APTARGROUP, INC. quarterly report, Q2 FY2019

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AptarGroup, Inc. — Q2 2019 Form 10-Q

Reporting period: Three and six months ended June 30, 2019; unaudited. AptarGroup supplies dispensing, sealing and active-packaging products and services through Beauty + Home, Pharma, and Food + Beverage segments. Dollar amounts below are in millions unless noted.

Financial performance and liquidity

  • Revenue: Q2 net sales were $742.7 million, up 5% year over year; core sales, excluding acquisitions and currency effects, rose 4%. For the first half, sales were $1,487.1 million, up 5%, with core sales up 5%.
  • Profit: Q2 operating income was $109.9 million versus $80.9 million; net income attributable to AptarGroup was $73.9 million versus $55.8 million. Diluted EPS was $1.12 versus $0.86. First-half operating income was $207.0 million versus $168.9 million; attributable net income was $136.9 million versus $115.1 million, and diluted EPS was $2.08 versus $1.78.
  • Margins: Q2 operating margin rose to 14.8% from 11.4%; net margin was 10.0% versus 7.8%. First-half operating margin was 13.9% versus 11.9%; net margin was 9.2% versus 8.1%. Adjusted EBITDA margin, a non-GAAP measure, was 21.6% in Q2 versus 19.9%, and 21.2% for the first half versus 19.5%.
  • Segment results: Q2 Pharma sales grew 17% reported and 10% core, with Adjusted EBITDA of $101.7 million (36.1% margin). Food + Beverage sales grew 18% reported and 10% core, with Adjusted EBITDA of $20.9 million (17.7% margin). Beauty + Home sales declined 7% reported and 3% core, while Adjusted EBITDA rose to $48.7 million (14.2% margin).
  • Cash flow: First-half operating cash flow was $221.1 million versus $154.5 million. Capital expenditures were $124.8 million versus $91.8 million; operating cash flow less capital expenditures was approximately $96.4 million. Investing activities used $157.2 million and financing activities used $31.8 million.
  • Cash, debt and liquidity: Cash and equivalents were $303.0 million at June 30, up from $261.8 million at year-end. Total debt was $1,270.9 million and net debt was $967.9 million; net debt to net capital improved to 38.0% from 41.9%. The company reported covenant ratios of 1.85x leverage against a maximum 3.50x and 15.31x interest coverage against a minimum 3.00x, and stated it could borrow approximately $887 million before reaching the leverage limit.
  • Capital returns: First-half dividends paid were $44.1 million. AptarGroup repurchased $19.1 million of shares during the first half and had $345.9 million remaining under its $350 million authorization at June 30. The quarterly dividend declared in July was $0.36 per share.

Material changes versus the prior period

  • Pharma and Food + Beverage drove core sales growth; Beauty + Home was pressured by lower tooling and product sales, including weak personal-care sales.
  • Currency translation reduced reported sales growth by 5% in Q2 and 6% in the first half. Acquisitions contributed 6% to reported sales growth in both periods.
  • Cost of sales fell as a share of revenue to 63.2% in Q2 from 65.3%, and to 63.1% for the first half from 65.1%. Management attributed the improvement to business mix, lower material costs, resin pass-through timing and reduced lower-margin tooling sales.
  • SG&A and depreciation and amortization increased, partly reflecting acquired businesses and growth-related spending. Interest expense also increased, primarily following the 2018 CSP Technologies acquisition.
  • Restructuring expense declined to $1.7 million in Q2 from $18.2 million and to $11.3 million for the first half from $24.2 million.
  • Goodwill rose to $737.4 million from $712.1 million, including acquisition-related additions. First-half capital spending and acquisition cash outlays were substantially higher than in 2018.

Outlook, commentary and risks

  • Guidance: Management expected Q3 2019 EPS of $0.91–$0.97, excluding restructuring costs and acquisition-related expenses, based on an estimated effective tax rate of 30%–32%. The prior-year Q3 tax rate was approximately 23%.
  • Transformation plan: The company estimated total implementation costs of approximately $90 million over three years, with most expected by the end of 2019, plus approximately $55 million in capital investment, mostly in 2019. It expected approximately $80 million of annualized incremental EBITDA by the end of 2020, principally in Beauty + Home. Cumulative costs were $77.3 million at June 30.
  • Investments and acquisitions: 2019 capital expenditures were estimated at $230–$250 million. Nanopharm and Gateway were acquired in May and June 2019 for approximately $38.1 million and $7.0 million, respectively; Gateway also carries contingent consideration estimated at $3.0 million.
  • Tax and unusual items: Q2 and first-half effective tax rates were 27.6% and 28.7%, respectively, affected by employee stock-compensation tax benefits and valuation-allowance charges. A favorable Brazilian court decision generated $2.7 million of first-quarter benefit ($1.7 million in cost of sales and $1.0 million in interest income); up to $10.2 million of additional recovery remained possible but unrecorded pending court decisions. A Brazil environmental reserve was $0.5 million at June 30.
  • Risks: Management identified foreign-exchange movements, economic and political conditions including Brexit, raw-material availability and costs, customer demand and concentration, acquisition integration, execution of the transformation plan, environmental remediation in Brazil, litigation, regulation, cybersecurity and product-liability risks. The company noted that year-end results can be affected by customer plant shutdowns and other seasonal or market factors.
  • Accounting change: Lease accounting adoption on January 1, 2019 recognized operating lease right-of-use assets and liabilities; June 30 balances were $77.0 million and $75.9 million, respectively. Prior periods were not recast.

Most important facts for investors to verify

  • Whether core growth in Pharma and Food + Beverage continues and offsets weakness in Beauty + Home, particularly personal care and tooling.
  • How much of reported growth and profitability reflects acquisitions, currency, material-cost timing and other non-GAAP adjustments.
  • Whether the $80 million annualized transformation EBITDA target by end-2020 is achieved, and whether the remaining plan costs and capital investments stay near estimates.
  • Whether cash generation supports the elevated capital-expenditure plan, acquisitions, dividends and buybacks while maintaining leverage and covenant headroom.
  • How the Q3 EPS outlook compares with results, including the higher expected tax rate and excluded restructuring and acquisition expenses.
  • Outcomes and potential financial effects of the Brazilian environmental matter, remaining Brazilian tax-recovery claims, Gateway earnout and other legal contingencies.