================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549-1004 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2001 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ----to---- COMMISSION FILE NUMBER 1-11846 AptarGroup, Inc. (Exact Name of Registrant as Specified in its Charter) DELAWARE 36-3853103 -------- ---------- (State of Incorporation) (I.R.S. Employer Identification No.) 475 West Terra Cotta Avenue, Suite E, Crystal Lake, Illinois 60014 - ------------------------------------------------------------ ------ (Address of Principal Executive Offices) (Zip Code) 815-477-0424 ------------ (Registrant's Telephone Number, Including Area Code) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No___ - Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date (August 6, 2001) Common Stock 35,893,435 ================================================================================
AptarGroup, Inc. FORM 10-Q QUARTER ENDED JUNE 30, 2001 INDEX <TABLE> <CAPTION> PART I. FINANCIAL INFORMATION Page ---- <S> <C> <C> ITEM 1. Financial statements Consolidated Statements of Income - Three and Six Months Ended June 30, 2001 and 2000 (Unaudited) 3 Consolidated Balance Sheets - June 30, 2001 and December 31, 2000 4 (Unaudited) Consolidated Statements of Cash Flows - Six Months Ended June 30, 2001 and 2000 6 (Unaudited) Notes to Consolidated Financial Statements 7 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 12 ITEM 3. Quantitative and Qualitative Disclosures about Market Risk 18 PART II. OTHER INFORMATION ITEM 2. Changes in Securities and Use of Proceeds 19 ITEM 4. Submission of Matters to a Vote of Security Holders 19 ITEM 6. Exhibits and Reports on Form 8-K 19 SIGNATURE 20 </TABLE>
AptarGroup, Inc. Consolidated Statements of Income (Amounts in Thousands, Except Per Share Data) (Unaudited) <TABLE> <CAPTION> Three Months Six Months Ended June 30, Ended June 30, --------------------- ----------------------- 2001 2000 2001 2000 ---- ---- ---- ---- <S> <C> <C> <C> <C> Net Sales.............................. $ 231,769 $ 227,667 $ 464,668 $ 445,313 Operating Expenses: Cost of sales........................ 143,662 141,604 290,009 275,922 Selling, research & development and administrative.................. 37,297 36,680 73,878 73,037 Depreciation and amortization........ 17,906 18,215 36,603 36,595 Strategic Initiative charges......... 7,275 -- 7,275 -- ---------- ---------- ----------- ----------- 206,140 196,499 407,765 385,554 ---------- ---------- ----------- ----------- Operating Income....................... 25,629 31,168 56,903 59,759 ---------- ---------- ----------- ----------- Other Income (Expense): Interest expense..................... (4,265) (4,827) (8,899) (8,949) Interest income...................... 370 428 1,041 607 Equity in results of affiliates...... (74) 40 (110) (185) Minority interests................... (156) (197) (396) (254) Miscellaneous, net................... 565 635 817 1,464 ---------- ---------- ----------- ----------- (3,560) (3,921) (7,547) (7,317) ---------- ---------- ----------- ----------- Income Before Income Taxes............. 22,069 27,247 49,356 52,442 Provision for Income Taxes............. 6,879 9,455 15,992 18,374 ---------- ---------- ----------- ----------- Net Income Before Cumulative Effect of a Change in Accounting Principle for Derivative Instruments and Hedging Activities................... 15,190 17,792 33,364 34,068 ---------- ---------- ----------- ----------- Cumulative Effect of a Change in Accounting Principle................. -- -- (64) -- ---------- ---------- ----------- ----------- Net Income............................. $ 15,190 $ 17,792 $ 33,300 $ 34,068 ========== ========== =========== =========== Net Income Per Common Share: Basic............................... $ .42 $ .49 $ .93 $ .95 ========== ========== =========== =========== Diluted............................. $ .41 $ .49 $ .91 $ .93 ========== ========== =========== =========== Average Number of Shares Outstanding: Basic............................... 35,795 35,949 35,739 36,041 Diluted............................. 36,649 36,564 36,491 36,588 </TABLE> See accompanying notes to consolidated financial statements. 3
AptarGroup, Inc. Consolidated Balance Sheets (Amounts in Thousands, Except Per Share Data) (Unaudited) <TABLE> <CAPTION> June 30, December 31, 2001 2000 ---- ---- <S> <C> <C> Assets Current Assets: Cash and equivalents........................................ $ 40,443 $ 55,559 Accounts and notes receivable, less allowance for doubtful accounts of $6,549 in 2001 and $6,927 in 2000............ 212,400 210,794 Inventories................................................. 124,647 121,522 Prepayments and other....................................... 20,740 19,674 ----------- ------------ 398,230 407,549 ----------- ------------ Property, Plant and Equipment: Buildings and improvements.................................. 106,174 108,905 Machinery and equipment..................................... 655,425 665,991 ----------- ------------ 761,599 774,896 Less: Accumulated depreciation.............................. (409,166) (402,412) ----------- ------------ 352,433 372,484 Land........................................................ 4,613 4,949 ----------- ------------ 357,046 377,433 ----------- ------------ Other Assets: Investments in affiliates................................... 10,308 11,127 Goodwill, less accumulated amortization of $14,154 in 2001 and $13,093 in 2000................................. 123,019 127,754 Miscellaneous............................................... 23,774 28,376 ----------- ------------ 157,101 167,257 ----------- ------------ Total Assets $ 912,377 $ 952,239 =========== ============ </TABLE> See accompanying notes to consolidated financial statements. 4
