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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 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 twelve 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 Act). Yes__
No X .
March 31, 2003 - 14,479,379
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest
practicable date.
Page 2
Index
Form 10-Q for the Quarter Ended March 31, 2003
Page
Part I -Financial Information
Item 1. Financial Statements
Consolidated Statements of Income for the Three Months ended March 31,
2003 and March 31, 2002 3
Condensed Consolidated Balance Sheets at March 31, 2003 and December 31,
2002 4
Consolidated Statement of Shareholder's Equity for the Three Months ended
March 31, 2003 5
Condensed Consolidated Statements of Cash Flows for the Three Months ended
March 31, 2003 and March 31, 2002 6
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations 12
Item 3. Quantitative and Qualitative Disclosure about Market Risk 18
Item 4. Controls and Procedures 18
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K 19
SIGNATURES 20
CERTIFICATIONS 21, 22
Index to Exhibits F-1,
F-2,
F-3
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)
Quarter Ended
March 31, 2003 March 31, 2002
- ----------------------------------------------------------------------------------------
Net sales $ 117,800 $ 101,700
Cost of goods and services sold 81,400 70,900
- ----------------------------------------------------------------------------------------
Gross profit 36,400 30,800
Selling, general and administrative expenses 24,400 20,300
Costs associated with plant explosion, net 5,100 -
Other (income) expense, net 400 (1,800)
- ----------------------------------------------------------------------------------------
Operating profit 6,500 12,300
Interest expense, net 1,900 2,400
- ----------------------------------------------------------------------------------------
Income before income taxes 4,600 9,900
Provision for income taxes 1,300 3,800
- ----------------------------------------------------------------------------------------
Income from consolidated operations 3,300 6,100
Equity in net income of affiliated companies 500 200
- ----------------------------------------------------------------------------------------
Income from continuing operations 3,800 6,300
Discontinued operations, net of tax - (200)
- ----------------------------------------------------------------------------------------
Net income $ 3,800 $ 6,100
========================================================================================
Net income (loss) per share:
Basic
Continuing operations $ 0.26 $ 0.44
Discontinued operations - (0.02)
- ----------------------------------------------------------------------------------------
$ 0.26 $ 0.42
- ----------------------------------------------------------------------------------------
Assuming dilution
Continuing operations $ 0.26 $ 0.44
Discontinued operations - (0.02)
- ----------------------------------------------------------------------------------------
$ 0.26 $ 0.42
- ----------------------------------------------------------------------------------------
Average common shares outstanding 14,480 14,366
Average shares assuming dilution 14,480 14,397
Dividends declared per common share $ 0.20 $ 0.19
See accompanying notes to condensed consolidated financial statements.
Page 4
West Pharmaceutical Services, Inc. and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
Unaudited
March 31, Dec. 31,
2003 2002
- -----------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash, including cash equivalents $ 37,100 $ 33,200
Accounts receivable 72,600 66,600
Inventories 42,400 41,300
Income tax refundable 3,000 3,600
Deferred income tax benefits 5,100 5,200
Other current assets 12,300 11,900
- -----------------------------------------------------------------------------------------
Total current assets 172,500 161,800
- -----------------------------------------------------------------------------------------
Property, plant and equipment 497,700 499,600
Less accumulated depreciation and amortization (284,000) (276,300)
- -----------------------------------------------------------------------------------------
213,700 223,300
Investments in affiliated companies 18,900 18,000
Goodwill 36,300 35,500
Pension asset 52,100 53,000
Deferred income tax benefits 20,600 19,900
Insurance receivable 10,600 -
Patents 7,000 7,300
Other intangibles 1,900 1,700
Other assets 8,300 9,100
- -----------------------------------------------------------------------------------------
Total Assets $ 541,900 $ 529,600
=========================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 11,400 $ 11,700
Notes payable 1,500 4,100
Accounts payable 21,600 19,200
Accrued expenses:
Salaries, wages and benefits 15,800 17,000
Income taxes payable 10,900 9,400
Restructuring costs 1,000 1,400
Deferred income taxes 2,400 2,400
Other 28,100 23,000
- -----------------------------------------------------------------------------------------
Total current liabilities 92,700 88,200
- -----------------------------------------------------------------------------------------
