AptarGroup, Inc. — Q2 2014 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2014. Unaudited results; dollar amounts below are in millions unless stated otherwise.
Business context and results
AptarGroup develops, manufactures and sells dispensing systems and packaging components. Its reporting segments are Beauty + Home, Pharma, and Food + Beverage.
| Metric | Q2 2014 | Q2 2013 | First half 2014 | First half 2013 |
|---|---|---|---|---|
| Net sales | $670.6 | $641.4 | $1,346.7 | $1,259.1 |
| Operating income | $84.6 | $80.9 | $163.3 | $145.5 |
| Operating margin | 12.6% | 12.6% | 12.1% | 11.6% |
| Net income attributable to AptarGroup | $53.1 | $49.8 | $101.5 | $89.8 |
| Diluted EPS | $0.79 | $0.73 | $1.49 | $1.31 |
| Dividend per share | $0.28 | $0.25 | $0.53 | $0.50 |
Q2 reported sales rose 5%; excluding currency effects, sales increased 4%. First-half reported sales rose 7%, or 6% excluding currency. Net income margin was 7.9% in Q2 versus 7.8% a year earlier, and 7.5% for the first half versus 7.1%.
Segments and material changes
- Beauty + Home: Q2 sales increased 3% to $385.2 million, while segment income fell 10% to $27.2 million and margin declined to 7.1% from 8.1%. Latin American start-up costs and currency effects, less favorable resin adjustments, and North American softness and inefficiencies weighed on results. First-half sales grew 5% to $776.5 million; income was nearly flat at $55.0 million.
- Pharma: Q2 sales grew 7% to $195.7 million and segment income rose 5% to $52.8 million. First-half sales increased 11% to $390.0 million and income rose 9% to $105.3 million. Growth included consumer health-care product introductions; Q2 injectables sales were affected by lower tooling and a customer’s excess inventory.
- Food + Beverage: Q2 sales increased 7% to $89.7 million and segment income rose 5% to $12.4 million. First-half sales increased 7% to $180.2 million and income rose 5% to $21.5 million. Higher sales and productivity were partly offset in Q2 by $1.3 million of less favorable resin adjustments.
- Q2 cost of sales remained 67.3% of sales; first-half cost of sales improved to 67.2% from 67.5%. SG&A rose to 14.4% of Q2 sales from 13.7%, and to 15.1% for the first half from 14.5%, reflecting R&D, ERP implementation, and stock-compensation costs.
- The European capacity restructuring was substantially complete by year-end 2013, with cumulative costs of about $19.5 million. Expected annualized savings are about $10 million; no restructuring expense was recorded in the first half of 2014.
Cash flow, debt and liquidity
- First-half operating cash flow was $109.6 million, essentially unchanged year over year. Capital expenditures were $87.1 million, versus $71.7 million; cash flow after capital expenditures was approximately $22.6 million.
- Cash and equivalents were $341.3 million at June 30, 2014, up from $309.9 million at year-end 2013. Total short- and long-term interest-bearing debt increased to $570.4 million from $494.6 million; net debt was approximately $229.1 million, compared with $184.7 million.
- Net debt to net capital was 13.0%, versus 11.1% at year-end. The $300 million U.S. revolving facility had $95 million unused and available; its maturity was extended to January 2019. The company reported a 27.2% debt-to-total-capital ratio against a 55% maximum covenant.
- Management estimated 2014 capital expenditures at approximately $190 million. The company repurchased 0.8 million shares for $52.9 million and paid $34.7 million in dividends during the first half. At June 30, 3.2 million shares remained authorized for repurchase.
Outlook, commentary and risks
- For Q3 2014, management expected growth in each segment and diluted EPS of $0.72–$0.77, based on a 35% tax rate. Guidance excludes an expected one-time tax expense of about $3 million, or $0.04 per share, from a legal reorganization; the charge was expected to raise the Q3 effective tax rate to 39%. Management expected the full-year tax rate, including the charge, to be about 35%.
- Management expected Beauty + Home profitability to improve gradually in the second half through efficiency, cost control and pricing, while Latin American conditions were expected to remain challenging. Other segments and new product introductions were expected to support growth.
- Management noted that customer plant shutdowns typically weigh on second-half results. Key stated risks include foreign-exchange volatility, resin and other input costs, customer and supplier conditions, execution of facility projects, pricing and productivity, demand and product launches, competition, regulation, and legal proceedings.
- The company reported approximately $7.0 million of uncertain tax-position liabilities at June 30 and said the balance could decrease by no more than $5 million over the next 12 months. Routine lawsuits and claims were not expected by management to materially affect results, but adverse outcomes could exceed recorded accruals. Most of the company’s cash was held outside the U.S.; repatriation could create tax costs.
Investor verification priorities
- Track Beauty + Home segment margins and whether Latin American start-up costs, currency impacts and North American operational issues abate.
- Compare Q3 and full-year performance with the $0.72–$0.77 Q3 EPS outlook, accounting for the separately excluded $0.04-per-share tax charge.
- Verify that planned capital spending, cash generation, dividends and repurchases remain consistent with the increase in debt and net debt.
- Monitor resin pass-through timing, foreign-currency exposure and the effect of customer shutdowns or inventory levels on segment demand.
- Review resolution of uncertain tax positions and legal contingencies, and the cash and tax implications of the non-U.S. legal reorganization.