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ATR > SEC Filings for ATR > Form 10-Q on 6-May-2013All Recent SEC Filings

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Form 10-Q for APTARGROUP INC


6-May-2013

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





Quarter Ended March 31,                                          2013          2012

Net Sales                                                     100.0 %       100.0 %
Cost of sales (exclusive of depreciation and
amortization shown below)                                      67.8          67.7
Selling, research & development and administrative             15.3          14.9
Depreciation and amortization                                   5.9           5.5
Restructuring initiatives                                       0.6            --
Operating Income                                               10.4          11.9
Other expense                                                  (0.8 )        (0.7 )
Income before Income Taxes                                      9.6          11.2

Net Income                                                      6.5 %         7.4 %

Effective Tax Rate                                             32.7 %        33.9 %

NET SALES

We reported net sales of $617.6 million for the quarter ended March 31, 2013, 4% above first quarter 2012 reported net sales of $592.5 million. Stelmi sales were $35.4 million which contributed 6% to the reported increase in the quarterly sales. The average U.S. dollar exchange rate weakened slightly relative to the Euro. However, this weakness was offset by strengthening of the U.S. dollar compared to other foreign currencies, such as the Brazilian Real, Swiss Franc and British Pound, in the first quarter of 2013 compared to the first quarter of 2012, and as a result, changes in exchange rates had a negative impact of 1% on our reported sales growth. Excluding acquisitions and changes in foreign currency rates, sales decreased by 1% in the first quarter of 2013 compared to the first quarter of 2012. The timing of custom tooling sales accounted for the majority of this decrease.

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:

Quarter Ended March 31,        2013   % of Total        2012   % of Total

Domestic                  $ 157,228           25 % $ 171,309           29 %
Europe                      356,526           58 %   325,709           55 %
Other Foreign               103,879           17 %    95,480           16 %

COST OF SALES (EXCLUSIVE OF DEPRECIATION SHOWN BELOW)

Our cost of sales as a percent of net sales increased slightly to 67.8% in the first quarter of 2013 compared to 67.7% in the first quarter of 2012. The increase is partially due to decreased sales volumes in our core Pharma segment. This negatively impacts our cost of sales percentage as margins on our pharmaceutical products typically are higher than the overall Company average. Also contributing to the increase in cost of sales percentage is the increase in raw material costs. Raw material costs, primarily the cost of plastic resin, increased in 2013 compared to 2012. 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.

SELLING, RESEARCH & DEVELOPMENT AND ADMINISTRATIVE

Our Selling, Research & Development and Administrative expenses ("SG&A") increased by approximately $5.8 million in the first quarter of 2013 compared to the same period a year ago. Excluding changes in foreign currency rates, SG&A increased by approximately $6.4 million in the quarter. Stelmi contributed operational costs of $4.7 million in the first quarter of 2013. The remaining increase is due to an increase in personnel costs and stock compensation expenses due to higher substantive vesting requirements. Excluding acquisitions, SG&A as a percentage of net sales increased to 15.4% compared to 14.9% in the same period of the prior year due primarily to lower core sales and the increase in expenses noted above.


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DEPRECIATION AND AMORTIZATION

Reported depreciation and amortization expenses increased by approximately $3.6 million in the first quarter of 2013 compared to the same period a year ago. Excluding changes in foreign currency rates, depreciation and amortization increased by approximately $3.7 million in the quarter compared to the same period a year ago. This increase is primarily related to $2.2 million of Stelmi costs reported in the first quarter of 2013. The remaining increase is related to the additional investments in our new products, especially in the Food + Beverage segment, along with continued roll-out of our global enterprise resource planning system and approximately $0.5 million related to our EOO restructuring initiatives. Excluding acquisitions, depreciation and amortization as a percentage of net sales increased to 5.8% in the first quarter of 2013 compared to 5.5% for the same period a year ago.

RESTRUCTURING INITIATIVES

On November 1, 2012, the Company announced a plan to optimize certain capacity in Europe ("EOO"). Due to increased production efficiencies and to better position the Company for future growth in Europe, AptarGroup will transfer and consolidate production capacity involving twelve facilities. Two facilities, one in Italy and one in Switzerland, are expected to close and will impact approximately 170 employees. During the first quarter of 2013, we recognized $4.1 million of restructuring expenses along with the $0.5 million of accelerated depreciation of assets mentioned above. Using current exchange rates, we expect to recognize approximately $9 million in additional costs, most of which will be incurred in 2013. Annual savings are estimated to be approximately 9 million (approximately $12 million using current exchange rates) beginning in late 2013.

OPERATING INCOME

Operating income decreased approximately $5.8 million in the first quarter of 2013 to $64.6 million compared to $70.4 million in the same period in the prior year. Changes in foreign currency rates had no measureable impact on operating income. Stelmi contributed a $7.1 million operating profit in the first quarter of 2013 and costs associated with the EOO restructuring initiative were $4.5 million. Excluding acquisitions and restructuring initiatives, the remaining $8.4 million decrease to operating income is mainly due to lower core sales and the increase in expenses noted above. Excluding acquisitions and restructuring initiatives, operating income as a percentage of net sales decreased to 10.0% in the first quarter of 2013 compared to 11.9% for the same period in the prior year.

