Table of Contents
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, 2019
OR
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 1-11846
AptarGroup, Inc.
DELAWARE
36-3853103
(State of Incorporation)
(I.R.S. Employer Identification No.)
265 EXCHANGE DRIVE, SUITE 100, CRYSTAL LAKE, ILLINOIS 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 þ
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 25, 2019, was 63,927,079 shares.
Form 10-Q
Quarter Ended September 30, 2019
INDEX
Part I.
FINANCIAL INFORMATION
Item 1.
Financial Statements (Unaudited)
Condensed Consolidated Statements of Income – Three and Nine Months Ended September 30, 2019 and 2018
1
Condensed Consolidated Statements of Comprehensive Income – Three and Nine Months Ended September 30, 2019 and 2018
2
Condensed Consolidated Balance Sheets – September 30, 2019 and December 31, 2018
3
Condensed Consolidated Statements of Changes in Equity – Three and Nine Months Ended September 30, 2019 and 2018
5
Condensed Consolidated Statements of Cash Flows - Nine Months Ended September 30, 2019 and 2018
6
Notes to Condensed Consolidated Financial Statements
7
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
29
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
44
Item 4.
Controls and Procedures
Part II.
OTHER INFORMATION
Unregistered Sales of Equity Securities and Use of Proceeds
45
Item 6.
Exhibits
46
Signature
47
i
PART I – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
In thousands, except per share amounts
Three Months Ended September 30,
Nine Months Ended September 30,
2019
2018
Net Sales
$
701,278
665,775
2,188,399
2,079,733
Operating Expenses:
Cost of sales (exclusive of depreciation and amortization shown below)
444,237
435,379
1,382,810
1,355,445
Selling, research & development and administrative
111,559
103,574
346,526
323,146
Depreciation and amortization
49,218
41,857
144,574
123,133
Restructuring initiatives
6,019
23,852
17,286
48,002
611,033
604,662
1,891,196
1,849,726
Operating Income
90,245
61,113
297,203
230,007
Other (Expense) Income:
Interest expense
(8,898)
(8,735)
(26,868)
(24,754)
Interest income
957
1,537
3,738
6,306
Equity in results of affiliates
238
(45)
152
(130)
Miscellaneous, net
(269)
(2,928)
148
(4,372)
(7,972)
(10,171)
(22,830)
(22,950)
Income before Income Taxes
82,273
50,942
274,373
207,057
Provision for Income Taxes
25,504
11,920
80,684
52,966
Net Income
56,769
39,022
193,689
154,091
Net Income Attributable to Noncontrolling Interests
(19)
(26)
(20)
Net Income Attributable to AptarGroup, Inc.
56,750
38,996
193,669
154,071
Net Income Attributable to AptarGroup, Inc. per Common Share:
Basic
0.89
0.63
3.05
2.47
Diluted
0.85
0.60
2.93
2.38
Average Number of Shares Outstanding:
64,010
62,378
63,485
62,304
66,702
65,129
66,163
64,822
Dividends per Common Share
0.36
0.34
1.06
0.98
See accompanying unaudited Notes to Condensed Consolidated Financial Statements.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
In thousands
Other Comprehensive Income:
Foreign currency translation adjustments
(42,540)
(9,869)
(42,737)
(53,157)
Changes in treasury locks, net of tax
—
17
Changes in derivative gains (losses), net of tax
279
(1,166)
(593)
1,046
Defined benefit pension plan, net of tax
Amortization of prior service cost included in net income, net of tax
82
90
249
278
Amortization of net loss included in net income, net of tax
631
1,243
1,901
3,754
Total defined benefit pension plan, net of tax
713
1,333
2,150
4,032
Total other comprehensive loss
(41,548)
(9,699)
(41,180)
(48,062)
Comprehensive Income
15,221
29,323
152,509
106,029
Comprehensive Income Attributable to Noncontrolling Interests
(7)
(15)
(8)
(4)
Comprehensive Income Attributable to AptarGroup, Inc.
15,214
29,308
152,501
106,025
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30,
December 31,
Assets
Current Assets:
Cash and equivalents
270,577
261,823
Accounts and notes receivable, less allowance for doubtful accounts of $3,775 in 2019 and $3,541 in 2018
552,289
569,630
Inventories
383,491
381,110
Prepaid and other
118,371
118,245
1,324,728
1,330,808
Property, Plant and Equipment:
Buildings and improvements
479,233
453,572
Machinery and equipment
2,432,515
2,368,332
2,911,748
2,821,904
Less: Accumulated depreciation
(1,893,520)
(1,855,810)
1,018,228
966,094
Land
24,511
25,519
1,042,739
991,613
Other Assets:
Investments in equity securities
8,264
25,448
Goodwill
722,070
712,095
Intangible assets
259,712
254,904
Operating lease right-of-use assets
72,481
Miscellaneous
35,145
62,867
1,097,672
1,055,314
Total Assets
3,465,139
3,377,735
In thousands, except share and per share amounts
Liabilities and Stockholders’ Equity
Current Liabilities:
Notes payable, including revolving credit facilities
46,276
101,293
Current maturities of long-term obligations, net of unamortized debt issuance costs
64,941
62,678
Accounts payable and accrued liabilities
537,620
525,199
648,837
689,170
Long-Term Obligations, net of unamortized debt issuance costs
1,075,153
1,125,993
Deferred Liabilities and Other:
Deferred income taxes
36,072
53,917
Retirement and deferred compensation plans
67,546
62,319
Operating lease liabilities
55,278
Deferred and other non-current liabilities
28,274
23,465
Commitments and contingencies
187,170
139,701
Stockholders’ Equity:
AptarGroup, Inc. stockholders’ equity
Common stock, $.01 par value, 199 million shares authorized, 68.5 and 67.3 million shares issued as of September 30, 2019 and December 31, 2018, respectively
685
673
Capital in excess of par value
756,988
678,769
Retained earnings
1,498,300
1,371,826
Accumulated other comprehensive loss
(351,672)
(310,504)
Less: Treasury stock at cost, 4.6 and 4.4 million shares as of September 30, 2019 and December 31, 2018, respectively
(350,645)
(318,208)
Total AptarGroup, Inc. Stockholders’ Equity
1,553,656
1,422,556
Noncontrolling interests in subsidiaries
323
315
Total Stockholders’ Equity
1,553,979
1,422,871
Total Liabilities and Stockholders’ Equity
4
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
Three Months Ended
AptarGroup, Inc. Stockholders’ Equity
September 30, 2019 and 2018
Accumulated
Other
Common
Capital in
Non-
Retained
Comprehensive
Stock
Treasury
Excess of
Controlling
Total
Earnings
(Loss) Income
Par Value
Interest
Equity
Balance - June 30, 2018
1,328,034
(291,660)
668
(336,278)
646,449
299
1,347,512
Net income
26
(9,858)
(11)
Changes in unrecognized pension gains (losses) and related amortization, net of tax
Stock awards and option exercises
12,137
24,261
36,402
Cash dividends declared on common stock
(21,179)
Balance - September 30, 2018
1,345,851
(301,348)
672
(324,141)
670,710
314
1,392,058
Balance - June 30, 2019
1,464,607
(310,136)
683
(317,380)
743,332
316
1,581,422
19
(42,528)
(12)
2,512
13,656
16,170
(23,057)
Treasury stock purchased
(35,777)
Balance - September 30, 2019
Nine Months Ended
Balance - December 31, 2017
1,301,147
(253,302)
667
(346,245)
609,471
310
1,312,048
20
Adoption of revenue recognition standard
2,937
(53,141)
(16)
11
26,009
67,705
93,725
(60,989)
(3,905)
Common stock repurchased and retired
(51,315)
(6)
(6,466)
(57,787)
Balance - December 31, 2018
(42,725)
12
22,436
78,219
100,667
(67,195)
(54,873)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
In thousands, brackets denote cash outflows
Cash Flows from Operating Activities:
Adjustments to reconcile net income to net cash provided by operations:
Depreciation
124,787
113,555
Amortization
19,787
9,578
Stock-based compensation
18,075
14,829
Provision for doubtful accounts
930
190
Loss (gain) on disposition of fixed assets
303
(979)
5,948
(5,414)
Defined benefit plan expense
11,517
14,466
(152)
130
Changes in balance sheet items, excluding effects from foreign currency adjustments:
Accounts and other receivables
724
(72,620)
(16,025)
(41,183)
Prepaid and other current assets
(1,721)
(807)
15,047
55,921
Income taxes payable
6,729
(7,481)
Retirement and deferred compensation plan liabilities
(935)
(21,534)
Other changes, net
1,678
(3,157)
Net Cash Provided by Operations
380,381
209,585
Cash Flows from Investing Activities:
Capital expenditures
(186,841)
(145,321)
Proceeds from sale of property, plant and equipment
3,658
4,056
Insurance proceeds
10,631
Acquisition of business, net of cash acquired
(49,062)
(527,916)
Acquisition of intangible assets, net
(4,621)
(346)
Investment in equity securities
(3,530)
(10,000)
Proceeds from sale of investment in equity securities
16,487
Notes receivable, net
(89)
216
Net Cash Used by Investing Activities
(223,998)
(668,680)
Cash Flows from Financing Activities:
Proceeds from notes payable
36,893
18,003
Repayments of notes payable
(41,145)
(6,395)
Proceeds and repayments of short term credit facility, net
(47,253)
139,384
Proceeds from long-term obligations
10,524
10,092
Repayments of long-term obligations
(64,924)
(67,026)
Dividends paid
Proceeds from stock option exercises
81,815
78,896
Purchase of treasury stock
Net Cash (Used) Provided by Financing Activities
(146,158)
50,273
Effect of Exchange Rate Changes on Cash
(6,471)
(7,436)
Net Increase (Decrease) in Cash and Equivalents and Restricted Cash
(416,258)
Cash and Equivalents and Restricted Cash at Beginning of Period
266,823
712,640
Cash and Equivalents and Restricted Cash at End of Period
296,382
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 CSP Technologies Acquisition (as defined herein).
291,382
Restricted cash included in prepaid and other
5,000
Total Cash and Equivalents and Restricted Cash shown in the Statement of Cash Flows
(Dollars in Thousands, Except per Share Amounts, or as Otherwise Indicated)
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.
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, 2018 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, 2018. The results of operations of any interim period are not necessarily indicative of the results that may be expected for the year.
During the quarter ended June 30, 2018, primarily based on published estimates, which indicate that Argentina's three-year cumulative inflation rate has exceeded 100%, we concluded that Argentina has become a highly inflationary economy. Beginning July 1, 2018, we have applied highly inflationary accounting for our Argentinian subsidiaries. We have changed the functional currency from the Argentinian peso to the U.S. dollar. Local currency monetary assets and liabilities have been remeasured into U.S. dollars using exchange rates as of the latest balance sheet date, with remeasurement adjustments and other transaction gains and losses recognized in net earnings. Our Argentinian operations contributed less than 2% of consolidated net assets and revenues at and for the nine months ended September 30, 2019 and 2018.
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 February 2016, the FASB issued a new standard related to leases to increase transparency and comparability among organizations. Most prominent among the changes in the standard is the recognition of right-of-use (“ROU”) assets and lease liabilities by lessees for those leases classified as operating leases, as our accounting for finance leases remained substantially unchanged. Under the new standard, disclosures are required to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. We adopted the standard on January 1, 2019 using a modified retrospective transition, with the effective date method. Under this method, financial results reported in periods prior to 2019 are not recast. We elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allows companies to carry forward their historical lease classification. We also implemented internal controls and key system functionality to enable the preparation of financial information on adoption. The impact of adoption of the standard to previously reported results is shown below.
