|
SECURITIES
AND EXCHANGE COMMISSION
|
Washington,
D.C. 20549
FORM
10-K
(Mark
One)
|
|
þ
|
ANNUAL REPORT PURSUANT TO
SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For
the Fiscal Year Ended December 31, 2008
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
Securities
registered pursuant to Section 12(b) of the Act:
|
Title
of each class
|
Name
of each exchange on which registered
|
|
Common
Stock, par value $.25 per share
|
New
York Stock Exchange
|
Securities
registered pursuant to Section 12 (g) of the Act:
None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.
Yes þ No o
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.
Yes o No þ
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 if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. 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
The
aggregate market value of the voting stock held by non-affiliates of the
registrant as of June 30, 2008 was approximately $1,403,459,343 based on the
closing price as reported on the New York Stock Exchange.
As of
January 31, 2009, there were 32,735,943 shares of the registrant’s common stock
outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
|
Document
|
Parts Into Which
Incorporated
|
|
Proxy
Statement for the Annual Meeting of Shareholders to be held May 5,
2009
|
Part
III
|
1
|
Page
|
|
|
PART I
|
|
|
3
|
|
|
3
3
3
4
6
6
7
7
7
7
7
8
8
8
9
|
|
|
9
|
|
|
13
|
|
|
14
|
|
|
15
|
|
|
15
|
|
|
15
|
|
|
PART
II
|
|
|
17
|
|
|
19
|
|
|
21
|
|
|
39
|
|
|
41
|
|
|
74
|
|
|
74
|
|
|
74
|
|
|
PART
III
|
|
|
75
|
|
|
75
|
|
|
75
|
|
|
76
|
|
|
76
|
|
|
PART
IV
|
|
|
77
|
PART I
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. Our products include stoppers and seals for vials and
components used in syringe, intravenous and blood collection
systems. Our customers include the world’s leading pharmaceutical,
biotechnology and medical device producers. The Company was
incorporated under the laws of the Commonwealth of Pennsylvania on July 27,
1923.
All
trademarks and registered trademarks used in this report are the property of
West Pharmaceutical Services, Inc., unless noted otherwise. Exubera® is a
registered trademark of Pfizer, Inc. Teflon® is a registered trademark of E.I.
DuPont de Nemours and Company. Crystal Zenith® is a registered trademark of
Daikyo Seiko, Ltd.
West
maintains a website at www.westpharma.com. Our
Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on
Form 8-K and amendments to those reports filed or furnished pursuant to Section
13(a) or 15(d) of the Securities Exchange Act of 1934 are available on our
website under the Investors –
SEC Filings caption as soon as reasonably practical after we
electronically file the material with, or furnish it to, the Securities and
Exchange Commission (SEC). These filings are also available to the public over
the Internet at the SEC’s website at www.sec.gov. You may also
read and copy any document we file at the SEC’s Public Reference Room at 100 F.
Street, N.E., Washington, D.C. 20549. Please call the SEC at
1-800-SEC-0330 for further information on the Public Reference
Room.
Throughout
this Form 10-K, we “incorporate by reference” certain information from parts of
other documents filed with the SEC and from our Proxy Statement for the 2009
Annual Meeting of Shareholders (2009 Proxy Statement), which will be filed with
the SEC within 120 days following the end of our 2008 fiscal
year. Our 2009 Proxy Statement will be available on our website on or
about March 31, 2009, under the caption Investors — Proxy
Materials.
Information
about our corporate governance, including our Corporate Governance Principles
and Code of Business Conduct, as well as information about our Directors, Board
Committees, Committee Charters, and instructions on how to contact the Board, is
available on our website under the Investors — Corporate Governance
caption. Information relating to the West Pharmaceutical Services
Dividend Reinvestment Plan is also available on our website under the Investors — Dividend Reinvestment
Program caption. We will provide any of the foregoing
information without charge upon written request to John R. Gailey III, Vice
President, General Counsel and Secretary, West Pharmaceutical Services, Inc.,
101 Gordon Drive, Lionville, Pennsylvania 19341.
We have
two reportable segments: Pharmaceutical Systems and Tech
Group. Comparative segment revenues and related financial information
for 2008, 2007 and 2006 are presented in a table contained in Note 5 to our
consolidated financial statements, Segment Information, and are
discussed within Results of
Operations in the Management’s Discussion and Analysis
of Financial Condition and Results of Operations section of this 2008
Form 10-K. Intersegment sales are eliminated in consolidation.
Our
Pharmaceutical Systems segment designs, manufactures and sells a variety of
packaging components and systems used in parenteral drug delivery for the
pharmaceutical, biopharmaceutical and generic industries. The primary
components we manufacture are subject to regulatory oversight within our
customers’ manufacturing facilities. We have manufacturing facilities
in North and South America, Europe and Asia Pacific, with affiliated companies
in Mexico and Japan. See Item 2, Properties, for additional
information on our manufacturing sites.
Our
Pharmaceutical Systems segment consists of two operating segments — Americas and
Europe/Asia Pacific — which are aggregated for reporting purposes because they
have similar economic characteristics, as well as similar products,
manufacturing processes, customer objectives, distribution procedures and
regulatory requirements.
Our
Pharmaceutical Systems business is composed of the following product
lines:
Pharmaceutical
packaging
|
·
|
Elastomeric
stoppers and discs, which serve as primary closures for pharmaceutical
vials.
|
|
·
|
Secondary
closures for pharmaceutical vials called Flip-Off® aluminum seals,
consisting of an aluminum seal and removable plastic button, and in some
applications, just an aluminum
seal.
|
|
·
|
Elastomeric
plungers, needle shields and tip caps to fit most standard prefilled
syringes and combination seals for dental cartridges and pen delivery
systems.
|
|
·
|
Pharmaceutical
containers, closures and
dispensers.
|
|
·
|
Enhanced
component processing: VeriSure™, Westar® RS (ready-to-sterilize) and
Westar® RU (ready-to-use).
|
Disposable medical
components
|
·
|
Elastomeric
components for blood collection systems and flashback bulbs, injection
sites and sleeve stoppers for intravenous (IV) dispensing
systems.
|
|
·
|
Elastomer
and co-molded elastomer/plastic components for infusion and IV
systems.
|
|
·
|
Non-filled
syringe components.
|
|
·
|
Dropper
bulbs for applications such as eye, ear and nasal drops, diagnostic
products and dispensing systems.
|
Safety and
administration
|
·
|
Sterile
devices for the reconstitution, transfer and administration of drug
products, including patented products such as the Mixject™, Mix2Vial™ and
Vial Adapters.
|
Laboratory and other
services
|
·
|
Extractables
and leachables testing, package/container testing, method
development/validation, stability testing, process development and problem
resolution.
|
Products
and services recently brought to market are the Daikyo Crystal Zenith® luer lock
syringe, Envision™ and the West Ready Pack™ system. The Daikyo Crystal Zenith
syringe is the market’s first silicone-free, ready-to-use prefillable syringe
that offers pharmaceutical and biopharmaceutical companies a total system
solution that can mitigate the risks associated with glass syringes. West’s
Envision components (plungers and stoppers) are inspected by an automated vision
inspection system to ensure they meet enhanced quality specifications for
visible and subvisible particulate and contamination. The West Ready Pack system
is a one-source solution ideal for pharmaceutical research and development and
clinical work. Each system comes with West stoppers, Flip-Off seals and vials
conveniently packaged in small volumes. Because the components are delivered
ready-to-use, component preparation is eliminated from the customer’s
processing, saving them time and money.
Our
tamper-evident Flip-Off seals consist of a metal overseal and a molded plastic
cap that is removed in order to permit needle access to the drug-vial
contents. These are sold in a wide range of sizes and colors to meet
customers’ needs for product identification and differentiation. The seals can
be provided using proprietary printing and embossing technology for multiple
layers of protection, such as, point-of-use instructions, item-level information
such as vial contents, drug dosage and strength, and cautionary statements that
can serve as counterfeiting deterrence.
Elastomeric
components are offered in a variety of standard and customer-specific
configurations and formulations and are available with advanced barrier films
and coatings to enhance their performance. Our proprietary FluroTec®
coating is a film that is applied using a patented molding process to reduce the
risk of product loss by contamination, enhance seal integrity and protect the
shelf life of packaged drugs. We also apply a Teflon® coating to the surface of
stoppers and plungers to improve compatibility between the closure and the drug.
B2-Coating is a coating applied to the surface of stoppers and plungers using a
patented process that eliminates the need for conventional silicone application.
It helps manufacturers reduce product rejections due to trace levels of silicone
molecules found in non-coated packaged drug compounds. FluroTec and B2-Coating
technologies are licensed from Daikyo Seiko, Ltd.
Our
VeriSure components are an example of how laboratory services can be combined
with a product offering. These components allow pharmaceutical and
biopharmaceutical companies to navigate the complex task of extractables
identification and the related analysis for qualifying a drug product’s
container/closure system more efficiently. The customer will receive a
Certificate of Analysis with each shipment of components. Also, with a known
extractables profile, customers can begin the design of leachables studies on a
quicker basis, a process which our analytical laboratory services can
support.
In
addition, our post-manufacturing processes, Westar RS and Westar RU, are
documented and fully validated procedures for washing and siliconizing stoppers
and syringe components to remove biological materials and endotoxins. Westar RS
prepares components for introduction into the customer’s sterilizer and Westar
RU provides sterilized components. The Westar processes increase the overall
efficiency of injectable drug production by outsourcing component processing,
thereby eliminating steps otherwise required in each of our customers’
manufacturing processes, and assure compliance with the latest regulatory
requirements for component preparation.
Medimop
Medical Projects, Ltd. is a leader in the world market for transfer, mixing and
administration systems for injectable pharmaceuticals. Many injectable drug
products are produced as freeze-dried powders in order to preserve product
efficacy during shipment and storage. These products must be reconstituted,
typically by diluting the powder with sterile water or other diluent at the
point of use. All Medimop products marketed in the United States
(U.S.) are cleared by the U.S. Food and Drug Administration (FDA). In addition,
many Medimop products are protected by patents.
As an
adjunct to our Pharmaceutical Systems products, we offer contract analytical
laboratory services for testing and evaluating primary drug packaging components
and their compatibility with the contained drug formulation. West Analytical
Services provides us and our customers with in-depth knowledge and analysis of
the interaction and compatibility of drug products with elastomer, glass and
plastic packaging components. Our analytical laboratories also provide
specialized testing for complete drug delivery systems.
Our Tech
Group segment is a global custom injection molder with over 40 years of
experience, offering contract manufacturing solutions for the healthcare and
consumer industries. This segment has manufacturing operations in the U.S.,
Puerto Rico and Ireland. See Item 2, Properties, for additional
information on our manufacturing sites.
Our Tech
Group segment consists of two operating segments — Americas and Europe — which
are aggregated for reporting purposes because they have similar economic
characteristics, as well as similar products, manufacturing processes, customer
objectives, distribution procedures and regulatory requirements. The Tech
Group is committed to producing the highest quality injection molded components
and devices, which include unique components for surgical, ophthalmic,
diagnostic and drug delivery systems, such as contact lens storage kits, pill
dispensers and disposable blood collection systems, as well as various personal
care and consumer products. The Tech Group’s record of success includes
manufacturing and assembly of systems and devices used for nasal, oral,
pulmonary and injectable delivery of drugs used to treat diseases affecting the
lives of people around the world.
The Tech
Group segment also has expertise in product design and development, including
in-house mold design and construction, an engineering center for developmental
and prototype tooling, process design and validation and high-speed automated
assemblies. Technologies include multi-component molding, in-mold
labeling, ultrasonic welding and clean room molding and device
assembly.
Our
newest offering will be the ConfiDose® auto-injector system, a solution for
enhancing patient compliance and safety. The needle remains shielded at all
times and retracts automatically after the injection. The system eliminates
preparation steps and automates the injection of drugs, providing patients with
a sterile, single-use disposable system that can be readily used at home. The
Tech Group segment will be responsible for manufacturing and assembling
commercial quantities of this system.
In an
effort to align our plant capacity and workforce with the revised business
outlook, in December 2007, our Board of Directors approved a restructuring plan
for the Tech Group segment designed to reduce operating costs and increase the
manufacturing efficiency of the segment. We incurred a total of $6.4 million in
restructuring and related charges, as part of this plan, through December 31,
2008. We expect to incur additional amounts of no more than $1.0 million during
the first half of 2009 as these restructuring activities are concluded. For
additional details, see Note 3 to our consolidated financial statements, Restructuring and Other
Items.
We have
significant operations outside the U.S. They are managed through the
same business segments as our U.S. operations – Pharmaceutical Systems and Tech
Group. Sales outside of the U.S. account for approximately 54% of
consolidated net sales. For a geographic breakdown of sales, see the table in
Note 5 to the consolidated financial statements, Segment
Information.
Although
the general business processes are similar to the domestic business,
international operations are exposed to additional risks. These risks
include currency fluctuations relative to the U.S. dollar, multiple tax
jurisdictions and particularly in Latin and South America and Israel, political
and social issues that could destabilize local markets and affect the demand for
our products.
Depending
on the direction of change relative to the U.S. dollar, foreign currency values
can increase or decrease the reported dollar value of our net assets and results
of operations. See the discussion under the caption Summary of Significant Accounting
Policies - Foreign Currency Translation in Note 1 to our consolidated
financial statements. Also see Note 3, Restructuring and Other
Items. We attempt to minimize some of our exposure to these
exchange rate fluctuations through the use of forward exchange contracts and
foreign currency denominated debt. This activity is generally
discussed in Note 1 under the caption Summary of Significant Accounting
Policies – Financial Instruments and in Note 15, Financial Instruments, to our
consolidated financial statements in this 2008 Form 10-K.
We use
three basic raw materials in the manufacture of our products: elastomers,
aluminum and plastic. Elastomers include both natural and synthetic materials.
We have access to adequate supplies of these raw materials to meet our
production needs through agreements with suppliers.
We employ
a supply-chain management strategy in our reporting segments, which involves
purchasing from integrated suppliers that control their own sources of supply.
This strategy has reduced the number of our raw material suppliers. Due to
regulatory control over our production processes, and the cost and time involved
in qualifying suppliers, we rely on single-source suppliers for many critical
raw materials. This strategy increases the risk that our supply lines may be
interrupted in the event of a supplier production problem. These risks are
managed, where possible, by selecting suppliers with multiple manufacturing
sites, rigid quality control systems, surplus inventory levels and other methods
of maintaining supply in case of an interruption in production, and therefore
we foresee no significant availability problems in the near
future.
Patents
and other proprietary rights are important to our business. We own or
license numerous patents and have patent applications pending in the U.S. and in
other countries that relate to various aspects of our products. In
addition, key value-added and proprietary products and processes are licensed
from our Japanese affiliate, Daikyo Seiko Ltd. Our patents and other
proprietary rights have been useful in establishing our market share and in the
growth of our business, and are expected to continue to be of value in the
future, as we continue to develop proprietary products. Although
important in the aggregate, we do not consider our business to be materially
dependent on any individual patent.
We also
rely heavily on trade secrets, manufacturing know-how and continuing
technological innovations, as well as in-licensing opportunities, to maintain
and further develop our competitive position, particularly in the area of
formulation development and tooling design.
Although
our Pharmaceutical Systems business is not inherently seasonal, sales and
operating profit in the second half of the year are typically lower than the
first half primarily due to scheduled plant shutdowns in conjunction with our
customers’ production schedules and the year-end impact of holidays on
production. During the shutdown periods, maintenance procedures are performed
and vacations are taken by production employees.
We are
required to carry significant amounts of inventory to meet customer
requirements. Other agreements also require us to purchase inventory
in bulk orders, which increases inventory levels but decreases the risk of
supply interruption. Levels of inventory are also influenced by the
seasonal patterns addressed above. For a more detailed discussion of
working capital, please see the discussion in Management’s Discussion and Analysis
of Financial Condition and Results of Operations under the caption Financial Condition, Liquidity and
Capital Resources.
Our
Pharmaceutical Systems customers include practically every major branded
pharmaceutical, generic and biopharmaceutical company in the world.
Pharmaceutical Systems components and other products are sold to major
pharmaceutical, biotechnology and hospital supply/medical device companies,
which incorporate them into their products for distribution to the ultimate
end-user.
With
extensive experience in contract manufacturing, our Tech Group segment sells to
many of the world’s largest medical device and pharmaceutical companies and to
large customers in the personal care and food-and-beverage industries. Tech
Group components generally are incorporated into our customers’ manufacturing
lines for further processing or assembly. West’s products and services are
distributed primarily through our own sales force and distribution network, with
limited use of contract sales agents and regional distributors.
Our ten
largest customers accounted for approximately 35.8% of our consolidated net
sales in 2008, but not one of these customers individually accounted for more
than 10% of net sales.
At
December 31, 2008, our order backlog was $230.1 million, most of which is
expected to be filled during fiscal year 2009. The order backlog was $253.0
million at the end of 2007. The decrease is primarily due to foreign currency
translation. In addition, our success in reducing lead times and improving
on-time delivery performance has resulted in customer orders closer to the
delivery date which decreases backlog. Order backlog includes firm
orders placed by customers for manufacture over a period of time according to
their schedule or upon confirmation by the customer. We also have contractual
arrangements with a number of our customers, and products covered by these
contracts are included in our backlog only as orders are received.
We
compete with several companies across our Pharmaceutical Systems product
lines. However, we believe that we supply a major portion of the U.S.
market for pharmaceutical elastomer and metal packaging components and have a
significant share of the European market for these components. Because of the
special nature of our pharmaceutical packaging components and our long-standing
participation in the market, competition is based primarily on product design
and performance, although total cost is becoming increasingly important as
pharmaceutical companies continue with aggressive cost-control programs across
their entire operations.
We
differentiate ourselves from our competition as a "full-service, value-added"
global supplier that can provide pre-sale formula and engineering development,
analytical services, regulatory expertise and post-manufacturing technologies,
as well as after-sale technical support. Customers also appreciate the global
scope of West’s manufacturing capability and our ability to produce many
products at multiple sites.
Our Tech
Group business is in very competitive markets for both healthcare and consumer
products. The competition varies from smaller regional companies to
large global molders that command significant market shares. There are extreme
cost pressures and many of our customers look off-shore to reduce
cost. We differentiate ourselves by leveraging our global capability
and by employing new technologies such as high-speed automated assembly,
insert-molding, multi-shot molding and expertise with multiple-piece closure
systems. Because of the more demanding regulatory requirements in the medical
device component area, there are a smaller number of other competitors, mostly
large-scale companies. We compete for this market on the basis of our
reputation for quality and reliability in engineering and project management,
diverse contract manufacturing capabilities and knowledge of and experience in
complying with FDA requirements.
We
maintain our own research-scale production facilities and laboratories for
developing new products and offer contract engineering design and development
services to assist customers with new product development.
Our
quality control, regulatory and laboratory testing capabilities are used to
ensure compliance with applicable manufacturing and regulatory standards for
primary and secondary pharmaceutical packaging components. The
engineering departments are responsible for product and tooling design and
testing, and for the design and construction of processing equipment. The
primary responsibility of our innovation group is seeking new opportunities in
injectable packaging and delivery systems, most of which will be manufactured by
our Tech Group segment and marketed by our Pharmaceutical Systems segment.
Research and development spending will continue to increase as we pursue
innovative strategic platforms in prefillable syringe, injectable container,
advanced injection and safety and administration systems.
We spent
$17.2 million in 2008, $14.0 million in 2007 and $8.7 million in 2006 on
development and engineering for the Pharmaceutical Systems
segment. The Tech Group segment incurred research and development
expenses of $1.5 million, $2.1 million, and $2.4 million in the years 2008, 2007
and 2006, respectively.
Commercial
development of our new products and services for medical and pharmaceutical
applications commonly requires several years. New products that we
develop may require separate approval as medical devices, and products that are
intended to be used in packaging and delivery of pharmaceutical products will be
subject to both customer acceptance of our products and regulatory approval of
the customer’s products following our development period.
As of
December 31, 2008, we employed 6,300 people in our operations throughout the
world.
The
statements in this section describe major risks to our business and should be
considered carefully. In addition, these statements constitute our cautionary
statements under the Private Securities Litigation Reform Act of
1995.
Our
disclosure and analysis in this 2008 Form 10-K contains some forward-looking
statements that are based on management’s beliefs and assumptions. We also
provide forward-looking statements in other materials we release to the public
as well as oral forward-looking statements. Such statements give our current
expectations or forecasts of future events. They do not relate strictly to
historical or current facts. We have attempted, wherever possible, to identify
forward-looking statements by using words such as “estimate,” “expect,”
“intend,” “believe,” “plan,” “anticipate” and other words and terms of similar
meaning. In particular, these include statements relating to future actions,
business plans and prospects, new products, future performance or results of
current or anticipated products, sales efforts, expenses, interest rates,
foreign-exchange rates, economic effects, the outcome of contingencies, such as
legal proceedings, and financial results.
Many
of the factors that will determine our future results are beyond our ability to
control or predict. Achievement of future results is 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. We also refer you to
further disclosures we make on related subjects in our Quarterly Reports on Form
10-Q and 8-K reports to the Securities and Exchange Commission.
Our
operating results may be adversely affected by unfavorable economic and market
conditions.
As widely
reported, financial markets in the U.S., Europe and Asia have been experiencing
extreme disruption in recent months, including volatility in security prices,
severely diminished liquidity and credit availability, rating downgrades of
certain investments and declining valuations of others. Our operating results in
one or more geographic regions may also be affected by uncertain or changing
economic conditions within that region. If global economic and market
conditions, or economic conditions in the U.S., Europe or Asia remain uncertain
or weaken further, we may experience material adverse impacts on our business,
financial condition and results of operations.
We
are exposed to credit risk on accounts receivable and certain prepayments made
in the normal course of business. This risk is heightened during periods when
economic conditions worsen.
A
substantial majority of our outstanding trade receivables are not covered by
collateral or credit insurance. In addition, we have made prepayments associated
with insurance premiums and other advances in the normal course of business.
While we have procedures to periodically monitor and limit exposure to credit
risk on trade receivables and other current assets, there can be no assurance
such procedures will effectively limit our credit risk and avoid losses, which
could have a material adverse effect on our financial condition and operating
results.
We
are exposed to fluctuations in the market values and the risk of loss of our
investment portfolio.
Our
available cash and cash equivalents are held in bank deposits, money market
funds and other short-term investments. We have funds in our operating accounts
that are with third-party financial institutions. These balances in the U.S. may
exceed the FDIC (Federal Deposit Insurance Corporation) insurance limits. While
we monitor the cash balances in our operating accounts, and adjust the balances
as appropriate, we could lose this cash or be unable to withdraw it in a timely
manner if the underlying financial institutions fail. Although we have not
recognized any material losses on our cash, cash equivalents and other cash
investments, future declines in their market values or other unexpected losses
could have a material adverse effect on our financial condition and operating
results.
Our
sales and profitability depend to a large extent on the sale of drug products
delivered by injection. If the products developed by our customers in the future
use another delivery system, our sales and profitability could
suffer.
Our
business depends to a substantial extent on customers' continued sales and
development of products that are delivered by injection. If our
customers fail to continue to sell, develop and deploy new injectable products
or we are unable to develop new products that assist in the delivery of drugs by
alternative methods, our sales and profitability may suffer.
If
we are unable to provide comparative value advantages, timely fulfillment of
customer orders, or resist pricing pressure, we will have to reduce our prices,
which may negatively impact our profit margins.
We
compete with several companies across our major product lines. Because of the
special nature of these products, competition is based primarily on product
design and performance, although total cost is becoming increasingly important
as pharmaceutical companies continue with aggressive cost control programs
across their entire operations. Competitors often compete on the basis of price.
We differentiate ourselves from our competition as a "full-service value-added"
supplier that is able to provide pre-sale compatibility studies and other
services and sophisticated post-sale technical support on a global basis.
However, we face continued pricing pressure from our customers and competitors.
If we are unable to resist or to offset the effects of continued pricing
pressure through our value-added services, improved operating efficiencies and
reduced expenditures, or if we have to reduce our prices, our sales and
profitability may suffer.
If we are
unable to expand our production capacity at our European and Asian facilities,
there may be a delay in fulfilling or we may be unable to fulfill customer
orders and this could potentially reduce our sales and our profitability may
suffer.
We
have significant indebtedness and debt service payments which could negatively
impact our liquidity.
We owe
substantial debts and have to commit significant cash flow to debt service
requirements. The level of our indebtedness, among other things,
could:
|
·
|
make
it difficult for us to obtain any necessary future financing for working
capital, capital expenditures, debt service requirements or other
purposes;
|
|
·
|
limit
our flexibility in planning for, or reacting to changes in, our business;
and
|
|
·
|
make
our financial results and share value more vulnerable in the event of a
downturn in our business.
|
Our
ability to meet our debt service obligations and to reduce our total
indebtedness depends on the results of our product development efforts, our
future operating performance, our ability to generate cash flow from the sale of
our products and on general economic, financial, competitive, legislative,
regulatory and other factors affecting our operations. Many of these factors are
beyond our control and our future operating performance could be adversely
affected by some or all of these factors.
If we
incur new indebtedness in the future, the related risks that we now face could
intensify. Whether we are able to make required payments on our outstanding
indebtedness and satisfy any other future debt obligations will depend on our
future operating performance and our ability to obtain additional debt or equity
financing.
We
are subject to regulation by governments around the world, and if these
regulations are not complied with, existing and future operations may be
curtailed, and we could be subject to liability.
The
design, development, manufacturing, marketing and labeling of certain of our
products and our customers’ products that incorporate our products are subject
to regulation by governmental authorities in the United States, Europe and other
countries, including the FDA and the European Medicines Agency. The regulatory
process can result in required modification or withdrawal of existing products
and a substantial delay in the introduction of new products. Also, it is
possible that regulatory approval may not be obtained for a new product. In
addition, our analytical laboratories perform certain contract services for drug
manufacturers and are subject to the FDA's current good manufacturing practices
regulations. We must also register as a contract laboratory with the FDA and are
subject to periodic inspections by the FDA. The Drug Enforcement Administration
has licensed our contract analytical laboratories to handle and store controlled
substances. Failure to comply with applicable regulatory requirements can result
in actions that could adversely affect our business and financial
performance.
Our
business may be adversely affected by changes in the regulation of drug products
and devices.
An effect
of the governmental regulation of our customers’ drug products, devices, and
manufacturing processes is that compliance with regulations makes it costly and
time consuming for customers to substitute or replace components and devices
produced by one supplier with those from another. In general terms,
regulation of our customers’ products that incorporate our components and
devices has increased over time. However, if the applicable
regulations were to be modified in a way that reduced the cost and time involved
for customers to substitute one supplier’s components or devices for those made
by another, it is likely that the competitive pressure on us would increase and
adversely affect our sales and profitability.
Our
business may be adversely affected by risks typically encountered in
international operations.
We
conduct business in most of the major pharmaceutical markets in the world. Sales
outside the U.S. account for approximately 54% of consolidated net sales.
Virtually all of these sales and related operating costs are denominated in the
currency of the local country and translated into U.S. dollars, which can result
in significant increases or decreases in the amount of those sales or earnings.
The main currencies, to which we are exposed, besides the U.S. dollar, are the
Euro, British Pound and Japanese Yen. The exchange rates between these
currencies and the U.S. dollar in recent years have fluctuated significantly and
may continue to do so in the future. In addition to translation
risks, we incur currency transaction gains or losses when we or one of our
subsidiaries enters into a purchase or sales transaction in a currency other
than that entity’s local currency.
International
operations are also exposed to the following risks: transportation delays and
interruptions; political and economic instability and disruptions; imposition of
duties and tariffs; import and export controls; the risks of divergent business
expectations or cultural incompatibility inherent in establishing and
maintaining operations in foreign countries; difficulties in staffing and
managing multi-national operations; labor strikes and/or disputes; and
potentially adverse tax consequences. Limitations on our ability to enforce
legal rights and remedies with third parties or our joint venture partners
outside of the U.S. could also create exposure. In addition, we may not be able
to operate in compliance with foreign laws and regulations, or comply with
applicable customs, currency exchange control regulations, transfer pricing
regulations or any other laws or regulations to which we may be subject, in the
event that these laws or regulations change.
Any of
these events could have an adverse effect on our international operations in the
future by reducing the demand for our products, decreasing the prices at which
we can sell our products or otherwise have an adverse effect on our financial
condition, results of operations and cash flows.
Raw
material and energy prices have a significant impact on our profitability. If
raw material and/or energy prices increase, and we cannot pass those price
increases on to our customers, our profitability and financial condition may
suffer.
We use
three basic raw materials in the manufacture of our products: elastomers (which
include synthetic and natural material), aluminum and plastic. In addition, our
manufacturing facilities consume a wide variety of energy products to fuel, heat
and cool our operations. Supply and demand factors, which are beyond our
control, generally affect the price of our raw materials and utility costs. If
we are unable to pass along increased raw material prices and energy costs to
our customers, our profitability, and thus our financial condition, may be
adversely affected. The prices of many of these raw materials and utilities are
cyclical and volatile. For example, the prices of certain commodities,
particularly petroleum-based raw materials, have in the recent past exhibited
rapid changes, increasing the cost of synthetic elastomers and
plastic. While we generally attempt to pass along increased costs to
our customers in the form of sales price increases, historically there has been
a time delay between raw material and/or energy price increases and our ability
to increase the prices of our products. In some circumstances, we may not be
able to increase the prices of our products due to competitive pressure and
other factors.
Disruptions
in the supply of key raw materials and difficulties in the supplier
qualification process, could adversely impact our operations.
We employ
a supply chain management strategy in our reporting segments, which involves
purchasing from integrated suppliers that control their own sources of supply.
This strategy has reduced the number of raw material suppliers used by us. This
increases the risk that our supply lines may be interrupted in the event of a
supplier production problem or financial difficulties. If one of our suppliers
is unable to supply materials needed for our products or our strategies for
managing these risks is unsuccessful, we may be unable to complete the process
of qualifying new replacement materials for some programs in time to meet future
production needs. Prolonged disruptions in the supply of any of our key raw
materials, difficulty completing qualification of new sources of supply, or in
implementing the use of replacement materials or new sources of supply could
have a material adverse effect on our operating results, financial condition or
cash flows.
Our
operations must comply with environmental statutes and regulations, and any
failure to comply could result in extensive costs which would harm our
business.
The
manufacture of some of our products involves the use, transportation, storage
and disposal of hazardous or toxic materials and is subject to various
environmental protection and occupational health and safety laws and regulations
in the countries in which we operate. This has exposed us in the
past, and could expose us in the future, to risks of accidental contamination
and events of non-compliance with environmental laws. Any such
occurrences could result in regulatory enforcement or personal injury and
property damage claims or could lead to a shutdown of some of our operations,
which could have an adverse effect on our business and results of
operations. We currently incur costs to comply with environmental
laws and regulations and these costs may become more significant.
A
loss of key personnel or highly skilled employees could disrupt our
operations.
Our
executive officers are critical to the management and direction of our
businesses. Our future success depends, in large part, on our ability to retain
these officers and other capable management personnel. With the exception of our
chief executive officer, in general, we do not enter into employment agreements
with our executive officers. We have entered into severance agreements with our
officers that allow those officers to terminate their employment under
particular circumstances, such as a change of control affecting our company.
Although we believe that we will be able to attract and retain talented
personnel and replace key personnel should the need arise, our inability to do
so could disrupt the operations of the unit affected or our overall operations.
In addition, because of the complex nature of many of our products and programs,
we are generally dependent on an educated and highly skilled engineering staff
and workforce. Our operations could be disrupted by a shortage of available
skilled employees.
