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 March 31, 2002
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 (May 9, 2002).
Common Stock 35,932,988
AptarGroup, Inc.
Form 10-Q
Quarter Ended March 31, 2002
INDEX
Part I. FINANCIAL INFORMATION Page
----
Item 1. Financial Statements (Unaudited)
Consolidated Statements of Income -
Three Months Ended March 31, 2002
and 2001 3
Consolidated Balance Sheets -
March 31, 2002 and December 31, 2001 4
Consolidated Statements of Cash Flows -
Three Months Ended March 31, 2002 and 2001 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 16
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 21
Part II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 22
Item 6. Exhibits and Reports on Form 8-K 22
SIGNATURE 23
2
AptarGroup, Inc.
Consolidated Statements of Income
For the Three Months Ended March 31, 2002 and 2001
(In thousands, except per share amounts)
(Unaudited)
Three Months Ended
March 31,
--------------------------
2002 2001
---- ----
Net Sales......................................................... $ 218,707 $ 232,899
Operating Expenses:
Cost of sales............................................ 139,761 146,347
Selling, research & development and administrative....... 35,060 36,581
Depreciation and amortization............................ 17,417 18,697
Patent dispute settlement................................ 4,168 --
Strategic Initiative charges............................. 29 --
----------- ----------
196,435 201,625
----------- ----------
Operating Income.................................................. 22,272 31,274
----------- ----------
Other Income (Expense):
Interest expense......................................... (2,801) (4,634)
Interest income.......................................... 330 671
Equity in results of affiliates.......................... (111) (36)
Minority interests....................................... (30) (240)
Miscellaneous, net....................................... 63 252
----------- ----------
(2,549) (3,987)
----------- ----------
Income Before Income Taxes........................................ 19,723 27,287
Provision for Income Taxes........................................ 6,448 9,113
----------- ----------
Net Income Before Cumulative Effect of a Change in
Accounting Principle for Derivative Instruments and
Hedging Activities....................................... 13,275 18,174
----------- ----------
Cumulative Effect of a Change in Accounting Principle............. -- (64)
----------- ----------
Net Income........................................................ $ 13,275 18,110
=========== ==========
Net Income Per Common Share:
Basic.................................................... $ .37 $ .51
=========== ==========
Diluted.................................................. $ .36 $ .50
=========== ==========
Average number of shares outstanding:
Basic.................................................... 35,863 35,683
Diluted.................................................. 36,679 36,344
See accompanying notes to consolidated financial statements.
3
AptarGroup, Inc.
Consolidated Balance Sheets
(In thousands, except per share amounts)
(Unaudited)
March 31, December 31,
2002 2001
------------ ------------
Assets
Current Assets:
Cash and equivalents ................................................ $ 52,348 $ 48,013
Accounts and notes receivable, less allowance for doubtful
accounts of $7,204 in 2002 and $7,366 in 2001 ..................... 192,005 185,131
Inventories ......................................................... 113,240 120,531
Prepayments and other ............................................... 24,197 21,240
--------- ---------
381,790 374,915
--------- ---------
Property, Plant and Equipment:
Buildings and improvements .......................................... 126,405 127,017
Machinery and equipment ............................................. 699,464 690,882
--------- ---------
825,869 817,899
Less: Accumulated depreciation ...................................... (452,629) (441,829)
--------- ---------
373,240 376,070
Land ................................................................ 4,952 5,032
--------- ---------
378,192 381,102
--------- ---------
Other Assets:
Investments in affiliates ........................................... 9,549 9,894
Goodwill ............................................................ 122,305 122,569
Intangible assets, less accumulated amortization of $4,991 in
2002 and $4,790 in 2001 ........................................... 13,014 13,450
Miscellaneous ....................................................... 14,055 13,397
--------- ---------
158,923 159,310
--------- ---------
Total Assets .................................................. $ 918,905 $ 915,327
========= =========
See accompanying notes to consolidated financial statements.
4
AptarGroup, Inc.
