full year.
Operating Expenses
------------------
To better relate costs to benefits received or activity in an
interim period, certain operating expenses have been
annualized for interim reporting purposes. Such expenses
include certain employee benefit costs, annual quantity
discounts and advertising.
Income Taxes
-------------
The tax rate used for interim periods is the estimated annual
effective consolidated tax rate, based on the current
estimate of full year results (excluding the charge for
acquired research and development in 1998), except that taxes
applicable to operating results in Brazil and prior year
adjustments, if any, are recorded as identified.
Net Loss Per Share
---------------------
In the first quarter 1998 because of the reported net loss,
the incremental shares from potential issuance of common
stock under the Company's stock option and award plan are not
included in average shares assuming dilution.
Page 10
West Pharmaceutical Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
(continued)
2. Inventories at March 31, 1999 and December 31, 1998 are
summarized as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
(in thousands) 1999 1998
-------- --------
Finished goods $ 16,100 $ 15,700
Work in process 11,400 13,700
Raw materials 13,700 14,100
-------- --------
$ 41,200 $ 43,500
-------- --------
-------- --------
</TABLE>
3. The carrying value of property, plant and equipment at March
31, 1999 and December 31, 1998 is determined as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
(in thousands) 1999 1998
-------- --------
Property, plant and equipment $464,500 $472,200
Less accumulated depreciation
and amortization 251,600 251,900
-------- --------
Net property, plant and equipment $212,900 $220,300
-------- --------
-------- --------
</TABLE>
4. For the three months ended March 31, 1999 and 1998, the
Company's comprehensive income (loss) is as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
March 31, 1999 March 31, 1998
-------------- ---------------
Net income (loss) $ 9,500 $ (19,700)
Foreign currency
translation adjustments (8,600) (2,600)
-------- --------
Comprehensive income (loss) $ 900 $(22,300)
-------- --------
-------- --------
</TABLE>
Page 11
West Pharmaceutical Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
(Continued)
5. Net sales to external customers and operating profit by
operating segment for the three months ended March 31, 1999
and March 31, 1998 is as follows:
Net Sales Operating Profit
1999 1998 1999 1998
---- ---- ---- ----
Device product development $93,400 $86,100 $21,500 $19,900
Contract services 20,600 19,100 2,200 900
Drug delivery research &
development 200 - (1,400) (800)
Corporate and unallocated
items - - (4,900) (33,100)
------- ------- ------- -------
Consolidated total $114,200 $105,200 $17,400 $(13,100)
------- ------- ------- -------
------- ------- ------- -------
Compared with December 31, 1998, there were no material
changes in the amount of assets as of March 31, 1999 for any
operating segment.
6. Common stock issued at March 31, 1999 was 17,165,141 shares,
of which 2,132,069 shares were held in treasury. Dividends
of $.16 per common share were paid in the first quarter of
1999 and a dividend of $.16 per share payable to holders of
record on April 21, 1999 was declared on March 6, 1999.
7. The Company has accrued the estimated cost of environmental
compliance expenses related to soil or ground water
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
$1.1 million at March 31, 1999 is sufficient to cover the
future costs of these remedial actions, which will be
carried out over the next several years. The Company has
not anticipated any possible recovery from insurance or
other sources.
8. On September 8, 1998, the Company recorded a pre-tax charge
of $4.0 million. The charge is related to employee
reductions associated with identified manufacturing and
other efficiencies. The charge covers severance and
benefits for 92 employees and other related charges.
Through March 31, 1999, the total payout of severance and
benefits associated with this charge was $2.4 million.
Page 12
West Pharmaceutical Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
(Continued)
9. On April 20, 1999, West Pharmaceutical Services, Inc.
announced the closing of its acquisition of assets of the
Clinical Services Division of Collaborative Clinical
Research, Inc. (CSD). The total purchase price of
approximately $17 million is subject to final adjustment.
The acquisition of CSD will be accounted for as a purchase
and CSD will be consolidated beginning on May 1, 1999. On a
proforma basis this acquisition would not have materially
affected historical sales or earnings in the financial
statements presented, had the purchase been consummated at
January 1, 1998.
10. On April 8, 1999 the Company entered into an agreement with
five insurance companies to borrow a total of $100 million
for ten years at a coupon rate of 6.81%, the effective
interest rate is 6.91%. Interest is payable quarterly. The
proceeds of the private placement were used to repay debt
under existing lines of credit, for the acquisition of CSD
and general corporate purposes.
Page 13
Item 2.
Management's Discussion and Analysis of Financial Condition and
----------------------------------------------------------------
Results of Operations for the Quarter Ended March 31, 1999 Versus
----------------------------------------------------------------
March 31, 1998.
--------------
Net Sales
----------
Net Sales for the first quarter of 1999 were $114.2 million, an
8.5% increase compared with net sales of $105.2 million for the
same quarter in 1998. In the device product development segment
the sales increase was more than 8% driven by strong demand in
Europe and Asia. This increase includes sales of $2.2 million in
the first quarter generated from Betraine Limited acquired on
July 1, 1998. The Company began consolidating Betraine operating
results as of July 1, 1998. Sales also increased 7.6% in the
contract services segment, and adjusting for the lower level of
company supplied materials in 1999 revenues, the sales
improvement is more than 17%. Revenue in our drug delivery
research & development segment was not significant and as
previously indicated is not anticipated to be significant for
several years.
