Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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, 2014
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.
DELAWARE
36-3853103
(State of Incorporation)
(I.R.S. Employer Identification No.)
475 WEST TERRA COTTA AVENUE, SUITE E, CRYSTAL LAKE, ILLINOIS 60014
815-477-0424
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
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer þ
Accelerated filer ¨
Non-accelerated filer ¨
Smaller reporting company ¨
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class
Outstanding at July 29, 2014
Common Stock, $.01 par value per share
65,178,148 shares
Form 10-Q
Quarter Ended June 30, 2014
INDEX
Part I.
FINANCIAL INFORMATION
Item 1.
Financial Statements (Unaudited)
Condensed Consolidated Statements of Income - Three and Six Months Ended June 30, 2014 and 2013
1
Condensed Consolidated Statements of Comprehensive Income – Three and Six Months Ended June 30, 2014 and 2013
2
Condensed Consolidated Balance Sheets – June 30, 2014 and December 31, 2013
3
Condensed Consolidated Statements of Changes in Equity – Six Months Ended June 30, 2014 and 2013
5
Condensed Consolidated Statements of Cash Flows - Six Months Ended June 30, 2014 and 2013
6
Notes to Condensed Consolidated Financial Statements
7
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
17
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
24
Item 4.
Controls and Procedures
Part II.
OTHER INFORMATION
Unregistered Sales of Equity Securities and Use of Proceeds
25
Item 6.
Exhibits
Signature
26
i
PART I – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
In thousands, except per share amounts
Three Months Ended June 30,
Six Months Ended June 30,
2014
2013
Net Sales
$
670,631
641,441
1,346,682
1,259,074
Operating Expenses:
Cost of sales (exclusive of depreciation and amortization shown below)
451,051
431,351
904,462
849,837
Selling, research & development and administrative
96,486
88,111
203,160
182,418
Depreciation and amortization
38,466
38,614
75,713
74,785
Restructuring initiatives
--
2,511
6,578
586,003
560,587
1,183,335
1,113,618
Operating Income
84,628
80,854
163,347
145,456
Other Income (Expense):
Interest expense
(5,246
)
(5,442
(10,127
(10,523
Interest income
1,047
846
2,063
1,695
Equity results of affiliates
(198
(61
(1,744
(323
Miscellaneous, net
(525
73
(153
(633
(4,922)
(4,584
(9,961
(9,784
Income before Income Taxes
79,706
76,270
153,386
135,672
Provision for Income Taxes
26,622
26,390
51,894
45,814
Net Income
53,084
49,880
101,492
89,858
Net Income Attributable to Noncontrolling Interests
(8
(78
(27
Net Income Attributable to AptarGroup, Inc.
53,076
49,802
101,465
89,831
Net Income Attributable to AptarGroup, Inc. per Common Share:
Basic
0.81
0.75
1.55
1.36
Diluted
0.79
0.73
1.49
1.31
Average Number of Shares Outstanding:
65,328
66,420
65,397
66,288
67,438
68,106
68,042
68,339
Dividends per Common Share
0.28
0.25
0.53
0.50
See accompanying Unaudited Notes to Condensed Consolidated Financial Statements.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
In thousands
Other Comprehensive Income (Loss):
Foreign currency translation adjustments
(5,164
6,551
(4,601
(29,062
Changes in treasury locks, net of tax
15
12
30
Defined benefit pension plan, net of tax
Amortization of prior service cost included in net income, net of tax
53
61
106
122
Amortization of net loss included in net income, net of tax
664
954
1,329
2,072
Total defined benefit pension plan, net of tax
717
1,015
1,435
2,194
Total other comprehensive (loss)/income
(4,441
7,581
(3,154
(26,838
Comprehensive Income
48,643
57,461
98,338
63,020
Comprehensive Income Attributable to Noncontrolling Interests
(9
(82
(18
(32
Comprehensive Income Attributable to AptarGroup, Inc.
48,634
57,379
98,320
62,988
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30,
December 31,
Assets
Current Assets:
Cash and equivalents
341,288
309,861
Accounts and notes receivable, less allowance for doubtful accounts of $4,205 in 2014 and $4,416 in 2013
509,324
438,221
Inventories
371,747
353,159
Prepaid and other
104,576
97,170
1,326,935
1,198,411
Property, Plant and Equipment:
Buildings and improvements
381,211
377,300
Machinery and equipment
2,038,274
1,982,195
2,419,485
2,359,495
Less: Accumulated depreciation
(1,569,388
(1,518,894
850,097
840,601
Land
24,042
24,061
874,139
864,662
Other Assets:
Investments in affiliates
6,580
8,243
Goodwill
358,302
358,865
Intangible assets, net
47,339
49,951
Miscellaneous
15,949
17,630
428,170
434,689
Total Assets
2,629,244
2,497,762
Liabilities and Stockholders’ Equity
Current Liabilities:
Notes payable
214,686
138,445
Current maturities of long-term obligations
1,104
1,325
Accounts payable and accrued liabilities
411,016
403,051
626,806
542,821
Long-Term Obligations
354,622
354,814
Deferred Liabilities and Other:
Deferred income taxes
39,411
42,072
Retirement and deferred compensation plans
76,583
71,883
Deferred and other non-current liabilities
5,010
5,864
Commitments and contingencies
121,004
119,819
Stockholders’ Equity:
AptarGroup, Inc. stockholders’ equity
Common stock, $.01 par value, 199 million shares authorized; 85.9 and 85.4 million shares issued as of June 30, 2014 and December 31, 2013, respectively
858
853
Capital in excess of par value
529,684
493,947
Retained earnings
1,686,191
1,619,419
Accumulated other comprehensive income
106,606
109,751
Less treasury stock at cost, 20.7 and 20.0 million shares as of June 30, 2014 and December 31, 2013, respectively
(797,096
(744,213
Total AptarGroup, Inc. Stockholders’ Equity
1,526,243
1,479,757
Noncontrolling interests in subsidiaries
569
551
Total Stockholders’ Equity
1,526,812
1,480,308
Total Liabilities and Stockholders’ Equity
4
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
AptarGroup, Inc. Stockholders’ Equity
Accumulated
Other
Common
Capital in
Non-
Retained
Comprehensive
Stock
Treasury
Excess of
Controlling
Total
Earnings
Income/(Loss)
Par Value
Interest
Equity
Balance – December 31, 2012:
1,513,558
60,683
840
(625,401
430,210
608
1,380,498
Net income
27
(29,067
Changes in unrecognized pension gains/losses and related amortization, net of tax
Stock option exercises & restricted stock vestings
10
44,824
44,835
Cash dividends declared on common stock
(33,103
Treasury stock purchased
(44,588
Balance – June 30, 2013:
1,570,286
33,840
850
(669,988
475,034
640
1,410,662
Balance – December 31, 2013:
(4,592
35,737
35,743
(34,693
(52,884
Balance – June 30, 2014:
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
In thousands, brackets denote cash outflows
Cash Flows from Operating Activities:
Adjustments to reconcile net income to net cash provided by operations:
Depreciation
72,946
72,303
Amortization
2,767
2,482
Stock based compensation
12,058
9,324
Recovery of doubtful accounts
(69
(723
(3,808
(6,756
Defined benefit plan expense
8,452
9,668
Equity in results of affiliates in excess of cash distributions received
1,744
323
Changes in balance sheet items, excluding effects from foreign currency adjustments:
Accounts receivable
(71,208
(67,815
(19,565
(22,591
Prepaid and other current assets
(5,868
(9,670
17,898
19,745
Income taxes payable
(21,572
9,258
(6,559
(7,752
Other changes, net
20,920
11,954
Net Cash Provided by Operations
109,628
109,608
Cash Flows from Investing Activities:
Capital expenditures
(87,068
(71,741
Disposition of property and equipment
2,287
2,946
Investment in unconsolidated affiliate
(13
Notes receivable, net
(163
(159
Net Cash Used by Investing Activities
(84,944
(68,967
Cash Flows from Financing Activities:
Proceeds (Repayments) of notes payable
77,019
(37,407
Repayments of long-term obligations
(308
(1,537
Dividends paid
Credit facility costs
(299
(498
Proceeds from stock option exercises
19,391
31,100
Purchase of treasury stock
Excess tax benefit from exercise of stock options
3,802
3,912
Net Cash Provided (Used) by Financing Activities
12,028
(82,121
Effect of Exchange Rate Changes on Cash
(5,285
1,715
Net Increase (Decrease) in Cash and Equivalents
31,427
(39,765
Cash and Equivalents at Beginning of Period
229,755
Cash and Equivalents at End of Period
189,990
(Amounts in Thousands, Except per Share Amounts, or Otherwise Indicated)
NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying Unaudited Condensed Consolidated Financial Statements include the accounts of AptarGroup, Inc. and our subsidiaries. The terms “AptarGroup” or “Company” as used herein refer to AptarGroup, Inc. and our subsidiaries. All significant intercompany accounts and transactions have been eliminated.
