22 EXHIBIT 13
Consolidated Balance Sheets
(Dollars in thousands, except per share)
December 31, 1998 1997
- -------------------------------------------------------------------------------------
Assets
Current Assets:
Cash and equivalents $ 25,159 $ 17,717
Accounts and notes receivable, less allowance for doubtful
accounts of $5,132 in 1998 and $3,812 in 1997 173,289 145,034
Inventories 101,091 79,262
Prepayments and other 17,110 14,148
--------- ---------
316,649 256,161
--------- ---------
Property, Plant and Equipment:
Buildings and improvements 90,768 74,351
Machinery and equipment 565,460 455,382
--------- ---------
656,228 529,733
Less: Accumulated depreciation (335,650) (281,899)
--------- ---------
320,578 247,834
Land 4,601 3,819
--------- ---------
325,179 251,653
--------- ---------
Other Assets:
Investments in affiliates 3,217 16,495
Goodwill, less accumulated amortization of $7,757 in 1998
and $6,030 in 1997 49,689 40,479
Miscellaneous 19,939 20,645
--------- ---------
72,845 77,619
--------- ---------
Total Assets $ 714,673 $ 585,433
========= =========
See accompanying notes to consolidated financial statements.
23
Consolidated Balance Sheets
(Dollars in thousands, except per share)
December 31, 1998 1997
- ---------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Current Liabilities:
Notes payable $ 29,663 $ -
Current maturities of long-term obligations 7,561 2,890
Accounts payable and accrued liabilities 130,209 122,507
-------- ---------
167,433 125,397
-------- ---------
Long-Term Obligations 80,875 70,740
-------- ---------
Deferred Liabilities and Other:
Deferred income taxes 24,989 21,432
Retirement and deferred compensation plans 14,957 11,872
Minority interests 4,189 4,568
Deferred and other non-current liabilities 6,722 9,369
-------- --------
50,857 47,241
-------- --------
Stockholders' Equity:
Preferred stock, $.01 par value, 1 million shares authorized,
none outstanding - -
Common stock, $.01 par value, 45 million shares authorized,
36.1 and 36.0 million outstanding in 1998 and 1997,
respectively 361 180
Capital in excess of par value 105,714 104,699
Retained earnings 329,582 274,524
Accumulated other comprehensive income (20,149) (37,348)
-------- --------
415,508 342,055
-------- --------
Total Liabilities and Stockholders' Equity $714,673 $585,433
======== ========
See accompanying notes to consolidated financial statements.
24
Consolidated Statements of Income
(Dollars in thousands, except per share)
Years Ended December 31, 1998 1997 1996
- ---------------------------------------------------------------------------------------------------
Net Sales $713,506 $655,390 $615,808
-------- -------- --------
Operating Expenses:
Cost of sales 444,615 418,110 399,654
Selling, research & development, and administrative 119,287 108,372 104,282
Depreciation and amortization 54,446 49,917 47,876
-------- -------- --------
618,348 576,399 551,812
-------- -------- --------
Operating Income 95,158 78,991 63,996
-------- -------- --------
Other Income (Expense):
Interest expense (6,451) (5,293) (6,330)
Interest income 1,146 1,172 1,132
Equity in income of affiliates 219 1,991 691
Minority interests (389) (286) (324)
Miscellaneous, net (375) 2,021 1,008
Lawsuit settlements 9,881 - -
-------- -------- --------
4,031 (395) (3,823)
-------- -------- --------
Income Before Income Taxes 99,189 78,596 60,173
Provision For Income Taxes 38,368 32,067 22,625
-------- -------- --------
Net Income $ 60,821 $ 46,529 $ 37,548
======== ======== ========
Net Income Per Common Share
Basic $ 1.69 $ 1.29 $ 1.05
-------- -------- --------
Diluted $ 1.65 $ 1.27 $ 1.03
-------- -------- --------
See accompanying notes to consolidated financial statements.
25
Consolidated Statements of Cash Flows
(Dollars in thousands, brackets denote cash outflows)
Years Ended December 31, 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities:
Net income $ 60,821 $ 46,529 $ 37,548
Adjustments to reconcile net income to net cash provided by operations:
Depreciation 51,808 47,199 44,798
Amortization 2,638 2,718 3,078
Provision for bad debts 1,912 1,261 1,148
Minority interests 389 286 324
Deferred income taxes 5,031 (26) 4,149
Retirement and deferred compensation plans 2,607 2,003 381
Equity in income of affiliates in excess of cash distributions received (219) (1,991) (590)
Changes in balance sheet items, excluding effects from acquisitions
and foreign currency adjustments:
Accounts and notes receivable (8,637) (28,799) (15,828)
Inventories (8,727) (11,639) (5,211)
Prepaid and other current assets 1,465 709 (631)
Accounts payable and accrued liabilities (19,287) 32,449 630
Other changes, net (4,822) (4,513) (2,480)
-------- -------- --------
Net cash provided by operations 84,979 86,186 67,316
-------- -------- --------
Cash Flows from Investing Activities:
Capital expenditures (79,811) (71,228) (62,794)
Disposition of property and equipment 1,911 3,181 858
(Acquisition) disposition of businesses, net (20,027) -- 1,942
Investments in affiliates (1,300) (1,219) (11)
Collection (Issuance) of notes receivable, net 330 (468) 804
-------- -------- --------
Net cash used by investing activities (98,897) (69,734) (59,201)
-------- -------- --------
Cash Flows from Financing Activities:
Proceeds from notes payable 28,698 -- --
Repayments of notes payable -- (4,033) (2,521)
Proceeds from long-term obligations 7,621 4,901 7,935
Repayments of long-term obligations (11,374) (9,617) (9,629)
Dividends paid (5,763) (5,390) (5,023)
Proceeds from stock options exercised 1,196 1,128 618
-------- -------- --------
Net cash provided (used) by financing activities 20,378 (13,011) (8,620)
-------- -------- --------
Effect of Exchange Rate Changes on Cash 982 (2,110) (441)
-------- -------- --------
Net Increase (Decrease) in Cash and Equivalents 7,442 1,331 (946)
Cash and Equivalents at Beginning of Period 17,717 16,386 17,332
-------- -------- --------
Cash and Equivalents at End of Period $ 25,159 $ 17,717 $ 16,386
======== ======== ========
Supplemental Cash Flow Disclosure:
Interest paid $ 6,347 $ 5,389 $ 6,218
Income taxes paid $ 36,400 $ 15,620 $ 19,121
See accompanying notes to consolidated financial statements.
26
Consolidated Statements of Changes in Equity
Years Ended December 31, 1998, 1997, and 1996
(Amounts in thousands, except per share)
Accumulated
Other Capital in
Comprehensive Retained Comprehensive Common Stock Excess of
Income Total Equity Earnings Income Par Value Par Value
- -----------------------------------------------------------------------------------------------------------------------------------
Balance - December 31, 1995 $312,286 $200,860 $ 8,293 $ 179 $102,954
Net income $ 37,548 37,548 37,548
Foreign currency translation adjustments (9,730) (9,730) (9,730)
--------
Comprehensive income $ 27,818
========
Stock awards 618 618
Cash dividends declared on common stock (5,023) (5,023)
-------- -------- -------- ------- --------
Balance - December 31, 1996 335,699 233,385 (1,437) 179 103,572
Net income $ 46,529 46,529 46,529
Foreign currency translation adjustments (35,911) (35,911) (35,911)
--------
Comprehensive income $ 10,618
========
Stock awards 1,128 1 1,127
Cash dividends declared on common stock (5,390) (5,390)
-------- -------- -------- ------- --------
Balance - December 31, 1997 342,055 274,524 (37,348) 180 104,699
Net income $ 60,821 60,821 60,821
Foreign currency translation adjustments 17,199 17,199 17,199
--------
Comprehensive income $ 78,020
========
Stock awards 1,196 1,196
Adjustment for stock split 181 (181)
Cash dividends declared on common stock (5,763) (5,763)
-------- -------- -------- ------- --------
Balance - December 31, 1998 $415,508 $329,582 $(20,149) $ 361 $105,714
======== ======== ======== ======= ========
See accompanying notes to consolidated financial statements.
