West Pharmaceutical Services Announces Fourth Quarter and Full Year 2007 Results

LIONVILLE, Pa., Feb. 21 /PRNewswire-FirstCall/ -- West Pharmaceutical Services, Inc. today announced the results of operations for the three months and year ended December 31, 2007. Fourth quarter reported results included pre-tax charges of $17.8 million, or $11.3 million after tax, for the combined effects of restructuring and impairment charges and for the effects of tax contingencies and offsetting tax benefits, or a combined $0.32 per diluted share. Quarterly results including and adjusted to exclude those items are as follows:

For the full year, revenues were $1,020.1 million and reported earnings per diluted share were $2.06, or an adjusted $2.37 per diluted share excluding certain items. Adjusted results are non-GAAP financial measures and the items excluded from the adjusted results are more fully described under the heading "Restructuring, Impairment and Other Charges," in the accompanying tables, and elsewhere in this release.

"In 2007 West continued to deliver strong fundamental operating results, with revenues surpassing $1 billion for the first time," said Donald E. Morel Jr. Ph.D., the Company's Chairman and Chief Executive Officer. "Despite several challenges in the second half of the year, we successfully executed against our expansion plan while meeting record demand, strengthening our balance sheet, and continuing to grow our investment in innovation in order to capitalize on future growth opportunities. More importantly, demand remains strong in critical therapeutic markets and across our key product lines as we begin 2008."

Outlook for 2008

The Company expects 2008 sales growth of 3% to 5% over reported 2007 sales, producing expected sales of between $1,050.0 million and $1,070.0 million, compared to $1,020.1 million in 2007. The Company expects adjusted earnings per diluted share, exclusive of restructuring costs, to be between $2.40 and $2.50 for 2008, compared to $2.37 in 2007.

"I firmly believe we will be able to deliver higher sales which should result in improved earnings compared with 2007 adjusted results. The successful implementation of restructuring within the Tech Group, normalized utilization at Tech's new Michigan facility, and our ability to improve efficiency in our Pharmaceutical Systems business as new capacity begins to come on-line, will be important factors in achieving our revenue and operating performance goals in 2008," said Dr. Morel. "We will continue investing in expansions of facilities in Europe, Asia and North America; constructing a new facility in China; improving critical information systems; further augmenting our R&D efforts; and introducing several new products to our customers. I remain confident that the combination of stable growth in our core business, geographic expansion of that business and the introductions of new products will lead to improved results and accelerating sales growth over the next five years."

Continuing sales growth is expected to outpace and more than offset the anticipated $50 million to $60 million of aggregate sales declines attributable to the Exubera(R) inhalable insulin device, slower sales of high- value components for Erythropoietin Stimulating Agent, or "ESA", drugs used to treat anemia in cancer and dialysis patients, and diagnostic components that the Company will no longer manufacture. The circumstances affecting sales of those products occurred during the second half of 2007. Consequently, the associated adverse effects on comparisons of 2008 interim results to comparable 2007 periods are expected to be more pronounced early in 2008 and to decline as the year progresses.

The Company expects 2008 sales to generate a consolidated gross profit margin of approximately 30%, compared to the 2007 gross margin of 28.6%. Consolidated gross margin is forecast to improve as a result of a disproportionate increase in revenue from higher-margin Pharmaceutical Systems products in relation to both lower margin disposable medical device components within the Pharmaceutical Systems segment and to Tech Group segment sales.

The Company's guidance is based on its current expectations regarding 2008, and actual results can be significantly affected by variability in sales dollars, volume and product mix, among other risks. Investors are directed to a non-exclusive listing of risk factors at the end of this press release and in the Company's Form 10-Q, Form 10-K and Form 8-K reports.

Fourth Quarter Results

Consolidated revenue in the fourth quarter of 2007 was $256.1 million, up from $231.9 million in the fourth quarter of 2006, a 10.5% increase, of which 5.9 percentage points were due to currency as the Company's foreign operations continued to benefit from the weaker US dollar. The consolidated gross profit margin was 27.5% in the quarter, or 1.2 percentage points lower than in the prior year quarter due to production cost inefficiencies in both segments, more significantly in the Tech Group. Reported quarterly operating profit of $7.6 million included combined charges of $17.8 million for restructuring, impairment and tax-contingency charges. Excluding those items, consolidated operating profit was $25.4 million, compared to $20.9 million in the prior year quarter.

Restructuring, Impairment and Other Charges

Reported fourth quarter 2007 results include a $12.9 million non-cash charge for the impairment of the entire net book value assigned to the Company's contract with Nektar Therapeutics following Pfizer, Inc.'s decision to exit the marketing of Exubera. The Company recently concluded an agreement with Nektar Therapeutics under which the Company will be reimbursed for its tangible investments in and the cost of maintaining and, if necessary, closing the operation.

During the quarter, the Company announced a restructuring of operations in the Tech Group segment, incurring $3.4 million of restructuring costs during the fourth quarter, with the expectation that an additional $8.6 million of costs will be incurred, primarily in 2008. Pursuant to the restructuring plan, two tool production operations will be consolidated, engineering operations will be reduced, certain production activities will be rationalized and a production facility will be closed. The restructuring is expected to yield cost savings and production efficiencies beginning in 2008.