Long-term debt, excluding current portion 160,700 159,200
Deferred income taxes 48,900 48,500
Other long-term liabilities 32,600 32,200
Shareholders' equity 207,000 201,500
- -----------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $ 541,900 $ 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 (loss) stock Total
- ---------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2002 $ 4,300 $ 30,900 $ 261,200 $ (13,400) $ (81,500) $ 201,500
Net income 3,800 3,800
Cash dividends declared (2,900) (2,900)
Foreign currency translation adjustment 4,500 4,500
Minimum pension liability
translation adjustment 100 100
- --------------------------------------------------------------------------------------------------------------------------------
Balance, March 31, 2003 $ 4,300 $ 30,900 $ 262,100 $ (8,800) $ (81,500) $ 207,000
================================================================================================================================
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)
Three Months Ended
March 31, March 31,
2003 2002
- -----------------------------------------------------------------------------------------------------
Cash flows provided by (used in) operating activities:
Net income $ 3,800 $ 6,100
Loss from discontinued operations - 200
Depreciation and amortization 8,100 7,900
Other non-cash items, net 900 (1,100)
Changes in assets and liabilities, net of effects of
discontinued operations 1,300 (10,200)
- -----------------------------------------------------------------------------------------------------
Net cash provided by operating activities
of continuing operations 14,100 2,900
- -----------------------------------------------------------------------------------------------------
Cash flows (used in) provided by investing activities:
Property, plant and equipment acquired (7,300) (10,600)
Insurance proceeds received for explosion
destroyed equipment 500 -
Deposit held in trust from sale of assets - 4,300
Customer advances, net of repayments 100 (1,100)
- -----------------------------------------------------------------------------------------------------
Net cash used in investing activities
of continuing operations (6,700) (7,400)
- -----------------------------------------------------------------------------------------------------
Cash flows (used in) provided by financing activities:
Net borrowings (repayments) under revolving
credit agreements 1,200 (1,800)
Repayment of subordinated debenture - (4,300)
Repayment of other long-term debt (100) (200)
Other notes payable, net (2,600) (100)
Dividend payments (2,900) (2,800)
Issuance of common stock - 2,100
- -----------------------------------------------------------------------------------------------------
Net cash used in financing activities
of continuing operations (4,400) (7,100)
- -----------------------------------------------------------------------------------------------------
Net cash used in discontinued operations - (200)
- -----------------------------------------------------------------------------------------------------
Effect of exchange rates on cash 900 (1,400)
- -----------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 3,900 (13,200)
Cash, including cash equivalents at beginning of period 33,200 42,100
- -----------------------------------------------------------------------------------------------------
Cash, including cash equivalents at end of period $ 37,100 $ 28,900
=====================================================================================================
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 three-month period ended March 31, 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 period ended March 31, 2003 and for the
comparative period in 2002 contain all adjustments, consisting only of normal recurring accruals and
adjustments, necessary for a fair presentation of the financial position as of March 31, 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 related to stock option and stock purchase plans for the three
months ended March 31, 2003 and 2002 because grants are made at 100% of fair market value 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
3/31/03 3/31/02
--------------------------------------------------------------------------------
Net income, as reported: $ 3,800 $ 6,100
Deduct: Total stock-based compensation expense
determined under the fair value based method
for all awards, net of tax (200) (400)
--------------------------------------------------------------------------------
Pro forma net income $ 3,600 $ 5,700
================================================================================
Net income per share:
Basic, as reported $ 0.26 $ 0.42
Basic, pro forma $ 0.25 $ 0.40
Diluted, as reported $ 0.26 $ 0.42
Diluted, pro forma $ 0.25 $ 0.39
--------------------------------------------------------------------------------
2. Inventories at March 31, 2003 and December 31, 2002 were as follows:
3/31/03 12/31/02
----------------------------------------------------------
Finished goods $ 18,800 $ 18,900
Work in process 8,700 7,400
Raw materials 14,900 15,000
----------------------------------------------------------
$ 42,400 $ 41,300