27
Notes To Consolidated Financial Statements
(Dollars in thousands, except per share)
Note - 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
AptarGroup, Inc. is an international company that designs,
manufactures and sells consumer product dispensing systems. The Company focuses
on providing value-added components to a variety of global consumer product
marketers in fragrance/cosmetics, personal care, pharmaceutical,
household/industrial products and food industries. The Company has manufacturing
facilities located throughout the world including facilities in the United
States, Europe, Asia and South America.
Basis of Presentation
The accompanying 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. All
significant intercompany accounts and transactions have been eliminated. Certain
previously reported amounts have been reclassified to conform to the current
period presentation.
Stock Split
In August 1998, the Company effected a two-for-one stock split.
Previously reported information has been restated to reflect the stock split.
Accounting Estimates
The financial statements are prepared in conformity with generally
accepted accounting principles (GAAP). This process requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expenses during
the reporting period. Actual results could differ from those estimates.
Cash Management
The Company considers all highly liquid investments with an original
maturity of three months or less when purchased to be cash equivalents.
Inventories
Inventories are stated at cost, which is lower than market. Costs
included in inventories are raw materials, direct labor and manufacturing
overhead. Cost of substantially all domestic inventories 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.
Investments in Affiliated Companies
The Company accounts for its investments in 50% or less owned
affiliated companies which it does not control using the equity method. These
investments are in companies that manufacture and distribute products similar to
the Company's products or supply components to the Company. No dividends from
affiliated companies were received in 1998 or 1997, and 1996 dividends were not
significant.
Property and Depreciation
Properties are stated at cost. Depreciation is determined on a
straight-line basis over the estimated useful lives for financial reporting
purposes and accelerated methods for income tax reporting. Generally, the
estimated useful lives are 25 to 40 years for buildings and improvements and 3
to 10 years for machinery and equipment.
Intangible Assets
Management believes goodwill acquired in purchase transactions has
continuing value. It is the Company's policy to amortize such costs primarily
over a period of 40 years using the straight-line method. Other intangibles,
consisting of patents, non-compete agreements and license agreements, acquired
in purchase transactions or developed, are capitalized and amortized over their
useful lives. Management assesses the value of the recorded goodwill and other
intangibles using projected undiscounted cash flows to determine if impairment
has occurred. It is management's opinion that no such impairment exists.
Derivatives
Gains and losses on hedges of existing assets or liabilities are
included in the carrying amount of those assets or liabilities and are
ultimately recognized in income as part of those carrying amounts. Gains and
losses related to qualifying hedges of firm commitments also are deferred and
are recognized in income or as adjustments of carrying amounts when the hedged
transaction occurs.
28
Research & Development Expenses
Research and development costs are expensed as incurred. These costs amounted to
$23,567, $20,843, and $20,120 in 1998, 1997 and 1996, respectively.
Income Taxes
A provision has not been made for U.S. or additional foreign taxes on
$220,282 of undistributed earnings of foreign subsidiaries. These earnings will
continue to be reinvested and could become subject to additional tax if they
were remitted as dividends, or lent to a U.S. affiliate, or if the Company
should sell its stock in the subsidiaries. It is not practicable to estimate the
amount of additional tax that might be payable on these undistributed foreign
earnings.
Translation of Foreign Currencies
The functional currencies of all the Company's foreign operations are the
local currencies. Assets and liabilities are translated into U.S. dollars at the
rates of exchange on the balance sheet date. Sales and expenses are translated
at the average rates of exchange prevailing during the year and the related
translation adjustments are accumulated in a separate section of stockholders'
equity. Foreign currency transaction gains and losses are reflected in income,
as a component of miscellaneous income and expense, and are not significant to
the consolidated results of operations for the years presented.
Segment Information
In 1998, the Company adopted Statement of Financial Accounting Standards
(FAS) 131, Disclosures about Segments of an Enterprise and Related Information.
FAS 131 supersedes FAS 14, Financial Reporting for Segments of a Business
Enterprise, replacing the "industry segment" approach with the "management"
approach. The management approach designates the internal organization that is
used by management for making operating decisions and assessing performance as a
source of the Company's reportable segments. FAS 131 also requires disclosures
about products and services, geographic areas, and major customers. The adoption
of FAS 131 did not affect results of operations or financial position but did
affect the disclosure of segment information in Note 15.
NOTE - 2 - ACQUISITIONS AND DISPOSITIONS
During 1998, the Company acquired a controlling interest in three companies
and increased its interest in a fourth, for approximately $20 million in cash,
and 50,000 shares of the Company's common stock (valued at approximately $1.5
million). The excess purchase price over the fair value of the net assets
acquired (goodwill) in these acquisitions was approximately $8 million and is
being amortized on a straight-line basis over 40 years. These acquisitions are
in companies that manufacture and distribute products similar to the Company's
products or supply components to the Company.
The 1998 acquisitions described above were accounted for by the purchase
method of accounting for business combinations. Accordingly, the accompanying
consolidated statements of income do not include any revenues or expenses
related to these acquisitions prior to the respective closing dates. Following
are the Company's unaudited pro forma results for 1998 and 1997 assuming the
acquisitions occurred on January 1, 1997 (in thousands, except for per share
data):
1998 1997
- ---------------------------------------------------------------------
Net Sales $740,977 $705,794
Net Income $ 61,859 $ 47,352
Net Earnings per common share:
Basic $ 1.71 $ 1.32
Diluted $ 1.68 $ 1.29
Weighted average shares outstanding:
Basic 36,073 35,988
Diluted 36,821 36,568
These unaudited pro forma results have been prepared for comparative
purposes only and may not be indicative of the results of operations which would
have actually resulted had the combinations been in effect on January 1, 1997,
or of future periods. Acquisitions and dispositions in 1997 and 1996 were not
significant.
29
Note - 3 - Financial Instruments and Risk Management
The Company has limited involvement with derivative financial
instruments and does not trade them. In accordance with the Company's policy,
derivatives may be used to manage certain interest rate and foreign exchange
exposures. The Company has a cross-currency interest rate swap to hedge an
intercompany lending transaction. This swap requires the Company to pay
principal of 37,031 French Francs plus interest at 8% and receive principal of
$7,500 plus interest at 7.08% over ten years. If the Company canceled the swap
at December 31, 1998, the Company would have received approximately $345 based
on the fair value of the swap on that date.
The Company principally used only forward exchange contracts, with
terms of less than one year, to hedge certain firm purchase and sale commitments
and intercompany cash transactions denominated in foreign currencies. The
notional value of the Company's forward exchange contracts was $24.7 million and
$20.5 million at December 31, 1998 and 1997, respectively. Deferred gains and
losses are recognized in earnings as part of the underlying transaction when the
transaction is settled. Such gains and losses were not significant to the
Company's financial results. The Company is exposed to credit-related losses in
the event of nonperformance by counter parties to financial instruments, but it
does not expect any counter parties to fail to meet their obligations. The
credit exposure of forward foreign exchange contracts is represented by the
difference between the forward contract rate and the spot rate at the time of
settlement.