Consolidated Balance Sheets
(In thousands, except per share amounts)
(Unaudited)
March 31, December 31,
2002 2001
---------- ------------
Liabilities and Stockholders' Equity
Current Liabilities:
Current maturities of long-term obligations .................. $ 12,708 $ 13,168
Accounts payable and accrued liabilities ..................... 147,237 140,983
--------- ---------
159,945 154,151
--------- ---------
Long-Term Obligations ............................................... 237,656 239,387
--------- ---------
Deferred Liabilities and Other:
Deferred income taxes ........................................ 27,672 28,026
Retirement and deferred compensation plans ................... 17,454 17,418
Minority interests ........................................... 5,637 5,099
Deferred and other non-current liabilities ................... 1,827 2,042
--------- ---------
52,590 52,585
--------- ---------
Stockholders' Equity:
Common stock, $.01 par value ................................. 371 370
Capital in excess of par value ............................... 124,349 122,926
Retained earnings ............................................ 501,354 490,229
Accumulated other comprehensive income ....................... (125,245) (114,402)
Less treasury stock at cost, 1,228 and 1,155 shares in
2002 and 2001, respectively .............................. (32,115) (29,919)
--------- ---------
468,714 469,204
--------- ---------
Total Liabilities and Stockholders' Equity ................... $ 918,905 $ 915,327
========= =========
See accompanying notes to consolidated statements.
5
AptarGroup, Inc.
Consolidated Statements of Cash Flows
(In thousands, brackets denote cash outflows)
(Unaudited)
Three Months Ended March 31,
----------------------------
2002 2001
---------- ---------
Cash Flows From Operating Activities:
Net income ....................................................................... $ 13,275 $ 18,110
Adjustments to reconcile net income to net cash provided by operations:
Depreciation ................................................................... 17,179 17,571
Amortization ................................................................... 238 1,126
Provision for bad debts ........................................................ 303 385
Strategic initiative charges ................................................... 29 --
Minority interests ............................................................. 30 240
Cumulative effect of accounting change, net of tax ............................. -- 64
Deferred income taxes .......................................................... 184 (1,168)
Retirement and deferred compensation plans ..................................... (1,825) (1,053)
Equity in results of affiliates in excess of cash distributions received ....... 111 36
Changes in balance sheet items, excluding
effects from foreign currency adjustments:
Accounts receivable .......................................................... (11,487) (8,373)
Inventories .................................................................. 4,826 (6,928)
Prepaid and other current assets ............................................. (3,026) (1,789)
Accounts payable and accrued liabilities ..................................... 9,907 2,193
Income taxes payable ......................................................... 731 6,424
Other changes, net ........................................................... (517) 2,174
---------- ---------
Net Cash Provided by Operations ....................................................... 29,958 29,012
---------- ---------
Cash Flows From Investing Activities:
Capital expenditures ............................................................. (20,363) (20,462)
Disposition of property and equipment ............................................ 382 209
Investments in affiliates ........................................................ -- (32)
(Issuance)/collection of notes receivable, net ................................... (78) 203
---------- ---------
Net Cash (Used) by Investing Activities ............................................... (20,059) (20,082)
---------- ---------
Cash Flows From Financing Activities:
Change in notes payable .......................................................... 3,096 (4,854)
Proceeds from long-term obligations .............................................. 12 3,068
Repayments of long-term obligations .............................................. (4,501) (2,821)
Dividends paid ................................................................... (2,150) (1,782)
Proceeds from stock options exercised ............................................ 1,423 2,073
Purchase of treasury stock ....................................................... (2,196) (737)
---------- ---------
Net Cash (Used) by Financing Activities ............................................... (4,316) (5,053)
---------- ---------
Effect of Exchange Rate Changes on Cash ............................................... (1,248) (3,747)
---------- ---------
Net Increase in Cash and Equivalents .................................................. 4,335 130
Cash and Equivalents at Beginning of Period ........................................... 48,013 55,559
---------- ---------
Cash and Equivalents at End of Period ................................................. $ 52,348 $ 55,689
========== =========
See accompanying notes to consolidated financial statements.
6
AptarGroup, Inc.
Notes to Consolidated Financial Statements
(Amounts in Thousands, Except per Share Amounts, 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, 2001. The results of operations of any
interim period are not necessarily indicative of the results that may be
expected for the year.
