UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549-1004

FORM 10-Q

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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

COMMISSION FILE NUMBER 1-11846

AptarGroup, Inc.

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 x No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Yes x No o

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date (July 28, 2004).

Common Stock          36,405,688

AptarGroup, Inc.

Form 10-Q

Quarter Ended June 30, 2004

INDEX

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PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)

AptarGroup, Inc.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)

In thousands, except per share amounts

See accompanying notes to consolidated financial statements.

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AptarGroup, Inc.
CONSOLIDATED BALANCE SHEETS
(Unaudited)

In thousands, except per share amounts      

See accompanying notes to consolidated financial statements.

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AptarGroup, Inc.
CONSOLIDATED BALANCE SHEETS
(Unaudited)

In thousands, except per share amounts      

See accompanying notes to consolidated financial statements.

3

AptarGroup, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

In thousands, brackets denote cash outflows      

See accompanying notes to consolidated financial statements.

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AptarGroup, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in Thousands, Except per Share Amounts, or Otherwise Indicated)
(Unaudited)
 

NOTE 1 — BASIS OF PRESENTATION

The accompanying unaudited 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.

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NOTE 2 — INVENTORIES

At June 30, 2004 and December 31, 2003, approximately 21% and 23%, respectively, of the total inventories are accounted for by using the last-in, first-out (LIFO) method, while the remaining inventories are valued using the first-in, first-out (FIFO) method. Inventories, by component, consisted of:

     Inventories are stated at cost, which is lower than market. Costs included in inventories are raw materials, direct labor and manufacturing overhead.

NOTE 3 — GOODWILL AND OTHER INTANGIBLE ASSETS

The table below shows a summary of intangible assets as of June 30, 2004 and December 31, 2003.

     Aggregate amortization expense for the intangible assets above for the three months ended June 30, 2004 and June 30, 2003 was $553 and $497, respectively. Aggregate amortization expense for the intangible assets above for the six months ended June 30, 2004 and June 30, 2003 was $1,139 and $972, respectively.

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

     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 June 30, 2004.

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     The changes in the carrying amount of goodwill since the year ended December 31, 2003 are as follows by reporting segment:

NOTE 4 — COMPREHENSIVE INCOME/(LOSS)

AptarGroup’s total comprehensive income was as follows:

NOTE 5 — RETIREMENT AND DEFERRED COMPENSATION PLANS

Components of Net Periodic Benefit Cost:

Employer Contributions:

The Company previously disclosed in its financial statements for the year ended December 31, 2003, that it expected to contribute approximately $1.6 million to its foreign defined benefit plans and that the Company did not expect to contribute to its domestic defined benefit plans in 2004. As of June 30, 2004, the Company contributed approximately $0.4 million to its foreign plans and did not contribute to its domestic plans. The Company presently anticipates contributing an additional $1.2 million to fund its foreign plans and does not anticipate contributing to its domestic plans in 2004.

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NOTE 6 — 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 currency 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 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 and collars, currency swaps, options and cross currency swaps to hedge these risks.

FAIR VALUE HEDGES

CASH FLOW HEDGES

HEDGE OF NET INVESTMENTS IN FOREIGN OPERATIONS

OTHER

NOTE 7 — 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. Management believes the resolution of these claims and lawsuits will not have a material adverse or positive effect on the Company’s financial position, results of operations or cash flow.

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NOTE 8 — STOCK REPURCHASE PROGRAM

In July 2004, the Board of Directors authorized the repurchase of an additional two million shares of the Company’s outstanding common stock, bringing the maximum number of shares to be repurchased to five million. The timing of and total amount expended for the share repurchase depends upon market conditions. During the quarter ended June 30, 2004, the Company repurchased 100 thousand shares for an aggregate amount of $3.9 million. The cumulative total number of shares repurchased through June 30, 2004 was approximately 1.5 million shares for an aggregate amount of $42.2 million.

