APTARGROUP, INC. - Quarter Report: 2021 March (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2021
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 1-11846
AptarGroup, Inc.
| Delaware | 36-3853103 | |||||||
| (State of Incorporation) | (I.R.S. Employer Identification No.) | |||||||
265 EXCHANGE DRIVE, SUITE 100, CRYSTAL LAKE, IL 60014
815-477-0424
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading symbol(s) | Name of each exchange on which registered | ||||||
| Common Stock, $.01 par value | ATR | New York Stock Exchange | ||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ◻
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes þ No ◻
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☑ | Accelerated filer | ☐ | Non-accelerated filer | ☐ | Smaller reporting company | ☐ | Emerging growth company | ☐ | ||||||||||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ◻
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No þ
The number of shares outstanding of common stock, as of April 23, 2021, was 65,714,946 shares.
AptarGroup, Inc.
Form 10-Q
Quarter Ended March 31, 2021
INDEX
i
PART I – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
AptarGroup, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
| In thousands, except per share amounts | |||||||||||
| Three Months Ended March 31, | 2021 | 2020 | |||||||||
| Net Sales | $ | 776,754 | $ | 721,553 | |||||||
| Operating Expenses: | |||||||||||
| Cost of sales (exclusive of depreciation and amortization shown below) | 488,705 | 451,256 | |||||||||
| Selling, research & development and administrative | 134,348 | 126,192 | |||||||||
| Depreciation and amortization | 57,438 | 50,806 | |||||||||
| Restructuring initiatives | 3,672 | 4,839 | |||||||||
| Total Operating Expenses | 684,163 | 633,093 | |||||||||
| Operating Income | 92,591 | 88,460 | |||||||||
| Other Income (Expense): | |||||||||||
| Interest expense | (7,415) | (8,388) | |||||||||
| Interest income | 381 | 175 | |||||||||
| Net investment gain | 16,809 | — | |||||||||
| Equity in results of affiliates | (515) | (799) | |||||||||
| Miscellaneous, net | (963) | (1,412) | |||||||||
| Total Other Income (Expense) | 8,297 | (10,424) | |||||||||
| Income before Income Taxes | 100,888 | 78,036 | |||||||||
| Provision for Income Taxes | 16,949 | 22,786 | |||||||||
| Net Income | $ | 83,939 | $ | 55,250 | |||||||
| Net Loss Attributable to Noncontrolling Interests | $ | 13 | $ | 3 | |||||||
| Net Income Attributable to AptarGroup, Inc. | $ | 83,952 | $ | 55,253 | |||||||
| Net Income Attributable to AptarGroup, Inc. per Common Share: | |||||||||||
| Basic | $ | 1.29 | $ | 0.86 | |||||||
| Diluted | $ | 1.24 | $ | 0.84 | |||||||
| Average Number of Shares Outstanding: | |||||||||||
| Basic | 65,229 | 64,009 | |||||||||
| Diluted | 67,648 | 66,111 | |||||||||
| Dividends per Common Share | $ | 0.36 | $ | 0.36 | |||||||
See accompanying unaudited Notes to Condensed Consolidated Financial Statements.
1
AptarGroup, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
| In thousands | |||||||||||
| Three Months Ended March 31, | 2021 | 2020 | |||||||||
| Net Income | $ | 83,939 | $ | 55,250 | |||||||
| Other Comprehensive Income (Loss): | |||||||||||
| Foreign currency translation adjustments | (48,482) | (42,229) | |||||||||
| Changes in derivative gains, net of tax | 520 | 1,483 | |||||||||
| Defined benefit pension plan, net of tax | |||||||||||
| Actuarial gain, net of tax | 319 | — | |||||||||
| Amortization of prior service cost included in net income, net of tax | 33 | 71 | |||||||||
| Amortization of net loss included in net income, net of tax | 2,354 | 1,565 | |||||||||
| Total defined benefit pension plan, net of tax | 2,706 | 1,636 | |||||||||
| Total other comprehensive loss | (45,256) | (39,110) | |||||||||
| Comprehensive Income | 38,683 | 16,140 | |||||||||
| Comprehensive Loss Attributable to Noncontrolling Interests | 13 | 3 | |||||||||
| Comprehensive Income Attributable to AptarGroup, Inc. | $ | 38,696 | $ | 16,143 | |||||||
See accompanying unaudited Notes to Condensed Consolidated Financial Statements.
2
AptarGroup, Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
| In thousands | |||||||||||
| March 31, 2021 | December 31, 2020 | ||||||||||
| Assets | |||||||||||
| Cash and equivalents | $ | 254,852 | $ | 300,137 | |||||||
| Short-term investments | — | 243 | |||||||||
| Total Cash and equivalents and Short-term investments | 254,852 | 300,380 | |||||||||
Accounts and notes receivable, less current expected credit loss ("CECL") of $6,151 in 2021 and $5,918 in 2020 | 621,093 | 566,623 | |||||||||
| Inventories | 394,179 | 379,379 | |||||||||
| Prepaid and other | 136,854 | 122,613 | |||||||||
| Total Current Assets | 1,406,978 | 1,368,995 | |||||||||
| Land | 28,773 | 28,334 | |||||||||
| Buildings and improvements | 577,724 | 579,616 | |||||||||
| Machinery and equipment | 2,777,028 | 2,808,623 | |||||||||
| Property, Plant and Equipment, Gross | 3,383,525 | 3,416,573 | |||||||||
| Less: Accumulated depreciation | (2,200,492) | (2,217,825) | |||||||||
| Property, Plant and Equipment, Net | 1,183,033 | 1,198,748 | |||||||||
| Investments in equity securities | 66,102 | 50,087 | |||||||||
| Goodwill | 883,543 | 898,521 | |||||||||
| Intangible assets, net | 331,032 | 344,309 | |||||||||
| Operating lease right-of-use assets | 64,118 | 69,845 | |||||||||
| Miscellaneous | 57,833 | 59,548 | |||||||||
| Total Other Assets | 1,402,628 | 1,422,310 | |||||||||
| Total Assets | $ | 3,992,639 | $ | 3,990,053 | |||||||
See accompanying unaudited Notes to Condensed Consolidated Financial Statements.
3
AptarGroup, Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
| In thousands, except share and per share amounts | |||||||||||
| March 31, 2021 | December 31, 2020 | ||||||||||
| Liabilities and Stockholders’ Equity | |||||||||||
| Current Liabilities: | |||||||||||
| Notes payable, revolving credit facility and overdrafts | $ | 1,036 | $ | 52,200 | |||||||
| Current maturities of long-term obligations, net of unamortized debt issuance costs | 64,776 | 65,666 | |||||||||
| Accounts payable, accrued and other liabilities | 690,117 | 662,463 | |||||||||
| Total Current Liabilities | 755,929 | 780,329 | |||||||||
| Long-Term Obligations, net of unamortized debt issuance costs | 1,037,983 | 1,054,998 | |||||||||
| Deferred income taxes | 32,790 | 37,242 | |||||||||
| Retirement and deferred compensation plans | 146,568 | 145,959 | |||||||||
| Operating lease liabilities | 47,530 | 52,212 | |||||||||
| Deferred and other non-current liabilities | 71,044 | 68,528 | |||||||||
| Commitments and contingencies | — | — | |||||||||
| Total Deferred Liabilities and Other | 297,932 | 303,941 | |||||||||
| AptarGroup, Inc. stockholders’ equity | |||||||||||
Common stock, $.01 par value, 199 million shares authorized, 70.0 and 69.5 million shares issued as of March 31, 2021 and December 31, 2020, respectively | 700 | 695 | |||||||||
| Capital in excess of par value | 874,623 | 849,161 | |||||||||
| Retained earnings | 1,704,336 | 1,643,825 | |||||||||
| Accumulated other comprehensive loss | (326,965) | (281,709) | |||||||||
Less: Treasury stock at cost, 4.4 and 4.5 million shares as of March 31, 2021 and December 31, 2020, respectively | (352,282) | (361,583) | |||||||||
| Total AptarGroup, Inc. Stockholders’ Equity | 1,900,412 | 1,850,389 | |||||||||
| Noncontrolling interests in subsidiaries | 383 | 396 | |||||||||
| Total Stockholders’ Equity | 1,900,795 | 1,850,785 | |||||||||
| Total Liabilities and Stockholders’ Equity | $ | 3,992,639 | $ | 3,990,053 | |||||||
See accompanying unaudited Notes to Condensed Consolidated Financial Statements.
4
AptarGroup, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(Unaudited)
| In thousands | |||||||||||||||||||||||||||||||||||||||||
| Three Months Ended | AptarGroup, Inc. Stockholders’ Equity | ||||||||||||||||||||||||||||||||||||||||
| March 31, 2021 and 2020 | Retained Earnings | Accumulated Other Comprehensive (Loss) Income | Common Stock Par Value | Treasury Stock | Capital in Excess of Par Value | Non- Controlling Interest | Total Equity | ||||||||||||||||||||||||||||||||||
Balance - December 31, 2019 | $ | 1,523,820 | $ | (341,948) | $ | 686 | $ | (381,238) | $ | 770,596 | $ | 336 | $ | 1,572,252 | |||||||||||||||||||||||||||
| Net income (loss) | 55,253 | — | — | — | — | (3) | 55,250 | ||||||||||||||||||||||||||||||||||
| (1,377) | — | — | — | — | — | (1,377) | |||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustments | — | (42,229) | — | — | — | — | (42,229) | ||||||||||||||||||||||||||||||||||
| Changes in unrecognized pension gains (losses) and related amortization, net of tax | — | 1,636 | — | — | — | — | 1,636 | ||||||||||||||||||||||||||||||||||
| Changes in derivative gains (losses), net of tax | — | 1,483 | — | — | — | — | 1,483 | ||||||||||||||||||||||||||||||||||
| Stock awards and option exercises | — | — | 3 | 8,665 | 14,971 | — | 23,639 | ||||||||||||||||||||||||||||||||||
| Cash dividends declared on common stock | (23,031) | — | — | — | — | — | (23,031) | ||||||||||||||||||||||||||||||||||
| Balance - March 31, 2020 | $ | 1,554,665 | $ | (381,058) | $ | 689 | $ | (372,573) | $ | 785,567 | $ | 333 | $ | 1,587,623 | |||||||||||||||||||||||||||
Balance - December 31, 2020 | $ | 1,643,825 | $ | (281,709) | $ | 695 | $ | (361,583) | $ | 849,161 | $ | 396 | $ | 1,850,785 | |||||||||||||||||||||||||||
| Net income (loss) | 83,952 | — | — | — | — | (13) | 83,939 | ||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustments | — | (48,482) | — | — | — | — | (48,482) | ||||||||||||||||||||||||||||||||||
| Changes in unrecognized pension gains (losses) and related amortization, net of tax | — | 2,706 | — | — | — | — | 2,706 | ||||||||||||||||||||||||||||||||||
| Changes in derivative gains (losses), net of tax | — | 520 | — | — | — | — | 520 | ||||||||||||||||||||||||||||||||||
| Stock awards and option exercises | — | — | 5 | 9,301 | 25,462 | — | 34,768 | ||||||||||||||||||||||||||||||||||
| Cash dividends declared on common stock | (23,441) | — | — | — | — | — | (23,441) | ||||||||||||||||||||||||||||||||||
| Balance - March 31, 2021 | $ | 1,704,336 | $ | (326,965) | $ | 700 | $ | (352,282) | $ | 874,623 | $ | 383 | $ | 1,900,795 | |||||||||||||||||||||||||||
See accompanying unaudited Notes to Condensed Consolidated Financial Statements.
5
AptarGroup, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| In thousands, brackets denote cash outflows | |||||||||||
| Three Months Ended March 31, | 2021 | 2020 | |||||||||
| Cash Flows from Operating Activities: | |||||||||||
| Net income | $ | 83,939 | $ | 55,250 | |||||||
| Adjustments to reconcile net income to net cash provided by operations: | |||||||||||
| Depreciation | 47,627 | 42,792 | |||||||||
| Amortization | 9,811 | 8,014 | |||||||||
| Stock-based compensation | 11,489 | 9,141 | |||||||||
| Provision for CECL | 342 | 1,251 | |||||||||
| Loss on disposition of fixed assets | 91 | 54 | |||||||||
| Gain on remeasurement of equity securities | (16,809) | — | |||||||||
| Deferred income taxes | (3,580) | 6 | |||||||||
| Defined benefit plan expense | 7,475 | 5,775 | |||||||||
| Equity in results of affiliates | 515 | 799 | |||||||||
| Change in fair value of contingent consideration | 975 | — | |||||||||
| Changes in balance sheet items, excluding effects from foreign currency adjustments: | |||||||||||
| Accounts and other receivables | (70,194) | (64,764) | |||||||||
| Inventories | (26,428) | (8,615) | |||||||||
| Prepaid and other current assets | (16,995) | (11,787) | |||||||||
| Accounts payable, accrued and other liabilities | 49,764 | 51,523 | |||||||||
| Income taxes payable | (3,121) | (5,278) | |||||||||
| Retirement and deferred compensation plan liabilities | (5,156) | (1,312) | |||||||||
| Other changes, net | 2,440 | 2,184 | |||||||||
| Net Cash Provided by Operations | 72,185 | 85,033 | |||||||||
| Cash Flows from Investing Activities: | |||||||||||
| Capital expenditures | (63,884) | (61,625) | |||||||||
| Proceeds from sale of property, plant and equipment | 318 | 166 | |||||||||
| Maturity of short-term investment | 243 | — | |||||||||
| Acquisition of business, net of cash acquired and release of escrow | — | (1,463) | |||||||||
| Acquisition of intangible assets, net | — | (3,955) | |||||||||
| Investment in equity securities | — | (20,423) | |||||||||
| Notes receivable, net | (593) | (785) | |||||||||
| Net Cash Used by Investing Activities | (63,916) | (88,085) | |||||||||
| Cash Flows from Financing Activities: | |||||||||||
| Proceeds from notes payable and overdrafts | 4,019 | 8,148 | |||||||||
| Repayments of notes payable and overdrafts | (3,180) | (2,030) | |||||||||
| Repayments and proceeds of short term revolving credit facility, net | (52,000) | 175,000 | |||||||||
| Proceeds from long-term obligations | 2,053 | — | |||||||||
| Repayments of long-term obligations | (4,337) | (2,386) | |||||||||
| Dividends paid | (23,441) | (23,031) | |||||||||
| Proceeds from stock option exercises | 31,871 | 18,602 | |||||||||
| Net Cash (Used) Provided by Financing Activities | (45,015) | 174,303 | |||||||||
| Effect of Exchange Rate Changes on Cash | (8,539) | (3,381) | |||||||||
| Net (Decrease) Increase in Cash and Equivalents and Restricted Cash | (45,285) | 167,870 | |||||||||
| Cash and Equivalents and Restricted Cash at Beginning of Period | 304,970 | 246,973 | |||||||||
| Cash and Equivalents and Restricted Cash at End of Period | $ | 259,685 | $ | 414,843 | |||||||
6
Restricted cash included in the line item prepaid and other on the Condensed Consolidated Balance Sheets as shown below represents amounts held in escrow related to the Fusion Acquisition and the Noble Acquisition.
| Three Months Ended March 31, | 2021 | 2020 | |||||||||
| Cash and equivalents | $ | 254,852 | $ | 410,840 | |||||||
| Restricted cash included in prepaid and other | 4,833 | 4,003 | |||||||||
| Total Cash and Equivalents and Restricted Cash shown in the Statement of Cash Flows | $ | 259,685 | $ | 414,843 | |||||||
See accompanying unaudited Notes to Condensed Consolidated Financial Statements.
7
AptarGroup, Inc.
Notes to Condensed Consolidated Financial Statements
(Dollars in Thousands, Except per Share Amounts, or as Otherwise Indicated)
(Unaudited)
NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying unaudited Condensed Consolidated Financial Statements include the accounts of AptarGroup, Inc. and our subsidiaries. The terms “AptarGroup”, “Aptar”, “Company”, “we”, “us” or “our” as used herein refer to AptarGroup, Inc. and our subsidiaries. All significant intercompany accounts and transactions have been eliminated. Certain previously reported amounts have been reclassified to conform to the current period presentation.
