atr-20201231
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United States Securities and Exchange Commission
Washington, D.C. 20549
FORM10-K
FOR THE FISCAL YEAR ENDEDDECEMBER 31, 2020
OR
FOR THE TRANSITION PERIOD FROM_____TO_____
COMMISSION FILE NUMBER1-11846
AptarGroup, Inc.
265 EXCHANGE DRIVE, SUITE 100,CRYSTAL LAKE,IL60014
815-477-0424
Securities Registered Pursuant to Section 12(b) of the Act:
Title of each class Trading symbol(s) Name of each exchange on which registered
Common Stock, $.01 par value ATR New York Stock Exchange
Securities Registered Pursuant to Section 12(g) of the Act:
NONE
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes☒
No ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes ☐
No☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes☒
No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes☒
No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management's assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes ☐
No ☒
The aggregate market value of the common stock held by non-affiliates as of June 30, 2020 was$7,230,606,494.
The number of shares outstanding of common stock, as of February 15, 2021, was65,163,222 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement to be delivered to stockholders in connection with the Annual Meeting of Stockholders to be held May 5, 2021 are incorporated by reference into Part III of this report.
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AptarGroup, Inc.
FORM 10-K
For the Year Ended December 31, 2020
INDEX
Page
Part I
Item 1. Business 1
Item 1A. Risk Factors 10
Item 1B. Unresolved Staff Comments 13
Item 2. Properties 14
Item 3. Legal Proceedings 14
Item 4. Mine Safety Disclosures 14
Part II
Item 6. Selected Financial Data 17
Item 7A. Quantitative and Qualitative Disclosure about Market Risk 34
Item 8. Financial Statements and Supplementary Data 35
Item 9A. Controls and Procedures 81
Item 9B. Other Information 81
Part III
Item 10. Directors, Executive Officers and Corporate Governance 81
Item 11. Executive Compensation 82
Item 14. Principal Accountant Fees and Services 82
Part IV
Item 15. Exhibits and Financial Statement Schedules 82
Index of Exhibits 83
Signatures 87
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PART I
ITEM 1. BUSINESS
WHO ARE WE AND WHAT DO WE DO
Aptar is a global leader in the design and manufacturing of a broad range of innovative drug delivery and consumer product dispensing, sealing and active packaging solutions and services for the prescription drug, consumer health care, injectables, active packaging, beauty, personal care, home care, food and beverage markets. Aptar uses 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. Aptar is headquartered in Crystal Lake, Illinois and has approximately 13,000 dedicated employees in 20 different countries. For more information, visit www.aptar.com.
Our business was started in the late 1940’s, manufacturing and selling aerosol valves in the United States, and has grown primarily through acquisitions and internal expansion. In this report, we may refer to AptarGroup, Inc. and its subsidiaries as “AptarGroup”, “Aptar” or the “Company”.
We have manufacturing facilities located throughout the world including North America, Europe, Asia and South America. We have approximately 6,000 customers with no single customer or group of affiliated customers accounting for greater than 5% of our 2020 Net Sales.
Consumers’ preference for convenience and product differentiation through drug delivery and packaging design and function are important to our customers and they have converted many of their packages from non-dispensing formats to dispensing systems that offer enhanced shelf appeal, convenience, cleanliness and accuracy of dosage.
We partner with our customers by providing innovative delivery systems and a suite of comprehensive services to help them succeed. While we offer a wide variety of services and products, our primary products are dispensing pumps, closures, aerosol valves, elastomeric primary packaging components and active packaging solutions.
Dispensing pumps are finger-actuated dispensing systems that dispense a spray or lotion from non-pressurized containers. The style of pump used depends largely on the nature of the product being dispensed, from small, fine mist pumps used with pharmaceutical products and perfume to lotion pumps for more viscous formulas.
Closures are primarily dispensing closures but to a lesser degree can include non-dispensing closures. Dispensing closures are plastic caps that allow a product to be dispensed without removing the cap.
Aerosol valves dispense product from pressurized containers. The majority of the aerosol valves that we sell are metered dose continuous spray valves, with the balance being bag-on valve and continuous spray valves.
We also manufacture and sell elastomeric primary packaging components. These components are used in the injectables market. Products include stoppers for infusion, antibiotic, lyophilization and diagnostic vials. Our elastomeric components also include pre-filled syringe components, such as plungers, needle shields, tip caps and cartridges, as well as dropper bulbs and syringe plungers.
We provide active packaging solutions via our material science technology which maintains the integrity of the container contents, extends shelf-life, controls moisture and reduces oxygenation. Our active packaging solutions remove gasses from the interior of the package environment and remove odor and other harmful contaminants.
During 2020 and 2019, we acquired several companies to strengthen and broaden our portfolio, including the following business combinations and asset purchases:
- October 2020 – Cohero Health, Inc. ("Cohero Health") asset purchase for cash paid at close of $2.4 million.
- April 2020 – Fusion Packaging, Inc. ("Fusion") for cash paid at close of approximately $163.8 million (net of $1.0 million of cash acquired) and contingent consideration liability due to sellers related to earn-out.
- October 2019 – Noble International Holdings, Inc., Genia Medical, Inc. and JBCB Holdings, LLC (collectively referred to as “Noble”) for cash paid at close of approximately $62.3 million (net of $1.6 million of cash acquired) and contingent consideration liability due to sellers related to earn-out.
- August 2019 – Bapco Closures Holdings Limited ("Bapco") for cash paid at close of $3.8 million (net of $2.9 million of cash acquired).
- June 2019 – Nanopharm Ltd. (“Nanopharm”) for cash paid at close of approximately $38.1 million (net of $1.8 million of cash acquired).
