APTARGROUP, INC.
(Dollars in thousands, except per share amounts or as otherwise indicated)
The objective of the following Management's Discussion and Analysis of Financial
Condition and Results of Operations ("MD&A") is to help the reader understand
the financial performance of AptarGroup, Inc. MD&A is presented in eight
sections: Overview, Results of Operations, Liquidity and Capital Resources,
Off-Balance Sheet Arrangements, Overview of Contractual Obligations, Recently
Issued Accounting Pronouncements, Critical Accounting Estimates, Operations
Outlook and Forward-Looking Statements. MD&A should be read in conjunction with
our Consolidated Financial Statements and accompanying Notes to Consolidated
Financial Statements contained elsewhere in this Annual Report on Form 10-K.
In MD&A, "we," "our," "us," "AptarGroup ," "AptarGroup, Inc. ", "Aptar" and the
"Company" refer to AptarGroup, Inc. and its consolidated subsidiaries.
OVERVIEW
GENERAL
Aptar is a global leader in the design and manufacturing of a broad range of
innovative drug delivery and consumer product dispensing, sealing, active
packaging solutions and services for the prescription drug, consumer health
care, injectables, active packaging, beauty, personal care, home care, food and
beverage markets. We use insights, design, engineering and science to create
dosing, dispensing, and protective packaging technologies for many of the
world's leading brands, in turn, making a meaningful difference in the lives,
looks, health and homes of people around the world.
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 certain 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 Aptar's
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 audited 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. See the reconciliation under "Non-U.S. GAAP Measures"
starting on page 24.
For the year ended December 31, 2020 , reported sales increased 2% to $2.93
billion from $2.86 billion a year ago. Core sales, excluding the positive impact
from changes in currency exchange rates and acquisition effects, were in line
with the prior year. A reconciliation of core sales growth to reported net sales
growth, the most directly comparable U.S. GAAP measure, can be found on page 20.
During 2020, strong top line growth in our Pharma segment compensated for lower
sales to the beauty market in our Beauty + Home segment and the beverage market
in our Food + Beverage segment which were significantly impacted by the COIVD-19
pandemic. However, along with lower sales related to COVID-19, our facilities
remained open and were temporarily impacted by additional costs, inefficiencies
and under-absorption in our manufacturing processes which negatively impacted
our profitability during the year.
2020 HIGHLIGHTS
•Diversified business drove performance throughout the pandemic with
considerable improvement in the second half of the year
•Reported sales growth of 2% with core sales equal to the prior year
•Reported earnings per share of $3.21 (a decrease of 12% compared to the prior
year)
•Adjusted earnings per share of $3.64 (a decrease of 9% compared to the prior
year when neutralizing currency effects)
•Earnings were negatively impacted by the effects of the global pandemic on the
beauty and beverage markets
•Record cash flow from operations of $570 million (an increase of 11% compared
to the prior year)
•Record free cash flow of $324 million (an increase of 19% compared to the prior
year)
•Achieved our 27th consecutive year of increasing our aggregate annual dividend
amount, returning $93 million to shareholders
•Acquired Fusion, a leader in high quality, prestige airless and color cosmetics
packaging, and conception-to-launch turnkey solutions for the North American
beauty market
•Expanded our portfolio of digital health offerings through a partnership with
Sonmol, the acquisition of the assets of Cohero Health , and the launch of a
connected inhaler program for respiratory diseases in India with Lupin Limited
•Furthered our ESG commitments and received additional recognition (Newsweek's
Most Responsible Companies, Barron's Most Sustainable Companies, CDP's A List
Company and Supplier Engagement leader, ISS ESG Prime Status, EcoVadis Gold)
18/ATR 2020 Form 10-K
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RESULTS OF OPERATIONS
The following table sets forth the consolidated statements of income and the
related percentages of net sales for the periods indicated. Refer to Item 7 -
Management's Discussion and Analysis of Financial Condition and Results of
Operations in Part II of our Annual Report on Form 10-K for the fiscal year
ended December 31, 2019 for additional information regarding Results of
Operations for the year ended December 31, 2019 as compared to the year ended
December 31, 2018 . Certain previously reported amounts have been reclassified to
conform to the current period presentation:
Year Ended December 31, 2020 2019
Amount in % of Amount in % of
Thousands $ Net Sales Thousands $ Net Sales
Net sales $ 2,929,340 100.0 % $ 2,859,732 100.0 %
Cost of sales (exclusive of depreciation and
amortization shown below) 1,842,821 62.9 1,818,398 63.6
Selling, research & development and
administrative 500,229 17.1 454,617 15.9
Depreciation and amortization 220,300 7.5 194,552 6.8
Restructuring initiatives 26,492 0.9 20,472 0.7
Operating income 339,498 11.6 371,693 13.0
Other expense (38,343) (1.3) (29,624) (1.0)
Income before income taxes 301,155 10.3 342,069 12.0
Net Income $ 214,090 7.3 % $ 242,227 8.5 %
Effective tax rate 28.9 % 29.2 %
Adjusted EBITDA margin (1) 20.0 % 20.7 %
(1)Adjusted EBITDA margin is calculated as Adjusted EBITDA divided by Reported
SIGNIFICANT DEVELOPMENTS
During 2020, financial results and operations were adversely impacted by the
COVID-19 pandemic. The significance of the impacts to our segments are discussed
herein and include, but are not limited to, the adverse impact on sales of our
products to certain applications such as our beauty products sold via duty free
travel and retail stores and a reduction of our products used for on-the-go
beverage applications.
As each of our segments produce dispensing systems that have been determined to
be essential products by various government agencies around the world, our
facilities remained operational during the year. 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. 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 have impacted our operations.
The extent to which the COVID-19 pandemic impacts our financial results and
operations for fiscal year 2021 and going forward for all three of our business
segments will depend on future developments which are highly uncertain and
cannot be predicted, including the availability, adoption, and effectiveness of
a vaccine, the length of time it takes for normal economic and operating
conditions to resume, additional governmental actions that may be taken and/or
extensions of time for restrictions that have been imposed to date, and numerous
other uncertainties. Incremental operating costs related to heightened cleaning
and sanitizing procedures at our factories, personal protective equipment for
our employees and temporary labor costs necessary to address absenteeism, among
others have been and will continue to be necessary as the pandemic continues in
the near-term. No impairments were recorded as of December 31, 2020 related to
the COVID-19 pandemic. See Part I, Item 1A, "Risk Factors," included in this
report for information on material risks associated with COVID-19.
19/ATR 2020 Form 10-K
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NET SALES
For the year ended December 31, 2020 , reported net sales increased 2% to $2.93
billion from $2.86 billion a year ago. Strong sales growth in certain markets
were offset by changes in currency exchange rates, passing-through lower resin
costs to customers and COVID-19 related effects on other markets we serve. While
the average U.S. dollar exchange rate weakened compared to the euro and other
European currencies, it strengthened compared to most of our other major
operating currencies, resulting in a negative currency translation impact of 1%.
