AptarGroup, Inc. — Q2 2020 Form 10-Q
Business context and period: AptarGroup manufactures dispensing, sealing, drug-delivery and active-packaging solutions. This unaudited filing covers the quarter and six months ended June 30, 2020; comparisons are with the corresponding 2019 periods unless noted. Amounts below are in millions except per-share data.
Financial performance
| Metric | Q2 2020 | Q2 2019 | First half 2020 | First half 2019 |
|---|---|---|---|---|
| Net sales | $699.3 | $742.7 | $1,420.9 | $1,487.1 |
| Operating income | $70.5 | $109.9 | $158.9 | $207.0 |
| Net income attributable to AptarGroup | $41.8 | $73.9 | $97.1 | $136.9 |
| Diluted EPS | $0.63 | $1.12 | $1.47 | $2.08 |
| Operating margin | 10.1% | 14.8% | 11.2% | 13.9% |
| Adjusted EBITDA margin | 19.5% | 21.6% | 19.8% | 21.2% |
- Q2 reported sales declined 6%; core sales, excluding acquisitions and currency, also fell 6%. First-half reported sales declined 4%, with core sales down 4%.
- Q2 cost of sales was 63.2% of revenue, unchanged year over year; first-half cost of sales improved to 62.8% from 63.1%. Higher SG&A and depreciation and amortization weighed on margins.
- Adjusted EBITDA was $136.6 million in Q2 and $280.7 million in the first half. The company’s adjusted measure excludes restructuring and acquisition-related costs and purchase-accounting adjustments.
- Cash provided by operations was $227.7 million in the first half, versus $221.1 million; capital expenditures were $123.0 million, resulting in reported free cash flow of $104.7 million versus $96.4 million.
- At June 30, cash and equivalents were $247.7 million; total debt was $1.300 billion and net debt was $1.052 billion. Net debt to net capital rose to 39.0% from 37.8% at year-end 2019. Stockholders’ equity was $1.646 billion.
- Current assets were $1.344 billion and current liabilities $829.8 million. The $150 million U.S. revolver balance was up from $25 million at year-end; the euro revolver was unused. Debt covenants were met: leverage ratio 1.98x against a 3.50x maximum, and interest coverage 15.50x against a 3.00x minimum.
Material changes and segment results
- Beauty + Home: Q2 sales fell 12% to $299.8 million and core sales declined 13%; adjusted EBITDA fell 51% to $24.0 million. Beauty sales were sharply affected by travel and retail disruption, while personal-care sales benefited from hand sanitizer and liquid soap demand. First-half sales declined 12% and adjusted EBITDA fell 43%.
- Pharma: Q2 sales rose 7% to $301.3 million, with core sales up 6%; adjusted EBITDA increased 3% to $104.1 million. First-half sales rose 8% and adjusted EBITDA increased 7%, supported by injectables, active packaging and consumer health care, partly offset by prescription-drug softness.
- Food + Beverage: Q2 sales fell 17% to $98.3 million and core sales declined 15%; adjusted EBITDA fell 15% to $17.8 million. Weaker on-the-go beverage demand, lower tooling sales and resin-cost pass-throughs contributed. First-half sales declined 11% and adjusted EBITDA fell 12%.
- Currency translation reduced Q2 sales by 3% and first-half sales by 2%; acquisitions added 3% and 2%, respectively.
Liquidity, transactions and unusual items
- On April 1, AptarGroup acquired Fusion Packaging for approximately $163.8 million, net of cash acquired, funded with cash and revolving-credit borrowings. Fusion contributed $13.8 million of Q2 sales and a $3.3 million pretax loss, including $2.7 million of inventory fair-value amortization. Purchase accounting remained in progress.
- First-half investing cash use was $317.1 million, including the Fusion acquisition and investments in BTY and Sonmol. The company reduced capital spending amid the pandemic; estimated 2020 capital expenditures were $230–$250 million.
- Management said it was prioritizing liquidity, temporarily suspending share repurchases and discretionary defined-benefit-plan contributions, while intending to continue quarterly dividends and strategic investment. The Q2 dividend was $0.36 per share; the board declared another $0.36 dividend payable August 19, 2020.
- Restructuring charges were $7.3 million in Q2 and $12.2 million in the first half. The transformation plan is expected to cost about $125 million in total, with $98.7 million incurred by June 30; related capital investments are expected to total about $50 million, with $43 million incurred. Management said it was progressing toward its initial $80 million annualized incremental EBITDA target by year-end 2020, but cited continuing headwinds.
- Fair value of contingent consideration liabilities was $24.7 million at June 30, principally associated with Fusion, Noble and Gateway acquisitions.
Outlook, risks and contingencies
- Management expected gradual improvement in the second half of 2020, dependent on travel recovery, retail reopening and consumer confidence. Q3 2020 EPS guidance was $0.80–$0.88, excluding restructuring expenses and acquisition-related costs, based on a 28%–30% effective tax rate.
- COVID-19 had reduced beauty travel/retail and on-the-go beverage demand, caused manufacturing inefficiencies and could materially affect future results. Most facilities remained operational as products were deemed essential. The company recorded no impairments as of June 30, but stated the duration and full impact of the pandemic could not be estimated.
- Other key exposures include foreign-exchange movements, customer and supplier financial health, raw-material availability and costs, acquisition integration, and economic and market conditions.
- Brazilian tax authorities assessed approximately $6.1 million for import-duty classification matters; the company is appealing and recorded no liability. A separate environmental matter in Brazil had a $0.4 million reserve. Potential further Brazilian tax recoveries of approximately $1.5–$7.5 million were not recorded because of uncertainty. A French facility fire-insurance settlement remained under negotiation; no proceeds or receivable were recorded in the first half.
- Management reported disclosure controls were effective at June 30, 2020. ERP systems were implemented at two facilities during the quarter, with related control environments modified.
Key facts for investors to verify
- Whether the Q3 EPS range and expected second-half recovery assumptions were achieved, especially as travel and retail activity evolved.
- How much of the reported performance decline reflects ongoing demand weakness versus temporary COVID-19 disruption, currency, resin pass-throughs and acquisition effects.
- Fusion’s integration, final purchase accounting, subsequent contribution to sales and earnings, and the contingent consideration exposure.
- Cash generation, capital expenditure execution, debt levels and covenant headroom if demand remains weak.
- Progress and realized savings from the restructuring plan, including whether the stated annualized EBITDA target remains attainable.
- Developments in the Brazilian tax assessment, environmental remediation reserve and outstanding insurance settlement.