Note 2 - Inventories
At March 31, 2002 and December 31, 2001, approximately 22% and 23%,
respectively, of the total inventories are accounted for by using the last-in,
first-out (LIFO) method, while the remaining inventories are valued using the
first-in, first-out (FIFO) method. Inventories, by component, consisted of:
March 31, December 31,
2002 2001
------------ ------------
Raw materials .................. $ 43,289 $ 45,370
Work in progress ............... 26,384 24,599
Finished goods ................. 44,677 51,446
------------ ------------
114,350 121,415
Less LIFO Reserve .............. (1,110) (884)
------------ ------------
Total .......................... $ 113,240 $ 120,531
============ ============
Inventories are stated at cost, which is lower than market. Costs included in
inventories are raw materials, direct labor and manufacturing overhead.
7
Note 3 - Comprehensive Income/(Loss)
AptarGroup's total comprehensive income/(loss) was as follows:
Three Months Ended March 31,
----------------------------
2002 2001
----------- -----------
Net income ............................................... $ 13,275 $ 18,110
Less: foreign currency translation adjustment ........ (10,843) (26,890)
----------- -----------
Total comprehensive income/(loss) .................... $ 2,432 $ (8,780)
=========== ===========
Note 4 - Stock Repurchase Program
The Board of Directors authorized the repurchase of a maximum of three million
shares of the Company's outstanding common stock. The timing of and total amount
expended for the share repurchase depends upon market conditions. During the
quarter ended March 31, 2002, the Company repurchased 73 shares for an aggregate
amount of $2.2 million. The cumulative total number of shares repurchased at
March 31, 2002 was 1,228 shares for an aggregate amount of $32.1 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 non-functional
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, currency 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 an
anticipated transaction, 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 March 31, 2002, the Company has recorded the fair value of derivative
instrument assets of $3.4 million in miscellaneous other assets with an
offsetting adjustment to debt related to fixed-to-variable interest rate swap
agreements with a notional principal value of $50 million. No gain or loss was
recorded in the income statement for the quarters ended March 31, 2002 or March
31, 2001 since there was no hedge ineffectiveness.
Cash Flow Hedges
The Company did not use any cash flow hedges in the quarters ended March 31,
2002 or March 31, 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, the Company will consider hedging the currency exposure associated
with such a transaction.
9
Other
As of March 31, 2002, the Company has recorded the fair value of foreign
currency forward exchange contracts of $81 in accounts payable and accrued
liabilities and $34 in prepayments and other in the balance sheet. All forward
exchange contracts outstanding as of March 31, 2002 had an aggregate contract
amount of $19.7 million.
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. See Note 11 -
Subsequent Event relating to settlement of an outstanding patent dispute.
Note 7 - Segment Information
The Company operates in the packaging components industry, which includes the
development, manufacture and sale of consumer product dispensing systems. The
Company is organized primarily based upon individual business units, which
resulted from historic acquisitions or internally created business units. All of
the business units sell primarily dispensing systems. These business units all
require similar production processes, sell to similar classes of customers and
markets, use the same methods to distribute products and operate in similar
regulatory environments. Based on the current economic characteristics of the
Company's business units, the Company has identified two reportable segments:
Dispensing Systems and SeaquistPerfect.
The Dispensing Systems segment is an aggregate of four of the Company's five
business units. The Dispensing Systems segment sells primarily non-aerosol spray
and lotion pumps, plastic dispensing and non-dispensing closures, and metered
dose aerosol valves. These three products are sold to all of the markets served
by the Company including the fragrance/cosmetic, pharmaceutical, personal care,
household, and food/beverage markets.
SeaquistPerfect represents the Company's fifth business unit and sells primarily
aerosol valves and accessories and certain non-aerosol spray and lotion pumps.
These products are sold primarily to the personal care, household, and
food/beverage markets.
The accounting policies of the segments are the same as those described in Note
1, Summary of Significant Accounting Policies in the Company's Annual Report to
Shareholders for the year ended December 31, 2001. The Company evaluates
performance of its business units and allocates resources based upon earnings
before interest expense in excess of interest income, corporate expenses and
income taxes (collectively referred to as "EBIT") excluding unusual items. The
Company accounts for intersegment sales and transfers as if the sales or
transfers were to third parties.
10
Financial information regarding the Company's reportable segments is shown
below.
