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10Q2 2003>
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 June 30, 2003
Commission File Number 1-8036
WEST PHARMACEUTICAL SERVICES, INC.
(Exact name of registrant as specified in its charter)
Pennsylvania 23-1210010
- ----------------------------------------- ---------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
101 Gordon Drive, PO Box 645,
Lionville, PA 19341-0645
- ----------------------------------------- ---------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 610-594-2900
N/A
- --------------------------------------------------------------------------------------
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 19434 during the preceding
12 months, and (2) has been subject to such filing requirements for the past 90 days.
Yes X No
Indicate by check mark whether the registrant is an accelerated filer (as defined in
Rule 12b-2 of the Exchange Act). Yes_X_ No __
June 30, 2003 - 14,494,573
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 June 30, 2003
Page
Part I -Financial Information
Item 1. Financial Statements (unaudited)
Consolidated Statements of Income for the Three Months and Six Months
ended June 30, 2003 and June 30, 2002 3
Condensed Consolidated Balance Sheets at June 30, 2003 and December 31,
2002 4
Consolidated Statement of Shareholders' Equity for the Six Months ended
June 30, 2003 5
Condensed Consolidated Statements of Cash Flows for the Six Months ended
June 30, 2003 and June 30, 2002 6
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations 13
Item 3. Quantitative and Qualitative Disclosure about Market Risk 19
Item 4. Controls and Procedures 19
Part II - Other Information
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 6. Exhibits and Reports on Form 8-K 20
SIGNATURES 21
Index to Exhibits F-1,
F-2
Page 3
Part I. Financial Information
Item 1. Financial Statements.
West Pharmaceutical Services, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(in thousands, except per share data)
Three Months Ended Six Months Ended
June 30, 2003 June 30, 2002 June 30, 2003 June 30, 2002
- ------------------------------------------------------------------------------------------------------------------
Net sales $ 126,400 $ 106,500 $ 244,200 $ 208,200
Cost of goods and services sold 85,000 75,800 166,400 146,700
- ------------------------------------------------------------------------------------------------------------------
Gross profit 41,400 30,700 77,800 61,500
Selling, general and administrative expenses 26,800 21,500 51,200 41,800
Costs associated with plant explosion, net 3,700 - 8,800 -
Other (income) expense, net 100 (600) 500 (2,400)
- -------------------------------------------------------------------------------------------------------------------
Operating profit 10,800 9,800 17,300 22,100
Interest expense, net 1,700 2,500 3,600 4,900
- -------------------------------------------------------------------------------------------------------------------
Income before income taxes 9,100 7,300 13,700 17,200
Provision for income taxes 2,900 2,200 4,200 6,000
- -------------------------------------------------------------------------------------------------------------------
Income from consolidated operations 6,200 5,100 9,500 11,200
Equity in net income of affiliated companies 700 100 1,200 300
- -------------------------------------------------------------------------------------------------------------------
Income from continuing operations 6,900 5,200 10,700 11,500
Discontinued operations, net of tax - 100 - (100)
- -------------------------------------------------------------------------------------------------------------------
Net income $ 6,900 $ 5,300 $ 10,700 $ 11,400
===================================================================================================================
Net income (loss) per share:
Basic
Continuing operations $ 0.48 $ 0.36 $ 0.74 $ 0.80
Discontinued operations - 0.01 - (0.01)
- -------------------------------------------------------------------------------------------------------------------
$ 0.48 $ 0.37 $ 0.74 $ 0.79
===================================================================================================================
Assuming dilution
Continuing operations $ 0.48 $ 0.36 $ 0.74 $ 0.80
Discontinued operations - 0.01 - (0.01)
- -------------------------------------------------------------------------------------------------------------------
$ 0.48 $ 0.37 $ 0.74 $ 0.79
- -------------------------------------------------------------------------------------------------------------------
Average common shares outstanding 14,483 14,430 14,481 14,398
Average shares assuming dilution 14,483 14,507 14,481 14,450
Dividends declared per common share $ 0.20 $ 0.19 $ 0.40 $ 0.38
See accompanying notes to condensed consolidated financial statements.
Page 4
West Pharmaceutical Services, Inc. and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
(in thousands)
June 30, December 31,
2003 2002
- --------------------------------------------------------------------------------
ASSETS
Current assets:
Cash, including cash equivalents $ 44,300 $ 33,200
Accounts receivable 80,900 66,600
Inventories 45,000 41,300
Income tax refundable 2,500 3,600
Deferred income tax benefits 5,300 5,200
Other current assets 11,300 11,900
- --------------------------------------------------------------------------------
Total current assets 189,300 161,800
- --------------------------------------------------------------------------------
Property, plant and equipment 516,600 499,600
Less accumulated depreciation and amortization (294,500) (276,300)
- --------------------------------------------------------------------------------
222,100 223,300
Investments in affiliated companies 19,500 18,000
Goodwill 38,200 35,500
Pension asset 50,700 53,000
Deferred income tax benefits 21,400 19,900
Insurance receivable 6,600 -
Patents 7,000 7,300
Other intangibles 1,900 1,700
Other assets 10,700 9,100
- --------------------------------------------------------------------------------
Total Assets $ 567,400 $ 529,600
================================================================================
LIABILITES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 11,800 $ 11,700
Notes payable 3,700 4,100
Accounts payable 21,900 19,200
Accrued expenses:
Salaries, wages and benefits 19,300 17,000
Income taxes payable 8,100 9,400
Restructuring costs 900 1,400
Deferred income taxes 2,400 2,400
Other 31,000 23,000
- --------------------------------------------------------------------------------
Total current liabilities 99,100 88,200
- --------------------------------------------------------------------------------
Long-term debt, excluding current portion 164,100 159,200
Deferred income taxes 49,700 48,500
Other long-term liabilities 32,800 32,200
Shareholders' equity 221,700 201,500
- --------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $ 567,400 $ 529,600
================================================================================
See accompanying notes to condensed consolidated financial statements.