Balance at
January 1,
Adjustments
Consolidated Balance Sheets
83,222
(1,383)
116,862
Property, plant and equipment
5,876
997,489
2,631
65,309
20,508
545,707
61,331
Long-term obligations, net of unamortized debt issuance costs
3,245
1,129,238
In February 2018, the FASB issued ASU 2018-02, which provides guidance on the reclassification of certain tax effects from accumulated other comprehensive income. This guidance allows for the reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act of 2017 (“TCJA”). The new standard is effective for fiscal years and interim periods beginning after December 15, 2018. We elected to early adopt this standard in the fourth quarter of 2018. As part of this adoption, we elected to reclassify $6.7 million of stranded income tax effects of the TCJA from accumulated other comprehensive income to retained earnings at the beginning of the fourth quarter of 2018.
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.
LEASES
We determine if an arrangement is a lease at inception. Operating lease assets are included in operating lease ROU assets and operating lease liabilities are included in accounts payable and accrued liabilities and operating lease liabilities in our consolidated balance sheets. Finance leases are included in property, plant and equipment, current maturities of long-term obligations and long-term obligations in our consolidated balance sheets.
ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. We use the implicit rate when readily determinable. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at the commencement date of the lease in determining the present value of lease payments. The operating lease ROU asset includes any lease payments made as well as initial direct costs incurred and excludes lease incentives. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for operating lease payments is recognized on a straight-line basis over the lease term.
We have lease agreements with lease and non-lease components, which are generally accounted for separately. For certain equipment leases, we account for the lease and non-lease components as a single lease component. We have elected not to recognize right-of-use assets and lease liabilities that arise from short-term leases (a lease whose term is 12 months or less and does not include a purchase option that we are reasonably certain to exercise).
Certain vehicle lease contracts include guaranteed residual value that is considered in the determination of lease classification. The probability of having to satisfy a residual value guarantee is not considered for the purpose of lease classification, but is considered when measuring a lease liability.
GOODWILL
We believe that the accounting estimates related to determining the fair value of our reporting units is a critical accounting estimate because: (1) it is highly susceptible to change from period to period because it requires management to make assumptions about the future cash flows for each reporting unit over several years, and (2) the impact that recognizing an impairment would have on the assets reported on our balance sheet as well as our results of operations could be material. Management’s determination of the fair value of our reporting units, based on future cash flows for the reporting units, requires significant judgment and the use of estimates and assumptions related to projected revenue growth rates, the terminal growth factor, as well as the discount rate. Actual cash flows in the future may differ significantly from those forecasted.
Management believes goodwill, or the excess purchase price over the fair value of the net assets acquired in purchase transactions has continuing value. Goodwill is not amortized and must be tested annually, or more frequently as circumstances dictate, for impairment. During the third quarter of 2019, we performed a separate quantitative impairment assessment using the discounted cash flow analysis of the Active Packaging reporting unit, which was formed as a result of the CSP Technologies Acquisition in the third quarter of 2018. We calculated the fair value of the Active Packaging reporting unit and compared it with the associated carrying amount (the “step one” approach”) as of July 1, 2019. Based on this quantitative analysis, the fair value of the reporting unit exceeded the carrying value and therefore no impairment loss was recognized.
RETIREMENT OF COMMON STOCK
During the first nine months of 2019, we repurchased 493 thousand shares of common stock, all of which were returned to treasury stock. During the first nine months of 2018, we repurchased 668 thousand shares of common stock, of which 623 thousand shares were immediately retired. Common stock was reduced by the number of shares retired at $0.01 par value per share. We allocate the excess purchase price over par value between additional paid-in capital and retained earnings.
8
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 temporary 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.
All of our non-U.S. earnings are subject to U.S. taxation, either from the transition tax enacted in the U.S. by the TCJA on accumulated non-U.S. earnings as of the end of 2017 or the global intangible low-taxed income (“GILTI”) provisions on non-U.S. earnings thereafter. We maintain our assertion that the cash and distributable reserves at our non-U.S. affiliates are indefinitely reinvested. We will provide for the necessary withholding and local income taxes when management decides that an affiliate should make a distribution. These decisions are made taking into consideration the financial requirements of the non-U.S. affiliates and the global cash management goals of the Company.
We provide a liability for the amount of unrecognized tax benefits from uncertain tax positions. This liability is provided whenever we determine that a tax benefit will not meet a more-likely-than-not threshold for recognition. See Note 5 - Income Taxes for more information.
NOTE 2 – REVENUE
At contract inception, we assess the goods and services promised in our contracts with customers and identify a performance obligation for each promise to transfer a good or service (or bundle of goods or services) that is distinct. To identify the performance obligations, we consider all the goods or services promised in the contract, whether explicitly stated or implied based on customary business practices. For a contract that has more than one performance obligation, we allocate the total contract consideration to each distinct performance obligation on a relative standalone selling price basis. Revenue is recognized when (or as) the performance obligations are satisfied (i.e., when the customer obtains control of the good or service). The majority of our revenues are derived from product and tooling sales; however, we also receive revenues from service, license, exclusivity and royalty arrangements, which collectively are not material to the quarterly and year-to-date results. Revenue by segment and geography for the three and nine months ended September 30, 2019 and 2018 is as follows:
For the Three Months Ended September 30, 2019
Latin
Segment
Europe
Domestic
America
Asia
Beauty + Home
188,542
75,931
40,261
23,448
328,182
Pharma
174,252
78,259
6,366
10,374
269,251
Food + Beverage
28,718
57,307
8,058
9,762
103,845
391,512
211,497
54,685
43,584
For the Three Months Ended September 30, 2018
190,267
83,353
44,653
23,487
341,760
161,733
50,126
6,165
9,491
227,515
29,472
47,870
7,476
11,682
96,500
381,472
181,349
58,294
44,660
For the Nine Months Ended September 30, 2019
607,316
236,883
124,352
69,370
1,037,921
549,080
226,073
21,100
27,638
823,891
92,015
177,587
25,153
31,832
326,587
1,248,411
640,543
170,605
128,840
For the Nine Months Ended September 30, 2018
622,184
252,709
140,238
73,338
1,088,469
520,574
132,496
19,229
26,552
698,851
90,185
143,005
23,343
35,880
292,413
1,232,943
528,210
182,810
135,770
9
We perform our obligations under a contract with a customer by transferring goods and/or services in exchange for consideration from the customer. The timing of performance will sometimes differ from the timing of the receipt of the associated consideration from the customer, thus resulting in the recognition of a contract asset or a contract liability. We recognize a contract asset when we transfer control of goods or services to a customer prior to invoicing for the related performance obligation. The contract asset is transferred to accounts receivable when the product is shipped and invoiced to the customer. We recognize a contract liability if the customer's payment of consideration precedes the entity's performance.
The opening and closing balances of our contract asset and contract liabilities are as follows:
Balance as of
Increase/
December 31, 2018
September 30, 2019
(Decrease)
Contract asset (current)
15,858
19,044
3,186
Contract asset (long-term)
Contract liability (current)
68,134
59,500
(8,634)
Contract liability (long-term)
11,261
12,705
1,444
The differences in the opening and closing balances of our contract asset and contract liabilities are primarily the result of timing differences between our performance and the customer’s payment. The total amount of revenue recognized during the current year against contract liabilities is $40.9 million, including $22.6 million relating to contract liabilities at the beginning of the year.
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 dispensing, sealing and active packaging solutions. The amount of consideration is typically fixed for such customers. At the time of delivery, the customer is invoiced the agreed-upon price. Revenue from product sales is typically recognized upon manufacture or shipment, when control of the goods transfers to the customer.
To determine when the control transfers, we typically assess, among other things, the shipping terms of the contract, shipping being one of the indicators of transfer of control. A majority of product sales are sold free on board (“FOB”) shipping point. For FOB shipping point shipments, control of the goods transfers to the customer at the time of shipment of the goods. Therefore, our performance obligation is satisfied at the time of shipment. 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.
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.
10
Tooling Sales
We also build or contract to build molds and other tools (collectively defined as “tooling”) necessary to produce our products. As with product sales, we recognize revenue when control of the tool transfers to the customer. If the tooling is highly customized with no alternative use to us and we have an enforceable right to payment for performance completed to date, we transfer control and recognize revenue over time by measuring progress towards completion using the Input Method based on costs incurred relative to total estimated costs to completion. Otherwise, revenue for the tooling is recognized at the point in time when the customer approves the tool. We do not have any material significant payment terms as payment is typically either received during the mold-build process or shortly after completion.
In certain instances, we offer extended warranties on tools sold to our customers above and beyond the normal standard warranties. We normally receive payment at the inception of the contract and recognize revenue over the term of the contract. At December 31, 2018, $758 thousand of unearned revenue associated with outstanding contracts was reported in Accounts Payable and Other Liabilities. At September 30, 2019, the unearned amount was $504 thousand. We expect to recognize approximately $49 thousand of the unearned amount during the remainder of 2019, $260 thousand in 2020, and $195 thousand thereafter.
NOTE 3 - INVENTORIES
Inventories, by component, consisted of:
Raw materials
111,551
110,720
Work in process
129,753
131,091
Finished goods
142,187
139,299
NOTE 4 – GOODWILL AND OTHER INTANGIBLE ASSETS
The changes in the carrying amount of goodwill by reporting segment since December 31, 2018 are as follows:
Beauty +
Food +
Corporate
Home
Beverage
& Other
223,933
359,883
128,279
1,615
713,710
Accumulated impairment losses
(1,615)
Balance as of December 31, 2018
Acquisition
28,138
Foreign currency exchange effects
(4,994)
(12,876)
(293)
(18,163)
218,939
375,145
127,986
723,685
Balance as of September 30, 2019
During the third quarter of 2019, we performed a separate quantitative impairment assessment using a discounted cash flow analysis of the Active Packaging reporting unit, which was formed as a result of the CSP Technologies Acquisition in the third quarter of 2018. We calculated the fair value of the Active Packaging reporting unit and compared it with the associated carrying amount (the “step one” approach”) as of July 1, 2019. Based on this quantitative analysis, the fair value of the reporting unit exceeded the carrying value and therefore no impairment loss was recognized.
The table below shows a summary of intangible assets as of September 30, 2019 and December 31, 2018.
Weighted Average
Gross
Amortization Period
Carrying
Net
(Years)
Amount
Value
Amortized intangible assets:
Patents
3.0
5,972
(4,635)
1,337
5,427
(5,294)
133
Acquired technology
13.4
93,153
(22,856)
70,297
92,389
(18,304)
74,085
Customer relationships
13.9
187,994
(29,336)
158,658
179,597
(20,439)
159,158
Trademarks and trade names
7.2
33,026
(9,564)
23,462
21,243
(5,914)
15,329
License agreements and other
11.0
14,830
(8,872)
5,958
13,852
(7,653)
6,199
Total intangible assets
12.8
334,975
(75,263)
312,508
(57,604)
Aggregate amortization expense for the intangible assets above for the quarters ended September 30, 2019 and 2018 was $7,399 and $4,005, respectively. Aggregate amortization expense for the intangible assets above for the nine months ended September 30, 2019 and 2018 was $19,787 and $9,578, respectively.
Future estimated amortization expense for the years ending December 31 is as follows:
7,683
(remaining estimated amortization for 2019)
2020
26,340
2021
25,484
2022
25,247
2023 and thereafter
174,958
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, 2019.
NOTE 5 – INCOME TAXES
The effective tax rate for the three months ended September 30, 2019 of 31.0% reflects a $2.1 million charge from the increase in the tax rate in France, which is retroactive to the beginning of 2019, offset by a $2.0 million benefit from the excess tax benefits from employee stock-based compensation. The effective tax rate for the three months ended September 30, 2018 of 23.4% was favorably impacted by net tax benefits of $5.0 million from discrete events. This included a $4.5 million benefit from the excess tax benefits from employee stock-based compensation and a $1.9 million benefit related to U.S. tax reform legislation, offset by other discrete charges.
