<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549-1004
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ----to----
COMMISSION FILE NUMBER 1-11846
AptarGroup, Inc.
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 36-3853103
-------- ----------
(State of Incorporation) (I.R.S. Employer Identification No.)
475 West Terra Cotta Avenue, Suite E, Crystal Lake, Illinois 60014
- ------------------------------------------------------------ -----
(Address of Principal Executive Offices) (Zip Code)
815-477-0424
------------
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
---- ----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date (November 10, 1999)
Common Stock 36,451,175
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<PAGE>
AptarGroup, Inc.
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 1999
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION Page
----
<C> <S> <C>
ITEM 1. Financial statements
Consolidated Statements of Income -
Three and Nine Months Ended September 30, 1999
and 1998 (Unaudited) 3
Consolidated Balance Sheets -
September 30, 1999 (Unaudited) and
December 31, 1998 4
Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 1999 and 1998
(Unaudited) 6
Notes to Consolidated Financial Statements
(Unaudited) 7
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12
ITEM 3. Quantitative and Qualitative Disclosures about
Market Risk 19
PART II. OTHER INFORMATION
ITEM 2. Changes in Securities and Use of Proceeds 21
ITEM 6. Exhibits and Reports on Form 8-K 21
SIGNATURE 23
</TABLE>
<PAGE>
AptarGroup, Inc.
Consolidated Statements of Income
For the Three and Nine Months Ended September 30, 1999 and 1998
(Dollars in Thousands, Except Per Share Data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net Sales............................................. $210,479 $182,692 $617,566 $535,386
Operating Expenses:
Cost of sales....................................... 130,489 112,644 384,464 333,131
Selling, research & development
and administrative................................ 33,507 30,201 99,875 88,203
Depreciation and amortization....................... 17,589 14,446 51,754 41,367
-------- -------- -------- --------
181,585 157,291 536,093 462,701
-------- -------- -------- --------
Operating Income...................................... 28,894 25,401 81,473 72,685
-------- -------- -------- --------
Other Income (Expense):
Interest expense.................................... (3,845) (1,578) (10,257) (4,668)
Interest income..................................... 322 166 943 694
Equity in results of affiliates..................... (283) (126) (831) 192
Minority interests.................................. (62) (27) (93) (236)
Miscellaneous, net.................................. 36 (606) 918 (282)
In-process research and development................. (3,300) -- (3,300) --
Lawsuit settlement, net............................. -- -- -- 815
-------- -------- -------- --------
(7,132) (2,171) (12,620) (3,485)
-------- -------- -------- --------
Income before Income Taxes............................ 21,762 23,230 68,853 69,200
Provision for Income Taxes............................ 8,868 8,712 25,510 27,237
-------- -------- -------- --------
Net Income............................................ $ 12,894 $ 14,518 $ 43,343 $ 41,963
======== ======== ======== ========
Net Income Per Common Share:
Basic............................................... $ .35 $ .40 $ 1.19 $ 1.16
======== ======== ======== ========
Diluted............................................. $ .35 $ .39 $ 1.17 $ 1.14
======== ======== ======== ========
Average Number of Shares Outstanding (in thousands):
Basic............................................... 36,440 36,087 36,325 36,035
Diluted............................................. 37,039 36,867 36,949 36,813
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
AptarGroup, Inc.
Consolidated Balance Sheets
(Dollars in Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
(Unaudited)
September 30, December 31,
1999 1998
------------ ------------
<S> <C> <C>
Assets
Current Assets:
Cash and equivalents........................................ $ 32,039 $ 25,159
Accounts and notes receivable, less allowance for doubtful
accounts of $6,522 in 1999 and $5,132 in 1998............ 192,344 173,289
Inventories................................................. 111,277 101,091
Prepayments and other....................................... 28,193 17,110
--------- --------
363,853 316,649
--------- --------
Property, Plant and Equipment:
Buildings and improvements.................................. 100,493 90,768
Machinery and equipment..................................... 621,112 565,460
--------- --------
721,605 656,228
Less: Accumulated depreciation.............................. (364,998) (335,650)
--------- --------
356,607 320,578
Land........................................................ 4,408 4,601
--------- --------
361,015 325,179
--------- --------
Other Assets:
Investments in affiliates................................... 4,272 3,217
Goodwill, less accumulated amortization of $9,409 in
1999 and $7,757 in 1998.................................. 128,559 49,689
Miscellaneous............................................... 24,754 19,939
--------- --------
157,585 72,845
--------- --------
Total Assets $ 882,453 $ 714,673
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
AptarGroup, Inc.
