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APTARGROUP, INC. - Quarter Report: 2011 September (Form 10-Q)

Table of Contents

 

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, 2011

 

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.

 

DELAWARE

 

36-3853103

(State of Incorporation)

 

(I.R.S. Employer Identification No.)

 

475 WEST TERRA COTTA AVENUE, SUITE E, CRYSTAL LAKE, ILLINOIS 60014

 

815-477-0424

 

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 þ No ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes þ No  o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one):

 

Large accelerated filer þ

 

Accelerated filer ¨

 

Non-accelerated filer ¨

 

Smaller reporting company ¨

 

 

 

 

(Do not check if a smaller reporting company)

 

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes ¨ No þ

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date

 

Class

 

Outstanding at October 27, 2011

Common Stock, $.01 par value per share

 

66,070,238 shares

 



Table of Contents

 

 

AptarGroup, Inc.

 

Form 10-Q

 

Quarter Ended September 30, 2011

 

INDEX

 

 

Part I.

FINANCIAL INFORMATION

 

 

 

 

Item 1.

Financial Statements (Unaudited)

 

 

 

 

 

Condensed Consolidated Statements of Income - Three and Nine Months Ended September 30, 2011 and 2010

1

 

 

 

 

Condensed Consolidated Balance Sheets - September 30, 2011 and December 31, 2010

2

 

 

 

 

Condensed Consolidated Statements of Changes in Equity - Nine Months Ended September 30, 2011 and 2010

4

 

 

 

 

Condensed Consolidated Statements of Cash Flows - Nine Months Ended September 30, 2011 and 2010

5

 

 

 

 

Notes to Condensed Consolidated Financial Statements

6

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

15

 

 

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

22

 

 

 

Item 4.

Controls and Procedures

22

 

 

 

Part II.

OTHER INFORMATION

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

23

 

 

 

Item 5.

Other Information

23

 

 

 

Item 6.

Exhibits

23

 

 

 

 

Signature

24

 

 

i



Table of Contents

 

PART I — FINANCIAL INFORMATION

 

ITEM 1.  FINANCIAL STATEMENTS (UNAUDITED)

 

AptarGroup, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

 

In thousands, except per share amounts

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2011

 

2010

 

2011

 

2010

 

 

 

 

 

 

 

 

 

 

 

Net Sales

 

$

601,196

 

$

517,537

 

$

1,792,643

 

$

1,545,929

 

Operating Expenses:

 

 

 

 

 

 

 

 

 

Cost of sales (exclusive of depreciation and amortization shown below)

 

406,768

 

342,539

 

1,198,919

 

1,018,870

 

Selling, research & development and administrative

 

86,716

 

71,105

 

267,485

 

221,014

 

Depreciation and amortization

 

33,505

 

32,403

 

102,024

 

98,877

 

Facilities consolidation and severance

 

 

381

 

 

381

 

 

 

526,989

 

446,428

 

1,568,428

 

1,339,142

 

Operating Income

 

74,207

 

71,109

 

224,215

 

206,787

 

 

 

 

 

 

 

 

 

 

 

Other Income (Expense):

 

 

 

 

 

 

 

 

 

Interest expense

 

(4,141

)

(3,477

)

(13,368

)

(10,580

)

Interest income

 

1,626

 

774

 

4,722

 

2,048

 

Equity in results of affiliates

 

126

 

 

126

 

 

Miscellaneous, net

 

(580

)

(260

)

(1,286

)

(2,401

)

 

 

(2,969

)

(2,963

)

(9,806

)

(10,933

)

 

 

 

 

 

 

 

 

 

 

Income before Income Taxes

 

71,238

 

68,146

 

214,409

 

195,854

 

 

 

 

 

 

 

 

 

 

 

Provision for Income Taxes

 

21,995

 

21,125

 

69,411

 

62,979

 

 

 

 

 

 

 

 

 

 

 

Net Income

 

$

49,243

 

$

47,021

 

$

144,998

 

$

132,875

 

 

 

 

 

 

 

 

 

 

 

Net Loss (Income) Attributable to Noncontrolling Interests

 

$

54

 

$

(38

)

$

65

 

$

(175

)

 

 

 

 

 

 

 

 

 

 

Net Income Attributable to AptarGroup, Inc.

 

$

49,297

 

$

46,983

 

$

145,063

 

$

132,700

 

 

 

 

 

 

 

 

 

 

 

Net Income Attributable to AptarGroup, Inc. Per Common Share:

 

 

 

 

 

 

 

 

 

Basic

 

$

0.74

 

$

0.70

 

$

2.17

 

$

1.97

 

Diluted

 

$

0.72

 

$

0.68

 

$

2.08

 

$

1.90

 

 

 

 

 

 

 

 

 

 

 

Average Number of Shares Outstanding:

 

 

 

 

 

 

 

 

 

Basic

 

66,381

 

67,213

 

66,747

 

67,471

 

Diluted

 

68,677

 

69,374

 

69,616

 

69,921

 

 

 

 

 

 

 

 

 

 

 

Dividends per Common Share

 

$

0.22

 

$

0.18

 

$

0.58

 

$

0.48

 

 

See accompanying unaudited notes to condensed consolidated financial statements.

 

1



Table of Contents

 

AptarGroup, Inc.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

In thousands, except per share amounts

 

 

 

 

September 30,

 

December 31,

 

 

 

2011

 

2010

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

Cash and equivalents

 

$

371,429

 

$

376,427

 

Accounts and notes receivable, less allowance for doubtful
accounts of $8,658 in 2011 and $8,560 in 2010

 

400,451

 

357,110

 

Inventories, net

 

297,430

 

272,255

 

Prepaid and other

 

87,170

 

58,191

 

 

 

1,156,480

 

1,063,983

 

 

 

 

 

 

 

Property, Plant and Equipment:

 

 

 

 

 

Buildings and improvements

 

338,479

 

316,415

 

Machinery and equipment

 

1,699,222

 

1,621,475

 

 

 

2,037,701

 

1,937,890

 

Less: Accumulated depreciation

 

(1,310,456

)

(1,231,557

)

 

 

727,245

 

706,333

 

Land

 

20,912

 

18,651

 

 

 

748,157

 

724,984

 

 

 

 

 

 

 

Other Assets:

 

 

 

 

 

Investments in affiliates

 

978

 

853

 

Goodwill

 

227,702

 

227,029

 

Intangible assets, net

 

3,387

 

5,242

 

Miscellaneous

 

9,657

 

10,627

 

 

 

241,724

 

243,751

 

Total Assets

 

$

2,146,361

 

$

2,032,718

 

 

See accompanying unaudited notes to condensed consolidated financial statements.

 

2



Table of Contents

 

AptarGroup, Inc.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

In thousands, except per share amounts

 

 

 

 

September 30,

 

December 31,

 

 

 

2011

 

2010

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

Notes payable

 

$

142,348

 

$

45,440

 

Current maturities of long-term obligations

 

3,472

 

50,126

 

Accounts payable and accrued liabilities

 

344,938

 

327,756

 

 

 

490,758

 

423,322

 

 

 

 

 

 

 

Long-Term Obligations

 

255,801

 

258,773

 

 

 

 

 

 

 

Deferred Liabilities and Other:

 

 

 

 

 

Deferred income taxes

 

19,665

 

22,134

 

Retirement and deferred compensation plans

 

34,425

 

39,362

 

Deferred and other non-current liabilities

 

9,206

 

9,353

 

Commitments and contingencies

 

 

 

 

 

63,296

 

70,849

 

 

 

 

 

 

 

Stockholders’ Equity:

 

 

 

 

 

AptarGroup, Inc. stockholders’ equity

 

 

 

 

 

Preferred stock, $.01 par value, 1 million shares authorized, none outstanding

 

 

 

Common stock, $.01 par value, 199 million shares authorized; 82.5 and 81.8 million shares issued as of September 30, 2011 and December 31, 2010, respectively

 

825

 

817

 

Capital in excess of par value

 

352,416

 

318,346

 

Retained earnings

 

1,385,307

 

1,279,013

 

Accumulated other comprehensive income

 

119,771

 

123,766

 

Less treasury stock at cost, 16.5 and 15.0 million shares as of September 30, 2011 and December 31, 2010, respectively

 

(522,590

)

(443,019

)

Total AptarGroup, Inc. Stockholders’ Equity

 

1,335,729

 

1,278,923

 

Noncontrolling interests in subsidiaries

 

777

 

851

 

 

 

 

 

 

 

Total Stockholders’ Equity

 

1,336,506

 

1,279,774

 

Total Liabilities and Stockholders’ Equity

 

$

2,146,361

 

$

2,032,718

 

 

See accompanying unaudited notes to condensed consolidated financial statements.

 

3



Table of Contents

 

AptarGroup, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(Unaudited)

 

In thousands, except per share amounts

 

 

 

 

 

 

AptarGroup, Inc. Stockholders’ Equity

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

Common

 

 

 

Capital in

 

Non-

 

 

 

 

 

Comprehensive

 

Retained

 

Comprehensive

 

Stock

 

Treasury

 

Excess of

 

Controlling

 

Total

 

 

 

Income

 

Earnings

 

Income/(Loss)

 

Par Value

 

Stock

 

Par Value

 

Interest

 

Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance — December 31, 2009:

 

 

 

$

1,150,017

 

$

186,099

 

$

806

 

$

(356,548

)

$

272,471

 

$

791

 

$

1,253,636

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

132,875

 

132,700

 

 

 

 

 

 

 

 

 

175

 

132,875

 

Foreign currency translation adjustments

 

(42,379

)

 

 

(42,391

)

 

 

 

 

 

 

12

 

(42,379

)

Changes in unrecognized pension gains/losses and related amortization, net of tax

 

575

 

 

 

575

 

 

 

 

 

 

 

 

 

575

 

Changes in treasury locks, net of tax

 

62

 

 

 

62

 

 

 

 

 

 

 

 

 

62

 

Net gain on Derivatives, net of tax

 

1

 

 

 

1

 

 

 

 

 

 

 

 

 

1

 

Comprehensive income

 

$

91,134

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock option exercises & restricted stock vestings

 

 

 

 

 

 

 

8

 

 

 

37,228

 

 

 

37,236

 

Cash dividends declared on common stock

 

 

 

(32,412

)

 

 

 

 

 

 

 

 

 

 

(32,412

)

Treasury stock purchased

 

 

 

 

 

 

 

 

 

(58,785

)

 

 

 

 

(58,785

)

Balance — September 30, 2010:

 

 

 

$

1,250,305

 

$

144,346

 

$

814

 

$

(415,333

)

$

309,699

 

$

978

 

$

1,290,809

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance — December 31, 2010:

 

 

 

$

1,279,013

 

$

123,766

 

$

817

 

$

(443,019

)

$

318,346

 

$

851

 

$

1,279,774

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

144,998

 

145,063

 

 

 

 

 

 

 

 

 

(65

)

144,998

 

Foreign currency translation adjustments

 

(5,256

)

 

 

(5,274

)

 

 

 

 

 

 

18

 

(5,256

)

Changes in unrecognized pension gains/losses and related amortization, net of tax

 

1,213

 

 

 

1,213

 

 

 

 

 

 

 

 

 

1,213

 

Changes in treasury locks, net of tax

 

65

 

 

 

65

 

 

 

 

 

 

 

 

 

65

 

Net gain on Derivatives, net of tax

 

1

 

 

 

1

 

 

 

 

 

 

 

 

 

1

 

Comprehensive income

 

$

141,021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock option exercises & restricted stock vestings

 

 

 

 

 

 

 

8

 

69

 

34,070

 

 

 

34,147

 

Cash dividends declared on common stock

 

 

 

(38,769

)

 

 

 

 

 

 

 

 

 

 

(38,769

)

Non-Controlling interest distribution

 

 

 

 

 

 

 

 

 

 

 

 

 

(27

)

(27

)

Treasury stock purchased

 

 

 

 

 

 

 

 

 

(79,640

)

 

 

 

 

(79,640

)

Balance — September 30, 2011:

 

 

 

$

1,385,307

 

$

119,771

 

$

825

 

$

(522,590

)

$

352,416

 

$

777

 

$

1,336,506

 

 

See accompanying unaudited notes to condensed consolidated financial statements.