In the opinion of management, the unaudited Condensed Consolidated Financial Statements (the “Condensed Consolidated Financial Statements”) include all normal recurring adjustments necessary for a fair statement of consolidated financial position, results of operations, comprehensive income, changes in equity and cash flows for the interim periods presented. The accompanying Condensed Consolidated Financial Statements have been prepared by the Company, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) have been condensed or omitted pursuant to such rules and regulations, although we believe that the disclosures made are adequate to make the information presented not misleading. Also, certain financial position data included herein was derived from the audited Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2020 but does not include all disclosures required by U.S. GAAP. Accordingly, these Condensed Consolidated Financial Statements and related notes should be read in conjunction with the audited Consolidated Financial Statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2020. The results of operations of any interim period are not necessarily indicative of the results that may be expected for the year.
There are many uncertainties regarding the current COVID-19 pandemic, including the availability, adoption, and effectiveness of a vaccine, the length of time it takes for normal economic and operating conditions to resume, additional governmental actions that may be taken and/or extensions of time for restrictions that have been imposed to date, and numerous other uncertainties. The pandemic has impacted certain markets within our business, our operations and our financial results during the three months ended March 31, 2021. No impairments were recorded as of March 31, 2021 related to the COVID-19 pandemic. While the disruption is currently expected to be temporary, there is uncertainty around the duration. Due to significant uncertainty surrounding the situation, future results could change and therefore our results could be materially impacted.
ADOPTION OF RECENT ACCOUNTING STANDARDS
Changes to U.S. GAAP are established by the Financial Accounting Standards Board (“FASB”) in the form of Accounting Standards Updates (“ASUs”) to the FASB’s Accounting Standards Codification.
Effective January 1, 2021, we adopted ASU 2020-10, Codification Improvements, which updates various codification topics by clarifying or improving disclosure requirements to align with the SEC's regulations, and no material impacts were noted.
Effective January 1, 2020, we adopted ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, issued by the FASB in June 2016, as well as the clarifying amendments subsequently issued. We applied the guidance using a modified retrospective approach and accordingly recognized an amount of $1.4 million as the cumulative adjustment to opening retained earnings in the first quarter of 2020. This is based on management's best estimates of specific losses on individual exposures particularly on current trade receivables, as well as the time value of money and reasonable and supportable information that is available at the reporting date about past events, current conditions and forecasts of future economic conditions. On an ongoing basis, we will contemplate forward-looking economic conditions in recording lifetime expected credit losses for our financial assets measured at cost, such as our trade receivables and certain other assets.
In January 2017, the FASB issued ASU 2017-04, which provides guidance to simplify how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. As a result, impairment charges are required for the amount by which a reporting unit’s carrying amount exceeds its fair value up to the amount of its allocated goodwill. We adopted the standard on January 1, 2020 and did not record any impairment charges.
In August 2018, the FASB issued ASU 2018-13, which amends disclosure requirements for fair value measurements. The new standard modifies disclosure requirements including removing requirements to disclose the valuation process for Level 3 measurements and adding requirements to disclose the changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements and the range and weighted average of significant unobservable inputs used to develop Level 3 measurements. We adopted the standard on January 1, 2020 and no material impacts were noted.
8
In August 2018, the FASB issued ASU 2018-14, which amends disclosure requirements for defined benefit pension and other postretirement plans. The amendments in this update remove disclosures that are no longer considered cost beneficial, clarify the specific requirements of disclosures, and add disclosure requirements identified as relevant. We adopted the standard during the fourth quarter of 2020 and appropriate disclosures are included in the notes to the financial statements to the extent applicable. The provisions of the new standard do not have any effect on our financial statements.
In August 2018, the FASB issued ASU 2018-15 to help entities evaluate the accounting for fees paid by a customer in a cloud computing arrangement (hosting arrangement) by providing guidance for determining when the arrangement includes a software license. The amendments in this update align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). Accordingly, the amendments require an entity (customer) in a hosting arrangement that is a service contract to follow the guidance in Subtopic 350-40 to determine which implementation costs to capitalize as an asset related to the service contract and which costs to expense. The amendments also require the entity (customer) to expense the capitalized implementation costs of a hosting arrangement that is a service contract over the term of the hosting arrangement, which includes reasonably certain renewals. We adopted the standard on January 1, 2020 and no material impacts were noted.
Other accounting standards that have been issued by the FASB or other standards-setting bodies did not have a material impact on our Condensed Consolidated Financial Statements.
INCOME TAXES
We compute taxes on income in accordance with the tax rules and regulations of the many taxing authorities where the income is earned. The income tax rates imposed by these taxing authorities may vary substantially. Taxable income may differ from pre-tax income for financial accounting purposes. To the extent that these differences create timing differences between the tax basis of an asset or liability and our reported amount in the financial statements, an appropriate provision for deferred income taxes is made.
We maintain our assertion that the cash and distributable reserves at our non-U.S. affiliates are indefinitely reinvested. At March 31, 2021, under currently enacted laws, we do not have a balance of foreign earnings that will be subject to U.S. taxation. We will provide for the necessary withholding and local income taxes when management decides that an affiliate should make a distribution. These decisions are made taking into consideration the financial requirements of the non-U.S. affiliates and the global cash management goals of the Company.
We provide a liability for the amount of unrecognized tax benefits from uncertain tax positions. This liability is provided whenever we determine that a tax benefit will not meet a more-likely-than-not threshold for recognition.
We are subject to the examination of our returns and other tax matters by the U.S. Internal Revenue Service and other tax authorities and governmental bodies. We believe that an adequate provision for any adjustments that may result from tax examinations exists. However, the outcome of tax audits cannot be predicted with certainty. If any issues addressed in our tax audits are resolved in a manner inconsistent with our expectations, we could be required to adjust its provision for income taxes in the period such resolution occurs. The resolution of each of these audits is not expected to be material to our Condensed Consolidated Financial Statements.
NOTE 2 – REVENUE
Revenue by segment and geography for the three months ended March 31, 2021 and 2020 is as follows:
| For the Three Months Ended March 31, 2021 | |||||||||||||||||||||||||||||
| Segment | Europe | Domestic | Latin America | Asia | Total | ||||||||||||||||||||||||
| Pharma | $ | 207,947 | $ | 89,295 | $ | 5,370 | $ | 11,220 | $ | 313,832 | |||||||||||||||||||
| Beauty + Home | 189,240 | 98,807 | 34,342 | 24,557 | 346,946 | ||||||||||||||||||||||||
| Food + Beverage | 28,502 | 67,063 | 9,253 | 11,158 | 115,976 | ||||||||||||||||||||||||
| Total | $ | 425,689 | $ | 255,165 | $ | 48,965 | $ | 46,935 | $ | 776,754 | |||||||||||||||||||
9
| For the Three Months Ended March 31, 2020 | |||||||||||||||||||||||||||||
| Segment | Europe | Domestic | Latin America | Asia | Total | ||||||||||||||||||||||||
| Pharma | $ | 190,130 | $ | 90,965 | $ | 6,579 | $ | 9,522 | $ | 297,196 | |||||||||||||||||||
| Beauty + Home | 186,950 | 81,845 | 36,181 | 19,584 | 324,560 | ||||||||||||||||||||||||
| Food + Beverage | 28,769 | 57,590 | 8,034 | 5,404 | 99,797 | ||||||||||||||||||||||||
| Total | $ | 405,849 | $ | 230,400 | $ | 50,794 | $ | 34,510 | $ | 721,553 | |||||||||||||||||||
We perform our obligations under a contract with a customer by transferring goods and/or services in exchange for consideration from the customer. The timing of performance will sometimes differ from the timing of the receipt of the associated consideration from the customer, thus resulting in the recognition of a contract asset or a contract liability. We recognize a contract asset when we transfer control of goods or services to a customer prior to invoicing for the related performance obligation. The contract asset is transferred to accounts receivable when the product is shipped and invoiced to the customer. We recognize a contract liability if the customer's payment of consideration precedes the entity's performance.
The opening and closing balances of our contract asset and contract liabilities are as follows:
| Balance as of December 31, 2020 | Balance as of March 31, 2021 | Increase/ (Decrease) | |||||||||||||||
| Contract asset (current) | $ | 16,109 | $ | 15,490 | $ | (619) | |||||||||||
| Contract asset (long-term) | $ | — | $ | — | $ | — | |||||||||||
| Contract liability (current) | $ | 87,188 | $ | 102,721 | $ | 15,533 | |||||||||||
| Contract liability (long-term) | $ | 21,584 | $ | 25,747 | $ | 4,163 | |||||||||||
The differences in the opening and closing balances of our contract asset and contract liabilities are primarily the result of timing differences between our performance and the customer’s payment. The total amount of revenue recognized during the current year against contract liabilities is $18.7 million, including $13.0 million relating to contract liabilities at the beginning of the year. Current contract assets and long-term contract assets are included within the Prepaid and Other and Miscellaneous assets, respectively, while current contract liabilities and long-term contract liabilities are included within Accounts Payable, Accrued and Other Liabilities and Deferred and Other Non-current Liabilities, respectively, within our Condensed Consolidated Balance Sheets.
Determining the Transaction Price
In most cases, the transaction price for each performance obligation is stated in the contract. In determining the variable amounts of consideration within the transaction price (such as volume-based customer rebates), we include an estimate of the expected amount of consideration as revenue. We apply the expected value method based on all of the information (historical, current, and forecast) that is reasonably available and identify reasonable estimates based on this information. We apply the method consistently throughout the contract when estimating the effect of an uncertainty on the amount of variable consideration to which we will be entitled.
Product Sales
We primarily manufacture and sell drug delivery, dispensing, sealing and active material science solutions. The amount of consideration is typically fixed for such customers. At the time of delivery, the customer is invoiced the agreed-upon price. Revenue from product sales is typically recognized upon manufacture or shipment, when control of the goods transfers to the customer.
To determine when the control transfers, we typically assess, among other things, the shipping terms of the contract, shipping being one of the indicators of transfer of control. A majority of product sales are sold FOB shipping point. For FOB shipping point shipments, control of the goods transfers to the customer at the time of shipment of the goods. Once the goods are shipped, we are precluded from redirecting the shipment to another customer. Therefore, our performance obligation is satisfied at the time of shipment. With respect to FOB destination sales, shipping and/or handling costs that occur before the customer obtains control of the goods are deemed to be fulfillment activities and are accounted for as fulfillment costs and revenue is recorded upon final delivery to the customer location. We have elected to account for shipping and handling costs that occur after the customer has obtained control of a good as fulfillment costs rather than as a promised service. We do not have any material significant payment terms as payment is typically received shortly after the point of sale.
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There also exist instances where we manufacture highly customized products that have no alternative use to us and for which we have an enforceable right to payment for performance completed to date. For these products, we transfer control and recognize revenue over time by measuring progress towards completion using the Output Method based on the number of products produced. As we normally make our products to a customer’s order, the time between production and shipment of our products is typically within a few weeks. We believe this measurement provides a faithful depiction of the transfer of goods as the costs incurred reflect the value of the products produced.
As a part of our customary business practice, we offer a standard warranty that the products will materially comply with the technical specifications and will be free from material defects. Because such warranties are not sold separately, do not provide for any service beyond a guarantee of a product’s initial specifications, and are not required by law, there is no revenue deferral for these types of warranties.
Tooling Sales
We also build or contract for molds and other tools (collectively defined as “tooling”) necessary to produce our products. As with product sales, we recognize revenue when control of the tool transfers to the customer. If the tooling is highly customized with no alternative use to us and we have an enforceable right to payment for performance completed to date, we transfer control and recognize revenue over time by measuring progress towards completion using the Input Method based on costs incurred relative to total estimated costs to completion. Otherwise, revenue for the tooling is recognized at the point in time when the customer approves the tool. We do not have any material significant payment terms as payment is typically either received during the mold-build process or shortly after completion.
In certain instances, we offer extended warranties on our tools above and beyond the normal standard warranties. We normally receive payment at the inception of the contract and recognize revenue over the term of the contract. At December 31, 2020, $536 thousand of unearned revenue associated with outstanding contracts was reported in Accounts Payable, Accrued and Other Liabilities. At March 31, 2021, the unearned amount was $523 thousand. We expect to recognize approximately $98 thousand of the unearned amount during the remainder of 2021, $142 thousand in 2022, and $283 thousand thereafter.
Service Sales
We also provide services to our pharmaceutical customers. As with product sales, we recognize revenue based on completion of each performance obligation of the service contract.
Contract Costs
We do not incur significant costs to obtain or fulfill revenue contracts.
Credit Risk
We are exposed to credit losses primarily through our product sales, tooling sales and services to our customers. We assess each customer’s ability to pay for the products we sell by conducting a credit review. The credit review considers our expected billing exposure and timing for payment and the customer’s established credit rating or our assessment of the customer’s creditworthiness based on our analysis of their financial statements when a credit rating is not available. We also consider contract terms and conditions, country and political risks, and business strategy in our evaluation. A credit limit is established for each customer based on the outcome of this review.
We monitor our ongoing credit exposure through active review of customer balances against contract terms and due dates. Our activities include timely account reconciliation, dispute resolution and payment confirmation. We may employ collection agencies and legal counsel to pursue recovery of defaulted receivables.
Current uncertainty in credit and market conditions due to the COVID-19 pandemic may slow our collection efforts if customers experience significant difficulty accessing credit and paying their obligations, which may lead to higher than normal accounts receivable and increased CECL charges.
NOTE 3 - INVENTORIES
Inventories, by component net of reserves, consisted of:
| March 31, 2021 | December 31, 2020 | ||||||||||
| Raw materials | $ | 115,645 | $ | 116,029 | |||||||
| Work in process | 124,097 | 115,870 | |||||||||
| Finished goods | 154,437 | 147,480 | |||||||||
| Total | $ | 394,179 | $ | 379,379 | |||||||
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NOTE 4 – GOODWILL AND OTHER INTANGIBLE ASSETS
The changes in the carrying amount of goodwill by reporting segment since December 31, 2020 are as follows:
| Pharma | Beauty + Home | Food + Beverage | Corporate & Other | Total | |||||||||||||||||||||||||
| Goodwill | $ | 436,731 | $ | 333,111 | $ | 128,679 | $ | 1,615 | $ | 900,136 | |||||||||||||||||||
| Accumulated impairment losses | — | — | — | (1,615) | (1,615) | ||||||||||||||||||||||||
| Balance as of December 31, 2020 | $ | 436,731 | $ | 333,111 | $ | 128,679 | $ | — | $ | 898,521 | |||||||||||||||||||
| Foreign currency exchange effects | (10,456) | (4,266) | (256) | — | (14,978) | ||||||||||||||||||||||||
| Goodwill | $ | 426,275 | $ | 328,845 | $ | 128,423 | $ | 1,615 | $ | 885,158 | |||||||||||||||||||
| Accumulated impairment losses | — | — | — | (1,615) | (1,615) | ||||||||||||||||||||||||
| Balance as of March 31, 2021 | $ | 426,275 | $ | 328,845 | $ | 128,423 | $ | — | $ | 883,543 | |||||||||||||||||||
The table below shows a summary of intangible assets as of March 31, 2021 and December 31, 2020.
| March 31, 2021 | December 31, 2020 | ||||||||||||||||||||||||||||||||||||||||
| Weighted Average Amortization Period (Years) | Gross Carrying Amount | Accumulated Amortization | Net Value | Gross Carrying Amount | Accumulated Amortization | Net Value | |||||||||||||||||||||||||||||||||||
| Amortized intangible assets: | |||||||||||||||||||||||||||||||||||||||||
| Patents | 13.8 | $ | 2,810 | $ | (1,440) | $ | 1,370 | $ | 2,861 | $ | (1,477) | $ | 1,384 | ||||||||||||||||||||||||||||
| Acquired technology | 12.2 | 109,508 | (38,415) | 71,093 | 111,854 | (36,943) | 74,911 | ||||||||||||||||||||||||||||||||||
| Customer relationships | 13.5 | 283,761 | (61,214) | 222,547 | 286,644 | (56,714) | 229,930 | ||||||||||||||||||||||||||||||||||
| Trademarks and trade names | 6.8 | 45,444 | (18,615) | 26,829 | 46,174 | (17,437) | 28,737 | ||||||||||||||||||||||||||||||||||
| License agreements and other | 36.7 | 18,981 | (9,788) | 9,193 | 19,208 | (9,861) | 9,347 | ||||||||||||||||||||||||||||||||||
| Total intangible assets | 13.3 | $ | 460,504 | $ | (129,472) | $ | 331,032 | $ | 466,741 | $ | (122,432) | $ | 344,309 | ||||||||||||||||||||||||||||
Aggregate amortization expense for the intangible assets above for the three months ended March 31, 2021 and 2020 was $9,811 and $8,014, respectively.
