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ATR > SEC Filings for ATR > Form 10-Q on 4-Nov-2013All Recent SEC Filings

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Form 10-Q for APTARGROUP INC


4-Nov-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





                                 Three Months Ended September 30,        Nine Months Ended September 30,
                                         2013                2012               2013                2012

Net Sales                               100.0 %             100.0 %            100.0 %             100.0 %
Cost of sales (exclusive
of depreciation and
amortization shown below)                68.0                69.1               67.7                68.1
Selling, research &
development and
administrative                           13.9                13.6               14.3                14.6
Depreciation and
amortization                              6.0                 6.0                5.9                 5.7
Restructuring initiatives                 0.3                  --                0.5                  --
Operating Income                         11.8                11.3               11.6                11.6
Other expense                            (0.8 )              (0.6 )             (0.8 )              (0.7 )
Income before income taxes               11.0                10.7               10.8                10.9

Net income                                7.3 %               7.1 %              7.2 %               7.2 %

Effective Tax Rate                       33.8 %              33.2 %             33.8 %              33.5 %

NET SALES

We reported net sales of $623.6 million for the quarter ended September 30, 2013, 6% above third quarter 2012 reported net sales of $589.6 million. The average U.S. dollar exchange rate weakened relative to the Euro. However, Latin American currencies, such as the Brazilian Real and Argentine Peso, continue to devalue significantly compared to both the Euro and U.S. dollar. Overall, the net change in currency rates positively impacted consolidated sales in the quarter by 2%. Excluding changes in foreign currency rates, sales increased by 4% in the third quarter of 2013 compared to the third quarter of 2012.

For the first nine months of 2013, we reported net sales of $1.9 billion, 7% above the first nine months of 2012 reported net sales of $1.8 billion. Stelmi, which was acquired in July of 2012, reported sales for the first six months of 2013 of $74.0 million which contributed 4% to the reported increase in the first nine month's sales. The year-to-date average U.S. dollar exchange rate weakened relative to the Euro but was offset by strengthening of the U.S. dollar compared to other foreign currencies, such as the Brazilian Real and Argentine Peso. This resulted in a 1% positive impact from changes in exchange rates on our reported sales growth. Excluding acquisitions and changes in foreign currency rates, sales increased 2% in the first nine months of 2013 compared to the first nine months 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,
                     2013   % of Total        2012   % of Total          2013   % of Total          2012   % of Total

Domestic        $ 152,213           25 % $ 168,584           29 % $   478,686           26 % $   506,214           29 %
Europe            357,891           57 %   312,910           53 %   1,076,695           57 %     944,230           54 %
Other Foreign     113,540           18 %   108,104           18 %     327,337           17 %     309,155           17 %
                $ 623,644                $ 589,598                $ 1,882,718                $ 1,759,599

COST OF SALES (EXCLUSIVE OF DEPRECIATION AND AMORTIZATION SHOWN BELOW)

Our cost of sales as a percent of net sales decreased to 68.0% in the third quarter of 2013 compared to 69.1% in the same period a year ago. Cost of sales in the prior year include approximately $3.8 million of inventory fair value adjustments related to the acquisition of Stelmi. Excluding this adjustment, 2012 cost of sales represented 68.5% of net sales. The remaining decrease is partially due to increased sales volumes in our core Pharma segment and the incremental sales related to our Stelmi acquisition. This positively impacts our cost of sales percentage as margins on our pharmaceutical products typically are higher than the overall Company average. Increases in resin of $3.1 million and unfavorable foreign currency transaction effects (primarily in Latin America) were offset by cost savings initiatives and lower tooling sales. Traditionally, sales of custom tooling generate lower margins than our regular product sales; thus, a decrease in sales of custom tooling positively impacted cost of sales as a percentage of sales.

In the first nine months of 2013, cost of sales as a percent of net sales decreased slightly to 67.7% compared to 68.1% in the same period a year ago. As discussed above, this decrease is mainly due to the fair value inventory adjustment related to


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the acquisition of Stelmi in the third quarter of 2012 and the incremental sales volumes related to our Pharma segment, which carry a higher margin than the overall Company average.

SELLING, RESEARCH & DEVELOPMENT AND ADMINISTRATIVE

Our Selling, Research & Development and Administrative expenses ("SG&A") increased by approximately $6.8 million in the third quarter of 2013 compared to the same period a year ago. Excluding changes in foreign currency rates, SG&A increased by approximately $5.1 million in the quarter. This increase is due in part to additional personnel costs and professional fees related to our North American enterprise system rollouts and the related organizational structure. Also, we recognized some additional personnel costs at our Aptar Stelmi operation to support future growth of this business. SG&A as a percentage of net sales increased to 13.9% compared to 13.6% in the same period of the prior year due primarily to the increase in expenses noted above.

