AptarGroup, Inc. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014. Financial statements are unaudited; dollar amounts below are in millions unless noted. AptarGroup develops and sells dispensing systems and packaging components through Beauty + Home, Pharma, and Food + Beverage segments.
Financial performance and liquidity
| Metric | Q1 2014 | Q1 2013 / comparison |
|---|---|---|
| Net sales | $676.1 | $617.6; up 9% |
| Operating income | $78.7 | $64.6; up 22% |
| Operating margin | 11.6% | 10.4% |
| Net income attributable to AptarGroup | $48.4 | $40.0; up 21% |
| Diluted EPS | $0.71 | $0.59 |
| Operating cash flow | $32.0 | $26.1 |
| Capital expenditures | $42.9 | $34.8 |
- Cost of sales fell to 67.1% of sales from 67.8%; SG&A rose to 15.8% from 15.3%. Net margin was 7.2%, versus 6.5%.
- Operating cash flow less capital expenditures was negative $10.9 million, compared with negative $8.7 million a year earlier; this is a simple calculation from reported figures, not a company-defined measure.
- Cash and equivalents were $317.2 million at March 31, 2014, versus $309.9 million at year-end 2013. Interest-bearing debt was $529.0 million, up from $494.6 million; net debt was approximately $211.9 million. Net debt to net capital was 12.2%, versus 11.1% at year-end.
- Cash provided by financing was $15.0 million, including $35.6 million of proceeds from notes payable; dividends paid were $16.4 million and share repurchases were $13.0 million.
- The $300 million U.S. revolving credit facility had $135 million unused and available. The company reported a 25.8% debt-to-total-capital ratio against a 55% maximum covenant.
Segments and changes versus prior year
- Beauty + Home: Sales of $391.2 million, up 8%; segment income of $27.8 million, up 14%; segment margin rose to 7.1% from 6.7%.
- Pharma: Sales of $194.3 million, up 15% reported and 12% excluding currency; segment income of $52.5 million, up 14%. Segment margin was 27.0%, versus 27.2%.
- Food + Beverage: Sales of $90.5 million, up 6% reported and 5% excluding currency; segment income of $9.1 million, up 6%. Segment margin remained 10.0%.
- Management attributed growth to stronger product sales across all segments. Foreign currency had no net effect on total sales growth, although it added 3 percentage points to Pharma sales growth and 1 point to Food + Beverage.
- Q1 2013 included $4.1 million of restructuring expense and $0.5 million of related accelerated depreciation; neither recurred in Q1 2014. Excluding currency, operating income increased approximately $12.7 million.
Outlook, commentary, risks, and unusual items
- Management expected broad-based demand to continue in Q2 and forecast Q2 EPS of $0.78–$0.83, compared with $0.77 a year earlier excluding the 2013 European restructuring impact. It anticipated challenging emerging-market currencies and less favorable resin-price adjustments.
- 2014 capital expenditures were estimated at approximately $190 million. The completed European capacity optimization plan had incurred approximately $19.5 million of cumulative costs; annualized savings were expected to be $10–$12 million.
- The board increased the quarterly dividend 12% to $0.28 per share on April 11, 2014, payable May 21. Q1 dividends were $0.25 per share.
- Net other expense included a $1.5 million write-down of a noncontrolling investment. A patent dispute concerning a specific fragrance pump ended with a license agreement in February 2014; the filing reports no damages assessed.
- Uncertain tax-position liabilities were $7.2 million; the company said they could decrease by no more than $5 million over the next 12 months. The effective tax rate increased to 34.3% from 32.7%, mainly due to French tax-law changes, partly offset by lower repatriation costs.
- Key risks cited include foreign-exchange volatility, resin and other input costs, customer demand and concentration changes, supplier availability, facility expansions and new-facility execution, competition, intellectual-property litigation, product liability, regulation, and economic or political conditions. Most cash was held outside the U.S.; repatriating certain foreign balances could trigger taxes.
Most important facts for investors to verify
- Whether sales growth and margin improvement persist, particularly given higher SG&A and the absence of prior-year restructuring charges.
- Whether Q2 EPS falls within the $0.78–$0.83 outlook and whether currency and resin trends develop as management expected.
- Whether operating cash generation can fund the planned $190 million of capital spending, dividends, and repurchases without materially increasing debt.
- How the $1.5 million investment write-down, uncertain tax positions, foreign-cash repatriation exposure, and remaining restructuring reserves evolve.
- Whether the company sustains covenant headroom and manages foreign-exchange, supplier, project-execution, and litigation risks.