Future estimated amortization expense for the years ending December 31 is as follows:
| 2021 | $ | 27,995 | (remaining estimated amortization for 2021) | ||||||||
| 2022 | 38,815 | ||||||||||
| 2023 | 38,545 | ||||||||||
| 2024 | 35,406 | ||||||||||
| 2025 and thereafter | 190,271 | ||||||||||
Future amortization expense may fluctuate depending on changes in foreign currency rates. The estimates for amortization expense noted above are based upon foreign exchange rates as of March 31, 2021.
NOTE 5 – INCOME TAXES
The tax provision for interim periods is determined using the estimated annual effective consolidated tax rate, based on the current estimate of full-year earnings and related estimated full year-taxes, adjusted for the impact of discrete quarterly items.
The effective tax rate for the three months ended March 31, 2021 and 2020, respectively, was 16.8% and 29.2%. The reported effective tax rate for the three months ended March 31, 2021 reflects additional tax benefits from employee stock-based compensation of $5.1 million and a $2.9 million benefit from changes in U.S. state tax laws during the quarter. A lower tax rate in France for 2021 and a more favorable mix of earnings also contributed to the lower tax rate in the current quarter.
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NOTE 6 – DEBT
Notes Payable, Revolving Credit Facility and Overdrafts
At March 31, 2021 and December 31, 2020, our notes payable, revolving credit facility and overdrafts, consisted of the following:
| March 31, 2021 | December 31, 2020 | ||||||||||
Notes payable 0.0% | $ | — | $ | 200 | |||||||
Revolving credit facility 0.00% | — | 52,000 | |||||||||
Overdrafts 8.10% | 1,036 | — | |||||||||
| $ | 1,036 | $ | 52,200 | ||||||||
We maintain a multi-currency revolving credit facility with two tranches that matures in July 2022 which provides for unsecured financing of up to $300 million that is available in the U.S. and up to €150 million that is available to our wholly-owned UK subsidiary. No balance was utilized under our U.S. facility or our euro-based revolving credit facility as of March 31, 2021. We utilized $52.0 million under our U.S. facility and no balance was utilized on our euro-based revolving credit facility as of December 31, 2020.
There are no compensating balance requirements associated with our revolving credit facility. Each borrowing under the credit facility will bear interest at rates based on LIBOR, prime rates or other similar rates, in each case plus an applicable margin. A facility fee on the total amount of the facility is also payable quarterly, regardless of usage. The applicable margins for borrowings under the credit facility and the facility fee percentage may change from time to time depending on changes in our consolidated leverage ratio.
In October 2020, we entered into an unsecured money market borrowing arrangement to provide short term financing of up to $30 million that is available in the U.S. No borrowing on this facility is permitted over a quarter end date. As such, no balance was utilized under this arrangement as of March 31, 2021 or December 31, 2020.
Long-Term Obligations
At March 31, 2021 and December 31, 2020, our long-term obligations consisted of the following:
| March 31, 2021 | December 31, 2020 | ||||||||||
Notes payable 0.00% – 10.90%, due in monthly and annual installments through 2028 | $ | 12,108 | $ | 14,002 | |||||||
Senior unsecured notes 3.2%, due in 2022 | 75,000 | 75,000 | |||||||||
Senior unsecured debts 1.5% USD floating swapped to 1.36% EUR fixed, equal annual installments through 2022 | 112,000 | 112,000 | |||||||||
Senior unsecured notes 3.5%, due in 2023 | 125,000 | 125,000 | |||||||||
Senior unsecured notes 1.0%, due in 2023 | 117,260 | 122,100 | |||||||||
Senior unsecured notes 3.4%, due in 2024 | 50,000 | 50,000 | |||||||||
Senior unsecured notes 3.5%, due in 2024 | 100,000 | 100,000 | |||||||||
Senior unsecured notes 1.2%, due in 2024 | 234,520 | 244,200 | |||||||||
Senior unsecured notes 3.6%, due in 2025 | 125,000 | 125,000 | |||||||||
Senior unsecured notes 3.6%, due in 2026 | 125,000 | 125,000 | |||||||||
| Finance Lease Liabilities | 28,389 | 30,025 | |||||||||
| Unamortized debt issuance costs | (1,518) | (1,663) | |||||||||
| $ | 1,102,759 | $ | 1,120,664 | ||||||||
| Current maturities of long-term obligations | (64,776) | (65,666) | |||||||||
| Total long-term obligations | $ | 1,037,983 | $ | 1,054,998 | |||||||
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The aggregate long-term maturities, excluding finance lease liabilities, which are disclosed in Note 7, due annually from the current balance sheet date for the next five years are:
| Year One | $ | 60,808 | |||
| Year Two | 134,839 | ||||
| Year Three | 344,773 | ||||
| Year Four | 285,040 | ||||
| Year Five | 250,259 | ||||
| Thereafter | 169 | ||||
Covenants
Our revolving credit facility and corporate long-term obligations require us to satisfy certain financial and other covenants including:
| Requirement | Level at March 31, 2021 | |||||||||||||
| Consolidated Leverage Ratio (1) | Maximum of 3.50 to 1.00 | 1.55 to 1.00 | ||||||||||||
| Consolidated Interest Coverage Ratio (1) | Minimum of 3.00 to 1.00 | 17.69 to 1.00 | ||||||||||||
________________________________________
(1)Definitions of ratios are included as part of the revolving credit facility agreement and the private placement agreements.
NOTE 7 – LEASES
We lease certain warehouse, plant and office facilities as well as certain equipment under noncancelable operating and finance leases expiring at various dates through the year 2034. Most of the operating leases contain renewal options and certain leases include options to purchase the related asset during or at the end of the lease term.
Amortization expense related to finance leases is included in depreciation expense while rent expense related to operating leases is included within cost of sales and selling, research & development and administrative expenses (“SG&A”).
The components of lease expense for the three months ended March 31, 2021 and 2020 were as follows:
| Three Months Ended March 31, | 2021 | 2020 | |||||||||
| Operating lease cost | $ | 5,789 | $ | 5,254 | |||||||
| Finance lease cost: | |||||||||||
| Amortization of right-of-use assets | $ | 976 | $ | 1,199 | |||||||
| Interest on lease liabilities | $ | 312 | $ | 348 | |||||||
| Total finance lease cost | $ | 1,288 | $ | 1,547 | |||||||
| Short-term lease and variable lease costs | $ | 3,128 | $ | 2,448 | |||||||
Supplemental cash flow information related to leases was as follows:
| Three Months Ended March 31, | 2021 | 2020 | |||||||||
| Cash paid for amounts included in the measurement of lease liabilities: | |||||||||||
| Operating cash flows from operating leases | $ | 5,755 | $ | 5,328 | |||||||
| Operating cash flows from finance leases | 349 | 369 | |||||||||
| Financing cash flows from finance leases | 1,198 | 1,657 | |||||||||
| Right-of-use assets obtained in exchange for lease obligations: | |||||||||||
| Operating leases | $ | 1,496 | $ | 5,233 | |||||||
| Finance leases | 47 | 220 | |||||||||
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NOTE 8 – RETIREMENT AND DEFERRED COMPENSATION PLANS
Effective January 1, 2021, our domestic noncontributory retirement plans were amended to provide that no individual who became an employee after December 31, 2020 could become a participant and that no employee whose employment terminated and who was rehired after December 31, 2020 may accrue benefits under the plan with respect to the period of employment which begins on the date that reemployment commences. These employees will instead be eligible for additional contribution to their defined contribution 401(k) employee savings plan. All domestic employees with hire/rehire dates prior to January 1, 2021 will still be eligible for the domestic pension plans and will still continue to accrue plan benefits after this date.
Components of Net Periodic Benefit Cost:
| Domestic Plans | Foreign Plans | ||||||||||||||||||||||
| Three Months Ended March 31, | 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||
| Service cost | $ | 4,227 | $ | 3,577 | $ | 2,078 | $ | 1,768 | |||||||||||||||
| Interest cost | 1,611 | 1,987 | 218 | 340 | |||||||||||||||||||
| Expected return on plan assets | (3,073) | (3,422) | (723) | (634) | |||||||||||||||||||
| Amortization of net loss | 2,503 | 1,548 | 589 | 514 | |||||||||||||||||||
| Amortization of prior service cost | — | — | 45 | 97 | |||||||||||||||||||
| Net periodic benefit cost | $ | 5,268 | $ | 3,690 | $ | 2,207 | $ | 2,085 | |||||||||||||||
The components of net periodic benefit cost, other than the service cost component, are included in the line Miscellaneous, net in the Condensed Consolidated Statements of Income.
EMPLOYER CONTRIBUTIONS
We currently have no minimum funding requirements for our domestic and foreign plans. There were no payments to our ongoing domestic supplemental executive retirement plan (SERP) annuity contracts during the three months ended March 31, 2021 and we do not expect additional significant payments during 2021. We have contributed approximately $1.0 million to our foreign defined benefit plans during the three months ended March 31, 2021 and do not expect additional significant contributions during 2021.
NOTE 9 – ACCUMULATED OTHER COMPREHENSIVE INCOME
Changes in Accumulated Other Comprehensive (Loss) Income by Component:
| Foreign Currency | Defined Benefit Pension Plans | Derivatives | Total | ||||||||||||||||||||
| Balance - December 31, 2019 | $ | (257,124) | $ | (83,147) | $ | (1,677) | $ | (341,948) | |||||||||||||||
| Other comprehensive (loss) income before reclassifications | (42,229) | — | 5,026 | (37,203) | |||||||||||||||||||
| Amounts reclassified from accumulated other comprehensive income (loss) | — | 1,636 | (3,543) | (1,907) | |||||||||||||||||||
| Net current-period other comprehensive (loss) income | (42,229) | 1,636 | 1,483 | (39,110) | |||||||||||||||||||
| Balance - March 31, 2020 | $ | (299,353) | $ | (81,511) | $ | (194) | $ | (381,058) | |||||||||||||||
| Balance - December 31, 2020 | $ | (178,025) | $ | (102,322) | $ | (1,362) | $ | (281,709) | |||||||||||||||
| Other comprehensive income (loss) before reclassifications | (48,482) | 319 | 5,061 | (43,102) | |||||||||||||||||||
| Amounts reclassified from accumulated other comprehensive income (loss) | — | 2,387 | (4,541) | (2,154) | |||||||||||||||||||
| Net current-period other comprehensive (loss) income | (48,482) | 2,706 | 520 | (45,256) | |||||||||||||||||||
| Balance - March 31, 2021 | $ | (226,507) | $ | (99,616) | $ | (842) | $ | (326,965) | |||||||||||||||
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Reclassifications Out of Accumulated Other Comprehensive (Loss) Income:
| Details about Accumulated Other Comprehensive Income Components | Amount Reclassified from Accumulated Other Comprehensive Income | Affected Line in the Statement Where Net Income is Presented | |||||||||||||||
| Three Months Ended March 31, | 2021 | 2020 | |||||||||||||||
| Defined Benefit Pension Plans | |||||||||||||||||
| Amortization of net loss | $ | 3,092 | $ | 2,062 | (1) | ||||||||||||
| Amortization of prior service cost | 45 | 97 | (1) | ||||||||||||||
| 3,137 | 2,159 | Total before tax | |||||||||||||||
| (750) | (523) | Tax impact | |||||||||||||||
| $ | 2,387 | $ | 1,636 | Net of tax | |||||||||||||
| Derivatives | |||||||||||||||||
| Changes in cross currency swap: interest component | $ | (12) | $ | (763) | Interest Expense | ||||||||||||
| Changes in cross currency swap: foreign exchange component | (4,529) | (2,780) | Miscellaneous, net | ||||||||||||||
| $ | (4,541) | $ | (3,543) | Net of tax | |||||||||||||
| Total reclassifications for the period | $ | (2,154) | $ | (1,907) | |||||||||||||
______________________________________________
(1)These accumulated other comprehensive income components are included in the computation of net periodic benefit costs, net of tax. See Note 8 – Retirement and Deferred Compensation Plans for additional details.
NOTE 10 – DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
We maintain a foreign exchange risk management policy designed to establish a framework to protect the value of our non-functional currency denominated transactions from adverse changes in exchange rates. Sales of our products can be denominated in a currency different from the currency in which the related costs to produce the product are denominated. Changes in exchange rates on such inter-country sales or intercompany loans can impact our results of operations. Our policy is not to engage in speculative foreign currency hedging activities, but to minimize our net foreign currency transaction exposure, defined as firm commitments and transactions recorded and denominated in currencies other than the functional currency. We may use foreign currency forward exchange contracts, options and cross currency swaps to economically hedge these risks.
For derivative instruments designated as hedges, we formally document the nature and relationships between the hedging instruments and the hedged items, as well as the risk management objectives, strategies for undertaking the various hedge transactions, and the method of assessing hedge effectiveness at inception. Quarterly thereafter, we formally assess whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in the fair value or cash flows of the hedged item. Additionally, in order to designate any derivative instrument as a hedge of an anticipated transaction, the significant characteristics and expected terms of any anticipated transaction must be specifically identified, and it must be probable that the anticipated transaction will occur. All derivative financial instruments used as hedges are recorded at fair value in the Condensed Consolidated Balance Sheets (See Note 11 - Fair Value).
Cash Flow Hedge
For derivative instruments that are designated and qualify as cash flow hedges, the changes in fair values are recorded in accumulated other comprehensive loss and included in changes in derivative gain/loss. The changes in the fair values of derivatives designated as cash flow hedges are reclassified from accumulated other comprehensive loss to net income when the underlying hedged item is recognized in earnings. Cash flows from the settlement of derivative contracts designated as cash flow hedges offset cash flows from the underlying hedged items and are included in operating activities in the Condensed Consolidated Statements of Cash Flows.
During 2017, our wholly-owned UK subsidiary borrowed $280 million in term loan borrowings under a new credit facility. In order to mitigate the currency risk of U.S. dollar debt on a euro functional currency entity and to mitigate the risk of variability in interest rates, we entered into a EUR/USD floating-to-fixed cross currency swap in the notional amount of $280 million to effectively hedge the foreign exchange and interest rate exposure on the $280 million term loan. This EUR/USD swap agreement fixed our U.S. dollar floating-rate debt to 1.36% euro fixed-rate debt. Related to this hedge, approximately $0.8 million of loss is included in accumulated other comprehensive loss at March 31, 2021. The amount expected to be recognized into earnings during the next 12 months related to the interest component of our cross currency swap based on prevailing foreign exchange and interest rates at March 31, 2021 is a loss of $0.5 million. The amount expected to be recognized into earnings during the next 12 months related to the foreign exchange component of our cross currency swap is dependent on fluctuations in currency exchange rates. As of March 31, 2021, the fair values of the cross currency swap were a $3.0 million liability. The swap contract expires on July 20, 2022.