The effective tax rate for the nine months ended September 30, 2019 of 29.4% was favorably impacted by net tax benefits of $4.3 million from discrete events. This consisted of a favorable impact of $13.6 million from the excess tax benefits from employee stock-based compensation offset by, among other items, a $7.0 million charge recognized to record a valuation allowance to properly reflect the realization of recorded deferred tax assets and the $2.1 million charge from the French tax rate increase. The effective tax rate for the nine months ended September 30, 2018 of 25.6% was favorably impacted by net tax benefits of $15.1 million from discrete items. This included a favorable impact of $9.9 million from the excess tax benefits from employee stock-based compensation and a $5.4 million benefit related to U.S. tax reform legislation.
NOTE 6 – DEBT
We hold U.S. dollar and euro-denominated debt to align our capital structure with our earnings base. At September 30, 2019, our long-term obligations consisted of the following:
Unamortized
Debt Issuance
Principal
Costs
Notes payable 0.00% – 10.90%, due in monthly and annual installments through 2028
19,907
Senior unsecured notes 3.2%, due in 2022
75,000
70
74,930
Senior unsecured debts 3.8% USD floating swapped to 1.36% EUR fixed, equal annual installments through 2022
168,000
428
167,572
Senior unsecured notes 3.5%, due in 2023
125,000
153
124,847
Senior unsecured notes 1.0%, due in 2023
109,005
371
108,634
Senior unsecured notes 3.4%, due in 2024
50,000
66
49,934
Senior unsecured notes 3.5%, due in 2024
100,000
99,847
Senior unsecured notes 1.2%, due in 2024
218,010
782
217,228
Senior unsecured notes 3.6%, due in 2025
181
124,819
Senior unsecured notes 3.6%, due in 2026
Finance Lease Liabilities
27,557
1,142,479
2,385
1,140,094
Current maturities of long-term obligations
(64,941)
Total long-term obligations
1,077,538
At December 31, 2018, our long-term obligations consisted of the following:
Notes payable 0.00% – 16.00%, due in monthly and annual installments through 2028
15,531
88
74,912
Senior unsecured debts 4.0% USD floating swapped to 1.36% EUR fixed, equal annual installments through 2022
224,000
541
223,459
114,535
432
114,103
76
49,924
99,819
229,070
904
228,166
207
124,793
208
124,792
Capital lease obligations
8,353
1,191,489
2,818
1,188,671
(62,678)
1,128,811
Aggregate long-term maturities, excluding finance lease liabilities, due annually from the current balance sheet date for the next five years are $61,085, $61,515, $135,217, $112,121, $494,402 and $250,582 thereafter.
We also maintain a multi-currency revolving credit facility with two tranches, providing for unsecured financing of up to $300 million that is available in the U.S. and up to €150 million that is available to our wholly-owned UK subsidiary. Each borrowing under the credit facility will bear interest at rates based on LIBOR, prime rates or other similar rates, in each case plus an applicable margin. A facility fee on the total amount of the facility is also payable quarterly, regardless of usage. The applicable margins for borrowings under the credit facility and the facility fee percentage may change from time to time depending on changes in our consolidated leverage ratio. The December 31, 2018 outstanding balance of €69.0 million on the euro-based revolving credit facility was paid in the first quarter of 2019. €27.0 million was utilized as of September 30, 2019. Credit facility balances are included in notes payable, including revolving credit facilities on the Condensed Consolidated Balance Sheet.
13
Our revolving credit facility and corporate long-term obligations require us to satisfy certain financial and other covenants including:
Requirement
Level at September 30, 2019
Consolidated Leverage Ratio (1)
Maximum of 3.50 to 1.00
1.68 to 1.00
Consolidated Interest Coverage Ratio (1)
Minimum of 3.00 to 1.00
16.07 to 1.00
NOTE 7 – LEASE COMMITMENTS
We lease certain warehouse, plant and office facilities as well as certain equipment under noncancelable operating and finance leases expiring at various dates through the year 2028. Most of the operating leases contain renewal options and certain leases include options to purchase the related asset during or at the end of the lease term.
Amortization expense related to finance leases is included in depreciation expense while rent expense related to operating leases is included within cost of sales and selling research & development and administrative expenses (“SG&A”). Rent expense related to operating leases (including taxes, insurance and maintenance when included in the rent) amounted to $8.3 million and $24.2 million in the three and nine months ended September 30, 2018, respectively, under the old lease accounting standard.
The components of lease expense for the current period were as follows:
Operating lease cost
6,001
17,442
Finance lease cost:
Amortization of right-of-use assets
1,165
3,041
Interest on lease liabilities
344
984
Total finance lease cost
1,509
4,025
Short-term lease and variable lease costs
1,757
6,027
Supplemental cash flow information related to leases was as follows:
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases
15,874
Operating cash flows from finance leases
877
Financing cash flows from finance leases
3,365
Right-of-use assets obtained in exchange for lease obligations:
Operating leases
11,673
Finance leases
12,401
14
Supplemental balance sheet information related to leases was as follows:
Operating Leases
16,351
Total operating lease liabilities
71,629
Finance Leases
Property, plant and equipment, gross
43,042
Accumulated depreciation
(3,125)
Property, plant and equipment, net
39,917
Current maturities of long-term obligations, net of unamortized debt issuance cost
3,856
Long-term obligations, net of unamortized debt issuance cost
23,701
Total finance lease liabilities
Weighted Average Remaining Lease Term (in years)
6.0
7.1
Weighted Average Discount Rate
5.06
%
5.34
Maturities of lease liabilities as of September 30, 2019, were as follows:
Operating
Finance
Leases
Year 1
19,113
5,028
Year 2
15,763
4,470
Year 3
11,167
3,659
Year 4
9,515
2,794
Year 5
7,177
2,340
Thereafter
21,337
17,433
Total lease payments
84,072
35,724
Less imputed interest
(12,443)
(8,167)
Maturities of lease liabilities as of December 31, 2018 under the old lease accounting standard were as follows:
Capital
26,512
1,828
21,386
1,653
16,529
1,546
12,549
1,160
10,225
880
21,932
3,827
109,133
10,894
(2,541)
Present value of future lease payments
As of September 30, 2019, we have additional operating and finance leases, primarily for buildings, that have not yet commenced of $3.8 million. These operating and finance leases will commence in years 2019 and 2020 with lease terms of 3 to 10 years.
15
NOTE 8 – RETIREMENT AND DEFERRED COMPENSATION PLANS
Components of Net Periodic Benefit Cost:
Domestic Plans
Foreign Plans
Service cost
2,772
2,853
1,429
1,457
Interest cost
1,845
1,713
491
445
Expected return on plan assets
(3,095)
(2,803)
(581)
(645)
Amortization of net loss
490
1,214
356
422
Amortization of prior service cost
111
122
Net periodic benefit cost
2,012
2,977
1,806
1,801
8,320
8,546
4,334
4,479
5,536
5,139
1,487
1,374
(9,284)
(8,409)
(1,759)
(1,982)
1,468
3,642
1,078
1,301
337
376
6,040
8,918
5,477
5,548
The components of net periodic benefit cost, other than the service cost component, are included in the line “Miscellaneous, net” in the income statement.
EMPLOYER CONTRIBUTIONS
Although we have no minimum funding requirement, we contributed $365 thousand to our domestic defined benefit plans during the nine months ended September 30, 2019 and do not expect additional significant contributions during 2019. We expect to contribute approximately $4.3 million to our foreign defined benefit plans in 2019, and as of September 30, 2019, we have contributed approximately $1.5 million of that amount.
NOTE 9 – ACCUMULATED OTHER COMPREHENSIVE INCOME
Changes in Accumulated Other Comprehensive (Loss) Income by Component:
Foreign
Defined Benefit
Currency
Pension Plans
Derivatives
(185,503)
(64,595)
(3,204)
Other comprehensive (loss) income before reclassifications
12,507
(40,634)
Amounts reclassified from accumulated other comprehensive income (loss)
(11,444)
(7,412)
Net current-period other comprehensive (loss) income
1,063
(48,046)
(238,644)
(60,563)
(2,141)
(248,401)
(60,463)
(1,640)
11,806
(30,919)
(12,399)
(10,249)
(41,168)
(291,126)
(58,313)
(2,233)
16
Reclassifications Out of Accumulated Other Comprehensive (Loss) Income:
Amount Reclassified from
Details about Accumulated Other
Accumulated Other
Affected Line in the Statement
Comprehensive Income Components
Where Net Income is Presented
Defined Benefit Pension Plans
846
1,636
(1)
1,758
Total before tax
(244)
(425)
Tax benefit
Net of tax
Changes in treasury locks
Interest Expense
Changes in cross currency swap: interest component
(1,309)
(1,337)
Changes in cross currency swap: foreign exchange component
(6,491)
(2,131)
(7,800)
(3,464)
588
(2,876)
Total reclassifications for the period
(7,087)
(1,543)
2,546
4,943
2,883
5,319
(733)
(1,287)
(4,315)
(3,824)
(8,084)
(9,984)
(13,782)
2,338
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 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 for additional details.
CASH FLOW HEDGE
For derivative instruments that are designated and qualify as cash flow hedges, the changes in fair values are recorded in accumulated other comprehensive loss and included in changes in derivative gain/loss. The changes in the fair values of derivatives designated as cash flow hedges are reclassified from accumulated other comprehensive loss to net income when the underlying hedged item is recognized in earnings. Cash flows from the settlement of derivative contracts designated as cash flow hedges offset cash flows from the underlying hedged items and are included in operating activities in the Condensed Consolidated Statements of Cash Flows.
During 2017, our wholly-owned UK subsidiary borrowed $280 million in term loan borrowings under a new credit facility. In order to mitigate the currency risk of U.S. dollar debt on a euro functional currency entity and to mitigate the risk of variability in interest rates, we entered into a cross currency swap in the notional amount of $280 million to effectively hedge the foreign exchange and interest rate exposure on the $280 million term loan. This EUR/USD swap agreement fixed our U.S. dollar floating-rate debt to 1.36% euro fixed-rate debt. Related to this hedge, approximately $2.2 million of loss is included in accumulated other comprehensive loss at September 30, 2019. The amount expected to be recognized into earnings during the next 12 months related to the interest component of our cross currency swap based on prevailing foreign exchange and interest rates at September 30, 2019 is $4.2 million. The amount expected to be recognized into earnings during the next 12 months related to the foreign exchange component of our cross currency swap is dependent on fluctuations in currency exchange rates. As of September 30, 2019, the fair values of the cross currency swap were a $6.7 million asset. The swap contract expires on July 20, 2022.
HEDGE OF NET INVESTMENTS IN FOREIGN OPERATIONS
A significant number of our operations are located outside of the United States. Because of this, movements in exchange rates may have a significant impact on the translation of the financial condition and results of operations of our foreign subsidiaries. A strengthening U.S. dollar relative to foreign currencies has a dilutive translation effect on our financial condition and results of operations. Conversely, a weakening U.S. dollar has an additive effect. In some cases, we maintain debt in these subsidiaries to offset the net asset exposure. We do not otherwise actively manage this risk using derivative financial instruments. In the event we plan on a full or partial liquidation of any of our foreign subsidiaries where our net investment is likely to be monetized, we will consider hedging the currency exposure associated with such a transaction.
OTHER
As of September 30, 2019, we have recorded the fair value of foreign currency forward exchange contracts of $38 thousand in prepaid and other and $0.6 million in accounts payable and accrued liabilities on the balance sheet. All forward exchange contracts outstanding as of September 30, 2019 had an aggregate notional contract amount of $43.9 million.
18
Fair Value of Derivative Instruments in the Condensed Consolidated Balance Sheets as of September 30, 2019 and December 31, 2018
not
Designated
Balance Sheet
as Hedging
Location
Instruments
Derivative Assets
Foreign Exchange Contracts
38
259
Cross Currency Swap Contract (1)
6,673
Derivative Liabilities
597
331
1,040
This cross currency swap contract is composed of both an interest component and a foreign exchange component.
