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 September 30, 1999
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Commission File Number 1-8036
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WEST PHARMACEUTICAL SERVICES, INC.
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(Exact name of registrant as specified in its charter)
Pennsylvania 23-1210010
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
101 Gordon Drive, PO Box 645,
Lionville, PA 19341-0645
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(Address of principal executive (Zip Code)
offices)
Registrant's telephone number, including area code 610-594-2900
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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 .
--- ---
September 30, 1999 -- 14,912,078
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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 September 30, 1999
Page
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Part I - Financial Information
Item 1. Financial Statements
Consolidated Statements of Operations for the
Three and Nine Months ended September 30,
1999 and September 30, 1998 3
Condensed Consolidated Balance Sheets at
September 30, 1999 and December 31, 1998 4
Condensed Consolidated Statements of Cash Flows
for the Nine Months ended September 30, 1999
and September 30, 1998 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 10
Item 3. Quantitative and Qualitative Disclosure
about Market Risk 15
Part II - Other Information
Item 1. Legal Proceedings 16
Item 2. Changes in Securities and Use of Proceeds 16
Item 3. Defaults Upon Senior Securities 16
Item 4. Submission of Matters to a Vote of
Security Holders 16
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 17
Index to Exhibits F-1
Page 3
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>
Three Months Ended Nine Months Ended
Sept. 30, 1999 Sept, 30, 1998 Sept. 30, 1999 Sept. 30, 1998
---------------- ------------- --------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales $115,100 100% $113,900 100% $353,700 100% $334,900 100%
Cost of goods sold 80,800 70 80,500 71 245,200 69 235,400 70
----------------------------------------------------------------------------------------------------
Gross profit 34,300 30 33,400 29 108,500 31 99,500 30
Selling, general and
administrative expenses 19,200 17 17,300 15 55,900 16 52,500 16
Restructuring charge - - 4,000 3 - - 4,000 1
Acquired research and development - - - - - - 28,200 8
Other expense (income), net (300) - (300) - - - (1,700) -
----------------------------------------------------------------------------------------------------
Operating profit 15,400 13 12,400 11 52,600 15 16,500 5
Interest expense 2,900 2 1,800 2 7,700 2 4,900 1
----------------------------------------------------------------------------------------------------
Income before income taxes
and minority interests 12,500 11 10,600 9 44,900 13 11,600 4
Provision for income taxes 4,000 4 4,100 4 16,500 5 15,300 5
Minority interests - - - - 100 - 100 -
----------------------------------------------------------------------------------------------------
Income (loss) from consolidated
operations 8,500 7% 6,500 5% 28,300 8% (3,800) (1)%
--- --- --- ---
Equity in net income of
affiliated companies 100 200 500
------------------------------ ---------- ----------- ---------- -----------
Net income (loss) $ 8,600 $6,500 $ 28,500 $ (3,300)
------------------------------ ---------- ----------- ---------- -----------
Net income (loss) per share:
Basic $ 0.58 $ 0.38 $ 1.91 $ (0.20)
Assuming dilution $ 0.57 $ 0.38 $ 1.89 $ (0.20)
------------------------------ ---------- ----------- ---------- -----------
Average common shares
outstanding 14,898 17,003 14,972 16,867
Average shares
assuming dilution 15,074 17,078 15,113 16,867
</TABLE>
See accompanying notes to consolidated financial statements.
Page 4
West Pharmaceutical Services, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
Unaudited
Sept. 30, 1999 Dec. 31, 1998
ASSETS -------------- -------------
<S> <C> <C>
Current assets:
Cash, including equivalents $ 37,500 $ 31,300
Accounts receivable 74,900 64,400
Inventories 42,000 43,500
Current deferred income tax benefits 9,600 9,700
Other current assets 11,800 10,800
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Total current assets 175,800 159,700
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Net property, plant and equipment 222,400 220,300
Investments in affiliated companies 17,100 15,700
Goodwill 71,000 61,200
Deferred charges and other assets 54,600 48,700
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Total Assets $540,900 $ 505,600
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 4,600 $ 800
Notes payable 3,600 35,300
Accounts payable 18,300 20,800
Accrued expenses:
Salaries, wages, benefits 16,100 17,100
Income taxes payable 11,900 8,500
Other 29,100 21,700
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Total current liabilities 83,600 104,200
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Long-term debt, excluding current portion 155,400 105,000
Deferred income taxes 39,700 39,100
Other long-term liabilities 27,000 26,600
Minority interests 600 600
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Shareholders' equity 234,600 230,100
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Total Liabilities and Shareholders' Equity $540,900 $ 505,600
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</TABLE>
See accompanying notes to consolidated financial statements.