 

4



Table of Contents

 

AptarGroup, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

In thousands, brackets denote cash outflows

 

Nine Months Ended September 30,

 

2011

 

2010

 

 

 

 

 

 

 

Cash Flows from Operating Activities:

 

 

 

 

 

Net income

 

$

144,998

 

$

132,875

 

Adjustments to reconcile net income to net cash provided by operations:

 

 

 

 

 

Depreciation

 

100,099

 

96,237

 

Amortization

 

1,925

 

2,640

 

Stock option based compensation

 

12,160

 

9,818

 

Provision for bad debts

 

1,188

 

333

 

Deferred income taxes

 

(4,710

)

(6,432

)

Facilities consolidation and severance

 

 

381

 

Retirement and deferred compensation plan expense

 

8,126

 

8,134

 

Changes in balance sheet items, excluding effects from foreign currency adjustments:

 

 

 

 

 

Accounts receivable

 

(19,655

)

(57,571

)

Inventories

 

(29,230

)

(42,910

)

Prepaid and other current assets

 

(31,111

)

(10,851

)

Accounts payable and accrued liabilities

 

15,252

 

51,518

 

Income taxes payable

 

(3,747

)

15,294

 

Retirement and deferred compensation plans

 

(13,770

)

(8,780

)

Other changes, net

 

3,250

 

(4,227

)

Net Cash Provided by Operations

 

184,775

 

186,459

 

 

 

 

 

 

 

Cash Flows from Investing Activities:

 

 

 

 

 

Capital expenditures

 

(126,710

)

(87,043

)

Disposition of property and equipment

 

1,656

 

1,062

 

Intangible assets acquired

 

129

 

(77

)

Acquisition of businesses, net of cash acquired

 

 

(3,014

)

Notes receivable, net

 

48

 

 

Net Cash Used by Investing Activities

 

(124,877

)

(89,072

)

 

 

 

 

 

 

Cash Flows from Financing Activities:

 

 

 

 

 

Proceeds from notes payable

 

97,360

 

7,047

 

Proceeds from long-term obligations

 

 

1,789

 

Repayments of long-term obligations

 

(49,342

)

(25,885

)

Dividends paid

 

(38,769

)

(32,412

)

Proceeds from stock options exercises

 

17,098

 

23,590

 

Purchase of treasury stock

 

(79,640

)

(58,785

)

Excess tax benefit from exercise of stock options

 

4,564

 

3,532

 

Net Cash Used by Financing Activities

 

(48,729

)

(81,124

)

 

 

 

 

 

 

Effect of Exchange Rate Changes on Cash

 

(16,167

)

(21,002

)

 

 

 

 

 

 

Net Decrease in Cash and Equivalents

 

(4,998

)

(4,739

)

Cash and Equivalents at Beginning of Period

 

376,427

 

332,964

 

Cash and Equivalents at End of Period

 

$

371,429

 

$

328,225

 

 

See accompanying unaudited notes to condensed consolidated financial statements.

 

5



Table of Contents

 

AptarGroup, Inc.

Notes to Condensed Consolidated Financial Statements

(Amounts in Thousands, Except per Share Amounts, or Otherwise Indicated)

(Unaudited)

 

NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

BASIS OF PRESENTATION

The accompanying unaudited condensed 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.  All significant intercompany accounts and transactions have been eliminated.

In the opinion of management, the unaudited condensed consolidated financial statements include all adjustments, consisting of only normal recurring adjustments, necessary for a fair statement of consolidated financial position, results of operations, changes in equity and cash flows for the interim periods presented.  The accompanying unaudited condensed consolidated financial statements have been prepared by the Company, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”).  Certain information and footnote disclosure normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“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 condensed consolidated 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 on Form 10-K for the year ended December 31, 2010.  The results of operations of any interim period are not necessarily indicative of the results that may be expected for the year.

As previously discussed in the AptarGroup Form 10-Q for the quarterly period ended March 31, 2011, the Company revised certain foreign currency cash flow effects that should not have been reported within cash flows from operating activities on the Condensed Consolidated Statements of Cash Flows.  Accordingly, the Company changed the classification of these foreign currency effects to appropriately reflect such amounts within effect of exchange rate changes on cash within the Condensed Consolidated Statements of Cash Flows and has revised our Statement of Cash Flows for the nine months ended September 30, 2010 presented herein.

Effective at the beginning of fiscal year 2011, AptarGroup’s new organizational structure consists of three market-focused lines of business which are Beauty + Home, Pharma and Food + Beverage. This new structure is a strategic step to become more closely aligned with our customers and the markets in which they operate.  Prior period information has been conformed to the new reporting structure.

 

ADOPTION OF RECENT ACCOUNTING PRONOUNCEMENTS

Changes to GAAP are established by the Financial Accounting Standards Board (“FASB”) in the form of accounting standards updates to the FASB’s Accounting Standards Codification.

In October 2009, the FASB issued an update to existing guidance on revenue recognition for arrangements with multiple deliverables.  This update allowed companies to allocate consideration received for qualified separate deliverables using estimated selling price for both delivered and undelivered items when vendor-specific objective evidence or third-party evidence is unavailable.  Additional disclosures discussing the nature of multiple element arrangements, the types of deliverables under the arrangements, the general timing of their delivery, and significant factors and estimates used to determine estimated selling prices are required.  The standard is effective for fiscal years beginning on or after June 15, 2010.  The adoption of this standard had no impact on the Consolidated Financial Statements.

 

INCOME TAXES

The Company computes taxes on income in accordance with the tax rules and regulations of the many taxing authorities where the income is earned.  The income tax rates imposed by these taxing authorities may vary substantially.  Taxable income may differ from pretax income for financial accounting purposes.  To the extent that these differences create differences between the tax basis of an asset or liability and its reported amount in the financial statements, an appropriate provision for deferred income taxes is made.

In its determination of which foreign earnings are permanently reinvested in foreign operations, the Company considers numerous factors, including the financial requirements of the U.S. parent company and those of its foreign subsidiaries, the U.S. funding needs for dividend payments and stock repurchases, and the tax consequences of remitting earnings to the U.S.  From this analysis, current year repatriation decisions are made in an attempt to provide a proper mix of debt and shareholder capital both within the U.S. and for non-U.S. operations.  The Company’s policy is to permanently reinvest its accumulated foreign earnings and only will make a distribution out of current year earnings to meet the cash needs at the parent company.  As such, the Company does not provide for taxes on earnings that are deemed to be permanently reinvested.  The effective tax rate for 2011 includes the estimated tax cost of repatriating $82 million of current year earnings, which was repatriated in the second quarter of 2011.

The Company provides a liability for the amount of tax benefits realized from uncertain tax positions.  This liability is provided whenever the Company determines that a tax benefit will not meet a more-likely-than-not threshold for recognition.  See Note 12 for more information.

 

NOTE 2 - INVENTORIES

 

At September 30, 2011 and December 31, 2010, approximately 19% and 20%, respectively, of the total inventories are accounted for by using the LIFO method.  Inventories, by component and net of reserves, consisted of:

 

 

 

6



Table of Contents

 

 

 

September 30,

 

December 31,

 

 

 

2011

 

2010

 

 

 

 

 

 

 

Raw materials

 

$

115,774

 

$

106,870

 

Work in progress

 

77,208

 

67,591

 

Finished goods

 

110,448

 

102,423

 

Total

 

303,430

 

276,884

 

Less LIFO Reserve

 

(6,000

)

(4,629

)

Total

 

$

297,430

 

$

272,255

 

 

NOTE 3 — GOODWILL AND OTHER INTANGIBLE ASSETS

 

As previously discussed in Note 1, we have changed our segments to align with our new organization structure.  Upon this change, we reassigned our goodwill based on relative fair value to our reporting units.  This reassignment is reflected in the below table in our gross opening goodwill balance.

 

The changes in the carrying amount of goodwill since the year ended December 31, 2010 are as follows by reporting segment:

 

 

 

 

Beauty +

 

 

 

Food +

 

Corporate

 

 

 

 

 

Home

 

Pharma

 

Beverage

 

and Other

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

Goodwill

 

$

171,515

 

$

37,678

 

$

17,836

 

$

1,615

 

$

228,644

 

Accumulated impairment losses

 

 

 

 

(1,615

)

(1,615

)

Balance as of December 31, 2010

 

$

171,515

 

$

37,678

 

$

17,836

 

$

 

$

227,029

 

Foreign currency exchange effects

 

172

 

505

 

(4

)

 

673

 

Goodwill

 

$

171,687

 

$

38,183

 

$

17,832

 

$

1,615

 

$

229,317

 

Accumulated impairment losses

 

 

 

 

(1,615

)

(1,615

)

Balance as of September 30, 2011

 

$

171,687

 

$

38,183

 

$

17,832

 

$

 

$

227,702

 

 

The table below shows a summary of intangible assets as of September 30, 2011 and December 31, 2010.

 

 

 

 

 

 

September 30, 2011

 

December 31, 2010

 

 

 

Weighted Average

 

Gross

 

 

 

 

 

Gross

 

 

 

 

 

 

 

Amortization

 

Carrying

 

Accumulated

 

Net

 

Carrying

 

Accumulated

 

Net

 

 

 

Period (Years)

 

Amount

 

Amortization

 

Value

 

Amount

 

Amortization

 

Value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortized intangible assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Patents

 

11

 

$

19,662

 

$

(18,490

)

$

1,172

 

$

18,489

 

$

(16,008

)

$

2,481

 

License agreements and other

 

4

 

23,005

 

(20,790

)

2,215

 

25,345

 

(22,584

)

2,761

 

Total intangible assets

 

7

 

$

42,667

 

$

(39,280

)

$

3,387

 

$

43,834

 

$

(38,592

)

$

5,242

 

 

Aggregate amortization expense for the intangible assets above for the quarters ended September 30, 2011 and 2010 was $186 and $806, respectively.  Aggregate amortization expense for the intangible assets above for the nine months ended September 30, 2011 and 2010 was $1,925 and $2,640, respectively.

