APTARGROUP, INC. Three Months Ended March 31, 2022 2021 Net sales 100.0 % 100.0 %
Cost of sales (exclusive of depreciation and amortization shown below)
64.2 62.9
Selling, research & development and administrative 17.2 17.3
Depreciation and amortization 7.0 7.4
Restructuring initiatives - 0.5
Operating income 11.6 11.9
Other income (expense) (1.3) 1.1
Income before income taxes 10.3 13.0
Net Income 7.4 10.8
Effective tax rate 28.0 % 16.8 %
Adjusted EBITDA margin (1) 18.5 % 19.6 %
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(1)Adjusted EBITDA margin is calculated as Adjusted EBITDA divided by Reported
SIGNIFICANT DEVELOPMENTS
As each of our segments produce dispensing systems that have been determined to
be essential products by various government agencies around the world, our
facilities have remained operational during the COVID-19 pandemic. We have taken
a variety of measures to ensure the availability and functioning of our critical
infrastructure, to promote the safety and security of our employees and to
support the communities in which we operate. We continue to follow public and
private sector policies and initiatives to reduce the transmission of COVID-19,
such as the imposition of travel restrictions, the promotion of social
distancing and the adoption of work-from-home arrangements, and all of these
policies and initiatives have impacted our operations.
The extent to which the COVID-19 pandemic impacts our financial results and
operations for fiscal year 2022 and beyond for all three of our business
segments will depend on future developments which are highly uncertain and
cannot be predicted, including the emergence of new variants, the availability,
adoption and efficacy of vaccines and boosters, the length of time it takes for
normal economic and operating conditions to resume, additional governmental
actions that may be taken and/or extended in response to any further resurgence
of the virus and numerous other uncertainties. No impairments were recorded as
of March 31, 2022 related to the COVID-19 pandemic. However, due to the general
uncertainty surrounding the situation, including areas such as cost inflation,
supply chain disruptions and labor shortages, future results could be materially
impacted.
The war in Ukraine and the recent COVID-19 outbreak in China have not as of
March 31, 2022 had a significant direct impact on our business in these regions
though the near-term visibility for both of these situations is expected to
remain fluid and uncertain for the next several quarters. However, we have
started to experience some indirect impacts on our business, including higher
energy costs and certain supply chain interruptions.
NET SALES
Reported net sales for the first three months of 2022 increased 9% to $844.9
million compared to $776.8 million for the first three months of 2021. The
average U.S. dollar exchange rate strengthened compared to the euro and other
major currencies in which we operate, resulting in a negative currency
translation impact of 4%. There was no significant impact from our acquisitions
of Voluntis S.A. ("Voluntis") and Weihai Hengyu Medical Products Co., Ltd.
("Hengyu") on our consolidated results during the first quarter of 2022.
Therefore, core sales, which exclude acquisitions and changes in foreign
currency rates, increased by 13% in the first three months of 2022 compared to
the same period in 2021. Price increases to our customers due to rising
inflationary costs had a positive impact on our core sales during the first
quarter of 2022. Of our 13% core sales increase, approximately 5% is due to
price adjustments related to the passing through of higher resin and other input
costs. Excluding these inflationary pass-throughs, all three segments still
reported strong core sales growth during the first quarter of 2022 as discussed
below.
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Three Months Ended
+ Home Beverage
Core Sales Growth 13 % 10 % 18 % 13 %
Acquisitions 1 % - % - % - %
Currency Effects (1) (5) % (4) % (2) % (4) %
Total Reported Net Sales Growth 9 % 6 % 16 % 9 %
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(1)Currency effects are calculated by translating last year's amounts at this year's foreign exchange rates.
The following table sets forth, for the periods indicated, net sales sourced by geographic location: Three Months Ended March 31, 2022 % of Total 2021 % of Total Domestic$ 280,005 33 %$ 255,165 33 % Europe 455,131 54 % 425,689 55 % Latin America 57,744 7 % 48,965 6 % Asia 52,052 6 % 46,935 6 %
For further discussion on net sales by reporting segment, please refer to the analysis of segment net sales and segment Adjusted EBITDA on the following pages.
COST OF SALES (EXCLUSIVE OF DEPRECIATION AND AMORTIZATION SHOWN BELOW)
Cost of sales ("COS") as a percent of net sales increased to 64.2% in the first
three months of 2022 compared to 62.9% in the same period a year ago. As
discussed above, we experienced significant inflationary increases in several
input costs during the current quarter including resin, metals, freight, labor
and utilities. While we maintain our normal pass-through of resin prices and
have implemented price increases to offset other cost increases, there is no
margin on these pass-throughs which increases our COS as a percentage of sales.