- May 2019 – Gateway Analytical LLC (“Gateway”) for cash paid at close of approximately $7.0 million and contingent consideration liability due to sellers related to earn-out.
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To further broaden our portfolio, during 2020 and 2019, we also invested in several equity investments, including:
- April 2020 – We acquired 30% of the equity interests in Healthcare, Inc., Shanghai Sonmol Internet Technology Co., Ltd. and its subsidiary, Shanghai Sonmol Medical Equipment Co., Ltd. (collectively referred to as "Sonmol") for $5 million.
- January 2020 – We acquired 49% of the equity interests in three related companies: Suzhou Hsing Kwang, Suqian Hsing Kwang and Suzhou BTY (collectively referred to as “BTY”) for $32 million.
- August 2019 – We made two preferred equity investments in sustainability companies Loop and PureCycle Technologies (“PureCycle”) for an aggregate amount of $3.5 million. In July 2020 and September 2020 we invested an additional $1.4 million in these two equity investments and also received $333 thousand of equity in PureCycle in exchange for a dedicated resource.
Refer to Note 19- Acquisitions and Note 20 - Investments in Equity Securities in Item 8 – Consolidated Financial Statements and Supplementary Data for further details on acquisition and related investment activities.
AVAILABLE INFORMATION
Our periodic and current reports, and any amendments to those reports, are available, free of charge, through a link on the Investors page of our website (www.aptar.com), as soon as reasonably practicable after the material is electronically filed with, or furnished to, the Securities and Exchange Commission (“SEC”). These filings are also available to the public over the Internet at the SEC’s website (www.sec.gov).
Also posted on our website are the charters for our Audit, Management Development and Compensation, Governance and Executive Committees, our Governance Principles, our Code of Conduct, our Director Independence Standards and our Conflict Minerals Statement. Within the time period required by the SEC and the New York Stock Exchange (“NYSE”), we will post on our website any amendment or waiver to the Code of Business Conduct & Ethics applicable to any executive officer or director. The information provided on our website is not part of this report and is therefore not incorporated herein by reference.
OUR STRATEGY
We seek to enhance our position as a leading global provider of innovative drug delivery and consumer product dispensing, sealing, active packaging solutions and services to deliver increased value to our customers and stockholders through strategic focus and execution in the following areas:
(i)Focus on Organic Growth: We are focused on accelerating our top line growth with added emphasis on high growth economies. Accordingly, we are creating empowered, regional, cross-functional profit and loss (“P&L”) teams who are fully accountable to drive profitable growth.
(ii)Focus on Talent and Leadership: Execution of our strategy requires a talented, motivated, diverse, global team. We have a focused talent acquisition and development strategy to ensure our teams have the right skills to execute our strategy.
(iii)Excellence in Core Business Functions: We have established three pillars of functional excellence to ensure we perform at best in class levels in the core functions of any manufacturing business, namely “innovate,” “produce” and “sell,” and that our business teams are supported in the areas of Innovation, Operations and Commercial Excellence.
(iv)Successful Transformation: To strengthen our performance and deepen our position as a true market shaper, we continually evaluate our business. In late 2017, we launched a comprehensive business transformation plan within our Beauty + Home segment and our key corporate support functions. While the global COVID-19 pandemic and other headwinds have negatively impacted volumes in our Beauty + Home segment and deferred some initiatives past our original 3 year timeline, we have continued focus on transforming our Beauty + Home segment by adding capabilities in Asia and capitalizing on fast growing application fields within the segment.
(v)Partnerships and Acquisitions: We will continue to focus on growing the Company through appropriate business acquisition opportunities as well as developing partnerships to expand the scope of our technologies, geographic presence and product offerings.
Facilitating the execution of our strategy are our core values, which dictate how we interact internally and externally with our employees, customers, suppliers and all stakeholders.
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DESCRIPTION OF OUR REPORTING SEGMENTS
INFORMATION ABOUT SEGMENTS
Our organizational structure consists of three market-focused business segments: Pharma, Beauty + Home and Food + Beverage. This is a strategic structure which allows us to be more closely aligned with our customers and the markets in which they operate. We primarily sell our products and services through our own sales force to pharmaceutical, health care, beauty, personal care, home care, food and beverage marketers. To a limited extent, we use independent representatives and distributors to increase our reach to smaller customers and export markets.
Operations that sell dispensing systems, drug delivery systems, sealing solutions and services to the prescription drug, consumer health care, injectables and active packaging markets form the Pharma segment. Operations that sell dispensing systems and sealing solutions primarily to the beauty, personal care and home care markets form the Beauty + Home segment. Operations that sell dispensing systems and sealing solutions to the food and beverage markets form the Food + Beverage segment. Each of these three business segments is described more fully below.
PHARMA
The Pharma segment is our largest segment in terms of profitability, accounting for 68% of our Adjusted EBITDA excluding non-allocated corporate costs, and is our second largest segment in terms of net sales and total assets, accounting for 42% and 39% of our Net Sales and Total Assets, respectively, in 2020. We believe we are a leading supplier of nasal drug delivery spray pumps and metered dose inhaler valves (“MDIs”) to the pharmaceutical and health care markets worldwide and we are an important supplier of elastomer for injectable primary packaging components worldwide. Characteristics of this market include (i) governmental regulation of our pharmaceutical customers, (ii) contaminant-controlled manufacturing environments and (iii) a significant amount of time and research from initially working with pharmaceutical companies at the molecular development stage of a medication through the eventual distribution to the market. We have clean-room manufacturing facilities in Argentina, China, France, Germany, India, Switzerland and the United States. We believe that providing value-added, convenient drug delivery and dispensing systems will continue to offer opportunities for our business. In addition, we believe there are opportunities for growth in the over-the-counter and generic pharmaceutical categories.