 

Future estimated amortization expense for the years ending December 31 is as follows:

 

2011

 

$

258

 

(remaining estimated amortization for 2011)

2012

 

617

 

 

2013

 

597

 

 

2014

 

704

 

 

2015

 

391

 

 

 

Future amortization expense may fluctuate depending on changes in foreign currency rates.  The estimates for amortization expense noted above are based upon foreign exchange rates as of September 30, 2011.

 

NOTE 4 — RETIREMENT AND DEFERRED COMPENSATION PLANS

 

Components of Net Periodic Benefit Cost:

 

 

7



Table of Contents

 

 

 

Domestic Plans

 

Foreign Plans

 

Three months ended September 30,

 

2011

 

2010

 

2011

 

2010

 

 

 

 

 

 

 

 

 

 

 

Service cost

 

$

1,405

 

$

1,220

 

$

517

 

$

404

 

Interest cost

 

1,165

 

1,072

 

650

 

571

 

Expected return on plan assets

 

(1,566

)

(1,054

)

(462

)

(333

)

Amortization of net loss

 

398

 

164

 

200

 

62

 

Amortization of prior service cost

 

1

 

1

 

97

 

87

 

Net periodic benefit cost

 

$

1,403

 

$

1,403

 

$

1,002

 

$

791

 

 

 

 

 

 

 

 

 

 

 

 

 

Domestic Plans

 

Foreign Plans

 

Nine months ended September 30,

 

2011

 

2010

 

2011

 

2010

 

 

 

 

 

 

 

 

 

 

 

Service cost

 

$

4,095

 

$

3,587

 

$

1,547

 

$

1,233

 

Interest cost

 

3,392

 

3,151

 

1,945

 

1,745

 

Expected return on plan assets

 

(3,608

)

(3,098

)

(1,383

)

(1,018

)

Amortization of net loss

 

1,245

 

482

 

599

 

189

 

Amortization of prior service cost

 

3

 

3

 

291

 

265

 

Net periodic benefit cost

 

$

5,127

 

$

4,125

 

$

2,999

 

$

2,414

 

 

EMPLOYER CONTRIBUTIONS

In order to meet or exceed minimum funding levels required by U.S. law, the Company has contributed $12.2 million, as of September 30, 2011, to its domestic defined benefit plans and does not anticipate any further contribution during 2011.  The Company also expects to contribute approximately $2.1 million to its foreign defined benefit plans in 2011, and as of September 30, 2011, has contributed approximately $0.7 million.

 

NOTE 5 — DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

 

The Company maintains a foreign exchange risk management policy designed to establish a framework to protect the value of the Company’s non-functional denominated transactions from adverse changes in exchange rates.  Sales of the Company’s products can be denominated in a currency different from the currency in which the related costs to produce the product are denominated.  Changes in exchange rates on such inter-country sales or intercompany loans can impact the Company’s results of operations.  The Company’s policy is not to engage in speculative foreign currency hedging activities, but to minimize its net foreign currency transaction exposure defined as firm commitments and transactions recorded and denominated in currencies other than the functional currency.  The Company may use foreign currency forward exchange contracts, options and cross currency swaps to economically hedge these risks.

The Company maintains an interest rate risk management strategy to minimize significant, unanticipated earnings fluctuations that may arise from volatility in interest rates.

For derivative instruments designated as hedges, the Company formally documents the nature and relationships between the hedging instruments and the hedged items, as well as the risk management objectives, strategies for undertaking the various hedge transactions, and the method of assessing hedge effectiveness.  Additionally, in order to designate any derivative instrument as a hedge of an anticipated transaction, the significant characteristics and expected terms of any anticipated transaction must be specifically identified, and it must be probable that the anticipated transaction will occur.

 

FAIR VALUE HEDGES

During 2011, the Company maintained an interest rate swap to convert a portion of its fixed-rate debt into variable-rate debt.  Under the interest rate swap contract, the Company exchanged, at specified intervals, the difference between fixed-rate and floating-rate amounts, which was calculated based on an agreed upon notional amount.  On May 31, 2011, this interest rate swap contract matured and was not renewed.  No gain or loss was recorded in the income statement in 2010 or nine months ended September 30, 2011 as any hedge ineffectiveness for the period was immaterial.

 

CASH FLOW HEDGES

As of September 30, 2011, the Company had one foreign currency cash flow hedge.  A French subsidiary of AptarGroup, AptarGroup Holding SAS, has hedged the risk of variability in Euro equivalent associated with the cash flows of an intercompany loan granted in Brazilian Real.  The forward contracts utilized were designated as a hedge of the changes in the cash flows relating to the changes in foreign currency rates relating to the loan and related forecasted interest.  The notional amount of the foreign currency forward contracts utilized to hedge cash flow exposure was 1.3 million Brazilian Real ($0.7 million) as of September 30, 2011.  The notional amount of the foreign currency forward contracts utilized to hedge cash flow exposure was 2.7 million Brazilian Real ($1.6 million) as of September 30, 2010.

During the three and nine months ended September 30, 2011, the Company did not recognize any net gain (loss) as any hedge ineffectiveness for the period was immaterial, and the Company did not recognize any net gain (loss) related to the portion of the hedging instrument excluded from the assessment of hedge effectiveness.  The Company’s foreign currency forward contracts hedge forecasted transactions for approximately six months (March 2012).

 

HEDGE OF NET INVESTMENTS IN FOREIGN OPERATIONS

A significant number of the Company’s operations are located outside of the United States.  Because of this, movements in exchange rates may have a significant impact on the translation of the financial condition and results of operations of the Company’s foreign entities.  A weakening U.S. dollar relative to foreign currencies has an additive translation effect on the Company’s financial condition and results of operations.  Conversely, a strengthening U.S. dollar has a dilutive effect.  The

 

8



Table of Contents

 

Company in some cases maintains debt in these subsidiaries to offset the net asset exposure.  The Company does not otherwise actively manage this risk using derivative financial instruments.  In the event the Company plans on a full or partial liquidation of any of its foreign subsidiaries where the Company’s net investment is likely to be monetized, the Company will consider hedging the currency exposure associated with such a transaction.

 

OTHER

As of September 30, 2011, the Company has recorded the fair value of foreign currency forward exchange contracts of $0.9 million in prepaid and other, $2.4 million in accounts payable and accrued liabilities, and $1.9 million in deferred and other non-current liabilities in the balance sheet.  All forward exchange contracts outstanding as of September 30, 2011 had an aggregate contract amount of $182.9 million.

 

 

Fair Value of Derivative Instruments in the Condensed Consolidated Balance Sheets as of September 30, 2011

and December 31, 2010

 

Derivative Contracts Designated as
Hedging Instruments

 

Balance Sheet
Location

 

September
30, 2011

 

December
31, 2010

 

 

 

 

 

 

 

 

 

Derivative Assets

 

 

 

 

 

 

 

Interest Rate Contracts

 

Miscellaneous

 

$

 

$

155

 

 

 

 

 

$

 

$

155

 

Derivative Liabilities

 

 

 

 

 

 

 

Foreign Exchange Contracts

 

Accounts payable and accrued liabilities

 

$

274

 

$

309

 

Foreign Exchange Contracts

 

Deferred and other non-current liabilities

 

 

377

 

 

 

 

 

$

274

 

$

686

 

Derivative Contracts Not Designated as Hedging Instruments

 

 

 

 

 

 

 

Derivative Assets

 

 

 

 

 

 

 

Foreign Exchange Contracts

 

Prepaid and other

 

$

866

 

$

1,660

 

 

 

 

 

$

866

 

$

1,660

 

Derivative Liabilities

 

 

 

 

 

 

 

Foreign Exchange Contracts

 

Accounts payable and accrued liabilities

 

$

2,084

 

$

1,089

 

Foreign Exchange Contracts

 

Deferred and other non-current liabilities

 

1,891

 

2,448

 

 

 

 

 

$

3,975

 

$

3,537

 

 

 

The Effect of Derivative Instruments on the Condensed Consolidated Statements of Income

for the Quarters Ended September 30, 2011 and September 30, 2010

 

Derivatives in Cash Flow
Hedging Relationships

 

 

 

Amount of Gain or (Loss)
Recognized in OCI on
Derivative (Effective Portion)

 

 

 

 

 

2011

 

2010

 

Foreign Exchange Contracts

 

 

 

 

$

(5

)

 

$

(6

)

 

 

 

 

 

$

(5

)

 

$

(6

)

 

 

Derivatives Not Designated as
Hedging Instruments

 

Location of Gain or (Loss) Recognized in Income on Derivative

 

Amount of Gain or (Loss) Recognized in Income on Derivative

 

 

 

 

 

2011

 

2010

 

Foreign Exchange Contracts

 

Other (Expense) Miscellaneous, net

 

 

$

168

 

 

$

(3,207

)

 

 

 

 

 

$

168

 

 

$

(3,207

)

 

 

The Effect of Derivative Instruments on the Condensed Consolidated Statements of Income

for the Nine Months Ended September 30, 2011 and September 30, 2010

 

Derivatives in Cash Flow
Hedging Relationships

 

 

 

Amount of Gain or (Loss)
Recognized in OCI on
Derivative (Effective Portion)

 

 

 

 

 

2011

 

2010

 

Foreign Exchange Contracts

 

 

 

$

6

 

$

6

 

 

 

 

 

$

6

 

$

6

 

 

9



Table of Contents

 

Derivatives Not Designated as
Hedging Instruments

 

Location of Gain or (Loss) Recognized in
Income on Derivative

 

Amount of Gain or (Loss)
Recognized in Income on
Derivative

 

 

 

 

 

2011

 

2010

 

Foreign Exchange Contracts

 

Other (Expense) Miscellaneous, net

 

$

(3,360

)

$

(4,334

)

 

 

 

 

$

(3,360

)

$

(4,334

)

 

 

NOTE 6 — COMMITMENTS AND CONTINGENCIES

 

The Company, in the normal course of business, is subject to a number of lawsuits and claims both actual and potential in nature including the proceeding noted below.  While management believes the resolution of these claims and lawsuits will not have a material adverse effect on the Company’s financial position or results of operations or cash flows, claims and legal proceedings are subject to inherent uncertainties, and unfavorable outcomes could occur that could include amounts in excess of any accruals which management has established.  Were such unfavorable final outcomes to occur, it is possible that they could have a material adverse effect on our financial position, results of operations and cash flows.

A competitor has filed a lawsuit against AptarGroup, Inc. alleging that certain processes utilized by AptarGroup, Inc. in the manufacture of a specific type of diptube infringe patents owned by the counterparty. This lawsuit seeks an exclusion order barring the manufacture of this specific diptube.  The Company believes it has meritorious defenses against the suit and any unfavorable outcome is not expected to have a material impact on the Company’s financial condition or results of operations.  Therefore, no accrual has been recorded related to this matter.