NOTE 9 — EARNINGS PER SHARE

AptarGroup’s authorized common stock consists of 99 million shares, having a par value of $0.01 each. Information related to the calculation of earnings per share is as follows:

NOTE 10 — 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 primarily based upon individual business units, which resulted from historic acquisitions or internally created business units. All of the business units sell primarily dispensing systems. These business units all require similar production processes, sell to similar classes of customers and markets, use the same methods to distribute products and operate in similar regulatory environments. Based on the current economic characteristics of the Company’s business units, the Company has identified two reportable segments: Dispensing Systems and SeaquistPerfect.

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     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, 2003. The Company evaluates performance of its business units and allocates resources based upon earnings before interest expense in excess of interest income, corporate expenses and income taxes (collectively referred to as “EBIT”) excluding unusual items. The Company accounts for intersegment sales and transfers as if the sales or transfers were to third parties.

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

Reconciliation of segment EBIT to consolidated income before income taxes is as follows:

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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

NET SALES

Net sales for the quarter and six months ended June 30, 2004 of $311.8 million and $627.4 million increased 8% and 13%, respectively, over the same periods a year ago. Changes in currency rates from 2003 to 2004 accounted for approximately half of the increase in sales for both the quarter and six month periods. Sales of tooling to customers also increased approximately $2 million and $13 million for the quarter and six months ended June 30, 2004, respectively. Excluding changes in foreign currency rates, the changes in sales by market were as follows:

	•		Our sales to the personal care market increased approximately 5% and 7% for the quarter and six months ended June 30, 2004, respectively, reflecting unit sales growth of both dispensing closures and spray pumps. Price competition for our dispensing closure product line continues to affect this market reducing selling prices.
	•		Our sales to the fragrance/cosmetic market increased 2% and 1% for the quarter and six months ended June 30, 2004, respectively. Price competition continues to impact the low-end sector of this market.
	•		Our sales to the pharmaceutical market decreased 1% and increased 5% for the quarter and six months ended June 30, 2004, respectively. Product mix had a negative impact on sales growth as sales of metered dose aerosol valves increased in both the quarter and six months ended while sales of spray pumps decreased over the same period. Typically, pharmaceutical spray pumps have a higher unit selling price than metered dose aerosol valves. The decrease in sales of pharmaceutical spray pumps for the first half of the year is due primarily to one customer that dramatically reduced its purchases beginning in the second half of 2003 to reduce its inventory levels. Sales for the quarter included approximately $1 million of milestone revenue relating to a customer project. The six months ended June 30, 2004 includes approximately a $7 million increase in sales of custom tooling primarily related to one specific customer project. The customer associated with this project has canceled the launch of this project. No sales were forecasted in 2004, but previously expected product sales in late 2005 and beyond will not be realized. However, we expect sales of our current dispensing system to this customer to continue into the future.
	•		Our sales to the food/beverage markets increased approximately 28% for both the quarter and six months ended June 30, 2004, reflecting the continued acceptance of our dispensing closure product range in this market.
	•		Our sales to the household market increased approximately 8% and 10% for the quarter and six months ended June 30, 2004, respectively, reflecting sales growth in both aerosol valves and spray pumps.

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

COST OF SALES (EXCLUSIVE OF DEPRECIATION SHOWN BELOW)

Our cost of sales as a percent of net sales increased to 66.1% in the second quarter compared to 65.4% in the second quarter of 2003. The following factors influenced our cost of sales percentage in the quarter ended June 30, 2004:

Continued Price Pressure. Pricing pressure continues in all the markets we serve, particularly in the low-end of the fragrance/cosmetic market and dispensing closure product range. We saw an increase in both direct and indirect competition from Asian suppliers. Directly, Asian suppliers continue to export more spray pumps in particular to the U.S. market. Indirectly, some fragrance marketers in the U.S. have started sourcing their entire product in Asia and importing the finished product back into the U.S. Price reductions, particularly in the areas previously mentioned, greater than cost savings achieved through productivity gains had a negative impact on cost of sales.