Consolidated Balance Sheets
(Dollars in Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
(Unaudited)
September 30, December 31,
Liabilities and Stockholder's Equity 1999 1998
------------- ------------
<S> <C> <C>
Current Liabilities:
Notes payable................................ $ 22,598 $ 29,663
Current maturities of long-term obligations.. 8,391 7,561
Accounts payable and accrued liabilities..... 138,633 130,209
------------- ------------
169,622 167,433
------------- ------------
Long-Term Obligations.......................... 235,350 80,875
------------- ------------
Deferred Liabilities and Other:
Deferred income taxes........................ 22,502 24,989
Retirement and deferred compensation plans... 13,807 14,957
Minority interests........................... 4,095 4,189
Deferred and other non-current liabilities... 5,484 6,722
------------- ------------
45,888 50,857
------------- ------------
Stockholders' Equity:
Common stock, $.01 par value................. 364 361
Capital in excess of par value............... 111,660 105,714
Retained earnings............................ 368,213 329,582
Accumulated other comprehensive income....... (48,644) (20,149)
------------- ------------
431,593 415,508
------------- ------------
Total Liabilities and Stockholders' Equity $ 882,453 $ 714,673
============= ============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
AptarGroup, Inc.
Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 1999 and 1998
(Dollars in Thousands, brackets denote cash outflows)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
1999 1998
----------------- ---------------
<S> <C> <C>
Cash Flows From Operating Activities:
Net income............................................... $ 43,343 $ 41,963
Adjustments to reconcile net income
to net cash provided by operations:
Depreciation............................................. 48,830 39,487
Amortization............................................. 2,924 1,880
Provision for bad debts.................................. 779 1,015
Minority interests....................................... 93 236
Deferred income taxes.................................... 587 (696)
Retirement and deferred compensation plans............... (568) (283)
Equity in results of affiliates in
excess of cash distributions received................. 831 (192)
In-process research & development write-off.............. 3,300 --
Changes in balance sheet items,
excluding effects from foreign currency adjustments:
Accounts receivable...................................... (4,879) (6,213)
Inventories.............................................. (5,074) (10,004)
Prepaid and other current assets......................... (5,304) (3,446)
Accounts payable and accrued liabilities................. 1,608 8,825
Other changes, net....................................... 6,542 (8,677)
----------------- ---------------
Net cash provided by operations.......................... 93,012 63,895
----------------- ---------------
Cash Flows From Investing Activities:
Capital expenditures..................................... (63,100) (49,271)
Disposition of property and equipment.................... 1,250 359
Acquisition of businesses................................ (144,431) (20,027)
(Issuance) collections of notes receivable, net......... (142) 387
Investments in affiliates................................ (1,500) (1,300)
----------------- ---------------
Net cash used by investing activities.................... (207,923) (69,852)
----------------- ---------------
Cash Flows From Financing Activities:
(Decrease) increase in notes payable..................... (7,672) 23,671
Proceeds from long-term obligations...................... 150,294 9,795
Repayments of long-term obligations...................... (16,344) (8,811)
Dividends paid........................................... (4,712) (4,321)
Proceeds from stock options exercised.................... 1,717 788
----------------- ---------------
Net cash provided by financing activities................ 123,283 21,122
----------------- ---------------
Effect of Exchange Rate Changes on Cash.................... (1,492) 2,061
----------------- ---------------
Net Increase in Cash and Equivalents....................... 6,880 17,226
Cash and Equivalents at Beginning of Period................ 25,159 17,717
----------------- ---------------
Cash and Equivalents at End of Period...................... $ 32,039 $ 34,943
================= ==============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
AptarGroup, Inc.
Notes To Consolidated Financial Statements
(Dollars in Thousands, Except Per Share Data)
(Unaudited)
Note 1 - Basis of Presentation
The accompanying unaudited (other than the balance sheet at December 31, 1998)
consolidated financial statements include the accounts of AptarGroup, Inc. and
its subsidiaries. The terms "AptarGroup" or "Company" as used herein refer to
AptarGroup, Inc. and its subsidiaries.
In the opinion of management, the unaudited consolidated financial statements
include all adjustments, consisting of only normal recurring adjustments,
necessary for a fair presentation of consolidated financial position and results
of operations for the interim periods presented. The accompanying unaudited
consolidated financial statements have been prepared by the Company, without
audit, pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosure normally included in
financial statements prepared in accordance with generally accepted accounting
principles (GAAP) have been condensed or omitted pursuant to such rules and
regulations, although the Company believes that the disclosures made are
adequate to make the information presented not misleading. Accordingly, these
unaudited financial statements and related notes should be read in conjunction
with the consolidated financial statements and notes thereto included in the
Company's Annual Report to Shareholders incorporated by reference into the
Company's Annual Report on Form 10-K for the year ended December 31, 1998. The
results of operations of any interim period are not necessarily indicative of
the results that may be expected for a fiscal year.
