APTARGROUP, INC. - Quarter Report: 2023 September (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 SEPTEMBER 30, 2023
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 301, 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 October 20, 2023, was 65,781,269 shares.
AptarGroup, Inc.
Form 10-Q
Quarter Ended September 30, 2023
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 September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Net Sales | $ | 892,997 | $ | 836,860 | $ | 2,648,970 | $ | 2,526,335 | |||||||||||||||
| Operating Expenses: | |||||||||||||||||||||||
| Cost of sales (exclusive of depreciation and amortization shown below) | 566,691 | 546,376 | 1,697,824 | 1,638,114 | |||||||||||||||||||
| Selling, research & development and administrative | 138,137 | 135,428 | 427,488 | 416,351 | |||||||||||||||||||
| Depreciation and amortization | 62,686 | 57,601 | 184,212 | 174,818 | |||||||||||||||||||
| Restructuring initiatives | 6,161 | 2,270 | 19,628 | 2,989 | |||||||||||||||||||
| Total Operating Expenses | 773,675 | 741,675 | 2,329,152 | 2,232,272 | |||||||||||||||||||
| Operating Income | 119,322 | 95,185 | 319,818 | 294,063 | |||||||||||||||||||
| Other (Expense) Income: | |||||||||||||||||||||||
| Interest expense | (9,984) | (9,756) | (29,900) | (30,668) | |||||||||||||||||||
| Interest income | 946 | 752 | 2,266 | 2,029 | |||||||||||||||||||
| Net investment (loss) gain | (1,240) | 649 | 1,839 | (1,084) | |||||||||||||||||||
| Equity in results of affiliates | 1,002 | 178 | 1,514 | (184) | |||||||||||||||||||
Miscellaneous income (expense), net | 3 | (2,093) | (1,341) | (3,144) | |||||||||||||||||||
| Total Other Expense | (9,273) | (10,270) | (25,622) | (33,051) | |||||||||||||||||||
| Income before Income Taxes | 110,049 | 84,915 | 294,196 | 261,012 | |||||||||||||||||||
| Provision for Income Taxes | 25,751 | 30,738 | 72,265 | 80,851 | |||||||||||||||||||
| Net Income | $ | 84,298 | $ | 54,177 | $ | 221,931 | $ | 180,161 | |||||||||||||||
| Net (Gain) Loss Attributable to Noncontrolling Interests | $ | (2) | $ | 67 | $ | 201 | $ | 131 | |||||||||||||||
| Net Income Attributable to AptarGroup, Inc. | $ | 84,296 | $ | 54,244 | $ | 222,132 | $ | 180,292 | |||||||||||||||
| Net Income Attributable to AptarGroup, Inc. per Common Share: | |||||||||||||||||||||||
| Basic | $ | 1.28 | $ | 0.83 | $ | 3.39 | $ | 2.75 | |||||||||||||||
| Diluted | $ | 1.26 | $ | 0.81 | $ | 3.32 | $ | 2.70 | |||||||||||||||
| Average Number of Shares Outstanding: | |||||||||||||||||||||||
| Basic | 65,707 | 65,322 | 65,550 | 65,446 | |||||||||||||||||||
| Diluted | 67,035 | 66,581 | 66,865 | 66,825 | |||||||||||||||||||
| Dividends per Common Share | $ | 0.41 | $ | 0.38 | $ | 1.17 | $ | 1.14 | |||||||||||||||
See accompanying unaudited Notes to Condensed Consolidated Financial Statements.
1
AptarGroup, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
| In thousands | |||||||||||||||||||||||
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Net Income | $ | 84,298 | $ | 54,177 | $ | 221,931 | $ | 180,161 | |||||||||||||||
| Other Comprehensive Income (Loss): | |||||||||||||||||||||||
| Foreign currency translation adjustments | (52,514) | (92,164) | (28,639) | (184,051) | |||||||||||||||||||
| Changes in derivative gains (losses), net of tax | 2,707 | 3,542 | (2,424) | 3,663 | |||||||||||||||||||
| Defined benefit pension plan, net of tax | |||||||||||||||||||||||
| Actuarial (loss) gain, net of tax | (5) | 31 | 63 | (719) | |||||||||||||||||||
| Amortization of prior service cost included in net income, net of tax | 33 | 25 | 98 | 78 | |||||||||||||||||||
| Amortization of net loss included in net income, net of tax | 161 | 1,551 | 483 | 4,703 | |||||||||||||||||||
| Total defined benefit pension plan, net of tax | 189 | 1,607 | 644 | 4,062 | |||||||||||||||||||
| Total other comprehensive loss | (49,618) | (87,015) | (30,419) | (176,326) | |||||||||||||||||||
| Comprehensive Income (Loss) | 34,680 | (32,838) | 191,512 | 3,835 | |||||||||||||||||||
| Comprehensive Loss Attributable to Noncontrolling Interests | 88 | 910 | 319 | 1,750 | |||||||||||||||||||
| Comprehensive Income (Loss) Attributable to AptarGroup, Inc. | $ | 34,768 | $ | (31,928) | $ | 191,831 | $ | 5,585 | |||||||||||||||
See accompanying unaudited Notes to Condensed Consolidated Financial Statements.
2
AptarGroup, Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
| In thousands | |||||||||||
| September 30, 2023 | December 31, 2022 | ||||||||||
| Assets | |||||||||||
| Cash and equivalents | $ | 151,573 | $ | 141,732 | |||||||
Accounts and notes receivable, less current expected credit loss ("CECL") of $12,209 in 2023 and $9,519 in 2022 | 717,484 | 676,987 | |||||||||
| Inventories | 490,872 | 486,806 | |||||||||
| Prepaid and other | 142,829 | 124,766 | |||||||||
| Total Current Assets | 1,502,758 | 1,430,291 | |||||||||
| Land | 29,421 | 30,197 | |||||||||
| Buildings and improvements | 718,242 | 693,542 | |||||||||
| Machinery and equipment | 3,022,026 | 2,925,517 | |||||||||
| Property, Plant and Equipment, Gross | 3,769,689 | 3,649,256 | |||||||||
| Less: Accumulated depreciation | (2,381,041) | (2,305,592) | |||||||||
| Property, Plant and Equipment, Net | 1,388,648 | 1,343,664 | |||||||||
| Investments in equity securities | 48,022 | 52,308 | |||||||||
| Goodwill | 943,037 | 945,632 | |||||||||
| Intangible assets, net | 287,231 | 315,744 | |||||||||
| Operating lease right-of-use assets | 53,510 | 58,675 | |||||||||
| Miscellaneous | 75,018 | 57,144 | |||||||||
| Total Other Assets | 1,406,818 | 1,429,503 | |||||||||
| Total Assets | $ | 4,298,224 | $ | 4,203,458 | |||||||
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 | |||||||||||
| September 30, 2023 | December 31, 2022 | ||||||||||
| Liabilities and Stockholders’ Equity | |||||||||||
| Current Liabilities: | |||||||||||
| Notes payable, revolving credit facility and overdrafts | $ | 124,503 | $ | 3,810 | |||||||
| Current maturities of long-term obligations, net of unamortized debt issuance costs | 366,378 | 118,981 | |||||||||
| Accounts payable, accrued and other liabilities | 740,759 | 794,385 | |||||||||
| Total Current Liabilities | 1,231,640 | 917,176 | |||||||||
| Long-Term Obligations, net of unamortized debt issuance costs | 680,065 | 1,052,597 | |||||||||
| Deferred income taxes | 17,448 | 20,563 | |||||||||
| Retirement and deferred compensation plans | 57,433 | 48,977 | |||||||||
| Operating lease liabilities | 39,697 | 42,948 | |||||||||
| Deferred and other non-current liabilities | 58,252 | 52,993 | |||||||||
| Commitments and contingencies | — | — | |||||||||
| Total Deferred Liabilities and Other | 172,830 | 165,481 | |||||||||
| AptarGroup, Inc. stockholders’ equity | |||||||||||
Common stock, $.01 par value, 199 million shares authorized, 71.5 million and 70.9 million shares issued as of September 30, 2023 and December 31, 2022, respectively | 715 | 709 | |||||||||
| Capital in excess of par value | 1,028,663 | 968,618 | |||||||||
| Retained earnings | 2,074,434 | 1,929,240 | |||||||||
| Accumulated other comprehensive loss | (371,440) | (341,366) | |||||||||
Less: Treasury stock at cost, 5.7 million and 5.6 million shares as of September 30, 2023 and December 31, 2022, respectively | (532,633) | (503,266) | |||||||||
| Total AptarGroup, Inc. Stockholders’ Equity | 2,199,739 | 2,053,935 | |||||||||
| Noncontrolling interests in subsidiaries | 13,950 | 14,269 | |||||||||
| Total Stockholders’ Equity | 2,213,689 | 2,068,204 | |||||||||
| Total Liabilities and Stockholders’ Equity | $ | 4,298,224 | $ | 4,203,458 | |||||||
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 | ||||||||||||||||||||||||||||||||||||||||
| September 30, 2023 and 2022 | 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 - June 30, 2022 | $ | 1,865,634 | $ | (404,576) | $ | 706 | $ | (467,550) | $ | 939,897 | $ | 14,353 | $ | 1,948,464 | |||||||||||||||||||||||||||
| Net income (loss) | 54,244 | — | — | — | — | (67) | 54,177 | ||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustments | — | (91,321) | — | — | — | (843) | (92,164) | ||||||||||||||||||||||||||||||||||
| Changes in unrecognized pension gains and related amortization, net of tax | — | 1,607 | — | — | — | — | 1,607 | ||||||||||||||||||||||||||||||||||
| Changes in derivative gains, net of tax | — | 3,542 | — | — | — | — | 3,542 | ||||||||||||||||||||||||||||||||||
| Stock awards and option exercises | — | — | 1 | 1,988 | 14,580 | — | 16,569 | ||||||||||||||||||||||||||||||||||
| Cash dividends declared on common stock | (24,829) | — | — | — | — | — | (24,829) | ||||||||||||||||||||||||||||||||||
| Treasury stock purchased | — | — | — | (19,241) | — | — | (19,241) | ||||||||||||||||||||||||||||||||||
| Balance - September 30, 2022 | $ | 1,895,049 | $ | (490,748) | $ | 707 | $ | (484,803) | $ | 954,477 | $ | 13,443 | $ | 1,888,125 | |||||||||||||||||||||||||||
| Balance - June 30, 2023 | $ | 2,017,065 | $ | (321,913) | $ | 713 | $ | (526,484) | $ | 1,005,007 | $ | 14,038 | $ | 2,188,426 | |||||||||||||||||||||||||||
| Net income (loss) | 84,296 | — | — | — | — | 2 | 84,298 | ||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustments | (1) | (52,423) | — | — | — | (90) | (52,514) | ||||||||||||||||||||||||||||||||||
| Changes in unrecognized pension gains and related amortization, net of tax | — | 189 | — | — | — | — | 189 | ||||||||||||||||||||||||||||||||||
| Changes in derivative gains, net of tax | — | 2,707 | — | — | — | — | 2,707 | ||||||||||||||||||||||||||||||||||
| Stock awards and option exercises | — | — | 2 | 2,114 | 23,656 | — | 25,772 | ||||||||||||||||||||||||||||||||||
| Cash dividends declared on common stock | (26,926) | — | — | — | — | — | (26,926) | ||||||||||||||||||||||||||||||||||
| Treasury stock purchased | — | — | — | (8,263) | — | — | (8,263) | ||||||||||||||||||||||||||||||||||
| Balance - September 30, 2023 | $ | 2,074,434 | $ | (371,440) | $ | 715 | $ | (532,633) | $ | 1,028,663 | $ | 13,950 | $ | 2,213,689 | |||||||||||||||||||||||||||
5
| In thousands | |||||||||||||||||||||||||||||||||||||||||
| Nine Months Ended | AptarGroup, Inc. Stockholders’ Equity | ||||||||||||||||||||||||||||||||||||||||
| September 30, 2023 and 2022 | 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, 2021 | $ | 1,789,413 | $ | (316,041) | $ | 704 | $ | (421,203) | $ | 916,534 | $ | 15,193 | $ | 1,984,600 | |||||||||||||||||||||||||||
| Net income (loss) | 180,292 | — | — | — | — | (131) | 180,161 | ||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustments | — | (182,432) | — | — | — | (1,619) | (184,051) | ||||||||||||||||||||||||||||||||||
| Changes in unrecognized pension gains (losses) and related amortization, net of tax | — | 4,062 | — | — | — | — | 4,062 | ||||||||||||||||||||||||||||||||||
| Changes in derivative gains (losses), net of tax | — | 3,663 | — | — | — | — | 3,663 | ||||||||||||||||||||||||||||||||||
| Stock awards and option exercises | — | — | 3 | 8,729 | 37,943 | — | 46,675 | ||||||||||||||||||||||||||||||||||
| Cash dividends declared on common stock | (74,656) | — | — | — | — | — | (74,656) | ||||||||||||||||||||||||||||||||||
| Treasury stock purchased | — | — | — | (72,329) | — | — | (72,329) | ||||||||||||||||||||||||||||||||||
| Balance - September 30, 2022 | $ | 1,895,049 | $ | (490,748) | $ | 707 | $ | (484,803) | $ | 954,477 | $ | 13,443 | $ | 1,888,125 | |||||||||||||||||||||||||||
Balance - December 31, 2022 | $ | 1,929,240 | $ | (341,366) | $ | 709 | $ | (503,266) | $ | 968,618 | $ | 14,269 | $ | 2,068,204 | |||||||||||||||||||||||||||
| Net income (loss) | 222,132 | — | — | — | — | (201) | 221,931 | ||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustments | (227) | (28,294) | — | — | — | (118) | (28,639) | ||||||||||||||||||||||||||||||||||
| Changes in unrecognized pension gains (losses) and related amortization, net of tax | — | 644 | — | — | — | — | 644 | ||||||||||||||||||||||||||||||||||
| Changes in derivative gains (losses), net of tax | — | (2,424) | — | — | — | — | (2,424) | ||||||||||||||||||||||||||||||||||
| Stock awards and option exercises | — | — | 6 | 7,935 | 60,045 | — | 67,986 | ||||||||||||||||||||||||||||||||||
| Cash dividends declared on common stock | (76,711) | — | — | — | — | — | (76,711) | ||||||||||||||||||||||||||||||||||
| Treasury stock purchased | — | — | — | (37,302) | — | — | (37,302) | ||||||||||||||||||||||||||||||||||
| Balance - September 30, 2023 | $ | 2,074,434 | $ | (371,440) | $ | 715 | $ | (532,633) | $ | 1,028,663 | $ | 13,950 | $ | 2,213,689 | |||||||||||||||||||||||||||
See accompanying unaudited Notes to Condensed Consolidated Financial Statements.