Page 5
West Pharmaceutical Services, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(in thousands)
<TABLE>
<CAPTION> Nine Months Ended
Sept. 30, 1999 Sept. 30, 1998
---------------- -------------------
<S> <C> <C>
Cash flows from operating activities:
Net income, plus net non-cash items $ 49,700 $ 45,800
Changes in assets and liabilities (6,700) (3,000)
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Net cash provided by operating activities 43,000 42,800
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Cash flows from investing activities:
Property, plant and equipment acquired (32,600) (27,900)
Proceeds from sale of assets 100 900
Payment for acquisitions, net of cash acquired (17,200) (19,500)
Customer advances, net of repayments 100 900
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Net cash used in investing activities (49,600) (45,600)
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Cash flows from financing activities:
Proceeds from long-term debt 100,000 5,800
Net repayments under revolving
credit agreements (77,800) -
Repayment of other long-term debt (1,300) (1,900)
Notes payable, net 7,200 700
Dividend payments (7,200) (7,500)
Sale of common stock, net 2,900 2,000
Purchase of treasury stock (9,000) -
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Net cash provided by (used in) financing activities 14,800 (900)
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Effect of exchange rates on cash (2,000) 1,500
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Net increase (decrease) in cash, including equivalents $ 6,200 $ (2,200)
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See accompanying notes to consolidated financial statements.
</TABLE>
Page 6
West Pharmaceutical Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
(In thousands, except share and per share data)
The interim consolidated financial statements for the nine-month
period ended September 30, 1999 should be read in conjunction
with the consolidated financial statements and notes thereto of
West Pharmaceutical Services, Inc.(The Company), 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 September 30, 1999 and the
related unaudited Consolidated Statements of Operations for
the three and nine-month periods then ended, and the
unaudited Condensed Consolidated Statement of Cash Flows for
the nine-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 September 30, 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
---------------------
For the nine months ended September 30, 1998, because of the
reported net loss, the incremental shares from potential
issuance of common stock under the Company's stock option and
award plansare not includedin averageshares assuming dilution.
Page 7
West Pharmaceutical Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
(continued)
2. Inventories at September 30, 1999 and December 31, 1998 are
summarized as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
1999 1998
-------- --------
Finished goods $ 14,000 $ 15,700
Work in process 14,800 13,700
Raw materials 13,200 14,100
-------- --------
$ 42,000 $ 43,500
-------- --------
-------- --------
</TABLE>
3. The carrying value of property, plant and equipment at
September 30, 1999 and December 31, 1998 is determined as
follows:
<TABLE>
<CAPTION>
<S> <C> <C>
1999 1998
-------- --------
Property, plant and equipment $486,700 $472,200
Less accumulated depreciation
and amortization 264,300 251,900
-------- --------
Net property, plant
and equipment $222,400 $220,300
-------- --------
-------- --------
</TABLE>
4. For the three and nine months ended September 30, 1999 and
1998, the Company's comprehensive income (loss) is as
follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
9/30/99 9/30/98 9/30/99 9/30/98
-------- ------- ------- -------
<S> <C> <C> <C> <C>
Net income (loss) $ 8,600 $ 6,500 $28,500 $(3,300)
Foreign currency
translation adjustments 2,600 4,100 (10,600) 1,400
------- ------- ------- -------
Page 8
West Pharmaceutical Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
(Continued)
Comprehensive income
(loss) $11,200 $10,600 $17,900 $(1,900)
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
5. Net sales to external customers and operating profit (loss) by
operating segment for the three and nine months ended September 30,
1999 and September 30, 1998 are as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
<S> <C> <C> <C> <C>
Net Sales: 1999 1998 1999 1998
---------- ---- ---- ---- ----
Device product development $ 92,700 $ 90,600 $286,900 $270,200
Contract services 21,900 22,900 65,900 63,700
Drug delivery research
and development 500 400 900 1,000
------- ------- -------- --------
Consolidated Total $115,100 $113,900 $353,700 $334,900
------- ------- -------- --------
------- ------- -------- --------
Three Months Ended Nine Months Ended
Operating Profit (Loss): 1999 1998 1999 1998
------------------------ ---- ---- ---- ----
Device product development $20,800 $18,300 $68,300 $59,900
Contract services 1,400 4,300 5,400 7,200
Drug delivery research
and development (2,200) (1,400) (5,200) (3,500)
Corporate and unallocated
items (4,600) (8,800) (15,900) (47,100)
------- ------- ------- -------
Consolidated Total $15,400 $12,400 $52,600 $16,500
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
Operating profit for the corporate segment includes a $4,000
restructuring charge in the 1998 third quarter and nine month results.
The 1998 year-to-date period also includes a $28,200 charge for
acquired research and development.
Compared with December 31, 1998, the only material change in operating
segment assets as of September 30, 1999 was the acquisition of the
Clinical Services Division of Collaborative Clinical Research, Inc. on
April 20, 1999 (see Note 9). This business unit is included in the
Contract Services segment.