AptarGroup, Inc. Consolidated Balance Sheets (Amounts in Thousands, Except Per Share Data) (Unaudited) <TABLE> <CAPTION> June 30, December 31, Liabilities and Stockholders' Equity 2001 2000 -------- ------------ <S> <C> <C> Current Liabilities: Notes payable...................................... $ 18,330 $ 29,248 Current maturities of long-term obligations........ 7,987 10,326 Accounts payable and accrued liabilities........... 153,626 163,528 ----------- ------------ 179,943 203,102 ----------- ------------ Long-Term Obligations................................ 248,024 252,752 ----------- ------------ Deferred Liabilities and Other: Deferred income taxes.............................. 31,282 35,873 Retirement and deferred compensation plans......... 12,077 12,597 Minority interests................................. 4,740 5,050 Deferred and other non-current liabilities......... 1,912 2,325 ----------- ------------ 50,011 55,845 ----------- ------------ Stockholders' Equity: Common stock, $.01 par value....................... 369 366 Capital in excess of par value..................... 119,377 115,034 Retained earnings.................................. 468,987 439,258 Accumulated other comprehensive loss............... (127,619) (89,163) Less treasury stock at cost, 1,055 shares in 2001 and 1,000 shares in 2000.......................... (26,715) (24,955) ----------- ------------ 434,399 440,540 ----------- ------------ Total Liabilities and Stockholders' Equity $ 912,377 $ 952,239 =========== ============ </TABLE> See accompanying notes to consolidated financial statements. 5
AptarGroup, Inc. Consolidated Statements of Cash Flows (Amounts in Thousands, brackets denote cash outflows) (Unaudited) <TABLE> <CAPTION> Six Months Ended June 30, Cash Flows From Operating Activities: 2001 2000 ---- ---- <S> <C> <C> Net income............................................... $ 33,300 $ 34,068 Adjustments to reconcile net income to net cash provided by operations: Depreciation............................................. 34,284 33,823 Amortization............................................. 2,319 2,772 Provision for bad debts.................................. 809 925 Strategic initiative charges............................. 7,275 -- Minority interests....................................... 396 254 Cumulative effect of accounting change................... 64 -- Deferred income taxes.................................... (3,546) 1,598 Retirement and deferred compensation plans............... (139) (495) Equity in results of affiliates in excess of cash distributions received................. 110 185 Changes in balance sheet items, excluding effects from foreign currency adjustments: Accounts receivable...................................... (19,511) (31,105) Inventories.............................................. (11,377) (16,844) Prepaid and other current assets......................... (1,965) (5,903) Accounts payable and accrued liabilities................. (2,958) 13,691 Changes in income taxes payable.......................... 2,975 18,262 Other changes, net....................................... 4,608 1,931 ------------ ----------- Net cash provided by operations.......................... 46,644 53,162 ------------ ----------- Cash Flows From Investing Activities: Capital expenditures..................................... (42,549) (39,854) Disposition of property and equipment.................... 811 1,854 Acquisition of businesses................................ -- (2,271) Investments in affiliates................................ (68) -- ------------ ----------- Net cash used by investing activities.................... (41,806) (40,271) ------------ ----------- Cash Flows From Financing Activities: (Decrease) increase in notes payable..................... (10,272) 7,198 Proceeds from long-term obligations...................... 1,114 1,699 Repayments of long-term obligations...................... (5,488) (4,286) Dividends paid........................................... (3,570) (3,605) Proceeds from stock options exercised.................... 4,346 1,249 Purchase of Treasury Stock............................... (1,760) (9,403) ------------ ----------- Net cash used by financing activities................... (15,630) (7,148) ------------ ----------- Effect of Exchange Rate Changes on Cash.................... (4,324) (1,269) ------------ ----------- Net (Decrease) Increase in Cash and Equivalents............ (15,116) 4,474 Cash and Equivalents at Beginning of Period................ 55,559 32,416 ------------ ----------- Cash and Equivalents at End of Period...................... $ 40,443 $ 36,890 ============ =========== </TABLE> See accompanying notes to consolidated financial statements. 6
AptarGroup, Inc. Notes To Consolidated Financial Statements (Amounts in Thousands, Except Per Share Data, or Otherwise Indicated) (Unaudited) Note 1 - Basis of Presentation The accompanying unaudited consolidated financial statements include the accounts of AptarGroup, Inc. and its subsidiaries. The terms "AptarGroup" or "Company" as used herein refer to AptarGroup, Inc. and its subsidiaries. In the opinion of management, the unaudited consolidated financial statements include all adjustments, consisting of only normal recurring adjustments, necessary for a fair presentation of consolidated financial position, results of operations, and cash flows for the interim periods presented. The accompanying unaudited consolidated financial statements have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosure normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures made are adequate to make the information presented not misleading. Accordingly, these unaudited consolidated financial statements and related notes should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Annual Report to Shareholders incorporated by reference into the Company's Annual Report on Form 10-K for the year ended December 31, 2000. The results of operations of any interim period are not necessarily indicative of the results that may be expected for a fiscal year. Note 2 - Inventories At June 30, 2001 and December 31, 2000, approximately 23% and 25%, respectively, of the total inventories are accounted for by the LIFO method. Inventories, by component, consisted of: June 30, December 31, 2001 2000 --------- ---------- Raw Materials $ 53,454 $ 55,429 Work in progress 22,082 20,975 Finished goods 50,948 46,805 --------- ---------- 126,484 123,209 Less LIFO reserve (1,837) (1,687) --------- ---------- Total $ 124,647 $ 121,522 ========= ========== Inventories are stated at cost, which is lower than market. Costs included in inventories are raw materials, direct labor and manufacturing overhead. The inventories of two domestic operations and the inventories of two foreign operations are determined by using the last-in, first-out "LIFO" method, while the remaining inventories are valued using the first-in, first-out (FIFO) method. 7