The acquisitions of Gateway , Nanopharm, Noble and Fusion positively impacted
sales by 3%. Therefore, core sales, which excludes acquisitions and changes in
foreign currency rates, for 2020 were in line with 2019. While our Pharma
segment reported strong product sales growth during 2020, both our Beauty + Home
and Food + Beverage segments were impacted by the COVID-19 pandemic and the
negative impact of passing through lower resin costs to our customers.
Year Ended December 31, 2020 Beauty Food +
Pharma +Home Beverage Total
Core Sales Growth 9 % (7) % (1) % - %
Acquisitions 2 % 4 % - % 3 %
Currency Effects (1) 1 % (1) % (2) % (1) % Total Reported Net Sales Growth 12 % (4) % (3) % 2 %
(1)Currency effects are calculated by translating last year's amounts at this year's foreign exchange rates. For further discussion on net sales by reporting segment, please refer to the segment analysis of net sales and operating income on the following pages. The following table sets forth, for the periods indicated, net sales by geographic location: Years Ended December 31, 2020 % of Total 2019 % of Total Domestic$ 965,986 33 %$ 836,768 29 % Europe 1,604,056 55 % 1,638,469 57 % Other Foreign 359,298 12 % 384,495 14 %
COST OF SALES (EXCLUSIVE OF DEPRECIATION AND AMORTIZATION SHOWN BELOW)
Our cost of sales ("COS") as a percent of net sales decreased to 62.9% in 2020
compared to 63.6% in 2019. Our COS percentage was positively impacted by our mix
of business as we reported sales growth in our higher margin Pharma segment and
from cost containment efforts made to mitigate the impact of the COVID-19
pandemic. However, we did experience some additional costs in 2020 due to
under-absorbed fixed overhead coming from lower volumes in our dedicated beauty
facilities and also from special bonus payments to certain employees who worked
to maintain supply to our customers and keep our facilities running, both of
which increased our COS percentage during the current year.
SELLING, RESEARCH & DEVELOPMENT AND ADMINISTRATIVE
Our Selling, Research & Development and Administrative expenses ("SG&A")
increased approximately 10% or $45.6 million to $500.2 million in 2020 compared
to $454.6 million in 2019. Excluding changes in foreign currency rates, SG&A
increased by approximately $46.3 million compared to the prior year. The
reported increase is mainly due to $20.8 million of incremental operational
costs during 2020 related to our acquired companies. We also recognized $9.4
million of retention and earn-out compensation for acquired company key
employees as part of the Fusion and Noble acquisitions which was partially
offset by lower travel costs due to the COVID-19 pandemic. SG&A as a percentage
of net sales increased to 17.1% compared to 15.9% in the prior year due to the
cost increases mentioned above.
DEPRECIATION AND AMORTIZATION
Reported depreciation and amortization expense increased approximately 13% or
$25.7 million to $220.3 million in 2020 compared to $194.6 million in 2019. The
increase was not impacted by changes in foreign currency rates. The majority of
this increase is due to $14.7 million of incremental depreciation and
amortization costs related to our acquired companies. We also increased our
capital spending during the current and prior year to support our growth
strategy. Depreciation and amortization as a percentage of net sales increased
to 7.5% in 2020 compared to 6.8% in the prior year.
20/ATR 2020 Form 10-K
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RESTRUCTURING INITIATIVES
In late 2017, Aptar began a business transformation plan to drive profitable
sales growth, increase operational excellence, enhance our approach to
innovation and improve organizational effectiveness. The primary focus of the
plan is the Beauty + Home segment; however, certain global general and
administrative functions have also been addressed. Restructuring costs related
to this plan for the years ended December 31, 2020 and 2019 are as follows:
Year Ended December 31, 2020 2019
Restructuring Initiatives by Segment
Pharma $ 220 $ 632
Beauty + Home 24,464 17,682
Food + Beverage 1,903 391
Corporate & Other (95) 1,767
Total Restructuring Initiatives
We have successfully implemented the vast majority of our planned initiatives related to our transformation over the past three years, including successfully implementing new commercial strategies, reducing costs and adding capabilities inAsia and in fast growing application fields that we believe will position the segment for future growth and profitability. However, the 2020 COVID-19 global pandemic has caused several initiatives that were expected to be completed in 2020 to be delayed, including the planned closure of two facilities in theU.S. , and resulted in a significant decline in our beauty business. While our Beauty + Home segment continues to be profitable, the disruption caused by the pandemic, including higher operating costs, have more than offset any expected growth in earnings from our transformation. Though we believe the beauty market remains a long-term attractive growth market and we remain committed to completing our remaining transformation initiatives, we expect the return to growth to be gradual and non-linear as this market is highly correlated to the return to post-pandemic normal consumer behavior, including travel, which has proven to be sporadic and uncertain. We expect total implementation costs of approximately$125 million for these initiatives. The cumulative expense incurred to date is$113 million . We have also made capital investments of approximately$50 million related to this plan, with no further significant capital investments expected. OPERATING INCOME Reported operating income decreased approximately$32.2 million or 9% to$339.5 million in 2020 compared to$371.7 million in 2019. Excluding changes in currency rates, operating income decreased by approximately$37.6 million in 2020 compared to 2019. The majority of this decrease occurred during the second quarter of 2020 due to the impact of lower sales and operational inefficiencies related to the COVID-19 pandemic. Operating income as a percentage of net sales decreased to 11.6% in 2020 compared to 13.0% for the prior year. NET OTHER EXPENSE Net other expense increased in 2020 to$38.3 million compared to$29.6 million in 2019. Interest expense, net of interest income, increased by approximately$1.0 million due to lower cash on hand after our acquisition of Fusion at the beginning of the second quarter of 2020. Miscellaneous expenses increased by approximately$3.2 million as a result of higher pension costs due to the decline in discount rates in 2020 compared to 2019, a$3.0 million other than temporary impairment on the Kali Care investment and higher costs to hedge certain Latin American currencies. These expenses were partially offset by a gain of approximately$3.1 million due to an observable price increase which determines the account value on our minority investment in PureCycle. PROVISION FOR INCOME TAXES The reported effective tax rate on income before income taxes for 2020 and 2019 was 28.9% and 29.2%, respectively. The tax rate for 2020 was lower compared to 2019 due primarily to our mix of earnings, with lower results in our high tax jurisdictions and improved results in our loss jurisdictions. This was offset by a$4.7 million charge taken in 2020 to adjust the income tax payable balances. AtDecember 31, 2020 , under currently enacted laws, we do not have a balance of foreign earnings that will be subject toU.S. taxation. We continually analyze our global working capital requirements and the potential tax liabilities that would be incurred if the non-U.S. subsidiaries made a distribution of their cash or distributable reserves. These liabilities would include local country withholding and income tax and potentialU.S. state taxation. During 2020, we removed our assertion that pre-2020 earnings inItaly ,Switzerland , and Columbia are indefinitely reinvested. We recorded a liability of$0.9 million to reflect the taxes that would be paid when these amounts are distributed. As ofDecember 31, 2020 , all other cash or distributable reserve amounts continue to be reinvested indefinitely and would become subject to these additional taxes if they were remitted as dividends. We estimate the additional tax that would be payable on these earnings to be in the range of$15 million to$25 million . NET INCOME ATTRIBUTABLE TO APTARGROUP, INC.
