-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, IWqvu1iX2PEPT4vmnpB9IBnbHFw6SIyHWlTSsEH4Z33++5njFDaVdeJkG8Eev+uL Ou0u5u50zEptT5/6foliAw== 0000950131-99-006237.txt : 19991115 0000950131-99-006237.hdr.sgml : 19991115 ACCESSION NUMBER: 0000950131-99-006237 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991112 FILER: COMPANY DATA: COMPANY CONFORMED NAME: APTARGROUP INC CENTRAL INDEX KEY: 0000896622 STANDARD INDUSTRIAL CLASSIFICATION: PLASTICS PRODUCTS, NEC [3089] IRS NUMBER: 363853103 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-11846 FILM NUMBER: 99748710 BUSINESS ADDRESS: STREET 1: 475 W TERRA COTTA AVE STREET 2: STE E CITY: CRYSTAL LAKE STATE: IL ZIP: 60014 BUSINESS PHONE: 8154770424 MAIL ADDRESS: STREET 1: 475 W. TERRA COTTA AVE. SUITE E CITY: CRYSTAL LAKE STATE: IL ZIP: 60014 10-Q 1 FORM 10-Q ================================================================================ 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 ================================================================================ AptarGroup, Inc. FORM 10-Q QUARTER ENDED SEPTEMBER 30, 1999 INDEX
PART I. FINANCIAL INFORMATION Page ---- 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
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)
Three Months Nine Months Ended September 30, Ended September 30, ------------------- ------------------- 1999 1998 1999 1998 -------- -------- -------- -------- 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
See accompanying notes to consolidated financial statements. 3 AptarGroup, Inc. Consolidated Balance Sheets (Dollars in Thousands, Except Per Share Data)
(Unaudited) September 30, December 31, 1999 1998 ------------ ------------ 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 ========= =========
See accompanying notes to consolidated financial statements. 4 AptarGroup, Inc. Consolidated Balance Sheets (Dollars in Thousands, Except Per Share Data)
(Unaudited) September 30, December 31, Liabilities and Stockholder's Equity 1999 1998 ------------- ------------ 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 ============= ============
See accompanying notes to consolidated financial statements. 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)
Nine Months Ended September 30, 1999 1998 ----------------- --------------- 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 ================= ==============
See accompanying notes to consolidated financial statements. 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 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.
Three Months Ended Sept 30, Nine Months Ended Sept 30, --------------------------- -------------------------- 1999 1998 1999 1998 - ---------------------------------------------------------------------------------------------------------- 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
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 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 Note 4 - Inventories At September 30, 1999 and December 31, 1998, inventories, by component, consisted of:
September 30, December 31, 1999 1998 -------- -------- Raw materials $ 43,852 $ 35,493 Work in progress 28,244 29,441 Finished goods 39,181 36,157 -------- -------- Total $111,277 $101,091 ======== ========
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 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:
Three months Ended Nine months ended September 30 September 30 ------------------------- -------------------------- 1999 1998 1999 1998 ------------ ----------- ------------ ------------ 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 ====== ====== ======= ======
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 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 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 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 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 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 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 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 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.
Average Contractual Buy/Sell Contract Amount Exchange Rate - --------------------------------------------------- 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
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.
2000 2001 2002 2003 2004 Thereafter - ---------------------------------------------------------------------------- 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
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 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 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 INDEX TO EXHIBITS Number and Description of Exhibit - --------------------------------- 27 Financial Data Schedules filed herewith. 22 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 EX-27 2 FINANCIAL DATA SCHEDULE
5 1,000 9-MOS DEC-31-1999 JAN-01-1999 SEP-30-1999 32,039 0 192,344 (6,522) 111,277 363,853 726,013 (364,998) 882,453 169,622 235,350 0 0 364 431,229 882,453 617,566 617,566 384,464 536,093 151,629 0 (10,257) 68,853 25,510 43,343 0 0 0 43,343 1.19 1.17
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