Note 3 - Comprehensive Income (Loss) AptarGroup's total comprehensive income (loss) was as follows: <TABLE> <CAPTION> Three months ended June 30 Six months ended June 30 -------------------------- ------------------------ 2001 2000 2001 2000 ---- ---- ---- ---- <S> <C> <C> <C> <C> Net income $ 15,190 $17,792 $ 33,300 $ 34,068 (Subtract): change in foreign (11,566) (1,250) (38,456) (17,335) currency translation adjustment -------- ------- -------- -------- Total comprehensive income (loss) $ 3,624 $16,542 $ (5,156) $ 16,733 ======== ======= ======== ======== </TABLE> Note 4 - Stock Repurchase Program In 1999, the Board of Directors authorized the repurchase of a maximum of one million shares of the Company's outstanding common stock and in 2000, the Board of Directors authorized the repurchase of up to an additional two million shares of the Company's outstanding common stock. The timing of and total amount expended for the share repurchase program depends upon market conditions. During the quarter ended June 30, 2001, the Company repurchased 30 thousand shares for an aggregate amount of $1.0 million. The cumulative total number of shares repurchased at June 30, 2001 was 1,055,000 shares for an aggregate amount of $26.7 million. Note 5 - Derivative Instruments and Hedging Activities Effective January 1, 2001, the Company adopted Statement of Financial Account Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities", and its related amendment SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities." These standards require that all derivative financial instruments be recorded in the consolidated balance sheets at fair value as either assets or liabilities. Changes in the fair value of derivatives will be recorded in each period in earnings or accumulated other comprehensive income, depending on whether a derivative is designated and effective as part of a hedge transaction. In accordance with the transition provisions of SFAS 133, the Company recorded the following cumulative effect adjustment in earnings as of January 1, 2001: Related to designated fair value hedging relationships Fair value of interest rate swaps $ 1,868 Offsetting changes in fair value of debt (1,868) Related to foreign currency forward exchange contracts Fair value of foreign currency forward exchange contracts (965) Previously deferred gains and losses 1,027 Related to cross currency swap Fair value of cross currency swap 1,436 Previously deferred gains and losses (1,576) Tax effect on above items 14 ------- Total cumulative effect of adoption on earnings, net of tax $ (64) ======= 8
The Company maintains a foreign exchange risk management policy designed to establish a framework to protect the value of the Company's foreign denominated transactions from adverse changes in exchange rates. Sales of the Company's products can be denominated in a currency different from the currency in which the related costs to produce the product are denominated. Changes in exchange rates on such inter-country sales impact the Company's results of operations. The Company's policy is not to engage in speculative foreign currency hedging activities, but to minimize its net foreign currency transaction exposure defined as firm commitments and transactions recorded and denominated in currencies other than the functional currency. The Company may use foreign currency forward exchange contracts, interest rate swaps, options and cross currency swaps to hedge these risks. The Company maintains an interest rate risk management strategy to minimize significant, unanticipated earnings fluctuations that may arise from volatility in interest rates. For derivative instruments designated as hedges, the Company formally documents the nature and relationships between the hedging instruments and the hedged items, as well as the risk management objectives, strategies for undertaking the various hedge transactions, and the method of assessing hedge effectiveness. Additionally, in order to designate any derivative instrument as hedges of anticipated transactions, the significant characteristics and expected terms of any anticipated transaction must be specifically identified, and it must be probable that the anticipated transaction will occur. Fair Value Hedges The Company uses interest rate swaps to convert a portion of its fixed-rate debt into variable-rate debt. Under the interest rate swap contracts, the Company exchanges at specified intervals, the difference between fixed-rate and floating-rate amounts, which is calculated based on an agreed upon notional amount. As of June 30, 2001, the Company has recorded the fair value of derivative instrument assets of $1.9 million in miscellaneous other assets with an offsetting adjustment to debt related to a fixed-to-variable interest rate swap agreement with a notional principal value of $50 million. No gain or loss was recorded in the income statement for the quarter ended June 30, 2001 since there was no hedge ineffectiveness. Cash Flow Hedges The Company did not use any cash flow hedges in the quarter ended June 30, 2001. Hedge of Net Investments in Foreign Operations A significant number of the Company's operations are located outside of the United States. Because of this, movements in exchange rates may have a significant impact on the translation of the financial condition and results of operations of the Company's foreign entities. A strengthening U.S. dollar relative to foreign currencies has a dilutive translation effect on the Company's financial condition and results of operations. Conversely, a weakening U.S. dollar has an additive effect. The Company in some cases maintains debt in these subsidiaries to offset the net asset exposure. The Company does not otherwise actively manage this risk using derivative financial instruments. In the event the Company plans on a full or partial liquidation of any of its foreign subsidiaries where the Company's net investment is likely to be monetized, corporate treasury will consider hedging the currency exposure associated with such a transaction. 9
