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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549-1004
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to ________
COMMISSION FILE NUMBER 1-11846
AptarGroup, Inc.
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 36-3853103
-------- ----------
(State of Incorporation) (I.R.S. Employer Identification No.)
475 West Terra Cotta Avenue, Suite E, Crystal Lake, Illinois 60014
- ------------------------------------------------------------ ------
(Address of Principal Executive Offices) (Zip Code)
815-477-0424
------------
(Registrant's Telephone Number, Including Area Code)
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 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date (November 9, 2001)
Common Stock 35,847,584
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AptarGroup, Inc.
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 2001
INDEX
PART I. FINANCIAL INFORMATION Page
----
ITEM 1. Financial statements (Unaudited)
Consolidated Statements of Income -
Three and Nine Months Ended September 30, 2001
and 2000 3
Consolidated Balance Sheets -
September 30, 2001 and December 31, 2000 4
Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 2001 and 2000 6
Notes to Consolidated Financial Statements 7
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 13
ITEM 3. Quantitative and Qualitative Disclosures about
Market Risk 20
PART II. OTHER INFORMATION
ITEM 2. Changes in Securities and Use of Proceeds 21
ITEM 6. Exhibits and Reports on Form 8-K 21
SIGNATURE 22
AptarGroup, Inc.
Consolidated Statements of Income
(Amounts in Thousands, Except Per Share Data)
(Unaudited)
Three Months Nine Months
Ended September 30, Ended September 30,
----------------------- -----------------------
2001 2000 2001 2000
---- ---- ---- ----
Net Sales ............................... $ 221,612 $ 224,691 $ 686,280 $ 670,004
Operating Expenses:
Cost of sales ......................... 139,483 142,595 429,492 418,517
Selling, research & development
and administrative .................. 35,897 35,251 109,775 108,288
Depreciation and amortization ......... 18,650 18,275 55,253 54,870
Strategic Initiative charges .......... 234 -- 7,509 --
--------- --------- --------- ---------
194,264 196,121 602,029 581,675
--------- --------- --------- ---------
Operating Income ........................ 27,348 28,570 84,251 88,329
--------- --------- --------- ---------
Other Income (Expense):
Interest expense ...................... (3,505) (5,157) (12,404) (14,106)
Interest income ....................... 335 468 1,376 1,075
Equity in results of affiliates ....... (58) 322 (168) 137
Minority interests .................... (199) (212) (595) (466)
Miscellaneous, net .................... (398) 994 419 2,458
--------- --------- --------- ---------
(3,825) (3,585) (11,372) (10,902)
--------- --------- --------- ---------
Income Before Income Taxes .............. 23,523 24,985 72,879 77,427
Provision for Income Taxes .............. 7,789 8,745 23,781 27,119
--------- --------- --------- ---------
Net Income Before Cumulative
Effect of a Change in
Accounting Principle for
Derivative Instruments and
Hedging Activities .................... 15,734 16,240 49,098 50,308
--------- --------- --------- ---------
Cumulative Effect of a Change in
Accounting Principle .................. -- -- (64) --
--------- --------- --------- ---------
Net Income .............................. $ 15,734 $ 16,240 $ 49,034 $ 50,308
========= ========= ========= =========
Net Income Per Common Share Before
Cumulative Effect of Accounting Change:
Basic ................................. $ 44 $ 45 $ 1.37 $ 1.40
========= ========= ========= =========
Diluted ............................... $ 43 $ 45 $ 1.35 $ 1.38
========= ========= ========= =========
Net Income Per Common Share After
Cumulative Effect of Accounting Change:
Basic ................................. $ 44 $ 45 $ 1.37 $ 1.40
========= ========= ========= =========
Diluted ............................... $ 43 $ 45 $ 1.34 $ 1.38
========= ========= ========= =========
Average Number of Shares Outstanding:
Basic ................................. 35,879 35,774 35,787 35,952
Diluted ............................... 36,661 36,294 36,499 36,485
See accompanying notes to consolidated financial statements.
3
AptarGroup, Inc.
Consolidated Balance Sheets
(Amounts in Thousands, Except Per Share Data)
(Unaudited)
September 30, December 31,
2001 2000
------------- ------------
Assets
Current Assets:
Cash and equivalents ...................................... $ 44,806 $ 55,559
Accounts and notes receivable, less allowance for doubtful
accounts of $7,138 in 2001 and $6,927 in 2000 ........... 207,125 210,794
Inventories ............................................... 129,079 121,522
Prepayments and other ..................................... 22,070 19,674
------------- ------------
403,080 407,549
------------- ------------
Property, Plant and Equipment:
Buildings and improvements ................................ 121,590 108,905
Machinery and equipment ................................... 689,839 665,991
------------- ------------
811,429 774,896
Less: Accumulated depreciation ............................ (440,014) (402,412)
------------- ------------
371,415 372,484
Land ...................................................... 4,854 4,949
------------- ------------
376,269 377,433
------------- ------------
Other Assets:
Investments in affiliates ................................. 10,304 11,127
Goodwill, less accumulated amortization of $15,606 in
2001 and $13,093 in 2000 ................................ 124,368 127,754
Miscellaneous ............................................. 27,028 28,376
------------- ------------
161,700 167,257
------------- ------------
Total Assets .......................................... $ 941,049 $ 952,239
============= ============
See accompanying notes to consolidated financial statements.
4
AptarGroup, Inc.