Difficulties
experienced in the design or implementation of our new enterprise resource
planning system may adversely affect our business and results of
operations.
We are in
the process of implementing SAP, an enterprise resource planning (“ERP”) system,
over a multi-year period for our North American operations. Phase one of this
implementation was completed in April 2008 and included the replacement of our
financial reporting, cash disbursement and order-to-cash systems. A second major
phase of the SAP project, focusing on procurement and plant operations,
commenced in October 2008 and will continue through 2009.
Our ERP
system is critical to our ability to accurately and efficiently maintain our
books and records, record transactions, provide critical information to our
management and prepare our financial statements. We have invested, and will
continue to invest, significant capital and human resources in the design and
implementation of this system. Any disruptions or delays encountered during the
implementation could adversely affect our ability to process and ship orders,
provide services and customer support, bill and track customers, fulfill
contractual obligations and file quarterly or annual reports with the SEC in a
timely manner. The resulting disruptions to our business could adversely affect
our results of operations, financial condition and cash flows. Even if we do not
encounter these difficulties, the design and implementation of the new ERP
system may be more costly than we had originally anticipated.
As of the
filing of this annual report on Form 10-K, there were no unresolved comments
from the Staff of the Securities and Exchange Commission.
Our
corporate headquarters are located in a leased building at 101 Gordon Drive,
Lionville, Pennsylvania. This building also houses our North American
sales and marketing, administrative support and customer service
functions.
The
following table summarizes production facilities by segment and geographic
region. All facilities shown are owned except where otherwise
noted.
|
Pharmaceutical
Systems
|
|
|
Manufacturing:
|
Contract
Analytical Laboratory:
|
|
North
American Operations
|
North
American Operations
|
|
United
States
Clearwater,
FL (1)
Jersey
Shore, PA
Kearney,
NE
Kinston,
NC
Lititz,
PA
St.
Petersburg, FL
South
American Operations
Brazil
Sao
Paulo
European
Operations
Denmark
Horsens
England
St.
Austell
France
Le
Nouvion
Germany
Eschweiler (1)
Stolberg
Serbia
Kovin
Asia
Pacific Operations
Singapore
Jurong
|
United
States
Lionville,
PA (2)
Maumee,
OH
Mold-and-Die
Tool Shops:
North
American Operations
United
States
Upper
Darby, PA (2)
European
Operations
England
Bodmin (2)
Tech
Group
Manufacturing:
North
American Operations
United
States
Frankfort,
IN (2)
Grand
Rapids, MI
Montgomery,
PA (2)
Phoenix,
AZ (2)
Scottsdale,
AZ (2)
(3)
Tempe,
AZ (2)
Williamsport,
PA
Puerto
Rico
Cayey
European
Operations
Ireland
Dublin (2)
(3)
|
(1) This
manufacturing facility is also used for research and development
activities.
(2) This
facility is leased in whole or in part.
(3) This
manufacturing facility is also used for mold and die production.
Our
Pharmaceutical Systems segment also owns facilities located in Ra’anana, Israel
and Athens, Texas used for research and development activities. Sales offices in
various locations are leased under short-term arrangements.
Our
manufacturing production facilities are well maintained and are operating
generally on two or three shifts. We are currently expanding
production capacity at the following facilities: Eschweiler, Germany; Jurong,
Singapore; Kovin, Serbia; Le Nouvion, France; Clearwater, Florida and Kinston,
North Carolina.
As part
of our effort to increase manufacturing capacity, we continue to move forward in
establishing a manufacturing presence in the Peoples Republic of China. In the
first quarter of 2008, we commenced ground-breaking activities for our new
plastic production facility. We anticipate completion of construction and
customer product validation activities for this plant by the end of 2009 and we
continue to evaluate opportunities for constructing rubber manufacturing
facilities in China and India.
On
February 2, 2006, we settled a lawsuit filed in connection with the January 2003
explosion and related fire at our Kinston, N.C. plant. Our monetary contribution
was limited to the balance of our deductibles under applicable insurance
policies, all of which has been previously recorded in our financial statements.
We continue to be a party, but not a defendant, in a lawsuit brought by injured
workers against a number of third-party suppliers to the Kinston plant. We
believe exposure in that case is limited to amounts we and our workers’
compensation insurance carrier would otherwise be entitled to receive by way of
subrogation from the plaintiffs.
None.
The
executive officers of the Company are set forth in the following
table:
|
Name
|
Age
|
Position
|
|
Joseph
E. Abbott
|
56
|
Vice
President and Corporate Controller
|
|
Michael
A. Anderson
|
53
|
Vice
President and Treasurer
|
|
Fabio
de Sampaio Dorio Filho
|
45
|
President,
Europe and Asia Pacific, Pharmaceutical Systems
|
|
Steven
A. Ellers
|
58
|
President
|
|
William
J. Federici
|
49
|
Vice
President and Chief Financial Officer
|
|
John
R. Gailey III
|
54
|
Vice
President, General Counsel and Secretary
|
|
Robert
S. Hargesheimer
|
51
|
President,
Tech Group
|
|
Richard
D. Luzzi
|
57
|
Vice
President, Human Resources
|
|
Donald
A. McMillan
|
50
|
President,
Americas, Pharmaceutical Systems
|
|
Donald
E. Morel, Jr., Ph.D.
|
51
|
Chairman
of the Board and Chief Executive Officer
|
|
Matthew
T. Mullarkey
|
46
|
Chief
Operating Officer
|
Joseph
E. Abbott
Mr.
Abbott joined us in 1997 as Director of Internal Audit. He was
promoted to Corporate Controller in 2000 and elected a Vice President in
2002.
Michael
A. Anderson
Mr.
Anderson joined us in 1992 as Director of Taxes. He held several positions in
finance and business development before being elected Vice President and
Treasurer in June 2001.
Fabio
de Sampaio Dorio Filho
Mr. Dorio
joined us in October 2008 as President, Designee, Europe and Asia Pacific, and
assumed full regional operating duties and responsibilities on January 1, 2009
as President, Europe and Asia Pacific, Pharmaceutical Systems. Prior to his
service at West, he served as Vice President and General Manager, Medical
Surgical Europe, Middle East and Africa, of Becton Dickinson UK Limited, a
manufacturer and distributor of a broad range of
medical supplies, devices, laboratory equipment and diagnostic
products.
Steven
A. Ellers
Mr.
Ellers joined us in 1983. After holding numerous positions in
operations, he was elected Executive Vice President in June 2000 and as
President, Pharmaceutical Systems Division in June 2002. He was
elected President in June 2005 and has been our Chief Operating Officer from
June 2005 through July 2008.
William
J. Federici
Mr.
Federici joined us in August 2003. He was previously National
Industry Director for Pharmaceuticals of KPMG LLP (accounting firm) from June
2002 until August 2003, and prior thereto, an audit partner with Arthur
Andersen, LLP.
John
R. Gailey III
Mr.
Gailey joined us in 1991 as Corporate Counsel and Secretary. He was
elected General Counsel in 1994 and Vice President in 1995.
Robert
S. Hargesheimer
Mr.
Hargesheimer joined us in 1992. He served in numerous operational and
general managerial roles before being elected President of the Device Group in
April 2003. He was elected President of the Tech Group in October
2005.
Richard
D. Luzzi
Mr. Luzzi
joined us in June 2002 as Vice President, Human Resources. Prior to
his service at West, he served as Vice President Human Resources of GS
Industries, a steel manufacturer.
Donald
A. McMillan
Mr.
McMillan joined us in May 1984. He served in numerous operations,
sales and sales-management and marketing positions prior to being elected
President, North America, Pharmaceutical Systems Division in October 2005. He
was elected President, Americas, Pharmaceutical Systems Division in July
2008.
Donald
E. Morel, Jr., Ph.D.
Dr. Morel
joined us in 1992. He has been Chairman of the Board of the Company since March
2003 and our Chief Executive Officer since April 2002. He was our
President from April 2002 to June 2006 and Chief Operating Officer from May 2001
to April 2002. He was Division President, Drug Delivery Systems from October
1999 to May 2001, and prior thereto, Group President.
Matthew
T. Mullarkey
Mr.
Mullarkey joined us in July 2008 as Chief Operating Officer. Prior to his
service at West, he served as Chief Executive Officer and President of Impact
Ceramics, LLC, an engineered materials business, and prior to that was Vice
President, Global Operations, of Invacare Corporation, a manufacturer and
distributor of home medical equipment and disposables.
PART II
Our
common stock is listed on the New York Stock Exchange. The high and low prices
for the stock for each calendar quarter in 2008 and 2007 and full year 2008 and
2007 were as follows:
|
First
Quarter
|
Second
Quarter
|
Third
Quarter
|
Fourth
Quarter
|
Year
|
||||||||||||||||||||||||||||||||||||
|
High
|
Low
|
High
|
Low
|
High
|
Low
|
High
|
Low
|
High
|
Low
|
|||||||||||||||||||||||||||||||
|
2008
|
45.47 | 36.96 | 48.92 | 43.04 | 52.00 | 42.26 | 49.60 | 29.52 | 52.00 | 29.52 | ||||||||||||||||||||||||||||||
|
2007
|
52.25 | 41.31 | 54.83 | 45.23 | 51.98 | 37.87 | 43.85 | 35.20 | 54.83 | 35.20 | ||||||||||||||||||||||||||||||
As of
January 31, 2009, we had 1,255 shareholders of record. There were also 2,765
holders of shares registered in nominee names. Our common stock paid
a quarterly dividend of $0.13 per share in each of the first three quarters of
2007; $0.14 per share in the fourth quarter of 2007 and each of the first three
quarters of 2008; and $0.15 per share in the fourth quarter of
2008.
Issuer
Purchases of Equity Securities
The
following table shows information with respect to purchases of our common stock
made during the three months ended December 31, 2008 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)
|
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
|
||||||||||||
|
October
1 – 31, 2008
|
343 | $ | 42.13 | - | - | |||||||||||
|
November
1 – 30, 2008
|
758 | 37.49 | - | - | ||||||||||||
|
December
1 – 31, 2008
|
6,292 | 37.72 | - | - | ||||||||||||
|
Total
|
7,393 | $ | 37.90 | - | - | |||||||||||
(1) Includes
1,279 shares purchased on behalf of employees enrolled in the Non-Qualified
Deferred Compensation Plan for Designated Officers (Amended and Restated
Effective January 1, 2004). Under the plan, Company match
contributions are delivered to the plan’s investment administrator, who upon
receipt, purchases shares in the open market and credits the shares to
individual plan accounts.
(2) Includes
6,114 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”).
Performance
Graph
The
following graph compares the cumulative total return to holders of the Company’s
common stock with the cumulative total return of the Standard & Poor’s
SmallCap 600 Index and the Standard & Poor’s 600 Health Care Equipment &
Supplies for the five years ended December 31, 2008. Cumulative total return to
shareholders is measured by dividing total dividends (assuming dividend
reinvestment) plus the per-share price change for the period by the share price
at the beginning of the period. The Company’s cumulative shareholder return is
based on an investment of $100 on December 31, 2003 and is compared to the
cumulative total return of the SmallCap 600 Index and the 600 Health Care
Equipment & Supplies over the period with a like amount
invested.
ITEM 6. SELECTED FINANCIAL
DATA.
FIVE-YEAR
SUMMARY
West
Pharmaceutical Services, Inc. and Subsidiaries
|
(in
millions, except per share data)
|
2008
|
2007
|
2006
|
2005
|
2004
|
|||||||||||||||
|
SUMMARY
OF OPERATIONS
|
||||||||||||||||||||
|
Net
sales
|
$ | 1,051.1 | $ | 1,020.1 | $ | 913.3 | $ | 699.7 | $ | 541.6 | ||||||||||
|
Operating
profit
|
124.1 | 94.9 | 101.0 | 73.4 | 49.4 | |||||||||||||||
|
Income
from continuing operations
|
86.0 | 71.2 | 61.5 | 46.0 | 34.3 | |||||||||||||||
|
(Loss)
income from discontinued operations
|
- | (0.5 | ) | 5.6 | 0.4 | (14.1 | ) | |||||||||||||
|
Net
income
|
$ | 86.0 | $ | 70.7 | $ | 67.1 | $ | 46.4 | $ | 20.2 | ||||||||||
|
Income
per share from continuing operations:
|
||||||||||||||||||||
|
Basic
(1)
|
$ | 2.65 | $ | 2.18 | $ | 1.91 | $ | 1.48 | $ | 1.14 | ||||||||||
|
Assuming
dilution (2)
|
2.50 | 2.06 | 1.83 | 1.41 | 1.11 | |||||||||||||||
|
(Loss)
income per share from discontinued operations:
|
||||||||||||||||||||
|
Basic
(1)
|
- | (.02 | ) | .18 | .01 | (.47 | ) | |||||||||||||
|
Assuming
dilution (2)
|
- | (.01 | ) | .17 | .01 | (.46 | ) | |||||||||||||
|
Average
common shares outstanding
|
32.4 | 32.7 | 32.2 | 31.1 | 30.0 | |||||||||||||||
|
Average
shares assuming dilution
|
36.1 | 36.2 | 33.6 | 32.5 | 30.8 | |||||||||||||||
|
Dividends
declared per common share
|
$ | 0.58 | $ | 0.54 | $ | 0.50 | $ | 0.46 | $ | 0.43 | ||||||||||
|
YEAR-END
FINANCIAL POSITION
|
||||||||||||||||||||
|
Cash
and cash equivalents
|
$ | 87.2 | $ | 108.4 | $ | 47.1 | $ | 48.8 | $ | 68.8 | ||||||||||
|
Working
capital
|
207.1 | 229.4 | 124.8 | 118.8 | 115.7 | |||||||||||||||
|
Total
assets
|
1,168.7 | 1,185.6 | 918.2 | 833.5 | 657.8 | |||||||||||||||
|
Total
invested capital:
|
||||||||||||||||||||
|
Total
debt
|
386.0 | 395.1 | 236.3 | 281.0 | 160.8 | |||||||||||||||
|
Minority
interests
|
- | 5.6 | 4.8 | 4.1 | - | |||||||||||||||
|
Shareholders’
equity
|
487.1 | 485.3 | 414.5 | 339.9 | 306.8 | |||||||||||||||
|
Total
invested capital
|
$ | 873.1 | $ | 886.0 | $ | 655.6 | $ | 625.0 | $ | 467.6 | ||||||||||
|
PERFORMANCE
MEASUREMENTS (3)
|
||||||||||||||||||||
|
Gross
margin (a)
|
28.8 | % | 28.6 | % | 29.0 | % | 28.1 | % | 29.5 | % | ||||||||||
|
Operating
profitability (b)
|
11.8 | % | 9.3 | % | 11.1 | % | 10.5 | % | 9.1 | % | ||||||||||
|
Effective
tax rate
|
21.6 | % | 19.9 | % | 29.1 | % | 29.0 | % | 27.2 | % | ||||||||||
|
Return
on invested capital (c)
|
11.1 | % | 9.9 | % | 11.2 | % | 9.5 | % | 7.9 | % | ||||||||||
|
Net
debt-to-total invested capital (d)
|
38.0 | % | 36.9 | % | 31.1 | % | 40.3 | % | 23.1 | % | ||||||||||
|
Research
and development expenses
|
$ | 18.7 | $ | 16.1 | $ | 11.1 | $ | 7.9 | $ | 6.8 | ||||||||||
|
Operating
cash flow
|
135.0 | 129.2 | 139.4 | 85.6 | 81.0 | |||||||||||||||
|
Stock
price range
|
$ | 52.00-29.52 | $ | 54.83-35.20 | $ | 52.77-24.83 | $ | 29.99-18.58 | $ | 25.49-16.38 | ||||||||||
(1) Based
on average common shares outstanding.
(2) Based
on average shares, assuming dilution.
(3)
Performance measurements represent indicators commonly used in the financial
community. They are not measures of financial performance under U.S. generally
accepted accounting principles (GAAP).
(a) Net
sales minus cost of goods and services sold, including applicable depreciation
and amortization, divided by net sales.
(b)
Operating profit divided by net sales.
(c)
Operating profit multiplied by one minus the effective tax rate divided by
average total invested capital.
(d) Net
debt (total debt less cash and cash equivalents) divided by total invested
capital, net of cash and cash equivalents.
Factors
affecting the comparability of the information reflected in the selected
financial data:
|
§
|
Income
from continuing operations in 2008 includes a net pre-tax gain on contract
settlement proceeds of $4.2 million, restructuring and related charges of
$3.0 million and discrete income tax benefits of $3.5 million.
Collectively, these items totaled to a $1.2 million pre-tax benefit ($4.3
million after tax).
|
|
§
|
On
December 29, 2008, we purchased the remaining 10% minority ownership in
our Medimop subsidiary for $8.5 million, which resulted in a $5.4 million
reduction to the minority interest
balance.
|
|
§
|
2007
income from continuing operations includes the impact of the restructuring
charges at our Tech Group segment, an impairment loss on our Nektar
contract intangible asset for the Exubera device and our provisions for
Brazilian tax issues, totaling a $26.4 million pre-tax charge ($19.4
million, after tax). Our 2007 results also include the recognition of
discrete tax benefits totaling $8.2
million.
|
|
§
|
During
2007, we issued $161.5 million of convertible junior subordinated
debentures carrying a 4% coupon rate and due on March 15, 2047, resulting
in net cash proceeds of $156.3 million, after payment of underwriting and
other costs of $5.2 million. These debentures are convertible
into our common stock at any time at an initial conversion price of $56.07
per share. We have and may use the proceeds for general corporate
purposes, which include capital expenditures, working capital, possible
acquisitions of other businesses, technologies or products, repaying debt,
and repurchasing our common stock.
|
|
§
|
2006
income from continuing operations includes a pre-tax loss on
extinguishment of debt of $5.9 million ($4.1 million, net of tax) and a
gain on a tax refund of $0.6
million.
|
|
§
|
On
December 31, 2006, we adopted Statement of Financial Accounting Standard
No. 158, “Employers' Accounting for Defined Benefit Pension and Other
Postretirement Plans—an amendment of FASB Statements No. 87, 88, 106, and
132(R)” (“SFAS 158”), which requires the recognition of the overfunded or
underfunded status of a defined benefit postretirement plan as measured by
the difference between the fair value of plan assets and the benefit
obligation. The adoption of SFAS 158 resulted in a reduction of
shareholder’s equity of $19.7 million ($32.0 million pre-tax, less a $12.3
million deferred tax benefit) at December 31,
2006.
|
|
§
|
During
2005, we acquired the businesses of Monarch, TGI and Medimop. Our
financial statements include the results of acquired businesses for
periods subsequent to their acquisition
date.
|
|
§
|
2005
income from continuing operations includes incremental income tax expense
of $1.5 million associated with the repatriation of foreign sourced income
under the American Jobs Creation Act of 2004 and a reduction in an
estimate for restructuring costs which increased income from continuing
operations by $1.3 million.
|
|
§
|
On January
1, 2005 we adopted Statement of Financial Accounting Standard 123
“Share-Based Payment – Revised 2004” (“SFAS 123(R)”) which required the
recognition of compensation expense connected with our stock option and
employee stock purchase plan programs that did not require expense
recognition in 2004 and prior periods under previous accounting standards.
The application of SFAS 123 to the results of 2004 and 2003 would have
resulted in additional net of tax costs of $1.2 million and $1.5 million,
respectively.
|
|
§
|
2004
income from continuing operations includes incremental manufacturing costs
of $7.9 million (net of tax) in connection with the interim production
processes that were put in place following the Kinston accident, along
with Kinston related legal expenses of $1.2 million (net of tax);
restructuring charges related to the closure of a U.K. manufacturing plant
of $1.0 million; an affiliate real estate gain of $0.6 million; and $2.1
million of favorable tax adjustments resulting from a change in French tax
law extending the life of net operating loss carryforwards, the use of
U.S. foreign tax credits that were previously expected to expire
unutilized and the favorable resolution of several prior year tax
issues.
|
ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Management’s
discussion and analysis should be read in conjunction with the consolidated
financial statements and accompanying notes contained elsewhere in this Report
on Form 10-K.
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 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.
West has
approximately 6,300 employees and generates more than half of its revenues
outside of the U.S., including 44% in Europe and 10% collectively in South
America, Asia, Australia and Israel. We have a global manufacturing footprint
with production and distribution facilities in North America, Europe, Latin
America, Asia and Australia. West has also formed global partnerships to share
technologies and market products with companies in Japan and
Mexico.
2008
Financial Performance Highlights
|
·
|
Net
sales were $1,051 million, an increase of $31 million compared to the
prior year, principally resulting from improved pricing and favorable
foreign currency exchange rates. Net sales grew despite regulatory and
insurance reimbursement related constraints and the
discontinuation of certain products, which resulted in lost sales of
$63 million for both segments
combined.
|
|
·
|
Gross
profit was $11 million higher than the prior year, and gross margin
improved slightly to 28.8% due to improved productivity, partially offset
by higher raw materials and energy costs, and the impact of the lost sales
items which totaled $25 million.
|
|
·
|
Operating
profit was $29 million higher than the prior year, including certain items
that are not indicative of ongoing operations. Included in 2008 operating
profit was a net gain of $1 million resulting from contract settlement
proceeds less costs incurred and the Tech Group restructuring and related
costs. Operating profit in 2007 included charges totaling $26 million
which were not allocated to our reporting segments. These items are
addressed in more detail within the Results of Operations section
below.
|
|
·
|
Net
income from continuing operations for 2008 was $86 million, or $2.50 per
diluted share compared to $71 million, or $2.06 per diluted share, in the
prior year.
|
|
·
|
Our
financial position remains very strong, with net cash flow from operations
totaling $135 million in 2008, increasing 4.5% compared to the prior
year.
|
|
·
|
At
December 31, 2008 our total debt was $386 million compared with $395
million in the prior year, and our net debt-to-total invested capital was
38.0%.
|
Recent
Trends and Developments
Pharmaceutical
Systems
The
majority of our sales growth in recent years has been generated by the
performance of Pharmaceutical Systems. Growth in 2008 was adversely affected by
isolated regulatory and insurance reimbursement changes that decreased the
demand for certain biotechnology customers’ products, our decision to cease
production of a low-margin disposable medical product component, and customer
inventory management initiatives in response to the recent global economic
turmoil. Despite these issues, we were successful in replacing the lost sales
and growing business through increased demand in certain global markets,
resulting in sales of $792 million, an increase of 7% over the prior year.
Pharmaceutical packaging components that include our post-manufacturing
value-added processes, including Westar® washing and FluroTec® and B-2 coatings,
continued to lead the demand for our products. Gross profit increased during the
year to $266 million, although the gross margin percentage decreased slightly
due to the lost sales issues described above and the increased raw material and
energy costs experienced during the year.
Tech
Group
Our Tech
Group segment had a challenging year in 2008 as it was forced to respond to the
loss of revenues associated with the Exubera inhalation device. In October 2007,
Pfizer Inc. discontinued marketing Exubera, a pulmonary insulin product
developed by our customer Nektar Therapeutics (“Nektar”) and licensed to Pfizer.
In addition to the lost business associated with Exubera, Tech Group experienced
decreased demand for an over-the-counter healthcare packaging product following
a significant 2007 market launch. At the same time, we experienced stronger than
expected demand for several other healthcare devices and consumer products. Tech
Group 2008 net sales were $271 million, 6% lower than the prior year, including
the impact of lost Exubera device sales of $33 million. Despite the drop in net
sales, operating profit increased $6 million, or over 50%, as a result of gains
in production efficiency and savings from restructuring and cost-cutting
activities.
In
December 2007, we announced a restructuring plan for our Tech Group which
proactively addressed anticipated changes in customers’ marketing plans for
certain products and aligned our plant capacity and workforce with the business
outlook and longer-term strategy of focusing the business on proprietary
products. As part of this plan, we implemented a series of restructuring
initiatives during 2008 to reduce production and engineering operations, reduce
administrative costs, and consolidate our tool shops into one location. During
2008 and 2007, we incurred restructuring costs totaling $3 million in each year,
and we will incur additional costs, not expected to exceed $1 million, during
the first half of 2009 as we complete this program. In the aggregate, expected
costs of this program consist of $4 million in severance and benefits for
approximately 326 employees, $2 million in asset-related charges, and $1 million
for contract termination fees and other expenses. Estimated cost savings were
approximately $5 million for 2008 and are expected to be approximately $6 to $7
million annually thereafter.
Business
Outlook
Management’s
operating priorities in 2009 will include a focus on generating organic growth,
improving operating margins and continuing to invest in the future. Now that the
Tech Group restructuring is substantially completed and we have implemented
other cost-reduction efforts throughout the organization, we expect to realize
incremental operating cost savings in 2009. We will continue to aggressively
manage the costs under our control, and take advantage of targeted restructuring
activities where necessary. Our business outlook remains positive for both
segments; however, we expect that sales growth will be hampered by the current
global economic conditions.
Pharmaceutical
Systems
Our 2009
revenue projections reflect the strengthening of the U.S. dollar versus the Euro
and certain other international currencies during the fourth quarter of 2008.
After taking into account an anticipated unfavorable foreign exchange impact of
8%, we expect full year revenues for Pharmaceutical Systems to be marginally
lower than those achieved in 2008. Growth, excluding the impact of currency, is
expected to continue to be driven by demand for our enhanced product offerings
including Westar® and advanced coated products, prefillable syringe components,
and safety and administration systems. We believe that the long-term drivers
remain strong and market dynamics support future growth with an aging
population, advances in treatments for chronic illnesses, many of which involve
biologic drugs, and a shift in the point-of-care from hospitals to specialty
clinics and homes.
Given our
positive growth outlook, we plan to continue funding the capital projects
necessary to meet customer demand and to provide for improved results in our
longer-term strategic plan. During 2008, we made significant strides in
increasing our plant capacity in Germany, Serbia, France, Singapore and the U.S.
We are also in the process of constructing a new facility in China, which will
manufacture plastic components for disposable medical products, and we continue
to evaluate opportunities for constructing rubber manufacturing facilities in
China and India. We expect our 2009 capital spending to be approximately equal
to the 2008 level, which will allow us to complete the ongoing expansion
projects, fund innovation for promising new products, replace certain
manufacturing and accounting information systems, and maintain our existing
facilities.
Tech
Group
We expect
full year 2009 revenues to be lower than those in 2008 by 5% to 7%, after taking
into account an expected unfavorable foreign exchange impact of approximately 3%
and lower plastic resin costs which are passed through to the majority of our
contract customers in the form of selling price adjustments. Excluding the
negative impact of these two items, growth is expected to come from demand in
healthcare devices and several new consumer product launches planned by our
customers. Although Tech Group is projecting lower sales for 2009, we believe
that the combination of a leaner cost structure, made possible by restructuring
initiatives, and increased operating efficiency at our production facilities
will provide for a consistent level of operating profit. On a longer-term basis,
we believe that the Tech Group segment will benefit from our innovation
initiatives in developing proprietary products incorporating new technologies
and advanced injection systems. With the expansion of our Grand Rapids, Michigan
plant now completed, the majority of our capital spending within the Tech Group
will be focused on the support of new products and routine facility and
equipment upgrades.
Research
& Development (“R&D”) and Innovation
We expect
2009 R&D spending to surpass 2008 levels by approximately 25% as we continue
to invest in advanced injectable packaging and delivery systems and safety and
reconstitution products. We anticipate that a majority of our developmental
medical devices will be manufactured by our Tech Group and marketed by
Pharmaceutical Systems. We believe that our commitment to develop and apply
proprietary technologies that improve the quality, safety and effectiveness of
therapeutic and diagnostic healthcare delivery systems will result in continued
long-term growth.
Global
Economic Conditions
Current
economic conditions in the U.S. and abroad are expected to have a moderate
impact on the sales growth of our products, as customers search for ways to cut
costs including rationalization of their inventories. In addition, we anticipate
that changes in foreign currency exchange rates will have an unfavorable impact
on consolidated sales of approximately 7% in 2009. After considering the
unfavorable foreign currency impact, we expect consolidated sales to be between
$1.01 billion and $1.03 billion, a reduction of 2% to 4% compared with those of
2008. Excluding the effects of changes in foreign currency translation, 2009
sales are expected to grow between 3.0% and 5.0%. Our financial projections for
2009 were prepared using a forecast of foreign currency exchange
rates for our various non-U.S. subsidiaries. As such, continued volatility
in key exchange rates during 2009 may result in significant differences in
U.S. dollar results, affecting the accuracy of our sales and earnings
projections.
In
addition to the impact on sales, the slowing economy and adverse conditions in
equity and debt markets contributed to a 25% decline in the value of our U.S.
pension assets, compared to a long-term rate of return assumption of 8%. As a
result of this and other changes in pension assumptions, we are expecting an
incremental pension expense of approximately $10 million in 2009. Continued
actual returns below our expected rate may also affect the amount and timing of
future contributions to the plan. We have no ERISA (Employee Retirement Income
Security Act) funding requirements in 2009; however, we have made a voluntary
pension contribution of $10 million in January 2009.
The
global reach of our business and the nature of our product portfolio that serves
primarily non-discretionary pharmaceutical and medical applications are expected
to limit the impact of temporary economic downturns. However, the world
financial markets have recently experienced extreme disruption and global
economic conditions have worsened. Accordingly, no assurance can be given that
the ongoing economic downturn will not have a material adverse effect on the
demand for our products.
RESULTS
OF OPERATIONS
Management’s
discussion and analysis of our operating results for the three years ended
December 31, 2008, and our financial position as of December 31, 2008, should be
read in conjunction with the accompanying consolidated financial statements and
footnotes appearing elsewhere in this report. Our financial statements include
the results of acquired businesses for periods subsequent to their acquisition
date. For the purpose of aiding the comparison of our year-to-year results,
reference is made in management's discussion and analysis to results excluding
the effects of changes in foreign exchange rates. Those re-measured period
results are not in conformity with U.S. generally accepted accounting principles
(“GAAP”) and are considered “non-GAAP financial measures.” The non-GAAP
financial measures are intended to explain or aid in the use of, not as a
substitute for, the related GAAP financial measures.
Percentages
in the following tables and throughout the Results of Operations section may
reflect rounding adjustments.
NET
SALES
The
following table summarizes net sales by reportable segment:
|
Year
Ended December 31,
|
%
Change
|
|||||||||||||||||||
|
($
in millions)
|
2008
|
2007
|
2006
|
08/07 | 07/06 | |||||||||||||||
|
Pharmaceutical
Systems
|
$ | 792.1 | $ | 741.8 | $ | 644.1 | 6.8 | % | 15.2 | % | ||||||||||
|
Tech
Group
|
270.5 | 289.2 | 279.2 | (6.5 | )% | 3.6 | % | |||||||||||||
|
Intersegment
sales
|
(11.5 | ) | (10.9 | ) | (10.0 | ) | - | - | ||||||||||||
|
Total
net sales
|
$ | 1,051.1 | $ | 1,020.1 | $ | 913.3 | 3.0 | % | 11.7 | % | ||||||||||
2008 compared to
2007
Consolidated
2008 net sales increased by $31.0 million, or 3.0%, over those achieved in the
prior year. Favorable foreign currency translation accounted for the vast
majority of the consolidated sales growth. Sales price increases contributed 2.3
percentage points to sales growth, as price increases including raw material
surcharges were implemented in response to rising raw material and energy costs
during the year. Substantially offsetting the impact of sales price increases
were lower volumes and unfavorable mix resulting from regulatory and insurance
reimbursement related constraints and the discontinuation of certain products,
which resulted in lost sales within both reporting segments.
