AptarGroup, Inc. — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. The filing is an annual report, not a standalone fourth-quarter filing; selected Q4 results are included below. Dollar amounts are in U.S. dollars.
Business context
Aptar is a global supplier of dispensing, sealing and active-packaging products and services. It reports three segments: Beauty + Home, Pharma, and Food + Beverage. Europe generated 57% of 2019 sales; no customer or affiliated customer group represented more than 6% of sales.
Financial performance and liquidity
| Metric | 2019 | 2018 |
|---|---|---|
| Net sales | $2.860 billion | $2.765 billion |
| Operating income | $371.7 million; 13.0% margin | $286.3 million; 10.3% margin |
| Net income attributable to AptarGroup | $242.2 million | $194.7 million |
| Diluted EPS | $3.66 | $3.00 |
| Adjusted EBITDA (non-GAAP) | $592.3 million; 20.7% margin | $550.9 million; 19.9% margin |
| Cash provided by operations | $514.5 million | $313.6 million |
| Capital expenditures | $242.3 million | $211.3 million |
| Free cash flow (non-GAAP) | $272.2 million | $102.4 million |
Reported sales rose 3%; core sales, excluding currency and acquisition effects, also increased 3%. A stronger U.S. dollar reduced reported sales growth by 4 percentage points, while acquisitions added 4 points. Cost of sales declined to 63.6% of sales from 65.6%, helped by business mix and lower material costs. The effective tax rate increased to 29.2% from 26.8%.
At year-end, cash and equivalents were $242.0 million, total debt was $1.196 billion and net debt was $953.7 million, down from $1.028 billion in 2018. Net debt to net capital improved to 37.8% from 41.9%. The company reported $1.572 billion in stockholders’ equity. Its $300 million U.S. and €150 million U.K. revolving facilities mature in July 2022; $25 million was drawn on the U.S. facility and none on the euro facility. Covenant ratios were within limits: leverage was 1.71x versus a 3.50x maximum, and interest coverage was 16.21x versus a 3.00x minimum.
Quarterly Q4 results: sales were $671.3 million versus $685.0 million in Q4 2018; net income was $48.5 million versus $40.7 million; diluted EPS was $0.73 versus $0.62.
Segments and changes versus prior year
- Beauty + Home: Sales fell 5% to $1.353 billion; core sales declined 1%. Personal care weakness, including customer destocking, weighed on results. Adjusted EBITDA fell 3% to $181.2 million, while its margin improved to 13.4% from 13.0%.
- Pharma: Sales rose 14% to $1.091 billion, including 10% core growth and a 9% acquisition contribution. Adjusted EBITDA rose 13% to $387.5 million. Margin was 35.5% versus 36.0%; excluding a $6.5 million investment gain recognized in 2018, the margin improved slightly.
- Food + Beverage: Sales rose 8% to $416.0 million, with 3% core growth. Adjusted EBITDA rose 18% to $68.1 million; margin improved to 16.4% from 15.0%. Food growth was partly offset by lower beverage volumes tied to a customer in China.
Reported net income increased 24%, while operating income rose 30%. Lower restructuring charges contributed to the comparison: restructuring expense was $20.5 million in 2019 versus $63.8 million in 2018. Other expense increased to $29.6 million, partly due to higher interest expense; 2018 included the $6.5 million investment gain.
Outlook, management commentary, risks and unusual items
- Management expected Q1 2020 EPS, excluding restructuring and acquisition-related costs, of $0.85–$0.93, based on an effective tax rate of 28%–30%. It flagged continuing Beauty + Home inventory reductions, coronavirus-related uncertainty and travel-retail exposure, difficult Pharma comparisons, and possible effects on Food + Beverage’s Asian business.
- The Beauty + Home transformation plan had incurred $86.5 million of cumulative expense through 2019, against expected total implementation costs of approximately $110 million; related capital investment was expected to total $55 million, with $38 million incurred. Management’s target was $80 million of annualized incremental EBITDA by the end of 2020, while noting that market and customer headwinds could offset benefits.
- 2019 acquisitions included Noble, Nanopharm and Gateway; Bapco was acquired as an asset purchase. Aptar also sold its Propeller Health investment for $16.5 million. In January 2020, it completed a 49% investment in BTY for approximately $32 million; in February 2020, it agreed to acquire Fusion, subject to customary closing conditions.
- Key risks include foreign-exchange exposure, competitive and pricing pressure, volatile raw-material costs, customer consolidation, sole-source materials and production sites, acquisition integration and goodwill impairment, environmental regulation, cybersecurity, and health epidemics. The company cited the coronavirus outbreak and had restricted employee travel to China and closed facilities in line with local instructions.
- Contingencies include a Brazilian tax assessment of approximately $7.9 million, which Aptar is contesting and for which it recorded no liability; a Brazilian environmental reserve of $0.5 million; and ordinary-course litigation with uncertain outcomes. Potential retrospective Brazilian tax recoveries were estimated at $3–$10 million but were not recorded.
- Goodwill was $763.5 million; no impairment was recorded. The auditor identified the Active Packaging goodwill assessment as a critical audit matter. The audit opinion was unqualified, and management and the auditor reported effective internal control over financial reporting; the audit excluded the 2019 acquisitions of Nanopharm and Noble from its internal-control assessment.
Important facts for investors to verify
- Whether the Beauty + Home transformation delivers its targeted annualized EBITDA benefit by the stated deadline, and whether ongoing segment headwinds persist.
- Whether Q1 2020 guidance and the stated coronavirus-related risks were realized, including impacts on travel retail, Chinese customers and supply chains.
- How much of reported growth and profitability came from acquisitions versus core operations, particularly in Pharma and Food + Beverage.
- Debt repayment, cash generation and capital-allocation plans, including dividends, share repurchases and acquisition spending.
- Resolution and potential financial exposure from the Brazilian tax assessment, environmental matter and unrecorded potential tax recoveries; also monitor goodwill assumptions and acquisition integration.