AptarGroup, Inc. — Q3 2012 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2012. AptarGroup develops, manufactures and sells dispensing systems and packaging components through Beauty + Home, Pharma, and Food + Beverage. Dollar amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Net sales | $589.6 | $601.2 | $1,759.6 | $1,792.6 |
| Operating income | $66.9 | $74.2 | $204.3 | $224.2 |
| Net income attributable to AptarGroup | $42.1 | $49.3 | $127.6 | $145.1 |
| Diluted EPS | $0.62 | $0.72 | $1.86 | $2.08 |
| Operating margin | 11.3% | 12.3% | 11.6% | 12.5% |
| Net margin | 7.1% | 8.2% | 7.2% | 8.1% |
| Effective tax rate | 33.2% | 30.9% | 33.5% | 32.4% |
Q3 sales declined 2% reported, but increased 2% excluding acquisitions and currency effects. Foreign exchange reduced reported Q3 sales growth by 8%. For the first nine months, operating cash flow was $197.5 versus $184.8; capital expenditures were $133.0 versus $126.7. Investing activities used $318.7, including $187.8 for the Stelmi acquisition. Financing activities used $86.8. Cash fell to $174.3 from $377.6 at year-end 2011.
Balance sheet and liquidity
- At September 30, 2012, total assets were $2,257.3 and stockholders’ equity was $1,378.3.
- Interest-bearing debt was $397.9, down from $438.6 at December 31, 2011; net debt was approximately $223.6 versus $61.0. Net debt to net capital rose to 14.0% from 4.5%.
- Current assets were $998.6 and current liabilities $380.6. The $300 million unsecured revolving facility, maturing in 2017, had $297 million unused and available. The company reported covenant debt-to-total-capital of 22.4%, below the 55% maximum.
- In September, AptarGroup issued $125 million in private-placement notes: $75 million at 3.25% due in 2022 and $50 million at 3.40% due in 2024. Cash and equivalents were mostly held outside the U.S.
- Capital expenditure spending for 2012 was estimated at approximately $180 million. The board declared a quarterly dividend of $0.22 per share, payable November 28, 2012.
Changes, segments and notable items
- Beauty + Home: Q3 sales fell 7% reported, but rose 1% excluding currency; segment income decreased 6% to $30.1. European weakness persisted, partly offset by personal-care growth in Asia and Latin America.
- Pharma: Q3 sales increased 7% to $156.1, including $25.3 from Stelmi; organic, constant-currency sales declined 2%. Segment income fell 24% to $34.2, including $5.0 of Stelmi fair-value and other acquisition adjustments. Prescription sales grew, while consumer health care sales weakened, particularly in Eastern Europe and Russia.
- Food + Beverage: Q3 sales rose 12% to $75.0 and segment income rose 39% to $9.6. Beverage growth, especially in Asia, and improved mix supported results.
- Reported sales and earnings were pressured by currency, weaker European volumes, increased tooling sales (which generally carry lower margins), and investment-related depreciation. Q3 cost of sales was 69.1% of sales versus 67.7%; excluding Stelmi, it was 68.5%. The effective tax rate reflected the French surtax and earnings mix; the nine-month rate also included tax related to repatriating $79 million of current-year foreign earnings.
- AptarGroup acquired Stelmi, a French producer of elastomer components for injectable drug delivery, on July 3 for approximately $188 million net of cash acquired. Stelmi contributed $25.3 million in Q3 sales and a $2.1 million pretax loss, including acquisition-related adjustments. The purchase added $109.7 million of goodwill.
- Share repurchases totaled $40.9 million for the first nine months, including $30.8 million in Q3; 2.8 million shares remained authorized for repurchase.
Outlook, risks and contingencies
- Management expected Q4 diluted EPS of $0.53–$0.58, including approximately $0.03 from Stelmi, versus $0.57 a year earlier. At current exchange rates, management estimated prior-year Q4 EPS would equate to about $0.54.
- Management cited continued currency headwinds, economic-driven softness in some markets, and lower demand for prescription nasal spray pumps due to high generic allergy-market inventory. It remained encouraged by customer project discussions but gave no broader full-year earnings guidance.
- On November 1, 2012, the company announced a European capacity optimization plan involving 12 facilities, two expected closures and approximately 170 affected employees. Estimated costs are €14 million (about $18 million), including €4 million non-cash; expected annual savings are €9 million (about $12 million) beginning in late 2013. Q4 EPS guidance excludes the plan.
- A competitor patent lawsuit resulted in an April 2012 U.S. finding of infringement relating to a specific pump. No damages were assessed; the company appealed. Management said claims and proceedings could nevertheless result in material adverse effects if outcomes are unfavorable.
- Key stated risks include foreign-exchange movements, economic and customer-demand conditions, input costs and supplier availability, successful integration of Stelmi, execution of the European plan, competition, litigation and intellectual-property protection. Management reported disclosure controls were effective as of September 30.
Important facts for investors to verify
- Whether Q4 EPS falls within the $0.53–$0.58 range and how currency and generic allergy-market inventories affect Pharma demand.
- Stelmi’s post-acquisition profitability, integration progress, and the final allocation and recurring impact of acquisition costs and purchase accounting.
- Progress, total charges, timing and realized savings from the European optimization plan.
- Developments in the appealed patent case and any financial exposure beyond the filing’s report of no damages assessed to date.
- Cash availability and funding needs, given that most cash is held outside the U.S., alongside planned capital spending, dividends and repurchases.