Note 2 - Acquisitions
In the second and third quarters of 1998, the Company acquired controlling
interests in two companies for approximately $15 million in cash, and 50,000
shares of the Company's common stock (valued at approximately $1.5 million). The
excess purchase price over the fair value of the net assets acquired (goodwill)
in these acquisitions was approximately $8 million and is being amortized on a
straight-line basis over 40 years. These acquisitions are in companies that
manufacture and distribute products similar to the Company's products.
On February 17, 1999, the Company acquired Emson Research, Inc. and related
companies (Emson) for approximately $123 million in cash and 148,371 shares of
the Company's common stock (valued at approximately $4 million). Approximately
$23 million of debt was assumed in the transaction. This acquisition was
initially funded through short-term borrowings. The Company incurred long-term
obligations in the second quarter of 1999 to replace most of the short-term
borrowings associated with the acquisition. Emson is a leading supplier of
perfume pumps in the North American market and also maintains a significant
position in the North American personal care and food pump markets. The excess
purchase price over the fair value of the net assets acquired (goodwill) in
these acquisitions was approximately $80 million and is being amortized on a
straight-line basis over 40 years.
7
<PAGE>
During the third quarter of 1999, the Company acquired controlling interests in
two companies and acquired a line of business from a third company for
approximately $21 million in cash and approximately $4 million in assumed debt.
The excess purchase price over the fair value of the net assets acquired
(goodwill) in these acquisitions was approximately $4 million and is being
amortized on a straight-line basis over lives ranging from 10 to 40 years. Two
of the three acquisitions are in companies that manufacture and distribute
products similar to the Company's products. The third acquisition, a company
called Microflow Engineering S.A. (Microflow), is a research and development
company whose primary project is to develop an electronic aerosol dispensing
system primarily for the pharmaceutical market. Based upon an independent
appraisal, a one-time charge against pretax and net income of $3,300 for
purchased in-process research and development (IPR&D) costs was recorded in
conjunction with the purchase of 80% of this company. See Note 3 below for
further disclosure on purchased IPR&D.
The acquisitions described above were accounted for by the purchase method of
accounting for business combinations. Accordingly, the accompanying consolidated
statements of income do not include any revenues or expenses related to these
acquisitions prior to their respective closing dates. Following are the
Company's unaudited pro forma results for the third quarter of 1998 and 1999,
and the nine months then ended, assuming the acquisitions occurred on January 1,
1998 (in thousands, except for per share data). The $3,300 write-off of IPR&D
has been excluded from the pro forma results.
<TABLE>
<CAPTION>
Three Months Ended Sept 30, Nine Months Ended Sept 30,
--------------------------- --------------------------
1999 1998 1999 1998
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Sales $210,479 $209,398 $628,727 $634,963
Net Income $ 16,085 $ 14,634 $ 45,064 $ 44,749
Net Earnings per common share:
Basic $ 0.44 $ 0.40 $ 1.24 $ 1.24
Diluted $ 0.43 $ 0.40 $ 1.22 $ 1.21
Weighted average shares outstanding:
Basic 36,440 36,235 36,352 36,213
Diluted 37,039 37,015 36,976 36,991
</TABLE>
These unaudited pro forma results have been prepared for comparative purposes
only and may not be indicative of the results of operations which would have
actually resulted had the combinations been in effect on January 1, 1998, or of
future periods.
8
<PAGE>
Note 3 - Purchased In-Process Research and Development
In connection with the acquisition of Microflow, the Company allocated $3,300 of
the purchase price to acquired IPR&D which was expensed as of the acquisition
date. Microflow is a development company engaged primarily in the development of
an electronic aerosol delivery device. This narrow development effort is
expected to be used by the Company primarily in drug delivery systems and may
have applications in other markets as well. However, Microflow's electronic
aerosol delivery device is not commercially viable at this time and has no known
alternative future uses apart from use in a dispensing system. The Company
acquired Microflow to expand its mechanical pump product line to include an
electronic dispensing system.
The Company used an independent professional appraisal consultant to assess and
allocate value to the IPR&D. The valuation was determined using the income
approach and the Company believes that the assumptions used in the forecast are
reasonable. No assurance can be given, however that the underlying assumptions
used to estimate expected sales, development costs or profitability, or the
events associated with the project will transpire as estimated. For these
reasons, actual results may vary from the projected results.
Estimated net cash inflows from the acquired in-process technology related to
the electronic aerosol delivery device are projected to commence in the year
2002, peak in 2006 and steadily decline at a rate of 20% through 2011. The
operating income as a percentage of sales assumption that was used did not
exceed current margins in the pharmaceutical market for mechanical pumps. The
in-process technology is expected to be completed sometime in 2000. As of the
date of the acquisition, approximately $1,458 had been expended to develop the
project and the estimated cost to complete the project is approximately $800, to
be incurred through the year 2000. An adjustment to the appraised value of the
acquired IPR&D was made to reflect the percentage of completion, which was
estimated at 65%. The cash flows related to the project were discounted using a
25% discount rate.