Pharmaceutical Systems - This
segment contributed $50.3 million to the full year sales increase, including
$26.2 million resulting from favorable foreign currency translation. Excluding
currency translation effects, sales were $24.1 million, or 3.3%, above prior
year levels. Price increases contributed approximately 2.3 percentage points of
the sales increase over the prior year. Favorable sales volume and mix
contributed 1.0 percentage point, despite the loss of the discrete
pharmaceutical packaging and disposable medical components sales described
below.
Sales of
pharmaceutical packaging components were $45.0 million higher than the prior
year due to increased sales of stoppers and seals used in a variety of customer
products as well as favorable currency translation. These increases more than
compensated for a $17.4 million decline in sales of a prefillable syringe
component caused by regulatory and insurance reimbursement changes affecting the
demand for certain customer products designed to treat anemia in cancer and
other patients. Sales of disposable medical components were $13.2 million lower,
as sales of other syringe components replaced a portion of the $13.6 million of
2007 sales of a low-margin blood collection system component that we ceased
producing. Sales of safety and administration systems, and laboratory and other
services were $18.5 million higher than the prior year, most of which was due to
increased demand for our drug reconstitution products and higher tooling
activity.
Tech Group - Full year sales
were $18.7 million below 2007 levels, including $3.6 million of favorable
foreign currency translation. Excluding the impact of foreign currency
translation, sales were $22.3 million, or 7.7%, below prior year levels. Price
increases contributed 2.4 percentage points to sales, while increased consumer
products sales volume offset a small portion of the lost Exubera device
business.
Sales of
healthcare devices decreased $17.1 million compared with the prior year. After
considering the lost Exubera sales of $33 million, we experienced increased
sales volume of other healthcare devices including medical filter products,
self-injection pens, and intra-nasal drug delivery systems, partially offset by
a drop-off in sales of packaging for a customer’s over-the-counter weight loss
product following a June 2007 market launch. Sales of consumer products, tooling
and other services decreased by $1.6 million due to lower demand for certain
personal care products and tooling services, partially offset by increased
volume of juice and dairy carton closures. Intersegment sales of $11.1 million
and $10.5 million in 2008 and 2007, respectively, were eliminated in
consolidation.
2007 compared to
2006
Consolidated
2007 net sales increased by $106.8 million, or 11.7%, over those achieved in
2006. Foreign currency translation accounted for $41.4 million, or 4.5
percentage points, of the sales growth. Excluding foreign currency translation,
2007 net sales increased $65.4 million or 7.2% over the prior year.
Pharmaceutical Systems - The
Pharmaceutical Systems segment contributed $97.7 million of the full year sales
increase, including $37.8 million resulting from favorable foreign currency
translation. Excluding foreign currency translation, Pharmaceutical Systems
sales were $59.9 million, or 9.3%, above prior year levels. Price increases
contributed approximately 2.5 percentage points of the sales increase over the
prior year, with the remainder of the increase attributed to positive sales
volume. Sales growth was strong in all geographical regions of the segment,
driven by increased demand for serum stoppers used in vial packaging for
vaccines, injectable treatments for chronic diseases, and increased demand for
pre-filled injection system components.
Tech Group - Full year sales
in 2007 were $10.0 million above prior year levels, $3.6 million of which
resulted from foreign currency translation. Excluding foreign currency
translation, Tech Group segment sales were $6.4 million, or 2.3%, above prior
year levels. Price increases contributed approximately 0.8 percentage points of
the sales increase in the Tech Group, with the remainder of the increase
attributed to positive sales volume. The Tech Group sales increase included a
$3.6 million increase in sales to Nektar of the Exubera device resulting from
the timing of the product launch by Pfizer in the U.S. earlier in the
year. Tech Group sales also benefited from strong sales of weight
loss product packaging, an intra-nasal delivery system and surgery devices, but
these were largely offset by a $13.2 million decline in revenue from tooling and
design projects. Intersegment sales of $10.5 million and $9.8 million in 2007
and 2006, respectively, were eliminated in consolidation.
GROSS
PROFIT
The
following table summarizes our gross profit and related gross margins by
reportable segment:
|
Year
Ended December 31,
|
%
Change
|
|||||||||||||||||||
|
($
in millions)
|
2008
|
2007
|
2006
|
08/07 | 07/06 | |||||||||||||||
|
Pharmaceutical
Systems:
|
||||||||||||||||||||
|
Gross
Profit
|
$ | 265.7 | $ | 256.3 | $ | 224.5 | 3.7 | % | 14.2 | % | ||||||||||
|
Gross
Margin
|
33.5 | % | 34.5 | % | 34.8 | % | ||||||||||||||
|
Tech
Group:
|
||||||||||||||||||||
|
Gross
Profit
|
$ | 36.9 | $ | 35.5 | $ | 40.3 | 3.9 | % | (11.9 | )% | ||||||||||
|
Gross
Margin
|
13.7 | % | 12.3 | % | 14.4 | % | ||||||||||||||
|
Consolidated
gross profit
|
$ | 302.6 | $ | 291.8 | $ | 264.8 | 3.7 | % | 10.2 | % | ||||||||||
|
Consolidated
gross margin
|
28.8 | % | 28.6 | % | 29.0 | % | ||||||||||||||
2008 compared to
2007
Consolidated
gross profit increased by $10.8 million over 2007, including the favorable
effect from foreign currency translation of $9.4 million. The gross margin
percentage improved slightly despite the unfavorable impact on sales volume and
mix caused by the loss of discrete business described in the Net Sales section
above.
Pharmaceutical Systems - Gross
margin for Pharmaceutical Systems declined by one percentage point versus the
prior year. Approximately half of this decrease was due to unfavorable volume
and mix resulting from the regulatory and insurance reimbursement issues
affecting the demand for prefillable syringe components used in certain anemia
products. The remaining decline resulted from increased depreciation expense and
production cost increases, as the positive benefit of sales price increases
offset a majority of the increased costs of raw materials, wage increases and
utilities used to operate our production facilities.
Tech Group - Gross margins
improved by 1.4 percentage points in comparison to prior year results. The
improved gross margin performance was largely due to a significant reduction in
plant overhead and improved production efficiency which contributed 3.4
percentage points. These gains resulted from our restructuring efforts and
efficiencies from the completion of start-up activities at our expanded
production facility in Michigan. Partially offsetting these increases by 1.5
percentage points was the impact of lower sales and unfavorable mix. Despite
sales increases in consumer products and other healthcare devices, the loss of
business associated with the Exubera device and the prior year weight loss
product launch resulted in a decline in sales and negative impact on gross
margin. During the year, the majority of raw material, energy and wage cost
increases were passed on to customers in the form of increased selling
prices.
2007 compared to
2006
Consolidated
2007 gross profit increased by $27.0 million over 2006, consisting of a $31.8
million increase in Pharmaceutical Systems segment gross profit and a $4.8
million decrease in Tech Group segment gross profit. Foreign currency
translation accounted for $12.9 million of the increase in consolidated gross
profit.
Pharmaceutical Systems - The
gross margin within the Pharmaceutical Systems segment declined moderately
compared to that achieved in 2006, primarily due to higher plant overhead costs
including the addition of engineering and other staff in support of our
expansion projects, increased manufacturing, supply and maintenance costs
resulting from strained capacity levels at several facilities in Europe, and
higher depreciation charges on machinery and equipment upgrades.
Tech Group - The Tech Group
segment gross profit and gross margin declines primarily reflect $6.0 million of
incremental costs associated with the relocation and start-up of our new
facility in Michigan.
RESEARCH
AND DEVELOPMENT (“R&D”) COSTS
The
following table summarizes R&D costs by reportable segment:
|
($
in millions)
|
2008
|
2007
|
2006
|
|||||||||
|
Pharmaceutical
Systems
|
$ | 17.2 | $ | 14.0 | $ | 8.7 | ||||||
|
Tech
Group
|
1.5 | 2.1 | 2.4 | |||||||||
|
Total
R&D costs
|
$ | 18.7 | $ | 16.1 | $ | 11.1 | ||||||
R&D
costs during 2008 were $2.6 million higher than those incurred in 2007, mostly
due to three ongoing development projects in the Pharmaceutical Systems segment.
The first is our development of prefillable syringe systems that will use Daikyo
Seiko, Ltd. (“Daikyo”) Crystal Zenith® resin, a unique, transparent polymer that
can be used to produce vials and syringe barrels. Daikyo, our 25% owned
affiliate in Japan, is also our partner in a long-standing marketing and
technology transfer agreement that enables West and Daikyo to develop products
that help customers mitigate drug product development risks and enhance drug
performance and patient safety. The other major projects include an advanced
injection system using auto-injector technology, which was acquired during 2007,
and a passive needle safety device.
The
increase in 2007 over 2006 R&D costs reflected the formation of our
innovation group which is responsible for seeking new opportunities in
injectable packaging and delivery systems. Our development projects are a
response to the market opportunities created by the convergence of primary drug
packaging and delivery systems and include initiatives in traditional injection
systems, components for pen system applications and auto injectors with
cartridges.
SELLING,
GENERAL and ADMINISTRATIVE (“SG&A”) COSTS
The
following table summarizes SG&A costs by reportable segment including
corporate and unallocated costs:
|
($
in millions)
|
2008
|
2007
|
2006
|
|||||||||
|
Pharmaceutical
Systems SG&A costs
|
$ | 110.1 | $ | 98.3 | $ | 81.8 | ||||||
|
Pharmaceutical
Systems SG&A as a % of segment net sales
|
13.9 | % | 13.3 | % | 12.7 | % | ||||||
|
Tech
Group SG&A costs
|
$ | 17.9 | $ | 22.0 | $ | 19.3 | ||||||
|
Tech
Group SG&A as a % of segment net sales
|
6.6 | % | 7.6 | % | 6.9 | % | ||||||
|
Corporate
costs:
|
||||||||||||
|
General
corporate costs
|
$ | 18.9 | $ | 21.0 | $ | 23.8 | ||||||
|
Stock-based
compensation expense
|
6.4 | 5.1 | 14.5 | |||||||||
|
U.S.
pension plan expense
|
6.0 | 6.1 | 8.4 | |||||||||
|
Total
SG&A costs
|
$ | 159.3 | $ | 152.5 | $ | 147.8 | ||||||
|
Total
SG&A as a % of total net sales
|
15.2 | % | 14.9 | % | 16.2 | % | ||||||
2008 compared to
2007
Consolidated
SG&A expenses were $6.8 million above those recorded in 2007, but only
increased marginally as a percentage of total net sales. The impact of foreign
currency translation accounted for $3.3 million of the increase.
In
Pharmaceutical Systems, 2008 SG&A expenses increased by $11.8 million over
the prior year. Foreign currency translation accounted for $3.1 million of the
increase. Compensation costs were $4.4 million above those incurred in 2007 due
to the impact of annual pay increases, and increased staffing of information
technology support functions. Costs associated with our new information systems
implementation, including depreciation expense and third-party consulting fees,
accounted for $2.3 million of the increase. Various other increases including
utilities and other corporate facilities costs contributed to the remaining
increase in SG&A expense.
SG&A
costs in the Tech Group were $4.1 million lower than the amount incurred in
2007. A net reduction in headcount associated with our restructuring efforts
accounted for half of the reduction in SG&A. The remainder of the reduction
was attributable to lower amortization expense, resulting from the 2007 Nektar
contract intangible write-off, and a reduction in various third-party consulting
services.
General
corporate SG&A costs were $2.1 million favorable to 2007 levels. These costs
include executive and director compensation and other corporate administrative
and facilities expenses. The majority of the decrease is the result of lower
facilities and administrative-related costs. Also included in corporate SG&A
are any above or below-target performance adjustments for our worldwide cash
bonus program. Annual cash bonus payments are made based on the achievement of
sales, operating profit, earnings per share and cash flow targets, and certain
qualitative performance milestones. 2008 cash-based bonus costs were slightly
lower than those earned in the prior year based upon management’s achievement of
targets.
Stock-based
compensation costs for 2008 increased by $1.3 million due to the impact of
changes in our stock price on the fair value of our stock-price indexed deferred
compensation liabilities. During 2008, our stock price decreased $2.82 per
share, closing at $37.77 per share on December 31, 2008, while during 2007 our
stock price decreased $10.64 per share, closing at $40.59 per share on December
31, 2007. The costs of non-U.S. pension and other retirement benefits programs
are reflected in the operating profit of the respective segment for all periods
presented.
2007 compared to
2006
Consolidated
SG&A expenses in 2007 were $4.7 million above those recorded in 2006. In the
Pharmaceutical Systems segment, 2007 SG&A expenses increased by $16.5
million compared to the prior year. Approximately $6.1 million of the
increase was compensation related, including increased staffing of sales,
strategic marketing and information systems functions, the impact of annual
salary increases and higher incentive compensation program costs. Foreign
currency translation accounted for $4.6 million of the 2007 to 2006 increase in
Pharmaceutical System segment SG&A costs. Professional service and
consulting costs related to the implementation of new information systems in the
U.S. and sales commission charges were $4.1 million higher in 2007 than in 2006.
The remaining $1.7 million increase in SG&A costs consisted mostly of higher
software maintenance, computer related supply costs, and depreciation
expense.
2007
SG&A costs in the Tech Group segment were $2.7 million above the prior year.
Higher staffing levels in quality control, human resource and other functions
together with annual salary increases accounted for $1.4 million of the growth.
Sales commissions were $0.6 million higher than in 2006. Foreign currency
translation, travel costs and bad debt expense contributed equally to the
remaining $0.7 million increase.
General
corporate SG&A costs were $2.8 million lower in 2007 than in 2006. Incentive
compensation costs in 2007 were $2.9 million lower than the prior year,
primarily due to the achievement of above target performance levels resulting in
above target bonus payouts in 2006, compared to 2007 incentive compensation
which was below target.
Stock-based
compensation costs for 2007 decreased by $9.4 million when compared to those
recorded in 2006, due primarily to a decrease in West stock-price indexed
compensation costs, partially offset by higher stock option and employee stock
purchase plan costs. Our stock price decreased $10.64 per share during 2007,
closing at $40.59 per share on December 31, 2007. In 2006, our stock price
increased $26.20 per share closing at $51.23 per share at December 31,
2006.
U.S.
pension plan expenses in 2007 were $2.3 million lower than those incurred during
2006. The decrease largely resulted from a 2006 amendment to our qualified
defined benefit pension plan in the U.S. Under the amended plan, benefits earned
under the plan’s pension formulas were frozen as of December 31, 2006 and
replaced with new cash-balance formulas resulting in a reduction of our
projected benefit obligation.
RESTRUCTURING,
IMPAIRMENT AND OTHER ITEMS
Other
income and expense items, consisting of gains, losses or impairments of segment
assets, foreign exchange transaction gains and losses, miscellaneous royalties
and sundry transactions are generally recorded within the respective segment.
Certain restructuring and other items considered outside the control of segment
management are not allocated to our reporting segments. The following table
summarizes our restructuring charges and other income and expense items for each
of the three years ended December 31:
|
($
in millions)
|
2008
|
2007
|
2006
|
|||||||||
|
Pharmaceutical
Systems
|
$ | 1.7 | $ | 2.1 | $ | 4.3 | ||||||
|
Tech
Group
|
(0.3 | ) | (0.2 | ) | 0.5 | |||||||
|
Corporate
|
0.3 | - | - | |||||||||
|
Unallocated
charges (credits):
|
||||||||||||
|
Impairment
charge, contract settlement and related gain, net
|
(4.2 | ) | 12.9 | - | ||||||||
|
Restructuring
and related charges
|
3.0 | 3.4 | - | |||||||||
|
Brazilian
excise tax and other charges
|
- | 10.1 | 0.1 | |||||||||
|
Total
unallocated charges (credits)
|
(1.2 | ) | 26.4 | 0.1 | ||||||||
|
Total
restructuring, impairment and other charges
|
$ | 0.5 | $ | 28.3 | $ | 4.9 | ||||||
The
year-over-year reduction in other expense for Pharmaceutical Systems is
attributable to net foreign exchange gains on intercompany and third-party
transactions recognized during 2008. Other expense in 2006 included a $2.5
million impairment charge for productive assets and royalties stemming from a
discontinued product. After taking this charge into consideration, the amounts
recognized in 2007 and 2006 are fairly consistent. For Tech Group, the reduction
in other expense in 2007 versus 2006 resulted from the recognition of income
from 2007 government grants in Europe. The majority of Tech Group other expense
in 2006 related to the sale or disposal of surplus equipment. The miscellaneous
charges recorded in 2008 corporate expense represent foreign exchange
transaction losses.
Impairment charge, contract
settlement and related gain, net - In the fourth quarter of 2007, we
recorded a $12.9 million impairment charge representing our net book value in
the Nektar contract intangible asset associated with the Exubera device. Under
an agreement reached with Nektar in February 2008, we received full
reimbursement for, among other things, severance related employee costs,
equipment, purchased raw materials and components, leases and other facility
costs associated with the shutdown of manufacturing operations related to this
device. During 2008, we received payments from Nektar which more than offset the
related costs incurred, resulting in a net gain of $4.2 million.
Restructuring and related
charges - We incurred $3.0 million and $3.4 million in 2008 and 2007,
respectively, of restructuring and related charges as part of our 2007 plan to
align the plant capacity and workforce of the Tech Group with the revised
business outlook for that segment. We expect to incur additional amounts, not to
exceed $1.0 million, during the first half of 2009 as these restructuring
activities are concluded.
Brazil excise tax and other
charges - During 2007, we increased our accruals for a series of social,
excise and other tax contingencies in Brazil by $10.1 million. These charges
followed a detailed review of several related tax cases pending in the Brazilian
courts, which indicated that it was probable that our positions taken on
previous tax returns, some of which date back to the late 1990’s, would not be
sustained. This matter is currently awaiting final disposition in the Brazilian
court system.
OPERATING
PROFIT
Operating
profit (loss) by reportable segment, corporate and other unallocated costs was
as follows:
|
($
in millions)
|
2008
|
2007
|
2006
|
|||||||||
|
Pharmaceutical
Systems
|
$ | 136.7 | $ | 141.9 | $ | 129.7 | ||||||
|
Tech
Group
|
17.8 | 11.6 | 18.1 | |||||||||
|
Corporate
and other unallocated costs:
|
||||||||||||
|
General
corporate costs
|
(19.2 | ) | (21.0 | ) | (23.9 | ) | ||||||
|
Stock-based
compensation costs
|
(6.4 | ) | (5.1 | ) | (14.5 | ) | ||||||
|
U.S.
pension expenses
|
(6.0 | ) | (6.1 | ) | (8.4 | ) | ||||||
|
Other
unallocated items
|
1.2 | (26.4 | ) | - | ||||||||
|
Consolidated
Operating Profit
|
$ | 124.1 | $ | 94.9 | $ | 101.0 | ||||||
2008 compared to
2007
Pharmaceutical
Systems operating profit was lower than prior year results by $5.2 million,
including a foreign currency translation benefit of $5.5 million. The impact of
higher sales and gross profit was more than offset by higher spending on
information systems and research and development initiatives as we replace
outdated management reporting systems and invest in innovative products for the
future.
Tech
Group operating profit was $6.2 million above that achieved in the prior year,
including a foreign currency benefit of $0.3 million, largely due to savings
resulting from the restructuring program initiated in late 2007, and production
efficiencies coming from higher throughput at our newly expanded Michigan
facility.
General
corporate costs declined as a result of lower compensation costs under our
annual performance-based bonus plan, and stock-based compensation costs
increased due to the impact of changes in our stock price on deferred
compensation obligations which are indexed to our stock price.
Other
unallocated income for 2008 totaled $1.2 million, consisting of a $3.0 million
restructuring charge and $4.2 million in proceeds less costs of transition
activities at our former Exubera device production facility. Other unallocated
expense for 2007 was $26.4 million including a $3.4 million restructuring
charge, a $12.9 million impairment loss on our customer contract intangible for
the Exubera device, and a $10.1 million provision for social, excise and other
tax liabilities in Brazil.
2007 compared to
2006
Our 2007
consolidated operating profit decreased by $6.1 million from that achieved in
2006. Operating profit for 2007 included $26.4 million in unallocated costs as
described above. The Pharmaceutical Systems segment’s 2007 results exceed those
of the prior year by $12.2 million, benefiting from sales growth, a favorable
product mix and the $7.6 million impact of foreign currency translation, which
combined to more than offset other cost increases.
Tech
Group segment operating profit was $6.5 million below that achieved in the prior
year, largely due to costs incurred during the relocation and validation of a
newly expanded production facility in Michigan.
General
corporate, stock-based compensation and U.S. pension plan costs were all lower
than those incurred in the prior year, with the significant decrease in
stock-price indexed deferred compensation programs attributed to the decline in
our stock price during 2007 compared to the strong increase in stock price
experienced in 2006.
LOSS
ON DEBT EXTINGUISHMENT
On
February 27, 2006 we prepaid $100.0 million in senior notes carrying a 6.81%
interest rate and a maturity date of April 8, 2009. Under the terms of the
original note purchase agreement dated April 8, 1999, the prepayment of the
notes entitled note holders to a “make whole” amount of $5.9 million in order to
compensate them for interest rate differentials between the 6.81% yield on the
notes and current market rates for the remaining term of the note. The
prepayment was financed by issuing €81.5 million (approximately $100.0 million)
of new senior unsecured notes at a weighted average interest rate of 4.34%,
before costs.
INTEREST
EXPENSE, NET
The
following table summarizes our net interest expense:
|
($
in millions)
|
2008
|
2007
|
2006
|
|||||||||
|
Interest
expense
|
$ | 18.6 | $ | 16.4 | $ | 13.4 | ||||||
|
Capitalized
interest
|
(2.6 | ) | (1.9 | ) | (0.7 | ) | ||||||
|
Interest
income
|
(1.4 | ) | (6.0 | ) | (2.1 | ) | ||||||
|
Interest
expense, net
|
$ | 14.6 | $ | 8.5 | $ | 10.6 | ||||||
2008 compared to
2007
Interest
expense for 2008, before capitalized interest and interest income, was $2.2
million above that recorded in the prior year. The timing of our issuance of
$161.5 million in convertible debt in March and April of 2007 accounted for $1.3
million of the year-to-date increase, as the notes were outstanding for the
entire 2008 year compared to a partial year in 2007. The impact of changes in
foreign exchange rates and bank commitment fees accounted for another $1.0
million of the increase. The decrease in interest income is also largely due to
the timing of the convertible debt issuance, as a portion of the proceeds was
invested in money market accounts and a strategic cash management fund in the
first half of 2007, and then subsequently used in our stock buy-back program and
in our capital expansion programs. In addition, interest income was reduced by
other-than-temporary losses on our strategic cash management fund investment
totaling $1.4 million in 2008. Capitalized interest increased as a result of our
Pharmaceutical Systems capital expansion projects in Europe.
2007 compared to
2006
Our 2007
net interest expense was $2.1 million lower than that incurred in 2006 due
largely to refinancing and investing activities and higher capitalized interest
on our capital expansion projects in Europe and in Michigan. During 2007, we
issued $161.5 million of convertible debt at a 4% fixed interest
rate. Interest expense on the convertible notes totaled $5.3 million
for the year ended December 31, 2007. The incremental interest expense from the
convertible notes was partially offset in the comparison of the 2007 and 2006
periods by favorable rate and volume variances totaling $1.3 million and $1.0
million, respectively, resulting from reduced borrowing levels on our revolving
credit facility and our 2006 refinancing activities. Our 2007 interest income is
$3.9 million favorable to that recorded in 2006. The additional interest income
was generated from the investment of a substantial portion of the proceeds from
our convertible debt offering.
INCOME
TAXES
Our
effective tax rate was 21.6% in 2008, 19.9% in 2007 and 29.1% in
2006. The following factors impacted the comparability of the tax
rate in 2008 versus 2007:
|
·
|
A
2008 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.
|
|
·
|
A
2008 United Kingdom tax law change effectively eliminated a portion of our
capital allowance carryforwards, resulting in a $1.2 million increase in
our tax provision.
|
|
·
|
In
2008, we recognized a $3.4 million net tax provision benefit resulting
from the expiration of open audit years in various tax jurisdictions, and
$0.3 million in other discrete benefits including reversals of U.S. state
valuation allowances and provision adjustments for returns filed in
2008.
|
|
·
|
In
2007, we recognized a $3.2 million provision benefit related to tax
credits originally generated and fully reserved in previous
periods.
|
|
·
|
In
2007, we recognized a $3.7 million provision benefit principally resulting
from the revision of tax planning strategies and the completion of related
documentation supporting prior year R&D credits, and a $1.3 million
tax benefit due to the closure of certain U.S. federal and state tax audit
years.
|
The
impact of these items reduced our effective tax rate by 3.2 percentage points in
2008 and 9.5 percentage points in 2007. After considering these items, the
remaining decrease in the 2008 effective tax rate was primarily due to a change
in mix of earnings to jurisdictions where we are subject to lower tax rates and
an increase in R&D tax benefits in the U.S. and Ireland.
In
addition to the 2007 factors listed above, the following items impacted the
comparability of the tax rate in 2007 versus 2006:
|
·
|
2006
included a net $0.7 million favorable provision adjustment resulting from
the closure of the 2002 U.S. federal tax audit
year.
|
|
·
|
In
2006, we recognized a $0.4 million provision benefit from a tax refund
associated with the disposition of our former plastic molding facility in
Puerto Rico.
|
The
combined impact of these two items reduced our 2006 effective tax rate by 1.4
percentage points. After considering these items, the remaining decrease in the
2007 effective tax rate was primarily due to a change in mix of foreign versus
U.S. earnings.
EQUITY
IN NET INCOME OF AFFILIATES
Equity in
net income from our 25% ownership interest in Daikyo in Japan and our 49%
ownership interest in three companies in Mexico was $0.8 million, $2.5 million,
and $1.9 million for the years 2008, 2007 and 2006, respectively. Our 2008
equity income was $1.7 million lower than the prior year due to reduced earnings
of Daikyo. The lower earnings were primarily the result of plant demolition and
disposal costs, as well as incremental depreciation expense associated with a
significant Crystal Zenith® capital expansion project and higher pension
costs.
The
increase in equity earnings in 2007 versus 2006 came from Daikyo, as their net
income was $0.6 million above that recorded in 2006. Daikyo’s sales were 5%
above prior year levels, their gross margins improved by three percentage
points, and there were no unusual charges in 2007 unlike 2006 when a $0.7
million charge was incurred related to a decision by Daikyo to demolish an
existing facility. These favorable items were partially offset by a loss on sale
of an investment security.
Purchases
from affiliates totaled $36.3 million in 2008, $31.3 million in 2007 and $24.1
million in 2006, the majority of which relate to a distributorship agreement
with Daikyo which allows us to purchase and re-sell Daikyo products. Sales to
affiliates were $1.7 million, $0.9 million and $0.8 million in 2008, 2007 and
2006, respectively.
INCOME
FROM CONTINUING OPERATIONS
Net
income from continuing operations in 2008 was $86.0 million, or $2.50 per
diluted share. Our 2008 results included a net gain on contract settlement
proceeds of $4.2 million, restructuring and related charges of $3.0 million, and
discrete income tax benefits of $3.5 million. Collectively, these items totaled
$1.2 million pre-tax ($4.3 million after tax, or $0.12 per diluted
share).
Net
income from continuing operations in 2007 was $71.2 million, or $2.06 per
diluted share. Our 2007 results include the impact of restructuring charges, an
impairment loss on our customer contract intangible asset with Nektar, and our
provisions for Brazilian tax issues which collectively totaled $26.4 million
pre-tax ($19.4 million after tax, or $0.54 per diluted share). Also included in
2007 results was the recognition of discrete tax benefits totaling $8.2 million,
or $0.23 per diluted share. After considering the impact of these items, income
from continuing operations in 2008 was slightly above the prior year
amount.
2006 net
income from continuing operations was $61.5 million, or $1.83 per diluted share.
Our 2006 results included a $5.9 million pre-tax loss on debt extinguishment
($4.1 million after tax, or $0.12 per diluted share) and the favorable
resolution of a claim for a tax refund associated with the disposition of our
former plastic molding facility in Puerto Rico. This resulted in the recognition
in income from continuing operations of $0.6 million, or $0.02 per diluted
share, consisting of a $0.4 million tax benefit and related interest income, net
of tax, of $0.2 million.
DISCONTINUED
OPERATIONS
Our 2007
results included a $0.5 million provision for claims anticipated from the 2005
divestiture of our former drug delivery business.
Our 2006
income from discontinued operations was $5.6 million, or $0.17 per diluted
share. As a result of a favorable outcome to our claim for tax benefits relating
to the 2001 sale of our former contract manufacturing and packaging business, we
received a tax refund resulting in the recognition of a $4.0 million tax
benefit. The settlement of this claim also resulted in pre-tax interest income
of $0.6 million ($0.4 million after taxes). We also recognized a $1.2 million
favorable adjustment to tax accruals associated with our former Drug Delivery
Systems segment primarily as a result of the closure of the 2002 U.S. federal
tax audit year.
FINANCIAL
CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Cash
Flows
The
following table and explanations provide cash flow data from continuing
operations for the years ended December 31,
|
($
in millions)
|
2008
|
2007
|
2006
|
|||||||||
|
Net
cash provided by operating activities
|
$ | 135.0 | $ | 129.2 | $ | 139.4 | ||||||
|
Net
cash used in investing activities
|
$ | (128.2 | ) | $ | (155.9 | ) | $ | (89.9 | ) | |||
|
Net
cash provided by (used in) financing activities
|
$ | (20.9 | ) | $ | 84.6 | $ | (60.2 | ) | ||||
Cash Flows from Operating Activities
- Our 2008 operating cash flows increased $5.8 million compared to the
prior year, including $16.7 million in proceeds received from our contract
settlement with Nektar, partially offset by related cash costs of $7.0 million.
Our favorable cash flow from operating results and the impact of this contract
settlement was reduced by the 2008 payment of income and other tax-related
liabilities in Brazil totaling $12.7 million. Operating cash flows in 2007 also
reflected unusually high payments related to tax issues in Brazil. During 2007,
we paid $11.7 million to escrow representing judicial deposits for the benefit
of the Brazil government to avoid further accretion of interest and penalties on
tax-related liabilities. After considering these items, the 2008 cash flows from
operating activities were slightly lower than 2007, as increased earnings in
2008 were offset by cash outflows for changes in working capital and other
assets and liabilities.
Cash flow
from operations in 2007 decreased $10.2 million versus 2006. Cash flow in 2007
was reduced by the $11.7 million payment to escrow for the benefit of the Brazil
government. Our operating cash flow in 2006 included the impact of a $5.9
million “make-whole” payment incurred as part of the extinguishment of our
former senior note agreement.
Cash Flows from Investing Activities
– In 2008, cash flows used in investing activities were $27.7 million
less, despite a $9.2 million increase in capital spending and the acquisition of
the remaining minority ownership (10%) of the Medimop companies for $8.5
million. The majority of the year-over-year decrease resulted from $16.8 million
in redemptions from the Columbia Strategic Cash Portfolio Fund, compared to
$22.7 million in net purchases in 2007. Our investment in this enhanced money
fund, which began an orderly liquidation in December 2007, is discussed in more
detail in Note 14, Fair Value
Measurements, to the consolidated financial statements. In 2007 compared
to 2006, the majority of the increase in cash flows used in investing activities
resulted from increased capital spending.
