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ATR > SEC Filings for ATR > Form 10-Q on 5-May-2014All Recent SEC Filings

Show all filings for APTARGROUP INC

Form 10-Q for APTARGROUP INC


5-May-2014

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,                                        2014           2013

Net Sales                                                     100.0 %        100.0 %
Cost of sales (exclusive of depreciation and
amortization shown below)                                      67.1           67.8
Selling, research & development and administrative             15.8           15.3
Depreciation and amortization                                   5.5            5.9
Restructuring initiatives                                        --            0.6
Operating Income                                               11.6           10.4
Other expense                                                  (0.7 )         (0.8 )
Income before Income Taxes                                     10.9            9.6

Net Income                                                      7.2 %          6.5 %

Effective Tax Rate                                             34.3 %         32.7 %

NET SALES

We reported net sales of $676.1 million for the quarter ended March 31, 2014, 9% above first quarter 2013 reported net sales of $617.6 million. The average U.S. dollar exchange rate weakened 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, Argentine Peso, Indian Rupee and Russian Ruble in the first quarter of 2014 compared to the first quarter of 2013 and, as a result, net changes in exchange rates did not impact our total reported sales growth. Therefore, sales excluding changes in foreign currency rates also increased by 9% in the first quarter of 2014 compared to the first quarter of 2013. Strong product sales across all three segments drove the overall increase in sales:

                                    Beauty               Food +
Net Sales Change over Prior Year    + Home    Pharma   Beverage   Total

Product Sales (including tooling)        9 %      12 %        5 %     9 %
Currency Effects                        (1 %)      3 %        1 %    --
Total Reported Net Sales Growth          8 %      15 %        6 %     9 %

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,        2014   % of Total        2013   % of Total

Domestic                  $ 170,677           25 % $ 157,228           25 %
Europe                      399,459           59 %   356,526           58 %
Other Foreign               105,915           16 %   103,879           17 %

COST OF SALES (EXCLUSIVE OF DEPRECIATION SHOWN BELOW)

Our cost of sales as a percent of net sales decreased to 67.1% in the first quarter of 2014 compared to 67.8% in the first quarter of 2013. The decrease is partially due to increased sales volumes across each segment allowing for greater operating leverage and the fact that our Pharma segment had the strongest sales growth of our three segments. This positively impacts our cost of sales percentage as margins on our pharmaceutical products typically are higher than the overall Company average. The impact of positive resin pass-throughs of approximately $1.5 million along with certain cost savings initiatives were partially offset by negative currency transaction effects and start-up costs for our new facilities in Latin America. Traditionally, sales of custom tooling generate lower margins than our regular product sales; thus, a decrease in the sales of custom tooling percentage positively impacted cost of sales as a percentage of sales.

SELLING, RESEARCH & DEVELOPMENT AND ADMINISTRATIVE

Our Selling, Research & Development and Administrative expenses ("SG&A") increased by approximately $12.4 million in the first quarter of 2014 compared to the same period a year ago. Excluding changes in foreign currency rates, SG&A increased by


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approximately $11.8 million in the quarter. The increase is due to several factors including increases in compensation, professional and legal fees, information technology charges and investments in research and development. SG&A as a percentage of net sales increased to 15.8% compared to 15.3% in the same period of the prior year as the cost increases noted above outpaced the increase in sales in the quarter.

DEPRECIATION AND AMORTIZATION

Reported depreciation and amortization expenses increased by approximately $1.1 million in the first quarter of 2014 compared to the same period a year ago. Excluding changes in foreign currency rates, depreciation and amortization increased by approximately $0.7 million in the quarter compared to the same period a year ago. Additional investments in our new products along with continued roll-out of our global enterprise resource planning system offset $0.5 million of accelerated depreciation related to our restructuring initiatives in 2013. Due to the increase in net sales, depreciation and amortization as a percentage of net sales decreased to 5.5% in the first quarter of 2014 compared to 5.9% for the same period a year ago.

RESTRUCTURING INITIATIVES

In November 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, impacting 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. 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 $14.1 million in the first quarter of 2014 to $78.7 million compared to $64.6 million in the same period in the prior year. Excluding changes in foreign currency rates, operating income increased by approximately $12.7 million in the quarter compared to the same period a year ago. As mentioned above, the first quarter of 2013 was negatively impacted by $4.1 million of restructurings costs along with $0.5 million of accelerated depreciation related to our restructuring initiatives. The remaining increase in operating income is mainly due to higher product sales noted above. Operating income as a percentage of net sales increased to 11.6% in the first quarter of 2014 compared to 10.4% for the same period in the prior year.

NET OTHER EXPENSE

Net other expenses in the first quarter of 2014 decreased slightly to $5.0 million from $5.2 million in the same period in the prior year. Lower interest expenses and hedging costs were offset by the recognition of a $1.5 million write-down on a non-controlling investment to align with the current fair value.