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, comprehensive income, changes in equity 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 (“SEC”). 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. Also, certain financial position data included herein was derived from the Audited Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013 but does not include all disclosures required by GAAP. Accordingly, these Unaudited Condensed Consolidated Financial Statements and related notes should be read in conjunction with the Audited Consolidated Financial Statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013. The results of operations of any interim period are not necessarily indicative of the results that may be expected for the year.
ADOPTION OF RECENT ACCOUNTING PRONOUNCEMENTS
Changes to GAAP are established by the Financial Accounting Standards Board (“FASB”) in the form of accounting standards updates to the FASB’s Accounting Standards Codification.
In July 2013, the FASB issued authoritative guidance on the presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. This standard requires an entity to present an unrecognized tax benefit, or a portion of an unrecognized tax benefit, in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward. The guidance is effective for the Company’s fiscal years beginning after December 15, 2013. This standard did not impact our current year financial statements as this was already the Company’s existing reporting treatment.
In March 2013, the FASB issued authoritative guidance which permits an entity to release cumulative translation adjustments into net income when a reporting entity (parent) ceases to have a controlling financial interest in a subsidiary or group of assets that is a business within a foreign entity. Accordingly, the cumulative translation adjustment should be released into net income only if the sale or transfer results in the complete or substantially complete liquidation of the foreign entity in which the subsidiary or group of assets had resided, or if a controlling financial interest is no longer held. The guidance is effective for the Company’s fiscal years beginning after December 15, 2013. This standard has only a minimal impact on our current year financial statements.
In February 2013, the FASB issued authoritative guidance that amends the presentation of accumulated other comprehensive income and clarifies how to report the effect of significant reclassifications out of accumulated other comprehensive income. The guidance requires footnote disclosures regarding the changes in accumulated other comprehensive income by component and the line items affected in the statements of earnings. The adoption of this standard had no impact on the Unaudited Condensed Consolidated Financial Statements other than disclosure. Additional information can be found in Note 6 of the Unaudited Notes to the Consolidated Financial Statements.
In January 2013, the FASB issued authoritative guidance requiring new asset and liability offsetting disclosures for derivatives, repurchase agreements and security lending transactions to the extent that they are offset in the financial statements or are subject to an enforceable master netting arrangement or similar agreement. We do not have any repurchase agreements and do not participate in securities lending transactions. Our derivative instruments are not offset in the financial statements. Accordingly, the adoption of this standard had no impact on the Unaudited Condensed Consolidated Financial Statements other than disclosure. Additional information can be found in Note 7 of the Unaudited Notes to the Condensed Consolidated Financial Statements.
Other accounting standards that have been issued by the FASB or other standards-setting bodies are not expected to have a material impact on our Unaudited Condensed Consolidated Financial Statements.
INCOME TAXES
The Company computes taxes on income in accordance with the tax rules and regulations of the many taxing authorities where income is earned. The income tax rates imposed by these taxing authorities may vary substantially. Taxable income may differ from pretax income for financial accounting purposes. To the extent that these differences create differences between the tax basis of an asset or liability and our reported amount in the financial statements, an appropriate provision for deferred income taxes is made.
In our determination of which foreign earnings are permanently reinvested in foreign operations, the Company considers numerous factors, including the financial requirements of the U.S. parent company and those of our foreign subsidiaries, the U.S. funding needs for dividend payments and stock repurchases, and the tax consequences of remitting earnings to the U.S. From this analysis, current year repatriation decisions are made in an attempt to provide a proper mix of debt and shareholder capital both within the U.S. and for non-U.S. operations. The Company’s policy is to permanently reinvest our accumulated
foreign earnings and will only make a distribution out of current year earnings to meet the cash needs at the parent company. As such, the Company does not provide for taxes on earnings that are deemed to be permanently reinvested. Since no distribution to the U.S. of foreign earnings is expected in 2014, the effective tax rate for 2014 includes no tax cost of repatriation. Although the Company does not expect to repatriate foreign earnings back to the U.S. in 2014, dividends on certain earnings within Europe are expected to be made to our European holding company. These dividends are expected to generate an additional tax cost of approximately $3 million in the third quarter.
The Company provides a liability for the amount of tax benefits realized from uncertain tax positions. This liability is provided whenever the Company determines that a tax benefit will not meet a more-likely-than-not threshold for recognition. See Note 4 of the Unaudited Notes to the Condensed Consolidated Financial Statements for more information.
NOTE 2 - INVENTORIES
At June 30, 2014 and December 31, 2013, approximately 19% and 20%, respectively, of the total inventories are accounted for by using the LIFO method. Inventories, by component, consisted of:
Raw materials
124,356
114,501
Work in process
110,587
108,924
Finished goods
144,378
137,591
379,321
361,016
Less LIFO Reserve
(7,574
(7,857
NOTE 3 – GOODWILL AND OTHER INTANGIBLE ASSETS
The changes in the carrying amount of goodwill since the year ended December 31, 2013 are as follows by reporting segment:
Beauty +
Food +
Corporate
Home
Pharma
Beverage
& Other
181,002
159,949
17,914
1,615
360,480
Accumulated impairment losses
(1,615
Balance as of December 31, 2013
Acquisition
Foreign currency exchange effects
(81
(417
(65
(563
180,921
159,532
17,849
359,917
Balance as of June 30, 2014
The table below shows a summary of intangible assets as of June 30, 2014 and December 31, 2013.
June 30, 2014
December 31, 2013
Weighted Average
Gross
Carrying
Net
Period (Years)
Amount
Value
Amortized intangible assets:
Patents
20,092
(19,793
299
20,165
(19,732
433
Acquired technology
40,393
(5,386
35,007
40,546
(4,055
36,491
License agreements and other
35,565
(23,532
12,033
35,259
(22,232
13,027
Total intangible assets
96,050
(48,711
95,970
(46,019
Aggregate amortization expense for the intangible assets above for the quarters ended June 30, 2014 and 2013 was $1,369 and $1,245, respectively. Aggregate amortization expense for the intangible assets above for the six months ended June 30, 2014 and 2013 was $2,767 and $2,482, respectively.
Future estimated amortization expense for the years ending December 31 is as follows:
2,800
(remaining estimated amortization for 2014)
2015
5,325
2016
4,316
2017
3,598
2018 and thereafter
31,300
8
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 June 30, 2014.