Page 9
West Pharmaceutical Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
(Continued)
6. Common stock issued at September 30, 1999 was 17,165,141 shares, of
which 2,253,063 shares were held in treasury. Dividends of $.16 per
common share were paid in the third quarter of1999 and a dividend of
$.17 per share payable to holders of record on October 20, 1999 was
declared on August 3, 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 $1,600 at September 30, 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. In September 1998, the Company recorded a pre-tax restructuring charge
of $4,000. 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
costs. Through September 30, 1999, the total payout of severance and
benefits associated with this charge was $3,000.
9. On April 20, 1999, the Company acquired the assets of the Clinical
Services Division (CSD) of Collaborative Clinical Research, Inc.. The
cash purchase price was $15,900, which was financed with available
cash, and the Company assumed $2,300 of current liabilities of CSD.
The acquisition was accounted for as a purchase and CSD was
consolidated on May 1, 1999. The preliminary allocation of the
purchase price is as follows:
Current assets $ 2,900
Equipment and
leasehold improvements 800
Goodwill 14,500
-------
$18,200
-------
-------
Pro forma results assuming acquisition of CSD as of January 1, 1999
would not have had any material effect on consolidated results.
10. On April 8, 1999, the Company entered into an agreement with five
insurance companies to borrow a total of $100,000 for ten years at a
coupon rate of 6.81%; the effective interest rate is 6.91%. Interest
is payable quarterly. The proceeds were used to repay debt under
existing lines of credit, for the acquisition of CSD, and for general
corporate purposes.
Page 10
Item 2.
Management's Discussion and Analysis of Financial Condition and
Results of Operations.
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Results of Operations for the Three and Nine Months ended
September 30, 1999 Versus Comparable 1998 Periods
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Net Sales
---------
Net sales for the third quarter of 1999 were $115.1 million; a
1.0% increase compared with 1998 third quarter sales of $113.9
million. At constant exchange rates, consolidated net sales
increased 3.4% in the third quarter.
Device product development (DPD) segment sales increased $2.1
million, or 2.3%, to $92.7 million; at constant exchange rates
the increase was 5.4%. Comparing sales at constant exchange
rates, device product development segment sales increased in
domestic and Asian markets, while European market sales were flat
and South American sales declined. The primary growth driver for
this segment was demand for packaging components for
pharmaceutical products. Management believes three factors were
the major reasons for this strong demand. First, customer demand
for components for insulin and vaccines, typically high-value
components, increased. Second, certain customers switched to
higher value components to improve their production efficiency.
Third, customers increased certain product inventories. Within
the DPD segment, medical device component sales grew modestly,
excluding the impact of the acquisition of Betraine Limited in
July 1998. Personal care and food dispensing component sales
were significantly lower, mainly due to lower Spout-Pak sales
compared with last year. Additionally, some of the new products
being made for the Company's customers have not come to market as
rapidly as expected.
Contract services segment sales declined 4.3% to $21.9 million.
The sales decline relates to contract manufacturing and packaging
services where sales were $4.1 million lower in the quarter.
Postponements of new projects and disappointing market success
for customers' new products were evident. Also contributing
to the quarter-over-quarter sales decline was the loss of business
from two customers that switched to in-house production and higher-
than-usual 1998 third-quarter sales attributable to customer
product launches. The sales decrease in the contract manufacturing
and packaging area was partially offset by $3 million of sales from
the clinical services unit acquired in April 1999. Revenues in
the start-up contract labs business and in the drug delivery
research and development segment were not significant, as expected.
Net sales for the first nine months of 1999 were $353.7 million,
5.6% higher than sales in the same period of 1998 and 7.1% higher
at constant exchange rates. Excluding exchange rate variances,
device product development segment sales were 8.1% higher and
contract services segment sales were 3.3% higher than year-to-
date 1998 sales. The major drivers for these increases are noted
above.
Page 11
Results of Operations for the Three and Nine Months ended
September 30, 1999 Versus Comparable 1998 Periods
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Gross Profit
------------
The 29.8% consolidated gross margin in the third quarter of 1999
increased half a percentage point over the prior year third
quarter margin. Margins in the device product development segment
improved significantly due to strong demand for parenteral
packaging components and successful cost saving programs. However,
this improvement was substantially offset by lower margins in the
contract services segment due to the contract manufacturing and
packaging unit's loss of two high margin products to in-house
production.
The consolidated gross profit margin for the nine-month period
was 30.7% compared with 29.7% in the same period of 1998. The
favorable product mix in third quarter sales in the device
product development segment and the May 1999 addition of the
higher margin clinical services business unit combined with
continued operating efficiency improvements in both segments were
the primary factors in the margin increase. These improvements
were partially offset by lower margins in the contract
manufacturing and packaging business unit.