SELLING, RESEARCH & DEVELOPMENT AND ADMINISTRATIVE
Selling, research & development and administrative expenses ("SG&A") increased
by $11.2 million to $145.5 million in the first three months of 2022 compared to
$134.3 million during the same period a year ago. Excluding changes in foreign
currency rates, SG&A increased by approximately $15.6 million in the first three
months of 2022 compared to the first three months of 2021. Of this increase,
$3.1 million relates to three months of incremental SG&A costs in 2022 as our
acquisitions of Hengyu and Voluntis were completed subsequent to March 31, 2021 .
The remaining increase is partially related to higher compensation costs,
including accruals related to our current short-term incentive compensation
programs and the timing of certain equity compensation arrangement expense
recognition. We also experienced an increase in information systems costs due to
an upgrade of our enterprise reporting system along with higher professional
fees for internal projects and higher travel costs compared to 2021. Finally, we
recorded a $1.5 million expected credit loss reserve against the outstanding
note receivable from one of our venture investments (Kali Care ) as discussed in
Note 17 - Investment in Equity Securities of the Condensed Consolidated
Financial Statements. SG&A as a percentage of net sales decreased to 17.2% in
the first quarter of 2022 compared to 17.3% during the same period in the prior
year.
DEPRECIATION AND AMORTIZATION
Reported depreciation and amortization expenses increased by approximately $1.2
million to $58.7 million in the first three months of 2022 compared to $57.4
million during the same period a year ago. Excluding changes in foreign currency
rates, depreciation and amortization increased by approximately $3.2 million in
the first three months of 2022 compared to the same period a year ago. As
mentioned above, approximately $1.2 million of this increase is due to our
acquisitions of Voluntis and Hengyu subsequent to March 31, 2021 and the
remaining increase relates to higher capital spending during the current and
prior year to support our growth strategy. Depreciation and amortization as a
percentage of net sales decreased to 7.0% in the first three months of 2022
compared to 7.4% in the same period of the prior year.
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RESTRUCTURING INITIATIVES
In late 2017, we began a business transformation plan to drive profitable sales
growth, increase operational excellence, enhance our approach to innovation and
improve organizational effectiveness. The primary focus of the plan was the
Beauty + Home segment; however, certain global general and administrative
functions were also addressed. As of the end of 2021, we have successfully
completed the vast majority of our planned initiatives related to our
transformation plan, including implementing new commercial strategies, reducing
costs and adding capabilities in Asia and in fast growing application fields
that we believe will position the segment for future growth and profitability.
However, the COVID-19 global pandemic resulted in a significant decline in our
beauty business. While our Beauty + Home segment continues to be profitable, the
disruption caused by the pandemic, including higher operating costs, have more
than offset any expected growth in earnings from our transformation. Although we
believe the beauty market remains a long-term attractive growth market and we
remain committed to completing our transformation initiatives, we expect the
return to growth to be gradual and non-linear as this market is highly
correlated to the return to post-pandemic normal consumer behavior, including
travel, which has proven to be sporadic and uncertain. The cumulative expense
incurred for this transformation plan as of March 31, 2022 was $136.5 million .
