AptarGroup, Inc. 10-Q Summary: Quarter Ended September 30, 2009
Business Context and Reporting Period
This is a Quarterly Report (Form 10-Q) for AptarGroup, Inc., a Delaware corporation, for the period ended September 30, 2009. The company operates in the packaging components industry, developing and manufacturing consumer product dispensing systems. Operations are organized into three reportable segments: Beauty & Home, Closures, and Pharma. The company is a large accelerated filer with 67,582,990 shares of common stock outstanding as of October 29, 2009.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2009 | Nine Months Ended Sep 30, 2009 |
|---|---|---|
| Net Sales | $473.7 million | $1,346.0 million |
| Operating Income | $52.9 million | $141.5 million |
| Net Income (Attributable to AptarGroup) | $33.5 million | $88.6 million |
| Diluted EPS | $0.48 | $1.27 |
| Operating Margin | 11.2% | 10.5% |
| Net Cash Provided by Operations | N/A | $222.1 million |
| Cash and Equivalents (Sep 30, 2009) | $294.9 million | $294.9 million |
| Total Debt (Short & Long Term) | $301.2 million | $301.2 million |
Material Changes vs. Prior Period
- Revenue Decline: Net sales decreased 11% in the quarter and 17% for the nine-month period compared to 2008. The decline was driven by weak demand in the fragrance/cosmetic market, a strengthening U.S. dollar (which negatively impacted sales by approximately 5-8%), and price decreases passed through to customers in the Closures segment due to lower resin costs.
- Profitability: Operating income decreased 12% in the quarter and 23% year-to-date. Net income decreased 16% in the quarter and 27% year-to-date.
- Cost Structure: Cost of sales as a percentage of net sales improved to 67.7% in the quarter (from 68.9% in 2008) due to cost savings efforts and a favorable product mix shift toward the higher-margin Pharma segment. However, underutilized overhead in the Beauty & Home segment negatively impacted margins.
- Restructuring: The company incurred $2.6 million in facilities consolidation and severance expenses in the quarter ($5.7 million year-to-date) related to consolidating French manufacturing facilities and reducing headcount in North America and Europe.
- Acquisitions: In August 2009, the company acquired Covit do Brasil for approximately $7.6 million. This acquisition added approximately 1% to sales for the period.
Guidance, Outlook, and Risks
- Outlook: Management remains cautiously optimistic that inventories may be reaching the lowest level in certain markets but expects softness in the fragrance/cosmetic market to continue in the near term. Global visibility remains limited due to weak consumer sentiment.
- Q4 Guidance: Excluding facilities consolidation and severance charges, diluted earnings per share for the fourth quarter are anticipated to be in the range of $0.43 to $0.48. This compares to $0.46 in the prior year. Management notes that a $5.2 million LIFO inventory reserve reduction in Q4 2008 (a positive effect of ~$0.05 per share) is not expected to repeat in Q4 2009.
- Liquidity: The company maintains a strong balance sheet with a Net Debt to Net Capital ratio of 0.5% as of September 30, 2009. Cash flow from operations remains the primary source of liquidity. Capital expenditures for 2009 are estimated at approximately $130 million.
- Risks: Key risks include significant fluctuations in foreign currency exchange rates (primary exposure to the Euro), changes in raw material costs (resin, metal), and the ability to successfully integrate acquisitions and manage the facilities consolidation plan.
Investor Verification Checklist
- Foreign Currency Impact: Verify the specific translation impact of the strengthening U.S. dollar on the Beauty & Home and Closures segments, which are heavily exposed to the Euro.
- Restructuring Progress: Monitor the execution of the $7 million facilities consolidation plan and the realization of the estimated $3-4 million in annual savings beginning in 2010.
- Resin Cost Pass-Through: Assess the timing and extent of price adjustments in the Closures segment relative to declining resin costs and the impact on volume.
- Pharma Segment Stability: Confirm the stability of the Pharma segment, which maintained high margins (28.6% in Q3) despite a 7% sales decline, as a counterbalance to weakness in other segments.
- Capital Allocation: Review the balance between capital expenditures ($130M estimated for 2009), share repurchases (4.2 million shares remaining authorized), and dividend payments ($0.15 per share quarterly).