Selling, General and Administrative Expenses
--------------------------------------------
Selling, general and administrative (SG&A) expenses totaled $19.2
million, or 16.7% of net sales, in the third quarter of 1999
compared with $17.3 million, or 15.2% of net sales, in the
comparable 1998 quarter. The major contributors to this increase
include the impact of the clinical services business unit
acquired in April 1999, higher drug delivery development spending
in preparation for planned Investigational New Drug filings later
this year and an increase in environmental remediation cost
estimates. Partially offsetting these increases were favorable
exchange rate variances and the absence of expenses associated
with bad debt reserves recognized in 1998. On a year-to-date
basis, SG&A expenses remained roughly constant as a percentage of
sales. SG&A expense increases resulting from acquisitions and
higher drug delivery spending were largely offset by higher
income from pension plan assets and the impact of a stronger U.S
dollar.
Restructuring Charge
--------------------
On September 8, 1998, the Company recorded a pre-tax
restructuring 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.
Page 12
Results of Operations for the Three and Nine Months ended
September 30, 1999 Versus Comparable 1998 Periods
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Acquired Research and Development
----------------------------------
On March 31, 1998, the Company acquired the remaining 70%
interest in DanBioSyst U.K. Ltd. for $33.5 million. The
transaction was accounted for by the purchase method and
estimated in-process research and development of $28.2 million
was expensed at the date of acquisition.
Other (Income) Expense
----------------------
For the year to date 1999 period, losses from foreign currency
transactions and fixed asset disposals offset interest income
from short-term investments. 1998 year-to-date other income
consisted of foreign currency transaction gains and short term
investment income. Lower investment balances in 1999 contributed
to the decline of other income in the year to date comparisons.
Interest Expense
----------------
Interest expense increased $1.1 million and $2.8 million in
comparisons of third-quarter and nine-month 1999 results with
comparable 1998 periods. Average borrowings have increased as a
result of stock buybacks, two million shares in October 1998 at
an average cost of $30.20 per share and 265,800 shares in 1999 at
an average cost of $33.79 per share, and due to acquisitions of
three business units since March 31, 1998.
Equity in Net Income of Affiliates
----------------------------------
For the 1999 third quarter, the Company's equity method
investments in Japan and in Mexico produced modest income as
compared to the losses experienced in Mexico in the 1998 quarter.
On a year-to-date basis, income trails prior year levels due to
poor market demand in both countries due largely to government
spending and reimbursement policies.
Income Taxes
------------
The Company lowered its previous effective tax rate estimate for
the full year 1999 to 38.2% from 38.5%. The third quarter
effective tax rate on ongoing operations for 1999 is more than
one percentage point lower than in the prior year, largely as a
result of recording the year-to-date adjustment to the estimated
tax rate in the 1999 third quarter. In addition, the 1999 third
quarter benefited from a favorable settlement of a prior years'
tax appeal in the amount of $0.7 million. For the nine-month
period, excluding the tax settlement benefit in 1999 and the
acquired research and development charge in 1998, the 1999
effective tax rate of 38.2% compares favorably with the 1998 rate
of 38.5%. The effective tax rate for the full 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 forecasted.
Page 13
Results of Operations for the Three and Nine Months ended
September 30, 1999 Versus Comparable 1998 Periods
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Net Income (Loss)
-----------------
The net income for the 1999 third quarter was $8.6 million, or
$0.58 per share, including $0.7 million, or $0.05 per share,
relating to the settlement of a prior years' tax appeal. In the
third quarter of 1998, net income was $6.5 million, or $0.38 per
share, which includes an after-tax restructuring charge of $2.5
million, or $0.15 per share. Excluding the effects of these
items, net income was $7.9 million, or $0.53 in the third quarter
of 1999 compared with $9.0 million, or $0.53 per share in the
same period of 1998. Average common shares outstanding in the
1999 third quarter were 14.9 million compared with 17.0 million in
third quarter 1998. The reduction in average common shares
outstanding is due to the Company's purchase of two million common
shares in an October 1998 self-tender and further open market
purchases in 1999.
For the nine-month period 1999 net income was $28.5 million, or
$1.91 per share, compared with a loss of $3.3 million, or $.20
per share, in the same period of 1998. The net loss for the
first nine months of 1998 includes a $28.2 million charge for
acquired research and development related to the acquisition of
DanBioSyst U.K. Ltd. and a net restructuring charge of $2.5
million. Excluding the $0.7 million tax settlement in 1999 and
the items noted above in 1998, net income for the first nine
months of 1999 was $27.8 million, or $1.86 per share, compared
with $27.4 million, or $1.62 per share, in the comparable period
of 1998. Average common shares outstanding for the first nine
months of 1999 were 15.0 million compared with 16.9 million in
the comparable 1998 period.
Financial Position
------------------
Working capital at September 30, 1999 was $92.2 million compared
with $55.5 million at December 31, 1998. The working capital
ratio at September 30, 1999 was 2.1 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%. Total debt outstanding at September 30, 1999 was $163.6
million, an increase of $22.5 million compared with year-end
1998. Debt as a percentage of total invested capital at
September 30, 1999 was 41.0% compared with 37.9% at December 31,
1998.