Under its Certificate of Incorporation, the Company has agreed to indemnify its officers and directors for certain events or occurrences while the officer or director is, or was serving, at its request in such capacity.  The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited; however, the Company has a directors’ and officers’ liability insurance policy that covers a portion of its exposure.  As a result of its insurance policy coverage, the Company believes the estimated fair value of these indemnification agreements is minimal.  The Company had no liabilities recorded for these agreements as of September 30, 2011.

 

NOTE 7 — STOCK REPURCHASE PROGRAM

 

On July 19, 2011, the Company’s Board of Directors authorized the Company to repurchase an additional four million shares of its outstanding common stock.  There is no expiration date for this repurchase program.

During the three and nine months ended September 30, 2011, the Company repurchased approximately 800 thousand and 1.6 million shares for aggregate amounts of $38.8 million and $79.6 million, respectively.  As of September 30, 2011, the Company had a remaining authorization to repurchase 4.1 million additional shares.  The timing of and total amount expended for the share repurchase depends upon market conditions.

 

NOTE 8 — EARNINGS PER SHARE

 

AptarGroup’s authorized common stock consists of 199 million shares, having a par value of $.01 each.  Information related to the calculation of earnings per share is as follows:

 

 

 

 

Three months ended

 

 

 

September 30, 2011

 

September 30, 2010

 

 

 

Diluted

 

Basic

 

Diluted

 

Basic

 

 

 

 

 

 

 

 

 

 

 

Consolidated operations

 

 

 

 

 

 

 

 

 

Income available to common stockholders

 

$

49,297

 

$

49,297

 

$

46,983

 

$

46,983

 

 

 

 

 

 

 

 

 

 

 

Average equivalent shares

 

 

 

 

 

 

 

 

 

Shares of common stock

 

66,381

 

66,381

 

67,213

 

67,213

 

Effect of dilutive stock based compensation

 

 

 

 

 

 

 

 

 

Stock options

 

2,291

 

 

2,147

 

 

Restricted stock

 

5

 

 

14

 

 

Total average equivalent shares

 

68,677

 

66,381

 

69,374

 

67,213

 

Net income per share

 

$

0.72

 

$

0.74

 

$

0.68

 

$

0.70

 

 

 

 

Nine months ended

 

 

 

September 30, 2011

 

September 30, 2010

 

 

 

Diluted

 

Basic

 

Diluted

 

Basic

 

 

 

 

 

 

 

 

 

 

 

Consolidated operations

 

 

 

 

 

 

 

 

 

Income available to common stockholders

 

$

145,063

 

$

145,063

 

$

132,700

 

$

132,700

 

 

 

 

 

 

 

 

 

 

 

Average equivalent shares

 

 

 

 

 

 

 

 

 

Shares of common stock

 

66,747

 

66,747

 

67,471

 

67,471

 

Effect of dilutive stock based compensation

 

 

 

 

 

 

 

 

 

Stock options

 

2,863

 

 

2,438

 

 

Restricted stock

 

6

 

 

12

 

 

Total average equivalent shares

 

69,616

 

66,747

 

69,921

 

67,471

 

Net income per share

 

$

2.08

 

$

2.17

 

$

1.90

 

$

1.97

 

 

10



Table of Contents

 

NOTE 9 — SEGMENT INFORMATION

 

The Company operates in the packaging components industry, which includes the development, manufacture and sale of consumer product dispensing systems.  The Company is organized into three reporting segments.  Operations that sell dispensing systems primarily to the personal care, fragrance/cosmetic and household markets form the Beauty + Home segment.  Operations that sell dispensing systems to the pharmaceutical market form the Pharma segment.  Operations that sell dispensing systems primarily to the food and beverage markets form the Food + Beverage segment.

The accounting policies of the segments are the same as those described in Note 1, Summary of Significant Accounting Policies in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.  The Company evaluates performance of its business segments and allocates resources based upon segment income.  Segment income is defined as earnings before interest expense in excess of interest income, certain corporate expenses and income taxes.  Beginning in 2011, the Company changed the segment income measure to include stock option and certain information technology costs that were historically maintained within Corporate & Other.  Prior period information has been conformed to incorporate this change.

Financial information regarding the Company’s reportable segments is shown below:

 

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2011

 

2010

 

2011

 

2010

 

Total Revenue:

 

 

 

 

 

 

 

 

 

Beauty + Home

 

$

391,535

 

$

348,858

 

$

1,178,065

 

$

1,037,772

 

Pharma

 

146,521

 

117,543

 

417,793

 

348,889

 

Food + Beverage

 

68,101

 

54,295

 

211,350

 

169,714

 

Other

 

40

 

38

 

122

 

109

 

Total Revenue

 

606,197

 

520,734

 

1,807,330

 

1,556,484

 

 

 

 

 

 

 

 

 

 

 

Less: Intersegment Sales:

 

 

 

 

 

 

 

 

 

Beauty + Home

 

$

4,034

 

$

2,750

 

$

11,564

 

$

8,421

 

Pharma

 

76

 

23

 

641

 

104

 

Food + Beverage

 

851

 

387

 

2,360

 

1,922

 

Other

 

40

 

37

 

122

 

108

 

Total Intersegment Sales

 

$

5,001

 

$

3,197

 

$

14,687

 

$

10,555

 

 

 

 

 

 

 

 

 

 

 

Net Sales:

 

 

 

 

 

 

 

 

 

Beauty + Home

 

$

387,501

 

$

346,108

 

$

1,166,501

 

$

1,029,351

 

Pharma

 

146,445

 

117,520

 

417,152

 

348,785

 

Food + Beverage

 

67,250

 

53,908

 

208,990

 

167,792

 

Other

 

 

1

 

 

1

 

Net Sales

 

$

601,196

 

$

517,537

 

$

1,792,643

 

$

1,545,929

 

 

 

 

 

 

 

 

 

 

 

Segment Income (1):

 

 

 

 

 

 

 

 

 

Beauty + Home

 

$

32,025

 

$

34,324

 

$

104,555

 

$

101,316

 

Pharma

 

44,801

 

35,091

 

124,058

 

98,510

 

Food + Beverage

 

6,891

 

6,443

 

23,076

 

24,758

 

Corporate  & Other

 

(9,964

)

(5,009

)

(28,634

)

(20,198

)

Income before interest and taxes

 

$

73,753

 

$

70,849

 

$

223,055

 

$

204,386

 

Interest expense, net

 

(2,515

)

(2,703

)

(8,646

)

(8,532

)

Income before income taxes

 

$

71,238

 

$

68,146

 

$

214,409

 

$

195,854

 

 

(1)   Included in the Segment Income figures reported above are consolidation/severance expenses, for the three and nine months ended September 30, 2011 and September 30, 2010, as follows:

 

CONSOLIDATION/SEVERANCE EXPENSES

 

Beauty + Home

 

$

 

$

(444

)

$

 

$

(444

)

Pharma

 

 

 

 

 

Food + Beverage

 

 

63

 

 

63

 

Total Consolidation/Severance Expenses

 

$

 

$

(381

)

$

 

$

(381

)

 

NOTE 10 — ACQUISITIONS

 

In March 2010, the Company acquired certain equipment, inventory and intellectual property rights for approximately $3.0 million in cash.  No debt was assumed in the transaction.  The purchase price approximated the fair value of the assets acquired and therefore no goodwill was recorded.  The results of operations subsequent to the acquisition are included in the statement of income.  The assets acquired are included in the Food + Beverage reporting segment.

This acquisition did not have a material impact on the results of operations in 2011 or 2010 and therefore no proforma information is required.

 

NOTE 11 — STOCK-BASED COMPENSATION

 

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Table of Contents

 

The Company issues stock options and restricted stock units to employees under Stock Awards Plans approved by shareholders.  Stock options are issued to non-employee directors for their services as directors under Director Stock Option Plans approved by shareholders.  Options are awarded with the exercise price equal to the market price on the date of grant and generally become exercisable over three years and expire 10 years after grant.  Restricted stock units generally vest over three years.

Compensation expense recorded attributable to stock options for the first nine months of 2011 was approximately $12.1 million ($8.5 million after tax), or $0.13 per basic share and $0.12 per diluted share.  The income tax benefit related to this compensation expense was approximately $3.6 million.  Approximately $11.2 million of the compensation expense was recorded in selling, research & development and administrative expenses and the balance was recorded in cost of sales.  Compensation expense recorded attributable to stock options for the first nine months of 2010 was approximately $9.8 million ($7.0 million after tax), or $0.10 per share (basic and diluted).  The income tax benefit related to this compensation expense was approximately $2.9 million.  Approximately $8.8 million of the compensation expense was recorded in selling, research & development and administrative expenses and the balance was recorded in cost of sales.

The Company uses historical data to estimate expected life and volatility.  The weighted-average fair value of stock options granted under the Stock Awards Plans was $11.36 and $9.18 per share in 2011 and 2010, respectively.  These values were estimated on the respective dates of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:

 

 

Stock Awards Plans:

Nine months ended September 30,

 

2011

 

2010

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividend Yield

 

1.7

%

1.8

%

Expected Stock Price Volatility

 

23.3

%

22.7

%

Risk-free Interest Rate

 

2.7

%

3.7

%

Expected Life of Option (years)

 

6.9

 

6.9

 

 

The fair value of stock options granted under the Director Stock Option Plan during the third quarter of 2011 was $12.00.  The fair value of stock options granted under the Director Stock Option Plan during the third quarter of 2010 was $10.07.  These values were estimated on the respective date of the grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:

 

 

Director Stock Option Plans:

Nine months ended September 30,

 

2011

 

2010

 

 

 

 

 

 

 

Dividend Yield

 

1.6

%

1.7

%

Expected Stock Price Volatility

 

22.9

%

22.6

%

Risk-free Interest Rate

 

2.5

%

3.4

%

Expected Life of Option (years)

 

6.9

 

6.9

 

 

A summary of option activity under the Company’s stock option plans as of September 30, 2011, and changes during the nine months then ended is presented below:

 

 

 

 

Stock Awards Plans

 

Director Stock Option Plans

 

 

 

Weighted Average

 

Weighted Average

 

 

 

Shares

 

Exercise Price

 

Shares

 

Exercise Price

 

 

 

 

 

 

 

 

 

 

 

Outstanding, January 1, 2011

 

8,208,736

 

$

28.91

 

219,000

 

$

30.40

 

Granted

 

1,284,150

 

48.21

 

85,500

 

51.26

 

Exercised

 

(859,487

)

20.79

 

(34,500

)

22.79

 

Forfeited or expired

 

(37,030

)

33.72

 

 

 

Outstanding at September 30, 2011

 

8,596,369

 

$

32.59

 

270,000

 

$

37.98

 

Exercisable at September 30, 2011

 

6,104,374

 

$

28.91

 

125,836

 

$

29.15

 

 

 

 

 

 

 

 

 

Weighted-Average Remaining Contractual Term (Years):

 

 

 

 

 

 

 

Outstanding at September 30, 2011

 

6.1

 

 

 

7.3

 

 

 

Exercisable at September 30, 2011

 

4.9

 

 

 

5.3

 

 

 

 

 

 

 

 

 

 

 

 

 

Aggregate Intrinsic Value ($000):

 

 

 

 

 

 

 

 

 

Outstanding at September 30, 2011

 

$

107,324

 

 

 

$

2,369

 

 

 

Exercisable at September 30, 2011

 

$

95,097

 

 

 

$

1,953

 

 

 

 

 

 

 

 

 

 

 

 

 

Intrinsic Value of Options Exercised ($000) During the Nine Months Ended:

 

 

 

 

 

September 30, 2011

 

$

25,475

 

 

 

$

970

 

 

 

September 30, 2010

 

$

24,034

 

 

 

$

703

 

 

 

 

The fair value of shares vested during the nine months ended September 30, 2011 and 2010 was $11.1 million and $11.7 million, respectively.  Cash received from option exercises was approximately $17.1 million and the actual tax benefit realized for the tax deduction from option exercises was approximately $6.3 million in the nine months ended September 30, 2011.  Cash received from option exercises was approximately $23.6 million and the actual tax benefit realized for the tax deduction from option exercises was approximately $5.4 million in the nine months ended September 30, 2010.  As of September 30,

 

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2011, the remaining valuation of stock option awards to be expensed in future periods was $9.8 million and the related weighted-average period over which it is expected to be recognized is 1.5 years.

