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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 June 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 (August 6, 2001)
Common Stock 35,893,435
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AptarGroup, Inc.
FORM 10-Q
QUARTER ENDED JUNE 30, 2001
INDEX
PART I. FINANCIAL INFORMATION Page
----
ITEM 1. Financial statements
Consolidated Statements of Income -
Three and Six Months Ended June 30, 2001
and 2000 (Unaudited) 3
Consolidated Balance Sheets -
June 30, 2001 and December 31, 2000 4
(Unaudited)
Consolidated Statements of Cash Flows -
Six Months Ended June 30, 2001 and 2000 6
(Unaudited)
Notes to Consolidated Financial Statements 7
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12
ITEM 3. Quantitative and Qualitative Disclosures about
Market Risk 18
PART II. OTHER INFORMATION
ITEM 2. Changes in Securities and Use of Proceeds 19
ITEM 4. Submission of Matters to a Vote of
Security Holders 19
ITEM 6. Exhibits and Reports on Form 8-K 19
SIGNATURE 20
AptarGroup, Inc.
Consolidated Statements of Income
(Amounts in Thousands, Except Per Share Data)
(Unaudited)
Three Months Six Months
Ended June 30, Ended June 30,
--------------------- -----------------------
2001 2000 2001 2000
---- ---- ---- ----
Net Sales.............................. $ 231,769 $ 227,667 $ 464,668 $ 445,313
Operating Expenses:
Cost of sales........................ 143,662 141,604 290,009 275,922
Selling, research & development
and administrative.................. 37,297 36,680 73,878 73,037
Depreciation and amortization........ 17,906 18,215 36,603 36,595
Strategic Initiative charges......... 7,275 -- 7,275 --
---------- ---------- ----------- -----------
206,140 196,499 407,765 385,554
---------- ---------- ----------- -----------
Operating Income....................... 25,629 31,168 56,903 59,759
---------- ---------- ----------- -----------
Other Income (Expense):
Interest expense..................... (4,265) (4,827) (8,899) (8,949)
Interest income...................... 370 428 1,041 607
Equity in results of affiliates...... (74) 40 (110) (185)
Minority interests................... (156) (197) (396) (254)
Miscellaneous, net................... 565 635 817 1,464
---------- ---------- ----------- -----------
(3,560) (3,921) (7,547) (7,317)
---------- ---------- ----------- -----------
Income Before Income Taxes............. 22,069 27,247 49,356 52,442
Provision for Income Taxes............. 6,879 9,455 15,992 18,374
---------- ---------- ----------- -----------
Net Income Before Cumulative
Effect of a Change in
Accounting Principle for
Derivative Instruments and
Hedging Activities................... 15,190 17,792 33,364 34,068
---------- ---------- ----------- -----------
Cumulative Effect of a Change in
Accounting Principle................. -- -- (64) --
---------- ---------- ----------- -----------
Net Income............................. $ 15,190 $ 17,792 $ 33,300 $ 34,068
========== ========== =========== ===========
Net Income Per Common Share:
Basic............................... $ .42 $ .49 $ .93 $ .95
========== ========== =========== ===========
Diluted............................. $ .41 $ .49 $ .91 $ .93
========== ========== =========== ===========
Average Number of Shares Outstanding:
Basic............................... 35,795 35,949 35,739 36,041
Diluted............................. 36,649 36,564 36,491 36,588
See accompanying notes to consolidated financial statements.
3
AptarGroup, Inc.