Net cash provided by operating activities of $43 million remained
constant with the prior year. Cash used in capital spending
increased to $32.6 million in 1999,$4.7 million more than in the
Page 14
Results of Operations for the Three and Nine Months ended
September 30, 1999 Versus Comparable 1998 Periods
-----------------------------------------------------------------
prior year period, largely due to spending on new product lines.
The Company also made two acquisitions in 1999: $15.9 million for
the assets of the Clinical Services Division of Collaborative
Clinical Research, Inc and a $1.3 million investment in a firm
involved in genotyping technology. Financing cash in-flows
during the year consisted of net debt proceeds of $28.1 million
and employee stock option exercise proceeds of $2.9 million.
Financing cash outflows consisted of $7.2 million of cash
dividends totaling $.32 per common share, and the $9.0 million
repurchase of 265,800 shares of common stock at an average cost of
$33.79 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 the 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 allow for 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 affect 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 September 30, 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 September 30, 1999.
Year 2000
---------
The Company continues to execute a comprehensive plan to address
the Year 2000 issue. Using internal and external resources the
Company identified and prioritized critical business processes
and plant locations, and completed an inventory of all computer
hardware and software and computer-controlled equipment. As a
result of this work, which started in April 1997, decisions were
made to remediate or replace mission-critical items.
At June 30, 1999, the Company had completed remediation or
replacement of all critical information systems that support
business functions. This includes all manufacturing, financial-
reporting and payroll systems, desktop computer hardware and
Page 15
Results of Operations for the Three and Nine Months ended
September 30, 1999 Versus Comparable 1998 Periods
-----------------------------------------------------------------
software and software-dependent systems and equipment used in
research and development, manufacturing processes and facility
management.
The Company also has received Year-2000 readiness certifications
from its major supplier base. As a follow-up measure to the
certification program, the Company has completed on-site
assessments of the key suppliers to the medical device products
segment and contract services segments.
The Company believes it has completed all modifications required
to address critical information systems. Nonetheless, the
Company is actively developing contingency plans and conducting
related training to cover an unexpected interruption of critical
systems and operations due to the Year 2000 problem. These
contingency plans are currently being reviewed by consultants to
assess their completeness and adequacy.
In addition, efforts to address any modifications to non-critical
systems will continue through the end of the year and possibly
into 2000, but the failure of such systems is not expected to
have any significant impact on the Company s business or
financial position or results.
Total pretax costs incurred through September 30 are
approximately $6.3 million, of which $5.1 million has been
capitalized. The Company expects to spend approximately $0.3
million in the remainder of 1999 on the project.
The Company believes that it has successfully remediated its
critical systems and facilities and that suppliers' year 2000
compliance programs have been completed in accordance with their
certifications. The Company's established contingency plan
covers unexpected interruptions. Management believes that all
reasonable actions and plans have been completed to assure
uninterrupted supply of its products and services to its
customers. However, there can be no absolute assurance that
problems will not arise from either internal or external systems
that could have an adverse impact on the Company's ability to
timely serve its customers or the estimated costs of its year
2000 program.
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".
Part II - Other Information
Page 16
Item 1. Legal Proceedings
-----------------
None.
Item 2. Changes in Securities and Use of Proceeds
-----------------------------------------
None.
Item 3. Defaults Upon Senior Securities
-------------------------------
None.
Item. 4. Submission of Matters to a Vote of Security
Holders
--------------------------------------------------
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 September 30, 1999.
Page 17
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)
November 15, 1999 /s/ Steven A. Ellers
------------------ ---------------------------------
Date (Signature)
Steven A. Ellers
Senior Vice President and
Chief Financial Officer
Page 18
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).
(10) (a) 1999 Stock-Equivalent Compensation Plan for
Non-Employee Directors.
(11) Not Applicable.
(15) None.
(18) None.
(19) None.
(22) None.
(23) None.
(24) None.
(27) Financial Data Schedule
(99) None.
F - 1
WEST PHARMACEUTICAL SERVICES, INC.
1999 STOCK-EQUIVALENTS COMPENSATION PLAN
FOR
NON-EMPLOYEE DIRECTORS
Adopted on May 27, 1999
PLAN DOCUMENT
STOCK-EQUIVALENTS COMPENSATION PLAN FOR
NON-EMPLOYEE DIRECTORS
1. Purpose. The West Pharmaceutical Services, Inc. Stock-
Equivalents Compensation Plan for Non-Employee Directors is
designed to achieve the following purposes:
Retain the services of experienced and knowledgeable
non-employee directors with superior talent and
achievement;
Give appropriate recognition to the past services of
non-employee directors of the Company;
Encourage eligible directors of the Company to acquire
a proprietary and vested interest in the growth and
performance of the Company; and
Generate an increased incentive for directors to
contribute to the Company's future success and
prosperity, thus enhancing the value of the Company for
the benefit of its shareholders.
