AptarGroup, Inc. — Q3 2014 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2014. AptarGroup develops and manufactures dispensing systems for beauty and home care, pharmaceutical and food and beverage markets. Figures below are in U.S. dollars; financial-statement amounts are in millions unless stated otherwise.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Net sales | $651.9 | $623.6 | $1,998.6 | $1,882.7 |
| Operating income | $78.6 | $73.3 | $242.0 | $218.8 |
| Operating margin | 12.1% | 11.8% | 12.1% | 11.6% |
| Net income attributable to AptarGroup | $48.6 | $45.3 | $150.1 | $135.1 |
| Diluted EPS | $0.73 | $0.67 | $2.21 | $1.98 |
| Net margin | 7.5% | 7.3% | 7.5% | 7.2% |
- Q3 sales increased 5% reported and 6% excluding currency effects; nine-month sales rose 6%, with currency having no material net impact.
- Q3 results benefited from growth, especially in Food + Beverage, and from the absence of prior-year European restructuring charges. Cost of sales remained 68.0% of sales in Q3; nine-month cost of sales improved to 67.4% from 67.7%.
- Segment performance was mixed in Q3: Beauty + Home sales rose 1%, but segment income fell 18% to $25.4 million; Pharma sales increased 4% and income 10% to $49.3 million; Food + Beverage sales rose 25% and income 52% to $11.7 million. Nine-month segment income was $80.4 million for Beauty + Home, $154.6 million for Pharma and $33.2 million for Food + Beverage.
- Net cash provided by operations was $200.0 million for nine months, compared with $194.5 million. Capital expenditures were $125.5 million versus $110.4 million; operating cash less capital expenditures was approximately $74.5 million versus $84.2 million.
- Cash and equivalents were $347.4 million at September 30, 2014, versus $309.9 million at year-end 2013. Interest-bearing debt was $602.1 million, up from $494.6 million; net debt was approximately $254.7 million. Net debt to net capital was 15.3%, compared with 11.1% at year-end.
- The $300 million U.S. revolving credit facility had $70 million unused and available. The company reported covenant debt-to-total-capital of 29.9%, below the 55% maximum, and stated it could borrow approximately $1.1 billion more before reaching that covenant limit.
Changes, outlook and risks
- Outlook: Management called Q4 challenging, citing weaker expected markets in parts of Latin America and Europe, little change expected in the U.S. growth trajectory, and a difficult comparison with strong Q4 2013 sales and more favorable currency. Q4 EPS guidance was $0.58–$0.63 using a 33% effective tax rate. The filing gives prior-year reported EPS of $0.54 and adjusted comparable EPS of $0.60.
- Costs and execution: Beauty + Home faced North American operational inefficiencies and startup costs at the Colombia facility. SG&A increased with R&D, ERP-system rollout and stock-based compensation investments. The completed European restructuring plan had cumulative costs of approximately $19.5 million and expected annualized savings of about $10 million.
- Currency and comprehensive income: Q3 currency effects reduced reported sales growth by 1%. Nine-month foreign currency translation adjustments were a loss of $123.4 million, contributing to comprehensive income attributable to AptarGroup of only $28.9 million despite net income of $150.1 million. Management cited exposure to the euro and volatile Latin American and Asian currencies.
- Tax and cash location: A non-U.S. legal reorganization generated approximately $3.1 million of additional Q3 tax costs, including $2.8 million related to a changed reinvestment assertion in Europe. Most cash was held outside the U.S.; repatriation could trigger tax, historically estimated at 10%–14% of repatriated amounts.
- Unusual items: A September fire at the Brazilian Graphocolor facility caused $3.7 million of costs, offset in the same income-statement lines by expected insurance proceeds for known losses. The company said it did not expect a material financial impact, but had not recognized uncertain potential insurance gains. A $1.5 million investment write-down was recorded in Q1.
- Capital returns: AptarGroup repurchased 1.4 million shares for $90.5 million in the first nine months and paid $52.9 million in dividends. On October 30, 2014, it announced a new share-repurchase authorization of up to $350 million, replacing prior authorizations. The board declared a $0.28-per-share quarterly dividend payable November 26.
- Other risks cited include input-cost changes, customer demand and launches, supplier availability, competition, regulation, cybersecurity, litigation, product liability, capital markets and the ability to execute expansions and acquisitions. Management stated normal-course legal claims were not expected to have a material adverse effect, while noting unfavorable outcomes could be material.
Important facts for investors to verify
- Whether Q4 EPS falls within the $0.58–$0.63 outlook, and how actual currency movements and regional demand compare with management’s assumptions.
- Whether Beauty + Home operational inefficiencies and Colombia startup costs improve, and whether Pharma and Food + Beverage growth remains sustainable.
- Actual insurance recoveries and operational effects from the Brazil fire, including any amounts beyond recognized receivables.
- Debt, cash availability and repatriation-tax implications, given higher borrowings and cash concentrated outside the U.S.
- Execution and returns from the $350 million repurchase authorization, planned capital spending of approximately $170 million for 2014, and ongoing investment in products and systems.