Consolidated Balance Sheets
(Amounts in Thousands, Except Per Share Data)
(Unaudited)
September 30, December 31,
Liabilities and Stockholders' Equity 2001 2000
------------- ------------
Current Liabilities:
Notes payable ................................... $ 6,144 $ 29,248
Current maturities of long-term obligations ..... 18,970 10,326
Accounts payable and accrued liabilities ........ 154,847 163,528
------------- ------------
179,961 203,102
------------- ------------
Long-Term Obligations ............................. 238,080 252,752
------------- ------------
Deferred Liabilities and Other:
Deferred income taxes ........................... 32,322 35,873
Retirement and deferred compensation plans ...... 12,553 12,597
Minority interests .............................. 5,222 5,050
Deferred and other non-current liabilities ...... 2,398 2,325
------------- ------------
52,495 55,845
------------- ------------
Stockholders' Equity:
Common stock, $.01 par value .................... 370 366
Capital in excess of par value .................. 120,850 115,034
Retained earnings ............................... 482,570 439,258
Accumulated other comprehensive income .......... (103,358) (89,163)
Less treasury stock at cost, 1,155 shares in 2001
and 1,000 shares in 2000 ...................... (29,919) (24,955)
------------- ------------
470,513 440,540
------------- ------------
Total Liabilities and Stockholders' Equity ...... $ 941,049 $ 952,239
============= ============
See accompanying notes to consolidated financial statements.
5
AptarGroup, Inc.
Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 2001 and 2000
(Amounts in Thousands, brackets denote cash outflows)
(Unaudited)
Nine Months Ended September 30,
2001 2000
---- ----
Cash Flows From Operating Activities:
Net income ............................................ $ 49,034 $ 50,308
Adjustments to reconcile net income
to net cash provided by operations:
Depreciation .......................................... 51,697 50,668
Amortization .......................................... 3,555 4,202
Provision for bad debts ............................... 1,297 1,347
Strategic Initiative charges .......................... 7,509 --
Minority interests .................................... 595 466
Cumulative effect of accounting change ................ 64 --
Deferred income taxes ................................. (2,936) 2,999
Retirement and deferred compensation plans ............ 691 (937)
Equity in results of affiliates in
excess of cash distributions received ............... 168 (137)
Changes in balance sheet items,
excluding effects from foreign currency adjustments:
Accounts receivable ................................... (4,283) (42,581)
Inventories ........................................... (10,893) (18,782)
Prepaid and other current assets ...................... (1,918) (3,929)
Accounts payable and accrued liabilities .............. (8,923) 24,200
Changes in income taxes payable ....................... 202 22,360
Other changes, net .................................... 1,840 5,017
---------- -----------
Net cash provided by operations ....................... 87,699 95,201
---------- -----------
Cash Flows From Investing Activities:
Capital expenditures .................................. (65,895) (68,687)
Disposition of property and equipment ................. 1,820 2,765
Acquisition of businesses ............................. -- (2,271)
Investments in affiliates ............................. (69) --
---------- -----------
Net cash used by investing activities ................. (64,144) (68,193)
---------- -----------
Cash Flows From Financing Activities:
(Decrease) increase in notes payable .................. (22,479) 23,585
Proceeds from long-term obligations ................... 6,719 2,525
Repayments of long-term obligations ................... (11,666) (13,434)
Dividends paid ........................................ (5,722) (5,392)
Proceeds from stock options exercised ................. 5,820 1,467
Purchase of Treasury Stock ............................ (4,964) (18,744)
---------- -----------
Net cash used by financing activities ................. (32,292) (9,993)
---------- ------------
Effect of Exchange Rate Changes on Cash ................. (2,016) (3,770)
---------- ------------
Net (Decrease) Increase in Cash and Equivalents ......... (10,753) 13,245
Cash and Equivalents at Beginning of Period ............. 55,559 32,416
---------- -----------
Cash and Equivalents at End of Period ................... $ 44,806 $ 45,661
========== ===========
See accompanying notes to consolidated financial statements.
6
AptarGroup, Inc.
Notes To Consolidated Financial Statements
(Unaudited)
Note 1 - Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited consolidated financial statements include the
accounts of AptarGroup, Inc. and its subsidiaries. The terms "AptarGroup" or
"Company" as used herein refer to AptarGroup, Inc. and its subsidiaries.
In the opinion of management, the unaudited consolidated financial statements
include all adjustments, consisting of only normal recurring adjustments,
necessary for a fair presentation of consolidated financial position, results of
operations, and cash flows for the interim periods presented. The accompanying
unaudited consolidated financial statements have been prepared by the Company,
without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosure normally
included in financial statements prepared in accordance with accounting
principles generally accepted in the United States of America (GAAP) have been
condensed or omitted pursuant to such rules and regulations, although the
Company believes that the disclosures made are adequate to make the information
presented not misleading. Accordingly, these unaudited consolidated financial
statements and related notes should be read in conjunction with the consolidated
financial statements and notes thereto included in the Company's Annual Report
to Shareholders incorporated by reference into the Company's Annual Report on
Form 10-K for the year ended December 31, 2000. The results of operations of any
interim period are not necessarily indicative of the results that may be
expected for a fiscal year.
Investments in Affiliated Companies
The Company accounts for its investments in 20% to 50% owned affiliated
companies using the equity method. These investments are in companies that
manufacture and distribute products similar to the Company's products or supply
components to the Company.
Revenue Recognition
The Company's policy is to recognize revenue from product sales when the title
and risk of loss has transferred to the customer and the Company has no
remaining obligations regarding the transaction. For the Company's products that
are shipped FOB shipping point, title and risk of loss transfers when the goods
leave the Company's shipping location. In some cases, (for example, certain
cross border shipments) the shipping terms may be FOB destination. In these
cases, the Company does not recognize the revenue and invoice the customer until
the goods reach the customer's location.