6
AptarGroup, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| In thousands, brackets denote cash outflows | |||||||||||
| Nine Months Ended September 30, | 2023 | 2022 | |||||||||
| Cash Flows from Operating Activities: | |||||||||||
| Net income | $ | 221,931 | $ | 180,161 | |||||||
| Adjustments to reconcile net income to net cash provided by operations: | |||||||||||
| Depreciation | 150,718 | 142,046 | |||||||||
| Amortization | 33,494 | 32,772 | |||||||||
| Stock-based compensation | 36,084 | 31,941 | |||||||||
| Provision for CECL | 3,449 | 3,344 | |||||||||
| (Gain) loss on disposition of fixed assets | (3,753) | 315 | |||||||||
| Net (gain) loss on remeasurement of equity securities | (1,839) | 1,084 | |||||||||
| Deferred income taxes | (16,978) | (9,506) | |||||||||
| Defined benefit plan expense | 10,659 | 18,367 | |||||||||
| Equity in results of affiliates | (1,514) | 184 | |||||||||
| Change in fair value of contingent consideration | — | (2,265) | |||||||||
| Changes in balance sheet items, excluding effects from foreign currency adjustments: | |||||||||||
| Accounts and other receivables | (43,061) | (76,921) | |||||||||
| Inventories | (5,188) | (62,139) | |||||||||
| Prepaid and other current assets | (19,236) | (9,903) | |||||||||
| Accounts payable, accrued and other liabilities | 3,860 | 62,053 | |||||||||
| Income taxes payable | (8,732) | 15,470 | |||||||||
| Retirement and deferred compensation plan liabilities | 1,323 | (15,432) | |||||||||
| Other changes, net | (5,615) | (5,222) | |||||||||
| Net Cash Provided by Operations | 355,602 | 306,349 | |||||||||
| Cash Flows from Investing Activities: | |||||||||||
| Capital expenditures | (231,199) | (226,131) | |||||||||
| Proceeds from government grants | — | 17,058 | |||||||||
| Proceeds from sale of property, plant and equipment | 6,037 | 778 | |||||||||
| Maturity of short-term investment | — | 740 | |||||||||
| Acquisition of businesses, net of cash acquired and release of escrow | (16,570) | (4,100) | |||||||||
| Acquisition of intangible assets, net | (3,648) | (5,189) | |||||||||
| Proceeds from sale of investment in equity securities | 5,604 | 1,599 | |||||||||
| Notes receivable, net | 439 | (7,155) | |||||||||
| Net Cash Used by Investing Activities | (239,337) | (222,400) | |||||||||
| Cash Flows from Financing Activities: | |||||||||||
| Proceeds from notes payable and overdrafts | 24,392 | 35,058 | |||||||||
| Repayments of notes payable and overdrafts | (27,863) | (33,417) | |||||||||
| Proceeds and (repayments) of short term revolving credit facility, net | 123,514 | (93,468) | |||||||||
| Proceeds from long-term obligations | 257 | 406,550 | |||||||||
| Repayments of long-term obligations | (117,289) | (262,245) | |||||||||
| Debt issuance costs | — | (4,009) | |||||||||
| Payment of contingent consideration obligation | (22,750) | — | |||||||||
| Dividends paid | (76,711) | (74,656) | |||||||||
| Proceeds from stock option exercises | 39,742 | 18,411 | |||||||||
| Purchase of treasury stock | (37,302) | (72,329) | |||||||||
| Net Cash Used by Financing Activities | (94,010) | (80,105) | |||||||||
| Effect of Exchange Rate Changes on Cash | (12,914) | (957) | |||||||||
| Net Increase in Cash and Equivalents and Restricted Cash | 9,341 | 2,887 | |||||||||
| Cash and Equivalents and Restricted Cash at Beginning of Period | 142,732 | 122,925 | |||||||||
| Cash and Equivalents and Restricted Cash at End of Period | $ | 152,073 | $ | 125,812 | |||||||
7
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 Metaphase acquisition.
| Nine Months Ended September 30, | 2023 | 2022 | |||||||||
| Cash and equivalents | $ | 151,573 | $ | 124,812 | |||||||
| Restricted cash included in prepaid and other | 500 | 1,000 | |||||||||
| Total Cash and Equivalents and Restricted Cash shown in the Statement of Cash Flows | $ | 152,073 | $ | 125,812 | |||||||
See accompanying unaudited Notes to Condensed Consolidated Financial Statements.
8
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, 2022 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, 2022. The results of operations of any interim period are not necessarily indicative of the results that may be expected for the year.
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.
In September 2022, the FASB issued ASU 2022-04, Liabilities-Supplier Finance Programs (Topic 405), which enhances the transparency of supplier finance programs and requires certain disclosures for a buyer in a supplier finance program. The requirements are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, except for the amendment on roll forward information, which is effective for fiscal years beginning after December 13, 2023. Early adoption is permitted. We adopted this guidance in the fourth quarter of 2022.
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 could 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. We adopted this guidance in the second quarter of 2023 and have transitioned away from LIBOR to SOFR in our revolving credit facility.
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 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 with the following exceptions: all earnings in Germany, the pre-2023 earnings in Suzhou, China and the pre-2020 earnings in Italy, Switzerland and Colombia. The change in the Suzhou, China assertion was made in the current quarter. Under current U.S. tax laws, all of our non-U.S. earnings are subject to U.S. taxation on a current or deferred basis. 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 our global cash management goals.
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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 government bodies. We believe that we have adequately provided a tax reserve for any adjustments that may result from tax examinations or uncertain tax positions. 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 our 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.
ASSETS HELD FOR SALE
Assets to be disposed of by sale are reported at the lower of their carrying amount or fair value less costs to sell, and are not depreciated while they are held for sale. During the second quarter of 2023, we recorded $0.7 million as assets held for sale within prepaid and other on our Condensed Consolidated Balance Sheets related to three buildings located in France. During the third quarter of 2023, two of the three buildings were sold and we recognized a $0.8 million gain on sale.
SUPPLY CHAIN FINANCE PROGRAM
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. Under these agreements, the average payment terms range from 60 to 120 days and are based on industry standards and best practices within each of our regions.
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 September 30, 2023, the amounts due to suppliers participating in the SCF and included in accounts payable, accrued and other liabilities were approximately $37.3 million.
We have lengthened the payment terms with our suppliers to be in line with customer trends. While we have offered a third party alternative 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.
NOTE 2 – REVENUE
Segment financial information for the prior periods has been recast to conform to the current presentation. Refer to Note 16 - Segment Information. Revenue by segment and geography based on shipped from locations for the three and nine months ended September 30, 2023 and 2022 was as follows:
| For the Three Months Ended September 30, 2023 | |||||||||||||||||||||||||||||
| Segment | Europe | Domestic | Latin America | Asia | Total | ||||||||||||||||||||||||
| Aptar Pharma | $ | 252,174 | $ | 106,804 | $ | 11,118 | $ | 19,092 | $ | 389,188 | |||||||||||||||||||
| Aptar Beauty | 203,599 | 58,181 | 39,963 | 22,237 | 323,980 | ||||||||||||||||||||||||
| Aptar Closures | 53,431 | 89,795 | 21,956 | 14,647 | 179,829 | ||||||||||||||||||||||||
| Total | $ | 509,204 | $ | 254,780 | $ | 73,037 | $ | 55,976 | $ | 892,997 | |||||||||||||||||||
| For the Three Months Ended September 30, 2022 | |||||||||||||||||||||||||||||
| Segment | Europe | Domestic | Latin America | Asia | Total | ||||||||||||||||||||||||
| Aptar Pharma | $ | 212,751 | $ | 105,542 | $ | 6,309 | $ | 18,795 | $ | 343,397 | |||||||||||||||||||
| Aptar Beauty | 169,936 | 75,070 | 35,195 | 22,845 | 303,046 | ||||||||||||||||||||||||
| Aptar Closures | 54,146 | 99,198 | 21,777 | 15,296 | 190,417 | ||||||||||||||||||||||||
| Total | $ | 436,833 | $ | 279,810 | $ | 63,281 | $ | 56,936 | $ | 836,860 | |||||||||||||||||||
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| For the Nine Months Ended September 30, 2023 | |||||||||||||||||||||||||||||
| Segment | Europe | Domestic | Latin America | Asia | Total | ||||||||||||||||||||||||
| Aptar Pharma | $ | 733,749 | $ | 309,946 | $ | 30,699 | $ | 61,540 | $ | 1,135,934 | |||||||||||||||||||
| Aptar Beauty | 629,168 | 175,942 | 113,282 | 61,564 | 979,956 | ||||||||||||||||||||||||
| Aptar Closures | 167,836 | 261,903 | 63,128 | 40,213 | 533,080 | ||||||||||||||||||||||||
| Total | $ | 1,530,753 | $ | 747,791 | $ | 207,109 | $ | 163,317 | $ | 2,648,970 | |||||||||||||||||||
| For the Nine Months Ended September 30, 2022 | |||||||||||||||||||||||||||||
| Segment | Europe | Domestic | Latin America | Asia | Total | ||||||||||||||||||||||||
| Aptar Pharma | $ | 632,876 | $ | 320,297 | $ | 20,503 | $ | 52,414 | $ | 1,026,090 | |||||||||||||||||||
| Aptar Beauty | 540,629 | 224,269 | 97,337 | 67,558 | 929,793 | ||||||||||||||||||||||||
| Aptar Closures | 163,424 | 304,051 | 62,327 | 40,650 | 570,452 | ||||||||||||||||||||||||
| Total | $ | 1,336,929 | $ | 848,617 | $ | 180,167 | $ | 160,622 | $ | 2,526,335 | |||||||||||||||||||
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 invoicing for 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 were as follows:
| Balance as of December 31, 2022 | Balance as of September 30, 2023 | Increase/ (Decrease) | |||||||||||||||
| Contract asset (current) | $ | 16,736 | $ | 19,768 | $ | 3,032 | |||||||||||
| Contract liability (current) | 80,241 | 73,282 | (6,959) | ||||||||||||||
| Contract liability (long-term) | 25,361 | 32,818 | 7,457 | ||||||||||||||
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 invoicing. The total amount of revenue recognized during the current year against contract liabilities is $106.0 million, including $59.4 million relating to contract liabilities at the beginning of the year. Current 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 and consumer product dosing, dispensing and protection technologies. The amount of consideration is typically fixed for customers. At the time of delivery, the customer is invoiced at the agreed-upon price. Revenue from product sales is typically recognized upon manufacture or shipment, when control of the goods transfers to the customer.
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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. For a majority of product sales, 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. For sales in which control transfers upon delivery, 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.
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 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. We do not have any material extended warranties as of September 30, 2023 or December 31, 2022.
Service Sales
We also provide services to our customers. As with product sales, we recognize revenue based on completion of each performance obligation of the service contract. Milestone deliverables and upfront payments are tied to specific performance obligations and recognized upon satisfaction of the individual performance obligation.
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.
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NOTE 3 - INVENTORIES
Inventories, by component net of reserves, consisted of:
| September 30, 2023 | December 31, 2022 | ||||||||||
| Raw materials | $ | 145,742 | $ | 159,041 | |||||||
| Work in process | 173,453 | 153,592 | |||||||||
| Finished goods | 171,677 | 174,173 | |||||||||
| Total | $ | 490,872 | $ | 486,806 | |||||||
NOTE 4 – GOODWILL AND OTHER INTANGIBLE ASSETS
The changes in the carrying amount of goodwill for the nine months ended September 30, 2023 by reporting segment were as follows:
| Aptar Pharma | Aptar Beauty | Aptar Closures | Total | ||||||||||||||||||||
| Balance as of December 31, 2022 | $ | 498,742 | $ | 319,011 | $ | 127,879 | $ | 945,632 | |||||||||||||||
| Reclassification due to segment change | — | (39,472) | 39,472 | — | |||||||||||||||||||
| Acquisitions | — | 3,655 | 114 | 3,769 | |||||||||||||||||||
| Foreign currency exchange effects | (5,191) | (1,025) | (148) | (6,364) | |||||||||||||||||||
| Balance as of September 30, 2023 | $ | 493,551 | $ | 282,169 | $ | 167,317 | $ | 943,037 | |||||||||||||||
The table below shows a summary of intangible assets as of September 30, 2023 and December 31, 2022.
| September 30, 2023 | December 31, 2022 | ||||||||||||||||||||||||||||||||||||||||
| Weighted Average Amortization Period (Years) | Gross Carrying Amount | Accumulated Amortization | Net Value | Gross Carrying Amount | Accumulated Amortization | Net Value | |||||||||||||||||||||||||||||||||||
| Amortized intangible assets: | |||||||||||||||||||||||||||||||||||||||||
| Patents | 9.8 | $ | 7,181 | $ | (1,617) | $ | 5,564 | $ | 8,044 | $ | (1,968) | $ | 6,076 | ||||||||||||||||||||||||||||
| Acquired technology | 11.4 | 136,860 | (65,378) | 71,482 | 135,191 | (56,628) | 78,563 | ||||||||||||||||||||||||||||||||||
| Customer relationships | 13.5 | 304,726 | (116,570) | 188,156 | 305,994 | (99,130) | 206,864 | ||||||||||||||||||||||||||||||||||
| Trademarks and trade names | 7.5 | 44,140 | (32,555) | 11,585 | 43,998 | (28,190) | 15,808 | ||||||||||||||||||||||||||||||||||
| License agreements and other | 31.4 | 16,910 | (6,466) | 10,444 | 15,425 | (6,992) | 8,433 | ||||||||||||||||||||||||||||||||||
| Total intangible assets | 13.3 | $ | 509,817 | $ | (222,586) | $ | 287,231 | $ | 508,652 | $ | (192,908) | $ | 315,744 | ||||||||||||||||||||||||||||
Aggregate amortization expense for the intangible assets above for the quarters ended September 30, 2023 and 2022 was $11,400 and $10,678, respectively. Aggregate amortization expense for the intangible assets above for the nine months ended September 30, 2023 and 2022 was $33,494 and $32,772, respectively.
As of September 30, 2023, future estimated amortization expense for the years ending December 31 is as follows:
| 2023 | $ | 11,473 | (remaining estimated amortization for 2023) | ||||||||
| 2024 | 41,267 | ||||||||||
| 2025 | 39,565 | ||||||||||
| 2026 | 37,287 | ||||||||||
| 2027 | 26,026 | ||||||||||
| Thereafter | 131,613 | ||||||||||
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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 September 30, 2023.
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 September 30, 2023 and 2022, respectively, was 23.4% and 36.2%. The effective tax rate for the nine months ended September 30, 2023 and 2022, respectively, was 24.6% and 31.0%. The effective tax rate for the three months ended September 30, 2023 reflects additional tax benefits from employee stock-based compensation and a benefit related to a change in the U.S. tax regulations issued during the quarter related to foreign tax credits. The effective tax rate for the three months ended September 30, 2022 reflects an out-of-period charge of $7.2 million for taxes related to a legal entity reorganization to enhance our dividend and cash management capabilities. The tax charge had an 8.5% impact on the effective tax rate for the three months ended September 30, 2022. The lower reported effective tax rate for the nine months ended September 30, 2023 reflects additional tax benefits from employee stock-based compensation, the refining of certain U.S. tax filing positions and a change in the U.S. tax regulations pertaining to foreign tax credits. As mentioned above, the tax rate for the nine months ended September 30, 2022, reflects an out-of-period charge for $7.2 million and had a 2.8% impact on the effective tax rate.
NOTE 6 – DEBT
Notes Payable, Revolving Credit Facility and Overdrafts
At September 30, 2023 and December 31, 2022, our notes payable, revolving credit facility and overdrafts consisted of the following:
| September 30, 2023 | December 31, 2022 | ||||||||||
Revolving credit facility 4.73% to 6.18% | $ | 123,790 | $ | — | |||||||
Overdrafts 4.64% to 4.71% | 713 | 3,810 | |||||||||
| $ | 124,503 | $ | 3,810 | ||||||||
On June 30, 2021, we entered into an amended and restated multi-currency revolving credit facility (the "revolving credit facility") with a syndicate of banks to replace the then-existing facility maturing July 2022 (the "prior credit facility") and to amend and restate the unsecured term loan facility extended to our wholly-owned UK subsidiary under the prior credit facility (as amended, the "amended term facility"). The revolving credit facility matures in June 2026, subject to a maximum of two one-year extensions in certain circumstances, and provides for unsecured financing of up to $600 million available in the U.S. and to our wholly-owned UK subsidiary. The amended term facility matured in July 2022 and was repaid in full. The revolving credit facility can be drawn in various currencies including USD, EUR, GBP, and CHF to the equivalent of $600 million, which may be increased by up to $300 million subject to the satisfaction of certain conditions. As of September 30, 2023, $44.5 million and €75.0 million ($79.3 million) was utilized under the revolving credit facility in the U.S. and no balance was utilized by our wholly-owned UK subsidiary. As of December 31, 2022, no balance was utilized under the revolving credit facility in the U.S. and no balance was utilized by our wholly-owned UK subsidiary.
There are no compensating balance requirements associated with our revolving credit facility. Each borrowing under the revolving credit facility will bear interest at rates based on SOFR (in the case of USD), EURIBOR (in the case of EUR), SONIA (in the case of GBP), SARON (in the case of CHF), prime rates or other similar rates, in each case plus an applicable margin. In May 2023 the revolving credit facility was amended to make SOFR the default borrowing rate for USD. The revolving credit facility also provides mechanics relating to a transition away from designated benchmark rates for other available currencies and the replacement of any such applicable benchmark by a replacement alternative benchmark rate or mechanism for loans made in the applicable currency. A facility fee on the total amount of the revolving credit facility is also payable quarterly, regardless of usage. The applicable margins for borrowings under the revolving 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 September 30, 2023 or December 31, 2022.
Long-Term Obligations
On July 19, 2023, we repaid in full the €100 million 0.98% Senior Notes that were due July 2023.
