PART I – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
AptarGroup, Inc. CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited) | | | | | | | | In thousands, except per share amounts | | | | | | | | | | Three Months Ended March 31, | | 2019 | | 2018 | | | | | | | | | | Net Sales | | $ | 744,460 | | $ | 703,350 | | Operating Expenses: | | | | | | | | Cost of sales (exclusive of depreciation and amortization shown below) | | | 469,132 | | | 455,822 | | Selling, research & development and administrative | | | 121,215 | | | 112,461 | | Depreciation and amortization | | | 47,489 | | | 41,175 | | Restructuring initiatives | | | 9,530 | | | 5,936 | | | | | 647,366 | | | 615,394 | | Operating Income | | | 97,094 | | | 87,956 | | | | | | | | | | Other (Expense) Income: | | | | | | | | Interest expense | | | (9,214) | | | (8,055) | | Interest income | | | 1,748 | | | 2,248 | | Equity in results of affiliates | | | (95) | | | (65) | | Miscellaneous, net | | | 466 | | | (867) | | | | | (7,095) | | | (6,739) | | | | | | | | | | Income before Income Taxes | | | 89,999 | | | 81,217 | | | | | | | | | | Provision for Income Taxes | | | 27,000 | | | 21,929 | | | | | | | | | | Net Income | | $ | 62,999 | | $ | 59,288 | | | | | | | | | | Net Loss Attributable to Noncontrolling Interests | | $ | 5 | | $ | 12 | | | | | | | | | | Net Income Attributable to AptarGroup, Inc. | | $ | 63,004 | | $ | 59,300 | | | | | | | | | | Net Income Attributable to AptarGroup, Inc. per Common Share: | | | | | | | | Basic | | $ | 1.00 | | $ | 0.95 | | Diluted | | $ | 0.96 | | $ | 0.92 | | | | | | | | | | Average Number of Shares Outstanding: | | | | | | | | Basic | | | 62,964 | | | 62,128 | | Diluted | | | 65,349 | | | 64,414 | | | | | | | | | | Dividends per Common Share | | $ | 0.34 | | $ | 0.32 | |
| | | | | | | | In thousands, except per share amounts | | | | | | | | | | Three Months Ended March 31, | | 2020 | | 2019 | | | | | | | | | | Net Sales | | $ | 721,553 | | $ | 744,460 | | Operating Expenses: | | | | | | | | Cost of sales (exclusive of depreciation and amortization shown below) | | | 451,256 | | | 469,132 | | Selling, research & development and administrative | | | 126,192 | | | 121,215 | | Depreciation and amortization | | | 50,806 | | | 47,489 | | Restructuring initiatives | | | 4,839 | | | 9,530 | | | | | 633,093 | | | 647,366 | | Operating Income | | | 88,460 | | | 97,094 | | | | | | | | | | Other (Expense) Income: | | | | | | | | Interest expense | | | (8,388) | | | (9,214) | | Interest income | | | 175 | | | 1,748 | | Equity in results of affiliates | | | (799) | | | (95) | | Miscellaneous, net | | | (1,412) | | | 466 | | | | | (10,424) | | | (7,095) | | | | | | | | | | Income before Income Taxes | | | 78,036 | | | 89,999 | | | | | | | | | | Provision for Income Taxes | | | 22,786 | | | 27,000 | | | | | | | | | | Net Income | | $ | 55,250 | | $ | 62,999 | | | | | | | | | | Net Loss Attributable to Noncontrolling Interests | | $ | 3 | | $ | 5 | | | | | | | | | | Net Income Attributable to AptarGroup, Inc. | | $ | 55,253 | | $ | 63,004 | | | | | | | | | | Net Income Attributable to AptarGroup, Inc. per Common Share: | | | | | | | | Basic | | $ | 0.86 | | $ | 1.00 | | Diluted | | $ | 0.84 | | $ | 0.96 | | | | | | | | | | Average Number of Shares Outstanding: | | | | | | | | Basic | | | 64,009 | | | 62,964 | | Diluted | | | 66,111 | | | 65,349 | | | | | | | | | | Dividends per Common Share | | $ | 0.36 | | $ | 0.34 | |
See accompanying unaudited Notes to Condensed Consolidated Financial Statements. AptarGroup, Inc. CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited) | | | | | | | | In thousands | | | | | | | | | | | | | | | | Three Months Ended March 31, | | 2019 | | 2018 | | | | | | | | | | Net Income | | $ | 62,999 | | $ | 59,288 | | Other Comprehensive Income: | | | | | | | | Foreign currency translation adjustments | | | (9,611) | | | 22,935 | | Changes in treasury locks, net of tax | | | — | | | 7 | | (Loss) gain on derivatives, net of tax | | | (393) | | | 346 | | Defined benefit pension plan, net of tax | | | | | | | | Amortization of prior service cost included in net income, net of tax | | | 84 | | | 96 | | Amortization of net loss included in net income, net of tax | | | 637 | | | 1,260 | | Total defined benefit pension plan, net of tax | | | 721 | | | 1,356 | | Total other comprehensive (loss) income | | | (9,283) | | | 24,644 | | Comprehensive Income | | | 53,716 | | | 83,932 | | Comprehensive (Income) Loss Attributable to Noncontrolling Interests | | | (3) | | | 1 | | Comprehensive Income Attributable to AptarGroup, Inc. | | $ | 53,713 | | $ | 83,933 | |
| | | | | | | In thousands | | | | | | | | | | | | | | Three Months Ended March 31, | 2020 | | 2019 | | | | | | | | | Net Income | $ | 55,250 | | $ | 62,999 | | Other Comprehensive (Loss) Income: | | | | | | | Foreign currency translation adjustments | | (42,229) | | | (9,611) | | Changes in derivative gains (losses), net of tax | | 1,483 | | | (393) | | Defined benefit pension plan, net of tax | | | | | | | Amortization of prior service cost included in net income, net of tax | | 71 | | | 84 | | Amortization of net loss included in net income, net of tax | | 1,565 | | | 637 | | Total defined benefit pension plan, net of tax | | 1,636 | | | 721 | | Total other comprehensive loss | | (39,110) | | | (9,283) | | Comprehensive Income | | 16,140 | | | 53,716 | | Comprehensive Loss (Income) Attributable to Noncontrolling Interests | | 3 | | | (3) | | Comprehensive Income Attributable to AptarGroup, Inc. | $ | 16,143 | | $ | 53,713 | |
See accompanying unaudited Notes to Condensed Consolidated Financial Statements. AptarGroup, Inc. CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited) | | | | | | | | In thousands | | | | | | | | | | | | | | | | | | | March 31, | | | December 31, | | | | | 2019 | | | 2018 | | Assets | | | | | | | | Current Assets: | | | | | | | | Cash and equivalents | | $ | 217,377 | | $ | 261,823 | | Accounts and notes receivable, less allowance for doubtful accounts of $3,820 in 2019 and $3,541 in 2018 | | | 599,561 | | | 569,630 | | Inventories | | | 390,403 | | | 381,110 | | Prepaid and other | | | 122,104 | | | 118,245 | | | | | 1,329,445 | | | 1,330,808 | | Property, Plant and Equipment: | | | | | | | | Buildings and improvements | | | 463,551 | | | 453,572 | | Machinery and equipment | | | 2,385,283 | | | 2,368,332 | | | | | 2,848,834 | | | 2,821,904 | | Less: Accumulated depreciation | | | (1,866,875) | | | (1,855,810) | | | | | 981,959 | | | 966,094 | | Land | | | 25,171 | | | 25,519 | | | | | 1,007,130 | | | 991,613 | | Other Assets: | | | | | | | | Investments in equity securities | | | 8,923 | | | 25,448 | | Goodwill | | | 703,709 | | | 712,095 | | Intangible assets | | | 246,899 | | | 254,904 | | Operating lease right-of-use assets | | | 82,099 | | | — | | Miscellaneous | | | 37,429 | | | 62,867 | | | | | 1,079,059 | | | 1,055,314 | | Total Assets | | $ | 3,415,634 | | $ | 3,377,735 | |
| | | | | | | | In thousands | | | | | | | | | | | | | | | | | | | March 31, | | | December 31, | | | | | 2020 | | | 2019 | | Assets | | | | | | | | Current Assets: | | | | | | | | Cash and equivalents | | $ | 410,840 | | $ | 241,970 | | Accounts and notes receivable, less current expected credit loss ("CECL") of $5,657 in 2020 and $3,626 in 2019 | | | 602,027 | | | 558,428 | | Inventories | | | 371,859 | | | 375,795 | | Prepaid and other | | | 129,926 | | | 115,048 | | | | | 1,514,652 | | | 1,291,241 | | Property, Plant and Equipment: | | | | | | | | Buildings and improvements | | | 502,706 | | | 504,328 | | Machinery and equipment | | | 2,506,084 | | | 2,521,737 | | | | | 3,008,790 | | | 3,026,065 | | Less: Accumulated depreciation | | | (1,961,683) | | | (1,963,520) | | | | | 1,047,107 | | | 1,062,545 | | Land | | | 24,312 | | | 25,133 | | | | | 1,071,419 | | | 1,087,678 | | Other Assets: | | | | | | | | Investments in equity securities | | | 39,167 | | | 8,396 | | Goodwill | | | 756,081 | | | 763,461 | | Intangible assets | | | 284,121 | | | 291,084 | | Operating lease right-of-use assets | | | 65,925 | | | 72,377 | | Miscellaneous | | | 45,187 | | | 47,882 | | | | | 1,190,481 | | | 1,183,200 | | Total Assets | | $ | 3,776,552 | | $ | 3,562,119 | |
See accompanying unaudited Notes to Condensed Consolidated Financial Statements. AptarGroup, Inc. CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) | | | | | | | | In thousands, except share and per share amounts | | | | | | | | | | | | | | | | | | | March 31, | | | December 31, | | | | | 2019 | | | 2018 | | Liabilities and Stockholders’ Equity | | | | | | | | Current Liabilities: | | | | | | | | Notes payable, including revolving credit facilities | | $ | 17,683 | | $ | 101,293 | | Current maturities of long-term obligations, net of unamortized debt issuance costs | | | 63,981 | | | 62,678 | | Accounts payable and accrued liabilities | | | 542,252 | | | 525,199 | | | | | 623,916 | | | 689,170 | | Long-Term Obligations, net of unamortized debt issuance costs | | | 1,141,062 | | | 1,125,993 | | Deferred Liabilities and Other: | | | | | | | | Deferred income taxes | | | 29,938 | | | 53,917 | | Retirement and deferred compensation plans | | | 63,691 | | | 62,319 | | Operating lease liabilities | | | 64,592 | | | — | | Deferred and other non-current liabilities | | | 24,721 | | | 23,465 | | Commitments and contingencies | | | — | | | — | | | | | 182,942 | | | 139,701 | | Stockholders’ Equity: | | | | | | | | AptarGroup, Inc. stockholders’ equity | | | | | | | | Common stock, $.01 par value, 199 million shares authorized, 67.6 and 67.3 million shares issued as of March 31, 2019 and December 31, 2018, respectively | | | 676 | | | 673 | | Capital in excess of par value | | | 700,933 | | | 678,769 | | Retained earnings | | | 1,413,453 | | | 1,371,826 | | Accumulated other comprehensive (loss) | | | (319,795) | | | (310,504) | | Less: Treasury stock at cost, 4.5 and 4.4 million shares as of March 31, 2019 and December 31, 2018, respectively | | | (327,871) | | | (318,208) | | Total AptarGroup, Inc. Stockholders’ Equity | | | 1,467,396 | | | 1,422,556 | | Noncontrolling interests in subsidiaries | | | 318 | | | 315 | | Total Stockholders’ Equity | | | 1,467,714 | | | 1,422,871 | | Total Liabilities and Stockholders’ Equity | | $ | 3,415,634 | | $ | 3,377,735 | |
| | | | | | | | In thousands, except share and per share amounts | | | | | | | | | | | | | | | | | | | March 31, | | | December 31, | | | | | 2020 | | | 2019 | | Liabilities and Stockholders’ Equity | | | | | | | | Current Liabilities: | | | | | | | | Notes payable, revolving credit facility and overdrafts | | $ | 220,511 | | $ | 44,259 | | Current maturities of long-term obligations, net of unamortized debt issuance costs | | | 65,049 | | | 65,988 | | Accounts payable, accrued and other liabilities | | | 605,738 | | | 573,028 | | | | | 891,298 | | | 683,275 | | Long-Term Obligations, net of unamortized debt issuance costs | | | 1,075,745 | | | 1,085,453 | | Deferred Liabilities and Other: | | | | | | | | Deferred income taxes | | | 39,795 | | | 41,388 | | Retirement and deferred compensation plans | | | 104,140 | | | 101,225 | | Operating lease liabilities | | | 49,004 | | | 55,276 | | Deferred and other non-current liabilities | | | 28,947 | | | 23,250 | | Commitments and contingencies | | | — | | | — | | | | | 221,886 | | | 221,139 | | Stockholders’ Equity: | | | | | | | | AptarGroup, Inc. stockholders’ equity | | | | | | | | Common stock, $.01 par value, 199 million shares authorized, 68.9 and 68.6 million shares issued as of March 31, 2020 and December 31, 2019, respectively | | | 689 | | | 686 | | Capital in excess of par value | | | 785,567 | | | 770,596 | | Retained earnings | | | 1,554,665 | | | 1,523,820 | | Accumulated other comprehensive loss | | | (381,058) | | | (341,948) | | Less: Treasury stock at cost, 4.7 and 4.8 million shares as of March 31, 2020 and December 31, 2019, respectively | | | (372,573) | | | (381,238) | | Total AptarGroup, Inc. Stockholders’ Equity | | | 1,587,290 | | | 1,571,916 | | Noncontrolling interests in subsidiaries | | | 333 | | | 336 | | Total Stockholders’ Equity | | | 1,587,623 | | | 1,572,252 | | Total Liabilities and Stockholders’ Equity | | $ | 3,776,552 | | $ | 3,562,119 | |
See accompanying unaudited Notes to Condensed Consolidated Financial Statements. AptarGroup, Inc. CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(Unaudited) | | | | | | | | | | | | | | | | | | | | | | | In thousands | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | AptarGroup, Inc. Stockholders’ Equity | | | | | | | | | | | | Accumulated | | | | | | | | | | | | | | | | Other | | Common | | | | Capital in | | Non- | | | | | | Retained | | Comprehensive | | Stock | | Treasury | | Excess of | | Controlling | | Total | | | | Earnings | | (Loss) Income | | Par Value | | Stock | | Par Value | | Interest | | Equity | | Balance - December 31, 2017 | | $ | 1,301,147 | | $ | (253,302) | | $ | 667 | | $ | (346,245) | | $ | 609,471 | | $ | 310 | | $ | 1,312,048 | | Net income | | | 59,300 | | | — | | | — | | | — | | | — | | | (12) | | | 59,288 | | Adoption of revenue recognition standard | | | 2,937 | | | — | | | — | | | — | | | — | | | — | | | 2,937 | | Foreign currency translation adjustments | | | — | | | 22,924 | | | — | | | — | | | — | | | 11 | | | 22,935 | | Changes in unrecognized pension gains (losses) and related amortization, net of tax | | | — | | | 1,356 | | | — | | | — | | | — | | | — | | | 1,356 | | Changes in treasury locks, net of tax | | | — | | | 7 | | | — | | | — | | | — | | | — | | | 7 | | Changes in derivative gains, net of tax | | | — | | | 346 | | | — | | | — | | | — | | | — | | | 346 | | Stock awards and option exercises | | | — | | | — | | | 5 | | | 12,174 | | | 30,212 | | | — | | | 42,391 | | Cash dividends declared on common stock | | | (19,830) | | | — | | | — | | | — | | | — | | | — | | | (19,830) | | Treasury stock purchased | | | — | | | — | | | — | | | (3,905) | | | — | | | — | | | (3,905) | | Common stock repurchased and retired | | | (11,336) | | | — | | | (1) | | | — | | | (1,460) | | | — | | | (12,797) | | Balance - March 31, 2018 | | $ | 1,332,218 | | $ | (228,669) | | $ | 671 | | $ | (337,976) | | $ | 638,223 | | $ | 309 | | $ | 1,404,776 | | | | | | | | | | | | | | | | | | | | | | | | | Balance - December 31, 2018 | | $ | 1,371,826 | | $ | (310,504) | | $ | 673 | | $ | (318,208) | | $ | 678,769 | | $ | 315 | | $ | 1,422,871 | | Net income | | | 63,004 | | | — | | | — | | | — | | | — | | | (5) | | | 62,999 | | Foreign currency translation adjustments | | | — | | | (9,619) | | | — | | | — | | | — | | | 8 | | | (9,611) | | Changes in unrecognized pension gains (losses) and related amortization, net of tax | | | — | | | 721 | | | — | | | — | | | — | | | — | | | 721 | | Changes in derivative gains, net of tax | | | — | | | (393) | | | — | | | — | | | — | | | — | | | (393) | | Stock awards and option exercises | | | — | | | — | | | 3 | | | 5,337 | | | 22,164 | | | — | | | 27,504 | | Cash dividends declared on common stock | | | (21,377) | | | — | | | — | | | — | | | — | | | — | | | (21,377) | | Treasury stock purchased | | | — | | | — | | | — | | | (15,000) | | | — | | | — | | | (15,000) | | Balance - March 31, 2019 | | $ | 1,413,453 | | $ | (319,795) | | $ | 676 | | $ | (327,871) | | $ | 700,933 | | $ | 318 | | $ | 1,467,714 | |
| | | | | | | | | | | | | | | | | | | | | | | In thousands | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | AptarGroup, Inc. Stockholders’ Equity | | | | | | | | | | | | Accumulated | | | | | | | | | | | | | | | | Other | | Common | | | | Capital in | | Non- | | | | | | Retained | | Comprehensive | | Stock | | Treasury | | Excess of | | Controlling | | Total | | | | Earnings | | (Loss) Income | | Par Value | | Stock | | Par Value | | Interest | | Equity | | Balance - December 31, 2018 | | $ | 1,371,826 | | $ | (310,504) | | $ | 673 | | $ | (318,208) | | $ | 678,769 | | $ | 315 | | $ | 1,422,871 | | Net income (loss) | | | 63,004 | | | — | | | — | | | — | | | — | | | (5) | | | 62,999 | | Foreign currency translation adjustments | | | — | | | (9,619) | | | — | | | — | | | — | | | 8 | | | (9,611) | | Changes in unrecognized pension gains (losses) and related amortization, net of tax | | | — | | | 721 | | | — | | | — | | | — | | | — | | | 721 | | Changes in derivative gains (losses), net of tax | | | — | | | (393) | | | — | | | — | | | — | | | — | | | (393) | | Stock awards and option exercises | | | — | | | — | | | 3 | | | 5,337 | | | 22,164 | | | — | | | 27,504 | | Cash dividends declared on common stock | | | (21,377) | | | — | | | — | | | — | | | — | | | — | | | (21,377) | | Treasury stock purchased | | | — | | | — | | | — | | | (15,000) | | | — | | | — | | | (15,000) | | Balance - March 31, 2019 | | $ | 1,413,453 | | $ | (319,795) | | $ | 676 | | $ | (327,871) | | $ | 700,933 | | $ | 318 | | $ | 1,467,714 | | | | | | | | | | | | | | | | | | | | | | | | | Balance - December 31, 2019 | | $ | 1,523,820 | | $ | (341,948) | | $ | 686 | | $ | (381,238) | | $ | 770,596 | | $ | 336 | | $ | 1,572,252 | | Net income (loss) | | | 55,253 | | | — | | | — | | | — | | | — | | | (3) | | | 55,250 | | Adoption of CECL standard | | | (1,377) | | | — | | | — | | | — | | | — | | | — | | | (1,377) | | Foreign currency translation adjustments | | | — | | | (42,229) | | | — | | | — | | | — | | | — | | | (42,229) | | Changes in unrecognized pension gains (losses) and related amortization, net of tax | | | — | | | 1,636 | | | — | | | — | | | — | | | — | | | 1,636 | | Changes in derivative gains (losses), net of tax | | | — | | | 1,483 | | | — | | | — | | | — | | | — | | | 1,483 | | Stock awards and option exercises | | | — | | | — | | | 3 | | | 8,665 | | | 14,971 | | | — | | | 23,639 | | Cash dividends declared on common stock | | | (23,031) | | | — | | | — | | | — | | | — | | | — | | | (23,031) | | Balance - March 31, 2020 | | $ | 1,554,665 | | $ | (381,058) | | $ | 689 | | $ | (372,573) | | $ | 785,567 | | $ | 333 | | $ | 1,587,623 | |
See accompanying unaudited Notes to Condensed Consolidated Financial Statements. AptarGroup, Inc. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) | | | | | | | | In thousands, brackets denote cash outflows | | | | | | | | | | | | | | | | Three Months Ended March 31, | | | 2019 | | | 2018 | | | | | | | | | | Cash Flows from Operating Activities: | | | | | | | | Net income | | $ | 62,999 | | $ | 59,288 | | Adjustments to reconcile net income to net cash provided by operations: | | | | | | | | Depreciation | | | 41,487 | | | 38,357 | | Amortization | | | 6,002 | | | 2,818 | | Stock-based compensation | | | 6,565 | | | 7,511 | | Provision for doubtful accounts | | | 497 | | | 94 | | Loss (gain) on disposition of fixed assets | | | 310 | | | (859) | | Deferred income taxes | | | 671 | | | (2,733) | | Defined benefit plan expense | | | 3,858 | | | 4,872 | | Equity in results of affiliates | | | 95 | | | 65 | | Changes in balance sheet items, excluding effects from foreign currency adjustments: | | | | | | | | Accounts and other receivables | | | (35,301) | | | (67,484) | | Inventories | | | (13,097) | | | (18,575) | | Prepaid and other current assets | | | (2,282) | | | 129 | | Accounts payable and accrued liabilities | | | 6,865 | | | 26,744 | | Income taxes payable | | | 3,511 | | | 3,255 | | Retirement and deferred compensation plan liabilities | | | (5,940) | | | (5,381) | | Other changes, net | | | 1,396 | | | 2,918 | | Net Cash Provided by Operations | | | 77,636 | | | 51,019 | | Cash Flows from Investing Activities: | | | | | | | | Capital expenditures | | | (51,742) | | | (40,019) | | Proceeds from sale of property and equipment | | | 178 | | | 2,848 | | Insurance proceeds | | | — | | | 10,631 | | Acquisition of business, release of escrow | | | (4,036) | | | — | | Acquisition of intangible assets | | | (221) | | | (124) | | Proceeds from sale of investment in equity securities | | | 16,487 | | | — | | Notes receivable, net | | | 231 | | | 208 | | Net Cash (Used) by Investing Activities | | | (39,103) | | | (26,456) | | Cash Flows from Financing Activities: | | | | | | | | Proceeds from notes payable | | | 16,783 | | | 8,564 | | Repayments of notes payable | | | (21,130) | | | (3,956) | | Proceeds and repayments of short term credit facility, net | | | (78,222) | | | — | | Proceeds from long-term obligations | | | 10,446 | | | 2,524 | | Repayments of long-term obligations | | | (3,227) | | | (3,855) | | Dividends paid | | | (21,377) | | | (19,830) | | Proceeds from stock option exercises | | | 20,939 | | | 34,880 | | Purchase of treasury stock | | | (15,000) | | | (3,905) | | Common stock repurchased and retired | | | — | | | (12,797) | | Net Cash (Used) Provided by Financing Activities | | | (90,788) | | | 1,625 | | Effect of Exchange Rate Changes on Cash | | | 2,809 | | | 5,930 | | Net (Decrease) Increase in Cash and Equivalents and Restricted Cash | | | (49,446) | | | 32,118 | | Cash and Equivalents and Restricted Cash at Beginning of Period | | | 266,823 | | | 712,640 | | Cash and Equivalents and Restricted Cash at End of Period | | $ | 217,377 | | $ | 744,758 | |
| | | | | | | | In thousands, brackets denote cash outflows | | | | | | | | | | | | | | | | Three Months Ended March 31, | | | 2020 | | | 2019 | | | | | | | | | | Cash Flows from Operating Activities: | | | | | | | | Net income | | $ | 55,250 | | $ | 62,999 | | Adjustments to reconcile net income to net cash provided by operations: | | | | | | | | Depreciation | | | 42,792 | | | 41,487 | | Amortization | | | 8,014 | | | 6,002 | | Stock-based compensation | | | 9,141 | | | 6,565 | | Provision for CECL | | | 1,251 | | | 497 | | Loss on disposition of fixed assets | | | 54 | | | 310 | | Deferred income taxes | | | 6 | | | 671 | | Defined benefit plan expense | | | 5,775 | | | 3,858 | | Equity in results of affiliates | | | 799 | | | 95 | | Changes in balance sheet items, excluding effects from foreign currency adjustments: | | | | | | | | Accounts and other receivables | | | (64,764) | | | (35,301) | | Inventories | | | (8,615) | | | (13,097) | | Prepaid and other current assets | | | (11,787) | | | (2,282) | | Accounts payable, accrued and other liabilities | | | 45,458 | | | 6,865 | | Income taxes payable | | | (5,278) | | | 3,511 | | Retirement and deferred compensation plan liabilities | | | (1,312) | | | (5,940) | | Other changes, net | | | 8,249 | | | 1,396 | | Net Cash Provided by Operations | | | 85,033 | | | 77,636 | | Cash Flows from Investing Activities: | | | | | | | | Capital expenditures | | | (61,625) | | | (51,742) | | Proceeds from sale of property, plant and equipment | | | 166 | | | 178 | | Acquisition of business, release of escrow | | | (1,463) | | | (4,036) | | Acquisition of intangible assets, net | | | (3,955) | | | (221) | | Investment in equity securities | | | (20,423) | | | — | | Proceeds from sale of investment in equity securities | | | — | | | 16,487 | | Notes receivable, net | | | (785) | | | 231 | | Net Cash Used by Investing Activities | | | (88,085) | | | (39,103) | | Cash Flows from Financing Activities: | | | | | | | | Proceeds from notes payable and overdrafts | | | 8,148 | | | 16,783 | | Repayments of notes payable and overdrafts | | | (2,030) | | | (21,130) | | Proceeds and repayments of short term revolving credit facility, net | | | 175,000 | | | (78,222) | | Proceeds from long-term obligations | | | — | | | 10,446 | | Repayments of long-term obligations | | | (2,386) | | | (3,227) | | Dividends paid | | | (23,031) | | | (21,377) | | Proceeds from stock option exercises | | | 18,602 | | | 20,939 | | Purchase of treasury stock | | | — | | | (15,000) | | Net Cash Provided (Used) by Financing Activities | | | 174,303 | | | (90,788) | | Effect of Exchange Rate Changes on Cash | | | (3,381) | | | 2,809 | | Net Increase (Decrease) in Cash and Equivalents and Restricted Cash | | | 167,870 | | | (49,446) | | Cash and Equivalents and Restricted Cash at Beginning of Period | | | 246,973 | | | 266,823 | | Cash and Equivalents and Restricted Cash at End of Period | | $ | 414,843 | | $ | 217,377 | |
