AptarGroup, Inc. — Q3 2019 Form 10-Q
Period: Three and nine months ended September 30, 2019. Unaudited results; comparative periods are the corresponding 2018 periods. AptarGroup makes dispensing, sealing and active-packaging products for beauty and home care, pharmaceuticals, food and beverage.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net sales | $701.3 million | $665.8 million | $2,188.4 million | $2,079.7 million |
| Operating income | $90.2 million | $61.1 million | $297.2 million | $230.0 million |
| Net income attributable to AptarGroup | $56.8 million | $39.0 million | $193.7 million | $154.1 million |
| Diluted earnings per share | $0.85 | $0.60 | $2.93 | $2.38 |
| Operating margin | 12.9% | 9.2% | 13.6% | 11.1% |
| Adjusted EBITDA margin | 20.9% | 20.2% | 21.1% | 19.7% |
For Q3, cost of sales was 63.3% of sales versus 65.4% a year earlier; the filing attributes the improvement to favorable product mix, lower material costs and the timing of resin-price pass-throughs. Adjusted EBITDA is a non-GAAP measure.
- Segment trends, Q3: Pharma sales rose 18% reported and 13% on a core basis; Beauty + Home sales fell 4% reported and 1% core; Food + Beverage sales rose 8% reported and 2% core. Core growth excludes acquisitions and currency effects.
- Company-wide Q3 reported sales growth was 5%, comprising 4% core growth, a 4% contribution from acquisitions and a 3% adverse currency effect. Nine-month core sales rose 5%; acquisitions added 5% and currency reduced reported growth by 5%.
- Q3 restructuring expense declined to $6.0 million from $23.9 million; nine-month expense was $17.3 million versus $48.0 million.
- The effective tax rate was 31.0% in Q3 and 29.4% for the nine months, compared with 23.4% and 25.6%, respectively, in 2018. The filing cites the French tax-rate increase, stock-compensation tax benefits and other discrete items.
Cash flow, balance sheet and capital allocation
- Nine-month operating cash flow was $380.4 million, up from $209.6 million. Investing activities used $224.0 million, including $186.8 million of capital expenditures and acquisition spending; financing activities used $146.2 million.
- Cash and equivalents were $270.6 million at September 30, 2019, compared with $261.8 million at December 31, 2018. Total debt was $1.186 billion, down from $1.290 billion; net debt was $915.8 million. Net debt to net capital declined to 37.1% from 41.9%.
- Stockholders’ equity was $1.554 billion. The company reported $648.8 million of current liabilities and $1.3247 billion of current assets.
- Nine-month dividends paid were $67.2 million; treasury-stock purchases were $54.9 million. A $350 million repurchase authorization had $310.1 million remaining at quarter-end. The quarterly dividend was $0.36 per share.
- Capital expenditures were forecast at approximately $240–$260 million for 2019. The company said it had adequate resources for foreseeable requirements and reported covenant ratios within stated limits.
Outlook, commentary and notable items
- Management forecast Q4 adjusted EPS of $0.74–$0.80, excluding restructuring and acquisition-related expenses, based on a 30%–32% adjusted effective tax-rate range.
- The business transformation plan, focused primarily on Beauty + Home, carries estimated implementation costs of about $90 million over three years; $83.3 million had been incurred by September 30. Planned related capital investments were approximately $50 million, with $32 million incurred. Management said it was progressing toward its target of $80 million in annualized incremental EBITDA by end-2020; customer, vendor, materials and macroeconomic changes could affect benefits.
- Q3 earnings benefited from Pharma mix and lower input costs, while Beauty + Home faced softer personal-care demand and customer destocking. The stronger U.S. dollar reduced reported sales; December customer plant shutdowns typically weigh on fourth-quarter results.
- Foreign-currency translation adjustments reduced Q3 comprehensive income by $42.5 million. The filing reported no goodwill impairment after a separate Active Packaging assessment.
- At quarter-end, the company had a $0.5 million reserve for environmental remediation at its Brazil facility. Potential additional Brazilian tax recoveries of approximately $10 million, including interest, were not recorded and remained subject to court decisions expected in 2020. The filing also describes ordinary-course litigation and related uncertainty.
- After quarter-end, AptarGroup agreed to acquire a 49% interest in BTY, subject to closing conditions, and acquired Noble for approximately $62 million, with potential earn-out payments of up to $31.3 million.
Important facts for investors to verify
- Whether Q4 adjusted EPS guidance and the 30%–32% tax-rate assumption were achieved; these are forward-looking estimates.
- How much reported and future growth reflects core demand versus acquisitions, foreign exchange and resin-price pass-throughs, particularly in Pharma and Beauty + Home.
- Whether planned capital spending, acquisitions, dividends and repurchases are supported by ongoing operating cash flow and debt reduction.
- Delivery of the transformation plan’s $80 million annualized EBITDA target, including remaining costs and required investment.
- Outcomes of the Brazil environmental review and tax-recovery litigation, acquisition earn-outs and integration, and the risks identified by management, including currency, customer demand, input costs and execution.