AptarGroup - 10-Q quarterly report FY

[ ]      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     

AptarGroup, Inc.

Quarter Ended September 30, 2005

PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)

AptarGroup, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)

See accompanying notes to condensed consolidated financial statements.

AptarGroup, Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)

See accompanying notes to condensed consolidated financial statements.

AptarGroup, Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)

See accompanying notes to condensed consolidated financial statements.

AptarGroup, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

See accompanying notes to condensed consolidated financial statements.

AptarGroup, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in Thousands, Except per Share Amounts, or Otherwise Indicated)
(Unaudited)

         In the opinion of management, the unaudited consolidated financial statements include all adjustments, consisting of only normal recurring adjustments, necessary for the fair statement 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 on Form 10-K for the year ended December 31, 2004. The results of operations of any interim period are not necessarily indicative of the results that may be expected for the year.

         At September 30, 2005 and September 30, 2004, the Company had stock-based employee compensation plans. The Company accounts for those plans under the recognition and measurement principles of APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and related Interpretations. No stock-based employee compensation cost is reflected in net income relating to stock options, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123, “Accounting for Stock-Based Compensation,” to stock-based employee compensation.

The table below shows a summary of intangible assets as of September 30, 2005 and December 31, 2004.

Estimated amortization expense for the years ending December 31 is as follows:

The Company previously disclosed in its financial statements for the year ended December 31, 2004, that it expected to contribute approximately $1.3 million to its domestic defined benefit plans and approximately $1.3 million to its foreign defined benefit plans in 2005. As of September 30, 2005, the Company has contributed approximately $2.0 million to its domestic plans and approximately $.7 million to its foreign plans. The Company does not anticipate making additional contributions to fund its domestic plans but does anticipate contributing an additional $.7 million to fund its foreign plans before the end of 2005.

         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 a hedge of an anticipated transaction, the significant characteristics and expected terms of any anticipated transaction must be specifically identified, and it must be probable that the anticipated transaction will occur.

The Company has an interest rate swap to convert a portion of its fixed-rate debt into variable-rate debt. Under the interest rate swap contract, 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 September 30, 2005, the Company recorded the fair value of derivative instrument assets of $2.0 million in miscellaneous other assets with an offsetting adjustment to debt related to the fixed-to-variable interest rate swap agreement with a notional principal value of $25 million. No gain or loss was recorded in the income statement for the three or nine months ended September 30, 2005 or September 30, 2004 since there was no hedge ineffectiveness.

The Company did not use any cash flow hedges in the quarters or nine months ended September 30, 2005 or September 30, 2004.

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 weakening U.S. dollar relative to foreign currencies has an additive translation effect on the Company’s financial condition. Conversely, a strengthening U.S. dollar has a dilutive effect. The Company in some cases maintains debt in these subsidiaries to offset the net asset exposure. The Company does not otherwise actively manage this risk using derivative financial instruments. In the event the Company plans on a full or partial liquidation of any of its foreign subsidiaries where the Company’s net investment is likely to be monetized, the Company will consider hedging the currency exposure associated with such a transaction.

As of September 30, 2005, the Company recorded the fair value of foreign currency forward exchange contracts of $691 thousand in accounts payable and accrued liabilities in the balance sheet. All forward exchange contracts outstanding as of September 30, 2005 had an aggregate contract amount of $73 million.

         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 or positive effect on the Company’s financial position, results of operations or cash flow.

         The Dispensing Systems segment is an aggregate of four of the Company’s five business units. The Dispensing Systems segment sells primarily non-aerosol spray and lotion pumps, plastic dispensing and non-dispensing closures, and metered dose aerosol valves. These three products are sold to all of the markets served by the Company including the fragrance/cosmetic, pharmaceutical, personal care, household, and food/beverage markets.

         SeaquistPerfect represents the Company’s fifth business unit and sells primarily aerosol valves and accessories and certain non-aerosol spray and lotion pumps. These products are sold primarily to the personal care, household, and food/beverage markets.