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Hedge of Net Investments in Foreign Operations
A significant number of our operations are located outside of the United States. Because of this, movements in exchange rates may have a significant impact on the translation of the financial condition and results of operations of our foreign subsidiaries. A weakening U.S. dollar relative to foreign currencies has an additive translation effect on our financial condition and results of operations. Conversely, a strengthening U.S. dollar has a dilutive effect. In some cases, we maintain debt in these subsidiaries to offset the net asset exposure. We do not otherwise actively manage this risk using derivative financial instruments. In the event we plan on a full or partial liquidation of any of our foreign subsidiaries where our net investment is likely to be monetized, we will consider hedging the currency exposure associated with such a transaction.
Other
As of March 31, 2021, we have recorded the fair value of foreign currency forward exchange contracts of $0.2 million in prepaid and other and $0.5 million in accounts payable, accrued and other liabilities on the balance sheet. All forward exchange contracts outstanding as of March 31, 2021 had an aggregate notional contract amount of $52.0 million.
Fair Value of Derivative Instruments in the Condensed Consolidated Balance Sheets as of March 31, 2021 and December 31, 2020
| March 31, 2021 | December 31, 2020 | ||||||||||||||||||||||||||||
Balance Sheet Location | Derivatives Designated as Hedging Instruments | Derivatives not Designated as Hedging Instruments | Derivatives Designated as Hedging Instruments | Derivatives not Designated as Hedging Instruments | |||||||||||||||||||||||||
| Derivative Assets | |||||||||||||||||||||||||||||
| Foreign Exchange Contracts | Prepaid and other | $ | — | $ | 166 | $ | — | $ | 322 | ||||||||||||||||||||
| $ | — | $ | 166 | $ | — | $ | 322 | ||||||||||||||||||||||
| Derivative Liabilities | |||||||||||||||||||||||||||||
| Foreign Exchange Contracts | Accounts payable, accrued and other liabilities | $ | — | $ | 504 | $ | — | $ | 146 | ||||||||||||||||||||
| Cross Currency Swap Contract (1) | Accounts payable, accrued and other liabilities | 3,027 | — | 8,309 | — | ||||||||||||||||||||||||
| $ | 3,027 | $ | 504 | $ | 8,309 | $ | 146 | ||||||||||||||||||||||
__________________________
(1)This cross currency swap contract is composed of both an interest component and a foreign exchange component.
The Effect of Cash Flow Hedge Accounting on Accumulated Other Comprehensive Income (Loss) for the Three Months Ended March 31, 2021 and 2020
| Derivatives in Cash Flow Hedging Relationships | Amount of Gain (Loss) Recognized in Other Comprehensive Income on Derivative | Location of (Loss) Gain Recognized in Income on Derivatives | Amount of Gain (Loss) Reclassified from Accumulated Other Comprehensive Income on Derivative | Total Amount of Affected Income Statement Line Item | |||||||||||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||||||||||||||
| Cross currency swap contract: | |||||||||||||||||||||||||||||||||||
| Interest component | $ | 532 | $ | 2,246 | Interest expense | $ | 12 | $ | 763 | $ | (7,415) | ||||||||||||||||||||||||
| Foreign exchange component | 4,529 | 2,780 | Miscellaneous, net | 4,529 | 2,780 | (963) | |||||||||||||||||||||||||||||
| $ | 5,061 | $ | 5,026 | $ | 4,541 | $ | 3,543 | ||||||||||||||||||||||||||||
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The Effect of Derivatives Not Designated as Hedging Instruments on the Condensed Consolidated Statements of Income for the Three Months Ended March 31, 2021 and 2020
| Derivatives Not Designated as Hedging Instruments | Location of (Loss) Gain Recognized in Income on Derivatives | Amount of (Loss) Gain Recognized in Income on Derivatives | |||||||||||||||
| 2021 | 2020 | ||||||||||||||||
| Foreign Exchange Contracts | Other (Expense) Income: Miscellaneous, net | $ | (513) | $ | 1,747 | ||||||||||||
| $ | (513) | $ | 1,747 | ||||||||||||||
| Gross Amounts Offset in the Statement of Financial Position | Net Amounts Presented in the Statement of Financial Position | Gross Amounts not Offset in the Statement of Financial Position | |||||||||||||||||||||||||||||||||
| Gross Amount | Financial Instruments | Cash Collateral Received | Net Amount | ||||||||||||||||||||||||||||||||
| Description | |||||||||||||||||||||||||||||||||||
| March 31, 2021 | |||||||||||||||||||||||||||||||||||
| Derivative Assets | $ | 166 | — | $ | 166 | — | — | $ | 166 | ||||||||||||||||||||||||||
| Total Assets | $ | 166 | — | $ | 166 | — | — | $ | 166 | ||||||||||||||||||||||||||
| Derivative Liabilities | $ | 3,531 | — | $ | 3,531 | — | — | $ | 3,531 | ||||||||||||||||||||||||||
| Total Liabilities | $ | 3,531 | — | $ | 3,531 | — | — | $ | 3,531 | ||||||||||||||||||||||||||
| December 31, 2020 | |||||||||||||||||||||||||||||||||||
| Derivative Assets | $ | 322 | — | $ | 322 | — | — | $ | 322 | ||||||||||||||||||||||||||
| Total Assets | $ | 322 | — | $ | 322 | — | — | $ | 322 | ||||||||||||||||||||||||||
| Derivative Liabilities | $ | 8,455 | — | $ | 8,455 | — | — | $ | 8,455 | ||||||||||||||||||||||||||
| Total Liabilities | $ | 8,455 | — | $ | 8,455 | — | — | $ | 8,455 | ||||||||||||||||||||||||||
NOTE 11 – FAIR VALUE
Authoritative guidelines require the categorization of assets and liabilities into three levels based upon the assumptions (inputs) used to price the assets or liabilities. Level 1 provides the most reliable measure of fair value, whereas Level 3 generally requires significant management judgment. The three levels are defined as follows:
•Level 1: Unadjusted quoted prices in active markets for identical assets and liabilities.
•Level 2: Observable inputs other than those included in Level 1. For example, quoted prices for similar assets or liabilities in active markets or quoted prices for identical assets or liabilities in inactive markets.
•Level 3: Unobservable inputs reflecting management’s own assumptions about the inputs used in pricing the asset or liability.
18
As of March 31, 2021, the fair values of our financial assets and liabilities were categorized as follows:
| Total | Level 1 | Level 2 | Level 3 | ||||||||||||||||||||
| Assets | |||||||||||||||||||||||
Investment in equity securities (1) | $ | 22,206 | $ | 22,206 | $ | — | $ | — | |||||||||||||||
Foreign exchange contracts (2) | 166 | — | 166 | — | |||||||||||||||||||
| Total assets at fair value | $ | 22,372 | $ | 22,206 | $ | 166 | $ | — | |||||||||||||||
| Liabilities | |||||||||||||||||||||||
Foreign exchange contracts (2) | $ | 504 | $ | — | $ | 504 | $ | — | |||||||||||||||
Cross currency swap contract (2) | 3,027 | — | 3,027 | — | |||||||||||||||||||
| Contingent consideration obligation | 32,115 | — | — | 32,115 | |||||||||||||||||||
| Total liabilities at fair value | $ | 35,646 | $ | — | $ | 3,531 | $ | 32,115 | |||||||||||||||
As of December 31, 2020, the fair values of our financial assets and liabilities were categorized as follows:
| Total | Level 1 | Level 2 | Level 3 | ||||||||||||||||||||
| Assets | |||||||||||||||||||||||
Foreign exchange contracts (2) | $ | 322 | $ | — | $ | 322 | $ | — | |||||||||||||||
| Total assets at fair value | $ | 322 | $ | — | $ | 322 | $ | — | |||||||||||||||
| Liabilities | |||||||||||||||||||||||
Foreign exchange contracts (2) | $ | 146 | $ | — | $ | 146 | $ | — | |||||||||||||||
Cross currency swap contract (2) | 8,309 | — | 8,309 | — | |||||||||||||||||||
| Contingent consideration obligation | 31,140 | — | — | 31,140 | |||||||||||||||||||
| Total liabilities at fair value | $ | 39,595 | $ | — | $ | 8,455 | $ | 31,140 | |||||||||||||||
________________________________________________
(1)Investment in PureCycle Technologies (PCT). See Note 17 - Investment in Equity Securities for discussion of this investment.
(2)Market approach valuation technique based on observable market transactions of spot and forward rates.
The carrying amounts of our other current financial instruments such as cash and equivalents, accounts and notes receivable, notes payable and current maturities of long-term obligations approximate fair value due to the short-term maturity of the instruments. We consider our long-term obligations a Level 2 liability and utilize the market approach valuation technique based on interest rates that are currently available to us for issuance of debt with similar terms and maturities. The estimated fair value of our long-term obligations was $1.1 billion as of March 31, 2021 and $1.1 billion as of December 31, 2020.
As discussed in Note 19 - Acquisitions of our Annual Report on Form 10-K for the year ended December 31, 2020, we have a contingent consideration obligation to the selling equity holders of:
–Fusion Packaging, Inc. ("Fusion") in connection with the acquisition of 100% of the equity interests of Fusion (the "Fusion Acquisition") based on 2022 cumulative performance targets, and
–Noble International Holdings, Inc., Genia Medical, Inc. and JBCB Holdings, LLC (collectively referred to as "Noble") in connection with the acquisition of 100% of the equity interests of Noble (the "Noble Acquisition") based on 2024 cumulative performance targets.
We consider these obligations Level 3 liabilities and have estimated the aggregate fair value for these contingent consideration arrangements as follows:
| March 31, 2021 | December 31, 2020 | ||||||||||
| Fusion Acquisition | $ | 27,460 | $ | 26,910 | |||||||
| Noble Acquisition | 4,655 | 4,230 | |||||||||
| $ | 32,115 | $ | 31,140 | ||||||||
19
Changes in the fair value of these obligations are recorded within selling, research & development and administrative expenses in our Condensed Consolidated Statements of Income. Significant changes to the inputs, as noted above, can result in a significantly higher or lower fair value measurement. The following table provides a summary of changes in our Level 3 fair value measurements:
| Balance, December 31, 2020 | $ | 31,140 | |||
| Increase in fair value recorded in earnings | 975 | ||||
| Balance, March 31, 2021 | $ | 32,115 | |||
NOTE 12 - COMMITMENTS AND CONTINGENCIES
In the normal course of business, we are subject to a number of lawsuits and claims both actual and potential in nature. While management believes the resolution of these claims and lawsuits will not have a material adverse effect on our financial position, our results of operations or cash flows, claims and legal proceedings are subject to inherent uncertainties, and unfavorable outcomes could occur and could include amounts in excess of any accruals which management has established. Were such unfavorable final outcomes to occur, it is possible that they could have a material adverse effect on our financial position, results of operations and cash flows.
Under our Certificate of Incorporation, we have agreed to indemnify our officers and directors for certain events or occurrences while the officer or director is, or was, serving at our request in such capacity. The maximum potential amount of future payments we could be required to make under these indemnification agreements is unlimited; however, we have a directors and officers liability insurance policy that covers a portion of our exposure. As a result of our insurance policy coverage, we believe the estimated fair value of these indemnification agreements is minimal. We have no liabilities recorded for these agreements as of March 31, 2021 and December 31, 2020.
In March 2017, the Supreme Court of Brazil issued a decision that a certain state value added tax should not be included in the calculation of federal gross receipts taxes. The decision reduces our gross receipts tax in Brazil prospectively and, potentially, retrospectively. If the Supreme Court of Brazil grants full retrospective recovery, we estimate remaining potential recoveries of approximately $1.0 million to $6.8 million, including interest. Due to uncertainties around our remaining court recovery claims, we have not recorded any further amounts relating to the retrospective nature of this matter.
In December 2019, tax authorities in Brazil notified us of a tax assessment of approximately $6.1 million, including interest and penalties of $2.3 million and $0.8 million, respectively, relating to differences in tax classification codes used for import duties for the period from January 2015 to August 2018. We are vigorously contesting the assessment, including interest and penalties, and have filed an administrative defense appeal in December 2019. In June 2020, an unfavorable decision was issued on the first administrative defense appeal. We filed a second administrative defense appeal in August 2020. We still believe we have a strong defense. Due to uncertainty in the amount of assessment and the timing of our appeal, no liability is recorded as of March 31, 2021.
NOTE 13 – STOCK REPURCHASE PROGRAM
On April 18, 2019, we announced a share repurchase authorization of up to $350 million of common stock. This authorization replaces previous authorizations and has no expiration date. We may repurchase shares through the open market, privately negotiated transactions or other programs, subject to market conditions.
During the three months ended March 31, 2021 and 2020, we did not repurchase any shares. As of March 31, 2021, there was $278.5 million of authorized share repurchases available to us.
NOTE 14 – STOCK-BASED COMPENSATION
We issue restricted stock units (“RSUs”), which consist of time-based and performance-based awards, to employees under stock awards plans approved by stockholders. In addition, RSUs are issued to non-employee directors under a Restricted Stock Unit Award Agreement for Directors pursuant to the Company’s 2018 Equity Incentive Plan. RSUs granted to employees vest according to a specified performance period and/or vesting period. Time-based RSUs generally vest over three years. Performance-based RSUs vest at the end of the specified performance period, generally three years, assuming required performance or market vesting conditions are met. Performance-based RSUs have one of two vesting conditions: (1) based on our internal financial performance metrics and (2) based on our total shareholder return (“TSR”) relative to total shareholder returns of an industrial peer group. At the time of vesting, the vested shares of common stock are issued in the employee’s name. In addition, RSU awards are generally net settled (shares are withheld to cover the employee tax obligation). RSUs granted to directors are only time-based and generally vest over one year.
20
The fair value of both time-based RSUs and performance-based RSUs pertaining to internal performance metrics is determined using the closing price of our common stock on the grant date. The fair value of performance-based RSUs pertaining to TSR is estimated using a Monte Carlo simulation. Inputs and assumptions used to calculate the fair value are shown in the table below. The fair value of these RSUs is expensed over the vesting period using the straight-line method or using the graded vesting method when an employee becomes eligible to retain the award at retirement.
| Three Months Ended March 31, | 2021 | 2020 | |||||||||
| Fair value per stock award | $ | 171.63 | $ | 94.98 | |||||||
| Grant date stock price | $ | 141.59 | $ | 83.93 | |||||||
| Assumptions: | |||||||||||
| Aptar's stock price expected volatility | 21.40 | % | 23.80 | % | |||||||
| Expected average volatility of peer companies | 50.00 | % | 48.50 | % | |||||||
| Correlation assumption | 58.10 | % | 63.50 | % | |||||||
| Risk-free interest rate | 0.32 | % | 0.31 | % | |||||||
| Dividend yield assumption | 1.02 | % | 1.72 | % | |||||||
A summary of RSU activity as of March 31, 2021 and changes during the three month period then ended is presented below:
| Time-Based RSUs | Performance-Based RSUs | ||||||||||||||||||||||
| Units | Weighted Average Grant-Date Fair Value | Units | Weighted Average Grant-Date Fair Value | ||||||||||||||||||||
| Nonvested at January 1, 2021 | 576,198 | $ | 92.47 | 590,064 | $ | 100.27 | |||||||||||||||||
| Granted | 128,297 | 137.97 | 169,268 | 152.47 | |||||||||||||||||||
| Vested | (118,349) | 89.95 | (71,994) | 128.70 | |||||||||||||||||||
| Forfeited | (2,785) | 95.77 | (31,338) | 91.23 | |||||||||||||||||||
| Nonvested at March 31, 2021 | 583,361 | $ | 106.33 | 656,000 | $ | 111.05 | |||||||||||||||||
Included in the March 31, 2021 time-based RSUs are 12,379 units granted to non-employee directors.
| Three Months Ended March 31, | 2021 | 2020 | |||||||||
| Compensation expense | $ | 11,262 | $ | 8,281 | |||||||
| Fair value of units vested | 19,116 | 9,303 | |||||||||
| Intrinsic value of units vested | 25,699 | 11,475 | |||||||||
The actual tax benefit realized for the tax deduction from RSUs was approximately $2.1 million in the three months ended March 31, 2021. As of March 31, 2021, there was $69.9 million of total unrecognized compensation cost relating to RSU awards which is expected to be recognized over a weighted-average period of 1.9 years.
