AptarGroup, Inc. — Q2 2013 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2013. AptarGroup develops and sells dispensing systems for beauty and home care, pharmaceutical and consumer health care, and food and beverage markets. Amounts below are in millions of dollars unless stated otherwise.
Financial performance
| Metric | Q2 2013 | Q2 2012 | First half 2013 | First half 2012 |
|---|---|---|---|---|
| Net sales | $641.4 | $577.5 | $1,259.1 | $1,170.0 |
| Operating income | $80.9 | $67.1 | $145.5 | $137.4 |
| Operating margin | 12.6% | 11.6% | 11.6% | 11.7% |
| Net income attributable to AptarGroup | $49.8 | $41.7 | $89.8 | $85.5 |
| Diluted EPS | $0.73 | $0.61 | $1.31 | $1.24 |
| Dividend per share | $0.25 | $0.22 | $0.50 | $0.44 |
- Q2 sales grew 11% reported; excluding acquisitions and currency movements, growth was 4%. First-half reported sales rose 8%, with 2% growth excluding acquisitions and currency.
- Q2 cost of sales was 67.3% of sales versus 67.6%; first-half cost of sales was 67.5% versus 67.6%. Q2 net margin was 7.8% versus 7.2%; first-half net margin was 7.1% versus 7.3%.
- First-half operating cash flow was $109.6, up from $84.2. Capital expenditures were $71.7 versus $95.4; operating cash flow less capital expenditures was $37.9, compared with negative $11.2 in the prior-year period.
Balance sheet and liquidity
- At June 30, cash and equivalents were $190.0, total assets $2,339.4, and stockholders’ equity $1,410.7. Cash was down from $229.8 at year-end 2012.
- Short- and long-term interest-bearing debt totaled $387.9, down from $427.5 at December 31, 2012. Net debt was approximately $197.9. Management reported net debt to net capital of 12.3%, compared with 12.5% at year-end.
- Current assets were $1,084.6 and current liabilities $439.3. The $300 million revolving credit facility was unused and available; its maturity was extended to January 31, 2018. The company reported compliance with its debt covenant, with a 21.6% debt-to-total-capital ratio against a 55% maximum.
- First-half financing cash use was $82.1, including $33.1 of dividends and $44.6 of share repurchases. Management estimated 2013 capital expenditures at approximately $160 million.
Material changes and segment trends
- Pharma: Q2 sales increased 38% to $182.9 and segment income rose 62% to $50.4; first-half sales grew 29% to $351.8 and segment income grew 37% to $96.4. The 2012 acquisition of Stelmi contributed $38.6 of Q2 sales and $74.0 for the first half. Excluding Stelmi and currency, Pharma sales rose 8% in Q2 and 2% in the first half.
- Beauty + Home: Q2 sales increased 2% to $375.0, but segment income fell 10% to $30.3. First-half sales declined 1% to $738.5 and segment income fell 18% to $54.8, reflecting North American softness, lower tooling sales, labor costs, and operational inefficiencies.
- Food + Beverage: Q2 sales rose 11% to $83.5 and segment income rose 53% to $11.9. First-half sales increased 12% to $168.8 and segment income rose 40% to $20.4, supported by product growth, productivity, and overhead absorption.
- Company Q2 operating income increased despite $3.1 of restructuring and related depreciation charges. First-half operating margin edged down because of higher depreciation, restructuring, and other costs.
Outlook, commentary, and risks
- Management expected each segment to grow year over year in Q3 and forecast diluted EPS of $0.68–$0.73, versus $0.62 in Q3 2012. Management noted the prior-year comparison included a $0.02-per-share negative Stelmi impact.
- The European Operations Optimization plan covers capacity transfers and consolidation across 12 facilities, including closures in Italy and Switzerland affecting about 170 employees. Estimated total cost was approximately €14 million (about $18 million), with about $6 million of additional costs expected, mostly in 2013. Annual savings were estimated at about €9 million (about $12 million) beginning in late 2013.
- Seasonal customer plant shutdowns in Europe may weigh on second-half results. Other stated risks include economic and market conditions, input costs and supply availability, productivity, foreign-exchange movements, project execution, customer demand, competition, litigation, and regulatory and tax changes.
- A competitor’s patent case concerning a specific fragrance pump resulted in a 2012 U.S. infringement finding; no damages were assessed. The company appealed, with oral argument scheduled for August 2013. Management said claims and proceedings could nonetheless result in material adverse effects if resolved unfavorably.
- The company repatriated $77 million of current-year foreign earnings in the first half and used the funds to reduce revolving-credit borrowings. Management stated that future repatriations may incur tax and that most cash was held outside the U.S.
- On July 18, 2013, the board authorized repurchases of an additional 4 million shares; a $0.25 quarterly dividend was also declared for payment in August.
Most important facts for investors to verify
- Whether the Q3 EPS outlook and expected growth across all segments were achieved, particularly amid seasonal shutdowns and market softness.
- Whether the expected EOO costs, facility closures, employee impacts, and late-2013 savings remain on schedule.
- How much of reported Pharma growth and profitability is attributable to Stelmi versus underlying demand, and whether Beauty + Home operating pressures improve.
- Cash generation, planned capital spending, debt levels, and the pace of dividends and share repurchases; most cash was located outside the U.S.
- Developments in the pending patent appeal and any changes in the company’s assessment of legal or uncertain tax exposures.