AptarGroup, Inc. — Q1 2015 Form 10-Q
Business and period: The filing covers the three months ended March 31, 2015, compared with Q1 2014. AptarGroup develops and manufactures dispensing systems and packaging components through its Beauty + Home, Pharma, and Food + Beverage segments. Amounts below are in U.S. dollars; financial statement amounts are shown in millions unless stated otherwise.
Financial performance
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Net sales | $589.8 | $676.1 | -13% reported; -1% excluding currency effects |
| Operating income | $73.6 | $78.7 | -6.5% reported; +$7.0 million excluding currency effects |
| Operating margin | 12.5% | 11.6% | +0.9 percentage points |
| Net income attributable to AptarGroup | $45.2 | $48.4 | -6.6% |
| Diluted EPS | $0.70 | $0.71 | -1.4% |
| Operating cash flow | $39.1 | $32.0 | +$7.0 million |
| Capital expenditures | $26.9 | $42.9 | -$16.0 million |
Cost of sales declined to 65.4% of sales from 67.1%; net income margin was 7.6% versus 7.2%. The effective tax rate was 33.4%, down from 34.3%.
Segments and drivers
- Beauty + Home: Net sales were $329.4 million, down 16% reported and 4% excluding currency effects. Segment income was $23.4 million, down 16%; margin held at 7.1%. Softer demand across regions and markets weighed on sales.
- Pharma: Net sales were $178.7 million, down 8% reported but up 7% excluding currency effects. Segment income was $52.0 million, down 1% reported; margin improved to 29.1% from 27.0%. Growth included prescription-market launches and stronger consumer-health products.
- Food + Beverage: Net sales were $81.7 million, down 10% reported and 4% excluding currency effects. Segment income was essentially flat at $9.1 million; margin rose to 11.1% from 10.0%. Beverage customer destocking and lower food tooling sales affected revenue.
A stronger U.S. dollar reduced reported sales by 12% overall, with negative currency impacts of 12% in Beauty + Home, 15% in Pharma, and 6% in Food + Beverage. Lower resin costs and the timing of resin pass-throughs, cost-saving initiatives, and favorable segment mix supported margins and constant-currency operating results. SG&A fell in reported dollars but increased about $1.2 million excluding currency effects, partly from R&D, ERP implementation, and stock compensation costs.
Cash, liquidity, debt, and capital allocation
- Cash and equivalents were $385.7 million at March 31, down from $399.8 million at year-end. The quarter’s $14.1 million cash decline included a $29.2 million adverse exchange-rate effect.
- Total short- and long-term interest-bearing debt was $834.8 million, versus $840.9 million at December 31, 2014. Net debt to net capital rose to 30.4% from 28.6%.
- The company issued $225 million of private-placement notes in February: $125 million due in 11 years at 3.61% and $100 million due in 9 years at 3.49%; proceeds repaid revolving credit borrowings. No amount was outstanding on the $300 million revolving facility at quarter-end.
- Debt covenants were comfortably met: leverage ratio 1.12 to 1.00 against a maximum 3.50; interest coverage 19.27 to 1.00 against a minimum 3.00. Management stated the company had resources to meet foreseeable business requirements.
- 2015 capital expenditures were estimated at approximately $150 million. The quarterly dividend was $0.28 per share, compared with $0.25 in Q1 2014. No shares were repurchased during Q1; the $250 million accelerated repurchase program remained subject to final settlement, expected by September 2015.
Outlook, risks, and unusual items
Management expected Q2 to deliver solid earnings growth on a comparable currency-adjusted basis, while warning that foreign exchange would remain a significant headwind and that macroeconomic growth was uncertain. Q2 EPS guidance was $0.73–$0.78, versus reported prior-year EPS of $0.79; management cited approximately $0.66 as the prior-year comparable EPS at similar exchange rates. The company also forecast full-year 2015 stock-option expense of approximately $17.8 million.
- Other key risks identified include foreign exchange, demand and customer spending, resin and other input costs, supplier availability, cost-control and productivity execution, capital spending, acquisitions, regulation, cybersecurity, litigation, product liability, and product development and launch execution.
- A September 2014 fire damaged a Brazilian facility. Repairs were progressing; a $2.0 million insurance receivable was recorded, with a final settlement expected in the second half of 2015. The incident had no material Q1 2015 impact.
- Management said ordinary-course lawsuits and claims were not expected to materially affect the company, but acknowledged that outcomes are uncertain and could exceed recorded accruals.
- Foreign-currency translation drove a $139.2 million other comprehensive loss, producing a $92.9 million comprehensive loss attributable to AptarGroup despite positive net income.
Important facts for investors to verify
- Whether Q2 EPS and full-year capital expenditure expectations were achieved, especially given continuing currency pressure.
- How much reported sales and earnings trends reflect underlying volume, product mix, and pricing versus exchange rates.
- Final settlement of the accelerated share repurchase and the resulting share count and capital structure.
- Progress on the Brazilian facility repairs and recovery of the recorded insurance receivable.
- Debt, cash availability, and covenant headroom, including the location of cash held outside the United States and potential repatriation tax costs.