AptarGroup, Inc. — Q2 2011 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2011. AptarGroup makes dispensing systems for beauty and home, pharmaceutical, food and beverage markets. The company reorganized its reporting into these three segments in 2011 and conformed prior-period segment data.
Financial performance
Amounts below are in millions of U.S. dollars except per-share data.
| Metric | Q2 2011 | Q2 2010 | First half 2011 | First half 2010 |
|---|---|---|---|---|
| Net sales | $614.9 | $522.9 | $1,191.4 | $1,028.4 |
| Operating income | $80.2 | $74.1 | $150.0 | $135.7 |
| Operating margin | 13.0% | 14.2% | 12.6% | 13.2% |
| Net income attributable to AptarGroup | $51.3 | $46.7 | $95.8 | $85.7 |
| Diluted EPS | $0.74 | $0.67 | $1.37 | $1.22 |
| Effective tax rate | 33.3% | 33.0% | 33.1% | 32.8% |
- Q2 sales grew 18%; management attributed about 10 percentage points of that increase to currency translation. First-half sales rose 16%.
- Cost of sales was 66.6% of sales in Q2 versus 66.0% a year earlier; SG&A was 14.7% versus 13.6%. Higher resin costs and delayed customer price pass-throughs, increased professional and personnel costs, and lower-margin tooling sales weighed on margins. Higher production utilization and a more favorable Pharma and Food + Beverage mix provided offsets.
- Q2 segment sales and income: Beauty + Home, $402.7 million and $39.9 million; Pharma, $138.7 million and $40.4 million; Food + Beverage, $73.5 million and $8.6 million. Pharma income rose 23%; Food + Beverage income fell 20%, with lower-margin tooling, input costs and higher structural costs cited as pressures.
- Six-month operating cash flow was $65.5 million, down from $132.8 million. Management attributed the decline mainly to working-capital investment supporting business growth. Capital expenditures were $78.9 million, compared with $59.8 million.
- Cash and equivalents were $341.3 million at June 30, versus $376.4 million at year-end 2010. Interest-bearing debt was approximately $363.3 million, versus $354.3 million at year-end; net debt was approximately $22.0 million. The debt-to-total-capital covenant limit was 55%, with the reported level at 20%.
- First-half cash uses included $24.1 million of dividends and $40.8 million of treasury-stock purchases. The quarterly dividend was increased 22% to $0.22 per share, declared for payment in August. The board also authorized repurchases of an additional 4 million shares after quarter-end.
Outlook, risks and notable items
- Management expected Q3 growth at a pace consistent with long-term normalized growth and forecast diluted EPS of $0.70–$0.75, compared with $0.68 in Q3 2010. It identified continued investment in R&D, food and beverage, consumer healthcare and developing regions.
- Expected 2011 capital expenditures were $170–$180 million. Management noted that summer customer shutdowns in Europe and December shutdowns typically affect second-half results.
- About $81 million of a planned $93 million current-year earnings repatriation was completed in Q2; the repatriation contributed to the higher effective tax rate. Most of the company’s $341.3 million cash balance was held outside the U.S.
- Key stated risks include foreign-exchange movements, resin and other input costs, the ability to pass on price increases, supplier availability, demand and customer product success, competition, product development and execution, and legal and intellectual-property matters. The company uses currency forwards and does not engage in speculative currency hedging.
- A competitor’s patent suit alleges infringement involving a specific diptube manufacturing process and seeks an exclusion order. AptarGroup said it believed it had meritorious defenses and that an unfavorable outcome was not probable; no accrual was recorded. Management cautioned that litigation outcomes remain uncertain.
- Uncertain tax-position liabilities were $10.3 million; management estimated a possible $1–$6 million reduction over the next 12 months as tax matters resolve. The filing also revised the presentation of prior-year cash-flow currency effects, moving them to the exchange-rate effect on cash.
Important facts for investors to verify
- Whether reported growth and segment trends persist after separating currency effects, particularly in Pharma and Food + Beverage.
- Whether pricing catches up with resin and other input-cost inflation, and whether operating margins recover from Q2 levels.
- Whether working-capital needs and the planned $170–$180 million of capital expenditures continue to constrain operating cash flow.
- How cash repatriation, share repurchases, dividends and borrowing affect liquidity and net debt, including the location and availability of overseas cash.
- Developments in the diptube patent litigation and the resolution of uncertain tax positions.