7
Note 2 - Inventories
At September 30, 2001 and December 31, 2000, approximately 22% and 25%,
respectively, of the total inventories are accounted for by the LIFO method.
Inventories, by component, consisted of:
(Amounts in Thousands)
September 30, December 31,
2001 2000
------------- ------------
Raw Materials $ 52,029 $ 55,429
Work in progress 23,699 20,975
Finished goods 54,188 46,805
------------- ------------
129,916 123,209
Less LIFO reserve (837) (1,687)
------------- ------------
Total $ 129,079 $ 121,522
============= ============
Inventories are stated at cost, which is lower than market. Costs included in
inventories are raw materials, direct labor and manufacturing overhead. The
inventories of two domestic operations and the inventories of two foreign
operations are determined by using the last-in, first-out (LIFO) method, while
the remaining inventories are valued using the first-in, first-out (FIFO)
method.
Note 3 - Comprehensive Income (Loss)
AptarGroup's total comprehensive income (loss) was as follows:
(Amounts in Thousands)
Three months ended September 30, Nine months ended September 30,
-------------------------------- -------------------------------
2001 2000 2001 2000
---- ---- ---- ----
Net income $ 15,734 $ 16,240 $ 49,034 $ 50,308
Add/(Subtract): foreign currency
translation adjustment 24,261 (25,890) (14,195) (43,225)
-------- -------- -------- --------
Total comprehensive income (loss) $ 39,995 $ (9,650) $ 34,839 $ 7,083
======== ======== ======== ========
Note 4 - Stock Repurchase Program
In 1999, the Board of Directors authorized the repurchase of a maximum of one
million shares of the Company's outstanding common stock and in 2000, the Board
of Directors authorized the repurchase of up to an additional two million shares
of the Company's outstanding common stock. The timing of and total amount
expended for the share repurchase program depends upon market conditions. During
the quarter ended September 30, 2001, the Company repurchased 100 thousand
shares for an aggregate amount of $3.2 million. The cumulative total number of
shares repurchased at September 30, 2001 was 1,155,000 shares for an aggregate
amount of $29.9 million.
Note 5 - Derivative Instruments and Hedging Activities
Effective January 1, 2001, the Company adopted Statement of Financial Account
Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging
Activities", and its related amendment SFAS No. 138, "Accounting for Certain
Derivative Instruments and Certain
8
Hedging Activities." These standards require that all derivative financial
instruments be recorded in the consolidated balance sheets at fair value as
either assets or liabilities. Changes in the fair value of derivatives are
recorded in each period in earnings or accumulated other comprehensive income,
depending on whether a derivative is designated and effective as part of a hedge
transaction.
In accordance with the transition provisions of SFAS 133, the Company recorded
the following cumulative effect adjustment in earnings as of January 1, 2001:
(Amounts in
Thousands)
Related to designated fair value hedging relationships
Fair value of interest rate swaps $ 1,868
Offsetting changes in fair value of debt (1,868)
Related to foreign currency forward exchange contracts
Fair value of foreign currency forward exchange contracts (965)
Previously deferred gains and losses 1,027
Related to cross currency swap
Fair value of cross currency swap 1,436
Previously deferred gains and losses (1,576)
Tax effect on above items 14
-------
Total cumulative effect of adoption on earnings, net of tax $ (64)
=======
The Company maintains a foreign exchange risk management policy designed to
establish a framework to protect the value of the Company's foreign denominated
transactions from adverse changes in exchange rates. Sales of the Company's
products can be denominated in a currency different from the currency in which
the related costs to produce the product are denominated. Changes in exchange
rates on such inter-country sales impact the Company's results of operations.
The Company's policy is not to engage in speculative foreign currency hedging
activities, but to minimize its net foreign currency transaction exposure
defined as firm commitments and transactions recorded and denominated in
currencies other than the functional currency. The Company may use foreign
currency forward exchange contracts, interest rate swaps, options and cross
currency swaps to hedge these risks.
The Company maintains an interest rate risk management strategy to minimize
significant, unanticipated earnings fluctuations that may arise from volatility
in interest rates.
For derivative instruments designated as hedges, the Company formally documents
the nature and relationships between the hedging instruments and the hedged
items, as well as the risk management objectives, strategies for undertaking the
various hedge transactions, and the method of assessing hedge effectiveness.
Additionally, in order to designate any derivative instrument as hedges of
anticipated transactions, the significant characteristics and expected terms of
any anticipated transaction must be specifically identified, and it must be
probable that the anticipated transaction will occur.
Fair Value Hedges
The Company uses interest rate swaps to convert a portion of its fixed-rate debt
into variable-rate debt. Under the interest rate swap contracts, the Company
exchanges at specified intervals, the difference between fixed-rate and
floating-rate amounts, which is calculated based on an agreed upon notional
amount.
9
As of September 30, 2001, the Company has recorded the fair value of derivative
instrument assets of $5.8 million in miscellaneous other assets with an
offsetting adjustment to debt related to a fixed-to-variable interest rate swap
agreement with a notional principal value of $50 million.
No gain or loss was recorded in the income statement for the quarter ended
September 30, 2001 since there was no hedge ineffectiveness.
Cash Flow Hedges
The Company did not use any cash flow hedges in the quarter ended September 30,
2001.