NOTE 4 — INCOME TAX UNCERTAINTIES
The Company had approximately $7.0 and $8.0 million recorded for income tax uncertainties as of June 30, 2014 and December 31, 2013, respectively. The $1.0 million change in income tax uncertainties was primarily the result of an audit settlement in the U.S and a lapse in the statute of limitations on two tax related issues. The amount, if recognized, that would impact the effective tax rate is $6.8 and $7.8 million, respectively. The Company estimates that it is reasonably possible that the liability for uncertain tax positions will decrease by no more than $5 million in the next twelve months from the resolution of various uncertain positions as a result of the completion of tax audits, litigation and the expiration of the statute of limitations in various jurisdictions.
NOTE 5 — RETIREMENT AND DEFERRED COMPENSATION PLANS
Components of Net Periodic Benefit Cost:
Domestic Plans
Foreign Plans
Three months ended June 30,
Service cost
2,010
2,045
1,081
959
Interest cost
1,482
1,246
699
658
Expected return on plan assets
(1,646
(1,474
(510
(447
Amortization of net loss
1,117
313
348
Amortization of prior service cost
80
92
Net periodic benefit cost
2,563
2,935
1,663
1,610
Six months ended June 30,
4,021
4,270
2,160
1,928
2,964
2,496
1,398
1,323
(3,292
(2,888
(1,020
(899
1,434
2,551
626
700
161
185
5,127
6,431
3,325
3,237
EMPLOYER CONTRIBUTIONS
Although the Company has no minimum funding requirement, we plan to contribute approximately $10 million to our domestic defined benefit plans in 2014. No 2014 contributions were made as of June 30, 2014. The Company also expects to contribute approximately $5.6 million to our foreign defined benefit plans in 2014 and, as of June 30, 2014, we have contributed approximately $1.5 million.
NOTE 6 — ACCUMULATED OTHER COMPREHENSIVE INCOME
Changes in Accumulated Other Comprehensive Income by Component:
Foreign
Defined Benefit
Currency
Pension Plans
Balance – December 31, 2012
120,097
(59,248
(166
Other comprehensive loss before reclassifications
Amounts reclassified from accumulated other comprehensive income
2,224
Net current-period other comprehensive (loss)/income
(26,843
Balance - June 30, 2013
91,030
(57,054
(136
Balance – December 31, 2013
149,965
(40,093
(121
(4,252
(340
1,107
(3,145
Balance - June 30, 2014
145,373
(38,658
(109
9
Reclassifications Out of Accumulated Other Comprehensive Income:
Details about Accumulated Other
Amount Reclassified from Accumulated
Affected Line in the Statement
Comprehensive Income Components
Other Comprehensive Income
Where Net Income is Presented
Defined Benefit Pension Plans
1,030
1,465
(a)
93
1,110
1,558
Total before tax
(393
(543
Tax benefit
Net of tax
Changes in treasury locks
23
Interest Expense
(4
Total reclassifications for the period
723
(a) These accumulated other comprehensive income components are included in the computation of net periodic benefit costs, net of tax (see Note 5 — Retirement and Deferred Compensation Plans for additional details).
2,060
3,251
(b)
187
2,221
3,438
(786
(1,244
Foreign Currency
Foreign Currency Gain
19
46
(7
(16
(b) These accumulated other comprehensive income components are included in the computation of net periodic benefit costs, net of tax (see Note 5 – Retirement and Deferred Compensation Plans for additional details).
NOTE 7 — DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
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 or intercompany loans can impact the Company’s results
of operations. The Company’s policy is not to engage in speculative foreign currency hedging activities, but to minimize our 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 economically 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 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.
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 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 liquidation of any of our 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.
OTHER
As of June 30, 2014, the Company has recorded the fair value of foreign currency forward exchange contracts of $0.7 million in prepaid and other, $0.1 million in miscellaneous other assets, $1.6 million in accounts payable and accrued liabilities, and $0.2 million in deferred and other non-current liabilities in the balance sheet. All forward exchange contracts outstanding as of June 30, 2014 had an aggregate contract amount of $154 million.
Fair Value of Derivative Instruments in the Condensed Consolidated Balance Sheets as of June 30, 2014
and December 31, 2013
Derivative Contracts Not Designated as Hedging Instruments
Balance Sheet Location
Derivative Assets
Foreign Exchange Contracts
688
3,003
Miscellaneous Other Assets
69
985
757
3,988
Derivative Liabilities
1,586
522
232
110
1,818
632
The Effect of Derivative Instruments on the Condensed Consolidated Statements of Income
for the Quarters Ended June 30, 2014 and June 30, 2013
Derivatives Not Designated as Hedging Instruments
Location of Gain or (Loss) Recognized in Income on Derivative
Amount of Gain or (Loss) Recognized in Income on Derivative
Other Income (Expense) Miscellaneous, net
(1,335
2,555
for the Six Months Ended June 30, 2014 and June 30, 2013
Location of Loss Recognized in Income on Derivative
Amount of Loss Recognized in Income on Derivative
(1,494
(43
11
Net Amounts
Gross Amounts not Offset in the
Gross Amounts
Presented in
Statement of Financial Position
Offset in the
the Statement of
Financial
Cash Collateral
Financial Position
Instruments
Received
Description
Total Liabilities
NOTE 8 — FAIR VALUE
Authoritative guidelines require the categorization of assets and liabilities into three levels based upon the assumptions (inputs) used to price the assets or liabilities. Level 1 provides the most reliable measure of fair value, whereas Level 3 generally requires significant management judgment. The three levels are defined as follows:
· Level 1: Unadjusted quoted prices in active markets for identical assets and liabilities.
· Level 2: Observable inputs other than those included in Level 1. For example, quoted prices for similar assets or liabilities in active markets or quoted prices for identical assets or liabilities in inactive markets.
· Level 3: Unobservable inputs reflecting management’s own assumptions about the inputs used in pricing the asset or liability.
As of June 30, 2014, the fair values of our financial assets and liabilities were categorized as follows:
Level 1
Level 2
Level 3
Forward exchange contracts (a)
Total assets at fair value
Liabilities
Total liabilities at fair value
As of December 31, 2013, the fair values of our financial assets and liabilities were categorized as follows:
(a) Market approach valuation technique based on observable market transactions of spot and forward rates.
The carrying amounts of the Company’s other current financial instruments such as cash and equivalents, notes payable and current maturities of long-term obligations approximate fair value due to the short-term maturity of the instrument. The Company considers our long-term obligations a Level 2 liability and utilizes the market approach valuation technique based on interest rates that are currently available to the Company for issuance of debt with similar terms and maturities. The estimated fair value of the Company’s long-term obligations was $371 million as of June 30, 2014 and $363 million as of December 31, 2013.
NOTE 9 — COMMITMENTS AND CONTINGENCIES
The Company, in the normal course of business, is subject to a number of lawsuits and claims both actual and potential in nature. While 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 or cash flows, claims and legal proceedings are subject to inherent uncertainties, and unfavorable outcomes could occur that could include amounts in excess of any accruals which management has established. Were such unfavorable final outcomes to occur, it is possible that they could have a material adverse effect on our financial position, results of operations and cash flows.
Under our Certificate of Incorporation, the Company has agreed to indemnify our officers and directors for certain events or occurrences while the officer or director is, or was, serving at our 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 our exposure. As a result of our 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 June 30, 2014.
NOTE 10 — STOCK REPURCHASE PROGRAM
During the three and six months ended June 30, 2014, the Company repurchased approximately 600 thousand and 800 thousand shares for approximately $39.9 million and $52.9 million, respectively. As of June 30, 2014, the Company has a remaining authorization to repurchase 3.2 million additional shares. The timing of and total amount expended for the share repurchases depends upon market conditions.
NOTE 11 — STOCK-BASED COMPENSATION
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 units generally vest over three years.
