AptarGroup, Inc. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. Dollar amounts below are in millions unless stated otherwise. The filing is unaudited.
Business context and financial performance
AptarGroup makes dispensing, drug-delivery, sealing and active material science products, reported in Pharma, Beauty + Home, and Food + Beverage segments.
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net sales | $836.9 | $825.4 | $2,526.3 | $2,413.2 |
| Operating income | $95.2 | $82.9 | $294.1 | $259.9 |
| Operating margin | 11.4% | 10.0% | 11.6% | 10.8% |
| Net income attributable to AptarGroup | $54.2 | $47.3 | $180.3 | $186.5 |
| Diluted EPS | $0.81 | $0.70 | $2.70 | $2.75 |
| Adjusted EBITDA margin | 18.4% | 18.7% | 18.6% | 18.8% |
Q3 net sales rose 1% as reported; core sales, excluding acquisitions and currency effects, increased 9%, comprising approximately 5% volume/mix and 4% pricing. For the nine months, reported sales rose 5% and core sales increased 11%, with approximately 5% from pricing and 6% from volume/mix. A stronger U.S. dollar reduced reported sales by 8% in Q3 and 6% year to date.
Q3 segment results were mixed: Pharma sales rose 10% reported (20% core); Beauty + Home sales fell 4% reported (4% core growth); Food + Beverage sales fell 3% reported (flat core). Pharma’s Adjusted EBITDA margin was 31.2% versus 32.2%; Beauty + Home’s was 11.5% versus 11.7%; Food + Beverage’s was 14.1% versus 16.2%. Pharma drove much of core growth, while Food + Beverage profitability was pressured by mix and operational inefficiencies.
Cash flow, debt and liquidity
- Nine-month operating cash flow was $306.3, versus $259.4 in 2021. Capital expenditures were $226.1; after $17.1 of government grant proceeds, reported free cash flow was $97.3, versus $42.7.
- Cash and equivalents were $124.8 at September 30, 2022; the cash flow statement reports $125.8 including $1.0 of restricted cash. Total debt was $1,192.3 and net debt $1,067.5. Net debt to net capital rose to 36.1% from 35.1% at year-end 2021.
- The $600 revolving credit facility matures in June 2026; approximately $49 was drawn by the UK subsidiary and none in the U.S. The company reported a 1.76x leverage ratio against a 3.50x maximum and 16.02x interest coverage against a 3.00x minimum.
- Management expects 2022 capital expenditures, net of grants, of approximately $300–$320. Q3 declared dividends were $0.38 per share; the company repurchased $72.3 of stock in the first nine months.
Material changes, outlook and risks
- Reported operating income improved, helped by sales growth and lower restructuring costs. Cost inflation, higher tooling mix and under-absorption offset some benefits; cost of sales rose to 65.3% of sales in Q3 from 65.1%.
- Interest expense increased, partly reflecting the $400 senior notes issued at 3.60% due 2032. The company redeemed $75 of 3.25% notes and $125 of 3.49% notes during 2022.
- Nine-month net income declined despite higher sales and operating income, reflecting a higher effective tax rate and other expense. The Q3 tax rate of 36.2% included a $7.2 out-of-period charge for a legal entity reorganization; management said the error was not material to either the quarter recorded or the quarter in which it should have been recorded. Nine-month tax rate was 31.0%, versus 22.9%.
- Foreign currency translation drove a $184.1 nine-month loss in other comprehensive income, contributing to lower equity. Q3 included a $4.5 one-time payment to certain European employees to mitigate inflation costs. A new operations and SG&A optimization initiative incurred $2.3 of Q3 restructuring costs.
- Fourth-quarter 2022 diluted EPS guidance is $0.73–$0.83, excluding restructuring costs, changes in fair value of equity investments and acquisition costs; guidance assumes a 28%–30% effective tax rate. Management expects Pharma growth to normalize, does not expect a repeat of prior-year at-home COVID-19 test-kit material science sales, and anticipates continued softness in personal care, food and beverage markets. No full-year EPS guidance is provided in the filing.
- Management cited inflation and energy/input costs, foreign exchange, supply-chain disruptions, labor availability and costs, customer demand and credit conditions, the war in Ukraine, COVID-19 variants, rising interest rates and market volatility as risks. The company said Ukraine had no significant direct business impact as of quarter-end, but reported indirect cost and supply effects.
- Customs-duty claims were approximately $13 of principal plus $5–$6 of interest and penalties; no liability was recorded because of uncertainty over assessment and appeal outcomes. The company also disclosed ordinary-course litigation and an insurance lawsuit concerning a 2016 facility fire; no recovery gain was recognized.
Important facts for investors to verify
- Whether pricing actions continue to offset inflation without further deterioration in segment margins, especially in Food + Beverage.
- How much reported growth and profitability are affected by currency movements, and whether Pharma demand and COVID-related product sales normalize as management expects.
- Delivery of Q4 EPS guidance and the stated $300–$320 full-year capital expenditure estimate.
- Working-capital and cash conversion trends, including receivables, inventory, and the $35 of supplier obligations under the supply-chain finance program.
- Resolution and potential financial exposure from customs claims and other contingencies, and progress under the new restructuring initiative.