AptarGroup - 10-Q quarterly report FY

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.

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date (November 1, 2002)

The accompanying unaudited consolidated financial statements include the accounts of AptarGroup, Inc. and its subsidiaries. The terms “AptarGroup” or “Company” as used herein refer to AptarGroup, Inc. and its subsidiaries.

In the opinion of management, the unaudited consolidated financial statements include all adjustments, consisting of only normal recurring adjustments, necessary for a fair presentation of consolidated financial position, results of operations, and cash flows for the interim periods presented. The accompanying unaudited consolidated financial statements have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosure normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures made are adequate to make the information presented not misleading. Accordingly, these unaudited consolidated financial statements and related notes should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report to Shareholders incorporated by reference into the Company’s Annual Report on Form 10-K for the year ended December 31, 2001. The results of operations of any interim period are not necessarily indicative of the results that may be expected for the year.

At September 30, 2002 and December 31, 2001, approximately 23% of the total inventories are accounted for by using the last-in, first-out (LIFO) method, while the remaining inventories are valued using the first-in, first-out (FIFO) method. Inventories, by component, consisted of:

Inventories are stated at cost, which is lower than market. Costs included in inventories are raw materials, direct labor and manufacturing overhead.

AptarGroup’s total comprehensive income was as follows:

The Board of Directors authorized the repurchase of a maximum of three million shares of the Company’s outstanding common stock. The timing of and total amount expended for the share repurchase depends upon market conditions. During the quarter ended September 30, 2002, the Company repurchased 55 thousand shares for an aggregate amount of $1.5 million. For the nine months ended September 30, 2002, the Company repurchased 130 thousand shares for an aggregate amount of $3.8 million. The cumulative total number of shares repurchased at September 30, 2002 was 1.3 million shares for an aggregate amount of $33.7 million.

Effective January 1, 2001, the Company adopted Statement of Financial Account Standards (“SFAS”) No. 133, “Accounting for Derivative Instruments and Hedging Activities”, and its related amendment SFAS No. 138, “Accounting for Certain Derivative Instruments and Certain Hedging Activities.” These standards require that all derivative financial instruments be recorded in the consolidated balance sheets at fair value as either assets or liabilities. Changes in the fair value of derivatives will be recorded in each period in earnings or accumulated other comprehensive income, depending on whether a derivative is designated and effective as part of a hedge transaction.

In accordance with the transition provisions of SFAS 133, the Company recorded the following cumulative effect adjustment in earnings as of January 1, 2001:

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

The Company maintains an interest rate risk management strategy to minimize significant, unanticipated earnings fluctuations that may arise from volatility in interest rates.

For derivative instruments designated as hedges, the Company formally documents the nature and relationships between the hedging instruments and the hedged items, as well as the risk management objectives, strategies for undertaking the various hedge transactions, and the method of assessing hedge effectiveness. Additionally, in order to designate any derivative instrument as hedges of 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 uses interest rate swaps to convert a portion of its fixed-rate debt into variable-rate debt. Under the interest rate swap contracts, the Company exchanges at specified intervals, the difference between fixed-rate and floating-rate amounts, which is calculated based on an agreed upon notional amount.

As of September 30, 2002, the Company has recorded the fair value of derivative instrument assets of $9.6 million in miscellaneous other assets with an offsetting adjustment to debt related to fixed-to-variable interest rate swap agreements with a notional principal value of $50 million. No gain or loss was recorded in the income statement for the quarters ended September 30, 2002 or September 30, 2001 since there was no hedge ineffectiveness.

The Company did not use any cash flow hedges in the quarters or nine months ended September 30, 2002 or September 30, 2001.

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 its foreign subsidiaries where the Company’s net investment is likely to be monetized, the Company will consider hedging the currency exposure associated with such a transaction.

As of September 30, 2002, the Company has recorded the fair value of foreign currency forward exchange contracts of $42 thousand in accounts payable and accrued liabilities and $262 thousand in prepayments and other in the balance sheet. All forward exchange contracts outstanding as of September 30, 2002 had an aggregate contract amount of $24.7 million.

