AptarGroup, Inc. — Q3 2011 Form 10-Q
Reporting period: Three and nine months ended September 30, 2011. Amounts are USD millions except per-share data. AptarGroup develops and manufactures dispensing systems for Beauty + Home, Pharma, and Food + Beverage markets.
Financial performance
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Net sales | $601.2 | $517.5 | $1,792.6 | $1,545.9 |
| Operating income | $74.2 | $71.1 | $224.2 | $206.8 |
| Operating margin | 12.3% | 13.7% | 12.5% | 13.4% |
| Net income attributable to AptarGroup | $49.3 | $47.0 | $145.1 | $132.7 |
| Diluted EPS | $0.72 | $0.68 | $2.08 | $1.90 |
| Net margin | 8.2% | 9.1% | 8.1% | 8.6% |
Sales increased 16% in both periods. Management attributed about 6 percentage points of growth to favorable currency translation; the balance was primarily higher product and custom-tooling sales. Cost of sales rose to 67.7% of sales in Q3 from 66.2%, while SG&A rose to 14.4% from 13.7%. Higher sales and earnings were therefore accompanied by lower operating and net margins.
Segment performance
- Beauty + Home: Q3 sales rose 12% to $387.5; segment income fell 7% to $32.0 and margin declined to 8.3% from 9.9%. Management cited underutilized capacity, legal fees, and higher-margin dilution from tooling sales.
- Pharma: Q3 sales rose 25% to $146.4; segment income rose 28% to $44.8 and margin improved to 30.6% from 29.9%, reflecting growth and volume leverage.
- Food + Beverage: Q3 sales rose 25% to $67.3; segment income rose 7% to $6.9, but margin declined to 10.2% from 12.0%. For the nine months, segment income decreased 7% to $23.1, with tooling mix, resin costs, start-up and structure costs cited as pressures.
Cash flow, balance sheet, and liquidity
- Nine-month operating cash flow was $184.8, versus $186.5 a year earlier. Capital expenditures were $126.7, versus $87.0; investing cash use totaled $124.9.
- Cash and equivalents were $371.4 at September 30, 2011, compared with $376.4 at year-end 2010. The filing says most cash is held outside the U.S.
- Total short- and long-term interest-bearing debt was $401.6, up from $354.3 at year-end. Net debt was approximately $30.2, compared with net cash of approximately $22.1 at year-end. Net debt to net capital was 2.2%, versus negative 1.8%.
- Cash used in financing was $48.7, including $79.6 of share repurchases and $38.8 of dividends paid; increased short-term borrowing partially offset uses. A further 4.1 million shares remained authorized for repurchase.
- Management estimated 2011 capital expenditures at approximately $170.0, primarily reflecting the new Food + Beverage facility and custom projects. The company reported compliance with its debt-to-total-capital covenant, at 23.1% against a 55% maximum.
Outlook, risks, and notable items
- Management forecast Q4 diluted EPS of $0.57–$0.62, compared with $0.59 in Q4 2010. It noted customer caution, inventory reassessment, and heightened price pressure amid economic uncertainty, particularly in the U.S. and Europe; it expressed encouragement about 2012 prospects.
- Key exposures include foreign exchange, resin and other input costs, customer demand and pricing, capacity utilization, capital spending, supplier availability, and litigation. A stronger U.S. dollar could reduce translated results; currency movements also affect cross-border costs and sales.
- Q3 foreign-currency translation adjustment was negative $111.3, resulting in comprehensive loss of $61.6 despite net income of $49.2.
- A competitor’s patent suit seeks to bar manufacture of a specific diptube. The company said it has meritorious defenses, expects no material impact, and recorded no accrual; it cautioned that adverse litigation outcomes could exceed accruals and be material.
- In October, AptarGroup acquired Indian dispensing-closure maker TKH Plastics for approximately $17 cash and $1 assumed debt, funded with operating cash. The CEO’s previously announced retirement is effective December 31, 2011; a two-year consulting agreement provides compensation of $450,000 annually.
- The effective tax rate was 32.4% for the first nine months. It includes estimated tax costs related to repatriation of $82 of current-year foreign earnings in Q2. Uncertain tax positions totaled $10.0; the company estimated a possible $1–$6 decrease over the next 12 months.
Most important facts for investors to verify
- Whether the Q4 EPS range and management’s more favorable 2012 view were borne out, given customer caution and pricing pressure.
- Whether margin pressure from utilization, tooling mix, SG&A, resin costs, and Food + Beverage start-up costs persisted or eased.
- Whether cash generation supports the higher capital-spending plan, share repurchases, dividends, and increased debt; also consider the location and potential tax cost of foreign cash.
- The outcome and potential financial exposure of the diptube patent litigation, and the integration and performance of the TKH acquisition.
- Currency sensitivity, uncertain tax-position resolutions, and the impact of CEO succession and consulting arrangements.