Other As of June 30, 2001, the Company has recorded the fair value of foreign currency forward exchange contracts of $482 thousand in accounts payable and accrued liabilities and $25 thousand in prepayments and other in the balance sheet. Note 6 - Contingencies The Company, in the normal course of business, is subject to a number of lawsuits and claims both actual and potential in nature. Management believes the resolution of these claims and lawsuits will not have a material adverse effect on the Company's financial position or results of operations. Note 7 - Strategic Initiative Charges In April 2001, the Company announced it had begun a project ("Strategic Initiative") to improve the efficiency of operations that produce pumps for its mass-market fragrance/cosmetic and personal care customers. In addition to improving efficiency, another objective of the Strategic Initiative is to improve customer service through reduced lead times and the ability to customize finished products on a local basis. As part of the Strategic Initiative, the Company will close one molding operation in Connecticut and consolidate the molding and assembly of the base cartridge (standard internal components common to modular pumps) into one of the Company's facilities in Italy. In addition, the Company is rationalizing its mass-market pump product lines for these two markets by discontinuing production of non-modular pumps and increasing capacity for its modular pumps. Charges related to the Strategic Initiative are expected to be approximately $10 million before taxes and will consist primarily of costs related to the closing of the molding operation and discontinuance of its non-modular pumps (including asset impairment write-downs, accelerated depreciation associated with revised useful lives and utility abatement reimbursements) as well as employee severance and related benefit costs. Approximately $3 million of the charges are expected to be cash outlays while the remaining $7 million will be non-cash charges (asset impairment write-downs and accelerated depreciation associated with revised useful lives). During the quarter ended June 30, 2001, the Company recorded Strategic Initiative related costs totaling $7.7 million before tax and $4.6 million after tax or approximately $0.13 per diluted share. Of the $7.7 million recorded in the second quarter, $464 thousand (representing accelerated depreciation) was included in the Company's total depreciation and amortization expense and $7.3 million was shown on a separate line of the income statement. A detail of these pre tax charges is shown in the following table: <TABLE> <CAPTION> Beginning Charges in the Charged Ending Reserve Reserves at quarter ended Cash Paid Against Assets at 06/30/01 12/31/00 6/30/01 <S> <C> <C> <C> <C> <C> Asset impairment write-downs $ -- $5,498 $ -- $(5,498) $ -- Employee severance -- 800 (33) -- 767 Other costs -- 977 -- -- 977 ----------------------------------------------------------------------------- Subtotal $ -- $7,275 $(33) $(5,498) $1,744 Accelerated depreciation -- 464 -- (464) -- ----------------------------------------------------------------------------- Total Strategic Initiative Related Costs $ -- $7,739 $(33) $(5,962) $1,744 ============================================================================= </TABLE> 10
Charges for asset impairment write-downs are impairment charges recorded for fixed assets held and used in the manufacture of non-modular pumps. These non- modular pumps will continue to be sold during the Strategic Initiative project, but will be discontinued once there is adequate capacity for the modular pumps. The undiscounted expected future cash flows for products using these non-modular pumps during this phase out period were less than the carrying value of the specific identifiable assets used to generate these cash flows and thus an impairment charge was recognized in accordance with SFAS 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." The impairment charge of $5.5 million was calculated by subtracting the fair market value of the assets held and used in the manufacture of non-modular pumps, (determined by discounting the expected future cash flows for products using these non-modular pumps) from the carrying value of these assets. As part of the Strategic Initiative, certain long-lived assets will be taken out of service prior to the end of their normal service period due to the plant shut down and rationalization of the product lines. Accordingly, the Company has changed the estimated useful lives of such assets, resulting in an acceleration of depreciation ("Accelerated Depreciation"), of which $464 thousand was recognized in the second quarter. An additional charge of approximately $1.5 million associated with Accelerated Depreciation is expected in future periods. The Strategic Initiative will result in personnel reductions in the U.S. of approximately 170 people or approximately 10% of all the Company's U.S. employees. The majority of these personnel reductions will be manufacturing related with a small reduction in administrative staff. Involuntary employee severance costs are based upon a formula including salary levels and years of service. Approximately $800 thousand has been accrued and is included in the Strategic Initiative charges shown in the income statement. Offsetting these personnel reductions will be an increase in personnel of approximately 80 people in Italy to support the centralization of the base cartridge production and assembly. To date, three people have been terminated resulting in a cash payment of $33 thousand. In addition to the involuntary severance costs described above, a retention or stay bonus will be paid to employees who remain with the company during the phase-out period. This stay bonus, which is estimated to be approximately $600 thousand, is also based upon salary levels and years of service. The stay bonus is being accrued over the future periods in which the employees earn the benefits. Approximately $177 thousand of the incurred stay bonus was accrued in the quarter ended June 30, 2001. In addition, as a result of closing down the molding operation, the Company will be required to refund an abatement of approximately $500 thousand to a utility provider and expects to spend approximately $300 thousand to refurbish the leased molding facility that is being vacated. These charges are included in other costs in the preceding table. 