Prescription Drug.Sales to the prescription drug market accounted for approximately 46% of the segment’s total net sales in 2020. Pumps sold to the prescription drug market deliver medications nasally, orally or topically. Currently the majority of our pumps sold are for nasal allergy treatments. Sales of pumps to deliver prescription allergy medicine that is now available over-the-counter remains part of our prescription drug division. This could provide us with growth opportunities as the movement to over-the-counter availability allows consumers easier access to these types of treatments. Our nasal pumps and unit dose and bidose devices are also used to deliver pain management and central nervous system therapies.
MDIs are used for dispensing precise amounts of aerosolized medication. This technology allows medication to be broken up into very fine particles, which enables the drug to be delivered typically via the pulmonary route. Currently the majority of our MDIs sold are used for respiratory ailments such as asthma and COPD (chronic obstructive pulmonary disease).
We continue to develop new drug delivery and dispensing systems and accessories in this segment. For example, we provide single dose delivery devices suitable for central nervous system applications. While we expect that these types of new products will come to market in the future, it is difficult to estimate when, as the rigors of pharmaceutical regulations affect the timing of product introductions by our pharmaceutical customers that use our drug delivery and dispensing systems.
Consumer Health Care.Sales to the consumer health care market accounted for approximately 22% of the segment’s total net sales in 2020. Many applications for this market are similar to the prescription market; however, these applications are sold over-the-counter without a prescription. Typical consumer health care spray applications include nasal decongestants, nasal salines and cough and cold applications. Typical consumer health care valve applications include nasal saline using our bag-on valve technology. We have developed a multi dose ophthalmic dispensing device suitable for unpreserved formulations. This technology is successfully marketed in Europe, North America and Latin America and is under development for other markets both for over-the-counter and prescription applications. Other products sold to this market include airless pump systems for dermal drug delivery applications. We have recently seen a trend to more child resistant and senior-friendly packaging solutions and have developed products to meet these market needs.
Injectables.Sales to the injectables market accounted for approximately 20% of the segment’s total net sales in 2020. Injectables are elastomeric primary packaging components for injectable drug delivery. Injectable products offered include stoppers for vials and pre-filled syringe components, such as plungers, needle shields, tip caps and components for cartridges. Our recent investment in this business allows us to market coated stoppers which better protect the contents of the vial and the integrity of biologic formulations. Pharmaceutical applications for this market include vaccines, anti-thrombotic, small molecules and biologics.
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Active Packaging.Active packaging is a technology Aptar acquired in 2018. Sales of active packaging products accounted for approximately 12% of the segment’s total net sales in 2020. Through proprietary material science expertise, we deliver active packaging solutions such as desiccant material to enhance the shelf life and effectiveness of diagnostic and solid dose products. Additionally, the technology is used to absorb moisture and oxygen as well as emit properties such as chlorine dioxide.
BEAUTY + HOME
The Beauty + Home segment is our second largest segment in terms of profitability, accounting for 21% of our Adjusted EBITDA excluding non-allocated corporate costs, and is our largest segment in terms of net sales and total assets representing 44% and 40% of our Net Sales and Total Assets, respectively, in 2020. The Beauty + Home segment primarily sells pumps and decorative components to the beauty market and pumps, closures, aerosol valves, accessories and sealing solutions to the personal care and home care markets. We believe we are a leading supplier for the majority of the products we sell primarily to the beauty and personal care markets.
Beauty.Sales to the beauty market accounted for approximately 46% of the segment’s total net sales in 2020. The beauty market requires a broad range of spray and lotion pumps, closures, elastomeric flow-control components and sampling dispensing systems to meet functional as well as aesthetic requirements. A considerable amount of research and coordination with our customers is required to qualify a pump for use with their products. Within the market, we expect the use of pumps to continue to increase, particularly in the cosmetics and sampling sectors. In the cosmetic sector, packaging for certain products such as natural and organic cosmetics and anti-aging lotions continue to provide us with growth opportunities. We are a leading provider of packaging solutions for prestige and mass market fragrance products. Our cosmetic lotion pumps, airless dispensing systems, lotion sampling devices and decorative capabilities along with our focus on color cosmetics including lip stick and lip gloss products will also provide growth opportunities. We see significant opportunities for growth in the sale of our products for cosmetic skin care and color cosmetic applications in Asia.
Personal Care.Sales to the personal care market accounted for approximately 46% of the segment’s total net sales in 2020 and primarily included sales of lotion pumps, closures, fine mist spray pumps, continuous spray aerosol valves, and elastomeric flow-control components. Personal care lotion pump applications include hand sanitizers, soaps, cleaners, and skin moisturizers. Personal care closures applications include hand sanitizers, shampoos and conditioners. Typical spray pump applications include hair care, body care and sun care products. Personal care continuous spray aerosol valve applications include hair care products, deodorants, shaving creams and sun care products. Our research and development teams continue to design unique accessories that increase the value of our continuous spray aerosol valve offerings.
Home Care.Sales to the home care market accounted for approximately 8% of the segment’s total net sales in 2020 and primarily included sales of continuous or metered dose spray aerosol valves, closures and to a lesser degree spray and lotion pumps. Applications for continuous spray valves include disinfectants, spray paints, insecticides and automotive products. Metered dose valves are used for air fresheners. Closure applications include liquid detergents, automotive products and household cleansers. Spray and lotion pump applications primarily include household, insect repellent and industrial cleaners.