The foregoing purposes are to be achieved through the
awarding of Stock-Equivalents on a tax-deferred basis
in combination with the Deferred Compensation Plan.
2. Definitions. As used in the Plan, the following terms shall
have the meanings set forth below:
(a) "Applicable Percentage" shall mean the product of (i)
the number of full Years of Service completed by an
Eligible Director through the Effective Date and (ii)
10%, provided that in no event shall the Applicable
Percentage exceed 100%.
(b) "Award Date" shall mean the date on which an award of
Stock Equivalents is made under the terms of this Plan.
(c) "Board" shall mean the board of directors of the
Company.
(d) "Committee" shall mean the Compensation Committee of
the Board.
(e) "Common Stock" shall mean the common stock, $0.25 par
value, of the Company.
(f) "Deferred Compensation Plan" shall mean the West
Pharmaceutical Services, Inc. Non-Qualified Deferred
Compensation Plan for Outside Directors, as amended
through May 27, 1999.
(g) "Company" shall mean West Pharmaceutical Services, Inc.
(h) "Director" shallmean a duly elected memberof the Board.
(i) "Effective Date" shall mean May 27, 1999.
(j) "Eligible Director" shall mean each Director of the
Company who is not an employee of the Company or any of
the Company's subsidiaries (as defined in section 425
(f) of the Internal Revenue Code of 1986, as amended
from time to time).
(k) "Exchange Act" shall mean the Securities Exchange Act
of 1934, as amended from time to time.
(l) "Fair Market Value" shall mean on any given date the
mean between the highest and lowest prices of actual
sales of Common Stock on the New York Stock Exchange
(or other principal exchange on which it is traded) on
such date. If no sales were made on such date, then
the mean shall be calculated using the highest and
lowest prices of sales on the last preceding day on
which the Common Stock was traded.
(m) "Retirement Plan" shall mean the Company s Retirement
Plan for Non-Employee Directors, as amended through May
27, 1999.
(n) "Plan" means the West Pharmaceutical Services, Inc.
Stock-Equivalents Compensation Plan for Non-Employee
Directors.
(o) "Stock Equivalent" shall mean the right of each
Eligible Director to receive upon termination of
service as an Eligible Director an amount in cash equal
to the Fair Market Value of the Common Stock multiplied
by the number of Stock Equivalents awarded to such
Eligible Director. For purposes of this Plan,
fractional Stock Equivalents, measured to the nearest
four decimal places, may be credited. The Fair Market
Value of Common Stock shall be determined by reference
to the termination date.
(p) "Year of Service" shall mean the period beginning on
the date of the Annual Meeting of Shareholders in any
applicable year and ending on the day immediately
preceding the date of the next Annual Meeting of
Shareholders.
3. Stock Equivalents.
(a) Award of Stock Equivalents.
(i) Completed Years of Service. Each Eligible
Director shall be awarded six hundred (600) Stock
Equivalents for each full Year of Service during
which the Director is an Eligible Director. The
Award Date shall be the date after the Annual
Meeting of Shareholders in the calendar year in
which the relevant Year of Service ends. The
awarding of Stock Equivalents under this Paragraph
shall commence on the date after the Annual
Meeting of Shareholders in the year 2000.
(ii) Partial Years of Service. In addition to the
award(s) made under Paragraph 3 a) i):
(A) Each person who first becomes an Eligible
Director other than at an Annual Meeting of
Shareholders shall be awarded fifty (50)
Stock Equivalents for each partial or full
calendar month served through the next Annual
Meeting of Shareholders. The Award Date for
such Stock Equivalents shall be the date
after such Annual Meeting; and
(B) Each Eligible Director whose service as an
Eligible Director terminates other than at an
Annual Meeting shall be awarded fifty (50)
Stock Equivalents for each partial or full
calendar month served through and including
the month of termination. The Award Date for
such Stock Equivalents shall be the
termination date.
(b) Stock Equivalents in Lieu of Retirement Plan Benefit.
(i) Any Eligible Director who was a participant in the
Retirement Plan and who is not scheduled to retire
on or before the Effective Date, may elect to
convert his or her annual retirement benefits
thereunder into Stock Equivalents. The number of
Stock Equivalents to be credited under this
paragraph shall be determined by dividing the
actuarially determined present value of such
benefits listed on Exhibit "A" by the average Fair
Market Value of the Common Stock during the last
ten business days of May 1999. The election shall
be made within the first 90 days following the
Effective Date by written notice to the Company's
Secretary.
(ii) Any Eligible Director who does not elect to
convert his or her retirement benefits to Stock
Equivalents, shall receive an annual retirement
benefit equal to the product of (A) $20,000,
multiplied by (B) that Director's Applicable
Percentage. The annual retirement benefit payable
under this paragraph shall be made in accordance
with Section 6 of the Retirement Plan.