Hedge of Net Investments in Foreign Operations
A significant number of the Company's operations are located outside of the
United States. Because of this, movements in exchange rates may have a
significant impact on the translation of the financial condition and results of
operations of the Company's foreign entities. A strengthening U.S. dollar
relative to foreign currencies has a dilutive translation effect on the
Company's financial condition and results of operations. Conversely, a weakening
U.S. dollar has an additive effect. The Company in some cases maintains debt in
these subsidiaries to offset the net asset exposure. The Company does not
otherwise actively manage this risk using derivative financial instruments. In
the event the Company plans on a full or partial liquidation of any of its
foreign subsidiaries where the Company's net investment is likely to be
monetized, corporate treasury will consider hedging the currency exposure
associated with such a transaction.
Other
As of September 30, 2001, the Company has recorded the fair value of foreign
currency forward exchange contracts of $9 thousand in accounts payable and
accrued liabilities and $634 thousand in prepayments and other in the balance
sheet.
Note 6 - Contingencies
The Company, in the normal course of business, is subject to a number of
lawsuits and claims both actual and potential in nature. Management believes the
resolution of these claims and lawsuits will not have a material adverse effect
on the Company's financial position or results of operations.
Note 7 - Strategic Initiative Charges
In April 2001, the Company announced it had begun a project ("Strategic
Initiative") to improve the efficiency of operations that produce pumps for its
mass-market fragrance/cosmetic and personal care customers. In addition to
improving efficiency, another objective of the Strategic Initiative is to
improve customer service through reduced lead times and the ability to customize
finished products on a local basis. As part of the Strategic Initiative, the
Company will close one molding operation in Connecticut and consolidate the
molding and assembly of the base cartridge (standard internal components common
to modular pumps) into one of the Company's facilities in Italy. In addition,
the Company is rationalizing its mass-market pump product lines for these two
markets by discontinuing production of non-modular pumps and increasing capacity
for its modular pumps.
Charges related to the Strategic Initiative are expected to be approximately $10
million before taxes and will consist primarily of costs related to the closing
of the molding operation and
10
discontinuance of its non-modular pumps (including asset impairment write-downs,
accelerated depreciation associated with revised useful lives and utility
abatement reimbursements) as well as employee severance and related benefit
costs. Approximately $3 million of the charges are expected to be cash outlays
while the remaining $7 million will be non-cash charges (asset impairment
write-downs and accelerated depreciation associated with revised useful lives).
Approximately $7.7 million charges before tax and $4.6 million after tax or
approximately $0.13 per diluted share were recorded in the second quarter ended
June 30, 2001. During the quarter ended September 30, 2001, the Company recorded
additional Strategic Initiative related costs totaling $1.0 million before tax
and $0.6 million after tax or approximately $0.02 per diluted share. Of the $1.0
million recorded in the third quarter, $697 thousand (representing Accelerated
Depreciation) was included in the Company's depreciation and amortization
expense, $100 thousand (representing training costs) was included in the
Company's cost of sales and $234 thousand (representing stay bonuses) was shown
on a separate line of the income statement. Detail of the pre tax charges (in
thousands) is shown in the following table:
Beginning Charges for Charged Ending
Reserves at the nine Cash Against Reserve at
12/31/00 months ended Paid Assets 09/30/01
9/30/01
Asset impairment write-downs $-- $5,498 $ -- $(5,498) $ --
Employee severance -- 800 (255) -- 545
Other costs -- 1,211 (228) -- 983
---------------------------------------------------------------
Subtotal $-- $7,509 $(483) $(5,498) $1,528
Accelerated depreciation -- 1,161 -- (1,161) --
Training Costs -- 100 (100) -- --
---------------------------------------------------------------
Total Strategic Initiative
Related Costs
$-- $8,770 $(583) $(6,659) $1,528
===============================================================
Charges for asset impairment write-downs are impairment charges recorded for
fixed assets held and used in the manufacture of non-modular pumps. These
non-modular pumps will continue to be sold during the Strategic Initiative
project, but will be discontinued once there is adequate capacity for the
modular pumps. The undiscounted expected future cash flows for products using
these non-modular pumps during this phase out period were less than the carrying
value of the specific identifiable assets used to generate these cash flows and
thus an impairment charge was recognized in accordance with SFAS 121 "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." The impairment charge of $5.5 million was calculated by subtracting the
fair market value of the assets held and used in the manufacture of non-modular
pumps, (determined by discounting the expected future cash flows for products
using these non-modular pumps) from the carrying value of these assets.
As part of the Strategic Initiative, certain long-lived assets will be taken out
of service prior to the end of their normal service period due to the plant shut
down and rationalization of the product lines. Accordingly, the Company has
changed the estimated useful lives of such assets, resulting in an acceleration
of depreciation ("Accelerated Depreciation"), of which $1.2 million was
recognized in the nine months ended September 30, 2001. An additional charge of
approximately $835 thousand associated with Accelerated Depreciation is expected
in future periods.
The Strategic Initiative will result in personnel reductions in the U.S. of
approximately 170 people or approximately 10% of all the Company's U.S.
employees. The majority of these personnel reductions
11
will be manufacturing related with a small reduction in administrative staff.
Involuntary employee severance costs are based upon a formula including salary
levels and years of service. Approximately $800 thousand has been accrued and is
included in the Strategic Initiative charges shown in the income statement.
Offsetting these personnel reductions will be an increase in personnel of
approximately 80 people in Italy to support the centralization of the base
cartridge production and assembly. To date, 69 people have been terminated
resulting in a cash payment of $255 thousand.