Management expects to continue supporting the development of the electronic
aerosol delivery device and believes the Company has a reasonable chance of
successfully completing the project. However, there can be no assurance such
efforts will be successful. Without successful completion of the efforts on the
acquired in-process technologies, the Company would not realize the future
revenues and projects attributed to the acquired IPR&D, and ultimately, the
Company would fail to realize the expected return on its investment. The failure
of the project would not, however, materially impact the Company's financial
position or results of operations.
9
<PAGE>
Note 4 - Inventories
At September 30, 1999 and December 31, 1998, inventories, by component,
consisted of:
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
-------- --------
<S> <C> <C>
Raw materials $ 43,852 $ 35,493
Work in progress 28,244 29,441
Finished goods 39,181 36,157
-------- --------
Total $111,277 $101,091
======== ========
</TABLE>
The LIFO reserve was not material at either September 30, 1999 or December
31, 1998.
Note 5 -- Long-Term Debt
On May 15, 1999 the Company entered into a $107 million, twelve-year private
debt placement agreement. The private placement is comprised of $107 million of
6.62% senior unsecured notes. The notes will be repaid in equal annual
installments of $21.4 million beginning on May 30, 2007 and ending on May 30,
2011.
During the third quarter of 1999, the Company entered into an interest rate swap
agreement with two different banks for a notional amount of $25,000 each or a
total of $50,000. The agreement swapped the fixed interest rate on the private
placement of 6.62% for variable floating rates equal to the six month London
Interbank Offered Rate (LIBOR) less 8.25 and 10.5 basis points. The amortization
schedule for the swap agreement was designed to match the amortization of the
underlying private placement.
The Company entered into a new multi-year, multi-currency unsecured revolving
credit agreement on June 30, 1999 allowing borrowings of up to $75 million.
Under this credit agreement, interest on borrowings is payable at a rate equal
to the LIBOR plus an amount based on the financial condition of the Company. At
September 30, 1999, the amount unused and available under this agreement was $10
million. The Company is required to pay a fee for the unused portion of the
commitment. The agreement expires on June 30, 2004. The credit available under
the revolving credit agreement provides management with the ability to refinance
certain short-term obligations on a long-term basis. As it is management's
intent to do so, an additional $10 million of short-term obligations
representing the unused and available amount under the new credit agreement have
been reclassified as long-term obligations as of September 30, 1999. Short-term
obligations of $25 million were reclassified as long-term obligations as of
December 31, 1998 under a previous revolving credit agreement.
The revolving credit agreement and private placement agreements contain
covenants that include certain financial tests, including minimum interest
coverage, net worth and maximum borrowings.
10
<PAGE>
Note 6 -- Comprehensive Income
AptarGroup's total comprehensive income for the third quarter of 1998 and 1999
and the nine months then ended was as follows:
<TABLE>
<CAPTION>
Three months Ended Nine months ended
September 30 September 30
------------------------- --------------------------
1999 1998 1999 1998
------------ ----------- ------------ ------------
<S> <C> <C> <C> <C>
Net income 12,894 14,518 43,343 41,963
Add/(Subtract): foreign currency 9,431 22,866 (28,496) 18,831
translation adjustment ------ ------ ------- ------
Total comprehensive income 22,325 37,384 14,847 60,794
====== ====== ======= ======
</TABLE>
Note 7 -- Stock Repurchase Program
The Board of Directors authorized on October 20, 1999 the repurchase of a
maximum of 1,000,000 shares of the Company's outstanding shares. The timing of
and total amount to be expended for the share repurchase will depend upon market
conditions.
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Net sales for the quarter and nine months ended September 30, 1999 totaled $210
million and $618 million, respectively, increases of approximately $28 million
and $82 million or 15%, when compared to the corresponding periods of 1998. The
stronger U.S. dollar relative to the same three-month and nine-month periods of
1998 negatively affected the translation of AptarGroup's foreign sales. If the
dollar exchange rate had been constant, sales for the three months and nine
months ended September 30, 1999 would have increased approximately 19% and 16%,
respectively. Acquisitions completed in the third quarter of 1998, the first
quarter of 1999 and the third quarter of 1999 accounted for $26 million and $81
million of the increase for the three and nine months ended September 30, 1999.
Increased sales to the pharmaceutical, personal care and food markets primarily
account for the difference in the increase in sales.
Sales to unaffiliated customers by European operations represented approximately
53% and 55%, respectively, of net sales for the quarter and nine months ended
September 30, 1999, compared to 57% and 56% for the same periods a year ago.
Sales to unaffiliated customers by U.S. operations represented 40% and 39% of
net sales for the quarter and nine months ended September 30, 1999 compared to
38% and 39% for the same periods a year ago. Sales to unaffiliated customers
from other foreign operations represented 7% and 6% of net sales for the quarter
and nine months ended September 30, 1999 compared to 5% for the same periods a
year ago.