FOOD + BEVERAGE
The Food + Beverage segment is our smallest segment in terms of profitability, net sales and total assets, representing 11%, 14% and 14%, respectively, of our Adjusted EBITDA excluding non-allocated corporate costs, Net Sales and Total Assets in 2020. We primarily sell dispensing closures and, to a lesser degree, non-dispensing closures, elastomeric flow control components, spray pumps and aerosol valves.
Sales of dispensing closures have grown as consumers worldwide have demonstrated a preference for a package utilizing the convenience of a dispensing closure. At the same time, consumer marketers are trying to differentiate their products by incorporating performance enhancing features such as bonded aluminum liners to plastic, flow-control and no-drip dispensing, inverted packaging and directional flow to make packages simpler to use, cleaner and more appealing to consumers. We also have an increasing number of product solutions that address the increased use of flexible packaging formats.
Food.Sales to the food market accounted for approximately 75% of the segment’s total net sales in 2020 and primarily include sales of dispensing closures and elastomeric flow-control components. To a lesser degree we also sell non-dispensing closures, continuous spray aerosol valves and spray pumps to this market. Applications for dispensing closures include sauces, condiments, infant nutrition and other food products. Applications for continuous spray aerosol valves include cooking sprays. Spray pump applications primarily include butter sprays. We also leverage our material science technology to sell and further develop packaging solutions to the food service market to enhance the shelf life of those products.
Beverage.Sales to the beverage market accounted for approximately 25% of the segment’s total net sales in 2020 and primarily include sales of dispensing closures and elastomeric flow-control components. Sales of dispensing closures to the beverage market have increased significantly over the last several years as we continue to see an increase of interest from marketers using dispensing closures for their products. Examples of beverage products currently utilizing dispensing closures include bottled water, sport and energy drinks, juices and concentrated water flavorings.
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GENERAL BUSINESS INFORMATION
RESEARCH AND DEVELOPMENT
Our commitment to innovation, one of our competitive strengths, has resulted in an emphasis on research and development directed toward developing affordable, new, sustainable and innovative packaging, drug delivery solutions and connected devices and adapting existing products for new markets or customer requirements. In certain cases, our customers share in the research and development expenses of customer initiated projects. Occasionally, we acquire or license from third parties technologies or products that are in various stages of development.
PATENTS AND TRADEMARKS
We customarily seek patent and trademark protection for our products and brands. We own and currently have numerous applications pending for patents and trademarks in many regions of the world. In addition, certain of our products are produced under patent licenses granted by third parties. We believe that we possess certain technical capabilities and know-how that make our products difficult for a competitor to duplicate. While valuable to our overall product portfolio, sales of any one individually patented product are not considered material to any specific segment or to our consolidatedresults.
TECHNOLOGY
We have technical expertise regarding injection molding, robotics, clean-room facilities and high-speed assembly. We also have expertise regarding the formulation and finishing of elastomer and silicone components. In addition, we offer a variety of sterilization options for elastomeric components and active packaging technologybased on proprietary material science expertise. Pumps and aerosol valves require the assembly of several different plastic, metal and rubber components using high-speed equipment. When molding dispensing closures, or plastic components to be used in pump or aerosol valve products, we use advanced plastic injection molding technology, including large cavitation plastic injection molds. We are able to mold within tolerances as small as one one-thousandth of an inch and we assemble products in a high-speed, cost-effective manner. We also provide analytical and connected device expertise within our pharma service technology businesses.
MANUFACTURING AND SOURCING
The majority of our worldwide production is located outside of the United States. Our philosophy is to produce as much as possible in the region where it will be sold. In order to augment capacity and to maximize internal capacity utilization (particularly for plastic injection molding), we use subcontractors to supply certain plastic, metal and rubber components. Certain suppliers of these components have unique technical abilities that make us dependent on them, particularly for aerosol valve and pump production. The principal raw materials used in our production are plastic resins, silicone, rubber and certain metal products. We believe an adequate supply of such raw materials is available from existing and alternative sources. We attempt to offset cost increases through improving productivity and developing new, higher margin solutions and increasing selling prices, as allowed by market conditions or contractual commitments. We source certain materials, especially some resins and rubber components for our pharmaceutical segment, from a single source. Significant delays in receiving these components or discontinuance of an approved raw material would require us to seek alternative sources, which could result in higher costs as well as impact our ability to supply products in the short-term. While there have been some supply chain disruptions due to confinements through the pandemic, we have not been materially impacted by such disruptions.
CUSTOMERS
We have approximately 6,000 customers with no single customer or group of affiliated customers accounting for greater than 5% of 2020 Net Sales. From time to time our customer base experiences normal consolidation events and this trend is expected to continue. A concentration of customers presents opportunities for increasing sales due to the breadth of our product line, our international presence and our long-term relationships with certain customers. However, consolidation of our customers could lead to pricing pressures, concentration of credit risk and fewer opportunities to introduce new products to the market.
INTERNATIONAL BUSINESS
We are geographically diverse with manufacturing and sales operations in Asia, Europe, Latin America (including Mexico) and North America. Europe is our largest region in terms of sales, where sales (including exports) for the years ended December 31, 2020 and 2019 were approximately 55% and 57%, respectively, of our consolidated sales. Asia and Latin America when aggregated represented approximately 12% and 14% of our consolidated sales for the years ended December 31, 2020 and 2019, respectively. Export sales from the United States were $179.0 million and $170.0 million in 2020 and 2019, respectively. We are a net exporter of goods from Europe and a net importer of goods to the North American, Asian and Latin American regions.