Consolidated Balance Sheets
(Amounts in Thousands, Except Per Share Data)
(Unaudited)
June 30, December 31,
2001 2000
---- ----
Assets
Current Assets:
Cash and equivalents........................................ $ 40,443 $ 55,559
Accounts and notes receivable, less allowance for doubtful
accounts of $6,549 in 2001 and $6,927 in 2000............ 212,400 210,794
Inventories................................................. 124,647 121,522
Prepayments and other....................................... 20,740 19,674
----------- ------------
398,230 407,549
----------- ------------
Property, Plant and Equipment:
Buildings and improvements.................................. 106,174 108,905
Machinery and equipment..................................... 655,425 665,991
----------- ------------
761,599 774,896
Less: Accumulated depreciation.............................. (409,166) (402,412)
----------- ------------
352,433 372,484
Land........................................................ 4,613 4,949
----------- ------------
357,046 377,433
----------- ------------
Other Assets:
Investments in affiliates................................... 10,308 11,127
Goodwill, less accumulated amortization of $14,154 in
2001 and $13,093 in 2000................................. 123,019 127,754
Miscellaneous............................................... 23,774 28,376
----------- ------------
157,101 167,257
----------- ------------
Total Assets $ 912,377 $ 952,239
=========== ============
See accompanying notes to consolidated financial statements.
4
AptarGroup, Inc.
Consolidated Balance Sheets
(Amounts in Thousands, Except Per Share Data)
(Unaudited)
June 30, December 31,
Liabilities and Stockholders' Equity 2001 2000
-------- ------------
Current Liabilities:
Notes payable...................................... $ 18,330 $ 29,248
Current maturities of long-term obligations........ 7,987 10,326
Accounts payable and accrued liabilities........... 153,626 163,528
----------- ------------
179,943 203,102
----------- ------------
Long-Term Obligations................................ 248,024 252,752
----------- ------------
Deferred Liabilities and Other:
Deferred income taxes.............................. 31,282 35,873
Retirement and deferred compensation plans......... 12,077 12,597
Minority interests................................. 4,740 5,050
Deferred and other non-current liabilities......... 1,912 2,325
----------- ------------
50,011 55,845
----------- ------------
Stockholders' Equity:
Common stock, $.01 par value....................... 369 366
Capital in excess of par value..................... 119,377 115,034
Retained earnings.................................. 468,987 439,258
Accumulated other comprehensive loss............... (127,619) (89,163)
Less treasury stock at cost, 1,055 shares in 2001
and 1,000 shares in 2000.......................... (26,715) (24,955)
----------- ------------
434,399 440,540
----------- ------------
Total Liabilities and Stockholders' Equity $ 912,377 $ 952,239
=========== ============
See accompanying notes to consolidated financial statements.
5
AptarGroup, Inc.
Consolidated Statements of Cash Flows
(Amounts in Thousands, brackets denote cash outflows)
(Unaudited)
Six Months Ended June 30,
Cash Flows From Operating Activities: 2001 2000
---- ----
Net income............................................... $ 33,300 $ 34,068
Adjustments to reconcile net income
to net cash provided by operations:
Depreciation............................................. 34,284 33,823
Amortization............................................. 2,319 2,772
Provision for bad debts.................................. 809 925
Strategic initiative charges............................. 7,275 --
Minority interests....................................... 396 254
Cumulative effect of accounting change................... 64 --
Deferred income taxes.................................... (3,546) 1,598
Retirement and deferred compensation plans............... (139) (495)
Equity in results of affiliates in
excess of cash distributions received................. 110 185
Changes in balance sheet items,
excluding effects from foreign currency adjustments:
Accounts receivable...................................... (19,511) (31,105)
Inventories.............................................. (11,377) (16,844)
Prepaid and other current assets......................... (1,965) (5,903)
Accounts payable and accrued liabilities................. (2,958) 13,691
Changes in income taxes payable.......................... 2,975 18,262
Other changes, net....................................... 4,608 1,931
------------ -----------
Net cash provided by operations.......................... 46,644 53,162
------------ -----------
Cash Flows From Investing Activities:
Capital expenditures..................................... (42,549) (39,854)
Disposition of property and equipment.................... 811 1,854
Acquisition of businesses................................ -- (2,271)
Investments in affiliates................................ (68) --
------------ -----------
Net cash used by investing activities.................... (41,806) (40,271)
------------ -----------
Cash Flows From Financing Activities:
(Decrease) increase in notes payable..................... (10,272) 7,198
Proceeds from long-term obligations...................... 1,114 1,699
Repayments of long-term obligations...................... (5,488) (4,286)
Dividends paid........................................... (3,570) (3,605)
Proceeds from stock options exercised.................... 4,346 1,249
Purchase of Treasury Stock............................... (1,760) (9,403)
------------ -----------
Net cash used by financing activities................... (15,630) (7,148)
------------ -----------
Effect of Exchange Rate Changes on Cash.................... (4,324) (1,269)
------------ -----------
Net (Decrease) Increase in Cash and Equivalents............ (15,116) 4,474
Cash and Equivalents at Beginning of Period................ 55,559 32,416
------------ -----------
Cash and Equivalents at End of Period...................... $ 40,443 $ 36,890
============ ===========
See accompanying notes to consolidated financial statements.