The Effect of Cash Flow Hedge Accounting on Accumulated Other Comprehensive Income (Loss) for the Quarters Ended September 30, 2019 and 2018
Amount of Gain (Loss)
Total Amount
Location of (Loss)
Reclassified from
of Affected
Derivatives in Cash
Recognized in
Gain Recognized
Income
Flow Hedging
Other Comprehensive
in Income on
Statement
Relationships
Income on Derivative
Line Item
Cross currency swap contract:
Interest component
1,586
(68)
1,309
Foreign exchange component
6,491
2,131
8,077
2,063
7,800
3,468
The Effect of Cash Flow Hedge Accounting on Accumulated Other Comprehensive Income (Loss) for the Nine Months Ended September 30, 2019 and 2018
4,058
5,084
4,315
3,824
8,084
9,984
12,142
15,068
12,399
13,808
The Effect of Derivatives Not Designated as Hedging Instruments on the Condensed Consolidated Statements of Income for the Quarters Ended September 30, 2019 and 2018
Amount of (Loss) Gain
Derivatives Not Designated
Location of (Loss) Gain Recognized
Recognized in Income
as Hedging Instruments
in Income on Derivatives
on Derivatives
Other (Expense) Income:Miscellaneous, net
(1,011)
The Effect of Derivatives Not Designated as Hedging Instruments on the Condensed Consolidated Statements of Income for the Nine Months Ended September 30, 2019 and 2018
(529)
102
Gross Amounts not Offset
Gross Amounts
Net Amounts
in the Statement of
Offset in the
Presented in
Financial Position
Statement of
the Statement of
Financial
Cash Collateral
Received
Description
6,711
Total Liabilities
1,371
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:
As of September 30, 2019, the fair values of our financial assets and liabilities were categorized as follows:
Level 1
Level 2
Level 3
Foreign exchange contracts (1)
Cross currency swap contract (1)
Total assets at fair value
Liabilities
Contingent consideration obligation
3,000
Total liabilities at fair value
3,597
As of December 31, 2018, the fair values of our financial assets and liabilities were categorized as follows:
The carrying amounts of our other current financial instruments such as cash and equivalents, accounts and notes receivable, notes payable and current maturities of long-term obligations approximate fair value due to the short-term maturity of the instruments. We consider our long-term obligations a Level 2 liability and utilize the market approach valuation technique based on interest rates that are currently available to us for issuance of debt with similar terms and maturities. The estimated fair value of our long-term obligations was $1.1 billion as of September 30, 2019 and December 31, 2018. As discussed in Note 18 – Acquisitions, we have a contingent consideration obligation to the selling equityholder of Gateway Analytical LLC (“Gateway”) in connection with the Gateway Acquisition (as defined herein) based on 2020 and 2022 performance targets defined in the purchase agreement. We consider this a Level 3 liability and on a quarterly basis we assess the projected results for the acquired business in comparison to the earnout targets and adjust the liability accordingly.
NOTE 12 - COMMITMENTS AND CONTINGENCIES
The Company, in the normal course of business, is 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 and could include amounts in excess of any accruals which management has established. Were such unfavorable final outcomes to occur, it is possible that they could have a material adverse effect on our financial position, results of operations and cash flows.
Under our Certificate of Incorporation, we have agreed to indemnify our officers and directors for certain events or occurrences while the officer or director is, or was, serving at our request in such capacity. The maximum potential amount of future payments we could be required to make under these indemnification agreements is unlimited; however, we have a directors and officers liability insurance policy that covers a portion of our exposure. As a result of our insurance policy coverage, we believe the estimated fair value of these indemnification agreements is minimal. We have no liabilities recorded for these agreements as of September 30, 2019 and December 31, 2018.
An environmental investigation, undertaken to assess areas of possible contamination, was completed at our facility in Jundiaí, São Paulo, Brazil. The facility is primarily an internal supplier of anodized aluminum components for certain of our dispensing systems. The testing indicated that soil and groundwater in certain areas of the facility were impacted above acceptable levels established by local regulations. In March 2017, we reported the findings to the relevant environmental authority, the Environmental Company of the State of São Paulo – CETESB. Based upon our best estimate, we recorded a reserve of $1.5 million (operating expense) in the first quarter of 2017 related to this contingency. For the nine months ended September 30, 2019, we have paid approximately $0.6 million and made adjustments to the accrual based on our future anticipated expenditures. As of September 30, 2019, our outstanding reserve is $0.5 million. The ultimate loss associated with this environmental contingency is subject to the investigation and ongoing review of the CETESB. We will continue to evaluate the range of likely costs as the investigation proceeds and we have further clarity on the nature and extent of remediation that will be required. We note that the contamination, or any failure to complete any required remediation in a timely manner, could potentially result in fines or penalties.
21
In March 2017, the Supreme Court of Brazil issued a decision that a certain state value added tax should not be included in the calculation of federal gross receipts taxes. The decision reduces our gross receipts tax in Brazil prospectively and, potentially, retrospectively. During the first quarter of 2019, we received a favorable court decision of $2.7 million for the retrospective right to recover part of our claim. This amount is recorded in cost of sales as a favorable impact of $1.7 million and $1.0 million was recognized as interest income. During the fourth quarter of 2018, we recorded an amount of $631 thousand based on the favorable court decision. If the Judicial Court grants full retrospective recovery, we estimate remaining potential recoveries of approximately $10 million, including interest. Due to uncertainties around our remaining court recovery claims, we have not recorded any further amounts relating to the retrospective nature of this matter. However, we anticipate decisions on our remaining claims in 2020.
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, 2019, we repurchased approximately 300 thousand and 493 thousand shares for approximately $35.8 million and $54.9 million, respectively. During the nine months ended September 30, 2018, we repurchased approximately 668 thousand shares for approximately $61.7 million. We did not repurchase any shares during the quarter ended September 30, 2018. As of September 30, 2019, there was $310.1 million of authorized share repurchases available to us.
NOTE 14 – STOCK-BASED COMPENSATION
Historically we have issued stock options and restricted stock units (“RSUs”), which consisted of time-based and performance-based awards, to employees under stock awards plans approved by stockholders. Beginning in 2019, we no longer issue stock options to employees. 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. Previously, non-employee directors were issued stock options under a Director Stock Option Plan. Stock options were awarded with the exercise price equal to the market price on the date of grant and generally vest over three years and expire 10 years after grant.
RSUs granted to employees vest according to a specified performance period and/or vesting period. Time-based RSUs generally vest over three years. Performance-based RSUs vest at the end of the specified performance period, generally three years, assuming required performance or market vesting conditions are met. Performance-based RSUs have one of two vesting conditions: (1) based on our internal financial performance metrics and (2) based on our total shareholder return (“TSR”) relative to total shareholder returns of an industrial peer group. At the time of vesting, the vested shares of common stock are issued in the employee’s name. In addition, RSU awards are generally net settled (shares are withheld to cover the employee tax obligation). RSUs granted to directors are only time-based and generally vest over one year.
Compensation expense attributable to employee stock options for the first nine months of 2019 was approximately $4.4 million ($3.6 million after tax). Approximately $3.7 million of the compensation expense was recorded in selling, research & development and administrative expenses and the balance was recorded in cost of sales. Compensation expense attributable to stock options for the first nine months of 2018 was approximately $8.9 million ($6.9 million after tax). Approximately $7.1 million of the compensation expense was recorded in selling, research & development and administrative expenses and the balance was recorded in cost of sales. The reduction in stock option expense is due to our move to RSUs as discussed above.
For stock option grants, we used historical data to estimate expected life and volatility. The weighted-average fair value of stock options granted under the stock awards plans was $14.82 per share during the first nine months of 2018. This value was estimated on the grant date using the Black-Scholes option-pricing model with the following weighted-average assumptions:
Stock Awards Plans:
Dividend Yield
1.5
Expected Stock Price Volatility
14.2
Risk-free Interest Rate
2.8
Expected Life of Option (years)
6.6
22
A summary of option activity under our stock plans during the nine months ended September 30, 2019 is presented below:
Stock Awards Plans
Director Stock Option Plans
Options
Exercise Price
Outstanding, January 1, 2019
6,761,055
65.76
155,200
58.13
Granted
Exercised
(1,382,639)
57.24
(14,200)
62.33
Forfeited or expired
(131,067)
71.67
Outstanding at September 30, 2019
5,247,349
67.96
141,000
57.71
Exercisable at September 30, 2019
4,464,502
65.61
Weighted-Average Remaining Contractual Term (Years):
5.6
3.3
5.1
Aggregate Intrinsic Value:
263,304
8,508
234,118
Intrinsic Value of Options Exercised During the Nine Months Ended:
76,797
722
September 30, 2018
62,895
2,187
The grant date fair value of options vested during the nine months ended September 30, 2019 and 2018 was $12.2 million and $16.5 million, respectively. Cash received from option exercises was approximately $81.8 million and the actual tax benefit realized for the tax deduction from option exercises was approximately $17.2 million in the nine months ended September 30, 2019. As of September 30, 2019, the remaining valuation of stock option awards to be expensed in future periods was $3.8 million and the related weighted-average period over which it is expected to be recognized is 1.0 year.
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.
Fair value per stock award
134.97
128.70
Grant date stock price
104.51
89.42
Assumptions:
Aptar's stock price expected volatility
16.50
12.30
Expected average volatility of peer companies
31.90
27.50
Correlation assumption
37.40
20.20
Risk-free interest rate
2.19
2.42
Dividend yield assumption
1.30
1.43
A summary of RSU activity as of September 30, 2019 and changes during the nine month period then ended is presented below:
Time-Based RSUs
Performance-Based RSUs
Units
Grant-Date Fair Value
Nonvested at January 1, 2019
261,487
91.78
69,990
111.55
173,333
92.63
123,246
119.35
Vested
(46,912)
87.38
Forfeited
(22,613)
98.82
(9,237)
117.45
Nonvested at September 30, 2019
365,295
92.32
183,999
117.34
Included in the September 30, 2019 time-based RSUs are 11,490 units granted to non-employee directors and 14,257 units vested related to non-employee directors.
23
Compensation expense recorded attributable to RSUs for the first nine months of 2019 and 2018 was approximately $13.7 million and $5.9 million, respectively. The actual tax benefit realized for the tax deduction from RSUs was approximately $719 thousand in the nine months ended September 30, 2019. The fair value of units vested during the nine months ended September 30, 2019 and 2018 was $4.1 million and $2.6 million, respectively. The intrinsic value of units vested during the nine months ended September 30, 2019 and 2018 was $4.9 million and $3.1 million, respectively. As of September 30, 2019, there was $32.3 million of total unrecognized compensation cost relating to RSU awards which is expected to be recognized over a weighted-average period of 2.3 years.
During 2017, we provided a long-term incentive program for certain employees. Each award is based on the cumulative TSR of our common stock during a three-year performance period compared to a peer group. The total expected expense related to this program for awards outstanding as of September 30, 2019 is approximately $3.0 million, of which $789 thousand and $1.0 million was recognized in the first nine months of 2019 and 2018, respectively.
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, 2019 and 2018 is as follows:
Consolidated operations
Income available to common stockholders
Average equivalent shares
Shares of common stock
Effect of dilutive stock-based compensation
Stock options
2,367
2,659
Restricted stock
325
92
Total average equivalent shares
Net income per share
2,425
2,440
253
78
NOTE 16 – SEGMENT INFORMATION
We are organized into three reporting segments. Our Beauty + Home segment sells to the personal care, beauty and home care markets. Our Pharma segment serves customers in the prescription drug, consumer health care, injectables and active packaging markets. Our Food + Beverage segment sells to the food and beverage markets.
24
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, 2018. We evaluate performance of our business units and allocate resources based upon Adjusted EBITDA. Adjusted EBITDA is defined as earnings before net interest, taxes, depreciation, amortization, unallocated corporate expenses, restructuring and acquisition-related costs. All internal segment reporting and discussions of results with our Chief Operating Decision Maker (CODM) are based on segment Adjusted EBITDA.
