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ATR > SEC Filings for ATR > Form 10-K on 28-Feb-2014All Recent SEC Filings

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Form 10-K for APTARGROUP INC


28-Feb-2014

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(In thousands, expect per share amounts or otherwise indicated)

The objective of the following Management's Discussion and Analysis of Consolidated Results of Operations and Financial Condition ("MD&A") is to help the reader understand the financial performance of AptarGroup, Inc. MD&A is presented in eight sections: Overview, Results of Operations, Liquidity and Capital Resources, Off-Balance Sheet Arrangements, Overview of Contractual Obligations, Recently Issued Accounting Pronouncements, Critical Accounting Estimates, Operations Outlook and Forward-Looking Statements. MD&A should be read in conjunction with our consolidated financial statements and accompanying Notes to Consolidated Financial Statements contained elsewhere in this Annual Report on Form 10-K.

In MD&A, "we," "our," "us," "AptarGroup," "AptarGroup, Inc." and "the Company" refer to AptarGroup, Inc. and its subsidiaries.

OVERVIEW

GENERAL

We are a leading global solution provider of a broad range of innovative packaging delivery solutions primarily for the beauty, personal care, home care, prescription drug, consumer health care, injectables, food and beverage markets. Our creative packaging solutions enhance the convenience, safety and security of consumers around the globe and allow our customers to differentiate their products in the market.

Our diverse product offering and broad global reach drove core sales growth in 2013. In spite of difficult conditions in certain markets, we were able to grow core sales by 4% over the prior year. Even though we began the year slowly, we saw improvement in year over year sales growth in the middle part of the year and ended with a strong fourth quarter. Our Pharma segment's strong results were driven by increased sales across each market served by this segment. Also, our Food + Beverage segment reported increased earnings while continued softness in the U.S., currency effects, and Latin American facility start-up costs had a negative impact on the results of our Beauty + Home segment. On a geographic basis excluding currency effects and the Aptar Stelmi acquisition, strong European sales growth was able to more than offset the softness in the U.S. We also continued to grow at a strong rate in Latin America and Asia.

We define core sales as net sales excluding acquisitions and changes in foreign currency rates. Core sales is a non-GAAP financial measure. We present this measure as supplemental information to help our investors better understand the trends in our business results over time. Our management uses core sales to evaluate our business on a consistent basis. A reconciliation of core sales growth to net sales growth, the most comparable GAAP measure, can be found on page 14.

2013 HIGHLIGHTS


Core sales increased 4% and net sales increased 8%.
Sales growth across all three business segments drove results.
We acquired a 20% non-controlling interest in Bapco Closures Holding Limited for approximately $5.2 million. In addition to this equity stake, we secured an exclusive global license related to innovative closures sealing technology that provides package integrity and tamper evidence.
We have substantially completed the European restructuring plan at the end of 2013 with total costs of approximately $19.5 million. Savings from this plan are expected to be in the range of $10 million to $12 million on an annualized basis.
French tax regulations enacted at the end of December negatively impacted earnings by $0.10 per share.
We spent approximately $119 million to repurchase 2.0 million shares of our common stock.
We made dividend payments to our shareholders totaling approximately $66 million.

13 /ATR

2013 Form 10-K


Table of Contents

                             RESULTS OF OPERATIONS

 The following table sets forth the consolidated statements of income and the
related percentages of net sales for the periods indicated:



                            2013                         2012                         2011
Years Ended         Amount in          % of      Amount in          % of      Amount in          % of
December 31,      $ Thousands     Net Sales    $ Thousands     Net Sales    $ Thousands     Net Sales

Net sales        $  2,520,013         100.0 % $  2,331,036         100.0 % $  2,337,183         100.0 %
Cost of sales
(exclusive of
depreciation
shown below)        1,708,936          67.8      1,590,365          68.2      1,568,286          67.1
Selling,
research &
development
and
administrative        364,747          14.4        341,634          14.7        347,629          14.9
Depreciation
and
amortization          149,956           6.0        137,022           5.9        134,243           5.7
Restructuring
initiatives            11,800           0.5          3,102           0.1            (71 )           -

Operating
income                284,574          11.3        258,913          11.1        287,096          12.3
Other expense         (20,191 )        (0.8 )      (17,540 )        (0.8 )      (12,154 )        (0.5 )