Dispensing SeaquistPerfect Corporate and Totals
Quarter ended March 31, Systems Other
- --------------------------------------------------------------------------------------------------
Total Revenue
2002 $ 180,027 $ 41,614 $ 221,641
2001 193,181 42,028 235,209
Less: Intersegment Sales
2002 $ 240 $ 2,694 $ 2,934
2001 134 2,176 2,310
Net Sales
2002 $ 179,787 $ 38,920 $ 218,707
2001 193,047 39,852 232,899
EBIT
2002 $ 26,108 $ 3,167 $ (2,814) $ 26,461
2001 31,549 2,600 (2,899) 31,250
Goodwill amortization of $880, $25 and $3 was included in EBIT for the quarter
ended March 31, 2001 for Dispensing Systems, SeaquistPerfect, and Corporate and
other, respectively.
Reconciliation of segment EBIT to consolidated income before income taxes is as
follows:
Quarter ended March 31 2002 2001
- --------------------------------------------------------------------------------
Income before income taxes
Total EBIT for reportable segments $ 26,461 $ 31,250
Strategic Initiative charges/(1)/ (99) --
Patent dispute settlement/(1)/ (4,168) --
Interest expense, net (2,471) (3,963)
---------------------------------
Income before income taxes $ 19,723 $ 27,287
=================================
/(1)/ Strategic Initiative related charges and the patent dispute settlement are
associated with the Dispensing Systems segment. Management evaluates the segment
profitability excluding these costs and therefore these costs are shown as
reconciling items to the consolidated totals.
11
Note 8 - Earnings Per Share
AptarGroup's authorized common stock consisted of 99 million shares, having a
par value of $0.01 each. Information related to the calculation of earnings per
share is as follows:
First quarter ended
--------------------------------------
March 31, 2002 March 31, 2001
------------------ ------------------
Diluted Basic Diluted Basic
--------------------------------------
Consolidated operations
Income available to common
shareholders $13,275 $13,275 $18,110 $18,110
------- ------- ------- -------
Average equivalent shares
Shares of common stock 35,863 35,863 35,683 35,683
Effect of dilutive stock options 816 -- 661 --
------- ------- ------- -------
Total average equivalent shares 36,679 35,863 36,344 35,683
------- ------- ------- -------
Net income per share/1/ $ 0.36 $ 0.37 $ 0.50 $ 0.51
======= ======= ======= =======
/1/ Net income per share amounts for 2001 are the same when calculated using
either net income before or after the cumulative effect of a change in
accounting principle.
Note 9 - Strategic Initiative
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 and reducing costs, 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 closed one molding operation in the U.S. and
will 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). Approximately $9.6 million of such charges before tax and
$6.0 million after-tax or approximately $0.17 per diluted share were recorded in
2001. No charges were recorded in the first quarter of 2001. Of the $9.6 million
recorded beginning in the second quarter ended June 30, 2001, approximately $1.8
million was included in the Company's depreciation and amortization expense,
$0.2 million was included in the Company's cost of sales and $7.6 million was
shown on a separate line of the income statement. Detail of the pre-tax charges
and changes in the reserves for the quarter ended March 31, 2002 (in thousands)
is shown in the following table:
12
Charges for
the three
Beginning months Charged Ending
Reserve at ended Against Reserve at
1/1/02 03/31/02 Cash Paid Assets 03/31/02
-----------------------------------------------------------------
Employee severance $ 469 $ -- $ (136) $ -- $ 333
Other costs 1,056 29 (250) -- 835
-----------------------------------------------------------------
Subtotal $ 1,525 $ 29 $ (386) $ -- $ 1,168
Accelerated depreciation -- 70 -- (70) --
-----------------------------------------------------------------
Total Strategic Initiative related
costs $ 1,525 $ 99 $ (386) $ (70) $ 1,168
=================================================================
Charges for asset impairment write-downs recorded in 2001 were 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 adequate capacity to
produce modular pumps has been established. 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 No. 121 "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of." An impairment charge of
$5.5 million in the quarter ended June 30, 2001 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 $1.8 million was
recognized in 2001 and $0.1 million was recorded in the quarter ended March 31,
2002. An additional charge of approximately $0.1 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 has been accrued and was included in the Strategic
Initiative charges shown in the income statement in 2001. 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. As of March 31, 2002, 89 people have been terminated resulting in a
cash payment of $467 through March 31, 2002.
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,
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.