We reported net income of
21/ATR 2020 Form 10-K
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PHARMA SEGMENT
Year Ended December 31, 2020 2019 % Change 2020 vs. 2019
Net Sales $ 1,225,779 $ 1,091,051 12.3 %
Adjusted EBITDA (1) 428,469 387,483 10.6
Adjusted EBITDA margin (1) 35.0 % 35.5 %
(1)Adjusted EBITDA is calculated as earnings before net interest, taxes,
depreciation, amortization, unallocated corporate expenses, restructuring
initiatives, acquisition-related costs and other special items. Adjusted EBITDA
margins are calculated as Adjusted EBITDA divided by Reported Net Sales . See the
reconciliation under "Non-U.S. GAAP Measures."
Reported net sales increased approximately 12% in 2020 to $1.23 billion compared
to $1.09 billion in 2019. Changes in currencies positively affected net sales by
1% while our acquisitions of Noble, Nanopharm and Gateway positively impacted
sales by 2% in 2020. Therefore, core sales increased 9% in 2020 compared to the
prior year. Sales increased in all the segment's markets during 2020. Core sales
to the prescription drug market were up against difficult comparisons due to
strong sales growth in 2019, but still increased 2% mainly driven by strong
demand for our drug delivery systems sold for central nervous system and asthma
treatments. Prior year prescription drug sales benefited from the realization of
$1.8 million of revenue for achieving a development milestone related to a
customer project. Core sales to the consumer health care market increased 5% on
increased demand for our drug delivery systems used on nasal decongestant, cough
and cold and eye care treatments. Core sales of our products to the injectables
markets grew 22% on price increases and higher COVID-19 related demand for
primary components used with injected medicines such as existing seasonal flu
vaccines and other injected medications related to higher levels of
hospitalization. Active packaging core sales increased 28% as a result of strong
growth in our Probiotics and ActivFilm products along with $12.0 million of
non-recurring tooling sale activities.
Year Ended December 31, 2020 Prescription Drug Consumer Health Injectables Active Packaging Total
Care
Core Sales Growth 2 % 5 % 22 % 28 % 9 %
Acquisitions - % - % 12 % - % 2 %
Currency Effects (1) 1 % 2 % 2 % 1 % 1 %
Total Reported Net Sales Growth 3 % 7 % 36 % 29 % 12 %
(1)Currency effects are calculated by translating last year's amounts at this
year's foreign exchange rates.
Adjusted EBITDA for 2020 increased to $428.5 million compared to $387.5 million
in 2019. Strong product sales growth across all the segment's markets, along
with incremental profit related to our acquisitions was able to compensate for
$3.9 million of additional stock-based compensation expense, a $3.0 million
other than temporary impairment on the Kali Care investment and $1.0 million of
retention and earn-out compensation for the Noble acquisition. While the Pharma
segment did not experience a significant sales impact from COVID-19, our margins
were negatively impacted by an unfavorable mix of sales within our portfolio of
products . We also made special bonus payments to certain employees who worked
to maintain supply to our customers and keep our facilities running during the
pandemic.
BEAUTY + HOME SEGMENT
Year Ended December 31, 2020 2019 % Change 2020 vs. 2019
Net Sales $ 1,298,151 $ 1,352,714 (4.0) %
Adjusted EBITDA (1) 129,299 181,150 (28.6)
Adjusted EBITDA margin (1) 10.0 % 13.4 %
(1)Adjusted EBITDA is calculated as earnings before net interest, taxes,
depreciation, amortization, unallocated corporate expenses, restructuring
initiatives, acquisition-related costs, and other special items. Adjusted EBITDA
margins are calculated as Adjusted EBITDA divided by Reported Net Sales . See the
reconciliation under "Non-U.S. GAAP Measures".
22/ATR 2020 Form 10-K
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Reported net sales decreased approximately 4% in 2020 to $1.30 billion compared
to $1.35 billion in 2019. Changes in currency rates negatively impacted net
sales by 1% while our acquisition of Fusion positively impacted sales by 4% in
2020. Therefore, core sales decreased 7% in 2020 compared to the prior year. The
COVID-19 pandemic negatively impacted core sales to the beauty market during
2020 due to a significant reduction in retail sales and in duty free sales due
to domestic and international travel reductions. Core sales of our products to
the beauty market decreased 20% as we experienced a significant reduction in
orders from customers providing both fragrance and skin care products, mainly in
the travel retail and standard retail settings. However, personal care core
sales increased 7% as increased sales of our hand sanitizer and liquid soap
dispensers more than compensated for softness in our deodorant, hair care and
sun care applications as many consumers continue to shelter in place. Core sales
to the home care markets increased 3% on strong demand for our household cleaner
and disinfectant products.
Year Ended December 31, 2020 Personal Care Beauty Home Care Total
Core Sales Growth 7 % (20) % 3 % (7) %
Acquisitions - % 8 % - % 4 %
Currency Effects (1) (2) % (1) % - % (1) %
Total Reported Net Sales Growth 5 % (13) % 3 % (4) %
(1)Currency effects are calculated by translating last year's amounts at this
year's foreign exchange rates.
Adjusted EBITDA for 2020 decreased to $129.3 million from $181.2 million
reported in 2019. As discussed above, the COVID-19 pandemic affected our
profitability due to overall lower sales volumes. Our profitability was further
impacted by lower overhead absorption due to fluctuations in demand primarily in
our facilities that manufacture beauty products and by special bonus payments to
certain employees who worked to maintain supply to our customers and keep our
facilities running. We also incurred $6.5 million of retention and earn-out
compensation for the Fusion acquisition.