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On March 7, 2022, we issued $400 million aggregate principal amount of 3.60% Senior Notes due March 2032 in an underwritten public offering. The form and terms of the notes were established pursuant to an Indenture, dated as of March 7, 2022, as amended and supplemented by a First Supplemental Indenture, dated as of March 7, 2022, each between the Company and U.S. Bank Trust Company, National Association, as trustee. Interest is payable semi-annually in arrears. The notes are unsecured obligations and rank equally in right of payment with all of our other existing and future senior, unsecured indebtedness.
At September 30, 2023 and December 31, 2022, our long-term obligations consisted of the following:
| September 30, 2023 | December 31, 2022 | ||||||||||
Notes payable 0.00% – 2.25%, due in monthly and annual installments through 2031 | $ | 15,005 | $ | 29,167 | |||||||
Senior unsecured notes 1.0%, due in 2023 | — | 106,995 | |||||||||
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 | 211,440 | 213,990 | |||||||||
Senior unsecured notes 3.6%, due in 2025 | 125,000 | 125,000 | |||||||||
Senior unsecured notes 3.6%, due in 2026 | 125,000 | 125,000 | |||||||||
Senior unsecured notes 3.6%, due in 2032, net of discount of $0.9 million | 399,128 | 399,050 | |||||||||
| Finance Lease Liabilities | 24,867 | 26,934 | |||||||||
| Unamortized debt issuance costs | (3,997) | (4,558) | |||||||||
| $ | 1,046,443 | $ | 1,171,578 | ||||||||
| Current maturities of long-term obligations | (366,378) | (118,981) | |||||||||
| Total long-term obligations | $ | 680,065 | $ | 1,052,597 | |||||||
The aggregate long-term maturities, excluding finance lease liabilities and unamortized debt issuance costs, which are discussed in Note 7, due annually from the current balance sheet date for the next five years and thereafter are:
| Year One | $ | 363,408 | |||
| Year Two | 6,368 | ||||
| Year Three | 256,200 | ||||
| Year Four | 315 | ||||
| Year Five | 72 | ||||
| Thereafter | 399,210 | ||||
Covenants
Our revolving credit facility and corporate long-term obligations require us to satisfy certain financial and other covenants including:
| Requirement | Level at September 30, 2023 | |||||||||||||
| Consolidated Leverage Ratio (1) | Maximum of 3.50 to 1.00 | 1.61 to 1.00 | ||||||||||||
| Consolidated Interest Coverage Ratio (1) | Minimum of 3.00 to 1.00 | 16.19 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 non-cancelable operating and finance leases expiring at various dates through the year 2037. 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.
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The components of lease expense for the three and nine months ended September 30, 2023 and 2022 were as follows:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Operating lease cost | $ | 5,150 | $ | 4,870 | $ | 15,841 | $ | 15,605 | |||||||||||||||
| Finance lease cost: | |||||||||||||||||||||||
| Amortization of right-of-use assets | $ | 908 | $ | 1,050 | $ | 2,686 | $ | 3,307 | |||||||||||||||
| Interest on lease liabilities | 289 | 307 | 883 | 947 | |||||||||||||||||||
| Total finance lease cost | $ | 1,197 | $ | 1,357 | $ | 3,569 | $ | 4,254 | |||||||||||||||
| Short-term lease and variable lease costs | $ | 5,774 | $ | 4,226 | $ | 15,883 | $ | 11,437 | |||||||||||||||
Supplemental cash flow information related to leases was as follows:
| Nine Months Ended September 30, | 2023 | 2022 | |||||||||
| Cash paid for amounts included in the measurement of lease liabilities: | |||||||||||
| Operating cash flows from operating leases | $ | 15,993 | $ | 15,001 | |||||||
| Operating cash flows from finance leases | 883 | 941 | |||||||||
| Financing cash flows from finance leases | 2,377 | 2,749 | |||||||||
| Right-of-use assets obtained in exchange for lease obligations: | |||||||||||
| Operating leases | $ | 7,764 | $ | 13,146 | |||||||
| Finance leases | 401 | 919 | |||||||||
NOTE 8 – RETIREMENT AND DEFERRED COMPENSATION PLANS
Effective January 1, 2021, our domestic noncontributory retirement plans were closed to new employees and employees who were rehired after December 31, 2020. These employees are instead 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 are still eligible for the domestic pension plans and continue to accrue plan benefits after this date.
Components of Net Periodic Benefit Cost:
| Domestic Plans | Foreign Plans | ||||||||||||||||||||||
| Three Months Ended September 30, | 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||
| Service cost | $ | 2,409 | $ | 3,948 | $ | 1,487 | $ | 1,775 | |||||||||||||||
| Interest cost | 2,158 | 1,742 | 915 | 330 | |||||||||||||||||||
| Expected return on plan assets | (3,094) | (3,228) | (589) | (653) | |||||||||||||||||||
| Amortization of net loss | — | 1,668 | 230 | 403 | |||||||||||||||||||
| Amortization of prior service cost | — | — | 45 | 35 | |||||||||||||||||||
| Net periodic benefit cost | $ | 1,473 | $ | 4,130 | $ | 2,088 | $ | 1,890 | |||||||||||||||
| Domestic Plans | Foreign Plans | ||||||||||||||||||||||
| Nine Months Ended September 30, | 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||
| Service cost | $ | 7,228 | $ | 11,838 | $ | 4,444 | $ | 5,621 | |||||||||||||||
| Interest cost | 6,473 | 5,227 | 2,735 | 1,045 | |||||||||||||||||||
| Expected return on plan assets | (9,283) | (9,684) | (1,758) | (2,069) | |||||||||||||||||||
| Amortization of net loss | — | 5,003 | 687 | 1,280 | |||||||||||||||||||
| Amortization of prior service cost | — | — | 133 | 106 | |||||||||||||||||||
| Net periodic benefit cost | $ | 4,418 | $ | 12,384 | $ | 6,241 | $ | 5,983 | |||||||||||||||
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The components of net periodic benefit cost, other than the service cost component, are included in the line miscellaneous income (expense), 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 contributions to our domestic defined benefit plans during the nine months ended September 30, 2023 and we do not expect significant payments during the rest of 2023. We contributed $1.0 million to our foreign defined benefit plans during the nine months ended September 30, 2023 and do not expect additional significant contributions during the rest of 2023.
NOTE 9 – ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME
Changes in Accumulated Other Comprehensive (Loss) Income by Component:
| Foreign Currency | Defined Benefit Pension Plans | Derivatives | Total | ||||||||||||||||||||
| Balance - December 31, 2021 | $ | (249,500) | $ | (66,486) | $ | (55) | $ | (316,041) | |||||||||||||||
| Other comprehensive (loss) income before reclassifications | (182,432) | (719) | 3,617 | (179,534) | |||||||||||||||||||
| Amounts reclassified from accumulated other comprehensive income (loss) | — | 4,781 | 46 | 4,827 | |||||||||||||||||||
| Net current-period other comprehensive (loss) income | (182,432) | 4,062 | 3,663 | (174,707) | |||||||||||||||||||
| Balance - September 30, 2022 | $ | (431,932) | $ | (62,424) | $ | 3,608 | $ | (490,748) | |||||||||||||||
| Balance - December 31, 2022 | $ | (328,740) | $ | (5,951) | $ | (6,675) | $ | (341,366) | |||||||||||||||
| Other comprehensive income (loss) before reclassifications | (28,294) | 63 | (2,424) | (30,655) | |||||||||||||||||||
| Amounts reclassified from accumulated other comprehensive income | — | 581 | — | 581 | |||||||||||||||||||
| Net current-period other comprehensive income (loss) | (28,294) | 644 | (2,424) | (30,074) | |||||||||||||||||||
| Balance - September 30, 2023 | $ | (357,034) | $ | (5,307) | $ | (9,099) | $ | (371,440) | |||||||||||||||
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 September 30, | 2023 | 2022 | |||||||||||||||
| Defined Benefit Pension Plans | |||||||||||||||||
| Amortization of net loss | $ | 230 | $ | 2,071 | (1) | ||||||||||||
| Amortization of prior service cost | 45 | 35 | (1) | ||||||||||||||
| 275 | 2,106 | Total before tax | |||||||||||||||
| (81) | (530) | Tax impact | |||||||||||||||
| $ | 194 | $ | 1,576 | Net of tax | |||||||||||||
| Derivatives | |||||||||||||||||
| Changes in cross currency swap: interest component | $ | — | $ | (33) | Interest Expense | ||||||||||||
| Changes in cross currency swap: foreign exchange component | — | 4,843 | Miscellaneous, net | ||||||||||||||
| $ | — | $ | 4,810 | Net of tax | |||||||||||||
| Total reclassifications for the period | $ | 194 | $ | 6,386 | |||||||||||||
17
| Details about Accumulated Other Comprehensive Income Components | Amount Reclassified from Accumulated Other Comprehensive Income | Affected Line in the Statement Where Net Income is Presented | |||||||||||||||
| Nine Months Ended September 30, | 2023 | 2022 | |||||||||||||||
| Defined Benefit Pension Plans | |||||||||||||||||
| Amortization of net loss | $ | 687 | $ | 6,283 | (1) | ||||||||||||
| Amortization of prior service cost | 133 | 106 | (1) | ||||||||||||||
| 820 | 6,389 | Total before tax | |||||||||||||||
| (239) | (1,608) | Tax impact | |||||||||||||||
| $ | 581 | $ | 4,781 | Net of tax | |||||||||||||
| Derivatives | |||||||||||||||||
| Changes in cross currency swap: interest component | $ | — | $ | (171) | Interest Expense | ||||||||||||
| Changes in cross currency swap: foreign exchange component | — | 217 | Miscellaneous, net | ||||||||||||||
| $ | — | $ | 46 | Net of tax | |||||||||||||
| Total reclassifications for the period | $ | 581 | $ | 4,827 | |||||||||||||
______________________________________________
(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.
Net Investment Hedge
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 has an additive effect. In some cases, we maintain debt in these subsidiaries to offset the net asset exposure. Conversely, a strengthening U.S. dollar relative to foreign currencies has a dilutive translation effect on our financial condition and results of operations. 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.
18
On July 6, 2022, we entered into a seven year USD/EUR fixed-to-fixed cross currency interest rate swap to effectively hedge the interest rate exposure relating to $203 million of the $400 million 3.60% Senior Notes due March 2032, which were issued by AptarGroup, Inc. on March 7, 2022. This USD/EUR swap agreement exchanged $203 million of fixed-rate 3.60% U.S. dollar debt to €200 million of fixed-rate 2.5224% euro debt. We pay semi-annual fixed rate interest payments on the euro notional amount of €2.5 million and receive semi-annual fixed rate interest payments on the USD notional amount of $3.7 million. This swap has been designated as a net investment hedge to effectively hedge the foreign exchange risk associated with €200 million of our euro denominated net assets. We elected the spot method for recording the net investment hedge. Gains and losses resulting from the settlement of the excluded components are recorded in interest expense in the Condensed Consolidated Statements of Income. Gains and losses resulting from the fair value adjustments to the cross currency swap agreements are recorded in accumulated other comprehensive (loss) income as the swaps are effective in hedging the designated risk. As of September 30, 2023, the fair value of the cross currency swap was a $12.0 million liability. The swap agreement will mature on September 15, 2029.
Other
As of September 30, 2023, we have recorded the fair value of foreign currency forward exchange contracts of $0.4 million in prepaid and other and $0.3 million in accounts payable, accrued and other liabilities on the Condensed Consolidated Balance Sheets. All forward exchange contracts outstanding as of September 30, 2023 had an aggregate notional contract amount of $51.1 million.
Fair Value of Derivative Instruments in the Condensed Consolidated Balance Sheets as of September 30, 2023 and December 31, 2022
| September 30, 2023 | December 31, 2022 | ||||||||||||||||||||||||||||
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 | $ | — | $ | 377 | $ | — | $ | 1,107 | ||||||||||||||||||||
| $ | — | $ | 377 | $ | — | $ | 1,107 | ||||||||||||||||||||||
| Derivative Liabilities | |||||||||||||||||||||||||||||
| Foreign Exchange Contracts | Accounts payable, accrued and other liabilities | $ | — | $ | 305 | $ | — | $ | 269 | ||||||||||||||||||||
| Cross Currency Swap Contract (1) | Accounts payable, accrued and other liabilities | 12,049 | — | 8,840 | — | ||||||||||||||||||||||||
| $ | 12,049 | $ | 305 | $ | 8,840 | $ | 269 | ||||||||||||||||||||||
__________________________
(1)This cross currency swap agreement is composed of both an interest component and a foreign exchange component.
The Effect of Derivatives Designated as Hedging Instruments on Accounting on Accumulated Other Comprehensive Income (Loss) for the Three Months Ended September 30, 2023 and 2022
| Derivatives Designated as Hedging Instruments | 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 | |||||||||||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||||||||||||||
| Cross currency swap agreement: | |||||||||||||||||||||||||||||||||||
| Interest component | $ | — | $ | (30) | Interest expense | $ | — | $ | 33 | $ | (9,984) | ||||||||||||||||||||||||
| Foreign exchange component | 2,707 | (1,238) | Miscellaneous, net | — | (4,843) | 3 | |||||||||||||||||||||||||||||
| $ | 2,707 | $ | (1,268) | $ | — | $ | (4,810) | ||||||||||||||||||||||||||||
19
The Effect of Derivatives Designated as Hedging Instruments on Accumulated Other Comprehensive Income (Loss) for the Nine Months Ended September 30, 2023 and 2022
| Derivatives Designated as Hedging Instruments | Amount of Gain Recognized in Other Comprehensive Income on Derivative | Location of Gain Recognized in Income on Derivatives | Amount of Gain Reclassified from Accumulated Other Comprehensive Income on Derivative | Total Amount of Affected Income Statement Line Item | |||||||||||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||||||||||||||
| Cross currency swap agreement: | |||||||||||||||||||||||||||||||||||
| Interest component | $ | — | $ | 229 | Interest expense | $ | — | $ | 171 | $ | (29,900) | ||||||||||||||||||||||||
| Foreign exchange component | (2,424) | 3,388 | Miscellaneous, net | — | (217) | (1,341) | |||||||||||||||||||||||||||||
| $ | (2,424) | $ | 3,617 | $ | — | $ | (46) | ||||||||||||||||||||||||||||
The Effect of Derivatives Not Designated as Hedging Instruments on the Condensed Consolidated Statements of Income for the Three Months Ended September 30, 2023 and 2022
| Derivatives Not Designated as Hedging Instruments | Location of (Loss) Gain Recognized in Income on Derivatives | Amount of (Loss) Gain Recognized in Income on Derivatives | |||||||||||||||
| 2023 | 2022 | ||||||||||||||||
| Foreign Exchange Contracts | Other (Expense) Income: Miscellaneous, net | $ | 44 | $ | (853) | ||||||||||||
| $ | 44 | $ | (853) | ||||||||||||||
The Effect of Derivatives Not Designated as Hedging Instruments on the Condensed Consolidated Statements of Income for the Nine Months Ended September 30, 2023 and 2022
| Derivatives Not Designated as Hedging Instruments | Location of Loss Recognized in Income on Derivatives | Amount of Loss Recognized in Income on Derivatives | |||||||||||||||
| 2023 | 2022 | ||||||||||||||||
| Foreign Exchange Contracts | Other (Expense) Income: Miscellaneous, net | $ | (756) | $ | (962) | ||||||||||||
| $ | (756) | $ | (962) | ||||||||||||||
20
| 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 | ||||||||||||||||||||||||||||||||
| September 30, 2023 | |||||||||||||||||||||||||||||||||||
| Derivative Assets | $ | 377 | — | $ | 377 | — | — | $ | 377 | ||||||||||||||||||||||||||
| Total Assets | $ | 377 | — | $ | 377 | — | — | $ | 377 | ||||||||||||||||||||||||||
| Derivative Liabilities | $ | 12,354 | — | $ | 12,354 | — | — | $ | 12,354 | ||||||||||||||||||||||||||
| Total Liabilities | $ | 12,354 | — | $ | 12,354 | — | — | $ | 12,354 | ||||||||||||||||||||||||||
| December 31, 2022 | |||||||||||||||||||||||||||||||||||
| Derivative Assets | $ | 1,107 | — | $ | 1,107 | — | — | $ | 1,107 | ||||||||||||||||||||||||||
| Total Assets | $ | 1,107 | — | $ | 1,107 | — | — | $ | 1,107 | ||||||||||||||||||||||||||
| Derivative Liabilities | $ | 9,109 | — | $ | 9,109 | — | — | $ | 9,109 | ||||||||||||||||||||||||||
| Total Liabilities | $ | 9,109 | — | $ | 9,109 | — | — | $ | 9,109 | ||||||||||||||||||||||||||
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.
