AptarGroup, Inc. — Q3 2016 Form 10-Q
Reporting period: Three and nine months ended September 30, 2016. AptarGroup sells dispensing systems across Beauty + Home, Pharma, and Food + Beverage. Financial amounts below are in millions unless noted; statements are unaudited.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net sales | $589.7 | $586.3 | $1,792.1 | $1,770.4 |
| Operating income | $82.3 | $88.1 | $245.2 | $257.2 |
| Net income attributable to AptarGroup | $53.1 | $53.2 | $156.0 | $156.0 |
| Diluted EPS | $0.82 | $0.83 | $2.40 | $2.41 |
| Operating margin | 14.0% | 15.0% | 13.6% | 14.5% |
- Q3 reported sales rose 1%, while core sales declined 1% after a 3% contribution from Mega Airless and a 1% negative currency effect. Nine-month reported sales rose 1%; core sales rose 1%.
- Q3 cost of sales improved to 64.6% of sales from 65.1%, helped by a higher Pharma sales mix. SG&A and depreciation and amortization increased as percentages of sales, weighing on operating margin. Adjusted EBITDA margin was 20.8% in Q3 and 20.5% for nine months; these are non-GAAP measures.
- Q3 segment results: Pharma sales rose 9% and segment income rose 4% to $55.0; Beauty + Home sales fell 2% and segment income fell 9% to $25.4; Food + Beverage sales fell 8% and segment income fell 24% to $10.1. Nine-month Pharma sales rose 5%, while Beauty + Home sales were flat and Food + Beverage sales fell 3%.
- Effective tax rate was 29.2% for Q3 and 28.8% year to date, down from 32.9% and 33.0%, respectively. Management cited a lower French corporate tax rate, investment tax incentives, and, for the year-to-date comparison, benefits from finalized French court rulings.
Cash flow, balance sheet, and capital
- Nine-month operating cash flow was $204.3, down from $231.4, primarily reflecting higher working-capital needs. Capital expenditures were $92.4; management estimated approximately $140 million for full-year 2016.
- Cash and equivalents were $432.7 at September 30, 2016, versus $489.9 at year-end 2015. Interest-bearing debt was $918.8, versus $817.8; net debt was $486.0, and net debt to net capital rose to 27.4% from 20.6%.
- The company had $126 million outstanding under its $300 million revolving credit facility. Covenant levels were well within stated limits: leverage ratio 1.10 versus a maximum 3.50, and interest coverage 14.57 versus a minimum 3.00. Management said it could borrow approximately another $1.1 billion before breaching the leverage covenant.
- Current assets were $1,302.2 and current liabilities $504.4. Cash was largely held outside the U.S.; repatriating certain foreign cash may incur tax. Long-term obligations totaled $776.8 on the balance sheet.
- Nine-month investing cash outflow was $265.5, including $203.0 net cash paid for Mega Airless. Financing cash outflow was $0.8, including $84.8 of share repurchases and $56.6 of dividends. The quarterly dividend was $0.30 per share; a $0.32 dividend was declared after quarter-end.
Material changes and unusual items
- AptarGroup acquired Mega Airless on February 29, 2016, for approximately $223.2 million ($203.0 million net of acquired cash), funded with cash and revolver borrowings. It added $18.3 million of Q3 sales and $42.9 million of nine-month sales. Nine-month results included $5.6 million of acquisition transaction costs and $2.6 million of inventory fair-value adjustment costs.
- Q3 operating income declined $5.8 million. For the first nine months, the reported decline included comparison with a $7.4 million benefit recorded in 2015 from changing certain inventory costing from LIFO to FIFO; excluding currency and that prior-year benefit, management said operating income declined approximately $1.3 million.
- A June 2016 fire at the Annecy, France facility caused $5.5 million of costs through September, partly offset by insurance proceeds and a $1.9 million insurance receivable; net 2016 expense was $1.4 million. Management did not expect a material financial impact, but insurance recovery timing remained uncertain.
- The company repurchased and retired 1.1 million shares for $84.8 million during the first nine months. A new authorization of up to $350 million was announced October 20, 2016, replacing prior authorizations.
- Foreign currency translation adjustments contributed $44.2 million of other comprehensive income for the first nine months, compared with a $115.0 million loss in the prior-year period.
Outlook, risks, and contingencies
- For Q4 2016, management expected EPS of $0.63–$0.68, excluding potential effects from timing of Annecy fire costs and insurance reimbursements. Prior-year reported EPS was $0.68; adjusted for cited special items, prior-year EPS was approximately $0.67.
- Management described Q4 as seasonally slower, citing customer caution, inventory reductions, lower promotional spending, delayed projects, geopolitical and economic uncertainty, competitive markets, and expected resin cost increases. It maintained a positive long-term outlook while emphasizing cost containment.
- Key risks include foreign exchange and input-cost volatility, customer and supplier concentration or financial weakness, acquisition integration, fire-related disruption and insurance recovery, economic and political conditions, product demand, litigation, cybersecurity, and execution of facility and product-development plans.
- Tax uncertainties were recorded at $9.1 million; the company estimated the liability could decrease by no more than $7.0 million over the next 12 months as audits, litigation, or limitation periods resolve. Management stated that ordinary-course lawsuits and claims were not expected to have a material effect, while acknowledging unfavorable outcomes could be material.
- Disclosure controls were deemed effective. The company was implementing ERP systems and reviewing Mega Airless internal controls; no material control change was reported beyond those activities.
Investor verification priorities
- Track Pharma growth and whether it offsets continued weakness in Beauty + Home and Food + Beverage, particularly beverage demand in China.
- Compare Q4 EPS with the $0.63–$0.68 guidance and assess the timing and net insurance recovery for the Annecy fire.
- Verify Mega Airless integration, realized contribution, acquisition-related costs, and the carrying values of acquired goodwill and intangibles.
- Monitor working capital, capital spending, debt and leverage after the acquisition, repurchases, and dividend payments.
- Review the resolution of uncertain tax positions and legal claims, and the effects of currency movements and resin costs on margins.