AptarGroup, Inc. — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021; unaudited. AptarGroup manufactures dispensing, drug-delivery, sealing and related solutions across Pharma, Beauty + Home, and Food + Beverage.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net sales | $825.4 million | $759.2 million | $2,413.2 million | $2,180.0 million |
| Operating income | $82.9 million | $99.0 million | $259.9 million | $258.0 million |
| Net income attributable to AptarGroup | $47.3 million | $63.7 million | $186.5 million | $160.8 million |
| Diluted EPS | $0.70 | $0.95 | $2.75 | $2.42 |
| Operating margin | 10.0% | 13.0% | 10.8% | 11.8% |
| Adjusted EBITDA margin | 18.7% | 20.6% | 18.8% | 20.1% |
Q3 sales grew 9% reported and 8% on a core basis (excluding acquisitions and currency). About 5 percentage points of core growth reflected pass-through of higher resin and other input costs. For the nine months, reported sales increased 11% and core sales increased 6%; currency contributed 4 percentage points and acquisitions about 1 percentage point to reported growth.
Q3 operating income fell about 16% as higher material, labor and other input costs, mix, and restructuring expenses pressured margins. For the nine-month period, reported operating income was slightly higher, but management said it declined approximately $11.9 million excluding currency effects. Net income attributable to AptarGroup rose for the nine months, helped in part by a lower effective tax rate (22.9% versus 29.4%); Q3 earnings were lower year over year.
Segments and material changes
- Pharma: Q3 sales were $313.2 million, down 1%; Adjusted EBITDA was $100.7 million, down 10%, with margin declining to 32.2% from 35.6%. Prescription-drug customer inventory drawdowns and lower demand in some healthcare categories offset growth in injectables.
- Beauty + Home: Q3 sales were $374.1 million, up 11%; Adjusted EBITDA rose 26% to $43.8 million and margin improved to 11.7%. Beauty demand recovered, while home-care sales declined in the quarter.
- Food + Beverage: Q3 sales were $138.1 million, up 30%; Adjusted EBITDA rose 10% to $22.4 million, but margin fell to 16.2% from 19.2%, partly reflecting unprofitable resin-cost pass-throughs. Sales benefited from market recovery and higher tooling sales.
For the first nine months, Beauty + Home and Food + Beverage Adjusted EBITDA increased 26% and 16%, respectively; Pharma Adjusted EBITDA declined 3%. Consolidated results also included a $9.0 million Q3 unrealized loss on the PureCycle investment, versus a $6.2 million unrealized gain for the nine-month period.
Cash flow, debt and liquidity
- Nine-month operating cash flow was $259.4 million, down from $381.4 million. The company attributed the decline mainly to higher receivables and inventory, including inventory built amid input-cost increases and supply-chain disruption.
- Capital expenditures were $216.7 million, versus $173.4 million. Free cash flow, defined by the company as operating cash flow less capital expenditures, was $42.7 million, versus $208.1 million.
- Cash and equivalents were $114.6 million at September 30, 2021, compared with $300.1 million at year-end 2020. Total debt was $1.117 billion; net debt was $1.002 billion, and net debt to net capital rose to 33.4% from 32.0%.
- The company reported covenant ratios of 1.76x consolidated leverage versus a 3.50x maximum, and 19.39x interest coverage versus a 3.00x minimum. Its amended $600 million revolving facility matures in June 2026; $56 million remained outstanding under a separate amended term facility maturing in July 2022.
- Management estimated 2021 capital expenditures of approximately $300 million to $330 million. The board declared a quarterly dividend of $0.38 per share, payable November 17, 2021.
Outlook, risks and unusual items
For Q4 2021, management expected core sales growth in each segment, with demand for beauty products, elastomer components and active material solutions expected to increase. Strong Q4 2020 comparisons were expected to challenge prescription drug delivery and Food + Beverage. Margins were expected to remain pressured by input-cost inflation, transportation, supply-chain disruption, labor shortages and sales mix. Q4 adjusted EPS guidance was $0.88 to $0.96, excluding restructuring, acquisition-related costs and changes in fair value of equity investments; guidance assumed a 28% to 30% tax rate.
COVID-19-related uncertainty, inflation, supply constraints, labor availability, currency movements and customer inventory drawdowns were identified as risks. Management cautioned that these conditions could materially affect results. The company reported no COVID-related impairment as of September 30, 2021.
Aptar acquired 64.3% of Voluntis and 80% of Hengyu during Q3, using cash; subsequent to quarter-end it acquired additional Voluntis shares, bringing ownership to 96.5%, with a squeeze-out expected before year-end. The company recorded $10.2 million of Q3 restructuring expense and $18.8 million for the nine months; cumulative expense under its transformation plan was $131.8 million, with approximately $135 million total implementation cost estimated. A Brazilian tax ruling produced a $2.7 million Q3 recovery recorded in cost of sales; a further estimated $2.6 million to $3.0 million recovery was not recorded due to uncertainty. A contested Brazilian import-duty tax assessment of approximately $6.1 million had no liability recorded; management said it believed it had a strong defense.
Important facts for investors to verify
- Whether input-cost, freight and labor inflation can be offset by pricing and productivity without further margin erosion.
- Whether Pharma inventory drawdowns and subdued prescription and consumer-health demand reverse, and how segment mix affects profitability.
- Whether working-capital requirements normalize and cash generation improves as capital spending and acquisition integration continue.
- Integration, purchase accounting and contingent consideration assumptions for Voluntis, Hengyu and prior acquisitions; the filing says 2021 acquisition accounting was still being finalized.
- Changes in PureCycle’s market value, which affected reported quarterly earnings, and the outcome of the unrecorded Brazilian tax matters and other legal claims.