6
AptarGroup, Inc.
Notes To Consolidated Financial Statements
(Amounts in Thousands, Except Per Share Data, or Otherwise Indicated)
(Unaudited)
Note 1 - 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.
Note 2 - Inventories
At June 30, 2001 and December 31, 2000, approximately 23% and 25%, respectively,
of the total inventories are accounted for by the LIFO method. Inventories, by
component, consisted of:
June 30, December 31,
2001 2000
--------- ----------
Raw Materials $ 53,454 $ 55,429
Work in progress 22,082 20,975
Finished goods 50,948 46,805
--------- ----------
126,484 123,209
Less LIFO reserve (1,837) (1,687)
--------- ----------
Total $ 124,647 $ 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.
7
Note 3 - Comprehensive Income (Loss)
AptarGroup's total comprehensive income (loss) was as follows:
Three months ended June 30 Six months ended June 30
-------------------------- ------------------------
2001 2000 2001 2000
---- ---- ---- ----
Net income $ 15,190 $17,792 $ 33,300 $ 34,068
(Subtract): change in foreign (11,566) (1,250) (38,456) (17,335)
currency translation adjustment -------- ------- -------- --------
Total comprehensive income (loss) $ 3,624 $16,542 $ (5,156) $ 16,733
======== ======= ======== ========
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 June 30, 2001, the Company repurchased 30 thousand
shares for an aggregate amount of $1.0 million. The cumulative total number of
shares repurchased at June 30, 2001 was 1,055,000 shares for an aggregate amount
of $26.7 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 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 will be 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:
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)
=======
8
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.
As of June 30, 2001, the Company has recorded the fair value of derivative
instrument assets of $1.9 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 June
30, 2001 since there was no hedge ineffectiveness.
Cash Flow Hedges
The Company did not use any cash flow hedges in the quarter ended June 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.
9
Other
As of June 30, 2001, the Company has recorded the fair value of foreign currency
forward exchange contracts of $482 thousand in accounts payable and accrued
liabilities and $25 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 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). During the quarter ended June 30, 2001, the Company
recorded Strategic Initiative related costs totaling $7.7 million before tax and
$4.6 million after tax or approximately $0.13 per diluted share. Of the $7.7
million recorded in the second quarter, $464 thousand (representing accelerated
depreciation) was included in the Company's total depreciation and amortization
expense and $7.3 million was shown on a separate line of the income statement. A
detail of these pre tax charges is shown in the following table:
Beginning Charges in the Charged Ending Reserve
Reserves at quarter ended Cash Paid Against Assets at 06/30/01
12/31/00 6/30/01
Asset impairment write-downs $ -- $5,498 $ -- $(5,498) $ --
Employee severance -- 800 (33) -- 767
Other costs -- 977 -- -- 977
-----------------------------------------------------------------------------
Subtotal $ -- $7,275 $(33) $(5,498) $1,744
Accelerated depreciation -- 464 -- (464) --
-----------------------------------------------------------------------------
Total Strategic Initiative
Related Costs $ -- $7,739 $(33) $(5,962) $1,744
=============================================================================
10
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 $464 thousand was
recognized in the second quarter. An additional charge of approximately $1.5
million 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 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, three people have been terminated resulting in a cash payment
of $33 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 $177 thousand of the incurred stay bonus was accrued in
the quarter ended June 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.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Net sales for the quarter and six months ended June 30, 2001 totaled $231.8
million and $464.7 million, respectively, increases of approximately 2% and 4%,
respectively when compared to the corresponding periods of 2000. The stronger
U.S. dollar relative to the same three-month and six-month periods of 2000
negatively affected the translation of AptarGroup's foreign sales. Net sales,
excluding changes in foreign currency exchange rates ("Core Sales"), grew 6%
and 9% for the quarter and six-month period ending June 30, 2001, respectively.
