file10q.htm
UNITED
STATES
|
SECURITIES
AND EXCHANGE COMMISSION
|
Washington,
D.C. 20549
FORM
10-Q
(Mark
One)
|
þ
|
QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For
the quarterly period ended March 31, 2009
or
|
¨
|
TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For
the transition period
from to
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
incorporation
or organization)
|
(I.R.S.
Employer Identification Number)
|
|
|
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
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes þ No o
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files).
Yes o No o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.
Large
accelerated filer
|
þ
|
|
Accelerated
filer
|
o
|
Non-accelerated
filer
|
o
|
(Do
not check if a smaller reporting company)
|
Smaller
reporting company
|
o
|
Indicate
by check mark whether the registrant is a shell company (as defined in rule
12b-2 of the Exchange Act). Yes o No þ
As of
April 30, 2009, there were 32,758,589 shares of the Registrant’s common stock
outstanding.
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F-1
|
(Cautionary
Statements Under the Private Securities Litigation Reform Act of
1995)
Our
disclosure and analysis in this Form 10-Q contains some forward-looking
statements that are based on management’s beliefs and assumptions, current
expectations, estimates and forecasts. Statements that are not historical facts,
including statements that are preceded by, followed by, or that include, words
such as “estimate,” “expect,” “intend,” “believe,” “plan,” “anticipate” and
other words and terms of similar meaning are forward-looking statements. West’s
estimated or anticipated future results, product performance or other
non-historical facts are forward-looking and reflect our current perspective on
existing trends and information.
Many of
the factors that will determine our future results are beyond our ability to
control or predict. These statements are subject to known or unknown risks or
uncertainties, and therefore, actual results could differ materially from past
results and those expressed or implied in any forward-looking
statement. You should bear this in mind as you consider
forward-looking statements. We undertake no obligation to publicly update
forward-looking statements, whether as a result of new information, future
events or otherwise.
Important
factors that may affect future results include, but are not limited to, the
following:
Revenue
and profitability:
·
|
sales
demand and our ability to meet that
demand;
|
·
|
competition
from other providers in our businesses, including customers’ in-house
operations, and from lower-cost producers in emerging markets, which can
impact unit volume, price and
profitability;
|
·
|
customers’
changing inventory requirements and manufacturing plans that alter
existing orders or ordering patterns for the products we supply to
them;
|
·
|
the
timing, regulatory approval and commercial success of customer products
that incorporate our products, including the availability and scope of
relevant public and private health insurance reimbursement for
prescription products, medical devices and components, and medical
procedures in which our customers’ products are employed or
consumed;
|
·
|
average
profitability, or mix, of products sold in any reporting
period;
|
·
|
maintaining
or improving production efficiencies and overhead
absorption;
|
·
|
the
timeliness and effectiveness of capital investments, particularly capacity
expansions, including the effects of delays and cost increases associated
with construction, availability and cost of capital goods, and necessary
internal, governmental and customer approvals of planned and completed
projects, and the demand for goods to be produced in new
facilities;
|
·
|
dependence
on third-party suppliers and partners, some of which are single-source
suppliers of critical materials and products, including our Japanese
partner and affiliate Daikyo Seiko,
Ltd.;
|
·
|
the
availability and cost of skilled employees required to meet increased
production, managerial, research and other needs, including professional
employees and persons employed under collective bargaining
agreements;
|
·
|
interruptions
or weaknesses in our supply chain, which could cause delivery delays or
restrict the availability of raw materials and key bought-in components
and finished products;
|
·
|
raw
material price escalation, particularly petroleum-based raw materials, and
our ability to pass raw material cost increases on to customers through
price increases;
|
·
|
deflation
of selling prices under contract requiring periodic price adjustments
based on published cost-of-living or similar indices;
and
|
·
|
claims
associated with product quality, including product liability, and the
related costs of defending and obtaining insurance indemnifying us for the
cost of such claims.
|
Other
Risks:
·
|
the
cost and progress of development, regulatory approval and marketing of new
products as a result of our research and development
efforts;
|
·
|
the
defense of self-developed or in-licensed intellectual property, including
patents, trade and service marks and trade
secrets;
|
·
|
dependence
of normal business operations on information and communication systems and
technologies provided, installed or operated by third parties, including
costs and risks associated with planned upgrades to existing business
systems;
|
·
|
the
effects of a prolonged U.S. or global economic downturn or
recession;
|
·
|
the
relative strength of the U.S. dollar in relation to other currencies,
particularly the Euro, British Pound, and Japanese
Yen;
|
·
|
changes
in tax law or loss of beneficial tax
incentives;
|
·
|
the
conclusion of unresolved tax positions inconsistent with currently
expected outcomes; and
|
·
|
significant
losses on investments of pension plan assets relative to expected returns
on those assets could increase our pension expense and funding obligations
in future periods.
|
We also
refer you to the risks associated with our business that are contained in our
annual report on Form 10-K under Item 1A, “Risk Factors and Cautionary Factors
That May Affect Future Results,” as supplemented from time to time in
subsequently filed Quarterly Reports on Form 10-Q, and other documents we may
file with the Securities and Exchange Commission (“SEC”).
All
trademarks and registered trademarks used in this report are the property of
West Pharmaceutical Services, Inc. and its subsidiaries, unless noted
otherwise.
Exubera® is a
registered trademark of Pfizer, Inc.
Crystal
Zenith® is a
registered trademark of Daikyo Seiko, Ltd.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
West
Pharmaceutical Services, Inc. and Subsidiaries
(In
millions, except per share data)
|
|
Three
Months Ended
March
31,
|
|
|
|
2009
|
|
|
2008
|
|
Net
sales
|
|
$ |
242.4 |
|
|
$ |
270.7 |
|
Cost
of goods and services sold
|
|
|
173.1 |
|
|
|
187.2 |
|
Gross
profit
|
|
|
69.3 |
|
|
|
83.5 |
|
Research
and development
|
|
|
4.3 |
|
|
|
5.4 |
|
Selling,
general and administrative expenses
|
|
|
42.9 |
|
|
|
40.1 |
|
Restructuring
and other items (Note 2)
|
|
|
0.9 |
|
|
|
(0.1 |
) |
Operating
profit
|
|
|
21.2 |
|
|
|
38.1 |
|
Interest
expense
|
|
|
3.9 |
|
|
|
4.1 |
|
Interest
income
|
|
|
(0.3 |
) |
|
|
(1.0 |
) |
Income
before income taxes
|
|
|
17.6 |
|
|
|
35.0 |
|
Income
tax expense
|
|
|
2.5 |
|
|
|
8.5 |
|
Equity
in net income (loss) of affiliated companies
|
|
|
0.3 |
|
|
|
(0.1 |
) |
Net
income
|
|
|
15.4 |
|
|
|
26.4 |
|
Less:
net income attributable to noncontrolling interests
|
|
|
- |
|
|
|
0.2 |
|
Net
income attributable to West
|
|
$ |
15.4 |
|
|
$ |
26.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income per share attributable to West common shareholders:
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.47 |
|
|
$ |
0.81 |
|
Assuming
dilution
|
|
$ |
0.46 |
|
|
$ |
0.76 |
|
Average
common shares outstanding
|
|
|
32.7 |
|
|
|
32.2 |
|
Average
shares assuming dilution
|
|
|
36.1 |
|
|
|
36.1 |
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to condensed consolidated financial
statements.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
West
Pharmaceutical Services, Inc. and Subsidiaries
(In
millions)
|
|
March
31,
2009
|
|
|
December
31,
2008
|
|
ASSETS
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
Cash,
including cash equivalents
|
|
$ |
62.7 |
|
|
$ |
87.2 |
|
Accounts
receivable, net
|
|
|
137.2 |
|
|
|
128.6 |
|
Inventories
|
|
|
120.0 |
|
|
|
115.7 |
|
Short-term
investments
|
|
|
2.9 |
|
|
|
4.3 |
|
Deferred
income taxes
|
|
|
3.9 |
|
|
|
5.1 |
|
Other
current assets
|
|
|
29.5 |
|
|
|
25.3 |
|
Total
current assets
|
|
|
356.2 |
|
|
|
366.2 |
|
Property,
plant and equipment
|
|
|
949.7 |
|
|
|
965.0 |
|
Less
accumulated depreciation and amortization
|
|
|
432.0 |
|
|
|
434.0 |
|
Property,
plant and equipment, net
|
|
|
517.7 |
|
|
|
531.0 |
|
Investments
in affiliated companies
|
|
|
36.4 |
|
|
|
33.6 |
|
Goodwill
|
|
|
103.0 |
|
|
|
105.3 |
|
Deferred
income taxes
|
|
|
59.5 |
|
|
|
63.7 |
|
Intangible
assets, net
|
|
|
49.0 |
|
|
|
50.0 |
|
Other
noncurrent assets
|
|
|
19.7 |
|
|
|
18.9 |
|
Total
Assets
|
|
$ |
1,141.5 |
|
|
$ |
1,168.7 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Notes
payable and other current debt
|
|
$ |
3.9 |
|
|
$ |
3.9 |
|
Accounts
payable
|
|
|
52.0 |
|
|
|
67.6 |
|
Pension
and other postretirement benefits
|
|
|
2.0 |
|
|
|
2.0 |
|
Accrued
salaries, wages and benefits
|
|
|
39.6 |
|
|
|
42.3 |
|
Income
taxes payable
|
|
|
0.9 |
|
|
|
2.7 |
|
Taxes
other than income
|
|
|
12.3 |
|
|
|
7.0 |
|
Other
current liabilities
|
|
|
28.0 |
|
|
|
33.6 |
|
Total
current liabilities
|
|
|
138.7 |
|
|
|
159.1 |
|
Long-term
debt
|
|
|
384.0 |
|
|
|
382.1 |
|
Deferred
income taxes
|
|
|
19.8 |
|
|
|
20.4 |
|
Pension
and other postretirement benefits
|
|
|
77.9 |
|
|
|
86.0 |
|
Other
long-term liabilities
|
|
|
32.5 |
|
|
|
34.0 |
|
Total
Liabilities
|
|
|
652.9 |
|
|
|
681.6 |
|
Commitments
and contingencies (Note 12)
|
|
|
|
|
|
|
|
|
Total
Equity
|
|
|
488.6 |
|
|
|
487.1 |
|
Total
Liabilities and Equity
|
|
$ |
1,141.5 |
|
|
$ |
1,168.7 |
|
See
accompanying notes to condensed consolidated financial
statements.