(c) Earnings With Respect to Stock Equivalents. Earnings
with respect to Stock Equivalents awarded under
Paragraph 3 a) or credited under Paragraph 3 b) shall
be determined in accordance with the terms of the
Deferred Compensation Plan.
(d) Crediting of Stock Equivalents. Stock Equivalents
awarded pursuant to Paragraph 3 a) or credited pursuant
to Paragraph 3 b) shall be credited to the Director's
C Account under the Deferred Compensation Plan.
(e) Payment of Stock Equivalents. Payment of Stock
Equivalents awarded or credited under the Plan shall be
made in accordance with the terms of the Deferred
Compensation Plan.
4. Adjustments. In the event of any change in the Common
Stock, the value and attributes of each Stock Equivalent
shall be appropriately adjusted consistent with such change
to the same extent as if such Stock Equivalents were issued
and outstanding shares of Common Stock. A change referred
to in this Paragraph includes, without limitation, a stock
dividend, recapitalization, reorganization, merger,
consolidation, split-up, combination or exchange of shares,
or rights offering to purchase Common Stock at a price
substantially below fair market value, or any similar change
affecting the Common Stock.
5. Nontransferability of Stock Equivalents. Stock Equivalents
awarded hereunder may not be sold, transferred, pledged,
assigned or otherwise alienated, other than by will or by
the laws of descent and distribution.
6. Amendment and Termination.
(a) Board Authority. The Board may amend or terminate the
Plan at any time; provided that no amendment may be
made without:
(i) the appropriate approval of the Company's
shareholders if such approval is necessary to
comply with any tax or other regulatory
requirement, including any shareholder approval
required a condition to exemptive relief under
Section 16(b) of the Exchange Act; or
(ii) the Eligible Director's consent, if such amendment
would adversely impair or affect any rights or
obligations under any Stock Equivalent theretofore
awarded to such Eligible Director.
(b) Prior Shareholder and Eligible Director Approval.
Anything herein to the contrary notwithstanding, the
Board may amend the Plan without the consent of
Eligible Directors or shareholders to comply with the
requirements of Rule 16b-3 issued under the Exchange
Act, or any successor rules promulgated by the
Securities and Exchange Commission.
7. Change in Control.
(a) Notwithstanding any other provision of this Plan, in
the event of a Change in Control (as defined herein),
each Eligible Director who received Stock Equivalents
as a result of the election under paragraph 3 b) i)
hereof shall receive additional Stock Equivalents. For
each such Eligible Director, the number of additional
Stock Equivalents shall be determined using the
following formula:
(i) ($300,000 FMV of Stock Equivalents) Fair
Market Value of Common Stock
(ii) where the "FMV of Stock Equivalents" means the
Fair Market Value of the Stock Equivalents
credited to his or her C Account as a result of
the election, including any earnings thereon. For
purposes of this calculation, the Fair Market
Value of the Stock Equivalents and of the Common
Stock shall be measured as of the date of the
Change in Control.
(b) A "Change in Control" shall mean a change in control of
a nature that would be required to be reported in
response to Item 1 of the Current Report on Form 8-K as
in effect on April 28, 1998 pursuant to Section 13 or
15(d) of the Exchange, provided, that, without
limitation, a Change in Control shall be deemed to have
occurred if:
(i) any "Person" (as such term is used in Sections
13(d) and 14(d) of the Exchange Act), other than:
(1) the Company,
(2) any Person who on the date hereof is a
director or officer of the Company, or
(3) a trustee or fiduciary holding securities
under an employee benefit plan of the
Company,
(B) is or becomes the "beneficial owner,"
(as defined in Rule 13-d3 under the
Exchange Act), directly or indirectly,
of securities of the Company
representing more than 50% of the
combined voting power of the Company's
then outstanding securities; or
(ii) during any period of two consecutive years during
the term of this Plan, individuals who at the
beginning of such period constitute the Board
cease for any reason to constitute at least a
majority thereof, unless the election of each
director who was not a director at the beginning
of such period has been approved in advance by
directors representing at least two-thirds of the
directors then in office who were directors at the
beginning of the period; or
(iii) the shareholders of the Company approve: (A) a
plan of complete liquidation of the Company; or
(B) an agreement for the sale or disposition of
all or substantially all of the Company's assets;
or (C) a merger, consolidation, or reorganization
of the Company with or involving any other
corporation, other than a merger, consolidation,
or reorganization that would result in the voting
securities of the Company outstanding immediately
prior thereto continuing to represent (either by
remaining outstanding or by being converted into
voting securities of the surviving entity), at
least fifty percent (50%) of the combined voting
power of the voting securities of the Company (or
the surviving entity, or an entity which as a
result of such transaction owns the Company or all
or substantially all of the Company's assets
either directly or through one or more
subsidiaries) outstanding immediately after such
merger, consolidation, or reorganization.