Core Sales of pumps to the fragrance/cosmetic market were strong in the quarter
and first half of the year while Core Sales of pumps and metered dose aerosol
valves to the pharmaceutical market showed modest growth for the same periods.
Core Sales of personal care products increased over the prior year primarily
due to continued strength of sales in Europe. Demand for the Company's
dispensing closures from the food/beverage market was also strong in the
quarter and first half of the year. Selling price increases did not have a
material impact on the Core Sales growth for the quarter or for the first half
of the year.
The following table sets forth (in thousands of dollars), for the periods
indicated, net sales by geographic region.
3 months 3 months 6 months 6 months
ended % of ended % of ended % of ended % of
6/30/01 Total 6/30/00 Total 6/30/01 Total 6/30/00 Total
-------------------------------------------------------------------------------------------------------
Domestic $ 90,806 39% $ 92,028 40% $175,733 38% $175,975 40%
Europe 122,260 53% 118,234 52% 250,913 54% 235,772 53%
Other
Foreign 18,703 8% 17,405 8% 38,022 8% 33,566 7%
Cost of sales as a percent of net sales decreased slightly to 62.0% in the
second quarter of 2001 compared to 62.2% in the second quarter of 2000. The
slight 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. For the first six months of 2001,
cost of sales as a percent of net sales increased slightly to 62.4% compared to
62.0% in the same period a year ago. The slight increase as a percent of net
sales for the six months ended June 30, 2001 is primarily attributed to the
acquisition and consolidation of a former joint venture for the entire six
months in 2001 that was accounted for on the equity method of accounting for
the first two months of 2000, and the mix of products sold in the first six
months compared to the prior year.
Selling, research & development and administrative expenses (SG&A) increased
1.7% or $0.6 million to $37.3 million in the second quarter of 2001 compared to
$36.7 million in the same period a year ago. SG&A as a percent of net sales
remained constant at 16.1% for the quarters ended June 30, 2001 and 2000. SG&A
for the six months ended June 30, 2001 increased
12
1.2% or $0.9 million to $73.9 million compared to $73.0 million a year ago. As
a percent of net sales, SG&A for the first six months of 2001 decreased to
15.9% compared to 16.4% a year ago. The decrease as a percent of net sales is
primarily attributed to cost reduction efforts in the U.S. targeted at the
personal care and household markets.
Depreciation and amortization as reported in the quarter decreased
approximately $300 thousand to $17.9 million compared to $18.2 million for the
same period a year ago. A stronger U.S. dollar relative to the prior year
helped decrease reported depreciation and amortization compared to the prior
year. As part of a project ("Strategic Initiative") to improve the efficiency
of operations that produce pumps for the its mass-market fragrance/cosmetic and
personal care customers, 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 $464 thousand was taken as
a charge in the second quarter and included in depreciation and amortization in
the income statement. Excluding this Accelerated Depreciation, depreciation and
amortization would have decreased nearly $800 thousand in the quarter. For the
reported six months ended June 30, 2001, depreciation and amortization was
relatively flat at $36.6 million compared to the prior year. Excluding the
Accelerated Depreciation, depreciation and amortization would have decreased
approximately $500 thousand compared to the prior year. The decrease for the
quarter and six-month period is primarily related to the stronger U.S. dollar
relative to the prior year.