13
Approximately $485 of the stay bonus was accrued in 2001 and an additional $29
was accrued in the quarter ended March 31, 2002, of which approximately $229 was
paid in 2001 and $111 was paid in 2002. In addition, as a result of closing down
the molding operation, the Company will be required to refund an abatement of
approximately $500 to a utility provider and expects to spend approximately $300
to refurbish the leased molding facility that was vacated in the first quarter
2002. Approximately $139 was spent through March 31, 2002. These are included in
other costs in the preceding table.
During 2001, approximately $170 of training costs was 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
sales in the income statement in 2001. No additional training costs were
incurred in the quarter ended March 31, 2002. It is expected that training costs
over the course of the project will cost approximately $500.
Note 10 -Goodwill and Other Intangible Assets - Adoption of Statement 142
The Company adopted Statement of Financial Accounting Standards ("SFAS") No.
142, "Goodwill and Other Intangible Assets" on January 1, 2002. Pursuant to this
standard, the Company has completed an assessment of the categorization of its
existing intangible assets and goodwill. In addition, the Company completed an
analysis of the fair value of its reporting units using both a discounted cash
flow analysis and market multiple approach and has determined that the fair
value of its reporting units exceeds the carrying values and therefore, no
impairment of goodwill needs to be recorded. Also pursuant to the standard, the
Company has ceased recording of goodwill amortization in 2002. The table below
shows income before income taxes, net income and earnings per share amounts for
the quarters ended March 31, 2002 and March 31, 2001 adjusted to add back
goodwill amortization and related tax effects for the first quarter 2001.
For the Quarter Ended March 31,
-------------------------------
2002 2001
---- ----
Reported income before income taxes $ 19,723 $ 27,287
Add back: Goodwill amortization -- 908
---------- -----------
Adjusted income before income taxes $ 19,723 $ 28,195
=========== ===========
Reported net income $ 13,275 $ 18,110
Add back: After tax impact of goodwill amortization -- 864
----------- -----------
Adjusted net income $ 13,275 $ 18,974
=========== ===========
Basic earnings per share:
Reported net income $ .37 $ .51
Goodwill amortization -- .02
---------- -----------
Adjusted net income $ .37 $ .53
========== ===========
Diluted earnings per share:
Reported net income $ .36 $ .50
Goodwill amortization -- .02
---------- -----------
Adjusted net income $ .36 $ .52
========== ===========
14
The Company does not have any intangible assets with indefinite lives. The table
below shows a summary of intangible assets as of March 31, 2002 and December 31,
2001.
March 31, 2002 December 31, 2001
---------------------------------------------------------------------------------------------
Gross Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Net Value Amount Amortization Net Value
---------------------------------------------------------------------------------------------
Patents $ 12,355 $ (2,564) $ 9,791 $ 12,549 $ (2,430) $ 10,119
License agreements, organization
costs, trademarks and other 5,650 (2,427) 3,223 5,691 (2,360) 3,331
------------- ------------ -------------- ------------- ------------- --------------
Total intangible assets $ 18,005 $ (4,991) $ 13,014 $ 18,240 $ (4,790) $ 13,450
============= ============ ============== ============= ============= ==============
Aggregate amortization expense of the quarters ended March 31, 2002 and 2001 was
$238 and $218 respectively. Amortization expense is estimated to be
approximately $1 million per year for each of the next five years.
The changes in the carrying amount of goodwill since the year ended December 31,
2001, are as follows by reporting segment:
Dispensing Systems SeaquistPerfect
Segment Segment Total
---------------------------------------------------
Balance as of January 1, 2001 $ 120,709 $ 1,860 $ 122,569
Foreign currency exchange effects (264) -- (264)
------------- ----------- ----------
Balance as of March 31, 2002 $ 120,445 $ 1,860 $ 122,305
============= =========== ==========
Note 11 - Subsequent Event
On May 13, 2002, the Company announced an agreement settling an outstanding
patent dispute to avoid the time and expense of a trial scheduled to begin in
late 2002. As part of the settlement, the parties have entered into a
cross-license agreement. As a result of the settlement, the Company has recorded
a pre-tax charge of $4.2 million ($2.7 million after-tax) in the quarter ended
March 31, 2002.