SG&A increased by approximately $12.9 million in the first nine months of 2013 compared to the same period a year ago. Excluding changes in foreign currency rates, SG&A increased by approximately $11.4 million in the first nine months of the year. We recorded Stelmi operational expenses of $9.9 million in the first half of 2013 while $6.0 million of professional fees related to the acquisition of Stelmi were recorded in 2012. The remaining increase is due to additional personnel costs and professional fees related to our North American enterprise system rollouts and Aptar Stelmi operations mentioned above along with an increase in personnel costs and stock compensation expenses due to higher substantive vesting requirements in the first quarter of 2013. SG&A as a percentage of net sales decreased to 14.3% in the first nine months of 2013 compared to 14.6% in the first nine months of 2012 primarily due to higher sales in 2013.

DEPRECIATION AND AMORTIZATION

Reported depreciation and amortization expenses increased by approximately $2.0 million in the third quarter of 2013 compared to the same period a year ago. Excluding changes in foreign currency rates, depreciation and amortization increased by approximately $1.0 million in the quarter compared to the same period a year ago. Approximately $0.5 million is depreciation related to our European restructuring plan. 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. Depreciation and amortization as a percentage of net sales remained constant at 6.0% in the third quarter of 2013 compared to the same period a year ago.

For the nine months of 2013, reported depreciation and amortization expenses increased by approximately $11.6 million compared to the first nine months of 2012. Excluding changes in foreign currency rates, depreciation and amortization increased by approximately $10.6 million in the first nine months. Incremental Stelmi depreciation and amortization for the first six months of 2013 represented $4.8 million of this increase while the accelerated depreciation on certain corporate assets and the European restructuring plan represented $3.0 million. The additional investments in our business referred to above make up the remaining increase. Excluding acquisitions, depreciation and amortization as a percentage of net sales increased slightly to 5.9% compared to 5.7% for the same period a year ago.

RESTRUCTURING INITIATIVES

On November 1, 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 is transferring and consolidating production capacity involving twelve facilities. Under the plan, one facility has closed and another is expected to close by the end of 2013. These closures will impact approximately 170 employees. During the three and nine months ended September 30, 2013, we recognized $2.2 million and $8.8 million of restructuring expenses, respectively, along with the $0.5 million and $1.5 million of accelerated depreciation of assets, respectively, mentioned above. Using current exchange rates, we expect to recognize approximately $3 million in additional costs, most of which will be incurred in the fourth quarter of 2013. Savings from the plan are expected to be approximately 9 million (approximately $12 million using current exchange rates) on an annualized basis the majority of which will begin in 2014.

OPERATING INCOME

Operating income increased approximately $6.4 million in the third quarter of 2013 to $73.3 million compared to $66.9 million in the same period in the prior year. Excluding changes in currency rates, operating income increased by approximately $4.7 million in the quarter. 2013 results include the negative impact of the European restructuring plan charges of $2.7 million while the 2012 results were negatively impacted by $3.8 million of fair value adjustments that were recorded for the acquisition date Stelmi inventory as discussed above. Excluding restructuring initiatives and Stelmi fair value adjustments, operating income increased by $5.3 million. The primary reason for the increase in operating income over the prior year is sales growth in our Pharma and Beauty + Home segments. Reported operating income as a percentage of net sales increased to 11.8% in the third quarter of 2013 compared to 11.3% for the same period in the prior year.

Operating income increased approximately $14.5 million in the first nine months of 2013 to $218.8 million compared to $204.3 million in the same period in the prior year. Excluding changes in currency rates, operating income increased by approximately $11.8 million in the first nine months of 2013. 2013 results include the positive impact of Stelmi, which had operating income of $14.4 million in the first six months of 2013. 2013 was also negatively impacted by the European restructuring plan charges of $10.3 million while the 2012 results were negatively impacted by $6.0 million of expense related to


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Stelmi acquisition costs and $3.8 million of fair value adjustments that were recorded for the acquisition date Stelmi inventory as mentioned above. Excluding acquisitions and restructuring costs, operating income increased slightly by $0.6 million which is due to sales growth across all three of our segments. Reported operating income as a percentage of sales remained constant at 11.6% in the first nine months of 2013 compared to the same period in the prior year.

NET OTHER EXPENSE

Net other expenses in the third quarter of 2013 increased to $5.0 million from $3.9 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.

