AptarGroup - 10-Q quarterly report FY

FOR THE TRANSITION PERIOD FROM           TO           

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 þ No o

Large accelerated filerþ                 Accelerated filero               Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

Three Months Ended March 31, 2007

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)

CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

Notes to Condensed Consolidated Financial Statements
(Amounts in Thousands, Except per Share Amounts, or Otherwise Indicated)
(Unaudited)

     In the opinion of management, the unaudited condensed consolidated financial statements include all adjustments, consisting of only normal recurring adjustments, necessary for a fair statement of consolidated financial position, results of operations, and cash flows for the interim periods presented. The accompanying unaudited condensed consolidated financial statements have been prepared by the Company, 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 condensed 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, 2006. The results of operations of any interim period are not necessarily indicative of the results that may be expected for the year.

     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.

     Effective January 1, 2007, the Company adopted the provisions of Financial Accounting Standards Board (“FASB”) Interpretation No. 48, “Accounting for Income Tax Uncertainty in Income Taxes (“FIN 48”). As a result of the implementation of FIN 48, the Company recognized a $1.6 million increase in the liability for income tax uncertainties. The increase was accounted for as a reduction to the January 1, 2007 balance of retained earnings, as required by FIN 48.

The Company previously disclosed in its financial statements for the year ended December 31, 2006, that it expected to contribute approximately $1 million to its domestic defined benefit plans and approximately $1.9 million to its foreign defined benefit plans in 2007. As of March 31, 2007, the Company has contributed approximately $0.3 million to its foreign plans and has not yet contributed to its domestic plans.

     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 are calculated based on an agreed upon notional amount.

     As of March 31, 2007, the Company has recorded the fair value of derivative instruments of $1.0 million in other non-current assets with a corresponding increase to debt related to a 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 in 2007 or 2006 as any hedge ineffectiveness for the periods was immaterial.

As of March 31, 2007, the Company had one foreign currency cash flow hedge. A French entity of AptarGroup, AptarGroup Holding SAS, has hedged the risk of variability in Euro equivalent associated with the cash flows of an intercompany loan granted in Brazilian Real. The forward contracts utilized were designated as a hedge of the changes in the cash flows relating to the changes in foreign currency rates relating to the loan and related forecasted interest. The notional amount of the foreign currency forward contracts utilized to hedge cash flow exposure was 6.7 million Brazilian Real ($3.3 million) as of March 31, 2007. There were no foreign currency forward contracts utilized to hedge cash flow exposures as of March 31, 2006.

     During the three months ended March 31, 2007, the Company did not recognize any net gain (loss) as any hedge ineffectiveness for the period was immaterial, and the Company did not recognize any net gain (loss) related to the portion of the hedging instrument excluded from the assessment of hedge effectiveness. The Company did not recognize any gain or loss during the three months ended March 31, 2007, for cash flow hedges that would have been discontinued. The Company’s foreign currency forward contracts hedge forecasted transactions for approximately five years (March 2012).

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 and results of operations. 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

As of March 31, 2007, the Company has recorded the fair value of foreign currency forward exchange contracts of $662 thousand in accounts payable and accrued liabilities and $1.0 million in deferred and other non-current liabilities in the balance sheet. All forward exchange contracts outstanding as of March 31, 2007 had an aggregate contract amount of $83.7 million.

     Under its Certificate of Incorporation, the Company has agreed to indemnify its officers and directors for certain events or occurrences while the officer or director is, or was serving, at its request in such capacity. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited; however, the Company has a directors and officers liability insurance policy that covers a portion of its exposure. As a result of its insurance policy coverage, the Company believes the estimated fair value of these indemnification agreements is minimal. The Company has no liabilities recorded for these agreements as of March 31, 2007.

     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, 2006. The Company evaluates performance of its business segments and allocates resources based upon earnings before interest expense in excess of interest income, stock option and corporate expenses, income taxes and unusual items (collectively referred to as “Segment Income”).

     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.

     The Company issues stock options and restricted stock units to employees under Stock Awards Plans approved by shareholders. Stock options are issued to non-employee directors for their services as directors under Director Stock Option Plans approved by shareholders. Options are awarded with the exercise price equal to the market price on the date of grant and generally become exercisable over three years and expire 10 years after grant. Restricted stock generally vests over three years.

     Compensation expense recorded attributable to stock options for the first quarter of 2007 was approximately $8.7 million ($6.1 million after tax), or $0.18 per share basic and $0.17 per share diluted. The income tax benefit related to this compensation expense was approximately $2.6 million. Approximately $8.3 million of the compensation expense was recorded

     The Company uses historical data to estimate expected life and volatility. The weighted-average fair value of stock options granted under the Stock Awards Plans was $18.61 and $16.09 per share in 2007 and 2006, respectively. These values were estimated on the respective dates of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:

     The fair value of restricted stock grants is the market price of the underlying shares on the grant date. A summary of restricted stock unit activity as of March 31, 2007, and changes during the period then ended is presented below:

     As of January 1, 2007, the total amount of unrecognized tax benefits is $7.0 million, of which $6.2 million, if recognized, would impact the effective tax rate. In the first quarter of 2007, the Company incurred unfavorable tax audit settlements of $500 thousand which were part of the January 1, 2007 unrecognized tax benefits. For the next twelve months, the Company does not anticipate material changes to its income tax uncertainties.

     The Company or its subsidiaries file income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. The major tax jurisdictions the Company files in with years still subject to income tax examinations are listed below.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS, OR OTHERWISE INDICATED)

     For further discussion on net sales by reporting segment, please refer to the segment analysis of net sales and operating income on the following pages.