As of September 30, 2023, 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) | $ | 1,532 | $ | 1,532 | $ | — | $ | — | |||||||||||||||
Foreign exchange contracts (2) | 377 | — | 377 | — | |||||||||||||||||||
| Convertible notes | 5,650 | — | — | 5,650 | |||||||||||||||||||
| Total assets at fair value | $ | 7,559 | $ | 1,532 | $ | 377 | $ | 5,650 | |||||||||||||||
| Liabilities | |||||||||||||||||||||||
Foreign exchange contracts (2) | $ | 305 | $ | — | $ | 305 | $ | — | |||||||||||||||
Cross currency swap contract (2) | 12,049 | — | 12,049 | — | |||||||||||||||||||
| Total liabilities at fair value | $ | 12,354 | $ | — | $ | 12,354 | $ | — | |||||||||||||||
21
As of December 31, 2022, 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) | $ | 5,297 | $ | 5,297 | $ | — | $ | — | |||||||||||||||
Foreign exchange contracts (2) | 1,107 | — | 1,107 | — | |||||||||||||||||||
| Convertible note | 5,650 | — | — | 5,650 | |||||||||||||||||||
| Total assets at fair value | $ | 12,054 | $ | 5,297 | $ | 1,107 | $ | 5,650 | |||||||||||||||
| Liabilities | |||||||||||||||||||||||
Foreign exchange contracts (2) | $ | 269 | $ | — | $ | 269 | $ | — | |||||||||||||||
Cross currency swap contract (2) | 8,840 | — | 8,840 | — | |||||||||||||||||||
| Contingent consideration obligation | 25,310 | — | — | 25,310 | |||||||||||||||||||
| Total liabilities at fair value | $ | 34,419 | $ | — | $ | 9,109 | $ | 25,310 | |||||||||||||||
________________________________________________
(1)Investment in PureCycle Technologies ("PCT" or "PureCycle"). See Note 18 – 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 instrument. We consider our long-term debt 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 $517.3 million as of September 30, 2023 and $868.7 million as of December 31, 2022.
During the first quarter of 2022, we invested $5.0 million in a convertible note in Enable Injections, Inc. This investment is recorded at fair value and is a Level 3 fair value measurement.
During the second quarter of 2022, we invested $1.0 million in a convertible note in Siklus Refill Pte. Ltd. ("Siklus"). During the fourth quarter of 2022, Siklus repaid $0.4 million of its convertible note. This investment is recorded at fair value and is a Level 3 fair value measurement.
As discussed in Note 12 – Fair Value of our Annual Report on Form 10-K for the year ended December 31, 2022, we had contingent consideration obligations 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 a Level 3 liability and estimated the aggregate fair value for these contingent consideration arrangements as follows:
| September 30, 2023 | December 31, 2022 | ||||||||||
| Fusion Acquisition | $ | — | $ | 25,310 | |||||||
| Noble Acquisition | — | — | |||||||||
| $ | — | $ | 25,310 | ||||||||
22
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. In April 2023, we repaid the outstanding contingent consideration obligation to the selling equity holders of Fusion. Approximately $22.8 million is recorded as a financing activity in our Condensed Consolidated Statements of Cash Flows representing the portion of the outstanding contingent consideration that was associated with the acquisition fair value of the liability. The remaining $2.5 million is recorded within cash flow from operations. The following table provides a summary of changes in our Level 3 fair value measurements:
| Balance, December 31, 2022 | $ | 25,310 | |||
| Increase in fair value recorded in earnings | — | ||||
| Payments | (25,310) | ||||
| Balance, September 30, 2023 | $ | — | |||
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, results of operations or cash flows, claims and legal proceedings are subject to inherent uncertainties, and unfavorable outcomes could occur that 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 September 30, 2023 and December 31, 2022.
A fire caused damage to our facility in Annecy, France in June 2016. We were insured for the damages caused by the fire, including business interruption insurance. During the second quarter of 2022, we filed a lawsuit against the insurance company to recover a part of our claim. No gain contingencies have been recognized as our ability to realize those gains remains uncertain.
We are periodically subject to loss contingencies resulting from custom duties assessments. We accrue for anticipated costs when an assessment has indicated that a loss is probable and can be reasonably estimated. We have received claims worth approximately $13 million in principal and $5 million to $6 million for interest and penalties. We are currently defending our position with respect to these claims in the respected administrative procedures. Due to uncertainty in the amount of the assessment and the timing of our appeal, no liability is recorded as of September 30, 2023.
We will continue to evaluate these liabilities periodically based on available information, including the progress of remedial investigations, the status of discussions with regulatory authorities regarding the methods and extent of remediation and the apportionment of costs and penalties among potentially responsible parties.
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 and nine months ended September 30, 2023, we repurchased approximately 66 thousand shares for $8.3 million and 318 thousand shares for $37.3 million, respectively. During the three and nine months ended September 30, 2022, we repurchased approximately 181 thousand shares for $19.2 million and 669 thousand shares for $72.3 million, respectively. As of September 30, 2023, there was $70.9 million of authorized share repurchases remaining under the existing authorization.
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.
23
For awards granted in the first quarter of 2023 and thereafter, our performance-based RSUs will vest solely based on our return on invested capital ("ROIC"). Award share payouts depend on the extent to which the ROIC performance goal has been achieved, but the final payout is adjusted by a total shareholder return ("TSR") modifier.
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 on or around the first anniversary of the date of grant.
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.
| Nine Months Ended September 30, | 2023 | (1) | 2022 | ||||||||
| Fair value per stock award | $ | 116.17 | $ | 141.95 | |||||||
| Grant date stock price | $ | 111.38 | $ | 114.52 | |||||||
| Assumptions: | |||||||||||
| Aptar's stock price expected volatility | 20.00 | % | 20.20 | % | |||||||
| Expected average volatility of peer companies | 39.70 | % | 41.70 | % | |||||||
| Correlation assumption | 33.30 | % | 41.20 | % | |||||||
| Risk-free interest rate | 3.83 | % | 2.04 | % | |||||||
| Dividend yield assumption | 1.36 | % | 1.33 | % | |||||||
________________________________________________
(1)The 2023 award inputs and assumptions are related to PSU-ROIC awards with a TSR modifier.
A summary of RSU activity as of September 30, 2023 and changes during the nine 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, 2023 | 426,361 | $ | 111.60 | 610,871 | $ | 118.77 | |||||||||||||||||
| Granted | 121,848 | 110.30 | 151,415 | 115.69 | |||||||||||||||||||
| Vested | (181,248) | 104.29 | (99,878) | 89.33 | |||||||||||||||||||
| Forfeited | (11,488) | 108.05 | (133,905) | 93.61 | |||||||||||||||||||
| Nonvested at September 30, 2023 | 355,473 | $ | 115.08 | 528,503 | $ | 129.82 | |||||||||||||||||
Included in the time-based RSU activity for the nine months ended September 30, 2023 are 10,614 units granted to non-employee directors and 10,589 units vested related to non-employee directors.
| Nine Months Ended September 30, | 2023 | 2022 | |||||||||
| Compensation expense | $ | 32,209 | $ | 31,925 | |||||||
| Fair value of units vested | 27,662 | 20,663 | |||||||||
| Intrinsic value of units vested | 32,319 | 22,329 | |||||||||
The actual tax benefit realized for the tax deduction from RSUs was approximately $5.6 million and $6.2 million in the nine months ended September 30, 2023 and 2022, respectively. As of September 30, 2023, there was $53.0 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. We did not issue stock options between 2019 and 2022. Stock options were awarded in the first quarter of 2023 with the exercise price equal to the market price on the date of grant based on the Black-Scholes model and generally vest over three years and expire 10 years after grant.
24
The Company uses historical data to estimate expected life and volatility. The weighted-average fair value of stock options granted under the stock awards plans were $19.84 and $24.23 per share for executive officers and all others employees, respectively, during the first nine months of 2023. Aptar executive officers received stock options with an exercise price that was 110% of the closing market price on the date of grant. These values were estimated on the respective dates of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:
| Stock Award Plans: | |||||
| Nine Months Ended September 30, | 2023 | ||||
| Dividend Yield | 1.41 | % | |||
| Expected Stock Price Volatility | 16.55 | % | |||
| Risk-free Interest Rate | 3.57 | % | |||
| Expected Life of Option (years) | 7 | ||||
A summary of option activity under our stock plans during the nine months ended September 30, 2023 is presented below:
| Stock Awards Plans | Director Stock Option Plans | ||||||||||||||||||||||
| Options | Weighted Average Exercise Price | Options | Weighted Average Exercise Price | ||||||||||||||||||||
| Outstanding, January 1, 2023 | 2,623,944 | $ | 73.34 | 51,700 | $ | 63.91 | |||||||||||||||||
| Granted | 314,833 | 116.20 | — | — | |||||||||||||||||||
| Exercised | (545,104) | 69.30 | (32,700) | 62.36 | |||||||||||||||||||
| Forfeited or expired | (4,130) | 83.84 | — | — | |||||||||||||||||||
| Outstanding at September 30, 2023 | 2,389,543 | $ | 79.89 | 19,000 | $ | 66.59 | |||||||||||||||||
| Exercisable at September 30, 2023 | 2,075,973 | $ | 74.40 | 19,000 | $ | 66.59 | |||||||||||||||||
| Weighted-Average Remaining Contractual Term (Years): | |||||||||||||||||||||||
| Outstanding at September 30, 2023 | 3.7 | 0.6 | |||||||||||||||||||||
| Exercisable at September 30, 2023 | 2.8 | 0.6 | |||||||||||||||||||||
| Aggregate Intrinsic Value: | |||||||||||||||||||||||
| Outstanding at September 30, 2023 | $ | 108,471 | $ | 1,115 | |||||||||||||||||||
| Exercisable at September 30, 2023 | $ | 105,629 | $ | 1,115 | |||||||||||||||||||
Intrinsic Value of Options Exercised During the Nine Months Ended: | |||||||||||||||||||||||
| September 30, 2023 | $ | 27,392 | $ | 1,978 | |||||||||||||||||||
| September 30, 2022 | $ | 13,618 | $ | — | |||||||||||||||||||
| Nine Months Ended September 30, | 2023 | ||||
| Compensation expense (included in SG&A) | $ | 3,561 | |||
| Compensation expense (included in Cost of sales) | 314 | ||||
| Compensation expense, Total | $ | 3,875 | |||
| Compensation expense, net of tax | 3,875 | ||||
The increase in stock option expense is due to the newly issued options as discussed above. Cash received from option exercises for the nine months ended September 30, 2023 and 2022 was approximately $39.7 million and $18.4 million, respectively. The actual tax benefit realized for the tax deduction from option exercises was approximately $6.8 million and $2.8 million in the nine months ended September 30, 2023 and 2022, respectively. As of September 30, 2023, there was $3.1 million of total unrecognized compensation cost relating to stock option awards which is expected to be recognized over a weighted-average period of 2.2 years.
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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 and nine months ended September 30, 2023 and 2022 was as follows:
| Three Months Ended | |||||||||||||||||||||||
| September 30, 2023 | September 30, 2022 | ||||||||||||||||||||||
| Diluted | Basic | Diluted | Basic | ||||||||||||||||||||
| Consolidated operations | |||||||||||||||||||||||
| Income available to common stockholders | $ | 84,296 | $ | 84,296 | $ | 54,244 | $ | 54,244 | |||||||||||||||
| Average equivalent shares | |||||||||||||||||||||||
| Shares of common stock | 65,707 | 65,707 | 65,322 | 65,322 | |||||||||||||||||||
| Effect of dilutive stock-based compensation | |||||||||||||||||||||||
| Stock options | 874 | — | 884 | — | |||||||||||||||||||
| Restricted stock | 454 | — | 375 | — | |||||||||||||||||||
| Total average equivalent shares | 67,035 | 65,707 | 66,581 | 65,322 | |||||||||||||||||||
| Net income per share | $ | 1.26 | $ | 1.28 | $ | 0.81 | $ | 0.83 | |||||||||||||||
| Nine Months Ended | |||||||||||||||||||||||
| September 30, 2023 | September 30, 2022 | ||||||||||||||||||||||
| Diluted | Basic | Diluted | Basic | ||||||||||||||||||||
| Consolidated operations | |||||||||||||||||||||||
| Income available to common stockholders | $ | 222,132 | $ | 222,132 | $ | 180,292 | $ | 180,292 | |||||||||||||||
| Average equivalent shares | |||||||||||||||||||||||
| Shares of common stock | 65,550 | 65,550 | 65,446 | 65,446 | |||||||||||||||||||
| Effect of dilutive stock-based compensation | |||||||||||||||||||||||
| Stock options | 886 | — | 1,034 | — | |||||||||||||||||||
| Restricted stock | 429 | — | 345 | — | |||||||||||||||||||
| Total average equivalent shares | 66,865 | 65,550 | 66,825 | 65,446 | |||||||||||||||||||
| Net income per share | $ | 3.32 | $ | 3.39 | $ | 2.70 | $ | 2.75 | |||||||||||||||
NOTE 16 – SEGMENT INFORMATION
During the year ended December 31, 2022, our organizational structure consisted of three market-focused business segments: Pharma, Beauty+Home and Food+Beverage. Effective January 1, 2023, we realigned two of our segments, allowing us to better serve our customers and positioning us for long-term profitable growth. We continue to have three reporting segments; Aptar Pharma and Aptar Beauty are named for the markets they serve with multiple product platforms, while Aptar Closures is named primarily for a single product platform that serves all available markets.
We combined all of our closures operations into a single segment - Aptar Closures. The Aptar Closures business serves multiple markets, including food, beverage, personal care, home care, beauty and healthcare. Closures that were developed in Beauty + Home moved to Aptar Closures together with the operations of legacy Food + Beverage. Aptar's food protection business and our elastomeric flow-control technology business continue to report through the Aptar Closures segment.
At the same time, we have simplified and focused our Beauty + Home segment to better leverage our complex spray and dispensing solutions for prestige and premium brands in the beauty and personal care markets. For many of our customers, personal care products are considered part of "beauty" and so we renamed this segment, simply, Aptar Beauty. The segment realignment had no impact on our consolidated statements of income, balance sheets, and cash flows. Segment financial information for the prior periods has been recast to conform to the current presentation.
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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, 2022. 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 unrealized investment gains and losses related to observable market price changes on equity securities and other special items.
Financial information regarding our reporting segments is shown below:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Total Sales: | |||||||||||||||||||||||
| Aptar Pharma | $ | 389,423 | $ | 345,079 | $ | 1,136,544 | $ | 1,037,120 | |||||||||||||||
| Aptar Beauty | 330,467 | 308,353 | 1,002,209 | 947,515 | |||||||||||||||||||
| Aptar Closures | 181,562 | 192,706 | 539,472 | 577,940 | |||||||||||||||||||
| Total Sales | $ | 901,452 | $ | 846,138 | $ | 2,678,225 | $ | 2,562,575 | |||||||||||||||
| Less: Intersegment Sales: | |||||||||||||||||||||||
| Aptar Pharma | $ | 235 | $ | 1,682 | $ | 610 | $ | 11,030 | |||||||||||||||
| Aptar Beauty | 6,487 | 5,307 | 22,253 | 17,722 | |||||||||||||||||||
| Aptar Closures | 1,733 | 2,289 | 6,392 | 7,488 | |||||||||||||||||||
| Total Intersegment Sales | $ | 8,455 | $ | 9,278 | $ | 29,255 | $ | 36,240 | |||||||||||||||
| Net Sales: | |||||||||||||||||||||||
| Aptar Pharma | $ | 389,188 | $ | 343,397 | $ | 1,135,934 | $ | 1,026,090 | |||||||||||||||
| Aptar Beauty | 323,980 | 303,046 | 979,956 | 929,793 | |||||||||||||||||||
| Aptar Closures | 179,829 | 190,417 | 533,080 | 570,452 | |||||||||||||||||||
| Net Sales | $ | 892,997 | $ | 836,860 | $ | 2,648,970 | $ | 2,526,335 | |||||||||||||||
| Adjusted EBITDA (1): | |||||||||||||||||||||||
| Aptar Pharma | $ | 136,344 | $ | 107,235 | $ | 371,508 | $ | 333,793 | |||||||||||||||
| Aptar Beauty | 41,070 | 36,563 | 121,375 | 112,343 | |||||||||||||||||||
| Aptar Closures | 27,607 | 23,483 | 81,387 | 69,020 | |||||||||||||||||||
| Corporate & Other, unallocated | (11,659) | (13,537) | (45,996) | (45,170) | |||||||||||||||||||
| Acquisition-related costs (2) | — | (231) | (255) | (231) | |||||||||||||||||||
| Restructuring Initiatives (3) | (6,161) | (2,270) | (19,628) | (2,989) | |||||||||||||||||||
| Net unrealized investment (loss) gain (4) | (5,428) | 277 | (2,349) | (2,297) | |||||||||||||||||||
| Depreciation and amortization | (62,686) | (57,601) | (184,212) | (174,818) | |||||||||||||||||||
| Interest Expense | (9,984) | (9,756) | (29,900) | (30,668) | |||||||||||||||||||
| Interest Income | 946 | 752 | 2,266 | 2,029 | |||||||||||||||||||
| Income before Income Taxes | $ | 110,049 | $ | 84,915 | $ | 294,196 | $ | 261,012 | |||||||||||||||
________________________________________________
(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 unrealized 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 for further details).