==========================================================
3. Comprehensive income (loss) for the three months ended March 31, 2003 and March 31, 2002 was as
follows:
Three Months Ended
3/31/03 3/31/02
--------------------------------------------------------------------------------------
Net income $ 3,800 $ 6,100
Foreign currency translation adjustments 4,500 (5,700)
Minimum pension liability translation adjustments 100 100
Fair value adjustment on derivative
financial instruments - 100
--------------------------------------------------------------------------------------
Comprehensive income (loss) $ 8,400 $ 600
======================================================================================
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 operating segment for the three months
ended March 31, 2003 and March 31, 2002 were as follows:
Three Months Ended
March 31
Net Sales: 2003 2002
------------------------------------------------------------------------
Pharmaceutical Systems $ 116,200 $ 99,100
Drug Delivery Systems 1,600 2,600
------------------------------------------------------------------------
Consolidated Total $ 117,800 $ 101,700
========================================================================
Three Months Ended
March 31
Operating Profit (Loss): 2003 2002
------------------------------------------------------------------------
Pharmaceutical Systems $ 21,000 $ 17,300
Drug Delivery Systems (3,500) (2,500)
Corporate costs (4,600) (4,900)
Pension income (expense) (1,300) 700
Costs associated with plant explosion (5,100) -
Argentina foreign exchange gain - 1,700
------------------------------------------------------------------------
Consolidated Total $ 6,500 $ 12,300
========================================================================
In the first quarter of 2003 approximately $11,100 of property, plant and equipment and $2,100 of inventory
in the Pharmaceutical Systems segment were destroyed in a plant explosion (see footnote #10). Compared with
December 31, 2002, there were no other material changes in the amount of assets as of March 31, 2003 for any
other operating segment.
5. Common stock issued at March 31, 2003 was 17,165,141 shares, of which 2,685,762 shares were held in
treasury. Dividends of $.20 per common share were paid in the first quarter of 2003 and a dividend of $.20
per share payable May 7, 2003 to holders of record on April 23, 2003 was declared on March 24, 2003.
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. Based on consultants' estimates
of the costs of remediation in accordance with applicable regulatory requirements, the Company believes the
accrued liability of $900 at March 31, 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.
Page 10
West Pharmaceutical Services, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
(in thousands, except share and per share data)
(continued)
7. 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 (200) (100) (300) (100) (400)
-----------------------------------------------------------------------------------------------------
Balance, March 31, 2003 $ 600 $ 400 $ 1,000 $ - $ 1,000 $
=====================================================================================================
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.
8. In December 2002, the Company sold its consumer healthcare research business located in Indianapolis,
Indiana. The results of this business have been reflected as discontinued operations in the accompanying
consolidated financial statements.
The Company was required to hold $4,300 of the proceeds from the 2001 sale of the contract manufacturing and
packaging business in trust for the repayment of certain debentures that became due and payable upon its
sale in 2001. These debentures were repaid in the first quarter of 2002 resulting in a $400, net of tax,
charge which was included in discontinued operations.
9. Other (income) expense for the three months ended March 31, 2003 and March 31, 2002 were as follows:
Three Months Ended
3/31/2003 3/31/2002
---------------------------
Foreign exchange (gains) losses $ - $ (1,600)
Loss on sales of equipment and other assets 300 -
Other 100 (200)
---------------------------
$ 400 $ (1,800)
===========================
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.
Page 11
West Pharmaceutical Services, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
(continued)
10. 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 $5,100 of direct costs associated with the loss in
the first quarter of 2003, primarily for uninsured costs, including deductibles, legal and investigational
costs, and environmental response costs.
In addition, at March 31, 2003 the Company recorded a $10,600 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, $2,100 for the net book value of the inventory and $2,400 of other recoverable costs, offset by a
$5,000 cash advance from the Company's insurance provider.
The Company has been named a defendant in a lawsuit in connection with the explosion in which plaintiffs
seek unspecified compensatory and punitive damages. The Company is unable to estimate the possible range of
loss at this time.