Strategic Initiative charges, excluding the $464 thousand of Accelerated
Depreciation, totaled $7.3 million for the quarter and six months ended June
30, 2001. The $7.3 million is primarily made up of 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 relate to stay
bonuses and Accelerated Depreciation.
Operating income for the second quarter of 2001 decreased $5.5 million compared
to the same period a year ago. Excluding the $7.3 million of Strategic
Initiative charges and $464 thousand of Accelerated Depreciation, operating
income would have increased $2.2 million or 7% compared to the prior year.
Operating income as a percentage of net sales excluding the Strategic
Initiative related costs increased to 14.4% compared to 13.7% a year ago,
reflecting the cost reduction efforts aimed at the U.S. personal care and
household markets as well as core sales growth. For the six months ended June
30, 2001, reported operating income decreased nearly $2.9 million compared to
the same period a year ago. Excluding the
13
Strategic Initiative charges and related Accelerated Depreciation, operating
income would have increased nearly $4.9 million.
Net other expenses decreased slightly in the second quarter to $3.6 million
compared to $3.9 million in the second quarter of 2000. The decrease is
primarily related to decreased net interest expense (interest expense in excess
of interest income) of approximately $500 thousand reflecting reduced interest
rates and borrowings compared to the prior year.
The reported effective tax rate was 31.2% and 32.4% for the second quarter and
six months ended June 30, 2001, respectively, compared to 34.7% and 35.0% for
the same periods a year ago. Excluding the impact of the after tax Strategic
Initiative charges and Accelerated Depreciation, the effective tax rates would
have been 33.4% for the quarter and six months ended June 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 impacts related to the Strategic
Initiative to be in the range of 33.0%- 34.0%.
Net income as reported for the second quarter decreased to $15.2 million
compared to $17.8 million in the second quarter of 2000. Excluding the
Strategic Initiative charges and Accelerated Depreciation, net income would
have increased to $19.8 million or $0.54 per diluted share compared to $0.49
per diluted share in the prior year. For the six months ended June 30, 2001,
reported net income after cumulative effect of a change in accounting principle
decreased to $33.3 million as compared to $34.1 million in the same period a
year ago. Excluding the Strategic Initiative charges and Accelerated
Depreciation, net income after cumulative effect of a change in accounting
principle would have increased to $37.9 million or $1.04 per diluted share
compared to $0.93 per diluted share in the prior year.
Quarterly Trends
AptarGroup's results of operations in the second half of the year typically
have been negatively impacted by European summer holidays and customer plant
shutdowns in December. 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 industries 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.
14
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 six months of 2001 was $46.6 million
compared to $53.1 million in the same period a year ago. The decrease is
primarily attributed to a change in income taxes payable and deferred income
taxes offset by higher net income before Strategic Initiative related costs.
Net cash used by investing activities increased slightly to $41.8 million from
$40.3 million a year ago. Capital expenditures for the first six months of 2001
were approximately $2.7 million higher than capital expenditures in the first
six months of 2000. Management anticipates that cash outlays for capital
expenditures for all of 2001 will be approximately $85 to $90 million.
Net cash used by financing activities was $15.6 million in the first six months
of 2001 compared to net cash used of $7.1 million in 2000. The increase in net
cash used by financing activities is due to a decrease in the short-term
borrowings offset by additional proceeds from stock option exercises and less
treasury stock repurchased this year. The ratio of net debt to total net
capitalization was 35% at June 30, 2001 and December 31, 2000, respectively.
Net debt is defined as interest bearing 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 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 June 30, 2001, the amount unused and available under this agreement
was $22 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 $22 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 June 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.
15
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 August 21, 2001 to shareholders of record as of July 31, 2001.
