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ATR > SEC Filings for ATR > Form 10-Q on 2-Nov-2012All Recent SEC Filings

Show all filings for APTARGROUP INC

Form 10-Q for APTARGROUP INC


2-Nov-2012

Quarterly Report


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

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

                             RESULTS OF OPERATIONS





                                   Three Months Ended September 30,        Nine Months Ended September 30,
                                           2012                2011               2012                2011

Net Sales                                 100.0 %             100.0 %            100.0 %             100.0 %
Cost of sales (exclusive of
depreciation and
amortization shown below)                  69.1                67.7               68.1                66.9
Selling, research &
development and
administrative                             13.6                14.4               14.6                14.9
Depreciation and
amortization                                6.0                 5.6                5.7                 5.7
Operating Income                           11.3                12.3               11.6                12.5
Other expense                              (0.6 )              (0.5 )             (0.7 )              (0.5 )
Income before income taxes                 10.7                11.8               10.9                12.0

Net income                                  7.1 %               8.2 %              7.2 %               8.1 %

Effective Tax Rate                         33.2 %              30.9 %             33.5 %              32.4 %

NET SALES

We reported net sales of $589.6 million for the quarter ended September 30, 2012, 2% below third quarter 2011 reported net sales of $601.2 million. Stelmi sales contributed $25.3 million which represents a 4% increase to the quarterly sales. The average U.S. dollar exchange rate strengthened relative to the Euro and other foreign currencies, such as the Brazilian Real, Swiss Franc and British Pound, in the third quarter of 2012 compared to the third quarter of 2011, and as a result, changes in exchange rates had a negative impact of 8% on our reported sales growth. Excluding acquisitions and changes in foreign currency rates, sales increased by 2% in the third quarter of 2012 compared to the third quarter of 2011. Custom tooling sales accounted for approximately 1% of the 2% core sales growth in the third quarter of 2012.

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:

                       Three Months Ended September 30,                   Nine Months Ended September 30,
                     2012   % of Total        2011   % of Total        2012   % of Total         2011   % of Total

Domestic        $ 168,584           29 % $ 161,650           27 % $ 506,214           29 % $  486,715           27 %
Europe            312,910           53 %   339,548           56 %   944,230           54 %  1,032,532           58 %
Other Foreign     108,104           18 %    99,998           17 %   309,155           17 %    273,396           15 %

COST OF SALES (EXCLUSIVE OF DEPRECIATION SHOWN BELOW)

Our cost of sales as a percent of net sales increased to 69.1% in the third quarter of 2012 compared to 67.7% in the third quarter of 2011. $3.8 million of this increase is related to the fair value adjustments that were recorded for the acquisition date Stelmi inventory. Excluding Stelmi, 2012 cost of sales represented 68.5% of net sales. The remaining increase is primarily due to decreased sales volumes in our European businesses, which negatively impact our ability to absorb fixed overhead expenses, $0.8 million of Lincolnton start-up costs and increased tooling sales. We had a $4.0 million increase in sales of tooling to customers, excluding currency effects, in the third quarter of 2012 compared to the prior year period. Traditionally, sales of custom tooling generate lower margins than our regular product sales; thus, an increase in sales of custom tooling negatively impacted cost of sales as a percentage of sales.

Cost of sales as a percent of net sales increased to 68.1% in the first nine months of 2012 compared to 66.9% in the same period a year ago. Excluding Stelmi, 2012 cost of sales represented 67.9% of net sales. The increase is due to $3.6 million of Lincolnton start-up costs as well as the European sales volume decreases and the tooling sales increases noted above. We had an $8.8 million increase in sales of tooling to customers, excluding currency effects, in the first nine months of 2012 compared to the prior year period resulting in a negative impact to our cost of sales percentage.

SELLING, RESEARCH & DEVELOPMENT AND ADMINISTRATIVE

Our Selling, Research & Development and Administrative expenses ("SG&A") decreased by approximately $6.6 million in the third quarter of 2012 compared to the same period a year ago. Excluding changes in foreign currency rates, SG&A increased by approximately $0.2 million in the quarter. Stelmi contributed operational costs of $3.7 million and transaction costs of $0.2 million in the third quarter of 2012. This increase is offset by lower professional fees as higher legal costs were incurred in 2011 and also by lower personnel costs (particularly in the Beauty + Home segment). SG&A as a percentage of net sales decreased to 13.6% compared to 14.4% in the same period of the prior year due primarily to the decrease in expenses noted above.

