AptarGroup, Inc. — 2016 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2016. The filing also reports fourth-quarter results. AptarGroup supplies packaging, dispensing and sealing systems through Beauty + Home, Pharma, and Food + Beverage.
Financial performance
| Metric | 2016 | 2015 |
|---|---|---|
| Net sales | $2,330.9 million | $2,317.1 million |
| Operating income / margin | $310.5 million / 13.3% | $324.1 million / 14.0% |
| Net income attributable to AptarGroup | $205.6 million | $199.3 million |
| Diluted EPS | $3.17 | $3.09 |
| Adjusted EBITDA / margin | $476.1 million / 20.4% | $454.0 million / 19.6% |
| Cash provided by operations | $327.2 million | $324.5 million |
| Capital expenditures | $129.0 million | $149.3 million |
| Cash and equivalents at year-end | $466.3 million | $489.9 million |
| Total interest-bearing debt | $946.6 million | $817.8 million |
| Net debt / net capitalization | $480.3 million / 29.0% | $298.1 million / 20.6% |
Sales rose about 1% as reported, but were flat excluding currency effects and acquisitions; foreign currency reduced sales by approximately 2%, while Mega Airless contributed approximately 3%. Cost of sales declined to 64.3% of sales from 64.8%, while SG&A rose to 15.8% from 15.2% and depreciation and amortization increased to 6.6% from 6.0%. The effective tax rate fell to 26.7% from 32.3%.
In the fourth quarter, sales were $538.9 million versus $546.8 million in the prior-year quarter; net income attributable to AptarGroup was $49.6 million versus $43.4 million, and diluted EPS was $0.77 versus $0.68.
Segments and material changes
- Beauty + Home: Sales declined 1% to $1,261.1 million; core sales fell 2%. Segment income increased to $100.6 million from $98.7 million, supported in part by Mega Airless and cost initiatives. Weak market conditions and lower tooling sales weighed on revenue.
- Pharma: Sales increased 4% to $741.5 million; core sales grew 5%. Segment income rose 4% to $219.0 million. Prescription, consumer health care and injectables all recorded core growth; Pharma remained the most profitable segment.
- Food + Beverage: Sales declined 1% to $328.4 million, although core sales increased 1%. Segment income fell 12% to $37.7 million, reflecting weaker beverage demand, particularly functional drinks in China, and adverse product mix.
Net income increased despite lower operating income, aided by the lower tax rate. The prior-year comparison includes a $7.4 million pretax benefit from a 2015 inventory accounting method change; management says 2016 operating income declined about $1.9 million excluding currency effects and that item. Adjusted EBITDA is a non-GAAP measure.
Liquidity, capital allocation and outlook
- Operating cash flow was $327.2 million. Investing activities used $300.5 million, including $203.0 million net cash paid for Mega Airless; financing activities used $31.6 million.
- The company had $166.0 million outstanding on its $300 million revolving credit facility at year-end. It reported compliance with debt covenants; leverage was 1.17x against a 3.50x maximum, and interest coverage was 13.35x against a 3.00x minimum.
- Management estimated 2017 capital expenditures of approximately $160 million. It expected to repatriate approximately $250 million in the liquidity discussion; the tax note describes planned repatriation of $300 million. Management said no additional tax was expected on the planned remittance under then-current law.
- A new $350 million share repurchase authorization was announced in October 2016. The company repurchased approximately 1.7 million shares for $131.4 million during 2016 and paid $76.7 million in dividends. The annual dividend declared was $1.22 per share.
- For first-quarter 2017, Aptar expected EPS of $0.72–$0.77 versus $0.67 a year earlier, excluding potentially unquantifiable timing effects from the Annecy fire and adoption of share-based compensation accounting changes.
Management commentary, unusual items and risks
Management described 2016 as difficult for Beauty + Home, while Pharma had another strong year and Food + Beverage performed well overall despite challenging Asian beverage demand. The Mega Airless acquisition closed February 29, 2016 for approximately $223.2 million (or $203.0 million net of acquired cash); it contributed $59.4 million of sales and $4.1 million of pretax income, including a $2.6 million inventory fair-value charge. Acquisition transaction costs were $5.6 million.
A June 2016 fire at the Annecy, France facility caused $10.7 million of costs. Aptar recorded $7.1 million of insurance proceeds and a $0.8 million receivable, and reported a $2.7 million net expense; further potential insurance gains were not recognized. Other key risks include foreign-exchange volatility, competitive pricing, variable resin and other input costs, customer or supplier consolidation, single-source supply dependencies, regulatory and healthcare cost pressures, pension assumptions, goodwill valuation, cybersecurity, and litigation or product-liability claims. Goodwill was $407.5 million; the annual impairment test found no impairment. The auditor issued an unqualified opinion and management reported effective internal control over financial reporting, excluding Mega Airless from its assessment because it was acquired during 2016.
Important facts for investors to verify
- Reconcile the different planned 2017 repatriation amounts in the filing ($250 million in MD&A versus $300 million in the tax note), and assess the tax assumptions.
- Track whether Pharma growth and Mega Airless integration offset continued softness in Beauty + Home and Food + Beverage beverage demand.
- Monitor debt, cash deployment, share repurchases and covenant headroom following the acquisition and increased net debt.
- Verify the ultimate insurance recovery and operational impact from the Annecy fire, including any later costs or reimbursements.
- Assess the sustainability of earnings growth given lower operating income, the reduced tax rate, and the filing’s use of adjusted non-GAAP measures.