Cost of sales as a percent of net sales increased slightly to 62.0% for the
quarter ended September 30, 1999 compared to 61.7% in the same period a year
ago. For the nine months ended September 30, 1999, cost of sales as a percent of
net sales increased slightly to 62.3% compared to 62.2% in the same period a
year ago. The slight increase for the quarter and nine months ended September
30, 1999 is attributed to higher labor costs as a percentage of sales offset by
other fixed overhead savings.
Selling, R&D and administrative expenses (SG&A) increased 11% or $3.3 million to
$33.5 million for the quarter ended September 30, 1999, compared to $30.2
million in the same period a year ago. The entire increase in SG&A is related to
acquisitions completed in 1999. As a percent of net sales, SG&A decreased for
the quarter ended September 30, 1999 to 15.9% from 16.5% a year ago. SG&A for
the nine months ended September 30, 1999, increased 13% or $11.7 million to
$99.9 million compared to $88.2 million a year ago. Approximately $9.5 million
of the increase is due to the acquisitions mentioned above. The remainder of the
increase is primarily due to additional information technology expenses related
to the Company's year 2000 readiness program and to the implementation of new
enterprise software systems at two major operations. As a percent of net sales,
SG&A decreased slightly for the nine months ended September 30, 1999 to 16.2%
compared to 16.5% a year ago.
12
<PAGE>
Operating income increased to $28.9 million for the quarter ended September 30,
1999 compared to $25.4 million for the same period a year ago for a 14%
increase. For the nine months ended September 30, 1999, operating income
increased to $81.5 million compared to $72.7 million for the same period a year
ago for a 12% increase. The increase for the quarter and nine months ended
September 30, 1999 is due to higher sales volume, the mix of products sold, and
acquisitions.
European operations represented 66% and 69% of total operating income for the
quarter and nine months ended September 30, 1999, respectively, compared to 74%
for the same periods a year ago. U.S. operations represented 40% of operating
income for the quarter and nine months ended September 30, 1999 compared to 36%
in the corresponding periods in 1998. The increase in U.S. operating income as a
percentage of the total operating income is due to the acquisition of Emson made
in the first quarter of 1999. The reconciling difference between Europe and U.S.
operating income to total operating income is due to operating income from other
foreign operations and corporate expenses.
Net other expense increased to $7.1 million in the third quarter of 1999
compared to $2.1 million expense for the same period in the prior year. The
change in net other expense is due primarily to a one-time charge of $3.3
million for purchased IPR&D related to the acquisition of Microflow during the
third quarter of 1999 and increased interest expense related to the Emson
acquisition completed in the first quarter of 1999. Net other expense increased
to $12.6 million for the nine months ended September 30, 1999 compared to $3.5
million for the same period a year ago. The increase is primarily due to
increased interest charges related to acquisitions, the one-time charge for
purchased IPR&D, and loss from equity in results of affiliates compared to
income in the prior year year.
The effective tax rate increased for the three months ended September 30, 1999
to 40.7% compared to 37.5% for the same period a year ago. The increase in the
effective tax rate is primarily due to the non tax-deductibility of the charge
for purchased IPR&D. Excluding the effect of the charge for purchased IPR&D in
1999, the effective tax rate for the three months ended September 30, 1999, was
35.4% instead of the 40.7% reported. For the nine months ended September 30,
1999, the effective tax rate was 37.0% compared to 39.4% for the same period a
year ago. Excluding the effect of the charge for purchased IPR&D in 1999, the
effective tax would have been 35.4%.
Net income for the quarter ended September 30, 1999, decreased 11% to $12.9
million compared to $14.5 million in the third quarter of 1998. The decrease is
due to the one-time charge of $3.3 million related to purchased IPR&D in the
quarter. Net income for the nine months ended September 30, 1999, increased 3%
to $43.3 million compared to $42.0 million in the same period a year ago.
Excluding the effect of the charge for purchased IPR&D, net income would have
increased 12% and 11% for the three and nine months ended September 30, 1999.
Other than the IPR&D charge, the acquisitions mentioned previously had an
immaterial effect on net income for the quarter and nine months ended September
30, 1999.
13
<PAGE>
Quarterly Trends
Customer plant shutdowns and holidays in December typically have negatively
impacted AptarGroup's results of operations for the fourth quarter. In the
future, AptarGroup's 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 AptarGroup's products are
sold or changes in general economic conditions in any of the countries in which
AptarGroup does business, and year 2000 concerns from customers.
