AptarGroup, Inc. — Q1 2013 Form 10-Q
Business context and reporting period. The filing covers the three months ended March 31, 2013, compared with the three months ended March 31, 2012. AptarGroup develops, manufactures and sells dispensing systems and packaging components through Beauty + Home, Pharma, and Food + Beverage. Figures below are in millions except per-share data.
Financial performance and liquidity
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Net sales | $617.6 | $592.5 | +4% |
| Operating income | $64.6 | $70.4 | −8% |
| Net income attributable to AptarGroup | $40.0 | $43.8 | −9% |
| Diluted EPS | $0.59 | $0.64 | −8% |
| Operating cash flow | $26.1 | $13.7 | +$12.5 |
| Capital expenditures | $34.8 | $42.5 | −$7.7 |
- Reported operating margin was approximately 10.5%, versus 11.9%; net margin was approximately 6.5%, versus 7.4%. Cost of sales was 67.8% of sales, compared with 67.7%.
- Operating cash flow less capital expenditures was approximately negative $8.7 million, versus negative $28.8 million. Cash and equivalents were $225.1 million at quarter-end, down from $229.8 million at year-end.
- Total short- and long-term interest-bearing debt was $441.6 million, up from $427.5 million at December 31, 2012. Net debt to net capital was 13.5%, versus 12.5%.
- The $300 million U.S. revolving credit facility had $250 million unused and available. The company reported covenant debt-to-total-capital of 24.1%, against a 55% maximum.
- The quarterly dividend was $0.25 per share, compared with $0.22 a year earlier. The company repurchased 201,000 shares for $10.8 million in the quarter.
Material changes and segment results
- Sales increased 4% as reported, including $35.4 million from the 2012 Stelmi acquisition. Excluding acquisitions and foreign exchange, sales decreased 1%; currency movements reduced reported sales growth by 1%.
- Beauty + Home: Sales fell 4% to $363.5 million and segment income fell 26% to $24.4 million. Management cited weaker sales and tooling, North American productivity issues, and higher labor costs.
- Pharma: Sales increased 21% to $168.9 million and segment income increased 17% to $46.0 million, supported by Stelmi. Excluding acquisitions and currency, sales declined 4%, including customer inventory destocking and continued European consumer health care softness.
- Food + Beverage: Sales increased 13% to $85.3 million and segment income increased 26% to $8.6 million, with tooling and product sales growth, improved productivity and better cost absorption.
- Operating income declined despite Stelmi’s contribution because of lower core sales, increased expenses, and $4.5 million of restructuring-related charges and depreciation. Net other expense increased to $5.2 million from $4.1 million, primarily due to costs associated with foreign-exchange hedges.
- Comprehensive income attributable to AptarGroup was $5.6 million, versus $86.2 million, largely reflecting a $35.6 million foreign-currency translation loss in Q1 2013 versus a $41.7 million translation gain in Q1 2012.
Outlook, risks and unusual items
- Management guided to Q2 2013 EPS of $0.73–$0.78, compared with $0.61 a year earlier; prior-year EPS included a $0.05 per-share Stelmi acquisition cost. Guidance excluded any EOO restructuring impact.
- Management expected Beauty + Home income to improve from Q1, more normalized order levels in legacy Pharma markets, continued good Stelmi performance, and Food + Beverage growth for the year if global economies did not deteriorate. 2013 capital expenditures were estimated at approximately $160 million.
- The European Operations Optimization plan covers capacity consolidation across 12 facilities; two facilities are expected to close, affecting approximately 170 employees. Estimated total cost is about $18 million, including non-cash costs. Q1 included $4.1 million of expense and $0.5 million of accelerated depreciation; approximately $9 million of additional costs was expected, mostly in 2013. Annual savings were estimated at about $12 million beginning in late 2013.
- The effective tax rate was 32.7%, down from 33.9%, including a benefit from an Italian tax-law change, partly offset by a new French distribution tax. The company expected to repatriate $76 million of current-year earnings in the first half of 2013; no funds were repatriated in Q1.
- Key risks cited include foreign-exchange movements, resin and other input costs, customer demand, productivity, execution of the European optimization plan, supplier availability, litigation, product liability, regulation, cybersecurity and economic conditions. The company reported a U.S. patent-infringement ruling against a subsidiary, appealed and awaiting a court decision; no damages had been assessed, and the ruling did not cover manufacturing or sales outside the United States.
- Management stated that ordinary-course legal claims were not expected to materially affect results, but acknowledged that unfavorable outcomes could exceed accruals and have a material effect. No off-balance-sheet arrangements were reported other than operating leases.
Important facts for investors to verify
- Whether underlying sales and margins recover, particularly in Beauty + Home and legacy Pharma, and how much Q1 growth depended on Stelmi.
- Delivery of the EOO plan’s remaining cost estimates, facility closures, employee impacts, timing and projected savings.
- Progress toward Q2 EPS guidance and the assumptions for normalized Pharma orders and Food + Beverage growth.
- Cash conversion, planned capital spending, borrowing needs, and the tax and cash effects of the expected $76 million repatriation.
- Developments in the patent appeal and any changes in litigation or uncertain-tax-position exposure.
- Exposure to currency movements and input-cost increases, including any lag in passing higher resin costs on to customers.