Net other expenses for the nine months ended September 30, 2013 also increased to $14.8 million from $12.5 million in the same period in the prior year. This increase is mainly due to increased interest expense and the costs of foreign currency hedges mentioned above.

EFFECTIVE TAX RATE

The reported effective tax rate was 33.8% for the three months ended September 30, 2013 compared to 33.2% for the same period ended September 30, 2012. The reported effective tax rate was 33.8% for the nine months ended September 30, 2013 compared to 33.5% for the same period ended September 30, 2012. The slight increases in the tax rates are attributable to higher tax rates in China and France, including withholding taxes on repatriated earnings from France, as well as the mix of earnings in higher tax countries.

NET INCOME ATTRIBUTABLE TO APTARGROUP, INC.

We reported net income attributable to AptarGroup, Inc. of $45.3 million and $135.1 million in the three and nine months ended September 30, 2013, respectively, compared to $42.1 million and $127.6 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.

                                  Three Months Ended September 30,       Nine Months Ended September 30,
                                          2013                2012               2013               2012

Net Sales                             $376,051            $358,476         $1,114,507         $1,104,911
Segment Income                          30,943              30,050             85,697             96,569
Segment Income as a
percentage of Net Sales                    8.2 %               8.4 %              7.7 %              8.7 %

Net sales for the quarter ended September 30, 2013 increased 5% to $376.1 million compared to $358.5 million in the third quarter of the prior year. Changes in foreign currency rates positively impacted reported sales by 1% for the quarter ended September 30, 2013. Sales, excluding foreign currency changes, to the beauty market increased 5% while sales to the personal care market increased 4% in the third quarter of 2013 compared to the same period in the prior year. Geographically, 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, decreased $1.8 million in the third quarter of 2013 to $9.1 million compared to $10.9 million in the third quarter of the prior year. Increases in resin pass-throughs to our customers positively impacted sales by $0.8 million.

Net sales increased 1% in the first nine months of 2013 compared to the first nine months of the prior year. Changes in foreign currency rates did not have a material impact on reported sales for the first nine months of 2013. Sales of our products, excluding foreign currency changes, to the beauty market increased 1% while sales to the personal care market increased 2% in the first nine months of 2013 compared to the first nine months of 2012. Geographically, increases in Europe, Asia and Latin America offset the softness in North America. Customer tooling sales, excluding foreign currency changes, decreased in the first nine months of 2013 to $23.1 million compared to $31.9 million in the first nine months of the prior year.

Segment income for the third quarter of 2013 increased approximately 3% to $30.9 million compared to $30.1 million reported in the prior year. Increased sales in Europe, Asia and Latin America were able to offset the higher labor costs and operational inefficiencies brought on by softness in the North American region. Additional personnel costs and professional fees related to our North American enterprise system rollouts along with a $1.4 million increase in resin costs also negatively impacted segment income in the third quarter of 2013.

Segment income in the first nine months of 2013 decreased approximately 11% to $85.7 million compared to $96.6 million reported in the same period in the prior year. We were negatively impacted by additional personnel costs and professional fees related to our North American enterprise system rollouts and the related organizational structure along with higher resin costs.


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PHARMA SEGMENT

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

                                 Three Months Ended September 30,      Nine Months Ended September 30,
                                         2013                2012              2013               2012

Net Sales                            $172,270            $156,100          $524,070           $429,122
Segment Income                         44,737              34,194           141,154            104,676
Segment Income as a
percentage of Net Sales                  26.0 %              21.9 %            26.9 %             24.4 %

Net sales for the Pharma segment increased by 10% in the third quarter of 2013 to $172.3 million compared to $156.1 million in the third quarter of 2012. Sales, excluding changes in foreign currency rates, increased 7%. Sales to the consumer health care market increased 21% due to strong nasal saline and nasal decongestant sales while sales, excluding foreign currency changes, to the injection market increased 27% driven by increased pricing and customer demand. Sales to the prescription market decreased 4% primarily due to lower custom tooling sales compared to the prior year.

Net sales for the first nine months of 2013 increased approximately 22% to $524.1 million compared to $429.1 million in the first nine months of the prior year. Stelmi sales were $74.0 million during the first half of 2013 and represented 17% of the increase. Foreign currency changes had a positive impact of 2% on total segment sales. Excluding acquisitions and changes in foreign currency rates, sales increased by 3% in the first nine months of 2013 compared to the first nine months of 2012. Excluding acquisitions and foreign currency rate changes, sales to the prescription and consumer health care markets increased 2% and 7%, respectively, in the first nine months of 2013 compared to the same period in the prior year. Decreases in the first quarter related to destocking of inventory by our customers serving the generic allergy market, especially in North America, and softness in the consumer health care market in Europe were more than offset by the increase in sales during the last six months.