CONDENSED CONSOLIDATED STATEMENT OF EQUITY
(UNAUDITED)
West
Pharmaceutical Services, Inc. and Subsidiaries
(In
millions, except per share data)
|
|
Common
Stock
|
|
|
|
|
|
Treasury
Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of shares
|
|
|
Common
Stock
|
|
|
Capital
in excess of par value
|
|
|
Number
of shares
|
|
|
Treasury
Stock
|
|
|
Retained
earnings
|
|
|
Accumulated
other comprehensive income
|
|
|
Total
|
|
Balance,
December 31, 2008
|
|
|
34.3 |
|
|
$ |
8.6 |
|
|
$ |
69.3 |
|
|
|
(1.6 |
) |
|
$ |
(63.2 |
) |
|
$ |
517.3 |
|
|
$ |
(44.9 |
) |
|
$ |
487.1 |
|
Net
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15.4 |
|
|
|
|
|
|
|
15.4 |
|
Stock-based
compensation
|
|
|
|
|
|
|
|
|
|
|
2.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.1 |
|
Shares
issued under stock plans
|
|
|
|
|
|
|
|
|
|
|
(0.3 |
) |
|
|
- |
|
|
|
1.1 |
|
|
|
|
|
|
|
|
|
|
|
0.8 |
|
Shares
repurchased for employee tax withholdings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- |
|
|
|
(0.8 |
) |
|
|
|
|
|
|
|
|
|
|
(0.8 |
) |
Excess
tax benefit from stock option exercises
|
|
|
|
|
|
|
|
|
|
|
0.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.2 |
|
Cash
dividends declared ($0.15 per share)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5.0 |
) |
|
|
|
|
|
|
(5.0 |
) |
Other
comprehensive income, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11.2 |
) |
|
|
(11.2 |
) |
Balance,
March 31, 2009
|
|
|
34.3 |
|
|
$ |
8.6 |
|
|
$ |
71.3 |
|
|
|
(1.6 |
) |
|
$ |
(62.9 |
) |
|
$ |
527.7 |
|
|
$ |
(56.1 |
) |
|
$ |
488.6 |
|
See
accompanying notes to condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
West
Pharmaceutical Services, Inc. and Subsidiaries
(In
millions)
|
|
Three
Months Ended
March
31,
|
|
|
|
2009
|
|
|
2008
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
Net
income
|
|
$ |
15.4 |
|
|
$ |
26.4 |
|
Depreciation
|
|
|
13.9 |
|
|
|
13.6 |
|
Amortization
|
|
|
1.1 |
|
|
|
1.1 |
|
Other
non-cash items, net
|
|
|
5.5 |
|
|
|
4.4 |
|
Changes
in assets and liabilities
|
|
|
(39.2 |
) |
|
|
(52.4 |
) |
Net
cash used in operating activities
|
|
|
(3.3 |
) |
|
|
(6.9 |
) |
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
|
(24.2 |
) |
|
|
(22.8 |
) |
Acquisition
of patents and other long-term assets
|
|
|
(2.5 |
) |
|
|
- |
|
Proceeds
from redemption of investments
|
|
|
1.5 |
|
|
|
7.8 |
|
Other
|
|
|
- |
|
|
|
0.1 |
|
Net
cash used in investing activities
|
|
|
(25.2 |
) |
|
|
(14.9 |
) |
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Borrowings
under revolving credit agreements, net
|
|
|
11.5 |
|
|
|
9.5 |
|
Changes
in other debt
|
|
|
- |
|
|
|
(0.1 |
) |
Dividend
payments
|
|
|
(5.0 |
) |
|
|
(4.5 |
) |
Excess
tax benefit from stock option exercises
|
|
|
0.2 |
|
|
|
2.2 |
|
Shares
repurchased for employee tax withholdings
|
|
|
(0.8 |
) |
|
|
(2.8 |
) |
Issuance
of common stock from treasury
|
|
|
0.7 |
|
|
|
1.5 |
|
Net
cash provided by financing activities
|
|
|
6.6 |
|
|
|
5.8 |
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rates on cash
|
|
|
(2.6 |
) |
|
|
1.2 |
|
Net
decrease in cash and cash equivalents
|
|
|
(24.5 |
) |
|
|
(14.8 |
) |
|
|
|
|
|
|
|
|
|
Cash,
including cash equivalents at beginning of period
|
|
|
87.2 |
|
|
|
108.4 |
|
Cash,
including cash equivalents at end of period
|
|
$ |
62.7 |
|
|
$ |
93.6 |
|
See
accompanying notes to condensed consolidated financial
statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note
1: Summary of Significant Accounting Policies
The
condensed consolidated financial statements included in this report are
unaudited and have been prepared in accordance with U.S. generally accepted
accounting principles (“GAAP”) for interim financial reporting and SEC
regulations. The year-end condensed balance sheet data was derived from audited
financial statements. Certain information and footnote disclosures normally
included in annual financial statements prepared in accordance with GAAP have
been condensed or omitted. In the opinion of management, these financial
statements include all adjustments which are of a normal recurring nature,
necessary for a fair presentation of the financial position, results of
operations, cash flows and the change in equity for the periods presented. The
results of operations for any interim period are not necessarily indicative of
results for the full year. The condensed consolidated financial statements for
the three month period ended March 31, 2009 should be read in conjunction with
the consolidated financial statements and notes thereto of West Pharmaceutical
Services, Inc. (which may be referred to as “West”, “the Company”, “we”, “us” or
“our”), appearing in our 2008 annual report on Form 10-K.
Note
2: Restructuring and Other Items
Restructuring
and other items consist of:
|
|
Three
Months Ended
|
|
|
|
March
31,
|
|
($
in millions)
|
|
2009
|
|
|
2008
|
|
Restructuring
and related charges:
|
|
|
|
|
|
|
Severance
and post-employment benefits
|
|
$ |
0.3 |
|
|
$ |
0.8 |
|
Asset
write-offs
|
|
|
0.3 |
|
|
|
0.1 |
|
Other
|
|
|
0.1 |
|
|
|
0.1 |
|
Total
restructuring and related charges
|
|
|
0.7 |
|
|
|
1.0 |
|
|
|
|
|
|
|
|
|
|
Other
items:
|
|
|
|
|
|
|
|
|
Contract
settlement and related gain
|
|
|
- |
|
|
|
(1.3 |
) |
Foreign
exchange losses
|
|
|
0.2 |
|
|
|
0.3 |
|
Other
|
|
|
- |
|
|
|
(0.1 |
) |
Total
other items
|
|
|
0.2 |
|
|
|
(1.1 |
) |
Total
restructuring and other items
|
|
$ |
0.9 |
|
|
$ |
(0.1 |
) |
Restructuring
and Related Charges
During
the first quarter of 2009, we incurred $0.7 million in restructuring and related
charges as part of our 2007 plan to align the plant capacity and workforce of
the Tech Group with its revised business outlook and as part of a longer-term
strategy of focusing the business on proprietary products.
Our
restructuring obligation was $0.4 million and $0.6 million as of March 31, 2009
and December 31, 2008, respectively. Total cash payments of $0.5 million, for
severance and related costs, were made during the three months ended March 31,
2009.
We expect
all remaining payments associated with the plan and all restructuring activities
to be substantially completed by the end of the second quarter of
2009.
Other
Items
In
February of 2008, we entered into an agreement with our former customer, Nektar
Therapeutics, that provided for the full reimbursement of, among other things,
severance-related costs, equipment, purchased raw materials and components,
lease and other facility costs associated with the shutdown of manufacturing
operations related to the Exubera® device. During the first quarter of 2008, we
received payments from Nektar, which more than offset the related costs
incurred, resulting in a net gain of $1.3 million.
Note
3: 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 earnings before taxes, adjusted
for the impact of discrete quarterly items. Tax effects not related to pre-tax
income in the current year are recognized as discrete items in the period in
which they were deemed more likely than not to be realized. During the first
quarter of 2009, we recorded a $1.7 million tax benefit resulting from the
expiration of open tax years in certain jurisdictions, as well as, the
completion of a tax audit, which directly reduced our total unrecognized tax
benefits. Our annual effective tax rate for 2009, excluding discrete quarterly
items, is estimated to be 24.6%.
In the
first quarter of 2008, we completed an agreement with the Republic of Singapore
which reduced our Singapore income tax rate for a period of 10 years on a
retroactive basis back to July 2007. As a result of this agreement, our first
quarter 2008 results contained a $1.0 million tax benefit which represented the
remeasurement of our current and deferred income tax liabilities at the new
rate. In addition, during the first three months of 2008, we recorded an
unrelated $0.1 million net tax benefit resulting from the expiration of open
audit years in certain tax jurisdictions.
It is
reasonably possible that due to the expiration of certain statutes during the
next 12 months, the total amount of unrecognized tax benefits may be reduced
further by approximately $2.5 million. During the three months ended March 31,
2009 and 2008, we recognized $0.1 million and $0.1 million in tax-related
interest expense and penalties. Accrued interest was $1.1 million and $1.0
million at March 31, 2009 and December 31, 2008, respectively.
Because
we are a global organization, we and our subsidiaries file income tax returns in
the U.S. Federal jurisdiction and various state and foreign jurisdictions. We
are subject to examination in the U.S. Federal tax jurisdiction for tax years
2005 through 2008. We are also subject to examination in various state and
foreign jurisdictions for tax years 2000 through 2008.