Page 12
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
-------------------------------------------------------------------------------------
Net Sales
- ---------
Net sales for the first quarter of 2003 were $117.8 million compared to $101.7 million reported in the first
quarter of 2002. Sales increased 16% from the prior year quarter with 7% of the increase due to the impact of
foreign exchange. Overall price increases accounted for 2.1% of the sales increase over the first quarter of
2002.
First quarter 2003 sales for the Pharmaceutical Systems segment were $116.2 million, a $17.1 million or 17%
increase from prior year reported sales of $99.1 million. Approximately 7% of the increase is the result of
foreign exchange. Segment sales increased in all geographic regions with significant increases in Europe mainly
in prefilled syringe components. European sales grew 38% with 25% of the increase resulting from foreign exchange
rates. Sales in domestic markets increased 8% from the prior year quarter. The increase in domestic markets is
primarily led by demand for the Company's Westar(R) line of ready-to-sterilize components.
Drug Delivery Systems segment revenues were $1.6 million, compared to $2.6 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 were consistent with those in the first quarter of 2002.
Operating Profit
- ----------------
The Company recorded operating profit of $6.5 million in the first quarter of 2003, compared to $12.3 million in
the prior year quarter. Operating profit (loss) by operating segment, including corporate costs, U.S. pension
plan income (expense) and other charges recorded in operating profit for the quarter ended March 31, 2003 and
March 31, 2002 were as follows:
Quarter Ended
($ in millions) March 31, 2003 March 31, 2002
---------------------------------------------------------------------------
Pharmaceutical Systems $ 21.0 $ 17.3
Drug Delivery Systems (3.5) (2.5)
Corporate costs (4.6) (4.9)
Pension income (expense) (1.3) 0.7
Argentina foreign
exchange gain - 1.7
Costs associated with plant
explosion (5.1) -
---------------------------------------------------------------------------
Consolidated Total $ 6.5 $ 12.3
===========================================================================
Page 13
Management's Discussion and Analysis of Financial Condition and Results of Operations, continued
- ------------------------------------------------------------------------------------------------
Pharmaceutical Systems' segment operating profit increased by $3.7 million, of which $1.7 million is due to the
strength of foreign currencies, particularly in Europe, versus the U.S. dollar. Improvements in 2003 resulted
from increased gross profit generated by sales volume increases. Gross margin in the Pharmaceutical Systems
segment increased to 31.2% compared to 30.6% in the prior year quarter, including the effects of improved
production efficiencies in Europe mostly relating to facility expansion projects in France and Germany. The
improvements in Europe were offset by higher domestic production costs resulting from the transfer of production
from Kinston to other manufacturing locations. Selling, general and administrative expenses were approximately
13% of net sales in both quarters.
In the Drug Delivery Systems' segment, lower clinical services revenues and higher research and development costs
on several near-term technology licensing opportunities contributed to an increased segment operating loss of
$1.0 million compared to 2002. During the first quarter of 2003, the Company completed a licensing agreement with
Chiron Corporation for the use of Chysis(TM) with a new vaccine product. West will conduct and receive reimbursement
for toxicology and other studies beginning in 2003, in addition to milestone payments connected to regulatory
filings and approvals, the majority of which are not expected to occur for two to three years.
Corporate costs were $4.6 million in 2003 down from the $4.9 million in 2002. The decrease in Corporate costs is
the result of a decrease in information systems project costs. Corporate other (income) expense for the first
quarter 2003 includes the impact of local rezoning activity which reduced the estimated fair value of a property
held for sale by $0.3 million.
U.S. pension plan expenses were $1.3 million in 2003 compared to income of $0.7 million in 2002. The additional
expense is mainly the result of declining pension plan asset values.
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
- -------------------------------------
The Company recognized $5.1 million of direct costs associated with the Kinston plant casualty loss in the first
quarter of 2003, primarily for 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 for the quarter. While the Company believes that these additional costs
will be subject to insurance recovery, it is unable to estimate the ultimate amount of the recovery at this time.