FOOD + BEVERAGE SEGMENT
Year Ended December 31, 2020 2019 % Change 2020 vs. 2019
Net Sales $ 405,410 $ 415,967 (2.5) %
Adjusted EBITDA (1) 71,995 68,108 5.7Adjusted EBITDA margin (1) 17.8 % 16.4 %
(1)Adjusted EBITDA is calculated as earnings before net interest, taxes, depreciation, amortization, unallocated corporate expenses, restructuring initiatives, acquisition-related costs 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". Reported net sales decreased by approximately 3% in 2020 to$405.4 million compared to$416.0 million in 2019. Changes in currency rates negatively impacted net sales by 2%. Therefore, core sales decreased 1% in 2020 compared to the prior year. The pass-through of lower resin costs and lower tooling sales negatively impacted 2020 sales by$13.7 million and$4.2 million , respectively. The changes in core sales by market were impacted by the COVID-19 pandemic in different ways. Core sales to the food market increased 7% due to the increased demand across several applications for pantry staples as consumers continued to cook at home during the pandemic. However, core sales to the beverage market decreased 20% as sales of our products used on premium single-serve bottled water and on-the-go functional drink products continue to be negatively impacted as consumers demand less on-the-go beverages during the COVID-19 pandemic. Year Ended December 31, 2020 Food Beverage Total Core Sales Growth 7 % (20) % (1) % Acquisitions - % - % - % Currency Effects (1) (1) % (2) % (2) %
Total Reported Net Sales Growth 6 % (22) % (3) %
(1)Currency effects are calculated by translating last year's amounts at this year's foreign exchange rates. Adjusted EBITDA increased to$72.0 million in 2020 compared to$68.1 million in 2019. Higher product sales to the food markets discussed above, along with the benefits we received from our cost containment activities and other operational improvements realized during 2020 more than compensated for lower tooling sales and other negative COVID-19 impacts, mainly on our on-the-go beverage market applications. 23/ATR 2020 Form 10-K
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CORPORATE & OTHER
In addition to our three reporting segments, Aptar assigns certain costs to
"Corporate & Other," which is presented separately in Note 18 of the Notes to
the Consolidated Financial Statements. For Corporate & Other, Adjusted EBITDA
(which excludes net interest, taxes, depreciation, amortization, restructuring
initiatives, acquisition-related costs 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 2020 decreased to $43.4 million compared to $44.4 million in 2019.
We recognized slightly higher operating costs during 2020 as we were able to
mitigate higher variable compensation and other personnel costs with cost
containment activities such as reduced travel spending. However, this increase
was more than offset by a gain of approximately $3.1 million due to an
observable price increase on our investment in PureCycle.
NON-U.S. GAAP MEASURES
In addition to the information presented herein that conforms to U.S. GAAP, we
also present financial information that does not conform to U.S. GAAP, which are
referred to as non-U.S. GAAP financial measures. Management may assess our
financial results both on a U.S. GAAP basis and on a non-U.S. GAAP basis. We
believe it is useful to present these non-U.S. GAAP financial measures because
they allow for a better period-over-period comparison of operating results by
removing the impact of items that, in management's view, do not reflect Aptar's
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 audited 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 MD&A, 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 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, and purchase accounting
adjustments related to acquisitions and investments. Our Operations Outlook is
also provided on a non-U.S. GAAP basis because certain reconciling items are
dependent on future events that either cannot be controlled, such as tax and
exchange rates, or reliably predicted because they are not part of our routine
activities, such as restructuring initiatives and acquisition-related costs.
We provide a reconciliation of Net Debt to Net Capital as a non-U.S. GAAP
measure. Net Debt is calculated as interest bearing debt less cash, cash
equivalents and short-term investments while Net Capital is calculated as
stockholder's 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. 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.
24/ATR 2020 Form 10-K
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Year Ended
Corporate &
Consolidated Pharma Beauty + Home Food + Beverage Other Net Interest
Net Sales $ 2,929,340 $ 1,225,779 $ 1,298,151 $ 405,410 $ - $ -
Reported net income $ 214,090
Reported income taxes 87,065
Reported income before
income taxes 301,155 351,411 3,832 32,324 (54,126) (32,286)
Adjustments:
Restructuring initiatives 26,492 220 24,464 1,903 (95) Transaction costs related to acquisitions 4,812 210 4,602 Purchase accounting adjustments related to acquisitions and investments 4,642 1,421 3,221 Adjusted earnings before income taxes 337,101 353,262 36,119 34,227 (54,221) (32,286) Interest expense 33,244 33,244 Interest income (958) (958) Adjusted earnings before net interest and taxes (Adjusted EBIT) 369,387 353,262 36,119 34,227 (54,221) - Depreciation and amortization 220,300 75,874 95,880 37,768 10,778 - Purchase accounting adjustments included in Depreciation and amortization above (3,367) (667)
(2,700)
Adjusted earnings before net interest, taxes, depreciation and amortization (Adjusted EBITDA)$ 586,320 $ 428,469 $
129,299
Adjusted EBITDA margins
(Adjusted EBITDA / Reported
Net Sales) 20.0 % 35.0 % 10.0 % 17.8 %
25/ATR 2020 Form 10-K
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Year Ended
Corporate &
Consolidated Pharma Beauty + Home Food + Beverage Other Net Interest
Net Sales $ 2,859,732 $ 1,091,051 $ 1,352,714 $ 415,967 $ - $ -
Reported net income $ 242,227
Reported income taxes 99,842
Reported income before
income taxes 342,069 317,897 80,281 31,835 (56,629) (31,315)
Adjustments:
Restructuring initiatives 20,472 632 17,682 391 1,767 Transaction costs related to acquisitions 3,927 3,364 409 154 Purchase accounting adjustments related to acquisitions and investments 1,202 1,202 Adjusted earnings before income taxes 367,670 323,095 98,372 32,380 (54,862) (31,315) Interest expense 35,489 35,489 Interest income (4,174) (4,174) Adjusted earnings before net interest and taxes (Adjusted EBIT) 398,985 323,095 98,372 32,380 (54,862) - Depreciation and amortization 194,552 65,590 82,778 35,728 10,456 - Purchase accounting adjustments included in Depreciation and amortization above (1,202) (1,202) Adjusted earnings before net interest, taxes, depreciation and amortization (Adjusted EBITDA)$ 592,335 $ 387,483 $
181,150
Adjusted EBITDA margins (Adjusted EBITDA / Reported Net Sales) 20.7 % 35.5 % 13.4 % 16.4 % Net Debt to Net Capital Reconciliation
Notes payable, revolving credit facility and overdrafts $
52,200 $ 44,259 Current maturities of long-term obligations, net of unamortized debt issuance costs
65,666 65,988
Long-Term Obligations, net of unamortized debt issuance costs 1,054,998 1,085,453
Total Debt $ 1,172,864 $ 1,195,700
Less:
Cash and equivalents $ 300,137 $ 241,970
Short-term investments 243 -
Net Debt $ 872,484 $ 953,730
Total Stockholders' Equity $ 1,850,785 $ 1,572,252
Net Debt 872,484 953,730
Net Capital $ 2,723,269 $ 2,525,982
Net Debt to Net Capital 32.0 % 37.8 %
26/ATR 2020 Form 10-K
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Free Cash Flow Reconciliation
Net Cash Provided by Operations $ 570,153 $ 514,457
Less:
Capital Expenditures 245,954 242,276
Free Cash Flow $ 324,199 $ 272,181
LIQUIDITY AND CAPITAL RESOURCES
Given the diversification of our segments, the low level of leverage relative to
others in our industry, and our ability to generate strong levels of cash flow
from operations, we believe we are in a strong financial position and have the
financial resources to meet our business requirements in the foreseeable future.
