AptarGroup, Inc. — Q3 2013 Form 10-Q
Business and period: AptarGroup develops and sells dispensing systems and packaging components for beauty and personal care, pharmaceuticals and consumer health care, and food and beverage markets. This unaudited filing covers the quarter and nine months ended September 30, 2013; comparisons are with 2012.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Net sales | $623.6m | $589.6m | $1,882.7m | $1,759.6m |
| Operating income | $73.3m | $66.9m | $218.8m | $204.3m |
| Net income attributable to AptarGroup | $45.3m | $42.1m | $135.1m | $127.6m |
| Diluted EPS | $0.67 | $0.62 | $1.98 | $1.86 |
| Operating margin | 11.8% | 11.3% | 11.6% | 11.6% |
- Q3 sales increased 6% as reported and 4% excluding currency effects. Nine-month sales increased 7% as reported; excluding acquisitions and currency, growth was 2%.
- Q3 cost of sales was 68.0% of sales versus 69.1%; management noted that 2012 included $3.8m of Stelmi acquisition-related inventory fair-value expense. Nine-month cost of sales was 67.7% versus 68.1%.
- Q3 reported effective tax rate was 33.8%, versus 33.2%; nine-month rate was 33.8%, versus 33.5%.
- Segments, Q3 net sales / segment income: Beauty + Home $376.1m / $30.9m; Pharma $172.3m / $44.7m; Food + Beverage $75.3m / $7.7m. Pharma led growth and profitability; Food + Beverage income declined 20% in the quarter.
Cash flow, balance sheet and capital allocation
- Nine-month cash from operations was $194.5m, compared with $197.5m. Increased working-capital requirements, including higher receivables and inventories, were the main reason for the decline.
- Capital expenditures were $110.4m versus $133.0m. Investing cash outflow was $108.3m, compared with $318.7m, which included the $187.8m Stelmi acquisition in 2012.
- At September 30, cash and equivalents were $247.9m (up from $229.8m at year-end); interest-bearing debt was $432.9m (up from $427.5m). Net debt was approximately $185.0m, and net debt to net capital was 11.2%, versus 12.5% at year-end.
- The $300m U.S. revolving credit facility had $240m unused and available. The debt-to-total-capital covenant limit was 55%; the reported level was 22.9%. Most cash was held outside the U.S., and repatriation may incur tax.
- Nine-month dividends paid were $49.7m and share repurchases were $80.2m. The board authorized an additional four million shares for repurchase in July; 4.6m shares remained authorized at quarter-end. The quarterly dividend was raised to $0.25 per share.
Changes, outlook and notable matters
- Pharma sales rose 10% in Q3, with strength in consumer health care and injection markets; nine-month growth included $74.0m of Stelmi sales. Beauty + Home Q3 sales rose 5%, but nine-month segment income fell 11%. Food + Beverage Q3 sales were nearly flat and segment income fell 20%, reflecting higher resin costs and lower tooling sales.
- The European capacity-consolidation plan involves 12 facilities and approximately 170 employees. One facility had closed and another was expected to close by year-end. Nine-month restructuring charges were $8.8m, with an additional $1.5m of accelerated depreciation. Approximately $3m of further costs were expected, mostly in Q4; annualized savings were estimated at about $12m, mostly beginning in 2014.
- For Q4, management expected core sales growth in each segment year over year, while noting continued weakness in U.S. Beauty + Home markets. EPS guidance was $0.62–$0.67 before European restructuring costs, compared with $0.57 in the prior-year quarter before such costs. Guidance assumed an approximately 30% tax rate and excluded a possible retroactive French tax adjustment of up to $0.09 per share.
- Key risks include foreign-exchange volatility, resin and other input costs, customer demand and market conditions, execution of restructuring and expansion projects, and tax changes. A patent dispute concerning a specific pump resulted in a U.S. infringement finding in 2012; the appeal returned the matter to district court for trial on patent validity, and no damages had been assessed. Management stated that adverse outcomes in claims or litigation could exceed recorded accruals and potentially materially affect results.
- Management reported effective disclosure controls as of September 30, 2013. An ERP system was implemented at a U.S. facility during the quarter, modifying the control environment there; no other material control changes were reported.
Important facts for investors to verify
- Whether Q4 EPS achieved the $0.62–$0.67 guidance range, and whether French tax rules produced the potential retroactive charge.
- Whether restructuring costs, facility closures and expected annualized savings proceeded on schedule.
- Whether Pharma growth persists and Beauty + Home profitability recovers, given continued U.S. softness and higher operating costs.
- Working-capital trends, capital spending against the approximately $160m full-year estimate, and the effect of buybacks, dividends and borrowing on net debt.
- Developments in the patent litigation and exposure to currency movements, resin costs and other listed operating risks.