Page 5
West Pharmaceutical Services, Inc. and Subsidiaries
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (Unaudited)
(in thousands)
Accumulated
Capital in other
Common excess of Retained comprehensive Treasury
stock par value earnings income (loss) stock Total
- ----------------------------------------------------------------------------------------------------------------
Balance, December 31, 2002 $ 4,300 $ 30,900 $ 261,200 $ (13,400) $ (81,500) $ 201,500
Net income 10,700 10,700
Shares issued under stock plans 400 400
Cash dividends declared (5,800) (5,800)
Foreign currency translation adjustment 15,000 15,000
Minimum pension liability
translation adjustment (200) (200)
Fair value of financial instruments
adjustment 100 100
- ----------------------------------------------------------------------------------------------------------------
Balance, June 30, 2003 $ 4,300 $ 30,900 $ 266,100 $ 1,500 $ (81,100) $ 221,700
================================================================================================================
See accompanying notes to condensed consolidated financial statements.
Page 6
West Pharmaceutical Services, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(in thousands)
Six Months Ended
June 30, June 30,
2003 2002
- --------------------------------------------------------------------------------------
Cash flows provided by (used in) operating activities:
Net income $ 10,700 $ 11,400
Loss from discontinued operations - 100
Depreciation and amortization 16,600 16,200
Other non-cash items, net 2,400 (2,900)
Changes in assets and liabilities, net of effects of
discontinued operations (4,000) (9,600)
- ---------------------------------------------------------------------------------------
Net cash provided by operating activities
of continuing operations 25,700 15,200
- ---------------------------------------------------------------------------------------
Cash flows (used in) provided by investing activities:
Property, plant and equipment acquired (18,100) (20,600)
Insurance proceeds received for explosion
destroyed equipment 4,500 -
Land acquired under government grant (2,000) -
Deposit held in trust from sale of assets - 4,300
Customer advances, net of repayments 700 (1,300)
- ---------------------------------------------------------------------------------------
Net cash used in investing activities
of continuing operations (14,900) (17,600)
- ---------------------------------------------------------------------------------------
Cash flows (used in) provided by financing activities:
Net borrowings (repayments) under revolving
credit agreements 4,500 (7,800)
Repayment of subordinated debenture - (4,300)
Repayment of other long-term debt (200) (200)
Other notes payable, net (600) 600
Dividend payments (5,800) (5,500)
Issuance of common stock - 3,200
- ---------------------------------------------------------------------------------------
Net cash used in financing activities
of continuing operations (2,100) (14,000)
- ---------------------------------------------------------------------------------------
Net cash provided by discontinued operations - 1,200
- ---------------------------------------------------------------------------------------
Effect of exchange rates on cash 2,400 1,100
- ---------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 11,100 (14,100)
Cash, including cash equivalents at beginning of period 33,200 42,100
- ---------------------------------------------------------------------------------------
Cash, including cash equivalents at end of period $ 44,300 $ 28,000
=======================================================================================
See accompanying notes to condensed consolidated financial statements.
Page 7
West Pharmaceutical Services, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
(in thousands, except share and per share data)
1. The interim consolidated financial statements for the six-month period ended June 30, 2003
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 2002 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 unaudited accounts.
Interim Period Accounting Policy
--------------------------------
In the opinion of management, the unaudited Condensed Consolidated Balance Sheet, the
unaudited Consolidated Statement of Shareholders' Equity, the unaudited Consolidated Statements
of Income and the unaudited Condensed Consolidated Statements of Cash Flows as of and for
the three and six-month periods ended June 30, 2003 and for the comparative periods in 2002
contain all adjustments, consisting only of normal recurring accruals and adjustments, necessary
for a fair presentation of the Company's financial position as of June 30, 2003 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.
Reclassification
----------------
Certain reclassifications were made to prior period financial statements to be consistent
with the current period reporting presentation.
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, except that taxes related to specific
events and taxes applicable to prior year adjustments, if any, are recorded as identified.
Stock-Based Compensation
------------------------
The Company accounts for stock-based compensation using the intrinsic value method
prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued
to Employees," and related interpretations. Accordingly, compensation cost for
stock options is measured as the excess, if any, of the quoted market price of the
Company's stock at the date of the grant over the amount an employee must pay to
acquire the stock.