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FOREIGN CURRENCY
Because of our international presence, movements in exchange rates have a significant impact on the translation of the financial statements of our foreign subsidiaries. Our primary foreign exchange exposure is to the euro, but we have foreign exchange exposure to the Chinese yuan, Brazilian real, Mexican peso, Swiss franc and other Asian, European and South American currencies. A strengthening U.S. dollar relative to foreign currencies has a dilutive translation effect on our financial statements. Conversely, a weakening U.S. dollar has an additive effect. We manage our exposures to foreign exchange principally with forward exchange contracts to economically hedge recorded transactions and firm purchase and sales commitments denominated in foreign currencies.
During the quarter ended June 30, 2018, we concluded that Argentina has become a highly inflationary economy primarily based on published estimates, which indicate that Argentina's three-year cumulative inflation rate has exceeded 100%. Beginning July 1, 2018, we applied highly inflationary accounting for our Argentinian subsidiary. We have changed the functional currency from the Argentinian peso to the U.S. dollar.
EMPLOYEE AND LABOR RELATIONS
Human Capital. Our key human capital management objectives are to attract, retain and develop the highest quality talent. To support these objectives, our human resources programs are designed to develop talent to prepare them for critical roles and leadership positions for the future; reward and support employees through competitive pay, benefit, and incentive programs; enhance our culture through efforts aimed at making the workplace more engaging and inclusive; acquire talent and facilitate internal talent mobility to create a high-performing, diverse workforce; and evolve and invest in technology, tools, and resources to enable employees at work.
As of December 31, 2020, AptarGroup has approximately 13,000 full-time employees. Of the full-time employees, approximately 7,900 are located in Europe, 2,600 are located in Asia and South America and the remaining 2,500 are located in North America. The majority of our European and Latin American employees are covered by collective bargaining arrangements made at either the local or national level in their respective countries and approximately 60 of the North American employees are covered by a collective bargaining agreement. The total labor force covered by a collective bargaining agreement represents 57% of the total employee population. Termination of employees at certain of our international operations could be costly due to local regulations regarding severance benefits. There were no material work stoppages in 2020 and management considers our employee relations to be satisfactory.
Employee Engagement. At AptarGroup, we conduct annual leadership for growth surveys. We have focused on organizational development based on our leadership principles, core values and strategic priorities. Our goal is to ensure that Aptar is well positioned for long-term growth and that we continue to be a high-performing, values-based, customer-focused company, with active commitments to innovation and sustainability.
Employee Development & Leadership Succession. Developing our employees to reach their full potential is an integral part of our Core Values. We have a strong foundation of learning and development systems and leadership programs at our Corporate University. Our leadership programs are targeted at all levels of the organization, from early career to senior leadership globally. Our program offerings also include many specialized programs such as change management, manufacturing and operational leadership, technical skills and others. Aptar also has developed and deployed an integrated talent management system that includes annual talent reviews, three tiered succession planning, and individual development planning. Promotions from within provide career growth opportunities for our employees.
Diversity & Inclusion. At AptarGroup, our goal is to promote a diverse and inclusive culture. Approximately 40% of the Board of Directors is comprised of women and 100% of Board Committee chairs are women. During 2020, we appointed a Diversity & Inclusion Global Leader and trained over 75% of senior leadership in Diversity & Inclusion (D&I) content. Women comprise 37% of the global employee population and 18% at senior leadership levels. Aptar launched a global Women's Employee Resource Group with a focus on increasing women in leadership. Aptar is included in the SPDR SSGA Gender Diversity Index ETF (SHE) which invests in companies that rank among the highest in gender diversity within senior leadership. Aptar is also a participant in the Catalyst CEO Champions for Change and the Gender and Diversity KPI Alliance.
Employee Well-being & Safety. Employee safety and well-being is a primary focus of Aptar and was of particular interest during fiscal year 2020 in light of the COVID-19 pandemic. In response to the 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. These measures include requiring remote working arrangements for employees where practicable and implementing new safety protocols. 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. Additionally, we expanded employee assistance and mindfulness programs globally to help employees and their families manage anxiety, stress, and overall well-being.
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COMPETITION
All of the markets in which we operate are highly competitive and we continue to experience price competition in all product lines and markets. Competitors include privately and publicly held entities that range from regional to international companies. We expect the market for our products to remain competitive, as consolidation among our competitors is increasing in the current economic climate. We believe our competitive advantages are consistent high levels of innovation, quality and service, geographic diversity, financial strength and stability and breadth of products and services. Our manufacturing strength lies in the ability to mold complex plastic components and formulate and finish elastomer and silicone components in a cost-effective manner and to assemble products at high speeds. Our business is somewhat capital intensive and it is becoming more important to our customers that we have global manufacturing capabilities. Both of these serve as barriers to entry for new competitors wanting to enter our business. Furthermore, within our Pharma business, increasing regulatory hurdles present a barrier for new competitors to enter the market.
While we have experienced some competition in Europe, Latin America and the United States from low cost Asian suppliers, particularly in the beauty and personal care market, this has not been significant. Although using low cost Asian suppliers may have a cost advantage, some customers prefer local suppliers citing better quality, better customer service and shorter lead times. We have also recently reduced our carbon footprint due to shorter supply chain networks being utilized, which we see as a competitive advantage.
ENVIRONMENT
Our manufacturing operations primarily involve plastic injection molding, automated assembly processes, elastomer and silicone formulation and finishing and, to a limited degree, metal anodization and vacuum metallization of plastic components. Historically, the environmental impact of these processes has been minimal, and we believe we meet current environmental standards in all material respects. To date, our manufacturing operations have not been significantly affected by environmental laws and regulations relating to the environment.