Note
4: Fair Value Measurements
On
January 1, 2008, we adopted Statement of Financial Accounting Standard (“SFAS”)
No. 157, “Fair Value Measurements” for financial assets and liabilities, which
defines fair value, establishes a framework for measuring fair value in GAAP,
and expands disclosures about fair value measurements. SFAS No. 157 also defines
fair value as the price that would be received to sell an asset or paid to
transfer a liability (exit price) in an orderly transaction between market
participants at the measurement date. In addition, SFAS No. 157 establishes a
fair value hierarchy that classifies the inputs to valuation techniques used to
measure fair value into one of the following three levels:
·
|
Level 1:
Unadjusted quoted prices in active markets for identical assets or
liabilities.
|
·
|
Level 2: Inputs
other than quoted prices that are observable for the asset or liability,
either directly or indirectly. These include quoted prices for similar
assets or liabilities in active markets and quoted prices for identical or
similar assets or liabilities in markets that are not
active.
|
·
|
Level 3:
Unobservable inputs that reflect the reporting entity’s own
assumptions.
|
The
following tables summarize the assets and liabilities that are measured at fair
value on a recurring basis in the balance sheet:
|
|
Balance
at
|
|
|
Basis
of Fair Value Measurements
|
|
|
|
March
31,
|
|
|
|
|
|
|
|
|
|
|
($
in millions)
|
|
2009
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term
investments
|
|
$ |
2.9 |
|
|
$ |
- |
|
|
$ |
2.9 |
|
|
$ |
- |
|
Deferred
compensation assets
|
|
|
2.5 |
|
|
|
2.5 |
|
|
|
- |
|
|
|
- |
|
Long-term
investments
|
|
|
0.8 |
|
|
|
- |
|
|
|
0.8 |
|
|
|
- |
|
Commodity
contracts
|
|
|
0.1 |
|
|
|
- |
|
|
|
0.1 |
|
|
|
|
|
|
|
$ |
6.3 |
|
|
$ |
2.5 |
|
|
$ |
3.8 |
|
|
$ |
- |
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency contracts
|
|
$ |
0.4 |
|
|
$ |
- |
|
|
$ |
0.4 |
|
|
$ |
- |
|
Interest
rate swap contracts
|
|
|
7.9 |
|
|
|
- |
|
|
|
7.9 |
|
|
|
- |
|
|
|
$ |
8.3 |
|
|
$ |
- |
|
|
$ |
8.3 |
|
|
$ |
- |
|
|
|
Balance
at
|
|
|
Basis
of Fair Value Measurements
|
|
|
|
December
31,
|
|
|
|
|
|
|
|
|
|
|
($
in millions)
|
|
2008
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term
investments
|
|
$ |
4.3 |
|
|
$ |
- |
|
|
$ |
4.3 |
|
|
$ |
- |
|
Deferred
compensation assets
|
|
|
2.8 |
|
|
|
2.8 |
|
|
|
- |
|
|
|
- |
|
Long-term
investments
|
|
|
0.8 |
|
|
|
- |
|
|
|
0.8 |
|
|
|
- |
|
|
|
$ |
7.9 |
|
|
$ |
2.8 |
|
|
$ |
5.1 |
|
|
$ |
- |
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency contracts
|
|
$ |
2.0 |
|
|
$ |
- |
|
|
$ |
2.0 |
|
|
$ |
- |
|
Interest
rate swap contracts
|
|
|
8.2 |
|
|
|
- |
|
|
|
8.2 |
|
|
|
- |
|
|
|
$ |
10.2 |
|
|
$ |
- |
|
|
$ |
10.2 |
|
|
$ |
- |
|
Short-
and long-term investments represent our remaining balance in the Columbia
Strategic Cash Portfolio Fund. See the discussion below regarding valuation of
the fund. Our deferred compensation assets are included within other current
assets and are valued based on quoted market prices in an active
market.
The fair
value of commodity contracts is included within other current assets and is
representative of the initial premium paid for the call options. The
fair values of our foreign currency contracts are included within other current
liabilities and are valued using quoted forward foreign exchange rates and spot
rates at the reporting date. Interest rate swap contracts are included within
other long-term liabilities and are valued using a discounted cash flow analysis
based on the terms of the contract and observable market inputs (i.e. LIBOR,
Eurodollar forward rates and swap spreads). Refer to Note 5, Derivative Instruments, for
further discussion of our derivative instruments.
Columbia
Strategic Cash Portfolio Fund
We hold
an investment in the Columbia Strategic Cash Portfolio Fund, which is an
enhanced cash fund that includes investments in certain asset-backed securities
and structured investment vehicles that are collateralized by sub-prime mortgage
securities or related to mortgage securities, among other assets. In
December 2007, as a result of adverse market conditions, the fund ceased
accepting cash redemption requests and changed to a floating net asset value.
The fund then began an orderly liquidation that is expected to continue through
2010 and has restricted redemptions to a pro-rata distribution of the underlying
securities held by the fund. During the first quarter of 2009, a total of $1.5
million in redemptions was received. The classification of the remaining balance
as of March 31, 2009 reflects information received from the fund manager
regarding the timing of expected distributions.
We
assessed the fair value of the fund based on the value of the underlying
securities as determined by the fund manager. This value was determined using a
market approach, which employs various indications of value including, but not
limited to, broker-dealer quotations and other widely available market
data.
Note
5: Derivative Instruments
As part
of our ongoing business operations, we are exposed to various risks such as
fluctuating interest rates, foreign exchange rates and increasing commodity
prices. To manage these market risks, we periodically enter into derivative
financial instruments such as interest rate swaps, call options and foreign
exchange contracts for periods consistent with and for notional amounts equal to
or less than the related underlying exposures. In accordance with our policy, we
do not purchase or hold any derivative financial instruments for speculation or
trading purposes.
Interest
Rate Risk
As a
result of our normal borrowing activities, we have entered into long-term debt
obligations with both fixed and variable interest rates. As of March 31, 2009,
we have two interest rate swap agreements outstanding which are designated as
cash flow hedges to protect against volatility in variable interest rates
payable on our $50.0 million note maturing on July 28, 2012 (“Series A Note”)
and our $25.0 million note maturing July 28, 2015 (“Series B Note”). Under both
of these swaps, we will receive variable interest rate payments based on
three-month London Interbank Offering Rates (“LIBOR”) in return for making fixed
rate payments quarterly. Including the applicable margin, the interest rate swap
agreements effectively fix the interest rates payable on Series A and B notes at
5.32% and 5.51%, respectively.
Foreign
Exchange Rate Risk
We have
entered into a series of foreign currency hedge contracts, designated as cash
flow hedges, to eliminate the currency risk associated with forecasted U.S.
Dollar (“USD”) denominated inventory purchases made by certain European
subsidiaries. As of March 31, 2009, there were nine monthly contracts
outstanding at $0.9 million each, for an aggregate notional amount of $8.1
million. The last contract in this series matures on December 15, 2009. The
contracts effectively fix the Euro to USD exchange rate for a portion of our
anticipated needs at a maximum of 1.280 USD per Euro while allowing us to
benefit from any currency movement between 1.280 and 1.462 USD per Euro. As of
March 31, 2009, the Euro was equal to 1.3205 USD.
We
periodically use forward exchange contracts, designated as fair value hedges, to
neutralize our exposure to fluctuating foreign exchange rates on exposures
created by cross-currency intercompany loans. As of March 31, 2009, there were
two contracts outstanding. The first contract had a notional amount of €6.0
million and was settled on April 30, 2009. The second contract had a notional
amount of €9.0 million and settled on April 15, 2009. Changes in the fair value
of these derivatives are recognized within restructuring and other items and are
offset by the changes in the fair values of the underlying exposures being
hedged.
In
addition, we have designated our €81.5 million Euro-denominated notes as a hedge
of our net investment in certain European subsidiaries. A cumulative foreign
currency translation loss of $4.6 million (net of tax of $2.9 million) on this
debt is recorded within accumulated other comprehensive income as of March 31,
2009. We have also designated our 2.7 billion Yen-denominated note
payable as a hedge of our net investment in a Japanese affiliate. At March 31,
2009, there was a cumulative foreign currency translation loss on this
Yen-denominated debt of $3.1 million (net of tax of $1.9 million) which is also
included within accumulated other comprehensive income.
Commodity
Price Risk
Many of
our Pharmaceutical Systems products are made from synthetic elastomers, which
are derived from the petroleum refining process. We purchase the majority of our
elastomers via long-term supply contracts, some of which contain clauses that
provide for surcharges related to changes in crude oil prices. In March 2009, we
purchased a series of crude oil call options, which we believe will reduce our
exposure to increases in oil-based surcharges and protect operating cash flows
with regard to a portion of our forecasted elastomer purchases during the months
of July through December 2009. These options are designed to effectively cap our
cost of the crude oil component of elastomer prices, allowing us to limit our
exposure to increasing petroleum prices. With these call option contracts, we
still benefit from a decline in crude oil prices, as there is no downward
exposure other than the premiums that we paid to enter into the
contracts.
As of
March 31, 2009, we held call option contracts for a total of 30,000 barrels of
crude oil which represents the equivalent of less than 50% of our exposure to
crude oil price increases based upon forecasted elastomer purchases during the
respective period. These call options were not designated as hedging instruments
under SFAS No. 133, “Accounting for Derivative Instruments and Hedging
Activities”. The premium paid for these options was $0.1 million which was also
equal to their fair value as of March 31, 2009.
Effects
of Derivative Instruments on Financial Position and Results of
Operations
Refer to
Note 4, Fair Value
Measurements, for information regarding derivative instruments that are
recorded at fair value in our condensed consolidated balance sheet as of March
31, 2009.
The
following table summarizes the effects of derivative instruments on other
comprehensive income (“OCI”) and earnings for the three months ended March 31,
2009. The amount of loss recognized in restructuring and other items related to
our outstanding fair value hedges, for the same time period, was not
material.
|
|
Amount
of Gain (Loss) Recognized in OCI
|
|
Location
of Gain (Loss) Reclassified from Accumulated OCI into
Income
|
|
Amount
of Gain (Loss) Reclassified from Accumulated OCI into
Income
|
|
Cash
Flow Hedges:
|
|
|
|
|
|
|
|
Foreign
currency hedge contracts
|
|
$ |
0.3 |
|
Cost
of goods and services sold
|
|
$ |
- |
|
Interest
rate swap contracts
|
|
|
0.7 |
|
Interest
expense
|
|
|
(0.5 |
) |
Total
|
|
$ |
1.0 |
|
|
|
$ |
(0.5 |
) |
|
|
|
|
|
|
|
|
|
|
Net
Investment Hedges:
|
|
|
|
|
|
|
|
|
|
Foreign
currency-denominated debt
|
|
$ |
9.4 |
|
Restructuring
and other items
|
|
$ |
- |
|
Total
|
|
$ |
9.4 |
|
|
|
$ |
- |
|
For the
three months ended March 31, 2009, there was no ineffectiveness related to our
cash flow and net investment hedges.