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(3)Restructuring Initiatives includes expense items for the three and nine months ended September 30, 2023 and 2022 as follows (see Note 19 – Restructuring Initiatives for further details):
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Restructuring Initiatives by Plan: | |||||||||||||||||||||||
| Optimization initiative | $ | 6,586 | $ | 2,254 | $ | 20,069 | $ | 2,254 | |||||||||||||||
| Prior year initiatives | (425) | 16 | (441) | 735 | |||||||||||||||||||
| Total Restructuring Initiatives | $ | 6,161 | $ | 2,270 | $ | 19,628 | $ | 2,989 | |||||||||||||||
| Restructuring Initiatives by Segment: | |||||||||||||||||||||||
| Aptar Pharma | $ | 92 | $ | — | $ | 1,657 | $ | — | |||||||||||||||
| Aptar Beauty | 2,880 | 2,240 | 12,650 | 2,774 | |||||||||||||||||||
| Aptar Closures | 3,098 | 30 | 4,060 | 215 | |||||||||||||||||||
| Corporate & Other | 91 | — | 1,261 | — | |||||||||||||||||||
| Total Restructuring Initiatives | $ | 6,161 | $ | 2,270 | $ | 19,628 | $ | 2,989 | |||||||||||||||
(4)Net unrealized investment gain (loss) represents the change in fair value of our investment in PCT (see Note 18 – Investment in Equity Securities for further details).
NOTE 17 – ACQUISITIONS
Business Combinations
On August 1, 2023, we paid the remaining $5.2 million purchase price in relation to the 2021 Hengyu acquisition. No further liability remains outstanding for this acquisition.
On March 1, 2023, we completed the acquisition of all the outstanding capital stock of iD SCENT. Located in Lyon, France, iD SCENT is an expert producer of paper fragrance sampling solutions that present multiple sustainability features. The purchase price was approximately $9.4 million (net of $1.4 million cash acquired) and was funded with cash on hand. The results of iD SCENT have been included in the consolidated financial statements within our Aptar Beauty segment since the date of acquisition.
Also on March 1, 2023, we completed the acquisition of 80% of the equity interest of Gulf Closures W.L.L. ( "Gulf Closures"). Gulf Closures, located in Bahrain, is a closure manufacturer for beverage products. The purchase price for 80% ownership was approximately $1.5 million (net of $1.2 million cash acquired) and was funded with cash on hand. This values the full company equity at approximately $3.3 million and implies a non-controlling interest valued at approximately $0.7 million as of the acquisition date. The results of Gulf Closures have been included in the consolidated financial statements within our Aptar Closures segment since the date of acquisition.
On August 31, 2022, we completed the acquisition of all the outstanding capital stock of Metaphase Design Group Inc. ("Metaphase"). Metaphase, located in St. Louis, Missouri, is a leading expert in ergonomic and industrial design of handheld devices including medical devices. The purchase price was approximately $5.1 million (net of $0.1 million cash acquired) and was funded with cash on hand. As of the acquisition date, $1.0 million was held in restricted cash for an indemnity escrow. The results of Metaphase have been included in the consolidated financial statements within our Aptar Pharma segment since the date of acquisition.
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NOTE 18 – INVESTMENT IN EQUITY SECURITIES
Our investment in equity securities consisted of the following:
| September 30, 2023 | December 31, 2022 | ||||||||||
| Equity Method Investments: | |||||||||||
| BTY | $ | 31,665 | $ | 31,490 | |||||||
| Sonmol | 4,621 | 4,997 | |||||||||
| Desotec GmbH | 859 | 863 | |||||||||
| Other Investments: | |||||||||||
| PureCycle | 1,532 | 5,297 | |||||||||
| YAT | 5,204 | 5,508 | |||||||||
| Loop | 2,894 | 2,894 | |||||||||
| Others | 1,247 | 1,259 | |||||||||
| $ | 48,022 | $ | 52,308 | ||||||||
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 $32.0 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. For the nine months ended September 30, 2023 and September 30, 2022, Aptar had purchases of $10.7 million and $7.2 million, respectively, from BTY. As of September 30, 2023 and December 31, 2022, approximately $2.1 million and $1.5 million, respectively, was due to BTY and included in accounts payable, accrued and other liabilities on our Condensed Consolidated Balance Sheets.
Sonmol
On April 1, 2020, we invested $5.0 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”). Sonmol is a leading Chinese pharmaceutical company that provides consumer electric devices and connected devices for asthma control.
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 closures markets.
Other Investments
In prior years, we invested, through a series of transactions, an aggregate amount of $2.9 million in preferred equity investments in Loop, a sustainability company.
In prior years, we also invested, through a series of transactions, $3.0 million in PureCycle and received $0.7 million of equity 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. 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 resulting in less than a 1% ownership interest. 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.
29
We have sold the following PCT shares related to the PureCycle investment:
| Shares Sold | Proceeds | Realized Gain | |||||||||||||||
| March 2022 | 107,600 | $ | 1,088 | $ | 841 | ||||||||||||
| August 2022 | 50,000 | $ | 511 | $ | 372 | ||||||||||||
| July 2023 | 248,859 | $ | 2,659 | $ | 1,968 | ||||||||||||
| August 2023 | 261,590 | $ | 2,945 | $ | 2,220 | ||||||||||||
For the three and nine months ended September 30, 2023 and 2022, we recorded the following net investment gain or loss on our investment in PureCycle:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Net investment (loss) gain | $ | (1,240) | $ | 649 | $ | 1,839 | $ | (1,084) | |||||||||||||||
On July 7, 2021, we invested approximately $5.9 million to acquire 10% of the equity interests in YAT, a multi-functional, science-driven online skincare solutions company.
There were no indications of impairment noted in the nine months ended September 30, 2023 related to these investments. In March 2022, we recorded a $1.5 million expected credit loss reserve against the outstanding note receivable from one of our venture investments (Kali Care) as a result of a proposed sale of such business.
NOTE 19 – RESTRUCTURING INITIATIVES
During the third quarter of 2022, we began an initiative to better leverage our fixed cost base through growth and cost reduction measures. For the three and nine months ended September 30, 2023, we recognized $6.6 million and $20.1 million of restructuring costs related to this initiative, respectively. For the three months ended September 30, 2022, we recognized $2.3 million of restructuring costs related to this initiative. The cumulative expense incurred as of September 30, 2023 was $26.3 million.
As of September 30, 2023, we have recorded the following activity associated with our optimization initiative:
| Beginning Reserve at 12/31/2022 | Net Charges for the Nine Months Ended 9/30/2023 | Cash Paid | Interest and FX Impact | Ending Reserve at 9/30/2023 | |||||||||||||||||||||||||
| Employee severance | $ | 4,993 | $ | 15,833 | $ | (8,605) | $ | (105) | $ | 12,116 | |||||||||||||||||||
| Professional fees and other costs | — | 4,236 | (3,991) | 8 | 253 | ||||||||||||||||||||||||
| Totals | $ | 4,993 | $ | 20,069 | $ | (12,596) | $ | (97) | $ | 12,369 | |||||||||||||||||||
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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 September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Net sales | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | |||||||||||||||
| Cost of sales (exclusive of depreciation and amortization shown below) | 63.5 | 65.3 | 64.1 | 64.9 | |||||||||||||||||||
| Selling, research & development and administrative | 15.5 | 16.2 | 16.1 | 16.5 | |||||||||||||||||||
| Depreciation and amortization | 7.0 | 6.9 | 7.0 | 6.9 | |||||||||||||||||||
| Restructuring initiatives | 0.7 | 0.2 | 0.7 | 0.1 | |||||||||||||||||||
| Operating income | 13.3 | 11.4 | 12.1 | 11.6 | |||||||||||||||||||
| Interest expense | (1.1) | (1.2) | (1.1) | (1.2) | |||||||||||||||||||
| Other expense | 0.1 | (0.1) | 0.1 | (0.1) | |||||||||||||||||||
| Income before income taxes | 12.3 | 10.1 | 11.1 | 10.3 | |||||||||||||||||||
| Net Income | 9.4 | 6.5 | 8.4 | 7.1 | |||||||||||||||||||
| Effective tax rate | 23.4 | % | 36.2 | % | 24.6 | % | 31.0 | % | |||||||||||||||
| Adjusted EBITDA margin (1) | 21.7 | % | 18.4 | % | 19.9 | % | 18.6 | % | |||||||||||||||
________________________________________________
(1)Adjusted EBITDA margin is calculated as Adjusted EBITDA divided by Reported Net Sales. See the reconciliation under "Non-U.S. GAAP Measures."
During the year ended December 31, 2022, our organizational structure consisted of three market-focused business segments: Pharma, Beauty + Home and Food + Beverage. Effective January 1, 2023, we realigned two of our segments, allowing us to better serve our customers and positioning us for long-term profitable growth. We continue to have three reporting segments; Aptar Pharma and Aptar Beauty are named for the markets they serve with multiple product platforms, while Aptar Closures is primarily named for a single product platform that serves all available markets. Previously reported amounts have been reclassified to conform to the current period presentation.
NET SALES
We reported net sales of $893.0 million for the quarter ended September 30, 2023, which represents a 7% increase compared to $836.9 million reported during the third quarter of 2022. The U.S. dollar weakened compared to the euro and other major currencies in which we operate, resulting in a positive currency translation impact of 4%. Our acquisitions of Metaphase, iD SCENT, and Gulf Closures also had a 1% positive impact on our consolidated results during the third quarter of 2023. Therefore, core sales, which excludes acquisitions and changes in foreign currency rates, increased by 2% in the third quarter of 2023 compared to the same period in 2022. Of our 2% core sales increase, half was due to strong volume growth, especially for products in our prescription, consumer healthcare and beauty applications, while inflationary price adjustments represented the other half.
| Third Quarter 2023 Net Sales Change over Prior Year | Aptar Pharma | Aptar Beauty | Aptar Closures | Total | |||||||||||||||||||
| Reported Net Sales Growth | 13 | % | 7 | % | (6) | % | 7 | % | |||||||||||||||
| Currency Effects (1) | (5) | % | (5) | % | (2) | % | (4) | % | |||||||||||||||
| Acquisitions | — | % | — | % | (1) | % | (1) | % | |||||||||||||||
| Core Sales Growth | 8 | % | 2 | % | (9) | % | 2 | % | |||||||||||||||
Reported net sales for the first nine months of 2023 increased 5% to $2.65 billion compared to $2.53 billion for the first nine months of 2022. 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 1%. Our acquisitions of Metaphase, iD SCENT, and Gulf Closures had a 1% positive impact on our consolidated results during the first nine months of 2023. Therefore, core sales, which excludes acquisitions and changes in foreign currency rates, increased by 3% in the first nine months of 2023 compared to the same period in 2022. The combination of strong volume growth, especially for products in our prescription, consumer healthcare and beauty applications as discussed above, along with price increases to recover inflationary cost increases had a positive impact on our core sales. Of our 3% core sales increase, approximately 2% was due to improved volumes and product mix while inflationary price adjustments represented the remaining 1% of the increase.
| Nine Months Ended September 30, 2023 Net Sales Change over Prior Year | Aptar Pharma | Aptar Beauty | Aptar Closures | Total | |||||||||||||||||||
| Reported Net Sales Growth | 11 | % | 5 | % | (7) | % | 5 | % | |||||||||||||||
| Currency Effects (1) | (1) | % | (1) | % | — | % | (1) | % | |||||||||||||||
| Acquisitions | (1) | % | — | % | (1) | % | (1) | % | |||||||||||||||
| Core Sales Growth | 9 | % | 4 | % | (8) | % | 3 | % | |||||||||||||||
________________________________________________
(1)Currency effects are calculated by translating last year’s amounts at this year’s foreign exchange rates.
The following table sets forth, for the periods indicated, net sales by geographic location:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||||||||||||||||||||||||||
| 2023 | % of Total | 2022 | % of Total | 2023 | % of Total | 2022 | % of Total | ||||||||||||||||||||||||||||||||||||||||
| Domestic | $ | 254,780 | 29 | % | $ | 279,810 | 33 | % | $ | 747,791 | 28 | % | $ | 848,617 | 34 | % | |||||||||||||||||||||||||||||||
| Europe | 509,204 | 57 | % | 436,833 | 52 | % | 1,530,753 | 58 | % | 1,336,929 | 53 | % | |||||||||||||||||||||||||||||||||||
| Latin America | 73,037 | 8 | % | 63,281 | 8 | % | 207,109 | 8 | % | 180,167 | 7 | % | |||||||||||||||||||||||||||||||||||
| Asia | 55,976 | 6 | % | 56,936 | 7 | % | 163,317 | 6 | % | 160,622 | 6 | % | |||||||||||||||||||||||||||||||||||
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 decreased to 63.5% in the third quarter of 2023 compared to 65.3% in the third quarter of 2022. Our COS percentage was positively impacted by an improved mix of our higher-margin Pharma product sales compared to the same period in 2022. We also benefited from the moderation of inflationary cost increases, which negatively impacted prior year results. While we maintained our normal pass-through of resin cost increases and implemented general price increases to offset other cost increases during the third quarter of 2022, there is no margin on resin pass-through costs, which increased our COS as a percentage of sales. During the third quarter of 2023, lower input costs had the opposite impact, which lowered our COS as a percentage of sales.
For the first nine months of 2023, COS as a percent of net sales decreased to 64.1% compared to 64.9% in the same period in 2022, in spite of approximately $16 million of additional costs related to the validation of the new injectables expansion capacity as well as inefficiencies in the first part of the year due to the Enterprise Resource Planning ("ERP") system implementation. As discussed above, this decrease is mainly due to an improved mix of our higher-margin Pharma products and the moderation of inflationary cost increases.
SELLING, RESEARCH & DEVELOPMENT AND ADMINISTRATIVE
Selling, research & development and administrative expenses (“SG&A”) increased by approximately $2.7 million to $138.1 million in the third quarter of 2023 compared to $135.4 million during the same period in 2022. Excluding changes in foreign currency rates, SG&A decreased by approximately $2.7 million in the quarter. Incremental costs related to our acquisitions of Metaphase, iD SCENT, and Gulf Closures were $0.4 million. The current quarter decrease in SG&A is related to lower headcount and other overhead costs as part of our ongoing focus on fixed cost management. SG&A as a percentage of net sales decreased to 15.5% in the third quarter of 2023 compared to 16.2% in the same period in 2022.
SG&A increased by $11.1 million to $427.5 million in the first nine months of 2023 compared to $416.4 million during the same period in 2022. Excluding changes in foreign currency rates, SG&A increased by approximately $7.9 million in the first nine months of 2023 compared to the first nine months of 2022. Incremental costs related to our acquisitions of Metaphase, iD SCENT, and Gulf Closures were $1.1 million. Improvements from our overhead cost management initiatives for the first nine months of 2023 were more than offset by higher compensation costs, including accruals related to our current short-term and long-term incentive compensation programs, along with higher travel costs compared to 2022. SG&A as a percentage of net sales decreased to 16.1% in the first nine months of 2023 compared to 16.5% in the same period in 2022.