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Amounts in Thousands, Except per Share Amounts, or Otherwise Indicated)
Results of Operations
Net sales for the quarter ended March 31, 2002 totaled $218.7 million, a
decrease of approximately $14.2 million or 6% from the corresponding period of
2001. Net sales were negatively affected by the translation of AptarGroup's
foreign sales into U.S. dollars due to the stronger U.S. dollar relative to the
same three-month period of 2001. Net sales, excluding changes in foreign
currency exchange rates ("Core Sales"), decreased 4% compared to the prior year.
Core Sales of the Company's products sold to the pharmaceutical market increased
significantly over the prior year while Core Sales of the Company's products
sold to the fragrance/cosmetic market decreased sharply over the prior year
record levels. Core Sales to the personal care, household, and food/beverage
markets all decreased slightly from the prior year.
The following table sets forth for the periods indicated, net sales by
geographic region.
2002 % of Total 2001 % of Total
- --------------------------------------------------------------------------------
Domestic $ 80,770 37% $ 84,931 37%
Europe 119,319 55% 128,653 55%
Other Foreign 18,618 8% 19,315 8%
Cost of sales as a percent of net sales increased to 63.9% in the first quarter
of 2002 compared to 62.8% in the same period a year ago. The cost of sales
percentage was negatively impacted by the following factors:
... Underutilized fixed costs worldwide due to the decrease in sales of pumps
in the first quarter, particularly to the fragrance/cosmetic market.
... Continued price pressure particularly in the closures business.
Partially offsetting these negative factors were the following positive impacts:
... Strong sales of the Company's products to the pharmaceutical market.
... Cost reduction programs implemented both in the U.S. and Europe.
Selling, research & development and administrative expenses (SG&A) decreased
more than 4% to $35.1 million in the first quarter of 2002 compared to $36.6
million in the same period a year ago. SG&A decreased primarily due to cost
containment efforts in all the business units, in particular, cost reductions
related to the Strategic Initiative project. SG&A increased slightly as a
percentage of net sales to 16.0% from 15.7% recorded a year ago.
Depreciation and amortization decreased approximately $1.3 million to $17.4
million compared to $18.7 million a year ago. The prior year amount includes
approximately $0.9 million of goodwill amortization that is not in the current
year amount. The remainder of the decrease is primarily due to assets taken out
of service as part of the Strategic Initiative project, as well as the effect of
translating the depreciation of foreign entities into U.S. dollars using a
stronger U.S. dollar relative to the same period a year ago.
Subsequent to the quarter ended March 31, 2002, the Company announced an
agreement settling an outstanding patent dispute to avoid the time and expense
of a trial that was scheduled to begin in late 2002. As part of the
16
settlement, the parties have entered into a cross-license agreement. Patent
dispute settlement charges of $4.2 million were recorded in the quarter ended
March 31, 2002.
Operating income decreased to $22.3 million compared to $31.3 million in the
prior year primarily due to the patent dispute settlement charges and the
decrease in sales mentioned above. Excluding the patent dispute settlement
charges, operating income decreased to $26.4 million compared to the $31.3
million in the prior year. Strategic Initiative related charges were not
significant in the quarters presented.
Net other expenses decreased to $2.5 million in the first quarter 2002 from $4.0
million in the prior year. The decrease is primarily due to a reduction in
interest expense in excess of interest income ("net interest") of approximately
$1.5 million. This reduction in net interest is primarily due to a reduction in
interest rates combined with decreasing debt levels compared to the prior year.
The effective tax rate for the three months ended March 31, 2002 was 32.7%,
compared to 33.4% for the same period a year ago. The decrease in the effective
tax rate is primarily attributed to the mix of income earned and elimination of
non-deductible goodwill amortization in 2002.
Net income for the first quarter decreased 27% to $13.3 million compared to
$18.2 million in the first quarter of 2001 before cumulative effect of a change
in accounting principle. Excluding the patent dispute settlement, net income
decreased approximately 12% to $16.0 million compared to the $18.2 million
recorded in the first quarter of 2001.
Dispensing Systems Segment
The Dispensing Systems segment is an aggregate of four of the Company's five
business units. The Dispensing Systems segment sells primarily non-aerosol spray
and lotion pumps, plastic dispensing and non-dispensing closures, and metered
dose aerosol valves. These three products are sold to all the markets served by
the Company including the fragrance/cosmetic, personal care, pharmaceutical,
household and food/beverage markets.