Income before
income taxes          264,383          10.5        241,373          10.3        274,942          11.8

Net Income            171,926           6.8        162,420           7.0        183,630           7.9

Effective tax
rate                    35.0%                        32.7%                        33.2%

NET SALES

We reported net sales of $2.5 billion for 2013, 8% above 2012 reported net sales of $2.3 billion. Stelmi, which was acquired in July of 2012, reported sales for the first six months of 2013 of $74.0 million which contributed 3% to the reported increase in 2013 net sales. The negative translation effect from weakening Latin American and Asian currencies was offset by the stronger Euro compared to prior year. This resulted in a 1% positive impact from changes in exchange rates on our reported sales growth. Although all three operating segments saw increases in 2013, the 4% core sales growth was mainly driven by the strong results of our Food + Beverage and Pharma segments.

In 2012, reported net sales of $2.3 billion were basically unchanged compared to $2.3 billion recorded in 2011. Stelmi sales contributed $56.8 million and represented a positive impact of 2% on our reported sales growth. The average U.S. dollar exchange rate strengthened relative to the Euro and other foreign currencies, such as the Brazilian Real and Swiss Franc, in 2012 compared to 2011, and as a result, changes in exchange rates had a negative impact of 5% on our reported sales growth. The 3% core sales growth was due to increased demand for our innovative dispensing systems across each of our business segments.

                  Net Sales Change over Prior Year    2013    2012

                  Core Sales                            4%      3%
                  Currency Effects                      1%     (5% )
                  Acquisitions                          3%      2%


                  Total Reported Net Sales Growth       8%      0%

For further discussion on net sales by reporting segment, please refer to the segment analysis of net sales and operating income on the following pages.

The following table sets forth, for the periods indicated, net sales by geographic location:

Years Ended
December 31,          2013     % of Total          2012     % of Total          2011     % of Total

Domestic       $   634,418            25%   $   650,637            28%   $   636,060            27%
Europe           1,452,041            58%     1,269,289            54%     1,340,036            57%
Other
Foreign            433,554            17%       411,110            18%       361,087            16%

COST OF SALES (EXCLUSIVE OF DEPRECIATION SHOWN BELOW)

Our cost of sales as a percentage of net sales decreased in 2013 to 67.8% compared to 68.2% in 2012.

The following factors positively impacted our cost of sales percentage in 2013:

Mix of Products Sold. Excluding acquisitions and foreign currency, our Pharma segment sales represented a higher percentage of our overall sales. This positively impacts our cost of sales percentage as margins on our pharmaceutical products typically are higher than the overall Company average.

14 /ATR

2013 Form 10-K


Table of Contents

Stelmi Acquisition. In 2012, approximately $3.8 million of inventory fair value adjustments related to the acquisition of Stelmi negatively impacted our cost of sales percentage. However, Stelmi margins are also higher than our Company average margins. Therefore, the strong sales volumes for a full year in 2013 also have a positive impact on the 2013 cost of sales percentage.

The following factors negatively impacted our cost of sales percentage in 2013:

Weakening of the U.S. Dollar. We are a net importer from Europe into the U.S. of products produced in Europe with costs denominated in Euros. As a result, when the U.S. dollar or other currencies weaken against the Euro, products produced in Europe (with costs denominated in Euros), and sold in currencies that are weaker compared to the Euro, have a negative impact on cost of sales as a percentage of net sales.

U.S. Overhead Utilization. Soft demand in certain product lines, along with costs related to our enterprise system rollouts, negatively impacted our North American cost of sales, mainly in our Beauty + Home segment.

Our cost of sales as a percentage of net sales increased in 2012 to 68.2% compared to 67.1% in 2011. Excluding Stelmi, 2012 cost of sales represented 68.1% of net sales:

The following factors negatively impacted our cost of sales percentage in 2012:

Increased Raw Material Costs. Raw material costs, primarily the cost of plastic resin, increased in 2012 compared to 2011. 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. Other material costs also increased such as the cost of aluminum, steel and rubber.

Mix of Products Sold. Excluding acquisitions and foreign currency, our Pharma segment sales represented a slightly lower percentage of our overall sales. This negatively impacts our cost of sales percentage as margins on our pharmaceutical products typically are higher than the overall company average.