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

     Segment Income in the first quarter of 2007 increased approximately 57% to $26.1 million compared to $16.6 million reported in the same period in the prior year. Acquisitions accounted for approximately $0.6 million of segment income in the quarter. The significant increase in segment income in the first quarter is due primarily to the increase in sales volumes mentioned above and the leveraging of fixed overhead costs worldwide. In addition, an increase in sales of our higher margin value added accessories to customers of sun care and other products helped contribute to the increase in profitability in the quarter.

     Segment Income in the first quarter of 2007 increased approximately 33% to $14.0 million compared to $10.5 million reported in the same period in the prior year. The increase in segment income is primarily derived from increased sales volumes in the quarter in Europe and a favorable product mix in the U.S. Acquisitions had an immaterial impact on segment income in the first quarter of 2007.

     Our net sales for the Pharma segment grew by 18% in the first quarter of 2007 to $87.9 million compared to $74.6 million in the first quarter of 2006. The weakening U.S. dollar compared to the Euro positively impacted the sales increase and represented 8% of the 18% increase. The remaining 10% increase is primarily due to strong sales of our metered dose inhaler valves used on asthma products and increased sales of our nasal spray pumps primarily for allergy related products. The strength of the product sales helped to offset a decrease in custom tooling sales in the quarter of nearly $3.6 million.

     Segment Income in the first quarter of 2007 increased approximately 33% to $22.7 million compared to $17.1 million reported in the same period in the prior year. The improvement in profitability is primarily due to the increase in product sales and improved manufacturing quality leading to lower costs.

     Our estimated stock option expense on a pre-tax basis (in $ millions) for the remainder of the year compared to the prior year is as follows:

     In the first quarter of 2007, our operations provided approximately $34.2 million in cash flow compared to $31.5 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 in cash flow is primarily attributable to an increase in earnings before depreciation, amortization and non-cash stock option expense partially offset by an increase in working capital needs to support the growth in the business. During the first quarter of 2007, we utilized the majority of the operating cash flows to finance capital expenditures.

     We used $30.4 million in cash for investing activities during the first quarter of 2007, compared to $47.6 million during the same period a year ago. The decrease in cash used for investing activities is due primarily to $16.2 million less spent on acquisitions in the first quarter of 2007 compared to the prior year. The acquisition of MVS was funded primarily from existing cash in Europe. Cash outlays for capital expenditures for 2007 are estimated to be approximately $140 million but could vary due to changes in currency rates.

     We received approximately $4.9 million in cash provided by financing activities in the first quarter of 2007 compared to $16.2 million in the first quarter of the prior year. The decrease in cash provided from financing activities is due primarily to an additional $7.3 million spent in the quarter to buy back shares of our own common stock.

Our revolving credit facility and certain long-term obligations require us to satisfy certain financial and other covenants including:

     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 $181.2 million in cash and equivalents is located outside of the U.S. In 2006, we decided to repatriate in 2007 a portion (approximately $10 million) of non-U.S. subsidiary current year earnings. We provided for additional taxes of approximately $.5 million in 2006 for this repatriation. We expect this dividend to be received in the second quarter of 2007.

     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.

     The Board of Directors declared an 18% increase in the quarterly dividend to $.26 per share payable on May 23, 2007 to stockholders of record as of May 2, 2007.

     In February 2007, the FASB issued SFAS No. 159 “The Fair Value Option for Financial Assets and Financial Liabilities.” This Statement permits entities to choose to measure many financial instruments and certain other items at fair value. SFAS No. 159 is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. The Company has not yet performed an analysis of any impact that the adoption of this standard will have on the financial results or existing covenants of the Company.

     Raw material costs are expected to continue to rise in the second quarter compared to the prior year, in particular the surcharge on nickel based products. This may have a negative impact on the anticipated results if delays or difficulties are encountered in passing through these additional costs to customers.

     We anticipate that diluted earnings per share (on a pre-split basis) for the second quarter of 2007 will be in the range of $.96 to $1.01 per share compared to $.77 per share in the prior year.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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 weakening U.S. dollar relative to foreign currencies has an additive translation effect on our financial condition and results of operations. Conversely, a strengthening U.S. dollar has a dilutive effect.

     Additionally, in some cases, we sell products denominated in a currency different from the currency in which the related costs are incurred. Any changes in exchange rates on such inter-country sales may impact our results of operations.

     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 March 31, 2007 about our forward currency exchange contracts. The majority of the contracts expire before the end of the first quarter of 2008 with the exception of a few contracts on intercompany loans that expire in the third quarter of 2013.

     At March 31, 2007, we had a fixed-to-variable interest rate swap agreement with a notional principal value of $25 million which requires us to pay an average variable interest rate (which was 5.3% at March 31, 2007) and receive a fixed rate of 6.6%. The variable rate is adjusted semiannually based on London Interbank Offered Rates (“LIBOR”). Variations in market interest rates would produce changes in our net income. If interest rates increase by 100 basis points, net income related to the interest rate swap agreement would decrease by less than $0.2 million assuming a tax rate of 31.5%. As of March 31, 2007, we recorded the fair value of the fixed-to-variable interest rate swap agreement of $1.0 million in miscellaneous other assets with an offsetting adjustment to debt. No gain or loss was recorded in the income statement in 2007 as any hedge ineffectiveness for the period is immaterial.

ITEM 4. CONTROLS AND PROCEDURES

PART II - - OTHER INFORMATION

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

ITEM 6. EXHIBITS

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.