Financial information regarding our reporting segments is shown below:
Total Sales:
333,870
346,040
1,056,626
1,103,664
271,608
227,691
830,679
699,105
104,458
97,297
328,280
294,362
Total Sales
709,936
671,028
2,215,585
2,097,131
Less: Intersegment Sales:
5,688
4,280
18,705
15,195
2,357
176
6,788
254
613
797
1,693
1,949
Total Intersegment Sales
8,658
5,253
27,186
17,398
Net Sales:
Adjusted EBITDA:
41,475
42,174
143,411
141,155
96,546
84,516
295,553
250,709
18,728
15,482
56,363
46,284
Corporate & Other, unallocated
(9,943)
(7,954)
(33,328)
(28,576)
Acquisition-related costs (1)
(1,355)
(10,369)
(2,636)
(12,932)
Restructuring Initiatives (2)
(6,019)
(23,852)
(17,286)
(48,002)
(49,218)
(41,857)
(144,574)
(123,133)
Interest Income
Restructuring Initiatives by Segment
5,341
18,854
14,869
38,501
168
2,008
381
3,596
204
2,638
826
4,307
Corporate & Other
306
352
1,210
1,598
Total Restructuring Initiatives
Note 17 – INSURANCE SETTLEMENT RECEIVABLE
A fire caused damage to our facility in Annecy, France in June 2016. The fire was contained to one of three production units and there were no reported injuries. Aptar Annecy supplies anodized aluminum components for certain Aptar dispensing systems. We are insured for the damages caused by the fire, including business interruption insurance, and we do not expect this incident to have a material impact on our financial results.
25
Losses related to the fire of $3.2 million and $14.1 million were incurred during the three and nine months ended September 30, 2018, respectively. For the nine months ended September 30, 2019, we received insurance proceeds of $3.4 million, and have no insurance receivable as of September 30, 2019. The final settlement continues to be negotiated. In many cases, our insurance coverage exceeds the amount of our recognized losses. However, no gain contingencies were recognized during the three and nine months ended September 30, 2019 as our ability to realize those gains remains uncertain. During the three and nine months ended September 30, 2019, profitability was not impacted. Profitability was negatively impacted by $1.5 million and $4.4 million during the three and nine months ended September 30, 2018, respectively. These 2018 losses negatively impacted the Beauty + Home and Pharma segments.
NOTE 18 – ACQUISITIONS
On August 2, 2019, we completed our asset acquisition (the “Bapco Acquisition”) of the remaining 80% ownership interest in the capital stock of Bapco Closures Holdings Limited (“Bapco”), for $3.8 million (net of $2.9 million of cash acquired). The 20% ownership investment previously held in Bapco is now included within the intangible assets acquired. Bapco, located in Horesell, UK, provides innovative closures sealing technology that provides package integrity and tamper evidence. The results of Bapco’s operations have been included in the Condensed Consolidated Financial Statements within our Food + Beverage segment since the date of acquisition.
During August 2019, we also invested an aggregate amount of $3.5 million in two preferred equity investments that are accounted for at cost less impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for identical or similar investments of the same issuer. There were no indications of impairment nor were there any changes from observable price changes noted in the three months ended September 30, 2019.
On June 5, 2019, we completed our acquisition (the “Nanopharm Acquisition”) of all of the outstanding capital stock of Nanopharm Ltd. (“Nanopharm”). Nanopharm, located in Newport, UK, is a science-driven, leading provider of orally inhaled and nasal drug product design and development services. The purchase price was approximately $38.1 million (net of $1.8 million of cash acquired) and was funded by cash on hand. The results of Nanopharm’s operations have been included in the Condensed Consolidated Financial Statements within our Pharma segment since the date of acquisition. We are in the process of finalizing purchase accounting.
On May 31, 2019, we completed our acquisition (the “Gateway Acquisition”) of all of the outstanding equity interests of Gateway Analytical LLC (“Gateway”). Gateway, located in Gibsonia, PA, provides industry-leading particulate detection and predictive analytical services to customers developing injectable medicines. The purchase price was approximately $7.0 million and was funded by cash on hand. As part of the Gateway Acquisition, we are also obligated to pay to the selling equityholder of Gateway certain contingent consideration based on 2020 and 2022 performance targets defined in the purchase agreement. Based on projections as of the acquisition date, we estimated the aggregate fair value for this contingent consideration arrangement to be $3.0 million. We are in the process of finalizing purchase accounting. The results of Gateway’s operations have been included in the Condensed Consolidated Financial Statements within our Pharma segment since the date of acquisition.
On August 27, 2018, we completed our acquisition (the “CSP Technologies Acquisition”) of all of the outstanding capital stock of CSP Technologies S.à r.l. (“CSP Technologies”). CSP Technologies is a leader in active packaging technology based on proprietary material science expertise for the pharma and food service markets. CSP Technologies operates two manufacturing locations in the U.S. and one in France. The purchase price was approximately $553.5 million and was funded by cash on hand. At acquisition, we maintained $5.0 million in an escrow account and classified this amount as restricted cash pending the finalization of a working capital adjustment. These funds were released from restriction in January 2019, which resulted in a refund of $964 thousand and a corresponding reduction of our purchase price and the associated goodwill balance in the amount of the refund.
The following table summarizes the assets acquired and liabilities assumed related to the CSP Technologies Acquisition as of the acquisition date at estimated fair value.
August 27, 2018
24,053
Accounts receivable
20,847
42,169
3,995
99,194
278,020
177,120
Other miscellaneous assets
1,039
129
31,989
Long-term obligations
6,037
38,442
1,038
15,344
Net assets acquired
553,458
The following table is a summary of the fair value estimates of the acquired identifiable intangible assets and weighted-average useful lives as of the acquisition date related to the CSP Technologies Acquisition:
Weighted-Average
Estimated
Useful Life
Fair Value
(in years)
of Asset
46,700
113,300
14,600
2,520
Goodwill, net of working capital settlement, in the amount of $277.1 million was recorded for the CSP Technologies Acquisition, of which $173.4 million and $103.7 million is included in the Pharma and Food + Beverage segments, respectively. Goodwill is calculated as the excess of the consideration transferred over the net assets acquired and represents the estimated future economic benefits arising from other assets acquired that could not be individually identified and separately recognized. Goodwill largely consists of leveraging our commercial presence in selling the CSP Technologies line of products in markets where CSP Technologies did not previously operate and the ability of CSP Technologies to maintain its competitive advantage from a technical viewpoint. Goodwill will not be amortized, but will be tested for impairment at least annually. We do not expect any of the goodwill will be deductible for tax purposes.
The unaudited pro forma results presented below include the effects of the CSP Technologies Acquisition as if it had occurred as of January 1, 2017. The unaudited pro forma results reflect certain adjustments related to the acquisition, such as intangible asset amortization, fair value adjustments for inventory and financing costs related to the change in our debt structure. The pro forma results do not include any synergies or other expected benefits of the acquisition. Accordingly, the unaudited pro forma financial information below is not necessarily indicative of either future results of operations or results that might have been achieved had the acquisition been completed on the date indicated.
687,201
2,172,737
Net Income Attributable to AptarGroup Inc.
48,034
158,527
Net Income per common share — basic
0.77
2.54
Net Income per common share — diluted
0.74
2.45
27
On May 1, 2018, we acquired 100% of the common stock of Reboul SAS (“Reboul”), a French manufacturer specializing in stamping, decorating and assembling metal and plastic packaging for the cosmetics and luxury markets, for a purchase price of approximately $3.6 million (net of $112 thousand of cash acquired). The results of Reboul’s operations have been included in the Condensed Consolidated Financial Statements within our Beauty + Home segment since the date of acquisition.
In May 2018, we invested $10.0 million in preferred equity stock of Reciprocal Labs Corporation, doing business as Propeller Health (“Reciprocal Labs”), which was accounted for at cost. No impairment charges were recorded during 2018 or 2019 against this investment. During the fourth quarter of 2018, we recorded a gain of approximately $6.5 million by adjusting the carrying amount to its expected proceeds as this investment was ultimately sold during January 2019.
NOTE 19 – RESTRUCTURING INITIATIVES
In late 2017, we began a business transformation to drive profitable sales growth, increase operational excellence, enhance our approach to innovation and improve organizational effectiveness. The primary focus of the plan is the Beauty + Home segment; however, certain global general and administrative functions are also being addressed. For the three and nine months ended September 30, 2019, we recognized $6.0 million and $17.3 million of restructuring costs related to this plan, respectively. For the three and nine months ended September 30, 2018, we recognized $23.9 million and $48.0 million of restructuring costs related to this plan, respectively. Using current exchange rates, we estimate total implementation costs of approximately $90 million over three years, including costs that have been recognized to date. The cumulative expense incurred as of September 30, 2019 was $83.3 million. We also anticipate making capital investments related to the transformation plan of approximately $50 million, of which $32 million has been incurred to date.
As of September 30, 2019 we have recorded the following activity associated with the business transformation:
Beginning
Net Charges for
Ending
Reserve at
the Nine Months
Interest and
12/31/2018
Ended 9/30/2019
Cash Paid
FX Impact
9/30/2019
Employee severance
3,934
7,566
(4,023)
(258)
7,219
Professional fees and other costs
11,101
9,720
(18,958)
(71)
1,792
Totals
15,035
(22,981)
(329)
9,011
NOTE 20 – SUBSEQUENT EVENTS
Subsequent to the quarter end, on October 1, 2019 we entered into a strategic definitive agreement to acquire 49% of the equity interests in three related companies: Suzhou Hsing Kwang, Suqian Hsing Kwang and Suzhou BTY, (collectively referred to as “BTY”), contingent on settlement date of the transaction. 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 subsequent to 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. The transaction, which is expected to close by the end of 2019 or early 2020, is subject to customary regulatory approvals and other customary closing conditions and the purchase will be funded with available cash on hand and/or borrowings under our revolving credit facilities.
Subsequent to the quarter end, on October 31, 2019 we acquired 100% of the equity interests of Noble International Inc., Genia Medical, Inc. and JBCB Holdings, LLC (collectively referred to as “Noble”), for approximately $62 million. Noble, based in Orlando, FL, is a leading provider in developing patient-centric advanced drug delivery system training devices including autoinjector, prefilled syringe, onbody and respiratory devices for the world’s leading biopharmaceutical companies and original equipment manufacturers. The purchase agreement also provides an earn-out provision providing for the payment of up to $31.3 million based on Noble’s financial performance during a 5 year measurement period.
28
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
Net sales
100.0
63.3
65.4
63.2
65.2
15.9
15.5
15.8
7.0
6.3
5.9
0.9
3.6
0.8
2.3
Operating income
12.9
9.2
13.6
11.1
Other expense
(1.2)
(1.5)
(1.1)
Income before income taxes
11.7
7.7
12.5
10.0
8.1
8.9
7.4
Effective tax rate
31.0
23.4
29.4
25.6
Adjusted EBITDA margin (1)
20.9
20.2
21.1
19.7
NET SALES
We reported net sales of $701.3 million for the quarter ended September 30, 2019, which represents a 5% increase compared to $665.8 million reported during the third quarter of 2018. The average U.S. dollar exchange rate strengthened compared to most major currencies we operate in, resulting in a negative currency translation impact of 3%. The acquisitions of CSP Technologies, Gateway and Nanopharm positively impacted sales by 4%. Therefore, core sales, which exclude acquisitions and changes in foreign currency rates, increased by 4% in the third quarter of 2019 compared to the third quarter of 2018. The consolidated core sales growth was primarily driven by strong demand for our drug delivery devices and components for injectable medicines produced by our Pharma segment. Our Food + Beverage segment also realized moderate core sales growth despite the negative effects of our pass-through of lower resin costs to our customers. Our Beauty + Home segment experienced volume declines in certain markets that resulted in a slight decrease in core sales. On a consolidated basis, an increase in tooling sales of $4.1 million in the Pharma segment was offset by the negative effect of $3.1 million related to the pass-through of lower resin prices to our customers.