Note
6: Inventories
Inventories
are valued at the lower of cost or market. Cost is determined using the
first-in-first-out method. Inventory balances are as follows:
|
|
March
31,
|
|
|
December
31,
|
|
($
in millions)
|
|
2009
|
|
|
2008
|
|
Finished
goods
|
|
$ |
48.4 |
|
|
$ |
46.9 |
|
Work
in process
|
|
|
19.6 |
|
|
|
18.8 |
|
Raw
materials
|
|
|
52.0 |
|
|
|
50.0 |
|
|
|
$ |
120.0 |
|
|
$ |
115.7 |
|
Note
7: Net Income Per Share
The
following tables reconcile net income and shares, attributable to West, used in
the calculation of basic net income per share to those used for diluted net
income per share:
|
|
Three
Months Ended
|
|
|
|
March
31,
|
|
($
in millions)
|
|
2009
|
|
|
2008
|
|
Net
income, as reported, for basic net income per share
|
|
$ |
15.4 |
|
|
$ |
26.2 |
|
Plus:
interest expense on convertible debt, net of tax
|
|
|
1.1 |
|
|
|
1.1 |
|
Net
income for diluted net income per share
|
|
$ |
16.5 |
|
|
$ |
27.3 |
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding
|
|
|
32.7 |
|
|
|
32.2 |
|
Assumed
stock options exercised based on the treasury stock method
|
|
|
0.5 |
|
|
|
1.0 |
|
Assumed
conversion of convertible debt, based on the if-converted
method
|
|
|
2.9 |
|
|
|
2.9 |
|
Weighted
average shares assuming dilution
|
|
|
36.1 |
|
|
|
36.1 |
|
Options
to purchase 1.0 million and 0.5 million shares of our common stock for the three
month periods ended March 31, 2009 and 2008, respectively, were not included in
the computation of diluted net income per share because their impact would be
antidilutive.
Note
8: Comprehensive Income
Comprehensive
income was as follows:
|
|
Three
Months Ended
|
|
|
|
March
31,
|
|
($
in millions)
|
|
2009
|
|
|
2008
|
|
Net
income
|
|
$ |
15.4 |
|
|
$ |
26.4 |
|
Other
comprehensive (loss) income, net of tax:
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustments
|
|
|
(12.7 |
) |
|
|
4.3 |
|
Defined
benefit pension and other postretirement plans
|
|
|
1.0 |
|
|
|
- |
|
Unrealized
gains (losses) on derivatives:
|
|
|
|
|
|
|
|
|
Unrealized
gains (losses) arising during the period
|
|
|
1.0 |
|
|
|
(2.3 |
) |
Gains
(losses) included in net income
|
|
|
(0.5 |
) |
|
|
(0.1 |
) |
Net
unrealized gains (losses) on derivatives
|
|
|
0.5 |
|
|
|
(2.4 |
) |
Other
comprehensive (loss) income, net of tax
|
|
|
(11.2 |
) |
|
|
1.9 |
|
Comprehensive
income
|
|
|
4.2 |
|
|
|
28.3 |
|
Comprehensive
income attributable to noncontrolling interests
|
|
|
- |
|
|
|
0.2 |
|
Comprehensive
income attributable to West
|
|
$ |
4.2 |
|
|
$ |
28.1 |
|
Note
9: Stock-Based Compensation
At March
31, 2009, there were approximately 2.1 million shares remaining in the 2007
Omnibus Incentive Compensation Plan (the “2007 Plan”) for future grants. The
2007 Plan provides for the granting of stock options, stock appreciation rights,
performance vesting share awards, performance vesting unit awards, and other
stock awards to employees and non-employee directors. The terms and conditions
of awards to be granted are determined by our Board’s nominating and
compensation committees. Vesting requirements vary by award.
In the
first quarter of 2009, we granted 380,500 stock options at an exercise price of
$32.09 per share to key employees under the 2007 Plan. The exercise price
represents the grant date fair value of our stock. Stock options granted to
employees vest in equal annual increments over 4 years of continuous service.
All awards expire ten years from the date of grant. The weighted average grant
date fair value of options granted during the first quarter of 2009 was $6.95 as
determined by the Black-Scholes option valuation model using the following
weighted average assumptions: a risk-free interest rate of 1.89%; expected life
of 5 years; stock volatility of 27.01%; and a dividend yield of 1.87%. Stock
volatility is estimated based on historical data, as well as any expected future
trends. Expected lives are based on prior experience.
We also
granted 118,750 performance vesting share (“PVS”) awards at a grant date fair
value of $32.09 to key employees under the 2007 Plan in the first quarter of
2009. Each PVS award entitles the holder to one share of our common
stock if annual growth rate of revenue and return on invested capital targets
are achieved over a three-year performance period. The actual payout may vary
from 0% to 200% of an employee’s targeted amount. The fair value of PVS awards
is based on the market price of our stock at the grant date and is recognized as
an expense over the performance period.
Note
10: Benefit Plans
The
components of net periodic benefit cost for the three months ended March 31 are
as follows ($ in millions):
|
|
Pension
benefits
|
|
|
Other
retirement benefits
|
|
|
Total
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Service
cost
|
|
$ |
2.0 |
|
|
$ |
1.8 |
|
|
$ |
0.2 |
|
|
$ |
0.2 |
|
|
$ |
2.2 |
|
|
$ |
2.0 |
|
Interest
cost
|
|
|
3.6 |
|
|
|
3.5 |
|
|
|
0.2 |
|
|
|
0.2 |
|
|
|
3.8 |
|
|
|
3.7 |
|
Expected
return on assets
|
|
|
(3.0 |
) |
|
|
(4.1 |
) |
|
|
- |
|
|
|
- |
|
|
|
(3.0 |
) |
|
|
(4.1 |
) |
Amortization
of prior service (credit) cost
|
|
|
(0.3 |
) |
|
|
(0.3 |
) |
|
|
- |
|
|
|
- |
|
|
|
(0.3 |
) |
|
|
(0.3 |
) |
Recognized
actuarial losses
|
|
|
1.7 |
|
|
|
0.5 |
|
|
|
- |
|
|
|
- |
|
|
|
1.7 |
|
|
|
0.5 |
|
Net
periodic benefit cost
|
|
$ |
4.0 |
|
|
$ |
1.4 |
|
|
$ |
0.4 |
|
|
$ |
0.4 |
|
|
$ |
4.4 |
|
|
$ |
1.8 |
|
|
|
Pension
benefits
|
|
|
Other
retirement benefits
|
|
|
Total
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
U.S.
plans
|
|
$ |
3.7 |
|
|
$ |
1.1 |
|
|
$ |
0.4 |
|
|
$ |
0.4 |
|
|
$ |
4.1 |
|
|
$ |
1.5 |
|
International
plans
|
|
|
0.3 |
|
|
|
0.3 |
|
|
|
- |
|
|
|
- |
|
|
|
0.3 |
|
|
|
0.3 |
|
Net
periodic benefit cost
|
|
$ |
4.0 |
|
|
$ |
1.4 |
|
|
$ |
0.4 |
|
|
$ |
0.4 |
|
|
$ |
4.4 |
|
|
$ |
1.8 |
|
Note
11: Segment Information
Net sales
and operating profit by reportable segment, corporate and other unallocated
costs were as follows:
|
|
Three
Months Ended
|
|
|
|
March
31,
|
|
($
in millions)
|
|
2009
|
|
|
2008
|
|
Net
sales
|
|
|
|
|
|
|
Pharmaceutical
Systems
|
|
$ |
183.2 |
|
|
$ |
207.5 |
|
Tech
Group
|
|
|
62.3 |
|
|
|
66.4 |
|
Intersegment
sales
|
|
|
(3.1 |
) |
|
|
(3.2 |
) |
Total
net sales
|
|
$ |
242.4 |
|
|
$ |
270.7 |
|
|
|
Three
Months Ended
|
|
|
|
March
31,
|
|
($
in millions)
|
|
2009
|
|
|
2008
|
|
Operating
profit
|
|
|
|
|
|
|
Pharmaceutical
Systems
|
|
$ |
27.4 |
|
|
$ |
43.6 |
|
Tech
Group
|
|
|
4.6 |
|
|
|
3.7 |
|
Corporate
costs
|
|
|
(4.6 |
) |
|
|
(5.6 |
) |
Stock-based
compensation costs
|
|
|
(1.4 |
) |
|
|
(2.4 |
) |
U.S.
pension and other retirement benefits
|
|
|
(4.1 |
) |
|
|
(1.5 |
) |
Restructuring
and net contract settlement (costs) gain
|
|
|
(0.7 |
) |
|
|
0.3 |
|
Total
operating profit
|
|
|
21.2 |
|
|
|
38.1 |
|
Interest
expense
|
|
|
3.9 |
|
|
|
4.1 |
|
Interest
income
|
|
|
(0.3 |
) |
|
|
(1.0 |
) |
Income
before income taxes
|
|
$ |
17.6 |
|
|
$ |
35.0 |
|
Our first
quarter 2008 results included a net contract settlement gain of $1.3 million,
partially offset by $1.0 million in restructuring and related
charges.
Note
12: Commitments and Contingent Liabilities
From time
to time, we are involved in product liability matters and other legal
proceedings and claims generally incidental to our normal business activities.
In accordance with SFAS No. 5, “Accounting for Contingencies”, we accrue for
loss contingencies when it is probable that a liability has been incurred and
the amount of the loss can be reasonably estimated. While the outcome of current
proceedings cannot be accurately predicted, we believe their ultimate resolution
should not have a material adverse effect on our business or financial position.
There have been no significant changes to the commitments and contingent
liabilities that were included in our annual report on Form 10-K for the year
ended December 31, 2008.
Note
13: New Accounting Standards
Recently
Adopted Standards
In
December 2007, the FASB issued SFAS No. 141(R), "Business
Combinations—a replacement of FASB Statement No. 141". This statement
establishes principles and requirements for how the acquirer recognizes and
measures assets acquired and liabilities assumed in a business combination, as
well as, goodwill acquired and determines what information to disclose to enable
users of the financial statements to evaluate the nature and financial effects
of a business combination. In April 2009, the FASB issued FSP SFAS 141(R)-1,
“Accounting for Assets Acquired and Liabilities Assumed in a Business
Combination That Arise from Contingencies,” which amends SFAS No. 141(R) to
require that contingent assets acquired and liabilities assumed be recognized at
fair value on the acquisition date if the fair value can be reasonably
estimated. If the fair value cannot be reasonably estimated, the contingent
asset or liability would be measured in accordance with SFAS No. 5, “Accounting
for Contingencies,” and FASB Interpretation No. 14, “Reasonable Estimation of
the Amount of a Loss.” Both pronouncements were effective for us as of January
1, 2009 and will be applied prospectively to business combinations entered into
on or after that date.
In
December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in
Consolidated Financial Statements—an amendment of ARB No. 51". This
statement requires that a noncontrolling interest in a subsidiary be reported as
equity and that the amount of consolidated net income attributable to the parent
and to the noncontrolling interest should be separately identified in the
consolidated financial statements. We have applied the provisions of SFAS No.