We have historically used cash flow from operations, our revolving credit
facilities, proceeds from stock options and debt, as needed, as our primary
sources of liquidity. Our primary uses of liquidity are to invest in equipment
and facilities that are necessary to support our growth and to make acquisitions
that will contribute to the achievement of our strategic objectives. Amid the
COVID-19 pandemic, we have been focused on preserving our liquidity and
therefore temporarily suspended our share repurchase plan and discretionary
contributions to our defined benefit plans in 2020. While we will continue to
assess the impact the pandemic is having on our business throughout 2021, we are
removing the aforementioned suspension in order to preserve our flexibility to
make repurchases from time to time depending on market conditions and provide
discretionary contributions to our defined benefit plans. We intend to continue
to pay quarterly dividends to stockholders, invest in our business and make
acquisitions as we consider 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 adversely impact our cash flows
from operations, we would have the ability to restrict and significantly reduce
capital expenditure levels as well as evaluate our acquisition strategy. A
prolonged and significant reduction in capital expenditure levels could increase
future repairs and maintenance costs, negatively impact our future growth
opportunities, as well as have a negative impact on operating margins if we were
unable to invest in new innovative products. Refer to Item 7 - Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources in Part II of our Annual Report on Form 10-K for
the fiscal year ended December 31, 2019 for additional information regarding
Liquidity and Capital Resources for the year ended December 31, 2019 as compared
to the year ended December 31, 2018 .
Cash and equivalents increased to $300.1 million at December 31, 2020 from
$242.0 million at December 31, 2019 . Total short and long-term interest bearing
debt of $1.17 billion at December 31, 2020 decreased from the $1.20 billion at
December 31, 2019 resulting from repayments made during the year on our group
credit facilities and long-term debt obligations. The ratio of our Net Debt
(interest bearing debt less cash and cash equivalents) to Net Capital
(stockholders' equity plus Net Debt) decreased to 32.0% at December 31, 2020
compared to 37.8% at December 31, 2019 . See the reconciliation under "Non-U.S.
GAAP Measures" starting on page 24.
In 2020, our operations provided approximately $570.2 million in cash flow
compared to $514.5 million in 2019. Cash flow from operations was primarily
derived from earnings before depreciation and amortization. The increase in 2020
cash flow from operations compared to 2019 is primarily attributable to better
working capital management which offset lower net income.
We used $452.0 million in cash for investing activities during 2020 compared to
$336.3 million during 2019. The higher cash utilization in 2020 compared to 2019
is mainly due to increased cash outflows related to acquisitions. During 2020,
$162.7 million of cash was utilized to fund the Fusion acquisition. We invested
$32.0 million in our 49% equity interest of BTY and $5.0 million in our 30%
equity interest of Sonmol, which are accounted for as equity method investments
and invested an additional $1.4 million in our Loop and PureCycle preferred
equity investments. Additionally, we paid $1.5 million of additional working
capital and escrow settlement related to our Noble Acquisition. During 2019,
approximately $106.3 million of cash was utilized to fund our Gateway , Nanopharm
and Noble Acquisitions; we also released $4.0 million relating to the final
escrow settlement on our acquisition of CSP Technologies and invested $3.5
million in Loop and PureCycle. We also received $16.5 million from the sale of
our investment in Propeller Health in 2019. Our investment in capital projects
increased $3.7 million during 2020 as compared to 2019. Our cash utilization in
2020 is mainly due to acquisitions and capital investments to support our growth
strategy.
Financing activities utilized $73.7 million in cash during 2020, compared to
$197.1 million during 2019. In 2020, we used cash on hand to pay $92.7 million
of dividends and repaid $64.7 million of long-term debt and $14.0 million of net
notes payable, while in 2019 we used cash on hand to repay net short term
revolving debt of $52.1 million , repay $67.3 million of long-term debt and pay
$90.2 million of dividends. Additionally, contributing to our lower utilization
of financing activities in 2020 compared to 2019 was the repurchase of $86.5
million of common stock that was placed into treasury during 2019 while no
treasury shares were repurchased during 2020. Finally, we received net proceeds
from stock option exercises of $68.6 million and net proceeds from our revolving
credit facility of $27.0 million in 2020 compared to net proceeds from stock
option exercises of $90.8 million in 2019.
27/ATR 2020 Form 10-K
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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. We utilized $52 million under our U.S. facility and no balance was
utilized under our euro-based revolving credit facility as of December 31, 2020 .
We utilized $25 million under our U.S. facility and no balance was utilized
under our euro-based revolving credit facility as of December 31, 2019 . Credit
facility balances are included in notes payable, revolving credit facility and
overdrafts on the Consolidated Balance Sheets.
Our revolving credit facility and certain long-term obligations require us to
satisfy certain financial and other covenants including:
Requirement Level at December 31, 2020
Consolidated Leverage Ratio (1) Maximum of 3.50 to 1.00 1.63 to 1.00
Consolidated Interest Coverage Ratio (1) Minimum of 3.00 to 1.00
16.86 to 1.00
(1)Definitions of ratios are included as part of the revolving credit facility
agreement.
Based upon the above consolidated leverage ratio covenant, we would have the
ability to borrow approximately an additional $1.1 billion before the 3.50 to
1.00 maximum ratio requirement would be exceeded.
In addition, in October 2020 , we entered into an unsecured money market
borrowing arrangement to provide short term financing of up to $30 million that
is available in the U.S. No balance was utilized under this arrangement as of
December 31, 2020 .
Our foreign operations have historically met cash requirements with the use of
internally generated cash or uncommitted short-term borrowings. We also have
committed financing arrangements in both the U.S. and the UK as detailed above.
We manage our global cash requirements considering (i) available funds among the
many subsidiaries through which we conduct business, (ii) the geographic
location of our liquidity needs, and (iii) the cost to access international cash
balances.
We facilitate a supply chain finance program ("SCF") across Europe and the U.S.
that is administered by a third-party platform. Eligible suppliers can elect to
receive early payment of invoices, less an interest deduction, and negotiate
their receivable sales arrangements through the third-party platform on behalf
of the respective SCF bank. We are not a party to those agreements, and the
terms of our payment obligations are not impacted by a supplier's participation
in the SCF. Accordingly, we have concluded that this program continues to be a
trade payable program and is not indicative of a borrowing arrangement.
All outstanding amounts related to suppliers participating in the SCF are
recorded within Accounts payable, accrued and other liabilities in our
Consolidated Balance Sheets, and associated payments are included in operating
activities within our Consolidated Statements of Cash Flows. As of December 31,
2020 , and 2019, the amounts due to suppliers participating in the SCF and
included in Accounts payable, accrued and other liabilities were approximately
$23 million and $17 million , respectively.