Note - 4 - Inventories
At December 31, 1998 and 1997, approximately 22% and 25%,
respectively, of the total inventories are accounted for by the LIFO method. The
LIFO reserve was not material for either 1998 or 1997. Inventories consisted of:
1998 1997
- -----------------------------------------------------------------------------
Raw materials $ 35,709 $ 25,938
Work-in-process 29,441 21,920
Finished goods 35,941 31,404
-------- --------
Total $101,091 $ 79,262
======== ========
Note - 5 - Accounts Payable and Accrued Liabilities
At December 31, 1998 and 1997, accounts payable and accrued
liabilities consisted of the following:
1998 1997
- ------------------------------------------------------------------------------
Accounts payable, principally trade $ 66,086 $ 64,045
Accrued employee compensation costs 32,004 27,922
Accrued federal income taxes payable 2,017 14,292
Other accrued liabilities 30,102 16,248
-------- --------
Total $130,209 $122,507
======== ========
Note - 6 - Income Taxes
Income before income taxes consists of:
1998 1997 1996
- ------------------------------------------------------------------------------
Domestic $ 34,185 $ 22,968 $ 18,995
Foreign 65,004 55,628 41,178
-------- -------- --------
$ 99,189 $ 78,596 $ 60,173
======== ======== ========
The provision for income taxes is comprised of:
Current:
Federal $ 11,898 $ 7,977 $ 6,318
State/local 1,625 1,738 1,413
Foreign 18,089 22,378 10,745
-------- -------- --------
31,612 32,093 18,476
-------- -------- --------
Deferred:
Federal/State 254 (1,391) (946)
Foreign 6,502 1,365 5,095
-------- -------- --------
6,756 (26) 4,149
-------- --------- --------
Total $ 38,368 $ 32,067 $ 22,625
======== ======== ========
30
The difference between the actual income tax provision and the tax
provision computed by applying the statutory federal income tax rate of 35.0% in
1998, 1997 and 1996 to income before income taxes is as follows:
1998 1997 1996
- --------------------------------------------------------------------------------
Income tax at statutory rate $ 34,716 $ 27,509 $ 21,060
State income taxes, net of federal benefit 1,105 836 806
Rate differential on earnings of foreign operations 2,434 4,364 1,775
Other items, net 113 (642) (1,016)
-------- --------- ---------
Actual income tax provision $ 38,368 $ 32,067 $ 22,625
======== ======== ========
Effective income tax rate 38.7% 40.8% 37.6%
Significant deferred tax assets and liabilities as of December 31,
1998 and 1997 are comprised of the following temporary differences:
1998 1997
- ------------------------------------------------------------------------------
Deferred Tax Assets:
Net operating loss carryforwards $ 4,787 $ 6,813
Asset bases differentials 3,800 3,991
Pensions 2,428 2,037
Other 10,354 8,501
-------- --------
Total deferred tax assets 21,369 21,342
-------- --------
Deferred Tax Liabilities:
Depreciation 30,211 25,101
Leases 3,652 3,083
Other 3,453 4,022
--------- -------
Total deferred tax liabilities 37,316 32,206
--------- -------
Net deferred tax liabilities $ 15,947 $ 10,864
========= ========
The impact of changes in enacted foreign tax rates on the accounting
for deferred taxes under FAS 109 was not significant to the provision for income
taxes to the years presented above.
On December 31, 1998, the Company had federal foreign tax net
operating loss carryforwards of approximately $7,325 which have an indefinite
carryforward period and approximately $1,468 which expire in 2002 and 2003.
The Company has not provided for taxes on certain tax-deferred income
of a foreign operation. The income arose predominately from government grants.
Taxes of approximately $2,812 would become payable at the time the income is
distributed.
Note - 7 - Debt
The average annual interest rate on short-term notes payable under
unsecured lines of credit was approximately 6.0% and 5.0% for 1998 and 1997,
respectively. There are no compensating balance requirements associated with
short-term borrowings. At December 31, 1998 and 1997, the Company had an
unsecured revolving credit agreement allowing borrowings of up to $25 million.
Under this credit agreement, interest on borrowings is payable at a rate equal
to the London Interbank Offered Rate (LIBOR) plus an amount based on the
financial condition of the Company. The Company is required to pay a fee for the
unused portion of the commitment. Such payments in 1998, 1997, and 1996 were not
significant. The agreement expires on April 29, 2001. The amount used under this
agreement was $25 million and $0 at December 31, 1998, and 1997 respectively.
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, short-term obligations of $25
million have been recorded as long-term obligations as of December 31, 1998.
Short-term obligations of $21.7 million and $3.3 million of current portion of
long-term debt were reclassified as long-term obligations as of December 31,
1997.
31
The revolving credit and the senior unsecured debt agreements contain
covenants that include certain financial tests, including minimum interest
coverage, net worth and maximum borrowings.
At December 31, the Company's long-term obligations consisted of the
following:
1998 1997
- ----------------------------------------------------------------------------------------
Borrowing under revolving credit agreement 5.9%, due in 2001 $ 25,000 $ -
Notes payable 1.2% - 17.2%, due in monthly
and annual installments through 2009 15,905 6,079
Senior unsecured debt 7.08%, due in installments through 2005 25,000 25,000
Mortgages payable 2.1% - 5.9%, due in monthly
and annual installments through 2008 10,377 7,635
Industrial revenue bond, interest at 79% of prime,
(which was 6.1% and 6.6% at December 31, 1998 and 1997),
due in quarterly installments through 2001 999 1,333
Capital lease obligations 11,155 8,583
------- -------
88,436 48,630
Less current portion (7,561) (2,890)
Reclass of short-term obligations - 25,000
-------- --------
Total long-term obligations $ 80,875 $ 70,740
======== ========
Substantially all of the notes and mortgages are payable by foreign
subsidiaries to foreign banks. Interest rates on such borrowings vary due to
differing market conditions in the countries in which such debt has been
incurred. Mortgages payable are secured by the properties or assets for which
the debt was obtained. Based on the borrowing rates currently available to the
Company for long-term obligations with similar terms and average maturities, the
fair value of the Company's long-term obligations approximates its book value.
Aggregate long-term maturities, excluding capital lease obligations,
due annually for the five years beginning in 1999 are $6,032, $8,930, $33,462,
$7,615, $7,830 and $13,412 thereafter.
NOTE - 8 - LEASE COMMITMENTS
The Company leases certain warehouse, plant, and office facilities as
well as certain equipment under noncancelable operating and capital leases
expiring at various dates through the year 2013. Most of the operating leases
contain renewal options and certain equipment leases include options to purchase
during or at the end of the lease term. Amortization expense related to capital
leases is included in depreciation expense. Rent expense under operating leases
(including taxes, insurance and maintenance when included in the rent) amounted
to $5,949, $4,696 and $4,702 in 1998, 1997 and 1996, respectively.
