AptarGroup - 10-Q quarterly report FY

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Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date (May 1, 2006).

INDEX

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.

At March 31, 2006 and December 31, 2005, approximately 22% and 23%, respectively, of the total inventories are accounted for by using the LIFO method. Inventories, by component, consisted of:

The changes in the carrying amount of goodwill since the year ended December 31, 2005 are as follows by reporting segment:

The table below shows a summary of intangible assets as of March 31, 2006 and December 31, 2005.

          Aggregate amortization expense for the intangible assets above for the quarters ended March 31, 2006 and 2005 was $791 and $609, respectively.

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

          Future amortization expense may fluctuate depending on changes in foreign currency rates. The estimates for amortization expense noted above are based upon foreign exchange rates as of March 31, 2006.

AptarGroup’s total comprehensive income/(loss) was as follows:

The Company maintains a foreign exchange risk management policy designed to establish a framework to protect the value of the Company’s non-functional denominated transactions from adverse changes in exchange rates. Sales of the Company’s products can be denominated in a currency different from the currency in which the related costs to produce the product are denominated. Changes in exchange rates on such inter-country sales impact the Company’s results of operations. The Company’s policy is not to engage in speculative foreign currency hedging activities, but to minimize its net foreign currency transaction exposure defined as firm commitments and transactions recorded and denominated in currencies other than the functional currency. The Company may use foreign currency forward exchange contracts, options and cross currency swaps to hedge these risks.

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.

During the quarter ended March 31, 2006, the Company repurchased 85.7 thousand shares for an aggregate amount of $4.6 million. As of March 31, 2006, the Company has outstanding authorizations to repurchase up to approximately 1.0 million shares. The timing of and total amount expended for the share repurchase depends upon market conditions.

AptarGroup’s authorized common stock consisted of 99 million shares, having a par value of $.01 each. Information related to the calculation of earnings per share is as follows:

Beginning with the first quarter of 2006, The Company is reporting new business segments that reflect AptarGroup’s realigned internal financial reporting structure. Prior period information has been conformed to the current presentation.

Financial information regarding the Company’s reportable segments is shown below:

During the first quarter of 2006, the Company acquired the net assets of CCL Dispensing Systems, LLC (“CCLDS”) for approximately $21.3 million in cash. No debt was assumed in the transaction. CCLDS is located in Libertyville, Illinois and produces primarily dispensing closures. The excess of the purchase price over the fair values of assets acquired and liabilities assumed was allocated to Goodwill. Preliminary goodwill of approximately $9.5 million was recorded on the acquisition and is deductible for tax purposes. The condensed consolidated statement of income includes CCLDS’ results of operations from February 6, 2006, the date of the acquisition.

Effective January 1, 2006, the Company adopted Statement of Financial Accounting Standards (“SFAS”) 123(R), “Share-Based Payment”. This statement replaces SFAS 123, “Accounting for Stock-Based Compensation” and supersedes Accounting Principles Board Opinion (“APB”) 25. SFAS 123(R) requires that all share-based compensation be recognized as an expense in the financial statements and that such cost be measured at the fair value of the award. Also under the new standard, excess tax benefits related to issuance of equity instruments under share-based payment arrangements are considered financing instead of operating cash flow activities. The Company has adopted the modified prospective method of applying SFAS 123(R), which requires the recognition of compensation expense on a prospective basis. Accordingly, prior period financial statements have not been restated.

          SFAS 123(R) 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. Under this approach, compensation costs are recognized over the requisite service period of the award instead of ratably over the vesting period stated in the grant. As such, costs would be recognized immediately, if the employee is retirement eligible on the date of grant or over the period from the date of grant until retirement eligibility if retirement eligibility is reached before the end of the vesting period stated in the grant. For awards granted prior to adoption, the Company will continue to recognize compensation costs ratably over the vesting period with accelerated recognition of the unvested portion upon actual retirement. Had we been using the non-substantive approach during the three months ended March 31, 2005, net income would have decreased by approximately $2.5 million ($.07 per share).

There have been no grants under the Director Stock Option Plan during the first quarter of 2006.

A summary of option activity under the Company’s stock option plans as of March 31, 2006, and changes during the period then ended is presented below:

          The fair value of shares vested during the three months ended March 31, 2006 and 2005 was $5.2 million and $4.2 million, respectively. Cash received from option exercises was approximately $8.2 million and the actual tax benefit realized for the tax deduction from option exercises was approximately $1.3 million in the three months ended March 31, 2006. As of March 31, 2006, the remaining valuation of stock option awards to be expensed in future periods was $13.8 million and the related weighted-average period over which it is expected to be recognized is 1.5 years.