Page 8
West Pharmaceutical Services, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
(in thousands, except share and per share data)
(continued)
The Company did not record compensation cost for stock options for the three and six-months
ended June 30, 2003 and 2002 because stock option grants were made at 100% of the fair market
value of the stock on the grant date. If the fair value based method prescribed in SFAS
No. 123, "Accounting for Stock-Based Compensation," had been applied to stock option grants,
the Company's net income and basic and diluted net income per share would have been reduced
as summarized below:
Three Months Ended Six Months Ended
6/30/03 6/30/02 6/30/03 6/30/02
-------------------------------------------------------------------------------------------------
Net income, as reported: $ 6,900 $ 5,300 $ 10,700 $ 11,400
Deduct: Total stock-based compensation
expense determined under the fair value
method for all awards, net of tax (300) (300) (500) (700)
-------------------------------------------------------------------------------------------------
Pro forma net income $ 6,600 $ 5,000 $ 10,200 $ 10,700
=================================================================================================
Net income per share:
Basic, as reported $ 0.48 $ 0.37 $ 0.74 $ 0.79
Basic, pro forma $ 0.46 $ 0.34 $ 0.71 $ 0.74
Diluted, as reported $ 0.48 $ 0.37 $ 0.74 $ 0.79
Diluted, pro forma $ 0.46 $ 0.34 $ 0.71 $ 0.74
---------------------------------------------------------------------------------------------------
2. Inventories at June 30, 2003 and December 31, 2002 were as follows:
6/30/03 12/31/02
-------------------------------------------------
Finished goods $ 18,000 $ 18,900
Work in process 10,100 7,400
Raw materials 16,900 15,000
-------------------------------------------------
$ 45,000 $ 41,300
=================================================
3. Comprehensive income (loss) for the three and six-months ended June 30, 2003 and June 30,
2002 was as follows:
Three Months Ended Six Months Ended
6/30/03 6/30/02 6/30/03 6/30/02
--------------------------------------------------------------------------------------------------
Net income $ 6,900 $ 5,300 $ 10,700 $ 11,400
Foreign currency translation adjustments 10,500 13,800 15,000 8,100
Minimum pension liability translation
adjustments (300) (300) (200) (200)
Fair value adjustment on derivative financial
instruments 100 (100) 100 -
--------------------------------------------------------------------------------------------------
Comprehensive income (loss) $ 17,200 $ 18,700 $ 25,600 $ 19,300
==================================================================================================
Page 9
West Pharmaceutical Services, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
(in thousands, except share and per share data)
(continued)
4. Net sales to external customers and operating profit (loss) by reporting segment
for the three and six-months ended June 30, 2003 and June 30, 2002 were as follows:
Three Months Ended Six Months Ended
Net Sales: 6/30/03 6/30/02 6/30/03 6/30/02
-----------------------------------------------------------------------------
Pharmaceutical Systems $ 125,200 $ 104,300 $ 241,400 $ 203,400
Drug Delivery Systems 1,200 2,200 2,800 4,800
-----------------------------------------------------------------------------
Consolidated Total $ 126,400 $ 106,500 $ 244,200 $ 208,200
=============================================================================
Three Months Ended Six Months Ended
Operating Profit (Loss): 6/30/03 6/30/02 6/30/03 6/30/02
----------------------------------------------------------------------------------
Pharmaceutical Systems $ 25,200 $ 18,200 $ 46,100 $ 35,400
Drug Delivery Systems (3,700) (3,800) (7,200) (6,300)
Corporate costs (5,100) (5,300) (9,600) (10,100)
Pension income (expense) (1,900) 700 (3,200) 1,400
Costs associated with plant
explosion (3,700) - (8,800) -
Argentina foreign exchange gain - - - 1,700
----------------------------------------------------------------------------------
Consolidated Total $ 10,800 $ 9,800 $ 17,300 $ 22,100
==================================================================================
During 2003, approximately $11,100 of property, plant and equipment and $2,400 of inventory
in the Pharmaceutical Systems segment were destroyed in a plant explosion (see footnote #11).
Compared with December 31, 2002, there were no other material changes in the amount of
assets as of June 30, 2003 for any other reporting segment.
5. Common stock issued at June 30, 2003 was 17,165,141 shares, of which 2,670,568 shares
were held in treasury. Dividends of $.20 per common share were paid in the second quarter
of 2003 and a dividend of $.20 per share payable August 6, 2003 to holders of record on
July 23, 2003 was declared on June 17, 2003.
Below are the calculations of earnings (loss) per share for the three and six-months
ended June 30, 2003 and 2002. The computation of diluted earnings per share for the
three and six-months ended June 30, 2003 excluded 2,059,416 and 2,088,469 options,
respectively, due to their antidilutive effect. The computation of diluted earnings per
share for the three and six-months ended June 30, 2002 excluded 734,092 and 829,875 options,
respectively, due to their antidilutive effect.
Page 10
West Pharmaceutical Services, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
(in thousands, except share and per share data)
(continued)
Three Months Ended Six Months Ended
6/30/03 6/30/02 6/30/03 6/30/02
---------------------------------------------------- -----------------------------
Net income (loss):
Income from continuing operations $6,900 $5,200 $10,700 $11,500
Discontinued operations - 100 - (100)
------ ------ ------- -------
Net income $6,900 $5,300 $10,700 $11,400
Shares (in thousands):
Average common shares outstanding 14,483 14,430 14,481 14,398
Add: Dilutive stock options - 77 - 52
------ ------ ------- -------
Average shares assuming dilution 14,483 14,507 14,481 14,450
Basic net income (loss) per share:
Income from continuing operations $0.48 $0.36 $0.74 $0.80
Discontinued operations - 0.01 - (0.01)
------ ------ ------ -------
Net income $0.48 $0.37 $0.74 $0.79
Diluted net income (loss) per share:
Income from continuing operations $0.48 $0.36 $0.74 $0.80
Discontinued operations - 0.01 - (0.01)
----- ------ ----- -----
Net income $0.48 $0.37 $0.74 $0.79
6. The Company has accrued the estimated cost of environmental compliance expenses related
to soil or ground water contamination at current and former manufacturing facilities.
During the second quarter of 2003, the Company accrued $400 for environmental response
activities at the Kinston facility. Based on consultants' estimates of the costs of
remediation in accordance with applicable regulatory requirements, the Company believes
the accrued liability of $1,300 at June 30, 2003 is sufficient to cover the future costs
of these remedial actions, which will be carried out over the next several years. The
Company does not anticipate any possible recovery from insurance or other sources.