Page 14
Management's Discussion and Analysis of Financial Condition and Results of Operations, continued
- ------------------------------------------------------------------------------------------------
As a result of higher than expected legal and investigatory costs associated with the accident, the Company has
raised its full year 2003 estimate of uninsured costs associated with the Kinston loss to approximately $10 million,
subject to continuing risks that the scope and cost of the legal response and investigation will increase.
Interest Expense, net
- ----------------------
Net interest costs were $1.9 million in 2003 a decline of $0.5 million from the prior year quarter. The decrease
is mainly due to increased interest income from customer advances as well as lower interest expense resulting
from lower debt levels in the current year.
Provision for Income Taxes
- --------------------------
The effective tax rate for the first quarter of 2003 was 29% compared to 39% in the first quarter of 2002. The
costs related to the Kinston casualty loss in 2003 resulted in a 3% decrease in the effective tax rate from the
prior year. The foreign exchange gain in 2002 generated a 4% increase in the effective tax rate. The remaining
decrease in the effective tax rate from the prior year quarter is a result of the utilization of foreign tax
credits and a change in the geographic mix of earnings.
Equity in Net Income of Affiliated Companies
- --------------------------------------------
Earnings from Daikyo Seiko, Ltd., a Japanese company in which the Company has a 25% ownership interest, improved
from the prior year quarter due to increased sales as well as decreases in manufacturing expenses. Results from
the Company's 49% owned Mexican affiliates were consistent with those reported in the first quarter of 2002.
Discontinued Operations
- -----------------------
In December 2002, the Company sold its consumer healthcare research business located in Indianapolis, Indiana.
First quarter 2002 income for this business of $0.2 million has been reflected as 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 became due and payable upon 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 first quarter of 2003 was $3.8 million, or $.26 per share, compared to $6.1 million, or $.42
per share, in the first quarter of 2002. Net income for the first quarter of 2003 included $5.1 million of
pre-tax costs ($3.3 million, or $0.23 per share, net of tax) related to the explosion at the Kinston facility.
Net income for the first quarter of 2002 included 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. Also included in 2002 was a loss on
discontinued operations of $0.2 million, or $0.02 per share, net of tax. Average common shares outstanding were
14.5 million in the first quarter of 2003 compared to 14.4 million in the first quarter of 2002.
Page 15
Management's Discussion and Analysis of Financial Condition and Results of Operations, continued
- ------------------------------------------------------------------------------------------------
Liquidity and Capital Resources
- -------------------------------
Working capital at March 31, 2003 was $79.8 million compared with $73.6 million at December 31, 2002. The
working capital ratio at March 31, 2003 was 1.9 to 1. Accounts receivable increased significantly, reflecting the
increase in March 2003 sales levels versus December 2002. Days sales outstanding remained consistent with 2002.
Cash flow from operations was $14.1 million in the first quarter of 2003, an increase of $11.2 million from the
prior year quarter. The increase is due to strong operating results in the Company's Pharmaceutical Systems
segment as well as the net impact of a cash advance from its insurance carrier related to the Kinston casualty
loss. Low fourth quarter 2001 sales negatively impacted first quarter 2002 cash flows.
Capital spending was $7.3 million, approximately half of which was focused on new products and expansion
activities, including the expansion of the Company's primary production facility for Westar products. The
remaining capital expenditures were for new equipment purchases and equipment upgrades used in the production of
the Company's existing product lines. Full year 2003 capital spending is projected to be approximately $45
million. The Company paid cash dividends totaling $2.9 million ($0.20 per share) during the first quarter of 2003.
Debt as a percentage of total invested capital at March 31, 2003 was 45.6% compared with 46.5% at December 31,
2002. Total shareholder's equity was $207.0 million at March 31, 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 June 2002, the Financial Accounting Standards Board (FASB) issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" (SFAS 146). SFAS 146 requires that a liability for costs associated
with a disposal activity, including those related to employee termination benefits, be recognized when the
liability is incurred, and not necessarily at the date of an entity's commitment to an exit plan as had been the
practice under the prior accounting guidance. SFAS 146, which was adopted on January 1, 2003, did not have an
impact on the Company's consolidated financial position or results of operations.