Third Quarter 2019
Beauty
Net Sales Change over Prior Year
+ Home
Core Sales Growth
Acquisitions
Currency Effects (1)
(3)
(2)
Total Reported Net Sales Growth
For the first nine months of 2019, we reported net sales of $2.2 billion, 5% above the first nine months of 2018 reported net sales of $2.1 billion. The average U.S. dollar exchange rate strengthened compared to all major currencies we operate in, resulting in a negative currency translation impact of 5%. The acquisitions of CSP Technologies, Reboul, Gateway and Nanopharm positively impacted sales by 5%. Core sales for the first nine months of 2019 increased 5% compared to the first nine months of 2018 as our Pharma and Food + Beverage segments reported strong growth over the first nine months of 2018. Core sales were negatively impacted by lower tooling sales of $6.8 million for the first nine months of 2019 compared to the same period in the prior year, primarily in our Beauty + Home segment.
Nine Months Ended September 30, 2019
(5)
The following table sets forth, for the periods indicated, net sales by geographic location:
% of Total
30%
27%
29%
25%
56%
57%
59%
Latin America
8%
9%
6%
7%
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 63.3% in the third quarter of 2019 compared to 65.4% in the third quarter of 2018. Our COS percentage was positively impacted by our mix of business and lower material costs. The mix of business positively impacted results as the sales growth of our higher margin Pharma products was greater than the sales growth of products in the other two segments. We also realized lower raw material input costs in the quarter and the associated positive impact from the timing of passing through resin cost reductions to our customers.
Cost of sales as a percent of net sales decreased to 63.2% in the first nine months of 2019 compared to 65.2% in the same period a year ago. As mentioned above, our COS was favorably impacted by the mix of Pharma business and the timing of resin pass-throughs to our customers. We also recognized lower custom tooling sales in the first nine months of 2019 compared to the prior year period. Sales of custom tooling typically generates lower margins than product sales, so lower tooling sales positively impacts cost of sales as a percentage of sales.
SELLING, RESEARCH & DEVELOPMENT AND ADMINISTRATIVE
Selling, research & development and administrative expenses (“SG&A”) increased by approximately $8.0 million to $111.6 million in the third quarter of 2019 compared to $103.6 million during the same period in 2018. Excluding changes in foreign currency rates, SG&A increased by approximately $10.6 million in the quarter. The increase is mainly due to $5.0 million of incremental operational costs during the third quarter of 2019 related to our acquired companies. We also recognized increases in professional fees and higher personnel costs in accordance with our growth strategy. SG&A as a percentage of net sales increased to 15.9% compared to 15.5% in the same period of the prior year due to the cost increases mentioned above.
SG&A increased by $23.4 million to $346.5 million in the first nine months of 2019 compared to $323.1 million during the same period a year ago. Excluding changes in foreign currency rates, SG&A increased by approximately $37.2 million in the first nine months of 2019 compared to the first nine months of 2018. As discussed above, the increase is related to $18.0 million of incremental costs from our acquired companies along with higher professional fees and personnel costs to implement our growth strategy. SG&A as a percentage of net sales increased to 15.8% compared to 15.5% in the same period of the prior year.
DEPRECIATION AND AMORTIZATION
Reported depreciation and amortization expenses increased by approximately $7.3 million to $49.2 million in the third quarter of 2019 compared to $41.9 million during the same period a year ago. Excluding changes in foreign currency rates, depreciation and amortization increased by approximately $8.5 million in the quarter compared to the same period a year ago. This increase is mainly due to $5.1 million of incremental costs related to our acquisitions. We also increased our capital spending during the current and prior year to support our growth strategy. Depreciation and amortization as a percentage of net sales increased to 7.0% in the third quarter of 2019 compared to 6.3% in the same period of the prior year primarily due to the incremental increase in expenses noted above.
30
For the first nine months of 2019, reported depreciation and amortization expenses increased by approximately $21.4 million compared to the first nine months of 2018. Excluding changes in foreign currency rates, depreciation and amortization increased by approximately $26.9 million compared to the same period a year ago. As discussed above, this increase is mainly due to $17.9 million of incremental costs from our acquisitions and increased capital spending in the prior and current year to support the growth in our business. Depreciation and amortization as a percentage of net sales increased to 6.6% in the first nine months of 2019 compared to 5.9% in the same period of the prior year.
RESTRUCTURING INITIATIVES
In late 2017, we began a business transformation to drive profitable sales growth, increase operational excellence, enhance our approach to innovation and improve organizational effectiveness. The primary focus of the plan is the Beauty + Home segment; however, certain global general and administrative functions are also being addressed. Restructuring costs related to this plan for the three and nine months ended September 30, 2019 and 2018 are as follows:
We estimate total implementation costs of approximately $90 million over three years, including costs that have been recognized to date. We expect most of these costs to be incurred by the end of 2019. We also anticipate making capital investments related to the business transformation of approximately $50 million, of which $32 million has been incurred to date. Based on our ongoing restructuring initiatives, we are progressing towards our initial target of $80 million annualized incremental EBITDA by the end of 2020, principally within the Beauty + Home segment. Ongoing changes in customer and vendor negotiations, material indices, macro-economic trends and other factors subsequent to our initial restructuring initiatives may impact the consolidated net benefits from these initiatives.
OPERATING INCOME
Operating income increased approximately $29.1 million in the third quarter of 2019 compared to the same period a year ago. Excluding changes in foreign currency rates, operating income increased by approximately $32.4 million in the quarter compared to the same period a year ago. We incurred lower restructuring costs and realized improved margins related to our acquisitions in the third quarter of 2019 compared to the prior year period. Additionally, this increase is partly due to the shift in product sales to our more profitable Pharma products, thus leading to a lower cost of sales. Operating income as a percentage of net sales increased to 12.9% in the third quarter of 2019 compared to 9.2% for the same period in the prior year due to these improvements.
Operating income increased approximately $67.2 million to $297.2 million in the first nine months of 2019 compared to $230.0 million in the same period of the prior year. Excluding changes in foreign currency rates, operating income increased by approximately $81.8 million in the first nine months of 2019 compared to the same period a year ago. As discussed above, this increase is due to improvements in gross margin due to the change in our sales mix along with incremental margins associated with our acquisitions and lower restructuring costs reported during the first nine months of 2019. Operating income as a percentage of net sales increased to 13.6% in the first nine months of 2019 compared to 11.1% for the same period in the prior year.
NET OTHER EXPENSE
Net other expense in the third quarter of 2019 decreased $2.2 million to $8.0 million from $10.2 million in the same period of the prior year. For 2019, miscellaneous expenses decreased by approximately $2.7 million as a result of lower volatility in our forward contracts during 2019 compared to 2018.
Net other expenses for the nine months ended September 30, 2019 decreased slightly to $22.8 million from $23.0 million in the same period of the prior year. For 2019, miscellaneous expenses decreased $4.5 million due to lower volatility in our forward contracts, while net interest expense increased by approximately $4.7 million as a result of the CSP Technologies acquisition during the third quarter of 2018.
31
EFFECTIVE TAX RATE
The effective tax rate for the nine months ended September 30, 2019 of 29.4% was favorably impacted by net tax benefits of $4.3 million from discrete events. This consisted of a favorable impact of $13.6 million from the excess tax benefits from employee stock-based compensation offset by, among other items, a $7.0 million charge recognized to record a valuation allowance to properly reflect the realization of recorded deferred tax assets and the $2.1 million charge from the French tax rate increase. The effective tax rate for the nine months ended September 30, 2018 of 25.6% was favorably impacted by net tax benefits of $15.1 million from discrete items. This included a favorable impact of $10.5 million from the excess tax benefits from employee stock-based compensation and a $5.3 million benefit related to U.S. tax reform legislation.
NET INCOME ATTRIBUTABLE TO APTARGROUP, INC.
We reported net income attributable to AptarGroup of $56.8 million and $193.7 million in the three and nine months ended September 30, 2019, respectively, compared to $39.0 million and $154.1 million for the same periods in the prior year.
BEAUTY + HOME SEGMENT
Operations that sell dispensing systems and sealing solutions to the personal care, beauty and home care markets form the Beauty + Home segment.
Adjusted EBITDA (1)
12.6%
12.3%
13.8%
13.0%
Reported sales for the quarter ended September 30, 2019 decreased 4% to $328.2 million compared to $341.8 million in the third quarter of the prior year. Changes in currency rates negatively impacted net sales by 3%. Therefore, core sales decreased 1% in the third quarter of 2019 compared to the same quarter of the prior year. The majority of this decrease is due to reduced demand from the personal care market and a $1.5 million reduction of sales due to the pass-through of lower resin prices to our customers. Core sales to the personal care market decreased 8%. The decrease is mostly related to a general softening of demand across most of our major applications, especially body care and hair care products, as political and economic uncertainties are leading to some customer destocking. Core sales of our products to the beauty market increased 5% on strong growth in skin care and fragrance dispensing systems, primarily driven by the Chinese luxury market and retail travel. Higher sales of our products used on insecticide applications drove the 4% core sales growth in the home care market.
Personal
Care
(10)
32
Reported sales decreased 5% in the first nine months of 2019 to $1.0 billion compared to $1.1 billion in the first nine months of the prior year. Changes in currency rates negatively impacted net sales by 5%. Core sales were flat for the first nine months of 2019 compared to the same period in the prior year. Core sales to the personal care market were down 5% due to general softness in demand noted above and lower product and tooling sales related to large product launch for a specific North America customer during the second quarter of 2018. Consistent with the quarter results, sales were higher across the other two markets as beauty and home care increased by 5% and 4%, respectively, over the prior year period. Strong sales across all applications drove the strong results in the beauty market, while higher product and tooling sales used on air care and insecticide applications drove the improvements in the home care market.
(9)
Adjusted EBITDA in the third quarter of 2019 decreased 2% to $41.5 million compared to $42.2 million reported in the same period in the prior year. During the third quarter of 2019, we experienced favorable material cost impacts due to lower raw material input costs and the associated positive impact from the timing delay of passing through resin cost to our customers. We also realized improved profitability on our tooling projects, but this was not enough to overcome the soft demand from our personal care customers.
Adjusted EBITDA in the first nine months of 2019 increased 2% to $143.4 million compared to $141.2 million reported in the same period in the prior year. Targeted price increases and favorable material cost impacts discussed above were able to offset pockets of softening sales and manufacturing headwinds at certain facilities.
PHARMA SEGMENT
Operations that sell drug delivery, sealing and active packaging solutions primarily to the prescription drug, consumer health care, injectables and active packaging markets form the Pharma segment.
35.9%
37.1%
Net sales for the Pharma segment increased 18% in the third quarter of 2019 to $269.3 million compared to $227.5 million in the third quarter of 2018. Changes in currencies negatively affected net sales by 4% while our acquisitions of CSP Technologies, Gateway and Nanopharm positively impacted sales by 9% in the third quarter of 2019. Therefore, core sales increased by 13% in the third quarter of 2019 compared to the third quarter of 2018. Core sales to the prescription drug market were particularly strong and increased 17% mainly driven by increased demand for our innovative drug delivery systems for allergic rhinitis, central nervous system and asthma. Core sales to the consumer health care market increased 3% as increased demand for our products used on nasal saline and eye care treatments more than compensated for some softness in demand for our cough & cold and nasal decongestant products. Core sales grew 12% to the injectables market from increased demand across a variety of components. Active packaging core sales comparisons are for the one month ended September 30 since our acquisition of CSP Technologies was at the end of August 2018. The increase is mostly due to strong sales of our products used for diabetes related products.