Restricted cash included in the line item prepaid and other on the Condensed Consolidated Balance Sheets as shown below represents amounts held in escrow.escrow related to the Noble Acquisition (as defined herein). | | | | | | | | Three Months Ended March 31, | | | 2020 | | | 2019 | | | | | | | | | | Cash and equivalents | | $ | 410,840 | | $ | 217,377 | | Restricted cash included in prepaid and other | | | 4,003 | | | — | | Total Cash and Equivalents and Restricted Cash shown in the Statement of Cash Flows | | $ | 414,843 | | $ | 217,377 | |
| | | | | | | | Three Months Ended March 31, | | | 2019 | | | 2018 | | | | | | | | | | Cash and equivalents | | $ | 217,377 | | $ | 741,062 | | Restricted cash included in prepaid and other | | | — | | | 3,696 | | Total Cash and Equivalents and Restricted Cash shown in the Statement of Cash Flows | | $ | 217,377 | | $ | 744,758 | |
See accompanying unaudited Notes to Condensed Consolidated Financial Statements. AptarGroup, Inc. Notes to Condensed Consolidated Financial Statements
(Dollars in Thousands, Except per Share Amounts, or as Otherwise Indicated) (Unaudited) NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION The accompanying unaudited Condensed Consolidated Financial Statements include the accounts of AptarGroup, Inc. and our subsidiaries. The terms “AptarGroup”, “Aptar”, “Company”, “we”, “us” or “our” as used herein refer to AptarGroup, Inc. and our subsidiaries. All significant intercompany accounts and transactions have been eliminated. Certain previously reported amounts have been reclassified to conform to the current period presentation. In the opinion of management, the unaudited Condensed Consolidated Financial Statements (the “Condensed Consolidated Financial Statements”) include all normal recurring adjustments necessary for a fair statement of consolidated financial position, results of operations, comprehensive income, changes in equity and cash flows for the interim periods presented. The accompanying Condensed Consolidated Financial Statements have been prepared by the Company, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) have been condensed or omitted pursuant to such rules and regulations, although we believe that the disclosures made are adequate to make the information presented not misleading. Also, certain financial position data included herein was derived from the audited Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 20182019 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, 2018.2019. The results of operations of any interim period are not necessarily indicative of the results that may be expected for the year. DuringThere are many uncertainties regarding the current COVID-19 pandemic, including the scope of scientific and health issues, the anticipated duration of the pandemic and the extent of local and worldwide social, political and economic disruption it may cause. The pandemic has impacted our business, operations and financial results 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 pesoMarch 31, 2020 including an overall reduction to the U.S. dollar. Local currency monetary assets and liabilities have been remeasured into U.S. dollars using exchange ratesnet sales. NaN impairments were recorded as of the latest balance sheet date, with remeasurement adjustments and other transaction gains and losses recognized in net earnings. Our Argentinian operations contributed approximately 2.0% of consolidated net assets and revenues at and for the three months ended March 31, 2019.2020. While the disruption is currently expected to be temporary, there is uncertainty around the duration. Due to significant uncertainty surrounding the situation, our judgment regarding future results could change and therefore our results could be materially impacted.
LEASES
We determine if an arrangement is a lease at inception. Operating lease assets are included in operating lease right-of-use (“ROU”) assets and 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.
ADOPTION OF RECENT ACCOUNTING PRONOUNCEMENTSSTANDARDS Changes to U.S. GAAP are established by the Financial Accounting Standards Board (“FASB”) in the form of Accounting Standards Updates (“ASUs”) to the FASB’s Accounting Standards Codification. Effective January 1, 2020, we adopted ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, issued by the FASB in June 2016, as well as the clarifying amendments subsequently issued. We applied the guidance using a modified retrospective approach and accordingly recognized an amount of $1.4 million as the cumulative adjustment to opening retained earnings in the first quarter of 2020. This is based on management's best estimates of specific losses on individual exposures particularly on current trade receivables, as well as the time value of money and reasonable and supportable information that is available at the reporting date about past events, current conditions and forecasts of future economic conditions. On an ongoing basis, we will contemplate forward-looking economic conditions in recording lifetime expected credit losses for our financial assets measured at cost, such as our trade receivables and certain other assets. In February 2016,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 new standard related to leases to increase transparency and comparability among organizations by requiring the recognition of ROU assets and lease liabilities on the balance sheet. Most prominent among the changes in the standard is the recognition of ROU assets and lease liabilities by lessees for those leases classified as operating leases. Under the standard, disclosuresresult, impairment charges are required to meet the objective of enabling users of financial statements to assessfor the amount timing, and uncertaintyby which a reporting unit’s carrying amount exceeds its fair value up to the amount of cash flows arising from leases.its allocated goodwill. We adopted the standard effectiveon January 1, 2019 using a modified retrospective transition, using the effective date method. Under this method, financial results reported in periods prior to 2019 are2020 and did 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 most significant impact was the recognition of ROU assets and lease liabilities for operating leases, as our accounting for finance leases remained substantially unchanged. The impact of adoption of the standard to previously reported results is shown below. | | | | | | | | | | | | | | Balance at | | | | | | Balance at | | | | | December 31, | | | | | | January 1, | | | | | 2018 | | | Adjustments | | | 2019 | | Consolidated Balance Sheets | | | | | | | | | | | Operating lease right-of-use assets | | $ | — | | $ | 83,222 | | $ | 83,222 | | Prepaid and other | | | 118,245 | | | (1,383) | | | 116,862 | | Property, plant and equipment | | | 991,613 | | | 5,876 | | | 997,489 | | Current maturities of long-term obligations, net of unamortized debt issuance costs | | | 62,678 | | | 2,631 | | | 65,309 | | Accounts payable and accrued liabilities | | | 525,199 | | | 20,508 | | | 545,707 | | Operating lease liabilities | | | — | | | 61,331 | | | 61,331 | | Long-term obligations, net of unamortized debt issuance costs | | | 1,125,993 | | | 3,245 | | | 1,129,238 | |
record any impairment charges. In FebruaryAugust 2018, the FASB issued ASU 2018-02,2018-15 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 provides guidanceimplementation costs to capitalize as an asset related to the service contract and which costs to expense. The amendments also require the entity (customer) to expense the capitalized implementation costs of a hosting arrangement that is a service contract over the term of the hosting arrangement, which includes reasonably certain renewals. We adopted the standard on January 1, 2020 and no material impacts were noted. In August 2018, the reclassification of certain tax effects from accumulated other comprehensive income. This guidance allowsFASB issued ASU 2018-13, which amends disclosure requirements for fair value measurements. The new standard modifies disclosure requirements including removing requirements to disclose the valuation process for Level 3 measurements and adding requirements to disclose the changes in unrealized gains and losses for the reclassification from accumulatedperiod included in other comprehensive income for recurring Level 3 fair value measurements and the range and weighted average of significant unobservable inputs used to retained earnings for stranded tax effects resulting fromdevelop Level 3 measurements. We adopted the Tax Cutsstandard on January 1, 2020 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.no material impacts were noted. Other accounting standards that have been issued by the FASB or other standards-setting bodies did not have a material impact on our Condensed Consolidated Financial Statements. RETIREMENT OF COMMON STOCK
During the first quarter of 2019, we repurchased 159 thousand shares of common stock, all of which were returned to treasury stock. During the first quarter of 2018, we repurchased 189 thousand shares of common stock, of which 144 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.
INCOME TAXES We compute taxes on income in accordance with the tax rules and regulations of the many taxing authorities where the income is earned. The income tax rates imposed by these taxing authorities may vary substantially. Taxable income may differ from pre-tax income for financial accounting purposes. To the extent that these differences create temporarytiming 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. Under current U.S. tax laws, all of our non-U.S. earnings are subject to U.S. taxation. We will provide for the necessary withholding and local income taxes when management decides that an affiliate should make a distribution. These decisions are made taking into consideration the financial requirements of the non-U.S. affiliates and the global cash management goals of the Company.
We provide a liability for the amount of unrecognized tax benefits from uncertain tax positions. This liability is provided whenever we determine that a tax benefit will not meet a more-likely-than-not threshold for recognition. See Note 5 - Income Taxes The Company is subject to taxation and files income tax returns in the U.S. federal jurisdiction and many state and foreign jurisdictions. The Company believes that an adequate provision has been made for more information.any adjustments that may result from tax examinations. However, the outcome of tax audits cannot be predicted with certainty. If any issues addressed in the Company’s tax audits are resolved in a manner inconsistent with its expectations, the Company could be required to adjust its provision for income taxes in the period such resolution occurs. The resolution of each of these audits is not expected to be material to our Condensed Consolidated Financial Statements. NOTE 2 – REVENUE 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 considered insignificant.not material to the year-to-date results. Revenue by segment and geography for the three months ended March 31, 20192020 and 20182019 is as follows: | | | | | | | | | | | | | | | | | | | For the Three Months Ended March 31, 2020 | | | | | | | | | Latin | | | | | | | | Segment | | Europe | | Domestic | | America | | Asia | | Total | | Beauty + Home | | $ | 186,950 | | $ | 81,845 | | $ | 36,181 | | $ | 19,584 | | $ | 324,560 | | Pharma | | | 190,130 | | | 90,965 | | | 6,579 | | | 9,522 | | | 297,196 | | Food + Beverage | | | 28,769 | | | 57,590 | | | 8,034 | | | 5,404 | | | 99,797 | | Total | | $ | 405,849 | | $ | 230,400 | | $ | 50,794 | | $ | 34,510 | | $ | 721,553 | |
| | | | | | | | | | | | | | | | | | | For the Three Months Ended March 31, 2019 | | | | | | | | | Latin | | | | | | | | Segment | | Europe | | Domestic | | America | | Asia | | Total | | Beauty + Home | | $ | 216,233 | | $ | 86,979 | | $ | 42,642 | | $ | 21,805 | | $ | 367,659 | | Pharma | | | 184,174 | | | 71,772 | | | 7,656 | | | 9,099 | | | 272,701 | | Food + Beverage | | | 30,961 | | | 55,120 | | | 7,884 | | | 10,135 | | | 104,100 | | Total | | $ | 431,368 | | $ | 213,871 | | $ | 58,182 | | $ | 41,039 | | $ | 744,460 | |
| | | | | | | | | | | | | | | | | | | For the Three Months Ended March 31, 2019 | | | | | | | | | Latin | | | | | | | | Segment | | Europe | | Domestic | | America | | Asia | | Total | | Beauty + Home | | $ | 216,233 | | $ | 86,979 | | $ | 42,642 | | $ | 21,805 | | $ | 367,659 | | Pharma | | | 184,174 | | | 71,772 | | | 7,656 | | | 9,099 | | | 272,701 | | Food + Beverage | | | 30,961 | | | 55,120 | | | 7,884 | | | 10,135 | | | 104,100 | | Total | | $ | 431,368 | | $ | 213,871 | | $ | 58,182 | | $ | 41,039 | | $ | 744,460 | |
| | | | | | | | | | | | | | | | | | | For the Three Months Ended March 31, 2018 | | | | | | | | | Latin | | | | | | | | Segment | | Europe | | Domestic | | America | | Asia | | Total | | Beauty + Home | | $ | 224,612 | | $ | 83,074 | | $ | 48,266 | | $ | 22,221 | | $ | 378,173 | | Pharma | | | 175,675 | | | 39,096 | | | 6,245 | | | 9,111 | | | 230,127 | | Food + Beverage | | | 29,811 | | | 48,215 | | | 7,763 | | | 9,261 | | | 95,050 | | Total | | $ | 430,098 | | $ | 170,385 | | $ | 62,274 | | $ | 40,593 | | $ | 703,350 | |
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 | | Balance as of | | Increase/ | | | | December 31, 2018 | | March 31, 2019 | | (Decrease) | | Contract asset (current) | | $ | 15,858 | | $ | 15,894 | | $ | 36 | | Contract asset (long-term) | | $ | — | | $ | — | | $ | — | | Contract liability (current) | | $ | 68,134 | | $ | 68,403 | | $ | 269 | | Contract liability (long-term) | | $ | 11,261 | | $ | 11,906 | | $ | 645 | |
| | | | | | | | | | | | | Balance as of | | Balance as of | | Increase/ | | | | December 31, 2019 | | March 31, 2020 | | (Decrease) | | Contract asset (current) | | $ | 16,245 | | $ | 13,457 | | $ | (2,788) | | Contract asset (long-term) | | $ | — | | $ | — | | $ | — | | Contract liability (current) | | $ | 79,305 | | $ | 78,974 | | $ | (331) | | Contract liability (long-term) | | $ | 9,779 | | $ | 14,994 | | $ | 5,215 | |
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 induring the current year that was included inagainst contract liabilities is $12.5 million, including $10.6 million relating to contract liabilities at the opening contract liability balance was $7.5 million.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, systems for our Beauty + Home, Pharma,sealing and Food + Beverage customers.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 FOBfree 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. Tooling Sales We also build, or contract forto 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, $7582019, $515 thousand of unearned revenue associated with outstanding contracts was reported in Accounts Payable, Accrued and Other Liabilities. At March 31, 2019,2020, the unearned amount was $686$432 thousand. We expect to recognize approximately $237$172 thousand of the unearned amount during the remainder of 2019, $2682020, $123 thousand in 2020,2021, and $181$137 thousand thereafter. Credit Risk We are exposed to credit losses primarily through our product sales, tooling sales and services to our customers. We assess each customer’s ability to pay for the products we sell by conducting a credit review. The credit review considers our expected billing exposure and timing for payment and the customer’s established credit rating or our assessment of the customer’s creditworthiness based on our analysis of their financial statements when a credit rating is not available. We also consider contract terms and conditions, country and political risks, and business strategy in our evaluation. A credit limit is established for each customer based on the outcome of this review. We monitor our ongoing credit exposure through active review of customer balances against contract terms and due dates. Our activities include timely account reconciliation, dispute resolution and payment confirmation. We may employ collection agencies and legal counsel to pursue recovery of defaulted receivables. At March 31, 2020, we reported $602 million of accounts receivable, net of CECL of $5.7 million. Changes in the allowance were not material for the three months ended March 31, 2020. Current uncertainty in credit and market conditions due to the COVID-19 pandemic may slow our collection efforts if customers experience significant difficulty accessing credit and paying their obligations, which may lead to higher than normal accounts receivable and increased CECL charges. NOTE 3 - INVENTORIES Inventories, by component, consisted of: | | | | | | | | | | | March 31, | | December 31, | | | | | 2019 | | 2018 | | | | | | | | | | | | | | | March 31, | | December 31, | | | | | 2020 | | 2019 | | Raw materials | | $ | 115,942 | | $ | 110,720 | | | $ | 106,787 | | $ | 111,653 | | Work in process | | | 125,774 | | | 131,091 | | | | 120,151 | | | 123,750 | | Finished goods | | | 148,687 | | | 139,299 | | | | 144,921 | | | 140,392 | | Total | | $ | 390,403 | | $ | 381,110 | | | $ | 371,859 | | $ | 375,795 | |
NOTE 4 – GOODWILL AND OTHER INTANGIBLE ASSETS The changes in the carrying amount of goodwill by reporting segment since December 31, 20182019 are as follows: | | | | | | | | | | | | | | | | | | | Beauty + | | | | | Food + | | Corporate | | | | | | | Home | | Pharma | | Beverage | | & Other | | Total | | Goodwill | | $ | 221,658 | | $ | 413,650 | | $ | 128,153 | | $ | 1,615 | | $ | 765,076 | | Accumulated impairment losses | | | — | | | — | | | — | | | (1,615) | | | (1,615) | | Balance as of December 31, 2019 | | $ | 221,658 | | $ | 413,650 | | $ | 128,153 | | $ | — | | $ | 763,461 | | Acquisition | | | — | | | 463 | | | — | | | — | | | 463 | | Foreign currency exchange effects | | | (2,201) | | | (5,543) | | | (99) | | | — | | | (7,843) | | Goodwill | | $ | 219,457 | | $ | 408,570 | | $ | 128,054 | | $ | 1,615 | | $ | 757,696 | | Accumulated impairment losses | | | — | | | — | | | — | | | (1,615) | | | (1,615) | | Balance as of March 31, 2020 | | $ | 219,457 | | $ | 408,570 | | $ | 128,054 | | $ | — | | $ | 756,081 | |
| | | | | | | | | | | | | | | | | | | Beauty + | | | | | Food + | | Corporate | | | | | | | Home | | Pharma | | Beverage | | & Other | | Total | | Goodwill | | $ | 223,933 | | $ | 359,883 | | $ | 128,279 | | $ | 1,615 | | $ | 713,710 | | Accumulated impairment losses | | | — | | | — | | | — | | | (1,615) | | | (1,615) | | Balance as of December 31, 2018 | | $ | 223,933 | | $ | 359,883 | | $ | 128,279 | | $ | — | | $ | 712,095 | | Acquisition | | | — | | | (964) | | | — | | | — | | | (964) | | Foreign currency exchange effects | | | (2,041) | | | (5,255) | | | (126) | | | — | | | (7,422) | | Goodwill | | $ | 221,892 | | $ | 353,664 | | $ | 128,153 | | $ | 1,615 | | $ | 705,324 | | Accumulated impairment losses | | | — | | | — | | | — | | | (1,615) | | | (1,615) | | Balance as of March 31, 2019 | | $ | 221,892 | | $ | 353,664 | | $ | 128,153 | | $ | — | | $ | 703,709 | |
The table below shows a summary of intangible assets as of March 31, 20192020 and December 31, 2018.2019. | | | | | | | | | | | | | | | | | | | | | | | | | | | March 31, 2019 | | | December 31, 2018 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | March 31, 2020 | | | December 31, 2019 | | Weighted Average | Weighted Average | | Gross | | | | | | | | Gross | | | | | | | | Weighted Average | | Gross | | | | | | | | Gross | | | | | | | | Amortization Period | Amortization Period | | Carrying | | Accumulated | | Net | | Carrying | | Accumulated | | Net | | Amortization Period | | Carrying | | Accumulated | | Net | | Carrying | | Accumulated | | Net | | | | (Years) | | Amount | | Amortization | | Value | | Amount | | Amortization | | Value | | | | | | (Years) | | Amount | | Amortization | | Value | | Amount | | Amortization | | Value | | Amortized intangible assets: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Patents | | 1.9 | | $ | 5,545 | | | (4,754) | | $ | 791 | | $ | 5,427 | | $ | (5,294) | | $ | 133 | | | 7.9 | | $ | 3,001 | | | (1,304) | | $ | 1,697 | | $ | 2,804 | | $ | (1,318) | | $ | 1,486 | | Acquired technology | | 13.5 | | | 90,867 | | | (19,774) | | | 71,093 | | | 92,389 | | | (18,304) | | | 74,085 | | | 13.0 | | | 99,437 | | | (27,143) | | | 72,294 | | | 100,511 | | | (25,430) | | | 75,081 | | Customer relationships | | 14.3 | | | 178,142 | | | (22,784) | | | 155,358 | | | 179,597 | | | (20,439) | | | 159,158 | | | 13.7 | | | 216,198 | | | (37,774) | | | 178,424 | | | 217,934 | | | (33,924) | | | 184,010 | | Trademarks and trade names | | 7.0 | | | 21,105 | | | (7,928) | | | 13,177 | | | 21,243 | | | (5,914) | | | 15,329 | | | 6.9 | | | 34,131 | | | (11,919) | | | 22,212 | | | 35,015 | | | (11,003) | | | 24,012 | | License agreements and other | | 11.9 | | | 14,171 | | | (7,691) | | | 6,480 | | | 13,852 | | | (7,653) | | | 6,199 | | | 17.6 | | | 19,671 | | | (10,177) | | | 9,494 | | | 16,153 | | | (9,658) | | | 6,495 | | Total intangible assets | | 13.2 | | $ | 309,830 | | $ | (62,931) | | $ | 246,899 | | $ | 312,508 | | $ | (57,604) | | $ | 254,904 | | | 13.0 | | $ | 372,438 | | $ | (88,317) | | $ | 284,121 | | $ | 372,417 | | $ | (81,333) | | $ | 291,084 | |
Aggregate amortization expense for the intangible assets above for the quarters ended March 31, 2020 and 2019 was $8,014 and 2018 was $6,002, and $2,818, respectively. Future estimated amortization expense for the years ending December 31 is as follows: | | | | | | | 2019 | | $ | 18,142 | | (remaining estimated amortization for 2019) | | | | | | | | | 2020 | | | 22,643 | | | | $ | 20,725 | | (remaining estimated amortization for 2020) | 2021 | | | 21,831 | | | | | 27,154 | | | 2022 | | | 21,545 | | | | | 26,915 | | | 2023 and thereafter | | | 162,738 | | | | 2023 | | | | 26,835 | | | 2024 and thereafter | | | | 182,492 | | |
Future amortization expense may fluctuate depending on changes in foreign currency rates. The estimates for amortization expense noted above are based upon foreign exchange rates as of March 31, 2019.2020. NOTE 5 – INCOME TAXES Based on currentThe tax laws, ourprovision for interim periods is determined using the estimated annual effective consolidated tax rate, based on the current estimate of full-year earnings and related estimated full year-taxes, adjusted for 2019, excludingthe impact of discrete tax impacts, is 30.4%. This rate reflects the mix of pre-tax income in various non-U.S. jurisdictions and the reduced U.S. federal tax rate, offset by unfavorable provisions within the U.S. tax law and U.S. state income tax increases. quarterly items.