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations Net sales for the quarter and six months ended June 30, 2001 totaled $231.8 million and $464.7 million, respectively, increases of approximately 2% and 4%, respectively when compared to the corresponding periods of 2000. The stronger U.S. dollar relative to the same three-month and six-month periods of 2000 negatively affected the translation of AptarGroup's foreign sales. Net sales, excluding changes in foreign currency exchange rates ("Core Sales"), grew 6% and 9% for the quarter and six-month period ending June 30, 2001, respectively. Core Sales of pumps to the fragrance/cosmetic market were strong in the quarter and first half of the year while Core Sales of pumps and metered dose aerosol valves to the pharmaceutical market showed modest growth for the same periods. Core Sales of personal care products increased over the prior year primarily due to continued strength of sales in Europe. Demand for the Company's dispensing closures from the food/beverage market was also strong in the quarter and first half of the year. Selling price increases did not have a material impact on the Core Sales growth for the quarter or for the first half of the year. The following table sets forth (in thousands of dollars), for the periods indicated, net sales by geographic region. <TABLE> <CAPTION> 3 months 3 months 6 months 6 months ended % of ended % of ended % of ended % of 6/30/01 Total 6/30/00 Total 6/30/01 Total 6/30/00 Total ------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> <C> <C> Domestic $ 90,806 39% $ 92,028 40% $175,733 38% $175,975 40% Europe 122,260 53% 118,234 52% 250,913 54% 235,772 53% Other Foreign 18,703 8% 17,405 8% 38,022 8% 33,566 7% </TABLE> Cost of sales as a percent of net sales decreased slightly to 62.0% in the second quarter of 2001 compared to 62.2% in the second quarter of 2000. The slight reduction in cost of sales as a percent of net sales is primarily attributed to lower raw material prices in the quarter, particularly plastic resin and cost reduction efforts in the U.S. For the first six months of 2001, cost of sales as a percent of net sales increased slightly to 62.4% compared to 62.0% in the same period a year ago. The slight increase as a percent of net sales for the six months ended June 30, 2001 is primarily attributed to the acquisition and consolidation of a former joint venture for the entire six months in 2001 that was accounted for on the equity method of accounting for the first two months of 2000, and the mix of products sold in the first six months compared to the prior year. Selling, research & development and administrative expenses (SG&A) increased 1.7% or $0.6 million to $37.3 million in the second quarter of 2001 compared to $36.7 million in the same period a year ago. SG&A as a percent of net sales remained constant at 16.1% for the quarters ended June 30, 2001 and 2000. SG&A for the six months ended June 30, 2001 increased 12
1.2% or $0.9 million to $73.9 million compared to $73.0 million a year ago. As a percent of net sales, SG&A for the first six months of 2001 decreased to 15.9% compared to 16.4% a year ago. The decrease as a percent of net sales is primarily attributed to cost reduction efforts in the U.S. targeted at the personal care and household markets. Depreciation and amortization as reported in the quarter decreased approximately $300 thousand to $17.9 million compared to $18.2 million for the same period a year ago. A stronger U.S. dollar relative to the prior year helped decrease reported depreciation and amortization compared to the prior year. As part of a project ("Strategic Initiative") to improve the efficiency of operations that produce pumps for the its mass-market fragrance/cosmetic and personal care customers, certain long-lived assets will be taken out of service prior to the end of their normal service period due to the plant shutdown and rationalization of the product lines. Accordingly, the Company has changed the estimated useful lives of such assets, resulting in an acceleration of depreciation ("Accelerated Depreciation"), of which $464 thousand was taken as a charge in the second quarter and included in depreciation and amortization in the income statement. Excluding this Accelerated Depreciation, depreciation and amortization would have decreased nearly $800 thousand in the quarter. For the reported six months ended June 30, 2001, depreciation and amortization was relatively flat at $36.6 million compared to the prior year. Excluding the Accelerated Depreciation, depreciation and amortization would have decreased approximately $500 thousand compared to the prior year. The decrease for the quarter and six-month period is primarily related to the stronger U.S. dollar relative to the prior year. Strategic Initiative charges, excluding the $464 thousand of Accelerated Depreciation, totaled $7.3 million for the quarter and six months ended June 30, 2001. The $7.3 million is primarily made up of non-cash fixed asset impairment charges of $5.5 million for fixed assets held for use related to the non-modular pumps that are going to be discontinued. These non-modular pumps will continue to be sold during the Strategic Initiative project, but will be discontinued once there is adequate capacity for the modular pumps. The undiscounted expected future cash flows for the products using these non- modular pumps during this phase out period were less than the carrying value of the specific identifiable assets used to generate these cash flows and thus an impairment charge was recognized in accordance with SFAS 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." The remaining Strategic Initiative charges related primarily to accrued severance costs and related benefits for 170 U.S. employees who will be involuntarily terminated, accrued utility abatement reimbursements and accrued costs to refurbish a leased facility that the Company will be moving out of as a result of the Strategic Initiative. The additional charges to be incurred in future periods related to the Strategic Initiative primarily relate to stay bonuses and Accelerated Depreciation. Operating income for the second quarter of 2001 decreased $5.5 million compared to the same period a year ago. Excluding the $7.3 million of Strategic Initiative charges and $464 thousand of Accelerated Depreciation, operating income would have increased $2.2 million or 7% compared to the prior year. Operating income as a percentage of net sales excluding the Strategic Initiative related costs increased to 14.4% compared to 13.7% a year ago, reflecting the cost reduction efforts aimed at the U.S. personal care and household markets as well as core sales growth. For the six months ended June 30, 2001, reported operating income decreased nearly $2.9 million compared to the same period a year ago. Excluding the 13