7. Goodwill by reportable segment as of June 30, 2003 and December 31, 2002 was as follows:
6/30/03 12/31/02
-------------------------------------------------
Pharmaceutical Systems $ 36,200 $ 33,500 $
Drug Delivery Systems 2,000 2,000
-------------------------------------------------
$ 38,200 $ 35,500 $
=================================================
The increase in the goodwill balance from December 31, 2002 is solely due to foreign
currency translation adjustments.
Page 11
West Pharmaceutical Services, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
(in thousands, except share and per share data)
(continued)
The cost and respective accumulated amortization for the Company's patents, was $11,500
and $4,500, respectively, as of June 30, 2003, and $11,400 and $4,100, respectively, as
of December 31, 2002. The cost basis of patents includes the effects of foreign currency
translation adjustments. The Company recorded $200 and $400 of amortization expense for the
three and six-months ended June 30, 2003 and 2002. Amortization for the full year 2003 is
estimated to be $700. The estimated annual amortization expense for each of the next five
years is approximately $700 per year.
8. The following table details the activity related to the Company's restructuring reserve,
which consists of accrued severance, benefits, contract termination costs and non-cash
write-offs:
Severance Continuing Discontinued
and benefits Other operations operations Total
----------------------------------------------------------------------------------------
Balance, December 31, 2002 $ 800 $ 500 $ 1,300 $ 100 $ 1,400 $ $
Cash payments (300) (100) (400) (100) (500)
-----------------------------------------------------------------------------------------
Balance, June 30, 2003 $ 500 $ 400 $ 900 $ - $ 900 $
=========================================================================================
Reductions to the reserve balance represent severance and benefits payments and monthly
payments for a terminated information systems contract. The Company expects to complete all
payments within the next twelve months.
9. In December 2002, the Company sold its consumer healthcare research business, previously
part of the Drug Delivery Systems segment. The results of this business have been
reflected as discontinued operations in the accompanying consolidated financial statements.
Revenues and pretax profit from the discontinued operation were $1,200 and $100 for the
three months ended June 30, 2002 and $3,200 and $500 for the six months ended June 30, 2002.
After-tax profit for the discontinued operation was $100 and $300, respectively, for the
three and six-months ended June 30, 2002.
The Company was required to hold $4,300 of the proceeds from the 2001 sale of its
contract manufacturing and packaging business in trust for the repayment of certain
debentures that the Company agreed to redeem as part of the sale. These debentures
were repaid in the first quarter of 2002 resulting in a $400, net of tax, charge which
was included in discontinued operations.
10. Other (income) expense for the three and six-months ended June 30, 2003 and June 30, 2002
were as follows:
Three Months Ended Six Months Ended
6/30/03 6/30/02 6/30/03 6/30/02
----------------------------------------------------------------------------------------
Foreign currency transaction (gains) losses $ (400) $ (700) $ (400) $ (2,300)
Loss on sales of equipment and other assets 400 - 700 -
Other 100 100 200 (100)
----------------------------------------------------------------------------------------
$ 100 $ (600) $ 500 $ (2,400)
========================================================================================
Page 12
West Pharmaceutical Services, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
(in thousands, except share and per share data)
(continued)
During the first quarter of 2002, the Company's Argentina subsidiary recorded a foreign
exchange gain of $1,700 on assets denominated in non-peso currencies due to the devaluation
of the Argentine peso. The foreign currency gain was subject to both Argentine federal
income taxes and related U.S. dividend withholding taxes.
11. On January 29, 2003, the Company's Kinston, North Carolina plant suffered an explosion
and related fire that resulted in six deaths, a number of injured personnel and substantial
damage to the building, machinery and equipment and inventories. The Company recognized $3,700
and $8,800 of direct costs associated with the loss in the three and six-months ended June 30,
2003, primarily for potentially uninsured costs, including deductibles, legal and
investigational costs, and environmental response costs. Certain additional costs associated
with operating under the Company's manufacturing recovery plan, including production inefficiencies,
additional freight and the use of overtime, are included in the results of operations. In the
second quarter of 2003, the Company recorded $2,600 in insurance recoveries related to these costs.
While the Company believes that additional costs will be subject to insurance recovery, it is
unable to estimate the ultimate amount of recovery at this time.
As of June 30, 2003 the Company has recorded a $6,600 insurance receivable from its
insurance provider. The receivable includes $11,100 for the net book value of the Kinston
plant's property, plant and equipment, $2,300 for the net book value of the inventory,
$2,600 for business interruption recoveries and $5,600 of other recoverable costs, offset
by a $15,000 cash advance from the Company's insurance provider.
In the second quarter of 2003 the Company purchased land from Lenoir County, North Carolina
for $2,000 on which the Company plans to rebuild its compression molding operation. Under
the terms of the agreement, commencing in 2005, the State will reimburse the Company $200
per year as long as the Company complies with certain capital investment and employment conditions.
The Company has been named a defendant in a lawsuit in connection with the explosion in
which plaintiffs seek unspecified compensatory and punitive damages. Because this lawsuit
is in its early stages, the Company is unable to state these plaintiffs' alleged damages.
The Company believes that overall it has sufficient insurance to cover any actual injuries
and damage related to the January incident.
Page 13
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
for the Three Months and Six Months ended June 30, 2003 versus June 30, 2002
-------------------------------------------------------------------------------------
Net Sales
- ---------
Net sales for the second quarter of 2003 were $126.4 million compared to $106.5 million
reported in the second quarter of 2002. Sales increased 19% from the prior year quarter with
9% of the increase due to the impact of foreign currency translation.