1998 1997
- ----------------------------------------------------------------------------------------
Assets recorded under capital leases consist of:
Buildings $ 12,393 $ 9,014
Machinery and equipment 12,811 11,072
-------- --------
25,204 20,086
Accumulated depreciation (12,598) (10,054)
-------- --------
$ 12,606 $ 10,032
======== ========
32
Future minimum payments, by year and in the aggregate, under the
capital leases and noncancelable operating leases with initial or remaining
terms of one year or more consisted of the following at December 31, 1998:
Capital Operating
Leases Leases
- -------------------------------------------------------------------------------
1999 $ 2,353 $ 5,713
2000 2,133 3,451
2001 1,961 2,564
2002 1,717 2,153
2003 1,502 1,736
Subsequent to 2003 5,173 4,254
-------- --------
Total minimum lease payments $ 14,839 $ 19,871
-------- ========
Amounts representing interest 3,684
Present value of future minimum lease payments 11,155
Less amount due in one year (1,529)
--------
$ 9,626
========
Note - 9 - Retirement and Deferred Compensation Plans
The Company has various noncontributory retirement plans covering
certain of its domestic and foreign employees. Benefits under the Company's
retirement plans are based on participants' years of service and annual
compensation as defined by each plan. Annual cash contributions to fund pension
costs accrued under the Company's domestic plans are generally equal to the
minimum funding amounts required by ERISA while pension commitments under its
foreign plans are partially offset by the cash surrender value of insurance
contracts purchased by the Company. Changes in the benefit obligation and plan
assets of the Company's domestic and foreign plans are as follows:
1998 1997
- --------------------------------------------------------------------------------
Change in benefit obligation:
Benefit obligation at beginning of year $ 22,424 $ 20,761
Service cost 2,319 1,276
Interest cost 1,506 1,360
Actuarial loss 2,224 864
Benefits paid (799) (634)
Foreign currency translation adjustment 654 (1,203)
-------- --------
Benefit obligation at end of year $ 28,328 $ 22,424
-------- --------
Change in plan assets:
Fair value of plan assets at beginning of year $ 18,194 $ 15,418
Actual return on plan assets (767) 2,472
Employer contribution 1,164 1,147
Benefits paid (799) (634)
Foreign currency translation adjustment 98 (209)
-------- --------
Fair value of plan assets at end of year $ 17,890 $ 18,194
-------- --------
Funded status $(10,438) $ (4,230)
Unrecognized net actuarial loss / (gain) 2,810 (2,774)
Unrecognized prior service cost 472 492
Unamortized net transition asset (244) (423)
-------- --------
Accrued benefit cost included in the balance sheet $ (7,400) $ (6,935)
======== ========
33
1998 1997 1996
- ------------------------------------------------------------------------------
Components of net periodic benefit cost:
Service cost $ 2,319 $ 1,276 $ 1,297
Interest cost 1,506 1,360 1,335
Expected return on plan assets (1,435) (1,246) (1,172)
Net amortized and deferred gains and losses (103) (171) (114)
------- ------- -------
Net periodic benefit cost $ 2,287 $ 1,219 $ 1,346
======= ======= =======
Plan assets primarily consist of U.S. government obligations,
investment grade corporate bonds and common and preferred stocks for the
domestic plans and insurance contracts for the foreign plans. The projected
benefit obligation for domestic plans was determined using assumed discount
rates of 6.75% and 7.25% in 1998 and 1997, respectively. For the foreign plans,
the projected benefit obligation was determined using an assumed discount rate
of 5.5% and 6.0% in 1998 and 1997, respectively. The assumed rates of increase
in compensation used in 1998 and 1997 were 4.75% and 5.0%, respectively, for the
domestic plans and 3.0% and 4.0%, respectively, for the foreign plans. The
expected long-term rate of return on plan assets was 8.25% and 8.5% in 1998 and
1997, respectively, for the domestic plans and 6.0% in 1998 and 1997 for the
foreign plans.
The Company has a non-qualified supplemental pension plan which
provides for pension amounts that would have been payable from the Company's
principal pension plan if it were not for limitations imposed by income tax
regulations. The liability for this plan was $378 and $277 at December 31, 1998
and 1997, respectively. This amount is included in the liability for domestic
plans shown above.
The Company also has unfunded retirement compensation arrangements
with certain employees. The cost of these retirement agreements is provided
currently as it relates to prior service agreements and ratably over the
employees' future employment as it applies to future service agreements. The
Company has no additional postretirement or postemployment benefit plans.
Note - 10 - 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 - 11 - Lawsuit Settlements
During 1998, the Company recorded approximately $9.9 million in
settlements of patent infringement lawsuits. The most significant settlement is
attributed to a favorable judgement in a lawsuit relating to an aerosol valve
component that was recorded in the fourth quarter of 1998. Diluted earnings per
share was positively impacted in 1998 by $.16 per share related to these lawsuit
settlements.
34
NOTE - 12 - PREFERRED STOCK PURCHASE RIGHTS
The Company has a preferred stock purchase rights plan (the "Rights
Plan") and each share of common stock has one preferred share purchase right (a
"Right"). Under the terms of the Rights Plan, if a person or group, other than
certain exempt persons, acquires 15% or more of the outstanding common stock,
each Right will entitle its holder (other than such person or members of such
group) to purchase, at the Right's then current exercise price, a number of
shares of the Company's common stock having a market value of twice such price.
In addition, under certain circumstances if the Company is acquired in a merger
or other business combination transaction, each Right will entitle its holder to
purchase, at the Right's then current exercise price, a number of the acquiring
company's common shares having a market value of twice such price.
Each Right entitles the holder under certain circumstances to buy one
two-thousandths of a share of Series A junior participating preferred stock, par
value $.01 per share, at an exercise price of $35. Each share of Series A
junior participating preferred stock will entitle its holder to 2,000 votes and
will have a minimum preferential quarterly dividend payment equal to the greater
of $10 per share or 2,000 times the amount paid to holders of common stock.
Currently 45 thousand shares of Series A junior participating preferred stock
have been reserved. The Rights will expire on April 6, 2003 unless previously
exercised or redeemed at the option of the Board of Directors for $.005 per
Right.
NOTE - 13 - STOCK BASED COMPENSATION
At December 31, 1998, the Company has four fixed stock-based
compensation plans which are discussed below. The Company follows APB Opinion
No. 25 and the related Interpretations in accounting for its stock option plans.
Accordingly, no significant compensation cost has been recognized for its stock
awards. Had compensation cost for the Company's stock awards plans been recorded
based on the fair value at the grant dates, consistent with the method of FAS
123, the Company's net income and earnings per share would have been reduced to
the pro forma amounts indicated below.
1998 1997 1996
- ----------------------------------------------------------------------------
Net Income
As Reported $ 60,821 $ 46,529 $ 37,548
Pro Forma $ 58,987 $ 45,343 $ 36,814
Basic Earnings per Share
As Reported $ 1.69 $ 1.29 $ 1.05
Pro Forma $ 1.64 $ 1.26 $ 1.03
Diluted Earnings per Share
As Reported $ 1.65 $ 1.27 $ 1.03
Pro Forma $ 1.60 $ 1.24 $ 1.01
The fair value of stock options granted under the 1996 and 1992 Stock
Awards Plans (collectively, the "Stock Awards Plans") was $9.87 and $6.99 per
share in 1998 and 1997, respectively. These values were estimated on the date of
the grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions for 1998 and 1997, respectively: dividend yield of
.7% for 1998 and .8% for 1997, expected volatility of 26.1% for both years,
risk-free interest rate of 5.6% and 6.5% and an expected life of 7.5 years for
both years. The fair value of stock options granted under the Director Stock
Option Plans in 1998 and 1997 was $13.10 and $8.82 per share. This value was
estimated on the date of the grant using the Black-Scholes option-pricing model
with the following weighted-average assumptions for 1998 and 1997: dividend
yield of .6% and .8%, expected volatility of 25.8% and 26.0%, risk-free interest
rate of 5.7% and 6.7% and an expected life of 7.5 years for both years. The pro
forma amounts reflected above are not likely to be representative of the pro
forma amounts in future years due to the FAS 123 transition rules which require
pro forma disclosure only for awards granted after 1994, although the Company
granted stock options in both 1994 and 1993.
Under the Stock Awards Plans, the Company may grant stock options,
stock appreciation rights, restricted stock and other stock awards to employees.
The combined maximum number of shares which may be issued under these plans is 4
million. Options granted under these plans become exercisable annually over a
three year period and expire ten years after the grant date. Director Stock
Option Plans provide for the award of stock options to non-employee Directors
who have not previously been awarded options. The combined maximum number of
shares subject to options under these plans is 160 thousand. Options granted
under these plans become exercisable over a three year period and expire ten
years after the grant date.
35
A summary of the status of the Company's stock option plans as of
December 31, 1998, 1997 and 1996, and changes during the years ending on those
dates is presented below.