Restructuring costs related to the above plan for the three months ended
Three Months Ended March 31, 2022 2021 Restructuring Initiatives by Segment Pharma $ -$ 35 Beauty + Home 258 1,096 Food + Beverage 33 (79) Corporate & Other - 2,620 Total Restructuring Initiatives$ 291 $ 3,672 OPERATING INCOME For the first three months of 2022, operating income increased approximately$5.1 million to$97.7 million compared to$92.6 million in the same period of the prior year. Excluding changes in foreign currency rates, operating income increased by approximately$9.8 million in the first three months of 2022 compared to the same period a year ago. The strong sales growth discussed above, along with lower restructuring costs during the current quarter drove this improvement. Operating income as a percentage of net sales decreased to 11.6% in the first three months of 2022 compared to 11.9% for the same period in the prior year. NET OTHER INCOME (EXPENSE) Net other income (expense) decreased$19.4 million to$11.1 million of expense for the three months endedMarch 31, 2022 from$8.3 million of income in the same period of the prior year.$18.1 million of this reduction is the change in fair value of our investment in PureCycle Technologies ("PCT" or "PureCycle"). As discussed in Note 17 - Investment inEquity Securities of the Condensed Consolidated Financial Statements, our investment in PureCycle was converted into shares of PCT, a publicly traded entity, during the first quarter of 2021. This investment is recorded at fair value based on observable market prices for identical assets with the change in fair value being recorded as a net investment gain or loss in the Condensed Consolidated Statements of Income. Interest expense increased by$1.5 million in the first quarter of 2022 as a result of approximately one month of interest expense on our$400 million 3.600% Senior Notes dueMarch 2032 , which were issued onMarch 7, 2022 . See Note 6 - Debt of the Condensed Consolidated Financial Statements for further details. PROVISION FOR INCOME TAXES The tax provision for interim periods is determined using the estimated annual effective consolidated tax rate, based on the current estimate of full-year earnings and related estimated full year-taxes, adjusted for the impact of discrete quarterly items. The effective tax rate for the three months endedMarch 31, 2022 and 2021, respectively, was 28.0% and 16.8%. The lower effective tax rate for the three months endedMarch 31, 2021 reflects incremental tax benefits from employee stock-based compensation of$8.0 million and a$2.9 million benefit from changes inU.S. state tax laws for the three months endedMarch 31, 2021 . NET INCOME ATTRIBUTABLE TO APTARGROUP, INC.
We reported net income attributable to
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PHARMA SEGMENT
Operations that sell dispensing systems, drug delivery systems, sealing
solutions and services to the prescription drug, consumer health care,
injectables, active material science solutions and digital health markets form
our Pharma segment.
Three Months Ended March 31, 2022 2021
Net Sales $ 342,462 $ 313,832
Adjusted EBITDA (1) 115,552 108,484
Adjusted EBITDA margin (1) 33.7 % 34.6 %
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(1)Adjusted EBITDA is calculated as earnings before net interest, taxes, depreciation, amortization, unallocated corporate expenses, restructuring initiatives, acquisition-related costs, net unrealized investment gains and losses related to observable market price changes on equity securities and other special items. Adjusted EBITDA margins are calculated as Adjusted EBITDA divided by ReportedNet Sales . See the reconciliation under "Non-U.S. GAAP Measures". Net sales for the first three months of 2022 increased by 9% to$342.5 million compared to$313.8 million in the first three months of 2021. Changes in currency rates negatively impacted net sales by 5% while the acquisitions ofVoluntis and Hengyu had a positive impact of 1% during the first quarter of 2022. Therefore, core sales increased by 13% in the first three months of 2022 compared to the same period in the prior year. All markets showed core sales growth during the first quarter of 2022 with almost all of the increase due to volume versus price pass-throughs. Core sales of our active material science solutions increased 58% mainly on strong demand for our Activ-Film products used with at-home COVID-19 test kits. Similarly, sales of our elastomeric components for COVID-19 and other vaccines drove the 7% core sales growth in our injectables market. The 13% core sales growth in the consumer health care market was driven by higher demand for our nasal decongestant, saline rinses and dermal solutions. Sales to the prescription drug market increased 3% on solid demand for our allergic rhinitis and asthma devices as many regions began to experience post-pandemic re-openings. Active Material Three Months Ended March 31, 2022 Prescription Consumer Science Net Sales Change over Prior Year Drug Health Care Injectables Solutions Digital Health Total Core Sales Growth 3 % 13 % 7 % 58 % - % 13 % Acquisitions - % - % 3 % - % 100 % 1 % Currency Effects (1) (4) % (5) % (6) % (4) % - % (5) % Total Reported Net Sales Growth (1) % 8 % 4 % 54 % 100 % 9 %
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(1)Currency effects are calculated by translating last year's amounts at this year's foreign exchange rates.
Adjusted EBITDA in the first three months of 2022 increased 3% to$115.6 million compared to$108.5 million reported in the same period of the prior year. This increase is mainly driven by our strong core sales growth discussed above. However, higher SG&A costs and incremental startup costs for our elastomeric component capacity expansion led to a lower Adjusted EBITDA margin. BEAUTY + HOME SEGMENT
Operations that sell dispensing systems and sealing solutions to the beauty, personal care and home care markets form our Beauty + Home segment.