Collection and payment periods tend to be longer for our operations located
outside the United States due to local business practices. We have also seen an
increasing trend in pressure from certain customers to lengthen their payment
terms. As the majority of our products are made to order, we have not needed to
keep significant amounts of finished goods inventory to meet customer
requirements. However, some of our contracts specify an amount of finished goods
safety stock we are required to maintain.
To the extent our financial position allows and there is a clear financial
benefit, we from time-to-time benefit from early payment discounts with some
suppliers. We are also lengthening the payment terms with our suppliers to be in
line with customer trends. While we have offered third party alternatives for
our suppliers to receive payments sooner, we generally do not utilize these
offerings from our customers as the economic conditions currently are not
beneficial for us.
OFF-BALANCE SHEET ARRANGEMENTS
We lease certain warehouse, plant and office facilities as well as certain
equipment under noncancelable operating leases. Most of the operating leases
contain renewal options and certain equipment leases include options to purchase
during or at the end of the lease term. As a result of the adoption of ASU
2016-02 and subsequent amendments, which requires organizations to recognize
leases on the balance sheet, we do not have significant off-balance sheet
arrangements. Please refer to Note 8 - Lease Commitments of the Notes to
Consolidated Financial Statements.
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OVERVIEW OF CONTRACTUAL OBLIGATIONS
Below is a table of our outstanding contractual obligations and future payments
as of December 31, 2020 :
Payment Due by Period Total 2021 2022-2023 2024-2025 2026 and After
Long-term debt obligations (1)
30,025 4,258 5,521 4,005 16,241
Operating leases (1) 71,016 18,804 25,568 12,261 14,383
Notes payable, revolving credit
facility and overdrafts (2) 52,200 52,200 - - -
Purchase obligations (3) 204,987 24,314 180,673 -
Interest obligations (4) 120,711 32,798 55,658 28,242 4,013
Total Contractual Obligations
$ 652,758 $ 564,974 $ 159,727 (1)The future payments listed above for long-term debt repayments and lease obligations reflect only principal payments. (2)Notes payable mainly includes foreign short-term borrowings. The future payments listed above assume that no additional amounts will be drawn under the credit facility. (3)Purchase obligations are agreements to purchase goods or services that are enforceable and legally binding on us that specify all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum, or variable price provisions; and the approximate timing of the transactions. (4)Approximately 10.3% of our total interest bearing long-term debt has variable interest rates. Using our long-term variable rate debt outstanding as ofDecember 31, 2020 of approximately$112.0 million at an average rate of approximately 1.72%, we included approximately$1.9 million and$1.0 million of variable interest rate obligations in 2021 and 2022, respectively, reflecting timing of anticipated debt repayments. Interest rate obligations also include anticipated interest on the finance and operating lease liabilities. We make contributions to our domestic pension plans but currently we are not required to make a minimum pension contribution to those plans. We also contribute to our foreign pension plans but amounts are expected to be discretionary in 2021 and future years. Therefore, amounts related to these plans are not included in the preceding table. We do not record a current portion of the liability for uncertain tax positions. Aside from deferred income taxes, we have approximately$214.5 million of other deferred long-term liabilities on the balance sheet, which consist primarily of retirement plan obligations. We are not able to reasonably estimate the timing of the long-term payments or the amount by which the liability will increase or decrease over time. Therefore, the long-term portion of the liability is excluded from the preceding table. RECENTLY ISSUED ACCOUNTING STANDARDS We have reviewed the recently issued accounting standards updates to FASB's Accounting Standards Codification that have future effective dates. Standards which are effective for 2020 are discussed in Note 1 - Summary of Significant Accounting Policies of the Notes to Consolidated Financial Statements. InMarch 2020 , the FASB issued ASU 2020-4, which provides optional expedients and exceptions for applyingU.S. GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments to this update apply only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. The new standard is effective upon issuance and can be adopted any time prior toDecember 31, 2022 . We do not anticipate that this new guidance will have a significant impact on our consolidated financial statements. Other accounting standards that have been issued by the FASB or other standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on our consolidated financial statements upon adoption. CRITICAL ACCOUNTING ESTIMATES The preparation of the financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We continually evaluate our estimates, including those related to bad debts, inventories, intangible assets, income taxes, pensions and contingencies. We base our estimates on historical experience and on a variety of other assumptions believed to be reasonable in order to make judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions. We believe the following critical accounting policies affect our more significant judgments and estimates used in preparation of our Consolidated Financial Statements. Management has discussed the development and selection of these critical accounting estimates with the audit committee of our Board of Directors and the audit committee has reviewed our disclosure relating to it in this MD&A. 29/ATR 2020 Form 10-K
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IMPAIRMENT OF GOODWILL
In accordance with current accounting standards, goodwill has an indefinite life
and is not amortized. We evaluate our goodwill for impairment at the reporting
unit level on an annual basis, or whenever indicators of impairment exist. We
have determined that our Beauty + Home and Food + Beverage business segments
represent reporting units. In addition to the Pharma business reporting unit,
the injectables and active packaging divisions of the Pharma segment qualify as
separate reporting units for goodwill impairment testing apart from the
remaining Pharma business. As of December 31, 2020 , we have $898.5 million of
goodwill, which is allocated as follows:
Reporting Unit Balance at December 31, 2020
Pharma $ 124,211
Injectables 143,561
Active Packaging 168,959
Beauty + Home 333,111
Food + Beverage 128,679
Total $ 898,521
We believe that the accounting estimates related to determining the fair value
of our reporting units is a critical accounting estimate because: (1) it is
highly susceptible to change from period to period because it requires
management to make assumptions about the future cash flows for each reporting
unit over several years, and (2) the impact that recognizing an impairment would
have on the assets reported on our balance sheet as well as our results of
operations could be material. Management's determination of the fair value of
our reporting units, based on future cash flows for the reporting units,
requires significant judgment and the use of estimates and assumptions related
to projected revenue growth rates, the terminal growth factor, as well as the
discount rate. Actual cash flows in the future may differ significantly from
those forecasted today. The estimates and assumptions for future cash flows and
their impact on the impairment testing of goodwill is a critical accounting
estimate.
For our goodwill impairment assessment, we first consider qualitative factors to
determine whether the existence of events or circumstances leads to a
determination that it is more likely than not (greater than 50 percent chance)
that the fair value of a reporting unit is less than its carrying amount (the
"step zero" approach). Such qualitative factors may include the following:
macroeconomic conditions; industry and market considerations; cost factors;
overall financial performance, and other relevant entity-specific events. In the
absence of sufficient qualitative factors, if it is determined that the fair
value of a reporting unit is below its carrying amount, where necessary,
goodwill will be impaired at that time.