The fair value of restricted stock unit grants is the market price of the underlying shares on the grant date.  A summary of restricted stock unit activity as of September 30, 2011, and changes during the period then ended is presented below:

 

 

 

 

 

 

Weighted-Average

 

 

 

Shares

 

Grant-Date Fair Value

 

 

 

 

 

 

 

Nonvested at January 1, 2011

 

22,303

 

$

34.71

 

Granted

 

5,035

 

49.63

 

Vested

 

(10,045

)

34.44

 

Nonvested at September 30, 2011

 

17,293

 

$

39.21

 

 

Compensation expense recorded attributable to restricted stock unit grants for the first nine months of 2011 and 2010 was approximately $247 and $452 thousand, respectivelyThe fair value of units vested during the nine months ended September 30, 2011 and 2010 was $346 and $298 thousand, respectively.  The intrinsic value of units vested during the nine months ended September 30, 2011 and 2010 was $492 and $330 thousand, respectively.  As of September 30, 2011 there was $125 thousand of total unrecognized compensation cost relating to restricted stock unit awards which is expected to be recognized over a weighted average period of 1.4 years.

 

NOTE 12 — INCOME TAX UNCERTAINTIES

 

The Company had approximately $10.0 and $10.9 million recorded for income tax uncertainties as of September 30, 2011 and December 31, 2010, respectively.  The $0.9 million change in income tax uncertainties reflects the settlement of a tax examination.  The amount, if recognized, that would impact the effective tax rate is $9.2 and $10.1 million, respectively.  The Company estimates that it is reasonably possible that the liability for uncertain tax positions will decrease between $1 and $6 million in the next twelve months from the resolution of various uncertain positions as a result of the completion of tax audits, litigation and the expiration of the statute of limitations in various jurisdictions.

 

NOTE 13 — FAIR VALUE

 

Authoritative guidelines require the categorization of assets and liabilities into three levels based upon the assumptions (inputs) used to price the assets or liabilities.  Level 1 provides the most reliable measure of fair value, whereas Level 3 generally requires significant management judgment.  The three levels are defined as follows:

·                 Level 1:   Unadjusted quoted prices in active markets for identical assets and liabilities.

·                 Level 2:   Observable inputs other than those included in Level 1.  For example, quoted prices for similar assets or liabilities in active markets or quoted prices for identical assets or liabilities in inactive markets.

·                 Level 3:   Unobservable inputs reflecting management’s own assumptions about the inputs used in pricing the asset or liability.

 

As of September 30, 2011, the fair values of our financial assets and liabilities were categorized as follows:

 

 

 

Total

 

Level 1

 

Level 2

 

Level 3

 

Assets

 

 

 

 

 

 

 

 

 

Forward exchange contracts (b)

 

866

 

 

866

 

 

Total assets at fair value

 

$

866

 

$

 

$

866

 

$

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

Forward exchange contracts (b)

 

$

4,249

 

$

 

$

4,249

 

$

 

Total liabilities at fair value

 

$

4,249

 

$

 

$

4,249

 

$

 

 

As of December 31, 2010, the fair values of our financial assets and liabilities were categorized as follows:

 

 

 

Total

 

Level 1

 

Level 2

 

Level 3

 

Assets

 

 

 

 

 

 

 

 

 

Interest rate swap (a)

 

$

155

 

$

 

$

155

 

$

 

Forward exchange contracts (b)

 

1,660

 

 

1,660

 

 

Total assets at fair value

 

$

1,815

 

$

 

$

1,815

 

$

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

Forward exchange contracts (b)

 

$

4,223

 

$

 

$

4,223

 

$

 

Total liabilities at fair value

 

$

4,223

 

$

 

$

4,223

 

$

 

 

(a)   Based on third party quotation from financial institution

(b)   Based on observable market transactions of spot and forward rates

 

The carrying amounts of the Company’s other current financial instruments such as cash and equivalents, notes payable and current maturities of long-term obligations approximate fair value due to the short-term maturity of the instrument.  The fair

 

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value of the Company’s long-term obligations is based on interest rates that are currently available to the Company for issuance of debt with similar terms and maturities.  The estimated fair value of the Company’s long term obligations was $282 million as of September 30, 2011 and $274 million as of December 31, 2010.

 

NOTE 14 — FACILITIES CONSOLIDATION AND SEVERANCE

 

In the second quarter of 2009, the Company announced a plan to consolidate two French dispensing closure manufacturing facilities and several sales offices in North America and Europe and has subsequently expanded the program to include additional headcount reductions.  The total costs associated with the consolidation/severance programs are $7.7 million.  The plan has been substantially completed, subject to the settlement of remaining reserve balances.

As of September 30, 2011 we have recorded the following activity associated with our consolidation/severance programs:

 

 

 

Beginning

 

 

 

 

 

 

 

Ending

 

 

 

Reserve at

 

Net

 

 

 

 

 

Reserve at

 

 

 

12/31/10

 

Charges

 

Cash Paid

 

FX Impact

 

9/30/11

 

 

 

 

 

 

 

 

 

 

 

 

 

Employee severance

 

$

1,299

 

$

(74

)

$

(61

)

$

6

 

$

1,170

 

Other costs

 

106

 

74

 

(73

)

(6

)

101

 

Totals

 

$

1,405

 

$

 

$

(134

)

$

 

$

1,271

 

 

NOTE 15 — COMPREHENSIVE INCOME

 

Comprehensive income for the three months ended September 30, 2011 and 2010 was as follows:

 

Three months ended September 30,

 

2011

 

2010

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

49,243

 

$

47,021

 

Foreign currency translation adjustment

 

(111,260

)

117,792

 

Changes in unrecognized pension gains/losses and related amortization, net of tax

 

429

 

186

 

Changes in treasury locks, net of tax

 

22

 

21

 

Net gain on Derivatives, net of tax

 

(5

)

(6

)

Comprehensive income

 

$

(61,571

)

$

165,014

 

 

NOTE 16 — SUBSEQUENT EVENT

 

In October 2011, the Company acquired TKH Plastics Pvt Ltd (“TKH”), a leading provider of injection molded dispensing closures in India.  The Company acquired 100% of the outstanding common stock of TKH for approximately $17 million in cash and approximately $1 million in assumed debt.  The acquisition was approved by the Board of Directors and will allow the Company to expand its geographical presence in India.  The purchase was funded using cash flows from operations.  The assets acquired will be included in the Beauty + Home reporting segment.  This acquisition will not have a material impact on the results of operations in 2011 and therefore no proforma information will be required.

 

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Table of Contents

 

ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS, OR OTHERWISE INDICATED)

 

RESULTS OF OPERATIONS

 

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2011

 

2010

 

2011

 

2010

 

 

 

 

 

 

 

 

 

 

 

Net Sales

 

100.0

%

100.0

%

100.0

%

100.0

%

Cost of sales (exclusive of depreciation and amortization shown below)

 

67.7

 

66.2

 

66.9

 

65.9

 

Selling, research & development and administrative

 

14.4

 

13.7

 

14.9

 

14.3

 

Depreciation and amortization

 

5.6

 

6.3

 

5.7

 

6.4

 

Facilities consolidation and severance

 

 

0.1

 

 

 

Operating Income

 

12.3

 

13.7

 

12.5

 

13.4

 

Other income (expense)

 

(0.5

)

(0.5

)

(0.5

)

(0.7

)

Income before income taxes

 

11.8

 

13.2

 

12.0

 

12.7

 

 

 

 

 

 

 

 

 

 

 

Net income

 

8.2

%

9.1

%

8.1

%

8.6

%

 

 

 

 

 

 

 

 

 

 

Effective Tax Rate

 

30.9

%

31.0

%

32.4

%

32.2

%

 

NET SALES

 

Net sales for the quarter and nine months ended September 30, 2011 were $601.2 million and $1.8 billion, respectively, representing an increase of 16% for both periods over the same periods a year ago.  The average U.S. dollar exchange rate weakened compared to the Euro and other foreign currencies, such as the Brazilian Real and Swiss Franc, in the third quarter of 2011 compared to 2010.  As a result, changes in exchange rates positively impacted sales by approximately 6% for the quarter and for the full year.  The remaining 10% of sales increases for the three and nine months ended September 30, 2011, were due primarily to higher product and custom tooling sales to our customers.

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

 

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

 

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2011

 

% of Total

 

2010

 

% of Total

 

2011

 

% of Total

 

2010

 

% of Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Domestic

 

$

161,650

 

27

%

$

150,267

 

29

%

$

486,715

 

27

%

$

454,380

 

29

%

Europe

 

339,548

 

56

%

288,130

 

56

%

1,032,532

 

58

%

875,689

 

57

%

Other Foreign

 

99,998

 

17

%

79,140

 

15

%

273,396

 

15

%

215,860

 

14

%

 

COST OF SALES (EXCLUSIVE OF DEPRECIATION SHOWN BELOW)

 

Our cost of sales as a percent of net sales increased to 67.7% in the third quarter of 2011 compared to 66.2% in the third quarter of 2010.

 

The following factors negatively impacted our cost of sales percentage in the third quarter of 2011:

 

Lower Utilization of Overhead Costs in Certain Operations.  Several of our business operations saw decreases in unit volumes produced and sold.  As a result of these lower production levels, overhead costs were not utilized as well as in the prior year, thus negatively impacting cost of goods sold as a percentage of net sales.

 

Increased Sales of Custom Tooling.  Sales of custom tooling increased $7.1 million in the third quarter of 2011 compared to the prior year third quarter.  Traditionally, sales of custom tooling generate lower margins than our regular product sales and thus, an increase in sales of custom tooling negatively impacted cost of sales as a percentage of sales.