Strengthening of the Euro. We are a net exporter from Europe of products produced in Europe with costs denominated in Euros. As a result, when the Euro strengthens against the U.S. dollar or other currencies, products produced in and exported from Europe and sold in currencies which have weakened against the Euro increase our costs, thus having a negative impact on cost of sales as a percentage of net sales.

Rising Raw Material Costs. Raw material costs, in particular plastic resin and metal, increased in the second quarter and first half of 2004. Only a portion of these raw material price increases have been passed on to customers with the net effect bringing a reduction in margin.

Operating Losses and Shut Down Expenses for a Mold Manufacturing Facility in the U.S. We decided in the first quarter of 2004 to close a mold manufacturing facility in the U.S. Due to a reduction in the volume of business in the second quarter of 2004, this facility lost approximately $600 thousand. In addition, approximately $400 thousand of shut down and related severance charges were recorded relating to approximately 40 people and are included in cost of goods sold during the second quarter. This facility will be completely vacated early in the third quarter of 2004. The majority of these expenses are shown in cost of goods sold.

Our cost of sales as a percent of net sales increased to 66.6% for the six months ended June 30, 2004 compared to 65.2% for the same period a year ago. In addition to the items already mentioned above relating to the second quarter, the following factors influenced our cost of sales percentage in the first half of 2004:

Increased Sales of Custom Tooling. We saw approximately a $13 million increase in sales of custom tooling in the first half of 2004. Traditionally, sales of custom tooling generates lower margins than our regular product sales and thus, any increased sales of custom tooling negatively impacts cost of sales as a percentage of sales.

Operating Losses and Shut Down Expenses for a Mold Manufacturing Facility in the U.S. Due to the reduction in the volume of business in the first half of 2004, this facility lost approximately $1.3 million. In addition, approximately $900 thousand of shut down and related severance charges were recorded relating to approximately 40 people and are included in cost of goods sold during the first half of 2004.

Sale of Building. In the first quarter of 2004, we sold a production facility and realized a gain on the sale of the building of approximately $1 million. The gain is included in cost of goods sold.

SELLING, RESEARCH & DEVELOPMENT AND ADMINISTRATIVE

Our Selling, Research & Development and Administrative expenses (“SG&A”) increased by approximately $1.9 million in the second quarter of 2004 compared to the same period a year ago. Approximately $1.7 million of the increase in SG&A is related to the strengthened Euro versus the U.S. dollar compared to the prior year. The remainder of the increase is due to normal inflationary costs and wage increases. Approximately 60% of our business is based in

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Europe and has costs denominated in Euros. SG&A as a percentage of net sales for the quarter ended June 30, 2004 decreased to 15.0% from 15.6% in 2003.

DEPRECIATION AND AMORTIZATION

Depreciation and amortization increased approximately $1.9 million in the second quarter of 2004 to $23.4 million compared to $21.5 million in the second quarter of 2003. Approximately $0.8 million of the increase is due to changes in foreign currency rates compared to the U.S. dollar in 2004. The remaining increase primarily relates to increased capital expenditures in prior years.

NET OTHER EXPENSE

Net other expenses in the second quarter of 2004 increased to $1.9 million from $1.5 million in the prior year primarily reflecting increased foreign currency losses of approximately $0.3 million.

EFFECTIVE TAX RATE

The reported effective tax rate for the three months and six months ended June 30, 2004 was 32% compared to 33.2% and 33.3%, for the same periods a year ago. The decrease in the effective tax rate is primarily attributed to the mix of income earned.

NET INCOME

We reported net income for the second quarter of 2004 of $22.8 million compared to $21.3 million reported in the second quarter of 2003. Net income for the six months ended June 30, 2004 was $44.0 million compared to $40.6 million for the first six months of the prior year.

DISPENSING SYSTEMS SEGMENT

The Dispensing Systems segment is an aggregate of four of our five business units. The Dispensing Systems segment sells primarily non-aerosol spray and lotion pumps, plastic dispensing closures, and metered dose aerosol valves. These three products are sold to all the markets we serve.