Lincolnton Start-up Costs. Start-up activities associated with our new facility in Lincolnton, North Carolina have led to under-absorption of costs. For 2012, we recognized $3.5 million of under-absorption in our results.

The following factor positively impacted our cost of sales percentage in 2012:

Strengthening of the U.S. Dollar. We are a net importer from Europe into the U.S. of products produced in Europe with costs denominated in Euros. As a result, when the U.S. dollar or other currencies strengthen against the Euro, products produced in Europe (with costs denominated in Euros) and sold in currencies that are stronger compared to the Euro, have a positive impact on cost of sales as a percentage of net sales.

SELLING, RESEARCH & DEVELOPMENT AND ADMINISTRATIVE

Our Selling, Research & Development and Administrative expenses ("SG&A") increased approximately 7% or $23.1 million in 2013 compared to the same period a year ago. Excluding changes in foreign currency rates, SG&A increased by approximately $20.3 million compared to the same period a year ago. Part of the increase is related to the Stelmi acquisition. In the first half of 2013, the Stelmi Group contributed approximately $9.9 million to our SG&A expense totals, while in 2012, we recorded $5.9 million of professional fees related to the acquisition. Also contributing to the increase were additional personnel costs and professional fees related to our North American enterprise system rollouts along with facility start-up costs in Latin America. For 2013, SG&A as a percentage of net sales decreased to 14.4% compared to 14.7% of net sales in the same period of the prior year due primarily to the increase in sales noted above.

In 2012, our SG&A decreased approximately 2% or $6.0 million. Excluding changes in foreign currency rates, SG&A increased by approximately $11.8 million for the year. Increases due to Stelmi operational costs of $7.7 million and transaction costs of $5.9 million were offset by lower professional fees as higher legal costs were incurred in 2011. For 2012, SG&A as a percentage of net sales decreased to 14.7% compared to 14.9% of net sales in the same period of the prior year.

DEPRECIATION AND AMORTIZATION

Depreciation and amortization expense increased approximately 9% or $12.9 million in 2013. Excluding changes in foreign currency rates, depreciation and amortization increased by approximately $11.1 million compared to the same period a year ago. 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 $4.2 million. Additional investments in our business make up the remaining increase. Excluding acquisitions, depreciation and amortization as a percentage of net sales increased slightly to 6.0% compared to 5.9% for the same period a year ago mainly due to the increase in expenses noted above.

In 2012, depreciation and amortization expense increased approximately 2% or $2.8 million. Excluding changes in foreign currency rates, depreciation and amortization increased $10.0 million. Stelmi represented $5.6 million and accelerated depreciation related to our European restructuring plan represented $1.6 million of the increase in 2012. The remaining increase is related to the additional investments in our new facilities in Lincolnton, North Carolina and Mumbai, India, and general capital investment increases across all three business segments. Depreciation and amortization expense increased to 5.9% of net sales in 2012 compared to 5.7% in 2011 primarily due to the items mentioned above.

15 /ATR

2013 Form 10-K


Table of Contents

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 transferred and consolidated production capacity involving twelve facilities. Under the plan, two facilities, one in Italy and one in Switzerland, closed which impacted approximately 170 employees. During 2013, we recognized $11.8 million of restructuring expenses along with $2.7 million accelerated depreciation of assets mentioned above. The plan was substantially completed at the end of 2013 with total costs of approximately $19.5 million. Savings from the plan are expected to be in the range of $10 million to $12 million on an annualized basis.

OPERATING INCOME

Operating income increased approximately $25.7 million or 10% to $284.6 million in 2013. Excluding acquisitions and restructuring costs, operating income increased by $11.3 million. The increase is mainly related to the sales growth across all three segments as discussed above. In 2013, the positive impact of Stelmi, which had operating income of $14.4 million in the first six months of 2013, was offset by the negative impact related to restructuring plan charges of $14.6 million. The 2012 results were negatively impacted by restructuring plan charges of $4.9 million, $5.9 million of Stelmi acquisition costs and $3.8 million related to Stelmi inventory fair value adjustments as mentioned above. Reported operating income, as a percentage of sales, increased slightly to 11.3% in 2013 compared to 11.1% in 2012 mainly due to the increase in sales discussed above.

