AptarGroup, Inc. — Q2 2015 Form 10-Q
Reporting period: Three and six months ended June 30, 2015. AptarGroup develops and sells dispensing systems for beauty and home care, pharmaceuticals, and food and beverage markets. Financial amounts below are in millions of dollars unless stated otherwise.
Financial performance
| Metric | Q2 2015 | Q2 2014 | First half 2015 | First half 2014 |
|---|---|---|---|---|
| Net sales | $594.3 | $670.6 | $1,184.1 | $1,346.7 |
| Operating income | $95.5 | $84.6 | $169.1 | $163.3 |
| Operating margin | 16.1% | 12.6% | 14.3% | 12.1% |
| Net income attributable to AptarGroup | $57.5 | $53.1 | $102.7 | $101.5 |
| Diluted EPS | $0.90 | $0.79 | $1.59 | $1.49 |
| Net cash from operations | Not presented by quarter | Not presented by quarter | $140.2 | $110.7 |
- Reported Q2 sales fell 11% year over year and first-half sales fell 12%, principally due to currency translation. Core sales, including tooling, rose 2% in Q2 and were flat for the first half.
- Q2 cost of sales was 63.1% of sales versus 67.3% a year earlier; for the first half it was 64.3% versus 67.2%. Management cited the inventory accounting change, favorable mix, productivity and cost savings, and favorable currency transaction effects. First-half resin pass-through timing also helped.
- Q2 net other expense increased to $9.8 million from $4.9 million, and first-half net other expense to $15.7 million from $10.0 million, mainly reflecting higher interest expense on new notes and costs associated with foreign-exchange contracts. Effective tax rates were 32.9% for Q2 and 33.1% for the first half.
- By segment, Q2 core sales increased 9% in Pharma and Food + Beverage, while Beauty + Home declined 4%. Q2 segment income was $55.5 million in Pharma, $15.0 million in Food + Beverage, and $27.2 million in Beauty + Home. First-half segment income was $107.5 million, $24.0 million, and $50.6 million, respectively.
- First-half investing cash outflow was $125.9 million, including $60.3 million of capital expenditures and $66.9 million invested in redeemable time deposits. Financing cash outflow was $5.9 million. Cash and equivalents ended at $391.8 million, versus $399.8 million at year-end.
Balance sheet, debt and liquidity
- At June 30, 2015, total assets were $2,477.8 million and stockholders’ equity was $1,127.7 million. Current assets totaled $1,311.6 million and current liabilities $401.5 million.
- Interest-bearing debt was approximately $836.9 million, comprising notes payable, current maturities and long-term obligations. The company reported a net-debt-to-net-capital ratio of 28.3%, compared with 28.6% at December 31, 2014. The $300 million revolving credit facility had no balance drawn at quarter-end; covenant leverage was 1.10x against a 3.50x maximum.
- In February 2015, AptarGroup issued $225 million of long-term notes at 3.49% and 3.61% to repay its revolving credit line. The overall $475 million private placement also supported the previously announced accelerated share repurchase program.
Changes, outlook and risks
- During Q2, the company changed certain North American inventories from LIFO to FIFO. It recognized a $7.4 million cumulative pre-tax benefit in current-period operating results rather than retrospectively restating prior periods. Management said the change was not material to prior statements or current-period trends.
- Foreign currency reduced reported sales growth by 13 percentage points in Q2 and 12 points in the first half. Foreign currency translation adjustments were a $94.1 million loss in first-half other comprehensive income, contributing to a $91.8 million decline in total other comprehensive income.
- Management expected Q3 diluted EPS of $0.77–$0.82, compared with reported prior-year EPS of $0.73; it estimated prior-year EPS at approximately $0.65 on a comparable currency basis. The company planned approximately $150 million of 2015 capital expenditures and continued investment in R&D and capital projects.
- Management cited near-term challenges from Latin American market stagnation and foreign exchange conditions. Disclosed risks include currency volatility, customer demand and financial condition, resin and other input costs, supplier availability, competition, product development and launches, cybersecurity, regulation, litigation, and the ability to contain costs and execute projects.
- Legal claims are described as ordinary-course matters; management did not expect a material adverse effect, while acknowledging uncertain outcomes could exceed accruals. A Brazil facility fire repair was progressing; the company had recognized a $4.3 million insurance receivable and expected final settlement in the second half of 2015. A tax-audit settlement in Italy contributed to lower uncertain tax liabilities.
- The board declared a $0.28-per-share quarterly dividend payable August 19, 2015. Approximately $100 million remained under the current share repurchase authorization; final ASR settlement was expected by the end of September 2015.
Important facts for investors to verify
- Whether core-sales and segment growth persist, particularly in Pharma and Food + Beverage, and whether weakness in Beauty + Home continues.
- How much of the reported margin improvement reflects the one-time $7.4 million inventory-method benefit, resin pass-through timing, and ongoing productivity gains.
- The effect of currency movements on sales, earnings, cash flows and equity, and the company’s exposure to foreign cash repatriation taxes.
- Progress on the Brazil insurance settlement, the Greece receivable exposure, and resolution of uncertain tax positions and other claims.
- Q3 performance against the EPS outlook, capital-spending plans, debt and covenant headroom, and final settlement of the ASR program.