AptarGroup, Inc. — Q2 2012 Form 10-Q
Business context and period. AptarGroup develops and sells dispensing systems and packaging components for beauty and home, pharmaceutical, and food and beverage markets. This unaudited report covers the quarter and six months ended June 30, 2012; comparisons are with the same 2011 periods unless noted. Dollar amounts below are in millions except per-share data.
Financial performance
| Metric | Q2 2012 | Q2 2011 | First half 2012 | First half 2011 |
|---|---|---|---|---|
| Net sales | $577.5 | $614.9 | $1,170.0 | $1,191.4 |
| Operating income | $67.1 | $80.2 | $137.4 | $150.0 |
| Operating margin | 11.6% | 13.0% | 11.7% | 12.6% |
| Net income attributable to AptarGroup | $41.7 | $51.3 | $85.5 | $95.8 |
| Diluted EPS | $0.61 | $0.74 | $1.24 | $1.37 |
| Cash provided by operations | Not provided separately | Not provided separately | $84.2 | $65.5 |
- Reported Q2 sales fell 6%; excluding currency movements, sales increased 2%. Currency translation reduced reported sales growth by 8%. First-half reported sales declined 2%.
- Q2 cost of sales was 67.6% of sales versus 66.6%; first-half cost of sales was 67.6% versus 66.5%. Management cited Lincolnton facility start-up expenses, lower European volumes and, for the half-year, higher custom-tooling sales, which generally carry lower margins.
- Q2 net income margin was 7.2% versus 8.3%; first-half margin was 7.3% versus 8.0%.
- First-half operating cash flow increased to $84.2 from $65.5, primarily due to improved working capital. Capital expenditures were $95.4 versus $78.9, so operating cash flow did not cover investment spending.
- At June 30, cash and equivalents were $300.9, down from $377.6 at year-end. Interest-bearing debt was $384.2, down from $438.6; net debt was $83.3. The net-debt-to-net-capital ratio was 5.8%, compared with 4.5% at year-end.
- Stockholders’ equity was $1,347.9. The company reported $188 million available under its $300 million revolving facility, which matures January 31, 2017. Cash was 99% held outside the U.S.
Segment performance and material changes
- Beauty + Home: Q2 sales were $369.3, down 8% reported but flat excluding currency; segment income fell 16% to $33.7. First-half sales declined 4% reported but grew 2% excluding currency; income fell 8% to $66.6.
- Pharma: Q2 sales were $133.0, down 4% reported but up 4% excluding currency; segment income fell 23% to $31.1. First-half sales rose 1% reported and 6% excluding currency, while income fell 11% to $70.5. Q2 income included $5.5 of Stelmi acquisition-related costs.
- Food + Beverage: Q2 sales rose 2% reported and 6% excluding currency to $75.2; segment income fell 9% to $7.9. First-half sales rose 6% reported and 9% excluding currency to $150.5; income fell 10% to $14.6. Higher selling and R&D costs and Lincolnton start-up costs weighed on income.
- Q2 net other expense increased to $4.5 from $3.3; management cited $1.3 of foreign-currency losses. First-half net other expense was $8.6 versus $6.8, primarily reflecting lower interest income.
- Comprehensive loss attributable to AptarGroup was $27.9 in Q2, despite net income of $41.7, mainly because foreign-currency translation adjustments were a negative $70.5. First-half comprehensive income attributable to the company was $58.3.
- Cash dividends declared were $0.22 per share in Q2 versus $0.18 a year earlier. The company repurchased approximately 189,000 shares for $10.1 in the first half, with no purchases in Q2.
Outlook, risks and unusual items
- Management expected European softness and challenging currency conditions to continue into Q3, with customer caution particularly in fragrance/cosmetics, personal care and consumer health care. Q3 diluted EPS guidance was $0.61–$0.66, versus $0.72 a year earlier; management noted prior-year EPS would have been approximately $0.65 at current exchange rates and benefited by about $0.02 from a lower tax rate.
- Management estimated 2012 capital expenditures of approximately $180, subject to exchange rates and project timing. The board declared a $0.22 quarterly dividend payable August 30, 2012.
- On July 3, 2012, after quarter-end, AptarGroup acquired the Stelmi Group for enterprise value of approximately €165 million ($207 million) in cash. Stelmi’s results were to be included in Pharma beginning in Q3. Purchase accounting was incomplete at filing, so acquired asset, liability, goodwill and intangible values were not yet available.
- A U.S. subsidiary was found in April 2012 to have infringed a competitor’s patents involving a specific pump; the ruling did not cover manufacturing or sales outside the U.S., assessed no damages, and was appealed. Management said ordinary-course claims were not expected to materially affect results, but acknowledged legal outcomes are uncertain.
- Key exposures include foreign exchange, European demand, input and raw-material costs, supplier availability, execution and integration of Stelmi, customer demand, competition, product liability, intellectual property litigation, and capital-market and interest-rate conditions. The company also noted typical seasonal customer plant shutdowns in Europe and December.
- Management stated disclosure controls were effective at June 30, 2012; no material change in internal control over financial reporting occurred during the quarter.
Important facts for investors to verify
- Whether Q3 guidance is achieved, especially given European demand softness and exchange-rate movements.
- Stelmi’s final purchase-price allocation, integration progress, and contribution to Pharma results, including ongoing acquisition-related costs.
- Whether operating margins recover as Lincolnton start-up costs subside and European volumes and product mix change.
- The location and accessibility of overseas cash, the cost and tax implications of further repatriations, and liquidity needs following the Stelmi purchase.
- The outcome of the patent appeal and any resulting operational, financial or legal consequences.
- Actual 2012 capital expenditures relative to the approximately $180 million estimate and the company’s ability to fund investment, dividends and repurchases from cash generation.