Why did earnings fall so sharply in 2000?

Net income declined to $1.6 million from $38.7 million, mainly due to a $20.8 million pre-tax restructuring charge in the fourth quarter of 2000, lower sales, and lower gross margins in both the Device Product Development and Contract Services segments. The filing states that 2000 results include an unusual $1.5 million tax benefit from the resolution of trade tax issues.

What drove the restructuring charge?

The November 2000 plan included closing contract packaging and plastic device manufacturing plants in Puerto Rico, closing the site management organization in Cleveland, Ohio, and closing the sterile-fill operation in Lakewood, New Jersey. The charge covered a $9.2 million goodwill write-down, a $7.7 million reduction to estimated net realizable value of assets to be sold, and $3.9 million of severance and asset disposal costs. About 180 employees are affected.

How is the Company's debt position changing?

Consolidated debt totaled $199.4 million at December 31, 2000, up from $171.1 million a year earlier. The Company signed a $135 million revolving credit agreement in July 2000 that includes a $70 million five-year facility and a $65 million 364-day line of credit. Its senior notes of $100 million are due 2009 at 6.81%.

What are the Company's capital spending plans for 2001?

Cash requirements for capital projects in 2001 are projected to be about $60 million. Projects focus on completing the capacity expansion at two European plants, new product development, technology upgrades, and a program to install enterprise resource planning capability, which will start in 2001.

Which business segments are most affected by weak demand?

Contract Services sales declined 20.5% from 1999, with contract manufacturing and packaging sales down 30.1%. The filing attributes this to customers converting to in-house production, weak market acceptance of certain products, few new product launches, and regulatory-related cancellations. Device Product Development sales were roughly flat at constant exchange rates, with domestic sales down 5.6% and international sales up 5.1%.

WST 10-K FY2000 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed March 30, 2001. Cited figures are marked; the original filing is the authoritative source.

West Pharmaceutical Services, Inc. (formerly The West Company, Incorporated) reported a sharp earnings decline for 2000.

Net sales were $430.1 million^a, down from $469.1 million in 1999, and net income fell to $1.6 million, or $.11 per share, from $38.7 million, or $2.59 per share, in 1999. The result includes a pre-tax restructuring charge of $20.8 million taken in the fourth quarter, tied to plant closures in Puerto Rico, the closure of a sterile-fill operation in Lakewood, New Jersey, and the closure of the clinical services site management organization. The Company also recognized an unusual $1.5 million tax benefit in 2000.

Excluding the items noted in the filing, the Company cites 2000 net income of $15.5 million^b, or $1.08 per share, compared with $36.3 million, or $2.44 per share, in 1999. The weakness was concentrated in the Contract Services segment, where sales declined 20.5% from 1999 and operated below breakeven margins. Device Product Development sales were broadly flat at constant exchange rates, with domestic sales down 5.6% and international sales up 5.1%.

Gross margin fell to 24.0% from 30.8%. Balance sheet leverage increased: consolidated debt rose to $199.4 million^c from $171.1 million, and total debt to total invested capital was 49.2%. Cash flow from operations fell to $48.6 million from $69.4 million, and capital spending rose to $57.3 million.

The Company has engaged UBS Warburg LLC to review strategic alternatives, which may include asset dispositions or business combinations. For 2001, management projects capital expenditures of about $60 million^d, focused on completing capacity expansion at two European plants and installing an enterprise resource planning system. The Company also disclosed a $135 million revolving credit agreement signed in July 2000 and a $100 million senior note issued in 1999.

02—Key points

Key Highlights

Net income fell to $1.6 million ($.11 per share) in 2000 from $38.7 million ($2.59 per share) in 1999, including a $15.5 million after-tax restructuring charge in the fourth quarter.
Net sales declined to $430.1 million from $469.1 million; the strong U.S. dollar reduced reported sales by about $19 million.
Contract Services sales fell 20.5% versus 1999, and the segment operated below breakeven margins due to low demand and contract cancellations.
Gross margin dropped to 24.0% from 30.8%, with gross profit of $103.4 million compared with $144.3 million.
Total debt rose to $199.4 million from $171.1 million, and debt to total invested capital reached 49.2%.
Operating cash flow was $48.6 million versus $69.4 million, while capital expenditures increased to $57.3 million.
UBS Warburg LLC was engaged to review all strategic alternatives, which may include asset dispositions or business combinations.

03—Questions

Frequently Asked Questions

Why did earnings fall so sharply in 2000?
Net income declined to $1.6 million from $38.7 million, mainly due to a $20.8 million pre-tax restructuring charge in the fourth quarter of 2000, lower sales, and lower gross margins in both the Device Product Development and Contract Services segments. The filing states that 2000 results include an unusual $1.5 million tax benefit from the resolution of trade tax issues.
What drove the restructuring charge?
The November 2000 plan included closing contract packaging and plastic device manufacturing plants in Puerto Rico, closing the site management organization in Cleveland, Ohio, and closing the sterile-fill operation in Lakewood, New Jersey. The charge covered a $9.2 million goodwill write-down, a $7.7 million reduction to estimated net realizable value of assets to be sold, and $3.9 million of severance and asset disposal costs. About 180 employees are affected.
How is the Company's debt position changing?
Consolidated debt totaled $199.4 million at December 31, 2000, up from $171.1 million a year earlier. The Company signed a $135 million revolving credit agreement in July 2000 that includes a $70 million five-year facility and a $65 million 364-day line of credit. Its senior notes of $100 million are due 2009 at 6.81%.
What are the Company's capital spending plans for 2001?
Cash requirements for capital projects in 2001 are projected to be about $60 million. Projects focus on completing the capacity expansion at two European plants, new product development, technology upgrades, and a program to install enterprise resource planning capability, which will start in 2001.
Which business segments are most affected by weak demand?
Contract Services sales declined 20.5% from 1999, with contract manufacturing and packaging sales down 30.1%. The filing attributes this to customers converting to in-house production, weak market acceptance of certain products, few new product launches, and regulatory-related cancellations. Device Product Development sales were roughly flat at constant exchange rates, with domestic sales down 5.6% and international sales up 5.1%.

04—Continue

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