Historically we issued stock options to our employees and non-employee directors. Beginning in 2019, we no longer issue stock options. Stock options were awarded with the exercise price equal to the market price on the date of grant and generally vest over three years and expire 10 years after grant. For stock option grants, we used historical data to estimate expected life and volatility.
21
A summary of option activity under our stock plans during the three months ended March 31, 2021 is presented below:
| Stock Awards Plans | Director Stock Option Plans | ||||||||||||||||||||||
| Options | Weighted Average Exercise Price | Options | Weighted Average Exercise Price | ||||||||||||||||||||
| Outstanding, January 1, 2021 | 3,998,047 | $ | 70.28 | 99,200 | $ | 60.80 | |||||||||||||||||
| Granted | — | — | — | — | |||||||||||||||||||
| Exercised | (507,468) | 63.37 | (29,500) | 58.76 | |||||||||||||||||||
| Forfeited or expired | (4,519) | 75.27 | — | — | |||||||||||||||||||
| Outstanding at March 31, 2021 | 3,486,060 | $ | 71.28 | 69,700 | $ | 61.66 | |||||||||||||||||
| Exercisable at March 31, 2021 | 3,486,060 | $ | 71.28 | 69,700 | $ | 61.66 | |||||||||||||||||
| Weighted-Average Remaining Contractual Term (Years): | |||||||||||||||||||||||
| Outstanding at March 31, 2021 | 4.7 | 2.5 | |||||||||||||||||||||
| Exercisable at March 31, 2021 | 4.7 | 2.5 | |||||||||||||||||||||
| Aggregate Intrinsic Value: | |||||||||||||||||||||||
| Outstanding at March 31, 2021 | $ | 245,389 | $ | 5,577 | |||||||||||||||||||
| Exercisable at March 31, 2021 | $ | 245,389 | $ | 5,577 | |||||||||||||||||||
Intrinsic Value of Options Exercised During the Three Months Ended: | |||||||||||||||||||||||
| March 31, 2021 | $ | 37,454 | $ | 2,474 | |||||||||||||||||||
| March 31, 2020 | $ | 18,202 | $ | 1,385 | |||||||||||||||||||
| Three Months Ended March 31, | 2021 | 2020 | |||||||||
| Compensation expense (included in SG&A) | $ | 185 | $ | 743 | |||||||
| Compensation expense (included in Cost of sales) | 42 | 117 | |||||||||
| Compensation expense, Total | $ | 227 | $ | 860 | |||||||
| Compensation expense, net of tax | 174 | 648 | |||||||||
| Grant date fair value of options vested | 2,421 | 7,565 | |||||||||
The reduction in stock option expense is due to our move to RSUs as discussed above. Cash received from option exercises was approximately $31.9 million. The actual tax benefit realized for the tax deduction from option exercises was approximately $9.1 million and $4.8 million in the three months ended March 31, 2021 and March 31, 2020, respectively. As of March 31, 2021, there is no remaining valuation of stock option awards to be expensed in future periods.
NOTE 15 – EARNINGS PER SHARE
Basic net income per share is calculated by dividing net income attributable to Aptar by the weighted-average number of common shares outstanding during the period. Diluted net income per share is calculated by dividing the net income attributable to Aptar by the weighted-average number of common and common equivalent shares outstanding during the applicable period. The difference between basic and diluted earnings per share is attributable to stock-based compensation awards. Stock-based compensation awards for which total employee proceeds exceed the average market price over the applicable period would have an antidilutive effect on earnings per share, and accordingly, are excluded from the calculation of diluted earnings per share. The reconciliation of basic and diluted earnings per share for the three months ended March 31, 2021 and 2020 is as follows:
22
| Three Months Ended | |||||||||||||||||||||||
| March 31, 2021 | March 31, 2020 | ||||||||||||||||||||||
| Diluted | Basic | Diluted | Basic | ||||||||||||||||||||
| Consolidated operations | |||||||||||||||||||||||
| Income available to common stockholders | $ | 83,952 | $ | 83,952 | $ | 55,253 | $ | 55,253 | |||||||||||||||
| Average equivalent shares | |||||||||||||||||||||||
| Shares of common stock | 65,229 | 65,229 | 64,009 | 64,009 | |||||||||||||||||||
| Effect of dilutive stock-based compensation | |||||||||||||||||||||||
| Stock options | 1,869 | — | 1,810 | — | |||||||||||||||||||
| Restricted stock | 550 | — | 292 | — | |||||||||||||||||||
| Total average equivalent shares | 67,648 | 65,229 | 66,111 | 64,009 | |||||||||||||||||||
| Net income per share | $ | 1.24 | $ | 1.29 | $ | 0.84 | $ | 0.86 | |||||||||||||||
NOTE 16 – SEGMENT INFORMATION
We are organized into three reporting segments. Operations that sell dispensing systems, drug delivery systems, sealing solutions and services to the prescription drug, consumer health care, injectables, and active material science solutions markets form the Pharma segment. Operations that sell dispensing systems and sealing solutions primarily to the beauty, personal care and home care markets form the Beauty + Home segment. Operations that sell dispensing systems and sealing solutions to the food and beverage markets form the Food + Beverage segment.
The accounting policies of the segments are the same as those described in Part II, Item 8, Note 1 - Summary of Significant Accounting Policies in our Annual Report on Form 10-K for the year ended December 31, 2020. We evaluate performance of our reporting segments and allocate resources based upon Adjusted EBITDA. Adjusted EBITDA is defined as earnings before net interest, taxes, depreciation, amortization, unallocated corporate expenses, restructuring initiatives, acquisition-related costs, net investment gains and losses related to observable market price changes on equity securities and other special items.
23
Financial information regarding our reporting segments is shown below:
| Three Months Ended March 31, | 2021 | 2020 | |||||||||
| Total Sales: | |||||||||||
| Pharma | $ | 315,811 | $ | 299,590 | |||||||
| Beauty + Home | 353,377 | 330,466 | |||||||||
| Food + Beverage | 116,703 | 100,301 | |||||||||
| Total Sales | $ | 785,891 | $ | 730,357 | |||||||
| Less: Intersegment Sales: | |||||||||||
| Pharma | $ | 1,979 | $ | 2,394 | |||||||
| Beauty + Home | 6,431 | 5,906 | |||||||||
| Food + Beverage | 727 | 504 | |||||||||
| Total Intersegment Sales | $ | 9,137 | $ | 8,804 | |||||||
| Net Sales: | |||||||||||
| Pharma | $ | 313,832 | $ | 297,196 | |||||||
| Beauty + Home | 346,946 | 324,560 | |||||||||
| Food + Beverage | 115,976 | 99,797 | |||||||||
| Net Sales | $ | 776,754 | $ | 721,553 | |||||||
| Adjusted EBITDA (1): | |||||||||||
| Pharma | $ | 108,484 | $ | 108,342 | |||||||
| Beauty + Home | 35,356 | 34,247 | |||||||||
| Food + Beverage | 19,990 | 15,407 | |||||||||
| Corporate & Other, unallocated | (11,607) | (13,828) | |||||||||
| Acquisition-related costs (2) | — | (2,274) | |||||||||
| Restructuring Initiatives (3) | (3,672) | (4,839) | |||||||||
| Net investment gain (4) | 16,809 | — | |||||||||
| Depreciation and amortization | (57,438) | (50,806) | |||||||||
| Interest Expense | (7,415) | (8,388) | |||||||||
| Interest Income | 381 | 175 | |||||||||
| Income before Income Taxes | $ | 100,888 | $ | 78,036 | |||||||
________________________________________________
(1)We evaluate performance of our reporting segments and allocate resources based upon Adjusted EBITDA. Adjusted EBITDA is defined as earnings before net interest, taxes, depreciation, amortization, unallocated corporate expenses, restructuring initiatives, acquisition-related costs, net investment gains and losses related to observable market price changes on equity securities and other special items.
(2)Acquisition-related costs include transaction costs and purchase accounting adjustments related to acquisitions and investments (see Note 17 – Acquisitions in our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2020 for further details).
(3)Restructuring Initiatives includes expense items for the three months ended March 31, 2021 and 2020 as follows (see Note 18 – Restructuring Initiatives for further details):
| Three Months Ended March 31, | 2021 | 2020 | |||||||||
| Restructuring Initiatives by Segment | |||||||||||
| Pharma | $ | 35 | $ | (31) | |||||||
| Beauty + Home | 1,096 | 4,907 | |||||||||
| Food + Beverage | (79) | 103 | |||||||||
| Corporate & Other | 2,620 | (140) | |||||||||
| Total Restructuring Initiatives | $ | 3,672 | $ | 4,839 | |||||||
(4)Net investment gain represents the change in fair value of our investment in PCT (see Note 17 – Investment in Equity Securities for further details).
24
NOTE 17 – INVESTMENT IN EQUITY SECURITIES
Our investment in equity securities consisted of the following:
| March 31, 2021 | December 31, 2020 | ||||||||||
| Equity Method Investments: | |||||||||||
| BTY | $ | 32,632 | $ | 33,020 | |||||||
| Sonmol | 5,400 | 5,598 | |||||||||
| Kali Care | 456 | 535 | |||||||||
| Desotec GmbH | 897 | 964 | |||||||||
| Other Investments: | |||||||||||
| PureCycle | 22,206 | 5,397 | |||||||||
| Loop | 2,894 | 2,894 | |||||||||
| Others | 1,617 | 1,679 | |||||||||
| $ | 66,102 | $ | 50,087 | ||||||||
Equity method investments
BTY
On January 1, 2020, we acquired 49% of the equity interests in 3 related companies: Suzhou Hsing Kwang, Suqian Hsing Kwang and Suzhou BTY (collectively referred to as “BTY”) for an approximate purchase price of $32 million. We have a call option to acquire an additional 26% to 31% of BTY’s equity interests following the initial lock-up period of 5 years based on a predetermined formula. Subsequent to the second lock-up period, which ends 3 years after the initial lock-up period, we have a call option to acquire the remaining equity interests of BTY based on a predetermined formula. Additionally, the selling shareholders of BTY have a put option for the remaining equity interest to be acquired by Aptar based on a predetermined formula. The BTY entities are leading Chinese manufacturers of high quality, decorative metal components, metal-plastic sub-assemblies, and complete color cosmetics packaging solutions for the beauty industry.
Sonmol
On April 1, 2020, we invested $5 million to acquire 30% of the equity interests in Healthcare, Inc., Shanghai Sonmol Internet Technology Co., Ltd. and its subsidiary, Shanghai Sonmol Medical Equipment Co., Ltd. (collectively referred to as “Sonmol”), a pharmaceutical and leading Chinese digital respiratory therapeutics company that provides connected devices for asthma control and develops digital therapies and services platforms targeting chronic respiratory illnesses and other diseases.
Kali Care
During 2017, we invested $5 million to acquire 20% of the equity interests in Kali Care, a technology company that provides digital monitoring systems for medical devices. During the fourth quarter of 2020, we recognized an other than temporary impairment of $3.0 million ($2.3 million after-tax) on our underlying assets in this investment as a result of a reassessment of the future value of the business and continued reduction in operating cash flows.
Desotec GmbH
During 2009, we invested €574 thousand to acquire 23% of the equity interests in Desotec GmbH, a leading manufacturer of special assembly machines for bulk processing for the pharmaceutical, beauty and home and food and beverages markets.
Other investments
During August 2019, we invested an aggregate amount of $3.5 million in two preferred equity investments in sustainability companies Loop and PureCycle Technologies (“PureCycle”) that were accounted for at cost less impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for identical or similar investments of the same issuer. During 2020, we invested an additional $1.4 million in these two equity investments and also received $333 thousand of equity in PureCycle in exchange for our resource dedication for technological partnership and support. In November 2020, we increased the value of the PureCycle investment by $3.1 million based on observable price changes.
25
In March 2021, PureCycle was purchased by a special purpose acquisition company and was subsequently listed on Nasdaq under the ticker PCT. At that time, our investment in PureCycle was converted into shares of PCT. This investment is now recorded at fair value based on observable market prices for identical assets and the change in fair value is recorded as a net investment gain or loss in the Condensed Consolidated Statements of Income. In March 2021, we recorded an unrealized gain on our investment in PureCycle of $16.8 million.
There were no indications of impairment noted in the three months ended March 31, 2021 related to these investments.
NOTE 18 – RESTRUCTURING INITIATIVES
In late 2017, we began a business transformation to drive profitable sales growth, increase operational excellence, enhance our approach to innovation and improve organizational effectiveness. The primary focus of the plan is the Beauty + Home segment; however, certain global general and administrative functions are also being addressed. For the three months ended March 31, 2021 and 2020, we recognized $3.7 million and $4.8 million of restructuring costs related to this plan, respectively. Using current exchange rates, we estimate total implementation costs of approximately $125 million for these initiatives, including costs that have been recognized to date. The cumulative expense incurred as of March 31, 2021 was $116.7 million. We have also made total capital investments related to this plan of approximately $50 million, with no further significant capital investments expected.
As of March 31, 2021 we have recorded the following activity associated with the business transformation:
| Beginning Reserve at 12/31/2020 | Net Charges for the Three Months Ended 3/31/2021 | Cash Paid | Interest and FX Impact | Ending Reserve at 3/31/2021 | |||||||||||||||||||||||||
| Employee severance | $ | 7,956 | $ | (260) | $ | (2,425) | $ | (163) | $ | 5,108 | |||||||||||||||||||
| Professional fees and other costs | 2,533 | 3,932 | (3,223) | (42) | 3,200 | ||||||||||||||||||||||||
| Totals | $ | 10,489 | $ | 3,672 | $ | (5,648) | $ | (205) | $ | 8,308 | |||||||||||||||||||
26
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS, OR AS OTHERWISE INDICATED)
RESULTS OF OPERATIONS
| Three Months Ended March 31, | 2021 | 2020 | |||||||||
| Net sales | 100.0 | % | 100.0 | % | |||||||
| Cost of sales (exclusive of depreciation and amortization shown below) | 62.9 | 62.5 | |||||||||
| Selling, research & development and administrative | 17.3 | 17.5 | |||||||||
| Depreciation and amortization | 7.4 | 7.0 | |||||||||
| Restructuring initiatives | 0.5 | 0.7 | |||||||||
| Operating income | 11.9 | 12.3 | |||||||||
| Other income (expense) | 1.1 | (1.5) | |||||||||
| Income before income taxes | 13.0 | 10.8 | |||||||||
| Net Income | 10.8 | 7.7 | |||||||||
| Effective tax rate | 16.8 | % | 29.2 | % | |||||||
| Adjusted EBITDA margin (1) | 19.6 | % | 20.0 | % | |||||||
________________________________________________
(1)Adjusted EBITDA margins are calculated as Adjusted EBITDA divided by Reported Net Sales. See the reconciliation under "Non-U.S. GAAP Measures".
SIGNIFICANT DEVELOPMENTS
During the first quarter of 2021, financial results and operations continued to be adversely impacted by the novel coronavirus ("COVID-19") pandemic. The significance of the impacts to our segments are discussed herein. While we have certain applications that have benefited from the pandemic such as injectables and personal care, these benefits are more than offset by the adverse impact on sales of our beauty products sold via duty free travel and retail stores and a reduction of our products used for bottled water and on-the-go beverage applications.
As each of our segments produce dispensing systems that have been determined to be essential products by various government agencies around the world, our facilities remained operational during the quarter. We have taken a variety of measures to ensure the availability and functioning of our critical infrastructure, to promote the safety and security of our employees and to support the communities in which we operate. We are following public and private sector policies and initiatives to reduce the transmission of COVID-19, such as the imposition of travel restrictions, the promotion of social distancing and the adoption of work-from-home arrangements, and all of these policies and initiatives have impacted our operations. Due to the dynamic nature of the situation, we are not able at this time to estimate the impact of COVID-19 on our future financial results and operations, but the impact could be material for the remainder of fiscal year 2021 and could be material during any future periods affected either directly or indirectly by this pandemic.