Capital
spending in 2008 totaled $138.6 million, a $9.2 million increase over the prior
year. Pharmaceutical Systems spending was $122.3 million, an increase of $14.2
million over the prior year. The increase is related to major projects to
increase our manufacturing capacity, including the expansion of our rubber
compounding capacity in Kinston, North Carolina, and ongoing plant expansion
projects in Europe and Asia. A portion of the total spending increase pertains
to information technology as we replaced our financial reporting, cash
disbursements and order-to-cash systems in North America. 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. Tech
Group capital spending was $9.2 million, a decrease of $11.7 million compared to
the prior year. Spending in 2007 was higher due to our Grand Rapids, Michigan
plant expansion project. The remainder of the change relates to a $6.8 million
decrease in the 2008 balance of accrued capital spending compared to the
December 31, 2007 balance.
Capital
spending in 2007 totaled $129.4 million, a $39.1 million increase over 2006.
Pharmaceutical Systems added $108.1 million in capital, compared to $62.3
million in 2006. The increase was largely due to significant projects to expand
the molding, production and tooling capacity at our existing facilities in
Europe and Singapore. Our 2007 capital spending also included $9.9 million in
connection with the construction of a new manufacturing facility in China, and
$7.7 million for information system projects in North America. Tech Group 2007
capital spending was $20.9 million, compared to $26.7 million in
2006. During 2007, we completed our plant relocation and expansion
project in Michigan. Other 2007 investing cash flows included an acquisition of
patents and other technology-related assets totaling $4.7 million.
Cash Flows from Financing Activities
– In 2008, the majority of the year-over-year decrease in cash flows from
financing activities resulted from the 2007 issuance of long-term debt,
partially offset by stock repurchase activity. Cash flows used in financing
activities for 2008 included $12.3 million in net repayment of borrowings under
our revolving debt facility and $3.1 million in new issuances of short-term
notes payable. We paid cash dividends totaling $18.6 million ($0.57 per share)
during the current year, compared to $17.5 million and $15.9 million in 2007 and
2006, respectively. We expect to continue our quarterly dividend program,
subject to annual Board of Directors’ approval.
Cash
flows provided by financing activities for 2007 included the issuance of $161.5
million of convertible junior subordinated debentures carrying a 4% coupon rate
and due in March of 2047, resulting in net cash proceeds of $156.3 million,
after payment of underwriting and other costs of $5.2 million. These net
proceeds provided funds used in the reduction of revolving credit facility
borrowings totaling $19.1 million. During 2007, we initiated and completed an
open-market repurchase program under which we acquired 980,300 shares of common
stock at total cost of $39.4 million ($40.23 per share).
Liquidity
Measures
The table
below displays key liquidity measures for West as of December 31,
|
($
in millions)
|
2008
|
2007
|
2006
|
|||||||||
|
Cash
and cash equivalents
|
$ | 87.2 | $ | 108.4 | $ | 47.1 | ||||||
|
Working
capital
|
$ | 207.1 | $ | 229.4 | $ | 124.8 | ||||||
|
Current
ratio
|
2.3
to 1
|
2.3
to 1
|
1.8
to 1
|
|||||||||
|
Total
debt
|
$ | 386.0 | $ | 395.1 | $ | 236.3 | ||||||
|
Net
debt-to-total invested capital
|
38.0 | % | 36.9 | % | 31.1 | % | ||||||
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,
minority interests and shareholders' equity. The majority of the change in key
liquidity measures in 2007 compared to 2006 resulted from the 2007 issuance of
convertible debt, net of our share buyback activity in that year.
Included
in other current assets and working capital at December 31, 2008 and December
31, 2007 were $9.3 million and $10.5 million, respectively, held in escrow
representing judicial deposits to the government of Brazil. The liability
associated with these tax exposures was recorded in taxes other than income on
the consolidated balance sheets and was also reflected as a component of working
capital in the table above.
Based on
our business outlook and our capital structure at the close of 2008, 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. Our 2009 capital spending budget is set at approximately
$140.0 million, a portion of which could be reduced at our discretion if global
economic conditions worsen or our market outlook changes
drastically.
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 unsecured committed
revolving credit agreement, which we generally use for working capital
requirements. As of December 31, 2008, we had available $165.0 million of
borrowing capacity under this facility, and we have not experienced any limit on
our ability to access this source of funds. This facility expires in 2011, and
market conditions at that time could affect the cost and terms of the
replacement facility, as well as terms of other debt instruments we enter into
from time to time.
Current
Market Conditions
Current
global economic conditions and instability in the financial markets have
increased our exposure to the possible liquidity and default risks of our
vendors, suppliers and other counterparties with which we conduct business. We
expect that some of our customers and vendors may experience difficulty in
obtaining the liquidity required to buy inventory or raw materials. We
periodically monitor our customers’ and key vendors’ financial condition and
assess their liquidity in order to mitigate our counterparty risks. If our key
suppliers are unable to provide raw materials needed for our products, we may be
unable to fulfill sales orders in a timely manner due to the rigorous
qualification process. To date, we have not experienced any significant increase
in customer collectibility risks, nor have we experienced increased supply risks
due to vendor insolvency. We do not expect that recent global credit market
conditions will have a significant impact on our liquidity; however, the world
financial markets have recently experienced extreme disruption. Accordingly, no
assurance can be given that the ongoing economic downturn will not have a
material adverse effect on our liquidity or capital resources.
Commitments
and Contractual Obligations
The
following table summarizes our contractual obligations and commitments at
December 31, 2008. These obligations are not expected to have a material impact
on liquidity.
|
Payments
Due By Period
|
||||||||||||||||||||
|
($
in millions)
|
Less
than 1 year
|
1
to 3 years
|
3
to 5 years
|
More
than 5 years
|
Total
|
|||||||||||||||
|
Purchase
obligations
|
$ | 12.6 | $ | 0.2 | $ | - | $ | - | $ | 12.8 | ||||||||||
|
Notes
payable and long-term debt
|
3.9 | 30.2 | 79.2 | 272.7 | 386.0 | |||||||||||||||
|
Interest
on long-term debt and interest rate swaps (1)
|
16.2 | 31.6 | 26.2 | 224.9 | 298.9 | |||||||||||||||
|
Operating
lease obligations
|
11.2 | 18.6 | 11.3 | 20.2 | 61.3 | |||||||||||||||
|
Pensions/other
post-retirement obligations
|
13.1 | - | - | - | 13.1 | |||||||||||||||
|
Total
contractual obligations
|
$ | 57.0 | $ | 80.6 | $ | 116.7 | $ | 517.8 | $ | 772.1 | ||||||||||
|
(1)
|
For
fixed-rate long-term debt, interest was based on principal amounts and
fixed coupon rates at year end. Future interest payments on variable-rate
debt were calculated using principal amounts and the applicable ending
interest rate at year end. Interest on fixed-rate derivative instruments
was based on notional amounts and fixed interest rates contractually
obligated at year end.
|
Reserves for uncertain tax
positions - The table above does not include $7.9 million of the total
unrecognized tax benefits for uncertain tax positions and approximately $1.0
million of associated accrued interest as of December 31, 2008. Due to the high
degree of uncertainty regarding the timing of potential cash flows, we cannot
reasonably estimate the settlement periods and amounts which may be
paid.
Letters of credit - We have
letters of credit totaling $5.1 million supporting the reimbursement of workers’
compensation and other claims paid on our behalf by insurance carriers and to
guarantee equipment lease payments in Ireland and the payment of sales tax
liabilities in the U.S. The accrual for insurance obligations was $5.2 million
at December 31, 2008.
Purchase obligations – Our
business creates a need to enter into various commitments with suppliers. In
accordance with GAAP, these unconditional purchase obligations are not reflected
in the accompanying consolidated balance sheets. These purchase commitments do
not exceed our projected requirements and are in the normal course of
business.
Foreign currency contracts –
We periodically enter into foreign currency contracts to reduce our exposure to
variability in cash flows related to anticipated purchases of raw materials and
other inventory denominated in non-functional currencies. We also enter into
forward exchange contracts to mitigate exposure of non-functional currency asset
and liability balances to changes in exchange rates. As of December 31, 2008,
these hedges resulted in a combined liability at a fair value of $2.0 million,
which is not reflected in the above table.
Pension/other post-retirement
obligations – Our objective in funding the domestic tax-qualified pension
plan is to accumulate funds sufficient to provide for all benefits and to
satisfy the minimum contribution requirements of ERISA. Our annual funding
decision also takes into account the extent to which the benefit obligation
exceeds its corresponding funded status. Outside of the U.S., our objective is
to fund the retirement costs over time within the limits of minimum requirements
and allowable tax deductions. The table above reflects a voluntary contribution
made in January 2009 to the U.S. qualified pension plan of $10.0 million. The
amounts and timing of future company contributions to the defined benefit and
other post-retirement pension plans are unknown because they are dependent on
pension fund asset performance, as well as other factors. The non-qualified
defined benefit pension plans and post-retirement medical plans are generally
not funded in advance.
OFF-BALANCE
SHEET AGREEMENTS
At
December 31, 2008, the Company had no off-balance sheet financing arrangements
other than operating leases and unconditional purchase obligations incurred in
the ordinary course of business and outstanding letters of credit related to
various insurance programs and leased equipment and sales tax liability
guarantees as noted above.
CRITICAL
ACCOUNTING POLICIES AND ESTIMATES
Management’s
discussion and analysis addresses consolidated financial statements that are
prepared in accordance with accounting principles generally accepted in the U.S.
The application of these principles requires management to make estimates and
assumptions, some of which are subjective and complex, that affect the amounts
reported in the consolidated financial statements. We believe the following
accounting policies and estimates are critical to understanding and evaluating
our results of operations and financial position:
REVENUE RECOGNITION: The majority of our
revenue is generated from our product manufacturing operations which convert
rubber, metal, and plastic raw materials into parts used in closure systems and
syringe components for use with injectable drugs and drug delivery
devices. Sales of manufactured components are recorded at the time
title and risk of loss passes to the customer. Some customers receive pricing
rebates upon attaining established sales volumes. Management records rebate
costs when the sales occur based on its assessment of the likelihood that these
volumes will be attained. We also establish product return liabilities for
customer quality claims when such amounts are deemed probable and can be
reasonably estimated.
IMPAIRMENT OF LONG-LIVED
ASSETS: We review goodwill and other long-lived assets annually and
whenever circumstances indicate that the carrying value of these assets may not
be recoverable. Goodwill is tested for impairment as part of the reporting unit
to which it belongs. Our reporting units are the same as our operating segments,
which we have determined to be the Americas and Europe/Asia Pacific divisions of
the Pharmaceutical Systems segment and the Americas and Europe divisions of the
Tech Group segment. For assets held and used in the business, management
estimates the future cash flows to be derived from the related asset or business
unit. When assets are held for sale, management determines fair value by
estimating the anticipated proceeds to be received upon the sale of the asset,
less disposition costs. Changes in the estimate of fair value,
including the estimate of future cash flows, could have a material impact on our
future results of operations and financial position.
EMPLOYEE BENEFITS: The
measurement of the annual cost and obligations under our defined benefit pension
and postretirement medical plans is subject to a number of assumptions. SFAS 87,
“Employers’ Accounting for Pensions”, as amended by SFAS 158, requires companies
to use an expected long-term rate of asset return assumption for computing
current year pension expense. For U.S. plans, which account for 91% of global
plan assets, the long-term rate of return assumption was 8.0% in 2008 and the
prior two years. This assumption is reviewed annually and determined by the
projected return for our target mix of plan assets (approximately 65% equity and
35% debt securities). Differences between the actual and expected returns are
recognized in accumulated other comprehensive income (loss) and subsequently
amortized into earnings as actuarial gains or losses. SFAS 87 also requires
companies to discount future obligations back to today’s dollars using an
appropriate discount rate. The discount rate selected is the single rate
equivalent for a theoretical portfolio of high quality corporate bonds that
produces a cash flow pattern equivalent to our plans’ projected benefit
payments. An increase in the discount rate decreases the pension benefit
obligation. This decrease is recognized in accumulated other comprehensive
income (loss) and subsequently amortized into earnings as an actuarial
gain.
Changes
in key assumptions, including the market performance of plan assets and other
actuarial assumptions, could have a material impact on our future results of
operations and financial position. We estimate that every 25 basis point
reduction in the long-term rate of return assumption would increase pension
expense by $0.3 million, and a 25 basis point reduction in the discount rate
would increase pension expense by $0.5 million.
The
discount rate used in determining the U.S. pension plans’ benefit obligation at
December 31, 2008 increased 25 basis points to 6.50%, to reflect market
conditions at that time. As of December 31, 2008, pre-tax actuarial losses
recognized in accumulated other comprehensive income (loss) related to pension
and other retirement benefits were $96.6 million, including a current year
actuarial loss of $52.2 million, which was the result of poor investment
performance. We estimate that the impact of these actuarial losses will increase
our 2009 pension expense by approximately $10 million compared with the current
year.
On
December 31, 2006, we adopted SFAS No. 158, “Employers' Accounting for Defined
Benefit Pension and Other Postretirement Plans—an amendment of FASB Statements
No. 87, 88, 106, and 132(R)”. SFAS 158 requires the recognition of an asset or
liability for the funded status of a defined benefit postretirement plan as
measured by the difference between the fair value of plan assets and the benefit
obligation. For a pension plan, the benefit obligation is the projected benefit
obligation; for any other postretirement plan, such as a retiree health plan,
the benefit obligation is the accumulated postretirement benefit
obligation.
Due to
poor investment performance during 2008, our funded status has been negatively
impacted as the value of our plan assets has declined significantly. Partially
offsetting this was an increase in our weighted average discount rate, which
lowered our pension plan liability. Based on full year negative plan asset
returns as of December 31, 2008 and a weighted average discount rate of 6.46%,
we were required to recognize a net pension underfunded balance of $73.0 million
compared to $14.8 million at December 31, 2007, and a decrease in accumulated
other comprehensive income of $34.9 million after-tax. Our underfunded balance
for other postretirement benefits was $15.0 million and $14.1 million at
December 31, 2008 and 2007, respectively.
INCOME TAXES: We estimate
income taxes payable based upon current domestic and international tax
legislation. In addition, deferred income tax assets and liabilities are
established to recognize differences between the tax basis and financial
statement carrying values of assets and liabilities. We maintain valuation
allowances where it is more likely than not that all or a portion of a deferred
tax asset will not be realized. The recoverability of tax assets is subject to
our estimates of future profitability, generally at the respective subsidiary
company and country level. Changes in tax legislation, business plans and other
factors may affect the ultimate recoverability of tax assets or final tax
payments, which could result in adjustments to tax expense in the period such
change is determined.
On
January 1, 2007, we adopted FIN 48. This interpretation clarifies the
accounting for uncertainty in income taxes recognized in financial statements.
FIN 48 prescribes a more-likely-than-not threshold for financial statement
recognition and measurement of a tax position taken or expected to be taken in a
tax return. The adoption of FIN 48 resulted in the recognition of net tax assets
that met the more-likely-than-not threshold of $21.6 million and was reflected
as an adjustment to the opening balance of retained earnings for
2007.
Please
refer to Note 1, Summary of
Significant Accounting Policies, and Note 18, New Accounting Standards, of
the Notes to Consolidated Financial Statements included within Item 8 of
this report for additional information on accounting and reporting standards
considered in the preparation and presentation of our financial
statements.
ITEM
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET
RISK.
We are
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. From time to time, we manage
these risks using derivative financial instruments such as interest rate swaps
and forward exchange contracts. Derivatives used by us are highly
effective as all of the critical terms of the derivative instruments match the
hedged item. Effectiveness is measured on a quarterly basis. In
accordance with Company policy, derivative financial instruments are not used
for speculation or trading purposes. All debt securities and derivative
instruments are considered non-trading.
Foreign Currency Exchange
Risk
We have
subsidiaries outside the U.S. accounting for approximately 54% of consolidated
net sales. Virtually all of these sales and related operating costs are
denominated in the currency of the local country and translated into U.S.
dollars. Although the majority of the assets and liabilities of these
subsidiaries are in the local currency of the subsidiary, they may also hold
assets or liabilities not denominated in their local currency. These items may
give rise to foreign currency transaction gains and losses. As a result, our
results of operations and financial position are exposed to changing exchange
rates. We periodically use forward contracts to hedge certain transactions or to
neutralize month-end balance sheet exposures on cross-currency intercompany
loans.
We have
entered into a series of foreign currency hedge contracts which are designed to
eliminate the currency risk associated with forecasted U.S. dollar (USD)
denominated inventory purchases made by certain European subsidiaries. As of
December 31, 2008, there were eleven monthly contracts outstanding at $0.9
million each, for an aggregate notional amount of $9.9 million. The fair value
of these contracts at December 31, 2008 was $0.5 million and was recorded within
other current liabilities. The last contract matures on December 15, 2009. The
contracts effectively fix the Euro to USD exchange rate for 40% of our
anticipated needs at a maximum of 1.2800 USD per Euro while allowing us to
benefit from any currency movement between 1.2800 and 1.4620 USD per Euro. As of
December 31, 2008, the Euro was equal to 1.4094 USD.
In
addition to these contracts, we have other forward exchange contracts hedging
various obligations for a fair value of $1.5 million at December 31,
2008.
We have
designated our €81.5 million Euro-denominated notes as a hedge of our investment
in the net assets of our European operations. A cumulative foreign currency
translation loss of $9.1 million (net of tax of $5.7 million) on the €81.5
million debt is recorded within accumulated other comprehensive income as of
December 31, 2008. We also have a 2.7 billion Yen-denominated note payable which
has been designated as a hedge of our investment in a Japanese
affiliate. At December 31, 2008, a foreign currency translation loss
on the Yen-denominated debt of $4.4 million (net of tax of $2.7 million) is
included within accumulated other comprehensive income.
Interest Rate
Risk
As a
result of our normal borrowing activities, we are exposed to fluctuations in
interest rates which we manage primarily through our financing activities. We
have long-term debt with both fixed and variable interest rates. Long-term debt
consists of senior notes, convertible debentures, revolving credit facilities
and capital lease obligations. Portions of long-term debt which are
payable during 2009 are classified as short-term liabilities as of December 31,
2008.
The
following table summarizes our interest rate risk-sensitive
instruments:
|
($
in millions)
|
2009
|
2010
|
2011
|
2012
|
2013
|
Thereafter
|
Carrying
Value
|
Fair
Value
|
||||||||||||||||||||||||
|
Current
Debt and Capital Leases:
|
||||||||||||||||||||||||||||||||
|
U.S.
dollar denominated
|
$ | 3.5 | $ | - | $ | - | $ | - | $ | - | $ | - | $ | 3.5 | $ | 3.5 | ||||||||||||||||
|
Average
interest rate – fixed
|
2.4 | % | - | - | - | - | - | |||||||||||||||||||||||||
|
Euro
denominated
|
$ | 0.4 | - | - | - | - | - | $ | 0.4 | $ | 0.4 | |||||||||||||||||||||
|
Average
interest rate – fixed
|
5.4 | % | - | - | - | - | - | |||||||||||||||||||||||||
|
Long-Term
Debt and Capital Leases:
|
||||||||||||||||||||||||||||||||
|
U.S.
dollar denominated (1)
|
- | - | - | $ | 50.0 | - | $ | 25.0 | $ | 75.0 | $ | 62.1 | ||||||||||||||||||||
|
Average
interest rate – variable
|
- | - | - | 4.3 | % | - | 4.4 | % | ||||||||||||||||||||||||
|
U.S.
dollar denominated
|
- | - | - | - | - | $ | 161.5 | $ | 161.5 | $ | 118.5 | |||||||||||||||||||||
|
Average
interest rate – fixed
|
- | - | - | - | - | 4.0 | % | |||||||||||||||||||||||||
|
Euro
denominated
|
- | - | $ | 0.3 | $ | 0.5 | $ | 28.7 | $ | 86.2 | $ | 115.7 | $ | 105.9 | ||||||||||||||||||
|
Average
interest rate – fixed
|
- | - | 5.5 | % | 5.3 | % | 4.2 | % | 4.4 | % | ||||||||||||||||||||||
|
Yen
denominated
|
- | - | $ | 29.9 | - | - | - | $ | 29.9 | $ | 28.6 | |||||||||||||||||||||
|
Average
interest rate – variable
|
- | - | 1.7 | % | - | - | - | |||||||||||||||||||||||||
(1) As of
December 31, 2008, we have two interest rate swap agreements outstanding which
are designed to protect against volatility in variable interest rates payable on
a $50.0 million note maturing on July 28, 2012 (“Series A Note”) and a $25.0
million note maturing July 28, 2015 (“Series B Note”). The first
interest-rate swap agreement has a notional amount of $50.0 million and
corresponds to the maturity date of the Series A Note and the second interest
rate swap agreement has a notional amount of $25.0 million and corresponds with
the maturity date of the Series B Note. Under each of the swap
agreements we will receive variable interest rate payments based on three-month
LIBOR in return for making quarterly fixed payments. Including the applicable
margin, the interest-rate swap agreements effectively fix the interest rates
payable on Series A and B notes payable at 5.32% and 5.51%,
respectively. At December 31, 2008, the interest rate-swap agreements
had a fair value of $8.2 million, unfavorable to the Company, and are recorded
as a noncurrent liability.
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
CONSOLIDATED
STATEMENTS OF INCOME
West
Pharmaceutical Services, Inc. and Subsidiaries for the years ended December 31,
2008, 2007 and 2006
|
(in
millions, except per share data)
|
2008
|
2007
|
2006
|
|||||||||
|
Net
sales
|
$ | 1,051.1 | $ | 1,020.1 | $ | 913.3 | ||||||
|
Cost
of goods and services sold
|
748.5 | 728.3 | 648.5 | |||||||||
|
Gross
profit
|
302.6 | 291.8 | 264.8 | |||||||||
|
Research
and development
|
18.7 | 16.1 | 11.1 | |||||||||
|
Selling,
general and administrative expenses
|
159.3 | 152.5 | 147.8 | |||||||||
|
Restructuring
and other items
|
0.5 | 28.3 | 4.9 | |||||||||
|
Operating
profit
|
124.1 | 94.9 | 101.0 | |||||||||
|
Loss
on debt extinguishment
|
- | - | 5.9 | |||||||||
|
Interest
expense
|
16.0 | 14.5 | 12.7 | |||||||||
|
Interest
income
|
(1.4 | ) | (6.0 | ) | (2.1 | ) | ||||||
|
Income
before income taxes and minority interests
|
109.5 | 86.4 | 84.5 | |||||||||
|
Income
tax expense
|
23.7 | 17.2 | 24.6 | |||||||||
|
Minority
interests
|
0.6 | 0.5 | 0.3 | |||||||||
|
Income
from consolidated operations
|
85.2 | 68.7 | 59.6 | |||||||||
|
Equity
in net income of affiliated companies
|
0.8 | 2.5 | 1.9 | |||||||||
|
Income
from continuing operations
|
86.0 | 71.2 | 61.5 | |||||||||
|
(Loss)
income from discontinued operations, net of tax
|
- | (0.5 | ) | 5.6 | ||||||||
|
Net
income
|
$ | 86.0 | $ | 70.7 | $ | 67.1 | ||||||
|
Net
income per share:
|
||||||||||||
|
Basic:
|
||||||||||||
|
Continuing
operations
|
$ | 2.65 | $ | 2.18 | $ | 1.91 | ||||||
|
Discontinued
operations
|
- | (0.02 | ) | .18 | ||||||||
| $ | 2.65 | $ | 2.16 | $ | 2.09 | |||||||
|
Assuming
dilution:
|
||||||||||||
|
Continuing
operations
|
$ | 2.50 | $ | 2.06 | $ | 1.83 | ||||||
|
Discontinued
operations
|
- | (0.01 | ) | .17 | ||||||||
| $ | 2.50 | $ | 2.05 | $ | 2.00 | |||||||
|
Average
common shares outstanding
|
32.4 | 32.7 | 32.2 | |||||||||
|
Average
shares assuming dilution
|
36.1 | 36.2 | 33.6 | |||||||||
The
accompanying notes are an integral part of the consolidated financial
statements.
CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME
West
Pharmaceutical Services, Inc. and Subsidiaries for the years ended December 31,
2008, 2007 and 2006
|
(in
millions)
|
2008
|
2007
|
2006
|
|||||||||
|
Net
income
|
$ | 86.0 | $ | 70.7 | $ | 67.1 | ||||||
|
Other
comprehensive (loss) income, net of tax (tax amounts shown below for 2008,
2007, 2006, respectively):
|
||||||||||||
|
Foreign
currency translation adjustments
|
(37.5 | ) | 19.9 | 20.5 | ||||||||
|
Minimum
pension liability adjustments
|
- | - | (0.1 | ) | ||||||||
|
Defined
benefit pension and other postretirement plans:
|
||||||||||||
|
Prior
service cost arising during period, net of tax of $0, $(0.7) and
$0
|
- | (1.2 | ) | - | ||||||||
|
Net
actuarial (loss) gain arising during period, net of tax of $(21.6), $3.4
and $0
|
(34.9 | ) | 6.4 | - | ||||||||
|
Less:
amortization of actuarial loss, net of tax of $0.6, $1.0 and
$0
|
1.0 | 1.6 | - | |||||||||
|
Less:
amortization of prior service credit included in net periodic benefit
cost, net of tax of $(0.4), $(0.4) and $0
|
(0.6 | ) | (0.7 | ) | - | |||||||
|
Less:
amortization of transition obligation included in net periodic benefit
cost
|
0.1 | 0.1 | - | |||||||||
|
Net
unrealized (losses) gains on securities of affiliates, net of tax of
$(1.6), $(0.4) and $0.4
|
(2.2 | ) | (0.6 | ) | 0.6 | |||||||
|
Net
unrealized (losses) gains on derivatives, net of tax of $(2.8), $(1.3) and
$0.3
|
(4.4 | ) | (2.1 | ) | 0.4 | |||||||
|
Other
comprehensive (loss) income, net of tax
|
(78.5 | ) | 23.4 | 21.4 | ||||||||
|
Comprehensive
income
|
$ | 7.5 | $ | 94.1 | $ | 88.5 | ||||||
The
accompanying notes are an integral part of the consolidated financial
statements.
CONSOLIDATED
BALANCE SHEETS
West
Pharmaceutical Services, Inc. and Subsidiaries at December 31, 2008 and
2007
|
(in
millions, except per share data)
|
2008
|
2007
|
||||||
|
ASSETS
|
||||||||
|
Current
assets:
|
||||||||
|
Cash,
including cash equivalents
|
$ | 87.2 | $ | 108.4 | ||||
|
Accounts
receivable, net
|
128.6 | 136.1 | ||||||
|
Inventories
|
115.7 | 111.8 | ||||||
|
Short-term
investments
|
4.3 | 21.0 | ||||||
|
Deferred
income taxes
|
5.1 | 5.3 | ||||||
|
Other
current assets
|
25.3 | 29.7 | ||||||
|
Total
current assets
|
366.2 | 412.3 | ||||||
|
Property,
plant and equipment
|
965.0 | 897.7 | ||||||
|
Less
accumulated depreciation and amortization
|
434.0 | 416.0 | ||||||
|
Property,
plant and equipment, net
|
531.0 | 481.7 | ||||||
|
Investments
in affiliated companies
|
33.6 | 31.7 | ||||||
|
Goodwill
|
105.3 | 109.2 | ||||||
|
Pension
asset
|
- | 13.0 | ||||||
|
Deferred
income taxes
|
63.7 | 61.0 | ||||||
|
Intangible
assets, net
|
50.0 | 55.0 | ||||||
|
Other
assets
|
18.9 | 21.7 | ||||||
|
Total
Assets
|
$ | 1,168.7 | $ | 1,185.6 | ||||
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
||||||||
|
Current
liabilities:
|
||||||||
|
Notes
payable and other current debt
|
$ | 3.9 | $ | 0.5 | ||||
|
Accounts
payable
|
67.6 | 80.4 | ||||||
|
Pension
and other postretirement benefits
|
2.0 | 1.8 | ||||||
|
Accrued
salaries, wages and benefits
|
42.3 | 38.1 | ||||||
|
Income
taxes payable
|
2.7 | 9.8 | ||||||
|
Taxes
other than income
|
7.0 | 17.7 | ||||||
|
Deferred
income taxes
|
0.9 | 2.5 | ||||||
|
Other
current liabilities
|
32.7 | 32.1 | ||||||
|
Total
current liabilities
|
159.1 | 182.9 | ||||||
|
Long-term
debt
|
382.1 | 394.6 | ||||||
|
Deferred
income taxes
|
20.4 | 46.6 | ||||||
|
Pension
and other postretirement benefits
|
86.0 | 40.1 | ||||||
|
Other
long-term liabilities
|
34.0 | 30.5 | ||||||
|
Total
Liabilities
|
681.6 | 694.7 | ||||||
|
Commitments
and contingencies (Note 17)
|
||||||||
|
Minority
interests
|
- | 5.6 | ||||||
|
Shareholders’
equity:
|
||||||||
|
Preferred
stock, 3.0 million shares authorized; no shares issued and outstanding in
2008 and 2007
|
- | - | ||||||
|
Common
stock, par value $.25 per share; 50.0 million shares authorized; shares
issued: 34.3 million in 2008 and 2007; shares outstanding: 32.7 million in
2008 and 32.3 million in 2007
|
8.6 | 8.6 | ||||||
|
Capital
in excess of par value
|
69.3 | 64.3 | ||||||
|
Retained
earnings
|
517.3 | 450.3 | ||||||
|
Accumulated
other comprehensive income
|
(44.9 | ) | 33.6 | |||||
|
Treasury
stock, at cost (1.6 million shares in 2008; 2.1 million shares in
2007)
|
(63.2 | ) | (71.5 | ) | ||||
|
Total
shareholders’ equity
|
487.1 | 485.3 | ||||||
|
Total
Liabilities and Shareholders’ Equity
|
$ | 1,168.7 | $ | 1,185.6 | ||||
The
accompanying notes are an integral part of the consolidated financial
statements.