Compensation expense recorded attributable to stock options for the first six months of 2014 was approximately $12.0 million ($7.8 million after tax). The income tax benefit related to this compensation expense was approximately $4.2 million. Approximately $10.8 million of the compensation expense was recorded in selling, research & development and administrative expenses and the balance was recorded in cost of sales. Compensation expense recorded attributable to stock options for the first six months of 2013 was approximately $9.3 million ($6.2 million after tax). The income tax benefit related to this compensation expense was approximately $3.1 million. Approximately $8.3 million of the compensation expense was recorded in selling, research & development and administrative expenses and the balance was recorded in cost of sales.
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 $14.84 and $10.07 per share in 2014 and 2013, respectively. These values were estimated on the respective dates of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:
Stock Awards Plans:
Dividend Yield
1.7
%
1.8
Expected Stock Price Volatility
22.2
22.7
Risk-free Interest Rate
2.3
1.2
Expected Life of Option (years)
6.9
The fair value of stock options granted under the Director Stock Option Plan during the second quarter of 2014 was $14.07. The fair value of stock options granted under the Director Stock Option Plan during the second quarter of 2013 was $10.89. These values were estimated on the respective date of the grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:
Director Stock Option Plans:
1.9
23.0
2.2
1.3
A summary of option activity under the Company’s stock plans during the first half of 2014 is presented below:
Stock Awards Plans
Director Stock Option Plans
Shares
Exercise Price
Outstanding, January 1, 2014
7,815,932
41.26
313,834
48.85
Granted
1,349,850
68.00
95,000
66.59
Exercised
(523,959
31.92
(40,166
47.96
Forfeited or expired
(24,067
51.10
Outstanding at June 30, 2014
8,617,756
45.99
368,668
53.52
Exercisable at June 30, 2014
5,945,005
39.68
188,159
45.98
Weighted-Average Remaining Contractual Term (Years):
6.3
7.8
5.2
6.4
Aggregate Intrinsic Value ($000):
183,123
5,008
163,021
3,973
Intrinsic Value of Options Exercised ($000) During the Six Months Ended:
18,050
741
June 30, 2013
28,188
285
13
The fair value of shares vested during the six months ended June 30, 2014 and 2013 was $13.9 million and $12.9 million, respectively. Cash received from option exercises was approximately $19.4 million and the actual tax benefit realized for the tax deduction from option exercises was approximately $5.5 million in the six months ended June 30, 2014. As of June 30, 2014, the remaining valuation of stock option awards to be expensed in future periods was $18.7 million and the related weighted-average period over which it is expected to be recognized is 1.6 years.
The fair value of restricted stock unit grants is the market price of the underlying shares on the grant date. A summary of restricted stock unit activity as of June 30, 2014, and changes during the period then ended is presented below:
Weighted-Average
Grant-Date Fair Value
Nonvested at January 1, 2014
25,681
53.49
43,671
67.57
Vested
(9,355
52.50
Nonvested at June 30, 2014
59,997
63.90
Compensation expense recorded attributable to restricted stock unit grants for the first half of 2014 and 2013 was approximately $1.1 million and $493 thousand, respectively. The fair value of units vested during the six months ended June 30, 2014 and 2013 was $491 thousand and $496 thousand, respectively. The intrinsic value of units vested during the six months ended June 30, 2014 and 2013 was $613 thousand and $582 thousand, respectively. As of June 30, 2014 there was $2.4 million of total unrecognized compensation cost relating to restricted stock unit awards which is expected to be recognized over a weighted-average period of 1.7 years.
During the first quarter of 2014, the Company approved a new long-term incentive program for certain employees. The program is based on the cumulative total shareholder return of our common stock during a three year performance period. Total expense related to this program is expected to be approximately $1.2 million over the performance period, of which $320 thousand was recognized in the first half of 2014.
NOTE 12 — EARNINGS PER SHARE
AptarGroup’s authorized common stock consists of 199 million shares, having a par value of $.01 each. Information related to the calculation of earnings per share is as follows:
Three months ended
Consolidated operations
Income available to common shareholders
Average equivalent shares
Shares of common stock
Effect of dilutive stock based compensation
Stock options
2,103
1,682
Restricted stock
Total average equivalent shares
Net income per share
14
Six months ended
2,616
2,043
29
NOTE 13 — SEGMENT INFORMATION
The Company operates in the packaging components industry, which includes the development, manufacture and sale of consumer product dispensing solutions. The Company is organized into three reporting segments. Operations that sell dispensing systems primarily to the personal care, beauty and home care markets form the Beauty + Home segment. Operations that sell dispensing systems primarily to the prescription drug, consumer health care and injectables markets form the Pharma segment. Operations that sell dispensing systems primarily to the food and beverage markets form the Food + Beverage segment.
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, 2013. Segment income is defined as earnings before net interest expense, certain corporate expenses, restructuring initiatives and related depreciation and income taxes.
Financial information regarding the Company’s reportable segments is shown below:
Total Revenue:
Beauty + Home
391,215
378,828
789,755
746,011
195,690
182,995
390,039
351,888
Food + Beverage
90,192
83,570
180,818
168,903
Total Revenue
677,097
645,393
1,360,612
1,266,802
Less: Intersegment Sales:
5,989
3,844
13,293
7,555
64
88
477
44
637
85
Total Intersegment Sales
6,466
3,952
13,930
7,728
Net Sales:
385,226
374,984
776,462
738,456
182,931
351,800
89,715
83,526
180,181
168,818
Segment Income (1):
27,198
30,339
54,979
54,754
52,793
50,437
105,275
96,417
12,416
11,864
21,496
20,414
Restructuring Initiatives and Related Depreciation
(3,067
(7,593
Corporate & Other
(8,502
(8,707
(20,300
(19,492
Income before interest and taxes
83,905
80,866
161,450
144,500
Interest expense, net
(4,199
(4,596
(8,064
(8,828
Income before income taxes
(1) The Company evaluates performance of our business units and allocates resources based upon segment income. Segment income is defined as earnings before net interest expense, certain corporate expenses, restructuring initiatives and income taxes. Restructuring Initiatives and Related Depreciation includes the following income/(expense) items for the three and six months ended June 30, 2014 as follows:
European Operations Optimization (“EOO”) Plan
556
Employee Severance and Other Costs
6,622
Prior Year Initiatives
(44
Total Restructuring Initiatives and Related Depreciation Expense
3,067
7,593
Restructuring Initiatives and Related Depreciation Expense by Segment
3,090
7,616
(23
NOTE 14 — ACQUISITIONS
In December 2013, AptarGroup acquired a 20% non-controlling investment in Bapco Closures Holding Limited (Bapco) for approximately $5.2 million. In addition to this equity stake, the Company secured an exclusive global license related to innovative closures sealing technology that provides package integrity and tamper evidence. This investment is being accounted for under the equity method of accounting from the date of acquisition and since it does not have a material impact on the results of operations in 2014 or 2013, pro forma information is not presented.