Foreign Currency
A significant portion of AptarGroup's operations are located outside the United
States. Because of this, movements in exchange rates may have a significant
impact on the translation of the financial condition and results of operations
of AptarGroup's foreign entities. In general, since the majority of the
Company's operations are based in Europe - primarily France, Germany and Italy-
a strengthening U.S. dollar relative to the major European currencies has a
dilutive translation effect on the Company's financial condition and results of
operations. Conversely, a weakening U.S. dollar would have an additive effect.
Additionally, in some cases, the Company sells products denominated in a
currency different from the currency in which the respective costs are incurred.
Changes in exchange rates on such inter-country sales impact the Company's
results of operations.
Liquidity and Capital Resources
Historically, AptarGroup has generated positive cash flow from operations and
has utilized the majority of such cash flows to invest in capital projects. Net
cash provided by operations for the nine months ended September 30, 1999 was
$93.0 million compared to $63.9 million in the same period a year ago. The
increase is primarily attributed to an increase in net income before the IPR&D
charge, an increase in depreciation and amortization and less cash used for
working capital in 1999.
Total net working capital at September 30, 1999 was $194.2 million compared to
$149.2 million at December 31, 1998. The increase in net working capital is
primarily due to the acquisition of businesses in 1999.
Net cash used by investing activities in the first nine months of 1999 increased
to $207.9 million from $69.9 million a year ago due to the Company's
acquisitions in 1999. The Company acquired Emson for $122.8 million in cash and
approximately $4 million of the Company's common stock. The Company assumed
approximately $23 million of debt in the transaction. This acquisition was
initially funded through short-term borrowings. As described below, the Company
incurred long-term obligations in the second quarter of 1999 to replace most of
the short-term borrowings associated with the acquisition of Emson. The Company
made three other acquisitions during the third quarter of 1999. The Company paid
approximately $21 million in cash and assumed approximately $4 million in debt
in the three other transactions.
14
<PAGE>
Management anticipates that cash outlays for capital expenditures for all of
1999 will be approximately $85 to $90 million.
Net cash provided by financing activities increased to $123.3 million in the
first nine months of 1999 compared to $21.1 million in 1998. The increase in net
cash provided by financing activities is due to borrowings for the acquisitions
mentioned above. The ratio of net debt to total net capitalization was 35.2% and
18.3% at September 30, 1999 and December 31, 1998, respectively. Net debt is
defined as debt less cash and cash equivalents and total net capitalization is
defined as stockholder's equity plus net debt.
On May 15, 1999 the Company entered into a $107 million, twelve-year private
debt placement agreement. The private placement is comprised of $107 million of
6.62% senior unsecured notes. The notes will be repaid in equal annual
installments of $21.4 million beginning on May 30, 2007 and ending on May 30,
2011.
During the third quarter of 1999, the Company entered into an interest rate swap
agreement with two different banks for a notional amount of $25,000 each or a
total of $50,000. The agreement swapped the fixed interest rate on the private
placement of 6.62% for variable floating rates equal to the six month LIBOR less
8.25 and 10.5 basis points. The amortization schedule for the swap agreement was
designed to match the amortization of the underlying private placement.
The Company entered into a new multi-year, multi-currency unsecured revolving
credit agreement on June 30, 1999 allowing borrowings of up to $75 million.
Under this credit agreement, interest on borrowings is payable at a rate equal
to the LIBOR plus an amount based on the financial condition of the Company. At
September 30, 1999, the amount unused and available under this agreement was $10
million. The Company is required to pay a fee for the unused portion of the
commitment. The agreement expires on June 30, 2004. The credit available under
the revolving credit agreement provides management with the ability to refinance
certain short-term obligations on a long-term basis. As it is management's
intent to do so, an additional $10 million of short-term obligations
representing the unused and available amount under the new credit agreement have
been reclassified as long-term obligations as of September 30, 1999. Short-term
obligations of $25 million were reclassified as long-term obligations as of
December 31, 1998 under a previous revolving credit agreement.
The revolving credit agreement and private placement agreements contain
covenants that include certain financial tests, such as minimum interest
coverage, net worth and maximum borrowings.
On October 20, 1999, the Board of Directors declared a quarterly dividend of
$.05 per share payable on November 23, 1999 to shareholders of record as of
November 2, 1999.
The Board of Directors authorized the repurchase of a maximum of 1,000,000
shares of the Company's outstanding shares. The timing of and total amount to be
expended for the share repurchase will depend upon market conditions.
15
<PAGE>
Year 2000
As many computer systems and other equipment with embedded chips or processors
(collectively, "Enterprise Systems") use only two digits to represent the year,
they may be unable to process accurately certain data before, during or after
the year 2000. This is commonly known as the Year 2000 ("Y2K") issue. The Y2K
issue can arise at any point in an entity's supply, manufacturing, processing,
distribution, and financial chains.
The Company has implemented a Y2K readiness program with the objective of having
all of the significant Enterprise Systems, including those that affect
facilities and manufacturing activities, functioning properly with respect to
the Y2K issue before January 1, 2000. The Company has established standardized
planning, assessment and progress documentation as well as set critical
deadlines that apply to all significant subsidiaries.