Net sales for the quarter ended March 31, 2002 decreased 7% or $13.2 million to
$179.8 million from $193.0 million reported in the first quarter of the prior
year. Strong sales of the segment's products to the pharmaceutical market were
more than offset by a decrease in sales of the segment's products to all of the
other markets served, in particular to the fragrance/cosmetic market.
Segment EBIT decreased 17% for the quarter ended March 31, 2002 to $26.1 million
compared to $31.5 million reported in the prior year. Excluding goodwill
amortization from the prior year, EBIT decreased 19%. The decrease in EBIT from
the prior year is primarily related to underutilized fixed costs worldwide due
to the decrease in sales of pumps to the fragrance/cosmetic market, as well as
continued price pressure, particularly for dispensing closures.
SeaquistPerfect Segment
SeaquistPerfect represents the Company's fifth business unit and sells primarily
aerosol valves and accessories and certain non-aerosol spray and lotion pumps.
These products are sold primarily to the personal care, household, and
food/beverage markets.
17
Net sales for the quarter ended March 31, 2002 decreased 3% or approximately
$1.0 million to $38.9 million from $39.9 million reported in the first quarter
of the prior year. Unit sales of aerosol valves in North America decreased as
anticipated due to the high level of aerosol valve sales in the first quarter of
2001. Sales of non-aerosol spray and lotion pumps were also slightly lower than
the prior year first quarter. Sales in Europe increased over the prior year, but
due to the strengthening of the U.S. dollar compared to the Euro over the prior
year first quarter, sales translated in U.S. dollars decreased slightly.
In spite of the decrease in sales, segment EBIT for the quarter ended March 31,
2002 increased 23% to $3.2 million from $2.6 million in the prior year. The
increase in EBIT is primarily due to higher sales of non-aerosol pumps in Europe
and cost savings programs implemented worldwide. Goodwill amortization was not
material for the SeaquistPerfect segment.
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 has 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.
Quarterly Trends
AptarGroup's results of operations in the second half of the year typically are
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, and changes in general economic conditions in any of the
countries in which AptarGroup does business.
Liquidity and Capital Resources
Net cash provided by operations in the first three months of 2002 increased to
$30.0 million compared to $29.0 million in the same period a year ago. The
increase is primarily attributed to less cash used for working capital in 2002
than for the same period a year ago. During the first quarter of 2002, the
Company utilized the majority of operating cash flows to finance capital
expenditures, repurchase Company stock, and pay dividends to shareholders. The
Company will pay for the patent dispute settlement and the cross-license
agreement referred to Note 11- Subsequent Event in the second quarter of 2002.
Cash and equivalents increased to $52.3 million at March 31, 2002 compared to
$48.0 million at December 31, 2001.
Net cash used by investing activities in the three months of 2002 and 2001
remained unchanged at $20.1 million. Capital expenditures in the first quarter
of 2002 were approximately $20 million or the same amount as capital
expenditures in the first quarter of 2001. Cash outlays for capital expenditures
for 2002 are estimated to
18
be approximately $80 million. The Company estimates that approximately 35% of
the capital expenditures in 2002 will be spent on maintenance of business.
Net cash used by financing activities decreased to $4.3 million in the first
three months of 2002 compared to $5.1 million in 2001. The slight decrease in
net cash used by financing activities is primarily due to a decrease in
repayment in interest bearing debt in 2002 compared to the prior year offset by
the purchase of more treasury stock in the first quarter of 2002 compared to
2001. The ratio of net debt to total net capitalization was 29.7% and 30.4% at
March 31, 2002 and December 31, 2001, 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 has a $100 million, multi-year, multi-currency unsecured revolving
credit agreement. 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 March 31, 2002, the amount unused and available under this agreement
was $27 million. At December 31, 2001, the amount unused and available under
this agreement was $24 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.
Since management has the ability and intent to do so, an additional $27 million
and $24 million of short-term obligations representing the unused and available
amount under the credit agreement have been reclassified as long-term
obligations as of March 31, 2002 and December 31, 2001, 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 it is in a strong financial position and has the financial
resources to meet business requirements in the foreseeable future. The Company
has historically used cash flow from operations as its primary source of
liquidity. In the case that customer demand would decrease significantly for a
prolonged period of time and negatively impact cash flow from operations, the
Company would have the ability to restrict and significantly reduce capital
expenditure levels which historically have been the most significant use of cash
for the Company.