Recently, we formalized our science-based targets setting an emissions reduction goal consistent with requirements to keep global warming well-below 2° Celsius by year 2030. This science-based approach incorporates our own operations and operations within the value chain. In addition, we annually undergo data assurance as part of our sustainability reporting. This assurance process allows for data on consumption of electricity, fuel oil, and natural gas, and renewable energy purchases to be verified for accuracy and completeness by an external organization. Globally this process is certified to the ISO 14064 standard for energy and greenhouse gas emission reporting.
Aptar was recognized for its actions to cut emissions, mitigate climate risks and further the low-carbon economy, based on the data reported by the Company through global environmental non-profit CDP's 2020 climate change questionnaire. Of more than 5,800 companies that were scored through the platform, Aptar is among the 273 companies securing a place on its prestigious 'A List' for tackling climate change. Through significant demonstrable action on climate change, Aptar is leading on corporate environmental ambition, action, and transparency worldwide.
There continues to be increased interest and awareness from consumers, and from our customers, in environmentally sustainable products, especially throughthesourcing of sustainable materials. We are focused on reducing our environmental impacts through product life cycle assessments, sustainable material trials, operational eco-efficiency initiatives and renewable energy sourcing. We have teams dedicated to designing for sustainability by providing products that improve recyclability and use less material.Aptar has launched products and components in North America, Europe and Asia made withpost-consumer recycled resins (PCR) and continues to explore additional opportunities for alternative resins and recyclable products.
We are actively collaborating with our customers on reliable products by supporting our customers’ participation in the circular e-commerce platform called “Loop,” in addition to being an investor in Loop ourselves. We also invested in and partnered with PureCycle, to prepare for the introduction of Ultra-Pure Recycled Polypropylene (UPRP) into dispensing applications.
Connecting with other companies through organizations like Ellen MacArthur Foundation’s New Plastics Economy and the World Business Council for Sustainable Development (WBCSD) provides an invaluable opportunity to share best practices and work on larger projects with aligned objectives towards a more circular economy.
Future regulations on environmental matters regarding recycling or material inputs could impact our business.
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GOVERNMENT REGULATION
Certain of our products are directly or indirectly affected by government regulation.The European Union has adopted a circular economy package. The package maps out a series of actions planned over several years. Some actions have resulted in regulations aimed to reducemarine litter, increase plastic recycling rates, prohibit single-use plastic packaging and introduce new taxes in relation to the end-of-life management of packaging. In parts of the United States, regulations require food and beverage companies to tether plastic caps to ensure the caps stay with the package, thus improving the likelihood the caps will enter the recycling stream. The potential exists for these types of regulations to expand worldwide. We have established an innovation team that focuses on designing for and converting into more sustainable options like post-consumer recycled resin and Food and Drug Administration approved resin alternatives. We are designing for sustainability by providing products that improve recyclability and use less material, and we offer multiple tethered options. We are also partnering with global and regional thought leaders to drive a more circular economy.
The Kigali amendment to the Montreal Protocol plans to phase down hydrofluorocarbon (HFC) propellants from baseline to 15% in order to reduce greenhouse gas emission. This type of propellant is used for pressurized metered-dose inhalers (pMDI). The phase down plan has an exemption for pharmaceutical applications of pMDIs; however, customers are looking for alternative propellants to reduce greenhouse gas emissions. We are working with the suppliers of these alternative propellants and our customers to develop new solutions.
Future government regulations could include healthcare cost containment policies. For example, reviews by various governments to determine the number of drugs, or prices thereof, that will be paid by their insurance systems could affect future sales of our pharmaceutical customers’ products and thus adversely impact our sales to these customers. Such regulation could adversely affect prices of and demand for our pharmaceutical products. We believe that the focus on the cost effectiveness of the use of medications as compared to surgery and hospitalization provides us with an opportunity to expand sales to the pharmaceutical market.
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INFORMATION ABOUT OUR EXECUTIVE OFFICERS
Our executive officers as of February 19, 2021 are as follows:
Name Age Position with the Company
Stephan Tanda 55 President and Chief Executive Officer
Robert Kuhn 58 Executive Vice President and Chief Financial Officer
Marc Prieur 55 President, Aptar Beauty + Home
Hedi Tlili 46 President, Aptar Food + Beverage
Gael Touya 51 President, Aptar Pharma
Xiangwei Gong 51 President, Aptar Asia
Shiela Vinczeller 57 Chief Human Resources Officer
Kimberly Y. Chainey 45 Executive Vice President, General Counsel and Secretary
There were no arrangements or understandings between any of the executive officers and any other person(s) pursuant to which such officers were elected.
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ITEM 1A. RISK FACTORS
Set forth below and elsewhere in this report and in other documents we file with the Securities and Exchange Commission are risks and uncertainties that could cause our actual results or other events to materially differ from the results or events contemplated by the forward-looking statements contained in this report and in other documents we file with the Securities and Exchange Commission. Additional risks and uncertainties not presently known to us, or that we currently deem immaterial, may also impair our business operations. You should carefully consider the following factors in addition to other information contained in this Form 10-K before purchasing any shares of our common stock.
Risks Related to Our Operations and Industry
The COVID-19 pandemic continues to adversely affect our business. Additional factors could exacerbate such negative consequences and/or create materially adverse effects. The COVID-19 pandemic adversely affected our sales of products to our travel and retail beauty business and on-the-go beverage customers during the year ended December 31, 2020 and that adverse impact will continue into 2021 as the pandemic continues globally. Beginning in the first quarter of 2020, economic and health conditions in the United States and across most of the globe have changed rapidly. Customer demand across all segments, particularly our Beauty + Home and Food + Beverage segments, may decrease further from historical levels depending on the duration and severity of the COVID-19 pandemic and the extent of further resurgences, 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. Such events may result in business and manufacturing disruption, inventory shortages due to disruptions to our supply chain and distribution channels, delivery delays, increased risk associated with customer payments and reduced sales and operations, any of which could materially affect our stock price, business prospects, financial condition, results of operations and liquidity.