         The accounting policies of the segments are the same as those described in Note 1, Summary of Significant Accounting Policies in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004. The Company evaluates performance of its business units and allocates resources based upon earnings before interest expense in excess of interest income, corporate expenses, income taxes and unusual items (collectively referred to as “Segment Income”). The Company accounts for intersegment sales and transfers as if the sales or transfers were to third parties.

         In August 2005, the Company purchased the remaining 20% of a consolidated subsidiary, Seaquist de Mexico, it didn’t previously own for $1 million. Seaquist de Mexico manufactures plastic injection molded dispensing closures for the North American market. No goodwill was recorded in the transaction.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS, OR OTHERWISE INDICATED)

         Our SG&A costs increased approximately $10.3 million for the nine months ended September 30, 2005 compared to the same period a year ago. Changes in foreign currency rates accounted for approximately $3.3 million of the increase in SG&A costs. The remainder of the increase is primarily due to normal inflationary costs and wage increases. SG&A as a percentage of net sales for the nine months ended September 30, 2005 decreased to 14.6% from 14.9% in 2004.

         Depreciation and amortization increased approximately $4.1 million for the first nine months of 2005 to $74.8 million compared to $70.7 million for the first nine months of 2004. Approximately $1.6 million of the increase is due to changes in foreign currency rates compared to the U.S. dollar in 2004. The remaining increase primarily relates to increased capital expenditures in prior years.

         Redeployment Program costs totaled $3.0 million in the third quarter of 2005. It is expected that additional pre-tax charges in the fourth quarter could be approximately $400 thousand to $1 million.

         Net other expenses for the nine months ended September 30, 2005 increased to $6.0 million from $2.8 million in the prior year primarily due to foreign currency losses of approximately $1.3 million for the nine months ended September 30, 2005 compared to foreign currency gains of approximately $.8 million for the same period in the prior year. As mentioned above, the prior year numbers include a gain on the repatriation of funds from Europe while the current year foreign currency loss includes approximately $.4 million of foreign currency losses related to the liquidation of a small finance operation in Europe. The remaining increase in net other expenses is due to increased interest expense of $1.3 million and decreased interest income of $.6 million for the same reasons described above for the third quarter.

         Net sales for the Dispensing Systems segment grew approximately 8% in the first nine months of 2005 compared to the first nine months of 2004. Sales of our pumps to the pharmaceutical market increased approximately $21 million while sales of our metered aerosol valves to the same market decreased approximately $5 million. Sales of our dispensing closures to the personal care and food markets increased approximately $27 million and $18 million, respectively, while sales of our spray pumps to the personal care market increased approximately $5 million. Offsetting these product sales increases was a decrease in sales of tooling to our customers of approximately $14 million for the nine months ended September 30, 2005. Net sales for the first nine months of the year excluding changes in foreign currency exchange rates increased approximately 5% from the prior year.

         Segment Income in the third quarter of 2005 increased approximately 14% to $43.0 million compared to $37.7 million reported in the prior year. The increase in Segment Income from the prior year is primarily related to the increase in product sales mentioned above combined with the decrease in tooling sales, which traditionally have lower margins.

         Segment Income in the first nine months of 2005 increased approximately 10% to $114.8 million compared to $104.0 million reported in the first nine months of the prior year. The increase in Segment Income from the prior year is mainly due to the same reasons noted above for the third quarter. In addition, operating losses and shut down costs for a mold manufacturing facility in the U.S. in the first nine months of 2004 that did not repeat in 2005 amounted to approximately $2.4 million.

         Net sales for the SeaquistPerfect segment for the first nine months of 2005 increased approximately 16%, or $25.5 million, compared to the first nine months of the prior year. Net sales excluding changes in foreign currency exchange rates increased approximately 15% from the prior year. Sales from EP Spray Systems SA accounted for approximately $9.1 million of the sales increase. The remaining sales increase is mainly due to the same reasons noted above for the third quarter as well as increased sales of aerosol valve products to the household market.