The Company, in the normal course of business, is subject to a number of lawsuits and claims both actual and potential in nature. Management believes the resolution of these claims and lawsuits will not have a material adverse effect on the Company’s financial position or results of operations.

On May 13, 2002, the Company announced an agreement settling an outstanding patent dispute to avoid the time and expense of a trial scheduled to begin in late 2002. As part of the settlement, the parties have entered into a cross-license agreement. As a result of the settlement, the Company recorded a pre-tax charge of $4.2 million ($2.7 million after-tax) in the quarter ended March 31, 2002.

The Company operates in the packaging components industry, which includes the development, manufacture and sale of consumer product dispensing systems. The Company is organized primarily based upon individual business units, which resulted from historic acquisitions or internally created business units. All of the business units sell primarily dispensing systems. These business units all require similar production processes, sell to similar classes of customers and markets, use the same methods to distribute products and operate in similar regulatory environments. Based on the current economic characteristics of the Company’s business units, the Company has identified two reportable segments: Dispensing Systems and SeaquistPerfect.

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

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

The accounting policies of the segments are the same as those described in Note 1, Summary of Significant Accounting Policies in the Company’s Annual Report to Shareholders for the year ended December 31, 2001. The Company evaluates performance of its business units and allocates resources based upon earnings before interest expense in excess of interest income, corporate expenses and income taxes (collectively referred to as “EBIT”) excluding non recurring items. The Company accounts for intersegment sales and transfers as if the sales or transfers were to third parties.

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

Goodwill amortization of $876, $31 and $3 was included in EBIT for the three months ended September 30, 2001 for Dispensing Systems, SeaquistPerfect, and Corporate and Other, respectively. Goodwill amortization of $2,631, $81 and $9 was included in EBIT for the nine months ended September 30, 2001 for Dispensing Systems, SeaquistPerfect, and Corporate and Other, respectively.

Reconciliation of segment EBIT to consolidated income before income taxes is as follows:

AptarGroup’s authorized common stock consisted of 99 million shares, having a par value of $0.01 each. Information related to the calculation of earnings per share is as follows:

In April 2001, the Company announced it had begun a project (“Strategic Initiative”) to improve the efficiency of operations that produce pumps for its mass-market fragrance/cosmetic and personal care customers. In addition to improving efficiency and reducing costs, another objective of the Strategic Initiative is to improve customer service through reduced lead times and the ability to customize finished products on a local basis. As part of the Strategic Initiative, the Company closed one molding operation in the U.S. and is in the process of consolidating the molding and assembly of the base cartridge (standard internal components common to modular pumps) into one of the Company’s facilities in Italy. The Company has also decided to close several of its sales offices in certain foreign countries. In addition, the Company is rationalizing its mass-market pump product lines for these two markets by discontinuing production of non-modular pumps and increasing capacity for its modular pumps.

Charges related to the Strategic Initiative are expected to be approximately $11.1 million before taxes and will consist primarily of costs related to the closing of the molding operation, sales offices and discontinuance of its non-modular pumps (including asset impairment write-downs, accelerated depreciation associated with revised useful lives and utility abatement reimbursements) as well as employee severance and related benefit costs. Since the beginning of the project in 2001 through September 30, 2002, approximately $11.0 million of the estimated $11.1 million of charges on a pre-tax

Charges for asset impairment write-downs recorded in 2001 were impairment charges recorded for fixed assets held and used in the manufacture of non-modular pumps. These non-modular pumps continue to be sold during the Strategic Initiative project, but will be discontinued once adequate capacity to produce modular pumps has been established. The undiscounted expected future cash flows for products using these non-modular pumps during this phase out period were less than the carrying value of the specific identifiable assets used to generate these cash flows and thus an impairment charge was recognized in accordance with SFAS No. 121 “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of.” An impairment charge of $5.5 million in the second quarter of 2001 was calculated by subtracting the fair market value of the assets held and used in the manufacture of non-modular pumps (determined by discounting the expected future cash flows for products using these non-modular pumps) from the carrying value of these assets.

