AptarGroup, Inc. — Q1 2012 Form 10-Q
Unaudited results for the three months ended March 31, 2012; comparisons are with the three months ended March 31, 2011 unless noted. AptarGroup develops, manufactures and sells dispensing systems through Beauty + Home, Pharma, and Food + Beverage segments. Amounts below are in millions except per-share data.
Financial performance and liquidity
| Metric | Q1 2012 | Q1 2011 / prior date |
|---|---|---|
| Net sales | $592.5 | $576.5; +3% reported, +6% excluding currency |
| Operating income / margin | $70.4 / 11.9% | $69.8 / 12.1% |
| Income before taxes | $66.3 | $66.3 |
| Net income attributable to AptarGroup | $43.8 | $44.5 |
| Diluted EPS | $0.64 | $0.64 |
| Effective tax rate | 33.9% | 32.9% |
| Operating cash flow | $13.7 provided | $4.1 used |
| Capital expenditures | $42.5 | $25.1 |
| Cash and equivalents | $329.8 at March 31 | $377.6 at December 31, 2011 |
| Interest-bearing debt | $406.6 at March 31 | $438.6 at December 31, 2011 |
Cost of sales rose to 67.7% of sales from 66.4%, while SG&A declined to 14.9% from 15.7% and depreciation and amortization fell to 5.5% from 5.8%. Net income margin was 7.4%, versus 7.7%. Dividends were $0.22 per share, compared with $0.18.
Cash fell by $47.8 during the quarter. Operating cash flow improved year over year, principally due to working capital, but was below capital spending. Financing activities used $32.4, including $14.5 of dividends, $10.1 of share repurchases and net debt repayments. Net debt to net capital was 5.3%, versus 4.5% at year-end. The company had $165 million available under its new $300 million revolving facility; the facility matures January 31, 2017. Its debt-to-total-capital covenant limit was 55%, against a reported 22.7% level.
Segment results and changes
- Beauty + Home: sales increased less than 1% to $377.2; excluding currency, sales rose 3%. Segment income was $33.0, up about 1%, and margin remained 8.7%. Growth excluding currency was reported across fragrance/cosmetic, personal care and household markets, led by household.
- Pharma: sales increased 6% to $140.0, or 8% excluding currency; segment income rose about 1% to $39.4. Margin declined to 28.1% from 29.5%, reflecting lower tooling margins and startup costs at the new Indian facility. Prescription-drug sales growth was led by North American allergy pumps.
- Food + Beverage: sales increased 10% to $75.3, or 11% excluding currency; segment income declined about 10% to $6.8 and margin fell to 9.0% from 11.1%. Lower-margin tooling growth and startup costs at the Lincolnton, North Carolina facility weighed on results.
Reported sales growth was held back by a stronger U.S. dollar; customer tooling sales increased $6.9 excluding currency, but tooling generally carries lower margins. Operating income grew only modestly despite higher sales. Net other expense increased to $4.1 from $3.5, primarily because interest expense rose about $0.6 following replacement of the prior credit facility. The higher tax rate reflected earnings mix in higher-tax jurisdictions and the French surtax. Foreign-currency translation contributed $41.7 to other comprehensive income, below the $67.7 contribution in Q1 2011.
Outlook, risks and notable items
- Management forecast Q2 diluted EPS of $0.70–$0.75, against the prior-year quarterly high of $0.74. It cited active customer projects and facilities coming on line, while expecting challenging input costs, inflation in some emerging markets and currency headwinds versus Q2 2011.
- Management estimated 2012 capital expenditures of approximately $160 million, subject to currency and project timing. It said it expected to contribute approximately $14.0 million to domestic defined-benefit plans and $3.9 million to foreign plans in 2012.
- Approximately 99% of quarter-end cash was held outside the U.S. The company repatriated about $46 million in Q1 and used the funds to reduce revolver borrowings; the effective tax rate included the estimated cost of repatriating $82 million of current-year earnings. Management said U.S. operations could meet their own operating liquidity needs.
- In April 2012, a U.S. subsidiary was found to have infringed a competitor’s patents concerning a specific fragrance pump. The ruling applies to the United States, does not bar manufacture or sales outside the U.S., and assessed no damages. The filing cautions that litigation outcomes remain uncertain.
- Other exposures include foreign-exchange movements, raw-material and other input costs, supplier availability, customer demand, interest rates and credit markets, execution of new product launches, and intellectual-property or other litigation. The company used forward currency contracts with an aggregate notional amount of approximately $337 million; most were due to expire before the end of Q2.
- The company repurchased approximately 189,000 shares for $10.1 million in Q1, with authorization for approximately 3.4 million additional shares at March 31. The board declared a $0.22 quarterly dividend payable May 17, 2012.
Investor verification priorities
- Check whether Q2 diluted EPS landed within the $0.70–$0.75 outlook and how currency and input-cost pressures affected margins.
- Track cash conversion against the planned approximately $160 million of 2012 capital expenditures, and review working-capital movements.
- Monitor Pharma and Food + Beverage margins as new facilities ramp and tooling-related sales mix changes.
- Review the U.S. patent case for any subsequent injunction, damages, or other developments.
- Assess access to foreign-held cash, repatriation taxes, revolver availability and covenant headroom as dividends and repurchases continue.