APTARGROUP, INC. annual report, FY2018

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AptarGroup, Inc. — 2018 Form 10-K

Business context and reporting period. The filing covers the fiscal year ended December 31, 2018; the company also reports fourth-quarter results. AptarGroup is a global supplier of dispensing, sealing and active-packaging solutions, organized into Beauty + Home, Pharma, and Food + Beverage. Europe accounted for 59% of annual sales. The company completed its acquisition of CSP Technologies in August and acquired Reboul in May.

Financial performance and key metrics

  • Full-year revenue: $2.765 billion, up 12% from $2.469 billion. Core sales, excluding currency and acquisitions, rose 8%.
  • Profitability: Operating income was $286.3 million, down 12%; operating margin fell to 10.3% from 13.1%. Net income attributable to AptarGroup was $194.7 million, down 11%, and diluted EPS was $3.00 versus $3.41. Adjusted EBITDA, a non-GAAP measure, increased 16% to $550.9 million; its margin rose to 19.9% from 19.2%.
  • Costs and taxes: Cost of sales increased to 65.6% of sales from 64.9%. The effective tax rate was 26.8%, versus 25.4%.
  • Cash flow and investment: Operating cash flow was $313.6 million, compared with $324.7 million. Capital expenditures were $211.3 million, up from $156.6 million. Operating cash flow less capital expenditures was approximately $102.4 million.
  • Debt and liquidity: Cash and equivalents were $261.8 million, down from $712.6 million. Total debt was approximately $1.290 billion and net debt was $1.028 billion, compared with $544.7 million net debt a year earlier. Net debt to net capital increased to 41.9% from 29.3%. The company reported covenant ratios of 2.09x leverage (maximum 3.50x) and 14.57x interest coverage (minimum 3.00x).
  • Fourth quarter: Sales were $685.0 million versus $625.9 million, up about 9%. Net income was $40.7 million versus $49.5 million, and diluted EPS was $0.62 versus $0.77. Fourth-quarter gross profit, as defined in the filing, was $184.8 million versus $179.2 million.

Material changes versus the prior comparable period

  • Pharma was the strongest segment: sales rose 18.5% to $954.7 million and adjusted EBITDA rose 24.6% to $343.7 million, supported by core growth and CSP Technologies.
  • Beauty + Home sales increased 8.6% to $1.426 billion; adjusted EBITDA rose 7.3% to $185.9 million. The company said sales growth and operating improvements helped offset higher material costs.
  • Food + Beverage sales increased 9.8% to $383.7 million, but adjusted EBITDA fell 8.4% to $57.6 million and margin declined to 15.0% from 18.0%. The company cited material-cost increases, lower tooling profitability, price concessions and a $1.6 million prepaid-royalty impairment.
  • Reported operating income and net income declined despite revenue growth, principally reflecting $63.8 million of restructuring charges, acquisition-related costs, and purchase-accounting adjustments for acquired inventory. The company said operating profitability improved by approximately $40.7 million excluding these and other identified costs.
  • Cash balances fell substantially, primarily because of the $553.5 million CSP Technologies acquisition, while net debt increased. Capital spending also rose.

Outlook, commentary, risks and unusual items

  • Guidance: Management expected positive sales momentum to continue in Q1 2019, with core sales growth in each segment. Q1 EPS guidance, excluding restructuring costs, was $0.95–$1.00, based on a 29%–31% effective tax rate. Guidance assumed unfavorable foreign-currency translation and a higher share count.
  • Transformation plan: Estimated implementation costs are approximately $90 million over three years, with about $55 million of related capital investment, most of it expected in 2019. Management targeted approximately $80 million of annualized incremental EBITDA by the end of 2020 versus 2017 levels; execution, timing and cost remain uncertain.
  • Acquisitions and unusual items: CSP Technologies contributed $48.9 million of 2018 sales and a $10.2 million pretax loss, including acquired-inventory fair-value amortization. Reboul’s contingent earn-out was not paid because targets were not achieved. Aptar recorded a $6.5 million gain on its Propeller Health investment, which was sold in January 2019.
  • Operating and financial risks: Risks include raw-material inflation and delays in passing costs to customers, foreign-exchange exposure, reliance on certain single-source materials, customer consolidation and pricing pressure, acquisition integration, and the success of pharmaceutical customers’ products. Argentina was treated as a highly inflationary economy from July 2018; the company changed the subsidiaries’ functional currency to the U.S. dollar.
  • Contingencies: The company had an environmental matter at its Brazil facility, with estimated investigation and possible remediation costs of $1.5–$3.0 million; it had accrued $1.5 million and made no adjustment in 2018. A possible Brazilian tax recovery could be up to $16.1 million including interest, but no further amount was recorded beyond a $631,000 favorable decision. Management said ordinary-course litigation was not expected to be material, while noting outcomes are uncertain.
  • Other considerations: Adoption of the new lease standard began January 1, 2019 and was expected to add operating-lease right-of-use assets and liabilities; the filing does not provide a clear quantified adoption impact. The auditor and management reported effective internal controls, but CSP Technologies was excluded from the 2018 control assessment because it was acquired during the year.

Most important facts for investors to verify

  • Whether Beauty + Home’s transformation delivers the targeted margin recovery and approximately $80 million EBITDA benefit by the end of 2020.
  • Whether higher raw-material costs can be passed through promptly, particularly in Food + Beverage, and whether that segment’s profitability stabilizes.
  • Integration progress and realized returns from CSP Technologies and Reboul, including final purchase accounting and the substantial goodwill and intangible assets recorded.
  • Cash generation, capital expenditure requirements and the path of net debt after the CSP acquisition; confirm covenant headroom and debt maturities.
  • Whether Q1 2019 guidance and the expected segment growth were achieved, and how currency and tax-rate assumptions affected results.
  • Updates on the Brazil environmental investigation and tax-recovery claims, as well as the quantified balance-sheet impact of lease-standard adoption.