Why did net income drop so sharply in 1998?

The decline was driven mainly by a $28.2 million non-deductible charge for acquired in-process research and development from the 1998 acquisition of DanBioSyst UK Ltd., plus a $2.5 million net restructuring charge in the third quarter. The 1998 effective tax rate was 76.1%, reflecting that non-deductible charge, versus 23.2% in 1997, which had included a $7.9 million net tax benefit.

How did the company's business segments perform?

Device Product Development produced $365.6 million of 1998 net sales and operating profit of $83.8 million. Contract Services had net sales of $82.6 million and operating profit of $9.7 million, up from $3.8 million in 1997. Drug Delivery Research and Development had $1.5 million in revenue and an operating loss of $5.3 million.

What drove the decline in device product sales?

Management said sales of manufactured device products for healthcare and consumer markets decreased 1% at constant exchange rates in 1998. Domestic sales fell 6% due to lower sales to several key customers, reduced customer inventory levels, lower resin prices, and the loss of business at three accounts to competitors. Sales in Asian and South American markets were lower due to local financial crises, while European sales rose 9%, partly due to the Betraine Limited acquisition.

How did the company use its cash in 1998 and what is its financing position?

Cash flow from operations was $71.0 million. Uses included $41.8 million of capital expenditures, $34.9 million for acquisitions, a $60.4 million share repurchase, and $9.4 million of dividends. Debt rose to $141.1 million. The company had $35 million available under its short-term revolving facility and $2.8 million under its long-term facility at year-end, and it was negotiating a substantial long-term debt facility expected to be reached in the second quarter of 1999.

What did the company say about its outlook and Year 2000 readiness?

Management said cash from operations, option exercises, available credit facilities, and current capitalization should provide sufficient flexibility to meet 1999 cash flow needs and implement a stock repurchase program for up to one million shares. The Year 2000 plan calls for required modifications to be completed by June 30, 1999, with the company stating that it expects adequate time in the second half of 1999 to address deficiencies without a material impact on critical business functions.

WST 10-K FY1998 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed May 6, 1999. Cited figures are marked; the original filing is the authoritative source.

West Pharmaceutical Services, Inc. (formerly The West Company, Incorporated) reported net sales of $449.7 million^a in 1998, compared with $452.5 million in 1997, and net income of $6.7 million, or $.41 per share, versus $44.4 million, or $2.69 per share, in 1997.

Results were affected by a $28.2 million^b charge for acquired in-process research and development tied to the 1998 acquisition of DanBioSyst UK Ltd. and a $2.5 million net restructuring charge in the third quarter of 1998. Excluding these items, the company states 1998 net income was $37.4 million, or $2.28 per share. The company operates three segments: Device Product Development, Contract Services, and Drug Delivery Research and Development.

Device Product Development accounted for $365.6 million^c of 1998 net sales, Contract Services for $82.6 million, and Drug Delivery Research and Development for $1.5 million. Balance sheet and cash flow data show total assets of $505.6 million, total debt of $141.1 million, and shareholders' equity of $230.1 million at year-end 1998, down from $277.7 million the prior year after a $60.4 million Dutch Auction self-tender repurchasing two million shares at $30 per share. Cash flow from operations was $71.0 million, capital expenditures were $41.8 million, and cash dividends totaled $9.4 million ($.61 per share).

Management cites weaker demand in domestic healthcare and consumer markets and in Asian and South American markets, while contract manufacturing and packaging sales rose 3%^d for the full year and 16% in the second half. The company stated it was negotiating a substantial long-term debt facility with a group of insurance companies, with agreement expected in the second quarter of 1999.

02—Key points

Key Highlights

1998 net sales were $449.7 million, down slightly from $452.5 million in 1997.
1998 net income fell to $6.7 million ($.41 per share) from $44.4 million ($2.69 per share), reflecting a $28.2 million acquired in-process R&D charge and a $2.5 million net restructuring charge.
Excluding the in-process R&D charge, the 1997 tax benefit, and restructuring charges, 1998 net income was $37.4 million ($2.28 per share).
Device Product Development generated $365.6 million of 1998 net sales, with operating profit of $83.8 million.
Shareholders' equity declined to $230.1 million after a $60.4 million Dutch Auction self-tender for two million shares at $30 per share.
Total debt rose to $141.1 million from $89 million at year-end 1997, and the company expects 1999 capital expenditures of $50 million.
Year 2000 remediation is targeted for completion by June 30, 1999, with pretax costs of approximately $3.7 million incurred in 1998 and about $5.0 million expected in 1999.

03—Questions

Frequently Asked Questions

Why did net income drop so sharply in 1998?
The decline was driven mainly by a $28.2 million non-deductible charge for acquired in-process research and development from the 1998 acquisition of DanBioSyst UK Ltd., plus a $2.5 million net restructuring charge in the third quarter. The 1998 effective tax rate was 76.1%, reflecting that non-deductible charge, versus 23.2% in 1997, which had included a $7.9 million net tax benefit.
How did the company's business segments perform?
Device Product Development produced $365.6 million of 1998 net sales and operating profit of $83.8 million. Contract Services had net sales of $82.6 million and operating profit of $9.7 million, up from $3.8 million in 1997. Drug Delivery Research and Development had $1.5 million in revenue and an operating loss of $5.3 million.
What drove the decline in device product sales?
Management said sales of manufactured device products for healthcare and consumer markets decreased 1% at constant exchange rates in 1998. Domestic sales fell 6% due to lower sales to several key customers, reduced customer inventory levels, lower resin prices, and the loss of business at three accounts to competitors. Sales in Asian and South American markets were lower due to local financial crises, while European sales rose 9%, partly due to the Betraine Limited acquisition.
How did the company use its cash in 1998 and what is its financing position?
Cash flow from operations was $71.0 million. Uses included $41.8 million of capital expenditures, $34.9 million for acquisitions, a $60.4 million share repurchase, and $9.4 million of dividends. Debt rose to $141.1 million. The company had $35 million available under its short-term revolving facility and $2.8 million under its long-term facility at year-end, and it was negotiating a substantial long-term debt facility expected to be reached in the second quarter of 1999.
What did the company say about its outlook and Year 2000 readiness?
Management said cash from operations, option exercises, available credit facilities, and current capitalization should provide sufficient flexibility to meet 1999 cash flow needs and implement a stock repurchase program for up to one million shares. The Year 2000 plan calls for required modifications to be completed by June 30, 1999, with the company stating that it expects adequate time in the second half of 1999 to address deficiencies without a material impact on critical business functions.

04—Continue

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