AptarGroup, Inc. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018. Unaudited results; dollar amounts below are in millions except per-share data. AptarGroup makes dispensing systems and sealing solutions across Beauty + Home, Pharma, and Food + Beverage.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Net sales | $710.6 | $617.7 | $1,414.0 | $1,219.1 |
| Operating income | $80.9 | $85.4 | $168.9 | $163.4 |
| Net income attributable to AptarGroup | $55.8 | $65.2 | $115.1 | $117.0 |
| Diluted EPS | $0.86 | $1.01 | $1.78 | $1.81 |
| Operating margin | 11.4% | 13.8% | 11.9% | 13.4% |
| Adjusted EBITDA margin | 19.9% | 20.1% | 19.5% | 19.6% |
Q2 reported sales grew 15%, including 4% favorable currency translation; core sales grew 11%. For the first half, reported sales rose 16%, including a 7% currency benefit, while core sales increased 9%. Growth was broad-based across segments. Higher tooling sales contributed to growth but carry lower margins than product sales.
Q2 segment sales and adjusted EBITDA were: Beauty + Home $368.5 and $45.8; Pharma $241.2 and $86.4; Food + Beverage $100.9 and $18.1. Pharma was the strongest profit-growth contributor. Food + Beverage adjusted EBITDA declined 3% in Q2 and 3% for the first half; Beauty + Home Q2 adjusted EBITDA rose 3%, while its margin fell to 12.4% from 13.8%.
Cash flow, debt and liquidity
- First-half operating cash flow was $154.5, versus $148.9 a year earlier. Capital expenditures were $91.8; operating cash flow less capital expenditures was approximately $62.8.
- Investing activities used $90.7, including capital spending and a $10.0 investment in Propeller Health; the company also received $10.6 of insurance proceeds. Financing activities used $52.3, including $39.8 of dividends and $57.8 of common-stock repurchases and retirements.
- Cash and equivalents were $718.1 at June 30, 2018. Total debt was $1,254.7 and net debt $536.6; net debt to net capital was 28.5%, compared with 29.3% at year-end 2017. Stockholders’ equity was $1,347.5.
- The $300 million U.S. revolver and €150 million UK revolver were undrawn. Covenant ratios were within limits: leverage 1.15x versus a 3.50x maximum; interest coverage 12.31x versus a 3.00x minimum. Management stated it had sufficient resources for foreseeable needs.
Material changes, outlook and notable items
- Restructuring charges were $18.2 in Q2 and $24.2 in the first half, reducing reported operating income and margins. The transformation is expected to cost approximately $90 million over three years, with approximately $45 million of related capital investment in 2018. Management targets about $80 million of annualized incremental EBITDA by the end of 2020.
- Management expected Q3 core sales growth in each segment and forecast Q3 EPS of $0.90–$0.95, excluding restructuring expenses and effects associated with the proposed CSP Technologies acquisition. The outlook assumes a 29%–31% effective tax rate.
- On July 26, 2018, Aptar announced a binding offer to acquire CSP Technologies for $555 million enterprise value, expected to be funded with cash and, subject to customary conditions, close in Q4 2018. The deal remained subject to completion of the works-council consultation, a definitive agreement, and regulatory approvals. Q2 included $1.9 of related transaction costs.
- The reported effective tax rate rose to 25.5% in Q2 from 18.1%, and to 26.3% for the first half from 21.5%, reflecting changes in tax benefits and new GILTI/BEAT taxes. The company recorded a $3.5 tax benefit in Q2 from revising its provisional transition-tax estimate; it expected to finalize provisional TCJA accounting in the second half of 2018.
- Higher material costs, delayed pass-through pricing, sales mix, and operational inefficiencies pressured cost of sales. Q2 cost of sales was 65.3% of sales, versus 64.7% a year earlier. Aptar cited customer and market demand, input costs, foreign exchange, and execution of its transformation among key uncertainties.
- A fire-related incident at the Annecy facility continued to affect results; Q2 profitability was reduced by $2.5. The company received $22.5 of insurance proceeds in the first half and had no insurance receivable at June 30; potential additional insurance gains were not recognized. Brazil environmental remediation remained under investigation, with estimated costs of $1.5–$3.0 and a $1.5 accrual; a separate U.S. environmental matter had a $0.75 accrual.
- Argentina was deemed highly inflationary beginning July 1, 2018; Aptar planned to change the subsidiaries’ functional currency to the U.S. dollar. Argentine operations represented less than 2% of first-half revenue.
- Foreign-currency translation reduced Q2 comprehensive income by $66.2; comprehensive loss attributable to AptarGroup was $7.2 despite positive net income. ASC 606 adoption added $2.9 to opening retained earnings; its disclosed effect on first-half net income was approximately $0.5 lower.
Important facts for investors to verify
- Whether core sales momentum and the Q3 EPS outlook were achieved, and how much growth depended on currency, tooling, and product mix.
- Progress, actual costs, savings, and timing of the transformation against the $90 million cost estimate and $80 million EBITDA target.
- Completion terms, funding, approvals, and integration risks for the proposed CSP Technologies acquisition.
- Whether raw-material inflation and delayed customer price pass-throughs continue to pressure margins, particularly in Food + Beverage and Beauty + Home.
- Final TCJA transition-tax accounting, the effect of GILTI/BEAT and Argentina’s highly inflationary accounting, and exposure to foreign-exchange movements.
- Resolution and potential cost of the Brazil and U.S. environmental matters, plus the timing and recoverability of any further Annecy fire insurance claims.