Strategic Initiative charges and related Accelerated Depreciation, operating income would have increased nearly $4.9 million. Net other expenses decreased slightly in the second quarter to $3.6 million compared to $3.9 million in the second quarter of 2000. The decrease is primarily related to decreased net interest expense (interest expense in excess of interest income) of approximately $500 thousand reflecting reduced interest rates and borrowings compared to the prior year. The reported effective tax rate was 31.2% and 32.4% for the second quarter and six months ended June 30, 2001, respectively, compared to 34.7% and 35.0% for the same periods a year ago. Excluding the impact of the after tax Strategic Initiative charges and Accelerated Depreciation, the effective tax rates would have been 33.4% for the quarter and six months ended June 30, 2001. The decrease compared to the same periods a year ago reflects the benefits of reductions in certain European corporate income tax rates. The Company expects the effective tax rate for 2001 excluding any impacts related to the Strategic Initiative to be in the range of 33.0%- 34.0%. Net income as reported for the second quarter decreased to $15.2 million compared to $17.8 million in the second quarter of 2000. Excluding the Strategic Initiative charges and Accelerated Depreciation, net income would have increased to $19.8 million or $0.54 per diluted share compared to $0.49 per diluted share in the prior year. For the six months ended June 30, 2001, reported net income after cumulative effect of a change in accounting principle decreased to $33.3 million as compared to $34.1 million in the same period a year ago. Excluding the Strategic Initiative charges and Accelerated Depreciation, net income after cumulative effect of a change in accounting principle would have increased to $37.9 million or $1.04 per diluted share compared to $0.93 per diluted share in the prior year. Quarterly Trends AptarGroup's results of operations in the second half of the year typically have been negatively impacted by European summer holidays and customer plant shutdowns in December. In the future, AptarGroup's results of operations in a quarterly period could be impacted by factors such as changes in product mix, changes in material costs, changes in growth rates in the industries to which AptarGroup's products are sold or changes in general economic conditions in any of the countries in which AptarGroup does business. Foreign Currency A significant number of the Company's operations are located outside of the United States. Because of this, movements in exchange rates may have a significant impact on the translation of the financial condition and results of operations of AptarGroup's foreign entities. The Company's primary foreign exchange exposure is to the Euro, but the Company also has foreign exchange exposure to South American and Asian currencies as well as the British Pound. A strengthening U.S. dollar relative to foreign currencies has a dilutive translation effect on the Company's financial condition and results of operations. Conversely, a weakening U.S. dollar would have an additive effect. 14
Additionally, in some cases, the Company sells products denominated in a currency different from the currency in which the related costs are incurred. Changes in exchange rates on such inter-country sales impact the Company's results of operations. Liquidity and Capital Resources Historically, AptarGroup has generated positive cash flow from operations and has utilized the majority of such cash flows to invest in capital projects. Net cash provided by operations in the first six months of 2001 was $46.6 million compared to $53.1 million in the same period a year ago. The decrease is primarily attributed to a change in income taxes payable and deferred income taxes offset by higher net income before Strategic Initiative related costs. Net cash used by investing activities increased slightly to $41.8 million from $40.3 million a year ago. Capital expenditures for the first six months of 2001 were approximately $2.7 million higher than capital expenditures in the first six months of 2000. Management anticipates that cash outlays for capital expenditures for all of 2001 will be approximately $85 to $90 million. Net cash used by financing activities was $15.6 million in the first six months of 2001 compared to net cash used of $7.1 million in 2000. The increase in net cash used by financing activities is due to a decrease in the short-term borrowings offset by additional proceeds from stock option exercises and less treasury stock repurchased this year. The ratio of net debt to total net capitalization was 35% at June 30, 2001 and December 31, 2000, respectively. Net debt is defined as interest bearing debt less cash and cash equivalents and total net capitalization is defined as stockholder's equity plus net debt. The Company amended its multi-year, multi-currency unsecured revolving credit agreement in 2000 to increase maximum borrowings allowed from $75 million to $100 million. Under this credit agreement, interest on borrowings is payable at a rate equal to LIBOR plus an amount based on the financial condition of the Company. At June 30, 2001, the amount unused and available under this agreement was $22 million. At December 31, 2000, the amount unused and available under this agreement was $15 million. The Company