AptarGroup, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Financial statements are unaudited. Dollar figures below are in millions unless stated otherwise.
Business context and results
AptarGroup makes drug-delivery, dispensing, sealing and packaging solutions. Its reporting segments are Beauty + Home, Pharma, and Food + Beverage. The company said COVID-19 remained a significant influence on demand, especially in travel and retail beauty and on-the-go beverages.
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net sales | $759.2 | $701.3 | $2,180.0 | $2,188.4 |
| Operating income | $99.0 | $90.2 | $258.0 | $297.2 |
| Net income attributable to AptarGroup | $63.7 | $56.8 | $160.8 | $193.7 |
| Diluted EPS | $0.95 | $0.85 | $2.42 | $2.93 |
| Operating margin | 13.0% | 12.9% | 11.8% | 13.6% |
| Adjusted EBITDA margin | 20.6% | 20.8% | 20.1% | 21.1% |
Financial position and cash flow
- Cash and equivalents: $226.5 at September 30, 2020, compared with $242.0 at December 31, 2019. Cash including restricted cash was $231.4.
- Debt: Total interest-bearing debt was $1.20 billion, versus $1.20 billion at year-end 2019. Net debt was $974.6; net debt to net capital was 35.6%, down from 37.8%.
- Liquidity and covenants: The company had $95.0 drawn on its $300 million U.S. revolving facility and none drawn on its €150 million UK facility. The reported leverage ratio was 1.81x against a 3.50x maximum; interest coverage was 15.92x against a 3.00x minimum.
- Cash flow, nine months: Operating cash flow was $381.4, capital expenditures were $173.4, and free cash flow (company-defined) was $208.1. Investing activities used $377.9, including the Fusion acquisition; financing activities used $26.7. Dividends paid were $69.4.
- Other: Quarterly dividend was $0.36 per share. Share repurchases were suspended during the first nine months of 2020 to preserve liquidity.
Material changes versus the prior period
- Q3 sales rose 8% year over year; management reported 2% core growth, with acquisitions contributing 4% and currency 2%. Q3 operating income rose about 10%, and attributable net income rose about 12%.
- For the first nine months, sales were nearly flat, but core sales declined 2%. Operating income fell 13% and attributable net income fell 17%; management attributed much of the operating-income decline to Q2 pandemic-related lower sales and operating inefficiencies.
- Segment trends: Q3 Pharma sales increased 17% (11% core), supported by injectables and active packaging. Beauty + Home sales increased 3% including Fusion, but core sales declined 5%; segment Adjusted EBITDA fell 16%. Food + Beverage sales increased 2%, while beverage demand remained weak. For the nine months, Pharma sales rose 11%, while Beauty + Home and Food + Beverage sales declined 7% each.
- Fusion, acquired April 1, contributed $37.9 of sales and a $1.5 pretax loss after acquisition through September 30. The company also made equity investments, including $32.0 for a 49% interest in BTY and $5.0 for a 30% interest in Sonmol.
Outlook, commentary and risks
- Management expected continued core growth, with rising demand in many end markets more than offsetting COVID-related declines in some markets. It expected Pharma to continue performing well, including opportunities directly and indirectly related to the pandemic.
- Q4 2020 EPS guidance was $0.84–$0.92, excluding restructuring expenses and acquisition-related costs, based on an estimated effective tax rate of 27%–29%.
- The transformation program had incurred $102.1 of estimated total implementation costs of approximately $125, with about $47 of anticipated $50 in related capital investments incurred. Management said it was progressing toward its initial target of $80 annualized incremental EBITDA by end-2020, while noting that COVID-19 and other market and customer headwinds had offset consolidated benefits.
- COVID-19 duration and further resurgences were uncertain; potential effects included weaker demand, operating disruption, supply-chain or delivery problems, customer-credit deterioration and material effects on results or liquidity. No impairment was recorded as of September 30, 2020.
- Other disclosed exposures include foreign-exchange movements, input-cost changes, acquisition integration and contingent consideration, and ordinary-course litigation. A Brazilian tax assessment of approximately $6.1 was being contested with no liability recorded; an environmental reserve of $0.4 remained for a Brazil facility. Potential additional recovery from a Brazilian tax matter was not recorded because of uncertainty.
Important facts for investors to verify
- Whether Q4 guidance and the expectation of continued core growth were achieved, particularly amid pandemic developments.
- Whether Pharma growth continued and Beauty + Home and Food + Beverage recovered from weak beauty-retail and on-the-go beverage demand.
- How acquisition integration, Fusion and Noble contingent consideration, and related amortization affect earnings and cash generation.
- Whether operating cash flow and liquidity remain sufficient to fund capital spending, dividends, debt obligations and strategic acquisitions.
- Developments in the unrecorded Brazilian tax assessment, environmental remediation, and other legal or tax contingencies.