The Company also recognized an additional $1.5 million pre-tax charge in the fourth quarter associated with the conclusion of several tax contingencies relating to its operations in Brazil and for which it recognized an $8.6 million pre-tax charge in the third quarter. Those effects were substantially offset by the recognition of several discrete tax benefits relating to prior years.

Results including and excluding the effects of these items are provided in this release and accompanying tables in order to aid investors in the analysis and the comparison of results to other periods. The results excluding the effects of these items are not in conformity with US Generally Accepted Accounting Principles, or GAAP, and are "non-GAAP" measures. These are included as a supplement to, and not as a substitute for GAAP results.

Pharmaceutical Systems Segment

Sales in the Pharmaceutical Systems segment were $187.3 million in the three months ended December 31, 2007, up from $164.0 million in the comparable 2006 period, a 14.2% increase. Currency accounted for 7.4 percentage points of the increase, as approximately 64% of segment sales are in currencies other than the US dollar and benefited from relatively stronger local currencies. Product sales gains were primarily in pharmaceutical packaging components. Excluding currency effects, nearly half of the sales increase was attributable to products employing the Company's coating technologies and Westar processing, which again grew at a faster pace than standard pharmaceutical packaging and disposable device components. Higher sales of the Company's TrimTec(R) IV container closure also contributed to the increase.

Stronger Pharmaceutical Systems sales yielded a gross profit of $62.1 million, up from $55.8 million in the prior year quarter. Gross profit margin was 0.8 percentage points lower than in the fourth quarter of 2006, at 33.2%. The lower margin was explained by higher production costs for overtime, maintenance and repairs in production units that have been producing at levels exceeding their optimal capacity utilization, primarily in European and Asian plants, including those undergoing expansion. There were also incremental costs in the North American production facilities associated with planned information technology upgrades. Material and energy costs were not a significant factor in the margin decline.

Segment selling, general and administrative (SG&A) costs were higher due to currency effects on foreign operating costs, higher compensation and increased outside service costs, primarily associated with information technology projects. Those increases were partially offset by lower incentive compensation and insurance costs. Overall SG&A in the segment was 13.7% of sales in the quarter, a decrease of 0.6 percentage points from the prior year period, and operating profit grew from $29.2 million in the 2006 period to $31.5 million in the fourth quarter of 2007.

The Tech Group Segment

Sales in the Tech Group segment were $71.1 million, or $1 million higher than in the prior year period. Increased sales of insulin pens, an intra-nasal device and several personal care products overcame slower sales of several products, most notably the Exubera inhalable insulin device.

Gross profit in the segment declined $2.4 million compared to the prior year period, to $8.3 million, and gross margin was 11.7% compared to 15.3% in the prior year quarter. The declines were attributed to the lower revenue from the relatively high margin Exubera business and to plant inefficiencies, which accounted for 2.7% of the decline and relate primarily to under-utilization of the segment's new Michigan facility. As a result of the foregoing and SG&A costs that increased by approximately $0.5 million over the prior year quarter, the segment's operating profit declined from $5.0 million in the prior year period to $2.4 million in the current year period.

Corporate and Other Items

General and administrative costs were significantly lower in the fourth quarter. The decline was attributed to $3.3 million of lower stock-based compensation expense, primarily the effect of a decline in the Company's share price in the current quarter and an increase in share price in the prior year period, $1.6 million lower annual incentive compensation, and $0.5 million lower US pension expense as a result of plan changes at the beginning of 2007. Consolidated SG&A costs declined from 18.0% of sales in the fourth quarter of 2006 to 15.5% in the current period. Excluding the pre-tax charges and income tax effects of the restructuring and intangible asset impairment charges, and the effects of changes in Brazilian tax contingencies and offsetting tax benefits, the effective tax rate was 27.2% in the quarter, lowering the annual effective tax rate on adjusted income from continuing operations to 28.7%.

Fourth Quarter Conference Call

The Company will host a conference call to discuss the results and business expectations at 9:00 a.m. Eastern Time today. To participate on the call please dial (888) 843-9981 or (210) 839-8506. The passcode is WST.

A live broadcast of the conference call will be available at the Company's web site, www.westpharma.com, in the "Investor" section. Please allow extra time prior to the call to visit the site and download the streaming media software required to listen to the Internet broadcast. An online archive of the broadcast will be available at the site two hours after the live call and will be available through Thursday, March 6, 2008, by dialing (800) 964-1213 or (203) 369-3655 and entering conference ID# 9215772

About West

West is a global manufacturer of components and systems for injectable drug delivery, including stoppers and seals for vials, and closures and disposable components used in syringe, IV and blood collection systems. The Company also provides products with application to the personal care, food and beverage markets. Headquartered in Lionville, Pennsylvania, West supports its partners and customers from 50 locations throughout North America, South America, Europe, Mexico, Japan, Asia and Australia. For more information, visit West at www.westpharma.com.