NOTE 15 — RESTRUCTURING INITIATIVES
In November 2012, the Company announced a plan to optimize certain capacity in Europe. Due to increased production efficiencies and to better position the Company for future growth in Europe, AptarGroup transferred and consolidated production capacity involving twelve facilities. Two facilities have closed impacting approximately 170 employees. The locations involved in the plan are facilities serving the beauty, personal care, food, beverage, and consumer health care markets. As of December 31, 2013, the plan was substantially complete. The cumulative expense incurred was $19.5 million. As of June 30, 2014 we have recorded the following activity associated with our European restructuring plan:
Beginning
Net Charges for
Ending
Reserve at
the Six Months
12/31/13
Ended 6/30/14
Cash Paid
FX Impact
6/30/14
Employee severance
2,521
(1,991
(3
527
Other costs
1,735
(639
1,105
Totals
4,256
(2,630
1,632
16
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS, OR AS OTHERWISE INDICATED)
RESULTS OF OPERATIONS
100.0
67.3
67.2
67.5
14.4
13.7
15.1
14.5
5.7
6.0
5.6
5.9
0.4
0.5
12.6
12.1
11.6
Other expense
(0.7
(0.8
11.9
11.4
10.8
7.9
7.5
7.1
Effective Tax Rate
33.4
34.6
33.8
NET SALES
We reported net sales of $670.6 million for the second quarter ended June 30, 2014, 5% above second quarter 2013 reported net sales of $641.4 million. The average U.S. dollar exchange rate weakened relative to the Euro in the second quarter of 2014 compared to the second quarter of 2013. However, the U.S. dollar strengthened compared to other foreign currencies, such as the Brazilian Real, Argentine Peso, Indian Rupee and Russian Ruble. As a result, net changes in exchange rates favorably impacted our reported sales growth by 1%. Therefore, sales excluding changes in foreign currency rates increased by 4% in the second quarter of 2014 compared to the second quarter of 2013. Each business segment reported an increase in sales:
Second Quarter 2014
Beauty
Net Sales Change over Prior Year
+ Home
Product Sales (including tooling)
Currency Effects
Total Reported Net Sales Growth
For the first six months of 2014, we reported net sales of $1.35 billion, 7% above the first six months of 2013 reported net sales of $1.26 billion. Consistent with the second quarter, the average U.S. dollar exchange rate weakened relative to the Euro but was mostly offset by strengthening of the U.S. dollar compared to other foreign currencies as mentioned above. Therefore, sales excluding changes in foreign currency rates increased by 6% in the first six months of 2014 compared to the first six months of 2013:
First Six Months of 2014
For further discussion on net sales by reporting segment, please refer to the segment analysis of net sales and segment income on the following pages.
The following table sets forth, for the periods indicated, net sales by geographic location:
% of Total
Domestic
161,624
169,245
332,301
326,473
Europe
393,282
59
362,278
57
792,741
718,804
Other Foreign
115,725
109,918
221,640
213,797
COST OF SALES (EXCLUSIVE OF DEPRECIATION AND AMORTIZATION SHOWN BELOW)
Our cost of sales as a percent of net sales was 67.3% in the second quarter of 2014, which is consistent with the cost of sales as a percent of net sales in the same period a year ago. Increased sales volumes in our Pharma segment positively impacted our cost of sales percentage as margins on our pharmaceutical products typically are higher than the overall Company average. Also favorably impacting the cost of sales percentage are cost savings initiatives, including savings related to our European restructuring initiative. These decreases were offset by less favorable resin adjustments in 2014 compared to 2013 which negatively impacted our cost of sales percentage. While the majority of resin cost increases are passed along to our customers in our selling prices, we typically experience a lag in the timing of passing on these cost increases. Currency effects and start-up costs in Latin America also unfavorably impacted the cost of sales percentage.
Cost of sales as a percent of net sales decreased slightly to 67.2% in the first six months of 2014 compared to 67.5% in the same period a year ago. This decrease is mainly due to increased sales volumes across each segment allowing for greater operating leverage and the fact that our Pharma segment had the strongest sales growth of our three segments.
SELLING, RESEARCH & DEVELOPMENT AND ADMINISTRATIVE
Our Selling, Research & Development and Administrative expenses (“SG&A”) increased by approximately $8.4 million to $96.5 million in the second quarter of 2014 compared to $88.1 million during the same period a year ago. Excluding changes in foreign currency rates, SG&A increased $7.3 million in the quarter. The increase is due to several factors including higher research and development costs associated with our recently acquired bonded aluminum to plastic license and higher information technology costs associated with our ongoing enterprise resource planning system roll-ins and higher stock compensation expense. SG&A as a percentage of net sales increased to 14.4% compared to 13.7% in the same period of the prior year due to the higher expenses noted above.
SG&A increased by approximately $20.8 million to $203.2 million in the first six months of 2014 compared to $182.4 million during the same period a year ago. Excluding changes in foreign currency rates, SG&A increased by approximately $19.1 million in the first six months of the year. As discussed above, the increase is mainly due to our investments in research and development and information technology systems along with higher stock compensation expense. SG&A as a percentage of net sales increased to 15.1% in the first six months of 2014 compared to 14.5% in the first six months of 2013 primarily due to higher expenses during the current year.
DEPRECIATION AND AMORTIZATION
Reported depreciation and amortization expenses slightly decreased to $38.5 million in the second quarter of 2014 compared to $38.6 million during the same period a year ago. Excluding changes in foreign currency rates, depreciation and amortization decreased by approximately $0.9 million in the quarter compared to the same period a year ago. 2013 expenses included $1.5 million of accelerated depreciation on certain corporate assets as well as $0.6 million of accelerated depreciation related to our European restructuring initiatives. These one-time charges in 2013 were partially offset by additional investments in our new products and continued roll-out of our global enterprise resource planning system in 2014. Depreciation and amortization as a percentage of net sales decreased to 5.7% in the second quarter of 2014 compared to 6.0% for the same period a year ago mainly due to our increase in sales during 2014.
For the first six months of 2014, reported depreciation and amortization expenses increased by approximately $0.9 million to $75.7 million compared to $74.8 million in the first half of 2013. Excluding changes in foreign currency rates, depreciation and amortization decreased by approximately $0.2 million in the first six months of 2014. As discussed above, one-time charges of $1.5 million of accelerated depreciation on certain corporate assets and $1.0 million of accelerated depreciation related to our restructuring initiatives in 2013 were partially offset by additional investments in our new products along with continued roll-out of our global enterprise resource planning system in 2014. Depreciation and amortization as a percentage of net sales also decreased slightly to 5.6% compared to 5.9% for the same period a year ago due to higher sales in the first half of 2014.
RESTRUCTURING INITIATIVES
In November 2012, the Company announced a plan to optimize certain capacity in Europe. Due to increased production efficiencies and to better position the Company for future growth in Europe, AptarGroup transferred and consolidated production capacity involving twelve facilities. Under the plan, two facilities were closed impacting approximately 170 employees. During the three and six months ended June 30, 2013, we recognized $2.6 million and $6.6 million of restructuring expenses, respectively, along with the $0.6 million and $1.0 million of accelerated depreciation of assets, respectively, mentioned above. The plan was substantially completed at the end of 2013 with total costs of approximately $19.5 million. Savings from the plan are expected to be approximately $10 million on an annualized basis.
OPERATING INCOME
Operating income increased approximately $3.7 million in the second quarter of 2014 to $84.6 million compared to $80.9 million in the same period in the prior year. Excluding changes in currency rates, operating income decreased by approximately $1.4 million in the quarter. The primary reason for the decrease in operating income over the prior year is the higher SG&A costs in
18
the current quarter as discussed above. Operating income as a percentage of net sales remained consistent at 12.6% in the second quarter of 2014 compared to the same period in the prior year.
Operating income increased approximately $17.8 million to $163.3 million in the first six months of 2014 compared to $145.5 million in the same period in the prior year. Excluding changes in currency rates, operating income increased by approximately $7.2 million in the first six months of 2014. The increase in operating income is mainly due to higher product sales discussed above. Operating income as a percentage of sales increased to 12.1% in the first six months of 2014 compared to 11.6% for the same period in the prior year.
NET OTHER EXPENSE
Net other expenses in the second quarter of 2014 increased to $4.9 million from $4.6 million in the same period in the prior year. This increase is mainly due to increased costs associated with forward contracts in place to mitigate our foreign currency exposure on cross border transactions.