Director Stock
Stock Awards Plans Option Plans
--------------------------- ------------------------
Option Price Option Price
Option Shares Shares Per Share Shares Per Share
- ------------------------------------------------------------------------------------------
Outstanding, January 1, 1996 1,285,034 $ 9.19-$ 17.75 38,000 $ 9.19
Granted 327,600 $ 18.00 -
Exercised (46,180) $ 9.19-$ 13.38 (2,000) $ 9.19
Canceled (5,710) $ 9.19-$ 18.00 -
--------- ------
Outstanding, December 31, 1996 1,560,744 $ 9.19-$ 18.00 36,000 $ 9.19
Granted 366,500 $ 16.81-$ 28.00 56,000 $ 20.88
Exercised (70,536) $ 9.19-$ 18.00 (4,000) $ 9.19
Canceled (15,576) $ 13.38-$ 18.00 -
--------- ------
Outstanding, December 31, 1997 1,841,132 $ 9.19-$ 28.00 88,000 $ 9.19-$ 20.88
Granted 533,500 $ 24.91 6,000 $ 32.38
Exercised (64,950) $ 9.19-$ 18.00 (6,000) $ 9.19
Canceled (19,794) $ 9.19-$ 18.00 (4,000) $ 20.88
--------- ------
Outstanding, December 31, 1998 2,289,888 $ 9.19-$ 28.00 84,000 $ 9.19-$ 32.38
========= ======
Options Exercisable at 12/31/96 892,010 36,000
Options Exercisable at 12/31/97 1,147,390 46,000
Options Exercisable at 12/31/98 1,426,752 55,500
Available for future grants
12/31/96 2,371,170 80,000
12/31/97 2,019,184 24,000
12/31/98 1,497,378 22,000
The following table summarizes information about stock options outstanding
at December 31, 1998:
Options Outstanding Options Exercisable
---------------------------------------------------------------------------
Weighted-
Shares Average Weighted- Shares Weighted-
Year Outstanding Remaining Average Exercisable Average
Granted at Year-end Life Exercise Price at Year-end Exercise Price
- ----------------------------------------------------------------------------------------------------------
Stock Awards Plan
1993 518,286 4.5 $ 9.19 518,286 $ 9.19
1994 240,978 5.1 10.31 240,978 10.31
1995 347,386 6.1 13.63 347,386 13.63
1996 305,636 7.1 18.00 203,338 18.00
1997 351,502 8.1 16.84 116,764 16.84
1998 526,100 9.1 24.91 -
--------- ---------
2,289,888 6.8 15.94 1,426,752 12.34
========= =========
Director Stock Options Plan
1993 26,000 4.4 $ 9.19 26,000 $ 9.19
1997 52,000 8.4 20.88 28,000 20.88
1998 6,000 9.4 32.38 1,500 32.38
--------- ---------
84,000 7.3 18.07 55,500 15.71
========= =========
Restricted stock totaling 8,100 shares in 1998, 1,062 shares in 1997 and
3,592 shares in 1996 were issued under the Stock Awards Plans. These shares vest
equally over three years and do not have voting or dividend rights prior to
vesting. Amounts available for future stock option grants under the Stock Awards
Plans have been reduced by restricted stock awards.
36
Note - 14 - Earnings Per Share
The reconciliations of basic and diluted earnings for the years
ending December 31, 1998, 1997 and 1996 are as follows:
Income Shares Per Share
(Numerator) (Denominator) Amount
- -----------------------------------------------------------------------------
For the Year Ended December 31, 1998
Basic EPS
Income available to common stockholders $ 60,821 36,051 $ 1.69
========
Effect of Dilutive Securities
Stock options - 748
-------- --------
Diluted EPS
Income available to common stockholders $ 60,821 36,799 $ 1.65
======== ======== ========
For the Year Ended December 31, 1997
Basic EPS
Income available to common stockholders $ 46,529 35,938 $ 1.29
========
Effect of Dilutive Securities
Stock options - 580
-------- --------
Diluted EPS
Income available to common stockholders $ 46,529 36,518 $ 1.27
======== ======== ========
For the Year Ended December 31, 1996
Basic EPS
Income available to common stockholders $ 37,548 35,878 $ 1.05
========
Effect of Dilutive Securities
Stock options - 684
-------- --------
Diluted EPS
Income available to common stockholders $ 37,548 36,562 $ 1.03
======== ======== ========
Note - 15 - 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 involve similar production processes, sell to similar classes
of customers and markets, use the same methods to distribute their products and
operate in similar regulatory environments. Management believes it operates in
one segment as defined by FAS 131.
37
The following are sales and long-lived asset information by geographic
area and product information for the years ended December 31, 1998, 1997 and
1996:
Geographic Information
Sales to
Unaffiliated Long-Lived
Customers(a) Assets
- -----------------------------------------------------------------------------
1998
United States $271,960 $ 97,325
Europe:
France 172,739 105,225
Germany 89,004 104,197
Italy 63,109 55,700
Other Europe 79,440 24,289
-------- --------
Total Europe 404,292 289,411
Other Foreign Countries 37,254 10,253
-------- --------
Total $713,506 $396,989
======== ========
1997
United States $263,589 $ 89,586
Europe:
France 148,003 81,449
Germany 82,498 84,136
Italy 63,090 44,975
Other Europe 65,153 17,685
-------- --------
Total Europe 358,744 228,245
Other Foreign Countries 33,057 6,847
-------- --------
Total $655,390 $324,678
======== ========
1996
United States $233,329 $ 84,727
Europe:
France 144,644 91,398
Germany 92,623 93,563
Italy 58,126 37,918
Other Europe 60,306 18,336
-------- --------
Total Europe 355,699 241,215
Other Foreign Countries 26,780 4,537
-------- --------
Total $615,808 $330,479
======== ========
(a) Sales are attributed to countries based upon where sales to
unaffiliated customers are invoiced.
Product Information
1998 1997 1996
- ----------------------------------------------------------------------------
Pumps $430,827 $390,467 $386,746
Closures 155,243 127,037 109,687
Valves 113,908 124,405 102,368
Other 13,528 13,481 17,007
-------- -------- --------
Total $713,506 $655,390 $615,808
======== ======== ========
38
NOTE - 16 - QUARTERLY DATA (UNAUDITED)
Quarterly results of operations and per share information for the years
ended December 31, 1998 and 1997 are as follows:
Quarter
----------------------------------------------- Total
First Second Third Fourth For Year
- -------------------------------------------------------------------------------------------------------------
Year Ended December 31, 1998
Net sales $170,942 $181,752 $182,692 $178,120 $713,506
Gross profit $ 51,312 $ 55,211 $ 56,246 $ 54,316 $217,085
Net income $ 13,181 $ 14,264 $ 14,518 $ 18,858 $ 60,821
Per Common Share - 1998
Net income
Basic $ .37 $ .40 $ .40 $ .52 $ 1.69
Diluted $ .36 $ .39 $ .39 $ .51 $ 1.65
Dividends paid $ .04 $ .04 $ .04 $ .04 $ .16
Stock price high $ 31.81 $ 32.94 $ 33.44 $ 30.13 $ 33.44
Stock price low $ 23.97 $ 28.00 $ 21.75 $ 19.69 $ 19.69
Average number of basic shares outstanding 35,992 36,024 36,087 36,098 36,051
Average number of diluted shares outstanding 36,716 36,852 36,867 36,773 36,799
Year Ended December 31, 1997
Net sales $158,290 $171,811 $163,525 $161,764 $655,390
Gross profit $ 45,600 $ 49,254 $ 47,888 $ 47,339 $190,081
Net income $ 11,413 $ 12,081 $ 12,474 $ 10,561 $ 46,529
Per Common Share - 1997
Net income
Basic $ .32 $ .34 $ .35 $ .29 $ 1.29
Diluted $ .31 $ .33 $ .35 $ .29 $ 1.27
Dividends paid $ .035 $ .035 $ .04 $ .04 $ .15
Stock price high $ 20.31 $ 22.94 $ 29.56 $ 29.56 $ 29.56
Stock price low $ 16.38 $ 17.56 $ 22.25 $ 25.22 $ 16.38
Average number of basic shares outstanding 35,908 35,922 35,950 35,972 35,938
Average number of diluted shares outstanding 36,300 36,476 36,626 36,682 36,518
NOTE - 17 - SUBSEQUENT EVENTS
On February 17, 1999, the Company acquired Emson Research, Inc. and related
companies (Emson) for approximately $123 million in cash and $4 million in
shares of the Company's stock. Approximately $23 million of debt was assumed in
the transaction. This acquisition was primarily funded through short-term
borrowings, although the Company anticipates incurring long-term obligations in
1999 to replace all or part of the short-term borrowings associated with the
acquisition. Emson is a leading supplier of perfume pumps in the North American
market and also maintains a significant position in the North American personal
care and food pump markets. Emson is also present in certain international
markets, principally in Europe. Emson sales for 1998 was approximately $85
million. This acquisition was accounted for under the purchase method of
accounting.