is required to pay a fee for the unused portion of the commitment. The agreement expires on June 30, 2004. The credit available under the revolving credit agreement provides management with the ability to refinance certain short-term obligations on a long-term basis. As it is management's intent to do so, an additional $22 million and $15 million of short-term obligations representing the unused and available amount under the credit agreement have been reclassified as long-term obligations as of June 30, 2001 and December 31, 2000, respectively. The Company's foreign operations have historically met cash requirements with the use of internally generated cash and borrowings. Foreign subsidiaries have financing arrangements with several foreign banks to fund operations located outside of the U.S., but all of these lines are uncommitted. Cash generated by foreign operations has been reinvested locally and the Company intends to continue to reinvest the undistributed earnings of foreign subsidiaries. A decision to change this past practice and to transfer such cash to the United States in the future may be impacted to the extent management believes the transaction costs and taxes associated with such transfers are less than the expected benefits of continued reinvestment. 15
The Company believes that it has the financial resources needed to meet business requirements and stock repurchases in the foreseeable future, including capital expenditures, working capital requirements, future dividends and potential acquisitions. The Board of Directors declared a quarterly dividend of $.06 per share payable on August 21, 2001 to shareholders of record as of July 31, 2001. Adoption of New Accounting Standards In July 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and other Intangible Assets." SFAS 141 requires companies to use the purchase method of accounting for all business combinations initiated after June 30, 2001 and eliminates the use of the pooling of interests method of accounting for business combinations. All of the Company's acquisitions to date have been accounted for using the purchase method of accounting for business combinations. SFAS 141 also establishes criteria that must be used to determine whether acquired intangible assets should be recognized separately from goodwill in the Company's financial statements. SFAS 142 details the method by which companies will account for goodwill and intangible assets after a business combination has been completed. This accounting standard provides that goodwill arising from a business combination will no longer be amortized and charged to expense over time. Instead, the goodwill must periodically be tested for impairment. If the fair value of the related reporting unit exceeds its carrying amount, an impairment loss is recognized in an amount equal to that excess. As required by SFAS 142, the Company intends to adopt this standard effective with the start of its new fiscal year, beginning January 1, 2002. Before the issuance of its first quarter financial statements, the Company must complete an assessment of the categorization of its existing intangible assets and goodwill in accordance with the new criteria and report them appropriately. Intangible assets with indefinite lives will not be subject to amortization, but will instead be periodically reviewed for impairment. Intangible assets with finite lives will continue to be subject to amortization over their expected useful lives. Within six months of adoption, the Company must complete a valuation of the goodwill to determine if there has been any impairment. The Company is in the process of performing a preliminary analysis of the effects of these two standards and has not yet determined the potential affect on future results. The Company is however, currently recording amortization of goodwill of approximately $3.6 million per year on a pretax basis and $3.4 million on an after tax basis. Outlook Sales of the Company's pharmaceutical dispensing systems are expected to increase in the second half of the year compared to the prior year and the outlook for the Company's food/beverage dispensing systems remains strong. Modest growth is forecasted over the prior year second half for the fragrance/cosmetic and personal care markets. 16
The Company expects to complete its Strategic Initiative in the fourth quarter of 2002. Until that time, additional charges of $2.3 million related to this project are expected to be recorded. The majority of those expenses relate to Accelerated Depreciation charges (non-cash) as well as stay bonuses during the phase out period. An estimated $0.9 million of charges are expected to be recorded in each of the third and fourth quarters of 2001 with the majority of the remainder expected to be recorded ratably over the first two quarters of 2002. Savings are expected to exceed $5 million annually once the project is complete. The majority of the savings will be due to the net reduction in personnel worldwide of approximately 90 people. The Company expects to achieve its previously announced full year 2001 guidance of earnings per share of $1.95 to $2.05 per share excluding Strategic Initiative charges and Accelerated Depreciation, and anticipates earnings per share of $0.48 to $0.52 per share in the third quarter excluding any Strategic Initiative charges and Accelerated Depreciation. Forward-Looking Statements In addition to the historical information presented in this quarterly report, the Company has made and will make certain forward-looking statements in this report, other reports filed by the Company with the Securities and Exchange Commission, reports to stockholders and in certain other contexts relating to future net sales, costs of sales, other expenses, profitability, financial resources, products and production schedules. Statements relating to the foregoing or that predict or indicate future events and trends and which do not relate solely to historical matters identify forward-looking statements. Forward-looking statements are made pursuant to the safe harbor provisions of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 and are based on management's beliefs as well as assumptions made by and information currently available to