This report contains pages (including cover page) SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For The Quarterly Period Ended March 31, 1998 --------------- Commission File Number 1-8036 ------ THE WEST COMPANY, INCORPORATED ----------------------------------------------------------------- (Exact name of registrant as specified in its charter) Pennsylvania 23-1210010 ------------------------------------- ---------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 101 Gordon Drive, PO Box 645, Lionville, PA 19341-0645 ------------------------------------- ---------------------- (Address of principal executive (Zip Code) offices) Registrant's telephone number, including area code 610-594-2900 -------------- N/A ----------------------------------------------------------------- Former name, former address and former fiscal year, if changed since last report. Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months, and (2) has been subject to such filing requirements for the past 90 days. Yes X . No . --- --- March 31, 1998 -- 16,980,762 ----------------------------------------------------------------- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
Page 2 Index Form 10-Q for the Quarter Ended March 31, 1998 Part I - Financial Information Item 1. Financial Statements Consolidated Statements of Operations for the Three Months ended March 31, 1998 and March 31, 1997 3 Condensed Consolidated Balance Sheets at March 31, 1998 and December 31, 1997 4 Condensed Consolidated Statements of Cash Flows for the Three Months ended March 31, 1998 and March 31, 1997 6 Notes to Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11 Item 3. Quantitative and Qualitative Disclosure about Market Risk 13 Part II - Other Information Item 1. Legal Proceedings 14 Item 6. Exhibits and reports on Form 8-K 14 SIGNATURES 15 Index to Exhibits F-1 Page 3
Part I - Financial Information Item 1. Financial Statements The West Company, Incorporated and Subsidiaries CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (in thousands, except per share data) <TABLE> <CAPTION> Quarter Ended March 31, 1998 March 31, 1997 --------------- -------------- <S> <C> <C> <C> <C> <C> <C> Net sales $ 105,200 100 % $114,700 100 % Cost of goods sold 73,900 70 82,000 71 ------------------------------------------------------------------------------------------------ Gross profit 31,300 30 32,700 29 Selling, general and administrative expenses 16,800 16 18,000 16 Acquired research and development 28,200 27 - - Other income, net (600) - (300) - ------------------------------------------------------------------------------------------------ Operating profit (loss) (13,100)(13) 15,000 13 Interest expense 1,200 1 1,400 1 ------------------------------------------------------------------------------------------------ Income (loss) before income taxes (14,300)(14) 13,600 12 and minority interests Provision for income taxes 5,400 5 5,200 5 ------------------------------------------------------------------------------------------------ Income (loss) from consolidated operations (19,700)(19) % 8,400 7 % ---- ---- Equity in net income of affiliated companies - - ------------------------------------------------------------------------------------------------ Net income (loss) $ (19,700) $ 8,400 ------------------------------------------------------------------------------------------------ Net income (loss) per share: Basic $ (1.19) $ .51 Assuming dilution $ (1.19) $ .51 Average shares outstanding 16,603 16,408 Average shares assuming dilution 16,603 16,551 See accompanying notes to consolidated financial statements. </TABLE> Page 4
The West Company, Incorporated and Subsidiaries CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) (in thousands) <TABLE> <CAPTION> ASSETS March 31, 1998 Dec. 31, 1997 -------------- ------------- <S> <C> <C> Current assets: Cash, including equivalents $ 66,400 $ 52,300 Accounts receivable 70,000 60,400 Inventories 43,200 38,300 Current deferred income tax benefits 9,700 9,400 Other current assets 10,200 10,300 -------------------------------------------------------------------------- Total current assets 199,500 170,700 -------------------------------------------------------------------------- Net property, plant and equipment 201,600 202,200 Investments in affiliated companies 14,400 22,700 Goodwill 60,500 51,600 Intangibles and other assets 32,400 30,700 -------------------------------------------------------------------------- Total Assets $508,400 $ 477,900 -------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current portion of long-term debt $ 600 $ 700 Notes payable 40,300 900 Accounts payable 18,600 18,600 Salaries, wages, benefits 11,900 13,400 Income taxes payable 9,600 5,400 Other current liabilities 23,700 19,000 -------------------------------------------------------------------------- Total current liabilities 104,700 58,000 -------------------------------------------------------------------------- Long-term debt, excluding current portion 84,900 87,400 Deferred income taxes 29,900 30,100 Other long-term liabilities 24,800 24,700 -------------------------------------------------------------------------- Shareholders' equity 264,100 277,700
Page 5 Total Liabilities and Shareholders' Equity $508,400 $ 477,900 -------------------------------------------------------------------------- See accompanying notes to consolidated financial statements. </TABLE> Page 6