 

Weakening of the U.S. Dollar.  We are a net importer from Europe into the U.S. of products produced in Europe with costs denominated in Euros.  As a result, when the U.S. dollar or other currencies weaken against the Euro, products produced in

 

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Europe (with costs denominated in Euros) and sold in currencies that are weaker compared to the Euro, have a negative impact on cost of sales as a percentage of net sales.

 

The following factors positively impacted our cost of sales percentage in the third quarter of 2011:

 

Mix of Products Sold.  Compared to the prior year, our Pharma and Food + Beverage segment sales represented a higher percentage of our overall sales.  This positively impacts our cost of sales percentage as margins on our pharmaceutical, food and beverage products typically are higher than the overall company average.

 

Decreasing Raw Material Costs.  Raw material costs, in particular plastic resin, decreased in the third quarter of 2011 compared to the third quarter of 2010.  While the majority of these cost decreases are passed along to our customers in our selling prices, we experienced the usual lag in the timing of passing on these cost decreases.

 

Our cost of sales as a percent of net sales increased to 66.9% in the first nine months of 2011 compared to 65.9% in the first nine months of 2010.  The increase is primarily due to the same factors mentioned above.

 

SELLING, RESEARCH & DEVELOPMENT AND ADMINISTRATIVE

 

Our Selling, Research & Development and Administrative expenses (“SG&A”) increased by approximately $15.6 million in the third quarter of 2011 compared to the same period a year ago.  On a constant currency basis, the increase would have been approximately $10.2 million in the quarter.  The majority of the increase is due to higher professional fees and personnel costs (particularly in the Food + Beverage segment).  SG&A as a percentage of net sales also increased to 14.4% compared to 13.7% in the same period of the prior year due to the increases noted above.

SG&A increased by approximately $46.5 million for the nine months ended September 30, 2011 compared to the same period a year ago.  On a constant currency basis, the increase would have been approximately $34.0 million for the nine month period.  The increase is due primarily to the reason mentioned above as well as higher stock option expense in the first nine months of 2011 versus the prior year.  For the nine months ended September 30, 2011, the percentage increased to 14.9% compared to 14.3% of net sales in the same period of the prior year.

 

DEPRECIATION AND AMORTIZATION

 

Reported depreciation and amortization expenses increased approximately $1.1 million in the third quarter of 2011 to $33.5 million compared to $32.4 million in the third quarter of 2010.  However, on a constant currency basis, the 2011 reported expense would have slightly decreased by approximately $1.0 million in the quarter.  Due to the increase in sales, depreciation and amortization as a percentage of net sales decreased to 5.6% in the third quarter of 2011 compared to 6.3% for the same period a year ago.

Depreciation and amortization expenses increased approximately $3.1 million in the first nine months of 2011 to $102.0 million compared to $98.9 million for the first nine months of 2010.  On a constant currency basis, the expense would have decreased by approximately $2.0 million for the nine month period.  Depreciation and amortization as a percentage of net sales decreased to 5.7% for the nine months ended September 30, 2011 compared to 6.4% in the same period of the prior year.

 

FACILITIES CONSOLIDATION AND SEVERANCE

 

Facilities consolidation and severance expenses were $381 thousand in the third quarter of 2010.  The amount represents the recognition of expenses related to the Company’s previously announced plan to consolidate several facilities and reduce headcount and changes in estimates.  The cumulative total amount since the program was initiated during the second quarter of 2009 is $7.7 million.

 

OPERATING INCOME

 

Operating income increased approximately $3.1 million in the third quarter of 2011 to $74.2 million compared to $71.1 million in the same period in the prior year.  Strong increases in sales volumes at each segment were able to offset lower capacity utilization, especially in certain of our Beauty + Home segment locations, contributing to the rise in operating income.  Operating income as a percentage of net sales decreased to 12.3% in the third quarter of 2011 compared to 13.7% for the same period in the prior year mainly due to the higher percentage of cost of sales and SG&A cost compared to prior year as discussed above.

Operating income increased approximately $17.4 million in the first nine months of 2011 to $224.2 million compared to $206.8 million in the same period in the prior year.  Operating income as a percentage of sales decreased to 12.5% in the first nine months of 2011 compared to 13.4% for the same period in the prior year.  These changes are primarily due to the same reasons mentioned for the third quarter results.

 

NET OTHER EXPENSE

 

Net other expenses remained consistent at $3.0 million in the third quarter of 2011 compared to the same period in the prior year.  A small increase in interest expense was offset by a similar increase in interest income.

 

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Net other expenses for the nine months ended September 30, 2011 decreased slightly to $9.8 million from $10.9 million in the same period in the prior year due primarily to lower foreign currency losses.

 

EFFECTIVE TAX RATE

 

The reported effective tax rate remained relatively constant at 30.9% and 32.4% for the three and nine months ended September 30, 2011, respectively, compared to 31.0% and 32.2% for the same periods ended September 30, 2010.  During the third quarter of 2011, the tax rate was favorably impacted by a reduction in the amount of current year earnings that were planned to be repatriated from foreign operations in 2011.  The tax rate for the third quarter of 2010 was favorably impacted by certain tax benefits that were recognized in Brazil.

 

NET INCOME ATTRIBUTABLE TO APTARGROUP, INC.

 

We reported net income attributable to AptarGroup, Inc. of $49.3 million and $145.1 million in the third quarter and nine months ended September 30, 2011, respectively, compared to $47.0 million and $132.7 million for the same periods in the prior year.

 

BEAUTY + HOME SEGMENT

 

Beginning with the first quarter of 2011, we are reporting new business segments that reflect our realigned internal financial reporting structure.  Prior period information has been conformed to the current presentation.

Operations that sell dispensing systems primarily to the personal care, fragrance/cosmetic and household markets form the Beauty + Home segment.

 

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2011

 

2010

 

2011

 

2010

 

 

 

 

 

 

 

 

 

 

 

Net Sales

 

$

387,501

 

$

346,108

 

$

1,166,501

 

$

1,029,351

 

Segment Income (1)

 

32,025

 

34,324

 

104,555

 

101,316

 

Segment Income as a percentage of Net Sales

 

8.3

%

9.9

%

9.0

%

9.8

%

 

(1)   The Company evaluates performance of its business segments and allocates resources based upon segment income.  Segment income is defined as earnings before interest expense in excess of interest income, certain corporate expenses and income taxes.  Beginning in 2011, the Company changed the segment income measure to include stock option and certain information technology costs that were historically maintained within Corporate & Other.  Prior period information has been conformed to incorporate this change.

 

Net sales for the quarter ended September 30, 2011 increased 12% to $387.5 million compared to $346.1 million in the third quarter of the prior year.  The weakening of the U.S. dollar compared to the Euro positively impacted sales and represented approximately 6% of the 12% increase in sales.  Excluding changes in exchange rates, sales increased 6% in the third quarter of 2011 compared to the same quarter of the prior year.  Sales, excluding foreign currency changes, to the fragrance/cosmetics were up 5% while personal care markets increased approximately 8% in the third quarter of 2011 compared to the same period in the prior year.  Increases in customer tooling sales of $8.5 million account for the remaining sales growth.

Net sales increased 13% in the first nine months of 2011 to $1.2 billion compared to $1.0 billion in the first nine months of the prior year.  The weakening of the U.S. dollar compared to the Euro positively impacted sales and represented approximately 5% of the 13% increase in sales.  Excluding changes in exchange rates, sales increased 8% for the first nine months of 2011 compared to the same period of the prior year.  Sales of our products, excluding foreign currency changes, to the fragrance/cosmetic and personal care markets increased approximately 12% and 5%, respectively, in the first nine months of 2011 compared to the first nine months of 2010 primarily due to increased demand for our fragrance and cosmetic and personal care dispensing systems.

Segment income for the third quarter of 2011 decreased approximately 7% to $32.0 million from $34.3 million reported in the same period in the prior year.  Profitability decreased primarily due to underutilized capacity, increased legal fees and higher tooling sales, which typically carry lower margins than normal product sales.

Segment income for the first nine months of 2011 increased approximately 3% to $104.6 million compared to $101.3 million reported in the same period in the prior year.  The profitability increase for the first nine months of 2011 is primarily due to the strength of fragrance/cosmetic sales in the first nine months as mentioned above.

 

PHARMA SEGMENT

 

Operations that sell dispensing systems to the pharmaceutical market form the Pharma segment.

 

 

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Table of Contents

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2011

 

2010

 

2011

 

2010

 

 

 

 

 

 

 

 

 

 

 

Net Sales

 

$

146,445

 

$

117,520

 

$

417,152

 

$

348,785

 

Segment Income

 

44,801

 

35,091

 

124,058

 

98,510

 

Segment Income as a percentage of Net Sales

 

30.6

%

29.9

%

29.7

%

28.2

%

 

Net sales for the Pharma segment increased by 25% in the third quarter of 2011 to $146.4 million compared to $117.5 million in the third quarter of 2011.  The weakening of the U.S. dollar compared to the Euro positively impacted sales and represented approximately 10% of the 25% increase in sales.  Sales excluding foreign currency changes to the prescription market increased 8% while sales to the consumer health care market increased 32%.

Net sales for the first nine months of 2011 increased approximately 20% to $417.2 million compared to $348.8 million in the first nine months of the prior year.  The weakening of the U.S. dollar compared to the Euro positively impacted sales and represented approximately 9% of the 20% increase in sales.  Sales, excluding foreign currency changes, to the prescription and consumer health care markets increased approximately 5% and 26%, respectively, in the first nine months of 2011 compared to the same period in the prior year.

Segment income in the third quarter of 2011 increased approximately 28% to $44.8 million compared to $35.1 million reported in the same period in the prior year.  This increase is mainly attributed to higher sales and leveraging of our cost structure from increased unit volumes.

Segment income in the first nine months of 2011 increased approximately 26% to $124.1 million compared to $98.5 million reported in the same period of the prior year.  This increase in segment income is due primarily to the same reasons mentioned above for the third quarter results.

 

FOOD + BEVERAGE SEGMENT

 

Operations that sell dispensing systems primarily to the food and beverage markets form the Food + Beverage segment.

 

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2011

 

2010

 

2011

 

2010

 

 

 

 

 

 

 

 

 

 

 

Net Sales

 

$

67,250

 

$

 53,908

 

$

208,990

 

$

167,792

 

Segment Income

 

6,891

 

6,443

 

23,076

 

24,758

 

Segment Income as a percentage of Net Sales

 

10.2

%

12.0

%

11.0

%

14.8

%

 

Net sales for the quarter ended September 30, 2011 increased approximately 25% to $67.3 million compared to $53.9 million in the third quarter of the prior year.  The weakening of the U.S. dollar compared to the Euro positively impacted sales and represented approximately 4% of the 25% increase in sales.  Approximately 3% of the product sales increase is tooling sales while the pass through of higher resin costs on sales of closures represented 7% of the increase over the prior year.  Excluding foreign currency changes, sales to the food market increased 13% while the beverage market increased approximately 42% mainly due to volume growth in our Asian region.