The ability of our employees to work may be significantly impacted by COVID-19. The majority of our office and management personnel are working remotely and the majority of our facilities remained operational during 2020 as each of our segments produce dispensing systems that have been determined to be essential products by various government agencies around the world. The health and safety of our workforce is of primary concern and we may need to enact further precautionary measures to help minimize the risk of our employees being exposed to the virus and overall organization fatigue. Further, our management team is focused on mitigating the adverse effects of the COVID-19 pandemic, which has required and will continue to require a large investment of time and resources across the entire company, thereby diverting their attention from other priorities that existed prior to the outbreak of the pandemic. 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, will be necessary as the pandemic continues in the near-term. If these conditions worsen, or last for an extended period of time, our ability to manage our business may be impaired, and operational risks, cybersecurity risks and other risks facing us even prior to the pandemic may be elevated.
If there is deterioration in economic conditions in a particular region or market, our business and operating results could be materially adversely impacted.Due to our strong balance sheet, diverse product offerings, various end-markets served, and our broad geographic presence, we believe we are well positioned to withstand temporary slowness in any one particular region or market. However, economic uncertainties affect businesses such as ours in a number of ways, making it difficult to accurately forecast and plan our future business activities. A tightening of credit in financial markets or other factors may lead consumers and businesses to postpone spending, which may cause our customers to cancel, decrease or delay their existing and future orders with us. In addition, financial difficulties experienced by our suppliers, customers or distributors could result in product delays, increased accounts receivable defaults, inventory or supply challenges and pricing pressures. An interruption in supply may also impact our ability to meet customer demands. Consumer demand for our customers’ products and shifting consumer preferences are unpredictable and could have a negative impact on our customers and our customers’ demand for our products.
We face strong global competition and our market share could decline.All of the markets in which we operate are highly competitive and we continue to experience competition in all product lines and segments. Competitors, including privately and publicly held entities that range from regional to international companies, are becoming increasingly credible in the core markets in which we do business. We expect the market for our products to remain competitive, as consolidation among our competitors is increasing in the current economic climate and exclusivity arrangements with customers may drive the creation of new competitors in the market.
Customers and consumers are increasingly requesting solutions that can be refilled and reused as the market moves toward more sustainable, environmentally-friendly products. A competitor's design innovation or ability to provide more sustainable products could have an adverse impact on our business. If we are unable to compete successfully, our market share may decline, which could materially adversely affect our results of operations and financial condition.
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Geopolitical conditions, including trade disputes and direct or indirect acts of war or terrorism, could have a material adverse effect on our operations and financial results.Our operations could be disrupted by geopolitical conditions such as Brexit, trade disputes, international boycotts and sanctions, political and social instability, acts of war, terrorist activity or other similar events. Such events could make it difficult, impossible or more expensive to manufacture or deliver products to our customers, receive production materials from our suppliers, or perform critical functions, all of which could adversely affect our business globally or in certain regions. In addition, our customers may export their finished products using our dispensing devices that were sold in other regions and an adverse geopolitical event may impact the sales of our customers’ products and thus indirectly negatively impact the demand for our dispensing solutions. Although, our business is well-diversified across nine end markets and many geographies as we produce in seventeen countries and we believe our diverse business model, coupled with our diverse and global customer base, allow some protection from dependency on any one geographic region, country or even trade route, our diversification efforts may not be successful in insulating our operations from disruptive geopolitical conditions and we do face some risk related to specific trade policies.
Consolidation of our customer base could impact our business.We believe mergers and acquisitions within our customer base create opportunities for increasing sales due to the breadth of our product line, our international presence and our long-term relationships with certain customers. However, consolidation of our customers could lead to pricing pressures, concentration of credit risk and fewer opportunities to introduce new products to the market.
The success or failure of our customers’ products, particularly in the pharmaceutical market, may materially affect our operating results and financial condition.In the pharmaceutical market, the proprietary nature of our customers’ products and the success or failure of their products in the market using our dispensing systems may have a material impact on our operating results and financial condition. We may potentially work for years on modifying our dispensing device to work in conjunction with a customer’s drug formulation. If the customer’s pharmaceutical product is not approved by regulatory bodies or it is not successful on the market, the associated costs may not be recovered.
Higher raw material costs and other inputs and an inability to increase our selling prices may materially adversely affect our operating results and financial condition.The cost of raw materials and other inputs (particularly plastic resin, rubber, metal, anodization costs and transportation and energy costs) are volatile and susceptible to rapid and substantial changes due to factors beyond our control, such as changing economic conditions, currency fluctuations, weather conditions, political unrest and instability in energy-producing nations, and supply and demand pressures. Raw material costs may increase in the coming years due to market fluctuation and the use of post-consumer resin for our sustainable product offerings and, although we have generally been able to increase selling prices to cover increased costs, future market conditions may prevent us from passing these increased costs on to our customers through timely price increases. In addition, we may not be able to improve productivity or realize savings from our cost reduction programs sufficiently enough to offset the impact of increased raw material costs. As a result, higher raw material costs could result in declining margins and operating results.