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DEPRECIATION AND AMORTIZATION
Reported depreciation and amortization expenses increased by approximately $5.1 million to $62.7 million in the third quarter of 2023 compared to $57.6 million during the same period in 2022. Excluding changes in foreign currency rates, depreciation and amortization increased by approximately $2.6 million in the third quarter compared to the third quarter of 2022. Incremental depreciation and amortization costs related to our acquisitions of Metaphase, iD SCENT, and Gulf Closures were $0.4 million. The majority of this increase relates to higher capital spending during the current and prior years to support our growth strategy, including several new manufacturing facilities commencing production during 2023. Depreciation and amortization as a percentage of net sales increased to 7.0% in the third quarter of 2023 compared to 6.9% in the same period of the prior year.
Reported depreciation and amortization expenses increased by approximately $9.4 million to $184.2 million in the first nine months of 2023 compared to $174.8 million during the same period a year ago. Excluding changes in foreign currency rates, depreciation and amortization increased by approximately $7.8 million in the first nine months of 2023 compared to the same period a year ago. Incremental depreciation and amortization costs related to our acquisitions of Metaphase, iD SCENT, and Gulf Closures were $0.6 million. As discussed above, this increase is due to higher internal capital investments during the current and prior years. Depreciation and amortization as a percentage of net sales increased to 7.0% in the first nine months of 2023 compared to 6.9% in the same period of the prior year.
RESTRUCTURING INITIATIVES
During the third quarter of 2022, we began an initiative to better leverage our fixed cost base through growth and cost reduction measures. For the three and nine months ended September 30, 2023, we recognized $6.6 million and $20.1 million of restructuring costs related to this initiative, respectively. For the three months ended September 30, 2022, we recognized $2.3 million of restructuring costs related to this initiative. The cumulative expense incurred as of September 30, 2023 was $26.3 million.
Restructuring costs for the three and nine months ended September 30, 2023 and 2022 were as follows:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Restructuring Initiatives by Plan: | |||||||||||||||||||||||
| Optimization initiative | $ | 6,586 | $ | 2,254 | $ | 20,069 | $ | 2,254 | |||||||||||||||
| Prior year initiatives | (425) | 16 | (441) | 735 | |||||||||||||||||||
| Total Restructuring Initiatives | $ | 6,161 | $ | 2,270 | $ | 19,628 | $ | 2,989 | |||||||||||||||
| Restructuring Initiatives by Segment: | |||||||||||||||||||||||
| Aptar Pharma | $ | 92 | $ | — | $ | 1,657 | $ | — | |||||||||||||||
| Aptar Beauty | 2,880 | 2,240 | 12,650 | 2,774 | |||||||||||||||||||
| Aptar Closures | 3,098 | 30 | 4,060 | 215 | |||||||||||||||||||
| Corporate & Other | 91 | — | 1,261 | — | |||||||||||||||||||
| Total Restructuring Initiatives | $ | 6,161 | $ | 2,270 | $ | 19,628 | $ | 2,989 | |||||||||||||||
OPERATING INCOME
Operating income increased approximately $24.1 million to $119.3 million in the third quarter of 2023 compared to $95.2 million in the same period a year ago. Excluding changes in foreign currency rates, operating income increased by approximately $17.6 million in the quarter compared to the same period a year ago mainly due to the strong sales growth in our Pharma segment and the SG&A leverage mentioned above. Operating income as a percentage of net sales increased to 13.3% in the third quarter of 2023 compared to 11.4% in the prior year period.
For the first nine months of 2023, operating income increased approximately $25.8 million to $319.8 million compared to $294.1 million in the same period of the prior year. Excluding changes in foreign currency rates, operating income increased by approximately $19.9 million in the first nine months of 2023 compared to the same period a year ago as our strong Pharma segment growth and SG&A leverage mentioned above was partially offset by higher restructuring costs. Operating income as a percentage of net sales increased to 12.1% in the first nine months of 2023 compared to 11.6% for the same period in the prior year.
INTEREST EXPENSE
Interest expense increased approximately $0.2 million to $10.0 million in the third quarter of 2023 compared to $9.8 million for the same period of the prior year. This slight increase is due to the maturity of the €100 million 0.98% Senior Notes due July 2023 which was repaid using our variable interest rate revolving credit facility.
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Interest expense decreased by $0.8 million to $29.9 million in the first nine months of 2023 compared to $30.7 million during the first nine months of 2022. This reduction is mainly due to the repayment of part of our private placement debt, which also included a $0.4 million make-whole payment for the early redemption during the second quarter of 2022 which did not repeat during 2023. See Note 6 - Debt of the Condensed Consolidated Financial Statements for further details.
NET OTHER INCOME (EXPENSE)
Net other income increased $1.2 million to $0.7 million of income in the third quarter of 2023 from $0.5 million of expense in the same period of the prior year. This increase is mainly due to $0.8 million of improvements in our equity investments along with $0.6 million in lower pension costs during the third quarter of 2023 compared to the third quarter of 2022.
Net other income increased $6.7 million to $4.3 million of income for the nine months ended September 30, 2023 from $2.4 million of expense in the same period of the prior year. $2.9 million of this increase is due to the change in the fair value of our PureCycle investment. As discussed in Note 18 - 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 recorded at fair value based on observable market prices for identical assets with the change in fair value being recorded as a net investment gain or loss in the Condensed Consolidated Statements of Income. The remaining increase is due to improvements in our other equity investments along with lower pension costs as discussed above.
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 September 30, 2023 and 2022, respectively, was 23.4% and 36.2%. The effective tax rate for the nine months ended September 30, 2023 and 2022, respectively, was 24.6% and 31.0%. The effective tax rate for the three months ended September 30, 2023 reflects additional tax benefits from employee stock-based compensation and a benefit related to a change in the U.S. tax regulations issued during the quarter related to foreign tax credits. The effective tax rate for the three months ended September 30, 2022 reflects an out-of-period charge of $7.2 million for taxes related to a legal entity reorganization to enhance our dividend and cash management capabilities. The tax charge had an 8.5% impact on the effective tax rate for the three months ended September 30, 2022. The lower reported effective tax rate for the nine months ended September 30, 2023 reflects additional tax benefits from employee stock-based compensation, the refining of certain U.S. tax filing positions and a change in the U.S. tax regulations pertaining to foreign tax credits. As mentioned above, the tax rate for the nine months ended September 30, 2022, reflects an out-of-period charge for $7.2 million and had a 2.8% impact on the effective tax rate.
NET INCOME ATTRIBUTABLE TO APTARGROUP, INC.
We reported net income attributable to AptarGroup, Inc. of $84.3 million and $222.1 million in the three and nine months ended September 30, 2023, respectively, compared to $54.2 million and $180.3 million for the same periods in the prior year.
APTAR PHARMA SEGMENT
Operations that sell proprietary dispensing systems, drug delivery systems, sealing solutions and services to the prescription drug, consumer health care, injectables, active material science solutions and digital health markets form our Aptar Pharma segment.
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Net Sales | $ | 389,188 | $ | 343,397 | $ | 1,135,934 | $ | 1,026,090 | |||||||||||||||
| Adjusted EBITDA (1) | 136,344 | 107,235 | 371,508 | 333,793 | |||||||||||||||||||
| Adjusted EBITDA margin (1) | 35.0 | % | 31.2 | % | 32.7 | % | 32.5 | % | |||||||||||||||
________________________________________________
(1)Adjusted EBITDA is calculated as earnings before net interest, taxes, depreciation, amortization, unallocated corporate expenses, restructuring initiatives, acquisition-related costs, net unrealized 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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Net sales for the Aptar Pharma segment increased 13% in the third quarter of 2023 to $389.2 million compared to $343.4 million in the third quarter of 2022. Changes in currencies positively affected net sales by 5%, while the acquisition of Metaphase did not have a significant impact during the third quarter of 2023. Therefore, core sales increased by 8% in the third quarter of 2023 compared to the third quarter of 2022. The majority of the sales growth is due to higher volumes in our prescription drug and consumer health care divisions. Core sales of our products to the prescription drug market increased 20% on strong demand for our products used on emergency medicines as customers prepare for opioid overdose reversal medications going over the counter in North America. We also continue to see strong growth in our allergic rhinitis, asthma, COPD therapies and central nervous system product sales. The 14% core sales growth in the consumer health care market was driven by higher demand for our eye care, cough and cold and nasal saline rinse solutions. Sales of our products to the injectables market increased 6% as new capacity continues to come online. Active material science solutions decreased 23% due to lower tooling sales along with a decrease in active vials used in diabetes care products and lower sales of our products used for probiotics after a period of rapid growth. Digital Health currently does not represent a significant percentage of the total Pharma sales.
| Third Quarter 2023 Net Sales Change over Prior Year | Prescription Drug | Consumer Health Care | Injectables | Active Material Science Solutions | Digital Health | Total | |||||||||||||||||||||||||||||
| Reported Net Sales Growth | 25 | % | 21 | % | 13 | % | (21) | % | (76) | % | 13 | % | |||||||||||||||||||||||
| Currency Effects (1) | (5) | % | (7) | % | (6) | % | (2) | % | (1) | % | (5) | % | |||||||||||||||||||||||
| Acquisitions | — | % | — | % | (1) | % | — | % | — | % | — | % | |||||||||||||||||||||||
| Core Sales Growth | 20 | % | 14 | % | 6 | % | (23) | % | (77) | % | 8 | % | |||||||||||||||||||||||
Net sales for the first nine months of 2023 increased by 11% to $1.14 billion compared to $1.03 billion in the first nine months of 2022. Changes in currency rates positively impacted net sales by 1%, and the acquisition of Metaphase also had a positive 1% impact during the first nine months of 2023. Therefore, core sales increased by 9% in the first nine months of 2023 compared to the same period in the prior year. Strong core sales growth for our products to the prescription and consumer health care markets more than compensated for lower sales to the injectables and active material science solutions markets. Core sales to the prescription drug market increased 26% on continued strong demand for our allergic rhinitis, asthma and emergency medicines and central nervous system devices. The 19% core sales growth in the consumer health care market was driven by higher demand for our nasal decongestant, saline rinses, eye care and cough and cold solutions. Core sales of our products to the injectables market declined 9% primarily due to the shutdown of operations for the implementation of our new ERP system in the first quarter. In addition, we were up against strong prior year comparisons as we experienced strong sales of our elastomeric components for COVID-19 and other vaccines during the prior year period which did not repeat in the first nine months of 2023. Similarly, core sales of our active material science solutions decreased 23% mainly on strong prior year period demand for our active film products used with at-home COVID-19 antigen test kits and tooling sales that did not repeat during the first nine months of 2023. Digital Health currently does not represent a significant percentage of the total Pharma sales.
| Nine Months Ended September 30, 2023 Net Sales Change over Prior Year | Prescription Drug | Consumer Health Care | Injectables | Active Material Science Solutions | Digital Health | Total | |||||||||||||||||||||||||||||
| Reported Net Sales Growth | 27 | % | 21 | % | (6) | % | (23) | % | (18) | % | 11 | % | |||||||||||||||||||||||
| Currency Effects (1) | (1) | % | (2) | % | (1) | % | — | % | (4) | % | (1) | % | |||||||||||||||||||||||
| Acquisitions | — | % | — | % | (2) | % | — | % | — | % | (1) | % | |||||||||||||||||||||||
| Core Sales Growth | 26 | % | 19 | % | (9) | % | (23) | % | (22) | % | 9 | % | |||||||||||||||||||||||
_______________________________________
(1)Currency effects are calculated by translating last year’s amounts at this year’s foreign exchange rates.
Adjusted EBITDA in the third quarter of 2023 increased 27% to $136.3 million compared to $107.2 million in the same period of the prior year. Earnings derived from the increase in prescription and consumer health care product sales growth, along with lower overhead costs, more than compensated for the softness in active material science solutions. Our Adjusted EBITDA margin improved to 35.0% in the third quarter of 2023 from 31.2% in the third quarter of 2022 mainly on the strength of our proprietary dispensing device sales.
Adjusted EBITDA in the first nine months of 2023 increased 11% to $371.5 million compared to $333.8 million in the same period of the prior year. The positive impact of our strong core sales growth in the prescription drug and consumer healthcare divisions was partially offset by the additional expenses related to our injectables ERP system implementation early in the year and the impact of lower COVID-19 related sales in our injectables and active material science solutions divisions, as discussed above. Overall, our Adjusted EBITDA margin improved slightly to 32.7% in the first nine months of 2023 compared to 32.5% in the first nine months of 2022.
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APTAR BEAUTY SEGMENT
Operations that sell dispensing systems and sealing solutions to the beauty, personal care and home care markets form our Aptar Beauty segment.
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Net Sales | $ | 323,980 | $ | 303,046 | $ | 979,956 | $ | 929,793 | |||||||||||||||
| Adjusted EBITDA (1) | 41,070 | 36,563 | 121,375 | 112,343 | |||||||||||||||||||
| Adjusted EBITDA margin (1) | 12.7 | % | 12.1 | % | 12.4 | % | 12.1 | % | |||||||||||||||
________________________________________________
(1)Adjusted EBITDA is calculated as earnings before net interest, taxes, depreciation, amortization, unallocated corporate expenses, restructuring initiatives, acquisition-related costs, net unrealized 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."
Reported net sales for the quarter ended September 30, 2023 increased 7% to $324.0 million compared to $303.0 million in the third quarter of the prior year. Changes in currency rates positively impacted net sales by 5% in the third quarter of 2023 while our acquisition of iD SCENT did not have a material impact on the sales in the quarter. Therefore, core sales increased 2% in the third quarter of 2023 compared to the same quarter of the prior year. Regionally, Europe delivered solid quarterly sales growth which more than compensated for the ongoing softness in demand in North America. Latin America also had good growth and Asia continued to gradually improve. Core sales of our products to the beauty market increased 14% as consumer demand for prestige and mass fragrance applications remained strong. Personal care and home care core sales decreased 15% and 24%, respectively, due to ongoing softness in demand, mainly in North America.
| Third Quarter 2023 Net Sales Change over Prior Year | Personal Care | Beauty | Home Care | Total | |||||||||||||||||||
| Reported Net Sales Growth | (11) | % | 21 | % | (21) | % | 7 | % | |||||||||||||||
| Currency Effects (1) | (4) | % | (6) | % | (3) | % | (5) | % | |||||||||||||||
| Acquisitions | — | % | (1) | % | — | % | — | % | |||||||||||||||
| Core Sales Growth | (15) | % | 14 | % | (24) | % | 2 | % | |||||||||||||||
For the first nine months of 2023, reported net sales increased 5% to $980.0 million compared to $929.8 million in the first nine months of the prior year. Changes in currency rates positively impacted net sales by approximately 1% while our acquisition of iD SCENT did not have an impact on segment sales. Therefore, core sales increased by 4% in the first nine months of 2023 compared to the same period in the prior year. Consistent with the quarterly results, strong regional sales growth in Europe and Latin America more than offset lower North American demand. Core sales of our products to the beauty market increased 14% during the first nine months of 2023 on higher sales in both prestige and mass fragrance, along with continued growth for our facial skin care and color cosmetic solutions. Personal care core sales decreased 7% as higher demand for our sun care applications was offset by softness in baby and hair care product sales mainly due to customer destocking in North America. Core sales of our home care market products declined 23% mainly due to lower demand from our hair care and surface cleaner customers.
| Nine Months Ended September 30, 2023 Net Sales Change over Prior Year | Personal Care | Beauty | Home Care | Total | |||||||||||||||||||
| Reported Net Sales Growth | (6) | % | 15 | % | (22) | % | 5 | % | |||||||||||||||
| Currency Effects (1) | (1) | % | (1) | % | (1) | % | (1) | % | |||||||||||||||
| Acquisitions | — | % | — | % | — | % | — | % | |||||||||||||||
| Core Sales Growth | (7) | % | 14 | % | (23) | % | 4 | % | |||||||||||||||
________________________________________________
(1)Currency effects are calculated by translating last year’s amounts at this year’s foreign exchange rates.
Adjusted EBITDA in the third quarter of 2023 increased 12% to $41.1 million compared to $36.6 million in the same period in the prior year. This is primarily attributable to higher tooling sales, lower input costs and operational improvements, which more than compensated for lower profitability on product sales. Our Adjusted EBITDA margin improved from 12.1% in the third quarter of 2022 to 12.7% during the third quarter of 2023.