NET SALES
Reported net sales for the first three months of 2021 increased 8% to $776.8 million compared to $721.6 million for the first three months of 2020. The average U.S. dollar exchange rate weakened compared to the euro and other major currencies in which we operate, resulting in a positive currency translation impact of 5%. The acquisition of Fusion Packaging, Inc. ("Fusion") positively impacted sales by 2%. Therefore, core sales, which exclude acquisitions and changes in foreign currency rates, increased by 1% in the first three months of 2021 compared to the same period in 2020 due to the positive impact of the increase in resin prices. Operationally, strong sales growth within our injectables market was offset by inventory drawdowns in our prescription and consumer healthcare markets. We also recognized strong sales growth within our food market while the beauty and beverage markets continued to be significantly impacted by the COVID-19 pandemic.
| Three Months Ended March 31, 2021 Net Sales Change over Prior Year | Pharma | Beauty + Home | Food + Beverage | Total | |||||||||||||||||||
| Core Sales Growth | — | % | (3) | % | 14 | % | 1 | % | |||||||||||||||
| Acquisitions | — | % | 6 | % | — | % | 2 | % | |||||||||||||||
| Currency Effects (1) | 6 | % | 4 | % | 2 | % | 5 | % | |||||||||||||||
| Total Reported Net Sales Growth | 6 | % | 7 | % | 16 | % | 8 | % | |||||||||||||||
________________________________________________
(1)Currency effects are calculated by translating last year’s amounts at this year’s foreign exchange rates.
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The following table sets forth, for the periods indicated, net sales by geographic location:
| Three Months Ended March 31, | 2021 | % of Total | 2020 | % of Total | |||||||||||||||||||
| Domestic | $ | 255,165 | 33 | % | $ | 230,400 | 32 | % | |||||||||||||||
| Europe | 425,689 | 55 | % | 405,849 | 56 | % | |||||||||||||||||
| Latin America | 48,965 | 6 | % | 50,794 | 7 | % | |||||||||||||||||
| Asia | 46,935 | 6 | % | 34,510 | 5 | % | |||||||||||||||||
For further discussion on net sales by reporting segment, please refer to the analysis of segment net sales and segment Adjusted EBITDA on the following pages.
COST OF SALES (EXCLUSIVE OF DEPRECIATION AND AMORTIZATION SHOWN BELOW)
Cost of sales ("COS") as a percent of net sales increased slightly to 62.9% in the first three months of 2021 compared to 62.5% in the same period a year ago. This increase in COS is mainly due to the decreased sales mix and smaller percentage of our Pharma business compared to the total during the first quarter of 2021. As discussed below, within the Pharma segment we experienced declines in sales to our higher margin prescription and consumer healthcare markets which leads to an overall increase in COS as a percentage of net sales. We also experienced higher resin costs, higher freight costs and logistic delays, and temporary inefficiencies in our manufacturing process related to the COVID-19 pandemic.
SELLING, RESEARCH & DEVELOPMENT AND ADMINISTRATIVE
Selling, research & development and administrative expenses ("SG&A") increased by $8.2 million to $134.3 million in the first three months of 2021 compared to $126.2 million during the same period a year ago. Excluding changes in foreign currency rates, SG&A increased by approximately $2.8 million in the first three months of 2021 compared to the first three months of 2020. The increase is due to $3.4 million of incremental SG&A costs from our acquisition of Fusion completed subsequent to March 31, 2020. The remaining decrease in SG&A is related to cost saving initiatives put in place due to COVID-19, such as lower travel and entertainment spending. SG&A as a percentage of net sales decreased to 17.3% compared to 17.5% in the same period of the prior year primarily due to these cost savings measures.
DEPRECIATION AND AMORTIZATION
Reported depreciation and amortization expenses increased by approximately $6.6 million to $57.4 million in the first three months of 2021 compared to $50.8 million during the same period a year ago. Excluding changes in foreign currency rates, depreciation and amortization increased by approximately $4.3 million in the first three months of 2021 compared to the same period a year ago. The majority of this increase is due to $2.4 million of incremental depreciation and amortization costs related to our Fusion acquisition. We have also increased our capital spending during the current and prior year to support our growth strategy. Depreciation and amortization as a percentage of net sales increased to 7.4% in the first three months of 2021 compared to 7.0% in the same period of the prior year.
RESTRUCTURING INITIATIVES
In late 2017, we began a business transformation plan to drive profitable sales growth, increase operational excellence, enhance our approach to innovation and improve organizational effectiveness. The primary focus of the plan is the Beauty + Home segment; however, certain global general and administrative functions are also being addressed. Restructuring costs related to this plan for the three months ended March 31, 2021 and 2020 are as follows:
| Three Months Ended March 31, | 2021 | 2020 | |||||||||
| Restructuring Initiatives by Segment | |||||||||||
| Pharma | $ | 35 | $ | (31) | |||||||
| Beauty + Home | 1,096 | 4,907 | |||||||||
| Food + Beverage | (79) | 103 | |||||||||
| Corporate & Other | 2,620 | (140) | |||||||||
| Total Restructuring Initiatives | $ | 3,672 | $ | 4,839 | |||||||
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We have successfully implemented the vast majority of our planned initiatives related to our transformation plan, including successfully implementing new commercial strategies, reducing costs and adding capabilities in Asia and in fast growing application fields that we believe will position the segment for future growth and profitability. However, the COVID-19 global pandemic has caused several initiatives that were expected to be completed in 2020 to be delayed, including the planned closure of two facilities in the U.S., and resulted in a significant decline in our beauty business. While our Beauty + Home segment continues to be profitable, the disruption caused by the pandemic, including higher operating costs, have more than offset any expected growth in earnings from our transformation. Though we believe the beauty market remains a long-term attractive growth market and we remain committed to completing our remaining transformation initiatives, we expect the return to growth to be gradual and non-linear as this market is highly correlated to the return to post-pandemic normal consumer behavior, including travel, which has proven to be sporadic and uncertain. We estimate total implementation costs of approximately $125 million for these initiatives. The cumulative expense incurred to date is $116.7 million. We have also made capital investments of approximately $50 million related to this plan, with no further significant capital investments expected.
OPERATING INCOME
For the first three months of 2021, operating income increased approximately $4.1 million to $92.6 million compared to $88.5 million in the same period of the prior year. Excluding changes in foreign currency rates, operating income decreased by approximately $2.8 million in the first three months of 2021 compared to the same period a year ago. The majority of this decrease is due to the impact of lower sales and operational inefficiencies related to the COVID-19 pandemic when comparing the current quarter results to the pre-COVID-19 results in the first quarter of 2020. We also experienced higher input costs with increased resin and transportation prices. Operating income as a percentage of net sales decreased to 11.9% in the first three months of 2021 compared to 12.3% for the same period in the prior year.
NET OTHER INCOME (EXPENSE)
Net other income (expense) improved $18.7 million to $8.3 million of income for the three months ended March 31, 2021 from $10.4 million of expense in the same period of the prior year. $16.8 million of this improvement is a gain on our investment in PureCycle Technologies (“PureCycle”). As discussed in Note 17 - Investment in Equity Securities of the Condensed Consolidated Financial Statements, our investment in PureCycle was converted into shares of PCT, a publicly traded entity, during the first quarter of 2021. This investment is now recorded at fair value based on observable market prices for identical assets and the change in fair value is recorded as a net investment gain or loss in the Condensed Consolidated Statements of Income. We believe that investment gains and losses, whether realized from sales or unrealized from changes in market prices, are not considered relevant to understanding our reported consolidated earnings or evaluating our periodic economic performance. We believe the net investment gains and losses recorded in earnings, including the changes in market prices for equity securities, in any given period has little analytical or predictive value. We also realized $1.0 million of lower interest expense during the first quarter of 2021 as we continue to reduce outstanding debt with our strong free cash flow generation over the past year. Within miscellaneous expense, an increase in pension costs was more than offset by a net favorable impact on our hedging activities during the first quarter of 2021 compared to the prior year period.
PROVISION FOR INCOME TAXES
The tax provision for interim periods is determined using the estimated annual effective consolidated tax rate, based on the current estimate of full-year earnings and related estimated full year-taxes, adjusted for the impact of discrete quarterly items. The effective tax rate for the three months ended March 31, 2021 and 2020, respectively, was 16.8% and 29.2%. The reported effective tax rate for the three months ended March 31, 2021 reflects additional tax benefits from employee stock-based compensation of $5.1 million and a $2.9 million benefit from changes in U.S. state tax laws during the quarter. A lower tax rate in France for 2021 and a more favorable mix of earnings also contributed to the lower tax rate in the current quarter.
NET INCOME ATTRIBUTABLE TO APTARGROUP, INC.
We reported net income attributable to AptarGroup of $84.0 million in the three months ended March 31, 2021, compared to $55.3 million for the same period in the prior year.
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PHARMA SEGMENT
Operations that sell dispensing systems, drug delivery systems, sealing solutions and services to the prescription drug, consumer health care, injectables and active material science solutions markets form the Pharma segment.
| Three Months Ended March 31, | 2021 | 2020 | |||||||||
| Net Sales | $ | 313,832 | $ | 297,196 | |||||||
| Adjusted EBITDA (1) | 108,484 | 108,342 | |||||||||
| Adjusted EBITDA margin (1) | 34.6 | % | 36.5 | % | |||||||
________________________________________________
(1)Adjusted EBITDA is calculated as earnings before net interest, taxes, depreciation, amortization, unallocated corporate expenses, restructuring initiatives, acquisition-related costs, net investment gains and losses related to observable market price changes on equity securities and other special items. Adjusted EBITDA margins are calculated as Adjusted EBITDA divided by Reported Net Sales. See the reconciliation under "Non-U.S. GAAP Measures".
Net sales for the first three months of 2021 increased by 6% to $313.8 million compared to $297.2 million in the first three months of 2020. Changes in currency rates positively impacted net sales by 6%. Therefore, core sales for the first three months of 2021 were even with the same period of the prior year. Core sales of our products to the injectables and active material science solutions markets increased 14% and 5% respectively due to strong demand for our vaccine components and active material science solutions. Core sales to the prescription drug and consumer health care markets decreased 8% and 1%, respectively as fewer non-critical doctor visits and lower incidence of cold and flu illnesses this season have resulted in certain Pharma customers drawing down inventory levels of allergy and other respiratory treatment delivery devices.
| Three Months Ended March 31, 2021 Net Sales Change over Prior Year | Prescription Drug | Consumer Health Care | Injectables | Active Material Science Solutions | Total | ||||||||||||||||||||||||
| Core Sales Growth | (8) | % | (1) | % | 14 | % | 5 | % | — | % | |||||||||||||||||||
| Currency Effects (1) | 6 | % | 7 | % | 7 | % | 3 | % | 6 | % | |||||||||||||||||||
| Total Reported Net Sales Growth | (2) | % | 6 | % | 21 | % | 8 | % | 6 | % | |||||||||||||||||||
_______________________________________
(1)Currency effects are calculated by translating last year’s amounts at this year’s foreign exchange rates.
Adjusted EBITDA in the first three months of 2021 increased slightly to $108.5 million compared to $108.3 million reported in the same period of the prior year. While first quarter core sales were at the same level as the first quarter of 2020, we experienced lower margins due to a shift in mix away from our more profitable prescription and consumer healthcare products. This reduction in margin was more than offset by cost savings initiatives and the translation of our foreign entity results to the U.S. dollar.
BEAUTY + HOME SEGMENT
Operations that sell dispensing systems and sealing solutions to the beauty, personal care and home care markets form the Beauty + Home segment.
| Three Months Ended March 31, | 2021 | 2020 | |||||||||
| Net Sales | $ | 346,946 | $ | 324,560 | |||||||
| Adjusted EBITDA (1) | 35,356 | 34,247 | |||||||||
| Adjusted EBITDA margin (1) | 10.2 | % | 10.6 | % | |||||||
________________________________________________
(1)Adjusted EBITDA is calculated as earnings before net interest, taxes, depreciation, amortization, unallocated corporate expenses, restructuring initiatives, acquisition-related costs, net investment gains and losses related to observable market price changes on equity securities and other special items. Adjusted EBITDA margins are calculated as Adjusted EBITDA divided by Reported Net Sales. See the reconciliation under "Non-U.S. GAAP Measures".
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For the first three months of 2021, net sales increased 7% to $346.9 million compared to $324.6 million in the first three months of the prior year. Changes in currency rates positively impacted net sales by 4% while our acquisition of Fusion improved sales by 6% in the first quarter of 2021. Therefore, core sales decreased by 3% in the first three months of 2021 compared to the same period in the prior year. The COVID-19 pandemic continued to negatively impact core sales to the beauty market during the first quarter of 2021 due to lower retail sales and duty free sales related to domestic and international travel reductions. Core sales of our products to the beauty market decreased 10% during the first three months of 2021 as we experienced a reduction in orders from customers providing both fragrance and skin care products as the first quarter of 2020 was only in the beginning stages of the COVID-19 pandemic. However, personal care core sales increased 2% as increased sales of our hand sanitizer and liquid soap dispensers more than compensated for softness in our deodorant, hair care and sun care applications while many consumers continue to shelter in place. Core sales to the home care markets increased 13% on strong demand for our air care, industrial and automotive products.
| Three Months Ended March 31, 2021 Net Sales Change over Prior Year | Personal Care | Beauty | Home Care | Total | |||||||||||||||||||
| Core Sales Growth | 2 | % | (10) | % | 13 | % | (3) | % | |||||||||||||||
| Acquisitions | — | % | 11 | % | — | % | 6 | % | |||||||||||||||
| Currency Effects (1) | 4 | % | 5 | % | 4 | % | 4 | % | |||||||||||||||
| Total Reported Net Sales Growth | 6 | % | 6 | % | 17 | % | 7 | % | |||||||||||||||
________________________________________________
(1)Currency effects are calculated by translating last year’s amounts at this year’s foreign exchange rates.
Adjusted EBITDA in the first three months of 2021 increased 3% to $35.4 million compared to $34.2 million reported in the same period in the prior year. This improvement is due to the incremental profit from our Fusion acquisition during the first quarter of 2021, partially offset by lower sales to the beauty market noted above along with higher resin and other input costs incurred during the first quarter of 2021. These cost increases are partially offset by operational improvements which are mainly driven from our transformation initiatives.
FOOD + BEVERAGE SEGMENT
Operations that sell dispensing systems and sealing solutions to the food and beverage markets form the Food + Beverage segment.
| Three Months Ended March 31, | 2021 | 2020 | |||||||||
| Net Sales | $ | 115,976 | $ | 99,797 | |||||||
| Adjusted EBITDA (1) | 19,990 | 15,407 | |||||||||
| Adjusted EBITDA margin (1) | 17.2 | % | 15.4 | % | |||||||
________________________________________________
(1)Adjusted EBITDA is calculated as earnings before net interest, taxes, depreciation, amortization, unallocated corporate expenses, restructuring initiatives, acquisition-related costs, net investment gains and losses related to observable market price changes on equity securities and other special items. Adjusted EBITDA margins are calculated as Adjusted EBITDA divided by Reported Net Sales. See the reconciliation under "Non-U.S. GAAP Measures".
Net sales for the first three months of 2021 increased by 16% to $116.0 million compared to $99.8 million in the first three months of 2020. Changes in currency rates positively impacted net sales by 2%. Therefore, core sales increased by 14% in the first three months of 2021 compared to the same period in the prior year. Strong product sales and the pass-through of higher resin costs positively impacted the first three months of 2021 by $7.5 million and $6.2 million, respectively. Core sales to the food market increased 19% while core sales to the beverage market increased 2% in the first three months of 2021 compared to the same period of the prior year. For the food markets, the strong pantry stocking that we experienced during the fourth quarter of 2020 continued into the first quarter of 2021 as consumers continued to cook at home during the COVID-19 pandemic. While the beverage market reported 2% growth in core sales during the quarter, this increase is all related to the pass through of higher resin prices. Sales of our premium bottled water and on-the-go functional drink products continued to be negatively impacted by the COVID-19 pandemic.
