01—Abstract
Summary
Summary of the 10-K filed March 9, 2005. Cited figures are marked; the original filing is the authoritative source.
West Pharmaceutical Services, Inc. reported net sales of $541.6 milliona for 2004, up 12% from $483.4 million in 2003, with about 5% of the increase attributed to the strengthening of the Euro and other currencies against the U.S. dollar.
Net income fell to $19.4 millionb from $31.9 million, driven largely by discontinued operations: a $14.1 million net loss from discontinued operations and a $4.7 million pre-tax loss on the disposal of the drug delivery business. Income from continuing operations was $33.5 million, or $1.09 per diluted share, versus $42.9 million, or $1.48 per diluted share, in 2003. The 2003 figure included a $17.3 million net gain from the Kinston insurance settlement, while 2004 absorbed $11.6 million of incremental manufacturing costs tied to interim production after the Kinston explosion.
Gross margin declined to 28.8% from 31.7%, and the company expects gross margin to improve to approximately 30% in 2005. In December 2004 West agreed to sell its drug delivery business to Archimedes Pharma Limited for $7.1 millionc in cash and assumed indebtedness, plus a 14% ownership interest in Archimedes and 3% of future royalty income. The company also plans to exit its clinical services unit in Evansville, Indiana.
Both businesses are presented as discontinued operations. Order backlog rose to $152.7 milliond at December 31, 2004, from $131.6 million a year earlier. Total debt declined to $160.8 million, and debt to total invested capital improved to 34.8% from 40.5%.
Cash from operations was $81.0 million, and capital expenditures were $57.4 million, with 2005 capital spending expected to be approximately $50.0 million. The Board approved in March 2005 a plan to repatriate up to $70 million under the American Jobs Creation Act of 2004, with the first-quarter 2005 tax expense estimated at $2 million to $4 million, or $0.06 to $0.13 per diluted share. Lawsuits related to the January 2003 Kinston explosion, which resulted in six deaths, remain pending, and the company believes its insurance is sufficient to cover expected losses from the litigation.
02—Key points
Key Highlights
- Net sales rose 12% to $541.6 million in 2004, with pharmaceutical packaging sales of $382.9 million, up from $341.2 million.
- Net income declined to $19.4 million ($0.63 per diluted share) from $31.9 million ($1.10 per diluted share), reflecting discontinued operations losses and a non-recurring 2003 insurance gain.
- Income from continuing operations was $33.5 million, or $1.09 per diluted share, compared with $42.9 million, or $1.48 per diluted share, in 2003.
- Gross margin fell to 28.8% from 31.7%, primarily due to $11.6 million of Kinston interim production costs; management expects approximately 30% in 2005.
- The drug delivery business is being sold to Archimedes Pharma Limited for $7.1 million, and West will hold a 14% stake; the clinical services unit is also being exited.
- Order backlog increased to $152.7 million from $131.6 million, and total debt fell to $160.8 million from $175.0 million.
- The Board approved repatriation of up to $70 million of foreign cash balances, with estimated first-quarter 2005 tax expense of $2 million to $4 million.
03—Questions
Frequently Asked Questions
Why did net income decline in 2004 despite higher sales?
Net sales grew 12%, but net income fell to $19.4 million from $31.900 million. The decline reflects a $14.1 million net loss from discontinued operations, a $4.7 million pre-tax loss on the disposal of the drug delivery business, and the absence of the $17.3 million net insurance settlement gain recorded in 2003. Income from continuing operations was $33.5 million, down from $42.9 million.
What happened to the gross margin in 2004?
Gross margin declined to 28.8% from 31.7%. The filing attributes most of the decrease to $11.6 million of costs incurred to run interim production after the January 2003 Kinston plant explosion, for which no further insurance coverage was available. Management expects gross margin to improve to approximately 30% in 2005 as the new Kinston plant reaches full utilization, although higher depreciation and raw material costs will partially offset the gains.
What is the status of the divestitures?
On December 24, 2004, West agreed to sell its drug delivery business to Archimedes Pharma Limited for $7.1 million in cash and assumed indebtedness, and received a 14% ownership interest in the new company. The sale closed in February 2005. West also intends to dispose of its clinical services unit in Evansville, Indiana, within the next year, with its net book value of $2.2 million expected to be recovered. Both operations are reported as discontinued operations.
How strong is the company's balance sheet and liquidity?
Total debt was $160.8 million at year-end 2004, down from $175.0 million, and debt to total invested capital improved to 34.8% from 40.5%. Cash rose to $68.8 million, and working capital was $110.0 million. The company had $50.8 million drawn on a $125.0 million revolving credit facility and was in compliance with all debt covenants, with a Leverage Ratio of 24.9%.
What are the key legal and tax risks disclosed?
Three lawsuits relate to the Kinston explosion, including a suit in North Carolina state court seeking unspecified compensatory and punitive damages. The company believes it has sufficient insurance to cover losses from expected litigation. On the tax side, the Board approved in March 2005 a plan to repatriate up to $70 million under the American Jobs Creation Act, with first-quarter 2005 tax expense estimated at $2 million to $4 million, or $0.06 to $0.13 per diluted share.
04—Continue