Gross Profit
------------
Consolidated gross profit was $34.4 million, an increase of 9.9%
compared with the first quarter 1998. The gross margin for the
first quarter was 30.2% of net sales compared with 29.8% in 1998.
Gross margins on device product development sales were virtually
flat, excluding the impact of low-margin Betraine sales.
Continued cost savings through efficiency programs offset the
impact of a lower-margin product mix and price competition. In
the contract services segment, improved efficiencies, a shift to
higher-margin, longer-running jobs and price increases improved
the gross margin on sales significantly.
Selling, General and Administrative Expenses
--------------------------------------------
Selling, general and administrative expenses increased $0.2
million compared with the same period in 1998, but represented
only 14.9% as a percentage of sales compared with 15.9% for 1998.
The 1998 acquisition of two U.K. companies added to expenses, but
these increases were offset, in part, by higher income from
pension plan assets and a favorable exchange rate impact.
Page 14
Results of Operations for the Quarter Ended March 31, 1999 Versus
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March 31, 1998, continued
--------------------------
Other (income) expense
----------------------
Reduced cash investment income and foreign currency transaction
losses in Europe were the primary factors contributing to the
decline in the other income category from $0.6 million of income
in 1998 to less than $0.1 million of expense in 1999.
Interest Expense and Equity in Affiliates
-----------------------------------------
Interest expense increased $.8 million in the first quarter
comparisons, because of additional debt associated with the $60.0
million repurchase of shares in the fourth quarter of 1998, and
the 1998 acquisitions.
Equity in net income of affiliates increased by $0.1 million
compared with first quarter 1998. The contribution to net income
from Daikyo Seiko, Ltd. declined but was offset by a positive
contribution versus losses from the Company's ownership interest
in three Mexican companies.
Taxes
-----
The effective tax rate for the three months 1999 was 38.5%,
slightly lower than the 39% rate for the same quarter in 1998,
excluding the charge for the acquired research and development.
The statutory rate reduction in Germany was the major
contributor. The effective tax rate for the year 1998, excluding
the impact of the charge for acquired research and development,
was 37.8%. The estimated increase in the 1999 tax rate reflects
the geographic mix of earnings.
Net Income
----------
Net income for the first quarter 1999 was $9.5 million , or $.63
per share, compared to a loss of $19.7 million, or $1.19 per
share, in the same period of 1998. Excluding the charge for
acquired research and development, net income for 1998 would have
been $8.5 million, or $.51 per share. Average common shares
outstanding in the first quarter were 15.1 million compared with
16.6 million in the first quarter 1998. The reduction in average
common shares outstanding is due to the Company's purchase of two
million common shares following a Dutch Auction self-tender offer
completed in October 1998.
Financial Position
------------------
Working capital at March 31, 1999 was$94.9 million compared with
Page 15
Results of Operations for the Quarter Ended March 31, 1999 Versus
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March 31, 1998, continued
--------------------------
$55.5 million at December 31, 1998. The working capital ratio at
March 31, 1999 was 2.4 to 1. The primary reason for the increase
in working capital is the Company's ability to finance $37.6
million of short-term notes payable on a long-term basis using
proceeds from a $100 million, 10-year private debt placement
closed on April 9, 1999. This private debt placement has a
coupon rate of 6.81%, and an effective interest rate of 6.91%.
Debt as a percentage of total invested capital at March 31, 1999
was 38.1% compared with 37.9% at December 31, 1998.
In the quarter funds generated from operations more than covered
capital spending of $7.7 million, cash dividends of $.16 per
share and repurchase of 86,500 shares of common stock at an
average price of $33.78 per share. The stock repurchases were
made pursuant to a plan authorized by the Company's Board of
Directors and announced on March 10, 1999. The plan provides for
purchase of up to one million shares of the Company's common
stock in open market or privately negotiated transactions.
The Company believes its financial condition and current
capitalization indicate an ability to finance substantial future
growth.
Market Risk
-----------
The Company is exposed to various market risk factors such as
fluctuating interest rates and foreign currency rate
fluctuations. These risk factors can impact results of
operations, cash flows and financial position. These risks are
managed periodically with the use of derivative financial
instruments such as interest rate swaps and forward exchange
contracts. In accordance with Company policy, derivative
financial instruments are not used for speculation or trading
purposes.
At March 31, 1999 and December 31, 1998 the Company had three
interest rate swap agreements in effect, with an estimated fair
value less than $0.1 million. There were no forward exchange
contracts in effect at March 31, 1999.
Year 2000
---------
The Company continues to execute its comprehensive, corporate-
wide project plan designed to address the year 2000 issue using
both internal and external resources. The plan is based on a
risk assessment, which identified and prioritized critical
Page 16
business processes and plant locations, and an inventory of all
computer
Results of Operations for the Quarter Ended March 31, 1999 Versus
-----------------------------------------------------------------
March 31, 1998, continued
--------------------------
hardware and software and computer-controlled manufacturing and
facility equipment. Remediation or replacement plans were
developed, and the project began in April 1997.