Three Months Ended March 31, 2022 2021 Net Sales$ 368,199 $ 346,946 Adjusted EBITDA (1) 39,498 35,356 Adjusted EBITDA margin (1) 10.7 % 10.2 %
________________________________________________
(1)Adjusted EBITDA is calculated as earnings before net interest, taxes, depreciation, amortization, unallocated corporate expenses, restructuring initiatives, acquisition-related costs, net unrealized investment gains and losses related to observable market price changes on equity securities and other special items. Adjusted EBITDA margins are calculated as Adjusted EBITDA divided by ReportedNet Sales . See the reconciliation under "Non-U.S. GAAP Measures". 31 -------------------------------------------------------------------------------- Table of Contents For the first three months of 2022, net sales increased 6% to$368.2 million compared to$346.9 million in the first three months of the prior year. Changes in currency rates negatively impacted net sales by approximately 4%. Therefore, core sales increased by 10% in the first three months of 2022 compared to the same period in the prior year. Approximately 6% of the 10% growth came from pass-through of higher input cost while the remaining amount is due to increased volumes as sales for many of our applications began to normalize after the COVID-19 impacts seen during 2021. Core sales of our products to the beauty market increased 16% during the first three months of 2022 as we experienced an increase in demand for both fragrance and color cosmetic products. Personal care core sales increased 8% as higher sales of our hair care and sun care applications more than offset the lower demand for our hand sanitizer dispensing solutions. Our home care market realized increased sales to our dish care customers. However, it was not enough to offset lower sales to our automotive and industrial customers, which saw a return to a more normal demand after the higher COVID-19 related volumes we realized in the first quarter of 2021. Three Months Ended March 31, 2022 Personal Home Net Sales Change over Prior Year Care Beauty Care Total Core Sales Growth 8 % 16 % (9) % 10 % Currency Effects (1) (4) % (5) % (3) % (4) % Total Reported Net Sales Growth 4 % 11 % (12) %
6 %
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(1)Currency effects are calculated by translating last year's amounts at this year's foreign exchange rates.
Adjusted EBITDA in the first three months of 2022 increased 12% to$39.5 million compared to$35.4 million reported in the same period in the prior year. Strong product sales growth drove the majority of the Adjusted EBITDA improvement in the first three months of 2022 while operational improvements were able to offset the net negative impact of inflation and supply chain challenges in certain regions. FOOD + BEVERAGE SEGMENT
Operations that sell dispensing systems, sealing solutions and food service trays to the food and beverage markets form our Food + Beverage segment.
Three Months Ended March 31, 2022 2021 Net Sales$ 134,271 $ 115,976 Adjusted EBITDA (1) 19,235 19,990 Adjusted EBITDA margin (1) 14.3 % 17.2 %
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(1)Adjusted EBITDA is calculated as earnings before net interest, taxes, depreciation, amortization, unallocated corporate expenses, restructuring initiatives, acquisition-related costs, net unrealized investment gains and losses related to observable market price changes on equity securities and other special items. Adjusted EBITDA margins are calculated as Adjusted EBITDA divided by ReportedNet Sales . See the reconciliation under "Non-U.S. GAAP Measures". Net sales for the first three months of 2022 increased by 16% to$134.3 million compared to$116.0 million in the first three months of 2021. Changes in currency rates negatively impacted net sales by 2%. Therefore, core sales increased by 18% in the first three months of 2022 compared to the same period in the prior year. As discussed above, increased product and tooling sales, along with the pass-through of higher material costs, positively impacted the first three months of 2022. Approximately 12% of the 18% core sales increase is due to passing through higher resin and other input costs. Core sales to the food market increased 18% while core sales to the beverage market increased 16% in the first three months of 2022 compared to the same period of the prior year. For the food market, we realized strong growth in sauces and condiments and our food service packaging products. The beverage market also reported growth as sales of our premium bottled water products continued to recover from the COVID-19 pandemic levels last year.
Three Months Ended
18 % 16 % 18 %
Currency Effects (1) (2) % (1) % (2) %
Total Reported Net Sales Growth 16 % 15 % 16 %
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(1)Currency effects are calculated by translating last year's amounts at this year's foreign exchange rates.