8. Funding. This Plan shall not be deemed to create any trust,
escrow, or other funding arrangement. No benefit payable
under the Plan shall be considered segregated funds and all
such amounts shall, at all times prior to the payment of
same, be and continue to be the property of the Company
commingled with its other assets. The right of any Eligible
Director or his or her eligible spouse to benefits under
this Plan shall be an unsecured claim against the general
assets of the Company.
9. Plan Administration. The general administration of the Plan
and the responsibility for interpreting the Plan and
carrying out its provisions shall be vested in the
Committee. The Committee may adopt such rules and
regulations as it may deem necessary for the proper
administration of the Plan, and its decision in all matters
shall be final, conclusive and binding. If one or more
members of the Committee are disqualified by personal
interest from taking part in a particular decision, the
remaining member or members of the Committee (although less
than a quorum) shall have full power to act on the matter.
10. Other Plans. Nothing contained in this Plan shall prevent
the Board from adopting other or additional compensation
arrangements, subject to shareholder approval if required by
applicable law or the rules of any stock exchange on which
the Common Stock is then listed. Such arrangements may be
either generally applicable or applicable only in specific
cases.
11. No Agreement to Retain Directors. The Plan does not
obligate the shareholders to continue to retain a Director
on the Board, or limit the right of shareholders to
terminate a Director's service on the Board.
12. Governing Law. The validity, construction, and effect of
the Plan and any rules and regulations relating to the Plan
shall be determined in accordance with the laws of the
Commonwealth of Pennsylvania and applicable federal laws.
13. Conformity With Law. If any provision of this Plan is or
becomes or is deemed invalid, illegal or enforceable in any
jurisdiction, or would disqualify the Plan under any law
deemed applicable by the Board, such provision shall be
construed or deemed amended in such jurisdiction to conform
to applicable laws. If it cannot be construed or deemed
amended without, in the determination of the Board,
materially altering the intent of the Plan, it shall be
stricken and the remainder of the Plan shall remain in full
force and effect.
14. Withholding. The rights of the Eligible Directors to
payments under this Plan shall be subject to the Company's
obligations to withhold from such payments the applicable
federal, state, local or foreign taxes.
15. Successorship. It is the intent that the obligation of the
Company to pay benefits accrued or payable hereunder shall
be binding upon any successor corporation or organization,
which succeeds to substantially all of the assets and
business of the Company. The term "Company" wherever used
herein shall mean and include any such corporation or
organization after such succession and such obligations
shall be deemed to have been expressly assumed by any such
corporation or other organization.
*********************
As adopted by the Compensation Committee of the Board of
Directors under delegated authority this 27th day of May, 1999.
[CORPORATE SEAL] WEST PHARMACEUTICAL SERVICES, INC.
By: __________________________________
John R. Gailey III, Secretary
Exhibit "A"
Directors' Retirement Plan
Conversion of Retirement Benefit to Stock Equivalents
As of May 1, 1999
------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Number of Annual Present
Completed Accrued Value of
Years of Retirement Accrued
Director Age Service Benefit Benefit
Tenely Albright 63 5 $10,000 $83,000
John Conway 53 1 2,000 11,000
George Ebright 61 6 12,000 102,000
L. Robert Johnson 57 10 20,000 141,000
William Longfield 60 3 6,000 52,000
John Neafsey 59 11 20,000 161,000
Monroe Trout 68 7 14,000 108,000
Anthony Welters 44 2 4,000 12,000
J. Roffe Wike 72 36 20,000 141,000
Geoffrey Worden 59 5 10,000 81,000
-----------------------------------------------------------------
</TABLE>
1 - Represents annual amount payable at retirement - assumed to
be 60 (or current age, if older)
2 - Based on 7.0% interest rate, payable for the lesser of 15
years and the life of the director
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1999
<CASH> 37,500
<SECURITIES> 0
<RECEIVABLES> 74,900
<ALLOWANCES> 0
<INVENTORY> 42,000
<CURRENT-ASSETS> 21,400
<PP&E> 486,700
<DEPRECIATION> 264,300
<TOTAL-ASSETS> 540,900
<CURRENT-LIABILITIES> 83,600
<BONDS> 155,400
0
0
<COMMON> 4,300
<OTHER-SE> 220,300
<TOTAL-LIABILITY-AND-EQUITY> 540,900
<SALES> 353,700
<TOTAL-REVENUES> 353,700
<CGS> 245,200
<TOTAL-COSTS> 245,200
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,700
<INCOME-PRETAX> 44,900
<INCOME-TAX> 16,500
<INCOME-CONTINUING> 28,500
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 28,500
<EPS-BASIC> 1.91
<EPS-DILUTED> 1.89
</TABLE>