Net other expenses for the six months ended June 30, 2014 increased slightly to $10.0 million from $9.8 million in the same period in the prior year. Lower interest expense and hedging costs were offset by the recognition of a $1.5 million write-down on a non-controlling investment taken during the first quarter of 2014 to align with the current fair value.
EFFECTIVE TAX RATE
The reported effective tax rate decreased to 33.4% for the three months ended June 30, 2014 compared to 34.6% for the same period ended June 30, 2013 and remained consistent at 33.8% for the six months ended June 30, 2014 and 2013. The decrease in the rate for the three months ended June 30, 2014 is related primarily to a favorable IRS ruling on the classification of a subsidiary that was determined in the second quarter of 2014. The rate for the six months ended June 30, 2013 was favorably impacted by an Italian tax law change which provided approximately the same benefit as the IRS ruling in 2014, thereby leaving the tax rates the same for the six months ended June 30, 2013 and 2014. Additionally, although the effective tax rate increased in 2014 due to tax law changes enacted in France in December 2013, the increase was offset by our decision not to repatriate funds from Europe in 2014 and the absence of any associated tax costs.
NET INCOME ATTRIBUTABLE TO APTARGROUP, INC.
We reported net income attributable to AptarGroup, Inc. of $53.1 million and $101.5 million in the three and six months ended June 30, 2014, respectively, compared to $49.8 million and $89.8 million for the same periods in the prior year.
BEAUTY + HOME SEGMENT
Operations that sell dispensing systems primarily to the personal care, beauty and home care markets form the Beauty + Home segment.
$385,226
$374,984
$776,462
$738,456
Segment Income
Segment Income as a percentage of Net Sales
8.1
7.4
Net sales for the quarter ended June 30, 2014 increased 3% to $385.2 million compared to $375.0 million in the second quarter of the prior year. For the segment, changes in foreign currency rates did not have a material impact on reported sales for the quarter ended June 30, 2014. Sales, excluding foreign currency changes, to the beauty market increased 3% mainly on the growth in new skin care products while sales to the personal care market were flat in the second quarter of 2014 compared to the same period in the prior year. Home care sales increased 17% mainly on higher tooling sales. Geographically, local currency sales increases in Europe, Asia and Latin America more than offset continued softness in the North American region. Customer tooling sales, excluding foreign currency changes, increased in the second quarter of 2014 to $11.5 million compared to $7.9 million in the second quarter of the prior year. Increases in resin pass throughs to our customers also positively impacted sales by $0.3 million.
Net sales increased 5% in the first six months of 2014 to $776.5 million compared to $738.5 million in the first six months of the prior year. Changes in foreign currency rates did not have a material impact on reported sales for the first six months of 2014. Sales of our products, excluding foreign currency changes, to the beauty market increased 6% while sales to the personal care market increased 5% in the first six months of 2014 compared to the first six months of 2013. Geographically, excluding foreign currency changes, all four regions reported sales growth. Customer tooling sales, excluding foreign currency changes, also increased in the first six months of 2014 to $16.3 million compared to $14.1 million in the first six months of the prior year.
Segment income for the second quarter of 2014 decreased approximately 10% to $27.2 million compared to $30.3 million reported in the prior year. Currency effects and start-up costs in Latin America negatively impacted results by approximately $2.1 million while less favorable resin adjustments negatively impacted results by approximately $0.9 million. Business softness and operational inefficiencies in North America also negatively impacted results.
Segment income in the first six months of 2014 increased by less than 1% to $55.0 million compared to $54.8 million reported in the same period in the prior year. Increases in product sales and savings related to our European restructuring initiative were offset by $5.3 million of negative currency transaction effects and start-up costs for our new facilities in Latin America along with higher SG&A costs mainly related to professional and legal fees.
PHARMA SEGMENT
Operations that sell dispensing systems to the prescription drug, consumer health care and injectables markets form the Pharma segment.
27.0
27.6
27.4
Net sales for the Pharma segment increased by 7% in the second quarter of 2014 to $195.7 million compared to $182.9 million in the second quarter of 2013. Changes in foreign currency rates represented 3% of the total segment sales increase. Sales, excluding changes in foreign currency rates, increased 4%. Sales, excluding foreign currency changes, to the prescription and consumer health care markets increased 3% and 11%, respectively. Consumer health care’s growth over the prior year was mainly due to several new eye care product introductions using our ophthalmic squeeze dispenser along with strong bag-on-valve sales for nasal saline products. Sales, excluding foreign currency changes, to the injectables market decreased by 3% with lower tooling sales accounting for 2% of the 3% decrease and the remainder due to one particular customer being overstocked.
Net sales for the first six months of 2014 increased approximately 11% to $390.0 million compared to $351.8 million in the first six months of the prior year. Changes in foreign currency rates represented 3% of the total segment sales increase. Excluding changes in foreign currency rates, sales increased by 8% in the first six months of 2014 compared to the first six months of 2013. Excluding foreign currency rate changes, sales to the prescription and consumer health care markets increased 6% and 18%, respectively, in the first six months of 2014 compared to the same period in the prior year led by strong sales of our products to the asthma/COPD, pain and nasal decongestant markets. Excluding foreign currency rate changes, sales to the injectables market increased 1% as first quarter sales increases more than offset the decrease in tooling sales and customer overstocking in the second quarter.
Segment income in the second quarter of 2014 increased approximately 5% to $52.8 million compared to $50.4 million reported in the same period in the prior year. This increase is mainly attributed to the higher sales for both the prescription and consumer health care markets as mentioned above.
Segment income in the first six months of 2014 increased approximately 9% to $105.3 million compared to $96.4 million reported in the same period of the prior year. This increase is again mainly attributed to the higher sales for the prescription and consumer health care markets. The Pharma segment also recognized a $1.5 million expense in the first quarter of 2014 related to the write-down of a non-controlling investment to align with the current fair value.
FOOD + BEVERAGE SEGMENT
Operations that sell dispensing systems primarily to the food and beverage markets form the Food + Beverage segment.
13.8
14.2
Net sales for the Food + Beverage segment for the quarter ended June 30, 2014 increased approximately 7% to $89.7 million compared to $83.5 million in the second quarter of the prior year. For the segment, changes in foreign currency rates did not have a material impact on reported sales for the quarter ended June 30, 2014. Excluding foreign currency rate changes, sales to the beverage market increased approximately 11% on the combination of the continued success of functional bottled water in the Asian region and growth in the concentrate market that collectively offset lower tooling sales. Excluding foreign currency rate changes, sales to the food market increased 4% mainly due to an increase in custom tooling sales. Increases in resin pass throughs to our customers also positively impacted sales by $0.6 million.
Net sales for the first six months of 2014 increased approximately 7% to $180.2 million compared to $168.8 million in the first six months of the prior year. Excluding changes in foreign currency rates, sales increased 6%. Sales, excluding foreign currency changes, to the beverage market increased 9% and sales to the food market increased approximately 4% in the first six months of 2014 compared to the same period in the prior year. Consistent with the second quarter, the six month beverage sales increase is driven by the continued success of functional bottled water in the Asian region and growth in the concentrate market offset by $4.8 million of lower tooling sales. The food increase is mainly due to improving sales to our sauces and condiments market.
20
Segment income in the second quarter of 2014 increased approximately 5% to $12.4 million compared to $11.9 million during the same period in the prior year. Segment income was positively impacted by the increased product sales discussed above along with improved productivity and overhead cost absorption, particularly in North America and Europe. Less favorable resin adjustments negatively impacted segment results by $1.3 million in the quarter.
Segment income in the first six months of 2014 increased approximately 5% to $21.5 million compared to $20.4 million reported in the same period of the prior year. The strong growth in product sales along with improved manufacturing productivity and cost absorption mentioned above contributed to the improvement.