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Our net sales for the Dispensing Systems segment grew by approximately 8% in the second quarter of 2004 over the second quarter of 2003 reflecting strong sales of our dispensing closure product range to the food/beverage and personal care markets as well as increased sales of our pumps to the fragrance/cosmetic market. The strengthening Euro also helped contribute to the sales increase. Net sales excluding changes in foreign currency exchange rates increased approximately 2% from the prior year.

SEAQUISTPERFECT SEGMENT

SeaquistPerfect represents our fifth business unit and sells primarily aerosol valves and accessories and certain non-aerosol spray and lotion pumps. These products are sold primarily to the personal care, household, and food/beverage markets.

     Net sales for the quarter ended June 30, 2004 increased 11% or approximately $5.2 million to $50.9 million from $45.7 million reported in the second quarter of the prior year. Net sales excluding changes in foreign currency exchange rates increased approximately 8% from the prior year. Net sales increased for both the personal care and household markets, reflecting strong sales of spray and lotion pumps and aerosol valves.

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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 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 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.

QUARTERLY TRENDS

Our results of operations in the second half of the year typically are negatively impacted by customer plant shutdowns in the summer months in Europe and 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, and changes in general economic conditions in any of the countries in which we do business.

LIQUIDITY AND CAPITAL RESOURCES

Our primary sources of liquidity are cash flow from operations and our revolving credit facility. Our financial condition continued to strengthen in the second quarter of 2004. Cash and equivalents increased to $187.1 million from $165.0 million at December 31, 2003. Total short and long-term interest bearing debt decreased in the quarter to $215.9 million from $221.9 million at December 31, 2003. The ratio of Net Debt (interest bearing debt less cash and cash equivalents) to Net Capital (stockholder’s equity plus Net Debt) decreased to approximately 3% compared to 7% as of December 31, 2003.

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

     Our foreign operations have historically met cash requirements with the use of internally generated cash or borrowings. 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 $187.1 million in cash and equivalents is located outside of the U.S. We are expecting to repatriate, net of applicable taxes, approximately $44 million during the third quarter of 2004.

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 2018. 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. We have an option on one building lease to purchase the building during or at the end of the term of the lease at approximately the amount expended by the lessor for the purchase of the building and improvements. If we do not exercise the purchase option at the end of the lease, we would be required to pay an amount not to exceed $9.5 million. Other than operating lease obligations, we do not have any off-balance sheet arrangements.

ADOPTION OF ACCOUNTING STANDARDS

In December 2003, the Financial Accounting Standards Board, (“FASB”) issued Interpretation No. (“FIN”) 46R, “Consolidation of Variable Interest Entities.” The objective of FIN 46 is to improve financial reporting by companies involved with variable interest entities. Prior to FIN 46R, companies have generally included another entity in its consolidated financial statements only if it controlled the entity through voting interest. FIN 46R changes that by requiring a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk or loss from the variable interest entity’s activities or entitled to receive a majority of the entity’s residual returns or both. Consolidation by a primary beneficiary of the assets, liabilities and results of activities of variable interest entities will provide more complete information about the resources, obligations, risks and opportunities of the consolidated company. We do not have any investments in variable interest entities.

OUTLOOK

The positive momentum we experienced in the first half of the year is expected to continue into the third quarter. Sales of our products to each of the markets we serve are expected to increase over the prior year. Sales of our products to the pharmaceutical market are expected to increase, particularly in light of anticipated expanding sales of our products to the generic pharmaceutical market. In addition, a pharmaceutical customer who had significantly reduced orders for pumps late in 2003 has begun placing orders. Our sales to the food/beverage and personal care markets are expected to increase as customers continue to launch new products into these markets. Sales of our fragrance/cosmetic and household products are also expected to increase over prior year third quarter volumes.

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     We have filed for tax refunds totaling approximately $1.5 million in the U.S. relating to research and development expenditures incurred from 2000 through 2002. These refunds will be recognized as a reduction of our tax provision when they are received. If the tax refunds are received, we will have to pay contingent consulting fees which will be recorded in SG&A.

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:

     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.

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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 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.

All the contracts expire before the end of the second quarter of 2005.