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| Three Months Ended March 31, 2021 Net Sales Change over Prior Year | Food | Beverage | Total | ||||||||||||||
| Core Sales Growth | 19 | % | 2 | % | 14 | % | |||||||||||
| Currency Effects (1) | 2 | % | 2 | % | 2 | % | |||||||||||
| Total Reported Net Sales Growth | 21 | % | 4 | % | 16 | % | |||||||||||
______________________________________________________________
(1)Currency effects are calculated by translating last year’s amounts at this year’s foreign exchange rates.
Adjusted EBITDA in the first three months of 2021 increased 30% to $20.0 million compared to $15.4 million reported in the same period of the prior year. Strong product sales to the food market, as discussed above, drove a large part of our adjusted EBITDA growth during the first quarter of 2021.
CORPORATE & OTHER
In addition to our three reporting segments, we assign certain costs to “Corporate & Other,” which is presented separately in Note 16 – Segment Information of the Notes to the Condensed Consolidated Financial Statements. For Corporate & Other, Adjusted EBITDA (which excludes net interest, taxes, depreciation, amortization, restructuring initiatives, acquisition-related costs, net investment gains and losses related to observable market price changes on equity securities and other special items) primarily includes certain professional fees, compensation and information system costs which are not allocated directly to our reporting segments. Corporate & Other expenses in the first three months of 2021 decreased to $11.6 million compared to $13.8 million reported in the same period of the prior year. On a constant currency basis, Corporate & Other expense decreased $3.5 million. As discussed above, part of this decrease is due to cost saving initiatives put in place due to COVID-19. We also benefited from a net favorable impact on our hedging activities during the first quarter of 2021.
NON-U.S. GAAP MEASURES
In addition to the information presented herein that conforms to U.S. GAAP, we also present financial information that does not conform to U.S. GAAP, which are referred to as non-U.S. GAAP financial measures. Management may assess our financial results both on a U.S. GAAP basis and on a non-U.S. GAAP basis. We believe it is useful to present these non-U.S. GAAP financial measures because they allow for a better period over period comparison of operating results by removing the impact of items that, in management’s view, do not reflect our core operating performance. These non-U.S. GAAP financial measures should not be considered in isolation or as a substitute for U.S. GAAP financial results, but should be read in conjunction with the unaudited Condensed Consolidated Statements of Income and other information presented herein. Investors are cautioned against placing undue reliance on these non-U.S. GAAP measures. Further, investors are urged to review and consider carefully the adjustments made by management to the most directly comparable U.S. GAAP financial measure to arrive at these non-U.S. GAAP financial measures.
In our Management’s Discussion and Analysis, we exclude the impact of foreign currency translation when presenting net sales information, which we define as “constant currency.” Changes in net sales excluding the impact of foreign currency translation is a non-U.S. GAAP financial measure. As a worldwide business, it is important that we take into account the effects of foreign currency translation when we view our results and plan our strategies. Consequently, when our management looks at our financial results to measure the core performance of our business, we may exclude the impact of foreign currency translation by translating our prior period results at current period foreign currency exchange rates. As a result, our management believes that these presentations are useful internally and may be useful to investors. We also exclude the impact of material acquisitions when comparing results to prior periods. Changes in operating results excluding the impact of acquisitions are non-U.S. GAAP financial measures. We believe it is important to exclude the impact of acquisitions on period over period results in order to evaluate performance on a more comparable basis.
We present earnings before net interest and taxes (“EBIT”) and earnings before net interest, taxes, depreciation and amortization (“EBITDA”). We also present our adjusted earnings before net interest and taxes (“Adjusted EBIT”) and adjusted earnings before net interest, taxes, depreciation and amortization (“Adjusted EBITDA”), both of which exclude the business transformation charges (restructuring initiatives), acquisition-related costs, purchase accounting adjustments related to acquisitions and investments and net investment gains and losses related to observable market price changes on equity securities. Our Outlook is also provided on a non-U.S. GAAP basis because certain reconciling items are dependent on future events that either cannot be controlled, such as tax and exchange rates, or reliably predicted because they are not part of our routine activities, such as restructuring initiatives and acquisition-related costs.
We provide a reconciliation of Net Debt to Net Capital as a non-U.S. GAAP measure. “Net Debt” is calculated as interest bearing debt less cash and equivalents and short-term investments while “Net Capital” is calculated as stockholders’ equity plus Net Debt. Net Debt to Net Capital measures a company’s financial leverage, which gives users an idea of a company's financial structure, or how it is financing its operations, along with insight into its financial strength. We believe that it is meaningful to take into consideration the balance of our cash, cash equivalents and short-term investments when evaluating our leverage. If needed, such assets could be used to reduce our gross debt position.
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Finally, we provide a reconciliation of free cash flow as a non-U.S. GAAP measure. Free cash flow is calculated as cash provided by operating activities less capital expenditures. We use free cash flow to measure cash flow generated by operations that is available for dividends, share repurchases, acquisitions and debt repayment. We believe that it is meaningful to investors in evaluating our financial performance and measuring our ability to generate cash internally to fund our initiatives.
| Three Months Ended | |||||||||||||||||||||||||||||||||||
| March 31, 2021 | |||||||||||||||||||||||||||||||||||
| Consolidated | Pharma | Beauty + Home | Food + Beverage | Corporate & Other | Net Interest | ||||||||||||||||||||||||||||||
| Net Sales | $ | 776,754 | $ | 313,832 | $ | 346,946 | $ | 115,976 | $ | — | $ | — | |||||||||||||||||||||||
| Reported net income | $ | 83,939 | |||||||||||||||||||||||||||||||||
| Reported income taxes | 16,949 | ||||||||||||||||||||||||||||||||||
| Reported income before income taxes | 100,888 | 87,670 | 9,688 | 10,010 | 554 | (7,034) | |||||||||||||||||||||||||||||
| Adjustments: | |||||||||||||||||||||||||||||||||||
| Restructuring initiatives | 3,672 | 35 | 1,096 | (79) | 2,620 | ||||||||||||||||||||||||||||||
| Net investment gain | (16,809) | (16,809) | |||||||||||||||||||||||||||||||||
| Adjusted earnings before income taxes | 87,751 | 87,705 | 10,784 | 9,931 | (13,635) | (7,034) | |||||||||||||||||||||||||||||
| Interest expense | 7,415 | 7,415 | |||||||||||||||||||||||||||||||||
| Interest income | (381) | (381) | |||||||||||||||||||||||||||||||||
| Adjusted earnings before net interest and taxes (Adjusted EBIT) | 94,785 | 87,705 | 10,784 | 9,931 | (13,635) | — | |||||||||||||||||||||||||||||
| Depreciation and amortization | 57,438 | 20,779 | 24,572 | 10,059 | 2,028 | ||||||||||||||||||||||||||||||
| Adjusted earnings before net interest, taxes, depreciation and amortization (Adjusted EBITDA) | $ | 152,223 | $ | 108,484 | $ | 35,356 | $ | 19,990 | $ | (11,607) | $ | — | |||||||||||||||||||||||
| Adjusted EBITDA margins (Adjusted EBITDA / Reported Net Sales) | 19.6 | % | 34.6 | % | 10.2 | % | 17.2 | % | |||||||||||||||||||||||||||
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| Three Months Ended | |||||||||||||||||||||||||||||||||||
| March 31, 2020 | |||||||||||||||||||||||||||||||||||
| Consolidated | Pharma | Beauty + Home | Food + Beverage | Corporate & Other | Net Interest | ||||||||||||||||||||||||||||||
| Net Sales | $ | 721,553 | $ | 297,196 | $ | 324,560 | $ | 99,797 | $ | — | $ | — | |||||||||||||||||||||||
| Reported net income | $ | 55,250 | |||||||||||||||||||||||||||||||||
| Reported income taxes | 22,786 | ||||||||||||||||||||||||||||||||||
| Reported income before income taxes | 78,036 | 89,854 | 7,108 | 5,962 | (16,675) | (8,213) | |||||||||||||||||||||||||||||
| Adjustments: | |||||||||||||||||||||||||||||||||||
| Restructuring initiatives | 4,839 | (31) | 4,907 | 103 | (140) | ||||||||||||||||||||||||||||||
| Transaction costs related to acquisitions | 1,384 | — | 1,384 | — | — | ||||||||||||||||||||||||||||||
| Purchase accounting adjustments related to acquisitions and investments | 1,390 | 1,128 | 262 | — | — | ||||||||||||||||||||||||||||||
| Adjusted earnings before income taxes | 85,649 | 90,951 | 13,661 | 6,065 | (16,815) | (8,213) | |||||||||||||||||||||||||||||
| Interest expense | 8,388 | 8,388 | |||||||||||||||||||||||||||||||||
| Interest income | (175) | (175) | |||||||||||||||||||||||||||||||||
| Adjusted earnings before net interest and taxes (Adjusted EBIT) | 93,862 | 90,951 | 13,661 | 6,065 | (16,815) | — | |||||||||||||||||||||||||||||
| Depreciation and amortization | 50,806 | 17,891 | 20,586 | 9,342 | 2,987 | ||||||||||||||||||||||||||||||
| Purchase accounting adjustments included in Depreciation and amortization above | (500) | (500) | — | — | — | ||||||||||||||||||||||||||||||
| Adjusted earnings before net interest, taxes, depreciation and amortization (Adjusted EBITDA) | $ | 144,168 | $ | 108,342 | $ | 34,247 | $ | 15,407 | $ | (13,828) | $ | — | |||||||||||||||||||||||
| Adjusted EBITDA margins (Adjusted EBITDA / Reported Net Sales) | 20.0 | % | 36.5 | % | 10.6 | % | 15.4 | % | |||||||||||||||||||||||||||
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| Net Debt to Net Capital Reconciliation | March 31, | December 31, | |||||||||
| 2021 | 2020 | ||||||||||
| Notes payable, revolving credit facility and overdrafts | $ | 1,036 | $ | 52,200 | |||||||
| Current maturities of long-term obligations, net of unamortized debt issuance costs | 64,776 | 65,666 | |||||||||
| Long-Term Obligations, net of unamortized debt issuance costs | 1,037,983 | 1,054,998 | |||||||||
| Total Debt | 1,103,795 | 1,172,864 | |||||||||
| Less: | |||||||||||
| Cash and equivalents | 254,852 | 300,137 | |||||||||
| Short-term investments | — | 243 | |||||||||
| Net Debt | $ | 848,943 | $ | 872,484 | |||||||
| Total Stockholders' Equity | $ | 1,900,795 | $ | 1,850,785 | |||||||
| Net Debt | 848,943 | 872,484 | |||||||||
| Net Capital | $ | 2,749,738 | $ | 2,723,269 | |||||||
| Net Debt to Net Capital | 30.9 | % | 32.0 | % | |||||||
| Free Cash Flow Reconciliation | March 31, | March 31, | |||||||||
| 2021 | 2020 | ||||||||||
| Net Cash Provided by Operations | $ | 72,185 | $ | 85,033 | |||||||
| Less: | |||||||||||
| Capital Expenditures | 63,884 | 61,625 | |||||||||
| Free Cash Flow | $ | 8,301 | $ | 23,408 | |||||||
FOREIGN CURRENCY
Because of our international presence, movements in exchange rates may have a significant impact on the translation of the financial statements of our foreign subsidiaries. Our primary foreign exchange exposure is to the euro, but we also have foreign exchange exposure to the Chinese yuan, Brazilian real, Mexican peso, Swiss franc and other Asian, European and South American currencies. A weakening U.S. dollar relative to foreign currencies has an additive translation effect on our financial statements. Conversely, a strengthening U.S. dollar has a dilutive effect. In some cases, we sell products denominated in a currency different from the currency in which the related costs are incurred. Any changes in exchange rates on such inter-country sales could materially impact our results of operations. During the first quarter of 2021, the U.S. dollar weakened compared to the major European currencies and the Chinese yuan, while it appreciated against most Latin America currencies. This resulted in an additive impact on our translated results during the first quarter of 2021 when compared to the first quarter of 2020.
QUARTERLY TRENDS
Our results of operations in the last quarter of the year typically are negatively impacted by customer plant shutdowns in December. Several of the markets we serve are impacted by the seasonality of underlying consumer products. This, in turn, may have an impact on our net sales and results of operations for those markets. However, we believe the diversification of our product portfolio minimizes fluctuations in our overall quarterly financial statements and results in immaterial seasonality impact on our Condensed Consolidated Financials Statements when viewed quarter over quarter.
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LIQUIDITY AND CAPITAL RESOURCES
Given the diversification of our segments, the low level of leverage relative to others in our industry and our ability to generate strong levels of cash flow from operations, we believe we are in a strong financial position and have the financial resources to meet our business requirements in the foreseeable future. We have historically used cash flow from operations, our revolving credit facilities, proceeds from stock options and debt, as needed, as our primary sources of liquidity. Our primary uses of liquidity are to invest in equipment and facilities that are necessary to support our growth and to make acquisitions that will contribute to the achievement of our strategic objectives. Amid the COVID-19 pandemic, we have been focused on preserving our liquidity; however, we intend to continue to pay quarterly dividends to our stockholders, invest in our business and make acquisitions as we consider necessary to achieve our strategic objectives. In the event that customer demand decreases significantly for a prolonged period of time due to the COVID-19 pandemic and adversely impacts our cash flows from operations, we would have the ability to restrict and significantly reduce capital expenditure levels as well as evaluate our acquisition strategy. A prolonged and significant reduction in capital expenditure levels could increase future repairs and maintenance costs as well as have a negative impact on operating margins if we were unable to invest in new innovative products.
Cash and equivalents and restricted cash decreased to $259.7 million at March 31, 2021 from $305.0 million at December 31, 2020. Total short and long-term interest bearing debt of $1.1 billion at March 31, 2021 was slightly lower than the $1.2 billion at December 31, 2020. The ratio of our Net Debt (interest bearing debt less cash and equivalents) to Net Capital (stockholders’ equity plus Net Debt) decreased to 30.9% at March 31, 2021 compared to 32.0% at December 31, 2020. See the reconciliation under "Non-U.S. GAAP Measures".
In the first three months of 2021, our operations provided approximately $72.2 million in net cash flow compared to $85.0 million for the same period a year ago. In both periods, cash flow from operations was primarily derived from earnings before depreciation and amortization. The decrease in cash provided by operations during the first three months of 2021 is primarily attributable to an increase in working capital requirements which offset higher net income.
We used $63.9 million in cash for investing activities during the first three months of 2021 compared to $88.1 million during the same period a year ago. Our investment in capital projects increased $2.3 million during the first three months of 2021 compared to the first three months of 2020. Our 2021 estimated cash outlays for capital expenditures are expected to be in the range of approximately $300 to $330 million but could vary due to changes in exchange rates as well as the timing of capital projects. Our decline in cash utilization is a result of no payments for business combinations or equity investments during the first three months of 2021, whereas during the first three months of 2020 we invested approximately $20.4 million in our BTY investment.
Financing activities used $45.0 million in cash during the first three months of 2021 compared to $174.3 million in cash provided by financing activities during the same period a year ago. During the first three months of 2021, we used cash on hand to repay net short term revolving debt of $52.0 million and paid $23.4 million of dividends. We received proceeds from stock option exercises of $31.9 million.