In 2012, operating income decreased approximately $28.2 million or 10% to $258.9 million. Excluding changes in foreign currency rates, operating income decreased by approximately $10.8 million in 2012 compared to 2011. Stelmi contributed a $4.6 million operating loss in 2012 and costs related to our European restructuring plan contributed $4.9 million. Excluding Stelmi, restructuring costs and the changes in foreign currency rates, operating income decreased by approximately $1.4 million in 2012 compared to the same period a year ago due to the higher cost of sales percentage and the incremental depreciation related to our capital investments. Operating income as a percentage of sales decreased to 11.1% in 2012 compared to 12.3% in 2011 also due to the higher percentage of cost of sales and depreciation cost compared to prior year as discussed above.

NET OTHER EXPENSES

Net other expenses in 2013 increased to $20.2 million compared to $17.5 million in 2012. This increase is mainly due to $1.6 million higher interest expense and increased losses in the fourth quarter on foreign currency transactions mainly due to the significant devaluation of the Argentine Peso, Brazilian Real and Indian Rupee when compared to the U.S. Dollar. We continue to hedge parts of this exposure when we believe it makes sense from a cost standpoint.

In 2012, net other expenses increased to $17.5 million compared to $12.2 million in 2011. This increase is mainly due to $2.7 million of lower interest income and $1.7 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.

EFFECTIVE TAX RATE

The reported effective tax rate on net income for 2013 and 2012 was 35.0% and 32.7%, respectively. The higher tax rate for 2013 is primarily the result of tax regulation changes enacted in France, offset partially by the tax benefits resulting from an Italian tax law change as well as the expected use of a Brazilian net operating loss.

The reported effective tax rate on net income for 2012 and 2011 was 32.7% and 33.2%, respectively. The lower tax rate for 2012 is primarily the mix of earnings and lower tax expense associated with earnings repatriated to the U.S. during 2012. These benefits were partially offset by tax increases resulting from law changes enacted in 2012 in France.

NET INCOME ATTRIBUTABLE TO APTARGROUP, INC.

We reported net income of $172.0 million in 2013 compared to $162.6 million reported in 2012 and $183.7 million reported in 2011.

                             BEAUTY + HOME SEGMENT



                                                                       % Change     % Change
Years Ended                                                            2013 vs.     2012 vs.
December 31,                     2013          2012          2011          2012         2011

Net Sales                 $ 1,488,145   $ 1,453,940   $ 1,516,305           2.4 %       (4.1 )%
Segment Income (1)            109,272       123,527       130,818         (11.5 )       (5.6 )
Segment Income as a
percentage of Net Sales          7.3%          8.5%          8.6%

(1)
Segment income is defined as earnings before net interest expense, certain corporate expenses, restructuring initiatives and income taxes. The Company evaluates performance of its business units and allocates resources based upon segment income. For a reconciliation of segment income to income before income taxes, see Note 17 to the Consolidated Financial Statements in Item 8.

16 /ATR

2013 Form 10-K


Table of Contents

Net sales increased approximately 2% in 2013 to $1.49 billion compared to $1.45 billion in 2012. Changes in foreign currency rates did not have a material impact on reported sales for 2013. Sales of our products, excluding foreign currency changes, to the beauty market increased approximately 2% while sales to the personal care market increased approximately 4% in 2013 compared to 2012. Softer sun care sales due to cooler weather conditions were offset by strong sales growth in Asia and Latin America. Sales of our home care products, excluding foreign currency changes, decreased approximately 4% mainly due to exiting certain unprofitable businesses in Europe. Geographically, increases in Europe, Asia and Latin America offset the softness in North America. Customer tooling sales, excluding foreign currency changes, decreased in 2013 to $38.6 million compared to $42.8 million in the prior year.

In 2012, net sales decreased approximately 4% to $1.45 billion compared to $1.52 billion in 2011. The strengthening U.S. dollar compared to the Euro negatively impacted sales by 6%. Excluding changes in exchange rates, sales increased 2% from the prior year. Sales of our products, excluding foreign currency changes, to the beauty market increased approximately 1% while sales to the personal care market increased approximately 3% in 2012 compared to 2011 mainly due to sales growth in Asia and Latin America. Sales of our home care products, excluding foreign currency changes, decreased approximately 5% due to lower tooling sales compared to the prior year.