Second quarter 2003 sales for the Pharmaceutical Systems segment were $125.2 million, a
$20.9 million or 20% increase from prior year quarter reported sales of $104.3 million.
Approximately 9% of the increase is the result of foreign currency translation. Segment
sales increased in all geographic regions with significant increases in Europe from sales
of prefilled syringe components. Facility expansions in France and Germany resulted in
increased sales volumes in the European region. International sales grew 30% with 19%
of the increase resulting from foreign currency translation. Sales in domestic markets
increased 12% from the prior year quarter, led primarily by continued demand for the Company's
Westar(R)line of ready-to-sterilize components.
Drug Delivery Systems segment revenues for the second quarter were $1.2 million in 2003,
compared to $2.2 million in the prior year quarter. The decrease in revenue is due to
the continued weakness in demand for clinical research in the contract research unit.
Drug delivery business unit revenues improved slightly from those in the second quarter of 2002.
Net sales in the first half of 2003 were $244.2 million compared to $208.2 million in the
first six months of 2002. Sales increased 17% from the prior year with 8% of the increase
due to the impact of foreign currency translation. Overall price increases accounted for
1.7% of the sales increase over the first six months of 2002. Pharmaceutical Systems segment
sales were 19% higher than the prior year with 8% of the increase resulting from foreign
currency translation. Drug Delivery Systems'revenues for the six-month period decreased
$2.0 million due to lower revenues in the contract research unit. Year-to-date 2003
revenues in the drug delivery business unit were up slightly from those in 2002. The same
factors that influenced the quarterly comparisons affected the six-month comparisons.
Operating Profit
- ----------------
The Company recorded operating profit of $10.8 million in the second quarter of 2003,
compared to $9.8 million in the prior year quarter. Operating profit (loss) by operating
segment, including corporate costs, U.S. pension plan income (expense) and other charges
recorded in operating profit, for the three and six-months ended June 30, 2003 and
June 30, 2002 were as follows:
Page 14
Management's Discussion and Analysis of Financial Condition and Results of Operations
for the Three Months and Six Months ended June 30, 2003 versus June 30, 2002, continued
- ---------------------------------------------------------------------------------------
Operating Profit (Loss) Three Months Ended Six Months Ended
($ in millions) June 30, 2003 June 30, 2002 June 30, 2003 June 30, 2002
-----------------------------------------------------------------------------------------
Pharmaceutical Systems $ 25.2 $ 18.2 $ 46.1 $ 35.4
Drug Delivery Systems (3.7) (3.8) (7.2) (6.3)
Corporate costs (5.1) (5.3) (9.6) (10.1)
Pension income (expense) (1.9) 0.7 (3.2) 1.4
Argentina foreign
exchange gain - - - 1.7
Costs associated with plant
explosion (3.7) - (8.8) -
-----------------------------------------------------------------------------------------
Consolidated Total $ 10.8 $ 9.8 $ 17.3 $ 22.1
=========================================================================================
Pharmaceutical Systems' segment operating profit for the second quarter increased by $7.0 million,
of which $1.6 million is due to foreign currency translation, particularly in Europe, versus the
U.S. dollar. Improvements in the 2003 second quarter resulted from increased gross profit generated
by sales volume increases. Gross margins in the Pharmaceutical Systems segment increased to 32.9%
compared to 29.3% in the prior year quarter, including the effects of production efficiencies in
Europe resulting from facility expansion projects in France and Germany. The improvements in Europe
were partially offset by additional costs resulting from the transfer of production from Kinston to
other manufacturing locations, including production inefficiencies, additional freight and the
use of overtime. In the second quarter of 2003 the Company recorded $2.6 million in insurance
recoveries related to these costs. Approximately 30% of the estimated recovery pertained to
operating expenses incurred in the first quarter of 2003. While the Company believes that additional
costs from the first and second quarter will be subject to insurance recovery, it is unable to
estimate the ultimate amount of the recovery at this time. Selling, general and administrative
expenses were approximately 13% of net sales in both quarters.
Pharmaceutical Systems' segment operating profit for the first half of 2003 increased by
$10.7 million, of which $3.4 million is due to foreign currency translation. The same
factors that influenced the quarterly comparisons affected the six-month comparisons.
In the Drug Delivery Systems' segment, second quarter 2003 operating losses decreased by
$0.1 million from the prior year quarter. Operating losses in the clinical services business
unit increased as the business continues to suffer from reduced demand and competition
from full service clinical research organizations. Modest improvements in drug delivery
technology revenue as well as decreased compensation costs led to decreased operating losses
in the drug delivery business unit. Operating losses for the first half of 2003 were
$7.2 million compared to $6.3 million in 2002. The increase in operating losses is due
primarily to the decrease in sales in the clinical services business unit.
Page 15
Management's Discussion and Analysis of Financial Condition and Results of Operations
for the Three Months and Six Months ended June 30, 2003 versus June 30, 2002, continued
- ---------------------------------------------------------------------------------------
Corporate costs were $5.1 million in the second quarter of 2003 down from $5.3 million in
2002. The decrease in the second quarter 2003 is due to a $0.5 million decrease in information
systems project costs partially offset by a $0.3 million increase in incentive compensation.
For the six-month period, Corporate costs were $9.6 million, a decrease of $0.5 million from
the $10.1 million in 2002. The decrease in the first half of 2003 is the result of a $1.2 million
decrease in information systems project costs and a $0.2 million decrease in other Corporate
costs partially offset by a $0.5 million increase in incentive compensation and a $0.4 million
increase in outside services costs.