SG&A decreased by approximately $11.3 million for the nine months ended September 30, 2012 compared to the same period a year ago. Excluding changes in foreign currency rates, SG&A increased by approximately $4.2 million in the


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first nine months of the year. Increases due to Stelmi operational costs of $3.7 million and transaction costs of $6.0 million were offset by the reduction in professional fees and personnel costs as mentioned above. For the nine months ended September 30, 2012, SG&A as a percentage of net sales decreased to 14.6% compared to 14.9% of net sales in the same period of the prior year.

DEPRECIATION AND AMORTIZATION

Reported depreciation and amortization expenses increased by approximately $1.7 million in the third quarter of 2012 compared to the same period a year ago. Excluding changes in foreign currency rates, depreciation and amortization increased by approximately $4.5 million in the quarter compared to the same period a year ago. This increase is primarily related to $2.9 million of Stelmi costs reported in the third quarter of 2012. The remaining increase is related to the additional investments in our new facility in Lincolnton, North Carolina and general capital investment increases across all three business segments. Depreciation and amortization as a percentage of net sales increased slightly to 6.0% in the third quarter of 2012 compared to 5.6% for the same period a year ago.

Depreciation and amortization expenses decreased approximately $1.6 million in the first nine months of 2012 to $100.4 million compared to $102.0 million for the first nine months of 2011. Excluding changes in foreign currency rates, the expense would have increased by approximately $4.7 million for the nine month period. Stelmi represented $2.9 million of the increase in the first nine months of 2012. The remaining increase is due to the reasons discussed above. Depreciation and amortization as a percentage of net sales was 5.7% for both the nine months ended September 30, 2012 and September 30, 2011.

OPERATING INCOME

Operating income decreased approximately $7.3 million in the third quarter of 2012 to $66.9 million compared to $74.2 million in the same period in the prior year. Excluding changes in foreign currency rates, operating income decreased by approximately $0.5 million in the quarter compared to the same period a year ago. Stelmi contributed a $2.1 million operating loss in the third quarter of 2012. The remaining $1.6 million increase to operating income is mainly due to the SG&A cost improvements mentioned above. Operating income as a percentage of net sales decreased to 11.3% in the third quarter of 2012 compared to 12.3% for the same period in the prior year mainly due to the negative impact of the Stelmi purchase accounting costs.

Operating income decreased approximately $19.9 million in the first nine months of 2012 to $204.3 million compared to $224.2 million in the same period in the prior year. Excluding changes in foreign currency rates, operating income decreased by approximately $3.9 million in the first nine months of 2012 compared to the same period a year ago. Stelmi contributed a $2.1 million operating loss in the first nine months of 2012. Excluding Stelmi and the changes in foreign currency rates, operating income decreased by approximately $1.9 million in the first nine months of 2012 compared to the same period a year ago. The increase in sales, excluding the impact of Stelmi and changes in foreign currency, was not enough to completely offset the incremental depreciation related to our capital investments. Operating income as a percentage of sales decreased to 11.6% in the first nine months of 2012 compared to 12.5% for the same period in the prior year. This is primarily due to the same reasons mentioned above.

NET OTHER EXPENSE

Net other expenses in the third quarter of 2012 increased $0.9 million to $3.9 million in the third quarter of 2012 from $3.0 million in the same period in the prior year. This increase is mainly due to $1.3 million of lower interest income and $0.6 million higher interest expense related to converting part of our short-term borrowing to long-term in order to lock in the historically low interest rates. This is partially offset by $1.2 million of foreign currency gains primarily related to the mark to market of foreign exchange forward contracts taken out on intercompany payables.

Net other expenses for the nine months ended September 30, 2012 increased $2.7 million to $12.5 million from $9.8 million in the same period in the prior year due primarily to $2.6 million lower interest income and $0.5 million higher borrowing expenses partially offset by $0.9 million of foreign currency gains as noted above.