Safe Harbor Statement

This press release contains forward-looking statements, within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, that are based on management's beliefs and assumptions, current expectations, estimates and forecasts. Statements that are not historical facts, including statements that are preceded by, followed by, or that include, words such as "estimate," "expect," "intend," "believe," "plan," "anticipate" and other words and terms of similar meaning are forward-looking statements. West's estimated or anticipated future results, product performance or other non-historical facts are forward-looking and reflect our current perspective on existing trends and information.

Many of the factors that will determine the Company's future results are beyond the ability of the Company to control or predict. These statements are 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.

Important factors that may affect future results include, but are not limited to, the following:

and other risks and uncertainties detailed in West's filings with the Securities and Exchange Commission, including our Registration Statement on Form 10-K filed with the SEC on March 1, 2007. You should evaluate any statement in light of these important factors.

Please refer to the "Notes to Non-GAAP financial measures" for more

Please refer to the "Notes to Non-GAAP financial measures" for more information. Non-GAAP measures are intended to explain or aid in the use of,

Notes to Non-GAAP financial measures:

For the purpose of aiding the comparison of our year-to-year results, management may refer to results excluding certain items in an effort to improve the analysis of underlying trends in the financial statements, and for consistency with performance metrics used for incentive compensation programs. These re-measured period results are not in conformity with United States generally accepted accounting principles ("GAAP") and are "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.

2007 Income Tax Adjustments:

Our results for the three and twelve-month periods ended December 31, 2007 include $1.7 million and $8.2 million, respectively, of tax adjustments related to prior years that were deemed more likely than not to be realized based on new information and changes in circumstances that occurred during 2007. The $8.2 million of discrete tax benefits recognized in 2007 includes the reversal of a $3.2 million valuation allowance related to certain tax credits generated in previous periods that was initially provided due to uncertainty in the generation of sufficient taxable income to utilize the credits, $3.7 million of tax benefits principally resulting from the revision of certain tax planning strategies and the completion of related documentation supporting research and development credits related to prior year tax returns, and a $1.3 million tax benefit primarily resulting from the closure of certain U.S. federal and state tax audit years.

$2007 Restructuring, Impairments and Other Charges:

Our results include restructuring, impairment and other charges totaling a $17.8 million pre-tax ($13.0 million net of related tax deductions) and $26.4 million ($19.4 million net of related tax deductions) for the three and twelve months periods ending December 31, 2007, respectively. The following table provides the detail of the individual components of these costs:

On October 18, 2007, Pfizer, Inc. announced that it had decided to discontinue marketing its Exubera(R) pulmonary insulin product, which was licensed by Pfizer, Inc. and developed by our customer, Nektar Therapeutics, returning the marketing rights to Nektar. Our Tech Group segment was one of two contract manufacturers of components for the device. Following the Pfizer announcement and in the absence of future orders for Exubera(R) devices, management determined that our intangible asset associated with our contract with Nektar was impaired and we recorded a $12.9 million impairment charge in the fourth quarter of 2007. Under an agreement reached with Nektar in February 2008, Tech Group will receive full reimbursement for, among other things, severance related employee costs, inventory, purchased raw materials and components, leased and other facility costs.

On December 11, 2007, our Board of Directors approved a restructuring plan for our Tech Group segment. The plan proactively addresses anticipated changes in customers' marketing plans for certain products and aligns the plant capacity and workforce with the current business outlook and longer-term strategy of focusing the business on proprietary products. The total cost of the restructuring plan is estimated at approximately $12.0 million. We incurred $3.4 million of these restructuring charges in 2007, and expect to complete the actions associated with the remaining $8.6 million in estimated costs by the end of 2008.

Our results also include provisions for a series of excise, gross receipts and value-added tax related issues in Brazil of $1.5 million and $10.1 million for the three and twelve month periods ended December 31, 2007, respectively. The increased provisions followed a detailed review of several tax cases pending in the Brazilian courts which now indicate that it is probable that the positions taken on certain tax returns dating back to the late 1990's would not be sustained.

2006 Extinguishment of Debt:

Our results for the twelve-month period ended December 31, 2006 include a pre-tax $5.9 million loss on debt extinguishment ($4.1 million net of tax) resulting from the pre-payment of $100.0 million in senior notes carrying a 6.81% interest rate and a maturity date of April 8, 2009.

2006 Tax Settlement:

Our results for the twelve-month period ended December 31, 2006 also include the favorable resolution of a claim for a tax refund associated with the disposition of our former plastic molding facility in Puerto Rico. The resolution of this claim 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.

The debt extinguishment and tax refund occurred in the first quarter of 2006 and had no impact on 2006 fourth quarter results.

CONTACT: Michael A. Anderson, Vice President and Treasurer, West
Pharmaceutical Services, Inc., +1-610-594-3345; Investors and Financial
Media: Evan Smith, or Theresa Kelleher, both of FD for West Pharmaceutical
Services, Inc., +1-212-850-5600, wst@fd.com

Web site: http://www.westpharma.com/