AptarGroup, Inc. — FY2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. This is an annual report, not a standalone fourth-quarter filing; selected Q4 results are included below. AptarGroup supplies packaging, dispensing and sealing solutions to beauty and home care, pharmaceutical, food and beverage markets.
Financial performance
| Metric | FY2017 | FY2016 |
|---|---|---|
| Net sales | $2,469.3 million | $2,330.9 million |
| Operating income / margin | $321.5 million / 13.0% | $310.5 million / 13.3% |
| Net income attributable to AptarGroup | $220.0 million | $205.6 million |
| Diluted EPS | $3.41 | $3.17 |
| Adjusted EBITDA / margin | $474.6 million / 19.2% | $476.1 million / 20.4% |
| Cash from operations | $324.7 million | $325.3 million |
| Capital expenditures | $156.6 million | $129.0 million |
| Cash and equivalents at year-end | $712.6 million | $466.3 million |
| Total interest-bearing debt | $1,257.3 million | $946.6 million |
| Net debt / net capitalization | $544.7 million / 29.3% | $480.3 million / 29.0% |
| Dividends declared per share | $1.28 | $1.22 |
Revenue rose 6%; excluding currency and acquisition effects, core sales increased 4%. The cost-of-sales ratio increased to 65.0% from 64.3%, and operating margin declined despite higher operating income. Adjusted EBITDA fell slightly. Cash from operations was broadly flat; cash less capital expenditures was approximately $168 million, calculated from reported figures.
By segment, net sales and segment income were: Beauty + Home, $1,313.8 million and $93.8 million; Pharma, $805.9 million and $234.8 million; Food + Beverage, $349.6 million and $38.2 million. Pharma remained the most profitable segment. Segment income at Beauty + Home declined 6.7%, while Pharma rose 7.2% and Food + Beverage rose 1.3%.
For Q4 2017, net sales were $625.9 million, net income attributable to AptarGroup was $49.5 million and diluted EPS was $0.77. Q4 2016 values were $538.9 million, $49.6 million and $0.77, respectively.
Changes versus the prior year
- Core sales growth was broad-based: Pharma grew 8%, Food + Beverage 6%, and Beauty + Home 2%. Currency and the Mega Airless acquisition each added approximately 1 percentage point to reported annual growth.
- Beauty + Home returned to core sales growth, but profitability weakened due to higher material costs and European decorative-packaging inefficiencies. Higher resin costs and tooling mix also pressured consolidated gross margin.
- Pharma sales growth was strong across prescription, consumer health care and injectables. Food + Beverage benefited from demand for dispensing closures, including in infant nutrition and bottled water.
- Cash increased largely following approximately $1.0 billion of European cash repatriations, funded in part by new European borrowings. Debt increased, while net debt rose moderately.
Outlook, management commentary and material items
- Management expected momentum to carry into Q1 2018 and forecast revenue growth in each segment. Q1 EPS guidance was $0.90–$0.95, excluding transformation costs that could not then be reasonably estimated; the comparison was $0.81 reported in Q1 2017, or approximately $0.91 adjusted for currency. Guidance assumed a 27%–29% effective tax rate.
- The transformation plan, begun in late 2017 and focused mainly on Beauty + Home, carries estimated implementation costs of approximately $90 million over three years and anticipated capital investment of approximately $45 million, mostly in 2018. Management targets approximately $80 million of annualized incremental EBITDA by 2020. The plan may cost more, take longer or fail to achieve its objectives.
- Management forecast approximately $200 million of capital expenditures in 2018. The company said it had sufficient resources for foreseeable needs and reported no outstanding balance on its $300 million U.S. revolving facility at year-end. Leverage and interest-coverage covenant ratios were 1.21x and 11.77x, respectively, against limits of no more than 3.50x and no less than 3.00x.
- U.S. tax reform generated a provisional net tax charge of $24.7 million in 2017, including a $31.6 million transition-tax charge and a $6.8 million benefit from remeasuring deferred taxes. The accounting remained subject to further evaluation; the company had not yet estimated the impact of GILTI rules.
- A $10.6 million insurance-recovery gain related to the Annecy, France fire reduced reported net other expense. The fire also caused $20.3 million of losses incurred in 2017; insurance proceeds and a receivable covered portions of the losses, while reported operating income was negatively affected by $5.6 million.
- Environmental testing at the company’s Jundiaí, Brazil facility found soil and groundwater impacts above local limits. Aptar accrued $1.5 million; preliminary investigation and remediation estimates were $1.5–$3.0 million, with potential additional fines or penalties and uncertainty pending investigation.
- The filing identifies risks from foreign exchange, raw-material costs, competition and pricing, customer and supplier concentration, sole-source materials, geopolitical disruption, cybersecurity, pharmaceutical customer-product outcomes, pension assumptions, environmental regulation and execution of the transformation plan. Routine legal claims were not expected by management to have a material effect, although unfavorable outcomes remain possible.
- The company revised prior-period cash-flow classifications related to restricted stock unit vesting; management said the reclassification was not material and did not affect income or balance-sheet figures. The auditor gave unqualified opinions on the financial statements and internal control over financial reporting.
Key investor verification points
- Track Beauty + Home execution: whether operating inefficiencies improve and the transformation delivers the stated $80 million EBITDA target within the cost and timing estimates.
- Assess the quality and durability of sales and earnings growth, including Pharma’s contribution, segment margins, resin inflation, tooling mix and foreign-exchange effects.
- Reconcile the sharp increase in gross debt with cash balances, repatriation needs, scheduled maturities and the company’s ability to service European borrowings.
- Monitor final U.S. tax-reform accounting, future tax rates and potential taxes on distributions of foreign cash and reserves; the filing estimates additional local and withholding taxes of $25–$35 million if relevant amounts are remitted.
- Follow the Brazil environmental investigation and remediation scope, insurance recovery and any further costs associated with the Annecy fire.