Net sales for the first nine months of 2011 increased approximately 25% to $209.0 million compared to $167.8 million in the first nine months of the prior year.  The weakening of the U.S. dollar compared to the Euro positively impacted sales and represented approximately 4% of the 25% increase in sales.  Sales excluding foreign currency changes to the food market increased 11% while the beverage markets increased approximately 44%.  Consistent with the third quarter, these increases are mainly due to higher custom tooling sales and stronger demand across all regions and markets.

Segment income in the third quarter of 2011 increased approximately 7% to $6.9 million compared to $6.4 million during the same period in the prior year.  Although we showed strong sales growth, start-up costs for our new U.S. facility and higher structure costs due to the implementation of this new segment combined to partially offset this sales growth.

Segment income in the first nine months of 2011 decreased approximately 7% to $23.1 million compared to $24.8 million reported in the same period of the prior year.  Although we showed strong sales growth, a large percentage of this growth was tooling related which carries lower margins than normal product sales.  Also, resin price increases and higher structure costs due to the implementation of this new segment combined to more than offset the increase in income resulting from the increase in sales.

 

FOREIGN CURRENCY

 

A significant number of our operations are located outside of the United States.  Because of this, movements in exchange rates may have a significant impact on the translation of the financial statements of our foreign entities.  Our primary foreign exchange exposure is to the Euro, but we have foreign exchange exposure to the Brazilian Real, British Pound, Swiss Franc and South American and Asian currencies, among others.  We manage our exposures to foreign exchange principally with forward exchange contracts to hedge certain transactions and firm purchase and sales commitments denominated in foreign currencies.  A weakening U.S. dollar relative to foreign currencies has an additive translation effect on our financial condition and results of operations. Conversely, a strengthening U.S. dollar has a dilutive effect.  In some cases, we sell products denominated in a currency different from the currency in which the related costs are incurred.  Changes in exchange rates on such inter-country sales could materially impact our results of operations.

 

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QUARTERLY TRENDS

 

Our results of operations in the last quarter of the year typically are negatively impacted by plant shutdowns in December.  In the future, our results of operations in a quarterly period could be impacted by factors such as changes in product mix, changes in material costs, changes in growth rates in the industries to which our products are sold, recognition of equity based compensation expense for retirement eligible employees in the period of grant and changes in general economic conditions in any of the countries in which we do business.

We generally incur higher stock option expense in the first quarter compared with the rest of the fiscal year.  Our estimated stock option expense on a pre-tax basis (in $ millions) for the year 2011 compared to 2010 is as follows:

 

 

 

2011

 

2010

 

 

 

 

 

 

 

First Quarter

 

$

7.7

 

$

6.0

 

Second Quarter

 

1.7

 

2.2

 

Third Quarter

 

2.8

 

1.6

 

Fourth Quarter (estimated)

 

1.6

 

1.4

 

 

 

$

13.8

 

$

11.2

 

 

LIQUIDITY AND CAPITAL RESOURCES

 

Our primary sources of liquidity are cash flow from operations and our revolving credit facility.  Cash and equivalents decreased to $371.4 million at September 30, 2011 from $376.4 million at December 31, 2010.  Total short and long-term interest bearing debt increased in the first nine months of 2011 to $401.6 million from $354.3 million at December 31, 2010.  The ratio of our Net Debt (interest bearing debt less cash and cash equivalents) to Net Capital (stockholder’s equity plus Net Debt) was 2.2% at the end of September 2011 compared to a negative 1.8% at December 31, 2010.

In the first nine months of 2011, our operations provided approximately $184.8 million in cash flow compared to $186.5 million for the same period a year ago.  In both periods, cash flow from operations was primarily derived from earnings before depreciation and amortization.  During the first nine months of 2011, we utilized the majority of our operating cash flows to finance capital expenditures and share repurchases.

We used $124.9 million in cash for investing activities during the first nine months of 2011, compared to $89.1 million during the same period a year ago.  The increase in cash used for investing activities is mainly due to $39.7 million more spent on capital expenditures in the first nine months of 2011 compared to the first nine months of 2010 which is primarily related to the investment in our new Food + Beverage facility and increases in custom projects.  Cash outlays for capital expenditures for 2011 are estimated to be approximately $170 million but could vary due to changes in exchange rates as well as the timing of capital projects.

We used approximately $48.7 million of cash on financing activities in the first nine months of 2011 compared to $81.1 million in cash used in the first nine months of the prior year.  The decrease in cash used by financing activities is due primarily to the increase in short-term borrowings to fund higher amounts of repayments of long-term obligations and share repurchases in 2011.

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

 

 

 

Requirement

 

Level at September 30, 2011

Debt to total capital ratio

 

Maximum of 55%

 

23.1%

 

Based upon the above debt to total capital ratio covenant we had the ability to borrow approximately an additional $1.2 billion at September 30, 2011 before the 55% requirement would be exceeded.

Our foreign operations have historically met cash requirements with the use of internally generated cash or borrowings.  These foreign subsidiaries have financing arrangements with several foreign banks to fund operations located outside the U.S., but all these lines are uncommitted.  Cash generated by foreign operations has generally been reinvested locally.  The majority of our $371.4 million in cash and equivalents is located outside of the U.S.

We believe we are in a strong financial position and have the financial resources to meet business requirements in the foreseeable future.  We have historically used cash flow from operations as our primary source of liquidity.  In the event that customer demand would decrease significantly for a prolonged period of time and negatively impact cash flow from operations, we would have the ability to restrict and significantly reduce capital expenditure levels, which historically have been the most significant use of cash for us.  A prolonged and significant reduction in capital expenditure levels could increase future repairs and maintenance costs as well as have a negative impact on operating margins if we were unable to invest in new innovative products.

On October 19, 2011, the Board of Directors declared a quarterly dividend of $0.22 per share payable on November 30, 2011 to stockholders of record as of November 9, 2011.

 

OFF-BALANCE SHEET ARRANGEMENTS

 

We lease certain warehouse, plant and office facilities as well as certain equipment under noncancelable operating leases expiring at various dates through the year 2029.  Most of the operating leases contain renewal options and certain equipment leases include options to purchase during or at the end of the lease term.  Other than operating lease obligations, we do not have any off-balance sheet arrangements.

 

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RECENTLY ISSUED ACCOUNTING STANDARDS

 

In May 2011, the FASB amended the guidance on fair value measurement and disclosure requirements.  The amended guidance results in a consistent definition of fair value and common requirements for measurement of and disclosure about fair value between U.S. GAAP and International Financial Reporting Standards (IFRS).  This guidance will be effective for the Company’s fiscal year ending December 31, 2012.  The Company does not believe that this new guidance will have a material impact on its consolidated financial statements.

In June 2011, the FASB amended the guidance for the presentation of comprehensive income. The amended guidance eliminates certain options for presenting comprehensive income but does not change which components of comprehensive income are recognized in net income or other comprehensive income.  The amended guidance is intended to enhance comparability between entities that report under generally accepted accounting principles and those that report under international financial reporting standards.  This guidance will be effective for the Company’s fiscal year ending December 31, 2012.  The Company does not believe that this new guidance will have a material impact on its consolidated financial statements.

In September 2011, the FASB amended the guidance on the annual testing of goodwill for impairment.  The amended guidance will allow companies to assess qualitative factors to determine if it is more-likely-than-not that goodwill might be impaired and whether it is necessary to perform the two-step goodwill impairment test required under current accounting standards.  This guidance will be effective for the Company’s fiscal year ending December 31, 2012, with early adoption permitted.  The Company does not believe that this new guidance will have a material impact on its consolidated financial statements.

Other accounting standards that have been issued by the FASB or other standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on our consolidated financial statements upon adoption.

 

OUTLOOK

 

As we look to the fourth quarter, we are seeing some caution on the part of certain customers as we head into the end of the year, primarily due to global economic uncertainties.  We believe this situation is temporary and that customers are assessing inventory levels after a relatively active past 12 months.  Some customers are also intensifying price pressures in light of an unstable economic outlook, particularly in the U.S. and Europe.  When we look at the variety of project activity, the strength and focus of our realigned organization, our broad geographic presence, and our strong balance sheet, we are encouraged as we look ahead to 2012.  Currently, we expect fourth quarter diluted earnings per share to be in the range of $.57 to $.62 per share compared to our record fourth quarter $.59 per share in the prior year.

 

FORWARD-LOOKING STATEMENTS

 

This Management’s Discussion and Analysis and certain other sections of this Form 10-Q contain forward-looking statements that involve a number of risks and uncertainties.  Words such as “expects,” “anticipates,” “believes,” “estimates,” and other similar expressions or future or conditional verbs such as “will,” “should,” “would” and “could” are intended to identify such forward-looking statements.  Forward-looking statements are made pursuant to the safe harbor provisions of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 and are based on our beliefs as well as assumptions made by and information currently available to us.  Accordingly, our actual results may differ materially from those expressed or implied in such forward-looking statements due to known or unknown risks and uncertainties that exist in our operations and business environment, including but not limited to:

·                economic, environmental and political conditions worldwide;

·                the cost of materials and other input costs (particularly resin, metal, anodization costs and transportation and energy costs);

·                the availability of raw materials and components (particularly from sole sourced suppliers) as well as the financial viability of these suppliers;

·                changes in customer and/or consumer spending levels;

·                our ability to increase prices;

·                significant fluctuations in foreign currency exchange rates;

·                volatility of global credit markets;

·                our ability to contain costs and improve productivity;

·                changes in capital availability or cost, including interest rate fluctuations;

·                the timing and magnitude of capital expenditures;

·                our ability to identify potential new acquisitions and to successfully acquire and integrate such operations or products;

·                direct or indirect consequences of acts of war or terrorism;

·                the impact of natural disasters;

·                changes or difficulties in complying with government regulation;

·                work stoppages due to labor disputes;

·                fiscal and monetary policy, including changes in worldwide tax rates;

·                competition, including technological advances;

·                difficulties in product development and uncertainties related to the timing or outcome of product development;

·                our ability to protect and defend our intellectual property rights, as well as litigation involving intellectual property rights;

·                the outcome of any legal proceeding that has been or may be instituted against us and others;

·               our ability to meet future cash flow estimates to support our goodwill impairment testing;

·                the demand for existing and new products;

·                our ability to manage worldwide customer launches of complex technical products, in particular in developing markets;

·                the success of our customers’ products, particularly in the pharmaceutical industry;

·                our ability to manage executive successions effectively;

·                significant product liability claims; and

·                other risks associated with our operations.

 

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Although we believe that our 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.  We undertake no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise.  Please refer to Item 1A (“Risk Factors”) of Part I included in the Company’s Annual Report on Form 10-K for additional risk factors affecting the Company.