     The fair value of units vested during the three months ended March 31, 2006 and 2005 was $409 and $357, respectively. The intrinsic value of units vested during the three months ended March 31, 2006 and 2005 was $749 and $791, respectively. As of March 31, 2006, there was $243 of total unrecognized compensation cost relating to restricted stock unit awards which is expected to be recognized over a weighted average period of 1.2 years.

The Company announced in the third quarter of 2005 a three year plan to reduce and redeploy certain personnel in its French fragrance/cosmetic operations. The objective of this three year plan is to better align production equipment and personnel between several sites in France to ultimately reduce costs and maintain competitiveness. This plan will be implemented in phases over a three year period and is expected to be completed in the fourth quarter of 2008. The plan anticipates a headcount reduction by the end of 2008 of approximately 90 people. Total costs associated with the Redeployment Program are expected to be approximately $7 to $9 million before taxes over the three year period and primarily relate to employee severance costs. Approximately $900 thousand of such charges before tax and $600 thousand after-tax or approximately $.02 per diluted share were recorded in the first quarter of 2006. The following table below highlights the pre-tax amount incurred in the period and the ending liability at the end of March 31, 2006. All charges related to the Redeployment Program are included in Cost of Sales in the condensed consolidated statement of income.

We recorded record net sales of $375.5 million for the quarter ended March 31, 2006, or 9% above first quarter 2005 net sales of $344.0 million. The U.S. dollar was stronger in the first quarter of 2006 versus the Euro compared to the same period a year ago. As a result, the stronger U.S. dollar negatively impacted the translation of our foreign denominated sales into U.S. dollars and reduced net sales by approximately 5%. Acquisitions made in 2005 and the first quarter of 2006, accounted for approximately $25.6 million of the $31.5 million increase in sales. Custom tooling sales increased by approximately $7.3 million in the first quarter of 2006 compared to the same period in 2005. Price increases, primarily related to material cost increases passed along to customers had a positive effect on net sales in the quarter. The changes in sales by reporting segment were as follows:

The following table sets forth, for the periods indicated, net sales by geographic location:

Our cost of sales as a percent of net sales remained constant at 67.6 % in the first quarter of 2006 compared to the same period a year ago. Our cost of sales percentage was negatively influenced by the following factors in 2006:

Rising Raw Material Costs. Raw material costs, in particular plastic resin costs in the U.S., continued to increase in the first quarter of 2006 over 2005. While the majority of this raw material price increase has been passed on to customers in the form of selling price increases, the net effect is a reduction in the margin percentage.

Stock Option Expenses. Stock option expense of approximately $300 thousand was recorded beginning in the first quarter of 2006 due to the adoption of SFAS 123R.

Partially offsetting these negative factors were the following positive factors in 2006:

Strengthening of the U.S. Dollar. We are a net importer from Europe into the U.S. of products produced in Europe with costs denominated in Euros. As a result, when the U.S. dollar or other currencies strengthen against the Euro, products produced in Europe (with costs denominated in Euros) and sold in currencies that are stronger compared to the Euro, have a positive impact on cost of sales as a percentage of net sales.

Our Selling, Research & Development and Administrative expenses (“SG&A”) increased by approximately $10.7 million in the first quarter of 2006 compared to the same period a year ago. Approximately $6.8 million of the increase relates to the expensing of stock options beginning in the first quarter of 2006 due to the adoption of SFAS 123R. Acquisitions accounted for approximately $3.0 million of the increase in SG&A in the quarter. Changes in currency rates had a positive impact of approximately $2.7 million in the quarter. SG&A as a percentage of net sales increased to 16.6% compared to 15.0% of net sales in the same period of the prior year primarily due to the expensing of stock options.

Depreciation and amortization increased approximately $1.4 million in the first quarter of 2006 to $26.9 million compared to $25.5 million in the first quarter of 2005. Changes in foreign currency rates positively impacted (less expense) depreciation and amortization by approximately $1.3 million. Acquisitions added approximately $3.0 million of additional depreciation and amortization expense in the quarter.

Operating income decreased approximately $2.0 million in the first quarter of 2006 to $32.4 million compared to $34.3 million in the same period in the prior year. The decrease is primarily due to $7.1 million (approximately 1.9% of sales) in stock option expense recorded in the quarter mostly offset by the increase in sales mentioned above. Operating income as percentage of net sales decreased to 8.6% in the first quarter 2006 compared to 10.0% for the same period in the prior year.

Net other expenses in the first quarter of 2006 increased to $3.4 million from $1.9 million in the same period in the prior year primarily reflecting increased interest expense of $1.1 million. The increase in interest expense is due primarily to higher average interest rates and higher borrowing levels.

The reported effective tax rate decreased slightly to 31.8% for the three months ended March 31, 2006 compared to 32.0% in the first quarter of 2005 due primarily to the expense of stock options in the U.S. as the U.S. effective rate is higher than our effective worldwide rate.