In addition to the involuntary severance costs described above, a retention or
stay bonus will be paid to employees who remain with the company during the
phase-out period. This stay bonus, which is estimated to be approximately $600
thousand, is also based upon salary levels and years of service. The stay bonus
is being accrued over the future periods in which the employees earn the
benefits. Approximately $411 thousand of the incurred stay bonus was accrued in
the nine months ended September 30, 2001. Approximately $228 thousand of stay
bonus was paid in the nine months ended September 30, 2001. In addition, as a
result of closing down the molding operation, the Company will be required to
refund an abatement of approximately $500 thousand to a utility provider and
expects to spend approximately $300 thousand to refurbish the leased molding
facility that is being vacated. These charges are included in other costs in the
preceding table.
During the quarter ended September 30, 2001, approximately $100 thousand of
training costs were incurred in Italy to train the new workers who were hired to
support the centralization of the base cartridge production and assembly. These
training costs are included in cost of goods sold in the income statement. It is
expected that training costs over the course of the project will cost
approximately $500 thousand.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Net sales for the quarter ended September 30, 2001 totaled $221.6 million, or a
decrease of 1% when compared to the corresponding period of 2000. Net sales for
the nine months ended September 30, 2001 totaled $686.3 million or an increase
of 2% when compared to the corresponding period of 2000. The stronger U.S.
dollar relative to the same three-month and nine-month periods of 2000
negatively affected the translation of AptarGroup's foreign sales. Net sales,
excluding changes in foreign currency exchange rates ("Core Sales"), were flat
for the quarter ended September 30, 2001, and grew 6% for the nine-month period
ended September 30, 2001. Core Sales of the Company's products to all markets
except the personal care market increased during the quarter. Core Sales of the
Company's products to the personal care market declined approximately 10% when
compared to the prior year. The terrorist attacks in the U.S. in the month of
September had a negative impact on sales in the quarter as shipments were
disrupted, and customers postponed and canceled some orders. Core Sales of all
of the Company's products for the nine months ended September 30, 2001 to all
the markets the Company serves were up modestly for the period. Selling price
increases did not have a material impact on the Core Sales growth for the
quarter or for the nine-month period.
The following table sets forth (in thousands of dollars), for the periods
indicated, net sales by geographic region.
3 months 3 months 9 months 9 months
ended % of ended % of ended % of ended % of
9/30/01 Total 9/30/00 Total 9/30/01 Total 9/30/00 Total
--------------------------------------------------------------------------
Domestic $82,919 38% $90,256 40% $258,652 38% $266,232 40%
Europe 118,345 53% 114,972 51% 369,259 54% 350,744 52%
Other
Foreign 20,348 9% 19,463 9% 58,369 8% 53,028 8%
Cost of sales as a percent of net sales decreased to 62.9% in the third quarter
of 2001 compared to 63.5% for the same period in 2000. The reduction in cost of
sales as a percent of net sales is primarily attributed to lower raw material
prices in the quarter, particularly plastic resin and cost reduction efforts in
the U.S. Cost of sales for the quarter includes $0.1 million of training costs
related to the Company's previously announced strategic initiative to improve
the efficiency of operations that produce pumps for its mass-market
fragrance/cosmetic and personal care customers ("Strategic Initiative"). For the
first nine months of 2001, cost of sales as a percent of net sales remained
relatively constant at 62.6% compared to 62.5% in the same period a year ago.
13
Selling, research & development and general and administrative expenses (SG&A)
increased approximately 1.7% or $0.6 million to $35.9 million in the third
quarter of 2001 compared to $35.3 million in the same period a year ago. The
slight increase in SG&A is primarily due to increased spending in research and
development in the quarter offset by cost savings in general and administrative
expenses. SG&A as a percent of net sales increased to 16.2% of sales in the
third quarter of 2001 compared to 15.7% in the same period a year ago. Increased
SG&A costs in the quarter combined with decreasing reported sales contributed to
the higher SG&A costs as a percentage of sales. SG&A for the nine months ended
September 30, 2001 increased approximately 1.4% or $1.5 million to $109.8
million compared to $108.3 million a year ago. As a percent of net sales, SG&A
for the first nine months of 2001 decreased slightly to 16.0% compared to 16.2%
for the same period a year ago.
Depreciation and amortization as reported in the quarter increased approximately
$0.4 million to $18.7 million compared to $18.3 million for the same period a
year ago. As part of the Company's Strategic Initiative, certain long-lived
assets will be taken out of service prior to the end of their normal service
period due to the plant shutdown and rationalization of the product lines.
Accordingly, the Company has changed the estimated useful lives of such assets,
resulting in an acceleration of depreciation ("Accelerated Depreciation"), of
which $0.7 million was recorded in the third quarter and included in
depreciation and amortization in the income statement. Excluding this
Accelerated Depreciation, depreciation and amortization would have decreased
nearly $0.3 million in the quarter. For the reported nine months ended September
30, 2001, depreciation and amortization increased slightly to $55.3 million
compared to $54.9 million in the prior year. Excluding the Accelerated
Depreciation for the first nine months of approximately $1.2 million,
depreciation and amortization would have decreased approximately $0.8 million
compared to the prior year. The decrease for the quarter and nine-month period
is primarily related to the stronger U.S. dollar relative to the prior year.
Strategic Initiative charges, excluding $0.7 million of Accelerated Depreciation
and $0.1 million of training costs, totaled $0.2 million for the quarter ended
September 30, 2001. The $0.2 million is for stay bonuses accrued to be paid to
employees who remain with the Company until their scheduled termination date.