EFFECTIVE TAX RATE

The reported effective tax rate increased to 34.3% in the first quarter of 2014 compared to 32.7% in the first quarter of 2013. The increase in the rate is primarily attributable to tax law changes in France in December 2013. This increase was partially offset by the reduction in repatriation costs. In addition, the tax rate for 2013 was favorably impacted by an Italian tax law change which allowed us to claim a refund from prior year taxes paid.

NET INCOME ATTRIBUTABLE TO APTARGROUP, INC.

We reported net income attributable to AptarGroup, Inc. of $48.4 million in the first quarter of 2014 compared to $40.0 million in the first quarter of 2013.

                             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 March 31,                      2014       2013

Net Sales                                     $391,236   $363,472
Segment Income                                  27,781     24,415
Segment Income as a percentage of Net Sales        7.1 %      6.7 %


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Net sales for the quarter ended March 31, 2014 increased 8% to $391.2 million compared to $363.5 million in the first quarter of the prior year. Excluding foreign currency changes, sales increased 9% in the first quarter of 2014 compared to the same quarter of the prior year. Sales, excluding foreign currency changes, to the beauty and personal care markets both increased by 10% in the first quarter of 2014 compared to the same period in the prior year. The increase is mainly due to strong product sales across all regions, especially for both markets in Europe and North America. Increases in resin pass throughs to our customers positively impacted sales by approximately $1.0 million but were offset by lower customer tooling sales of $1.4 million in the first quarter of 2014 compared to the first quarter of the prior year.

Segment income for the first quarter of 2014 increased approximately 14% to $27.8 million from $24.4 million reported in the same period in the prior year. The increase compared to the prior year is due mostly to the higher product sales discussed above, increases from resin pass through, savings related to our European optimization plan and better productivity in North America. These improvements were slightly offset by negative currency transaction effects, start-up costs for our new facilities in Latin America and higher SG&A costs mainly related to professional and legal fees.

PHARMA SEGMENT

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

Three Months Ended March 31,                      2014       2013

Net Sales                                     $194,349   $168,869
Segment Income                                  52,482     45,980
Segment Income as a percentage of Net Sales       27.0 %     27.2 %

Net sales for the Pharma segment increased by 15% in the first quarter of 2014 to $194.3 million compared to $168.9 million in the first quarter of 2013. Foreign currency changes had a positive impact of 3% on the total segment sales. Excluding changes in foreign currency rates, sales increased by 12% in the first quarter of 2014 compared to the first quarter of 2013. Excluding foreign currency rate changes, sales to the prescription, consumer health care and injectables markets increased 9%, 27% and 6%, respectively, in the first quarter of 2014 compared to the same period in the prior year. Product sales increased in all three markets, especially on the strength of metered dose valves for asthma treatment to the prescription market and non-prescription nasal decongestant sales to the consumer health care market. Excluding changes in foreign currency rates, customer tooling sales also improved by $2.5 million over the prior year.

Segment income in the first quarter of 2014 increased approximately 14% to $52.5 million compared to $46.0 million reported in the same period in the prior year. This increase is mainly due to the higher product and tooling sales to all three markets as discussed above offset slightly by higher selling and information system implementation costs. The Pharma segment also recognized a $1.5 million expense related to the write-down of a minority interest investment to align with the current fair value.

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,                     2014      2013

Net Sales                                     $90,466   $85,292
Segment Income                                  9,080     8,550
Segment Income as a percentage of Net Sales      10.0 %    10.0 %

Net sales for the quarter ended March 31, 2014 increased approximately 6% to $90.5 million compared to $85.3 million in the first quarter of the prior year. Foreign currency changes had a positive impact of 1% on the total segment sales. Excluding changes in foreign currency rates, sales increased by 5% in the first quarter of 2014 compared to the first quarter of 2013. Excluding foreign currency rate changes, sales to the food market increased 4% and sales to the beverage market increased approximately 7% in the first quarter of 2014 compared to the same period in the prior year. The increase to the food market is being driven by strong condiment sales while the beverage increase is mainly due to increased bottled water and functional drink sales in Asia. Increases in resin pass throughs to our customers positively impacted sales by approximately $2.1 million but were offset by lower customer tooling sales of approximately $1.0 million due to several large projects which closed in the first quarter of 2013.

Segment income in the first quarter of 2014 increased approximately 6% to $9.1 million compared to $8.6 million during the same period in the prior year. Improved product sales and increases from resin pass throughs noted above contributed to the improvements in the first quarter of 2014 compared to the same period in the prior year. This improvement was slightly offset by a higher investment in research and development, especially around our BAP technology.