160 prospectively, as of January 1, 2009, except for the presentation and
disclosure requirements, which were applied retrospectively for all periods
presented. The adoption did not have a material impact on our financial
statements.
In
October 2008, the FASB issued Staff Position (“FSP”) FAS 157-3, “Determining the
Fair Value of a Financial Asset When the Market for That Asset Is Not Active.”
This FSP clarifies the application of SFAS No. 157 in a market that is not
active and provides an example to illustrate key considerations in determining
the fair value of a financial asset when the market for that financial asset is
not active. FSP FAS 157-3 was effective upon issuance, including prior periods
for which financial statements had not been issued. We considered this guidance
in our determination of fair values in Note 4, Fair Value
Measurements.
On
January 1, 2009, we adopted the requirements of SFAS No. 157 for non-recurring
nonfinancial assets and liabilities, that had been deferred for one year under
FSP FAS 157-2, “Effective Date of FASB Statement No. 157.” We did not have any
nonfinancial assets or nonfinancial liabilities that required remeasurement upon
adoption or during the three months ended March 31, 2009; therefore, there was
no impact on our financial statements in the first quarter of 2009.
On
January 1, 2009, we adopted SFAS No. 161, “Disclosures about Derivative
Instruments and Hedging Activities — an Amendment of FASB Statement 133.” This
statement requires enhanced disclosures regarding derivatives and hedging
activities, including information about how: (a) an entity uses derivative
instruments; (b) derivative instruments and related hedged items are accounted
for under SFAS No. 133; and (c) derivative instruments and related hedged items
affect an entity’s financial position, financial performance and cash flows.
Refer to Note 5, Derivative
Instruments, for further information and disclosures.
Standards
Issued Not Yet Adopted
In
December 2008, the FASB issued FSP FAS 132(R)-1, “Employers’ Disclosures about
Postretirement Benefit Plan Assets,” which amends FAS 132(R) to provide guidance
on disclosures about plan assets of a defined benefit pension or other
postretirement plan. These new disclosures will provide users of the financial
statements with an understanding of how investment allocation decisions are
made, the major categories of plan assets, the input and valuation techniques
used to measure the fair value of plan assets, the effects of fair value
measurements and the significant concentrations of risk in regard to the plan
assets. This FSP is effective for fiscal years ending after December 15,
2009. As the position only requires enhanced disclosures, management believes
its adoption will not have an impact on our financial statements.
In April
2009, the FASB issued FSP FAS 157-4, “Determining Whether a Market Is Not Active
and a Transaction Is Not Distressed”, which supersedes FSP FAS 157-3 This FSP
provides additional guidance in determining whether a market is active or
inactive and whether a transaction is distressed. It is applicable to all assets
and liabilities that are measured at fair value and requires enhanced
disclosures. This FSP is effective for interim and annual reporting periods
ending after June 15, 2009, and shall be applied prospectively. Management
believes that the adoption of FSP FAS 157-4 will not have a material impact on
our financial statements.
In April
2009, the FASB issued FSP FAS 107-1 and APB 28-1, “Interim Disclosures about
Fair Value of Financial Instruments,” which amends FAS No. 107, “Disclosures
about Fair Values of Financial Instruments,” to require disclosures about fair
value of financial instruments in interim, as well as, annual financial
statements. It also amends APB Opinion No. 28, “Interim Financial Reporting,” to
require those disclosures in all interim financial statements. This FSP is
effective for interim reporting periods ending after June 15, 2009. Management
believes that the adoption of this position will not have a material impact on
our financial statements.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The
following discussion should be read in conjunction with the Management’s
Discussion and Analysis and consolidated financial statements and accompanying
notes included in our annual report on Form 10-K for the fiscal year ended
December 31, 2008.
COMPANY
OVERVIEW
West
Pharmaceutical Services, Inc. (which may be referred to as West, the Company, we, us or our) is a manufacturer of
components and systems for injectable drug delivery and plastic packaging and
delivery system components for the healthcare and consumer products industries.
The vast majority of our business is conducted in healthcare markets. Our
mission is to develop and apply proprietary technologies that improve the safety
and effectiveness of therapeutic and diagnostic healthcare delivery systems. Our
business is conducted through two reporting segments - "Pharmaceutical Systems"
and "Tech Group." Pharmaceutical Systems focuses on primary packaging and
systems for injectable drug delivery, including stoppers and seals for vials,
closures and other components used in syringe, intravenous and blood collection
systems, prefillable syringe components, and safety and administration systems.
The Tech Group offers custom contract-manufacturing solutions using plastic
injection molding and manual and automated assembly processes targeted to the
healthcare and consumer products industries. Our customer base includes the
leading global producers and distributors of pharmaceuticals, biologics, medical
devices and personal care products.
As a
result of our global manufacturing and distribution presence, more than half of
our sales are generated outside of the U.S. in currencies other than the U.S.
dollar. For consolidated financial reporting purposes, transactions and balances
reported in foreign currencies must be translated into U.S. dollars based upon
applicable foreign currency exchange rates. Fluctuations in foreign currency
exchange rates, therefore, can have a significant effect on our consolidated
financial results. In general, our financial results are affected positively by
a weaker U.S. dollar and negatively by a stronger U.S. dollar as compared to the
foreign currencies in which we conduct our business. In terms of net sales and
operating profit, the most significant foreign currencies are the Euro, the
British Pound, the Danish Krone and the Singapore Dollar, with the
Euro-denominated sales representing the majority.
Recent
Trends and Developments
As
expected during the first quarter 2009, the U.S. dollar continued to strengthen
against our most significant foreign currencies and the resulting translation of
foreign currency exchange rates had a negative impact on our results versus
prior year. We reported first quarter 2009 revenues of $242.4 million,
representing a decrease of 10.4% from the same period a year ago, reflecting
unfavorable foreign currency translation of 7.5 percentage points. Sales in the
U.S. for the first quarter of 2009 were $119.5 million, representing a decrease
from the prior year quarter of 6.1%. Domestic sales for the quarter reflected
the impact of customer inventory reduction and cost-cutting programs due to the
current economic uncertainty, and the impact of regulatory-related delays
imposed on certain customers’ products. First quarter international revenues
were $122.9 million, representing a decrease of 14.3% below the prior year
period, the vast majority of which related to unfavorable foreign currency
translation effects. Excluding the changes in foreign currency exchange rates,
international revenues would have been substantially equal to those in the prior
year quarter and consolidated revenues on that basis declined 2.9%. Sales of our
advanced pharmaceutical packaging components such as West Spectra™ seals and
those that incorporate our enhanced manufacturing processes, including Westar®,
West Envision®, and value-added coatings, were substantially equal to those in
the first quarter of 2008.
Overall,
management expects that the U.S. dollar in 2009 will be stronger than in 2008
relative to our most significant foreign currencies, which is expected to have
an adverse effect upon our quarterly and full-year financial results throughout
2009. For example, if we were to translate our full-year 2008 financial results
using our 2009 forecasted exchange rates, our consolidated net sales in 2008
would have been approximately $70 million lower than the actual
results.
Management
also expects that the unfavorable global economic conditions which began in the
second half of 2008 will continue further into 2009, having an overall negative
impact on current year orders due to lower discretionary spending on
pharmaceutical products and medical services. Customers are expected to continue
to aggressively manage their inventory levels by keeping safety stock and
ordering horizons in check in response to uncertain market conditions. As the
year proceeds, however, we expect a return to more normal customer ordering
patterns and increased pricing tied to contract anniversary dates, resulting in
more favorable quarterly comparisons to the respective 2008
periods.
RESULTS
OF OPERATONS
For the
purpose of aiding the comparison of our year-to-year results, reference is made
in management's discussion and analysis to results excluding the effects of
changes in foreign exchange rates. Those re-measured period results are not in
conformity with U.S. generally accepted accounting principles (“GAAP”) and are
considered “non-GAAP financial measures.” The non-GAAP financial measures are
intended to explain or aid in the use of, not as a substitute for, the related
GAAP financial measures.
Percentages
in the following tables and throughout this Results of Operations section may
reflect rounding adjustments.
NET
SALES
The
following table presents net sales by reportable segment:
|
|
Three
Months Ended
|
|
Net
sales:
|
|
March
31,
|
|
($
in millions)
|
|
2009
|
|
|
2008
|
|
Pharmaceutical
Systems
|
|
$ |
183.2 |
|
|
$ |
207.5 |
|
Tech
Group
|
|
|
62.3 |
|
|
|
66.4 |
|
Intersegment
sales
|
|
|
(3.1 |
) |
|
|
(3.2 |
) |
Total
net sales
|
|
$ |
242.4 |
|
|
$ |
270.7 |
|
Consolidated
first quarter 2009 net sales decreased by $28.3 million, or 10.4%, over those
achieved in the first quarter of 2008, including $20.3 million, or 7.5
percentage points, resulting from unfavorable foreign currency translation.
Excluding foreign currency effects, first quarter 2009 net sales decreased $8.0
million, or 2.9%, as compared to the prior year quarter. Unfavorable sales
volumes and mix contributed 4.2 percentage points to the decline, which was
partially offset by sales price increases of 1.3 percentage points, as annual
price increases went into effect during the first quarter for our non-contract
customers.
Pharmaceutical
Systems
This
segment reported a first quarter 2009 sales decline of $24.3 million compared
with the same quarter of 2008, including $18.5 million resulting from
unfavorable foreign currency translation. Excluding these currency effects,
sales were $5.8 million, or 2.7%, below prior year levels despite selling price
increases of 2.5 percentage points. Unfavorable sales volume and mix contributed
5.2 percentage points of the decline, resulting from customer inventory
management, regulatory-related interruptions affecting production at certain
customer facilities and generally lower demand due to market conditions in the
U.S. and Europe.
Sales of
pharmaceutical packaging components were $18.7 million lower than the prior
year, the vast majority of which related to the unfavorable currency translation
effect. Excluding foreign currency impacts, sales of traditional packaging
components including stoppers, seals and prefilled injection components
contributed to the decline, a portion of which was due to the regulatory-related
issues mentioned above. Sales of disposable medical components were $2.7 million
lower than the prior year first quarter, most of which related to lower sales of
non-filled syringe components. The combined sales of safety and administration
systems, and laboratory and other services were $2.9 million lower than the
prior year due to the effects of foreign exchange and generally lower demand for
laboratory and other services.