39
Report of Independent Accountants
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF APTARGROUP, INC.
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of income, of cash flows and of changes in
equity present fairly, in all material respects, the financial position of
AptarGroup, Inc. and its subsidiaries at December 31, 1998 and 1997 and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1998 in conformity with generally accepted
accounting principles. These financial statements are the responsibility of
AptarGroup, Inc.'s management; our responsibility is to express an opinion on
these financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
--------------------------
Chicago, Illinois
February 18, 1999
Management's Responsibility for Financial Statements
The financial statements of AptarGroup, Inc. and its consolidated
subsidiaries, and all other information presented in this Annual Report, are the
responsibility of the management of the Company. These statements have been
prepared in accordance with generally accepted accounting principles
consistently applied and reflect in all material respects the substance of
events and transactions that should be included.
Management is responsible for the accuracy and objectivity of the financial
statements, including estimates and judgments reflected therein, and fulfills
this responsibility primarily by establishing and maintaining accounting systems
and practices adequately supported by internal accounting controls. Management
believes that the internal accounting controls in use are satisfactory to
provide reasonable assurance that the Company's assets are safeguarded, that
transactions are executed in accordance with management's authorizations, and
that the financial records are reliable for the purpose of preparing financial
statements.
Independent accountants were selected by the Board of Directors, upon the
recommendation of the Audit Committee, to audit the financial statements in
accordance with generally accepted auditing standards. Their audits include a
review of internal accounting control policies and procedures and selected tests
of transactions.
The Audit Committee of the Board of Directors, which consists of two
directors who are not officers or employees of the Company, meets regularly with
management and the independent accountants to review matters relating to
financial reporting, internal accounting controls, and auditing. The independent
accountants have unrestricted access to the Audit Committee.
/s/ Carl A. Siebel /s/ Stephen J. Hagge
CARL A. SIEBEL STEPHEN J. HAGGE
President and Chief Executive Officer Executive Vice President and
Chief Financial Officer,
Secretary and Treasurer
40
Five Year Summary of Selected Financial Data
(In millions of dollars, except per share data)
Year Ended December 31, 1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------
Statement of Income Data:
Net Sales $713.5 $655.4 $615.8 $557.5 $474.3
Cost of Sales 444.6 418.1 399.7 358.4 301.5
% Of Net Sales 62.3% 63.8% 64.9% 64.3% 63.6%
Selling, Research & Development, and Administrative 119.3 108.4 104.3 96.2 85.7
% of Net Sales 16.7% 16.5% 16.9% 17.3% 18.1%
Depreciation and Amortization 54.4 49.9 47.9 43.5 38.4
% of Net Sales 7.6% 7.6% 7.8% 7.8% 8.1%
Operating Income 95.2 79.0 64.0 59.3 48.7
% of Net Sales 13.3% 12.1% 10.4% 10.6% 10.2%
Net Income 60.8 46.5 37.5 35.7 27.3
% of Net Sales 8.5% 7.1% 6.1% 6.4% 5.7%
Net Income, excluding effect of lawsuit settlements 54.7 46.5 37.5 35.7 27.3
% of Net Sales 7.7% 7.1% 6.1% 6.4% 5.7%
Per Common Share:
Net Income
Basic 1.69 1.29 1.05 1.00 0.83
Diluted 1.65 1.27 1.03 0.99 0.82
Diluted, excluding effect of lawsuit settlements 1.49 1.27 1.03 0.99 0.82
Cash Dividends Declared 0.16 0.15 0.14 0.13 0.115
Balance Sheet and Other Data:
Capital Expenditures $ 79.8 $ 71.2 $ 62.8 $ 55.5 $ 41.9
Total Assets 714.7 585.4 576.1 559.2 465.4
Long-Term Obligations 80.9 70.7 76.6 80.7 53.8
Stockholders' Equity 415.5 342.1 335.7 312.3 270.6
Interest Bearing Debt to Total Capitalization 22.1% 17.7% 21.1% 23.8% 19.2%
Net Debt to Total Net Capitalization (1) 18.3% 14.0% 18.0% 20.5% 14.0%
(1) Net Debt is debt less cash and cash equivalents. Net Capitalization is
Stockholder's Equity plus Net Debt.
41
Management's Discussion and Analysis of Consolidated Results
of Operations and Financial Condition
Results of Operations
The following table sets forth, for the periods indicated, the percentage
relationship of certain items to net sales.
Year Ended December 31, 1998 1997 1996
- -----------------------------------------------------------------------------
Net sales 100.0% 100.0% 100.0%
Cost of sales 62.3 63.8 64.9
Selling, research & development, and administrative 16.7 16.5 16.9
Depreciation and amortization 7.6 7.6 7.8
----- ----- -----
Operating income 13.4 12.1 10.4
Other income (expenses), net 0.5 (0.1) (0.6)
----- ----- -----
Income before income taxes 13.9 12.0 9.8
Provision for income taxes 5.4 4.9 3.7
----- ----- -----
Net income 8.5% 7.1% 6.1%
===== ===== =====
1998 Compared to 1997
Net sales in 1998 totaled $713.5 million, an increase of 8.9% when compared
to net sales of $655.4 million in 1997. Sales were negatively affected by the
translation of AptarGroup's foreign sales due to the stronger U.S. dollar
relative to 1997. If the U.S. dollar exchange rates had not changed from year to
year, net sales for 1998 would have increased approximately 10%. More than half
of the increase (approximately 56%), is attributed to increased volume of the
Company's major product lines in all the markets it serves except for aerosol
valve sales in the U.S. to the personal care and household markets, and pump
sales worldwide to the low to mid-priced fragrance/cosmetics market. The
remainder of the increase is due to sales from acquisitions completed in 1998.
European sales represented approximately 57% of the Company's total sales
compared to 55% in 1997. U.S. sales represented approximately 38% of the
Company's total sales compared to 40% in 1997. Sales from other foreign
operations represented 5% of the Company's total sales in both 1998 and 1997.
Cost of sales as a percent of net sales decreased in 1998 to 62.3% compared
to 63.8% in 1997. The decrease is attributed to the mix of products sold and
cost savings. The impact of changes in raw material costs, including plastic
resin and metal, in 1998 was not significant.
Selling, research & development, and administrative ("SG&A") increased as a
percent of sales in 1998 to 16.7% from 16.5% in 1997. The increase is due to
increased spending on research and development projects and an increase in
information technology expenses related to the Euro introduction and
implementation of new enterprise software systems at two major operations.
Depreciation and amortization represented 7.6% of sales for both 1998 and
1997.
Operating income increased to $95.2 million compared to $79.0 million in
1997, primarily due to the product mix and cost savings mentioned above. The
impact on operating income due to the slightly stronger U.S. dollar in 1998 was
insignificant.
Operating income from European operations (excluding corporate expenses)
represented 76% and 74% of total operating income in 1998 and 1997,
respectively. Operating income in 1998 from U.S. operations (excluding corporate
expenses) represented 37% of total operating income compared to 41% in 1997. The
increase in the percentage of operating income attributable to European
operations was primarily due to the mix of products sold. The reconciling
difference between European and U.S. operating income to total operating income
is income from other foreign operations, corporate expenses and inter-geographic
consolidated eliminations.
Net other income (expenses) increased to $4.0 million income in 1998 from
($0.4 million) expense in 1997. The significant change in net other income
(expense) is due to approximately $9.9 million in favorable lawsuit settlements
received in 1998. These favorable lawsuit settlements were offset by a decrease
of $1.8 million in income of affiliates due to the consolidation in 1998 of two
subsidiaries in which the Company purchased majority interests during the year.
These subsidiaries were previously recorded on the equity method of accounting.
In addition, $2.5 million in net foreign currency transaction losses from 1997
to 1998 also offset the favorable settlements. The net realized transaction
losses are primarily due to the U.S. dollar weakening against the major European
currencies in the second half of the year.