The Company has historically evaluated its goodwill for impairment annually as
of December 31 or more frequently if impairment indicators arose in accordance
with Accounting Standards Codification ("ASC") Topic 350, "Intangibles -
Goodwill and Other." In the fourth quarter of 2019, the Company changed the date
of its annual assessment of goodwill to October 1 for all reporting units. The
change in testing date for goodwill is a change in accounting principle, which
management believes is preferable as the new date of the assessment better
aligns with the Company's budgeting process and will create a more efficient and
timely process surrounding the impairment tests. The change in the assessment
date does not delay, accelerate or avoid a potential impairment charge. The
Company has determined that it is impracticable to objectively determine
projected cash flows and related valuation estimates that would have been used
as of each October 1 of prior reporting periods without the use of hindsight. As
such, the Company prospectively applied the change in annual goodwill impairment
testing date from October 1, 2019 . No impairment was recognized during the years
ended December 31, 2019 or 2018.
Based on our qualitative assessment of macroeconomic, industry, and market
events and circumstances as well as the overall financial performance of the
reporting units, we determined it was more likely than not that the fair value
of these reporting units was greater than their carrying amounts. Due to the
passage of time since the last quantitative assessment, management determined it
appropriate to calculate the fair value of the reporting units and compare with
their associated carrying amounts as of October 1, 2020 . Based on this
quantitative analysis, we determined the fair value of our reporting units are
not less than their carrying value and therefore no impairment of goodwill was
recognized during the year ended December 31, 2020 .
We believe our assumptions used in discounting future cash flows are
appropriate. Any increase in estimated cash flows would have no impact on the
reported carrying amount of goodwill. However, if our current estimates of cash
flows for the Active Packaging reporting unit had been 59% lower, the fair value
of the reporting unit would have been lower than the carrying value thus
requiring us to record an impairment loss. The excess of approximately $169.0
million in carrying value of goodwill over the implied value would need to be
written down for impairment. A full $169.0 million impairment loss would have
reduced Total Assets as of December 31, 2020 by approximately 4.2% and would
have reduced Income before Income Taxes in 2020 by approximately 56.1%. If we
had been required to recognize an impairment loss of the full $169.0 million , it
would likely not have significantly affected our liquidity and capital resources
because, in spite of any such impairment loss, we would have been within the
terms of our debt covenants.
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INCOME TAXES
We recognize tax benefits from uncertain tax positions if it more likely than
not that the tax position will be sustained on examination by the taxing
authorities, based on the technical merits of the position. The tax benefits
recognized in the financial statements from such positions are measured based on
the largest benefit that has a greater-than-50% likelihood of being realized
upon ultimate settlement. The calculation of tax liabilities involves
significant judgement in estimating the impact of uncertainties in the
application of U.S. GAAP and complex tax laws. Resolution of these uncertainties
in a manner inconsistent with management's expectations could have a material
impact on the Company's financial condition and operating results.
At December 31, 2020 and 2019, we had $124.8 million and $116.0 million ,
respectively, of deferred tax assets net of valuation allowance on our balance
sheet, a significant portion of which is related to net operating losses and
other tax carryforwards. The ultimate realization of these deferred tax assets
is dependent upon the amount, source, and timing of future taxable income. In
cases where we believe it is more likely than not that we may not realize the
future potential tax benefits, we establish a valuation allowance against the
deferred tax assets.
ACQUISITIONS
We account for business combinations using the acquisition method, which
requires management to estimate the fair value of identifiable assets acquired
and liabilities assumed, and to properly allocate purchase price consideration
to the individual assets acquired and liabilities assumed. Goodwill is measured
as the excess amount of consideration transferred, compared to fair value of the
assets acquired and the liabilities assumed. The allocation of the purchase
price utilizes significant estimates and assumptions in determining the fair
values of identifiable assets acquired and liabilities assumed, especially with
respect to intangible assets. These estimates are based on all available
information and in some cases assumptions with respect to the timing and amount
of future revenues and expenses associated with an asset. The purchase price
allocation for business acquisitions contains uncertainties because it requires
management's judgment.
Management applied judgment in determining the fair value of the acquired assets
with respect to the acquisitions of Fusion, Noble, Nanopharm, and Gateway . The
judgments made in determining the estimated fair value assigned to the assets
acquired, as well as the estimated life of the assets, can materially impact net
income in periods subsequent to the acquisition through depreciation and
amortization, and in certain instances through impairment charges, if the asset
becomes impaired in the future. In particular, judgment was applied with respect
to determining the fair value of customer relationships intangible assets, which
involved the use of significant estimates and assumptions with respect to the
timing and amounts of cash flow projections, the revenue growth rates, the
customer attrition rates, the EBITDA margins and the discount rate.
VALUATION OF PENSION BENEFITS
The benefit obligations and net periodic pension cost associated with our
domestic and foreign noncontributory pension plans are determined using
actuarial assumptions. Such assumptions include discount rates to reflect the
time value of money, rate of employee compensation increases, demographic
assumptions to determine the probability and timing of benefit payments, and the
long-term rate of return on plan assets. The actuarial assumptions are based
upon management's best estimates, after consulting with outside investment
advisors and actuaries. Because assumptions and estimates are used, actual
results could differ from expected results.
The discount rate is utilized principally in calculating our pension
obligations, which are represented by the Accumulated Benefit Obligation (ABO)
and the Projected Benefit Obligation ("PBO"), and in calculating net periodic
benefit cost. In establishing the discount rate for our foreign plans, we review
a number of relevant interest rates including Aa corporate bond yields. In
establishing the discount rate for our domestic plans, we match the hypothetical
duration of our plans, using a weighted average duration that is based upon
projected cash payments, to a simulated bond portfolio (FTSE Pension Index
Curve). At December 31, 2020 , the discount rates for our domestic and foreign
plans were 2.40% and 0.54%, respectively.
We believe that the accounting estimates related to determining the valuation of
pension benefits are critical accounting estimates because: (1) changes in them
can materially affect net income and (2) we are required to establish the
discount rate and the expected return on fund assets, which are highly uncertain
and require judgment. The estimates for the valuation of pension benefits are
critical accounting estimates for all of our segments.
To the extent the discount rates increase (or decrease), our PBO and net
periodic benefit cost will decrease (or increase) accordingly. The estimated
effect of a 1% decrease in each discount rate would be a $84.7 million increase
in the PBO ($65.4 million for the domestic plans and $19.3 million for the
foreign plans) and a $8.4 million increase in net periodic benefit cost ($7.0
million for the domestic plans and $1.4 million for the foreign plans). To the
extent the PBO increases, the after-tax effect of such increase could reduce
Other Comprehensive Income and Stockholders' Equity. The estimated effect of a
1% increase in each discount rate would be a $65.3 million decrease in the PBO
($49.5 million for the domestic plans and $15.8 million for the foreign plans)
and a $7.1 million decrease in net periodic benefit cost ($5.8 million for the
domestic plans and $1.3 million for the foreign plans).