We reported net income of $19.8 million in the first quarter of 2006 compared to $22.1 million in the first quarter of 2005.

Beginning with the first quarter of 2006, we are reporting new business segments that reflect our realigned internal financial reporting structure. Prior period information has been conformed to the current presentation.

(1) Segment Income is defined as earnings before net interest, stock option and corporate expenses, income taxes and unusual items. The Company evaluates performance of its business units and allocates resources based upon Segment Income. For a reconciliation of Segment Income to income before income taxes, see Note 10 — Segment information to the Consolidated Financial Statements in Item 1.

          Net sales for the quarter ended March 31, 2006 increased 9% in the first quarter of 2006 to $195.3 million compared to $179.1 million in the first quarter of the prior year. The strengthening U.S. dollar compared to the Euro negatively impacted the sales increase. Net sales excluding changes in foreign currency exchange rates increased approximately 14% from the prior year. Acquisitions accounted for approximately $22.6 million or 13% of the sales increase. Sales excluding foreign currency changes and acquisitions to the personal care market increased approximately 5% in the first quarter of 2006 compared to the same period in the prior year, while sales to the fragrance/cosmetic market were flat and sales to the household market decreased approximately 6%.

The Closures segment designs and manufactures primarily dispensing closures. These products are sold primarily to the personal care, household and food/beverage markets.

          Net sales for the quarter ended March 31, 2006 increased 11% in the first quarter of 2006 to $105.5 million compared to $94.7 million in the first quarter of the prior year. The strengthening U.S. dollar compared to the Euro negatively impacted the sales increase. Acquisitions accounted for approximately $3.0 million or 3% of the sales increase. Sales excluding foreign currency changes and acquisitions to the personal care market increased approximately 6% in the first quarter of 2006 compared to the same period in the prior year, while sales to the food/beverage market increased 33% and household decreased 12%.

Operations that sell dispensing systems to the pharmaceutical market now form the Pharma segment.

          Our net sales for the Pharmaceutical segment grew by 6% in the first quarter of 2006 to $74.6 million compared to $70.1 million in the first quarter of 2005. The strengthening U.S. dollar compared to the Euro negatively impacted the sales increase. Net sales excluding changes in foreign currency exchange rates increased approximately 14% from the prior year. An increase in tooling sales in the quarter contributed approximately $3.7 million of the sales increase. Increased selling prices to this market accounted for approximately $1.2 million of the increased sales.

A significant number of our 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 statements of our foreign entities. Our primary foreign exchange exposure is to the Euro, but we have foreign exchange exposure to South American and Asian currencies, among others. We manage our foreign exchange exposures principally with forward exchange contracts to hedge certain transactions and firm purchase and sales commitments denominated in foreign currencies. A strengthening U.S. dollar relative to foreign currencies has a dilutive translation effect on our financial statements. Conversely, a U.S. weakening dollar has an additive effect. In some cases, we sell 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 could materially impact our results of operations.

Our results of operations in the second half of the year typically are negatively impacted by customer plant shutdowns in the summer months in Europe and plant shutdowns in December. In the future, our 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 our products are sold, recognition of equity based compensation expense for retirement eligible employees in the period of grant and changes in general economic conditions in any of the countries in which we do business.

Our primary sources of liquidity are cash flow from operations and our revolving credit facility. Cash and equivalents decreased to $120.2 million from $117.6 million at December 31, 2005. Total short and long-term interest bearing debt increased in the first quarter of 2006 to $265.7 million from $246.6 million at December 31, 2005. The ratio of our Net Debt (interest bearing debt less cash and cash equivalents) to Net Capital (stockholder’s equity plus Net Debt) increased to approximately 15% compared to 14% as of December 31, 2005.

          Based upon the above interest coverage ratio covenant, we could borrow additional debt up to a limit where interest expense would not exceed approximately $59 million. Actual interest expense for the past four quarters was approximately $13.2 million. Based upon the above debt to capital ratio covenant we would have the ability to borrow an additional $774 million before the 55% requirement would be exceeded.

          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.

We lease certain warehouse, plant and office facilities as well as certain equipment under noncancelable operating leases expiring at various dates through the year 2018. 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. We have an option on one building lease to purchase the building during or at the end of the term of the lease at approximately the amount expended by the lessor for the purchase of the building and improvements, which was the fair value of the facility at the inception of the lease. This lease has been accounted for as an operating lease. If the Company exercises its option to purchase the building, the Company would account for this transaction as a capital expenditure. If the Company does not exercise the purchase option by the end of the lease in 2008, the Company would be required to pay an amount not to exceed $9.5 million and would receive certain rights to the proceeds from the sale of the related property. The value of the rights to be obtained relating to this property is expected to exceed the amount paid if the purchase option is not exercised. Other than operating lease obligations, we do not have any off-balance sheet arrangements.