The Board of Directors declared a quarterly dividend of $.06 per share payable
on May 22, 2002 to shareholders of record as of May 1, 2002.
Adoption of Accounting Standards
In July 2001, the FASB issued SFAS No. 143 "Accounting for Asset Retirement
Obligations." SFAS No. 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 statement
will not have any immediate impact on the Company upon adoption.
19
Outlook
The demand for the Company's fragrance/cosmetic products sold to the low to mid
range of the market is expected to improve in the second quarter of 2002 while
sales of the Company's products to the upper end of the fragrance/cosmetic
market is anticipated to remain weak. Sales of the Company's products to the
pharmaceutical market are expected to remain strong in the second quarter as
well. The outlook for the sales of the Company's products to the other markets
for the second quarter also remains positive. In spite of the improving sales
over the first quarter of 2002, sales for the second quarter of 2002 are still
expected to be below the prior year second quarter due to the strong sales
recorded in the second quarter of 2001.
The Company expects second quarter 2002 diluted earnings per share to be in the
range of $.48 to $.54 per share, excluding any Strategic Initiative related
charges, compared to $.41 per share reported in the second quarter of 2001. On a
comparable basis (excluding strategic initiative related charges of $.13 per
share and goodwill amortization of $.02 per share) diluted earnings per share
were $.56 per share in the second quarter of 2001. Customers continue to be
optimistic about business conditions improving in the second half of the year,
and as a result, the Company continues to target double-digit earnings growth
for the full year of 2002 on a comparable basis over 2001.
Forward-Looking Statements
This Management's Discussion and Analysis and certain other sections of this
Form 10-Q contain forward-looking statements that involve a number of risks and
uncertainties. 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 or unknown
risks and uncertainties that exist in the Company's operations and business
environment, including but not limited to direct or indirect consequences of
acts of war or terrorism, 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
timing and magnitude of capital expenditures and acquisitions, currency exchange
rates, interest rates, economic and market conditions in the United States,
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.
20
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
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 has 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.
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 March 31, 2002, about the Company's
forward currency exchange contracts. All the contracts expire before the end of
the third quarter of 2002.
Average Contractual
Buy/Sell Contract Amount Exchange Rate
- --------------------------------------------------------------------------------
Euro/U.S. Dollar $ 15,578 1.1448
Euro/British Pound 1,468 1.6236
U.S. Dollar/Chinese Yuan 1,178 .1207
Other 1,439
----------------
Total $ 19,663
================
The other contracts in the above table represent contracts to buy or sell
various other currencies (principally Asian and Australian). As of March 31,
2002, the Company has recorded the fair value of foreign currency forward
exchange contracts of $81 in accounts payable and accrued liabilities and $34 in
prepayments and other in the balance sheet.
All forward exchange contracts outstanding as of March 31, 2001 had an aggregate
contract amount of $20.8 million.
At March 31, 2002, 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 (which was 2.0% at March 31,
2002) and receive a fixed rate of 6.6%. The variable rates are adjusted
semiannually based on London Interbank Offered Rates ("LIBOR"). Variations in
market interest rates would produce changes in the Company's net income. If
interest rates increase by 10%, net income related to the interest rate swap
agreements would decrease by approximately $100 assuming a tax rate of 33%. As
of March 31, 2002, the Company has recorded the fair value of derivative
instrument assets of $3.4 million in miscellaneous other assets with an
offsetting adjustment to debt related to the fixed-to-variable interest rate
swap agreements. No gain or loss was recorded in the income statement in 2002
since there was no hedge ineffectiveness.
21
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
During the quarter ended March 31, 2002, the FCP Aptar Savings Plan (the "Plan")
sold 50 shares of Common Stock of the Company on behalf of the participants at
an average price of $34.50 per share for an aggregate amount of $1,725. At March
31, 2002, the Plan owns 4,970 shares of Common Stock of the Company. Certain
employees of AptarGroup S.A.S., and Valois S.A.S., subsidiaries 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 (BNP) Paribas Asset Management. 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) There are no Exhibits accompanying this Form 10-Q
b) On April 16, 2002 the Company filed a report on Form 8-K,
pursuant to Item 5 of Form 8-K, disclosing quarterly revenue and
earnings data by reportable segment for the year 2001.
22
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: May 14, 2002
23