U.S. pension plan expenses were $1.9 million in the second quarter of 2003 compared to income
of $0.7 million in the same period of 2002. Year-to-date pension expense was $3.2 million in
2003 compared to income of $1.4 million in 2002. The increase in pension expense is mainly
the result of lower returns on pension plan assets. The Company expects the increase in pension
expense over comparable prior-year periods to continue at $2.3 million per quarter for the
remainder of 2003.
First quarter 2002 results include a $1.7 million foreign exchange gain recorded by the
Company's subsidiary in Argentina on net assets denominated in non-peso currencies due to
the devaluation of the Argentine peso.
Costs Associated With Plant Explosion
- -------------------------------------
During the first six months of 2003, the Company recognized $8.8 million of direct costs
associated with the January 29, 2003 Kinston explosion primarily for potentially uninsured
legal, investigational, and environmental response costs.
The Company believes full year potentially uninsured direct costs related to the Kinston
explosion will be approximately $10 million, subject to continuing risks that the scope and
cost of the legal response and investigation may increase.
Interest Expense, net
- ---------------------
Net interest costs were $1.7 million in the second quarter 2003 a decline of $0.8 million
from the $2.5 million in the prior year quarter. For the six-months ended June 30, 2003
net interest costs were $3.6 million compared to $4.9 million in the prior year. The decrease
for the three and six-months ended June 30, 2003 is due to increased interest income from
customer advances of $0.3 million and $0.7 million, respectively, as well as a decrease
in interest expense of $0.4 million and $0.5 million, respectively, resulting from lower
average debt levels and lower interest rates in the current year. The remaining decrease
is due to an increase in interest income from international banks.
Provision for Income Taxes
- --------------------------
The effective tax rate for the second quarter of 2003 and 2002 was 31%. The costs related
to the Kinston casualty loss in 2003 resulted in a 1% decrease in the effective tax rate
from the prior year quarter. For the six-month period the effective tax rate was 30% in
2003 compared to 35% in 2002. The costs related to the Kinston casualty loss in 2003 resulted
in a 2% decrease in the effective tax rate from the prior year. The foreign exchange gain
in 2002 generated a 2% increase in the effective tax rate.
Page 16
Management's Discussion and Analysis of Financial Condition and Results of Operations
for the Three Months and Six Months ended June 30, 2003 versus June 30, 2002, continued
- ---------------------------------------------------------------------------------------
Equity in Net Income of Affiliated Companies
- --------------------------------------------
Earnings in net income of affiliated companies was $0.7 million in the second quarter of
2003 up from the $0.1 million in the second quarter of 2002. Earnings for the six-month
period were also up from the prior year with income of $1.2 million in 2003 compared to
$0.3 million in 2002. Earnings from Daikyo Seiko, Ltd., a Japanese company in which the
Company has a 25% ownership interest, improved from the prior year due to increased sales.
Daikyo continues to experience increases in demand from its U.S. and European customers.
Results from the Company's 49% owned Mexican affiliates were up slightly from those in 2002.
Sales increases and efficiencies resulting from a restructuring completed in 2002 have begun
to benefit 2003 earnings.
Discontinued Operations
- -----------------------
In December 2002, the Company sold its consumer healthcare research business located in
Indianapolis, Indiana. Second quarter 2002 income for this business of $0.1 million and
year-to-date 2002 income of $0.3 million have been reflected in discontinued operations
in the accompanying consolidated financial statements.
The Company was required to hold $4.3 million of the proceeds of the 2001 sale of the
contract manufacturing and packaging business in trust for the repayment of certain
debentures that the Company agreed to redeem as part of the sale. These debentures were
repaid in the first quarter of 2002 resulting in a $0.4 million, net of tax, charge which
was included in discontinued operations.
Net Income
- ----------
Net income for the second quarter of 2003 was $6.9 million, or $.48 per share, compared to
$5.3 million, or $.37 per share, in the second quarter of 2002. Net income for the second
quarter of 2003 included $3.7 million of pre-tax costs ($2.5 million, or $0.17 per share,
net of tax) related to the explosion at the Kinston facility. Net income for the second
quarter of 2002 included income from discontinued operations of $0.1 million, or $0.01 per
share, net of tax. Average common shares outstanding were 14.5 million in the second
quarter of 2003 compared to 14.4 million in the second quarter of 2002.
Net income for the six-month period was $10.7 million, or $0.74 per share, compared to
$11.4 million, or $0.79 per share, for the 2002 period. 2003 results include $8.8 million
of pre-tax costs ($5.8 million, or $0.40 per share, net of tax) related to the Kinston
explosion. 2002 results include a $1.7 million foreign exchange gain ($0.8 million, or
$0.05 per share, net of tax) related to the devaluation of the Argentine peso and a loss
on discontinued operations of $0.1 million, or $0.01 per share, net of tax. Average common
shares outstanding were 14.5 million for the first six months of 2003 compared to
14.4 million in 2002.
Liquidity and Capital Resources
- -------------------------------
Working capital at June 30, 2003 was $90.2 million compared with $73.6 million at
December 31, 2002. The working capital ratio at June 30, 2003 was 1.9 to 1. Accounts
receivable increased significantly, reflecting the increase in June 2003 sales levels
versus December 2002. Days sales outstanding remained consistent with 2002 at 53 days.
Cash flow from operations was $25.7 million for the first six months of 2003, an increase
of $10.5 million from the prior year. The increase is due to improved operating results
in the Company's Pharmaceutical Systems segment. As a result of the Kinston explosion,
the Company has recorded a net insurance receivable of $6.6 million as of June 30, 2003.
The receivable includes $13.4 million for the net book value of property, plant, and
equipment and inventory destroyed in the explosion as well as $8.2 million of recoverable
costs and business interruption recoveries. Theses costs were offset by the $15.0 million
advance from the Company's insurance carrier.