Tech
Group
First
quarter 2009 sales were $4.1 million below 2008 levels, including $1.8 million
of unfavorable foreign currency translation. Excluding the effect of foreign
currency, sales were $2.3 million, or 3.4%, below prior year levels. Lower sales
prices contributed 2.3 percentage points of the sales decline as a result of
reduced plastic resin costs, which are contractually passed through to certain
customers in the form of adjusted selling prices. The remaining decline in sales
was the result of overall reduced sales volumes, primarily from our U.S.
operations and due to our decision to discontinue selling the low-margin
consumer products manufactured at a facility in Mexico which was sold in the
fourth quarter of 2008 as part of our Tech Group restructuring
initiative.
Sales
results by significant product group were mixed during the first quarter.
Healthcare devices sales increased $1.1 million compared with the prior year
quarter due to increased demand for components used in self-injection pens and
increased volume for certain other medical devices manufactured in Europe.
However, the combined sales of consumer products, tooling and other services
decreased $5.2 million due to the plastic resin pass-through effect on selling
prices, and as a result of our decision to exit the consumer products business
in Mexico. Intersegment sales of $3.1 million and $3.2 million in 2009 and 2008,
respectively, were eliminated in consolidation.
GROSS
PROFIT
The
following table presents our gross profit and related gross margins by
reportable segment:
|
|
Three
Months Ended
|
|
Gross
profit:
|
|
March
31,
|
|
($
in millions)
|
|
2009
|
|
|
2008
|
|
Pharmaceutical
Systems
|
|
|
|
|
|
|
Gross
Profit
|
|
$ |
59.8 |
|
|
$ |
74.9 |
|
Gross
Margin
|
|
|
32.7 |
% |
|
|
36.1 |
% |
|
|
|
|
|
|
|
|
|
Tech
Group
|
|
|
|
|
|
|
|
|
Gross
Profit
|
|
$ |
9.5 |
|
|
$ |
8.6 |
|
Gross
Margin
|
|
|
15.2 |
% |
|
|
12.9 |
% |
|
|
|
|
|
|
|
|
|
Consolidated
Gross Profit
|
|
$ |
69.3 |
|
|
$ |
83.5 |
|
Consolidated
Gross Margin
|
|
|
28.6 |
% |
|
|
30.8 |
% |
First
quarter 2009 consolidated gross profit decreased $14.2 million over the same
quarter in 2008, with $4.9 million of the decline due to foreign currency
translation. The remaining decline was attributable to the impact of lower sales
volumes, unfavorable capacity utilization at our plants and higher production
costs, net of increased selling prices.
Pharmaceutical
Systems
The first
quarter 2009 gross profit and gross margin percentage for Pharmaceutical Systems
declined by $15.1 million and 3.4 percentage points, respectively, versus the
prior year quarter. The decrease was attributable to unfavorable sales volume
and mix, higher production costs including raw materials, and lower capacity
utilization at most plants due to reduced volumes. The impact of unfavorable
sales volume and mix and higher raw material costs reduced our gross margin by
1.2 percentage points, and 1.0 percentage point, respectively, compared to the
first quarter of 2008. A portion of the increased raw materials costs was due to
the appreciation in value of the U.S. dollar versus the Euro which resulted in
higher costs for dollar-denominated materials purchased in Europe. In addition,
several of our key raw material supply contracts include lagging petroleum-based
surcharges, which continued to reflect the higher oil prices experienced in the
latter part of 2008. As the year proceeds, however, we expect gross margins to
improve once we begin to realize the benefits of lower commodity costs in the
price of our key raw materials.
Tech
Group
First
quarter 2009 gross profit and gross margin percentage for the Tech Group
improved by $0.9 million and 2.3 percentage points, respectively, in comparison
to prior year results. The improved gross margin performance was largely due to
favorable sales volume and mix in our European operations, as we recently
increased production capacity to meet the demand for certain medical devices. In
addition, we experienced a significant reduction in U.S. plant overhead
resulting from our restructuring efforts and continued focus on improving
production efficiencies. While the pass-through of reduced plastic resin costs
resulted in lower selling prices, gross profit was not affected due to the
offsetting favorable effect on raw material costs.
RESEARCH
AND DEVELOPMENT (“R&D”) COSTS
The
following table presents R&D costs by reportable segment:
|
|
Three
Months Ended
|
|
|
|
March
31,
|
|
($
in millions)
|
|
2009
|
|
|
2008
|
|
Pharmaceutical
Systems
|
|
$ |
4.0 |
|
|
$ |
4.9 |
|
Tech
Group
|
|
|
0.3 |
|
|
|
0.5 |
|
Total
R&D expense
|
|
$ |
4.3 |
|
|
$ |
5.4 |
|
R&D
costs during the first quarter of 2009 were $1.1 million lower than those
incurred in 2008 as several Pharmaceutical Systems projects have transitioned
into early stages of commercial production and, therefore, the focus has shifted
from R&D to expanding production capabilities and related
activities.
We expect
consolidated R&D costs for the full year 2009 to reach approximately $23.0
million, as a major focus of our innovation team will continue to be the
development of prefillable syringe systems and various other applications that
will use Daikyo Seiko, Ltd. (“Daikyo”) Crystal Zenith® resin, a unique,
transparent polymer that can be used to produce vials and syringe barrels.
Daikyo, our 25% owned affiliate in Japan, is also our partner in a long-standing
marketing and technology transfer agreement that enables West and Daikyo to
develop products that help customers mitigate drug product development risks and
enhance drug performance and patient safety. In addition to the various Crystal
Zenith projects, other significant R&D projects include an advanced
injection system using auto-injector technology, and a passive needle safety
device.
SELLING,
GENERAL AND ADMINISTRATIVE (“SG&A”) COSTS
The
following table presents SG&A costs by reportable segment including
corporate and unallocated costs:
|
|
Three
Months Ended
|
|
|
|
March
31,
|
|
($
in millions)
|
|
2009
|
|
|
2008
|
|
Pharmaceutical
Systems SG&A costs
|
|
$ |
28.5 |
|
|
$ |
26.1 |
|
Pharmaceutical
Systems SG&A as a % of segment net sales
|
|
|
15.6 |
% |
|
|
12.6 |
% |
|
|
|
|
|
|
|
|
|
Tech
Group SG&A costs
|
|
$ |
4.4 |
|
|
$ |
4.5 |
|
Tech
Group SG&A as a % of segment net sales
|
|
|
7.0 |
% |
|
|
6.7 |
% |
|
|
|
|
|
|
|
|
|
Corporate
costs:
|
|
|
|
|
|
|
|
|
General
corporate costs
|
|
|
4.5 |
|
|
|
5.6 |
|
Stock-based
compensation expense
|
|
|
1.4 |
|
|
|
2.4 |
|
U.S.
pension and other retirement benefits
|
|
|
4.1 |
|
|
|
1.5 |
|
Total
Selling, General & Administrative costs
|
|
$ |
42.9 |
|
|
$ |
40.1 |
|
Total
SG&A as a % of total net sales
|
|
|
17.7 |
% |
|
|
14.8 |
% |
First
quarter 2009 consolidated SG&A expenses were $2.8 million above those
recorded in 2008, including a $2.3 million favorable effect from foreign
currency translation.
In
Pharmaceutical Systems, 2009 SG&A expenses increased by $2.4 million over
the prior year, despite the impact from foreign currency translation which
reduced SG&A by $2.2 million. Compensation costs were $1.5 million above
those incurred in the 2008 quarter mostly due to increased staffing of
information technology and other necessary technical and manufacturing support
functions and to the impact of annual salary increases. Depreciation expense,
also associated with our second quarter 2008 information systems implementation,
accounted for $0.5 million of the increase. Severance and related benefits costs
increased by $0.9 million, most of which resulted from our decision to
consolidate laboratory functions into our Lionville, PA facility and to relocate
certain development center functions to our St. Petersburg, FL plant. We expect
to incur additional costs of approximately $0.5 million during the second
quarter of 2009 as we complete this laboratory consolidation and relocation
process. Various other costs including utilities, professional services and
other corporate facilities costs contributed to the remaining increase in
SG&A expense.
General
corporate SG&A costs were $1.1 million favorable to 2008 levels, reflecting
lower levels of third-party professional services and a reduction in our
estimated annual performance-based bonus incentive costs. Stock-based
compensation costs for 2009 decreased $1.0 million due primarily to the impact
of changes in our stock price on the fair value of our deferred compensation
liabilities. The deferred compensation liabilities are indexed to our stock
price and valued at its quarterly closing market price with the resulting change
in value recorded in earnings. During the first quarter of 2009, our stock price
decreased $4.96 per share, closing at $32.81 per share on March 31, 2009, while
during the first quarter of 2008 our stock price increased $3.64 per share,
closing at $44.23 per share.
U.S.
pension plan expense in the three months ended March 31, 2009 was $2.6 million
higher than in the comparable 2008 period, primarily resulting from lower than
assumed performance on plan assets throughout 2008. We anticipate full-year 2009
U.S. pension and other retirement benefits costs to be $10.4 million higher than
the $6.0 million incurred during 2008. The costs of non-U.S. pension and other
retirement benefits programs are reflected in the operating profit of the
respective segment.
RESTRUCTURING
AND OTHER ITEMS
Other
income and expense items, consisting of gains, losses or impairments of segment
assets, foreign exchange transaction items and miscellaneous royalties and
sundry transactions are generally recorded within the respective segment.
Certain restructuring and other items considered outside the control of segment
management are not allocated to our reporting segments. The following table
presents our restructuring charges and other income and expense items for the
respective period:
|
|
Three
Months Ended
|
|
|
|
March
31,
|
|
($
in millions)
|
|
2009
|
|
|
2008
|
|
Pharmaceutical
Systems
|
|
$ |
(0.1 |
) |
|
$ |
0.3 |
|
Tech
Group
|
|
|
0.2 |
|
|
|
(0.1 |
) |
Corporate
|
|
|
0.1 |
|
|
|
- |
|
Unallocated
charges (credits):
|
|
|
|
|
|
|
|
|
Contract
settlement and related gain, net
|
|
|
- |
|
|
|
(1.3 |
) |
Restructuring
and related charges
|
|
|
0.7 |
|
|
|
1.0 |
|
Total
unallocated charges (credits)
|
|
|
0.7 |
|
|
|
(0.3 |
) |
Total
restructuring and other items
|
|
$ |
0.9 |
|
|
$ |
(0.1 |
) |
Other
income and expense items for Pharmaceutical Systems, Tech Group and Corporate
are attributable to gains and losses on the sale of fixed assets, foreign
exchange transaction gains and losses on intercompany and third-party
transactions, and other miscellaneous charges. There were no individually
significant income and expense items during the first quarters of 2009 and
2008.