CORPORATE & OTHER
In addition to our three operating business segments, AptarGroup assigns certain costs to “Corporate & Other,” which is presented separately in Note 13 of the Unaudited Notes to the Condensed Consolidated Financial Statements. Corporate & Other primarily includes certain professional fees, compensation and information system costs which are not allocated directly to our operating segments. Corporate & Other expense decreased to $8.5 million for the quarter ended June 30, 2014 compared to $8.7 million in the second quarter of the prior year mainly due to a $1.5 million adjustment for accelerated depreciation on certain corporate assets in 2013 which outweighed increases in professional fees and personnel costs in 2014.
Corporate & Other expense in the first six months of 2014 increased to $20.3 million compared to $19.5 million reported in the same period of the prior year. The increase is mainly due to increases in professional fees along with higher personnel costs. These increases are somewhat offset by the 2013 accelerated depreciation on certain corporate assets noted above.
FOREIGN CURRENCY
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 also have foreign exchange exposure to the Brazilian Real, British Pound, Swiss Franc and other South American and Asian currencies, among others. Recently we have experienced volatility in certain Latin American and Asian currencies, including the Argentine Peso, Brazilian Real, Indian Rupee and the Russian Ruble. We manage our exposures to foreign exchange principally with forward exchange contracts to hedge certain transactions and firm purchase and sales commitments denominated in foreign currencies. A weakening U.S. dollar relative to foreign currencies has an additive translation effect on our financial statements. Conversely, a strengthening U.S. dollar has a dilutive 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.
QUARTERLY TRENDS
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.
We generally incur higher stock option expense in the first quarter compared with the rest of the fiscal year. Our estimated stock option expense on a pre-tax basis (in $ millions) for the year 2014 compared to 2013 is as follows:
First Quarter
8.4
6.5
Second Quarter
3.7
2.8
Third Quarter (estimated for 2014)
2.9
Fourth Quarter (estimated for 2014)
17.9
LIQUIDITY AND CAPITAL RESOURCES
Our primary sources of liquidity are cash flow from operations and our revolving credit facility. In the first six months of 2014, our operations provided approximately $109.6 million in cash flow. Our operations provided the same level of cash flow in the first six months of 2013. In both periods, cash flow from operations was primarily derived from earnings before depreciation and amortization. During the first half of 2014, we utilized the majority of the operating cash flows to finance capital expenditures.
We used $84.9 million in cash for investing activities during the first half of 2014, compared to $69.0 million during the same period a year ago. The increase in cash used for investing activities is due primarily to an increase in capital expenditures of $15.3 million in the first half of 2014 compared to the first half of 2013. Cash outlays for capital expenditures for 2014 are estimated to be approximately $190 million but could vary due to changes in exchange rates as well as the timing of capital projects.
Proceeds from financing activities were $12.0 million in the first half of 2014 compared to a use of $82.1 million in cash for financing activities during the same period a year ago. The increase in cash from financing activities was primarily due to an increase in the proceeds from notes payable primarily used to cover dividends and share repurchases in 2014.
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Cash and equivalents increased to $341.3 million at June 30, 2014 from $309.9 million at December 31, 2013. Total short and long-term interest bearing debt also increased in the first half of 2014 to $570.4 million from $494.6 million at December 31, 2013. The ratio of our Net Debt (interest bearing debt less cash and cash equivalents) to Net Capital (stockholder’s equity plus Net Debt) was 13.0% at the end of June 2014 compared to 11.1% at December 31, 2013.
Our U.S. operations generate sufficient cash flows to fund their liquidity needs and do not depend on cash located outside of the U.S. for their operations. Nevertheless, we are a dividend payer and have an active share repurchase program. These two items are funded with operating cash flows from the U.S. and are supplemented by additional borrowings from our revolving credit facility. Specifically, in the U.S., we have an unsecured $300 million revolving line of credit of which $95 million was unused and available as of June 30, 2014 and believe we have the ability to borrow additional funds should the need arise. On January 31, 2013, we amended the revolving credit facility to, among other things, add a swingline loan sub-facility and extend the maturity date for the revolving credit facility by one year, to January 31, 2018. On January 31, 2014, we amended the revolving credit facility to, among other things, increase the amount of permitted receivables transactions from $100 to $150 million, reduce the cost of committed funds by 12.5 basis points and uncommitted funds by 2.5 basis points, and extend the maturity date of the revolving credit facility by one year, to January 31, 2019.
Our revolving credit facility and certain long-term obligations require us to satisfy certain financial and other covenants including:
Requirement
Level at June 30, 2014
Debt to total capital ratio
Maximum of 55%
27.2%
Based upon the above debt to total capital ratio covenant we had the ability to borrow approximately an additional $1.3 billion at June 30, 2014 before the 55% requirement would be exceeded.
Our foreign operations have historically met cash requirements with the use of internally generated cash or borrowings. These 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 $341.3 million in cash and equivalents is located outside of the U.S. We manage our global cash requirements considering (i) available funds among the many subsidiaries through which we conduct business, (ii) the geographic location of our liquidity needs, and (iii) the cost to access international cash balances. If we were to repatriate non-U.S. cash balances from certain subsidiaries, it could have adverse tax consequences as we may be required to pay and record income tax expense on these funds. Historically, the tax consequences associated with repatriating current year earnings to the U.S. have been between 10% and 14% of the repatriated amount.
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. Our primary uses of liquidity are to invest in equipment and facilities that are necessary to support our growth and to make acquisitions that will contribute to the achievement of our strategic objectives. 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, as well as evaluate our acquisition strategy and dividend and share repurchase programs. 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.
On July 17, 2014, the Board of Directors declared a quarterly dividend of $0.28 per share payable on August 20, 2014 to stockholders of record as of July 30, 2014.
OFF-BALANCE SHEET ARRANGEMENTS
We lease certain warehouse, plant and office facilities as well as certain equipment under noncancelable operating leases expiring at various dates through the year 2027. 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. Other than operating lease obligations, we do not have any off-balance sheet arrangements.
RECENTLY ISSUED ACCOUNTING STANDARDS
We have reviewed the recently issued accounting standards updates to the FASB’s Accounting Standards Codification that have future effective dates. Standards which are effective for the first half of 2014 are discussed in Note 1 of the Unaudited Notes to Condensed Consolidated Financial Statements.
In May 2014, the FASB amended the guidance for recognition of revenue from customer contracts. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in the amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance will be effective for the Company’s fiscal year beginning after December 15, 2016. Early application is not permitted.
Other accounting standards that have been issued by the FASB or other standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on our consolidated financial statements upon adoption.
OUTLOOK
Looking to the third quarter, we anticipate that each of our business segments will grow over the prior year. With a focus on operational efficiencies, cost containment and price adjustments where possible, we expect our Beauty + Home segment’s profitability to gradually improve during the second half of the year; however, conditions in Latin America are expected to remain challenging for this segment. Our other segments are expected to continue to do well and the diversification of our business and
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flow of new product introductions will continue to support our long-term growth.
AptarGroup expects diluted earnings per share using a 35% effective tax rate to be in the range of $0.72 to $0.77 per share for the third quarter of 2014 compared to $0.67 per diluted share reported in the prior year period, or $0.70 per share after excluding the negative impact of $0.03 per share from the European restructuring plan. AptarGroup is in the process of implementing a legal reorganization for our non-U.S. subsidiaries that will allow greater financial flexibility in the future. As a result of this legal reorganization, the Company expects to record a one-time tax expense in the third quarter of approximately $3 million or $0.04 per share, which is not included in the guidance range given. The impact of this one-time tax expense is expected to increase the effective tax rate in the third quarter to 39%. AptarGroup anticipates the full year effective tax rate, including the one-time expense mentioned above, to be approximately 35%.
