AptarGroup In Line, Falls YoY (AMCRY) (ATR) (REXMY)

AptarGroup, Inc. (ATR) reported third-quarter 2012 adjusted earnings of 64 cents per share compared with 74 cents in the year-ago quarter. Earnings were in line with the Zacks Consensus Estimate and within management’s guidance of 61 cents to 66 cents.

Adjusted earnings in the reported quarter excluded expenses of 2 cents pertaining to the Stelmi acquisition. The year-ago quarter’s results excluded a positive impact of 2 cents per share related to a lower effective tax rate. Including these, earnings came in at 62 cents per share in the quarter versus 72 cents a share in the year-ago quarter.

Operational Update

Total revenue decreased 2% year over year to $589.6 million, but surpassed the Zacks Consensus Estimate of $586 million. Core sales increased 2% excluding currency effects and acquisition. Changes in currency exchange rates had an 8% negative impact on sales in the quarter. Aptar Stelmi contributed approximately $25 million to sales in the quarter. Latin America and Asian markets remained strong while Europe continued to be weak.

Cost of sales remained flat at $407 million in the quarter. Selling, Research & Development and Administrative expenses declined 8% to $80 million. Operating income declined 10% to $67 million with operating margin contracting 100 basis points to 11.3%.

Segment Performance

Total revenue in the Beauty + Homes segment declined 7% to $358 million in the quarter. Operating income declined 6% to $30 million. Segment operating margin decreased 10 basis points to 8.4%.

Total revenue in the Pharma segment increased 7% to $156 million. Operating income dropped 24% to $34 million. Consequently, operating margin contracted 870 bps to 21.9%.

Total revenue in the Food + Beverage segment jumped 12% to $75 million. Operating income increased 39% to $9.6 million. Operating income also expanded 260 basis points to 12.8% in the quarter.

Financial Performance

Cash and cash equivalents were $174.3 million as of September 30, 2012, compared with $300.9 million as of June 30, 2012. Total debt amounted to $397.8 million as of September 30, 2012, versus $384.2 million as of June 30, 2012.

Optimization Plan of European Operations

AptarGroup announced a plan to transfer and consolidate production capacity in twelve facilities and shut down two facilities in Europe. The concerned facilities serve the beauty, personal care, food, beverage, and consumer health care markets. Total costs will be to the tune of €14 million (approximately $18 million), of which approximately €4 million (approximately $5 million using current exchange rates) relates to non-cash expenses. The plan is estimated to generate annual savings of approximately €9 million (approximately $12 million) beginning in late 2013.

Outlook

The company expects earnings to remain in the range of 53 cents to 58 cents per share in the fourth quarter. This includes approximately 3 cents per share from the results of Aptar Stelmi.

Our View

AptarGroup has recently completed the acquisition of Stelmi Group, the manufacturer of elastomer primary packaging components for injectable drug delivery. With this purchase, AptarGroup enters the new arena of primary packaging components used in the injectable drug delivery. This acquisition endows AptarGroup with the opportunity to expand its product portfolio of pharmaceutical solutions in the Pharma segment. The integration is on track and the acquisition is expected to result in an accretion of between 12 cents and 16 cents per share beginning in the fourth quarter.

Furthermore, the optimization plan in Europe will position the company well for future growth. However, the ongoing weak economic conditions prevailing in Europe and foreign currency translation may affect results in the fourth quarter.

Crsytal Lake, Illinois-based AptarGroup is a leading global supplier of a broad range of innovative dispensing systems for the fragrance/cosmetic, personal care, pharmaceutical, household and food/beverage markets. AptarGroup also faces competition from companies like Amcor Ltd. (AMCRY) and Rexam plc (REXMY). AptarGroup retains a short-term Zacks #3 Rank (Hold).