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS’ EQUITY
West
Pharmaceutical Services, Inc. and Subsidiaries for the years ended December 31,
2008, 2007 and 2006
|
Common
Stock
|
Treasury
Stock
|
|||||||||||||||||||||||||||||||
|
(in
millions, except per share data)
|
Number
of shares
|
Common
Stock
|
Capital
in excess of par value
|
Retained
earnings
|
Accumulated
other comprehensive income (loss)
|
Number
of shares
|
Treasury
Stock
|
Total
|
||||||||||||||||||||||||
|
Balance,
December 31, 2005
|
34.3 | $ | 8.6 | $ | 39.3 | $ | 325.0 | $ | 8.9 | (2.6 | ) | $ | (41.9 | ) | $ | 339.9 | ||||||||||||||||
|
Net
income
|
67.1 | 67.1 | ||||||||||||||||||||||||||||||
|
Shares
issued under stock plans
|
2.6 | 1.2 | 10.0 | 12.6 | ||||||||||||||||||||||||||||
|
Shares
repurchased for employee tax withholdings
|
- | (1.3 | ) | (1.3 | ) | |||||||||||||||||||||||||||
|
Excess
tax benefit from stock option exercises
|
10.9 | 10.9 | ||||||||||||||||||||||||||||||
|
Cash
dividends declared ($0.50 per share)
|
(16.4 | ) | (16.4 | ) | ||||||||||||||||||||||||||||
|
Changes
– other comprehensive income
|
21.4 | 21.4 | ||||||||||||||||||||||||||||||
|
Adjustment
to initially apply SFAS 158, net of tax
|
(19.7 | ) | (19.7 | ) | ||||||||||||||||||||||||||||
|
Balance,
December 31, 2006
|
34.3 | $ | 8.6 | $ | 52.8 | $ | 375.7 | $ | 10.6 | (1.4 | ) | $ | (33.2 | ) | $ | 414.5 | ||||||||||||||||
|
Cumulative
effect of adoption of FIN 48 (Note 5)
|
21.6 | 21.6 | ||||||||||||||||||||||||||||||
|
Net
income
|
70.7 | 70.7 | ||||||||||||||||||||||||||||||
|
Shares
issued under stock plans
|
9.3 | 0.4 | 3.7 | 13.0 | ||||||||||||||||||||||||||||
|
Shares
purchased under stock repurchase program
|
(1.0 | ) | (39.4 | ) | (39.4 | ) | ||||||||||||||||||||||||||
|
Shares
repurchased for employee tax withholdings
|
(1.0 | ) | (0.1 | ) | (2.6 | ) | (3.6 | ) | ||||||||||||||||||||||||
|
Excess
tax benefit from stock option exercises
|
3.2 | 3.2 | ||||||||||||||||||||||||||||||
|
Cash
dividends declared ($0.54 per share)
|
(17.7 | ) | (17.7 | ) | ||||||||||||||||||||||||||||
|
Affiliate
adoption of SFAS 158, net of tax
|
(0.4 | ) | (0.4 | ) | ||||||||||||||||||||||||||||
|
Changes
– other comprehensive income
|
23.4 | 23.4 | ||||||||||||||||||||||||||||||
|
Balance,
December 31, 2007
|
34.3 | $ | 8.6 | $ | 64.3 | $ | 450.3 | $ | 33.6 | (2.1 | ) | $ | (71.5 | ) | $ | 485.3 | ||||||||||||||||
|
Net
income
|
86.0 | 86.0 | ||||||||||||||||||||||||||||||
|
Shares
issued under stock plans
|
(0.9 | ) | 0.6 | 13.5 | 12.6 | |||||||||||||||||||||||||||
|
Shares
repurchased for employee tax withholdings
|
(0.1 | ) | (5.2 | ) | (5.2 | ) | ||||||||||||||||||||||||||
|
Excess
tax benefit from stock option exercises
|
5.9 | 5.9 | ||||||||||||||||||||||||||||||
|
Cash
dividends declared ($0.58 per share)
|
(19.0 | ) | (19.0 | ) | ||||||||||||||||||||||||||||
|
Changes
– other comprehensive loss
|
(78.5 | ) | (78.5 | ) | ||||||||||||||||||||||||||||
|
Balance,
December 31, 2008
|
34.3 | $ | 8.6 | $ | 69.3 | $ | 517.3 | $ | (44.9 | ) | (1.6 | ) | $ | (63.2 | ) | $ | 487.1 | |||||||||||||||
The
accompanying notes are an integral part of the consolidated financial
statements.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
West
Pharmaceutical Services, Inc. and Subsidiaries for the years ended December 31,
2008, 2007 and 2006
|
(in
millions)
|
2008
|
2007
|
2006
|
|||||||||
|
Cash
flows from operating activities:
|
||||||||||||
|
Net
income
|
$ | 86.0 | $ | 70.7 | $ | 67.1 | ||||||
|
Adjustments
to reconcile net income to net cash provided by operating activities of
continuing operations:
|
||||||||||||
|
Loss
(gain) from discontinued operations, net of tax
|
- | 0.5 | (5.6 | ) | ||||||||
|
Depreciation
|
56.1 | 51.6 | 48.1 | |||||||||
|
Amortization
|
4.5 | 5.0 | 4.6 | |||||||||
|
Stock-based
compensation
|
6.4 | 5.1 | 14.5 | |||||||||
|
Loss
on sales of equipment and asset impairments
|
- | 13.7 | 4.0 | |||||||||
|
Deferred
income taxes
|
7.3 | (6.4 | ) | 4.9 | ||||||||
|
Pension
and other retirement plans
|
4.9 | 5.9 | 8.9 | |||||||||
|
Equity
in undistributed earnings of affiliates, net of dividends
|
(0.7 | ) | (2.4 | ) | (1.9 | ) | ||||||
|
Changes
in assets/liabilities, net of discontinued operations and
acquisitions:
|
||||||||||||
|
Decrease
(increase) in accounts receivable
|
1.9 | (20.5 | ) | 2.8 | ||||||||
|
Increase
in inventories
|
(13.4 | ) | (9.0 | ) | (22.8 | ) | ||||||
|
(Increase)
decrease in other current assets
|
(0.7 | ) | 3.9 | (3.1 | ) | |||||||
|
(Decrease)
increase in accounts payable
|
(3.3 | ) | 16.0 | 15.8 | ||||||||
|
Changes
in other assets and liabilities
|
(14.0 | ) | (4.9 | ) | 2.1 | |||||||
|
Net
cash provided by operating activities
|
135.0 | 129.2 | 139.4 | |||||||||
|
Cash
flows from investing activities:
|
||||||||||||
|
Capital
expenditures
|
(138.6 | ) | (129.4 | ) | (90.3 | ) | ||||||
|
Proceeds
from sale of investment
|
- | 0.7 | - | |||||||||
|
Acquisition
of 10% minority ownership in Medimop
|
(8.5 | ) | - | - | ||||||||
|
Acquisition
of patents and other assets
|
(0.5 | ) | (4.7 | ) | - | |||||||
|
Redemptions
(purchase) of investments, net
|
16.8 | (22.7 | ) | - | ||||||||
|
Other
|
2.6 | 0.2 | 0.4 | |||||||||
|
Net
cash used in investing activities
|
(128.2 | ) | (155.9 | ) | (89.9 | ) | ||||||
|
Cash
flows from financing activities:
|
||||||||||||
|
Issuance
of long-term debt
|
- | 156.3 | 100.1 | |||||||||
|
Prepayment
of senior notes
|
- | - | (100.0 | ) | ||||||||
|
Repayments
under revolving credit agreements, net
|
(12.3 | ) | (19.1 | ) | (57.7 | ) | ||||||
|
Changes
in other debt, including overdrafts
|
3.1 | 0.3 | (2.0 | ) | ||||||||
|
Dividend
payments
|
(18.6 | ) | (17.5 | ) | (15.9 | ) | ||||||
|
Shares
purchased under stock repurchase program
|
- | (39.4 | ) | - | ||||||||
|
Issuance
of common stock under employee stock plans
|
6.2 | 4.4 | 5.7 | |||||||||
|
Excess
tax benefit from stock option exercises
|
5.9 | 3.2 | 10.9 | |||||||||
|
Shares
repurchased for employee tax withholdings
|
(5.2 | ) | (3.6 | ) | (1.3 | ) | ||||||
|
Net
cash (used in) provided by financing activities
|
(20.9 | ) | 84.6 | (60.2 | ) | |||||||
|
Cash
flows from discontinued operations:
|
||||||||||||
|
Net
cash provided by operating activities
|
- | - | 4.4 | |||||||||
|
Net
cash provided by discontinued operations
|
- | - | 4.4 | |||||||||
|
Effect
of exchange rates on cash
|
(7.1 | ) | 3.4 | 4.6 | ||||||||
|
Net
(decrease) increase in cash and cash equivalents
|
(21.2 | ) | 61.3 | (1.7 | ) | |||||||
|
Cash
and cash equivalents at beginning of period
|
108.4 | 47.1 | 48.8 | |||||||||
|
Cash
and cash equivalents at end of period
|
$ | 87.2 | $ | 108.4 | $ | 47.1 | ||||||
|
Supplemental
cash flow information:
|
||||||||||||
|
Interest
paid, net of amounts capitalized
|
$ | 15.9 | $ | 12.2 | $ | 14.0 | ||||||
|
Income
taxes paid, net
|
$ | 25.0 | $ | 25.3 | $ | 15.0 | ||||||
|
Dividends
declared, not paid
|
$ | 4.9 | $ | 4.5 | $ | 4.3 | ||||||
The
accompanying notes are an integral part of the consolidated financial
statements.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Note
1: Summary of Significant Accounting Policies
Principles of
Consolidation: The
consolidated financial statements include the accounts of West Pharmaceutical
Services, Inc. and its majority-owned subsidiaries (which may be referred to as
“West”, the “Company”, “we”, “us” or “our”) after the elimination of
intercompany transactions. We have no participation or other rights in variable
interest entities.
Use of Estimates: The
financial statements are prepared in conformity with generally accepted
accounting principles in the United States (“U.S.”). These principles require
management to make estimates and assumptions that affect the reported amounts of
assets, liabilities, revenues and expenses and the disclosure of contingencies
in the financial statements. Actual amounts realized may differ from these
estimates.
Cash and Cash
Equivalents: Cash equivalents include time deposits,
certificates of deposit and all highly liquid debt instruments with maturities
of three months or less at the time of purchase.
Accounts Receivable: Our
accounts receivable balance at December 31, 2008 and 2007 was net of an
allowance for doubtful accounts of $0.7 million and $0.6 million, respectively.
We record the allowance based on a specific identification
methodology.
Inventories: Inventories are
valued at the lower of cost or market. Cost is determined using the
first-in-first-out (“FIFO”) method. The following is a summary of inventories at
December 31:
|
($
in millions)
|
2008
|
2007
|
||||||
|
Finished
goods
|
$ | 46.9 | $ | 45.1 | ||||
|
Work
in process
|
18.8 | 16.5 | ||||||
|
Raw
materials
|
50.0 | 50.2 | ||||||
| $ | 115.7 | $ | 111.8 | |||||
Short-Term Investments:
Short-term investments represent our investment in the Columbia Strategic
Cash Portfolio Fund, which is an enhanced cash fund managed by the Bank of
America. When it is determined that an other-then-temporary decline in net asset
value has occurred, the investment is written down with a charge to the
statement of income. See Note 14, Fair Value Measurements, for
a more detailed discussion.
Property, Plant and Equipment:
Property, plant and equipment assets are carried at cost. Maintenance and minor
repairs and renewals are charged to expense as incurred. Costs incurred for
computer software developed or obtained for internal use are capitalized for
application development activities and immediately expensed for preliminary
project activities or post-implementation activities. Upon sale or retirement of
depreciable assets, costs and related accumulated depreciation are eliminated,
and gains or losses are recognized in restructuring and other items.
Depreciation and amortization are computed principally using the straight-line
method over the estimated useful lives of the assets, or the remaining term of
the lease, if shorter.
Goodwill and Other
Intangibles: Goodwill and indefinite-lived intangibles are tested at
least annually for impairment in the fourth quarter following the completion of
our annual budget and long-range plan process, or more frequently in certain
circumstances. Intangible assets with finite lives are amortized using the
straight-line method over their estimated useful lives, and reviewed for
impairment if an event occurs that indicates that there may be an impairment.
The goodwill impairment test first requires a comparison of the fair value of
each reporting unit to its carrying amount, including goodwill. If the carrying
amount exceeds fair value, a second step must be performed. The second step
requires the comparison of the carrying amount of the goodwill to its implied
fair value, which is calculated as if the reporting unit had just been acquired
as of the testing date. Any excess of the carrying amount of goodwill over the
implied fair value would represent an impairment loss. Certain trademarks have
been determined to have indefinite lives and therefore are not subject to
amortization.
Impairment
testing for indefinite-lived intangibles requires a comparison between the fair
value and carrying value of the asset, and any excess carrying value would
represent an impairment. Fair values are primarily determined using discounted
cash flow analyses.
Impairment of Long-Lived
Assets: Long-lived assets, including property, plant and equipment, and
intangible assets subject to amortization, are reviewed for impairment whenever
circumstances indicate that the carrying value of these assets may not be
recoverable. An asset is considered impaired if the carrying value of the asset
exceeds the sum of the future expected undiscounted cash flows to be derived
from the asset. Once an asset is considered impaired, an impairment loss is
recorded within restructuring and other items for the difference between the
asset's carrying value and its fair value. For assets to be held and used in the
business, management determines fair value using estimated future cash flows to
be derived from the asset discounted to a net present value using an appropriate
discount rate. For assets held for sale or for investment purposes, management
determines fair value by estimating the proceeds to be received upon sale of the
asset, less costs to sell.
Employee Benefits: The
measurement of the obligations under our defined benefit pension and
postretirement medical plans are subject to a number of assumptions. These
include the rate of return on plan assets and the rate at which the future
obligations are discounted to present value.
On
December 31, 2006, we adopted SFAS No. 158, “Employers' Accounting for Defined
Benefit Pension and Other Postretirement Plans—an amendment of FASB Statements
No. 87, 88, 106, and 132(R)” (“SFAS 158”). This standard requires the
recognition of an asset or liability for the funded status of a defined benefit
postretirement plan as measured by the difference between the fair value of plan
assets and the benefit obligation. For a pension plan, the benefit obligation is
the projected benefit obligation; for any other postretirement plan, such as a
retiree health plan, the benefit obligation is the accumulated postretirement
benefit obligation. The adoption of SFAS 158 resulted in a reduction of
shareholders’ equity of $19.7 million ($32.0 million pre-tax, less a $12.3
million deferred tax benefit) at December 31, 2006. See Note 13,
Benefit Plans, for a
more detailed discussion of our pension and other retirement plans.
Financial Instruments: All
derivatives are recognized as either assets or liabilities in the balance sheet
and recorded at their fair value. We use financial instruments such as interest
rate swaps and foreign currency hedge contracts to minimize the exposure related
to fluctuating interest and foreign exchange rates. For a derivative designated
as hedging the exposure to variable cash flows of a forecasted transaction
(referred to as a cash flow hedge), the effective portion of the derivative's
gain or loss is initially reported as a component of other comprehensive income,
net of tax, and subsequently reclassified into earnings when the forecasted
transaction affects earnings. For a derivative designated as hedging the
exposure to changes in the fair value of a recognized asset or liability or a
firm commitment (referred to as a fair value
hedge), the derivative’s gain or loss is recognized in
earnings in the period of change together with the offsetting loss or gain on
the hedged item. For a derivative designated as hedging the foreign
currency exposure of a net investment in a foreign operation, the gain or loss
is reported in other comprehensive income, net of tax, as part of the cumulative
translation adjustment. The ineffective portion of any derivative used in a
hedging transaction is recognized immediately into earnings. We do not purchase
or hold any derivative financial instrument for investment or trading
purposes.
Foreign Currency Translation:
Foreign currency transaction gains and losses are recognized in the
determination of net income. Foreign currency translation adjustments of
subsidiaries and affiliates operating outside the U.S. are accumulated in other
comprehensive income, a separate component of shareholders' equity.
Revenue Recognition: The
majority of our revenue is generated from our standard product manufacturing
operations which convert rubber, metal, and plastic raw materials into component
parts used in closure systems and syringe components for use with injectable
drugs and drug delivery devices. Sales of manufactured components are
recorded at the time title and risk of loss passes to the customer. Some
customers receive pricing rebates upon attaining established sales volumes. We
record rebate costs when sales occur based on our assessment of the likelihood
that these volumes will be attained. We also establish product return
liabilities for customer quality claims when such amounts are deemed probable
and can be reasonably estimated.
Shipping and Handling Costs:
Shipping and handling costs are included in cost of goods and services sold.
Shipping and handling costs billed to customers in connection with the sale are
included in net sales.
Research and Development:
Research and development expenditures are for the creation, engineering and
application of new or improved products and processes. Expenditures include
primarily salaries and outside services for those directly involved in research
and development activities and are expensed as incurred.
Environmental Remediation and
Compliance Costs: Environmental remediation costs are accrued when such
costs are probable and reasonable estimates are determinable. Cost estimates are
not discounted and include investigation, cleanup and monitoring activities;
such estimates are adjusted, if necessary, based on additional findings. In
general, environmental compliance costs are expensed as incurred.
Litigation: 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. These estimates are based on an
analysis made by internal and external legal counsel considering information
known at the time. Legal costs in connection with loss contingencies are
expensed as incurred.
Income Taxes: Income taxes are
accounted for in accordance with SFAS No. 109, “Accounting for Income Taxes.”
Deferred income taxes are recognized by applying enacted statutory tax rates,
applicable to future years, to temporary differences between the tax basis and
financial statement carrying values of our assets and liabilities. Valuation
allowances are established when it is more likely than not that all or a portion
of a deferred tax asset will not be realized. No provision is made for the U.S.
income taxes on the undistributed earnings of wholly-owned foreign subsidiaries
as such earnings are intended to be permanently reinvested. We
recognize interest costs related to income taxes in interest expense and
penalties within restructuring and other items. The tax law ordering approach is
used for purposes of determining whether an excess tax benefit has been realized
during the year.
Stock-Based Compensation: We
account for stock-based compensation in accordance with the provisions of SFAS
No. 123(R), “Share Based Payment - Revised 2004.” Under the fair value
provisions of this statement, stock-based compensation cost is measured at the
grant date based on the value of the award and is recognized as expense over the
vesting period. In order to determine the fair value of stock options on the
grant date, the company uses the Black-Scholes valuation model.
Net Income Per Share: Basic
net income per share is computed by dividing net income by the weighted average
number of shares of common stock outstanding during each period. Net income per
share assuming dilution considers the dilutive effect of outstanding stock
options and other stock awards, based on the treasury stock method, as well as,
convertible debt, based on the if-converted method. The treasury stock method
assumes the use of exercise proceeds to repurchase common stock at the average
fair market value in the period. The if-converted method assumes conversion of
the debt at the beginning of the reporting period (or at time of issuance, if
later). In addition, interest charges applicable to the convertible debt, net of
tax, are added back to net income for the purpose of this
calculation.
Note
2: Discontinued Operations
In 2007,
we recorded a $0.5 million provision, or ($0.01) per diluted share, for
potential claims resulting from the 2005 divestiture of our former drug delivery
business.
Our 2006
income from discontinued operations was $5.6 million, or $0.17 per diluted
share. As a result of a favorable outcome to our claim for tax benefits relating
to the 2001 sale of our former contract manufacturing and packaging business, we
received a tax refund resulting in the recognition of a $4.0 million tax
benefit. The settlement of this claim also resulted in pre-tax interest income
of $0.6 million ($0.4 million after taxes). We also recognized a $1.2 million
favorable adjustment to tax accruals associated with our former Drug Delivery
Systems segment primarily as a result of the closure of the 2002 U.S. federal
tax audit year.
Note
3: Restructuring and Other Items
Restructuring
and other items consisted of:
|
($
in millions)
|
2008
|
2007
|
2006
|
|||||||||
|
Restructuring
and related charges
|
||||||||||||
|
Severance
and post-employment benefits
|
$ | 1.4 | $ | 2.0 | $ | - | ||||||
|
Asset
write-offs
|
1.0 | 1.1 | - | |||||||||
|
Other
|
0.6 | 0.3 | - | |||||||||
|
Total
restructuring and related charges
|
3.0 | 3.4 | - | |||||||||
|
Impairment
charges
|
- | 12.9 | 2.5 | |||||||||
|
Other
items:
|
||||||||||||
|
Contract
settlement and related costs (gain)
|
(4.2 | ) | - | - | ||||||||
|
Brazilian
excise and other tax related charges
|
- | 10.1 | 0.1 | |||||||||
|
Foreign
exchange losses
|
1.6 | 0.7 | 0.7 | |||||||||
|
Loss
on sales of equipment
|
0.7 | 1.1 | 1.5 | |||||||||
|
Other
|
(0.6 | ) | 0.1 | 0.1 | ||||||||
|
Total
other items
|
(2.5 | ) | 12.0 | 2.4 | ||||||||
|
Total
restructuring and other items
|
$ | 0.5 | $ | 28.3 | $ | 4.9 | ||||||
Restructuring
and Related Charges
During
2008 and 2007, we incurred $3.0 million and $3.4 million, respectively, 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. We expect to incur additional severance and related costs of no more
than $1.0 million during the first half of 2009 as these restructuring
activities are concluded.
The
following table details activity related to our restructuring
obligations:
|
($
in millions)
|
Severance
and benefits
|
Other
Costs
|
Total
|
|||||||||
|
Balance,
December 31, 2006
|
$ | - | $ | - | $ | - | ||||||
|
Charges
|
2.0 | 1.4 | 3.4 | |||||||||
|
Non-cash
asset write-offs
|
- | (1.1 | ) | (1.1 | ) | |||||||
|
Cash
payments
|
(0.1 | ) | - | (0.1 | ) | |||||||
|
Balance,
December 31, 2007
|
1.9 | 0.3 | 2.2 | |||||||||
|
Charges
|
1.4 | 1.6 | 3.0 | |||||||||
|
Non-cash
asset write-offs
|
- | (0.6 | ) | (0.6 | ) | |||||||
|
Cash
payments
|
(3.1 | ) | (0.9 | ) | (4.0 | ) | ||||||
|
Balance,
December 31, 2008
|
$ | 0.2 | $ | 0.4 | $ | 0.6 | ||||||
We expect
all payments associated with the plan to be completed by the end of the second
quarter of 2009.
Impairment
Charges
In the
fourth quarter of 2007, we recorded a $12.9 million impairment charge
representing our net book value in the Nektar contract intangible asset
associated with the Exubera device.
During
2006, Pharmaceutical Systems recorded a $2.5 million charge related to a
discontinued product, including a $1.6 million reduction to the value of the
respective production assets, a $0.5 million minimum royalty payment called for
under a licensing agreement and a $0.4 million decrease in the value of our
licensing rights.
Other
Items
Under an
agreement reached with Nektar in February 2008, we received full reimbursement
for, among other things, severance-related employee costs, equipment, purchased
raw materials and components, leases and other facility costs associated with
the shutdown of manufacturing operations related to the Exubera device. During
2008, we received payments from Nektar which more than offset the related costs
incurred, resulting in a net gain of $4.2 million.
During
2007, we increased our accruals in Brazil for a series of excise, gross receipts
and value-added tax contingencies by $10.1 million. The increased provisions
followed a detailed review of several related tax cases pending in the Brazilian
courts, which indicated that it was probable that the positions taken on
previous tax filings, some of which date back to the late 1990’s, would not be
sustained.
Note
4: Income Taxes
Financial
Accounting Standards Board (“FASB”) Interpretation No. 48
On
January 1, 2007, we adopted FASB Interpretation No. 48, “Accounting for
Uncertainty in Income Taxes”, an interpretation of SFAS No. 109, “Accounting for
Income Taxes” (“FIN 48”). This interpretation clarifies the accounting for
uncertainty in income taxes recognized in financial statements. FIN 48
prescribes a more-likely-than-not threshold for financial statement recognition
and measurement of a tax position taken or expected to be taken in a tax return.
The adoption of FIN 48 resulted in the recognition of net tax assets that met
the more-likely-than-not threshold of $21.6 million and was reflected as an
adjustment to the opening balance of retained earnings for 2007.
Because
we are a global organization, we and our subsidiaries file income tax returns in
the U.S. Federal jurisdiction and various state and foreign jurisdictions.
During 2008, the statute of limitations for the 2004 U.S. Federal tax year
lapsed, leaving tax years 2005 through 2008 open to examination in the U.S.
Federal tax jurisdiction. We are also subject to examination in various state
and foreign jurisdictions for tax years 2000 through 2008.
A
reconciliation of the beginning and ending amount of unrecognized tax benefits
is as follows:
|
($
in millions)
|
2008
|
2007
|
||||||
|
Balance
at January 1
|
$ | 10.2 | $ | 10.1 | ||||
|
Additions
for tax positions taken in the current year
|
0.3 | 0.7 | ||||||
|
Additions
for tax positions of prior years
|
0.8 | 0.7 | ||||||
|
Reduction
for expiration of statute of limitations
|
(3.4 | ) | (1.3 | ) | ||||
|
Balance
at December 31
|
$ | 7.9 | $ | 10.2 | ||||
In
addition, we had accrued interest and penalties of $1.0 million and $0.7 million
at December 31, 2008 and 2007, respectively. During both 2008 and 2007, we
recognized pre-tax expense of $0.1 million for interest and penalties. As of
December 31, 2008, we had approximately $7.9 million of total gross unrecognized
tax benefits, which, if recognized, would favorably impact the effective income
tax rate. We anticipate that the amount of unrecognized tax benefits may change
in the next 12 months; however, due to uncertainties in timing, it is not
reasonably possible to estimate a range of the possible change.
SFAS
No. 109 Disclosures:
The
components of income before income taxes and minority interests
are:
|
($
in millions)
|
2008
|
2007
|
2006
|
|||||||||
|
U.S.
operations
|
$ | 27.4 | $ | 25.6 | $ | 17.8 | ||||||
|
International
operations
|
82.1 | 60.8 | 66.7 | |||||||||
|
Total
income before income taxes and minority interests
|
$ | 109.5 | $ | 86.4 | $ | 84.5 | ||||||
The
related provision for income taxes from continuing operations consists
of:
|
($
in millions)
|
2008
|
2007
|
2006
|
|||||||||
|
Current:
|
||||||||||||
|
Federal
|
$ | (2.8 | ) | $ | 0.5 | $ | 0.4 | |||||
|
State
|
- | - | (0.5 | ) | ||||||||
|
International
|
19.2 | 23.1 | 19.8 | |||||||||
|
Current
income tax provision
|
16.4 | 23.6 | 19.7 | |||||||||
|
Deferred:
|
||||||||||||
|
Federal
|
7.5 | 0.3 | 3.1 | |||||||||
|
International
|
(0.2 | ) | (6.7 | ) | 1.8 | |||||||
|
Deferred
income tax provision
|
7.3 | (6.4 | ) | 4.9 | ||||||||
|
Provision
for income taxes, continuing operations
|
$ | 23.7 | $ | 17.2 | $ | 24.6 | ||||||
The
components of deferred income taxes recognized in the balance sheet at December
31 are as follows:
|
($
in millions)
|
2008
|
2007
|
||||||
|
Current
assets
|
$ | 5.1 | $ | 5.3 | ||||
|
Noncurrent
assets
|
87.1 | 88.0 | ||||||
|
Noncurrent
valuation allowance
|
(23.4 | ) | (27.0 | ) | ||||
|
Current
liabilities
|
(0.9 | ) | (2.5 | ) | ||||
|
Noncurrent
liabilities
|
(20.4 | ) | (46.6 | ) | ||||
|
Deferred
tax asset
|
$ | 47.5 | $ | 17.2 | ||||
Deferred
income taxes result from temporary differences between the amount of assets and
liabilities recognized for financial reporting and tax purposes. The significant
components of our deferred tax assets and liabilities at December 31
are:
|
($
in millions)
|
2008
|
2007
|
||||||
|
Deferred
tax assets
|
||||||||
|
Net
operating loss carryforwards
|
$ | 36.9 | $ | 32.2 | ||||
|
Tax
credit carryforwards
|
21.1 | 17.8 | ||||||
|
Restructuring
and impairment charges
|
0.2 | 5.2 | ||||||
|
Capital
loss carryforwards
|
1.1 | 1.4 | ||||||
|
Pension
and deferred compensation
|
47.4 | 15.2 | ||||||
|
Other
|
10.1 | 15.2 | ||||||
|
Valuation
allowance
|
(23.4 | ) | (27.0 | ) | ||||
|
Total
deferred tax assets
|
93.4 | 60.0 | ||||||
|
Deferred
tax liabilities:
|
||||||||
|
Accelerated
depreciation
|
40.1 | 34.7 | ||||||
|
Other
|
5.8 | 8.1 | ||||||
|
Total
deferred tax liabilities
|
45.9 | 42.8 | ||||||
|
Net
deferred tax asset
|
$ | 47.5 | $ | 17.2 | ||||
A
reconciliation of the U.S. statutory corporate tax rate to our effective
consolidated tax rate on income before income taxes from continuing operations
follows:
|
2008
|
2007
|
2006
|
||||||||||
|
U.S.
statutory corporate tax rate
|
35.0 | % | 35.0 | % | 35.0 | % | ||||||
|
Tax
on international operations less than U.S. tax rate
|
(7.6 | ) | (4.2 | ) | (2.6 | ) | ||||||
|
Non-benefited
losses
|
0.5 | 2.5 | 1.5 | |||||||||
|
Reversal
of prior valuation allowance
|
(1.2 | ) | (4.2 | ) | (1.9 | ) | ||||||
|
Reversal
of reserves related to closed years
|
(3.1 | ) | (1.5 | ) | (1.4 | ) | ||||||
|
U.S.
tax on international earnings, net of foreign tax credits
|
(0.9 | ) | (4.1 | ) | (1.3 | ) | ||||||
|
State
income taxes, net of federal tax benefit
|
0.2 | (3.2 | ) | (3.4 | ) | |||||||
|
Other
|
(1.3 | ) | (0.4 | ) | 3.2 | |||||||
|
Effective
tax rate, continuing operations
|
21.6 | % | 19.9 | % | 29.1 | % | ||||||
During
the first half of 2008, we completed an agreement with the Republic of Singapore
which reduces our Singapore income tax rate for a period of 10 years on a
retroactive basis back to June 2007. As a result of this agreement, our 2008
results contain a $1.0 million tax benefit which represents the remeasurement of
our current and deferred income tax liabilities at the new rate. In addition,
during 2008, we recorded an unrelated $3.4 million net tax benefit resulting
from the expiration of open audit years in certain tax
jurisdictions.
At
December 31, 2008, we had U.S. federal net operating loss carryforwards of $41.8
million and state operating loss carryforwards of $233.3 million, which created
deferred tax assets of $14.7 million and $13.7 million, respectively; and
foreign operating loss carryforwards of $33.9 million, which created a deferred
tax asset of $8.5 million. Management estimates that certain state
and foreign operating loss carryforwards are unlikely to be utilized and the
associated deferred tax assets have been fully reserved. Federal net operating
loss carryforwards expire after 2024. State loss carryforwards expire as
follows: $10.0 million in 2009 and $223.0 million thereafter. Foreign loss
carryforwards will begin to expire in 2012, while $29.7 million of the total
$33.9 million will not expire.
As of
December 31, 2008, we had available foreign tax credit carryforwards of $13.9
million expiring as follows: $0.2 million in 2011, $2.6 million in 2012, $0.4
million in 2014, $3.5 million in 2015, $1.8 million in 2016, $2.9 million in
2017 and $2.5 million in 2018. We have U.S. federal and foreign research and
development credit carryforwards of $6.3 million and $0.9 million,
respectively. The $6.3 million of U.S. federal research and
development credits expire as follows: $0.4 million expire in 2021, $0.5 million
expire in 2022 and $5.4 million expire after 2022. The foreign research and
development credits have an indefinite carryforward.
As of
December 31, 2008, we had U.S. capital loss carryforwards of $2.9 million, which
created a deferred tax asset of $1.1 million, which is fully reserved. During
2007, as the result of an Internal Revenue Service closing agreement, we
realized an additional $8.1 million benefit in the basis of an investment
related to the disposition of our former drug delivery business, creating a
deferred tax asset of $3.2 million which is fully reserved. The U.S. capital
loss carryforwards will begin to expire in 2012.
Undistributed
earnings of foreign subsidiaries amounted to $404.5 million at December 31,
2008, on which deferred income taxes have not been provided because such
earnings are intended to be reinvested indefinitely outside of the
U.S.
Note
5: Segment Information
Our
operations are comprised of two reportable segments: “Pharmaceutical Systems”
and “Tech Group”. Pharmaceutical Systems focuses on the design,
manufacture and distribution of elastomer and metal components used in
parenteral drug delivery for customers in the pharmaceutical and
biopharmaceutical industries. The Tech Group offers custom
contract-manufacturing solutions utilizing plastic injection molding processes
targeted to the healthcare and consumer product industries. Pharmaceutical
Systems has two operating segments: the Americas and Europe/Asia Pacific. Tech
Group is also split into two operating segments: the Americas and Europe. These
operating segments are aggregated for reporting purposes as they have common
economic characteristics, produce and sell a similar range of products, use a
similar distribution process and have a similar customer base.