Page 17
Management's Discussion and Analysis of Financial Condition and Results of Operations
for the Three Months and Six Months ended June 30, 2003 versus June 30, 2002, continued
- ---------------------------------------------------------------------------------------
Capital spending for the six-month period ended June 30, 2003 was $18.1 million. Expenditures
include new equipment purchases and equipment upgrades used in the production of the Company's
existing product lines, as well as expenditures focused on new products and expansion activities,
including the expansion of the Company's primary production facility for Westar products and expansions
at various European facilities. Full year 2003 capital spending is projected to be approximately
$64.5 million, which includes $16 million related to the replacement of the damaged Kinston facility.
The Company expects that the Kinston construction project will be largely financed by replacement
cost coverage provided by the Company's property insurance policy. In the second quarter of
2003, the Company purchased land under an economic development grant with the state of North
Carolina. Under the terms of the agreement, the state will reimburse a portion of the purchase
price every year as long as the Company maintains minimum capital investment and workforce
conditions. The Company paid cash dividends totaling $5.8 million ($0.40 per share) during the
first half of 2003.
Debt as a percentage of total invested capital (total debt and shareholders' equity) at
June 30, 2003 was 44.8% compared to 46.5% at December 31, 2002. Total shareholders' equity
was $221.7 million at June 30, 2003 compared to $201.5 million at December 31, 2002. The
increase in equity was due to current year net income and positive foreign currency
translation adjustments partially offset by dividend payments.
The Company believes that its financial condition, current capitalization and expected income
from operations will be sufficient to meet the Company's future expected cash requirements,
at least through July 2005, at which time the Company's revolving credit facility expires.
The Company fully expects to obtain similar credit facilities at that time.
The Company is subject to certain risks and uncertainties connected with the explosion at
the Company's Kinston, NC plant. See the text under the caption "Cautionary Statement
Regarding Forward-Looking Information."
New Accounting Standards
- ------------------------
In November 2002, the Emerging Issues Task Force ("EITF") reached a consensus opinion on
EITF 00-21, "Revenue Arrangements with Multiple Deliverables." The consensus provides
guidance on the timing of revenue recognition for sales arrangements that deliver more than
one product or service. EITF 00-21 is effective for revenue arrangements entered into in
fiscal periods beginning after June 15, 2003. EITF 00-21 is not expected to have a material
effect on the Company's consolidated financial position or results of operations.
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.
In order to minimize the exposure to foreign currency fluctuations, the Company borrowed
10.0 million British Pound Sterling (BPS) in 2002 and designated the borrowing as a hedge
of the Company's net investment in its U.K. subsidiaries. Due to unfavorable interest rates,
the 10.0 million BPS debt was repaid in the first quarter of 2003. The mark-to-market
currency adjustments recorded as a cumulative translation adjustment to shareholders'
equity will remain there until the disposal of the investment.
Page 18
Management's Discussion and Analysis of Financial Condition and Results of Operations
for the Three Months and Six Months ended June 30, 2003 versus June 30, 2002, continued
- ---------------------------------------------------------------------------------------
Due to continuing fluctuations in the Japanese Yen, in January 2003, the Company entered
into an arrangement to hedge its net investment in Daikyo Seiko, Ltd., a Japanese company
in which the Company has a 25% ownership interest. The Company's strategy is to minimize
the exposure to foreign currency fluctuations by employing borrowings in the functional
currency of the investment. The Company borrowed 1.7 billion Yen under its five-year
revolving credit facility and has designated the borrowing as a hedge of its net investment
in the Company's investment in Daikyo.
In June 2003, the Company entered into a forward contract in order to hedge foreign currency
exposure on a cross currency intercompany loan. The forward contract, which is designated
as a fair value hedge, terminated in July 2003 when the intercompany loan was repaid.
The notional amount for the forward contract taken out by a subsidiary with a BPS functional
currency was 12.4 million Danish Krone.
Cautionary Statement Regarding Forward-Looking Information
- ----------------------------------------------------------
Certain statements contained in this Report or in other company documents and certain
statements that may be made by management of the Company orally may contain forward-looking
statements as defined in the Private Securities Litigation Reform Act of 1995. These statements
can be identified by the fact that they do not relate strictly to historic or current facts.
They use words such as "estimate," "expect," "intend," "believe," "plan, " "anticipate" and
other words and terms of similar meaning in connection with any discussion of future operating
or financial performance or condition. In particular, these include statements concerning
future actions, future performance or results of current and anticipated products, sales
efforts, expenses, the outcome of contingencies such as legal proceedings, and financial results.
Because actual results are affected by risks and uncertainties, the Company cautions investors
that actual results may differ materially from those expressed or implied in any forward
looking statement.
It is not possible to predict or identify all such risks and uncertainties, but factors that
could cause the actual results to differ materially from expected and historical results
include, but are not limited to: sales demand, timing of customers' projects; successful
development of proprietary drug delivery technologies and systems; regulatory, licensee
and/or market acceptance of products based on those technologies; competitive pressures;
the strength or weakness of the U.S. dollar; inflation; the cost of raw materials; the
availability of credit facilities; and, statutory tax rates. With respect to the explosion
and fire at the Company's Kinston, NC plant, the following factors should also be taken into
consideration: the timely replacement of production capacity; the adequacy and timing of
insurance recoveries for property losses; the unpredictability of existing and future
possible litigation related to the explosion and the adequacy of insurance recoveries for
costs associated with such litigation; government actions or investigations affecting the
Company; the ability of the Company to successfully shift production and compounding capacity
to other plant sites in a timely manner, including the successful integration of experienced
personnel to other production sites; the extent of uninsured costs for, among other things,
legal and investigation services and incremental insurance; and regulatory approvals and
customer acceptance of goods from alternate sites.