NET OTHER EXPENSE

Net other expenses in the first quarter of 2013 increased to $5.2 million from $4.1 million in the same period in the prior year. This increase is mainly due to increased costs associated with hedges in place to mitigate our foreign currency exposure on cross border transactions.

EFFECTIVE TAX RATE

The reported effective tax rate decreased to 32.7% in the first quarter ended March 31, 2013 compared to 33.9% in the first quarter of 2012. During the first quarter of 2013, the rate was favorably impacted by tax benefits recorded due to an Italian tax law change which allowed us to claim a refund from prior year taxes paid. The favorable impact was partially offset by a new French three percent distribution tax effective for all distributions paid on or after August 17, 2012.

NET INCOME ATTRIBUTABLE TO APTARGROUP, INC.

We reported net income attributable to AptarGroup, Inc. of $40.0 million in the first quarter of 2013 compared to $43.8 million in the first quarter of 2012.

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 March 31,                       2013        2012

Net Sales                                     $ 363,472   $ 377,151
Segment Income                                   24,415      32,972
Segment Income as a percentage of Net Sales         6.7 %       8.7 %

Net sales for the quarter ended March 31, 2013 decreased 4% to $363.5 million compared to $377.2 million in the first quarter of the prior year. Excluding foreign currency changes, sales decreased 3% in the first quarter of 2013 compared to the same quarter of the prior year. Sales, excluding foreign currency changes, to the beauty and personal care markets were down 2% and 3%, respectively, in the first quarter of 2013 compared to the same period in the prior year. Geographically, sales


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increases in Asia and Latin America were offset by softness in North America caused by a snowstorm on the east coast along with certain unprofitable business we exited. Customer tooling sales, excluding foreign currency changes, also decreased in the first quarter of 2013 to $6.2 million compared to $10.3 million in the first quarter of the prior year.

Segment income for the first quarter of 2013 decreased approximately 26% to $24.4 million from $33.0 million reported in the same period in the prior year. The negative impact of lower product and tooling sales mentioned above along with productivity issues and higher labor costs in North America contributed to 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 March 31,                       2013        2012

Net Sales                                     $ 168,869   $ 140,043
Segment Income                                   45,980      39,372
Segment Income as a percentage of Net Sales        27.2 %      28.1 %

Net sales for the Pharma segment increased by 21% in the first quarter of 2013 to $168.9 million compared to $140.0 million in the first quarter of 2012. Stelmi sales were $35.4 million and represented 25% of the increase. Foreign currency changes had no measureable impact on the total segment sales. Excluding acquisitions and changes in foreign currency rates, sales decreased by 4% in the first quarter of 2013 compared to the first quarter of 2012. Excluding acquisitions and foreign currency rate changes, sales to the prescription and consumer health care markets decreased 2% and 9%, respectively, in the first quarter of 2013 compared to the same period in the prior year. The majority of the decrease to the prescription market is due to destocking of inventory by our generic customers, especially in North America, while the decrease in sales to the consumer health care market is due to continued softness in Europe.

Segment income in the first quarter of 2013 increased approximately 17% to $46.0 million compared to $39.4 million reported in the same period in the prior year. Stelmi segment income was $6.9 million in the first quarter of 2013. Excluding Stelmi, segment income would have decreased slightly in the first quarter of 2013 to $39.1 million compared to $39.4 million reported in the same period in the prior year. This decrease is mainly due to lower sales to the prescription and consumer health care market offset by higher margins on product sales compared to the prior year.

FOOD + BEVERAGE SEGMENT

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

Three Months Ended March 31,                      2013       2012

Net Sales                                     $ 85,292   $ 75,304
Segment Income                                   8,550      6,788
Segment Income as a percentage of Net Sales       10.0 %      9.0 %

Net sales for the quarter ended March 31, 2013 increased approximately 13% to $85.3 million compared to $75.3 million in the first quarter of the prior year. Foreign currency changes had no measureable impact on the total segment sales. Excluding foreign currency rate changes, sales to the food market increased 14% and sales to the beverage market increased approximately 13% in the first quarter of 2013 compared to the same period in the prior year. The majority of the food increase is driven by tooling sales, which increased $4.9 million over the first quarter of 2012 while the beverage increase is mainly due to increased product sales globally, especially in Asia for the functional bottled water market.

Segment income in the first quarter of 2013 increased approximately 26% to $8.6 million compared to $6.8 million during the same period in the prior year. The strong growth in product sales noted above along with improved manufacturing productivity and cost absorption contributed to the improvements in the first quarter of 2013 compared to the same period in the prior year.

CORPORATE & OTHER

In addition to our three operating business segments, AptarGroup assigns certain costs to "Corporate & Other," which is presented separately in Note 10 of the Notes to the Condensed Consolidated Financial Statements. Corporate & Other primarily includes certain corporate compensation and information system costs which are not allocated directly to our operating segments. Corporate & Other expense increased to $10.8 million for the quarter ended March 31, 2013 compared to $8.6 million in the first quarter of the prior year mainly due to increased costs associated with hedges in place to support our foreign currency cross border transactions and higher personnel costs.