FORWARD-LOOKING STATEMENTS
Certain statements in Management’s Discussion and Analysis and other sections of this Form 10-Q are forward-looking and involve a number of risks and uncertainties, including certain statements set forth in the Restructuring Initiatives, Quarterly Trends, Liquidity and Capital Resources, and Outlook sections of this Form 10-Q. 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:
· economic, environmental and political conditions worldwide;
· financial conditions of customers and suppliers;
· the cost of materials and other input costs (particularly resin, metal, anodization costs and transportation and energy costs);
· changes or consolidations within our customer base and/or changes in consumer spending levels;
· the availability of raw materials and components (particularly from sole sourced suppliers) as well as the financial viability of these suppliers;
· our ability to contain costs and improve productivity;
· our ability to successfully implement facility expansions and new facility projects, including the Stelmi expansion and our new facility in Colombia;
· our ability to increase prices, contain costs and improve productivity;
· significant fluctuations in foreign currency exchange rates, including the current volatility noted in the Latin American and Asian regions;
· changes in capital availability or cost, including interest rate fluctuations;
· volatility of global credit markets;
· the timing and magnitude of capital expenditures;
· our ability to identify potential new acquisitions and to successfully acquire and integrate such operations or products;
· direct or indirect consequences of acts of war or terrorism;
· cybersecurity threats that could impact our networks and reporting systems;
· the impact of natural disasters and other weather-related occurrences;
· fiscal and monetary policy, including changes in worldwide tax rates;
· changes or difficulties in complying with government regulation;
· changing regulations or market conditions regarding environmental sustainability;
· work stoppages due to labor disputes;
· competition, including technological advances;
· our ability to protect and defend our intellectual property rights, as well as litigation involving intellectual property rights;
· the outcome of any legal proceeding that has been or may be instituted against us and others;
· our ability to meet future cash flow estimates to support our goodwill impairment testing;
· the demand for existing and new products;
· our ability to manage worldwide customer launches of complex technical products, in particular in developing markets;
· the success of our customers’ products, particularly in the pharmaceutical industry;
· difficulties in product development and uncertainties related to the timing or outcome of product development;
· significant product liability claims; and
· other risks associated with our operations.
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, except as required by law. Please refer to Item 1A (“Risk Factors”) of Part I included in the Company’s Annual Report on Form 10-K for additional risk factors affecting the Company.
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 the Brazilian Real, British Pound, Swiss Franc and other 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 June 30, 2014 about our forward currency exchange contracts. The majority of the contracts expire before the end of the third quarter of 2014.
Average
Min / Max
Contract Amount
Contractual
Notional
Buy/Sell
(in thousands)
Exchange Rate
Volumes
Swiss Franc/Euro
63,579
0.8212
62,510-63,579
Euro/Brazilian Real
21,206
3.3149
20,980-21,393
Euro/U.S. Dollar
17,161
1.3649
13,777-17,161
U.S. Dollar/Chinese Yuan
10,040
6.2632
8,310-10,040
British Pound/Euro
9,539
1.2482
9,416-10,014
Euro/Mexican Peso
8,371
18.9396
4,398-8,371
Czech Koruna/Euro
6,651
0.0364
5,597-6,651
Euro/Indian Rupee
4,245
84.7583
3,088-4,245
Euro/Columbian Peso
3,577
2,880.3990
2,050-3,577
Euro/Chinese Yuan
3,532
8.5805
3,532-3,890
Chinese Yuan/U.S. Dollar
1,430
0.1602
970-1,430
Euro/Russian Ruble
1,112
46.8264
1,112-1,112
3,651
154,094
As of June 30, 2014, we have recorded the fair value of foreign currency forward exchange contracts of $0.7 million in prepaid and other, $0.1 million in miscellaneous other assets, $1.6 million in accounts payable and accrued liabilities and $0.2 million in deferred and other non-current liabilities in the balance sheet.
ITEM 4. CONTROLS AND PROCEDURES
DISCLOSURE CONTROLS AND PROCEDURES
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 June 30, 2014. 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.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
During the quarter ended June 30, 2014, the Company implemented an enterprise resource planning system at three U.S. facilities. Consequently, the control environments have been modified at these locations. Other than these items, no other changes 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 June 30, 2014 that materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II - OTHER INFORMATION
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
RECENT SALES OF UNREGISTERED SECURITIES
The employees of AptarGroup S.A.S. and Aptar France S.A.S., our subsidiaries, are eligible to participate in the FCP Aptar Savings Plan (the “Plan”). All eligible participants are located outside of the United States. An independent agent purchases shares of our 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 shares of our common stock under the Plan. The agent under the Plan is Banque Nationale de Paris Paribas Fund Services. 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. During the quarter ended June 30, 2014, the Plan purchased 8,307 shares of our common stock on behalf of the participants at an average price of $66.11 per share, for an aggregate amount of $549 thousand, and sold 587 shares of our common stock on behalf of the participants at an average price of $67.11 per share, for an aggregate amount of $39 thousand. At June 30, 2014, the Plan owns 49,036 shares of our common stock.
ISSUER PURCHASES OF EQUITY SECURITIES
The following table summarizes the Company’s purchases of our securities for the quarter ended June 30, 2014:
Period
Total Number Of Shares Purchased
Average Price Paid Per Share
Total Number Of Shares Purchased As Part Of Publicly Announced Plans Or Programs
Maximum Number Of Shares That May Yet Be Purchased Under The Plans Or Programs
4/1 – 4/30/14
52,844
67.05
3,719,847
5/1 – 5/31/14
351,967
66.42
3,367,880
6/1 – 6/30/14
195,189
66.43
3,172,691
600,000
66.48
The Company announced the existing repurchase program, authorizing the Company to repurchase up to four million shares of our outstanding common stock on July 18, 2013. There is no expiration date for this repurchase program.
ITEM 6. EXHIBITS
Exhibit 10.1
AptarGroup, Inc. 2014 Stock Awards Plan, filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on May 12, 2014, is hereby incorporated by reference.
Exhibit 10.2
Form of AptarGroup, Inc. Stock Option Agreement for Employees pursuant to the AptarGroup, Inc. 2014 Stock Awards Plan.
Exhibit 10.3
Form of AptarGroup, Inc. Restricted Stock Unit Award Agreement pursuant to the AptarGroup, Inc. 2014 Stock Awards Plan.
Exhibit 10.4
Employment Agreement effective August 1, 2014 of Salim Haffar.
Exhibit 31.1
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Exhibit 31.2
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
Exhibit 101
The following financial information from our Quarterly Report on Form 10-Q for the second quarter of fiscal 2014, filed with the SEC on August 4, 2014, formatted in Extensible Business Reporting Language (XBRL): (i) the Condensed Consolidated Statements of Income - Three and Six Months Ended June 30, 2014 and 2013, (ii) the Condensed Consolidated Statements of Comprehensive Income – Three and Six Months Ended June 30, 2014 and 2013, (iii) the Condensed Consolidated Balance Sheets – June 30, 2014 and December 31, 2013, (iv) the Condensed Consolidated Statements of Changes in Equity - Six Months Ended June 30, 2014 and 2013, (v) the Condensed Consolidated Statements of Cash Flows - Six Months Ended June 30, 2014 and 2013 and (vi) the Notes to Condensed Consolidated Financial Statements.
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.
(Registrant)
By /s/ ROBERT W. KUHN
Robert W. Kuhn
Executive Vice President,
Chief Financial Officer and Secretary
(Duly Authorized Officer and
Principal Accounting and Financial Officer)
Date: August 4, 2014
INDEX OF EXHIBITS
Exhibit
Number
10.1
10.2
10.3
10.4
31.1
31.2
32.1
32.2
101