AptarGroup, Inc. — Q3 2018 Form 10-Q
Business context and period. This unaudited quarterly report covers the three and nine months ended September 30, 2018. AptarGroup makes dispensing, sealing and active-packaging solutions through Beauty + Home, Pharma, and Food + Beverage. Unless noted, amounts below are in U.S. dollars; financial statement figures are in millions.
Financial performance and liquidity
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Net sales | $665.8 | $624.3 | $2,079.7 | $1,843.4 |
| Operating income | $61.1 | $80.9 | $230.0 | $244.3 |
| Net income attributable to AptarGroup | $39.0 | $53.5 | $154.1 | $170.5 |
| Diluted EPS | $0.60 | $0.83 | $2.38 | $2.64 |
| Operating margin | 9.2% | 13.0% | 11.1% | 13.3% |
| Adjusted EBITDA (non-GAAP) | $134.2 | $118.2 | $409.6 | $356.8 |
| Adjusted EBITDA margin (non-GAAP) | 20.2% | 18.9% | 19.7% | 19.4% |
- Q3 reported sales rose 7%; core sales, excluding acquisitions and currency, also rose 7%. For the first nine months, reported sales increased 13%, including 9% core growth.
- Nine-month operating cash flow was $209.6 million, down from $265.2 million. Capital expenditures were $145.3 million, versus $120.8 million; the filing forecasts 2018 capex of approximately $190–$210 million.
- At September 30, cash and equivalents were $291.4 million ($296.4 million including $5.0 million restricted cash). Total debt was $1.349 billion and net debt was $1.058 billion; net debt to net capital increased to 43.2% from 29.3% at year-end 2017. The weighted-average debt interest rate was 2.66%, with 90% fixed-rate and 10% floating-rate debt.
- Debt covenants were met: leverage ratio 2.05x versus a 3.50x maximum; interest coverage 12.36x versus a 3.00x minimum. Management stated covenant capacity permitted approximately $773 million of additional borrowing before reaching the leverage limit.
- The quarterly dividend was $0.34 per share, up from $0.32 a year earlier.
Material changes and segment trends
- GAAP operating income and net income declined despite higher sales, primarily reflecting $23.9 million of Q3 restructuring charges, $7.1 million of CSP acquisition transaction costs, higher raw-material costs and acquisition-related inventory accounting adjustments. Nine-month restructuring charges were $48.0 million.
- Pharma led segment growth: Q3 sales increased 14% and Adjusted EBITDA increased 28% to $84.5 million. Beauty + Home sales rose 2%, while Adjusted EBITDA declined 1% to $42.2 million. Food + Beverage sales rose 6%, but Adjusted EBITDA declined 15% to $15.5 million.
- Aptar acquired CSP Technologies on August 27 for approximately $553.5 million, funded with cash on hand. CSP contributed $13.2 million in Q3 sales and a $1.9 million pretax loss, including $3.3 million of inventory fair-value amortization. Purchase accounting remained provisional. Aptar also acquired Reboul in May for approximately $3.6 million.
- Cash declined substantially from year-end, principally to fund CSP. Nine-month investing cash outflow was $668.7 million, including the acquisition; financing activities provided $50.3 million.
- Foreign-currency translation reduced Q3 sales by 3%, while nine-month translation increased sales by 3%. Foreign-currency translation adjustments reduced comprehensive income by $53.2 million in the first nine months.
Outlook, commentary and risks
- For Q4, management expected core sales growth in each segment despite difficult comparisons, continuing inflation and raw-material and transportation costs pressuring margins, and isolated weaker beverage volumes in China.
- Q4 EPS guidance was $0.81–$0.86, excluding restructuring and acquisition costs, based on an estimated 30%–32% effective tax rate. Management cited prior-year adjusted EPS of $0.78 after specified adjustments and comparable exchange rates.
- The business transformation is expected to cost approximately $90 million over three years, with approximately $54 million of related capital investment anticipated in 2018. Management targets approximately $80 million of annualized incremental EBITDA by the end of 2020, principally in Beauty + Home.
- Management cited risks including input-cost inflation and delays in passing costs through to customers, foreign-exchange movements, customer and supplier conditions, acquisition integration, product demand, and execution of the transformation. December customer shutdowns typically weigh on Q4 results.
- Argentina was treated as highly inflationary beginning July 1, 2018; the change to U.S.-dollar functional currency resulted in approximately $1.0 million of additional Q3 losses. Argentina represented about 2% of consolidated net assets and revenue for the nine-month period.
- Brazil environmental investigation costs were estimated at $1.5–$3.0 million, with $1.5 million accrued and no Q3 adjustment. A separate U.S. environmental matter was settled for $239,000 in Q3 and the remaining accrual released. Management said ordinary-course litigation outcomes could exceed accruals; it did not expect current claims to materially affect results, but noted uncertainty.
- The company expected to adopt the new lease standard on January 1, 2019 and anticipated recognizing right-of-use assets and lease liabilities for operating leases; the impact was still under assessment.
Important facts for investors to verify
- Whether the transformation delivers targeted savings and EBITDA while containing its stated costs and capital spending.
- Whether CSP integration, provisional purchase accounting and acquired-business profitability develop as expected.
- How quickly higher resin, metal and transportation costs can be passed through, and whether Food + Beverage profitability recovers.
- Whether cash generation and leverage improve after the acquisition, and how refinancing, interest rates and foreign exchange affect liquidity and earnings.
- How the Brazil environmental investigation, other legal contingencies and the finalization of tax-reform accounting affect future costs and reported results.