Our
executive management evaluates the performance of these operating segments based
on operating profit and cash flow generation. General corporate
expenses, restructuring charges and other items considered outside the control
of segment management are not allocated to the segments. Corporate assets
include pension assets, investments in affiliated companies and net assets of
discontinued operations. The accounting policies of the segments are
the same as those described in the summary of significant accounting
policies.
The
following table provides information on sales by significant product
group:
|
($
in millions)
|
2008
|
2007
|
2006
|
|||||||||
|
Pharmaceutical
packaging
|
$ | 622.8 | $ | 577.8 | $ | 495.8 | ||||||
|
Disposable
medical components
|
107.2 | 120.4 | 109.2 | |||||||||
|
Safety
and administration systems
|
33.1 | 25.5 | 21.0 | |||||||||
|
Laboratory
and other services
|
29.0 | 18.1 | 18.1 | |||||||||
|
Pharmaceutical
Systems
|
792.1 | 741.8 | 644.1 | |||||||||
|
Healthcare
devices
|
171.7 | 188.8 | 155.6 | |||||||||
|
Consumer
products
|
74.1 | 73.3 | 84.4 | |||||||||
|
Tooling
and other services
|
24.7 | 27.1 | 39.2 | |||||||||
|
Tech
Group
|
270.5 | 289.2 | 279.2 | |||||||||
|
Intersegment
sales
|
(11.5 | ) | (10.9 | ) | (10.0 | ) | ||||||
|
Net
sales
|
$ | 1,051.1 | $ | 1,020.1 | $ | 913.3 | ||||||
We do not
have any customers accounting for greater than 10% of consolidated net
sales.
The
following table presents sales and net property, plant and equipment, by the
country in which the legal subsidiary is domiciled and assets are
located.
|
Sales
|
Property,
Plant and Equipment, Net
|
|||||||||||||||||||||||
|
($
in millions)
|
2008
|
2007
|
2006
|
2008
|
2007
|
2006
|
||||||||||||||||||
|
United
States
|
$ | 488.5 | $ | 496.4 | $ | 464.5 | $ | 238.9 | $ | 209.9 | $ | 185.3 | ||||||||||||
|
Germany
|
145.4 | 114.7 | 97.7 | 119.9 | 111.0 | 78.5 | ||||||||||||||||||
|
France
|
100.7 | 99.8 | 73.7 | 43.4 | 43.1 | 38.2 | ||||||||||||||||||
|
Other
European countries
|
211.5 | 193.6 | 174.4 | 72.6 | 70.8 | 51.5 | ||||||||||||||||||
|
Other
|
105.0 | 115.6 | 103.0 | 56.2 | 46.9 | 31.2 | ||||||||||||||||||
| $ | 1,051.1 | $ | 1,020.1 | $ | 913.3 | $ | 531.0 | $ | 481.7 | $ | 384.7 | |||||||||||||
The
following table provides summarized financial information for our
segments:
|
($
in millions)
|
Pharmaceutical
Systems
|
Tech
Group
|
Corporate
and Eliminations
|
Consolidated
|
||||||||||||
|
2008
|
||||||||||||||||
|
Net
sales
|
$ | 792.1 | $ | 270.5 | $ | (11.5 | ) | $ | 1,051.1 | |||||||
|
Income
before income taxes and minority interests
|
136.7 | 17.8 | (45.0 | ) | 109.5 | |||||||||||
|
Segment
assets
|
816.3 | 227.5 | 124.9 | 1,168.7 | ||||||||||||
|
Capital
expenditures
|
129.2 | 9.0 | 0.4 | 138.6 | ||||||||||||
|
Depreciation
and amortization expense
|
43.9 | 14.9 | 1.8 | 60.6 | ||||||||||||
|
2007
|
||||||||||||||||
|
Net
sales
|
$ | 741.8 | $ | 289.2 | $ | (10.9 | ) | $ | 1,020.1 | |||||||
|
Income
before income taxes and minority interests
|
141.9 | 11.6 | (67.1 | ) | 86.4 | |||||||||||
|
Segment
assets
|
737.7 | 247.4 | 200.5 | 1,185.6 | ||||||||||||
|
Capital
expenditures
|
108.1 | 20.9 | 0.4 | 129.4 | ||||||||||||
|
Depreciation
and amortization expense
|
39.0 | 15.9 | 1.7 | 56.6 | ||||||||||||
|
2006
|
||||||||||||||||
|
Net
sales
|
$ | 644.1 | $ | 279.2 | $ | (10.0 | ) | $ | 913.3 | |||||||
|
Income
before income taxes and minority interests
|
129.7 | 18.1 | (63.3 | ) | 84.5 | |||||||||||
|
Segment
assets
|
576.7 | 248.2 | 93.3 | 918.2 | ||||||||||||
|
Capital
expenditures
|
62.3 | 26.7 | 1.3 | 90.3 | ||||||||||||
|
Depreciation
and amortization expense
|
34.4 | 16.6 | 1.7 | 52.7 | ||||||||||||
Note
6: Net Income Per Share
The
following table reconciles net income and shares used in the calculation of
basic net income per share to those used for diluted net income per
share.
|
($
and shares in millions)
|
2008
|
2007
|
2006
|
|||||||||
|
Income
from continuing operations
|
$ | 86.0 | $ | 71.2 | $ | 61.5 | ||||||
|
Discontinued
operations, net of tax
|
- | (0.5 | ) | 5.6 | ||||||||
|
Net
income, as reported, for basic net income per share
|
86.0 | 70.7 | 67.1 | |||||||||
|
Plus:
interest expense on convertible debt, net of tax
|
4.3 | 3.4 | - | |||||||||
|
Net
income for diluted net income per share
|
$ | 90.3 | $ | 74.1 | $ | 67.1 | ||||||
|
Weighted
average common shares outstanding
|
32.4 | 32.7 | 32.2 | |||||||||
|
Assumed
stock options exercised, based on the treasury stock
method
|
0.8 | 1.2 | 1.4 | |||||||||
|
Assumed
conversion of convertible debt, based on the if-converted
method
|
2.9 | 2.3 | - | |||||||||
|
Weighted
average shares assuming dilution
|
36.1 | 36.2 | 33.6 | |||||||||
Options
outstanding but not included in the computation of diluted earnings per share
because their impact was antidilutive were 0.6 million, 0.3 million and 0.3
million for fiscal years 2008, 2007 and 2006, respectively.
Note
7: Comprehensive Income
Comprehensive
income consists of reported net income and other comprehensive income, which
reflects revenues, expenses and gains and losses that generally accepted
accounting principles exclude from net income. For us, the items excluded from
current net income were cumulative foreign currency translation adjustments,
unrealized gains or losses on available-for-sale securities of affiliates, fair
value adjustments on derivative financial instruments and pension liability
adjustments.
The
components of accumulated other comprehensive income, net of tax, at December 31
are as follows:
|
($
in millions)
|
2008
|
2007
|
||||||
|
Foreign
currency translation
|
$ | 16.0 | $ | 53.5 | ||||
|
Unrealized
(losses) gains on securities of affiliates
|
(0.9 | ) | 1.7 | |||||
|
Unrealized
losses on derivatives
|
(5.4 | ) | (1.0 | ) | ||||
|
Defined
benefit pension and other postretirement plans
|
(54.6 | ) | (20.6 | ) | ||||
| $ | (44.9 | ) | $ | 33.6 | ||||
Defined
benefit pension and other postretirement plan adjustments for 2007 include the
adoption of SFAS 158 by one of our affiliates in the amount of $(0.4) million
(see Note 11, Affiliated
Companies).
Note
8: Stock Repurchase Program
On August
8, 2007, our Board of Directors authorized a share repurchase program of up to
one million shares of our common stock. The program allowed us to repurchase our
shares on the open market or in privately negotiated transactions in accordance
with the requirements of the Securities and Exchange Commission. During the year
ended December 31, 2007, we purchased 980,300 shares of common stock under this
program at a cost of $39.4 million, or an average price of $40.23 per share. On
February 27, 2008, we announced that we did not intend to make further share
repurchases under this program.
Note
9: Goodwill and Intangibles
The
changes in the carrying amount of goodwill by reportable segment are as
follows:
|
($
in millions)
|
Pharmaceutical
Systems
|
Tech
Group
|
Total
|
|||||||||
|
Balance,
December 31, 2006
|
$ | 69.4 | $ | 33.4 | $ | 102.8 | ||||||
|
Foreign
currency translation
|
5.7 | 0.7 | 6.4 | |||||||||
|
Balance,
December 31, 2007
|
75.1 | 34.1 | 109.2 | |||||||||
|
Additions
|
3.1 | - | 3.1 | |||||||||
|
Foreign
currency translation
|
(6.9 | ) | (0.1 | ) | (7.0 | ) | ||||||
|
Balance,
December 31, 2008
|
$ | 71.3 | $ | 34.0 | $ | 105.3 | ||||||
On
December 29, 2008, we purchased the remaining 10% minority ownership in our
Medimop subsidiary for $8.5 million, which resulted in additional goodwill of
$3.1 million.
Intangible
assets and accumulated amortization as of December 31 were as
follows:
|
2008
|
2007
|
|||||||||||||||||||||||
|
($
in millions)
|
Cost
|
Accumulated
Amortization
|
Net
|
Cost
|
Accumulated
Amortization
|
Net
|
||||||||||||||||||
|
Technology
and patents
|
$ | 10.7 | $ | (3.5 | ) | $ | 7.2 | $ | 10.8 | $ | (2.7 | ) | $ | 8.1 | ||||||||||
|
Trademarks
|
11.2 | (0.3 | ) | 10.9 | 11.4 | (0.3 | ) | 11.1 | ||||||||||||||||
|
Customer
relationships
|
29.3 | (6.0 | ) | 23.3 | 30.5 | (4.3 | ) | 26.2 | ||||||||||||||||
|
Customer
contracts
|
8.2 | (1.5 | ) | 6.7 | 8.3 | (1.1 | ) | 7.2 | ||||||||||||||||
|
Non-compete
agreements
|
3.9 | (2.0 | ) | 1.9 | 3.8 | (1.4 | ) | 2.4 | ||||||||||||||||
| $ | 63.3 | $ | (13.3 | ) | $ | 50.0 | $ | 64.8 | $ | (9.8 | ) | $ | 55.0 | |||||||||||
During
2008, Pharmaceutical Systems acquired licenses for a total of $0.5 million, to
be amortized over 5 years.
In the
fourth quarter of 2007, we recorded a $12.9 million impairment charge on our
Nektar contract intangible asset, which represented a cost of $14.8 million less
accumulated amortization of $1.9 million as of December 31, 2007. This loss was
included in restructuring and other items.
The cost
basis of intangible assets includes the effects of foreign currency translation
adjustments, which were $2.0 million and $1.6 million for the twelve months
ended December 31, 2008 and 2007, respectively. Amortization expense
for the years ended December 31, 2008, 2007 and 2006 was $3.5 million, $4.4
million and $4.2 million, respectively. Estimated future annual amortization
expense is as follows: 2009 to 2011 - $3.5 million, 2012 - $3.2 million and 2013
- $2.9 million. Trademarks with a carrying amount of $10.0 million were
determined to have indefinite lives and therefore do not require
amortization.
Note
10: Property, Plant and Equipment
A summary
of gross property, plant and equipment at December 31 is presented in the
following table:
|
($
in millions)
|
Expected
useful lives (years)
|
2008
|
2007
|
|||||||||
|
Land
|
$ | 9.5 | $ | 12.6 | ||||||||
|
Buildings
and improvements
|
5-50 | 220.7 | 215.1 | |||||||||
|
Machinery
and equipment
|
10-15 | 499.6 | 496.7 | |||||||||
|
Molds
and dies
|
4-7 | 73.1 | 72.1 | |||||||||
|
Computer
hardware and software
|
3-10 | 20.1 | 3.7 | |||||||||
|
Construction
in progress
|
142.0 | 97.5 | ||||||||||
| $ | 965.0 | $ | 897.7 | |||||||||
Depreciation
expense for the years ended December 31, 2008, 2007 and 2006 was $56.1 million,
$51.6 million and $48.1 million, respectively.
We are in
the process of implementing SAP, an enterprise resource planning (“ERP”) system,
over a multi-year period for our North American operations. During the second
quarter of 2008, we successfully replaced our financial reporting, cash
disbursement and order-to-cash systems. The second phase of this SAP project,
focusing on procurement and plant operations, started in late 2008 and is
expected to continue on a plant-by-plant basis through 2009.
Capitalized
leases included in ‘buildings and improvements’ were $2.5 million and $3.2
million at December 31, 2008 and 2007, respectively. Capitalized leases included
in ‘machinery and equipment’ were $2.2 million and $2.3 million at December 31,
2008 and 2007, respectively. Accumulated depreciation on all
property, plant and equipment accounted for as capitalized leases was $1.9
million and $1.6 million at December 31, 2008 and 2007,
respectively.
We
capitalize interest on borrowings during the active construction period of major
capital projects. Capitalized interest
is added to the cost of the underlying assets and is amortized over the useful
lives of the assets. Capitalized interest for the years ended December 31, 2008,
2007 and 2006 was $2.6 million, $1.9 million and $0.7 million,
respectively.
Note
11: Affiliated Companies
At
December 31, 2008, the following affiliated companies were accounted for under
the equity method:
|
Location
|
Ownership
interest
|
||||
|
West
Pharmaceutical Services Mexico, S.A. de C.V.
|
Mexico
|
49 | % | ||
|
Aluplast
S.A. de C.V.
|
Mexico
|
49 | % | ||
|
Pharma
Tap S.A. de C.V.
|
Mexico
|
49 | % | ||
|
Daikyo
Seiko, Ltd. (“Daikyo”)
|
Japan
|
25 | % | ||
Unremitted
income of affiliated companies included in consolidated retained earnings
amounted to $24.7 million, $24.0 million and $21.6 million at December 31, 2008,
2007 and 2006, respectively. Dividends received from affiliated companies were
$0.1 million annually for 2008, 2007 and 2006.
Our
equity in unrealized (losses) gains of Daikyo's investment in securities
available-for-sale and derivative instruments, included in accumulated other
comprehensive income, a separate component of shareholders' equity, was $(0.9)
million, $1.7 million and $2.3 million at December 31, 2008, 2007 and 2006,
respectively. Our equity in Daikyo’s cumulative effect of their adoption of SFAS
158, also included in accumulated other comprehensive income, was $(0.4) million
at December 31, 2007.
Our
purchases and royalty payments made to affiliates totaled $36.3 million, $31.3
million and $24.1 million, respectively, in 2008, 2007 and 2006, of which $3.7
million and $4.3 million was due and payable as of December 31, 2008 and 2007,
respectively. These transactions primarily relate to a distributorship agreement
allowing us to purchase and re-sell Daikyo products. Sales to affiliates were
$1.7 million, $0.9 million and $0.8 million, respectively, in 2008, 2007 and
2006, of which $0.2 million was receivable as of December 31, 2008 and
2007.
We also
have affiliates that are accounted for as cost investments, which are carried at
the lower of cost or market. In March 2007, the Tech Group sold its investment
in a tool shop located in Ireland for $0.7 million and recorded a $0.4 million
gain on sale of this investment.
At
December 31, the aggregate carrying amount of investments in affiliated
companies was as follows:
|
($
in millions)
|
2008
|
2007
|
||||||
|
Equity
companies
|
$ | 32.8 | $ | 30.6 | ||||
|
Cost
companies
|
0.8 | 1.1 | ||||||
| $ | 33.6 | $ | 31.7 | |||||
Note
12: Debt
At
December 31, 2008 and 2007, we had short-term obligations under capital leases
of $0.4 million and $0.5 million, respectively, denominated in Euros and
carrying a weighted average interest rate of 5.4%. In December 2008, we issued a
note payable for $3.5 million which matures in June 2009 and carries an interest
rate of 2.4%.
The
following table summarizes our long-term debt obligations at December
31:
|
($
in millions)
|
2008
|
2007
|
||||||
|
Capital
leases, due 2011 (5.5%)
|
$ | 0.3 | $ | 0.5 | ||||
|
Capital
leases, due 2012 (5.3%)
|
0.5 | 0.7 | ||||||
|
Revolving
credit facility, due 2011 (1.7%)
|
29.9 | 36.9 | ||||||
|
Series
A floating rate notes, due 2012 (4.3%)
|
50.0 | 50.0 | ||||||
|
Series
B floating rate notes, due 2015 (4.4%)
|
25.0 | 25.0 | ||||||
|
Euro
note A, due 2013 (4.2%)
|
28.7 | 30.0 | ||||||
|
Euro
note B, due 2016 (4.4%)
|
86.2 | 90.0 | ||||||
|
Convertible
debt, due 2047 (4.0%)
|
161.5 | 161.5 | ||||||
| $ | 382.1 | $ | 394.6 | |||||
Our
long-term capital lease obligations as of December 31, 2008 are in connection
with the financing of equipment purchases and are denominated in
Euros.
As of
December 31, 2008, we have $29.9 million of borrowings under our multi-currency
revolving credit agreement due in 2011, all of which is denominated in Japanese
Yen. This Yen-denominated note is accounted for as a hedge of our net investment
in our Japanese affiliate. Borrowings under the revolving credit facility are at
variable rates determined by reference to the applicable London Interbank
Offering Rates (“LIBOR”) plus a margin ranging from 0.5 percentage points to
1.375 percentage points determined by our leverage ratio. Under the leverage
ratio, our total indebtedness cannot exceed three-and one-half (3.5) times our
earnings before income tax, depreciation and amortization for any period of four
consecutive quarters. Our credit agreement contains a $200 million committed
credit facility and an “accordion” feature under which the credit facility may
be temporarily increased to $250 million. We pay a quarterly commitment fee
ranging from 0.125% to 0.30% as determined by the leverage ratio on any unused
commitments. The borrowings under the revolving credit agreement of $29.9
million together with outstanding letters of credit of $5.1 million result in an
unused commitment level of $165.0 million under the facility at December 31,
2008.
In 2005,
we concluded a private placement of $75.0 million in senior floating rate
notes. The total amount of the private placement was divided into two
tranches with $50.0 million maturing on July 28, 2012 (“Series A Notes”) and
$25.0 million maturing on July 28, 2015 (“Series B Notes”). The two
tranches have interest payable based on LIBOR rates, with the Series A Notes at
LIBOR plus 0.8 percentage points and the Series B Notes at LIBOR plus 0.9
percentage points. We entered into two interest-rate swap agreements
to protect against volatility in the interest rates payable on the Series A and
B floating rate notes (discussed in Note 15, Financial Instruments), which
effectively fixed the interest rates at 5.32% and 5.51%,
respectively.
In 2006,
we issued Euro-denominated notes totaling €81.5 million. Euro note A of €20.4
million (or $28.7 million at December 31, 2008) has a term of 7 years due
February 27, 2013 with a fixed annual interest rate of 4.215% while Euro note B
of €61.1 million ($86.2 million at December 31, 2008) has a term of 10 years due
February 27, 2016 at a fixed annual interest rate of 4.38%. These
Euro-denominated notes are accounted for as a hedge of our net investment in our
European subsidiaries. The proceeds of the Euro notes were used to prepay $100.0
million of our 6.81% senior notes with an original maturity date of April 8,
2009. As required by the note purchase agreement, we incurred costs of $5.9
million in connection with the prepayment, which was accounted for as a loss on
debt extinguishment.
On March
14, 2007, the Company issued $150.0 million of Convertible Junior Subordinated
Debentures (“debentures”) due March 15, 2047. On April 3, 2007, the underwriters
exercised an over-allotment option resulting in the issuance of an additional
$11.5 million of debentures, bringing the total aggregate principal amount
outstanding to $161.5 million. The debentures bear interest at a rate of 4%
annually and are convertible into shares of our common stock at an initial
conversion rate, subject to adjustment, of 17.8336 shares per $1,000 of
principal amount, which equals a conversion price of approximately $56.07 per
share. The holders may convert their debentures at any time prior to maturity.
On or after March 20, 2012, if our common stock closing price exceeds 150% of
the then prevailing conversion price for at least 20 trading days during any 30
consecutive trading day period, we have the option to cause the debentures to be
automatically converted into West shares at the prevailing conversion rate. As
of December 31, 2008, no debentures have been converted.
Total net
proceeds from this offering were $156.3 million. We have and may use the
proceeds for general corporate purposes, which include capital expenditures,
working capital, possible acquisitions of other businesses, technologies or
products, repaying debt, and repurchasing our capital stock. In connection with
the offering, we incurred debt issuance costs in the amount of $5.2 million,
consisting of underwriting discounts and commissions, legal and other
professional fees. These costs are recorded as a noncurrent asset and are being
amortized as additional interest expense over the term of the
debentures.
Covenants
included in our senior debt agreements conform to those in our revolving credit
agreement.
Interest
costs incurred during 2008, 2007 and 2006 were $18.6 million, $16.4 million and
$13.4 million, respectively, of which $2.6 million, $1.9 million and $0.7
million, respectively, were capitalized as part of the cost of constructing
property, plant and equipment. The aggregate annual maturities of long-term debt
are as follows: 2011 - $30.2 million, 2012 - $50.5 million, 2013 - $28.7 million
and thereafter - $272.7 million.
Note
13: Benefit Plans
Certain
of our U.S. and international subsidiaries sponsor defined benefit pension
plans. In addition, we provide minimal life insurance benefits for certain U.S.
retirees and pay a portion of healthcare costs for retired U.S. salaried
employees and their dependents. Benefits for participants are coordinated with
Medicare and the plan mandates Medicare risk (“HMO”) coverage wherever possible
and caps the total contribution for non-HMO coverage. We also sponsor
a defined contribution savings plan for certain salaried and hourly U.S.
employees.
On
October 17, 2006, our Board of Directors approved an amendment to our U.S.
qualified defined benefit pension plan, effective January 1, 2007. Benefits
earned under the former plan’s pension formulas and accruals for both hourly and
salaried participants were frozen as of December 31, 2006. Under the
amended plan, new cash-balance formulas were implemented for covered hourly and
salaried participants and new hires, pursuant to which a percentage of each
participant’s compensation will be credited to a participant account each year.
This amendment resulted in an $18.8 million reduction in our projected benefit
obligations at December 31, 2006. The impact of this plan amendment
will be recognized as a reduction to pension expense over a 12 year period
representing the estimated average remaining service period of plan participants
affected by the amendment. Our Board also adopted certain ‘safe harbor’ features
to our 401(k) savings plan, covering certain salaried and hourly U.S. employees,
effective January 1, 2007. In addition, the Company increased its
contributions to a 100% match on the first 3% of employee base compensation
contributions, and a 50% match on the next 2% of employee
contributions. Our 401(k) plan contributions were $2.5 million, $2.3
million and $1.4 million for 2008, 2007 and 2006, respectively.
Pension
and Other Retirement Benefits
The
components of net periodic benefit cost and other amounts recognized in other
comprehensive income are as follows:
|
Pension
benefits
|
Other
retirement benefits
|
|||||||||||||||||||||||
|
($
in millions)
|
2008
|
2007
|
2006
|
2008
|
2007
|
2006
|
||||||||||||||||||
|
Net
periodic benefit cost:
|
||||||||||||||||||||||||
|
Service
cost
|
$ | 7.7 | $ | 7.7 | $ | 5.4 | $ | 0.8 | $ | 1.0 | $ | 1.0 | ||||||||||||
|
Interest
cost
|
14.2 | 13.3 | 13.2 | 0.8 | 0.9 | 0.8 | ||||||||||||||||||
|
Expected
return on assets
|
(16.6 | ) | (16.2 | ) | (14.8 | ) | - | - | - | |||||||||||||||
|
Amortization
of prior service (credit) cost
|
(1.1 | ) | (1.2 | ) | 0.7 | 0.1 | 0.1 | 0.1 | ||||||||||||||||
|
Amortization
of transition obligation
|
0.1 | 0.1 | 0.1 | - | - | - | ||||||||||||||||||
|
Recognized
actuarial losses
|
1.6 | 2.6 | 3.9 | - | - | - | ||||||||||||||||||
|
Net
periodic benefit cost
|
$ | 5.9 | $ | 6.3 | $ | 8.5 | $ | 1.7 | $ | 2.0 | $ | 1.9 | ||||||||||||
|
Other
changes in plan assets and benefit obligations recognized in other
comprehensive income, pre-tax:
|
||||||||||||||||||||||||
|
Net
loss (gain) arising during period
|
$ | 56.8 | $ | (7.8 | ) | $ | - | $ | (0.3 | ) | $ | (2.0 | ) | $ | - | |||||||||
|
Prior
service cost arising during period
|
- | 1.9 | - | - | - | - | ||||||||||||||||||
|
Amortization
of prior service credit (cost)
|
1.1 | 1.2 | - | (0.1 | ) | (0.1 | ) | - | ||||||||||||||||
|
Amortization
of transition obligation
|
(0.1 | ) | (0.1 | ) | - | - | - | - | ||||||||||||||||
|
Amortization
of actuarial loss
|
(1.6 | ) | (2.6 | ) | - | - | - | - | ||||||||||||||||
|
Minimum
pension liability adjustments
|
- | - | 0.1 | - | - | - | ||||||||||||||||||
|
Total
recognized in other comprehensive income
|
$ | 56.2 | $ | (7.4 | ) | $ | 0.1 | $ | (0.4 | ) | $ | (2.1 | ) | $ | - | |||||||||
|
Total
recognized in net periodic benefit cost and other comprehensive
income
|
$ | 62.1 | $ | (1.1 | ) | $ | 8.6 | $ | 1.3 | $ | (0.1 | ) | $ | 1.9 | ||||||||||
Net
periodic benefit cost by geographic location is as follows:
|
Pension
benefits
|
Other
retirement benefits
|
|||||||||||||||||||||||
|
($
in millions)
|
2008
|
2007
|
2006
|
2008
|
2007
|
2006
|
||||||||||||||||||
|
U.S.
plans
|
$ | 4.3 | $ | 4.1 | $ | 6.5 | $ | 1.7 | $ | 2.0 | $ | 1.9 | ||||||||||||
|
International
plans
|
1.6 | 2.2 | 2.0 | - | - | - | ||||||||||||||||||
|
Net
periodic benefit cost
|
$ | 5.9 | $ | 6.3 | $ | 8.5 | $ | 1.7 | $ | 2.0 | $ | 1.9 | ||||||||||||
The
following tables present the changes in the benefit obligation and the fair
value of plan assets, as well as the funded status of the plans:
|
Pension
benefits
|
Other
retirement benefits
|
|||||||||||||||
|
($
in millions)
|
2008
|
2007
|
2008
|
2007
|
||||||||||||
|
Change
in benefit obligation:
|
||||||||||||||||
|
Benefit
obligation, January 1
|
$ | (231.7 | ) | $ | (226.6 | ) | $ | (14.1 | ) | $ | (14.6 | ) | ||||
|
Service
cost
|
(7.7 | ) | (7.7 | ) | (0.8 | ) | (1.0 | ) | ||||||||
|
Interest
cost
|
(14.2 | ) | (13.3 | ) | (0.8 | ) | (0.9 | ) | ||||||||
|
Participants’
contributions
|
- | - | (0.4 | ) | (0.4 | ) | ||||||||||
|
Actuarial
gain
|
11.4 | 9.4 | 0.4 | 2.0 | ||||||||||||
|
Amendments/transfers
in
|
(0.4 | ) | (1.7 | ) | - | - | ||||||||||
|
Benefits/expenses
paid
|
10.1 | 10.1 | 0.7 | 0.8 | ||||||||||||
|
Foreign
currency translation
|
7.3 | (1.9 | ) | - | - | |||||||||||
|
Benefit
obligation, December 31
|
$ | (225.2 | ) | $ | (231.7 | ) | $ | (15.0 | ) | $ | (14.1 | ) | ||||
|
Pension
benefits
|
Other
retirement benefits
|
|||||||||||||||
|
($
in millions)
|
2008
|
2007
|
2008
|
2007
|
||||||||||||
|
Change
in plan assets:
|
||||||||||||||||
|
Fair
value of assets, January 1
|
$ | 216.9 | $ | 210.5 | $ | - | $ | - | ||||||||
|
Actual
return on assets
|
(52.2 | ) | 14.0 | - | - | |||||||||||
|
Employer
contribution
|
2.4 | 2.0 | 0.3 | 0.4 | ||||||||||||
|
Participants’
contribution
|
- | - | 0.4 | 0.4 | ||||||||||||
|
Benefits/expenses
paid
|
(10.1 | ) | (10.1 | ) | (0.7 | ) | (0.8 | ) | ||||||||
|
Foreign
currency translation
|
(4.8 | ) | 0.5 | - | - | |||||||||||
|
Fair
value of plan assets, December 31
|
$ | 152.2 | $ | 216.9 | $ | - | $ | - | ||||||||
|
Funded
status at end of year
|
$ | (73.0 | ) | $ | (14.8 | ) | $ | (15.0 | ) | $ | (14.1 | ) | ||||
International
pension plan assets, at fair value, included in the preceding table were $13.4
million and $20.8 million at December 31, 2008 and 2007,
respectively.
Amounts
recognized in the balance sheet are as follows:
|
Pension
benefits
|
Other
retirement benefits
|
|||||||||||||||
|
($
in millions)
|
2008
|
2007
|
2008
|
2007
|
||||||||||||
|
Pension
asset
|
$ | - | $ | 13.0 | $ | - | $ | - | ||||||||
|
Current
liabilities
|
(0.9 | ) | (0.9 | ) | (1.1 | ) | (0.9 | ) | ||||||||
|
Noncurrent
liabilities
|
(72.1 | ) | (26.9 | ) | (13.9 | ) | (13.2 | ) | ||||||||
| $ | (73.0 | ) | $ | (14.8 | ) | $ | (15.0 | ) | $ | (14.1 | ) | |||||
The
amounts in accumulated other comprehensive income, pre-tax, consist
of:
|
Pension
benefits
|
Other
retirement benefits
|
|||||||||||||||
|
($
in millions)
|
2008
|
2007
|
2008
|
2007
|
||||||||||||
|
Net
actuarial loss (gain)
|
$ | 98.5 | $ | 42.9 | $ | (1.9 | ) | $ | (1.6 | ) | ||||||
|
Transition
obligation
|
0.7 | 1.1 | - | - | ||||||||||||
|
Prior
service (credit) cost
|
(9.6 | ) | (10.6 | ) | 0.4 | 0.5 | ||||||||||
|
Accumulated
other comprehensive income
|
$ | 89.6 | $ | 33.4 | $ | (1.5 | ) | $ | (1.1 | ) | ||||||
The
actuarial net loss, transition obligation and prior service credit for the
defined benefit pension plans that will be amortized from accumulated other
comprehensive income into net pension expense over the next fiscal year are $6.7
million, $0.1 million and $(1.1) million, respectively. The prior service cost
for the other retirement benefit plan that will be amortized from accumulated
other comprehensive income into net pension expense over the next fiscal year is
$0.1 million.
The
accumulated benefit obligation for all defined benefit pension plans was $223.3
million and $229.5 million at December 31, 2008 and 2007, respectively,
including $27.9 million and $37.3 million, respectively, for international
pension plans.