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Prescription
Consumer
Active
Drug
Health Care
Injectables
Packaging
186
198
Net sales for the first nine months of 2019 increased by 18% to $823.9 million compared to $698.9 million in the first nine months of 2018. Changes in currencies negatively affected net sales by 6% while our acquisitions of CSP Technologies, Nanopharm and Gateway positively impacted sales by 12% in the first nine months of 2019. Therefore, core sales increased 12% in the first nine months of 2019 compared to the same period in the prior year. As discussed above, the prescription drug market core sales increase of 18% was mainly driven by strong demand for our products sold for central nervous system and allergic rhinitis treatments. We also benefitted from the realization of $1.8 million of revenue for achieving a development milestone related to a customer project. Core sales to the consumer health care market increased 6% as increased demand for our products used on eye care and nasal saline treatments more than offset lower tooling sales. Core sales of our products to the injectables markets grew 6% due to increased demand across a variety of components. Active packaging core sales comparisons are for the one month ended September 30 since our acquisition of CSP Technologies was at the end of August 2018. The increase is mostly due to strong sales of our products used for diabetes treatment and favorable timing of some of our customer orders.
805
(21)
803
Adjusted EBITDA in the third quarter of 2019 increased 14% to $96.5 million compared to $84.5 million reported in the same period of the prior year. The strong product sales growth discussed above along with incremental profit related to our acquisitions led to the increase in reported results for the third quarter of 2019 compared to the third quarter of 2018.
Adjusted EBITDA in the first nine months of 2019 increased 18% to $295.6 million compared to $250.7 million reported in the same period of the prior year. The increased sales and results of acquisitions discussed above offset higher overhead costs and lower profitability on some tooling projects.
FOOD + BEVERAGE SEGMENT
Operations that sell dispensing systems and sealing solutions to the food and beverage markets form the Food + Beverage segment.
18.0%
16.0%
17.3%
15.8%
34
Net sales for the quarter ended September 30, 2019 increased approximately 8% to $103.8 million compared to $96.5 million in the third quarter of the prior year. Incremental sales from our CSP Technologies acquisition positively impacted sales by 8% while changes in foreign currency rates had an unfavorable impact of 2% on total segment sales. Therefore, core sales increased by 2% in the third quarter of 2019 compared to the third quarter of 2018. For the segment, we realized strong product sales growth offset by a $1.6 million decrease in the pass-through of resin price changes in the quarter ended September 30, 2019 compared to the third quarter of the prior year. Core sales to the food market increased 3% while core sales to the beverage market increased 1% in the third quarter of 2019 compared to the same period of the prior year. For the food market, we realized increased sales of our products used on dairy and granular/powder applications. For the beverage market, high demand for our bottled water products more than offset lower sales of our products used on functional drink and juice applications, mainly in China.
Food
Net sales for the first nine months of 2019 increased by 12% to $326.6 million compared to $292.4 million in the first nine months of 2018. Incremental sales from our CSP Technologies acquisition positively impacted sales by 10% while changes in currency rates negatively impacted net sales by 3% in the first nine months of 2019. Therefore, core sales increased by 5% in the first nine months of 2019 compared to the same period in the prior year. Core sales to the food market increased 7% while core sales to the beverage market increased 3% in the first nine months of 2019 compared to the same period of the prior year. Sales to the food market increased due to strong sales of our products used on granular/powder and sauces/condiments applications, which more than offset lower tooling sales. For the beverage market, increased sales of our products used on bottled water and dairy applications compensated for a decrease in functional drink application sales in China and Europe, as the European region experienced lower temperatures early in the filling season. Lower tooling sales and the pass-through of resin price changes negatively impacted core sales compared to the first nine months of 2018 by $1.8 million and $1.4 million, respectively.
Adjusted EBITDA in the third quarter of 2019 increased 21% to 18.7 million compared to $15.5 million reported in the same period of the prior year. This increase is due to incremental profit related to our CSP Technologies acquisition and solid core sales growth discussed above. We also benefitted from the positive timing delay of passing on resin cost decreases from previous quarters to our customers.
Adjusted EBITDA in the first nine months of 2019 increased 22% to $56.4 million compared to $46.3 million reported in the same period of the prior year. As discussed above, our profitability was favorably impacted by our strong core sales growth, pass-through of lower resin costs to our customers and incremental profit related to our CSP Technologies acquisition.
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 to the Notes to the Condensed Consolidated Financial Statements. For Corporate & Other, Adjusted EBITDA (which excludes net interest, taxes, depreciation, amortization, restructuring and acquisition-related costs) 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, 2019, Corporate & Other expenses increased to $9.9 million from $8.0 million in the third quarter of 2018. This increase is mainly due to higher professional fees and personnel costs as we continue to implement our growth strategy.
35
Corporate & Other expenses in the first nine months of 2019 increased to $33.3 million compared to $28.6 million reported in the same period of the prior year. As discussed above, this increase is mainly due to higher costs as we continue to implement our growth strategy.
NON-U.S. GAAP MEASURES
In addition to the information presented herein that conforms to U.S. GAAP, we also present financial information that does not conform to U.S. GAAP, which are referred to as non-U.S. GAAP financial measures. Management may assess our financial results both on a U.S. GAAP basis and on a non-U.S. GAAP basis. We believe it is useful to present these non-U.S. GAAP financial measures because they allow for a better period over period comparison of operating results by removing the impact of items that, in management’s view, do not reflect our core operating performance. These non-U.S. GAAP financial measures should not be considered in isolation or as a substitute for U.S. GAAP financial results, but should be read in conjunction with the unaudited Condensed Consolidated Statements of Income and other information presented herein. Investors are cautioned against placing undue reliance on these non-U.S. GAAP measures. Further, investors are urged to review and consider carefully the adjustments made by management to the most directly comparable U.S. GAAP financial measure to arrive at these non-U.S. GAAP financial measures.
In our Management’s Discussion and Analysis, we exclude the impact of foreign currency translation when presenting net sales information, which we define as “constant currency.” Changes in net sales excluding the impact of foreign currency translation is a non-U.S. GAAP financial measure. As a worldwide business, it is important that we take into account the effects of foreign currency translation when we view our results and plan our strategies. Consequently, when our management looks at our financial results to measure the core performance of our business, we may exclude the impact of foreign currency translation by translating our prior period results at current period foreign currency exchange rates. As a result, our management believes that these presentations are useful internally and may be useful to investors. We also exclude the impact of material acquisitions when comparing results to prior periods. Changes in operating results excluding the impact of acquisitions are non-U.S. GAAP financial measures. We believe it is important to exclude the impact of acquisitions on period over period results in order to evaluate performance on a more comparable basis.
We present adjusted earnings before net interest and taxes (“Adjusted EBIT”) and consolidated adjusted earnings before net interest, taxes, depreciation and amortization (“Adjusted EBITDA”), both of which exclude the business transformation charges (restructuring initiatives), acquisition-related costs and purchase accounting adjustments that affected inventory values. Our “Outlook” discussion below, as well as the estimated annual effective tax rate above, are 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, or reliably predicted because they are not part of our routine activities, such as restructuring and acquisition-related costs.
Finally, 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 and equivalents, and short-term investments when evaluating our leverage. If needed, such assets could be used to reduce our gross debt position.
36
Consolidated
Net Interest
-
Reported net income
Reported income taxes
Reported income before income taxes
15,413
78,418
9,323
(12,940)
(7,941)
Adjustments:
Transaction costs related to acquisitions
708
520
154
Purchase accounting adjustments related to acquired companies' inventory and backlog
647
Adjusted earnings before income taxes
89,647
20,788
79,753
9,681
(12,634)
8,898
(957)
Adjusted earnings before net interest and taxes (Adjusted EBIT)
97,588
20,687
16,793
9,047
2,691
Adjusted earnings before net interest, taxes, depreciation and amortization (Adjusted EBITDA)
146,806
Adjusted EBITDA margins (Adjusted EBITDA / Reported Net Sales)
20.9%
3,471
67,016
5,481
(17,828)
(7,198)
7,082
Purchase accounting adjustments related to acquired companies' inventory
3,287
2,761
526
85,163
22,325
71,785
8,645
(10,394)
8,735
(1,537)
92,361
19,849
12,731
6,837
134,218
20.2%
37
66,407
244,101
29,234
(42,239)
(23,130)
1,767
1,579
869
294,295
81,310
246,930
30,214
(41,029)
26,868
(3,738)
317,425
62,101
48,623
26,149
7,701
461,999
21.1%
40,688
208,915
21,736
(45,834)
(18,448)
9,526
574
8,952
3,406
119
267,991
79,882
215,272
26,569
(35,284)
24,754
(6,306)
286,439
61,273
35,437
19,715
6,708
409,572
19.7%
Net Debt to Net Capital Reconciliation
Total Debt
1,186,370
1,289,964
Less:
Net Debt
915,793
1,028,141
Total Stockholders' Equity
Net Capital
2,469,772
2,451,012
Net Debt to Net Capital
41.9%
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 strengthening U.S. dollar relative to foreign currencies has a dilutive translation effect on our financial statements. Conversely, 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. We manage our exposures to foreign exchange principally with forward exchange contracts to economically hedge recorded transactions and firm purchase and sales commitments denominated in foreign currencies. Changes in exchange rates on such inter-country sales could materially impact our results of operations. During the third quarter of 2019 the U.S. dollar strengthened compared to the euro. This resulted in a dilutive impact on our translated results during the third quarter of 2019 when compared to the third quarter of 2018. Beginning July 1, 2018, we have applied highly inflationary accounting for our Argentinian subsidiaries. We have changed the functional currency from the Argentinian peso to the U.S. dollar. Our Argentinian operations contributed less than 2% of consolidated net assets and revenues at and for the nine months ended September 30, 2019.
QUARTERLY TRENDS
Our results of operations in the last quarter of the year typically are negatively impacted by customer plant shutdowns in December. In the future, our results of operations in a quarterly period could be impacted by factors such as the seasonality of certain products within our segments, changes in foreign currency rates, changes in product mix, changes in material costs, changes in growth rates in the markets to which our products are sold and changes in general economic conditions in any of the countries in which we do business.
Historically, we have incurred higher employee stock compensation expense in the first quarter compared with the rest of the fiscal year due to the timing and recognition of stock option expense. During 2019, we transitioned from employee stock options to RSUs and PSUs and therefore we do not anticipate as much variability in expense between quarters in the future. Our estimated total stock-based compensation expense on a pre-tax basis (in $ millions) for the year 2019 compared to 2018 is as follows:
First Quarter
6.5
7.5
Second Quarter
3.4
Third Quarter
3.9
Fourth Quarter (estimated for 2019)
6.1
4.8
24.2
19.6
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LIQUIDITY AND CAPITAL RESOURCES
We believe we are in a strong financial position and have the financial resources to meet our business requirements in the foreseeable future. We have historically used cash flow from operations, our revolving credit facilities and debt, as needed, as our primary sources of liquidity. Our primary uses of liquidity are to invest in equipment and facilities that are necessary to support our growth, cost efficiencies, and to make acquisitions that will contribute to the achievement of our strategic objectives. Other uses of liquidity include repurchasing shares of our common stock and paying dividends to stockholders. In the event that customer demand would decrease significantly for a prolonged period of time and negatively impact cash flow from operations, we would have the ability to restrict and significantly reduce capital expenditure levels, as well as evaluate our acquisition strategy and dividend and share repurchase programs. 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 increased to $270.6 million at September 30, 2019 from $261.8 million at December 31, 2018. Total short and long-term interest bearing debt of $1.2 billion at September 30, 2019 decreased from the $1.3 billion at December 31, 2018 resulting from repayments made during the year on our group credit facilities and long-term debt obligations. The ratio of our Net Debt (interest bearing debt less cash and equivalents) to Net Capital (stockholders’ equity plus Net Debt) decreased to 37.1% at September 30, 2019 compared to 41.9% at December 31, 2018. See the reconciliation of non-U.S. GAAP measures starting on page 36.
In the first nine months of 2019, our operations provided approximately $380.4 million in net cash flow compared to $209.6 million for the same period a year ago. In both periods, cash flow from operations was primarily derived from earnings before depreciation and amortization. The increase in cash provided by operations during the first nine months of 2019 is primarily attributable to the lower restructuring costs, improved profitability and better working capital management.