42
The effective income tax rate decreased to 38.7% in 1998 from 40.1% in
1997. The 1997 effective tax rate includes an adjustment to the balance of
deferred taxes due to the increase in the French corporate tax rate in 1997.
This adjustment did not reoccur in 1998. In addition, the ongoing
rationalization of tax rates combined with the mix of income earned also helped
contribute to the decrease in the effective tax rate. The Company expects the
effective tax rate for 1999 to be in the range of 36% to 37%.
Net income increased 30.7% to $60.8 million in 1998 compared to $46.5
million in 1997. This increase includes the effect of the lawsuit settlements
mentioned above. Excluding the lawsuit settlements, net income increased 18% to
$54.7 million compared to the $46.5 million recorded in 1997. The increase in
net income excluding the lawsuit settlements is primarily due to the increase in
sales volume, a better mix of products sold, and cost savings efforts.
1997 COMPARED TO 1996
Net sales in 1997 totaled $655.4 million, an increase of 6.4% when compared
to net sales of $615.8 million in 1996. Sales were negatively affected by the
translation of AptarGroup's foreign sales due to the stronger U.S. dollar
relative to 1996. If the U.S. dollar exchange rates had not changed from year to
year, net sales for 1997 would have increased approximately 15%. The increase in
sales is primarily attributed to increased volume of the Company's major product
lines despite a competitive pricing environment. European sales represented
approximately 55% of the Company's total sales compared to 58% in 1996. U.S.
sales represented approximately 40% of the Company's total sales compared to 38%
in 1996. Sales from other foreign operations represented 5% of the Company's
total sales compared to 4% in 1996.
Cost of sales as a percent of net sales decreased in 1997 to 63.8% compared
to 64.9% in 1996. The decrease is attributed to the mix of products sold, cost
savings and a net gain from changes in exchange rates on inter-country
transactions. The impact of changes in raw material costs, including plastic
resin and metal, in 1997 was not significant.
SG&A increased to $108.4 million compared to $104.3 million in 1996. SG&A
decreased as a percent of sales to 16.5% in 1997 from 16.9% in 1996 due to sales
growing at a faster pace than SG&A expenses.
Depreciation and amortization expenses increased to $49.9 in 1997 from
$47.9 million in 1996. As a percent of sales, depreciation and amortization
decreased to 7.6% in 1997 from 7.8% in 1996.
Operating income increased to $79.0 million compared to $64.0 million in
1996. Operating income was favorably impacted in 1997 by approximately $4.3
million of a net gain due to favorable changes in exchange rates between
comparable periods on various inter-country transactions, partially offset by
the adverse effect of the stronger U.S. dollar on the translation of foreign
denominated results.
During 1997, the Company began production in China. Due to underutilization
of overheads during this first year of production, operating income was
adversely affected by $1.2 million.
Operating income from European operations (excluding corporate expenses)
represented 74% and 68% of total operating income in 1997 and 1996,
respectively. Operating income in 1997 from U.S. operations (excluding corporate
expenses) represented 41% of total operating income compared to 44% in 1996. The
increase in the percentage of operating income attributable to European
operations was primarily due to the mix of products sold and the net gain from
changes in exchange rates. The reconciling difference between European and U.S.
operating income to total operating income is income from other foreign
operations, corporate expenses and inter-geographic consolidated eliminations.
Net other expenses decreased to $0.4 million in 1997 from $3.8 million in
1996. The decrease is primarily attributable to increased income from equity
investments in affiliates coupled with lower net interest expense.
The effective income tax rate increased to 40.8% in 1997 from 37.6% in
1996. The increased effective tax rate is primarily due to an increased
corporate tax rate in France combined with the mix of income earned. During the
fourth quarter of 1997, the French government increased the French corporate tax
rate by 5 percentage points, from 36.7 to 41.7 percent, retroactive to the
beginning of the year. This increased income tax expense for the year by
approximately $1.8 million, which was recorded in the fourth quarter. Had the
French tax increase been passed at the beginning of 1997, income taxes for each
quarter would have increased by approximately $0.4 million. The remainder
relates to an adjustment to the balance of deferred taxes at the beginning of
the year which will not recur in 1998. The increased French tax rate will
continue in 1998. The Company expects the effective tax rate for 1998 to be in
the range of 40.0% to 40.5%.
Net income increased 24% to $46.5 million in 1997 compared to $37.5 million
in 1996. The increase in net income is primarily due to higher sales volume and
cost containment efforts.
FOREIGN CURRENCY
A significant portion of the Company's operations is located outside of the
United States. Because of this, movements in exchange rates may have a
significant impact on the translation of the financial conditions and results of
operations of AptarGroup's foreign entities. The Company's significant foreign
exchange exposures are to the major currencies which are now part of the Euro
(the Italian Lira, French Franc and German Mark). 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.
43
The table below provides information as of December 31, 1998 about the
Company's forward currency exchange contracts. All the contracts expire before
the end of the second quarter of 1999.
Average
Contractual
Buy/Sell Contract Amount Exchange Rate
- --------------------------------------------------------------------------------
FRF/USD $ 13,400 5.59
LIRE/FRF 4,286 295.33
LIRE/USD 2,600 1,611.80
FRF/GBP 1,810 9.65
DM/USD 1,318 1.65
FRF/YEN 998 0.0453
The Company is also party to certain smaller contracts to buy or sell
various other currencies (principally European and Australian) that had an
aggregate contract amount of approximately $0.3 million as of December 31, 1998.
All forward exchange contracts outstanding as of December 31, 1997 had an
aggregate contract amount of $20.5 million.
The Company has a cross-currency interest rate swap to hedge an
intercompany lending transaction. This swap requires the Company to pay
principal of 37,031 French Francs plus interest at 8% and receive principal of
$7,500 plus interest at 7.08% over ten years. If the Company canceled the swap
at December 31, 1998, the Company would have received approximately $345 based
on the fair value of the swap on that date.
The table below presents the cash flows in both foreign currency and U.S.
dollars that are expected to be exchanged over the duration of the contract.
1999 2000 2001 2002 2003 Thereafter
- -------------------------------------------------------------------------------
Pay FRF FRF 8,253 7,822 7,400 6,992 6,560 11,850
Receive USD $1,602 1,525 1,450 1,377 1,299 2,370
Additionally, in some cases, the Company sells products denominated in a
currency different from the currency for which the respective costs are
incurred. Changes in exchange rates on such inter-country sales impacts the
Company's results of operations.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company has generated positive cash flows from
operations. During 1998, the Company utilized the majority of such cash flows to
finance capital expenditures and acquisitions. Net cash provided by operations
was $85.0 million, $86.2 million, and $67.3 million during 1998, 1997 and 1996,
respectively. In each of these years, cash flow from operations was primarily
derived from earnings before depreciation and amortization and from changes in
working capital. Cash and equivalents were $25.2 million at December 31, 1998
versus $17.7 million at December 31, 1997 and $16.4 million at December 31,
1996.
Working capital increased to $149.2 million at December 31, 1998 compared
to $130.8 million and $121.0 million at December 31, 1997 and 1996,
respectively. The increase in working capital in 1998 and 1997 was primarily due
to an increase in accounts receivable and inventory, the majority of which was
due to acquisitions the Company made in 1998.
Net cash used by investing activities totaled $98.9 million, $69.7 million,
and $59.2 million for the years ended December 31, 1998, 1997 and 1996,
respectively. The increase between 1997 and 1998 is primarily due to
acquisitions completed in 1998 of $20.0 million and an increase in capital
expenditures of $8.6 million. Capital expenditures were $79.8 million, $71.2
million, and $62.8 million for the years ended December 31, 1998, 1997 and 1996,
respectively. Cash outlays for capital expenditures for 1999 are estimated to be
approximately $85 million before any effects of acquisitions made in 1999.