EFFECTIVE TAX RATE

The reported effective tax rate increased to 33.2% for the three months ended September 30, 2012 compared to 30.9% for the same period ended September 30, 2011. During the third quarter of 2011, the tax rate was favorably impacted by a reduction in the amount of current year earnings that were planned to be repatriated from foreign operations in 2011. The tax rate for the three months ended September 30, 2012 was negatively impacted by a French surtax enacted late in 2011.

The reported effective tax rate increased to 33.5% for the nine months ended September 30, 2012 compared to 32.4% for the same period ended September 30, 2011. The increase in the rate for the nine months ended September 30, 2012 was related to the mix of earnings in higher tax countries and the French surtax mentioned above.

NET INCOME ATTRIBUTABLE TO APTARGROUP, INC.

We reported net income attributable to AptarGroup, Inc. of $42.1 million and $127.6 million in the three and nine months ended September 30, 2012, respectively, compared to $49.3 million and $145.1 million for the same periods in the prior year.


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BEAUTY + HOME SEGMENT

Operations that sell dispensing systems primarily to the personal care, fragrance/cosmetic and home care markets form the Beauty + Home segment.

                                       Three Months Ended September 30,          Nine Months Ended September 30,
                                              2012                 2011                2012                 2011

Net Sales                        $         358,476    $         387,501   $       1,104,911    $       1,166,501
Segment Income                              30,050               32,025              96,674              104,555
Segment Income as a percentage
of Net Sales                                   8.4 %                8.3 %               8.7 %                9.0 %

Net sales for the quarter ended September 30, 2012 decreased 7% to $358.5 million compared to $387.5 million in the third quarter of the prior year. Excluding foreign currency changes, sales increased 1% in the third quarter of 2012 compared to the same quarter of the prior year. Sales, excluding foreign currency changes, to the fragrance/cosmetics market were down 2% while sales to the personal care market increased approximately 6% in the third quarter of 2012 compared to the same period in the prior year. Geographically, strong sales in Asia and Latin America were partially offset by continued softness in Europe. Customer tooling sales, on a constant currency basis, decreased slightly when compared to the prior year.

Net sales decreased 5% in the first nine months of 2012 to $1.1 billion compared to $1.2 billion in the first nine months of the prior year. Excluding foreign currency changes, sales increased 1% for the first nine months of 2012 compared to the same period of the prior year. Sales of our products, excluding foreign currency changes, to the fragrance/cosmetics market increased approximately 1% while sales to the personal care market increased approximately 2% in the first nine months of 2012 compared to the first nine months of 2011 mainly due to sales growth in Asia and Latin America.

Segment income for the third quarter of 2012 decreased approximately 6% to $30.1 million from $32.0 million reported in the same period in the prior year. The negative impacts of foreign currency changes, inflation in Latin America and the lower sales volumes in Europe were partially offset by lower legal fees and the positive impact from the timing of reduced resin cost pass-throughs of approximately $375 thousand.

Segment income for the first nine months of 2012 decreased approximately 8% to $96.7 million compared to $104.6 million reported in the same period in the prior year. The decrease in segment income in the first nine months of 2012 was primarily due to foreign currency changes and lower sales volumes in Europe, as mentioned above. Favorable resin cost pass-through of $1.7 million and sales growth in Asia and Latin America helped to offset some of this decrease.

PHARMA SEGMENT

Operations that sell dispensing systems to the prescription drug and consumer health care markets form the Pharma segment.

                                       Three Months Ended September 30,        Nine Months Ended September 30,
                                              2012                 2011               2012                2011

Net Sales                        $         156,100    $         146,445   $        429,122    $        417,152
Segment Income                              34,194               44,801            104,676             124,058
Segment Income as a percentage
of Net Sales                                  21.9 %               30.6 %             24.4 %              29.7 %

Net sales for the Pharma segment increased by 7% in the third quarter of 2012 to $156.1 million compared to $146.4 million in the third quarter of 2011. Stelmi sales were $25.3 million and represented 18% of the increase. Foreign currency changes negatively impacted sales by 9%. Excluding acquisitions and changes in foreign currency rates, sales decreased by 2% in the third quarter of 2012 compared to the third quarter of 2011. Excluding acquisitions and foreign currency rate changes, sales to the prescription market increased 4% while sales to the consumer health care market decreased 13%. While the prescription business continues to show good growth, we believe the lower sales of our products to the consumer health care market are the result of slowing sales in Eastern Europe and Russia.