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 arising from a business combination
will no longer be amortized and charged to expense over time. Instead, the
goodwill must periodically be tested for impairment. If the fair value of the
related reporting unit exceeds its carrying amount, an impairment loss is
recognized in an amount equal to that excess.
As required by SFAS 142, the Company intends to 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 with indefinite lives will not be subject to amortization,
but will instead be periodically reviewed for impairment. 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 the 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.
Outlook
Sales of the Company's pharmaceutical dispensing systems are expected to
increase in the second half of the year compared to the prior year and the
outlook for the Company's food/beverage dispensing systems remains strong.
Modest growth is forecasted over the prior year second half for the
fragrance/cosmetic and personal care markets.
16
The Company expects to complete its Strategic Initiative in the fourth quarter
of 2002. Until that time, additional charges of $2.3 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 bonuses during the
phase out period. An estimated $0.9 million of charges are expected to be
recorded in each of the third and fourth quarters 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.
The Company expects to achieve its previously announced full year 2001 guidance
of earnings per share of $1.95 to $2.05 per share excluding Strategic
Initiative charges and Accelerated Depreciation, and anticipates earnings per
share of $0.48 to $0.52 per share in the third quarter excluding any Strategic
Initiative charges and Accelerated Depreciation.
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, 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.
17
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 June 30, 2001 about the Company's
forward currency exchange contracts. All the contracts expire before the end
of the fourth quarter of 2001.
Average
Contract Amount Contractual
Buy/Sell (in millions) Exchange Rate
-------------------------------------------------------------------------------
EURO/USD.............................. $19,205 1.1539
USD/CNY............................... 2,000 .1207
EURO/YEN.............................. 1,734 .0095
EURO/GBP.............................. 1,571 1.6288
EURO/ARS.............................. 1,271 1.0935
Other................................. 764
-------
Total................................. $26,545
=======
The other contracts in the above table represent contracts to buy or sell
various other currencies (principally European and Australian). If the Company
cancelled the forward exchange contracts at June 30, 2001, the Company would
have paid approximately $0.5 million based on the fair value of the contracts
on that date.
All forward exchange contracts outstanding as of June 30, 2000 had an aggregate
contract amount of $23.7 million.
At June 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 June 30, 2001, the Company would
have received approximately $1.9 million based on the fair value of the swaps
on that date.
18
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
During the quarter ended June 30, 2001, the FCP Aptar Savings Plan (the
"Plan") purchased 1,200 shares of Common Stock of the Company on behalf of
the participants at an average price of $33.09 per share for an aggregate
amount of $39,708. During the same quarter, the Plan sold 180 shares of
Common Stock of the Company at the average price of $32.09 per share for an
aggregate amount of $5,776. At June 30, 2001, the Plan owns 4,665 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of stockholders was held on May 9, 2001. A vote was
taken by ballot for the election of three directors to hold office until
the 2004 Annual Meeting of Stockholders. The following nominees received
the number of votes as set forth below:
Broker
Nominee For Withhold Non-votes
------- --- -------- ---------
Alain Chevassus 32,195,428 289,831 -0-
Stephen J. Hagge 32,195,512 289,747 -0-
Carl A. Siebel 32,194,320 290,939 -0-
No votes were cast for any other nominee for director. The directors
continuing in office until the 2002 Annual Meeting are King Harris, Peter
Pfeiffer and Dr. Joanne C. Smith. Directors continuing in office until the
2003 Annual Meeting of Stockholders are Ralph Gruska, Leo Guthart, and
Professor Dr. Robert W. Hacker.
No other matters were submitted to a vote by ballot at the 2001 Annual
Meeting.
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 June 30, 2001.
19
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: August 10, 2001
20
INDEX TO EXHIBITS
Number and Description of Exhibit
---------------------------------
10.26* Employment Agreement dated February 17, 2000, between AptarGroup, Inc.
and Rick Schofield.
* Filed herewith.
21