Page 16
Management's Discussion and Analysis of Financial Condition and Results of Operations, continued
- ------------------------------------------------------------------------------------------------
In November 2002, FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others" (FIN 45) was issued. FIN 45 elaborates on the
disclosures to be made by a guarantor about its obligations under certain guarantees that it has issued. The
disclosure requirements of FIN 45 became effective for financial statements ending after December 15, 2002. FIN
45 also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the
fair value of the obligation undertaken in issuing the guarantee. The recognition provisions apply on a
prospective basis to guarantees issued or modified after December 31, 2002. FIN 45 did not have a material
effect on the Company's consolidated financial position or results of operations.
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. The Company is currently analyzing
the impact, if any, the adoption of EITF 00-21 will have on its financial statements.
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 adjustments recorded as a cumulative translation adjustment to shareholders' equity
will remain there until the disposal of the investment.
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.
Page 17
Management's Discussion and Analysis of Financial Condition and Results of Operations, continued
- ------------------------------------------------------------------------------------------------
In March 2003, the Company entered into two forward contracts in order to hedge foreign currency exposure on
cross currency intercompany loans. Both forward contracts, which were designated as fair value hedges, terminate
in April 2003 when the intercompany loans will be repaid. The notional amounts for the two forward contracts
entered into by a subsidiary with a BPS functional currency were $3.0 million and 12.2 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 18
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
------------------------
In connection with the preparation and filing of the Company's Quarterly Report on Form 10-Q for the
third quarter of 2002, the Company established disclosure controls and procedures (as defined under
SEC Rules 13a-14 and 15d-14). These controls and procedures 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. As part of this process, the Company also established a
Disclosure Committee of key management from a variety of functional areas. The Disclosure Committee
monitors the Company's disclosure controls and procedures, assists the Certifying Officers in evaluating
their effectiveness and supports the Certifying Officers' certification of the Company's periodic
reports as required by SEC Rule 13a-14 and 15d-14.
The Certifying Officers have evaluated the effectiveness of the Company's disclosure controls and
procedures within 90 days prior to the filing date of this report, and based on such evaluation, have
concluded that such disclosure controls and procedures are effective.
There were no significant changes in internal controls or in other factors that could significantly
affect the Company's internal controls subsequent to the date of the evaluation mentioned above. In
addition, no corrective actions were taken or required with regard to significant deficiencies or
material weaknesses.
Page 19
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) See Index to Exhibits on pages F-1, F-2 and F-3 of this Report.
(b) On February 5, 2003, the Company filed a Current Report on Form 8-K.
Under Item 5 of that Report, the Company furnished to the Commission
press releases dated January 29, January 30 and February 4, 2003.
On February 13, 2003, the Company filed a Current Report on Form 8-K.
Under Item 5 of that Report, the Company furnished to the Commission the
press release dated February 11, 2003.
On February 24, 2003, the Company filed a Current Report of Form 8-K.
Under Item 5 of that Report, the Company furnished to the Commission
the press release dated February 20, 2003.
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 20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this
report to be signed on its behalf by the undersigned thereunto duly authorized.
WEST PHARMACEUTICAL SERVICES, INC.
---------------------------------------------------
(Registrant)
May 13, 2003 /s/ Linda R. Altemus
- ------------- ---------------------------------------------------
Date Linda R. Altemus
Vice President and Chief Financial Officer
Page 21
CERTIFICATION
I, Donald E. Morel, Jr. Ph.D., certify that:
1. I have reviewed this quarterly report on Form 10-Q of West Pharmaceutical Services, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or
omit to state a material fact necessary to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial information included in this
quarterly report, fairly present in all material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within
90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls
and procedures based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to
the registrant's auditors and the audit committee of registrant's board of directors (or persons performing
the equivalent function):
a) all significant deficiencies in the design or operation of internal controls which could adversely
affect the registrant's ability to record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a significant
role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this quarterly report whether or not
there were significant changes in internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation, including any corrective actions
with regard to significant deficiencies and material weaknesses.