Contract settlement and related
gain, net - In February of 2008 we entered into an agreement with our
customer, Nektar Therapeutics, which provided for the full reimbursement of,
among other things, severance-related employee costs, purchased raw materials
and components, equipment, leases and other facility costs for maintaining and
closing the Exubera device production facility. During the first quarter of
2008, we received payments from Nektar which more than offset related costs
incurred, resulting in a net gain of $1.3 million.
Restructuring and related
charges – As part of a plan to reduce Tech Group operating costs, we
initiated a series of restructuring initiatives at the end of 2007 to align the
plant capacity and workforce of our Tech Group with the revised business outlook
for the segment and as part of a longer-term strategy of focusing the business
on proprietary products. We incurred $0.7 million and $1.0 million during the
first quarters of 2009 and 2008, respectively, in restructuring and related
charges as part of this plan. The majority of these charges related to severance
and post-employment benefits and a smaller portion related to asset write-offs
and other related costs. We expect that these restructuring activities will be
substantially completed during the second quarter of 2009.
OPERATING
PROFIT
Operating
profit by reportable segment and corporate and other unallocated items were as
follows:
|
|
Three
Months Ended
|
|
|
|
March
31,
|
|
($
in millions)
|
|
2009
|
|
|
2008
|
|
Pharmaceutical
Systems
|
|
$ |
27.4 |
|
|
$ |
43.6 |
|
Tech
Group
|
|
|
4.6 |
|
|
|
3.7 |
|
Corporate
and other unallocated items:
|
|
|
|
|
|
|
|
|
General
corporate costs
|
|
|
(4.6 |
) |
|
|
(5.6 |
) |
Stock-based
compensation costs
|
|
|
(1.4 |
) |
|
|
(2.4 |
) |
U.S.
pension and other retirement benefits
|
|
|
(4.1 |
) |
|
|
(1.5 |
) |
Other
unallocated (charges) income
|
|
|
(0.7 |
) |
|
|
0.3 |
|
Total
operating profit
|
|
$ |
21.2 |
|
|
$ |
38.1 |
|
Pharmaceutical
Systems’ operating profit for the quarter was lower than that of the prior year
by $16.2 million, including an unfavorable foreign currency translation impact
of $2.1 million. The reduction in operating profit was the result of lower sales
and gross profit combined with higher spending on SG&A as discussed
above.
Tech
Group operating profit was $0.9 million above that achieved in the prior year
quarter, despite an unfavorable foreign currency translation impact of $0.4
million, largely due to the increased gross profit resulting from favorable
European sales and lower production overhead in the U.S. as described
above.
General
corporate costs and stock-based compensation costs declined by a combined $2.0
million as described in the SG&A Costs section above.
U.S. pension and other retirement benefit costs increased $2.6 million over the
prior year quarter and are projected to be $10.4 million higher for the full
year as discussed above. The change in other unallocated (charges) income is
described in more detail in the Restructuring and Other Items
section above.
INTEREST
EXPENSE, NET
The
following table presents our net interest expense by significant
component:
|
|
Three
Months Ended
|
|
|
|
March
31,
|
|
($
in millions)
|
|
2009
|
|
|
2008
|
|
Interest
expense
|
|
$ |
4.4 |
|
|
$ |
4.6 |
|
Interest
income
|
|
|
(0.3 |
) |
|
|
(1.0 |
) |
Capitalized
interest
|
|
|
(0.5 |
) |
|
|
(0.5 |
) |
Interest
expense, net
|
|
$ |
3.6 |
|
|
$ |
3.1 |
|
Consolidated
first quarter 2009 net interest expense increased by $0.5 million over the
amount recognized in the first quarter of 2008. This increase resulted from
lower interest income due to less favorable market rates of interest earned as
well as lower levels of cash and cash equivalents on hand during the first
quarter of 2009.
INCOME
TAXES
Our
effective tax rate was 14.6% in the first quarter of 2009 and 24.2% in the prior
year quarter. The following factors impacted the comparability of the tax rates
in 2009 versus 2008:
·
|
In
2009, we recognized a $1.7 million provision benefit principally resulting
from the completion of a tax audit and the expiration of open tax periods
in certain foreign tax
jurisdictions.
|
·
|
In
2008, an agreement with the Republic of Singapore reduced our income tax
rate in that country for a period of 10 years, on a retroactive basis back
to July 2007, resulting in a $1.0 million tax
benefit.
|
·
|
Also
in 2008, we recognized a $0.1 million net tax provision benefit resulting
from the expiration of open tax audit years in certain foreign tax
jurisdictions.
|
The
impact of these items reduced our effective tax rate by 10.0 percentage points
in 2009 and 3.1 percentage points in 2008. Excluding these discrete items, the
annualized effective tax rate was estimated to be 24.6% and 27.4% for 2009 and
2008, respectively. The decrease in the 2009 annualized effective tax rate was
primarily due to a change in mix of earnings which resulted in a higher
concentration of earnings in jurisdictions where we are subject to lower tax
rates, and a fourth quarter 2008 renewal of the U.S. tax credit for certain
R&D activities.
EQUITY
IN AFFILIATES
The
contribution to earnings from our 25% ownership interest in Daikyo in Japan and
49% ownership interest in three companies in Mexico for the first quarter 2009
was $0.4 million favorable compared to the first quarter 2008 results. The first
quarter of 2008 reflects our share of Daikyo’s demolition and disposal costs
associated with their Crystal Zenith capital expansion project.
NET
INCOME ATTRIBUTABLE TO WEST
First
quarter 2009 net income attributable to West was $15.4 million, or $0.46 per
diluted share, which included restructuring and related charges of $0.7 million,
and discrete income tax benefits of $1.7 million. Collectively, these items
totaled $1.3 million after tax, or $0.04 per diluted share. Same quarter 2008
net income attributable to West was $26.2 million, or $0.76 per diluted share.
Our 2008 results included a net gain on contract settlement proceeds of $1.3
million, restructuring and related charges of $1.0 million, and discrete income
tax benefits of $1.1 million. Collectively, these items totaled a net benefit of
$0.3 million pre-tax ($1.3 million after tax, or $0.04 per diluted share).
Excluding the impact of these items, net income attributable to West in 2009 was
below the prior year amount due to the reduction in gross profit on lower sales
and higher SG&A costs as described in the respective sections
above.
FINANCIAL
CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Cash
Flows
The
following table and explanations provide cash flow data from continuing
operations for the three months ended March 31:
($
in millions)
|
|
2009
|
|
|
2008
|
|
Net
cash used in operating activities
|
|
$ |
(3.3 |
) |
|
$ |
(6.9 |
) |
Net
cash used in investing activities
|
|
$ |
(25.2 |
) |
|
$ |
(14.9 |
) |
Net
cash provided by financing activities
|
|
$ |
6.6 |
|
|
$ |
5.8 |
|
Cash Flows from Operating Activities
- Our first quarter 2009 cash used in operating activities improved $3.6
million compared to the prior year, as the reduction in net income was more than
offset by favorable changes in working capital and other assets and liabilities
compared to the first quarter of 2008. Included in 2009 net cash used in
operating activities was a $10.0 million voluntary contribution to our U.S.
qualified pension plan. Operating cash flows in the 2008 quarter reflected cash
payments related to income tax and other tax-related issues in Brazil totaling
$12.7 million.
Cash Flows from Investing Activities
– In 2009, cash flows used in investing activities were $10.3 million
higher than the prior year quarter. Contributing to the increased spending was a
$2.5 million earnout payment related to a 2007 acquisition of patents and other
intangible assets, and a $6.3 million reduction in redemptions from the Columbia
Strategic Cash Portfolio Fund. Our investment in this enhanced money fund, which
began an orderly liquidation in December 2007, is discussed in more detail in
Note 4, Fair Value
Measurements, to the condensed consolidated financial
statements.
Capital
spending in the first quarter of 2009 totaled $24.2 million, a $1.4 million
increase over the prior year quarter. Pharmaceutical Systems’ spending was $16.2
million, a decrease of $4.1 million over the first quarter of 2008. The decrease
was attributable to the completion of the first phase of our North American
information technology project, the implementation of an enterprise resource
planning (“ERP”) system. The first phase involved the replacement of our
financial reporting, cash disbursements and order-to-cash systems by the end of
the first quarter of 2008. The second phase of this project, focusing on
procurement and plant operations, is currently in progress and is expected to be
completed in the fourth quarter of 2009. Capital spending for the Tech Group was
$1.6 million, a decrease of $0.9 million compared to the prior year quarter as a
result of a difference in the timing of equipment upgrades. The remainder of the
change was attributable to a reduction in the balance of accrued capital
spending, which resulted in an overall increase over the 2008
period.
We
anticipate full year 2009 capital spending will be approximately $130 million,
including the completion of our plastics manufacturing facility in China, plant
expansions at Kinston, North Carolina and Clearwater, Florida, and continued
funding of our European expansion and the North American information systems
project. With the construction of our Grand Rapids, Michigan plant now
completed, the majority of our anticipated capital spending within the Tech
Group is focused on routine facility and equipment upgrades. We will continue to
monitor our level of capital investment throughout 2009 and adjust our plan in
accordance with market demand and optimal internal resource
allocations.
Cash Flows from Financing Activities
– The year-over-year increase in cash flows from financing activities
resulted from increased borrowings under our revolving debt facilities,
partially offset by higher dividends paid and lower proceeds from the issuance
of common stock. In the 2009 period, we borrowed $11.5 million from our
revolving credit agreements compared to $9.5 in the same period of 2008. We paid
cash dividends totaling $5.0 million ($0.15 per share) during the current year
quarter, compared to $4.5 million ($0.14 per share) in the prior year quarter.
On February 25, 2009, we declared a cash dividend of $0.15 per share payable May
6, 2009 to stockholders of record at the close of business on April 22,
2009.