Strategic Initiative charges excluding $1.2 million of Accelerated Depreciation
and $0.1 million of training costs, totaled $7.5 million for the nine months
ended September 30, 2001. The $7.5 million primarily relates to non-cash fixed
asset impairment charges of $5.5 million for fixed assets held for use related
to the non-modular pumps that are going to be discontinued. These non-modular
pumps will continue to be sold during the Strategic Initiative project, but will
be discontinued once there is adequate capacity for the modular pumps. The
undiscounted expected future cash flows for the products using these non-modular
pumps during this phase out period were less than the carrying value of the
specific identifiable assets used to generate these cash flows and thus an
impairment charge was recognized in accordance with SFAS 121 "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of."
The remaining Strategic Initiative charges related primarily to accrued
severance costs and related benefits for 170 U.S. employees who will be
involuntarily terminated, accrued utility abatement reimbursements and accrued
costs to refurbish a leased facility that the Company will be moving out of as a
result of the Strategic Initiative. The additional charges to be incurred in
future periods related to the Strategic Initiative primarily will be for stay
bonuses and Accelerated Depreciation. Strategic Initiative charges plus
Accelerated Depreciation and other related costs such as training are
hereinafter referred to as "Total Strategic Initiative Related Costs."
14
Operating income for the third quarter of 2001 decreased approximately $1.2
million compared to the same period a year ago. Excluding $1.0 million of
Total Strategic Initiative Related Costs, operating income decreased $0.2
million or 1% compared to the prior year. Operating income as a percentage
of net sales for the quarter, excluding the Total Strategic Initiative
Related Costs, increased slightly to 12.8% compared to 12.7% a year ago.
For the nine months ended September 30, 2001, reported operating income
decreased nearly $4.1 million compared to the same period a year ago.
Excluding $8.8 million of Total Strategic Initiative Related Costs,
operating income increased nearly $4.7 million reflecting the cost
reduction efforts aimed at the U.S. personal care and household markets.
Operating income as a percentage of net sales for the nine months ended
September 30, 2001, excluding the Total Strategic Initiative Related Costs,
increased to 13.6% compared to 13.2% a year ago.
Net other expenses increased slightly in the third quarter to $3.8 million
compared to $3.6 million in the third quarter of 2000. The increase is primarily
related to the net of the following items:
. increased foreign currency transaction losses of approximately $1.5 million
. a reduction in net interest expense (interest expense in excess of interest
income) of approximately $1.5 million reflecting reduced interest rates and
borrowings compared to the prior year and
. reduced equity in results of affiliates of approximately $0.4 million
Net other expenses for the nine months ended September 30, 2001 increased
slightly to $11.4 million compared to $10.9 million for the same period a year
ago. The increase is primarily related to the net of the following items:
. increased foreign currency transaction losses of approximately $2.0 million
. a reduction in net interest expense (interest expense in excess of interest
income) of approximately $2.0 million reflecting reduced interest rates and
borrowings compared to the prior year
. reduced equity in results of affiliates of approximately $0.3 million and
. increased minority interest expense of approximately $0.1 million.
The reported effective tax rate was 33.1% and 32.6% for the third quarter and
nine months ended September 30, 2001, respectively, compared to 35.0% for the
same periods a year ago. Excluding the impact of the after tax Total Strategic
Initiative Related Costs, the effective tax rates would have been 33.4% for the
quarter and nine months ended September 30, 2001. The decrease compared to the
same periods a year ago reflects the benefits of reductions in certain European
corporate income tax rates. The Company expects the effective tax rate for 2001,
excluding any impact related to the Strategic Initiative, to be in the range of
33.0% - 34.0%.
Net income as reported for the third quarter decreased to $15.7 million compared
to $16.2 million in the third quarter of 2000. Excluding the after tax Total
Strategic Initiative Related Costs, net income increased to $16.4 million and
$0.45 per diluted share compared to $16.2 million and $0.45 per diluted share in
the prior year. For the nine months ended September 30, 2001, reported net
income after cumulative effect of a change in accounting principle decreased to
$49.0 million as compared to $50.3 million in the same period a year ago.
Excluding the after tax Total Strategic Initiative Related Costs, net income
after cumulative
15
effect of a change in accounting principle increased to $54.3 million and $1.49
per diluted share compared to $50.3 million and $1.38 per diluted share in the
prior year.
Quarterly Trends
Customer plant shutdowns and holidays in December typically have negatively
impacted AptarGroup's results of operations for the fourth quarter. In the
future, AptarGroup's results of operations in a quarterly period could be
impacted by factors such as changes in product mix, changes in material costs,
changes in growth rates in the markets to which AptarGroup's products are sold
or changes in general economic conditions in any of the countries in which
AptarGroup does business.
Foreign Currency
A significant number of the Company's operations are located outside of the
United States. Because of this, movements in exchange rates may have a
significant impact on the translation of the financial condition and results of
operations of AptarGroup's foreign entities. The Company's primary foreign
exchange exposure is to the Euro, but the Company also has foreign exchange
exposure to South American and Asian currencies as well as the British Pound. A
strengthening U.S. dollar relative to foreign currencies has a dilutive
translation effect on the Company's financial condition and results of
operations. Conversely, a weakening U.S. dollar would have an additive effect.
Additionally, in some cases, the Company sells products denominated in a
currency different from the currency in which the related costs are incurred.
Changes in exchange rates on such inter-country sales impact the Company's
results of operations.
Liquidity and Capital Resources
Historically, AptarGroup has generated positive cash flow from operations and
has utilized the majority of such cash flows to invest in capital projects. Net
cash provided by operations in the first nine months of 2001 was $87.7 million
compared to $95.2 million in the same period a year ago. The decrease is
primarily attributable to increased working capital needs.
