AptarGroup, Inc. — Q3 2015 Form 10-Q
Business context and period. AptarGroup develops and sells dispensing systems and packaging components for personal care, beauty, home care, pharmaceutical, health care, food and beverage markets. This unaudited report covers the quarter and nine months ended September 30, 2015; comparisons are with the corresponding 2014 periods. Unless noted, amounts below are in millions of U.S. dollars.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Net sales | $586.3 | $651.9 | $1,770.4 | $1,998.6 |
| Operating income | $88.1 | $78.6 | $257.2 | $242.0 |
| Operating margin | 15.0% | 12.1% | 14.5% | 12.1% |
| Net income attributable to AptarGroup | $53.2 | $48.6 | $156.0 | $150.1 |
| Diluted EPS | $0.83 | $0.73 | $2.41 | $2.21 |
| Net income margin | 9.1% | 7.5% | 8.8% | 7.5% |
Sales and segments. Reported sales fell 10% in Q3 and 11% for the nine months, principally because of adverse currency translation. Excluding currency effects, core sales rose 3% in Q3 and 1% year to date. Q3 core sales increased 10% in Pharma and 3% in Food + Beverage, while Beauty + Home declined 1%. Nine-month core sales were up 8% in Pharma and 3% in Food + Beverage, but down 3% in Beauty + Home.
| Segment | Q3 sales | Q3 segment income | Nine-month sales | Nine-month segment income |
|---|---|---|---|---|
| Beauty + Home | $321.6 | $28.0 | $970.2 | $78.5 |
| Pharma | $175.4 | $52.9 | $537.4 | $160.4 |
| Food + Beverage | $89.2 | $13.2 | $262.8 | $37.3 |
Margins and costs. Cost of sales declined to 65.1% of sales in Q3 from 68.0%; management cited favorable sales mix, lower material costs, productivity, cost savings and resin pass-through timing. Nine-month cost of sales was 64.5% versus 67.4%, also benefiting from a $7.4 million inventory-accounting change. SG&A was 13.9% of Q3 sales versus 14.1%, but 15.1% year to date versus 14.8%, reflecting higher pension and professional fees, among other costs. Interest expense increased as a result of debt issued in late 2014 and early 2015.
Cash flow, liquidity and debt
- Nine-month operating cash flow was $231.4 million, up from $201.4 million; management attributed the increase primarily to lower working-capital requirements.
- Investing cash outflow was $171.1 million, including $106.2 million of capital expenditures and $67.4 million invested in redeemable-at-notice, two-year time deposits. Financing cash outflow was $10.0 million; dividends paid were $52.5 million.
- At September 30, cash and equivalents were $434.1 million and short-term investments were $67.1 million. Total assets were $2.492 billion and stockholders’ equity was $1.160 billion.
- Total interest-bearing debt was approximately $836.5 million, compared with $840.9 million at year-end 2014. Net debt to net capital was 22.4%, down from 28.6%. The $300 million revolving facility was undrawn; leverage and interest-coverage ratios were 0.93x and 15.35x, respectively, against limits of 3.50x maximum and 3.00x minimum.
- The company reported that most cash was held outside the United States; repatriating certain foreign balances could trigger tax. It stated that it expected to have adequate resources for foreseeable business needs.
Material changes, outlook and risks
- Accounting change: In Q2 2015, certain North American operations changed inventory accounting from LIFO to FIFO. The $7.4 million cumulative pretax benefit reduced cost of sales and increased attributable net income by approximately $4.8 million, or $0.08 per diluted share. Management said the change was not material to prior-period statements and did not restate them.
- Capital returns and financing: The company completed settlement of its $250 million accelerated share repurchase on September 25, receiving about 719,000 additional shares; approximately 3.8 million shares were repurchased in total under the program. About $100 million remained under the $350 million authorization. The board declared a $0.30-per-share quarterly dividend in October, a 7% increase from the prior quarter.
- Guidance: For Q4, AptarGroup expected EPS of $0.61–$0.66, assuming a comparable effective tax rate, versus reported prior-year EPS of $0.63. At comparable exchange rates, prior-year EPS would have been approximately $0.58. Management expected currency to remain a headwind, with continued selected-market softness and possible customer inventory reductions, but anticipated comparable-currency earnings improvement.
- Key risks and contingencies: Risks include foreign exchange movements, market and customer demand, resin and other input costs, supplier availability, competition, execution of capital and product-development projects, cybersecurity, regulation and litigation. Management said ordinary-course legal claims were not expected to materially affect results, but acknowledged that unfavorable outcomes could exceed accruals and could be material. A 2014 fire at a Brazilian facility remained under insurance review; a $1.0 million receivable was recorded, with final settlement expected in the first half of 2016. The incident had no material effect on 2015 results to date.
- Other notable items: Q3 foreign-exchange forward contracts generated a $5.9 million gain in miscellaneous net income; the nine-month gain was $5.9 million. Foreign-currency translation produced a $115.0 million nine-month other-comprehensive loss. The company also disclosed a nonmaterial revision to prior equity presentation for treasury-share reissuances, with no effect on earnings or cash flows. Disclosure controls were reported effective.
Important facts for investors to verify
- How much of reported earnings and margin improvement reflects recurring operating performance versus the $7.4 million FIFO benefit and resin pass-through timing.
- Whether Pharma and Food + Beverage growth and Beauty + Home stabilization continue, particularly after currency effects and customer inventory adjustments.
- The sensitivity of translated revenue, earnings and balance-sheet values to the U.S. dollar, along with the potential impact of foreign cash repatriation taxes.
- Debt maturities, interest costs, capital spending plans, remaining share-repurchase authorization and the sustainability of the higher dividend.
- Resolution and collection of the Brazilian fire-insurance claim, and any material developments in legal or uncertain tax matters.