AptarGroup, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019. Unaudited consolidated results; dollar amounts below are in millions except per-share data.
Business context and results
AptarGroup makes dispensing, sealing and active-packaging solutions across Beauty + Home, Pharma, and Food + Beverage. Reported sales benefited from the CSP Technologies and Reboul acquisitions, while a stronger U.S. dollar reduced translated results.
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Net sales | $744.5 | $703.4 | +6%; core sales +7% |
| Operating income | $97.1 | $88.0 | +10% |
| Operating margin | 13.0% | 12.5% | +0.5 percentage points |
| Net income attributable to AptarGroup | $63.0 | $59.3 | +6% |
| Diluted EPS | $0.96 | $0.92 | +4% |
| Adjusted EBITDA (non-GAAP) | $154.5 | $134.1 | +15% |
| Adjusted EBITDA margin (non-GAAP) | 20.8% | 19.1% | +1.7 percentage points |
| Operating cash flow | $77.6 | $51.0 | +$26.6 |
| Capital expenditures | $51.7 | $40.0 | +$11.7 |
Segments and material changes
- Beauty + Home: Sales $367.7 million, down 3% reported but up 3% on a core basis. Adjusted EBITDA was essentially flat at $53.2 million; margin rose to 14.5% from 14.1%.
- Pharma: Sales $272.7 million, up 19% reported and 15% core. Adjusted EBITDA rose 22% to $97.4 million; margin increased to 35.7% from 34.7%. Growth reflected strong prescription-drug and consumer-health demand and the CSP acquisition.
- Food + Beverage: Sales $104.1 million, up 10% reported and 3% core. Adjusted EBITDA increased 31% to $16.7 million; margin was 16.0% versus 13.4%. Acquisition contribution and lower material costs helped; lower tooling sales partly offset product growth.
Consolidated cost of sales declined to 63.0% of sales from 64.8%, supported by business mix, lower input costs and timing of resin-cost pass-throughs. SG&A rose to $121.2 million, including higher acquisition-related operating costs, professional fees and personnel costs. Depreciation and amortization increased to $47.5 million, partly due to acquisitions and investment in capacity.
Cash, debt and liquidity
- Cash and equivalents were $217.4 million at March 31, down from $261.8 million at year-end. Total debt was $1.223 billion, compared with $1.290 billion at December 31; net debt was $1.005 billion.
- Net debt to net capital was 40.7%, down from 41.9%. The company reported a 2.00:1 consolidated leverage ratio against a maximum of 3.50:1, and interest coverage of 14.75:1 against a minimum of 3.00:1.
- No revolving-credit-facility balance was drawn at quarter-end. The facility provides up to $300 million in the U.S. and €150 million through a UK subsidiary; management said covenant capacity allowed approximately $767 million of additional borrowing.
- Financing activities used $90.8 million, principally reflecting $78.2 million of revolving-credit repayments, $21.4 million of dividends and $15.0 million of treasury-stock purchases. Operating cash flow exceeded capital expenditures by approximately $25.9 million during the quarter.
- The company adopted lease accounting on January 1, 2019, recognizing $82.1 million of operating lease right-of-use assets and $80.5 million of operating lease liabilities at March 31.
Outlook, risks and unusual items
- Q2 outlook: EPS of $1.09–$1.15, excluding restructuring costs, with an assumed effective tax rate of 29%–31%. Management expects continued positive product-sales growth across most applications, but does not expect Q2 2018’s high custom-tooling sales to recur.
- Investment and transformation: 2019 capital expenditures were estimated at $230–$250 million. The business transformation is expected to cost about $90 million over three years, with most costs expected by year-end 2019, plus approximately $55 million of related capital investment, mostly in 2019. Management targets approximately $80 million of annualized incremental EBITDA by the end of 2020.
- Shareholder returns: The board declared a quarterly dividend increase of $0.02 to $0.36 per share, payable May 22, 2019. On April 18, the company announced a new $350 million repurchase authorization with no expiration date.
- Tax and special items: The Q1 effective tax rate was 30.0%, versus 27.0% a year earlier; the prior-year rate benefited from $4.4 million of share-based compensation tax benefits. Q1 2019 included a favorable $2.7 million Brazilian tax-court decision, recorded as $1.7 million lower cost of sales and $1.0 million interest income. No further recovery on the remaining potential claim, estimated at up to $13.4 million including interest, was recorded.
- Contingencies and risks: Environmental investigation at the Jundiaí, Brazil facility remains ongoing; estimated investigation and possible remediation costs are $1.5–$3.0 million, with a $1.5 million accrual and possible fines or penalties. Management said ordinary-course legal claims are not expected to have a material adverse effect, but unfavorable outcomes could exceed accruals. Other cited risks include currency movements, input costs and supply availability, customer demand, acquisition integration, regulation, cybersecurity and execution of the transformation plan.
- The U.S. dollar’s strength reduced reported sales growth by 7 percentage points. Argentina has been accounted for as a highly inflationary economy since July 2018; its operations represented about 2% of consolidated net assets and Q1 revenue.
Important facts for investors to verify
- Whether core sales growth and Pharma performance persist after separating acquisition effects and currency translation.
- Whether the $80 million annualized transformation EBITDA target is achieved, and how much of the $90 million cost and $55 million investment remains to be incurred.
- Whether the $230–$250 million capital-spending plan and higher working-capital needs affect cash generation and leverage.
- Progress and outcomes for the remaining Brazilian tax recovery claims and the Jundiaí environmental investigation.
- Q2 results against the EPS range, particularly given the expected comparison with elevated prior-year tooling sales.