Net sales for the first nine months of 2012 increased approximately 3% to $429.1 million compared to $417.2 million in the first nine months of the prior year. Stelmi sales were $25.3 million and represented 6% of the increase. Foreign currency changes negatively impacted sales by 6%. Excluding acquisitions and changes in foreign currency rates, sales increased by 3% in the first nine months of 2012 compared to the first nine months of 2011. Excluding acquisitions and foreign currency rate changes, sales to the prescription market increased 7% while sales to the consumer health care market decreased 4%. The growth in sales to the prescription market is primarily due to an increase in sales of our nasal pumps to the allergy/rhinitis market. The decrease in sales of our products to the consumer health care market is due primarily to slowing sales of our customers in Eastern Europe and Russia and also last year was an all-time record for sales of our products to the consumer health care market.

Segment income in the third quarter of 2012 decreased approximately 24% to $34.2 million compared to $44.8 million reported in the same period in the prior year. This decrease is mainly attributed to $5.0 million of Stelmi fair value and other acquisition adjustments and the negative impact of changes in exchange rates.

Segment income in the first nine months of 2012 decreased approximately 16% to $104.7 million compared to $124.1 million reported in the same period of the prior year. This decrease is due to the Stelmi fair value and other acquisition adjustments mentioned above along with Stelmi transaction costs of $6.0 million and the negative impact of changes in exchange rates. These expenses are offset somewhat by the increased profits from higher prescription sales during the nine months of 2012.


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FOOD + BEVERAGE SEGMENT

Operations that sell dispensing systems primarily to the food and beverage markets form the Food + Beverage segment.

                                        Three Months Ended September 30,        Nine Months Ended September 30,
                                              2012                  2011               2012                2011

Net Sales                        $          75,022     $          67,250   $        225,566    $        208,990
Segment Income                               9,611                 6,891             24,252              23,076
Segment Income as a percentage
of Net Sales                                  12.8 %                10.2 %             10.8 %              11.0 %

Net sales for the quarter ended September 30, 2012 increased approximately 12% to $75.0 million compared to $67.3 million in the third quarter of the prior year. Sales, excluding changes in foreign currency rates, increased 16%. Excluding foreign currency rate changes, sales to the food market were down 4% while sales to the beverage market increased approximately 56% in the third quarter of 2012 compared to the same period in the prior year. Excluding changes in foreign currency rates, product sales increased $6.4 million mainly due to beverage sales in Asia while tooling sales increased $3.7 million due to custom beverage projects in North America.

Net sales for the first nine months of 2012 increased approximately 8% to $225.6 million compared to $209.0 million in the first nine months of the prior year. Excluding changes in foreign currency rates, sales increased 11%. Excluding foreign currency rate changes, sales to the food market decreased 2% while the sales to the beverage market increased approximately 37%.

Segment income in the third quarter of 2012 increased approximately 39% to $9.6 million compared to $6.9 million during the same period in the prior year. Increased volumes and better product mix along with a $0.8 million positive impact from the timing of reduced resin cost pass-throughs more than offset $0.8 million of additional costs related to our new Lincolnton, North Carolina facility.

Segment income in the first nine months of 2012 increased approximately 5% to $24.3 million compared to $23.1 million reported in the same period of the prior year. Increased volumes and better product mix again helped to offset increases in research and development, and selling costs of approximately $2.5 million and Lincolnton start-up costs of approximately $3.6 million.