The reported effective tax rate for the three months ended March 31, 2020 and 2019, respectively, was 29.2% and 30.0%, as the impact of discrete tax items. The decrease in the period were largely offsetting. The reported effective tax rate for the three months ended March 31, 20182020 was 27.0%. The prior yearprimarily due to a larger tax rate was favorably impacted by $4.4 million of tax benefitsbenefit from employee share-based compensation.compensation offset in part by a mix of other discrete items. NOTE 6 – DEBT We hold U.S. dollarNotes Payable, Revolving Credit Facility and euro-denominated debt to align our capital structure with our earnings base. Overdrafts
At March 31, 2020 and December 31, 2019, our long-term obligationsnotes payable, revolving credit facility and overdrafts, consisted of the following: | | | | | | | | | | March 31, | | December 31, | | | | 2020 | | 2019 | | Notes payable 8.10% due in 2020 | | $ | 2,664 | | $ | 1,436 | | Revolving credit facility 1.88% due in 2020 | | | 200,000 | | | 25,000 | | Overdrafts 5.68% - 7.82% due in 2020 | | | 17,847 | | | 17,823 | | | | $ | 220,511 | | $ | 44,259 | |
| | | | | | | | | | | | | | | Unamortized | | | | | | | | Debt Issuance | | | | | | Principal | | Costs | | Net | | Notes payable 0.00% – 16.00%, due in monthly and annual installments through 2028 | | $ | 23,421 | | $ | — | | $ | 23,421 | | Senior unsecured notes 3.2%, due in 2022 | | | 75,000 | | | 83 | | | 74,917 | | Senior unsecured debts 4.3% USD floating swapped to 1.36% EUR fixed, equal annual installments through 2022 | | | 224,000 | | | 503 | | | 223,497 | | Senior unsecured notes 3.5%, due in 2023 | | | 125,000 | | | 172 | | | 124,828 | | Senior unsecured notes 1.0%, due in 2023 | | | 112,165 | | | 408 | | | 111,757 | | Senior unsecured notes 3.4%, due in 2024 | | | 50,000 | | | 73 | | | 49,927 | | Senior unsecured notes 3.5%, due in 2024 | | | 100,000 | | | 172 | | | 99,828 | | Senior unsecured notes 1.2%, due in 2024 | | | 224,330 | | | 863 | | | 223,467 | | Senior unsecured notes 3.6%, due in 2025 | | | 125,000 | | | 200 | | | 124,800 | | Senior unsecured notes 3.6%, due in 2026 | | | 125,000 | | | 200 | | | 124,800 | | Financial lease liabilities | | | 23,801 | | | — | | | 23,801 | | | | $ | 1,207,717 | | $ | 2,674 | | $ | 1,205,043 | | Current maturities of long-term obligations | | | (63,981) | | | — | | | (63,981) | | Total long-term obligations | | $ | 1,143,736 | | $ | 2,674 | | $ | 1,141,062 | |
At December 31, 2018, our long-term obligations consisted of the following:
| | | | | | | | | | | | | | | Unamortized | | | | | | | | Debt Issuance | | | | | | Principal | | Costs | | Net | | Notes payable 0.00% – 16.00%, due in monthly and annual installments through 2028 | | $ | 15,531 | | $ | — | | $ | 15,531 | | Senior unsecured notes 3.2%, due in 2022 | | | 75,000 | | | 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 | | Senior unsecured notes 3.5%, due in 2023 | | | 125,000 | | | 181 | | | 124,819 | | Senior unsecured notes 1.0%, due in 2023 | | | 114,535 | | | 432 | | | 114,103 | | Senior unsecured notes 3.4%, due in 2024 | | | 50,000 | | | 76 | | | 49,924 | | Senior unsecured notes 3.5%, due in 2024 | | | 100,000 | | | 181 | | | 99,819 | | Senior unsecured notes 1.2%, due in 2024 | | | 229,070 | | | 904 | | | 228,166 | | Senior unsecured notes 3.6%, due in 2025 | | | 125,000 | | | 207 | | | 124,793 | | Senior unsecured notes 3.6%, due in 2026 | | | 125,000 | | | 208 | | | 124,792 | | Capital lease obligations | | | 8,353 | | | — | | | 8,353 | | | | $ | 1,191,489 | | $ | 2,818 | | $ | 1,188,671 | | Current maturities of long-term obligations | | | (62,678) | | | — | | | (62,678) | | Total long-term obligations | | $ | 1,128,811 | | $ | 2,818 | | $ | 1,125,993 | |
Our revolving credit facility and corporate long-term obligations require us to satisfy certain financial and other covenants including:
| | | | | | | Requirement
| | Level at March 31, 2019
| Consolidated Leverage Ratio (1)
| | Maximumof 3.50 to 1.00
| | 2.00 to 1.00
| Consolidated Interest Coverage Ratio (1)
| | Minimum of 3.00 to 1.00
| | 14.75 to 1.00
|
| (1)
| | Definitions of ratios are included as part of the revolving credit facility agreement and the note purchase agreements.
|
We also maintain a multi-currency revolving credit facility with two tranches providingthat matures in July 2022 which provides for unsecured financing of up to $300 million that is available in the U.S. and up to €150 million that is available to our wholly-owned UK subsidiary. $200.0 million was utilized under our U.S. facility and 0 balance was utilized under our euro-based revolving credit facility as of March 31, 2020. $25.0 million was utilized under our U.S. facility and 0 balance was utilized on our euro-based revolving credit facility as of December 31, 2019. There are 0 compensating balance requirements associated with our revolving credit facility. Each borrowing under the credit facility will bear interest at rates based on LIBOR, prime rates or other similar rates, in each case plus an applicable margin. A facility fee on the total amount of the facility is also payable quarterly, regardless of usage. The applicable margins for borrowings under the credit facility and the facility fee percentage may change from time to time depending on changes in our consolidated leverage ratio. The Long-Term Obligations At March 31, 2020, our long-term obligations consisted of the following: | | | | | | | | | | | | | | | Unamortized | | | | | | | | Debt Issuance | | | | | | Principal | | Costs | | Net | | Notes payable 0.00% – 10.90%, due in monthly and annual installments through 2028 | | $ | 15,551 | | $ | — | | $ | 15,551 | | Senior unsecured notes 3.2%, due in 2022 | | | 75,000 | | | 59 | | | 74,941 | | Senior unsecured debts 3.1% USD floating swapped to 1.36% EUR fixed, equal annual installments through 2022 | | | 168,000 | | | 352 | | | 167,648 | | Senior unsecured notes 3.5%, due in 2023 | | | 125,000 | | | 135 | | | 124,865 | | Senior unsecured notes 1.0%, due in 2023 | | | 110,315 | | | 341 | | | 109,974 | | Senior unsecured notes 3.4%, due in 2024 | | | 50,000 | | | 60 | | | 49,940 | | Senior unsecured notes 3.5%, due in 2024 | | | 100,000 | | | 135 | | | 99,865 | | Senior unsecured notes 1.2%, due in 2024 | | | 220,630 | | | 701 | | | 219,929 | | Senior unsecured notes 3.6%, due in 2025 | | | 125,000 | | | 157 | | | 124,843 | | Senior unsecured notes 3.6%, due in 2026 | | | 125,000 | | | 157 | | | 124,843 | | Finance Lease Liabilities | | | 28,395 | | | — | | | 28,395 | | | | $ | 1,142,891 | | $ | 2,097 | | $ | 1,140,794 | | Current maturities of long-term obligations | | | (65,049) | | | — | | | (65,049) | | Total long-term obligations | | $ | 1,077,842 | | $ | 2,097 | | $ | 1,075,745 | |
At December 31, 2018 outstanding balance2019, our long-term obligations consisted of €69.0 million on the euro-based revolving credit facility was paid in the first quarter of 2019. No balances were drawn as of March 31, 2019. Credit facility balances are included in notes payable, including revolving credit facilities on the Condensed Consolidated Balance Sheet.following: Aggregate
| | | | | | | | | | | | | | | Unamortized | | | | | | | | Debt Issuance | | | | | | Principal | | Costs | | Net | | Notes payable 0.00% – 10.90%, due in monthly and annual installments through 2028 | | $ | 19,220 | | $ | — | | $ | 19,220 | | Senior unsecured notes 3.2%, due in 2022 | | | 75,000 | | | 64 | | | 74,936 | | Senior unsecured debts 3.2% USD floating swapped to 1.36% EUR fixed, equal annual installments through 2022 | | | 168,000 | | | 390 | | | 167,610 | | Senior unsecured notes 3.5%, due in 2023 | | | 125,000 | | | 144 | | | 124,856 | | Senior unsecured notes 1.0%, due in 2023 | | | 112,170 | | | 356 | | | 111,814 | | Senior unsecured notes 3.4%, due in 2024 | | | 50,000 | | | 63 | | | 49,937 | | Senior unsecured notes 3.5%, due in 2024 | | | 100,000 | | | 144 | | | 99,856 | | Senior unsecured notes 1.2%, due in 2024 | | | 224,340 | | | 742 | | | 223,598 | | Senior unsecured notes 3.6%, due in 2025 | | | 125,000 | | | 169 | | | 124,831 | | Senior unsecured notes 3.6%, due in 2026 | | | 125,000 | | | 169 | | | 124,831 | | Finance Lease Liabilities | | | 29,952 | | | — | | | 29,952 | | | | $ | 1,153,682 | | $ | 2,241 | | $ | 1,151,441 | | Current maturities of long-term obligations | | | (65,988) | | | — | | | (65,988) | | Total long-term obligations | | $ | 1,087,694 | | $ | 2,241 | | $ | 1,085,453 | |
The aggregate long-term maturities, excluding finance lease obligations,liabilities, which are disclosed in Note 7, due annually from the current balance sheet date for the next five years are $60,592, $62,195, $61,111, $135,252, $339,883$61,181, $60,285, $134,343, $337,444, $270,846 and $524,883$250,397 thereafter. Covenants Our revolving credit facility and corporate long-term obligations require us to satisfy certain financial and other covenants including: | | | | | |
| Requirement |
| Level at March 31, 2020 | Consolidated Leverage Ratio (1) | | Maximumof 3.50 to 1.00 | | 1.73 to 1.00 | Consolidated Interest Coverage Ratio (1) | | Minimum of 3.00 to 1.00 | | 16.32 to 1.00 |
(1) | Definitions of ratios are included as part of the revolving credit facility agreement and the note purchase agreements. |
NOTE 7 – LEASE COMMITMENTSLEASES 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 2028.2032. 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 $8.1 million in the first quarter of 2018 under the old lease accounting standard. The components of lease expense for the current periodthree months ended March 31, 2020 and 2019 were as follows: | | | | | Three Months Ended March 31, | | 2019 | | Operating lease cost | | $ | 6,004 | | | | | | | Finance lease cost: | | | | | Amortization of right-of-use assets | | $ | 872 | | Interest on lease liabilities | | | 315 | | Total finance lease cost | | $ | 1,187 | | | | | | | Short-term lease and variable lease costs | | $ | 1,942 | |
| | | | | | | | Three Months Ended March 31, | | 2020 | | 2019 | | Operating lease cost | | $ | 5,254 | | $ | 6,004 | | | | | | | | | | Finance lease cost: | | | | | | | | Amortization of right-of-use assets | | $ | 1,199 | | $ | 872 | | Interest on lease liabilities | | | 348 | | | 315 | | Total finance lease cost | | $ | 1,547 | | $ | 1,187 | | | | | | | | | | Short-term lease and variable lease costs | | $ | 2,448 | | $ | 1,942 | |
Supplemental cash flow information related to leases was as follows: | | | | | Three Months Ended March 31, | | 2019 | | Cash paid for amounts included in the measurement of lease liabilities: | | | | | Operating cash flows from operating leases | | $ | 6,469 | | Operating cash flows from finance leases | | | 243 | | Financing cash flows from finance leases | | | 1,140 | | | | | | | Right-of-use assets obtained in exchange for lease obligations: | | | | | Operating leases | | $ | 4,515 | | Finance leases | | | 10,697 | |
| | | | | | | | Three Months Ended March 31, | | 2020 | | 2019 | | Cash paid for amounts included in the measurement of lease liabilities: | | | | | | | | Operating cash flows from operating leases | | $ | 5,328 | | $ | 6,469 | | Operating cash flows from finance leases | | | 369 | | | 243 | | Financing cash flows from finance leases | | | 1,657 | | | 1,140 | | | | | | | | | | Right-of-use assets obtained in exchange for lease obligations: | | | | | | | | Operating leases | | $ | 5,233 | | $ | 4,515 | | Finance leases | | | 220 | | | 10,697 | |
Supplemental balance sheet information related to leases was as follows:
| | | | | | | March 31, 2019 | | Operating Leases | | | | | Operating lease right-of-use assets | | $ | 82,099 | | | | | | | Accounts payable and accrued liabilities | | $ | 15,935 | | Operating lease liabilities | | | 64,592 | | Total operating lease liabilities | | $ | 80,527 | | | | | | | Finance Leases | | | | | Property, plant and equipment, gross | | $ | 31,735 | | Accumulated depreciation | | | (1,095) | | Property, plant and equipment, net | | $ | 30,640 | | | | | | | Current maturities of long-term obligations, net of unamortized debt issuance cost | | $ | 3,389 | | Long-term obligations, net of unamortized debt issuance cost | | | 20,412 | | Total finance lease liabilities | | $ | 23,801 | | | | | | | Weighted Average Remaining Lease Term (in years) | | | | | Operating leases | | | 6.4 | | Finance leases | | | 7.3 | | | | | | | Weighted Average Discount Rate | | | | | Operating leases | | | 4.92 | % | Finance leases | | | 5.66 | % |
Maturities of lease liabilities as of March 31, 2019, were as follows:
| | | | | | | | | | Operating | | Finance | | | | Leases | | Leases | | Year 1 | | $ | 19,988 | | $ | 4,605 | | Year 2 | | | 16,408 | | | 3,704 | | Year 3 | | | 12,897 | | | 3,087 | | Year 4 | | | 10,467 | | | 2,200 | | Year 5 | | | 8,586 | | | 1,769 | | Thereafter | | | 26,358 | | | 16,472 | | Total lease payments | | | 94,704 | | | 31,837 | | Less imputed interest | | | (14,177) | | | (8,036) | | Total | | $ | 80,527 | | $ | 23,801 | |
Maturities of lease liabilities as of December 31, 2018 under the old lease accounting standard were as follows:
| | | | | | | | | | Operating | | Capital | | | | Leases | | Leases | | Year 1 | | $ | 26,512 | | $ | 1,828 | | Year 2 | | | 21,386 | | | 1,653 | | Year 3 | | | 16,529 | | | 1,546 | | Year 4 | | | 12,549 | | | 1,160 | | Year 5 | | | 10,225 | | | 880 | | Thereafter | | | 21,932 | | | 3,827 | | Total lease payments | | $ | 109,133 | | | 10,894 | | Less imputed interest | | | | | | (2,541) | | Present value of future lease payments | | | | | $ | 8,353 | |
As of March 31, 2019, we have additional operating and finance leases, primarily for buildings, that have not yet commenced of $4.0 million. These operating and finance leases will commence in years 2019 and 2020 with lease terms of 3 to 10 years.