Date: May 13, 2003 /s/ Donald E. Morel, Jr. Ph.D
------------------------------------
Donald E. Morel, Jr. Ph.D.
Chairman of the Board,
President and Chief Executive Officer
Page 22
CERTIFICATION
I, Linda R. Altemus, certify that:
1. I have reviewed this quarterly report on Form 10-Q of West Pharmaceutical Services, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or
omit to state a material fact necessary to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial information included in this
quarterly report, fairly present in all material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within
90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls
and procedures based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to
the registrant's auditors and the audit committee of registrant's board of directors (or persons performing
the equivalent function):
a) all significant deficiencies in the design or operation of internal controls which could adversely
affect the registrant's ability to record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a significant
role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this quarterly report whether or not
there were significant changes in internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation, including any corrective actions
with regard to significant deficiencies and material weaknesses.
Date: May 13, 2003 /s/ Linda R. Altemus
-----------------------------------------
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) Miscellaneous long term debt instruments and credit facility agreements of the Company, under
which the underlying authorized debt is equal to less than ten percent of the total assets of
the Company and its subsidiaries on a consolidated basis, may not be filed as exhibits to
this report pursuant to Section (b) (4) (iii) A of Item 601 of Reg S-K. The Company agrees to
furnish to the Commission, upon request, copies of any such unfiled instruments (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).
(4) (b) Note Purchase Agreement dated as of April 8, 1999 among the Company and the insurance
companies identified on a schedule thereto, incorporated by reference to Exhibit (4)(b)
of the Company's Form 10-Q for the quarter ended September 30, 2000 (File No. 1-8036).
F - 1
INDEX TO EXHIBITS
Exhibit
Number
(4) (c) Credit Agreement, dated as of July 26, 2000 among the Company, the banks and other
financial institutions identified on a schedule thereto, and PNC Bank, N.A., as agent for
the banks (the "Credit Agreement"), incorporated by reference to Exhibit (4) (c) of the
Company's Form 10-Q for the quarter ended September 30, 2000 (File No. 1-8036).
(4) (c) (1) First Amendment dated as of September 14, 2000, to the Credit Agreement, incorporated by
reference to Exhibit(4) (c) (1) of the Company's Annual Report on Form 10-K for the year
ended December 31, 2001 (File No. 1-8036).
(4) (c) (2) Second Amendment dated as of November 17, 2000, to the Credit Agreement, incorporated
by reference to Exhibit (4) (c) (2) of the Company's Annual Report on Form 10-K for the
year ended December 31, 2001 (File No. 1-8036).
(4) (c) (3) Joinder and Assumption Agreement dated as of February 28, 2001, with respect to the Credit
Agreement, incorporated by reference to Exhibit (4) (c) (3) of the Company's Annual
Report on Form 10-K for the year ended December 31, 2001 (File No. 1-8036).
(4) (c) (4) Third Amendment dated as of February 28, 2001 to the Credit Agreement, incorporated by
reference to Exhibit (4) (c) (4) of the Company's Annual Report on Form 10-K for the year
ended December 31, 2001 (File No. 1-8036).
(4) (c) (5) Fourth Amendment dated as of July 13, 2001 to the Credit Agreement, incorporated
by reference to Exhibit (10) (a) of the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 2001 (File No 1-8036).
(4) (c) (6) Extension Agreement dated as of January 5, 2001 to the Credit Agreement, incorporated by
reference to Exhibit (4) (c) (6) of the Company's Annual Report on Form 10-K for the year
ended December 31, 2001 (File No. 1-8036).
(4) (c) (7) Fifth Amendment dated as of July 17, 2002 to the Credit Agreement, incorporated by
reference to Exhibit (4) ( c) (7) of the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 2002 (File No. 1-8036).
F - 2
INDEX TO EXHIBITS
Exhibit
Number
(10) Management Incentive Plan 2003.
(11) Non applicable.
(15) None.
(18) None.
(19) None.
(22) None.
(23) Non Applicable.
(24) None.
(99) (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.
(99) (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-3