CORPORATE & OTHER

In addition to our three operating business segments, AptarGroup assigns certain costs to "Corporate & Other," which is presented separately in Note 9. Corporate & Other primarily includes certain corporate compensation and information system costs which are not allocated directly to our operating segments. Corporate & Other expense decreased to $6.4 million for the quarter ended September 30, 2012 compared to $10.0 million in the third quarter of the prior year mainly due to lower professional fees and personnel costs.

Corporate & Other expense in the first nine months of 2012 decreased to $22.0 million compared to $28.6 million reported in the same period of the prior year. The decrease is mainly due to lower professional fees and personnel costs mentioned above along with changes in our LIFO reserve of $1.5 million. This LIFO reserve is maintained at the corporate level as the segments all report on a FIFO basis for consistency.

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 South American and Asian currencies, among others. 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 strengthening U.S. dollar relative to foreign currencies has a dilutive translation effect on our financial statements. Conversely, a weakening U.S. dollar has an additive effect. In some cases, we sell products denominated in a currency different from the currency in which the related costs are incurred. Changes in exchange rates on such inter-country sales could materially impact our results of operations. Recently, the weaker Brazilian Real vs. the U.S. Dollar and Euro has had a negative transaction impact on imported components and finished goods into South America.

QUARTERLY TRENDS

Our results of operations in the last quarter of the year typically are negatively impacted by 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 2012 compared to 2011 is as follows:

                               2012     2011
First Quarter                $  5.8   $  7.7
Second Quarter                  2.9      1.7
Third Quarter                   2.1      2.8
Fourth Quarter (estimated)      1.9      1.6
                             $ 12.7   $ 13.8


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LIQUIDITY AND CAPITAL RESOURCES

Our primary sources of liquidity are cash flow from operations and our revolving credit facility. Cash and equivalents decreased to $174.3 million at September 30, 2012 from $377.6 million at December 31, 2011 primarily due to the Stelmi acquisition that was completed in July of 2012. Total short and long-term interest bearing debt decreased in the first nine months of 2012 to $397.9 million from $438.6 million at December 31, 2011. The ratio of our Net Debt (interest bearing debt less cash and cash equivalents) to Net Capital (stockholder's equity plus Net Debt) was 14.0% at the end of September 2012 compared to 4.5% at December 31, 2011.

In the first nine months of 2012, our operations provided approximately $197.5 million in cash flow compared to $184.8 million for the same period a year ago. In both periods, cash flow from operations was primarily derived from earnings before depreciation and amortization. The increase in cash provided by operations is primarily attributable to an improvement in working capital. During the first nine months of 2012, we utilized the majority of the operating cash flows to finance capital expenditures.

We used $318.7 million in cash for investing activities during the first nine months of 2012, compared to $124.9 million during the same period a year ago. The increase in cash used for investing activities is due primarily to the acquisition of Stelmi of $187.8 million and an increase in capital expenditures of $6.3 million in the first nine months of 2012 compared to the first nine months of 2011. Cash outlays for capital expenditures for 2012 are estimated to be approximately $180 million but could vary due to changes in exchange rates as well as the timing of capital projects.

We used approximately $86.8 million of cash on financing activities in the first nine months of 2012 compared to $48.7 million in cash used in the first nine months of the prior year. The increase in cash used by financing activities was primarily due to a decrease in our borrowings as we were able to utilize repatriated funds to pay down a portion of our revolving credit facility.

On January 31, 2012, we entered into a new revolving credit facility that provides for unsecured financing of up to $300 million. This new facility matures on January 31, 2017 and replaces a previously existing $200 million unsecured financing facility that would have matured in 2012 and was cancelled without any early termination penalty on January 31, 2012. We initially drew $185 million in borrowings from the new credit facility, of which $165 million was used to repay in full the outstanding obligations under the previous credit facility. Each borrowing under the new credit facility will bear interest at rates based on LIBOR, prime and other similar rates, in each case plus an applicable margin. A facility fee on the total amount of the facility is also payable quarterly, regardless of usage. The applicable margins for borrowings under the new credit facility and the facility fee percentage may change from time to time depending on changes in our consolidated leverage ratio. The representations, covenants and events of default in the new credit facility are substantially similar to the representations, covenants and events of default contained in the previous credit facility.

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

Requirement Level at September 30, 2012 . . .

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