Adjusted EBITDA in the first nine months of 2023 increased 8% to $121.4 million compared to $112.3 million reported in the same period in the prior year mainly due to higher profitability on product sales, along with lower input costs and operational improvements as discussed above. Therefore, our Adjusted EBITDA margin improved from 12.1% in the first nine months of 2022 to 12.4% during the first nine months of 2023.
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APTAR CLOSURES SEGMENT
Operations that sell dispensing systems, sealing solutions and food service trays to the food, beverage, personal care, home care, beauty and healthcare markets form our Aptar Closures segment. Aptar's food protection business and elastomeric flow-control technology business continue to report through the Aptar Closures segment.
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Net Sales | $ | 179,829 | $ | 190,417 | $ | 533,080 | $ | 570,452 | |||||||||||||||
| Adjusted EBITDA (1) | 27,607 | 23,483 | 81,387 | 69,020 | |||||||||||||||||||
| Adjusted EBITDA margin (1) | 15.4 | % | 12.3 | % | 15.3 | % | 12.1 | % | |||||||||||||||
________________________________________________
(1)Adjusted EBITDA is calculated as earnings before net interest, taxes, depreciation, amortization, unallocated corporate expenses, restructuring initiatives, acquisition-related costs, net unrealized 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."
Reported sales for the quarter ended September 30, 2023 decreased approximately 6% to $179.8 million compared to $190.4 million in the third quarter of the prior year. Changes in currency rates positively impacted net sales by 2%, while our acquisition of Gulf Closures positively impacted net sales by 1%. Therefore, core sales for the third quarter of 2023 decreased by 9% compared to the same quarter of the prior year. Approximately 3% of the decrease for the current quarter is due to the pass-through of lower input costs while the remaining 6% is due to lower product and tooling sales. Sales to the food market decreased 11% primarily on softer demand for our dairy and dry spice applications. The 3% increase in beverage market sales is mostly related to higher customer demand for our concentrate applications. Personal care sales declined 24% due to lower demand for our body and hair care closures.
| Third Quarter 2023 Net Sales Change over Prior Year | Food | Beverage | Personal Care | Other (2) | Total | ||||||||||||||||||||||||
| Reported Net Sales Growth | (10) | % | 17 | % | (22) | % | 25 | % | (6) | % | |||||||||||||||||||
| Currency Effects (1) | (1) | % | (5) | % | (2) | % | (1) | % | (2) | % | |||||||||||||||||||
| Acquisitions | — | % | (9) | % | — | % | — | % | (1) | % | |||||||||||||||||||
| Core Sales Growth | (11) | % | 3 | % | (24) | % | 24 | % | (9) | % | |||||||||||||||||||
Net sales for the first nine months of 2023 decreased by 7% to $533.1 million compared to $570.5 million in the first nine months of 2022. Changes in currency rates had no impact on net sales while our acquisition of Gulf Closures positively impacted net sales by 1%. Therefore, core sales decreased by 8% in the first nine months of 2023 compared to the same period in the prior year. Approximately half of the 8% core sales decrease is due to passing through lower input costs. Tooling sales and volumes were also lower as customers continued to work through their inventory levels, primarily in North America. Core sales to the food and personal care markets decreased 8% and 20%, respectively, while core sales to the beverage market increased 2% in the first nine months of 2023 compared to the same period of the prior year. For the food market, we were up against strong prior year period comparisons, mainly for sauces and condiment applications and our food service packaging products. The personal care market was also negatively impacted with lower sales of our body and hair care applications. The beverage market reported growth mainly from higher demand for our juice applications.
| Nine Months Ended September 30, 2023 Net Sales Change over Prior Year | Food | Beverage | Personal Care | Other (2) | Total | ||||||||||||||||||||||||
| Reported Net Sales Growth | (8) | % | 10 | % | (19) | % | 3 | % | (7) | % | |||||||||||||||||||
| Currency Effects (1) | — | % | (2) | % | (1) | % | — | % | — | % | |||||||||||||||||||
| Acquisitions | — | % | (6) | % | — | % | — | % | (1) | % | |||||||||||||||||||
| Core Sales Growth | (8) | % | 2 | % | (20) | % | 3 | % | (8) | % | |||||||||||||||||||
______________________________________________________________
(1)Currency effects are calculated by translating last year’s amounts at this year’s foreign exchange rates.
(2)Other includes beauty, home care and healthcare markets.
Adjusted EBITDA in the third quarter of 2023 increased 18% to $27.6 million compared to $23.5 million reported in the same period of the prior year. Operational improvements, along with lower SG&A costs were able to compensate for the lower product sales noted above. Approximately one third of our sales decrease was due to passing through lower input costs. These pass-throughs typically do not carry any margin, but the lower sales favorably impact our Adjusted EBITDA margin. Therefore, our Adjusted EBITDA margin improved from 12.3% in the third quarter of 2022 to 15.4% during the third quarter of 2023.
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Adjusted EBITDA in the first nine months of 2023 increased 18% to $81.4 million compared to $69.0 million reported in the same period of the prior year. Our profitability was positively impacted by a focus on operational improvements and containing costs within our new segment structure. As discussed above, approximately half of our sales decrease was due to passing through lower input costs. As these pass-throughs typically do not carry any margin, the lower sales favorably impact our Adjusted EBITDA margin. This led to our Adjusted EBITDA margin improving from 12.1% in the first nine months of 2022 to 15.3% during the first nine months of 2023.
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 unrealized 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.
For the quarter ended September 30, 2023, Corporate & Other Adjusted EBITDA decreased to $11.7 million of expense from $13.5 million of expense in the third quarter of 2022. This expense decrease is due to approximately $4.2 million of realized gains on the sale of PCT shares related to the PureCycle investment partially offset by higher professional fees for corporate projects and higher incentive compensation costs, including accruals related to our current short-term and equity compensation programs.
Corporate & Other Adjusted EBITDA in the first nine months of 2023 increased to $46.0 million of expense compared to $45.2 million of expense reported in the same period of the prior year. As mentioned above, this increase is mainly related to higher incentive compensation costs along with higher professional fees for corporate projects.
NON-U.S. GAAP MEASURES
In addition to the information presented herein that conforms to accounting principles generally accepted in the United States of America ("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 and other 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 restructuring initiatives, acquisition-related costs, purchase accounting adjustments related to acquisitions and investments and net unrealized 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 exchange rates and changes in the fair value of equity investments, or reliably predicted because they are not part of our routine activities, such as restructuring and acquisition 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 plus proceeds from government grants related to 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 | |||||||||||||||||||||||||||||||||||
| September 30, 2023 | |||||||||||||||||||||||||||||||||||
| Consolidated | Aptar Pharma | Aptar Beauty | Aptar Closures | Corporate & Other | Net Interest | ||||||||||||||||||||||||||||||
| Net Sales | $ | 892,997 | $ | 389,188 | $ | 323,980 | $ | 179,829 | $ | — | $ | — | |||||||||||||||||||||||
| Reported net income | $ | 84,298 | |||||||||||||||||||||||||||||||||
| Reported income taxes | 25,751 | ||||||||||||||||||||||||||||||||||
| Reported income before income taxes | 110,049 | 108,113 | 17,415 | 11,647 | (18,088) | (9,038) | |||||||||||||||||||||||||||||
| Adjustments: | |||||||||||||||||||||||||||||||||||
| Restructuring initiatives | 6,161 | 92 | 2,880 | 3,098 | 91 | ||||||||||||||||||||||||||||||
Net investment loss | 1,240 | 1,240 | |||||||||||||||||||||||||||||||||
Realized gain on investments included in net investment loss above | 4,188 | 4,188 | |||||||||||||||||||||||||||||||||
| Adjusted earnings before income taxes | 121,638 | 108,205 | 20,295 | 14,745 | (12,569) | (9,038) | |||||||||||||||||||||||||||||
| Interest expense | 9,984 | 9,984 | |||||||||||||||||||||||||||||||||
| Interest income | (946) | (946) | |||||||||||||||||||||||||||||||||
| Adjusted earnings before net interest and taxes (Adjusted EBIT) | 130,676 | 108,205 | 20,295 | 14,745 | (12,569) | — | |||||||||||||||||||||||||||||
| Depreciation and amortization | 62,686 | 28,139 | 20,775 | 12,862 | 910 | ||||||||||||||||||||||||||||||
| Adjusted earnings before net interest, taxes, depreciation and amortization (Adjusted EBITDA) | $ | 193,362 | $ | 136,344 | $ | 41,070 | $ | 27,607 | $ | (11,659) | $ | — | |||||||||||||||||||||||
| Reported net income margin (Reported net income / Reported Net Sales) | 9.4 | % | |||||||||||||||||||||||||||||||||
| Adjusted EBITDA margins (Adjusted EBITDA / Reported Net Sales) | 21.7 | % | 35.0 | % | 12.7 | % | 15.4 | % | |||||||||||||||||||||||||||
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| Three Months Ended | |||||||||||||||||||||||||||||||||||
| September 30, 2022 | |||||||||||||||||||||||||||||||||||
| Consolidated | Aptar Pharma | Aptar Beauty | Aptar Closures | Corporate & Other | Net Interest | ||||||||||||||||||||||||||||||
| Net Sales | $ | 836,860 | $ | 343,397 | $ | 303,046 | $ | 190,417 | $ | — | $ | — | |||||||||||||||||||||||
| Reported net income | $ | 54,177 | |||||||||||||||||||||||||||||||||
| Reported income taxes | 30,738 | ||||||||||||||||||||||||||||||||||
| Reported income before income taxes | 84,915 | 83,571 | 14,729 | 10,460 | (14,841) | (9,004) | |||||||||||||||||||||||||||||
| Adjustments: | |||||||||||||||||||||||||||||||||||
| Restructuring initiatives | 2,270 | — | 2,240 | 30 | — | ||||||||||||||||||||||||||||||
Net investment gain | (649) | (649) | |||||||||||||||||||||||||||||||||
Realized gain on investments included in net investment gain above | 372 | 372 | |||||||||||||||||||||||||||||||||
| Transaction costs related to acquisitions | 231 | 231 | — | — | — | ||||||||||||||||||||||||||||||
| Adjusted earnings before income taxes | 87,139 | 83,802 | 16,969 | 10,490 | (15,118) | (9,004) | |||||||||||||||||||||||||||||
| Interest expense | 9,756 | 9,756 | |||||||||||||||||||||||||||||||||
| Interest income | (752) | (752) | |||||||||||||||||||||||||||||||||
| Adjusted earnings before net interest and taxes (Adjusted EBIT) | 96,143 | 83,802 | 16,969 | 10,490 | (15,118) | — | |||||||||||||||||||||||||||||
| Depreciation and amortization | 57,601 | 23,433 | 19,594 | 12,993 | 1,581 | ||||||||||||||||||||||||||||||
| Adjusted earnings before net interest, taxes, depreciation and amortization (Adjusted EBITDA) | $ | 153,744 | $ | 107,235 | $ | 36,563 | $ | 23,483 | $ | (13,537) | $ | — | |||||||||||||||||||||||
| Reported net income margin (Reported net income / Reported Net Sales) | 6.5 | % | |||||||||||||||||||||||||||||||||
| Adjusted EBITDA margins (Adjusted EBITDA / Reported Net Sales) | 18.4 | % | 31.2 | % | 12.1 | % | 12.3 | % | |||||||||||||||||||||||||||
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| Nine Months Ended | |||||||||||||||||||||||||||||||||||
| September 30, 2023 | |||||||||||||||||||||||||||||||||||
| Consolidated | Aptar Pharma | Aptar Beauty | Aptar Closures | Corporate & Other | Net Interest | ||||||||||||||||||||||||||||||
| Net Sales | $ | 2,648,970 | $ | 1,135,934 | $ | 979,956 | $ | 533,080 | $ | — | $ | — | |||||||||||||||||||||||
| Reported net income | $ | 221,931 | |||||||||||||||||||||||||||||||||
| Reported income taxes | 72,265 | ||||||||||||||||||||||||||||||||||
| Reported income before income taxes | 294,196 | 288,603 | 46,643 | 39,174 | (52,590) | (27,634) | |||||||||||||||||||||||||||||
| Adjustments: | |||||||||||||||||||||||||||||||||||
| Restructuring initiatives | 19,628 | 1,657 | 12,650 | 4,060 | 1,261 | ||||||||||||||||||||||||||||||
Net investment gain | (1,839) | (1,839) | |||||||||||||||||||||||||||||||||
Realized gain on investments included in net investment gain above | 4,188 | 4,188 | |||||||||||||||||||||||||||||||||
| Transaction costs related to acquisitions | 255 | — | 199 | 56 | — | ||||||||||||||||||||||||||||||
| Adjusted earnings before income taxes | 316,428 | 290,260 | 59,492 | 43,290 | (48,980) | (27,634) | |||||||||||||||||||||||||||||
| Interest expense | 29,900 | 29,900 | |||||||||||||||||||||||||||||||||
| Interest income | (2,266) | (2,266) | |||||||||||||||||||||||||||||||||
| Adjusted earnings before net interest and taxes (Adjusted EBIT) | 344,062 | 290,260 | 59,492 | 43,290 | (48,980) | — | |||||||||||||||||||||||||||||
| Depreciation and amortization | 184,212 | 81,248 | 61,883 | 38,097 | 2,984 | ||||||||||||||||||||||||||||||
| Adjusted earnings before net interest, taxes, depreciation and amortization (Adjusted EBITDA) | $ | 528,274 | $ | 371,508 | $ | 121,375 | $ | 81,387 | $ | (45,996) | $ | — | |||||||||||||||||||||||
| Reported net income margin (Reported net income / Reported Net Sales) | 8.4 | % | |||||||||||||||||||||||||||||||||
| Adjusted EBITDA margins (Adjusted EBITDA / Reported Net Sales) | 19.9 | % | 32.7 | % | 12.4 | % | 15.3 | % | |||||||||||||||||||||||||||
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| Nine Months Ended | |||||||||||||||||||||||||||||||||||
| September 30, 2022 | |||||||||||||||||||||||||||||||||||
| Consolidated | Aptar Pharma | Aptar Beauty | Aptar Closures | Corporate & Other | Net Interest | ||||||||||||||||||||||||||||||
| Net Sales | $ | 2,526,335 | $ | 1,026,090 | $ | 929,793 | $ | 570,452 | $ | — | $ | — | |||||||||||||||||||||||
| Reported net income | $ | 180,161 | |||||||||||||||||||||||||||||||||
| Reported income taxes | 80,851 | ||||||||||||||||||||||||||||||||||
| Reported income before income taxes | 261,012 | 263,222 | 49,196 | 29,294 | (52,061) | (28,639) | |||||||||||||||||||||||||||||
| Adjustments: | |||||||||||||||||||||||||||||||||||
| Restructuring initiatives | 2,989 | — | 2,774 | 215 | — | ||||||||||||||||||||||||||||||
Net investment loss | 1,084 | 1,084 | |||||||||||||||||||||||||||||||||
Realized gain on investments included in net investment loss above | 1,213 | 1,213 | |||||||||||||||||||||||||||||||||
| Transaction costs related to acquisitions | 231 | 231 | — | — | — | ||||||||||||||||||||||||||||||
| Adjusted earnings before income taxes | 266,529 | 263,453 | 51,970 | 29,509 | (49,764) | (28,639) | |||||||||||||||||||||||||||||
| Interest expense | 30,668 | 30,668 | |||||||||||||||||||||||||||||||||
| Interest income | (2,029) | (2,029) | |||||||||||||||||||||||||||||||||
| Adjusted earnings before net interest and taxes (Adjusted EBIT) | 295,168 | 263,453 | 51,970 | 29,509 | (49,764) | — | |||||||||||||||||||||||||||||
| Depreciation and amortization | 174,818 | 70,340 | 60,373 | 39,511 | 4,594 | ||||||||||||||||||||||||||||||
| Adjusted earnings before net interest, taxes, depreciation and amortization (Adjusted EBITDA) | $ | 469,986 | $ | 333,793 | $ | 112,343 | $ | 69,020 | $ | (45,170) | $ | — | |||||||||||||||||||||||
| Reported net income margin (Reported net income / Reported Net Sales) | 7.1 | % | |||||||||||||||||||||||||||||||||
| Adjusted EBITDA margins (Adjusted EBITDA / Reported Net Sales) | 18.6 | % | 32.5 | % | 12.1 | % | 12.1 | % | |||||||||||||||||||||||||||
| Net Debt to Net Capital Reconciliation | September 30, | December 31, | |||||||||
| 2023 | 2022 | ||||||||||
| Notes payable, revolving credit facility and overdrafts | $ | 124,503 | $ | 3,810 | |||||||
| Current maturities of long-term obligations, net of unamortized debt issuance costs | 366,378 | 118,981 | |||||||||
| Long-Term Obligations, net of unamortized debt issuance costs | 680,065 | 1,052,597 | |||||||||
| Total Debt | 1,170,946 | 1,175,388 | |||||||||
| Less: | |||||||||||
| Cash and equivalents | 151,573 | 141,732 | |||||||||
| Net Debt | $ | 1,019,373 | $ | 1,033,656 | |||||||
| Total Stockholders' Equity | $ | 2,213,689 | $ | 2,068,204 | |||||||
| Net Debt | 1,019,373 | 1,033,656 | |||||||||
| Net Capital | $ | 3,233,062 | $ | 3,101,860 | |||||||
| Net Debt to Net Capital | 31.5 | % | 33.3 | % | |||||||
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| Free Cash Flow Reconciliation | September 30, | September 30, | |||||||||
| 2023 | 2022 | ||||||||||
| Net Cash Provided by Operations | $ | 355,602 | $ | 306,349 | |||||||
| Capital Expenditures | (231,199) | (226,131) | |||||||||
| Proceeds from Government Grants | — | 17,058 | |||||||||
| Free Cash Flow | $ | 124,403 | $ | 97,276 | |||||||
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 has an additive effect. In some cases, we sell products denominated in a currency different from the currency in which the related costs are incurred. Conversely, a strengthening U.S. dollar relative to foreign currencies has a dilutive translation effect on our financial statements. Any changes in exchange rates on such inter-country sales could materially impact our results of operations. During the third quarter and for the nine months ended September 30, 2023, the U.S. dollar weakened compared to all European currencies except the Russian ruble and most Asian currencies. This resulted in an additive impact on our translated results during the third quarter and year-to-date period of 2023 when compared to the third quarter and year-to-date period of 2022.