NOTE 8 – RETIREMENT AND DEFERRED COMPENSATION PLANS Components of Net Periodic Benefit Cost: | | | | | | | | | | | | | | | | | Domestic Plans | | Foreign Plans | | | | | | | | | | | | | | | | | | | | | Domestic Plans | | Foreign Plans | | Three Months Ended March 31, | | 2019 | | 2018 | | 2019 | | 2018 | | | 2020 | | 2019 | | 2020 | | 2019 | | Service cost | | $ | 2,773 | | $ | 2,849 | | $ | 1,460 | | $ | 1,531 | | | $ | 3,577 | | $ | 2,773 | | $ | 1,768 | | $ | 1,460 | | Interest cost | | | 1,845 | | | 1,720 | | | 501 | | | 472 | | | | 1,987 | | | 1,845 | | | 340 | | | 501 | | Expected return on plan assets | | | (3,094) | | | (2,814) | | | (592) | | | (679) | | | | (3,422) | | | (3,094) | | | (634) | | | (592) | | Amortization of net loss | | | 489 | | | 1,218 | | | 363 | | | 446 | | | | 1,548 | | | 489 | | | 514 | | | 363 | | Amortization of prior service cost | | | — | | | — | | | 113 | | | 129 | | | | — | | | — | | | 97 | | | 113 | | Net periodic benefit cost | | $ | 2,013 | | $ | 2,973 | | $ | 1,845 | | $ | 1,899 | | | $ | 3,690 | | $ | 2,013 | | $ | 2,085 | | $ | 1,845 | |
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 no0 minimum funding requirement, we contributed $365 $204thousand to our ongoing domestic defined benefit planssupplemental employee retirement plan (“SERP”) annuity contracts during the quarterthree months ended March 31, 2019.2020. We expectplan to contribute approximately $4.3 millionan additional $200 thousand to pay our ongoing SERP annuity contracts during 2020. We have contributed approximately $711thousand to our foreign defined benefit plans in 2019, and as ofduring the three months ended March 31, 2019, we have contributed approximately $0.7 million of that amount.2020 and do not expect additional significant contributions during 2020. NOTE 9 – ACCUMULATED OTHER COMPREHENSIVE INCOME Changes in Accumulated Other Comprehensive (Loss) Income by Component: | | | | | | | | | | | | | | | | Foreign | | Defined Benefit | | | | | | | | | | Currency | | Pension Plans | | Derivatives | | Total | | Balance - December 31, 2017 | | $ | (185,503) | | $ | (64,595) | | $ | (3,204) | | $ | (253,302) | | Other comprehensive income (loss) before reclassifications | | | 22,924 | | | — | | | (4,715) | | | 18,209 | | Amounts reclassified from accumulated other comprehensive income | | | — | | | 1,356 | | | 5,068 | | | 6,424 | | Net current-period other comprehensive income | | | 22,924 | | | 1,356 | | | 353 | | | 24,633 | | Balance - March 31, 2018 | | $ | (162,579) | | $ | (63,239) | | $ | (2,851) | | $ | (228,669) | | | | | | | | | | | | | | | | Balance - December 31, 2018 | | $ | (248,401) | | $ | (60,463) | | $ | (1,640) | | $ | (310,504) | | Other comprehensive income (loss) before reclassifications | | | (9,619) | | | — | | | 5,738 | | | (3,881) | | Amounts reclassified from accumulated other comprehensive income (loss) | | | — | | | 721 | | | (6,131) | | | (5,410) | | Net current-period other comprehensive income | | | (9,619) | | | 721 | | | (393) | | | (9,291) | | Balance - March 31, 2019 | | $ | (258,020) | | $ | (59,742) | | $ | (2,033) | | $ | (319,795) | |
| | | | | | | | | | | | | | | | Foreign | | Defined Benefit | | | | | | | | | | Currency | | Pension Plans | | Derivatives | | Total | | Balance - December 31, 2018 | | $ | (248,401) | | $ | (60,463) | | $ | (1,640) | | $ | (310,504) | | Other comprehensive (loss) income before reclassifications | | | (9,619) | | | — | | | 5,738 | | | (3,881) | | Amounts reclassified from accumulated other comprehensive income (loss) | | | — | | | 721 | | | (6,131) | | | (5,410) | | Net current-period other comprehensive (loss) income | | | (9,619) | | | 721 | | | (393) | | | (9,291) | | Balance - March 31, 2019 | | $ | (258,020) | | $ | (59,742) | | $ | (2,033) | | $ | (319,795) | | | | | | | | | | | | | | | | Balance - December 31, 2019 | | $ | (257,124) | | $ | (83,147) | | $ | (1,677) | | $ | (341,948) | | Other comprehensive (loss) income before reclassifications | | | (42,229) | | | — | | | 5,026 | | | (37,203) | | Amounts reclassified from accumulated other comprehensive income (loss) | | | — | | | 1,636 | | | (3,543) | | | (1,907) | | Net current-period other comprehensive (loss) income | | | (42,229) | | | 1,636 | | | 1,483 | | | (39,110) | | Balance - March 31, 2020 | | $ | (299,353) | | $ | (81,511) | | $ | (194) | | $ | (381,058) | |
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 | | Comprehensive Income | | Where Net Income is Presented | | Three Months Ended March 31, | | 2020 | | 2019 | | | | | | | | | | | | | | Defined Benefit Pension Plans | | | | | | | | | | Amortization of net loss | | $ | 2,062 | | $ | 852 | | (1) | | Amortization of prior service cost | | | 97 | | | 113 | | (1) | | | | | 2,159 | | | 965 | | Total before tax | | | | | (523) | | | (244) | | Tax benefit | | | | $ | 1,636 | | $ | 721 | | Net of tax | | Derivatives | | | | | | | | | | Changes in cross currency swap: interest component | | $ | (763) | | $ | (1,454) | | Interest Expense | | Changes in cross currency swap: foreign exchange component | | | (2,780) | | | (4,677) | | Miscellaneous, net | | | | $ | (3,543) | | $ | (6,131) | | Net of tax | | Total reclassifications for the period | | $ | (1,907) | | $ | (5,410) | | | |
| | | | | | | | | | | | Amount Reclassified from | | | | Details about Accumulated Other | | Accumulated Other | | Affected Line in the Statement | | Comprehensive Income Components | | Comprehensive Income | | Where Net Income is Presented | | Three Months Ended March 31, | | 2019 | | 2018 | | | | | | | | | | | | | | Defined Benefit Pension Plans | | | | | | | | | | Amortization of net loss | | $ | 852 | | $ | 1,664 | | (1) | | Amortization of prior service cost | | | 113 | | | 129 | | (1) | | | | | 965 | | | 1,793 | | Total before tax | | | | | (244) | | | (437) | | Tax benefit | | | | $ | 721 | | $ | 1,356 | | Net of tax | | Derivatives | | | | | | | | | | Changes in treasury locks | | $ | — | | $ | 11 | | Interest Expense | | Changes in cross currency swap: interest component | | | (1,454) | | | (1,019) | | Interest Expense | | Changes in cross currency swap: foreign exchange component | | | (4,677) | | | 7,116 | | Miscellaneous, net | | | | | (6,131) | | | 6,108 | | Total before tax | | | | | — | | | (1,040) | | Tax benefit | | | | $ | (6,131) | | $ | 5,068 | | Net of tax | | Total reclassifications for the period | | $ | (5,410) | | $ | 6,424 | | | |
(1) | (1)
| | These accumulated other comprehensive income components are included in the computation of net periodic benefit costs, net of tax (seetax. See Note 8 – Retirement and Deferred Compensation Plans for additional details). details. |
NOTE 10 – DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES We maintain a foreign exchange risk management policy designed to establish a framework to protect the value of our non-functional 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 (seeSheets. See Note 11 - Fair Value).Value for additional details. CASH FLOW HEDGECash 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 $2.0$0.2 million of loss is included in accumulated other comprehensive loss at March 31, 2019.2020. The amount expected to be recognized into earnings during the next 12 months related to the interest component of our cross currency swap based on prevailing foreign exchange and interest rates at March 31, 20192020 is $5.1$2.2 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 March 31, 2019,2020, the fair valuevalues of the cross currency swap waswere a $3.6$6.8 million asset. The swap contract expires on July 20, 2022. HEDGE OF NET INVESTMENTS IN FOREIGN OPERATIONSHedge 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. OTHEROther
As of March 31, 2019,2020, we have recorded the fair value of foreign currency forward exchange contracts of $0.4$2.1 million in prepaid and other and $0.7$0.5 million in accounts payable and accrued liabilities on the balance sheet. All forward exchange contracts outstanding as of March 31, 20192020 had an aggregate notional contract amount of $39.6$56.1 million. Fair Value of Derivative Instruments in the Condensed Consolidated Balance Sheets as of March 31, 20192020 and December 31, 20182019 | | | | | | | | | | | | | | | | | | | | March 31, 2020 | | December 31, 2019 | | | | | | | | Derivatives | | | | Derivatives | | | | | | Derivatives | | not | | Derivatives | | not | | | | | | Designated | | Designated | | Designated | | Designated | | | | Balance Sheet | | as Hedging | | as Hedging | | as Hedging | | as Hedging | | | | Location | | Instruments | | Instruments | | Instruments | | Instruments | | Derivative Assets | | | | | | | | | | | | | | | | Foreign Exchange Contracts | | Prepaid and other | | $ | — | | $ | 2,061 | | $ | — | | $ | 206 | | Cross Currency Swap Contract (1) | | Prepaid and other | | | 6,769 | | | — | | | 2,552 | | | — | | | | | | $ | 6,769 | | $ | 2,061 | | $ | 2,552 | | $ | 206 | | | | | | | | | | | | | | | | | | Derivative Liabilities | | | | | | | | | | | | | | | | Foreign Exchange Contracts | | Accounts payable, accrued and other liabilities | | $ | — | | $ | 505 | | $ | — | | $ | 401 | | | | | | $ | — | | $ | 505 | | $ | — | | $ | 401 | |
| | | | | | | | | | | | | | | | | | | | March 31, 2019 | | December 31, 2018 | | | | | | | | Derivatives | | | | Derivatives | | | | | | Derivatives | | not | | Derivatives | | not | | | | | | Designated | | Designated | | Designated | | Designated | | | | Balance Sheet | | as Hedging | | as Hedging | | as Hedging | | as Hedging | | | | Location | | Instruments | | Instruments | | Instruments | | Instruments | | Derivative Assets | | | | | | | | | | | | | | | | Foreign Exchange Contracts | | Prepaid and other | | $ | — | | $ | 391 | | $ | — | | $ | 259 | | Cross Currency Swap Contract (1) | | Prepaid and other | | | 3,557 | | | — | | | — | | | — | | | | | | $ | 3,557 | | $ | 391 | | $ | — | | $ | 259 | | | | | | | | | | | | | | | | | | Derivative Liabilities | | | | | | | | | | | | | | | | Foreign Exchange Contracts | | Accounts payable and accrued liabilities | | $ | — | | $ | 713 | | $ | — | | $ | 331 | | Cross Currency Swap Contract (1) | | Accounts payable and accrued liabilities | | | — | | | — | | | 1,040 | | | — | | | | | | $ | — | | $ | 713 | | $ | 1,040 | | $ | 331 | |
(1) | This cross currency swap contract is composed of both an interest component and a foreign exchange component. |
(1)This cross currency swap contract is composed of both an interest component and a foreign exchange component.
The Effect of Cash Flow Hedge Accounting on Accumulated Other Comprehensive Income (Loss) for the QuartersThree Months Ended March 31, 20192020 and 20182019 | | | | | | | | | | | | | | | | | | | | | | Amount of Gain (Loss) | | Total Amount | | | | | Amount of Gain (Loss) | | Location of (Loss) | | Reclassified from | | of Affected | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Amount of Gain (Loss) | | Total Amount | | | | | Amount of Gain (Loss) | | Location of (Loss) | | Reclassified from | | of Affected | | Derivatives in Cash | | Recognized in | | Gain Recognized | | Accumulated | | Income | | | Recognized in | | Gain Recognized | | Accumulated | | Income | | Flow Hedging | | Other Comprehensive | | in Income on | | Other Comprehensive | | Statement | | | Other Comprehensive | | in Income on | | Other Comprehensive | | Statement | | Relationships | | Income on Derivative | | Derivatives | | Income on Derivative | | Line Item | | | Income on Derivative | | Derivatives | | Income on Derivative | | Line Item | | | | 2019 | | 2018 | | | | 2019 | | 2018 | | | | | | | | 2020 | | 2019 | | | | 2020 | | 2019 | | | | Cross currency swap contract: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Interest component | | $ | 1,392 | | $ | 1,435 | | Interest expense | | $ | 1,454 | | $ | 1,019 | | $ | (9,214) | | | $ | 2,246 | | $ | 1,392 | | Interest expense | | $ | 763 | | $ | 1,454 | | $ | (8,388) | | Foreign exchange component | | | 4,677 | | | (7,116) | | Miscellaneous, net | | | 4,677 | | | (7,116) | | 466 | | | | 2,780 | | | 4,677 | | Miscellaneous, net | | | 2,780 | | | 4,677 | | (1,412) | | | | $ | 6,069 | | $ | (5,681) | | | | $ | 6,131 | | $ | (6,097) | | | | | | | | $ | 5,026 | | $ | 6,069 | | | | $ | 3,543 | | $ | 6,131 | | | |
The Effect of Derivatives Not Designated as Hedging Instruments on the Condensed Consolidated Statements of Income for the QuartersThree Months Ended March 31, 20192020 and 20182019 | | | | | | | | | | | | | | Amount of (Loss) Gain | | Derivatives Not Designated | | Location of (Loss) Gain Recognized | | Recognized in Income | | as Hedging Instruments | | in Income on Derivatives | | on Derivatives | | | | | | 2020 | | 2019 | | Foreign Exchange Contracts | | Other (Expense) Income: Miscellaneous, net | | $ | 1,747 | | $ | (263) | | | | | | $ | 1,747 | | $ | (263) | |
| | | | | | | | | | | | | | Amount of (Loss) Gain | | Derivatives Not Designated | | Location of (Loss) Gain Recognized | | Recognized in Income | | as Hedging Instruments | | in Income on Derivatives | | on Derivatives | | | | | | 2019 | | 2018 | | Foreign Exchange Contracts | | Other (Expense) Income: Miscellaneous, net | | $ | (263) | | $ | 141 | | | | | | $ | (263) | | $ | 141 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | Gross Amounts not Offset | | | | | | | | | | Gross Amounts | | Net Amounts | | in the Statement of | | | | | | | | | | Offset in the | | Presented in | | Financial Position | | | | | | | Gross | | Statement of | | the Statement of | | Financial | | Cash Collateral | | Net | | | | Amount | | Financial Position | | Financial Position | | Instruments | | Received | | Amount | | Description | | | | | | | | | | | | | | | | | March 31, 2020 | | Derivative Assets | | $ | 8,830 | | — | | $ | 8,830 | | — | | — | | $ | 8,830 | | Total Assets | | $ | 8,830 | | — | | $ | 8,830 | | — | | — | | $ | 8,830 | | | | | | | | | | | | | | | | | | | Derivative Liabilities | | $ | 505 | | — | | $ | 505 | | — | | — | | $ | 505 | | Total Liabilities | | $ | 505 | | — | | $ | 505 | | — | | — | | $ | 505 | | | | | | | | | | | | | | | | | | | December 31, 2019 | | Derivative Assets | | $ | 2,758 | | — | | $ | 2,758 | | — | | — | | $ | 2,758 | | Total Assets | | $ | 2,758 | | — | | $ | 2,758 | | — | | — | | $ | 2,758 | | | | | | | | | | | | | | | | | | | Derivative Liabilities | | $ | 401 | | — | | $ | 401 | | — | | — | | $ | 401 | | Total Liabilities | | $ | 401 | | — | | $ | 401 | | — | | — | | $ | 401 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | Gross Amounts not Offset | | | | | | | | | | Gross Amounts | | Net Amounts | | in the Statement of | | | | | | | | | | Offset in the | | Presented in | | Financial Position | | | | | | | Gross | | Statement of | | the Statement of | | Financial | | Cash Collateral | | Net | | | | Amount | | Financial Position | | Financial Position | | Instruments | | Received | | Amount | | Description | | | | | | | | | | | | | | | | | March 31, 2019 | | Derivative Assets | | $ | 3,948 | | — | | $ | 3,948 | | — | | — | | $ | 3,948 | | Total Assets | | $ | 3,948 | | — | | $ | 3,948 | | — | | — | | $ | 3,948 | | | | | | | | | | | | | | | | | | | Derivative Liabilities | | $ | 713 | | — | | $ | 713 | | — | | — | | $ | 713 | | Total Liabilities | | $ | 713 | | — | | $ | 713 | | — | | — | | $ | 713 | | | | | | | | | | | | | | | | | | | December 31, 2018 | | Derivative Assets | | $ | 259 | | — | | $ | 259 | | — | | — | | $ | 259 | | Total Assets | | $ | 259 | | — | | $ | 259 | | — | | — | | $ | 259 | | | | | | | | | | | | | | | | | | | Derivative Liabilities | | $ | 1,371 | | — | | $ | 1,371 | | — | | — | | $ | 1,371 | | Total Liabilities | | $ | 1,371 | | — | | $ | 1,371 | | — | | — | | $ | 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: | · ● | | Level 1: Unadjusted quoted prices in active markets for identical assets and liabilities. |
| · ● | | Level 2: Observable inputs other than those included in Level 1. For example, quoted prices for similar assets or liabilities in active markets or quoted prices for identical assets or liabilities in inactive markets. |
| · ● | | Level 3: Unobservable inputs reflecting management’s own assumptions about the inputs used in pricing the asset or liability. |
TableAs of ContentsMarch 31, 2020, the fair values of our financial assets and liabilities were categorized as follows:
| | | | | | | | | | | | | | | | Total | | Level 1 | | Level 2 | | Level 3 | | Assets | | | | | | | | | | | | | | Foreign exchange contracts (1) | | $ | 2,061 | | $ | — | | $ | 2,061 | | $ | — | | Cross currency swap contract (1) | | | 6,769 | | | — | | | 6,769 | | | — | | Total assets at fair value | | $ | 8,830 | | $ | — | | $ | 8,830 | | $ | — | | Liabilities | | | | | | | | | | | | | | Foreign exchange contracts (1) | | $ | 505 | | $ | — | | $ | 505 | | $ | — | | Contingent consideration obligation | | | 5,930 | | | — | | | — | | | 5,930 | | Total liabilities at fair value | | $ | 6,435 | | $ | — | | $ | 505 | | $ | 5,930 | |
As of MarchDecember 31, 2019, the fair values of our financial assets and liabilities were categorized as follows: | | | | | | | | | | | | | | | | Total | | Level 1 | | Level 2 | | Level 3 | | Assets | | | | | | | | | | | | | | Foreign exchange contracts (1) | | $ | 206 | | $ | — | | $ | 206 | | $ | — | | Cross currency swap contract (1) | | | 2,552 | | | — | | | 2,552 | | | — | | Total assets at fair value | | $ | 2,758 | | $ | — | | $ | 2,758 | | $ | — | | Liabilities | | | | | | | | | | | | | | Foreign exchange contracts (1) | | $ | 401 | | $ | — | | $ | 401 | | $ | — | | Contingent consideration obligation | | | 5,930 | | | — | | | — | | | 5,930 | | Total liabilities at fair value | | $ | 6,331 | | $ | — | | $ | 401 | | $ | 5,930 | |
| | | | | | | | | | | | | | | | Total | | Level 1 | | Level 2 | | Level 3 | | Assets | | | | | | | | | | | | | | Foreign exchange contracts (1) | | $ | 391 | | $ | — | | $ | 391 | | $ | — | | Cross currency swap contract (1) | | | 3,557 | | | — | | | 3,557 | | | — | | Total assets at fair value | | $ | 3,948 | | $ | — | | $ | 3,948 | | $ | — | | Liabilities | | | | | | | | | | | | | | Foreign exchange contracts (1) | | $ | 713 | | $ | — | | $ | 713 | | $ | — | | Total liabilities at fair value | | $ | 713 | | $ | — | | $ | 713 | | $ | — | |
As of December 31, 2018, the fair values of our financial assets and liabilities were categorized as follows:
| | | | | | | | | | | | | | | | Total | | Level 1 | | Level 2 | | Level 3 | | Assets | | | | | | | | | | | | | | Foreign exchange contracts (1) | | $ | 259 | | $ | — | | $ | 259 | | $ | — | | Total assets at fair value | | $ | 259 | | $ | — | | $ | 259 | | $ | — | | Liabilities | | | | | | | | | | | | | | Foreign exchange contracts (1) | | $ | 331 | | $ | — | | $ | 331 | | $ | — | | Cross currency swap contract (1) | | | 1,040 | | | — | | | 1,040 | | | — | | Total liabilities at fair value | | $ | 1,371 | | $ | — | | $ | 1,371 | | $ | — | |
(1) | (1)
| | Market approach valuation technique based on observable market transactions of spot and forward rates. |
The carrying amounts of our other current financial instruments such as cash and equivalents, accounts and notes receivable, notes payable and current maturities of long-term obligations approximate fair value due to the short-term maturity of the instruments. We consider our long-term obligations a Level 2 liability and utilize the market approach valuation technique based on interest rates that are currently available to us for issuance of debt with similar terms and maturities. The estimated fair value of our long-term obligations was $1.1$1.0 billion as of March 31, 20192020 and $1.1 billion as of December 31, 2019. As discussed in Note 17 - Acquisitions, we have a contingent consideration obligation to the selling equity holders of Noble in connection with the Noble Acquisition (as defined herein) based on 2024 cumulative performance targets and a contingent consideration obligation to the selling equity holder of Gateway in connection with the Gateway Acquisition (as defined herein) based on 2020 and 2022 performance targets. We consider these obligations a Level 3 liability and have estimated the aggregate fair value for these contingent consideration arrangements to be $2.9 million and $3.0 million, respectively, as of March 31, 2020 and December 31, 2018.2019. 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 no0 liabilities recorded for these agreements as of March 31, 20192020 and December 31, 2018.2019. A fire caused damage to our facility in Annecy, France in June 2016. We are insured for the damages caused by the fire, including business interruption insurance. For the three months ended March 31, 2020, we did not receive any insurance proceeds, and have 0 insurance receivable as of March 31, 2020. During the three months ended March 31, 2020 and 2019, profitability was not impacted. The final settlement continues to be negotiated. In many cases, our insurance coverage exceeds the amount of our recognized losses. However, 0 gain contingencies were recognized during the three months ended March 31, 2020 as our ability to realize those gains remains uncertain. 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. We continue to monitor and test the affected areas to determine the full extent of the impact and the scope of any required remediation. Initial costs for further investigation and possible remediation, which are based on assumptions about the area of impact and customary remediation costs, are estimated to be in the rangeBased upon our best estimate, we recorded a reserve of $1.5 million (operating expense) in the first quarter of 2017 related to $3.0this contingency. During 2019, we paid approximately $0.6 million. For the three months ended March 31, 2020, we paid approximately $0.1 million and made adjustments to the accrual based on our future anticipated expenditures. As of March 31, 2020, our outstanding reserve is $0.4 million. The range of possibleultimate loss associated with this environmental contingency is subject to considerable uncertainty due to the incomplete status of 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. We accrued $1.5 million (operating expense) in the first quarter of 2017 relating to this contingency. The amount is periodically reviewed, and adjusted as necessary, as the matter continues to evolve. Based on the current status of the investigation, no adjustment to the accrual was necessary for the quarter ended March 31, 2019. In March 2017, the Supreme Court of Brazil issued a decision that a certain state value added tax should not be included in the calculation of federal gross receipts taxes. The decision reduces our gross receipts tax in Brazil prospectively and, potentially, retrospectively. If the Judicial Court grants full retrospective recovery, we estimate potential recoveries of up to $13.4 million, including interest. 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. If the Judicial Court grants full retrospective recovery, we estimate remaining potential recoveries of approximately $2 million to $8 million, including interest, depending on the future decisions of the Supreme Court of Brazil. 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, In December 2019, tax authorities in Brazil notified us of a tax assessment of approximately $6.1 million, including interest and penalties of $2.3 million and $0.8 million, respectively, relating to differences in tax classification codes used for import duties for the period from January 2015 to August 2018. We are vigorously contesting the assessment, including interest and penalties, and have filed an administrative defense appeal in December 2019. Considering the complex nature of the assessment, we anticipate decisions on our remaining claims in 2019.expect the appeal process to go through different levels of administrative and/or judicial review. Accordingly, due to uncertainty of the timing and amounts of assessment, 0 liability is recorded as of March 31, 2020. NOTE 13 – STOCK REPURCHASE PROGRAM We announced the $350 million share repurchase program in effect for the quarter ended March 31, 2019 on October 20, 2016. On April 18, 2019, we announced a new share repurchase authorization of up to $350 million of common stock. This authorization replaces previous authorizations and has no expiration date. We may repurchase shares through the open market, privately negotiated transactions or other programs, subject to market conditions.
