AptarGroup, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; comparisons are to the three months ended March 31, 2021 unless otherwise stated. AptarGroup manufactures dispensing, drug-delivery, sealing and material-science solutions through Pharma, Beauty + Home, and Food + Beverage. Financial statements are unaudited.
Financial performance
| Metric | Q1 2022 | Q1 2021 | Change / context |
|---|---|---|---|
| Net sales | $844.9 million | $776.8 million | Reported growth 9%; core sales growth 13%, excluding currency and acquisitions. Currency reduced reported growth by 4 percentage points. |
| Operating income | $97.7 million | $92.6 million | Increased; operating margin was 11.6% versus 11.9%. |
| Net income attributable to AptarGroup | $62.4 million | $84.0 million | Decreased, principally reflecting the prior-year PureCycle fair-value gain and a higher tax rate. |
| Diluted EPS | $0.93 | $1.24 | Declined year over year. |
| Adjusted EBITDA | $156.3 million | $152.2 million | Adjusted EBITDA margin was 18.5% versus 19.6%. |
| Cash from operations | $92.1 million | $72.2 million | Improved, with management citing better working-capital management and lower restructuring costs. |
| Capital expenditures | $73.1 million | $63.9 million | Partly offset by $8.0 million of government-grant proceeds in 2022. |
| Free cash flow | $27.0 million | $8.3 million | Company-defined non-GAAP measure: operating cash flow less capital expenditures plus qualifying grant proceeds. |
Segment sales and Adjusted EBITDA: Pharma sales were $342.5 million, up 9% reported, with Adjusted EBITDA of $115.6 million and a 33.7% margin (34.6% prior year). Beauty + Home sales were $368.2 million, up 6%, with Adjusted EBITDA of $39.5 million and a 10.7% margin (10.2%). Food + Beverage sales were $134.3 million, up 16%, with Adjusted EBITDA of $19.2 million and a 14.3% margin (17.2%).
Liquidity, debt and capital allocation
- Cash and short-term investments were $356.3 million at March 31, 2022, compared with $123.7 million at December 31, 2021. The increase primarily reflected the bond offering.
- Total debt was $1.438 billion, compared with $1.197 billion at year-end. Net debt was $1.082 billion; net debt to net capital was 35.1%, unchanged from December 31, 2021.
- The company issued $400 million of 3.600% senior notes due 2032 in March. No borrowings were outstanding under its $600 million revolving credit facility at quarter-end; $56 million remained outstanding under a term facility maturing in July 2022.
- Debt covenant ratios were within stated limits: consolidated leverage was 1.83x against a maximum of 3.50x, and interest coverage was 18.90x against a minimum of 3.00x.
- Financing activities provided $211.9 million, including bond proceeds; the company paid $24.9 million in dividends and repurchased approximately 140,000 shares for $16.0 million. The quarterly dividend was $0.38 per share.
Material changes and unusual items
- Reported sales growth included approximately 5 percentage points of core growth from price adjustments for inflationary input costs; management said these pass-throughs generally carry no margin. Cost of sales rose to 64.2% of sales from 62.9%.
- Net other expense was $11.1 million, versus net other income of $8.3 million. The comparison was heavily affected by PureCycle: Q1 2022 included a $1.2 million unrealized loss, while Q1 2021 included a $16.8 million unrealized gain.
- The effective tax rate was 28.0%, compared with 16.8%. The prior-year rate benefited from $8.0 million of stock-compensation tax benefits and a $2.9 million benefit from U.S. state tax-law changes.
- Beauty + Home and Food + Beverage faced cost, labor or supply-chain pressures. Food + Beverage Adjusted EBITDA margin declined amid operational inefficiencies and unmarginable cost pass-throughs; Pharma margin declined partly due to higher SG&A and startup costs for capacity expansion.
Outlook, risks and contingencies
- For Q2 2022, management forecast EPS of $0.92–$1.02, excluding restructuring expenses, acquisition-related costs and changes in fair value of equity investments; guidance assumed a 27%–29% effective tax rate. Management expected growth in each segment, including strong prescription-drug device growth, while anticipating lower demand for at-home COVID-19 tests.
- Management estimated 2022 capital expenditures, net of government grants, of approximately $300–$330 million. It expected to redeem $75 million of private-placement notes during Q2 at principal plus a make-whole premium.
- Management cited inflation, resin and other input costs, labor availability, supply-chain interruptions, foreign exchange, and uncertain effects from the war in Ukraine and COVID-19 outbreaks in China. The company reported indirect impacts including higher energy costs and supply interruptions; the direct regional impact had not been significant as of March 31.
- Ongoing lawsuits and claims could have unfavorable outcomes, although management did not expect them to have a material adverse effect. A Brazilian tax assessment of approximately $6.1 million, including interest and penalties, was being contested; no liability was recorded, and the outcome remained uncertain.
- The company recorded a $1.5 million expected credit-loss reserve on a note receivable from venture investment Kali Care. It also reported no COVID-19-related impairments as of quarter-end, while warning that pandemic-related uncertainty could materially affect future results.
Most important facts for investors to verify
- Whether core sales growth can continue as inflationary price pass-throughs and unusually strong demand for at-home COVID-19 testing normalize.
- Whether input-cost inflation, labor shortages and supply-chain constraints continue to pressure margins, particularly in Food + Beverage.
- Execution of Q2 EPS guidance and the $300–$330 million capital-spending plan, including capacity investments.
- Debt refinancing and repayment timing, including the July 2022 term facility and planned redemption of $75 million of notes; monitor leverage and interest costs.
- Effects of currency movements, the PureCycle investment valuation, and resolution of the Brazilian tax assessment and other legal contingencies.