As part of the Strategic Initiative, certain long-lived assets have been taken out of service prior to the end of their normal service period due to the plant shut down and rationalization of the product lines. Accordingly, the Company changed the estimated useful lives of such assets, resulting in an acceleration of depreciation (“Accelerated Depreciation”), of which $1.9 million was recognized in 2001 and $.1 million was recorded in the nine months ended September 30, 2002. There will be no additional charges associated with Accelerated Depreciation in future periods.

The Strategic Initiative will result in personnel reductions in the U.S. of approximately 170 people or approximately 10% of all the Company’s U.S. employees and approximately 30 people outside of the U.S. The majority of these personnel reductions will be manufacturing related with a small reduction in administrative staff. Involuntary employee severance costs are based upon a formula including salary levels and years of service. Approximately $.8 million has been accrued and was included in the Strategic Initiative charges shown in the income statement in 2001 and an additional $1.1 million was accrued and included in the Strategic Initiative charges in 2002 due to additional personnel reductions.

Offsetting these personnel reductions will be an increase in personnel of approximately 70 people in Italy to support the centralization of the base cartridge production and assembly. As of September 30, 2002, approximately 150 people have been terminated resulting in a cash payment of $.9 million through September 30, 2002.

In addition to the involuntary severance costs described above, a retention or stay bonus will be paid to employees who remain with the Company during the phase-out period. This stay bonus, which is estimated to be approximately $.6 million, is also based upon salary levels and years of service. The stay bonus is being accrued over the future periods in which the employees earn the benefits.

Approximately $.5 million of the stay bonus was accrued in 2001 and an additional $.1 million was accrued in the nine months ended September 30, 2002, of which approximately $.2 million was paid in 2001 and $.2 million was paid in 2002. In addition, as a result of closing down the molding operation, the Company will be required to refund an abatement of approximately $.3 million to a utility provider of which $.1 million was paid in 2002. The remainder is expected to be paid in 2003. The Company also spent approximately $.2 million to refurbish the leased molding facility that was vacated in the first quarter 2002. These are included in other costs in the preceding table. The amount recorded through nine months of 2002 for other costs is negative due to the reversal of approximately $.2 million of accruals no longer needed.

Approximately $.2 million and $.3 million of training costs were incurred in Italy in 2001 and 2002, respectively, to train the new workers who were hired to support the centralization of the base cartridge production and assembly. These training costs are included in cost of sales in the income statement.

The Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets” on January 1, 2002. Pursuant to this standard, the Company has completed an assessment of the categorization of its existing intangible assets and goodwill. In addition, the Company completed an analysis of the fair value of its reporting units using both a discounted cash flow analysis and market multiple approach and has determined that the fair value of its reporting units exceeds the carrying values and therefore, no impairment of goodwill needs to be recorded. Also pursuant to the standard, the Company has ceased recording of goodwill amortization in 2002. The table below shows income before income taxes, net income and earnings per share amounts for the quarters and nine months ended September 30, 2002 and September 30, 2001, adjusted to add back goodwill amortization and related tax effects for 2001.

The Company does not have any intangible assets with indefinite lives. The table below shows a summary of intangible assets as of September 30, 2002 and December 31, 2001.

The Company acquired a license to manufacture and sell a certain type of fixation system for pumps in the second quarter of 2002 for approximately $1 million. The license agreement will be amortized on a straight line basis over 3 years.

Aggregate amortization expense for the quarters ended September 30, 2002 and 2001 was $345 and $326, respectively. Aggregate amortization expense for the nine months ended September 30, 2002 and 2001 was $858 and $834, respectively. Amortization expense is estimated to be approximately $1 million per year for each of the next five years.