Net cash used by investing activities decreased to $64.1 million from $68.2
million a year ago. The decrease is primarily due to reduced capital
expenditures in 2001. Management anticipates that cash outlays for capital
expenditures for all of 2001 will be between $82 and $87 million compared to $94
million in 2000.
Net cash used by financing activities was $32.3 million in the first nine months
of 2001 compared to net cash used of $10.0 million in 2000. The increase in net
cash used by financing activities is due primarily to repayments of short term
and long term obligations. The ratio of net debt to total net capitalization was
31.7% and 35.0% at September 30, 2001 and December 31, 2000, respectively. Net
debt is defined as debt less cash and cash equivalents and total net
capitalization is defined as stockholder's equity plus net debt.
The Company amended its multi-year, multi-currency unsecured revolving credit
agreement in 2000 to increase maximum borrowings allowed from $75 million to
$100 million. Under this
16
credit agreement, interest on borrowings is payable at a rate equal to LIBOR
plus an amount based on the financial condition of the Company. At September 30,
2001, the amount unused and available under this agreement was $27 million. At
December 31, 2000, the amount unused and available under this agreement was $15
million. The Company is required to pay a fee for the unused portion of the
commitment. The agreement expires on June 30, 2004. The credit available under
the revolving credit agreement provides management with the ability to refinance
certain short-term obligations on a long-term basis. As it is management's
intent to do so, an additional $27 million and $15 million of short-term
obligations representing the unused and available amount under the credit
agreement have been reclassified as long-term obligations as of September 30,
2001 and December 31, 2000, respectively.
The Company's foreign operations have historically met cash requirements with
the use of internally generated cash and borrowings. Foreign subsidiaries have
financing arrangements with several foreign banks to fund operations located
outside of the U.S., but all of these lines are uncommitted. Cash generated by
foreign operations has been reinvested locally and the Company intends to
continue to reinvest the undistributed earnings of foreign subsidiaries. A
decision to change this past practice and to transfer such cash to the United
States in the future may be impacted to the extent management believes the
transaction costs and taxes associated with such transfers are less than the
expected benefits of continued reinvestment.
The Company believes that it has the financial resources needed to meet business
requirements and stock repurchases in the foreseeable future, including capital
expenditures, working capital requirements, future dividends and potential
acquisitions.
The Board of Directors declared a quarterly dividend of $.06 per share payable
on November 21, 2001 to stockholders of record as of October 31, 2001.
Forward-Looking Statements
In addition to the historical information presented in this quarterly report,
the Company has made and will make certain forward-looking statements in this
report, other reports filed by the Company with the Securities and Exchange
Commission, reports to stockholders and in certain other contexts relating to
future net sales, costs of sales, other expenses, profitability, financial
resources, products and production schedules. Statements relating to the
foregoing or that predict or indicate future events and trends and which do not
relate solely to historical matters identify forward-looking statements.
Forward-looking statements are made pursuant to the safe harbor provisions of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934 and are based on management's beliefs as well as
assumptions made by and information currently available to management.
Accordingly, the Company's actual results may differ materially from those
expressed or implied in such forward-looking statements due to known and unknown
risks and uncertainties that exist in the Company's operations and business
environment, including, among other factors, government regulation including tax
rate policies, competition and technological change, intellectual property
rights, the failure by the Company to produce anticipated cost savings or
improve productivity, the ability to successfully execute the Company's
Strategic Initiative, the timing and magnitude of capital expenditures and
acquisitions, currency exchange rates, economic and market conditions in North
America, Europe and the rest of the world, changes in customer spending levels,
the demand for existing and new products, the cost and availability of raw
materials, the successful integration of the Company's acquisitions, direct
17
or indirect consequences of acts of war or terrorism and other risks associated
with the Company's operations. Although the Company believes that its
forward-looking statements are based on reasonable assumptions, there can be no
assurance that actual results, performance or achievements will not differ
materially from any future results, performance or achievements expressed or
implied by such forward-looking statements. Readers are cautioned not to place
undue reliance on forward-looking statements.
Adoption of New Accounting Standards
In July 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 141, "Business Combinations" and
SFAS No. 142, "Goodwill and other Intangible Assets."
SFAS 141 requires companies to use the purchase method of accounting for all
business combinations initiated after June 30, 2001 and eliminates the use of
the pooling of interests method of accounting for business combinations. All of
the Company's acquisitions to date have been accounted for using the purchase
method of accounting for business combinations. SFAS 141 also establishes
criteria that must be used to determine whether acquired intangible assets
should be recognized separately from goodwill in the Company's financial
statements.
SFAS 142 details the method by which companies will account for goodwill
and intangible assets after a business combination has been completed. This
accounting standard provides that goodwill and indefinite lived intangible
assets arising from a business combination will no longer be amortized and
charged to expense over time. Instead, the goodwill and indefinite lived
intangible assets must be tested annually or as circumstances dictate for
impairment. If the carrying value of indefinite lived intangible assets exceed
their fair value, an impairment loss is recognized in an amount equal to that
excess. If the carrying value of the related reporting unit exceeds its fair
value, an impairment loss is recognized to the extent that the carrying value of
reporting unit goodwill exceeds the "implied fair value" of reporting unit
goodwill.
As required by SFAS 142, the Company will adopt this standard effective with the
start of its new fiscal year, beginning January 1, 2002. Before the issuance of
its first quarter financial statements, the Company must complete an assessment
of the categorization of its existing intangible assets and goodwill in
accordance with the new criteria and report them appropriately. Intangible
assets that have indefinite lives must be assessed for impairment in the first
quarter of adoption. Intangible assets with finite lives will continue to be
subject to amortization over their expected useful lives. Within six months of
adoption, the Company must complete a valuation of each reporting units goodwill
to determine if there has been any impairment. The Company is in the process of
performing a preliminary analysis of the effects of these two standards and has
not yet determined the potential affect on future results. The Company is,
however, currently recording amortization of goodwill of approximately $3.6
million per year on a pretax basis and $3.4 million on an after tax basis.