The West Company Incorporated and Subsidiaries CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (in thousands) <TABLE> <CAPTION> Quarter Ended March 31, 1998 March 31, 1997 ---------------- ---------------- <S> <C> <C> Cash flows from operating activities: Net income, plus net non-cash items $ 14,400 $ 15,900 Changes in assets and liabilities (6,000) (4,900) -------------------------------------------------------------------------------------- Net cash provided by operating activities 8,400 11,000 -------------------------------------------------------------------------------------- Cash flows from investing activities: Property, plant and equipment acquired (7,600) (6,300) Proceeds from sale of assets 800 200 Payment for acquisition, net of cash acquired (6,900) - Customer advances, net of repayments (900) (300) -------------------------------------------------------------------------------------- Net cash used in investing activities (14,600) (6,400) -------------------------------------------------------------------------------------- Cash flows from financing activities: Proceeds from other long-term debt - 100 Repayment of long-term debt (2,400) (300) Notes payable, net 23,900 (400) Dividend payments (2,500) (2,300) Sale of common stock, net 1,400 800 -------------------------------------------------------------------------------------- Net cash provided by (used in) financing activities 20,400 (2,100) -------------------------------------------------------------------------------------- Effect of exchange rates on cash (100) (900) -------------------------------------------------------------------------------------- Net increase in cash, including equivalents $ 14,100 $ 1,600 -------------------------------------------------------------------------------------- Certain items in operating activities have been reclassified for 1997 to conform with 1998 classifications. See accompanying notes to consolidated financial statements. </TABLE> Page 7
The West Company, Incorporated and Subsidiaries Notes to Consolidated Financial Statements (Unaudited) The interim consolidated financial statements for the quarter ended March 31, 1998 should be read in conjunction with the consolidated financial statements and notes thereto of The West Company, Incorporated appearing in the Company's 1997 Annual Report on Form 10-K. The year-end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by generally accepted accounting principles. Interim results are based on the Company's accounts without audit. 1. Interim Period Accounting Policy --------------------------------- In the opinion of management, the unaudited Condensed Consolidated Balance Sheet as of March 31, 1998 and the related unaudited Consolidated Statement of Operations and the unaudited Condensed Consolidated Statement of Cash Flows for the three month period then ended and for the comparative period in 1997 contain all adjustments, consisting only of normal recurring accruals, necessary to present fairly the financial position as of March 31, 1998 and the results of operations and cash flows for the respective periods. The results of operations for any interim period are not necessarily indicative of results for the full year. Operating Expenses ------------------ To better relate costs to benefits received or activity in an interim period, certain operating expenses have been annualized for interim reporting purposes. Such expenses include depreciation due to use of the half year convention, certain employee benefit costs, annual quantity discounts, and advertising. Income Taxes ------------- The tax rate used for interim periods is the estimated annual effective consolidated tax rate, based on the current estimate of full year results (excluding the charge for acquired research and development), except that taxes applicable to operating results in Brazil and prior year adjustments, if any, are recorded as identified. Net Loss Per Share --------------------- In the first quarter 1998 because of the reported net loss, the incremental shares from potential issuance of common stock under the Company's stock option and award plans are not included in average shares assuming dilution. Page 8
The West Company, Incorporated and Subsidiaries Notes to Consolidated Financial Statements (Unaudited) (Continued) 2. Inventories at March 31, 1998 and December 31, 1997 are summarized as follows: (in thousands) 1998 1997 -------- -------- Finished goods $ 17,700 $ 15,800 Work in process 10,300 8,100 Raw materials 15,200 14,400 -------- -------- $ 43,200 $ 38,300 -------- -------- -------- -------- 3. The carrying value of property, plant and equipment at March 31, 1998 and December 31, 1997 is determined as follows: (in thousands) 1998 1997 -------- -------- Property, plant and equipment $434,000 $428,600 Less accumulated depreciation 232,400 226,400 -------- -------- Net property, plant and equipment $201,600 $202,200 -------- -------- -------- -------- 4. In 1998, the Company adopted Statement of Financial Accounting Standard (SFAS) No. 130, Reporting Comprehensive Income, which establishes standards for the disclosure of comprehensive income and its components. Comprehensive income is the total of net income and other revenue, expenses, gains and losses for the period which are excluded from net income under generally accepted accounting principles. For the three months ended March 31, 1998 and 1997, the Company's comprehensive income (loss) is as follows: March 31, 1998 March 31, 1997 -------------- -------------- Net income (loss) $(19,700) $8,400 Foreign currency translation adjustments (2,600) (5,800) --------- --------- Comprehensive income (loss) $(22,300) $2,600 --------- --------- --------- --------- In 1997, the Financial Accounting Standards Board (FASB) issued SFAS No. 131, "Disclosure About Segments of an Enterprise and Related Information." As required by the standard, the Company will begin reporting under SFAS No. 131 in its Annual Report. 5. Common stock issued at March 31, 1998 was 17,165,104 shares, of which 184,342 shares were held in treasury. Dividends of $.15 per common share were paid in the first quarter of 1998 and a dividend of $.15 per share payable to holders of record on April 22, 1998 was declared on March 10, 1998. 6. The Company has accrued the estimated cost of environmental compliance expenses related to soil or ground water contamination at current and former manufacturing facilities. The ultimate cost to be incurred by the Company and the timing of such payments cannot be fully determined. However, based on consultants' estimates of the costs of remediation in accordance with applicable regulatory requirements, the Company believes the accrued liability of $1.5 million at March 31, 1998 is sufficient to cover the future costs of these remedial actions, which will be carried out over the next two to five years. The Company has not anticipated any possible recovery from insurance or other sources. 7. At March 31, 1998 the cumulative number of employees terminated in accordance with the restructuring plan announced on March 29, 1996 was 225 and total payout of severance and