In order to address the Y2K issue, the Company has developed and implemented a
five-phase readiness program which is comprised of 1) planning, 2) assessment,
3) renovation/replacement, 4) testing/validation, and 5) contingency planning.
The Company has substantially completed phases one through four of the program.
Though certain systems may require additional modifications in the fourth
quarter of 1999, the Company believes that these systems will be Y2K ready by
the end of 1999. Currently, the Company is in the process of completing phase
five, the contingency planning phase of the program. The Company is developing
contingency plans intended to mitigate the possible disruption in business
operations that may result from the Y2K issue. Contingency plans may include
increasing inventory levels, securing alternate sources of supply, adjusting
facility shutdown and start-up schedules and other appropriate measures.
The different phases of the program address the potential Y2K risk that could be
found in the following five functional areas: 1) business applications (hardware
and software), 2) production equipment, 3) facility systems, 4) communication
infrastructure and 5) vendor/customer management.
Although the Company has a significant number of key business partners,
including suppliers and customers, the Company does not currently anticipate any
material disruption in its business due to supplier or customer Y2K issues. More
specifically, the Company, through the current stage of its Y2K program, has not
received any information that would lead it to believe that any significant
supplier or customer will suffer business interruption due to Y2K issues to a
degree that would materially affect the Company's ability to conduct business.
The current estimated costs of the project are based on management's estimates,
which were derived utilizing numerous assumptions of future events including the
continued availability of certain resources, third party modification plans and
other factors. However, there can be no guarantee that these estimates will be
achieved and actual results could differ significantly from those planned. Based
on management's current estimations, the projected costs of the Company's Y2K
readiness program are expected to total $2.7 million the majority of which has
been incurred.
Although the Company expects its critical Enterprise Systems to be Y2K ready by
the end of
16
<PAGE>
1999, there is no guarantee that this goal will be achieved. Specific factors
that give rise to this uncertainty include a possible loss of technical
resources to perform the work, failure to identify all susceptible systems, non-
compliance by third parties whose systems and operations impact the Company, and
other similar uncertainties. A reasonably possible worst case scenario might
include one or more of the Company's significant production facilities incurring
interruption in business either from internal systems failures or failure to
perform on the part of third parties, including suppliers. Such an event could
result in a material disruption to the Company's operations. Specifically, the
Company could experience an interruption in its ability to produce certain
products, collect and process orders, process payments, manage inventory and
perform adequate customer service. Should the worst case scenario occur it
could, depending on its duration, have a material adverse impact on the
Company's results of operations and financial position, but that impact can not
be estimated.
Forward-Looking Statements
In addition to the historical information presented in this quarterly report,
the Company has made and will make certain forward-looking statements in this
report, other reports filed by the Company with the Securities and Exchange
Commission, reports to stockholders and in certain other contexts relating to
future net sales, costs of sales, other expenses, profitability, financial
resources, products and production schedules. Statements relating to the
foregoing or that predict or indicate future events and trends and which do no
relate solely to historical matters identify 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 management's beliefs as well as
assumptions made by and information currently available to management.
Accordingly, the Company's actual results may differ materially from those
expressed or implied in such forward-looking statements due to known and unknown
risks and uncertainties that exist in the Company's operations and business
environment, including, among other factors, government regulation including tax
rate policies, competition and technological change, intellectual property
rights, the failure by the Company to produce anticipated cost savings or
improve productivity, the failure by the Company or its suppliers or customers
to achieve Y2K compliance, the timing and magnitude of capital expenditures and
acquisitions, currency exchange rates, economic and market conditions in the
United States, Europe and the rest of the world, changes in customer spending
levels, the demand for existing and new products, the cost and availability of
raw materials, the successful integration of the Company's acquisitions, and
other risks associated with the Company's operations. Although the Company
believes that its forward-looking statements are based on reasonable
assumptions, there can be no assurance that actual results, performance or
achievements will not differ materially from any future results, performance or
achievements expressed or implied by such forward-looking statements. Readers
are cautioned not to place undue reliance on forward-looking statements.
Adoption of New Accounting Standards
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This Statement requires that entities
recognize all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. Due to the
complexity of this new standard, the Company is still assessing the impact it
will have on the
17
<PAGE>
financial position or results of operations, but does not anticipate it having a
material impact on the financial statements. In June 1999, the FASB issued SFAS
No. 137, which amended the effective date of SFAS 133. The new effective date
for implementation of SFAS 133 is now for all fiscal quarters of all fiscal
years beginning after June 15, 2000.