Net cash provided (used) by financing activities was $20.4 million, $(13.0)
million, and $(8.6) million for the years ended December 31, 1998, 1997 and
1996, respectively. The net cash provided by financing activities was used to
help fund acquisitions completed during 1998. The Company's total interest
bearing debt net of cash to total capitalization net of cash ratio was 18.3% and
14.0% as of December 31, 1998 and 1997, respectively. For each of these years,
the majority of debt was denominated in foreign currency. AptarGroup has
historically borrowed locally to hedge potential currency fluctuation for assets
that were purchased outside of the United States. It is expected that this
practice will continue.
At December 31, 1998 and 1997, the Company had an unsecured revolving
credit agreement allowing borrowings of up to $25 million. This agreement
expires in April, 2001 and the Company had borrowed the full $25 million against
this agreement at December 31, 1998. The Company had no borrowings outstanding
against this agreement at December 31, 1997.
44
On February 17, 1999, the Company acquired Emson Research, Inc. and related
companies (Emson) for approximately $123 million in cash and $4 million of the
Company's stock. Approximately $23 million of debt was assumed in the
transaction. This acquisition was funded through short-term borrowings, although
the Company anticipates incurring long-term obligations in 1999 to replace all
or part of the short-term borrowings associated with the acquisition. Emson is a
leading supplier of perfume pumps in the North American market and also
maintains a significant position in the North American personal care and food
pump markets.
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 generally been reinvested locally. While
management currently intends to reinvest such cash from foreign operations, the
timing of the decision to transfer such cash to the U.S. 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.
OUTLOOK
A general slowdown in the demand for pumps for the low to mid-priced
fragrance/cosmetics market occurred in the second half of 1998. This slowdown is
principally attributed to the impact of both the Russian and Asian crises
experienced in 1998. This slowdown has continued into 1999. It is anticipated
that this sector of the fragrance/cosmetics market will experience some recovery
in the second half of the year, but no assurance can be given in that respect.
Should the slowdown continue longer than expected, it may start to have a
negative impact on the results of the Company.
Over the past few years, a consolidation of the Company's customer base has
occurred. This trend is expected to continue. A concentration of customers may
result in additional price pressure or loss of volume. This situation also
presents opportunities for increasing sales due to the breadth of the Company's
product line and its international presence.
The Company's net income could be affected by increases in raw material
costs. The Company will attempt to offset inflation through cost containment and
increased selling prices over time, as allowed by market conditions.
As the Company expands geographically, particularly into Asia and South
America, investments may be made in countries that may not be as politically
stable as the U.S. or the western European countries in which the Company
primarily had operations at the end of 1998. The Company intends to monitor its
exposure in these other countries to minimize risk.
The European Community introduced a common European monetary unit called
the Euro effective January 1, 1999. While the Euro has had significant
accounting and systems impacts, the introduction has not had a material effect
on the results of operations. As more customers and suppliers become more
comfortable in working with the single currency in the future, the Euro could
have impacts on pricing and costs. The Company believes that any negative impact
coming from pricing will be more than offset by the increase in consumer demand
that a stronger European Community will bring in the future.
The Company could experience an increase in the level of customer orders in
the second half of 1999 if certain customers desire to increase their inventory
levels relating to Year 2000 concerns.
YEAR 2000
As many computer systems and other equipment with embedded chips or
processors (collectively, "Enterprise Systems") use only two digits to represent
the year, they may be unable to process accurately certain data before, during
or after the year 2000. This is commonly known as the Year 2000 ("Y2K") issue.
The Y2K issue can arise at any point in an entity's supply, manufacturing,
processing, distribution, and financial chains.
The Company has implemented a Y2K readiness program with the objective of
having all of the significant Enterprise Systems, including those that affect
facilities and manufacturing activities, functioning properly with respect to
the Y2K issue before January 1, 2000. The Company has established standardized
planning, assessment and progress documentation as well as set critical
deadlines that apply to all significant subsidiaries.
In order to address the Y2K issue, the Company has developed and
implemented a five-phase readiness program which is comprised of 1) planning, 2)
assessment, 3) renovation/replacement, 4) testing/validation, and 5) contingency
planning. The Company has completed the planning and assessment phases of the
program. Currently, the Company is in the process of completing the
renovation/replacement phase and has begun the testing/validation phase. While
the Company intends to carry out contingency planning actions throughout the
duration of the Y2K preparation process, the Company's objective is to complete
the testing/validation of all significant Enterprise Systems by the end of the
first quarter of 1999. Though certain systems may require additional
modification after the first quarter of 1999, the Company believes that these
systems will be fully Y2K ready by the end of 1999. However, as part of the
Company's Y2K readiness program, contingency plans are required for any
significant Enterprise System that, for any reason, cannot be tested and
successfully validated by the end of the first quarter of 1999.
The different phases of the program address the potential Y2K risk that
could be found in the following five functional areas: 1) business applications
(hardware and software), 2) production equipment, 3) facility systems, 4)
communication infrastructure and 5) vendor/customer management.
45
Although the Company has a significant number of key business partners,
including suppliers and customers, the Company does not currently anticipate any
material disruption in its business due to supplier or customer Y2K issues. More
specifically, the Company, through the current stage of its Y2K program, has not
received any information that would lead it to believe that any significant
supplier or customer will suffer business interruption due to Y2K issues to a
degree that would materially affect the Company's ability to conduct business.
Concurrently with the Y2K readiness measures described above, the Company
is developing contingency plans intended to mitigate the possible disruption in
business operations that may result from the Y2K issue, and is developing cost
estimates for such plans. Once developed, contingency plans and related cost
estimates will be continually refined, as additional information becomes
available. Contingency plans may include increasing inventory levels, securing
alternate sources of supply, adjusting facility shut-down and start-up schedules
and other appropriate measures.
To date, the Company has not incurred any material costs related to the
different phases of its Y2K program. The current estimated costs of the project
are based on management's estimates, which were derived utilizing numerous
assumptions of future events including the continued availability of certain
resources, third party modification plans and other factors. However, there can
be no guarantee that these estimates will be achieved and actual results could
differ significantly from those planned. Based on management's current
estimations, the projected costs of the Company's Y2K readiness program are
expected to total $3.5 million.
Although the Company expects its critical Enterprise Systems to be Y2K
ready by the end of 1999, there is no guarantee that these results will be
achieved. Specific factors that give rise to this uncertainty include a possible
loss of technical resources to perform the work, failure to identify all
susceptible systems, non-compliance by third parties whose systems and
operations impact the Company, and other similar uncertainties. A reasonably
possible worst case scenario might include one or more of the Company's
significant production facilities incurring interruption in business either from
internal systems failures or failure to perform on the part of third parties,
including suppliers. Such an event could result in a material disruption to the
Company's operations. Specifically, the Company could experience an interruption
in its ability to produce certain products, collect and process orders, process
payments, manage inventory and perform adequate customer service. Should the
worst case scenario occur it could, depending on its duration, have a material
adverse impact on the Company's results of operations and financial position,
but that impact is not estimable.
ADOPTION OF ACCOUNTING STANDARDS
In March 1998 and April 1998, the AcSEC (Accounting Standards Executive
Committee) issued Statement of Position (SOP) 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use" and SOP 98-5
"Reporting on the Costs of Start-Up Activities," respectively. Both Statements
are effective for fiscal years beginning after December 15, 1998, and early
adoption is encouraged. SOP 98-1 provides guidance on accounting for the costs
of computer software developed or obtained for internal use. SOP 98-5 requires
that entities expense start-up costs and organization costs as they are
incurred. The Company has already adopted both of these Statements and the
impact of adoption was not material to the financial statements.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities." This statement is effective for all fiscal quarters of
all fiscal years beginning after June 15, 1999. This Statement requires that an
entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value. Due
to the complexity of this new standard, the Company is still assessing the
impact it will have on the financial position or results of operations.
FORWARD-LOOKING STATEMENTS
This Management's Discussion and Analysis and certain other sections of
this annual report contain forward-looking statements that involve a number of
risks and uncertainties. Forward-looking statements are made pursuant to the
safeharbor provision 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, 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 failure by the Company or its suppliers or
customers to achieve Y2K compliance, the timing and magnitude of capital
expenditures and acquisitions, currency exchange 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.