Segment income for 2013 decreased approximately 12% to $109.3 million from $123.5 million reported in 2012. Increased earnings from the strong sales in Europe, Asia and Latin America were not able to offset the higher labor costs and operational inefficiencies brought on by softness in the North American region and facility start-up costs in Brazil and Columbia. Additional personnel costs and professional fees related to our North American enterprise system rollouts also negatively impacted segment income in 2013.

In 2012, segment income decreased approximately 6% to $123.5 million from $130.8 million reported in 2011. The decrease in segment income in 2012 compared to 2011 was primarily due to foreign currency changes and lower sales volumes in Europe. Increased earnings related to the strong sales growth in Asia and Latin America helped to offset some of this decrease.

                                 PHARMA SEGMENT



                                                                      % Change       % Change
                                                                      2013 vs.       2012 vs.
Years Ended December 31,            2013        2012        2011          2012           2011

Net Sales                      $ 708,774   $ 588,693   $ 553,930          20.4 %          6.3 %
Segment Income                   189,689     141,912     164,390          33.7          (13.7 )
Segment Income as a
percentage of Net Sales            26.8%       24.1%       29.7%

Net sales of our products to the Pharma segment increased 20% in 2013 to $708.8 million compared to $588.7 million in 2012. Stelmi sales were $74.0 million during the first half of 2013 and represented 12% of the increase. Foreign currency changes had a positive impact of 2% on total segment sales. Excluding acquisitions and changes in exchange rates, sales increased 6% in 2013 compared to the prior year. Excluding acquisitions and foreign currency rate changes, sales of our products to the prescription drug and consumer health care markets increased 2% and 11%, respectively, in 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 nine months of the year. We also increased second half injectables sales during 2013 compared to 2012 due to strong volumes and selective pricing increases. Customer tooling sales, excluding foreign currency changes, also increased in 2013 to $22.0 million compared to $18.6 million in the prior year.

In 2012, sales of our products to the Pharma segment increased 6% to $588.7 million compared to $553.9 million in 2011. Stelmi sales were $56.8 million and represented 10% of the increase. The strengthening U.S. dollar compared to the Euro negatively impacted sales by 5%. Excluding acquisitions and changes in exchange rates, sales increased 1% in 2012 compared to the same period of the prior year. Sales of our products, excluding acquisitions and foreign currency changes, to the prescription drug market increased 3% while sales to the consumer health care market decreased 2%. The growth in sales to the prescription drug 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 2011 was an all-time record for sales of our products to the consumer health care market.

Segment income increased 34% to $189.7 million in 2013 compared to $141.9 million in 2012. Stelmi segment income was $14.5 million in the first six months of 2013. We also reported the $5.9 million of acquisition fees and $3.8 million of fair value adjustments related to Stelmi during 2012. Excluding Stelmi and the related acquisition fees, segment income increased $23.6 million in 2013 compared to the same period in the prior year. This increase is attributed to the higher sales in each of the markets we serve by this segment along with improved overhead absorption at our Pharma operating facilities.

In 2012, segment income decreased 14% to $141.9 million compared to $164.4 million in 2011. This decrease is due to Stelmi fair value and other acquisition adjustments along with Stelmi transaction costs of $5.9 million and the negative impact

17 /ATR

2013 Form 10-K


Table of Contents

of changes in exchange rates. These expenses are offset somewhat by the increased profits from higher prescription drug sales during 2012.

                            FOOD + BEVERAGE SEGMENT



                                                                   % Change
                                                                   2013 vs.          % Change
Years Ended December 31,         2013        2012        2011          2012     2012 vs. 2011

Net Sales                   $ 323,094   $ 288,403   $ 266,948          12.0 %             8.0 %
Segment Income                 35,186      30,415      27,801          15.7               9.4
Segment Income as a
percentage of Net Sales         10.9%       10.5%       10.4%

Net sales of our products to the Food + Beverage segment increased by approximately 12% in 2013 to $323.1 million compared to $288.4 million in 2012. Excluding changes in foreign currency rates, sales increased 11%. Sales of our products, excluding foreign currency changes, to the food market increased 10% and sales of our products to the beverage market increased approximately 13% in . . .

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