Adjusted EBITDA in the first three months of 2022 decreased 4% to$19.2 million compared to$20.0 million reported in the same period of the prior year. As discussed above, we experienced increased product and tooling sales growth during the first quarter of 2022. However, our profitability was negatively impacted by some operational inefficiencies, specifically inNorth America , due to labor and supply chain issues. These issues, along with the lack of margin on the pass-through of higher input costs, had a negative impact on our Adjusted EBITDA margin during the current quarter. 32
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CORPORATE & OTHER
In addition to our three reporting segments, we assign certain costs to
"Corporate & Other," which is presented separately in Note 16 - Segment
Information of the Notes to the Condensed Consolidated Financial Statements. For
Corporate & Other, Adjusted EBITDA (which excludes net interest, taxes,
depreciation, amortization, restructuring initiatives, acquisition-related
costs, net unrealized investment gains and losses related to observable market
price changes on equity securities and other special items) primarily includes
certain professional fees, compensation and information system costs which are
not allocated directly to our reporting segments. Corporate & Other expenses in
the first three months of 2022 increased to $18.0 million compared to $11.6
million reported in the same period of the prior year. This increase is
partially related to higher compensation costs, including accruals related to
our current short-term incentive compensation programs and the timing of equity
compensation expense recognition including substantive vesting conditions for
retirement eligible employees. We also reported higher professional fees and
travel costs compared to 2021.
NON-U.S. GAAP MEASURES
In addition to the information presented herein that conforms to accounting
principles generally accepted in the United States of America ("U.S. GAAP"), we
also present financial information that does not conform to U.S. GAAP, which are
referred to as non-U.S. GAAP financial measures. Management may assess our
financial results both on a U.S. GAAP basis and on a non-U.S. GAAP basis. We
believe it is useful to present these non-U.S. GAAP financial measures because
they allow for a better period over period comparison of operating results by
removing the impact of items that, in management's view, do not reflect our core
operating performance. These non-U.S. GAAP financial measures should not be
considered in isolation or as a substitute for U.S. GAAP financial results, but
should be read in conjunction with the unaudited Condensed Consolidated
Statements of Income and other information presented herein. Investors are
cautioned against placing undue reliance on these non-U.S. GAAP measures.
Further, investors are urged to review and consider carefully the adjustments
made by management to the most directly comparable U.S. GAAP financial measure
to arrive at these non-U.S. GAAP financial measures.
In our Management's Discussion and Analysis, we exclude the impact of foreign
currency translation when presenting net sales and other information, which we
define as "constant currency." Changes in net sales excluding the impact of
foreign currency translation is a non-U.S. GAAP financial measure. As a
worldwide business, it is important that we take into account the effects of
foreign currency translation when we view our results and plan our strategies.
Consequently, when our management looks at our financial results to measure the
core performance of our business, we may exclude the impact of foreign currency
translation by translating our prior period results at current period foreign
currency exchange rates. As a result, our management believes that these
presentations are useful internally and may be useful to investors. We also
exclude the impact of material acquisitions when comparing results to prior
periods. Changes in operating results excluding the impact of acquisitions are
non-U.S. GAAP financial measures. We believe it is important to exclude the
impact of acquisitions on period over period results in order to evaluate
performance on a more comparable basis.
We present earnings before net interest and taxes ("EBIT") and earnings before
net interest, taxes, depreciation and amortization ("EBITDA"). We also present
our adjusted earnings before net interest and taxes ("Adjusted EBIT") and
adjusted earnings before net interest, taxes, depreciation and amortization
("Adjusted EBITDA"), both of which exclude the business transformation charges
(restructuring initiatives), acquisition-related costs, purchase accounting
adjustments related to acquisitions and investments and net unrealized
investment gains and losses related to observable market price changes on equity
securities. Our Outlook is also provided on a non-U.S. GAAP basis because
certain reconciling items are dependent on future events that either cannot be
controlled, such as exchange rates and changes in the fair value of equity
investments, or reliably predicted because they are not part of our routine
activities, such as restructuring and acquisition costs.
We provide a reconciliation of Net Debt to Net Capital as a non-U.S. GAAP
measure. "Net Debt" is calculated as interest bearing debt less cash and
equivalents and short-term investments while "Net Capital " is calculated as
stockholders' equity plus Net Debt. Net Debt to Net Capital measures a company's
financial leverage, which gives users an idea of a company's financial
structure, or how it is financing its operations, along with insight into its
financial strength. We believe that it is meaningful to take into consideration
the balance of our cash, cash equivalents and short-term investments when
evaluating our leverage. If needed, such assets could be used to reduce our
gross debt position.
Finally, we provide a reconciliation of free cash flow as a non-U.S. GAAP
measure. Free cash flow is calculated as cash provided by operating activities
less capital expenditures plus proceeds from government grants related to
capital expenditures. We use free cash flow to measure cash flow generated by
operations that is available for dividends, share repurchases, acquisitions and
debt repayment. We believe that it is meaningful to investors in evaluating our
financial performance and measuring our ability to generate cash internally to
fund our initiatives.
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