AptarGroup, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; unaudited. AptarGroup sells dispensing systems and sealing solutions across Beauty + Home, Pharma, and Food + Beverage. Unless otherwise noted, financial amounts below are in millions of U.S. dollars.
Financial results and key metrics
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Net sales | $601.3 | $582.3 | +3% |
| Operating income | $77.5 | $69.2 | +12% |
| Operating margin | 12.9% | 11.9% | +1.0 percentage point |
| Net income attributable to AptarGroup | $51.8 | $43.9 | +18% |
| Diluted EPS | $0.81 | $0.67 | +21% |
| Cash from operations | $41.0 | $11.9 | +$29.1 |
| Adjusted EBITDA and margin | $114.7; 19.1% | $112.0; 19.2% | EBITDA +2.5% |
Cost of sales declined to 64.0% of sales from 64.2%; SG&A declined to 16.9% from 17.7%. The effective tax rate was 25.4%, versus 26.7%. Q1 2017 EPS included tax benefits from adopting the share-based compensation accounting standard and repatriation-related tax credits.
Segment performance: Beauty + Home sales were $322.4 million (+3% reported; +1% core), with segment income of $22.2 million versus $23.5 million. Pharma sales were $196.9 million (+8% reported; +10% core), with segment income of $59.1 million versus $53.2 million. Food + Beverage sales were $82.0 million (-3% reported; -1% core), with segment income of $7.1 million versus $9.3 million. Core sales exclude acquisition and currency effects.
Balance sheet, cash flow and capital
- Cash and equivalents were $284.7 million at March 31, down from $466.3 million at year-end. The company attributed the decline primarily to repayment of its revolving credit facility using repatriated funds.
- Total debt was $781.2 million, down from $946.6 million; net debt was $496.5 million, up from $480.3 million. Net debt to net capital was 28.6%, versus 29.0% at year-end.
- The $300 million revolving credit facility had no balance outstanding at quarter-end. The company reported covenant ratios of 1.15x leverage against a 3.50x maximum and 13.45x interest coverage against a 3.00x minimum.
- Operating cash flow was $41.0 million. Investing activities used $38.4 million, including $34.8 million of capital expenditures and a $5.0 million investment in Kali Care. Financing activities used $186.0 million, including $163.7 million of net note repayments, $19.9 million of dividends, and $16.0 million of share repurchases.
- Management estimated 2017 capital expenditures of approximately $160 million. The quarterly dividend was $0.32 per share; the board declared another $0.32 dividend payable in May 2017.
Material changes and unusual items
- Reported sales grew 3%; management attributed 3% to core growth, while acquisitions added 2% and currency reduced growth by 2%. Pharma’s strong growth was the principal operating driver; Food + Beverage was softer.
- Year-over-year comparisons were affected by 2016 Mega Airless acquisition costs: $5.6 million of transaction costs and $2.6 million of purchase-accounting inventory adjustments. These items did not recur in Q1 2017.
- Q1 2017 included a $1.5 million accrual for investigation and potential remediation of contamination at the company’s Jundiaí, Brazil facility. Preliminary estimated costs were $1.5–$3.0 million; fines or penalties are possible and the ultimate exposure remains uncertain.
- The 2016 fire at the Annecy, France facility generated $4.9 million of costs in Q1 2017. The company recognized a $4.4 million insurance receivable for probable reimbursement and reported $1.3 million of net expense for the quarter; it did not expect a material financial impact from the incident.
- Aptar repatriated approximately $263 million in Q1, primarily to reduce debt and fund repurchases. It plans to repatriate an additional $750 million of previously indefinitely reinvested earnings, using a mix of fixed medium-term and variable short-term European debt to facilitate the transfer. Management expects no significant tax consequences under current law.
- The company acquired a 20% interest in Kali Care for $5.0 million, expanding investment in connected medication-monitoring technology.
Outlook, risks and contingencies
For Q2 2017, management expected growth in Pharma and Food + Beverage and noted uncertainty for Beauty + Home, including the pace of economic growth in the U.S. and Brazil. EPS guidance was $0.92–$0.97, compared with reported Q2 2016 EPS of $0.91; the guidance assumed a 26.5%–27.5% tax rate. Currency-adjusted comparable prior-year EPS was approximately $0.87. The filing provides no full-year earnings guidance.
Key disclosed risks include foreign-exchange movements, economic and political conditions, customer demand and concentration, resin and other input costs, raw-material availability, facility expansion and product launches, acquisitions and integration, cybersecurity, environmental remediation, litigation, and product liability. Legal claims are described as ordinary-course matters; management did not expect them to materially affect results, but acknowledged unfavorable outcomes could exceed accruals. Revenue-standard adoption was still under evaluation; Aptar anticipated full retrospective adoption when effective.
Investor verification priorities
- Track whether Pharma growth sustains and whether Beauty + Home and Food + Beverage recover, including segment margins and product-market trends.
- Verify the final scope, cost, timing, and any penalties related to the Brazil environmental matter, and the timing and sufficiency of Annecy fire insurance recoveries.
- Assess execution and funding of the planned $750 million repatriation, including the European borrowing mix, tax treatment, and subsequent use of proceeds.
- Compare cash conversion and working-capital movements with earnings; monitor planned capital spending against the approximately $160 million estimate.
- Monitor debt, leverage covenants, share repurchases, and the effect of share-based compensation and repatriation-related tax benefits on reported EPS.