In July 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." SFAS 143 addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated retirement costs. This statement is effective for financial
statements issued for fiscal years beginning after June 15, 2002. The Company
has performed a preliminary assessment and has determined that this standard
will not have any immediate impact on the Company upon adoption.
18
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." SFAS 144 addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. This statement is
effective for financial statements issued for fiscal years beginning after
December 15, 2001. The Company believes it is in compliance with the application
of this statement today and does not foresee any impact upon adoption next year.
Fourth Quarter 2001 Outlook
There is volatility in customer order patterns due to the uncertain global
economic environment and, as a result, it is difficult to forecast sales of the
Company's products to all of the Company's markets for the fourth quarter. Based
upon current orders, however, the Company does expect the sale of pumps and
metered dose aerosol valves to the pharmaceutical market to increase in the
fourth quarter over the prior year. Due to the uncertainty beyond October,
fourth quarter Core Sales could range from being the same as the prior year's
level to five percent less. If Core Sales are equal to last year or down five
percent, the Company would expect earnings for the fourth quarter to range from
$0.32 to $0.38 per diluted share excluding Total Strategic Initiative Related
Costs.
The Company expects to complete its Strategic Initiative in the fourth quarter
of 2002. Until that time, additional charges of approximately $1.4 million
related to this project are expected to be recorded. The majority of those
expenses relate to Accelerated Depreciation charges (non-cash) as well as stay
bonus and training costs during the phase out period. An estimated $0.9 million
of charges are expected to be recorded in the fourth quarter of 2001 with the
majority of the remainder expected to be recorded ratably over the first two
quarters of 2002. Savings are expected to exceed $5 million annually once the
project is complete. The majority of the savings will be due to the net
reduction in personnel worldwide of approximately 90 people.
19
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The Company manages its exposures to foreign exchange principally with forward
exchange contracts to hedge certain firm purchase and sales commitments and
intercompany cash transactions denominated in foreign currencies.
The table below provides information as of September 30, 2001 about the
Company's forward currency exchange contracts. All the contracts expire before
the end of the first quarter of 2002.
Average
Contract Amount Contractual
Buy/Sell (in millions) Exchange Rate
- --------------------------------------------------------------------------------
EURO/USD ................................ $ 13,370 1.1428
EURO/GBP ................................ 2,223 1.6191
EURO/YEN ................................ 1,907 .0094
EURO/ARS ................................ 1,498 1.0935
USD/CNY ................................. 1,230 .1208
Other ................................... 1,614
--------
Total ................................... $ 21,842
========
The other contracts in the above table represent contracts to buy or sell
various other currencies (principally European, Asian and South American). If
the Company cancelled the forward exchange contracts at September 30, 2001, the
Company would have received approximately $0.6 million based on the fair value
of the contracts on that date.
All forward exchange contracts outstanding as of September 30, 2000 had an
aggregate contract amount of $29.3 million.
At September 30, 2001, the Company has fixed-to-variable interest rate swap
agreements with a notional principal value of $50 million which require the
Company to pay an average variable interest rate of 3.92% and receive a fixed
rate of 6.62%. The variable rates are adjusted semiannually based on London
Interbank Offered Rates ("LIBOR"). Variations in market interest rates will
produce changes in the Company's net income. If there were a hypothetical 10%
increase in interest rates, net income related to the interest rate swap
agreements would decrease by approximately $0.1 million assuming a tax rate of
33%. If the Company canceled the swaps at September 30, 2001, the Company would
have received approximately $5.8 million based on the fair value of the swaps on
that date.
20
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
During the quarter ended September 30, 2001, the FCP Aptar Savings Plan (the
"Plan") purchased 150 shares of Common Stock of the Company on behalf of the
participants at an average price of $32.99 per share for an aggregate amount of
$4,949. During the same quarter, the Plan sold 420 shares of Common Stock of the
Company at the average price of $32.00 per share for an aggregate amount of
$13,440. At September 30, 2001, the Plan owns 4,545 shares of Common Stock of
the Company. Employees of AptarGroup S.A., a French subsidiary of the Company,
are eligible to participate in the Plan. All eligible participants are located
outside of the United States. An agent independent of the Company purchases
shares of Common Stock available under the Plan for cash on the open market and
the Company issues no shares. The Company does not receive any proceeds from the
purchase of Common Stock under the Plan. The agent under the Plan is Banque
Nationale de Paris. No underwriters are used under the Plan. All shares are sold
in reliance upon the exemption from registration under the Securities Act of
1933 provided by Regulation S promulgated under that Act.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) See the attached Index To Exhibits
(b) No reports on Form 8-K were filed for the quarter ended September 30,
2001.
21
SIGNATURE
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.
AptarGroup, Inc.
(Registrant)
By /s/ Stephen J. Hagge
--------------------
Stephen J. Hagge
Executive Vice President, Chief
Financial Officer and Secretary
(Duly Authorized Officer and
Principal Financial Officer)
Date: November 13, 2001
22
INDEX TO EXHIBITS
Number and Description of Exhibit
- ---------------------------------
10.27* Supplement to the pension scheme agreement dated October 16, 2001
pertaining to the pension plan between AptarGroup, Inc. and Peter
Pfeiffer, filed as Exhibit 10.6 to the 1993 10-K, is filed herewith.
23