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


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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.

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 2013 compared to 2012 is as follows:

                                        2013     2012
First Quarter                         $  6.5   $  5.8
Second Quarter (estimated for 2013)      2.8      2.9
Third Quarter (estimated for 2013)       2.2      2.1
Fourth Quarter (estimated for 2013)      2.1      1.9
                                      $ 13.6   $ 12.7

LIQUIDITY AND CAPITAL RESOURCES

Our primary sources of liquidity are cash flow from operations and our revolving credit facility. In the first quarter of 2013, our operations provided approximately $26.1 million in cash flow compared to $13.7 million for the same period a year ago. In both periods, cash flow from operations was primarily derived from earnings before depreciation and amortization. During the first quarter of 2013, we utilized the majority of the operating cash flows to finance capital expenditures.

We used $32.7 million in cash for investing activities during the first quarter of 2013, compared to $42.0 million during the same period a year ago. The decrease in cash used for investing activities is due primarily to $7.7 million less spent on capital expenditures in the first quarter of 2013 compared to the first quarter of 2012. Cash outlays for capital expenditures for 2013 are estimated to be approximately $160 million but could vary due to changes in exchange rates as well as the timing of capital projects.

We received approximately $8.4 million in cash provided by financing activities in the first quarter of 2013 compared to using $32.4 million in the first quarter of the prior year. In the first quarter of 2012, we utilized $46 million of funds repatriated during the quarter to pay down a portion of our revolving credit facility. No funds were repatriated during the first quarter of 2013 which required us to increase borrowings on our revolving credit facility.

Cash and equivalents decreased to $225.1 million at March 31, 2013 from $229.8 million at December 31, 2012. Total short and long-term interest bearing debt increased in the first quarter of 2013 to $441.6 million from $427.5 million at December 31, 2012. The ratio of our Net Debt (interest bearing debt less cash and cash equivalents) to Net Capital (stockholder's equity plus Net Debt) was 13.5% at the end of March 2013 compared to 12.5% at December 31, 2012.

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 and the repatriations of current year foreign earnings. Specifically, in the U.S., we have an unsecured $300 million revolving line of credit of which $250 million was unused and available as of March 31, 2013 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. To take advantage of low interest rates during the past year, we completed a $125 million private placement on September 5, 2012, consisting of $75 million of 10 year notes at an interest rate of 3.25% and $50 million of 12 year notes at an interest rate of 3.40%.

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

Requirement Level at March 31, 2013 Debt to total capital ratio Maximum of 55% 24.1%

Based upon the above debt to total capital ratio covenant we had the ability to borrow approximately an additional $1.3 billion at March 31, 2013 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 $225.1 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. The repatriation of non-U.S. cash balances from


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certain subsidiaries 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. has been between 10% and 14% of the repatriated amount. We would not expect future impacts to be materially different.

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. The acquisition of the Stelmi group was funded with cash available from our European operations. 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 April 11, 2013, the Board of Directors declared a quarterly dividend of $0.25 per share payable on May 17, 2013 to stockholders of record as of April 26, 2013.

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 2029. 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

In July 2012, the FASB amended the guidance on the annual testing of indefinite-lived intangible assets (other than goodwill) for impairment. The amended guidance will allow companies to first assess qualitative factors to determine whether it is more-likely-than-not that an indefinite-lived intangible asset might be impaired and whether it is necessary to perform the quantitative impairment test required under current accounting standards. This guidance will be effective for the Company's fiscal year ending December 31, 2013, with early adoption permitted. The Company does not believe that this new guidance will have a material impact on its consolidated financial statements.

In March 2013, the FASB issued 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 will be effective for the Company's fiscal years beginning after December 15, 2013; however, early adoption is 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 second quarter, we anticipate our Beauty + Home segment's income to improve from the disappointing first quarter results. We are optimistic that our legacy Pharma business will see more normalized order levels in the U.S. generic allergy and European consumer health care markets in the second quarter. Also, Aptar Stelmi is expected to continue to perform well. Our Food
+ Beverage segment is expected to continue to grow this year compared to the prior year provided the global economies do not deteriorate.

Our second quarter earnings per share guidance does not include any impact from our EOO plan. Currently, we anticipate earnings per share for the second quarter to be in the range of $0.73 to $0.78 compared to $0.61 per share a year ago. Prior year reported earnings per share included a negative $0.05 per share related to costs associated with the Aptar Stelmi acquisition.

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 Liquidity and Capital Resources, Off Balance Sheet Arrangements, 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;
changes in customer and/or consumer spending levels;


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the cost of materials and other input costs (particularly resin, metal, anodization costs and transportation and energy costs);
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;
the timing and successful completion of our EOO plan;
our ability to increase prices;
significant fluctuations in foreign currency exchange rates;
changes in capital availability or cost, including interest rate fluctuations; . . .

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