The
aggregate projected benefit obligation and fair value of plan assets for pension
plans with projected benefit obligations in excess of plan assets were $225.2
million and $152.2 million, respectively, as of December 31, 2008 and $48.6
million and $20.8 million, respectively, as of December 31, 2007. The aggregate
accumulated benefit obligation and fair value of plan assets for pension plans
with accumulated benefit obligations in excess of plan assets were $223.3
million and $152.2 million, respectively, as of December 31, 2008 and $46.4
million and $20.8 million, respectively, as of December 31, 2007.
Benefit
payments expected to be paid under our defined benefit pension plans in the next
ten years are as follows:
|
($
in millions)
|
Domestic
Plans
|
International
Plans
|
Total
|
|||||||||
|
2009
|
$ | 11.8 | $ | 1.0 | $ | 12.8 | ||||||
|
2010
|
13.2 | 1.1 | 14.3 | |||||||||
|
2011
|
14.7 | 2.0 | 16.7 | |||||||||
|
2012
|
16.5 | 1.1 | 17.6 | |||||||||
|
2013
|
17.8 | 1.6 | 19.4 | |||||||||
|
2014
to 2018
|
111.6 | 9.1 | 120.7 | |||||||||
| $ | 185.6 | $ | 15.9 | $ | 201.5 | |||||||
In 2009,
we expect to contribute approximately $12.0 million to pension plans, of which
$1.5 million is for international plans. Included in this amount is a voluntary
contribution to the U.S. qualified pension plan of $10.0 million, which was made
in January 2009. We also expect to contribute $1.1 million to other retirement
plans in 2009. We periodically consider additional, voluntary
contributions depending on the investment returns generated by pension plan
assets, changes in benefit obligation projections and other
factors.
Weighted
average assumptions used to determine net periodic benefit cost are as
follows:
|
Pension
benefits
|
Other
retirement benefits
|
|||||||||||||||||||||||
|
2008
|
2007
|
2006
|
2008
|
2007
|
2006
|
|||||||||||||||||||
|
Discount
rate
|
6.22 | % | 5.86 | % | 5.52 | % | 6.00 | % | 5.70 | % | 5.65 | % | ||||||||||||
|
Rate
of compensation increase
|
4.85 | % | 4.73 | % | 4.68 | % | - | - | - | |||||||||||||||
|
Long-term
rate of return on assets
|
7.79 | % | 7.86 | % | 7.85 | % | - | - | - | |||||||||||||||
Weighted
average assumptions used to determine the benefit obligations are as
follows:
|
Pension
benefits
|
Other
retirement benefits
|
|||||||||||||||
|
2008
|
2007
|
2008
|
2007
|
|||||||||||||
|
Discount
rate
|
6.46 | % | 6.15 | % | 6.25 | % | 6.00 | % | ||||||||
|
Rate
of compensation increase
|
4.85 | % | 4.73 | % | - | - | ||||||||||
The
discount rate used to determine the benefit obligations for U.S. pension plans
was 6.50% and 6.25% for the years ended December 31, 2008 and 2007,
respectively. The weighted average discount rate used to determine
the benefit obligations for all international plans was 6.17% and 5.67% for the
years ended December 31, 2008 and 2007, respectively. The rate of
compensation increase for U.S. plans was 5.00% for all years presented while the
weighted average rate for all international plans was 2.66% for 2008 and 2.88%
for 2007. Other retirement benefits were only available to U.S.
employees. The long-term rate of return for U.S. plans, which accounts for 91%
of global plan assets, was 8.00% for the years ended December 31, 2008, 2007 and
2006.
The
assumed healthcare cost trend rate used to determine benefit obligations is
8.50% for all participants in 2008, decreasing to 5.00% by 2014. Increasing or
decreasing the assumed healthcare cost trend rate by one percentage point would
result in a $0.8 million increase or decrease, respectively, in the
postretirement obligation. The assumed healthcare cost trend rate used to
determine net periodic benefit cost is 9.50% for all participants in 2008,
decreasing to 5.50% by 2012. The effect of a one percentage point change in the
rate would result in a $0.1 million increase or decrease in the aggregate
service and interest cost components.
The
weighted average asset allocations by asset category for our pension plans, at
December 31, are as follows:
|
2008
|
2007
|
|||||||
|
Equity
securities
|
61 | % | 66 | % | ||||
|
Debt
securities
|
39 | % | 33 | % | ||||
|
Cash
|
- | 1 | % | |||||
| 100 | % | 100 | % | |||||
Our U.S.
pension plan is managed as a balanced portfolio comprised of two components:
equity and fixed income debt securities. Equity investments are used to maximize
the long-term real growth of fund assets, while fixed income investments are
used to generate current income, provide for a more stable periodic return, and
to provide some protection against a prolonged decline in the market value of
equity investments. Temporary funds may be held as cash. We maintain a long-term
strategic asset allocation policy which provides guidelines for ensuring that
the fund's investments are managed with the short-term and long-term financial
goals of the fund but provide the flexibility to allow for changes in capital
markets.
The
following are our target asset allocations and acceptable allocation
ranges:
|
Target
allocation
|
Allocation
range
|
|||||||
|
Equity
securities
|
65%
|
60%-70%
|
||||||
|
Debt
securities
|
35%
|
30%-40%
|
||||||
|
Other
|
0%
|
0%-5%
|
||||||
Diversification
across and within asset classes is the primary means by which we mitigate risk.
We maintain guidelines for all asset and sub-asset categories in order to avoid
excessive investment concentrations. Fund assets are monitored on a regular
basis. If at any time the fund asset allocation is not within the acceptable
allocation range, funds will be reallocated. We also review the fund on a
regular basis to ensure that the investment returns received are consistent with
the short-term and long-term goals of the fund and with comparable market
returns. We are prohibited from pledging of securities and from investing
pension fund assets in the following: our own stock, securities on margin and
derivative securities.
We
provide certain post-employment benefits for terminated and disabled employees,
including severance pay, disability-related benefits and healthcare benefits.
These costs are accrued over the employee's active service period or, under
certain circumstances, at the date of the event triggering the
benefit.
Note
14: Fair Value Measurements
On
January 1, 2008, we adopted SFAS No. 157, “Fair Value Measurements” (“SFAS 157”)
for financial assets and liabilities. SFAS 157 defines fair value, establishes a
framework for measuring fair value in GAAP, and expands disclosures about fair
value measurements. Although the adoption of SFAS 157 did not change our
valuation of assets or liabilities, we are now required to provide additional
disclosures as part of our financial statements.
SFAS 157
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. SFAS 157 also 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 table summarizes the assets and liabilities that are measured at fair
value on a recurring basis in the balance sheet:
|
Basis
of Fair Value Measurements
|
||||||||||||||||
|
Balance
at
|
||||||||||||||||
|
December
31,
|
||||||||||||||||
|
($
in millions)
|
2008
|
Level
1
|
Level
2
|
Level
3
|
||||||||||||
|
Assets:
|
||||||||||||||||
|
Short-term
investments (a)
|
$ | 4.3 | $ | - | $ | 4.3 | $ | - | ||||||||
|
Deferred
compensation asset (b)
|
2.8 | 2.8 | - | - | ||||||||||||
|
Long-term
investments (a)
|
0.8 | - | 0.8 | - | ||||||||||||
| $ | 7.9 | $ | 2.8 | $ | 5.1 | $ | - | |||||||||
|
Liabilities:
|
||||||||||||||||
|
Foreign
currency hedge contracts (c)
|
$ | 2.0 | $ | - | $ | 2.0 | $ | - | ||||||||
|
Interest
rate swap contracts (d)
|
8.2 | - | 8.2 | - | ||||||||||||
| $ | 10.2 | $ | - | $ | 10.2 | $ | - | |||||||||
|
(a)
|
Represents
our remaining investment in the Columbia Strategic Cash Portfolio Fund.
See discussion below regarding
valuation.
|
|
(b)
|
Included
in other assets. Valuation is based on quoted market prices in an active
market.
|
|
(c)
|
Included
in other current liabilities. Valued using quoted forward foreign exchange
rates and spot rates at the reporting
date.
|
|
(d)
|
Included
in other long-term liabilities. 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).
|
In
October 2008, the FASB issued FSP No. 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 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 No. 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 as of December 31, 2008.
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 2009 and has
restricted redemptions to a pro-rata distribution of the underlying securities
held by the fund. Our initial investment in 2007 was $25.0 million and a total
of $2.3 million had been redeemed in December of 2007. During 2008, we received
an additional $16.8 million in redemptions.
We
assessed the fair value of the fund based on the value of the underlying
securities as determined by fund management. 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. During 2008, we recognized an unrealized loss of $1.4
million related to these securities, which was recorded within interest income
in the accompanying consolidated statements of income. At the end of 2008, an
investment balance of $5.1 million remained, with $4.3 million in short-term
investments and $0.8 million in other assets on the consolidated balance sheet,
reflecting information received from the fund manager regarding the expected
timing of distributions. These investments are subject to credit, liquidity,
market and interest rate risks, and there may be further declines in the value
up to the carrying amount of this investment.
Note
15: Financial Instruments
Cash and
cash equivalents, accounts receivable and short-term debt, due to their short
maturity, are held at carrying values that approximate fair value. Interest rate
swaps are valued using a discounted cash flow analysis based on the terms of the
contract and observable market inputs, and foreign exchange hedge contracts are
valued using quoted forward foreign exchange rates and spot rates at the
reporting date. The fair values of long-term debt and derivative financial
instruments are based on quoted market prices or pricing models using current
market rates. The estimated fair value of our short- and long-term debt was
$319.0 million and $375.1 million at December 31, 2008 and 2007,
respectively.
As of
December 31, 2008 and 2007, we held investments in the Columbia Strategic Cash
Portfolio Fund totaling $5.1 million and $23.3 million, respectively. We
assessed the fair value of the fund based on the value of the underlying
securities as determined by the fund management. See Note 14, Fair Value Measurements, for
further discussion.
We
account for derivatives under SFAS No. 133, “Accounting for Derivative
Instruments and Hedging Activities” as amended by SFAS No. 138 and SFAS No. 149.
The standard requires that all derivative instruments be recorded on the balance
sheet at fair value and establishes criteria for designation and effectiveness
of the hedging relationships. We use certain derivative financial instruments to
enhance our ability to manage risk, including interest rate, foreign currency
and commodity risks that exist as part of ongoing business operations.
Derivative instruments are entered into for periods consistent with and for
notional amounts equal to or less than the related underlying exposures. We do
not purchase or hold any derivative financial instruments for investment or
trading purposes.
On July
28, 2005, we entered into two interest-rate swap agreements to protect against
volatility in the interest rates payable on Series A and B floating rate notes.
The first interest rate swap agreement has a seven-year term with a notional
amount of $50.0 million under which we will receive variable interest rate
payments based on three-month LIBOR in return for making quarterly fixed
payments. The second interest rate swap agreement has a ten-year term with a
notional amount of $25.0 million under which we receive variable interest rate
payments based on 3-month LIBOR in return for making quarterly fixed payments.
The interest-rate swap agreements effectively fix the interest rates payable on
the Series A and B floating rate notes at 5.32% and 5.51%, respectively. The
fair value of these agreements was $8.2 million and $1.4 million at December 31,
2008 and 2007, respectively.
We have
entered into a series of foreign currency hedge contracts which are designed to
eliminate the currency risk associated with forecasted U.S. dollar (USD)
denominated raw material and other inventory purchases made by certain European
subsidiaries. As of December 31, 2008, there were eleven monthly contracts
outstanding at $0.9 million each, for an aggregate notional amount of $9.9
million. The fair value of these contracts at December 31, 2008 was $0.5 million
and was recorded within other current liabilities. The last contract matures on
December 15, 2009. The contracts effectively fix the Euro to USD exchange rate
for 40% of our anticipated needs at a maximum of 1.2800 USD per Euro while
allowing us to benefit from any currency movement between 1.2800 and 1.4620 USD
per Euro. As of December 31, 2008, the Euro was equal to 1.4094
USD.
In
addition to these contracts, we had other forward currency contracts hedging
various obligations for a fair value of $1.5 million and $0.1 million at
December 31, 2008 and 2007, respectively.
Note
16: Stock-Based Compensation
At
December 31, 2008, there were approximately 2,832,135 shares remaining in the
2007 Omnibus Incentive Compensation Plan (the “2007 Plan”) for future grants.
The 2007 Plan provides for the granting of stock options, stock appreciation
rights, performance vesting share awards, performance vesting unit awards, and
other stock awards to employees and non-employee directors. The terms and
conditions of awards to be granted are determined by our Board’s nominating and
compensation committees. Vesting requirements vary by award.
Stock
options and stock appreciation rights reduce the number of shares available for
grant by one share for each share granted. All other awards under the 2007 Plan
will reduce the total number of shares available for grant by an amount equal to
2.5 times the number of shares awarded. If any awards made under the 2004
Stock-Based Compensation Plan would entitle a plan participant to an amount of
Company stock in excess of the target amount, the additional shares (up to a
maximum threshold) would also be distributed under the 2007 Plan.
The
following table summarizes our stock-based compensation expense for the years
ended December 31:
|
($
in millions)
|
2008
|
2007
|
2006
|
|||||||||
|
Stock
option and appreciation rights
|
$ | 3.3 | $ | 3.0 | $ | 2.4 | ||||||
|
Performance
vesting shares
|
1.8 | 3.2 | 3.5 | |||||||||
|
Performance
vesting units
|
0.1 | 0.1 | 0.2 | |||||||||
|
Performance
vesting shares/units dividend equivalents
|
0.1 | 0.1 | - | |||||||||
|
Employee
stock purchase plan
|
0.4 | 0.4 | 0.2 | |||||||||
|
Deferred
compensation plans
|
0.7 | (1.7 | ) | 8.2 | ||||||||
|
Total
stock-based compensation expense
|
$ | 6.4 | $ | 5.1 | $ | 14.5 | ||||||
The
amount of unrecognized compensation expense for all nonvested awards as of
December 31, 2008, was approximately $9.6 million, which is expected to be
recognized over a weighted average period of 1.7 years. This amount excludes the
employee stock purchase plan.
Stock
Options
Stock
options granted to employees vest in equal annual increments over 4 years of
continuous service, while the stock options granted to non-employee directors
vest one year from the date of grant. All awards expire ten years from the date
of grant. Upon the exercise of stock options, shares are issued in exchange for
the exercise price of the options.
The
following table summarizes changes in outstanding options:
|
(in
millions, except per share data)
|
2008
|
2007
|
2006
|
|||||||||
|
Options
outstanding, January 1
|
2.7 | 2.7 | 3.9 | |||||||||
|
Granted
|
0.5 | 0.3 | 0.3 | |||||||||
|
Exercised
|
(0.5 | ) | (0.2 | ) | (1.4 | ) | ||||||
|
Forfeited
|
(0.1 | ) | (0.1 | ) | (0.1 | ) | ||||||
|
Options
outstanding, December 31
|
2.6 | 2.7 | 2.7 | |||||||||
|
Options
exercisable, December 31
|
1.6 | 1.9 | 1.9 | |||||||||
|
Weighted
Average Exercise Price
|
2008
|
2007
|
2006
|
|||||||||
|
Options
outstanding, January 1
|
$ | 21.89 | $ | 18.32 | $ | 15.44 | ||||||
|
Granted
|
42.50 | 44.96 | 33.30 | |||||||||
|
Exercised
|
14.09 | 15.10 | 13.69 | |||||||||
|
Forfeited
|
39.87 | 17.81 | 19.95 | |||||||||
|
Options
outstanding, December 31
|
$ | 29.91 | $ | 21.89 | $ | 18.32 | ||||||
|
Options
exercisable, December 31
|
$ | 20.64 | $ | 17.02 | $ | 15.12 | ||||||
As of
December 31, 2008, the weighted average remaining contractual life of options
outstanding and of options exercisable was 5.6 years and 4.4 years,
respectively.
As of
December 31, 2008, the aggregate intrinsic value of total options outstanding
was $28.3 million, of which $28.1 million represented vested
options.
The fair
value of the options was estimated on the date of grant using a Black-Scholes
option valuation model that uses the following weighted average assumptions in
2008, 2007 and 2006: a risk-free interest rate of 3.0%, 4.5% and 4.7%,
respectively; stock volatility of 24.5%, 30.3% and 29.3%, respectively; and
dividend yields of 1.3%, 1.2% and 1.4%, respectively. Stock volatility is
estimated based on historical data as well as any expected future
trends. Expected lives, which are based on prior experience, averaged
5 years for 2008 and 2007 and 6 years for options granted in
2006. The weighted average grant date fair value of options granted
in 2008, 2007 and 2006 was $9.94, $13.93 and $10.86, respectively.
For the
years ended December 31, 2008, 2007 and 2006, the intrinsic value of options
exercised was $18.0 million, $9.0 million and $34.0 million
respectively. The grant date fair value of options vested during
those same periods was $3.0 million, $2.5 million and $1.9 million,
respectively.
Stock
Appreciation Rights
Stock
appreciation rights (“SARs”) granted to eligible international employees vest in
equal annual increments over 4 years of continuous service. All awards expire
ten years from the date of grant. The fair value of each SAR is adjusted at the
end of each reporting period with the resulting change reflected in expense.
Upon exercise of a SAR, the employee receives cash for the difference between
the grant price and the fair market value of the Company’s stock on the date of
exercise. As a result of the cash settlement feature, SAR awards are recorded
within other long-term liabilities.
The
following table summarizes changes in outstanding SARs:
|
2008
|
2007
|
2006
|
||||||||||
|
SARs
outstanding, January 1
|
40,339 | 22,154 | - | |||||||||
|
Granted
|
24,062 | 20,413 | 22,154 | |||||||||
|
Exercised
|
(4,208 | ) | (557 | ) | - | |||||||
|
Forfeited
|
(4,181 | ) | (1,671 | ) | - | |||||||
|
SARs
outstanding, December 31
|
56,012 | 40,339 | 22,154 | |||||||||
|
SARs
exercisable, December 31
|
10,196 | 4,979 | - | |||||||||
|
Weighted
Average Exercise Price
|
2008
|
2007
|
2006
|
|||||||||
|
SARs
outstanding, January 1
|
$ | 38.85 | $ | 32.59 | $ | - | ||||||
|
Granted
|
41.70 | 44.97 | 32.59 | |||||||||
|
Exercised
|
32.59 | 32.59 | - | |||||||||
|
Forfeited
|
40.39 | 32.59 | - | |||||||||
|
SARs
outstanding, December 31
|
$ | 40.43 | $ | 38.85 | $ | 32.59 | ||||||
|
SARs
exercisable, December 31
|
$ | 37.98 | $ | 32.59 | $ | - | ||||||
Performance
Awards
In
addition to stock options and SAR awards, we grant performance vesting share
(“PVS”) awards and performance vesting unit (“PVU”) awards. These
awards are based on the Company’s performance against pre-established targets,
including annual growth rate of revenue and return on invested capital (“ROIC”),
over a specified performance period. Depending on the achievement of the
targets, recipients of PVS awards are entitled to receive a certain number of
shares of common stock, whereas, recipients of PVU awards are entitled to
receive a payment in cash per unit based on the fair market value of a share of
our common stock at the end of the performance period.
The
following table summarizes changes in our outstanding PVS awards:
|
2008
|
2007
|
2006
|
||||||||||
|
Non-vested
PVS awards, January 1
|
261,131 | 275,145 | 319,899 | |||||||||
|
Granted
at target level
|
158,795 | 94,571 | 89,012 | |||||||||
|
Above
target awards
|
45,015 | 66,391 | 28,950 | |||||||||
|
Vested
and converted
|
(123,891 | ) | (171,891 | ) | (144,750 | ) | ||||||
|
Forfeited
|
(10,592 | ) | (3,085 | ) | (17,966 | ) | ||||||
|
Non-vested
PVS awards, December 31
|
330,458 | 261,131 | 275,145 | |||||||||
|
Weighted
Average Grant Date Fair Value
|
2008
|
2007
|
2006
|
|||||||||
|
Non-vested
PVS awards, January 1
|
$ | 34.81 | $ | 25.35 | $ | 21.00 | ||||||
|
Granted
at target level
|
42.45 | 44.96 | 32.69 | |||||||||
|
Above
target awards
|
24.86 | 19.41 | 19.41 | |||||||||
|
Vested
and converted
|
25.14 | 19.41 | 19.41 | |||||||||
|
Forfeited
|
40.28 | 28.79 | 22.67 | |||||||||
|
Non-vested
PVS awards, December 31
|
$ | 40.62 | $ | 34.81 | $ | 25.35 | ||||||
The
actual payout of PVS awards 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. The weighted average grant date fair value of PVS awards granted during
the years 2008, 2007 and 2006 was $42.45, $44.96 and $32.69, respectively. We
expect that the PVS awards will vest at 65% of their target award amounts
converting to 223,000 shares to be issued over an average remaining term of 1.8
years.
In
addition to the PVS awards, we granted 8,523 PVU awards in 2008. The fair value
of PVU awards is also based on the market price of our stock at the grant date.
These awards are revalued at the end of each quarter based on changes in our
stock price. As a result of the cash settlement feature, PVU awards are recorded
within other long-term liabilities.
The
following table summarizes our PVU awards outstanding as of December 31, 2008,
and changes during the year then ended:
|
PVU
awards
|
Weighted
Average Grant Date Fair Value per award
|
|||||||
|
Non-vested
PVU awards, January 1
|
12,632 | $ | 38.29 | |||||
|
Granted
at target level
|
8,523 | 41.70 | ||||||
|
Above
target awards
|
- | - | ||||||
|
Vested
and converted
|
- | - | ||||||
|
Forfeited
|
(1,809 | ) | 37.73 | |||||
|
Non-vested
PVU awards, December 31
|
19,346 | $ | 39.85 | |||||
Employee
Stock Purchase Plan
We also
offer an Employee Stock Purchase Plan (ESPP) which provides for the sale of our
common stock to substantially all employees at 85% of the current market price
on the last trading day of each quarterly offering period. Payroll deductions
are limited to 25% of the employee's base salary. In addition, employees may not
buy more than 1,000 shares during any offering period (4,000 shares per year)
nor can they buy more than $25 thousand worth of stock in any one calendar year.
Purchases under the ESPP were 53,029 shares, 50,181 shares and 31,719 shares for
the years 2008, 2007 and 2006, respectively. At December 31, 2008,
there were approximately 2.4 million shares available for issuance under the
ESPP.
Deferred
Compensation Plans
Our
deferred compensation programs include a Non-Qualified Deferred Compensation
Plan for Non-Employee Directors, under which non-employee directors may defer
all or part of their annual cash retainers and meeting fees. The deferred fees
may be credited to a stock-equivalent account. Amounts credited to this account
are converted into deferred stock units based on the fair market value of one
share of our common stock on the last day of the quarter. Deferred stock units
are ultimately paid in cash at an amount determined by multiplying the number of
units by the fair market value of our common stock at the date of termination.
Similarly, a non-qualified deferred compensation plan for designated executive
officers provides for the investment in deferred stock units. As of December 31,
2008, the two deferred compensation plans held a total of 294,809 deferred stock
units, which, due to their cash settlement feature, are recorded within other
long-term liabilities. The liabilities are valued at the closing market price of
our stock at the end of each period with the resulting change in value recorded
in our income statement for the respective period. The Non-Qualified Deferred
Compensation Plan for Non-Employee Directors also holds 39,859 deferred stock
awards.
Management
Incentive Plan
Under our
management incentive plan, participants are paid bonuses on the attainment of
certain financial goals, which they can elect to receive in either cash or
shares of our common stock. If the employee elects payment in shares,
they are also given a restricted incentive stock award equal to one share for
each four bonus shares issued. The incentive stock awards vest at the
end of four years provided that the participant has not made a disqualifying
disposition of their bonus shares. Incentive stock award grants were 5,700
shares, 4,800 shares and 5,200 shares in 2008, 2007 and 2006,
respectively. Incentive stock forfeitures of 600 shares, 1,200 shares
and 1,900 shares occurred in 2008, 2007 and 2006, respectively. Compensation
expense is recognized over the vesting period based on the fair market value of
common stock on the award date: $41.70 per share granted in 2008, $44.97 per
share granted in 2007 and $32.59 per share granted in 2006.
Note
17: Commitments and Contingencies
At
December 31, 2008, we were obligated under various operating lease agreements
with terms ranging from one month to 20 years. Net rental expense in 2008, 2007
and 2006 was $11.2 million, $10.6 million and $11.4 million, respectively, and
is net of sublease income of $0.7 million annually for the same
years.
At
December 31, 2008, future minimum rental payments under non-cancelable operating
leases were:
|
Year
|
($
in millions)
|
|||
|
2009
|
$ | 11.2 | ||
|
2010
|
10.0 | |||
|
2011
|
8.6 | |||
|
2012
|
7.8 | |||
|
2013
|
3.5 | |||
|
Thereafter
|
20.2 | |||
|
Total
|
61.3 | |||
|
Less
sublease income
|
2.7 | |||
| $ | 58.6 | |||
At
December 31, 2008, outstanding unconditional contractual commitments for the
purchase of raw materials and utilities amounted to $12.8 million, of which,
$12.6 million is due to be paid in 2009.
We have
letters of credit totaling $5.1 million supporting the reimbursement of workers’
compensation and other claims paid on our behalf by insurance carriers and to
guarantee the payment of equipment leases in Ireland and sales tax liabilities
in the U.S. Our accrual for insurance obligations was $5.2 million at December
31, 2008.
On
February 2, 2006, we settled a lawsuit filed in connection with the January 2003
explosion and related fire at our Kinston, N.C. plant. Our monetary contribution
was limited to the balance of our deductibles under applicable insurance
policies, all of which has been previously recorded in our financial statements.
The settlement concluded all litigation related to the Kinston accident in which
we have been named a defendant. In regards to the same incident, we
continue to be a party, but not a defendant, in a lawsuit brought by injured
workers against a number of our third-party suppliers. We believe exposure in
that case is limited to amounts we and our workers’ compensation insurance
carrier would otherwise be entitled to receive by way of subrogation from the
plaintiffs.
During
2007, a detailed review was performed of several related tax cases pending in
the Brazilian courts, which indicated that it was probable that the positions
taken on our previous tax filings, some of which date back to the late 1990’s,
would not be sustained. This matter is currently awaiting final disposition in
the Brazilian court system. Our total accrual at December 31, 2008 and 2007
related to these matters was $6.7 million and $21.3 million, respectively.
During 2008, payments of income and other tax-related liabilities in Brazil
totaled $12.7 million. In the fourth quarter of 2007, we made judicial deposits
totaling $11.7 million to the government of Brazil in order to discontinue any
further interest or penalties from accruing on these matters.
We have
accrued, within other currently liabilities, the estimated cost of environmental
remediation expenses related to soil or ground water contamination at current
and former manufacturing facilities. We believe the accrual of $0.3
million at December 31, 2008 is sufficient to cover the future costs of these
remedial actions.
Note
18: New Accounting 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. This
statement also provides guidance for recognizing and measuring the 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. SFAS No. 141(R) is effective for annual periods beginning after
December 15, 2008. SFAS No. 141(R) will be applied prospectively to
business combinations on or after January 1, 2009.
In
December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in
Consolidated Financial Statements—an amendment of ARB No. 51". This
statement establishes accounting and reporting standards for the noncontrolling
interest in a subsidiary and for the deconsolidation of a subsidiary. This
statement is effective for fiscal years beginning after December 15, 2008. It
will be applied prospectively, except for the presentation and disclosure
requirements, which will be applied retrospectively for all periods presented.
The adoption of this statement will require our minority interest balance to be
reported as a component of shareholders’ equity beginning in the first quarter
of 2009.
In
December 2007, the FASB ratified Emerging Issues Task Force Issue No. 07-1,
“Accounting for Collaborative Arrangements” (“EITF 07-1”). EITF 07-1 defines
collaborative arrangements and establishes accounting and reporting requirements
for transactions between participants in the arrangement and with third parties.
EITF 07-1 provides guidance on the classification of payments between
participants of the arrangement, the appropriate income statement presentation,
as well as related disclosures. EITF 07-1 is effective for fiscal years
beginning after December 15, 2008 and should be applied retrospectively to all
prior periods presented for all collaborative arrangements existing as of the
effective date. Management believes that the adoption of EITF 07-1 will not have
an impact on our financial statements.
In
February 2008, the FASB issued Staff Position (“FSP”) No. 157-2, “Effective Date
of FASB Statement No. 157”, which delays the effective date of SFAS 157 one year
for nonfinancial assets and nonfinancial liabilities, except for those
recognized or disclosed at fair value in the financial statements on a recurring
basis. FSP No. 157-2 is effective for us beginning January 1, 2009.
In
March 2008, the FASB issued 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 FASB Statement No.133, “Accounting for Derivative
Instruments and Hedging Activities;” and (c) derivative instruments and
related hedged items affect an entity’s financial position, financial
performance and cash flows. SFAS No. 161 is effective for fiscal years and
interim periods beginning after November 15, 2008. As SFAS No. 161 only
requires enhanced disclosures, management believes its adoption will not have a
material impact on our financial statements.
In April
2008, the FASB issued FSP No. FAS 142-3, “Determination of the Useful Life of
Intangible Assets.” This FSP amends the factors that should be considered in
developing renewal or extension assumptions used to determine the useful life of
a recognized intangible asset under FASB Statement No. 142, “Goodwill and Other
Intangible Assets.” This FSP is effective for financial statements issued for
fiscal years beginning after December 15, 2008. The disclosure requirements are
to be applied prospectively to all intangible assets recognized as of, and
subsequent to, the effective date. Management believes that the adoption of FSP
No. FAS 142-3 will not have an impact on our financial statements.
In June
2008, the FASB issued FSP No. EITF 03-6-1, “Determining Whether Instruments
Granted in Share-Based Payment Transactions Are Participating Securities.” This
FSP states that unvested share-based payment awards that contain nonforfeitable
rights to dividends or dividend equivalents (whether paid or unpaid) are
participating securities and shall be included in the computation of earnings
per share pursuant to the two-class method. This FSP is effective for financial
statements issued for fiscal years beginning after December 15, 2008. Management
believes that the adoption of FSP No. EITF 03-6-1 will not have an impact on our
financial statements.
In
December 2008, the FASB issued FSP No. FAS 132(R)-1, “Employers’ Disclosures
about Postretirement Benefit Plan Assets.” This FSP expands the disclosure
requirements relating to defined benefit pension and other postretirement plans
including how investment allocation decisions are made and the investment
policies and strategies that support those decisions, major categories of plan
assets, the input and valuation techniques used in measuring benefit plan assets
at fair value, and significant concentrations of risk within plan assets. This
FSP is effective for fiscal years ending after December 15, 2009. As FSP
No. FAS 132(R)-1 only requires enhanced disclosures, management has determined
its adoption will not have a material impact on our financial
statements.
Report
of Independent Registered Public Accounting Firm
To the
Shareholders and the Board of Directors of
West
Pharmaceutical Services, Inc.
In
our opinion, the consolidated financial statements listed in the index appearing
under Item 15 (a) (1), present fairly, in all material respects, the financial
position of West Pharmaceutical Services, Inc. and its subsidiaries at December
31, 2008 and 2007, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 2008 in conformity with
accounting principles generally accepted in the United States of
America. In addition, in our opinion, the financial statement
schedule appearing under Item 15 (a) (2) presents fairly, in all material
respects, the information set forth therein when read in conjunction with the
related consolidated financial
statements. Also in our opinion, the Company maintained, in all
material respects, effective internal control over financial reporting as of
December 31, 2008, based on criteria established in Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). The Company's management is responsible
for these financial statements and financial statement schedule, for maintaining
effective internal control over financial reporting and for its assessment of
the effectiveness of internal control over financial reporting, included in
Management's Report on Internal Control over Financial Reporting appearing under
Item 9A. Our responsibility is to express opinions on these financial
statements, on the financial statement schedule, and on the Company's internal
control over financial reporting based on our integrated audits. We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audits to obtain reasonable assurance about whether
the financial statements are free of material misstatement and whether effective
internal control over financial reporting was maintained in all material
respects. Our audits of the financial statements included examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial statement
presentation. Our audit of internal control over financial reporting
included obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists, and testing and
evaluating the design and operating effectiveness of internal control based on
the assessed risk. Our audits also included performing such other
procedures as we considered necessary in the circumstances. We believe that our
audits provide a reasonable basis for our opinions.