Page 9 The West Company, Incorporated and Subsidiaries Notes to Consolidated Financial Statements (Unaudited) (Continued) benefits was $6.8 million. Restructuring activities, except for the sale of one building and certain excess equipment and payout of remaining severance, have been completed. 8. On March 31, 1998, the Company acquired for approximately BPS 20 million ($33.5 million at March 31, 1998) the remaining 70% interest in DanBioSyst U.K. Ltd. ("DBS"), making DBS a wholly-owned subsidiary. This transaction is accounted for by the purchase method, and was financed with cash of $9.4 million, 320,406 shares of restricted common stock valued at $8.7 million, and short-term notes of $15.4 million. Based on a preliminary appraisal of the assets acquired, the allocation of the purchase price has been estimated as follows: (in millions) Current assets 1.3 Equipment and leasehold improvements .8 In-process research & development 28.2 Other intangibles .4 Goodwill 2.8 Estimated in-process research and development was written off at the date of acquisition. The purchase price allocation will be finalized in the second quarter of 1998 and operating results of DBS will be consolidated beginning on April 1, 1998. Page 10
Item 2. Management's Discussion and Analysis of Financial Condition and -------------------------------------------------------------- Results of Operations. ---------------------- Results of Operations for the Quarter Ended March 31, 1998 Versus ----------------------------------------------------------------- March 31, 1997. ------------------------ Net Sales --------- Net sales for the first quarter of 1998 were $105.2 million, an 8% decrease compared with sales for the same quarter in 1997. The anticipated sales decline is attributed primarily to lower sales and a reduction in several key healthcare customers' product sales. Additionally, customers' inventory reductions impacted first quarter 1998 sales. Also, the strong U.S. dollar impacted sales, excluding this effect sales for the first quarter declined 6% when compared with the first quarter of 1997. Gross Profit ------------ Gross profit margin for the first quarter was 29.8% of net sales compared with 28.5% for the same period in 1997. The Company continues to benefit from cost savings programs and margins on sales of contract services increased substantially compared with 1997's first quarter. Selling, General and Administrative ----------------------------------- Selling, general and administrative (SG&A) expenses decreased by $1.3 million for the quarter and as a percentage of net sales rose slightly. SG&A expenses decreased primarily because of the impact of the strong U.S. dollar, lower pension costs due to higher income on pension plan assets, and lower expenses associated with bad debts and other claims. Acquired Research and Development --------------------------------- The information contained in Note 8 to the Consolidated Financial Statements, which is incorporated herein by reference, describes the Company's acquisition of DanBioSyst U.K. Ltd., and the estimated allocation of the purchase price based on preliminary appraisal work. Acquired in-process research and development estimated at $28.2 million was expensed, as required by Statement of Financial Accounting Standards (SFAS) No. 2, at the date of purchase.
Page 11 Management's Discussion and Analysis of Financial Condition ---------------------------------------------------------- and Results of Operations.(Continued) -------------------------------------- Other Income and Expense -------------------------- Other income increased in the first quarter 1998 compared with the same quarter in 1997, reflecting interest income earned on higher average temporary cash investments during the period. Interest Expense -------------------------------------------------------------- Lower interest rates and lower average debt levels reduced interest expense by $.2 million in 1998 compared with first quarter 1997. Minority interest and the Company's equity in net income of affiliated companies for both comparable reporting periods were less than $.1 million. For the first quarter 1998, operating results improved at Daikyo Seiko, Ltd., a Japanese Company in which the Company owns a 25% equity stock, due to increased sales and margins. The increase was offset by operating losses and an unfavorable exchange rate impact at the Company's affiliates in Mexico. Taxes ----- The effective tax rate for the first quarter 1998 was 39%, excluding the charge for acquired research and development. For the first quarter of 1997, the effective tax rate was 38.5%. This is higher than the actual effective rate of 23.2% at year end 1997, which was significantly affected by two events: a tax reorganization of the Company's German subsidiaries, and repatriation of cash dividends from certain subsidiaries, which resulted in a net benefit of $7.9 million to the Company. Excluding this net benefit, the 1997 effective tax rate was 37%. An increase in the statutory tax rate of France, enacted in the fourth quarter 1997, has increased the effective tax rate in 1998 for the Company. Net Income/Loss ---------------- The net loss for the first quarter 1998 was $19.7 million, or $1.19 per share. The loss is a result of a charge of $28.2 million, or $1.70 per share, for the estimate of acquired research and development associated with the acquisition of DanBioSyst U.K. Ltd. Excluding this charge, net income for the quarter was $8.5 million, or $.51 per share. This compares with net income of $8.4 million, or $.51 per share, in the first quarter of 1997.