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The assumed expected long-term rate of return on assets is the average rate of
earnings expected on the funds invested to provide for the benefits included in
the PBO. Of domestic plan assets, approximately 48% was invested in equities,
28% was invested in fixed income securities, 10% was invested in hedge funds, 7%
was invested in infrastructure securities, 5% was invested in real estate
securities and 2% was invested in money market funds, at December 31, 2020 . Of
foreign plan assets, approximately 92% was invested in investment funds, 5% was
invested in equity securities, 2% was invested in corporate securities, 1% was
invested in fixed income securities and no amount was invested in money market
funds at December 31, 2020 .
The expected long-term rate of return assumptions are determined based on our
investment policy combined with expected risk premiums of equities and fixed
income securities over the underlying risk-free rate. This rate is utilized
principally in calculating the expected return on the plan assets component of
the net periodic benefit cost. To the extent the actual rate of return on assets
realized over the course of a year is greater or less than the assumed rate,
that year's net periodic benefit cost is not affected. Rather, this gain (or
loss) reduces (or increases) future net periodic benefit cost over a period of
approximately 15 to 20 years. To the extent the expected long-term rate of
return on assets increases (or decreases), our net periodic benefit cost will
decrease (or increase) accordingly. The estimated effect of a 1% decrease (or
increase) in each expected long-term rate of return on assets would be a $2.5
million increase (or decrease) in net periodic benefit cost.
The average rate of compensation increase is utilized principally in calculating
the PBO and the net periodic benefit cost. The estimated effect of a 0.5%
decrease in each rate of expected compensation increase would be a $8.4 million
decrease in the PBO ($2.1 million for the domestic plans and $6.3 million for
the foreign plans) and a $1.5 million decrease to the net periodic benefit cost.
The estimated effect of a 0.5% increase in each rate of expected compensation
increase would be a $8.9 million increase in the PBO ($2.1 million for the
domestic plans and $6.8 million for the foreign plans) and a $1.8 million
increase to the net periodic benefit cost.
Our primary pension related assumptions as of December 31, 2020 and 2019 were as
follows:
Actuarial Assumptions as of December 31, 2020 2019
Discount rate:
Domestic plans 2.40 % 3.20 %
Foreign plans 0.54 % 1.04 %
Expected longterm rate of return on plan assets: Domestic plans
7.00 % 7.00 %
Foreign plans 3.59 % 3.69 %
Rate of compensation increase:
Domestic plans 3.19 % 4.00 %
Foreign plans 3.05 % 3.05 %
In order to determine the 2021 net periodic benefit cost, we expect to use the
discount rates, expected long-term rates of return on plan assets and rates of
compensation increase assumptions as of December 31, 2020 . The estimated impact
of the changes to the assumptions as noted in the table above on our 2021 net
periodic benefit cost is expected to be an increase of approximately $5.6
million .
OPERATIONS OUTLOOK
Looking to the first quarter, we expect continued growth in our injectables
components, active material solutions and dispensing systems for sanitizers,
cleaners and food products. Our demand in the beauty fragrance and on-to-go
beverage markets is expected to remain under pressure in the near-term. We are
also experiencing a drawdown of inventories by certain prescription drug and
consumer health care customer in response to fewer cold and flu illnesses
resulting from pandemic-related confinements and social distancing and fewer
non-critical doctor visits. We are optimistic about the long-term opportunities
for growth, based on strong innovation and customer project pipelines across
each of our businesses and we continue to take significant steps to invest in
growth capacity.
Aptar expects earnings per share for the first quarter of 2021, excluding any
restructuring expenses and acquisition-related costs, to be in the range of
$0.86 to $0.94 and this guidance is based on an effective tax rate range of 28%
to 30%.
32/ATR 2020 Form 10-K
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FORWARD-LOOKING STATEMENTS
Certain statements in MD&A and other sections of this Form 10-K are
forward-looking and involve a number of risks and uncertainties, including
certain statements set forth in the Significant Developments, Restructuring
Initiatives, Liquidity and Capital Resources, Contingencies and Operations
Outlook sections of this Form 10-K. Words such as "expects," "anticipates,"
"believes," "estimates," "future", "potential", "are optimistic" and other
similar expressions or future or conditional verbs such as "will," "should,"
"would" and "could" are intended to identify such forward-looking statements.
Forward-looking statements are made pursuant to the safe harbor provisions of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934 and are based on our beliefs as well as assumptions made by
and information currently available to us. Accordingly, our actual results or
other events may differ materially from those expressed or implied in such
forward-looking statements due to known or unknown risks and uncertainties that
exist in our operations and business environment, including but not limited to:
•pandemics, including the impact of COVID-19 on our global supply chain and our
global customers and operations, which has elevated and may or will continue to
elevate many of the risks and uncertainties discussed below;
•our ability to preserve organizational culture and maintain employee
productivity in the work-from-home environment caused by the current pandemic;
•economic conditions worldwide, including potential deflationary or inflationary
conditions in regions we rely on for growth;
•political conditions worldwide, including the impact of the UK leaving the
European Union (Brexit) on our UK and European operations;
•significant fluctuations in foreign currency exchange rates or our effective
tax rate;
•the impact of tax reform legislation, changes in tax rates and other
tax-related events or transactions that could impact our effective tax rate;
•financial conditions of customers and suppliers;
•consolidations within our customer or supplier bases;
•changes in customer and/or consumer spending levels;
•loss of one or more key accounts;
•the availability of raw materials and components (particularly from sole
sourced suppliers) as well as the financial viability of these suppliers;
•fluctuations in the cost of materials, components and other input costs
(particularly resin, metal, anodization costs and transportation and energy
costs);
•our ability to successfully implement facility expansions and new facility
projects;
•our ability to offset inflationary impacts with cost containment, productivity
initiatives or price increases;
•changes in capital availability or cost, including interest rate fluctuations;
•volatility of global credit markets;
•our ability to identify potential new acquisitions and to successfully acquire
and integrate such operations or products, including the successful integration
of the businesses we have acquired, including contingent consideration
valuation;
•direct or indirect consequences of acts of war, terrorism or social unrest;
•cybersecurity threats that could impact our networks and reporting systems;
•the impact of natural disasters and other weather-related occurrences;
•fiscal and monetary policies and other regulations;
•changes or difficulties in complying with government regulation;
•changing regulations or market conditions regarding environmental
sustainability;
•work stoppages due to labor disputes;
•competition, including technological advances;
•our ability to protect and defend our intellectual property rights, as well as
litigation involving intellectual property rights;
•the outcome of any legal proceeding that has been or may be instituted against
us and others;
•our ability to meet future cash flow estimates to support our goodwill
impairment testing;
•the demand for existing and new products;
•the success of our customers' products, particularly in the pharmaceutical
industry;
•our ability to manage worldwide customer launches of complex technical
products, particularly in developing markets;
•difficulties in product development and uncertainties related to the timing or
outcome of product development;
•significant product liability claims;
•the execution of our business transformation plan; and
•other risks associated with our operations.
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 Part 1, Item 1A Risk Factors included in this
Form 10-K for additional risk factors affecting the Company.
33/ATR 2020 Form 10-K
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