Since year-end 1998, significant progress has been made in the
remediation or replacement of critical information systems which
support business functions. West-Lakewood's manufacturing
systems have been completed and other systems are on schedule to
meet the targeted first half completion dates. Desktop computer
hardware and software remediation or replacement is in progress
with expected early summer completion. Remediation or
replacement of software dependent research and development,
manufacturing process and facility management systems and
equipment is progressing well at all locations. The Company has
completed on-site audits of 10 key suppliers in follow-up to
previously received readiness disclosures; this program
continues.
Pretax costs incurred in 1999 through March 31 are approximately
$0.6 million, of which $0.5 million has been capitalized. The
Company expects to spend approximately $4.0 million during the
remainder of the year on the project.
The Company anticipates that required modifications to address
substantially all of the year 2000 issues will be completed by
June 30, 1999. However, the Company is developing a contingency
plan for the year 2000 issues which is in the final stage of
development. The Company believes there is adequate time during
the last half of 1999 to address any deficiencies without any
significant impact on critical business functions.
The cost of the year 2000 project and the date on which the
Company believes it will substantially complete modifications are
based on management's best estimates. The estimates are based on
numerous assumptions of future events, including the continued
availability of certain resources and other factors. Because
none of these estimates can be guaranteed, actual time and cost
to complete modifications could differ materially from those
anticipated. Specific factors that might cause such differences
include, but are not limited to, the reliability and timely
receipt of vendor certifications, the appropriateness and
effectiveness of testing and validation methods, the availability
and cost of trained personnel and the timely availability of
replacement computer hardware, software and equipment and similar
uncertainties.
Page 17
Results of Operations for the Quarter Ended March 31, 1999 Versus
-----------------------------------------------------------------
March 31, 1998, continued
--------------------------
Item 3. Quantitative and Qualitative Disclosure about Market
Risk
----------------------------------------------
The information called for by this item is incorporated
by reference to the text appearing in Item 2
"Management's Discussion and Analysis of Financial
Condition and Results of Operations-Market Risk".
Page 18
Part II - Other Information
Item 1. Legal Proceedings
-----------------
None.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) See Index to Exhibits on pages F-1 and F-2 of this
Report.
(b) No reports on Form 8-K have been filed for the
quarter ended March 31, 1999.
Page 19
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
WEST PHARMACEUTICAL SERVICES,INC.
-----------------------------------
(Registrant)
May 17, 1999 /s/ Steven A. Ellers
------------- ---------------------------------
Date (Signature)
Steven A. Ellers
Senior Vice President and
Chief Financial Officer
Page 20
INDEX TO EXHIBITS
Exhibit
Number
(3) (a) Amended and Restated Articles of
Incorporation of the Company through January
4, 1999, incorporated by reference to the
Company's Annual Report on Form 10-K for the
year ended December 31, 1998 (File No. 1-
8036).
(3) (b) ByLaws of the Company, as amended through
October 27, 1998, incorporated by reference
to Exhibit (3)(b) to the Company's Form 10-Q
for the quarter ended September 30, 1998
(File No. 1-8036).
(4) (a) Form of stock certificate for common stock,
incorporated by reference to the Company's
Annual Report on Form 10-K for the year ended
December 31, 1998 (File No. 1-8036).
(4) (b) Flip-In Rights Agreement between the Company
and American Stock Transfer & Trust Company,
as Rights Agent, dated as of January 16,
1990, incorporated by reference to Exhibit 1
to the Company's Form 8-A Registration
Statement (File No. 1-8036).
(4) (c) Flip-Over Rights Agreement between the
Company and American Stock Transfer & Trust
Company, as Rights Agent, dated as of January
16, 1990, incorporated by reference to
Exhibit 2 to the Company's Form 8-A
Registration Statement (File No. 1-8036).
(9) None.
(10) None.
(11) Not Applicable.
(12) Not Applicable.
(15) None.
(16) Not applicable.
(18) None.
(19) None.
(22) None.
(23) None.
(24) None.
F - 1
Page 21
Exhibit
Number
(27) Financial Data Schedule
(99) None.
F - 2
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1999
<CASH> 33,000
<SECURITIES> 0
<RECEIVABLES> 68,100
<ALLOWANCES> 0
<INVENTORY> 41,200
<CURRENT-ASSETS> 20,200
<PP&E> 464,500
<DEPRECIATION> 251,600
<TOTAL-ASSETS> 500,300
<CURRENT-LIABILITIES> 67,600
<BONDS> 139,600
0
0
<COMMON> 4,300
<OTHER-SE> 223,000
<TOTAL-LIABILITY-AND-EQUITY> 500,300
<SALES> 114,200
<TOTAL-REVENUES> 114,200
<CGS> 79,800
<TOTAL-COSTS> 79,800
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,000
<INCOME-PRETAX> 15,400
<INCOME-TAX> 5,900
<INCOME-CONTINUING> 9,400
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,500
<EPS-PRIMARY> .63
<EPS-DILUTED> .63
</TABLE>