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. The diversification of our product portfolio minimizes fluctuations in our overall quarterly financial statements and results in an immaterial seasonality impact on our Condensed Consolidated Financial Statements when viewed quarter over quarter.
Generally, we have incurred higher stock-based compensation expense in the first quarter compared with the rest of the fiscal year due to the timing and recognition of stock-based expense from substantive vesting for retirement eligible employees. As of September 30, 2023, our estimated stock option expense on a pre-tax basis for the year 2023 compared to 2022 is as follows:
| 2023 | 2022 | ||||||||||
| First Quarter | $ | 15,042 | $ | 13,362 | |||||||
| Second Quarter | 10,391 | 8,774 | |||||||||
| Third Quarter | 10,051 | 9,805 | |||||||||
| Fourth Quarter (estimated for 2023) | 9,689 | 8,996 | |||||||||
| $ | 45,173 | $ | 40,937 | ||||||||
LIQUIDITY AND CAPITAL RESOURCES
Given our current 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 to meet our business requirements in the foreseeable future. We have historically used cash flow from operations, our revolving and other credit facilities, proceeds from stock options and debt, as needed, as our primary sources of liquidity. Our primary uses of cash are to invest in equipment and facilities that are necessary to support our growth, pay quarterly dividends to stockholders, to make acquisitions and repurchase shares of our common stock that will contribute to the achievement of our strategic objectives. Due to uncertain macroeconomic conditions, including rising interest rates and the inflationary environment, in the event that customer demand decreases significantly for a prolonged period of time and adversely impacts our cash flows from operations, we would have the ability to restrict and significantly reduce capital expenditure levels and share repurchases, as well as reevaluate 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 increased to $152.1 million at September 30, 2023 from $142.7 million at December 31, 2022. Total short and long-term interest-bearing debt of $1.2 billion at September 30, 2023 was consistent with the $1.2 billion at December 31, 2022. The ratio of our Net Debt (interest-bearing debt less cash and equivalents) to Net Capital (stockholders’ equity plus Net Debt) decreased to 31.5% at September 30, 2023 from 33.3% at December 31, 2022. See the reconciliation under "Non-U.S. GAAP Measures."
In the first nine months of 2023, our operations provided approximately $355.6 million in net cash flow compared to $306.3 million for the same period a year ago. In both periods, cash flow from operations was primarily derived from earnings before depreciation and amortization.
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We used $239.3 million in cash for investing activities during the first nine months of 2023 compared to $222.4 million during the same period a year ago. During 2023, approximately $9.4 million was utilized to fund the iD SCENT acquisition, $5.2 million was utilized to fund the remaining payment on the Hengyu acquisition and $1.5 million was utilized to fund the Gulf Closures acquisition. Our investment in capital projects net of government grant proceeds increased $22.1 million during the first nine months of 2023 compared to the first nine months of 2022 primarily due to the $17.1 million in grant proceeds received in 2022 offsetting a portion of our capital expenditures. Our 2023 estimated cash outlays for capital expenditures net of government grant proceeds are expected to be approximately $300 million.
Financing activities used $94.0 million in cash during the first nine months of 2023 compared to $80.1 million in cash used by financing activities during the same period a year ago. During the first nine months of 2023, we paid $76.7 million of dividends, received $39.7 million from stock option exercises and purchased $37.3 million of treasury stock. Additionally, we paid our outstanding contingent consideration obligation for Fusion of $25.3 million of which $22.8 million was treated as a financing outflow and repaid $117.3 million of long-term debt. During the first nine months of 2022, we received proceeds from long-term obligations of $406.6 million primarily from the issuance of $400 million of our 3.60% Senior Notes due March 2032 and we repaid $93.5 million related to our revolving credit facility, redeemed all $75.0 million of our 3.25% senior unsecured notes and repaid $125.0 million of our 3.49% senior unsecured notes.
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 September 30, 2023.
On June 30, 2021, we entered into an amended and restated multi-currency revolving credit facility (the "revolving credit facility") with a syndicate of banks to replace the then-existing facility maturing July 2022 (the "prior credit facility") and to amend and restate the unsecured term loan facility extended to our wholly-owned UK subsidiary under the prior credit facility (as amended, the "amended term facility"). The revolving credit facility matures in June 2026, subject to a maximum of two one-year extensions in certain circumstances, and provides for unsecured financing of up to $600 million available in the U.S. and to our wholly-owned UK subsidiary. The amended term facility matured in July 2022 and was repaid in full. The revolving credit facility can be drawn in various currencies including USD, EUR, GBP, and CHF to the equivalent of $600 million, which may be increased by up to $300 million subject to the satisfaction of certain conditions. As of September 30, 2023, $44.5 million and €75.0 million ($79.3 million) was utilized under the revolving credit facility in the U.S. and no balance was utilized by our wholly-owned UK subsidiary. As of December 31, 2022, no balance was utilized under the revolving credit facility in the U.S. and no balance was utilized by our wholly-owned UK subsidiary.
There are no compensating balance requirements associated with our revolving credit facility. Each borrowing under the revolving credit facility will bear interest at rates based on SOFR (in the case of USD), EURIBOR (in the case of EUR), SONIA (in the case of GBP), SARON (in the case of CHF), prime rates or other similar rates, in each case plus an applicable margin. In May 2023 the revolving credit facility was amended to make SOFR the default borrowing rate for USD. The revolving credit facility also provides mechanics relating to a transition away from designated benchmark rates for other available currencies and the replacement of any such applicable benchmark by a replacement alternative benchmark rate or mechanism for loans made in the applicable currency. A facility fee on the total amount of the revolving credit facility is also payable quarterly, regardless of usage. The applicable margins for borrowings under the revolving credit facility and the facility fee percentage may change from time to time depending on changes in our consolidated leverage ratio. Credit facility balances are included in notes payable, revolving credit facility and overdrafts 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 September 30, 2023 | ||||||||||
| Consolidated Leverage Ratio (1) | Maximum of 3.50 to 1.00 | 1.61 to 1.00 | |||||||||
| Consolidated Interest Coverage Ratio (1) | Minimum of 3.00 to 1.00 | 16.19 to 1.00 | |||||||||
__________________________________________________________
(1)Definitions of ratios are included as part of the revolving credit facility agreement and private placement agreements.
Based upon the above consolidated leverage ratio covenant, we would have the ability to borrow approximately an additional $1.2 billion before the 3.50 to 1.00 maximum ratio requirement would be exceeded.
On July 6, 2022, we entered into an agreement to swap approximately $200 million of our fixed USD debt to fixed EUR debt which would generate interest savings of approximately $0.5 million per quarter based upon exchange rates as of the transaction date.
On October 12, 2023, the Board of Directors declared a quarterly cash dividend of $0.41 per share payable on November 16, 2023 to stockholders of record as of October 26, 2023.
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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.
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.
RECENTLY ISSUED ACCOUNTING STANDARDS
We have reviewed the recently issued ASUs to the FASB’s Accounting Standards Codification that have future effective dates. Standards that have been adopted during 2023 are discussed in Note 1 – Summary of Significant Accounting Policies of the Notes to 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.
OUTLOOK
In the fourth quarter, we expect continued growth in our proprietary pharma drug delivery systems and continued improvement in our injectables division’s performance as new capacity continues to come online. Our fragrance dispensing solutions experienced strong growth in the first nine months of the year and we anticipate sales for these dispensing solutions to finish strong in 2023. Our Beauty and Closures segments will be aided by the improving environment in North America as we start to move past the destocking caused by elevated inventory levels.
We expect earnings per share for the fourth quarter of 2023, excluding any restructuring expenses, changes in the fair value of equity investments and acquisition costs, to be in the range of $1.06 to $1.14 and this guidance is based on an effective tax rate range of 24% to 26%.
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 or other events 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:
•geopolitical conflicts worldwide including the invasion of Ukraine by the Russian military and the recent events in the Middle East and the resulting indirect impact on demand from our customers selling their products into these countries, as well as rising input costs and certain supply chain disruptions;
•lower demand and asset utilization due to an economic recession either globally or in key markets we operate within;
•economic conditions worldwide, including inflationary conditions and potential deflationary conditions in other regions we rely on for growth;
•the execution of our fixed cost initiatives, including our optimization initiative;
•the availability of raw materials and components (particularly from sole sourced suppliers) as well as the financial viability of these suppliers;
•fluctuations in the cost of materials, components, transportation cost as a result of supply chain disruptions and labor shortages, and other input costs (particularly resin, metal, anodization costs and energy costs);
•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;
•our ability to successfully implement facility expansions and new facility projects;
•our ability to offset inflationary impacts with cost containment, productivity initiatives and price increases;
•changes in capital availability or cost, including rising interest rates;
45
•volatility of global credit markets;
•our ability to identify potential new acquisitions and to successfully acquire and integrate such operations, including the successful integration of the businesses we have acquired, including contingent consideration valuation;
•our ability to build out acquired businesses and integrate the product/service offerings of the acquired entities into our existing product/service portfolio;
•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; and
•other risks associated with our operations.
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, 2022 for additional risks and uncertainties that may cause our actual results or other events to differ materially from those expressed or implied in such forward-looking statements.
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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 September 30, 2023 about our forward currency exchange contracts. The majority of the contracts expire before the end of the fourth quarter of 2023.
| Buy/Sell | Contract Amount (in thousands) | Average Contractual Exchange Rate | Min / Max Notional Volumes | ||||||||||||||
| EUR / USD | $ | 13,536 | 1.0879 | 13,535 - 30,321 | |||||||||||||
| EUR / BRL | 11,314 | 5.3288 | 11,314 - 12,050 | ||||||||||||||
| CZK / EUR | 5,829 | 0.0414 | 2,148 - 7,194 | ||||||||||||||
| EUR / THB | 4,652 | 36.8238 | 4,652 - 4,964 | ||||||||||||||
| MXN / USD | 4,000 | 0.0576 | 4,000 - 5,300 | ||||||||||||||
| USD / EUR | 3,714 | 0.9157 | 1,837 - 3,714 | ||||||||||||||
| USD / CNY | 2,100 | 7.0552 | 2,100 - 2100 | ||||||||||||||
| CHF / EUR | 1,889 | 1.0427 | 478 - 1,889 | ||||||||||||||
| EUR / CNY | 1,585 | 7.5409 | 1,585 - 6,504 | ||||||||||||||
| GBP / EUR | 959 | 1.1605 | 476 - 959 | ||||||||||||||
| EUR / MXN | 845 | 18.5248 | 0 - 845 | ||||||||||||||
| EUR / CHF | 212 | 0.9642 | 0 - 212 | ||||||||||||||
| USD / GBP | 183 | 0.7756 | 76 - 183 | ||||||||||||||
| CHF / USD | 163 | 1.1366 | 161 - 273 | ||||||||||||||
| USD / CHF | 93 | 0.8904 | 0 - 93 | ||||||||||||||
| EUR / GBP | 53 | 0.8625 | 0 - 53 | ||||||||||||||
| Total | $ | 51,127 | |||||||||||||||
As of September 30, 2023, we have recorded the fair value of foreign currency forward exchange contracts of $0.4 million in prepaid and other and $0.3 million in accounts payable, accrued and other liabilities on the Condensed Consolidated Balance Sheets. On July 6, 2022, we entered into a seven year USD/EUR fixed-to-fixed cross currency interest rate swap to effectively hedge the interest rate exposure relating to $203 million of the $400 million 3.60% Senior Notes due March 2032 which were issued by AptarGroup, Inc. on March 7, 2022. This USD/EUR swap agreement exchanged $203 million of fixed-rate 3.60% USD debt to €200 million of fixed-rate 2.5224% EUR debt. The fair value of this net investment hedge is $12.0 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 September 30, 2023. 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
During the fiscal quarter ended September 30, 2023, we implemented ERP systems at three operating units. Consequently, the control environments have been modified at these locations to incorporate the controls contained within the new ERP systems. Except for the foregoing, 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 September 30, 2023 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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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 BNP 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 September 30, 2023, the Plan purchased no shares of our common stock on behalf of the participants, and sold 11,324 shares of our common stock on behalf of the participants at an average price of $105.73, for an aggregate amount of $1.2 million. At September 30, 2023, the Plan owned 120,479 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 replaced 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 and nine months ended September 30, 2023, we repurchased approximately 66 thousand shares for $8.3 million and 318 thousand shares for $37.3 million, respectively. As of September 30, 2023, there was $70.9 million of authorized share repurchases remaining under the existing authorization.
The following table summarizes our purchases of our securities for the quarter ended September 30, 2023:
| Period | Total Number Of Shares Purchased | Average Price Paid Per Share | Total Number Of Shares Purchased As Part Of Publicly Announced Plans Or Programs | Dollar Value Of Shares That May Yet Be Purchased Under The Plans Or Programs (in millions) | |||||||||||||||||||
| 7/1 - 7/31/23 | — | $ | — | — | $ | 79.2 | |||||||||||||||||
| 8/1 - 8/31/23 | 33,525 | 125.02 | 33,525 | 75.0 | |||||||||||||||||||
| 9/1 - 9/30/23 | 32,000 | 127.23 | 32,000 | 70.9 | |||||||||||||||||||
| Total | 65,525 | $ | 126.10 | 65,525 | $ | 70.9 | |||||||||||||||||
ITEM 5. OTHER INFORMATION
Rule 10b5-1 Plan Elections
During the three months ended September 30, 2023, no director or officer of the Company adopted, modified or terminated a “Rule 10b5-1 trading arrangement” or “non-Rule 10b5-1 trading arrangement,” as each term is defined in Item 408 of Regulation S-K.
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ITEM 6. EXHIBITS
Exhibit 3.1 | |||||||||||
| 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 third quarter of fiscal 2023, filed with the SEC on October 26, 2023, formatted in Inline Extensible Business Reporting Language (XBRL): (i) the Cover Page, (ii) the Condensed Consolidated Statements of Income – Three and Nine Months Ended September 30, 2023 and 2022, (iii) the Condensed Consolidated Statements of Comprehensive Income – Three and Nine Months Ended September 30, 2023 and 2022, (iv) the Condensed Consolidated Balance Sheets – September 30, 2023 and December 31, 2022, (v) the Condensed Consolidated Statements of Changes in Equity – Three and Nine Months Ended September 30, 2023 and 2022, (vi) the Condensed Consolidated Statements of Cash Flows - Nine Months Ended September 30, 2023 and 2022 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: October 26, 2023 | ||||||||
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