AptarGroup, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018. Amounts are in U.S. dollars; financial amounts are in millions unless stated otherwise. The interim financial statements are unaudited.
Business context and results
AptarGroup makes dispensing systems and sealing solutions across Beauty + Home, Pharma, and Food + Beverage. Net sales rose 17% to $703.4 million year over year. The company attributed 10 percentage points of reported growth to favorable currency translation; core sales growth was 7%, reflecting higher demand across all three segments.
- Beauty + Home: Sales increased 17% to $378.2 million, including 8% core growth. Adjusted EBITDA rose 26% to $53.1 million; margin expanded to 14.1% from 13.1%.
- Pharma: Sales increased 17% to $230.1 million, including 6% core growth. Adjusted EBITDA rose 16% to $79.8 million; margin eased to 34.7% from 35.0%. Lower custom tooling sales weighed on core growth.
- Food + Beverage: Sales increased 16% to $95.1 million, including 10% core growth. Adjusted EBITDA declined 2% to $12.7 million; margin fell to 13.4% from 15.8%, reflecting resin-cost pass-through timing and product mix.
Financial and liquidity highlights
- Profit: Operating income was $88.0 million, up from $78.0 million; operating margin declined to 12.5% from 13.0%. Net income attributable to AptarGroup was $59.3 million versus $51.8 million. Diluted EPS was $0.92 versus $0.81. Consolidated Adjusted EBITDA was $134.1 million, with a 19.1% margin, unchanged year over year.
- Costs and taxes: Cost of sales increased to 64.8% of sales from 64.0%, reflecting higher material costs, mix, and lagged customer price increases. The effective tax rate rose to 27.0% from 25.4%, in part due to GILTI and BEAT taxes.
- Cash flow: Operating cash flow was $51.0 million versus $38.2 million. Capital expenditures were $40.0 million versus $34.8 million; operating cash flow less capital expenditures was approximately $11.0 million, a derived measure. Investing activities used $26.5 million, including $10.6 million of insurance proceeds. Financing activities provided $1.6 million.
- Cash and debt: Cash and equivalents were $741.1 million at quarter-end. Total interest-bearing debt was $1.270 billion and net debt was $529.3 million; net debt to net capital improved to 27.4% from 29.3% at year-end. The $300 million U.S. revolver and €150 million UK revolver were undrawn. Covenant ratios were within limits: leverage of 1.15x against a 3.50x maximum and interest coverage of 12.12x against a 3.00x minimum.
- Shareholder returns: The quarterly dividend was $0.32 per share. AptarGroup repurchased approximately 189,000 shares for $16.7 million; $125.2 million remained authorized.
Material changes and notable items
- The company adopted the new revenue standard on January 1, 2018 using the modified retrospective method. Adoption increased opening retained earnings by $2.9 million; prior-year figures were not restated. The reported Q1 net income impact was immaterial.
- A business transformation begun in late 2017 generated $5.9 million of Q1 restructuring costs. AptarGroup estimates total implementation costs of approximately $90 million over three years, expects about $45 million of related capital investment in 2018, and targets approximately $80 million of annualized incremental EBITDA by the end of 2020.
- The Annecy, France facility fire continued to affect operations. Q1 fire-related losses were $5.9 million; the company reported $18.9 million in insurance proceeds received and no insurance receivable at quarter-end. It did not recognize potential insurance gains because realization remained uncertain.
- At its Brazil facility, contamination investigation and remediation costs were initially estimated at $1.5 million to $3.0 million. A $1.5 million expense was accrued in Q1 2017; no adjustment was made in Q1 2018 while the investigation continued.
- On May 1, 2018, after quarter-end, AptarGroup announced its acquisition of Reboul SAS for enterprise value of €14 million (approximately $17 million), less net debt assumed, with an earn-out that could raise the value to €23 million (approximately $28 million). The purchase was to be funded with cash; Q1 included $0.5 million in transaction costs and $3.7 million placed in escrow as restricted cash.
Outlook, commentary, and risks
- For Q2 2018, management expected core sales growth in each reporting segment and continued favorable currency effects. EPS guidance was $0.99–$1.04, compared with $1.01 in Q2 2017. Guidance assumed a 30%–32% effective tax rate, versus approximately 18% in the prior-year quarter. No full-year EPS guidance is stated in the filing.
- Management estimated 2018 capital expenditures of approximately $190 million to $210 million. It stated that liquidity was sufficient for foreseeable needs and that cash-flow pressure from a prolonged demand downturn could prompt cuts to capital spending and reassessment of acquisitions, dividends, and repurchases.
- Key operating pressures include material and resin costs, pricing pass-through delays, operational inefficiencies in European custom decorative packaging, and product mix. Results are also exposed to foreign exchange, tax-rate changes, customer and supplier conditions, raw-material availability, regulation, and execution of the business transformation.
- The filing describes lawsuits and claims in the ordinary course of business; management did not expect them to materially affect results or cash flows, but noted unfavorable outcomes could exceed accruals. The Brazil environmental matter remains uncertain and could involve remediation costs or penalties.
Important facts for investors to verify
- Whether core sales growth and the Q2 guidance were achieved, particularly given the unusually large currency contribution to reported Q1 growth.
- Progress, total costs, capital requirements, and realized savings from the transformation plan, including the $80 million annualized EBITDA target.
- Whether material-cost inflation, pricing delays, and European decorative-packaging inefficiencies continue to pressure operating margins.
- Final costs and any penalties arising from the Brazil environmental investigation, and the timing and collectability of Annecy-related insurance recoveries.
- Reboul’s closing terms, any earn-out payment, and integration results; the transaction was announced after the reporting date.
- Changes in debt, liquidity, currency exposures, and the effective tax rate, including finalization of provisional U.S. tax-reform accounting.