management. Accordingly, the Company's actual results may differ materially from those expressed or implied in such forward-looking statements due to known and unknown risks and uncertainties that exist in the Company's operations and business environment, including, among other factors, government regulation including tax rate policies, competition and technological change, intellectual property rights, the failure by the Company to produce anticipated cost savings or improve productivity, the ability to successfully execute the Company's Strategic Initiative, the timing and magnitude of capital expenditures and acquisitions, currency exchange rates, economic and market conditions in North America, Europe and the rest of the world, changes in customer spending levels, the demand for existing and new products, the cost and availability of raw materials, the successful integration of the Company's acquisitions, and other risks associated with the Company's operations. Although the Company believes that its forward-looking statements are based on reasonable assumptions, there can be no assurance that actual results, performance or achievements will not differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements. Readers are cautioned not to place undue reliance on forward-looking statements. 17
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company manages its exposures to foreign exchange principally with forward exchange contracts to hedge certain firm purchase and sales commitments and intercompany cash transactions denominated in foreign currencies. The table below provides information as of June 30, 2001 about the Company's forward currency exchange contracts. All the contracts expire before the end of the fourth quarter of 2001. Average Contract Amount Contractual Buy/Sell (in millions) Exchange Rate ------------------------------------------------------------------------------- EURO/USD.............................. $19,205 1.1539 USD/CNY............................... 2,000 .1207 EURO/YEN.............................. 1,734 .0095 EURO/GBP.............................. 1,571 1.6288 EURO/ARS.............................. 1,271 1.0935 Other................................. 764 ------- Total................................. $26,545 ======= The other contracts in the above table represent contracts to buy or sell various other currencies (principally European and Australian). If the Company cancelled the forward exchange contracts at June 30, 2001, the Company would have paid approximately $0.5 million based on the fair value of the contracts on that date. All forward exchange contracts outstanding as of June 30, 2000 had an aggregate contract amount of $23.7 million. At June 30, 2001, the Company has fixed-to-variable interest rate swap agreements with a notional principal value of $50 million which require the Company to pay an average variable interest rate of 3.92% and receive a fixed rate of 6.62%. The variable rates are adjusted semiannually based on London Interbank Offered Rates ("LIBOR"). Variations in market interest rates will produce changes in the Company's net income. If there were a hypothetical 10% increase in interest rates, net income related to the interest rate swap agreements would decrease by approximately $0.1 million assuming a tax rate of 33%. If the Company canceled the swaps at June 30, 2001, the Company would have received approximately $1.9 million based on the fair value of the swaps on that date. 18
PART II - OTHER INFORMATION ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS During the quarter ended June 30, 2001, the FCP Aptar Savings Plan (the "Plan") purchased 1,200 shares of Common Stock of the Company on behalf of the participants at an average price of $33.09 per share for an aggregate amount of $39,708. During the same quarter, the Plan sold 180 shares of Common Stock of the Company at the average price of $32.09 per share for an aggregate amount of $5,776. At June 30, 2001, the Plan owns 4,665 shares of Common Stock of the Company. Employees of AptarGroup S.A., a French subsidiary of the Company, are eligible to participate in the Plan. All eligible participants are located outside of the United States. An agent independent of the Company purchases shares of Common Stock available under the Plan for cash on the open market and the Company issues no shares. The Company does not receive any proceeds from the purchase of Common Stock under the Plan. The agent under the Plan is Banque Nationale de Paris. No underwriters are used under the Plan. All shares are sold in reliance upon the exemption from registration under the Securities Act of 1933 provided by Regulation S promulgated under that Act. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The annual meeting of stockholders was held on May 9, 2001. A vote was taken by ballot for the election of three directors to hold office until the 2004 Annual Meeting of Stockholders. The following nominees received the number of votes as set forth below: Broker Nominee For Withhold Non-votes ------- --- -------- --------- Alain Chevassus 32,195,428 289,831 -0- Stephen J. Hagge 32,195,512 289,747 -0- Carl A. Siebel 32,194,320 290,939 -0- No votes were cast for any other nominee for director. The directors continuing in office until the 2002 Annual Meeting are King Harris, Peter Pfeiffer and Dr. Joanne C. Smith. Directors continuing in office until the 2003 Annual Meeting of Stockholders are Ralph Gruska, Leo Guthart, and Professor Dr. Robert W. Hacker. No other matters were submitted to a vote by ballot at the 2001 Annual Meeting. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) See the attached Index To Exhibits (b) No reports on Form 8-K were filed for the quarter ended June 30, 2001. 19
SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. AptarGroup, Inc. (Registrant) By /s/ Stephen J. Hagge -------------------- Stephen J. Hagge Executive Vice President, Chief Financial Officer and Secretary (Duly Authorized Officer and Principal Financial Officer) Date: August 10, 2001 20
INDEX TO EXHIBITS Number and Description of Exhibit --------------------------------- 10.26* Employment Agreement dated February 17, 2000, between AptarGroup, Inc. and Rick Schofield. * Filed herewith. 21