As
discussed in Note 1 to the consolidated financial statements, the Company
changed the manner in which it accounts for its defined benefit pension and
other postretirement plans effective December 31, 2006 and the manner in which
it accounts for uncertainty in income taxes in 2007.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal
control over financial reporting includes those policies and procedures that
(i) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of
the company; (ii) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and
(iii) provide reasonable assurance regarding prevention or timely detection
of unauthorized acquisition, use, or disposition of the company’s assets that
could have a material effect on the financial statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers
LLP
PricewaterhouseCoopers
LLP
Philadelphia,
Pennsylvania
February
26, 2009
Quarterly
Operating and Per Share Data (Unaudited)
|
($
in millions, except per share data)
|
First
Quarter
(1)
|
Second
Quarter (2)
|
Third
Quarter (3)
|
Fourth
Quarter (4)
|
Full
Year
|
|||||||||||||||
|
2008
|
||||||||||||||||||||
|
Net
sales
|
$ | 270.7 | $ | 279.3 | $ | 256.2 | $ | 244.9 | $ | 1,051.1 | ||||||||||
|
Gross
profit
|
83.5 | 83.6 | 66.0 | 69.5 | 302.6 | |||||||||||||||
|
Income
from continuing operations
|
26.2 | 28.7 | 13.3 | 17.8 | 86.0 | |||||||||||||||
|
Discontinued
operations, net
|
- | - | - | - | - | |||||||||||||||
|
Net
income
|
$ | 26.2 | $ | 28.7 | $ | 13.3 | $ | 17.8 | $ | 86.0 | ||||||||||
|
Basic
earnings per share
|
||||||||||||||||||||
|
Continuing
operations
|
$ | 0.81 | $ | 0.89 | $ | 0.41 | $ | 0.54 | $ | 2.65 | ||||||||||
|
Discontinued
operations
|
- | - | - | - | - | |||||||||||||||
| $ | 0.81 | $ | 0.89 | $ | 0.41 | $ | 0.54 | $ | 2.65 | |||||||||||
|
Diluted
earnings per share
|
||||||||||||||||||||
|
Continuing
operations
|
$ | 0.76 | $ | 0.82 | $ | 0.40 | $ | 0.52 | $ | 2.50 | ||||||||||
|
Discontinued
operations
|
- | - | - | - | - | |||||||||||||||
| $ | 0.76 | $ | 0.82 | $ | 0.40 | $ | 0.52 | $ | 2.50 | |||||||||||
|
2007
|
||||||||||||||||||||
|
Net
sales
|
$ | 257.6 | $ | 263.7 | $ | 242.7 | $ | 256.1 | $ | 1,020.1 | ||||||||||
|
Gross
profit
|
80.4 | 76.7 | 64.3 | 70.4 | 291.8 | |||||||||||||||
|
Income
from continuing operations
|
26.5 | 26.5 | 12.2 | 6.0 | 71.2 | |||||||||||||||
|
Discontinued
operations, net
|
- | (0.5 | ) | - | - | (0.5 | ) | |||||||||||||
|
Net
income
|
$ | 26.5 | $ | 26.0 | $ | 12.2 | $ | 6.0 | $ | 70.7 | ||||||||||
|
Basic
earnings per share
|
||||||||||||||||||||
|
Continuing
operations
|
$ | 0.81 | $ | 0.80 | $ | 0.37 | $ | 0.19 | $ | 2.18 | ||||||||||
|
Discontinued
operations
|
- | (0.01 | ) | - | - | (0.02 | ) | |||||||||||||
| $ | 0.81 | $ | 0.79 | $ | 0.37 | $ | 0.19 | $ | 2.16 | |||||||||||
|
Diluted
earnings per share
|
||||||||||||||||||||
|
Continuing
operations
|
$ | 0.77 | $ | 0.74 | $ | 0.36 | $ | 0.19 | $ | 2.06 | ||||||||||
|
Discontinued
operations
|
- | (0.01 | ) | - | - | (0.01 | ) | |||||||||||||
| $ | 0.77 | $ | 0.73 | $ | 0.36 | $ | 0.19 | $ | 2.05 | |||||||||||
The sum
of the individual per share amounts does not equal full year due to
rounding.
Factors
affecting the comparability of the information reflected in the quarterly
data:
|
(1)
|
Net
income in the first quarter of 2008 included $0.7 million ($0.02 per
diluted share) of restructuring and related charges, a net gain on
contract settlement of $0.8 million ($0.03 per diluted share) and discrete
tax benefits of $1.1 million ($0.03 per diluted
share).
|
|
(2)
|
Second
quarter 2008 net income included $0.9 million ($0.02 per diluted share) of
restructuring and related charges in the second quarter of 2008 and a net
gain on contract settlement of $4.2 million ($0.11 per diluted share). Net
income in the second quarter of 2007 included discrete tax benefits
of $2.4 million ($0.06 per diluted
share).
|
|
(3)
|
In
the third quarter of 2008, net income from continuing operations included
contract settlement costs of $1.1 million ($0.03 per diluted share) and
discrete tax benefits of $2.2 million ($0.06 per diluted share). The third
quarter of 2007 net income included a discrete tax benefit of $4.1 million
($0.11 per diluted share) and our provision for Brazilian tax issues of
$6.4 million ($0.17 per diluted
share).
|
|
(4)
|
Net
income included $0.3 million ($0.01 per diluted share) of restructuring
and related charges in the fourth quarter of 2008, contract settlement
costs of $1.2 million ($0.04 per diluted share) and a discrete tax benefit
of $0.3 million ($0.01 per diluted share). Net income in the fourth
quarter of 2007 included a discrete tax benefit of $1.7 million ($0.04 per
diluted share), $2.3 million ($0.07 per diluted share) of restructuring
and related charges, an impairment loss on our Nektar customer contract
intangible asset of $8.4 million ($0.23 per diluted share) and our
provision for Brazilian tax issues of $2.3 million ($0.06 per diluted
share).
|
None.
Evaluation
of Disclosure Controls and Procedures
An
evaluation was performed under the supervision and with the participation of our
management, including our Chief Executive Officer and Chief Financial Officer,
of the effectiveness of our disclosure controls and procedures (as defined in
Rule 13a-15(e) under the Securities Exchange Act of 1934), as of the end of the
period covered by this annual report on Form 10-K. Based on this
evaluation, our Chief Executive Officer and Chief Financial Officer have
concluded that, as of December 31, 2008 our disclosure controls and procedures
are effective.
Management’s
Report on Internal Control over Financial Reporting
The
management of West Pharmaceutical Services, Inc. (the “Company”) is responsible
for establishing and maintaining adequate internal control over financial
reporting, as defined in Rule 13a-15(f) under the Securities Exchange Act of
1934. Our internal control over financial reporting is a process
designed under the supervision of our principal executive and principal
financial officer to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of our financial statements for external
reporting purposes in accordance with U.S. generally accepted accounting
principles.
Management
assessed the effectiveness of our internal control over financial reporting as
of December 31, 2008 based on the framework established in “Internal
Control-Integrated Framework” issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Based on this
assessment, management has determined that our internal control over financial
reporting was effective as of December 31, 2008.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also projections of any evaluation
of effectiveness to future periods are subject to the risks that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with policies or procedures may deteriorate.
The
effectiveness of our internal control over financial reporting as of December
31, 2008 has been audited by PricewaterhouseCoopers LLP, an independent
registered pubic accounting firm, as stated in their report, which is included
herein.
Changes
in Internal Controls
We are in
the process of implementing SAP, an enterprise resource planning (“ERP”) system,
over a multi-year period for our North American operations. During the second
quarter of 2008, we successfully replaced our financial reporting, cash
disbursement and order-to-cash systems. The second phase of this SAP project
will focus 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.
None.
PART III
Information
about our Directors is incorporated by reference from the discussion under Proposals Requiring Your Vote - Item
#1–Election of Directors and Section 16(a) Beneficial Ownership Reporting
Compliance; Governance of the Company – Governance Information – Code of
Business Conduct; Governance of the Company – Board and Committee
Membership in our 2009 Proxy Statement.
Information
about our Audit Committee, including the members of the committee, and our Audit
Committee financial experts, is incorporated by reference from the discussion
under the headings Governance
of the Company – Board and Committee Membership – The Audit Committee and
Audit Committee Financial
Experts in our 2009 Proxy Statement. Information about the West Code of
Business Conduct governing our employees, including our Chief Executive Officer,
Chief Financial Officer and Principal Accounting Officer, and our Directors, is
incorporated by reference from the discussion under the heading Governance of the Company –
Governance Information – Code of Business Conduct in our 2009 Proxy
Statement. We intend to post any amendments to, or waivers from, our Code of
Business Conduct on our website, www.westpharma.com. The balance of
the information required by this item is contained in the discussion entitled
Executive Officers of the
Company in Part I of this 2008 Form 10-K.
Information
about director compensation is incorporated by reference from the discussion
under the heading Compensation
of Non-Employee Directors – 2008 Director Compensation Table in our 2009 Proxy Statement.
Information about executive compensation is incorporated by reference from the
discussion under the headings Governance of the Company – Board
and Committee Membership – The Compensation Committee; Executive Compensation –
Compensation Discussion and Analysis; Executive Compensation – Executive
Compensation Tables – 2008 Summary Compensation Table; 2008 Grants of Plan-Based
Awards Table; Outstanding Equity Awards at Fiscal Year-End 2008; 2008 Option
Exercises and Stock Vested Table; 2008 Nonqualified Deferred Compensation Table;
2008 Pension Benefits Table; Executive Compensation – Estimated Payments Following Severance and
Payments Upon Termination in Connection With a Change in
Control in our 2009 Proxy Statement.
Information
about director independence is incorporated by reference from the discussion
under the heading Governance
of the Company – Director Independence in our 2009 Proxy
Statement. Information about board and committee meeting attendance
is incorporated by reference from the discussion under the heading Governance of the Company – Meetings
of the Board and its Committees in our 2009 Proxy
Statement. Information about our nominating, audit and compensation
committees is incorporated by reference from the discussion under the heading
Governance of the Company –
Board and Committee Membership in our 2009 Proxy
Statement. Information about communication with the board is
incorporated by reference from the discussion under the heading Governance of the Company –
Governance Information – Communicating with the Board in our 2009 Proxy
Statement.
Information
required by this Item is incorporated by reference from the discussion under the
headings Security Ownership of
Certain Beneficial Owners and Management in our 2009 Proxy
Statement.
Equity
Compensation Plan Information
The
following table sets forth information about the grants of stock options,
restricted stock or other rights under all of the Company’s equity compensation
plans as of the close of business on December 31, 2008. The table does not
include information about tax-qualified plans such as the West 401(k)
Plan.
|
Plan
Category
|
Number
of Securities
to
be Issued Upon Exercise of Outstanding Options, Warrants
and
Rights (a)
|
Weighted-Average
Exercise
Price
of Outstanding Options,
Warrants
and Rights (b)
|
Number
of Securities Remaining
Available
for Future Issuance Under
Equity
Compensation Plans (Excluding
Securities
Reflected in Column (a)) (c)
|
|
Equity
compensation plans approved by security holders
|
2,608,580
(1)
|
$26.91
|
5,174,568
(2)
|
|
Equity
compensation plans not approved by security holders
|
-
|
-
|
-
|
|
Total
|
2,608,580
|
$26.91
|
5,174,568
|
|
(1)
|
Includes
445,721 outstanding stock options under the 2007 Omnibus Incentive
Compensation Plan, 1,319,837 outstanding stock options under the 2004
Stock-Based Compensation Plan, which was terminated in 2007, 791,022
outstanding stock options under the 1998 Key Employee Incentive
Compensation Plan, which was terminated in 2004, 52,000 outstanding
options under the 1999 Non-Qualified Stock Option Plan for Non-Employee
Directors, which was terminated in 2004. No future grants or awards
may be made under the terminated plans. Does not include
stock-equivalent units granted or credited to directors under the
Non-Qualified Deferred Compensation Plan for Non-Employee Directors
because such units are settled only in cash and do not involve the
issuance of any option, warrant or right to acquire the Company’s common
stock or other securities.
|
|
(2)
|
Represents
2,360,795 shares reserved under the Company’s Employee Stock Purchase Plan
and 2,813,773 shares remaining available for issuance under the 2007
Omnibus Incentive Compensation Plan. The
estimated number of shares that could be issued for the current period
from the Employee Stock Purchase Plan is 1,145,000. This number of
shares is calculated by multiplying the 1,000 share per offering period
per participant limit by 1,145, the number of current participants in the
plan.
|
Information
called for by this Item is incorporated by reference from the discussion under
the heading Governance of the
Company – Director Qualifications and Director Independence in our
2009 Proxy Statement.
Information
called for by this Item is incorporated by reference from the discussions under
the headings Governance of the
Company – Board and Committee Membership – The Audit Committee; Proposals
Requiring Your Vote – Item #2 – Ratification of Appointment of Independent
Registered Public Accounting Firm – Policy on Pre-Approval of Audit and
Permissible Non-Audit Services, Audit and Non-Audit Fees and
Audit Committee Report
in our 2009 Proxy Statement.
PART IV
(a)
1. Financial Statements
The
following documents are included in Part II, Item 8:
Consolidated
Statements of Income for the years ended December 31, 2008, 2007 and
2006
Consolidated
Statements of Comprehensive Income for the years ended December 31, 2008, 2007
and 2006
Consolidated
Balance Sheets at December 31, 2008 and 2007
Consolidated
Statements of Shareholders' Equity for the years ended December 31, 2008, 2007
and 2006
Consolidated
Statements of Cash Flows for the years ended December 31, 2008, 2007 and
2006
Notes to
Consolidated Financial Statements
Report of
Independent Registered Public Accounting Firm
(a)
2. Financial Statement Schedules
Schedule
II - Valuation and Qualifying Accounts
|
($
in millions)
|
Balance
at beginning of period
|
Charged
to costs and expenses
|
Deductions
(1)
|
Balance
at
end
of period
|
||||||||||||
|
For
the year ended December 31, 2008
|
||||||||||||||||
|
Allowances
deducted from assets
|
||||||||||||||||
|
Deferred
tax asset valuation allowance
|
$ | 27.0 | $ | 0.2 | $ | (3.8 | ) | $ | 23.4 | |||||||
|
Allowance
for doubtful accounts receivable
|
0.6 | 0.3 | (0.2 | ) | 0.7 | |||||||||||
|
Total
allowances deducted from assets
|
$ | 27.6 | $ | 0.5 | $ | (4.0 | ) | $ | 24.1 | |||||||
|
For
the year ended December 31, 2007
|
||||||||||||||||
|
Allowances
deducted from assets
|
||||||||||||||||
|
Deferred
tax asset valuation allowance
|
$ | 25.3 | $ | 4.9 | $ | (3.2 | ) | $ | 27.0 | |||||||
|
Allowance
for doubtful accounts receivable
|
0.9 | - | (0.3 | ) | 0.6 | |||||||||||
|
Total
allowances deducted from assets
|
$ | 26.2 | $ | 4.9 | $ | (3.5 | ) | $ | 27.6 | |||||||
|
For
the year ended December 31, 2006
|
||||||||||||||||
|
Allowances
deducted from assets
|
||||||||||||||||
|
Deferred
tax asset valuation allowance
|
$ | 24.3 | $ | 2.5 | $ | (1.5 | ) | $ | 25.3 | |||||||
|
Allowance
for doubtful accounts receivable
|
1.0 | 0.1 | (0.2 | ) | 0.9 | |||||||||||
|
Total
allowances deducted from assets
|
$ | 25.3 | $ | 2.6 | $ | (1.7 | ) | $ | 26.2 | |||||||
__________________________
|
(1)
|
Includes
accounts receivable written off, translation adjustments and reversals of
prior year valuation allowances.
|
All other
schedules are omitted because they are either not applicable, not required or
because the information required is contained in the consolidated financial
statements or notes thereto.
|
(a)
3.
|
Exhibits
- An index of the exhibits included in this Form 10-K Report or
incorporated by reference is contained on pages F-1 through
F-5. Exhibit numbers 10.1 through 10.55 are management
contracts or compensatory plans or
arrangements.
|
|
(b)
|
See
subsection (a) 3. above.
|
|
(c)
|
Financial
Statements of affiliates are omitted because they do not meet the tests of
a significant subsidiary at the 20%
level.
|
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) 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
February
26, 2009
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons in the capacities and on the dates
indicated.
|
Signature
|
Title
|
Date
|
|
/s/ Donald E. Morel,
Jr., Ph.D
|
Director,
Chief Executive Officer and Chairman
|
February
24, 2009
|
|
Donald
E. Morel, Jr., Ph.D
|
of
the Board, (Principal Executive Officer)
|
|
|
/s/ Joseph E.
Abbott
|
Vice
President and Corporate Controller
|
February
24, 2009
|
|
Joseph
E. Abbott
|
(Principal
Accounting Officer)
|
|
|
/s/ William J.
Federici
|
Vice
President and Chief Financial Officer
|
February
24, 2009
|
|
William
J. Federici
|
(Principal
Financial Officer)
|
|
|
/s/ Thomas W.
Hofmann
|
Director
|
February
24, 2009
|
|
Thomas
W. Hofmann*
|
||
|
/s/ L. Robert
Johnson
|
Director
|
February
24, 2009
|
|
L.
Robert Johnson*
|
||
|
/s/ Paula A.
Johnson
|
Director
|
February
24, 2009
|
|
Paula
A. Johnson*
|
||
|
/s/ John P.
Neafsey
|
Director
|
February
24, 2009
|
|
John
P. Neafsey*
|
||
|
/s/ John H.
Weiland
|
Director
|
February
24, 2009
|
|
John
H. Weiland*
|
||
|
/s/ Anthony
Welters
|
Director
|
February
24, 2009
|
|
Anthony
Welters*
|
||
|
/s/ Geoffrey F.
Worden
|
Director
|
February
24, 2009
|
|
Geoffrey
F. Worden*
|
||
|
/s/ Robert C.
Young
|
Director
|
February
24, 2009
|
|
Robert
C. Young*
|
||
|
/s/ Patrick J.
Zenner
|
Director
|
February
24, 2009
|
|
Patrick
J. Zenner*
|
* By John
R. Gailey III pursuant to a power of attorney.
EXHIBIT
INDEX
|
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 1998 10-K report.
|
|
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
(1)
|
Instruments
defining the rights of holders of long-term debt securities of West and
its subsidiaries have been omitted.
|
|
10.1
|
Lease
dated as of December 31, 1992 between Lion Associates, L.P. and us
relating to the lease of our headquarters in Lionville, Pa. is
incorporated by reference from our 1992 10-K report.
|
|
10.2
|
First
Addendum to Lease dated as of May 22, 1995 between Lion Associates, L.P.
and us is incorporated by reference from our 1995 10-K
report.
|
|
10.3
|
Lease
dated as of December 14, 1999 between White Deer Warehousing &
Distribution Center, Inc. and us relating to the lease of our site in
Montgomery, Pa. is incorporated by reference from our 2002 10-K
report.
|
|
10.4 (2)
|
1999
Non-Qualified Stock Option Plan for Non-Employee Directors, effective as
of April 27, 1999 (now terminated) is incorporated by reference from our
10-Q report for the quarter ended June 30, 1999.
|
|
10.5 (2)
|
Amendment
No. 1 to 1999 Non-Qualified Stock Option Plan for Non-Employee Directors,
effective October 30, 2001 is incorporated by reference from our 2001 10-K
report.
|
|
10.6 (2)
|
Form
of Second Amended and Restated Change-in-Control Agreement between us and
certain of our executive officers dated as of March 25, 2000 is
incorporated by reference from our 10-Q report for the quarter ended March
31, 2000.
|
|
10.7 (2)
|
Form
of Amendment No. 1 to Second Amended and Restated Change-in-Control
Agreement dated as of May 1, 2001 between us and certain of our executive
officers is incorporated by reference from our 2001 10-K
report.
|
|
10.8 (2)
|
Form
of Amendment No. 2 to Second Amended and Restated Change-in-Control
Agreement between us and certain of our executive officers, dated as of
various dates in December 2008.
|
|
10.9 (2)
|
Schedule
of agreements with executive officers.
|
|
10.10 (2)
|
Award
Letter dated July 28, 2008 between us and Matthew T. Mullarkey (relating
to the 2007-2009 performance period) incorporated by reference from our
Form 8-K dated July 28, 2008.
|
|
Exhibit
Number
|
Description
|
||
| 10.11 (2) |
Award
Letter dated July 28, 2008 between us and Matthew T. Mullarkey (relating
to the 2008-2010 performance period) incorporated by reference
from our
Form
8-K dated July 28, 2008.
|
||
|
10.12 (2)
|
Severance
and Non-Competition Agreement dated July 28, 2008 between us and Matthew
T. Mullarkey incorporated by reference from our Form 8-K dated July 28,
2008.
|
||
|
10.13 (2)
|
Non-Competition
Agreement, dated as of October 5, 1994, between us and Steven A. Ellers,
incorporated by reference from our 2007 10-K report.
|
||
|
10.14 (2)
|
Employment
Agreement, dated as of April 30, 2002, between us and Donald E. Morel, Jr.
is incorporated by reference from our 10-Q report for the quarter ended
September 30, 2002.
|
||
|
10.15 (2)
|
Amendment
#1 to the Employment Agreement between us and Donald E. Morel, Jr., dated
as of December 19, 2008.
|
||
|
10.16 (2)
|
Non-Qualified
Stock Option Agreement, dated as of April 30, 2002 between us and Donald
E. Morel, Jr. is incorporated by reference from our 10-Q report for the
quarter ended September 30, 2002.
|
||
|
10.17 (2)
|
Supplemental
Employees' Retirement Plan, as amended and restated effective January 1,
2008.
|
||
|
10.18 (2)
|
Non-Qualified
Deferred Compensation Plan for Designated Employees, as amended and
restated effective January 1, 2008.
|
||
|
10.19 (2)
|
Deferred
Compensation Plan for Outside Directors, as amended and restated effective
January 1, 2008.
|
||
|
10.20 (2)
|
1998
Key Employee Incentive Compensation Plan, dated March 10, 1998 (now
terminated) is incorporated by reference from our 1997 10-K
report.
|
||
|
10.21 (2)
|
Amendment
No. 1 to 1998 Key Employees Incentive Compensation Plan, effective October
30, 2001 is incorporated by reference from our 2001 10-K
report.
|
||
|
10.22 (2)
|
2007
Omnibus Incentive Compensation Plan effective as of May 1, 2007,
incorporated by reference to Exhibit 99.1 of the Company’s Form 8-K dated
May 4, 2007.
|
||
|
10.23 (2)
|
2004
Stock-Based Compensation Plan (now terminated) is incorporated by
reference from our Proxy Statement for the 2004 Annual Meeting of
Shareholders.
|
||
|
10.24 (2)
|
Form
of Director 2004 Non-Qualified Stock Option Award Agreement, issued
pursuant to the 2004 Stock-Based Compensation Plan is incorporated by
reference from our 10-Q report for the quarter ended September 30,
2004.
|
||
|
10.25 (2)
|
Form
of Director 2004 Stock Unit Award Agreement, issued pursuant to the 2004
Stock-Based Compensation Plan is incorporated by reference from our 10-Q
report for the quarter ended September 30, 2004.
|
||
|
10.26 (2)
|
Form
of Director 2004 Non-Qualified Stock Option Agreement, issued pursuant to
the 2004 Stock-Based Compensation Plan is incorporated by reference from
our 10-Q report for the quarter ended September 30,
2004.
|
||
|
Exhibit
Number
|
Description
|
|
10.27 (2)
|
Form
of Executive 2005 Bonus and Incentive Share Award Notice is incorporated
by reference from our 10-Q report for the quarter ended September 30,
2005.
|
|
10.28 (2)
|
Form
of Executive 2005 Non-Qualified Stock Option Award Notice is incorporated
by reference from our 10-Q report for the quarter ended September 30,
2005.
|
|
10.29 (2)
|
Form
of Director 2005 Non-Qualified Stock Option Award Notice is incorporated
by reference from our 10-Q report for the quarter ended September 30,
2005.
|
|
10.30 (2)
|
Form
of Director 2005 Stock Unit Share Award Notice is incorporated by
reference from our 10-Q report for the quarter ended September 30,
2005.
|
|
10.31 (2)
|
Form
of Executive 2006 Bonus and Incentive Share Award is incorporated by
reference from our 10-Q report for the quarter ended March 31,
2006.
|
|
10.32 (2)
|
Form
of Executive 2006 Non-Qualified Stock Option Award is incorporated by
reference from our 10-Q report for the quarter ended March 31,
2006.
|
|
10.33 (2)
|
Form
of 2006 Performance-Vesting Restricted (“PVR”) Share Award is incorporated
by reference from our 10-Q report for the quarter ended March 31,
2006.
|
|
10.34 (2)
|
Form
of Director 2006 Non-Qualified Stock Option Award Notice is incorporated
by reference from our 10-Q report for the quarter ended June 30,
2006.
|
|
10.35 (2)
|
Form
of Director 2006 Stock Unit Award Notice is incorporated by reference from
our 10-Q report for the quarter ended June 30, 2006.
|
|
10.36 (2)
|
Form
of 2007 Bonus and Incentive Share Award, issued pursuant to the 2004
Stock-Based Compensation Plan, incorporated by reference from our 10-Q
report for the quarter ended March 31, 2007.
|
|
10.37 (2)
|
Form
of 2007 Non-Qualified Stock Option and Performance-Vesting Share Unit
Award, issued pursuant to the 2004 Stock-Based Compensation Plan,
incorporated by reference from our 10-Q report for the quarter ended March
31, 2007.
|
|
10.38 (2)
|
Form
of Director 2007 Deferred Stock Award, issued pursuant to the 2007 Omnibus
Incentive Compensation Plan, incorporated by reference from our 10-Q
report for the quarter ended June 30, 2007.
|
|
10.39 (2)
|
Form
of 2008 Bonus and Incentive Share Award, issued pursuant to the 2007
Omnibus Incentive Compensation Plan, incorporated by reference from our
10-Q report for the quarter ended March 31, 2008.
|
|
10.40 (2)
|
Form
of 2008 Non-Qualified Stock Option and Performance-Vesting Share Unit
Award, issued pursuant to the 2007 Omnibus Incentive Compensation Plan,
incorporated by reference from our 10-Q report for the quarter ended March
31, 2008.
|
|
10.41 (2)
|
Form
of Director 2008 Deferred Stock Award, issued pursuant to the 2007 Omnibus
Incentive Compensation Plan.
|
|
Exhibit
Number
|
Description
|
|
10.42
|
Credit
Agreement, dated as of May 17, 2004 among us, certain of our subsidiaries,
the banks and other financial institutions from time to time parties
thereto and PNC Bank, National Association, as Agent is incorporated by
reference from our 8-K report dated May 28, 2004.
|
|
10.43
|
First
Amendment, dated as of May 18, 2005, between us, our direct and indirect
subsidiaries listed on the signature pages thereto, the several banks and
other financial institutions parties thereto, and PNC Bank, National
Association, as Agent for the Banks is incorporated by reference from our
8-K report dated May 25, 2005.
|
|
10.44
|
Third
Amendment, dated as of February 28, 2006, among us and certain of our
direct and indirect subsidiaries listed on the signature pages thereto,
the several banks and other financial institutions parties to the Credit
Agreement (as defined therein), and PNC Bank, National Association, as
Agent for the Banks, is incorporated by reference to Exhibit 10.1 of the
our Current Report on Form 8-K, dated March 3, 2006.
|
|
10.45
|
Multi-Currency
Note Purchase and Private Shelf Agreement, dated as of February 27, 2006,
among us and The Prudential Insurance Company of America, Prudential
Retirement Insurance and Annuity Company, Pruco Life Insurance Company,
Pruco Life Insurance Company of New Jersey, American Skandia Life
Assurance Corporation and Prudential Investment Management, Inc., is
incorporated by reference to Exhibit 10.2 of the Company’s Current Report
on Form 8-K, dated March 3, 2006.
|
|
10.46(4)
|
Agreement,
effective as of January 1, 2005, between us and The Goodyear Tire &
Rubber Company is incorporated by reference from our 10-Q report for the
quarter ended June 30, 2005.
|
|
10.47(4)
|
Supply
Agreement, dated as of October 1, 2007, between us and Becton, Dickinson
and Company is incorporated by reference from our 2007 10-K
report.
|
|
10.48
|
Distributorship
Agreement, dated January 25, 2007, between Daikyo Seiko, Ltd. and us is
incorporated by reference from our 2006 10-K report.
|
|
10.49(4)
|
Amended
and Restated Technology Exchange and Cross License Agreement, dated
January 25, 2007, between us and Daikyo Seiko, Ltd. is incorporated by
reference from our 2006 10-K report.
|
|
10.50(4)
|
2006-2010
Worldwide Butyl Polymer Supply/Purchase Agreement, entered into on October
6, 2006 and effective from January 1, 2006 through December 31, 2010,
between us and ExxonMobil Chemical Company is incorporated by reference
from our 2006 10-K report.
|
|
10.51(2)
|
Amendment
to Letter Agreement, dated as of May 1, 2003, between us and Robert S.
Hargesheimer is incorporated by reference from our 2003 10-K
report.
|
|
10.52(2)
|
Amendment
#2 to Letter Agreement, dated as of December 19, 2008, between us and
Robert S. Hargesheimer.
|
|
10.53(2)
|
Letter
Agreement dated as of March 30, 2006 between us and Donald E.
Morel, Jr. is incorporated by reference from our 10-Q report for the
quarter ended June 30, 2006.
|
|
Exhibit
Number
|
Description
|
|
10.54(3)
|
Share
and Interest Purchase Agreement, dated as of July 5, 2005, among us, West
Pharmaceutical Services of Delaware, Inc., Medimop Medical Projects, Ltd.,
Medimop USA LLC and Freddy Zinger is incorporated by reference from our
8-K report dated July 8, 2005.
|
|
10.55
|
Note
Purchase Agreement, dated as of July 28, 2005, among us and each of the
purchasers listed on Schedule A thereto, is incorporated by reference from
our 8-K report dated August 3, 2005.
|
|
12.
|
Computation
of Ratio of Earnings to Fixed Charges.
|
|
21.
|
Subsidiaries
of the Company.
|
|
23.
|
Consent
of Independent Registered Public Accounting Firm.
|
|
24.
|
Powers
of Attorney.
|
|
31.1
|
Certification
by the Chief Executive Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
31.2
|
Certification
by the Chief Financial Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
32.1
|
Certification
by the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
|
32.2
|
Certification
by Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
(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)
|
Management
compensatory plan.
|
|
(3)
|
We
agree to furnish to the SEC, upon request, a copy of each exhibit to this
Share and Interest Purchase
Agreement.
|
|
(4)
|
Certain
portions of this exhibit have been omitted pursuant to a confidential
treatment request submitted to the
SEC.
|