AptarGroup, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; unaudited. Unless otherwise noted, dollar amounts are in millions. AptarGroup supplies dispensing, drug-delivery, sealing and material-science solutions through Pharma, Beauty + Home, and Food + Beverage.
Financial performance
| Metric | Q1 2021 | Q1 2020 | Change / context |
|---|---|---|---|
| Net sales | $776.8 | $721.6 | Up 8% reported; core sales up 1%, with 5% favorable currency impact and 2% contribution from acquisitions. |
| Operating income | $92.6 | $88.5 | Reported operating margin declined to 11.9% from 12.3%; excluding currency effects, operating income decreased about $2.8. |
| Net income attributable to AptarGroup | $84.0 | $55.3 | Includes a $16.8 unrealized PureCycle investment gain and a lower effective tax rate. |
| Diluted EPS | $1.24 | $0.84 | Q1 2021 benefited from the investment gain and tax items. |
| Adjusted EBITDA | $152.2 | $144.2 | Adjusted EBITDA margin was 19.6%, versus 20.0%. |
| Operating cash flow | $72.2 | $85.0 | Lower year over year, primarily reflecting higher working-capital requirements. |
| Capital expenditures / free cash flow | $63.9 / $8.3 | $61.6 / $23.4 | Free cash flow is operating cash flow less capital expenditures. |
Cost of sales was 62.9% of sales, compared with 62.5%; implied gross margin was 37.1%, versus 37.5%. The effective tax rate was 16.8%, versus 29.2%, reflecting $5.1 of employee stock-compensation tax benefits, a $2.9 benefit from U.S. state tax-law changes, a lower French tax rate and earnings mix.
Segment results
- Pharma: Sales of $313.8, up 6% reported, but core sales were flat. Adjusted EBITDA was $108.5, approximately unchanged; margin declined to 34.6% from 36.5%. Injectables and active material science were strong, offset by prescription and consumer-health inventory reductions.
- Beauty + Home: Sales of $346.9, up 7% reported, but core sales fell 3%; Fusion and currency contributed to reported growth. Adjusted EBITDA was $35.4, up from $34.2; margin was 10.2% versus 10.6%. Beauty sales remained weak, while home care and personal care showed strength.
- Food + Beverage: Sales of $116.0, up 16% reported and 14% core. Adjusted EBITDA increased to $20.0 from $15.4; margin improved to 17.2% from 15.4%. Food demand was strong; beverage growth largely reflected resin-price pass-through.
Liquidity, debt and capital
- At March 31, cash and equivalents were $254.9; cash, equivalents and restricted cash totaled $259.7. Total debt was $1.104 billion and net debt was $848.9. Net debt to net capital improved to 30.9% from 32.0% at year-end 2020.
- Cash declined by $45.3 during the quarter. Financing used $45.0, including repayment of $52.0 of revolving debt and $23.4 of dividends; stock-option exercises provided $31.9.
- No borrowing was outstanding under the U.S. or euro revolving facilities at quarter-end. Available facilities provide up to $300 million and €150 million; the company also reported approximately $1.1 billion of additional borrowing capacity under its leverage covenant.
- Leverage was 1.55x against a maximum of 3.50x; interest coverage was 17.69x against a minimum of 3.00x. The board declared a subsequent quarterly dividend of $0.38 per share, payable May 19, 2021.
- Management estimated 2021 capital expenditures of approximately $300–$330 million.
Outlook, commentary and risks
- For Q2 2021, management guided to diluted EPS of $0.91–$0.99, excluding restructuring expenses, acquisition-related costs and changes in fair value of equity investments; guidance assumed a 26%–28% effective tax rate.
- Management expected prescription-drug and consumer-health demand to remain pressured by customer inventory reductions, while some markets would face easier comparisons with the pandemic-affected prior-year quarter. Timing of passing through higher resin and other raw-material costs was expected to weigh on results.
- COVID-19 continued to affect beauty products tied to travel and retail, as well as bottled-water and on-the-go beverage applications. Management could not estimate the pandemic’s future impact and warned it could be material.
- Higher resin, freight and logistics costs, supply availability, manufacturing inefficiencies, foreign-exchange movements and uncertain customer demand are key risks. The company also cited potential impacts from inflation, customer and supplier financial conditions, and execution of its transformation plan.
- The business transformation plan had incurred $116.7 of an estimated $125 total implementation cost by quarter-end; $3.7 was expensed in Q1. Pandemic disruption delayed certain initiatives, and management expected Beauty + Home’s return to growth to be gradual and uneven.
- Legal and tax contingencies include a contested Brazilian import-duty assessment of approximately $6.1, for which no liability was recorded, and potential Brazilian tax recoveries estimated at $1.0–$6.8, also unrecorded. Management said outcomes of legal claims are uncertain.
- Disclosure controls and procedures were assessed as effective at March 31, 2021; no material change in internal control over financial reporting was reported.
Most important facts for investors to verify
- How much reported earnings growth reflects recurring operations versus the $16.8 PureCycle fair-value gain and favorable tax items.
- Whether core sales and margins recover as customer inventory adjustments, pandemic-related disruption and Beauty + Home weakness ease.
- Whether resin, freight and other input-cost increases can be passed through without further margin pressure.
- Whether cash generation supports the $300–$330 capital-spending plan, dividends and other strategic uses while preserving leverage headroom.
- Developments in the Brazilian tax matters, COVID-19 impacts, and completion and costs of the restructuring program.