We used $224.0 million in cash for investing activities during the first nine months of 2019 compared to $668.7 million during the same period a year ago. Our investment in capital projects increased $41.5 million during the first nine months of 2019 compared to the first nine months of 2018, which was driven by $19.3 million of additions related to our CSP Technologies and Nanopharm acquisitions. During the first nine months of 2019, $48.9 million of cash was utilized to fund our Gateway, Nanopharm and Bapco acquisitions; we also released $4.0 million relating to the final escrow settlement on our acquisition of CSP Technologies and invested $3.5 million in two preferred equity investments which are accounted for at cost. We received $16.5 million from the sale of our investment in Reciprocal Labs Corporation, doing business as Propeller Health. During the first nine months of 2018, approximately $553.5 million of our cash (net of $24.1 million of cash acquired) was utilized to fund our acquisition of CSP Technologies during 2018. $5.0 million was held in restricted cash pending the finalization of the working capital adjustment, which was completed during the first quarter of 2019. We also invested $10.0 million in preferred equity stock of Reciprocal Labs Corporation, which was accounted for at cost, and acquired Reboul, a French manufacturer specializing in stamping, decorating and assembling metal and plastic packaging for the cosmetics and luxury markets, for an initial purchase price of approximately $3.6 million (net of $112 thousand of cash acquired). Our 2019 estimated cash outlays for capital expenditures are expected to be in the range of approximately $240 to $260 million but could vary due to changes in exchange rates as well as the timing of capital projects.
Financing activities used $146.2 million in cash during the first nine months of 2019 compared to $50.3 million in cash provided by financing activities during the same period a year ago. During the first nine months of 2019, we received net proceeds from our stock option exercises of $81.8 million. We used cash on hand to pay $67.2 million of dividends, repay $47.3 million on our revolving credit facility and repurchase $54.9 million of treasury stock.
We hold U.S. dollar and euro-denominated debt to align our capital structure with our earnings base. We also maintain a multi-currency revolving credit facility with two tranches, providing for unsecured financing of up to $300 million that is available in the U.S. and up to €150 million that is available to our wholly-owned UK subsidiary. Each borrowing under the credit facility will bear interest at rates based on LIBOR, prime rates or other similar rates, in each case plus an applicable margin. A facility fee on the total amount of the facility is also payable quarterly, regardless of usage. The applicable margins for borrowings under the credit facility and the facility fee percentage may change from time to time depending on changes in our consolidated leverage ratio. The December 31, 2018 outstanding balance of €69.0 million on the euro-based revolving credit facility was paid in the first quarter of 2019. €27.0 million was utilized as of September 30, 2019. Credit facility balances are included in notes payable, including revolving credit facilities on the Condensed Consolidated Balance Sheet.
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Based upon the above consolidated leverage ratio covenant, we have the ability to borrow approximately an additional $1.0 billion before the 3.50 to 1.00 maximum ratio requirement is exceeded.
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 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.
On October 17, 2019, the Board of Directors declared a quarterly cash dividend of $0.36 per share payable on November 20, 2019 to stockholders of record as of October 30, 2019.
CONTINGENCIES
The Company, in the normal course of business, is subject to a number of lawsuits and claims both actual and potential in nature. Please refer to Note 12 - Commitments and Contingencies of the Notes to Condensed Consolidated Financial Statements for a discussion of contingencies affecting our business.
OFF-BALANCE SHEET ARRANGEMENTS
We lease certain warehouse, plant and office facilities as well as certain equipment under noncancelable operating leases. Most of the operating leases contain renewal options and certain equipment leases include options to purchase during or at the end of the lease term. As a result of the adoption of ASU 2016-02 and subsequent amendments, which requires organizations to recognize leases on the balance sheet, we do not have significant off-balance sheet arrangements. Please refer to Note 7 – Lease Commitments of the Notes to Condensed Consolidated Financial Statements for lease arrangements that have not yet commenced and therefore are not included on the balance sheet.
RECENTLY ISSUED ACCOUNTING STANDARDS
We have reviewed the recently issued accounting standards updates to the FASB’s Accounting Standards Codification that have future effective dates. Standards that are effective for 2019 are discussed in Note 1 – Summary of Significant Accounting Policies of the Notes to Condensed Consolidated Financial Statements.
In June 2016, the FASB issued ASU 2016-13, which changes the accounting guidance for measurement of credit losses on financial instruments. The guidance replaces the incurred loss impairment methodology in current U.S. GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information when recording credit loss estimates. The new standard is effective for fiscal years and interim periods beginning after December 15, 2019. We are currently evaluating the impact of adopting this guidance.
In January 2017, the FASB issued ASU 2017-04, which provides guidance to simplify how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. As a result, impairment charges will be required for the amount by which a reporting unit’s carrying amount exceeds its fair value up to the amount of its allocated goodwill. The new standard is effective for the annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. We do not believe that this new guidance will have a material impact on our Condensed Consolidated Financial Statements.
In August 2018, the FASB issued ASU 2018-14, which amends disclosure requirements for defined benefit pension and other postretirement plans. The amendments in this update remove disclosures that are no longer considered cost beneficial, clarify the specific requirements of disclosures, and add disclosure requirements identified as relevant. The new standard is effective for fiscal years ending after December 15, 2020. As this update amends disclosure requirements, we do not expect any significant impact around adopting this guidance.
In August 2018, the FASB issued ASU 2018-15 to help entities evaluate the accounting for fees paid by a customer in a cloud computing arrangement (hosting arrangement) by providing guidance for determining when the arrangement includes a software license. The amendments in this update align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). Accordingly, the amendments require an entity (customer) in a hosting arrangement that is a service contract to follow the guidance in Subtopic 350-40 to determine which implementation costs to capitalize as an asset related to the service contract and which costs to expense. The amendments also require the entity (customer) to expense the capitalized implementation costs of a hosting arrangement that is a service contract over the term of the hosting arrangement, which includes reasonably certain renewals. The new standard is effective for fiscal years beginning after December 15, 2019. We are currently evaluating the impact of adopting this guidance.
41
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
We expect earnings per share for the fourth quarter, excluding any restructuring costs and acquisition related expenses, to be in the range of $0.74 to $0.80 and this guidance is based on an effective tax rate range of 30% to 32%. The effective tax rate on adjusted earnings for the prior year fourth quarter was approximately 29%.
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 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” 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 (the “Exchange Act”) and are based on our beliefs as well as assumptions made by and information currently available to us. Accordingly, our actual results may differ materially from those expressed or implied in such forward-looking statements due to known or unknown risks and uncertainties that exist in our operations and business environment including, but not limited to:
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Although we believe that our forward-looking statements are based on reasonable assumptions, there can be no assurance that actual results, performance or achievements will not differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements. Readers are cautioned not to place undue reliance on forward-looking statements. We undertake no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. Please refer to Item 1A (“Risk Factors”) of Part I included in our Annual Report on Form 10-K for the year ended December 31, 2018 for additional risk factors affecting the Company.
43
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 entities. Our primary foreign exchange exposure is to the euro, but we also have foreign exchange exposure to the Chinese yuan, Brazilian real, Mexican peso and Swiss franc, among other Asian, European, and South American currencies. A strengthening U.S. dollar relative to foreign currencies has a dilutive translation effect on our financial condition and results of operations. Conversely, a weakening U.S. dollar relative to foreign currencies has an additive 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.
We manage our exposures to foreign exchange principally with forward exchange contracts to hedge certain firm purchase and sales commitments and intercompany cash transactions denominated in foreign currencies.
The table below provides information as of September 30, 2019 about our forward currency exchange contracts. The majority of the contracts expire before the end of the third quarter of 2019.
Average
Min / Max
Contract Amount
Contractual
Notional
Buy/Sell
(in thousands)
Exchange Rate
Volumes
EUR / USD
14,138
1.1164
13,919-28,394
EUR / BRL
11,688
4.6254
11,646-12,814
CHF / EUR
6,518
0.9079
6,518-6,792
EUR / IDR
4,673
17.1408
4,409-4,673
EUR / INR
4,042
78.6460
3,975-4,138
GBP / EUR
1,360
1.1158
831-1,360
EUR / MXN
22.1501
613-687
USD / EUR
473
0.8940
473-7,245
CHF / USD
1.0179
10-519
MXN / USD
0.0518
9-29
43,887
As of September 30, 2019, we have recorded the fair value of foreign currency forward exchange contracts of $0.04 million in prepaid and other and $0.6 million in accounts payable and accrued liabilities on the balance sheet. We also entered into a EUR/USD floating-to-fixed cross currency swap on July 20, 2017 to effectively hedge the foreign exchange and interest rate exposure on the $280 million bank term loan drawn by our wholly-owned UK subsidiary. The fair value of this cash flow hedge is $6.7 million reported in prepaid on the balance sheet.
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, 2019. Based on that evaluation, the chief executive officer and chief financial officer have concluded that these controls and procedures were effective as of such date.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
No changes in our internal control over financial reporting (as such term is defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) occurred during our fiscal quarter ended September 30, 2019 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II - OTHER INFORMATION
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
RECENT SALES OF UNREGISTERED SECURITIES
Certain French employees are eligible to participate in the FCP Aptar Savings Plan (the “Plan”). An independent agent purchases shares of common stock available under the Plan for cash on the open market and we do not issue shares. We do not receive any proceeds from the purchase of common stock under the Plan. The agent under the Plan is Banque Nationale de Paris Paribas Fund Services. No underwriters are used under the Plan. All shares are sold in reliance upon the exemption from registration under the Securities Act of 1933 provided by Regulation S promulgated under that Act. During the quarter ended September 30, 2019, the Plan purchased 1,931 shares of our common stock on behalf of the participants at an average price of $118.55, for an aggregate amount of $229 thousand. The Plan sold 1,992 shares of our common stock on behalf of the participants at an average price of $122.38, for an aggregate amount of $244 thousand during the same period. At September 30, 2019, the Plan owned 85,550 shares of our common stock.
ISSUER PURCHASES OF EQUITY SECURITIES
On April 18, 2019, we announced a share purchase authorization of up to $350 million of common stock. This authorization replaces previous authorizations and has no expiration date. We may repurchase shares through the open market, privately negotiated transactions or other programs, subject to market conditions.
During the three months ended September 30, 2019, we repurchased approximately 300 thousand shares for approximately $35.8 million.
The following table summarizes our purchases of our securities for the quarter ended September 30, 2019:
Dollar Value Of
Total Number Of Shares
Shares that May Yet be
Total Number
Purchased as Part Of
Purchased Under The
Of Shares
Average Price
Publicly Announced
Plans or Programs
Period
Purchased
Paid Per Share
Plans Or Programs
(in millions)
7/1 – 7/31/19
38,721
122.95
341.1
8/1 – 8/31/19
82,462
119.27
331.3
9/1 – 9/30/19
178,938
118.37
310.1
300,121
119.21
ITEM 6. EXHIBITS
Exhibit 31.1
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Exhibit 31.2
Exhibit 32.1
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Exhibit 32.2
Exhibit 101
The following information from our Quarterly Report on Form 10-Q for the third quarter of fiscal 2019, filed with the SEC on November 1, 2019, 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, 2019 and 2018, (iii) the Condensed Consolidated Statements of Comprehensive Income – Three and Nine Months Ended September 30, 2019 and 2018, (iv) the Condensed Consolidated Balance Sheets – September 30, 2019 and December 31, 2018, (v) the Condensed Consolidated Statements of Changes in Equity – Three and Nine Months Ended September 30, 2019 and 2018, (vi) the Condensed Consolidated Statements of Cash Flows - Nine Months Ended September 30, 2019 and 2018 and (vii) the Notes to Condensed Consolidated Financial Statements.
Exhibit 104
Cover Page Interactive Data File (embedded within the Inline XBRL document).
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.
(Registrant)
By
/s/ ROBERT W. KUHN
Robert W. Kuhn
Executive Vice President,
Chief Financial Officer and Secretary
(Duly Authorized Officer and
Principal Accounting and Financial Officer)
Date: November 1, 2019