The Company assumes no obligation to update forward-looking statements as circumstances
change. Investors are advised, however, to consult any further disclosures the Company
makes on related subjects in the Company's 10-K, 10-Q and 8-K reports.
Page 19
Item 3. Quantitative and Qualitative Disclosure about Market Risk.
---------------------------------------------------------
The information called for by this item is included in the text under the caption
"Market Risk" in Item 2. "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and should be read in conjunction with the Company's Form
10-K filed for the year ended December 31, 2002.
Item 4. Controls and Procedures.
-----------------------
The Company has established disclosure controls and procedures (as defined
under SEC Rules 13a-15(e) and 15d-15(e) that are designed to, among other things,
ensure that information required to be disclosed in the Company's periodic reports
is recorded, processed, summarized and reported on a timely basis and that such
information is made known to the Company's Chief Executive Officer and Chief
Financial Officer (together, the "Certifying Officers") to allow timely decisions
regarding required disclosure.
The Certifying Officers have evaluated the effectiveness of the Company's disclosure
controls and procedures as of the end of the period covered by this quarterly report,
and based on such evaluation, have concluded that such disclosure controls and
procedures are effective.
Additionally, based on their evaluation of the Company's internal control over
financial reporting, the Certifying Officers have also concluded that there has
been no change during the period covered by this report to the Company's internal
control over financial reporting that has materially affected, or is reasonably
likely to materially affect, these internal controls.
Page 20
Part II - Other Information
Item 4. Submission of Matters to a Vote of Security Holders.
(a) The Company held its annual meeting of shareholders on April 29, 2003.
(c) Three matters were voted on at the annual meeting: (1) the election of four
directors in Class I; (2) the approval of the Company's 2003 Employee Stock
Purchase Plan; and (3) the ratification of the appointment of
PricewaterhouseCoopers LLP as the Company's independent accountants for 2003.
The results of the voting are as follows:
Proposal #1 - Election of Directors
For Withheld
--------- --------
William H. Longfield 12,488,839 58,623
Anthony Welters 12,415,217 132,245
Robert C. Young 12,486,549 60,913
Patrick J. Zenner 12,486,646 60,816
Proposal #2 - Approval of the 2003 Employee Stock Purchase Plan
For Against Abstained
-------- --------- ---------
7,537,311 3,494,767 12,456
Proposal #3 - Ratification of Appointment of Independent Accountants
For Against Abstained
12,259,350 282,337 5,774
Item 6. Exhibits and Reports on Form 8-K
(a) See Index to Exhibits on pages F-1 and F-2 of this Report.
On April 22, 2003, the Company filed a Current Report on Form 8-K.
Under Item 12 of that Report, the Company furnished to the Commission
the press release dated April 22, 2003.
Page 21
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 thereunt
duly authorized.
WEST PHARMACEUTICAL SERVICES, INC.
-------------------------------------------------
(Registrant)
August 13, 2003 /s/ Linda R. Altemus
- ---------------- -------------------------------------------------
Date Linda R. Altemus
Vice President and Chief Financial Officer
INDEX TO EXHIBITS
Exhibit
Number
(2) None
(3) (a) Amended and Restated Articles of Incorporation of the Company through
January 4, 1999 incorporated by reference to Exhibit (3)(a) of 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 Exhibit (4) (a) of the Company's Annual Report on Form 10-K for the
year ended December 31, 1998 (File No. 1-8036).
(4)(a)(1) Article 5, 6, 8(c) and 9 of the Amended and Restated Articles of Incorporation
of the Company, incorporated by reference to Exhibit (3)(a) of the Company's
Annual Report on Form 10-K for the year ended December 31, 1998 (File No. 1-8036).
(4)(a)(2) Article I and V of the Bylaws of the Company, as amended, 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).
(10) (a) Change-In-Control Agreement, dated as of May 1, 2003, between the Company and
Joseph E. Abbott.
(10) (b) Second Amended and Restated Change-In-Control Agreement, dated as of May 1, 2003,
between the Company and Michael A. Anderson.
(10) (c) Change-In-Control Agreement, dated as of May 1, 2003, between the Company and
Bruce S. Morra.
(10) (d) Confidentiality and Non-Competition Agreement, dated as of April 7, 2003, between
the Company and Bruce S. Morra.
F - 1
INDEX TO EXHIBITS
Exhibit
Number
(10) (e) Amendment to Non-Competition Agreement, dated as of May 1, 2003, between the
Company and Bruce S. Morra.
(10) (f) (1) Extension Agreement, dated as of July 8, 2003, to Credit Agreement, dated as
of July 26, 2000 (the "Credit Agreement") among the Company, the several banks
and financial institutions listed on the signature pages thereto, and PNC Bank,
National Association, as Agent.
(10) (f) (2) Commitment and Acceptance, dated as of July 21, 2003, with respect to the
Credit Agreement among the Company, Manufacturers and Traders Trust Company
and PNC Bank, N.A.
(11) Non Applicable.
(15) None.
(18) None.
(19) None.
(22) None.
(23) Non Applicable.
(24) None.
(31) (a) Section 302 Certification by Donald E. Morel, Jr., Ph.D.
(31) (b) Section 302 Certification by Linda R. Altemus.
(32) (a) Certification by Donald E. Morel, Jr., Ph.D., pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
(32) (b) Certification by Linda R. Altemus, pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
F-2