AptarGroup, Inc. — Q2 2016 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2016. Unaudited consolidated results; dollar amounts below are in millions except per-share data.
Business context and results
AptarGroup makes dispensing systems for beauty and home care, pharmaceutical and food and beverage markets. It acquired Mega Airless on February 29, 2016; its results are included from that date.
| Metric | Q2 2016 | Q2 2015 | First half 2016 | First half 2015 |
|---|---|---|---|---|
| Net sales | $620.0 | $594.3 | $1,202.3 | $1,184.1 |
| Operating income | $93.6 | $95.5 | $162.8 | $169.1 |
| Net income attributable to AptarGroup | $59.0 | $57.5 | $102.9 | $102.7 |
| Diluted EPS | $0.91 | $0.90 | $1.58 | $1.59 |
| Operating margin | 15.1% | 16.1% | 13.6% | 14.3% |
| Effective tax rate | 30.0% | 32.9% | 28.6% | 33.1% |
Reported sales rose 4% in Q2 and 2% in the first half. Management reported core sales growth of 3% in each period, with acquisitions adding 3% and 2%, respectively, and currency reducing growth by about 2% in both periods. Q2 sales growth in Beauty + Home and Pharma was partly offset by Food + Beverage weakness.
- Beauty + Home: Q2 sales $340.3 million, up 7%; segment income $30.5 million, up 12%. Beauty and home-care demand improved; personal care remained weak.
- Pharma: Q2 sales $191.0 million, up 4%; segment income $58.6 million, up 6%. Growth included allergic rhinitis, eye care and injectable products; some customer destocking and lower tooling sales were offsets.
- Food + Beverage: Q2 sales $88.6 million, down 3%; segment income $13.6 million, down 9%. Asian beverage softness and unfavorable mix weighed on results.
Cash flow, balance sheet and capital
- First-half operating cash flow was $86.1 million, down from $140.2 million. Capital expenditures were $56.9 million; operating cash flow less capital expenditures was approximately $29.1 million.
- Cash and equivalents were $361.7 million at June 30, versus $489.9 million at year-end 2015. Short-term investments were nil, compared with $29.8 million at year-end.
- Interest-bearing debt was $890.6 million, up from $817.8 million at year-end; net debt was approximately $528.9 million. Net debt to net capital was 29.6%, compared with 20.6% at year-end.
- Long-term obligations, including current maturities, totaled about $825.0 million net of issuance costs. The $300 million revolving credit facility had $55 million outstanding. Covenant ratios were within limits: leverage 1.25x versus a 3.50x maximum; interest coverage 13.02x versus a 3.00x minimum.
- Management estimated 2016 capital expenditures of approximately $155 million. The company paid $37.7 million in dividends and repurchased and retired 636,000 shares for $48.7 million during the first half. The quarterly dividend was $0.30 per share.
Material changes, outlook and risks
- Q2 reported operating income declined $1.9 million, while first-half operating income declined $6.3 million. Management said operating income increased excluding currency effects and the prior-year $7.4 million inventory-accounting benefit; first-half results also included $5.6 million of Mega Airless transaction costs and a $2.6 million acquired-inventory fair-value charge.
- First-half SG&A increased $13.6 million and depreciation and amortization increased $8.1 million year over year, reflecting acquisition-related expenses, transaction costs, ERP implementation, compensation, and acquired assets. Working-capital needs and a $10 million domestic pension contribution also reduced operating cash flow.
- Mega Airless was acquired for approximately $223.2 million, or $203.0 million net of cash acquired, funded with cash and revolving-credit borrowings. It contributed Q2 sales of $18.4 million and pretax income of $1.8 million. Goodwill recorded for the acquisition was approximately $106 million.
- A June 25 fire affected one of three production units at the Annecy, France facility. No injuries were reported; production was being supported by other suppliers and the company’s Brazil facility. The company reported $0.6 million of costs, offset by expected insurance proceeds for known losses, and did not expect a material financial impact. Final recovery and timing remained uncertain.
- For Q3, AptarGroup expected EPS of $0.79–$0.84, excluding potential timing effects from Annecy fire costs and insurance reimbursements; prior-year reported EPS was $0.83, or approximately $0.81 at comparable exchange rates. Management expected continued weakness in Asian beverage markets but growth in other markets, and anticipated customer validation of expanded U.S. elastomer capacity in the first half of 2017.
- Key risks cited include foreign-exchange movements, customer demand and concentration, raw-material costs and availability, acquisition integration, facility expansion execution, litigation, regulation, cybersecurity, and the Annecy fire. Most cash was held outside the U.S.; repatriation from certain subsidiaries could trigger tax costs. The company also noted normal-course litigation and claims; management did not expect them to have a material effect, but unfavorable outcomes could exceed accruals.
Important facts for investors to verify
- Whether reported and core sales growth, segment trends and customer demand persist, particularly in Asian beverages and personal care.
- How Mega Airless performs after integration and whether acquisition synergies offset transaction, amortization and financing costs.
- Annecy production recovery, insurance proceeds and any effect on Q3 results beyond the stated EPS range assumptions.
- Cash conversion and working-capital trends, planned capital spending, and the effect of higher debt and interest costs.
- The treatment of the prior-year $7.4 million inventory-accounting benefit and the acquisition-related charges when assessing comparable operating performance.
- Exposure to currency movements, overseas cash access and the resolution of uncertain tax positions and legal contingencies.