During the three months ended March 31, 2020, we did not repurchase any shares. During the three months ended March 31, 2019, wethe Company repurchased approximately 159 thousand shares for approximately $15.0 million. During the three months endedAs of March 31, 2018, we repurchased approximately 189 thousand shares for approximately $16.7 million. 2020, there was $278.5 million of authorized share repurchases available to us. NOTE 14 – STOCK-BASED COMPENSATION Historically we have issued stock options andWe issue restricted stock units (“RSUs”), which consistedconsist 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). Director RSUs granted to directors are only time-based and generally vest over one year. Compensation expense attributable to employee stock options for the first three months of 2019 was approximately $1.8 million ($1.5 million after tax). The income tax benefit related to this compensation expense was approximately $0.3 million. Approximately $1.6 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 three months of 2018 was approximately $4.9 million ($3.5 million after tax). The income tax benefit related to this compensation expense was approximately $1.4 million. Approximately $4.0 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 three 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:
| | | | Three Months Ended March 31,
| | 2018 | | Dividend Yield
| | 1.5
| %
| Expected Stock Price Volatility
| | 14.2
| %
| Risk-free Interest Rate
| | 2.8
| %
| Expected Life of Option (years)
| | 6.6
| |
A summary of option activity under our stock plans during the three months ended March 31, 2019 is presented below:
| | | | | | | | | | | | | | | Stock Awards Plans | | Director Stock Option Plans | | | | | | | Weighted Average | | | | Weighted Average | | | | | Options | | Exercise Price | | Options | | Exercise Price | | Outstanding, January 1, 2019 | | | 6,761,055 | | $ | 65.76 | | 155,200 | | $ | 58.13 | | Granted | | | — | | | — | | — | | | — | | Exercised | | | (349,320) | | | 59.81 | | (1,000) | | | 53.72 | | Forfeited or expired | | | (5,842) | | | 58.11 | | — | | | — | | Outstanding at March 31, 2019 | | | 6,405,893 | | $ | 66.10 | | 154,200 | | $ | 58.16 | | Exercisable at March 31, 2019 | | | 5,593,702 | | $ | 63.88 | | 154,200 | | $ | 58.16 | | Weighted-Average Remaining Contractual Term (Years): | | | | | | | | | | | | | Outstanding at March 31, 2019 | | | 5.7 | | | | | 3.9 | | | | | Exercisable at March 31, 2019 | | | 5.3 | | | | | 3.9 | | | | | Aggregate Intrinsic Value: | | | | | | | | | | | | | Outstanding at March 31, 2019 | | $ | 258,093 | | | | $ | 7,437 | | | | | Exercisable at March 31, 2019 | | $ | 237,778 | | | | $ | 7,437 | | | | | Intrinsic Value of Options Exercised During the Three Months Ended: | | | | | | | | | | | | | March 31, 2019 | | $ | 14,047 | | | | $ | 51 | | | | | March 31, 2018 | | $ | 22,804 | | | | $ | 1,608 | | | | |
The grant date fair value of options vested during the three months ended March 31, 2019 and 2018 was $12.2 million and $16.5 million, respectively. Cash received from option exercises was approximately $20.9 million and the actual tax benefit realized for the tax deduction from option exercises was approximately $3.4 million in the three months ended March 31, 2019. As of March 31, 2019, the remaining valuation of stock option awards to be expensed in future periods was $6.5 million and the related weighted-average period over which it is expected to be recognized is 1.4 years.
The fair value of both time-based RSUs and performance-based RSUs pertaining to internal performance metrics is determined using the closing price of our common stock on the grant date. The fair value of performance-based RSUs pertaining to TSR is estimated using a Monte Carlo simulation. Inputs and assumptions used to calculate the fair value are shown in the table below. The fair value of these RSUs is expensed over the vesting period using the straight-line method or using the graded vesting method when an employee becomes eligible to retain the award at retirement. | | | | | | | | | | | | | | | | Three Months Ended March 31, | | | 2019 | | 2018 | | | | | 2020 | | 2019 | | | Fair value per stock award | | $ | 134.97 | | $ | 128.70 | | | $ | 94.98 | | | $ | 134.97 | | Grant date stock price | | $ | 104.51 | | $ | 89.42 | | | $ | 83.93 | | | $ | 104.51 | | Assumptions: | | | | | | | | | | | | | | Aptar's stock price expected volatility | | | 16.50 | % | | 12.30 | % | | | | 23.80 | % | | 16.50 | % | | Expected average volatility of peer companies | | | 31.90 | % | | 27.50 | % | | | | 48.50 | % | | 31.90 | % | | Correlation assumption | | | 37.40 | % | | 20.20 | % | | | | 63.50 | % | | 37.40 | % | | Risk-free interest rate | | | 2.19 | % | | 2.42 | % | | | | 0.31 | % | | 2.19 | % | | Dividend yield assumption | | | 1.30 | % | | 1.43 | % | | | | 1.72 | % | | 1.30 | % | |
A summary of RSU activity as of March 31, 20192020 and changes during the three month period then ended is presented below: | | | | | | | | | | | | | | | Time-Based RSUs | | Performance-Based RSUs | | | | | | | Weighted Average | | | | Weighted Average | | | | | Units | | Grant-Date Fair Value | | Units | | Grant-Date Fair Value | | | Nonvested at January 1, 2019 | | 261,487 | | $ | 91.78 | | 69,990 | | $ | 111.55 | | | | | | | | | | | | | | | | | | | Time-Based RSUs | | Performance-Based RSUs | | | | | | | Weighted Average | | | | Weighted Average | | | | | Units | | Grant-Date Fair Value | | Units | | Grant-Date Fair Value | | Nonvested at January 1, 2020 | | | 480,729 | | $ | 95.45 | | 181,680 | | $ | 117.26 | | Granted | | 112,553 | | | 101.96 | | 122,737 | | | 120.62 | | | 176,424 | | | 81.75 | | 206,408 | | | 90.85 | | Vested | | (32,202) | | | 85.13 | | — | | | — | | | (112,515) | | | 82.64 | | — | | | — | | Forfeited | | (3,786) | | | 104.54 | | — | | | — | | | (217) | | | 100.14 | | (589) | | | 120.61 | | Nonvested at March 31, 2019 | | 338,052 | | $ | 95.66 | | 192,727 | | $ | 117.32 | | | Nonvested at March 31, 2020 | | | 544,421 | | $ | 92.11 | | 387,499 | | $ | 103.23 | |
NonvestedIncluded in the March 31, 2020 time-based RSUs outstanding as of March 31, 2019, include 14,257are 11,490 units awardedgranted to non-employee directors.
Compensation expense recorded attributable to RSUs for the first three months of 20192020 and 20182019 was approximately $4.7$8.3 million and $2.6$4.7 million, respectively. The actual tax benefit realized for the tax deduction from RSUs was approximately $408 thousand$1.5 million in the three months ended March 31, 2019.2020. The fair value of units vested during the three months ended March 31, 2020 and 2019 and 2018 was $2.7$9.3 million and $1.0$2.7 million, respectively. The intrinsic value of units vested during the three months ended March 31, 2020 and 2019 and 2018 was $3.2$11.5 million and $1.3$3.2 million, respectively. As of March 31, 2019,2020, there was $42.0$62.7 million of total unrecognized compensation cost relating to RSU awards which is expected to be recognized over a weighted-average period of 2.52.3 years. Historically we provided a long-term incentive program for certain employees. Each award is basedissued stock options to our employees and non-employee directors. Beginning in 2019, we no longer issue stock options. Stock options were awarded with the exercise price equal to the market price on the cumulative TSRdate of our commongrant and generally vest over three years and expire 10 years after grant. Compensation expense attributable to employee stock during a three-year performance period compared to a peer group. The total expected expense related to this programoptions for awards outstanding asthe first three months of March 31, 2019 is2020 was approximately $2.8$0.9 million ($0.7 million after tax). Approximately $0.7 million of which $206 thousandthe compensation expense was recorded in selling, research & development and $409 thousandadministrative expenses and the balance was recognizedrecorded in cost of sales. Compensation expense attributable to stock options for the first three months of 2019 was approximately $1.8 million ($1.5 million after tax). Approximately $1.6 million of the compensation expense was recorded in selling, research & development and 2018,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. A summary of option activity under our stock plans during the three months ended March 31, 2020 is presented below: | | | | | | | | | | | | | | | Stock Awards Plans | | Director Stock Option Plans | | | | | | | Weighted Average | | | | Weighted Average | | | | | Options | | Exercise Price | | Options | | Exercise Price | | Outstanding, January 1, 2020 | | | 5,044,180 | | $ | 68.32 | | 135,251 | | $ | 58.45 | | Granted | | | — | | | — | | — | | | — | | Exercised | | | (292,090) | | | 55.16 | | (21,251) | | | 51.20 | | Forfeited or expired | | | (6,630) | | | 65.60 | | — | | | — | | Outstanding at March 31, 2020 | | | 4,745,460 | | $ | 69.20 | | 114,000 | | $ | 59.80 | | Exercisable at March 31, 2020 | | | 4,583,864 | | $ | 68.43 | | 114,000 | | $ | 59.80 | | Weighted-Average Remaining Contractual Term (Years): | | | | | | | | | | | | | Outstanding at March 31, 2020 | | | 5.3 | | | | | 3.2 | | | | | Exercisable at March 31, 2020 | | | 5.1 | | | | | 3.2 | | | | | Aggregate Intrinsic Value: | | | | | | | | | | | | | Outstanding at March 31, 2020 | | $ | 143,971 | | | | $ | 4,530 | | | | | Exercisable at March 31, 2020 | | $ | 142,195 | | | | $ | 4,530 | | | | | Intrinsic Value of Options Exercised During the Three Months Ended: | | | | | | | | | | | | | March 31, 2020 | | $ | 18,202 | | | | $ | 1,385 | | | | | March 31, 2019 | | $ | 14,047 | | | | $ | 51 | | | | |
The grant date fair value of options vested during the three months ended March 31, 2020 and 2019 was $7.6 million and $12.2 million, respectively. Cash received from option exercises was approximately$18.6 million and the actual tax benefit realized for the tax deduction from option exercises was approximately $4.8 million in the three months ended March 31, 2020. As of March 31, 2020, the remaining valuation of stock option awards to be expensed in future periods was $1.5 million and the related weighted-average period over which it is expected to be recognized is 0.9 years. NOTE 15 – EARNINGS PER SHARE Basic net income per share is calculated by dividing net income attributable to Aptar by the weighted-average number of common shares outstanding during the period. Diluted net income per share is calculated by dividing the net income attributable to Aptar by the weighted-average number of common and common equivalent shares outstanding during the applicable period. The difference between basic and diluted earnings per share is attributable to stock-based compensation awards. Stock-based compensation awards for which total employee proceeds exceed the average market price over the applicable period would have an antidilutive effect on earnings per share, and accordingly, are excluded from the calculation of diluted earnings per share. The reconciliation of basic and diluted earnings per share for the three months ended March 31, 20192020 and 20182019 is as follows: | | | | | | | | | | | | | | | | | Three Months Ended | | | | | March 31, 2019 | | March 31, 2018 | | | | | Diluted | | Basic | | Diluted | | Basic | | | | | | | | | | | | | | | | | | | | | Three Months Ended | | | | | March 31, 2020 | | March 31, 2019 | | | | | Diluted | | Basic | | Diluted | | Basic | | Consolidated operations | | | | | | | | | | | | | | | | | | | | | | | | | | | Income available to common stockholders | | $ | 63,004 | | $ | 63,004 | | $ | 59,300 | | $ | 59,300 | | | $ | 55,253 | | $ | 55,253 | | $ | 63,004 | | $ | 63,004 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Average equivalent shares | | | | | | | | | | | | | | | | | | | | | | | | | | | Shares of common stock | | | 62,964 | | | 62,964 | | | 62,128 | | | 62,128 | | | | 64,009 | | | 64,009 | | | 62,964 | | | 62,964 | | Effect of dilutive stock-based compensation | | | | | | | | | | | | | | | | | | | | | | | | | | | Stock options | | | 2,222 | | | — | | | 2,216 | | | — | | | | 1,810 | | | — | | | 2,222 | | | — | | Restricted stock | | | 163 | | | — | | | 70 | | | — | | | | 292 | | | — | | | 163 | | | — | | Total average equivalent shares | | | 65,349 | | | 62,964 | | | 64,414 | | | 62,128 | | | | 66,111 | | | 64,009 | | | 65,349 | | | 62,964 | | Net income per share | | $ | 0.96 | | $ | 1.00 | | $ | 0.92 | | $ | 0.95 | | | $ | 0.84 | | $ | 0.86 | | $ | 0.96 | | $ | 1.00 | |
NOTE 16 – SEGMENT INFORMATION We are organized into three3 reporting segments. Operations that sell dispensing systems and sealing solutions primarilyOur Beauty + Home segment sells to the personal care, beauty and home care markets form the Beauty + Home segment. Operations that sell dispensing systems, sealing and active packaging solutions primarily tomarkets. Our Pharma segment serves customers in the prescription drug, consumer health care, injectables and injectables markets form the Pharma segment. Operations that sell dispensing systems and sealing solutions primarilyactive packaging markets. Our Food + Beverage segment sells to the food and beverage markets form the Food + Beverage segment.markets. 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, 2018.2019. 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: | | | | | | | | Three Months Ended March 31, | | 2020 | | 2019 | | Total Sales: | | | | | | | | Beauty + Home | | $ | 330,466 | | $ | 373,503 | | Pharma | | | 299,590 | | | 274,494 | | Food + Beverage | | | 100,301 | | | 104,727 | | Total Sales | | $ | 730,357 | | $ | 752,724 | | Less: Intersegment Sales: | | | | | | | | Beauty + Home | | $ | 5,906 | | $ | 5,844 | | Pharma | | | 2,394 | | | 1,793 | | Food + Beverage | | | 504 | | | 627 | | Total Intersegment Sales | | $ | 8,804 | | $ | 8,264 | | Net Sales: | | | | | | | | Beauty + Home | | $ | 324,560 | | $ | 367,659 | | Pharma | | | 297,196 | | | 272,701 | | Food + Beverage | | | 99,797 | | | 104,100 | | Net Sales | | $ | 721,553 | | $ | 744,460 | | Adjusted EBITDA (1): | | | | | | | | Beauty + Home | | $ | 34,247 | | $ | 53,191 | | Pharma | | | 108,342 | | | 97,357 | | Food + Beverage | | | 15,407 | | | 16,691 | | Corporate & Other, unallocated | | | (13,828) | | | (12,755) | | Acquisition-related costs (2) | | | (2,274) | | | — | | Restructuring Initiatives (3) | | | (4,839) | | | (9,530) | | Depreciation and amortization | | | (50,806) | | | (47,489) | | Interest Expense | | | (8,388) | | | (9,214) | | Interest Income | | | 175 | | | 1,748 | | Income before Income Taxes | | $ | 78,036 | | $ | 89,999 | |
| | | | | | | | Three Months Ended March 31, | | 2019 | | 2018 | | Total Sales: | | | | | | | | Beauty + Home | | $ | 373,503 | | $ | 383,463 | | Pharma | | | 274,494 | | | 230,132 | | Food + Beverage | | | 104,727 | | | 95,645 | | Total Sales | | $ | 752,724 | | $ | 709,240 | | Less: Intersegment Sales: | | | | | | | | Beauty + Home | | $ | 5,844 | | $ | 5,290 | | Pharma | | | 1,793 | | | 5 | | Food + Beverage | | | 627 | | | 595 | | Total Intersegment Sales | | $ | 8,264 | | $ | 5,890 | | Net Sales: | | | | | | | | Beauty + Home | | $ | 367,659 | | $ | 378,173 | | Pharma | | | 272,701 | | | 230,127 | | Food + Beverage | | | 104,100 | | | 95,050 | | Net Sales | | $ | 744,460 | | $ | 703,350 | | Adjusted EBITDA: | | | | | | | | Beauty + Home | | $ | 53,191 | | $ | 53,135 | | Pharma | | | 97,357 | | | 79,840 | | Food + Beverage | | | 16,691 | | | 12,739 | | Corporate & Other, unallocated | | | (12,755) | | | (11,579) | | Restructuring Initiatives (1) | | | (9,530) | | | (5,936) | | Depreciation and amortization | | | (47,489) | | | (41,175) | | Interest Expense | | | (9,214) | | | (8,055) | | Interest Income | | | 1,748 | | | 2,248 | | Income before Income Taxes | | $ | 89,999 | | $ | 81,217 | |
(1) | (1)We evaluate performance of our reporting segments and allocate resources based upon Adjusted EBITDA. Adjusted EBITDA is defined as earnings before net interest, taxes, depreciation, amortization, unallocated corporate expenses, restructuring and acquisition-related costs.
|
(2) | Acquisition-related costs include transaction costs and purchase accounting adjustments related to acquisitions and investments (see Note 17 – Acquisitions and Note 18 – Investment in Equity Securities for further details). |
(3) | Restructuring Initiatives includes expense items for the three months ended March 31, 20192020 and 20182019 as follows (see Note 19 – Restructuring Initiatives for further details): |
| | | | | | | | | | | | | | | | | | Three Months Ended March 31, | | 2019 | | 2018 | | | 2020 | | 2019 | | Restructuring Initiatives by Segment | | | | | | | | | | | | | | | Beauty + Home | | $ | 8,269 | | $ | 5,016 | | | $ | 4,907 | | $ | 8,269 | | Pharma | | | 326 | | | 364 | | | | (31) | | | 326 | | Food + Beverage | | | 510 | | | 315 | | | | 103 | | | 510 | | Corporate & Other | | | 425 | | | 241 | | | | (140) | | | 425 | | Total Restructuring Initiatives | | $ | 9,530 | | $ | 5,936 | | | $ | 4,839 | | $ | 9,530 | |
Note
NOTE 17 – INSURANCE SETTLEMENT RECEIVABLEACQUISITIONS A fire caused damageBusiness Combinations
On February 13, 2020, we entered into a securities purchase agreement to our facilityacquire 100% of the equity interests (the “Fusion Acquisition”) of Fusion Packaging, Inc. (“Fusion”). Subsequent to the quarter end, on April 1, 2020 we closed on the Fusion Acquisition for a purchase price of approximately $165 million. Fusion, based in Annecy, FranceDallas, TX, is a global leader in June 2016. The fire was contained to onethe design, engineering and distribution of three production units and there were no reported injuries. Aptar Annecy supplies anodized aluminum components for certain Aptar dispensing systems. While repairs are underway, we source from our network of suppliers as well as from our anodizing facility in Brazil. We are insuredluxury packaging for the damages caused bybeauty industry. The purchase agreement also provides an earn-out provision providing for the fire, including business interruption insurance, and we do not expect this incidentpayment of up to have$33.9 million based on Fusion’s financial performance during a material impact on our financial results. Losses related to the fire of $5.9 million were incurred during the three months ended March 31, 2018. We have an insurance receivable of $3.4 million as of March 31, 2019. We did not receive any insurance proceeds during the first quarter of 2019. In many cases, our insurance coverage exceeds the amount of our recognized losses. However, no gain contingencies were recognized during the three months ended March 31, 2019 as our ability to realize those gains remains uncertain. During the three months ended March 31, 2019, profitability was not impacted while profitability was negatively impacted by $1.5 million during the three months ended March 31, 2018. These 2018 losses negatively impacted the Beauty + Home segment.
NOTE 18 – ACQUISITIONS3 year measurement period.
On August 27, 2018,October 31, 2019, we completed our acquisition (the “CSP Technologies“Noble Acquisition”) of all100% of the outstanding capital stockequity interests of CSP Technologies S.à r.l. (“CSP Technologies”Noble International Holdings, Inc., Genia Medical, Inc. and JBCB Holdings, LLC (collectively referred to as “Noble”). CSP TechnologiesNoble, based in Orlando, FL, is a leaderleading provider in active packaging technology based on proprietary material science expertisedeveloping patient-centric advanced drug delivery system training devices including autoinjector, prefilled syringe, onbody and respiratory devices for the pharmaworld’s leading biopharmaceutical companies and food service markets. CSP Technologies operates two manufacturing locations in the U.S. and one in France.original equipment manufacturers. The purchase price was approximately $553.5$62.3 million (net of $1.6 million of cash acquired) and was funded by cash on hand. As part of the Noble Acquisition, we are also obligated to pay to the selling equityholders of Noble certain contingent consideration based on 2024 cumulative financial performance metrics defined in the purchase agreement. Based on projection as of the acquisition date, we estimated the aggregate fair value for this contingent consideration arrangement to be $2.9 million utilizing the Black-Scholes valuation model. As of December 31, 2019, $5 million which was held in restricted cash pending the finalization of a working capital adjustment and indemnity escrow. During the first quarter of 2020, $1.0 million related to the working capital escrow was released from restriction, in January 2019 resulting in an additional $463 thousand payment due to the seller and a refundcorresponding increase to our purchase price and associated goodwill balance. The results of $964 thousand.Noble’s operations have been included in the Condensed Consolidated Financial Statements within our Pharma segment since the date of acquisition. 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. 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. The results of Gateway’s operations have been included in the Condensed Consolidated Financial Statements within our Pharma segment since the date of acquisition. The following table summarizes the assets acquired and liabilities assumedas of the acquisition date at estimated fair value. | | | | | | | | August 27, 2018 | | | | | | | | | | | | 2019 | | Assets | | | | | | | | | Cash and equivalents | | $ | 24,053 | | | $ | 3,427 | | Accounts receivable | | | 20,847 | | | | 3,504 | | Inventories | | | 42,169 | | | Prepaid and other | | | 3,995 | | | | 2,478 | | Property, plant and equipment | | | 99,194 | | | | 4,267 | | Goodwill | | | 278,020 | | | | 59,143 | | Intangible assets | | | 177,120 | | | | 52,980 | | Other miscellaneous assets | | | 1,039 | | | | 430 | | Liabilities | | | | | | | | | Current maturities of long-term obligations | | | 129 | | | Accounts payable and accrued liabilities | | | 31,989 | | | Long-term obligations | | | 6,037 | | | Accounts payable, accrued and other liabilities | | | | 5,388 | | Deferred income taxes | | | 38,442 | | | | 2,592 | | Retirement and deferred compensation plans | | | 1,038 | | | Deferred and other non-current liabilities | | | 15,344 | | | | 1,598 | | Net assets acquired | | $ | 553,458 | | | $ | 116,651 | |
During the quarter ended March 31, 2019, we settled our $5 million working capital escrow account resulting in a reduction of our purchase price and the associated goodwill balance by $964 thousand.