         Segment Income in the third quarter of 2005 increased approximately 3% to $4.5 million compared to $4.3 million reported in the prior year. EP Spray Systems contributed approximately $1.0 million to Segment Income in the quarter. Raw material cost increases and lower sales volumes in Europe eroded most of the Segment Income contributed by EP Spray in the quarter.

         Segment Income in the first nine months of 2005 increased approximately 22% to $17.5 million compared to $14.4 million reported in the first nine months of the prior year. EP Spray Systems contributed approximately $2.6 million of the $3.2 million increase in Segment Income. The remainder of the increase reflects the increased sales volumes for the year partially offset by increased raw material costs.

         In the first nine months of 2005, our operations provided approximately $153.6 million in cash flow compared to $133.4 million for the same period a year ago. In both periods, cash flow from operations was primarily derived from earnings before depreciation and amortization. The increase from the prior year is primarily attributed to an increase in profitability before depreciation expense along with better management of working capital. During the first nine months of 2005, we utilized the operating cash flows to finance capital expenditures, acquire new businesses, pay higher dividends and repurchase the Company’s common stock.

         We used $103.5 million in cash for investing activities during the first nine months of 2005, compared to $72.8 million during the same period a year ago. The increase in cash used for investing activities is due primarily to the acquisition of EP Spray Systems SA in the first quarter of 2005. The acquisition of the company in Switzerland was paid for using existing cash in Europe. Cash outlays for capital expenditures for 2005 are estimated to be in the range of $100 to $105 million. Approximately $53 million of existing cash in Europe will be used in the fourth quarter of 2005 for the acquisition of MBF Développement SAS.

         Cash used by financing activities was $37.2 million in the first nine months of 2005 compared to $70.8 million in the same period a year ago. An increase in short-term debt of $30.5 million was used for share repurchases of the Company’s common stock and an increase in dividends paid to shareholders.

         The Board of Directors declared a quarterly dividend of $.20 per share payable November 23, 2005 to stockholders of record as of November 2, 2005.

         Our foreign operations have historically met cash requirements with the use of internally generated cash or borrowings. Foreign subsidiaries have financing arrangements with several foreign banks to fund operations located outside the U.S., but all these lines are uncommitted. Cash generated by foreign operations has generally been reinvested locally. The majority of our $165 million in cash and equivalents is located outside of the U.S.

         We believe we are in a strong financial position and have the financial resources to meet business requirements in the foreseeable future. We have historically used cash flow from operations as our primary source of liquidity. In the event that customer demand would decrease significantly for a prolonged period of time and negatively impact cash flow from operations, we would have the ability to restrict and significantly reduce capital expenditure levels, which historically have been the most significant use of cash for us. A prolonged and significant reduction in capital expenditure levels could increase future repairs and maintenance costs as well as have a negative impact on operating margins if we were unable to invest in new innovative products.

         In November 2004, the FASB issued SFAS No. 151 “Inventory Costs.” SFAS No. 151 amends the guidance in Accounting Research Bulletin (“ARB”) No. 43, Chapter 4, “Inventory Pricing,” to clarify the abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). Paragraph 5 of ARB No. 43, Chapter 4 previously stated that “...under some circumstances, items such as idle facility expense, excessive spoilage, double freight, and rehandling costs may be so abnormal as to require treatment as current period charges...” SFAS No. 151 requires that those items be recognized as current period charges regardless of whether they meet the criterion of “so abnormal.” In addition, SFAS No. 151 requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. SFAS No. 151 is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. We have performed a preliminary assessment and have determined that this statement will not have a material impact on us upon adoption.

         In December 2004, the FASB issued SFAS No. 123R “Share-Based Payment”. SFAS No. 123R is a revision of SFAS No. 123 “Accounting for Stock-Based Compensation”. This Statement supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and its related implementation guidance. This Statement requires a public company to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award (with limited exceptions). That cost will be recognized over the period during which an employee is required to provide service in exchange for the award; the requisite service period (usually the vesting period). We are currently following APB No. 25 and applying the nominal vesting approach.