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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 13 of the Unaudited Notes to the Condensed Consolidated Financial Statements. Corporate & Other primarily includes certain professional fees, compensation and information system costs which are not allocated directly to our operating segments. Corporate & Other expense increased to $11.8 million for the quarter ended March 31, 2014 compared to $10.8 million in the first quarter of the prior year mainly due to increases in professional fees along with higher personnel costs and stock compensation expenses due to a higher Black Sholes valuation.

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. Recently we have experienced volatility in certain Latin American and Asian currencies, including the Argentine Peso, Brazilian Real, Indian Rupee and the Russian Ruble. 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 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 2014 compared to 2013 is as follows:

                                        2014     2013
First Quarter                         $  8.4   $  6.5
Second Quarter (estimated for 2014)      3.7      2.8
Third Quarter (estimated for 2014)       2.9      2.2
Fourth Quarter (estimated for 2014)      2.9      2.2
                                      $ 17.9   $ 13.7

LIQUIDITY AND CAPITAL RESOURCES

Our primary sources of liquidity are cash flow from operations and our revolving credit facility. In the first quarter of 2014, our operations provided approximately $32.0 million in cash flow compared to $26.1 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 2014, we utilized the majority of the operating cash flows to finance capital expenditures.

We used $40.5 million in cash for investing activities during the first quarter of 2014, compared to $32.7 million during the same period a year ago. The increase in cash used for investing activities is due primarily to $8.1 million more spent on capital expenditures in the first quarter of 2014 compared to the first quarter of 2013. Cash outlays for capital expenditures for 2014 are estimated to be approximately $190 million but could vary due to changes in exchange rates as well as the timing of capital projects.

Proceeds from financing activities were $15.0 million in the first quarter of 2014 compared to $8.4 million in the first quarter of the prior year. The increase in cash from financing activities was primarily due to an increase in the proceeds from notes payable primarily used to cover working capital needs in the first quarter of 2014.

Cash and equivalents increased to $317.2 million at March 31, 2014 from $309.9 million at December 31, 2013. Total short and long-term interest bearing debt increased in the first quarter of 2014 to $529.0 million from $494.6 million at December 31, 2013. The ratio of our Net Debt (interest bearing debt less cash and cash equivalents) to Net Capital (stockholder's equity plus Net Debt) was 12.2% at March 31, 2014 compared to 11.1% at December 31, 2013.

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 at times, the repatriations of current year foreign earnings. Specifically, in the U.S., we have an unsecured $300 million revolving line of credit of which $135 million was unused and available as of March 31, 2014 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. On January 31, 2014, we amended the revolving credit facility to, among other things, increase the amount of permitted receivables transactions from $100 to $150 million, reduce the cost of committed funds by 12.5 basis points and


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uncommitted funds by 2.5 basis points, and extend the maturity date of the revolving credit facility by one year, to January 31, 2019.

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

Requirement Level at March 31, 2014 Debt to total capital ratio Maximum of 55% 25.8%

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, 2014 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 $317.2 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. If we were to repatriate non-U.S. cash balances from certain subsidiaries, it 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. have been between 10% and 14% of the repatriated amount.

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. 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, 2014, the Board of Directors increased the quarterly dividend by 12% to $0.28 per share payable on May 21, 2014 to shareholders of record as of April 30, 2014.

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 2027. 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

We have reviewed the recently issued accounting standards updates to the FASB's Accounting Standards Codification that have future effective dates. Standards which are effective for the first quarter of 2014 are discussed in Note 1 of the Unaudited Notes to Condensed Consolidated Financial Statements. The Company has carefully considered any new pronouncements that alter previous generally accepted accounting principles and does not believe that any new or modified principles will have a material impact on our reported financial position or operations in the near term.

OUTLOOK

We are encouraged by the current level of project discussion with customers who are seeking innovative packaging solutions to help grow their businesses. We are optimistic that we will see some of these new projects coming to market over the next twelve months. Looking to the second quarter, we expect broad-based demand for our innovative dispensing solutions to continue across each of our business segments and drive growth over the prior year. In the near-term, the emerging market currency environments are expected to remain challenging and we don't anticipate the impact from resin pricing adjustments to be as favorable as it was in the prior year. Currently, we expect second quarter earnings per share to be in the range of $0.78 to $0.83 compared to $0.77 per share a year ago excluding the impact of our European restructuring plan in 2013.

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 Restructuring Initiatives, Quarterly Trends, Liquidity and Capital Resources, 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:


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          economic, environmental and political conditions worldwide;

          changes or consolidations within our customer base and/or changes in
consumer spending levels;

          financial conditions of customers and suppliers;

          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;

          our ability to successfully implement facility expansions and new
facility projects, including the Stelmi expansion and our new facility in
Colombia;

          our ability to increase prices, contain costs and improve

productivity;

significant fluctuations in foreign currency exchange rates, including the current volatility noted in the Latin American and Asian regions;

. . .

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