In February 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 155 “Accounting for Certain Hybrid Financial Instruments — An Amendment of FASB Statements No. 133 and 140.” This Statement allows financial instruments that have embedded derivatives to be accounted for as a whole (eliminating the need to bifurcate the derivative from its host) if the holder elects to account for the whole instrument on a fair value basis. SFAS No. 155 is effective for all financial instruments acquired or issued after the beginning of an entity’s first fiscal year that begins after September 15, 2006. The Company has performed a preliminary evaluation and determined that it currently does not have any embedded derivatives and as a result the adoption of this accounting pronouncement is not expected to have an impact on the financial results of the Company.

The preparation of our consolidated financial statements in conformity with U.S. GAAP often requires us to make judgments, estimates and assumptions regarding uncertainties that affect the results of operations, financial position and cash flows of the Company, as well as the related footnote disclosures. Management bases its estimates on knowledge of our operations, markets in which we operate, historical trends, and other assumptions. Actual results could differ from these estimates under different assumptions or conditions.

The Company has adopted the modified prospective method of applying SFAS 123(R) which requires the recognition of compensation expense on a prospective basis. Accordingly, prior period financial statements have not been restated.

We expect sales to continue to increase in the second quarter in spite of the potential negative impact expected from a continued stronger U.S. dollar relative to the Euro. In spite of continued pricing pressure, sales in the Beauty and Home segment are expected due primarily to the acquisitions in the fourth quarter of 2005. In addition, sales of high-end fragrance/cosmetic products are expected to improve due to a strong order book at the end of the first quarter. This may be somewhat offset by a softening in sales to the personal care market in the U.S. Sales in the Closures segment are also expected to increase over the prior year due partially to the full quarter impact of the acquisition of CCL Dispensing as well as increased volumes of the core products. Unit sales in the Pharma segment are expected to improve, but overall sales are expected to decline in the second quarter due to lower custom tooling sales and negative currency effects.

This Management’s Discussion and Analysis and certain other sections of this Form 10-Q contain forward-looking statements that involve a number of risks and uncertainties. Words such as “expects,” “anticipates,” “believes,” “estimates,” and other similar expressions or future or conditional verbs such as “will,” “should,” “would” and “could” are intended to identify such 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 our beliefs as well as assumptions made by and information currently available to us. Accordingly, our 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 our operations and business environment, including but not limited to:

          Although we believe that our 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. We undertake no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise.

A significant number of our 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 our entities. Our primary foreign exchange exposure is to the Euro, but we also have foreign exchange exposure to South American and Asian currencies, among others. A strengthening U.S. dollar relative to foreign currencies has a dilutive translation effect on our financial condition and results of operations. Conversely, a weakening U.S. dollar has an additive effect.

          As of March 31, 2006, we have recorded the fair value of foreign currency forward exchange contracts of $29 thousand in accounts payable and accrued liabilities in the balance sheet.

The Company’s management has evaluated, with the participation of the chief executive officer and chief financial officer of the Company, the effectiveness of the Company’s disclosure controls and procedures (as that term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) as of March 31, 2006. Based on that evaluation, the chief executive officer and chief financial officer have concluded that these controls and procedures were effective as of such date.

No change in the Company’s internal control over financial reporting (as such term is defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) occurred during the Company’s fiscal quarter ended March 31, 2006 that materially affected, or is reasonably like to materially affect, the Company’s internal control over financial reporting.

During the quarter ended March 31, 2006, the FCP Aptar Savings Plan (the “Plan”) purchased 400 shares of our Common Stock on behalf of the participants at an average price of $54.07 per share, for an aggregate amount of $21.6 thousand. At March 31, 2006, the Plan owns 6,500 shares of our Common Stock. The employees of AptarGroup S.A.S. and Valois S.A.S., our subsidiaries, are eligible to participate in the Plan. All eligible participants are located outside of the United States. An independent agent purchases shares of Common Stock available under the Plan for cash on the open market and we do not issue shares. We do not receive any proceeds from the purchase of Common Stock under the Plan. The agent under the Plan is Banque Nationale de Paris Paribas Asset Management. No underwriters are used under the Plan. All shares are sold in reliance upon the exemption from registration under the Securities Act of 1933 provided by Regulation S promulgated under that Act.

The following table summarizes the Company’s purchases of its securities for the quarter ended March 31, 2006:

          On July 15, 2004, the Company announced that its Board of Directors authorized the company to repurchase two million shares of its outstanding common stock. There is no expiration date for this repurchase program.

Exhibit 10.1 Summary of Bonus Arrangements for Executive Officers.

Exhibit 31.1 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

Exhibit 31.2 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

Exhibit 32.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

Exhibit 32.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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.