We hold U.S. dollar and euro-denominated debt to align our capital structure with our earnings base. We also maintain a multi-currency revolving credit facility with two tranches, providing for unsecured financing of up to $300 million that is available in the U.S. and up to €150 million that is available to our wholly-owned UK subsidiary. Each borrowing under the credit facility will bear interest at rates based on LIBOR, prime rates or other similar rates, in each case plus an applicable margin. A facility fee on the total amount of the facility is also payable quarterly, regardless of usage. The applicable margins for borrowings under the credit facility and the facility fee percentage may change from time to time depending on changes in our consolidated leverage ratio. No balance was utilized under our U.S. facility or our euro-based revolving credit facility as of March 31, 2021. The $52.0 million balance at December 31, 2020 under our U.S. credit facility was repaid during the first quarter of 2021. Credit facility balances are included in notes payable, including revolving credit facilities on the Condensed Consolidated Balance Sheets.
Our revolving credit facility and corporate long-term obligations require us to satisfy certain financial and other covenants including:
| Requirement | Level at March 31, 2021 | ||||||||||
| Consolidated Leverage Ratio (1) | Maximum of 3.50 to 1.00 | 1.55 to 1.00 | |||||||||
| Consolidated Interest Coverage Ratio (1) | Minimum of 3.00 to 1.00 | 17.69 to 1.00 | |||||||||
__________________________________________________________
(1)Definitions of ratios are included as part of the revolving credit facility agreement and the private placement agreements.
Based upon the above consolidated leverage ratio covenant, we have the ability to borrow approximately an additional $1.1 billion before the 3.50 to 1.00 maximum ratio requirement is exceeded.
In addition, in October 2020, we entered into an unsecured money market borrowing arrangement to provide short term financing of up to $30 million that is available in the U.S. No balance was utilized under this arrangement as of March 31, 2021.
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Our foreign operations have historically met cash requirements with the use of internally generated cash or uncommitted short-term borrowings. We also have committed financing arrangements in both the U.S. and the UK as detailed above. We manage our global cash requirements considering (i) available funds among the many subsidiaries through which we conduct business, (ii) the geographic location of our liquidity needs, and (iii) the cost to access international cash balances.
We facilitate a supply chain finance program ("SCF") across Europe and the U.S. that is administered by a third-party platform. Eligible suppliers can elect to receive early payment of invoices, less an interest deduction, and negotiate their receivable sales arrangements through the third-party platform on behalf of the respective SCF bank. We are not a party to those agreements, and the terms of our payment obligations are not impacted by a supplier's participation in the SCF. Accordingly, we have concluded that this program continues to be a trade payable program and is not indicative of a borrowing arrangement.
All outstanding amounts related to suppliers participating in the SCF are recorded within Accounts payable, accrued and other liabilities in our Condensed Consolidated Balance Sheets, and associated payments are included in operating activities within our Condensed Consolidated Statements of Cash Flows. As of March 31, 2021 and December 31, 2020, the amounts due to suppliers participating in the SCF and included in Accounts payable, accrued and other liabilities were approximately $26 million and $23 million, respectively.
Collection and payment periods tend to be longer for our operations located outside the United States due to local business practices. We have also seen an increasing trend in pressure from certain customers to lengthen their payment terms. As the majority of our products are made to order, we have not needed to keep significant amounts of finished goods inventory to meet customer requirements. However, some of our contracts specify an amount of finished goods safety stock we are required to maintain.
To the extent our financial position allows and there is a clear financial benefit, we from time-to-time benefit from early payment discounts with some suppliers. We are also lengthening the payment terms with our suppliers to be in line with customer trends. While we have offered third party alternatives for our suppliers to receive payments sooner, we generally do not utilize these offerings from our customers as the economic conditions currently are not beneficial for us.
On April 15, 2021, the Board of Directors declared a quarterly cash dividend of $0.38 per share payable on May 19, 2021 to stockholders of record as of April 28, 2021.
CONTINGENCIES
The Company, in the normal course of business, is subject to a number of lawsuits and claims both actual and potential in nature. Please refer to Note 12 - Commitments and Contingencies of the Notes to Condensed Consolidated Financial Statements for a discussion of contingencies affecting our business.
OFF-BALANCE SHEET ARRANGEMENTS
We do not have significant off-balance sheet arrangements.
RECENTLY ISSUED ACCOUNTING STANDARDS
We have reviewed the recently issued accounting standards updates to the FASB’s Accounting Standards Codification that have future effective dates. Standards that have been adopted during 2021 are discussed in Note 1 – Summary of Significant Accounting Policies of the Notes to Condensed Consolidated Financial Statements.
In March 2020, the FASB issued ASU 2020-04, which provides optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships and other transactions affected by reference rate reform if certain criteria are met. The amendments to this update apply only to contracts, hedging relationships and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. ASU 2020-04 was further amended in January 2021 by ASU 2021-01 which clarified the applicability of certain provisions. Both standards are effective upon issuance and can be adopted any time prior to December 31, 2022. The guidance in ASU 2020-04 and ASU 2021-01 is optional and may be elected over time as reference rate reform activities occur. As of March 31, 2021, we have not yet modified any contracts as a result of reference rate reform and are evaluating the impact this standard may have on our Condensed Consolidated Financial Statements.
Other accounting standards that have been issued by the FASB or other standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on our Condensed Consolidated Financial Statements upon adoption.
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OUTLOOK
Current underlying demand conditions in our markets are not expected to change dramatically from what we experienced in the first quarter. We anticipate that demand for our prescription drug and consumer health care devices will remain under pressure compared to the prior year as customers continue to reduce existing inventories. In certain other markets, we expect to have easier comparisons to the prior year second quarter which was the period most severely impacted by pandemic lockdowns. We also expect our results to be negatively impacted by timing of passing through higher resin and other raw material costs.
We expect earnings per share for the second quarter of 2021, excluding any restructuring expenses, acquisition-related costs and changes in the fair value of equity investments, to be in the range of $0.91 to $0.99 and this guidance is based on an effective tax rate range of 26% to 28%.
FORWARD-LOOKING STATEMENTS
Certain statements in Management’s Discussion and Analysis and other sections of this Form 10-Q are forward-looking and involve a number of risks and uncertainties, including certain statements set forth in the Significant Developments, Restructuring Initiatives, Quarterly Trends, Liquidity and Capital Resources, Contingencies and Outlook sections of this Form 10-Q. Words such as “expects,” “anticipates,” “believes,” “estimates,” “future,” “potential”, "are optimistic" and other similar expressions or future or conditional verbs such as “will,” “should,” “would” and “could” are intended to identify such forward-looking statements. Forward-looking statements are made pursuant to the safe harbor provisions of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 and are based on our beliefs as well as assumptions made by and information currently available to us. Accordingly, our actual results may differ materially from those expressed or implied in such forward-looking statements due to known or unknown risks and uncertainties that exist in our operations and business environment including, but not limited to:
•pandemics, including the impact of COVID-19 on our global supply chain and our global customers and operations, which has elevated and may or will continue to elevate many of the risks and uncertainties discussed below;
•our ability to preserve organizational culture and maintain employee productivity in the work-from-home environment caused by the current pandemic;
•the availability of raw materials and components (particularly from sole sourced suppliers) as well as the financial viability of these suppliers;
•economic conditions worldwide, including potential deflationary or inflationary conditions in regions we rely on for growth;
•political conditions worldwide;
•significant fluctuations in foreign currency exchange rates or our effective tax rate;
•the impact of tax reform legislation, changes in tax rates and other tax-related events or transactions that could impact our effective tax rate;
•financial conditions of customers and suppliers;
•consolidations within our customer or supplier bases;
•changes in customer and/or consumer spending levels;
•loss of one or more key accounts;
•fluctuations in the cost of materials, components, transportation cost as a result of on-going container shortages, and other input costs (particularly resin, metal, anodization costs, and energy costs);
•our ability to successfully implement facility expansions and new facility projects;
•our ability to offset inflationary impacts with cost containment, productivity initiatives or price increases;
•changes in capital availability or cost, including interest rate fluctuations;
•volatility of global credit markets;
•our ability to identify potential new acquisitions and to successfully acquire and integrate such operations and products, including the successful integration of the businesses we have acquired, including contingent consideration valuation;
•direct or indirect consequences of acts of war, terrorism or social unrest;
•cybersecurity threats that could impact our networks and reporting systems;
•the impact of natural disasters and other weather-related occurrences;
•fiscal and monetary policies and other regulations;
•changes or difficulties in complying with government regulation;
•changing regulations or market conditions regarding environmental sustainability;
•work stoppages due to labor disputes;
•competition, including technological advances;
•our ability to protect and defend our intellectual property rights, as well as litigation involving intellectual property rights;
•the outcome of any legal proceeding that has been or may be instituted against us and others;
•our ability to meet future cash flow estimates to support our goodwill impairment testing;
•the demand for existing and new products;
•the success of our customers’ products, particularly in the pharmaceutical industry;
•our ability to manage worldwide customer launches of complex technical products, particularly in developing markets;
•difficulties in product development and uncertainties related to the timing or outcome of product development;
•significant product liability claims;
•the execution of our business transformation plan; and
•other risks associated with our operations.
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Although we believe that our forward-looking statements are based on reasonable assumptions, there can be no assurance that actual results, performance or achievements will not differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements. Readers are cautioned not to place undue reliance on forward-looking statements. We undertake no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. Please refer to Item 1A (Risk Factors) of Part I included in our Annual Report on Form 10-K for the year ended December 31, 2020.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
A significant number of our operations are located outside of the United States. Because of this, movements in exchange rates may have a significant impact on the translation of the financial condition and results of operations of our subsidiaries. Our primary foreign exchange exposure is to the euro, but we also have foreign exchange exposure to the Chinese yuan, Brazilian real, Mexican peso, Swiss franc and other Asian, European, and South American currencies. A weakening U.S. dollar relative to foreign currencies has an additive translation effect on our financial condition and results of operations. Conversely, a strengthening U.S. dollar relative to foreign currencies has a dilutive translation effect on our financial condition and results of operations. Additionally, in some cases, we sell products denominated in a currency different from the currency in which the related costs are incurred. Any changes in exchange rates on such inter-country sales may impact our results of operations.
The table below provides information as of March 31, 2021 about our forward currency exchange contracts. The majority of the contracts expire before the end of the second quarter of 2021.
| Buy/Sell | Contract Amount (in thousands) | Average Contractual Exchange Rate | Min / Max Notional Volumes | ||||||||||||||
| EUR / USD | $ | 17,784 | 1.2069 | 11,457 - 18,027 | |||||||||||||
| EUR / BRL | 9,112 | 6.5198 | 9,112 - 9,652 | ||||||||||||||
| CZK / EUR | 5,450 | 0.0383 | 3,572 - 5,450 | ||||||||||||||
| EUR / INR | 3,880 | 89.8200 | 3,880 - 3,918 | ||||||||||||||
| EUR / THB | 4,143 | 36.5925 | 3,635 - 4,143 | ||||||||||||||
| MXN / USD | 1,300 | 0.0485 | 0 - 1,300 | ||||||||||||||
| EUR / GBP | 70 | 0.8707 | 70 - 990 | ||||||||||||||
| CHF / EUR | 3,220 | 0.9186 | 3,220 - 3,585 | ||||||||||||||
| EUR / CNY | 1,172 | 7.7831 | 0 - 1,172 | ||||||||||||||
| EUR / MXN | 645 | 24.7225 | 366 - 645 | ||||||||||||||
| GBP / EUR | 992 | 1.1355 | 992 - 1,876 | ||||||||||||||
| USD / EUR | 1,086 | 0.8316 | 1,086 - 5,696 | ||||||||||||||
| USD / CNY | 3,100 | 6.5175 | 0 - 3,100 | ||||||||||||||
| Total | $ | 51,954 | |||||||||||||||
As of March 31, 2021, we have recorded the fair value of foreign currency forward exchange contracts of $0.2 million in prepaid and other and $0.5 million in accounts payable, accrued and other liabilities on the Condensed Consolidated Balance Sheets. We also entered into a EUR/USD floating-to-fixed cross currency swap on July 20, 2017 to effectively hedge the foreign exchange and interest rate exposure on the $280 million bank term loan drawn by our wholly-owned UK subsidiary. The fair value of this cash flow hedge is $3.0 million reported in accounts payable, accrued and other liabilities on the Condensed Consolidated Balance Sheets.
ITEM 4. CONTROLS AND PROCEDURES
DISCLOSURE CONTROLS AND PROCEDURES
Management has evaluated, with the participation of the chief executive officer and chief financial officer of the Company, the effectiveness of our disclosure controls and procedures (as that term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) as of March 31, 2021. Based on that evaluation, the chief executive officer and chief financial officer have concluded that these controls and procedures were effective as of such date.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
No changes in our internal control over financial reporting (as such term is defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) occurred during our fiscal quarter ended March 31, 2021 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Amid the COVID-19 pandemic, we have implemented remote work arrangements and restricted non-essential business travel. These arrangements have not materially affected our ability to maintain our business operations, including the operation of financial reporting systems, internal control over financial reporting and disclosure controls and procedures.
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PART II - OTHER INFORMATION
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
RECENT SALES OF UNREGISTERED SECURITIES
Certain French employees are eligible to participate in the FCP Aptar Savings Plan (the “Plan”). An independent agent purchases shares of common stock available under the Plan for cash on the open market and we do not issue shares. We do not receive any proceeds from the purchase of common stock under the Plan. The agent under the Plan is Banque Nationale de Paris Paribas Fund Services. No underwriters are used under the Plan. All shares are sold in reliance upon the exemption from registration under the Securities Act of 1933 provided by Regulation S promulgated under that Act. During the quarter ended March 31, 2021, the Plan purchased 15,003 shares of our common stock on behalf of the participants at an average price of $134.57, for an aggregate amount of $2.0 million. The Plan sold 4,378 shares of our common stock on behalf of the participants at an average price of $141.47, for an aggregate amount of $619 thousand during the same period. At March 31, 2021, the Plan owned 95,752 shares of our common stock.
ISSUER PURCHASES OF EQUITY SECURITIES
On April 18, 2019, we announced a share purchase authorization of up to $350 million of common stock. This authorization replaces previous authorizations and has no expiration date. We may repurchase shares through the open market, privately negotiated transactions or other programs, subject to market conditions.
During the three months ended March 31, 2021, we did not repurchase any shares. As of March 31, 2021, there was $278.5 million of authorized share repurchases available to us. Amid the COVID-19 pandemic, we have been focused on preserving our liquidity and therefore temporarily suspended our share repurchase plan in 2020. While we continue to assess the impact the pandemic is having on our business throughout 2021, we removed the aforementioned suspension during the first quarter of 2021 in order to preserve our flexibility to make repurchases from time to time depending on market conditions.
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ITEM 6. EXHIBITS
| Exhibit 10.1 | |||||||||||
| Exhibit 31.1 | |||||||||||
| Exhibit 31.2 | |||||||||||
| Exhibit 32.1 | |||||||||||
| Exhibit 32.2 | |||||||||||
| Exhibit 101 | The following information from our Quarterly Report on Form 10-Q for the first quarter of fiscal 2021, filed with the SEC on April 30, 2021, formatted in Inline Extensible Business Reporting Language (XBRL): (i) the Cover Page, (ii) the Condensed Consolidated Statements of Income – Three Months Ended March 31, 2021 and 2020, (iii) the Condensed Consolidated Statements of Comprehensive Income – Three Months Ended March 31, 2021 and 2020, (iv) the Condensed Consolidated Balance Sheets – March 31, 2021 and December 31, 2020, (v) the Condensed Consolidated Statements of Changes in Equity – Three Months Ended March 31, 2021 and 2020, (vi) the Condensed Consolidated Statements of Cash Flows - Three Months Ended March 31, 2021 and 2020 and (vii) the Notes to Condensed Consolidated Financial Statements. | ||||||||||
| Exhibit 104 | Cover Page Interactive Data File (embedded within the Inline XBRL document). | ||||||||||
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| AptarGroup, Inc. | ||||||||
| (Registrant) | ||||||||
| By | /s/ ROBERT W. KUHN | |||||||
| Robert W. Kuhn | ||||||||
| Executive Vice President and Chief Financial Officer | ||||||||
| (Duly Authorized Officer and | ||||||||
| Principal Accounting and Financial Officer) | ||||||||
| Date: April 30, 2021 | ||||||||
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