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: | | | | | | | | | | Weighted-Average | | Estimated | | | | | Useful Life | | Fair Value | | | | | (in years) | | of Asset | | | | | | | | | | | | | | 2019 | | | | | Weighted-Average | | Estimated | | | | | Useful Life | | Fair Value | | | | | (in years) | | of Asset | | Acquired technology | | 12 | | $ | 46,700 | | | 8 | | $ | 9,160 | | Customer relationships | | 16 | | | 113,300 | | | 11 | | | 39,379 | | Trademarks and trade names | | 9 | | | 14,600 | | | 4 | | | 2,457 | | License agreements and other | | 11 | | | 2,520 | | | 1 | | | 1,984 | | Total | | | | $ | 177,120 | | | | | $ | 52,980 | |
Goodwill net of working capital settlement, in the amount of $277.1$59.1 million was recorded forrelated to the CSP Technologies Acquisition, of2019 acquisitions which $173.4 million and $103.7 million is included in the Pharma and Food + Beverage segments, respectively.segment. 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 lineNoble, Nanopharm and Gateway lines of products in markets where CSP Technologiesthey did not previously operate and the abilityabilities of CSP Technologiesthe acquired companies to maintain itstheir competitive advantage from a technical viewpoint. Goodwill will not be amortized, but will be tested for impairment at least annually. We do not expect anyFor 2019 acquisitions, goodwill of the goodwill$29.6 million will be deductible for tax purposes. The unaudited pro forma results presented below include the effectsAsset Acquisition
On August 2, 2019, we completed our asset acquisition (the “Bapco Acquisition”) of the CSP Technologies Acquisition as if it had occurred as of January 1, 2017. The unaudited pro forma results reflect certain adjustments related toremaining 80% ownership interest in 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. | | | | | Three Months Ended March 31, | | | 2018 | | | | | | | Net Sales | | $ | 737,430 | | Net Income Attributable to AptarGroup Inc. | | | 60,116 | | Net Income per common share — basic | | | 0.97 | | Net Income per common share — diluted | | | 0.93 | |
On May 1, 2018, we acquired 100% of the commoncapital stock of Reboul, a French manufacturer specializing in stamping, decorating and assembling metal and plastic packagingBapco Closures Holdings Limited (“Bapco”), for the cosmetics and luxury markets, for a purchase price$3.8 million (net of approximately $3.6$2.9 million (exclusive of $112 thousand of cash acquired) (the “Reboul Acquisition”). The 20% ownership investment previously held in Bapco is now included within the intangible assets acquired. Bapco, located in Leeds, UK, provides innovative closures sealing technology that provides package integrity and tamper evidence. The results of Reboul’sBapco’s operations have been included in the consolidated financial statementsCondensed Consolidated Financial Statements within our BeautyFood + HomeBeverage segment since the date of acquisition.
In May 2018,
NOTE 18 –INVESTMENT IN EQUITY SECURITIES Our investment in equity securities consisted of the following: | | | | | | | | | | March 31, | | December 31, | | | | 2020 | | 2019 | | Equity Method Investments: | | | | | | | | BTY | | $ | 31,043 | | $ | 119 | | Kali Care | | | 3,772 | | | 3,881 | | Desotec GmbH | | | 811 | | | 858 | | | | | | | | | | Other Investments | | | 3,541 | | | 3,538 | | | | $ | 39,167 | | $ | 8,396 | |
Equity method investments BTY On October 1, 2019 we entered into a strategic definitive agreement to acquire 49% of the equity interests in 3 related companies: Suzhou Hsing Kwang, Suqian Hsing Kwang and Suzhou BTY (collectively referred to as “BTY”), contingent on the 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. On January 1, 2020, the transaction closed for an approximate purchase price of $31 million for our 49% share. As of March 31, 2020, we paid approximately $20 million, with the remaining amount of $11 million included in Accounts payable, accrued and other liabilities. The amount is payable after certain conditions under the definitive agreement are fulfilled and is expected to be paid during the second quarter of 2020. Kali Care During 2017, we invested $10.0$5 million to acquire 20% of the equity interests in Kali Care, a technology company that provides digital monitoring systems for medical devices. Desotec GmbH During 2009, we invested €574 thousand to acquire 23% of the equity interests in Desotec GmbH, a leading manufacturer of special assembly machines for bulk processing for the pharmaceutical, beauty and home and food and beverages markets. Healthcare, Inc. Subsequent to the quarter end, on April 1, 2020, we invested $5 million to acquire 30% of the equity interests in Healthcare, Inc., Shanghai Sonmol Internet Technology Co., Ltd. and its subsidiary, Shanghai Sonmol Medical Equipment Co., Ltd., a pharmaceutical company that provides connected devices for asthma control. Other investments During August 2019, we invested an aggregate amount of $3.5 million in 2 preferred equity stock of Reciprocal Labs Corporation, doing business as Propeller Health, which wasinvestments in sustainability companies Loop and Purecycle Technologies that are accounted for at cost. Nocost less impairment, chargesif any, plus or minus changes resulting from observable price changes in orderly transactions for identical or similar investments of the same issuer. There were recorded during 2018 or 2019 against this investment. During0 indications of impairment nor were there any changes from observable price changes noted in 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.three months ended March 31, 2020. 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 willare also bebeing addressed. For the three months ended March 31, 20192020 and 2018,2019, we recognized $9.5$4.8 million and $5.9$9.5 million of restructuring costs related to this plan, respectively. Using current exchange rates, we estimate total implementation costs of approximately $90$110 million over three years,for these initiatives, including costs that have been recognized to date. The cumulative expense incurred as of March 31, 20192020 was $75.6$91.3 million. We also anticipate making capital investments related to the transformation plan of approximately $55$50 million, of which the majority will be in 2019.$40 million has been incurred to date. As of March 31, 20192020 we have recorded the following activity associated with the business transformation: | | | | | | | | | | | | | | | | | | | Beginning | | Net Charges for | | | | | | | | Ending | | | | Reserve at | | the Three Months | | | | | Interest and | | Reserve at | | | | 12/31/2019 | | Ended 3/31/2020 | | Cash Paid | | FX Impact | | 3/31/2020 | | Employee severance | | $ | 7,090 | | $ | 4,066 | | $ | (503) | | $ | 187 | | $ | 10,840 | | Professional fees and other costs | | | 3,609 | | | 773 | | | (3,069) | | | (9) | | | 1,304 | | Totals | | $ | 10,699 | | $ | 4,839 | | $ | (3,572) | | $ | 178 | | $ | 12,144 | |
| | | | | | | | | | | | | | | | | | | Beginning | | Net Charges for | | | | | | | | Ending | | | | Reserve at | | the Three Months | | | | | | | | Reserve at | | | | 12/31/2018 | | Ended 3/31/2019 | | Cash Paid | | FX Impact | | 3/31/2019 | | Employee severance | | $ | 3,934 | | $ | 2,360 | | $ | (750) | | $ | (36) | | $ | 5,508 | | Professional fees and other costs | | | 11,101 | | | 7,170 | | | (14,892) | | | (19) | | | 3,360 | | Totals | | $ | 15,035 | | $ | 9,530 | | $ | (15,642) | | $ | (55) | | $ | 8,868 | |
NOTE 20 – SUBSEQUENT EVENTS On April 1, 2020, the Fusion Acquisition closed for an approximate purchase price of $165 million, plus an earn-out, to acquire 100% of the membership interests. Refer to Note 17 – Acquisitions for further details on the acquisition. ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS, OR AS OTHERWISE INDICATED) RESULTS OF OPERATIONS | | | | | | | | Three Months Ended March 31, | | 2020 | | | 2019 | | | | | | | | | | | Net sales | | 100.0 | % | | 100.0 | % | | Cost of sales (exclusive of depreciation and amortization shown below) | | 62.5 | | | 63.0 | | | Selling, research & development and administrative | | 17.5 | | | 16.3 | | | Depreciation and amortization | | 7.0 | | | 6.4 | | | Restructuring initiatives | | 0.7 | | | 1.3 | | | Operating income | | 12.3 | | | 13.0 | | | Other expense | | (1.5) | | | (0.9) | | | Income before income taxes | | 10.8 | | | 12.1 | | | Net Income | | 7.7 | | | 8.5 | | | Effective tax rate | | 29.2 | % | | 30.0 | % | | Adjusted EBITDA margin (1) | | 20.0 | % | | 20.8 | % | |
| | | | | | | | Three Months Ended March 31, | | 2019 | | | 2018 | | | | | | | | | | | Net sales | | 100.0 | % | | 100.0 | % | | Cost of sales (exclusive of depreciation and amortization shown below) | | 63.0 | | | 64.8 | | | Selling, research & development and administrative | | 16.3 | | | 16.0 | | | Depreciation and amortization | | 6.4 | | | 5.9 | | | Restructuring initiatives | | 1.3 | | | 0.8 | | | Operating income | | 13.0 | | | 12.5 | | | Other expense | | (0.9) | | | (1.0) | | | Income before income taxes | | 12.1 | | | 11.5 | | | Net Income | | 8.5 | | | 8.4 | | | Effective tax rate | | 30.0 | % | | 27.0 | % | | Adjusted EBITDA margin (1) | | 20.8 | % | | 19.1 | % | |
(1) | (1)
| | Adjusted EBITDA margins are calculated as Adjusted EBITDA divided by Reported Net Sales. See the reconciliation of non-U.S. GAAP measures starting on page 30. 31. |
SIGNIFICANT DEVELOPMENTS During the first quarter of 2020, financial results and operations were adversely impacted by the current coronavirus (“COVID-19”) pandemic. The significance of the impacts to our segments during the first quarter of 2020 are discussed herein and include, but are not limited to, the adverse impact on sales of products to our travel and retail beauty business and on-the-go beverage customers. The extent to which the COVID-19 pandemic impacts our financial results and operations for fiscal year 2020 and going forward for all three of our business segments will depend on future developments which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of the outbreak and the international actions being taken to contain and treat it. No impairments were recorded as of March 31, 2020. While the disruption is currently expected to be temporary, there is uncertainty around the duration. Due to significant uncertainty surrounding the situation, our judgment regarding future results could change and therefore our results could be materially impacted. As each of our segments produce dispensing systems that have been determined to be essential products by various government agencies around the world, the majority of our facilities remained operational during the first quarter of 2020. We are taking a variety of measures to ensure the availability and functioning of our critical infrastructure, to promote the safety and security of our employees and to support the communities in which we operate. These measures include requiring remote working arrangements for employees where practicable. We are following public and private sector policies and initiatives to reduce the transmission of COVID-19, such as the imposition of travel restrictions, the promotion of social distancing and the adoption of work-from-home arrangements, and all of these policies and initiatives could impact our operations. Due to the speed with which the situation is developing, we are not able at this time to estimate the impact of COVID-19 on our future financial results and operations, but the impact could be material for the remainder of fiscal year 2020 and could be material during any future periods affected either directly or indirectly by this pandemic. See Part II, Item 1A, “Risk Factors,” included elsewhere in this report for information on material risks associated with COVID-19. NET SALES We reported net sales of $744.5$721.6 million for the quarter ended March 31, 2019,2020, which represents a 6% increase3% decrease compared to $703.4$744.5 million reported during the first quarter of 2018.2019. The average U.S. dollar exchange rate strengthened compared to most major currencies we operate in, resulting in a negative currency translation impact of 7%2%. The acquisitions of CSP TechnologiesGateway, Nanopharm and ReboulNoble positively impacted sales by 6%1%. Therefore, core sales, which exclude acquisitions and changes in foreign currency rates, increaseddecreased by 7%2% in the first quarter of 20192020 compared to the same period in 2019. During the first quarter of 2018. The2020, our consolidated core sales growth reflected a strong increase in demand for products in our Pharma segment along with increases inwere negatively impacted by the COVID-19 pandemic, especially within our Beauty + Home segment. Beauty sales within this segment were significantly impacted by the loss of travel and retail sales during the first quarter 2020. Our Food + Beverage segments. Core toolingsegment also realized lower core sales decreased $3.7 milliondue to the negative impact of COVID-19, especially on our single-serving beverage product sales along with a significant decline in the resin price pass-through to our customers during the quarter. Our Pharma segment realized strong core sales growth during the first quarter ended March 31, 2019of 2020 as all four of our divisions posted improved results compared to the same prior year as increased sales in the Beauty + Home and Pharma segments were more than offset by lower tooling sales in the Food + Beverage segment.period. | | | | | | | | | | Three Months Ended March 31, 2019 | | Beauty | | | | Food + | | | | Net Sales Change over Prior Year | | + Home | | Pharma | | Beverage | | Total | | | | | | | | | | | | Core Sales Growth | | 3 | % | 15 | % | 3 | % | 7 | % | Acquisitions | | 1 | % | 13 | % | 11 | % | 6 | % | Currency Effects (1) | | (7) | % | (9) | % | (4) | % | (7) | % | Total Reported Net Sales Growth | | (3) | % | 19 | % | 10 | % | 6 | % |
| | | | | | | | | | Three Months Ended March 31, 2020 | | Beauty | | | | Food + | | | | Net Sales Change over Prior Year | | + Home | | Pharma | | Beverage | | Total | | | | | | | | | | | | Core Sales Growth | | (9) | % | 7 | % | (2) | % | (2) | % | Acquisitions | | — | % | 4 | % | — | % | 1 | % | Currency Effects (1) | | (3) | % | (2) | % | (2) | % | (2) | % | Total Reported Net Sales Growth | | (12) | % | 9 | % | (4) | % | (3) | % |
| (1) | | Currency effects are calculated by translating last year’s amounts at this year’s foreign exchange rates. |
The following table sets forth, for the periods indicated, net sales by geographic location: | | | | | | | | | | | | | | | | | | | | | | | | Three Months Ended March 31, | | 2019 | | % of Total | | 2018 | | % of Total | | | 2020 | | % of Total | | 2019 | | % of Total | | Domestic | | $ | 213,871 | | 29% | | $ | 170,385 | | 24% | | | $ | 230,400 | | 32% | | $ | 213,871 | | 29% | | Europe | | | 431,368 | | 58% | | 430,098 | | 61% | | | | 405,849 | | 56% | | 431,368 | | 58% | | Latin America | | | 58,182 | | 8% | | 62,274 | | 9% | | | | 50,794 | | 7% | | 58,182 | | 8% | | Asia | | | 41,039 | | 5% | | 40,593 | | 6% | | | | 34,510 | | 5% | | 41,039 | | 5% | |
For further discussion on net sales by reporting segment, please refer to the analysis of segment net sales and segment Adjusted EBITDA on the following pages. COST OF SALES (EXCLUSIVE OF DEPRECIATION AND AMORTIZATION SHOWN BELOW) Cost of sales (“COS”) as a percent of net sales decreased to 62.5% in the first quarter of 2020 compared to 63.0% in the first quarter of 2019 compared to 64.8% in the first quarter of 2018.2019. Our COS percentage was positively impacted by our mix of business and lower material costs. MixThe mix of business positively impacted salesresults as thewe reported sales growth of our higher margin Pharma products was greater than thecompared to sales growth of productsdeclines in the other two segments. We also recognized lower custom tooling salesrealized approximately $5.2 million in the first quarter 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. We also realized a lower COS percentage due to lower raw material input costs induring the quarter as both resin and metal prices declined compared to the associated positive impact from the timing delay of passing through resin cost increasesprior year. We did experience some additional costs and temporary disruptions to our customers.manufacturing capacities during the first quarter of 2020 related to the COVID-19 pandemic. For example, we declared a special bonus payment to certain employees who worked to maintain supply to our customers and keep our facilities running, which increased our COS percentage by approximately 0.4% during the first quarter of 2020. SELLING, RESEARCH & DEVELOPMENT AND ADMINISTRATIVE Selling, research & development and administrative expenses (“SG&A”) increased by approximately $8.7$5.0 million to $121.2$126.2 million in the first quarter of 20192020 compared to $112.5$121.2 million during the same period in 2018.2019. Excluding changes in foreign currency rates, SG&A increased by approximately $15.2$7.6 million in the quarter. The increase is mainlypartly due to $7.0$2.8 million of incremental operational costs during the first quarter of 20192020 related to the CSP Technologies and Reboul acquisitions.our acquired companies. We also recognized increases in professional fees and higher personnel costs, including $2.7 million in stock-based compensation, in accordance with our growth strategy. SG&A as a percentage of net sales increased to 16.3%17.5% compared to 16.0%16.3% in the same period of the prior year due to the cost increases mentioned above. DEPRECIATION AND AMORTIZATION Reported depreciation and amortization expenses increased by approximately $6.3$3.3 million to $47.5$50.8 million in the first quarter of 20192020 compared to $41.2$47.5 million during the same period a year ago. Excluding changes in foreign currency rates, depreciation and amortization increased by approximately $8.9$4.4 million in the quarter compared to the same period a year ago.in 2019. This increase is mainlypartly due to $6.4$2.0 million of incremental operational results and amortization of purchase accounting adjustmentscosts related to our CSP Technologies and Reboul acquisitions. We also increased our capital spending during the pastfirst quarter and the prior year to support theour growth in our business.strategy. Depreciation and amortization as a percentage of net sales increased to 6.4%7.0% in the first quarter of 20192020 compared to 5.9%6.4% in the same period of the prior year primarily due to the incremental increase in expenses noted above. 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. During the first quarter of 2019, we recognized approximately $9.5 million of restructuringRestructuring costs related to this plan with approximately $8.3 million, $0.3 million, $0.5 millionfor the three months ended March 31, 2020 and $0.4 million being reported within the Beauty + Home segment, Pharma segment, Food + Beverage segment and Corporate & Other, respectively. During the first quarter2019 are as follows: | | | | | | | | Three Months Ended March 31, | | 2020 | | 2019 | | Restructuring Initiatives by Segment | | | | | | | | Beauty + Home | | $ | 4,907 | | $ | 8,269 | | Pharma | | | (31) | | | 326 | | Food + Beverage | | | 103 | | | 510 | | Corporate & Other | | | (140) | | | 425 | | Total Restructuring Initiatives | | $ | 4,839 | | $ | 9,530 | |
We estimate total implementation costs of approximately $90$110 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 $55$50 million, of which the majority will be in 2019. We expect this business transformation$40 million has been incurred to yielddate. Based on our ongoing restructuring initiatives, we are progressing towards our initial target of $80 million annualized incremental EBITDA of approximately $80 million by the end of 2020, principally within the Beauty + Home segment. However, in addition to impacts of COVID-19, ongoing changes in customer and vendor negotiations, material indices, macro-economic trends and other factors represent continuing headwinds to the Beauty + Home segment, and have offset the consolidated net benefits from these initiatives. OPERATING INCOME Operating income increaseddecreased approximately $9.1$8.6 million in the first quarter of 20192020 compared to the same period a year ago. Excluding changes in foreign currency rates, operating income increaseddecreased by approximately $15.7$6.2 million in the quarter compared to the same period a year ago. This increase is mainly due to acquisitions along with strong core sales growth and the lower cost of sales percentage as discussed above. Operating income as a percentage of net sales increaseddeclined to 13.0%12.3% in the first quarter of 20192020 compared to 12.5% for the same period13.0% in the prior year mainly due to these improvements.the increases in SG&A and depreciation and amortization when compared to a lower sales base as discussed above. These cost increases are partially offset by our lower COS percentage and the reduction in restructuring costs during the first quarter of 2020 compared to the prior year. NET OTHER EXPENSE Net other expense in the first quarter of 20192020 increased $0.4$3.3 million to $7.1$10.4 million from $6.7$7.1 million in the same period of the prior year. For 2019, net interest expenseMiscellaneous expenses increased by approximately $1.7$1.9 million mainlyin part due to borrowings for the acquisition of CSP Technologies duringhigh costs to hedge certain Latin American and Asian currencies. We also experienced higher pension costs due to the third quarter of 2018 and increased borrowings during first quarter of 2019decline in discount rates in 2020 compared to first quarter of 2018. However, miscellaneous, net other expense was favorable in the first quarter of 2019 compared to the first quarter of 2018 by approximately $1.3 million as a result of lower pension component costs as discount rates were higher in 2019 compared 2018.2019. EFFECTIVE TAX RATE Based on currentThe tax laws, ourprovision for interim periods is determined using the estimated annual effective consolidated tax rate, based on the current estimate of full-year earnings and related estimated full year-taxes, adjusted for 2019, excludingthe impact of discrete tax impacts, is 30.4%. This rate reflects the mix of pre-tax income in various non-U.S. jurisdictions and the reduced U.S. federal tax rate, offset by unfavorable provisions within the U.S. tax law and U.S. state income tax increases.quarterly items. The reported effective tax rate for the three months ended March 31, 2020 and 2019 was 29.2% and 30.0%, as the impact of discrete tax itemsrespectively. The decrease in the period were largely offsetting. The reported effective tax rate for the three months ended March 31, 20182020 was 27.0%. The prior yearprimarily due to a larger tax rate was favorably impacted by $4.4 million of tax benefitsbenefit from employee share-based compensation. compensation offset in part by a mix of other discrete items.