Page 12 Financial Position ------------------ Working capital at March 31, 1998 was $94.8million compared with Management's Discussion and Analysis of Financial Condition ---------------------------------------------------------- and Results of Operations.(Continued) -------------------------------------- $112.7 million at December 31, 1997. The working capital ratio at March 31, 1998 was 1.91 to 1. Cash provided by operations and available cash balances were used to fund capital expenditures, repay debt and make dividend payments. On March 30, 1998, the Company borrowed $24.5 million under a short-term money market facility to finance the DanBioSyst acquisition, (see disclosure on the acquisition in Note 8 to the Consolidated Financial Statements). However, the sellers elected to receive a portion of the purchase price, $15.4 million in short-term notes. This change in payment terms increased cash and short term notes payable at March 31, 1998. The Company intends to repay the borrowing under the short-term facility during the second quarter. As a result of the borrowing described above, total debt as a percentage of total invested capital was 32.2% at March 31, 1998, compared with 24.2% at December 31, 1997. At March 31, 1998 the Company had available unused lines of credit of $113.5 million. This available borrowing capacity and cash flow from operations is adequate, in the opinion of management, to meet estimated cash requirements and fund future growth. Item 3. Quantitative and Qualitative Disclosure about Market Risk ------------------------------------------------------ Not applicable. Page 13 Part II - Other Information Item 1. Legal Proceedings ----------------- None. Item 6. Exhibits and Reports on Form 8-K __________________________________ (a) See Index to Exhibits on pages F-1 and F-2 of this Report. (b) No reports on Form 8-K have been filed for the quarter ended March 31, 1998.
Page 14 SIGNATURES ---------- Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. THE WEST COMPANY, INCORPORATED ----------------------------------- (Registrant) May 15, 1998 /s/ Steven A. Ellers ------------- --------------------------------- Date (Signature) Steven A. Ellers Senior Vice President, Finance and Administration
Page 15 INDEX TO EXHIBITS <TABLE> <CAPTION> Exhibit Number <S> (3) (a) Restated Articles of Incorporation of the Company, incorporated by reference to Exhibit (4) to the Company's Registration Statement on Form S-8 (Registration No. 33-37825). (3) (b) Bylaws of the Company, as amended and restated December 13, 1994, incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1994 (File No. 1-8036). (4) (a) Form of stock certificate for common stock incorporated by reference to Exhibit (3) (b) to the Company's Annual Report on Form 10-K for the year ended December 31, 1989 (File No. 1-8036). (4) (b) Flip-In Rights Agreement between the Company and American Stock Transfer & Trust Company, as Rights Agent, dated as of January 16, 1990, incorporated by reference to Exhibit 1 to the Company's Form 8-A Registration Statement (File No. 1-8036). (4) (c) Flip-Over Rights Agreement between the Company and American Stock Transfer & Trust Company, as Rights Agent, dated as of January 16, 1990, incorporated by reference to Exhibit 2 to the Company's Form 8-A Registration Statement (File No. 1-8036). (9) None. (10) (a) Non-Qualified Stock Option Plan for Non- Employee Directors, as amended as of April 28, 1998. (10) (b) Form of amended and restated agreement between the Company and certain of its executive officers. (10) (c) Schedule of agreements with executive officers. (10) (d) Amendment No. 2 to Retirement Plan for Non-Employee Directors of the Company, dated April 28, 1998. (10) (e) Amendment No. 2 to Non-Qualified Deferred Compensation Plan for Designated Executive Officers dated April 28, 1998.
Page 16 Exhibit Number <S> (10) (f) Amendment No. 1 Non-qualified Deferred Compensation Plan for Outside Directors. (11) Not Applicable. (12) Not Applicable. (15) None. (16) Not applicable. (18) None. (19) None. (22) None. (23) None. (24) None. (27) Financial Data Schedule (99) None. </TABLE> F-2