Liquidity
Measures
The table
below presents key liquidity measures as of March 31, 2009 and
2008:
($
in millions)
|
|
2009
|
|
|
2008
|
|
Cash
and cash equivalents
|
|
$ |
62.7 |
|
|
$ |
93.6 |
|
|
|
|
|
|
|
|
|
|
Working
capital
|
|
$ |
217.5 |
|
|
$ |
264.1 |
|
|
|
|
|
|
|
|
|
|
Current
ratio
|
|
2.6
to 1
|
|
|
2.7
to 1
|
|
|
|
|
|
|
|
|
|
|
Total
debt
|
|
$ |
387.9 |
|
|
$ |
417.5 |
|
|
|
|
|
|
|
|
|
|
Net
debt-to-total invested capital
|
|
|
40.0 |
% |
|
|
38.6 |
% |
Short-term
investments that have maturities of ninety days or less when purchased are
considered cash equivalents. Working capital is defined as current assets less
current liabilities. Current ratio is defined as the ratio of current assets to
current liabilities. Net debt is defined as total debt less cash and cash
equivalents, and total invested capital is defined as the sum of net debt and
total equity.
Working
capital at March 31, 2009 decreased $46.6 million, or 17.6%, compared with the
balance at March 31, 2008, reflecting lower cash and accounts receivable
balances, and a partial liquidation of our investment in the Columbia Strategic
Cash Portfolio Fund. Our accounts receivable days-sales-outstanding (“DSO”)
ratio was 50.9 days at March 31, 2009 compared to 51.1 days at March 31, 2008.
Our inventory turnover ratio was 5.9 and 6.4 at March 31, 2009 and 2008,
respectively, which reflected the impact of increased inventory balances at
March 31, 2009 as a result of the timing of certain raw materials purchases. The
ratio of net debt-to-total invested capital increased slightly as a result of a
reduction in total equity caused by the impact of the strengthened U.S. dollar
on cumulative foreign currency translation adjustments, which is a component of
other comprehensive income.
Included
in other current assets and working capital at March 31, 2009 and December 31,
2008 was approximately $9.3 million held in escrow representing judicial
deposits to the government of Brazil related to positions taken in prior years
on social security, excise, and other tax returns. These deposits were made in
order to discontinue any further interest or penalties from accruing while we
proceed with the related court proceedings and the determination of final
settlement amounts. The liability associated with these tax exposures was
recorded in taxes other than income on the condensed consolidated balance sheets
and was also reflected as a component of working capital in the table
above.
Based on
our business outlook and our current capital structure, we believe that we have
ample liquidity to fund our business needs, new product development, capital
expansion, pension and other post-retirement benefits and to pay dividends. We
may also use our liquidity from time to time to repay debt, fund acquisitions,
repurchase shares for treasury and to make other investments. We expect that our
cash requirements for the foreseeable future will be met primarily through our
cash flows from operations, cash and cash equivalents on hand, and amounts
available under our $200.0 million multi-currency revolving credit agreement,
which we generally use for working capital requirements. As of March 31, 2009,
we had available $156.1 million of borrowing capacity under this committed
credit facility, and we have not experienced any limit on our ability to access
this source of funds. This facility expires in 2011, and market conditions at
that time could affect the cost and terms of the replacement facility, as well
as terms of other debt instruments we enter into from time to time.
Current
Market Conditions
Through
the three months ended March 31, 2009, actual returns for our U.S. pension plan
are significantly below our expected long-term rate of return of 7.75% due to
the continuing adverse conditions in the equity and debt markets. Continued
actual returns below this expected rate may affect the amount and timing of
future contributions to the plan and may increase our pension expense in future
periods. We have no ERISA (Employee Retirement Income Security Act) funding
requirements in 2009; however, we have made a $10.0 million voluntary
contribution during January 2009.
Current
global economic conditions and instability in the financial markets have
increased our exposure to the possible liquidity and default risks of our
vendors, suppliers and other counterparties with which we conduct business. It
is possible that some of our customers and vendors may experience difficulty in
obtaining the liquidity required to buy inventory or raw materials. We
periodically monitor our customers’ and key vendors’ financial condition and
assess their liquidity in order to mitigate our counterparty risks. If our key
suppliers are unable to provide raw materials needed for our products, we may be
unable to fulfill sales orders in a timely manner due to the rigorous
qualification process. To date, we have not experienced any significant increase
in customer collectibility risks, nor have we experienced increased supply risks
due to vendor insolvency. We do not expect that recent global credit market
conditions will have a significant impact on our liquidity; however, the world
financial markets have recently experienced extreme disruption. Accordingly, no
assurance can be given that the ongoing economic downturn will not have a
material adverse effect on our liquidity or capital resources.
Commitments
and Contractual Obligations
No
significant changes to contractual obligations occurred during the first three
months of 2009.
OFF-BALANCE
SHEET ARRANGEMENTS
At March
31, 2009, we had no off-balance sheet financing arrangements other than
operating leases, unconditional purchase obligations incurred in the ordinary
course of business and outstanding letters of credit related to various
insurance programs, as well as, leased equipment and sales tax liability
guarantees as noted in our annual report on Form 10-K for the year ended
December 31, 2008.
NEW
ACCOUNTING STANDARDS
For
information on new accounting standards that were adopted and those issued but
not yet adopted during the first quarter of 2009, and the impact, if any, on our
financial position or results of operations, see Note 13 of the Notes to
Condensed Consolidated Financial Statements included under Item 1 of this Form
10-Q.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
During
the first quarter of 2009, we implemented an economic hedging strategy which we
believe will reduce our exposure to increases in oil-based surcharges and
protect operating cash flows with regard to a portion of our forecasted
elastomer purchases. Specifically, we purchased a series of crude oil call
options to hedge a portion of our forecasted elastomer purchases during the
months of July through December 2009. Call options are designed to effectively
cap our cost of the crude oil component of elastomer prices, allowing us to
limit our exposure to increasing petroleum prices. With these call option
contracts, we still benefit from a decline in crude oil prices, as there is no
downward exposure other than the premiums that we paid to enter into the
contracts.
There
have been no material changes in market risk and no other material changes to
the information provided in Part II, Item 7A of our annual report on Form 10-K
for the year ended December 31, 2008.
Evaluation
of Disclosure Controls and Procedures
We have
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 our periodic reports is recorded,
processed, summarized and reported on a timely basis and that such information
is made known to our Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow timely decisions regarding required disclosure. Our
management, under the supervision and with the participation of the Chief
Executive Officer and the Chief Financial Officer, has evaluated the
effectiveness of our disclosure controls and procedures as of the end of the
period covered by this quarterly report, and based on such evaluation, has
concluded that such disclosure controls and procedures are
effective.
Changes in Internal
Controls
We are in
the process of implementing SAP, an ERP system, over a multi-year period for our
North American operations. During 2008, we successfully replaced our financial
reporting, cash disbursement and order-to-cash systems. The second phase of this
SAP project is focused on procurement and plant operations. The implementation
of the second phase started in late 2008 and is expected to continue on a
plant-by-plant basis through 2009. These implementations have resulted in
certain changes to business processes and internal controls impacting financial
reporting. We have evaluated the control environment as affected by this project
and believe that our controls remained effective.
During
the period covered by this report, there have been no other changes to our
internal control over financial reporting that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
There
have been no significant changes to the risk factors disclosed in Part I, Item
1A of our annual report on Form 10-K for the year ended December 31,
2008.
ITEM 2. UNREGISTERED SALES OF EQUITY
SECURITIES AND USE OF PROCEEDS
The
following table shows information with respect to purchases of our common stock
made during the three months ended March 31, 2009 by us or any of our
“affiliated purchasers” as defined in Rule 10b-18(a)(3) under the Exchange
Act:
Period
|
|
Total
number of shares purchased
(1)(2)(3)
|
|
|
Average
price paid per share
|
|
|
Total
number of shares purchased as part of publicly announced plans or
programs
|
|
|
Maximum
number of shares that may yet be purchased under the plans or
programs
|
|
January
1 – 31, 2009
|
|
|
- |
|
|
$ |
- |
|
|
|
- |
|
|
|
- |
|
February
1 – 28, 2009
|
|
|
7,077 |
|
|
$ |
32.26 |
|
|
|
- |
|
|
|
- |
|
March
1 – 31, 2009
|
|
|
40,022 |
|
|
$ |
30.98 |
|
|
|
- |
|
|
|
- |
|
Total
|
|
|
47,099 |
|
|
$ |
31.17 |
|
|
|
- |
|
|
|
- |
|
(1) Includes
13,932 shares purchased on behalf of employees enrolled in the Non-Qualified
Deferred Compensation Plan for Designated Employees (Amended and Restated
Effective January 1, 2008). Under the plan, Company match
contributions are delivered to the plan’s investment administrator, who then
purchases shares in the open market and credits the shares to individual plan
accounts.
(2) Includes
6,568 shares of common stock acquired from employees who tendered already-owned
shares to satisfy the exercise price on option exercises as part of our 2007
Omnibus Incentive Compensation Plan (the “2007 Plan”).
(3) Includes
26,599 shares of common stock acquired from employees who tendered already-owned
shares to satisfy withholding tax obligations on the vesting of incentive and
restricted stock awards, as part of the 2007 Plan.
See Index
to Exhibits on page F-1 of this Report.
Pursuant
to the requirements of the Securities Exchange Act of 1934, West Pharmaceutical
Services, Inc. has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WEST
PHARMACEUTICAL SERVICES, INC.
(Registrant)
By: /s/ William J.
Federici
William
J. Federici
Vice
President and Chief Financial Officer
May 6,
2009
Exhibit
Number
|
Description
|
3.1
|
Our
Amended and Restated Articles of Incorporation effective December 17, 2007
are incorporated by reference from our Form 8-K dated December 17,
2007.
|
3.2
|
Our
Bylaws, as amended effective October 14, 2008 are incorporated by
reference from our Form 8-K dated October 20, 2008.
|
4.1
|
Form
of stock certificate for common stock is incorporated by reference from
our 1998 10-K report.
|
4.2
|
Article
5, 6, 8(c) and 9 of our Amended and Restated Articles of Incorporation are
incorporated by reference from our Form 8-K dated December 17,
2007.
|
4.3
|
Article
I and V of our Bylaws, as amended through October 14, 2008 are
incorporated by reference from our Form 8-K dated October 20,
2008.
|
4.4
|
Instruments
defining the rights of holders of long-term debt securities of West and
its subsidiaries have been omitted.1
|
|
|
|
|
|
|
|
|
|
|
1 We agree
to furnish to the SEC, upon request, a copy of each instrument with respect to
issuances of long-term debt of the Company and its
subsidiaries.
2 Certain
portions of this exhibit have been omitted pursuant to a confidential treatment
request submitted to the SEC.