 

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ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

A significant number of our operations are located outside of the United States.  Because of this, movements in exchange rates may have a significant impact on the translation of the financial condition and results of operations of our entities.  Our primary foreign exchange exposure is to the Euro, but we also have foreign exchange exposure to the Brazilian Real, British Pound, Swiss Franc and South American and Asian currencies, among others.  A weakening U.S. dollar relative to foreign currencies has an additive translation effect on our financial condition and results of operations.  Conversely, a strengthening U.S. dollar has a dilutive effect.

Additionally, in some cases, we sell products denominated in a currency different from the currency in which the related costs are incurred.  Any changes in exchange rates on such inter-country sales may impact our results of operations.

We manage our 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, 2011 about our forward currency exchange contracts.  The majority of the contracts expire before the end of the fourth quarter of 2011 with the exception of a few contracts that expire in the third quarter of 2013.

 

 

 

 

 

 

Average

 

Min / Max

 

 

 

Contract Amount

 

Contractual

 

Notional

 

Buy/Sell

 

(in thousands)

 

Exchange Rate

 

Volumes

 

 

 

 

 

 

 

 

 

Euro/U.S. Dollar

 

$

104,962

 

1.3517

 

8,320-104,962

 

Swiss Franc/Euro

 

32,065

 

0.8282

 

32,065-44,994

 

British Pound/Euro

 

11,589

 

1.1461

 

11,121-17,910

 

Euro/Mexican Peso

 

10,795

 

17.7707

 

4,430-10,795

 

Czech Koruna/Euro

 

9,804

 

0.0407

 

9,377-9,839

 

Euro/Brazilian Real

 

4,202

 

4.3378

 

4,202-4,202

 

Euro/Argentinian Peso

 

2,679

 

6.1900

 

2,679-2,679

 

Chinese Yuan/U.S. Dollar

 

1,200

 

0.1553

 

1,200-2,400

 

Euro/Chinese Yuan

 

1,005

 

8.7369

 

764-1,005

 

Other

 

4,555

 

 

 

 

 

Total

 

$

182,856

 

 

 

 

 

 

As of September 30, 2011, we have recorded the fair value of foreign currency forward exchange contracts of $0.9 million in prepaid and other, $2.4 million in accounts payable and accrued liabilities and $1.9 million in deferred and other non-current liabilities in the balance sheet.

During 2011, the Company maintained an interest rate swap to convert a portion of its fixed-rate debt into variable-rate debt.  Under the interest rate swap contract, the Company exchanged, at specified intervals, the difference between fixed-rate and floating-rate amounts, which was calculated based on an agreed upon notional amount.  As of May 31, 2011, this interest rate swap contract matured and was not renewed.  No gain or loss was recorded in the income statement in 2010 or the nine months ended September 30, 2011 as any hedge ineffectiveness for the period was immaterial.

As of September 30, 2011, the Company had one foreign currency cash flow hedge.  A French subsidiary of AptarGroup, AptarGroup Holding SAS, has hedged the risk of variability in Euro equivalent associated with the cash flows of an intercompany loan granted in Brazilian Real.  The forward contracts utilized were designated as a hedge of the changes in the cash flows relating to the changes in foreign currency rates relating to the loan and related forecasted interest.  The notional amount of the foreign currency forward contracts utilized to hedge cash flow exposure was 1.3 million Brazilian Real ($0.7 million) as of September 30, 2011.  The notional amount of the foreign currency forward contracts utilized to hedge cash flow exposure was 2.7 million Brazilian Real ($1.6 million) as of September 30, 2010.  During the three and nine months ended September 30, 2011, the Company did not recognize any net gain (loss) as any hedge ineffectiveness for the period was immaterial, and the Company did not recognize any net gain (loss) related to the portion of the hedging instrument excluded from the assessment of hedge effectiveness.  These foreign currency forward contracts hedge forecasted transactions for approximately six months (March 2012).

 

ITEM 4.  CONTROLS AND PROCEDURES

 

DISCLOSURE CONTROLS AND PROCEDURES

 

The Company’s management has evaluated, with the participation of the chief executive officer and chief financial officer of the Company, the effectiveness of the Company’s disclosure controls and procedures (as that term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) as of September 30, 2011.  Based on that evaluation, the chief executive officer and chief financial officer have concluded that these controls and procedures were effective as of such date.

 

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

 

No change in the Company’s internal control over financial reporting (as such term is defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) occurred during the Company’s fiscal quarter ended September 30, 2011 that materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

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PART II - OTHER INFORMATION

 

ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

RECENT SALES OF UNREGISTERED SECURITIES

 

The employees of AptarGroup S.A.S. and Valois S.A.S., our subsidiaries, are eligible to participate in the FCP Aptar Savings Plan (the “Plan”).  All eligible participants are located outside of the United States.  An independent agent purchases shares of our Common Stock available under the Plan for cash on the open market and we do not issue shares.  We do not receive any proceeds from the purchase of shares of our Common Stock under the Plan.  The agent under the Plan is Banque Nationale de Paris Paribas Fund Services.  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.  During the quarter ended September 30, 2011, the Plan purchased 1,934 shares of our Common Stock on behalf of the participants at an average price of $47.28 per share, for an aggregate amount of $91 thousand, and sold 1,040 shares of our Common Stock on behalf of the participants at an average price of $54.34 per share, for an aggregate amount of $57 thousand.  At September 30, 2011, the Plan owns 28,246 shares of our Common Stock.

 

ISSUER PURCHASES OF EQUITY SECURITIES

 

The following table summarizes the Company’s purchases of its securities for the quarter ended September 30, 2011:

 

 

Period

 

Total Number
Of Shares
Purchased

 

Average Price
Paid Per Share

 

Total Number Of Shares
Purchased As Part Of
Publicly Announced
Plans Or Programs

 

Maximum Number Of
Shares That May Yet Be
Purchased Under The

Plans Or Programs

 

 

 

 

 

 

 

 

 

 

 

7/1 – 7/31/11

 

140,000

 

$

51.92

 

140,000

 

4,720,943

 

8/1 – 8/31/11

 

587,485

 

47.78

 

587,485

 

4,133,458

 

9/1 – 9/30/11

 

72,515

 

47.88

 

72,515

 

4,060,943

 

Total

 

800,000

 

$

48.52

 

800,000

 

4,060,943

 

 

The Company announced the existing repurchase program on July 17, 2008.  On July 19, 2011, the Company announced that its Board of Directors authorized the Company to repurchase an additional four million of its outstanding shares.  There is no expiration date for these repurchase programs.

 

ITEM 5.  OTHER INFORMATION

 

On November 2, 2011, in connection with the previously announced retirement of President and Chief Executive Officer Peter Pfeiffer that will be effective December 31, 2011, AptarGroup entered into a two-year Consulting Agreement with Mr. Pfeiffer, to become effective January 1, 2012 (“Consulting Agreement”). The Consulting Agreement may be terminated by Mr. Pfeiffer at any time upon 30 days written notice.  Compensation for the consulting services to be provided by Mr. Pfeiffer will be $450,000 per year and will be paid in equal monthly installments. Pursuant to the Consulting Agreement, Mr. Pfeiffer will be an independent contractor, rather than an employee, of AptarGroup.  In addition, the Consulting Agreement contains restrictive covenants prohibiting Mr. Pfeiffer from competing with AptarGroup or soliciting its employees during the term of the Consulting Agreement.

 

The foregoing description of the Consulting Agreement is qualified in its entirety by reference to the full text of the Consulting Agreement, a copy of which is attached hereto as Exhibit 10.1 and incorporated herein by reference.

 

ITEM 6.  EXHIBITS

 

Exhibit 10.1

 

Consulting Agreement between AptarGroup, Inc. and Peter Pfeiffer dated November 2, 2011.

 

 

 

Exhibit 10.2

 

AptarGroup, Inc. Stock Option Agreement for Employees pursuant to the AptarGroup, Inc. 2011 Stock Awards Plan.

 

 

 

Exhibit 10.3

 

AptarGroup, Inc. Restricted Stock Unit Award Agreement pursuant to the AptarGroup, Inc. 2011 Stock Awards Plan.

 

 

 

Exhibit 31.1

 

Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

Exhibit 31.2

 

Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

Exhibit 32.1

 

Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 

Exhibit 32.2

 

Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 

Exhibit 101

 

The following financial information from our Quarterly Report on Form 10-Q for the third quarter of fiscal 2011, filed with the SEC on November 2, 2011, formatted in Extensible Business Reporting Language (XBRL): (i) the Condensed Consolidated Statements of Income - Three and Nine Months Ended September 30, 2011 and 2010, (ii) the Condensed Consolidated Balance Sheets - September 30, 2011 and December 31, 2010, (iii) the Condensed Consolidated Statements of Changes in Equity - Nine Months Ended September 30, 2011 and 2010, (iv) the Condensed Consolidated Statements of Cash Flows - Nine Months Ended September 30, 2011 and 2010 and (v) the Notes to Condensed Consolidated Financial Statements.(1)

 

 

 

(1)

 

The XBRL related information in Exhibit 101 to this Quarterly Report on Form 10-Q shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to liability of that section and shall not be incorporated by reference into any filing or other document pursuant to the Securities Act of 1933, except as shall be expressly set forth by specific reference in such filing or document.

 

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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/ ROBERT W. KUHN

 

Robert W. Kuhn

 

Executive Vice President,

 

Chief Financial Officer and Secretary

 

(Duly Authorized Officer and

 

Principal Financial Officer)

 

 

 

 

 

Date: November 2, 2011

 

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Table of Contents

 

INDEX OF EXHIBITS

 

Exhibit

 

 

Number

 

Description

 

 

 

10.1

 

Consulting Agreement between AptarGroup, Inc. and Peter Pfeiffer dated November 2, 2011.

 

 

 

10.2

 

AptarGroup, Inc. Stock Option Agreement for Employees pursuant to the AptarGroup, Inc. 2011 Stock Awards Plan.

 

 

 

10.3

 

AptarGroup, Inc. Restricted Stock Unit Award Agreement pursuant to the AptarGroup, Inc. 2011 Stock Awards Plan.

 

 

 

31.1

 

Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

31.2

 

Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

32.1

 

Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 

32.2

 

Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 

101

 

The following financial information from our Quarterly Report on Form 10-Q for the third quarter of fiscal 2011, filed with the SEC on November 2, 2011, formatted in Extensible Business Reporting Language (XBRL): (i) the Condensed Consolidated Statements of Income - Three and Nine Months Ended September 30, 2011 and 2010, (ii) the Condensed Consolidated Balance Sheets - September 30, 2011 and December 31, 2010, (iii) the Condensed Consolidated Statements of Changes in Equity - Nine Months Ended September 30, 2011 and 2010, (iv) the Condensed Consolidated Statements of Cash Flows - Nine Months Ended September 30, 2011 and 2010 and (v) the Notes to Condensed Consolidated Financial Statements.(1)

 

 

 

(1)

 

The XBRL related information in Exhibit 101 to this Quarterly Report on Form 10-Q shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to liability of that section and shall not be incorporated by reference into any filing or other document pursuant to the Securities Act of 1933, as amended, except as shall be expressly set forth by specific reference in such filing or document.

 

25