NET INCOME ATTRIBUTABLE TO APTARGROUP, INC. We reported net income attributable to AptarGroup of $63.0$55.3 million in the first quarter of 2019three months ended March 31, 2020, compared to $59.3$63.0 million for the same period in the first quarter of 2018.prior year. BEAUTY + HOME SEGMENT Operations that sell dispensing systems and sealing solutions primarily to the personal care, beauty and home care markets form the Beauty + Home segment. | | | | | | | | Three Months Ended March 31, | | 2020 | | 2019 | | | | | | | | | | Net Sales | | $ | 324,560 | | $ | 367,659 | | Adjusted EBITDA (1) | | | 34,247 | | | 53,191 | | Adjusted EBITDA margin (1) | | | 10.6% | | | 14.5% | |
| | | | | | | | | | | | | | | | Three Months Ended March 31, | | 2019 | | 2018 | | | | | | | | | | Net Sales | | $ | 367,659 | | $ | 378,173 | | Adjusted EBITDA (1) | | | 53,191 | | | 53,135 | | Adjusted EBITDA margin (1) | | | 14.5% | | | 14.1% | |
(1) | (1)
| | Adjusted EBITDA is calculated as earnings before net interest, taxes, depreciation, amortization, unallocated corporate expenses, restructuring and acquisition-related costs. Adjusted EBITDA margins are calculated as Adjusted EBITDA divided by Reported Net Sales. See the reconciliation of non-U.S. GAAP measures starting on page 30. 31. |
Reported sales for the quarter ended March 31, 20192020 decreased 3%12% to $367.7$324.6 million compared to $378.2$367.7 million in the first quarter of the prior year. Incremental sales from our Reboul acquisition positively impacted sales by 1% while changesChanges in currency rates negatively impacted net sales by 7%3%. Therefore, core sales increased 3%decreased 9% in the first quarter of 20192020 compared to the same quarter of the prior year. Geographically,The COVID-19 pandemic negatively impacted core sales increased in all regions compared toduring the prior year due to improved customer demand and targeted price increases. We also experienced core sales growth in all markets as personal care, beauty and home care increased by 3%, 4% and 2%, respectively, compared to the prior year. The increase in personal care sales mainly relates to increasedfirst quarter of 2020. Core sales of our products used on babyto the beauty market decreased 13% as we experienced reduced orders from customers providing prestige beauty products, mainly in the travel retail and standard retail settings. Many beauty stores began closing toward the end of the quarter in response to government shelter in place regulations. Core sales to the personal care and home care markets decreased 5% and 6%, respectively. Increased demand for our dispensing solutions for hand sanitizers and cleaners was not enough to offset declines in other personal care and home care categories such as sun care and hair care applications, while the beauty market realized sales increases across all of its major applications.which were also negatively impacted by travel restrictions and shelter in place regulations. | | | | | | | | | | Three Months Ended March 31, 2020 | | Personal | | | | Home | | | | Net Sales Change over Prior Year | | Care | | Beauty | | Care | | Total | | | | | | | | | | | | Core Sales Growth | | (5) | % | (13) | % | (6) | % | (9) | % | Currency Effects (1) | | (2) | % | (3) | % | (2) | % | (3) | % | Total Reported Net Sales Growth | | (7) | % | (16) | % | (8) | % | (12) | % |
| | | | | | | | | | Three Months Ended March 31, 2019 | | Personal | | | | Home | | | | Net Sales Change over Prior Year | | Care | | Beauty | | Care | | Total | | | | | | | | | | | | Core Sales Growth | | 3 | % | 4 | % | 2 | % | 3 | % | Acquisitions | | — | % | 2 | % | — | % | 1 | % | Currency Effects (1) | | (6) | % | (8) | % | (5) | % | (7) | % | Total Reported Net Sales Growth | | (3) | % | (2) | % | (3) | % | (3) | % |
| (1) | | Currency effects are calculated by translating last year’s amounts at this year’s foreign exchange rates. |
Adjusted EBITDA in the first quarter of 2019 was2020 decreased 36% to $34.2 million compared to $53.2 million which is consistent with the $53.1 million reported in the same period in the prior year. Operational improvementsAs discussed above, the COVID-19 pandemic affected our profitability as sales were impacted by travel restrictions and targeted price increases relatedgovernment shelter in place regulations. Our profitability was further impacted by special bonus payments to certain employees who worked to maintain supply to our restructuring projects were offset by the negative impacts of changescustomers and keep our facilities running as well as lower overhead absorption due to fluctuations in foreign currency rates along with inefficiencies at certain manufacturingdemand primarily in our facilities and higher SG&A costs related to investments made to develop our global strategy.that manufacture beauty products. During the first quarter of 2019,2020, we experienced a favorable material cost impactsimpact of approximately $1.4 million due to lower raw material input costs, andhowever this was not enough to offset the associated positive impact from the timing delay of passing through resin cost increases from previous quartersgeneral economic uncertainties which has led to lower sales to our customers leading to the slight improvement in adjusted EBITDA and higher adjusted EBITDA margin during the quarter.across our markets. PHARMA SEGMENT Operations that sell dispensing systems,drug delivery, sealing and active packaging solutions primarily to the prescription drug, consumer health care, injectables and injectablesactive packaging markets form the Pharma segment. | | | | | | | | Three Months Ended March 31, | | 2020 | | 2019 | | | | | | | | | | Net Sales | | $ | 297,196 | | $ | 272,701 | | Adjusted EBITDA (1) | | | 108,342 | | | 97,357 | | Adjusted EBITDA margin (1) | | | 36.5% | | | 35.7% | |
| | | | | | | | | | | | | | | | Three Months Ended March 31, | | 2019 | | 2018 | | | | | | | | | | Net Sales | | $ | 272,701 | | $ | 230,127 | | Adjusted EBITDA (1) | | | 97,357 | | | 79,840 | | Adjusted EBITDA margin (1) | | | 35.7% | | | 34.7% | |
(1) | (1)
| | Adjusted EBITDA is calculated as earnings before net interest, taxes, depreciation, amortization, unallocated corporate expenses, restructuring and acquisition-related costs. Adjusted EBITDA margins are calculated as Adjusted EBITDA divided by Reported Net Sales. See the reconciliation of non-U.S. GAAP measures starting on page 30. 31. |
Net sales for the Pharma segment increased 19%9% in the first quarter of 20192020 to $272.7$297.2 million compared to $230.1$272.7 million in the first quarter of 2018.2019. Changes in currencies negatively affected net sales by 9%2% while the acquisitionour acquisitions of CSP TechnologiesGateway, Nanopharm and Noble positively impacted sales by 13%4% in the first quarter of 2019.2020. Therefore, core sales increased by 15%7% in the first quarter of 20192020 compared to the first quarter of 2018. The2019. Our Pharma segment had another good quarter with core sales growth across each end market with particularly strong growth in our injectables and active packaging businesses. As these two markets are currently smaller than our prescription drug and consumer health care markets, experienced increased core sales overthere is a smaller impact on the prior year, while core sales tooverall segment growth. The segment was not significantly impacted by the injectables market were flat.COVID-19 pandemic during the first quarter of 2020. Core sales to the prescription drug market were particularly strong and increased 22%2%, mainly driven by increased demand foron continued growth in sales of our innovative nasal drug delivery systems 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. Salesproducts. Core sales to the consumer health care market also increased 10% on strong2% as increased demand for our products used on nasal decongestant nasal saline and eye care treatments. treatments more than compensated for some softness in demand for our nasal saline products. Injectables core sales grew 21% on increased demand across a variety of components while active packaging core sales improved 26% primarily due to our new Activ Blister packaging for the launch of an oral HIV preventative drug. | | | | | | | | | | | | Three Months Ended March 31, 2019 | | Prescription | | Consumer | | | | Active | | | | Net Sales Change over Prior Year | | Drug | | Health Care | | Injectables | | Packaging | | Total | | | | | | | | | | | | | | Core Sales Growth | | 22 | % | 10 | % | — | % | — | % | 15 | % | Acquisitions | | — | % | — | % | — | % | 100 | % | 13 | % | Currency Effects (1) | | (8) | % | (9) | % | (6) | % | — | % | (9) | % | Total Reported Net Sales Growth | | 14 | % | 1 | % | (6) | % | 100 | % | 19 | % |
| | | | | | | | | | | | Three Months Ended March 31, 2020 | | Prescription | | Consumer | | | | Active | | | | Net Sales Change over Prior Year | | Drug | | Health Care | | Injectables | | Packaging | | Total | | | | | | | | | | | | | | Core Sales Growth | | 2 | % | 2 | % | 21 | % | 26 | % | 7 | % | Acquisitions | | 1 | % | — | % | 19 | % | — | % | 4 | % | Currency Effects (1) | | (2) | % | (1) | % | (3) | % | (1) | % | (2) | % | Total Reported Net Sales Growth | | 1 | % | 1 | % | 37 | % | 25 | % | 9 | % |
| (1) | | Currency effects are calculated by translating last year’s amounts at this year’s foreign exchange rates. |
Adjusted EBITDA in the first quarter of 20192020 increased 22%11% to $97.4$108.3 million compared to $79.8$97.4 million reported in the same period of the prior year. The strong product sales growth discussed above along with incremental profit related to our CSP Technologies acquisitionacquisitions led to the increase in reported results for the first quarter of 20192020 compared to the first quarter of 2018.2019. While we didn’t experience a significant impact from COVID-19 on our Pharma segment sales, we did recognize the special bonus payments discussed above which negatively impacted our adjusted EBITDA during the first quarter of 2020. FOOD + BEVERAGE SEGMENT Operations that sell dispensing systems and sealing solutions primarily to the food and beverage markets form the Food + Beverage segment. | | | | | | | | Three Months Ended March 31, | | 2020 | | 2019 | | | | | | | | | | Net Sales | | $ | 99,797 | | $ | 104,100 | | Adjusted EBITDA (1) | | | 15,407 | | | 16,691 | | Adjusted EBITDA margin (1) | | | 15.4% | | | 16.0% | |
| | | | | | | | | | | | | | | | Three Months Ended March 31, | | 2019 | | 2018 | | | | | | | | | | Net Sales | | $ | 104,100 | | $ | 95,050 | | Adjusted EBITDA (1) | | | 16,691 | | | 12,739 | | Adjusted EBITDA margin (1) | | | 16.0% | | | 13.4% | |
(1) | (1)
| | Adjusted EBITDA is calculated as earnings before net interest, taxes, depreciation, amortization, unallocated corporate expenses, restructuring and acquisition-related costs. Adjusted EBITDA margins are calculated as Adjusted EBITDA divided by Reported Net Sales. See the reconciliation of non-U.S. GAAP measures starting on page 30. 31. |
Net sales for the quarter ended March 31, 2019 increased2020 decreased approximately 10%4% to $104.1$99.8 million compared to $95.1$104.1 million in the first quarter of the prior year. Incremental sales from our CSP Technologies acquisition positively impacted sales by 11% while changes in foreignForeign currency rates had an unfavorable impact of 4%2% on the total segment sales. Therefore, core sales increaseddecreased by 3%2% in the first quarter of 20192020 compared to the first quarter of 2018. For2019. This decrease is due to the segment, strong product sales growth was partially offset by $6.4 millionpassing on of lower toolingresin costs to our customers as well as lower single-serving beverage closure sales duewhich appears to some large tooling projects recognized in the first quarter of 2018. We also realized a $1.1 million increase in the pass-through of resin price changes in the quarter ended March 31, 2019 comparedbe related to the first quarter of the prior year. Core sales toCOVID-19 crisis. For the food market, we realized increased 2% while core sales toof our products used on dairy and spreads applications. For the beverage market, increased 7% in the first quarter of 2019 compareddemand for our bottled water products was not enough to the same period of the prior year. For the food market, increasesoffset a decline in sales of our products to our granular powder and infant nutrition customers more than compensated for $5.8 million of lower tooling sales compared to the same period last year. For the beverage market, we recognized strong sales of our products mainly to our bottled water andon-the-go functional drink customers.products that were significantly affected by COVID-19 impacts. | | | | | | | | | | Three Months Ended March 31, 2020 | | | | | | | | | | Net Sales Change over Prior Year | | | | Food | | Beverage | | Total | | | | | | | | | | | | Core Sales Growth | | | | 2 | % | (13) | % | (2) | % | Currency Effects (1) | | | | (1) | % | (2) | % | (2) | % | Total Reported Net Sales Growth | | | | 1 | % | (15) | % | (4) | % |
| | | | | | | | | | Three Months Ended March 31, 2019 | | | | | | | | | | Net Sales Change over Prior Year | | | | Food | | Beverage | | Total | | | | | | | | | | | | Core Sales Growth | | | | 2 | % | 7 | % | 3 | % | Acquisitions | | | | 15 | % | — | % | 11 | % | Currency Effects (1) | | | | (3) | % | (5) | % | (4) | % | Total Reported Net Sales Growth | | | | 14 | % | 2 | % | 10 | % |
| (1) | | Currency effects are calculated by translating last year’s amounts at this year’s foreign exchange rates. |
Adjusted EBITDA in the first quarter of 2019 increased 31%2020 decreased 8% to $16.7$15.4 million compared to $12.7$16.7 million reported in the same period of the prior year. This increase is mainly due to the solid product sales growthThe COVID-19 impacts discussed above, lower material costs combinedalong with the positive timing delay of passing on resin cost increases from previous quartersspecial bonus payments to certain employees who worked to maintain supply to our customers and incremental profit related tokeep our CSP Technologies acquisition.facilities running, more than offset the benefits we received from lower resin input costs and other operational improvements realized during the first quarter of 2020. 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 transactionacquisition-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 March 31, 2019,2020, Corporate & Other expenses increased to $12.8$13.8 million from $11.6$12.8 million in the first quarter of 2018.2019. This increase is mainly due to higher stock-compensation expense, professional feesand other personnel costs as we continue to implement our growth strategy. NON-U.S. GAAP MEASURESMEASURES 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.charges (restructuring initiatives), acquisition-related costs and purchase accounting adjustments related to acquisitions and investments.Our “Outlook” discussion below as well as the estimated annual effective tax rate above, areis 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, weWe provide a reconciliation of Net Debt to Net Capital as a non-U.S. GAAP measure. Net Debt“Net Debt” is calculated as interest bearing debt less cash cashand equivalents and short-term investments while Net Capital“Net Capital” is calculated as stockholder’sstockholders’ 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 cashand equivalents, and short-term investments when evaluating our leverage. If needed, such assets could be used to reduce our gross debt position.
| | | | | | | | | | | | | | | | | | | | | Three Months Ended | | | March 31, 2019 | | | | | | | Consolidated | | Beauty + Home | | Pharma | | Food + Beverage | | Corporate & Other | | Net Interest | Net Sales | | $ | 744,460 | | $ | 367,659 | | $ | 272,701 | | $ | 104,100 | | $ | - | | $ | - | | | | | | | | | | | | | | | | | | | | Reported net income | | $ | 62,999 | | | | | | | | | | | | | | | | Reported income taxes | | | 27,000 | | | | | | | | | | | | | | | | Reported income before income taxes | | | 89,999 | | | 24,181 | | | 81,258 | | | 7,716 | | | (15,690) | | | (7,466) | Adjustments: | | | | | | | | | | | | | | | | | | | Restructuring initiatives | | | 9,530 | | | 8,269 | | | 326 | | | 510 | | | 425 | | | | Adjusted earnings before income taxes | | | 99,529 | | | 32,450 | | | 81,584 | | | 8,226 | | | (15,265) | | | (7,466) | Interest expense | | | 9,214 | | | | | | | | | | | | | | | 9,214 | Interest income | | | (1,748) | | | | | | | | | | | | | | | (1,748) | Adjusted earnings before net interest and taxes (Adjusted EBIT) | | | 106,995 | | | 32,450 | | | 81,584 | | | 8,226 | | | (15,265) | | | - | Depreciation and amortization | | | 47,489 | | | 20,741 | | | 15,773 | | | 8,465 | | | 2,510 | | | - | Adjusted earnings before net interest, taxes, depreciation and amortization (Adjusted EBITDA) | | $ | 154,484 | | $ | 53,191 | | $ | 97,357 | | $ | 16,691 | | $ | (12,755) | | $ | - | | | | | | | | | | | | | | | | | | | | Adjusted EBITDA margins (Adjusted EBITDA / Reported Net Sales) | | | 20.8% | | | 14.5% | | | 35.7% | | | 16.0% | | | | | | |
Finally, we provide a reconciliation of free cash flow as a non-U.S. GAAP measure. Free cash flow is calculated as cash provided by operating activities less capital expenditures. We use free cash flow to measure cash flow generated by operations that is available for dividends, share repurchases, acquisitions and debt repayment. We believe that it is meaningful to investors in evaluating our financial performance and measuring our ability to generate cash internally to fund our initiatives.
| | | | | | | | | | | | | | | | | | | | | Three Months Ended | | | March 31, 2020 | | | | | | | Consolidated | | Beauty + Home | | Pharma | | Food + Beverage | | Corporate & Other | | Net Interest | Net Sales | | $ | 721,553 | | $ | 324,560 | | $ | 297,196 | | $ | 99,797 | | $ | - | | $ | - | | | | | | | | | | | | | | | | | | | | Reported net income | | $ | 55,250 | | | | | | | | | | | | | | | | Reported income taxes | | | 22,786 | | | | | | | | | | | | | | | | Reported income before income taxes | | | 78,036 | | | 7,108 | | | 89,854 | | | 5,962 | | | (16,675) | | | (8,213) | Adjustments: | | | | | | | | | | | | | | | | | | | Restructuring initiatives | | | 4,839 | | | 4,907 | | | (31) | | | 103 | | | (140) | | | | Transaction costs related to acquisitions | | | 1,384 | | | 1,384 | | | | | | | | | | | | | Purchase accounting adjustments related to acquisitions and investments | | | 1,390 | | | 262 | | | 1,128 | | | | | | | | | | Adjusted earnings before income taxes | | | 85,649 | | | 13,661 | | | 90,951 | | | 6,065 | | | (16,815) | | | (8,213) | Interest expense | | | 8,388 | | | | | | | | | | | | | | | 8,388 | Interest income | | | (175) | | | | | | | | | | | | | | | (175) | Adjusted earnings before net interest and taxes (Adjusted EBIT) | | | 93,862 | | | 13,661 | | | 90,951 | | | 6,065 | | | (16,815) | | | - | Depreciation and amortization | | | 50,806 | | | 20,586 | | | 17,891 | | | 9,342 | | | 2,987 | | | - | Purchase accounting adjustments included in Depreciation and amortization above | | | (500) | | | | | | (500) | | | | | | | | | | Adjusted earnings before net interest, taxes, depreciation and amortization (Adjusted EBITDA) | | $ | 144,168 | | $ | 34,247 | | $ | 108,342 | | $ | 15,407 | | $ | (13,828) | | $ | - | | | | | | | | | | | | | | | | | | | | Adjusted EBITDA margins (Adjusted EBITDA / Reported Net Sales) | | | 20.0% | | | 10.6% | | | 36.5% | | | 15.4% | | | | | | |
| | | | | | | | | | | | | | | | | | | | | Three Months Ended | | | March 31, 2019 | | | | | | | Consolidated | | Beauty + Home | | Pharma | | Food + Beverage | | Corporate & Other | | Net Interest | Net Sales | | $ | 744,460 | | $ | 367,659 | | $ | 272,701 | | $ | 104,100 | | $ | - | | $ | - | | | | | | | | | | | | | | | | | | | | Reported net income | | $ | 62,999 | | | | | | | | | | | | | | | | Reported income taxes | | | 27,000 | | | | | | | | | | | | | | | | Reported income before income taxes | | | 89,999 | | | 24,181 | | | 81,258 | | | 7,716 | | | (15,690) | | | (7,466) | Adjustments: | | | | | | | | | | | | | | | | | | | Restructuring initiatives | | | 9,530 | | | 8,269 | | | 326 | | | 510 | | | 425 | | | | Adjusted earnings before income taxes | | | 99,529 | | | 32,450 | | | 81,584 | | | 8,226 | | | (15,265) | | | (7,466) | Interest expense | | | 9,214 | | | | | | | | | | | | | | | 9,214 | Interest income | | | (1,748) | | | | | | | | | | | | | | | (1,748) | Adjusted earnings before net interest and taxes (Adjusted EBIT) | | | 106,995 | | | 32,450 | | | 81,584 | | | 8,226 | | | (15,265) | | | - | Depreciation and amortization | | | 47,489 | | | 20,741 | | | 15,773 | | | 8,465 | | | 2,510 | | | - | Adjusted earnings before net interest, taxes, depreciation and amortization (Adjusted EBITDA) | �� | $ | 154,484 | | $ | 53,191 | | $ | 97,357 | | $ | 16,691 | | $ | (12,755) | | $ | - | | | | | | | | | | | | | | | | | | | | Adjusted EBITDA margins (Adjusted EBITDA / Reported Net Sales) | | | 20.8% | | | 14.5% | | | 35.7% | | | 16.0% | | | | | | |
| | | | | | | | | | | | | | | | | | | | | Three Months Ended | | | March 31, 2018 | | | | | | | Consolidated | | Beauty + Home | | Pharma | | Food + Beverage | | Corporate & Other | | Net Interest | Net Sales | | $ | 703,350 | | $ | 378,173 | | $ | 230,127 | | $ | 95,050 | | $ | - | | $ | - | | | | | | | | | | | | | | | | | | | | Reported net income | | $ | 59,288 | | | | | | | | | | | | | | | | Reported income taxes | | | 21,929 | | | | | | | | | | | | | | | | Reported income before income taxes | | | 81,217 | | | 26,707 | | | 68,292 | | | 5,926 | | | (13,901) | | | (5,807) | Adjustments: | | | | | | | | | | | | | | | | | | | Restructuring initiatives | | | 5,936 | | | 5,016 | | | 364 | | | 315 | | | 241 | | | | Adjusted earnings before income taxes | | | 87,153 | | | 31,723 | | | 68,656 | | | 6,241 | | | (13,660) | | | (5,807) | Interest expense | | | 8,055 | | | | | | | | | | | | | | | 8,055 | Interest income | | | (2,248) | | | | | | | | | | | | | | | (2,248) | Adjusted earnings before net interest and taxes (Adjusted EBIT) | | | 92,960 | | | 31,723 | | | 68,656 | | | 6,241 | | | (13,660) | | | - | Depreciation and amortization | | | 41,175 | | | 21,412 | | | 11,184 | | | 6,498 | | | 2,081 | | | - | Adjusted earnings before net interest, taxes, depreciation and amortization (Adjusted EBITDA) | | $ | 134,135 | | $ | 53,135 | | $ | 79,840 | | $ | 12,739 | | $ | (11,579) | | $ | - | | | | | | | | | | | | | | | | | | | | Adjusted EBITDA margins (Adjusted EBITDA / Reported Net Sales) | | | 19.1% | | | 14.1% | | | 34.7% | | | 13.4% | | | | | | |
| | | | | | | | Net Debt to Net Capital Reconciliation | | | March 31, | | | December 31, | | | | | 2020 | | | 2019 | | | | | | | | | | Notes payable, revolving credit facility and overdrafts | | $ | 220,511 | | $ | 44,259 | | Current maturities of long-term obligations, net of unamortized debt issuance costs | | | 65,049 | | | 65,988 | | Long-Term Obligations, net of unamortized debt issuance costs | | | 1,075,745 | | | 1,085,453 | | Total Debt | | | 1,361,305 | | | 1,195,700 | | Less: | | | | | | | | Cash and equivalents | | | 410,840 | | | 241,970 | | Net Debt | | $ | 950,465 | | $ | 953,730 | | | | | | | | | | Total Stockholders' Equity | | $ | 1,587,623 | | $ | 1,572,252 | | Net Debt | | | 950,465 | | | 953,730 | | Net Capital | | $ | 2,538,088 | | $ | 2,525,982 | | | | | | | | | | Net Debt to Net Capital | | | 37.4% | | | 37.8% | |
| | | | | | | | Net Debt to Net Capital Reconciliation | | | March 31, | | | December 31, | | | | | 2019 | | | 2018 | | | | | | | | | | Notes payable, including revolving credit facilities | | $ | 17,683 | | $ | 101,293 | | Current maturities of long-term obligations, net of unamortized debt issuance costs | | | 63,981 | | | 62,678 | | Long-Term Obligations, net of unamortized debt issuance costs | | | 1,141,062 | | | 1,125,993 | | Total Debt | | | 1,222,726 | | | 1,289,964 | | Less: | | | | | | | | Cash and equivalents | | | 217,377 | | | 261,823 | | Net Debt | | $ | 1,005,349 | | $ | 1,028,141 | | | | | | | | | | Total Stockholders' Equity | | $ | 1,467,714 | | $ | 1,422,871 | | Net Debt | | | 1,005,349 | | | 1,028,141 | | Net Capital | | $ | 2,473,063 | | $ | 2,451,012 | | | | | | | | | | Net Debt to Net Capital | | | 40.7% | | | 41.9% | |
| | | | | | | | Free Cash Flow Reconciliation | | | March 31, | | | March 31, | | | | | 2020 | | | 2019 | | | | | | | | | | Net Cash Provided by Operations | | $ | 85,033 | | $ | 77,636 | | | | | | | | | | Less: | | | | | | | | Capital Expenditures | | | 61,625 | | | 51,742 | | Free Cash Flow | | $ | 23,408 | | $ | 25,894 | |
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 first quarter of 20192020 the U.S. dollar strengthened compared to the Euro.euro and other currencies in Latin America and Asia. This resulted in a dilutive impact on our translated results during the first quarter of 20192020 when compared to the first 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 approximately 2.0% of consolidated net assets and revenues at and for the three months ended March 31, 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 addition to the future,impacts of COVID-19, 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 rest33
| | | | | | | | | | 2019 | | 2018 | | First Quarter | | $ | 6.5 | | $ | 7.5 | | Second Quarter (estimated for 2019) | | | 6.1 | | | 3.4 | | Third Quarter (estimated for 2019) | | | 5.9 | | | 3.9 | | Fourth Quarter (estimated for 2019) | | | 5.8 | | | 4.8 | | | | $ | 24.3 | | $ | 19.6 | |
LIQUIDITY AND CAPITAL RESOURCES WeGiven the diversification of our segments, 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 usedOur Pharma segment provided strong operating cash flow from operations,flows to balance out the temporary softness in some of our revolving credit facilitiesBeauty + Home and debt, as needed, as our primary sourcesFood + Beverage markets during the first quarter of liquidity.2020. 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 ofAmid the COVID-19 pandemic, we are focused on preserving our liquidity includeand therefore we have temporarily suspended repurchasing shares of our common stock and payingcontributions to our defined benefit plans. However, we intend to continue to pay quarterly dividends to stockholders.our stockholders, invest in our business and make acquisitions, as considered necessary to achieve our strategic objectives. In the event that customer demand would decrease significantly for a prolonged period of time due to the COVID-19 pandemic and negativelyadversely impact our 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.strategy. A prolonged and significant reduction in capital expenditure levels could increase future repairs and maintenance costs as well as have a negative impact on operating margins if we were unable to invest in new innovative products.