The changes in the carrying amount of goodwill since the year ended December 31, 2001, are as follows by reporting segment:

Net sales for the quarter and nine months ended September 30, 2002 totaled $239.8 million and $691.6 million, respectively, for an increase of approximately 8% and 1%, respectively, when compared to the corresponding periods of 2001. The U.S. dollar weakened against the Euro in the third quarter relative to the same period a year ago and thus had a positive impact on the translation of the Company’s European subsidiaries into U.S. dollars in the third quarter. Based on a year to date average, the U.S. dollar remained slightly weaker through the first nine months compared to the first nine months of the prior year. Net sales, excluding changes in foreign currency exchange rates (“Core Sales”), increased approximately 4% and decreased approximately 1% for the quarter and nine-month periods ended September 30, 2002, respectively, compared to the 8% and 1% increase reported. Core Sales of the Company’s products increased to all markets served in the third quarter ended September 30, 2002, compared with the same period a year ago with the exception of Core Sales of pumps to the fragrance/cosmetic market, which decreased. Core Sales of the Company’s products to the personal care and food markets were particularly strong in the quarter. Core Sales of the Company’s products for the first nine months of 2002 compared to the same period in the prior year increased to all markets served except the fragrance/cosmetic market.

The following table sets forth (in thousands of dollars), for the periods indicated, net sales by geographic region.

Cost of sales as a percent of net sales increased to 64.3% in the third quarter of 2002 compared to 62.9% in the third quarter of 2001. For the first nine months, cost of sales as a percent of net sales also increased to 64.0% compared to 62.6% in the prior year. The cost of sales for the quarter and nine months ended September 30, 2002, was negatively impacted by the following factors:

Partially offsetting these negative factors were the following positive impacts:

Selling, research & development and administrative expenses (SG&A) increased 4.2% or $1.5 million to $37.4 million in the third quarter of 2002 compared to $35.9 million in the same period a year ago. The increase in SG&A in the quarter is due primarily to changes in exchange rates partially offset by cost containment efforts in all the business units. SG&A as a percent of net sales decreased to 15.6% from 16.2%.

SG&A for the nine months ended September 30, 2002, increased .6% or $.7 million to $110.5 million compared to $109.8 million a year ago. The increase in SG&A is primarily due to changes in exchange rates partially offset by cost containment efforts in all the business units. As a percent of net sales, SG&A for the first nine months of 2002 was approximately the same as the prior year at 16.0%.

Depreciation and amortization for the third quarter ended September 30, 2002, increased approximately $.4 million to $19.1 million compared to $18.7 million in the same quarter of the prior year. The prior year amount includes approximately $.9 million of goodwill amortization and approximately $.7 million of accelerated depreciation related to the Strategic Initiative. Excluding those two items, depreciation increased approximately $2.0 million primarily due to changes in exchange rates.

Depreciation and amortization for the nine months ended September 30, 2002, decreased approximately $2.1 million to $53.2 million compared to $55.3 million for the same period in the prior year. The prior year amount includes approximately $2.7 million of goodwill amortization and approximately $1.2 million of accelerated depreciation related to the Strategic Initiative while the current year includes approximately $.1 million of accelerated depreciation. Excluding those two items, depreciation and amortization increased approximately $1.7 million through the first nine months of 2002. The increase is due primarily to changes in exchange rates.

Strategic Initiative charges were not significant for the quarter ended September 30, 2002 compared to $1.0 million recorded for the same period a year ago. Strategic Initiative charges totaled $1.4 million for the nine months ended September 30, 2002, compared to $8.8 million for nine months ended September 30, 2001. The Strategic Initiative was announced in the second quarter of 2001 to improve the efficiency of operations that produce pumps for the mass-market fragrance/cosmetic and personal care customers. The total cost of the project is expected to be $11.1 million of which approximately $11.0 million was expensed through September 30, 2002.

In May 2002, the Company announced an agreement settling an outstanding patent dispute to avoid the time and expense of a trial that was scheduled to begin in late 2002. As part of the settlement, the parties have entered into a cross-license agreement. Patent dispute settlement charges of $4.2 million before taxes were included in the results for the first quarter ended March 31, 2002.

The following table details the calculation of operating income on a comparable basis by adjusting reported operating income for goodwill amortization recorded in the prior year and nonrecurring charges related to the Strategic Initiative and patent dispute settlement.