Segment income in the third quarter of 2013 increased approximately 31% to $44.7 million compared to $34.2 million reported in the same period in the prior year. Excluding $3.8 million of fair value adjustments related to Stelmi during the third quarter of 2012, segment income increased $6.7 million in the third quarter of 2013 compared to the third quarter of 2012. This increase is mainly attributed to the higher sales to the consumer health care and injection markets along with better overhead absorption at our Pharma operating facilities.

Segment income in the first nine months of 2013 increased approximately 35% to $141.2 million compared to $104.7 million reported in the same period of the prior year. Stelmi segment income was $14.5 million in the first six months of 2013. We also reported the $6.0 million of acquisition fees and $3.8 million of fair value adjustments related to Stelmi during the first nine months of 2012. Excluding Stelmi and the related acquisition fees, segment income increased $12.2 million in the first nine months of 2013 compared to the same period in the prior year. This increase is attributed to the higher sales to the consumer health care and injection markets and the improved overhead absorption mentioned above.

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,
                                        2013                2012              2013               2012

Net Sales                            $75,323             $75,022          $244,141           $225,566
Segment Income                         7,688               9,611            28,102             24,142
Segment Income as a
percentage of Net Sales                 10.2 %              12.8 %            11.5 %             10.7 %

Net sales for the Food + Beverage segment for the quarter ended September 30, 2013 increased slightly to $75.3 million compared to $75.0 million in the third quarter of the prior year. Sales, excluding changes in foreign currency rates, decreased 1%. Excluding foreign currency changes, sales to the food market increased 4% while sales to the beverage market decreased 7%. The beverage market decrease is mainly due to a decrease in custom tooling project sales, excluding foreign currency changes, of $2.3 million. Increases in resin pass-throughs to our customers positively impacted sales by $1.0 million.

Net sales for the first nine months of 2013 increased approximately 8% to $244.1 million compared to $225.6 million in the first nine months of the prior year. Excluding changes in foreign currency rates, sales increased 7%. Sales, excluding foreign currency changes, to the food market increased 8% and sales to the beverage market increased approximately 7% in the first nine months of 2013 compared to the same period in the prior year. The food increase is driven by tooling sales, which increased $2.8 million over the first nine months of 2012, and higher sales of our products into new application fields such as infant formula in North America. The beverage increase is mainly due to increased product sales globally, especially in Asia, for the functional bottled water market.

Segment income in the third quarter of 2013 decreased approximately 20% to $7.7 million compared to $9.6 million during the same period in the prior year. Segment income was negatively impacted by $1.7 million of resin cost increases along with lower tooling sales mentioned above, which more than offset the increases due to improved product sales.

Segment income in the first nine months of 2013 increased approximately 16% to $28.1 million compared to $24.1 million reported in the same period of the prior year. Strong growth in product sales along with improved manufacturing productivity and cost absorption offset increased resin costs and contributed to the improvements in the first nine months of 2013 compared to the same period in the prior year.


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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, professional fees, information system costs and LIFO inventory adjustments which are not allocated directly to our operating segments. Corporate & Other expense increased to $8.1 million for the quarter ended September 30, 2013 compared to $6.4 million in the third quarter of the prior year mainly due higher professional fees and personnel costs as well as increased costs associated with hedges in place to support our foreign currency cross border transactions.

Corporate & Other expense in the first nine months of 2013 increased to $27.6 million compared to $22.0 million reported in the same period of the prior year. The increase is mainly due to a $1.5 million adjustment for accelerated depreciation on certain corporate assets and increased costs associated with hedges in place to support our foreign currency cross border transactions.

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 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 increased 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 2013 compared to the prior year is as follows:

                                        2013     2012
First Quarter                         $  6.5   $  5.8
Second Quarter                           2.8      2.9
Third Quarter                            2.2      2.1
Fourth Quarter (estimated for 2013)      2.2      1.9
                                      $ 13.7   $ 12.7

LIQUIDITY AND CAPITAL RESOURCES

Our primary sources of liquidity are cash flow from operations and our revolving credit facility. Cash and equivalents increased to $247.9 million at September 30, 2013 from $229.8 million at December 31, 2012. Total short and long-term interest bearing debt also increased in the first nine months of 2013 to $432.9 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 11.2% at the end of September 2013 compared to 12.5% at December 31, 2012.

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