AptarGroup, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016. Unaudited results; amounts below are in U.S. dollars unless noted. AptarGroup sells dispensing systems through Beauty + Home, Pharma, and Food + Beverage segments.
Financial performance
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Net sales | $582.3 million | $589.8 million | Down 1% reported; core sales up 2% |
| Operating income | $69.2 million | $73.6 million | Down 6% |
| Operating margin | 11.9% | 12.5% | Down 0.6 percentage points |
| Net income attributable to AptarGroup | $43.9 million | $45.2 million | Down 3% |
| Diluted EPS | $0.67 | $0.70 | Down 4% |
| Cash from operations | $11.9 million | $39.8 million | Down $27.9 million |
Cost of sales fell to 64.2% of sales from 65.4%, reflecting segment mix and lower-margin tooling sales. SG&A rose to 17.7% of sales from 16.3%, while depreciation and amortization increased to 6.2% from 5.8%. The effective tax rate declined to 26.7% from 33.4%, primarily due to French tax refunds and a reduction in the French corporate tax rate.
Segments and changes versus prior year
- Beauty + Home: Sales of $314.3 million, down 5% reported and 1% on a core basis; segment income was $23.5 million versus $23.4 million. Beauty-market growth was offset by weaker personal care and home care demand.
- Pharma: Sales of $183.1 million, up 2% reported and 5% excluding currency; segment income rose to $53.2 million from $52.0 million. Prescription and injectable products supported growth; some nasal decongestant customer destocking weighed on results.
- Food + Beverage: Sales of $84.9 million, up 4% reported and 7% excluding currency; segment income rose to $9.3 million from $9.1 million.
Currency translation reduced reported sales growth by approximately 4 percentage points overall. Mega Airless contributed approximately 1 percentage point to consolidated sales, including one month of activity.
Liquidity, debt, and significant transactions
Cash and equivalents were $386.0 million at March 31, 2016, down from $489.9 million at year-end. Interest-bearing debt increased to $907.2 million from $817.8 million, primarily to fund the Mega Airless acquisition; net debt to net capital rose to 29.1% from 20.6%. The company reported $70 million outstanding on its $300 million revolving credit facility. Covenant levels were within requirements: leverage ratio 1.10x against a 3.50x maximum, and interest coverage 14.57x against a 3.00x minimum.
Operating cash flow declined mainly because of higher working-capital needs, including a $70.9 million use of cash from receivables. Investing cash use was $198.7 million, including $203.0 million net cash paid for Mega Airless. Capital expenditures were $24.2 million in the quarter; management estimated approximately $150 million for 2016. Dividends paid were $18.8 million, and $8.6 million was spent repurchasing and retiring 113,000 shares.
The February 29 acquisition of Mega Airless had a purchase price of approximately $223.2 million. It contributed $6.2 million of sales and a $1.8 million pretax loss for the post-acquisition period, including $2.6 million of inventory fair-value expense. AptarGroup also recorded $5.6 million of transaction costs. Acquisition-related goodwill was $109.7 million.
Outlook, risks, and unusual items
Management expected Q2 core sales growth in Beauty + Home, excluding the acquisition, and growth in the other segments against strong prior-year comparisons. Q2 EPS guidance was $0.87–$0.92, including an estimated $0.02 per share contribution from Mega Airless. The comparison cited prior-year EPS of $0.81 after specified inventory-accounting and currency adjustments; reported Q2 2015 EPS was $0.90.
Key exposures include foreign-exchange movements, especially the euro; resin and other input costs; customer demand and destocking; acquisition integration; execution of capital projects and the global ERP rollout; and legal, regulatory, supplier, cybersecurity, and product-liability risks. The filing says legal claims are not expected to have a material adverse effect, but acknowledges uncertain outcomes could exceed accruals. Uncertain tax positions totaled $8.2 million; management said the liability could decrease by no more than $7.3 million over the next 12 months.
Other notable items: Q1 results included acquisition costs and inventory fair-value charges; foreign-currency translation produced $65.2 million of other comprehensive income, versus a $139.2 million loss in Q1 2015. A $3.2 million receivable remained for an insurance claim relating to a 2014 Brazil facility fire; a final settlement was expected within six months. Management stated disclosure controls were effective, while ERP implementation changed control environments at four facilities and acquired-business controls were under review.
Important facts for investors to verify
- Whether Mega Airless integration, expected growth, and earnings contribution develop as planned, and how much of reported results reflects acquisition costs and purchase accounting.
- Whether working capital converts to cash and operating cash flow recovers after the unusually low Q1 level.
- How sales, margins, and demand trends evolve by segment, particularly Beauty + Home, and how currency and resin-cost changes affect reported results.
- Whether debt, liquidity, covenant headroom, and planned capital expenditures remain consistent with management’s outlook.
- Resolution of the French tax matters, uncertain tax positions, and the Brazil insurance settlement; review the full filing and prior annual report for related details.