Cash and equivalents decreasedincreased to $217.4$414.8 million at March 31, 20192020 from $261.8$247.0 million at December 31, 2018 as cash on hand was used to pay down the balance on our revolving credit facilities.2019. Total short and long-term interest bearing debt of $1.2 $1.4billion at March 31, 2019 was lower than the $1.32020 increased from $1.2 billion at December 31, 2018.2019 resulting from $175.0 million in net proceeds from our group credit facility during the first quarter of 2020 the majority of which was utilized to fund the second quarter Fusion acquisition. The ratio of our Net Debt (interest bearing debt less cash and cash equivalents) to Net Capital (stockholders’ equity plus Net Debt) decreased to 40.7%37.4% at March 31, 20192010 compared to 41.9%37.8% at December 31, 2018.2019. See the reconciliation of non-U.S. GAAP measures starting on page 30.31. In the first three months of 2019,2020, our operations provided approximately $77.6$85.0 million in net cash flow compared to $51.0$77.6 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 quarterthree months of 20192020 is primarily attributable to the improved profitabilitylower restructuring costs and better working capital management. We used $39.1$88.1 million in cash for investing activities during the first quarterthree months of 20192020 compared to $26.5$39.1 million during the same period a year ago. Our investment in capital projects increased $11.7$9.9 million during the first three months of 2020 compared to the first three months of 2019, as projects in progress at year end were paid during the first quarter of 2019 compared to the first quarter of 2018.2020. During the first quarterthree months of 2019,2020, we received $16.5invested $20.4 million fromin our 49% equity interest of BTY, which is accounted for as an equity method investment. Additionally, we released $1.0 million relating to the sale of our investment in Reciprocal Labs Corporation, which was reduced by $4.0 million from the finalworking capital escrow settlement on our purchase of CSP Technologies. During the first quarter of 2018, we received $10.6 million of insurance proceedsand paid an additional $463 thousand as a working capital payment related to the Annecy fire.our acquisition of Noble. Our 20192020 estimated cash outlays for capital expenditures are expected to be in the range of approximately $230$220 to $250$240 million but could vary due to changes in exchange rates as well as the timing of capital projects. Financing activities used $90.8provided $174.3 million in cash during the first quarterthree months of 20192020 compared to proceeds of $1.6$90.8 million in cash used by financing activities during the same period a year ago. During the first quarterthree months of 2019,2020, we received net proceeds from our U.S. short term credit facility of $175.0 million and stock option exercises of $18.6 million. We used cash on hand to pay $78.2$23.0 million onof dividends and repayments of $4.4 million related to our revolving credit facility. We also realized $13.9 million less proceeds from stock option exercises in the first quarter of 2019 compared to the first quarter of 2018. outstanding debt obligations. 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$200.0 million was utilized under our U.S. facility and no balance of €69.0 million on thewas utilized under our euro-based revolving credit facility as of March 31, 2020. The $25.0 million balance at December 31, 2019 under our U.S. credit facility was paid inrepaid during the first quarter of 2019. No balances were drawn as of March 31, 2019.2020. Credit facility balances are included in notes payable, including revolving credit facilities on the Condensed Consolidated Balance Sheet. Sheets. Our revolving credit facility and corporate long-term obligations require us to satisfy certain financial and other covenants including: | | | | | |
| Requirement |
| Level at March 31, 20192020 | Consolidated Leverage Ratio (1) | | Maximumof 3.50 to 1.00 | | 2.001.73 to 1.00
| Consolidated Interest Coverage Ratio (1) | | Minimum of 3.00 to 1.00 | | 14.7516.32 to 1.00
|
(1) | (1)
| | Definitions of ratios are included as part of the revolving credit facility agreement and the note purchase agreements. |
Based upon the above consolidated leverage ratio covenant, we have the ability to borrow approximately an additional $767 million$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 April 17, 2019,15, 2020, the Board of Directors declared an increase in thea quarterly cash dividend of $0.02 per share to $0.36 per share payable on May 22, 201920, 2020 to stockholders of record as of May 1, 2019. April 29, 2020. 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 anysignificant off-balance sheet arrangements. Please refer to Note 7 – Leases of the Notes to Condensed Consolidated Financial Statements. 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 20192020 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.
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 ForFactors that could impact our second quarter results, include among other things, the duration and severity of the COVID-19 pandemic, the pace and scope of reopening in regions that are currently under government confinement orders, the speed at which beauty and other retail stores open, the willingness of consumers to participate in those shopping channels, the rate at which airline travel will resume and the general level of on-the-go consumption particularly with certain beverage products.
Aptar expects the near-term effects related to the COVID-19 pandemic to continue through the second quarter we anticipate continued positive product sales growth across most of our application fields, althoughand anticipates that they will be more pronounced than the high level of custom tooling sales reportedCompany experienced in the first quarter. The results of Aptar’s Beauty + Home segment are expected to be significantly impacted by continued softness across each end market primarily related to the effects of COVID-19. In addition, the Food + Beverage segment, which had very strong growth in the prior year second quarter, of 2018 is not expected to repeat. see continued softness in the on-the-go beverage market primarily related to COVID-19 and the impact from passing on lower resin costs. Aptar’s Pharma segment is facing difficult comparisons compared to the prior year’s exceptional growth, especially within its prescription division. Aptar’s second quarter results are expected to include expenses of approximately $3.6 million (pretax) related to the Thank You Award being given to employees who have made it possible for Aptar to continue to supply critical infrastructure industries during the COVID-19 crisis. We expect earnings per share for the second quarter of 2020, excluding any restructuring expenses and acquisition-related costs, to be in the range of $1.09$0.58 to $1.15. This$0.73 and this guidance is based on an effective tax rate range of 29%31% to 31%33%. FORWARD-LOOKING STATEMENTS Certain statements in Management’s Discussion and Analysis and other sections of this Form 10-Q are forward-looking and involve a number of risks and uncertainties, including certain statements set forth in the Significant Developments, Restructuring Initiatives, Quarterly Trends, Liquidity and Capital Resources, Contingencies and Outlook sections of this Form 10-Q. Words such as “expects,” “anticipates,” “believes,” “estimates,” “future,” “potential” 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: ● | · outbreaks of pandemics, including the impact of COVID-19 on our global supply chain and our global customers and operations, which has elevated and may or will continue to elevate many of the risks and uncertainties discussed below; |
● | | economic conditions worldwide, including potential deflationary or inflationary conditions in regions we rely on for growth; |
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| | political conditions worldwide;worldwide, including the impact of the UK leaving the European Union (Brexit) on our UK operations; |
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| | significant fluctuations in foreign currency exchange rates or our effective tax rate; |
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| | the impact of tax reform legislation, changes in tax rates and other tax-related events or transactions that could impact our effective tax rate; |
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| | financial conditions of customers and suppliers; |
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| | consolidations within our customer or supplier bases; |
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| | changes in customer and/or consumer spending levels; |
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| | loss of one or more key accounts; |
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| | the availability of raw materials and components (particularly from sole sourced suppliers) as well as the financial viability of these suppliers; |
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| | fluctuations in the cost of materials, components and other input costs (particularly resin, metal, anodization costs and transportation and energy costs); |
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| | the impact and extent of contamination found at our facility in Brazil;
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| ·
| | our ability to successfully implement facility expansions and new facility projects; |
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| | our ability to offset inflationary impacts with cost containment, productivity initiatives or price increases; |
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| | changes in capital availability or cost, including interest rate fluctuations; |
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| | volatility of global credit markets; |
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| | the timing and magnitude of capital expenditures;
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| ·
| | our ability to identify potential new acquisitions and to successfully acquire and integrate such operations and products, including the successful integration of the CSP Technologies and Reboul businesses; businesses we have acquired, including contingent consideration valuation; |
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| | direct or indirect consequences of acts of war, terrorism or social unrest; |
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| | cybersecurity threats that could impact our networks and reporting systems; |
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| | the impact of natural disasters and other weather-related occurrences; |
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| | fiscal and monetary policies and other regulations; |
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| | changes or difficulties in complying with government regulation; |
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| | changing regulations or market conditions regarding environmental sustainability; |
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| | work stoppages due to labor disputes; |
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| | competition, including technological advances; |
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| | our ability to protect and defend our intellectual property rights, as well as litigation involving intellectual property rights; |
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| | the outcome of any legal proceeding that has been or may be instituted against us and others; |
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| | our ability to meet future cash flow estimates to support our goodwill impairment testing; |
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| | the demand for existing and new products; |
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| | the success of our customers’ products, particularly in the pharmaceutical industry; |
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| | our ability to manage worldwide customer launches of complex technical products, particularly in developing markets; |
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| | difficulties in product development and uncertainties related to the timing or outcome of product development; |
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| | significant product liability claims; |
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| | the execution of our business transformation plan; and |
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| | other risks associated with our operations. |
Although we believe that our forward-looking statements are based on reasonable assumptions, there can be no assurance that actual results, performance or achievements will not differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements. Readers are cautioned not to place undue reliance on forward-looking statements. We undertake no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. Please refer to Item 1A (“Risk Factors”)(Risk Factors) of Part I included in our Annual Report on Form 10-K for the year ended December 31, 20182019 and to Item 1A (Risk Factors) of Part II of this report for additional risk factors affecting the Company. 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 strengtheningweakening U.S. dollar relative to foreign currencies has a dilutivean additive translation effect on our financial condition and results of operations. Conversely, a weakeningstrengthening U.S. dollar relative to foreign currencies has an additivea dilutive translation effect on our financial condition and results of operations. Additionally, in some cases, we sell products denominated in a currency different from the currency in which the related costs are incurred. Any changes in exchange rates on such inter-country sales may impact our results of operations. 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 March 31, 20192020 about our forward currency exchange contracts. The majority of the contracts expire before the end of the second quarter of 2019.2020. | | | | | | | | | | | | | | | Average | | Min / Max | | | | | | Contract Amount | | Contractual | | Notional | | | | | | | | | | | | | | | | | | | Average | | Min / Max | | | | | | Contract Amount | | Contractual | | Notional | | Buy/Sell | | | (in thousands) | | Exchange Rate | | Volumes | | | | (in thousands) | | Exchange Rate | | Volumes | | | | | | | | | | | | | | | | | | | | | | EUR / USD | | | $ | 22,646 | | 1.1074 | | 18,669-22,646 | | EUR / BRL | | $ | 12,692 | | 4.3362 | | 12,692-17,219 | | | | 9,376 | | 4.8745 | | 9,376-11,407 | | EUR / USD | | | 11,425 | | 1.1433 | | 11,425-14,055 | | | CHF / EUR | | | | 6,089 | | 0.9387 | | 6,040-6,605 | | EUR / INR | | | 5,275 | | 81.8900 | | 5,124-5,275 | | | | 3,781 | | 79.7800 | | 3,781-3,981 | | CZK / EUR | | | | 3,169 | | 0.0384 | | 0-3,169 | | EUR / MXN | | | | 2,137 | | 21.5937 | | 1,999-2,239 | | USD / EUR | | | 3,792 | | 0.8771 | | 2,991-7,519 | | | | 2,085 | | 0.8972 | | 1,322-4,978 | | EUR / IDR | | | 2,407 | | 19.2090 | | 2,407-2,443 | | | USD / CNY | | | | 2,000 | | 7.0663 | | 2,000-2,000 | | EUR / CHF | | | | 1,773 | | 1.0587 | | 0-1,773 | | MXN / USD | | | | 1,384 | | 0.0519 | | 557-1,384 | | CHF / USD | | | | 835 | | 1.0367 | | 0-835 | | GBP / EUR | | | 1,377 | | 1.1457 | | 538-1,377 | | | | 718 | | 1.1774 | | 718-1,544 | | EUR / MXN | | | 1,043 | | 21.8531 | | 1,022-1,061 | | | USD / MXN | | | 1,015 | | 19.3020 | | 990-1,315 | | | CHF / EUR | | | 491 | | 0.8826 | | 491-44,874 | | | USD / BRL | | | 100 | | 3.7743 | | 100-550 | | | USD / CHF | | | | 130 | | 0.9551 | | 0-130 | | Total | | $ | 39,617 | | | | | | | $ | 56,123 | | | | | |
As of March 31, 2019,2020, we have recorded the fair value of foreign currency forward exchange contracts of $0.4$2.1 million in prepaid and other and $0.7$0.5 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 $3.6$6.8 million and is reported in prepaid and other 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 March 31, 2019.2020. 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 NoDuring the fiscal quarter ended March 31, 2020, we implemented enterprise resource planning (“ERP”) systems at two operating facilities. Consequently, the control environments have been modified at these locations to incorporate the controls contained within the new ERP systems. Except for the foregoing, no changes in our internal control over financial reporting (as such term is defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) occurred during our fiscal quarter ended March 31, 20192020 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Amid the COVID-19 pandemic, we have implemented remote work arrangements and restricted non-essential business travel. These arrangements have not materially affected our ability to maintain our business operations, including the operation of financial reporting systems, internal control over financial reporting and disclosure controls and procedures. PART II - OTHER INFORMATION ITEM 1A. RISK FACTORS The following risk factors are in addition to the risks described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 under Item 1A, “Risk Factors” filed with the SEC pursuant to the Exchange Act. The effects of the events and circumstances described in the following risk factors have elevated and may or will continue to elevate many of the risks contained in the Company’s Form 10-K, including the risks relating to a deterioration in economic conditions in a particular region or market, our fixed costs structure, reliance on single sourced materials and manufacturing sites and potential asset impairments. The COVID-19 pandemic is currently adversely affecting our business. Additional factors could exacerbate such negative consequences and/or cause other materially adverse effects. The COVID-19 pandemic adversely affected our sales of products to our travel and retail beauty business and on-the-go beverage customers in the quarter ended March 31, 2020 and that adverse impact has continued into the second quarter. Since the end of the quarter, economic and health conditions in the United States and across most of the globe have changed rapidly. Customer demand across all segments, particularly our Beauty + Home and Food + Beverage segments, may decrease further from historical levels depending on the duration and severity of the COVID-19 pandemic, the length of time it takes for normal economic and operating conditions to resume, additional governmental actions that may be taken and/or extensions of time for restrictions that have been imposed to date, and numerous other uncertainties. Such events may result in business and manufacturing disruption, inventory shortages due to disruptions to our supply chain and distribution channels, delivery delays, increased risk associated with customer payments and reduced sales and operations, any of which could materially affect our stock price, business prospects, financial condition, results of operations and liquidity. The ability of our employees to work may be significantly impacted by COVID-19.The majority of our office and management personnel are working remotely and the majority of our facilities remained operational during the first quarter of 2020 as each of our segments produce dispensing systems that have been determined to be essential products by various government agencies around the world. The health and safety of our workforce is of primary concern and we may need to enact further precautionary measures to help minimize the risk of our employees being exposed to the virus. Further, our management team is focused on mitigating the adverse effects of the COVID-19 pandemic, which has required and will continue to require a large investment of time and resources across the entire company, thereby diverting their attention from other priorities that existed prior to the outbreak of the pandemic. If these conditions worsen, or last for an extended period of time, our ability to manage our business may be impaired, and operational risks, cybersecurity risks and other risks facing us even prior to the pandemic may be elevated. ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS RECENT SALES OF UNREGISTERED SECURITIES Certain French employees are eligible to participate in the FCP Aptar Savings Plan (the “Plan”). An independent agent purchases shares of common stock available under the Plan for cash on the open market and we do not issue shares. We do not receive any proceeds from the purchase of common stock under the Plan. The agent under the Plan is Banque Nationale de Paris Paribas Fund Services. No underwriters are used under the Plan. All shares are sold in reliance upon the exemption from registration under the Securities Act of 1933 provided by Regulation S promulgated under that Act. During the quarter ended March 31, 2019,2020, the Plan purchased 3,61010,487 shares of our common stock on behalf of the participants at an average price of $92.76,$98.22, for an aggregate amount of $335 thousand.$1.0 million. The Plan sold 30012,202 shares of our common stock on behalf of the participants at an average price of $101.56,$98.35, for an aggregate amount of $30 thousand$1.2 million during the same period. At March 31, 2019,2020, the Plan owned 85,98788,478 shares of our common stock. ISSUER PURCHASES OF EQUITY SECURITIES We announced the $350 million share repurchase authorization in effect for the quarter ended March 31, 2019 on October 20, 2016. On April 18, 2019, we announced a new share purchase authorization of up to $350 million of common stock. This authorization replaces previous authorizations and has no expiration date. We may repurchase shares through the open market, privately negotiated transactions or other programs, subject to market conditions.
During the three months ended March 31, 2019,2020, we repurchased approximately 159 thousanddid not repurchase any shares. As of March 31, 2020, there was $278.5 million of authorized share repurchases available to us. Amid the COVID-19 pandemic, we are focused on preserving our liquidity and therefore we have temporarily suspended repurchasing shares for approximately $15.0 million. The following table summarizes our purchases of our securities for the quarter ended March 31, 2019:common stock.
| | | | | | | | | | | | | | | | | | | | | | 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) | | | | | | | | | | | | | | | 1/1 – 1/31/19 | | | 159,191 | | $ | 94.23 | | 159,191 | | $ | 65.2 | | 2/1 – 2/28/19 | | | — | | | — | | — | | | 65.2 | | 3/1 – 3/31/19 | | | — | | | — | | — | | | 65.2 | | Total | | | 159,191 | | $ | 94.23 | | 159,191 | | $ | 65.2 | |
ITEM 6. EXHIBITS | | | | | | | | | Exhibit 10.1 | | Form of AptarGroup, Inc. Restricted Stock Unit Award Agreement (Performance-Based Vesting Form) (U.S./Mexico/Argentina employee version) pursuant to the AptarGroup, Inc. 2018 Equity Incentive Plan. | | | | Exhibit 10.2 | | Form of AptarGroup, Inc. Restricted Stock Unit Award Agreement (Performance-Based Vesting Form) (French employee version) pursuant to the AptarGroup, Inc. 2018 Equity Incentive Plan. | | | | Exhibit 10.3 | | Form of AptarGroup, Inc. Restricted Stock Unit Award Agreement (Performance-Based Vesting Form) (All Other Employees) pursuant to the AptarGroup, Inc. 2018 Equity Incentive Plan. | | | | Exhibit 10.4 | | Form of AptarGroup, Inc. Restricted Stock Unit Award Agreement (Service-Based Vesting Form) (U.S./Mexico/Argentina employee version) pursuant to the AptarGroup, Inc. 2018 Equity Incentive Plan. | | | | Exhibit 10.5 | | Form of AptarGroup, Inc. Restricted Stock Unit Award Agreement (Service-Based Vesting Form) (non-French employee version) pursuant to the AptarGroup, Inc. 2018 Equity Incentive Plan. | | | | Exhibit 10.6 | | Form of AptarGroup, Inc. Restricted Stock Unit Award Agreement (Service-Based Vesting Form) (French employee version) pursuant to the AptarGroup, Inc. 2018 Equity Incentive Plan. | | | | Exhibit 31.1 | | Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | | | | Exhibit 31.2 | | Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | | | | 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 | | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | | | | Exhibit 101 | | The following financial information from our Quarterly Report on Form 10-Q for the first quarter of fiscal 2019,2020, filed with the SEC on May 1, 2019,2020, formatted in Inline Extensible Business Reporting Language (XBRL): (i) the Cover Page, (ii) the Condensed Consolidated Statements of Income – Three Months Ended March 31, 2020 and 2019, and 2018, (ii)(iii) the Condensed Consolidated Statements of Comprehensive Income – Three Months Ended March 31, 2020 and 2019, and 2018, (iii)(iv) the Condensed Consolidated Balance Sheets – March 31, 20192020 and December 31, 2018, (iv)2019, (v) the Condensed Consolidated Statements of Changes in Equity – Three Months Ended March 31, 2020 and 2019, and 2018, (v)(vi) the Condensed Consolidated Statements of Cash Flows - Three Months Ended March 31, 2020 and 2019 and 2018 and (vi)(vii) the Notes to Condensed Consolidated Financial Statements. | | | Exhibit 104 | | Cover Page Interactive Data File (embedded within the Inline XBRL document). | | | | | |
SIGNATURE SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. | | AptarGroup, Inc. | | | (Registrant) | | | | | By | /s/ ROBERT W. KUHN | | | Robert W. Kuhn | | | Executive Vice President, | | | Chief Financial Officer and Secretary | | | (Duly Authorized Officer and | | | Principal Accounting and Financial Officer) | | | | | | | | | Date: May 1, 20192020 |
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