AptarGroup, Inc. — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. AptarGroup sells dispensing systems and sealing solutions through Beauty + Home, Pharma, and Food + Beverage. Dollar figures below are in millions unless stated otherwise.
Financial performance
- Q2 revenue: $617.7, down 0.4% reported year over year; core sales grew 1% after a 1% negative currency effect.
- Q2 earnings: Operating income was $84.9, down 9.3%, and operating margin declined to 13.8% from 15.1%. Net income attributable to AptarGroup was $65.2, up 10.4%; diluted EPS was $1.01 versus $0.91. The effective tax rate fell to 18.1% from 30.0%, supporting the increase in net income.
- Six-month results: Revenue was $1,219.1, up 1.4%; operating income was $162.4, essentially flat. Net income attributable to AptarGroup was $117.0 versus $102.9, and diluted EPS was $1.81 versus $1.58. Effective tax rate was 21.5%, down from 28.6%.
- Margins and costs: Q2 cost of sales rose to 64.7% of revenue from 62.9%, reflecting higher resin and other material costs and European operating inefficiencies. Management expected to recover higher resin costs through customer pass-throughs. Q2 adjusted EBITDA margin was 20.1%, versus 21.5%.
- Segments, Q2: Beauty + Home sales fell 5% reported (4% core) and segment income fell 17% to $25.2. Pharma sales rose 6% reported (8% core) and segment income rose 2% to $59.8. Food + Beverage sales rose 6% reported (7% core), while segment income fell 7% to $12.6.
- Cash flow, first six months: Operating cash flow was $148.9 versus $84.2 in 2016; capital expenditures were $66.7 versus $56.9. Investing used $70.3, compared with $231.2, which included the prior-year Mega Airless acquisition. Financing used $216.4, primarily reflecting debt repayment, dividends, and share repurchases.
- Liquidity and debt: At June 30, cash was $336.9; total interest-bearing debt was $778.5 and net debt was $441.6. Net debt to net capital improved to 25.2% from 29.0% at year-end 2016. The company had no balance on its $300 million U.S. revolving facility at quarter-end and reported covenant ratios well within limits.
- Shareholder returns: Q2 dividends were $0.32 per share. The company repurchased approximately 613,000 shares for $51.7 during the quarter; $235.7 remained under its $350 million authorization at June 30.
Material changes and notable items
- Beauty + Home weakness—especially home care and fragrance—offset growth in Pharma and Food + Beverage. Pharma benefited from consumer health, injectables, and tooling demand; Food + Beverage gained in food products and bottled water.
- Q2 operating income was pressured by lower Beauty + Home sales, material costs, and European decorative-packaging inefficiencies. In the first half, prior-year Mega Airless transaction and inventory-accounting charges also affect comparisons; these totaled $8.2 pretax in 2016.
- The lower 2017 tax rate reflected the new share-based compensation accounting standard and repatriation-related tax benefits. The filing reports an $8.3 tax benefit from the new standard for the first half, as well as a $3 tax benefit associated with repatriation activities.
- In the first half, Aptar repatriated $263 of foreign earnings and used most proceeds to reduce debt and fund repurchases. After quarter-end, it repatriated an additional €700 million and entered into new borrowing arrangements, including a $280 million term loan and €150 million revolver borrowing; it also arranged €300 million of private placements. A cross-currency swap was entered into to hedge the term loan’s currency and interest-rate exposure.
- Aptar accrued $1.5 for investigation and potential remediation of contamination at its Brazil facility; preliminary estimated costs were $1.5–$3.0, with possible fines or penalties and substantial uncertainty.
- The 2016 comparative cash-flow statement was revised to reclassify $1.845 from operating to financing activities. Management said the error was not material to previously issued statements; income and balance sheet were unaffected.
Outlook, risks, and contingencies
- Q3 guidance: Diluted EPS of $0.77–$0.82, compared with $0.82 reported a year earlier; prior-year comparable adjusted EPS was approximately $0.83 after currency adjustment. Guidance assumes a 26.5%–28.5% effective tax rate.
- Management expected continued near-term Beauty + Home challenges, including weakness in North America and Brazil and potential China disruption from heat-related energy restrictions affecting Aptar and suppliers. Pharma’s pipeline was described as solid, but prior-year tooling sales make year-over-year growth difficult. Food + Beverage was expected to continue growing.
- Management estimated 2017 capital expenditures of $150–$155. It stated that reduced customer demand could prompt cuts to capital spending and reconsideration of acquisitions, dividends, or repurchases.
- Risks highlighted include currency and tax-rate volatility, resin and other input costs, customer or supplier concentration and financial health, fire-related impacts in Annecy, Brazil contamination, product demand, intellectual-property litigation, regulation, and execution of capacity expansions.
- The 2016 Annecy fire continued to affect operations: first-half costs were $9.9 and insurance proceeds received were $12.0; reported profitability was negatively affected by $2.7. Aptar said it did not expect a material financial impact, but recovery of additional insurance gains remained uncertain. The filing also describes ordinary-course lawsuits and claims whose outcomes are uncertain.
Most important facts for investors to verify
- Whether Beauty + Home sales and segment profitability stabilize, and whether the Q3 EPS range is achieved.
- Timing and success of resin-price pass-throughs and remediation of European operational inefficiencies.
- The final scope, cost, and any penalties associated with Brazil environmental remediation.
- Cash, debt, and net leverage following the post-quarter €700 million repatriation and new borrowing arrangements.
- How much Q2 and first-half earnings growth reflects lower taxes rather than operating improvement; also monitor the effective tax rate.
- Insurance recoveries and remaining operational effects of the Annecy fire, and any material developments in legal or other contingencies.
- The quantified financial impact of adopting the new revenue-recognition standard; Aptar had not yet determined that impact and anticipated full retrospective adoption.