18
<PAGE>
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
A significant portion of AptarGroup's operations is located outside the United
States. Because of this, movements in exchange rates may have a significant
impact on the translation of the financial condition and results of operations
of AptarGroup's foreign entities. The Company's significant foreign exchange
exposures are to the major currencies which are now part of the Euro (the
Italian Lira, French Franc and German Mark). The Company manages its exposures
to foreign exchange principally with forward exchange contracts to hedge certain
firm purchase and sales commitments and intercompany cash transactions
denominated in foreign currencies.
The table below provides information as of September 30, 1999 about the
Company's forward currency exchange contracts. All the contracts expire before
the end of the first quarter of 2000.
<TABLE>
<CAPTION>
Average
Contractual
Buy/Sell Contract Amount Exchange Rate
- ---------------------------------------------------
<S> <C> <C>
FRF/USD $19,489 6.15
LIRE/GBP 5,435 2959.33
LIRE/USD 3,446 1,841.86
DM/USD 2,400 1.84
FRF/GBP 2,306 9.99
FRF/YEN 1,674 0.0549
</TABLE>
The Company is also party to certain smaller contracts to buy or sell various
other currencies (principally Australian) that had an aggregate contract amount
of $0.3 million as of September 30, 1999.
The Company has a cross-currency interest rate swap to hedge an intercompany
lending transaction. This swap requires the Company to pay principal of 31,741
French Francs plus interest at 8% and receive principal of $6,429 plus interest
at 7.08% over ten years. If the Company canceled the swap at September 30, 1999,
the Company would have received approximately $1,025 based on the fair value of
the swap on that date.
The table below presents the cash flows in both foreign currency and U.S.
dollars that are expected to be exchanged over the duration of the contract.
<TABLE>
<CAPTION>
2000 2001 2002 2003 2004 Thereafter
- ----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Pay FRF FRF 7,822 7,400 6,992 6,560 6,137 5,713
Receive USD $1,525 1,450 1,377 1,299 1,223 1,147
</TABLE>
The Company entered into two $25,000 interest rate swap agreements during the
third quarter of 1999 to swap fixed interest rates for variable interest rates.
At September 30, 1999 fixed to variable interest rate swaps of $50,000 were
outstanding with an average pay rate of 5.08% and an average receive rate of
6.62%. Variations in market interest rates would produce changes in the
Company's net income. If interest rates increased by 10% net income related
19
<PAGE>
to the two interest rate swap agreements would decrease by approximately $162
assuming a tax rate of 36%.
Additionally, in some cases, the Company sells products denominated in a
currency different from the currency for which the respective costs are
incurred. Changes in exchange rates on such inter-country sales impacts the
Company's results of operations.
20
<PAGE>
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
During the quarter ended September 30, 1999, 40 shares of Common Stock of the
Company were sold to participants in the FCP Aptar Savings Plan, (the "Plan") at
the price of $26.38 per share. Employees of AptarGroup S.A., a subsidiary of the
Company, are eligible to participate in the Plan. All eligible participants are
located outside of the United States. An agent independent of the Company
purchases shares of Common Stock available under the Plan for cash on the open
market and the Company issues no shares. The Company does not receive any
proceeds from the purchase of Common Stock under the Plan. The agent under the
Plan is Banque Nationale de Paris. No underwriters are used under the Plan. All
shares are sold in reliance upon the exemption from registration under the
Securities Act of 1933 provided by Regulation S promulgated under that Act.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 27 is included with this report.
(b) No reports on Form 8-K were filed for the quarter ended September 30, 1999.
21
<PAGE>
INDEX TO EXHIBITS
Number and Description of Exhibit
- ---------------------------------
27 Financial Data Schedules filed herewith.
22
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AptarGroup, Inc.
(Registrant)
By /s/ Stephen J. Hagge
--------------------
Stephen J. Hagge
Executive Vice President and Chief
Financial Officer, Secretary and
Treasurer
(Duly Authorized Officer and
Principal Financial Officer)
Date: November 12, 1999
23
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 32,039
<SECURITIES> 0
<RECEIVABLES> 192,344
<ALLOWANCES> (6,522)
<INVENTORY> 111,277
<CURRENT-ASSETS> 363,853
<PP&E> 726,013
<DEPRECIATION> (364,998)
<TOTAL-ASSETS> 882,453
<CURRENT-LIABILITIES> 169,622
<BONDS> 235,350
0
0
<COMMON> 364
<OTHER-SE> 431,229
<TOTAL-LIABILITY-AND-EQUITY> 882,453
<SALES> 617,566
<TOTAL-REVENUES> 617,566
<CGS> 384,464
<TOTAL-COSTS> 536,093
<OTHER-EXPENSES> 151,629
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (10,257)
<INCOME-PRETAX> 68,853
<INCOME-TAX> 25,510
<INCOME-CONTINUING> 43,343
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 43,343
<EPS-BASIC> 1.19
<EPS-DILUTED> 1.17
</TABLE>