         SFAS No. 123R upon adoption requires the application of the non-substantive vesting approach which means that an award is fully vested when the employee’s retention of the award is no longer contingent on providing subsequent service. This would be the case for awards that vest when employees become retirement eligible or awards granted to retirement eligible employees. Had we been using the non-substantive approach instead of the nominal vesting approach when calculating the effect on net income and earnings per share in Note 1 to the Consolidated Financial Statements, net income would have increased by approximately $0.6 million and decreased by approximately $1.4 million for the quarter and nine months ended September 30, 2005, respectively, and increased by approximately $0.4 million and decreased by approximately $1.6 million for the quarter and nine months ended September 30, 2004, respectively. SFAS No. 123R is effective for us January 1, 2006. We are currently in the process of evaluating which option pricing model to use when we implement SFAS No. 123R and thus we have not completed the estimate of the impact that this Statement will have on our financial results of operations.

         In December 2004, the FASB issued FASB Staff Position (“FSP”) No. FAS 109-1 “Application of FASB Statement No. 109, Accounting for Income Taxes, to the Tax Deduction on Qualified Production Activities Provided by the American Jobs Creation Act of 2004 (the “Act”)”. This FSP was issued in response to tax deductions for certain qualified production activities provided by the Act, which was signed into law by the President of the United States on October 22, 2004. As a result of the Act, this FSP concludes that those deductions included in the Act should be accounted for as a special deduction in accordance with SFAS No. 109. This FSP is effective immediately. The Act provides a deduction for income from qualified domestic production activities, which will be phased-in from 2005 through 2010. In return, the Act provides for a two-year phase-out of the existing extra-territorial income exclusion (“ETI”) for foreign sales. We expect the net effect of the phase in of this new deduction and the phase-out of the ETI to not be significant based on current earnings levels. The special deduction treatment per this FSP has no effect on deferred tax assets and liabilities existing at the enactment date. Rather, the impact of this deduction will be reported in the period in which the deduction is claimed on our tax return.

         In December 2004, the FASB issued FSP No. FAS 109-2, “Accounting and Disclosure Guidelines for the Foreign Repatriation Provisions within the American Jobs Creation Act of 2004”. This FSP was issued in response to another provision of the Act that provides for temporary incentive for U.S. companies to repatriate accumulated income earned abroad and is effective immediately. This temporary incentive provides an 85% dividends received deduction for certain dividends from controlled foreign corporations. The deduction is subject to a number of limitations and as of today, we are not yet in a position to decide to what extent we might elect to use the repatriation provisions of the Act related to our foreign earnings. Because the majority of the Company’s foreign earnings are in higher-taxed countries, the benefits provided by the repatriation provision of the Act are, for the most part, benefits the Company was already receiving prior to the Act. Because of this, the repatriation provisions of the Act do not provide significant benefits to the Company.

         While our operations in the U.S. are not located in areas affected by the two hurricanes in the third quarter, the effects of these events on our customers, suppliers and end consumers are difficult to predict. Excluding any additional costs related to the Redeployment Program, we expect diluted earnings per share for the fourth quarter of 2005 to be in the range of $.62 to $.67 per share compared to record fourth quarter results of $.65 per share in 2004.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

         Additionally, we are a net importer of products produced in European countries with Euro based costs, into the U.S. and sold in U.S. dollars. A weaker dollar compared to the Euro makes imported European produced products more expensive, thus reducing operating income margins.

         We manage our exposures to foreign exchange principally with forward exchange contracts to hedge certain firm purchase and sales commitments and intercompany cash transactions denominated in foreign currencies.

         The table below provides information as of September 30, 2005 about our forward currency exchange contracts.

ITEM 4. CONTROLS AND PROCEDURES

PART II — OTHER INFORMATION

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

ITEM 6. EXHIBITS

SIGNATURE

INDEX OF EXHIBITS