In difficult market conditions, our fixed costs structure combined with potentially lower revenues may negatively impact our results.Our business is characterized by relatively high fixed costs and, notwithstanding our utilization of third-party manufacturing capacity, most of our production requirements are met by our own manufacturing facilities. In difficult environments, we are generally faced with a decline in the utilization rates of our manufacturing facilities due to decreases in product demand. During such periods, our plants may not operate at full capacity and the costs associated with this excess capacity are charged directly to cost of sales. Difficult market conditions in the future may adversely affect our utilization rates and consequently our future gross margins, and this, in turn, could have a material negative impact on our business, financial condition and results of operations.
If our unionized employees were to engage in a strike or other work stoppage, our business, operating results and financial position could be materially adversely affected.The majority of our European and Latin American employees are covered by collective bargaining arrangements made either at the local or national level in their respective countries and approximately 60 of our North American employees are covered by a collective bargaining agreement. Although we believe that our relations with our employees are satisfactory, no assurance can be given that this will continue. If disputes with our unions arise, or if our unionized workers engage in a strike or other work stoppage, we could incur higher labor costs or experience a significant disruption of operations, which could have a material adverse effect on our business, operating results and financial position.
Single sourced materials and manufacturing sites could adversely impact our ability to deliver product.We source certain materials, especially some resins and rubber components for our pharmaceutical segment, from a single source. Any disruption in the supply of these materials could adversely impact our ability to deliver product to our customers. Similarly, we have certain components and products that are manufactured at a single location or from a single machine or mold. Any disruption to the manufacturing process could also adversely impact our ability to deliver product to our customers.
If we were to incur a significant product liability claim above our current insurance coverage, our business, operating results and financial condition could be materially adversely affected.The failure of our devices to operate as intended may result in a product liability claim against us. We believe we maintain adequate levels of product liability insurance coverage. A product liability claim in excess of our insurance coverage or not covered by existing insurance may materially adversely affect our business, operating results and financial condition.
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Increased cybersecurity threats could pose a risk to our operations.Increased global information security threats and more sophisticated, targeted computer crime pose a risk to the confidentiality, availability and integrity of our data, operations and infrastructure, as well as the data of our customers. We continue to assess potential threats and make investments seeking to reduce the risk of these threats by employing a number of security measures, including employee training, comprehensive monitoring of our networks and systems, ensuring strong data protection standards including authentication mechanisms are in place, and safeguarding our critical information assets. We also periodically test our systems for vulnerabilities and regularly rely on third parties to conduct such tests. To date, we have seen no material impact on our business or operations from these threats; however, we cannot guarantee that our security efforts will prevent unauthorized access or loss of functionality to our or our third-party providers’ systems. Even with these mitigations, our information systems remain potentially vulnerable to sophisticated cybersecurity threats, particularly as more business activities have shifted online due to the COVID-19 pandemic. Depending on their nature and scope, such threats could potentially lead to the compromise of confidential information, improper use of our systems and networks, manipulation and destruction of data, production downtimes and operational disruptions, which in turn could adversely affect our reputation, competitiveness and results of operations.
If our integration of acquisitions are unsuccessful, our financial performance may suffer.We continue to pursue growth through acquisitions, including the recent Fusion, Noble, Nanopharm and Gateway acquisitions. If our integration efforts, including unlocking synergies, are unsuccessful we may not realize the full potential of the acquisitions and as a result our financial performance may suffer.
We are currently implementing a business transformation plan, with the main objective to return our Beauty + Home segment to historical growth and profit margins.Certain elements of this transformation plan can be disruptive to our business and our employees if we do not manage the change properly. Furthermore, ongoing changes in material indices, macro-economic trends and other factors have resulted in negative headwinds, and may continue to negatively impact our transformation plan. In addition, the current COVID-19 pandemic has adversely impacted, and may continue to adversely impact, the timing and extent of declines in customer orders and delays in certain footprint optimization plans. As a result of the foregoing, the transformation plan is taking longer to complete than currently expected, may be more costly to complete than currently expected and may not be successful in returning Beauty + Home to historical growth and profit margins. Any such effects could materially adversely impact our business.
Risks Related to Financial, Legal and Regulatory Matters
We have foreign currency translation and transaction risks that may materially adversely affect our operating results.A majority of our operations are located outside of the United States. Because of this, movements in exchange rates may have an impact on the translation of the financial statements of our foreign entities. Our primary foreign exchange exposure is to the euro, but we have foreign exchange exposure to the Chinese yuan, Brazilian real, Mexican peso, Swiss franc, and other Asian, European and South American currencies. A strengthening U.S. dollar relative to foreign currencies has a dilutive translation effect on our financial statements. Conversely, a weakening U.S. dollar has an additive translation effect. In some cases, we sell products denominated in a currency different from the currency in which the related costs are incurred. We manage our exposures to foreign exchange principally with forward exchange contracts to economically hedge certain transactions and firm purchase and sales commitments denominated in foreign currencies. The volatility of currency exchange rates may materially affect our operating results.
We have approximately $898.5 million in recorded goodwill at December 31, 2020, and changes in future business conditions could cause this asset to become impaired, requiring write-downs that would reduce our operating income.We evaluate the recoverability of goodwill amounts annually, or more frequently when evidence of potential impairment exists. The impairment test is based on several factors requiring judgment. A decrease in expected reporting unit cash flows or changes in market conditions, including as a result of the COVID-19 pandemic, may indicate potential impairment of recorded goodwill and, as a result, our operating results could be materially adversely affected. See “Critical Accounting Estimates” in Part II, Item 7 for additional information.
Government regulation on environmental matters regarding recycling or environmental sustainability policies could impact our business.Future government regulations mandating the use or limitations of certain materials could impact our manufacturing processes or the technologies we use forcing faster development and adoption of alternative materials or assets used in the production of our products.
Future government regulations of healthcare cost containment policies may impact our pharmaceutical sales.Review by governments of the number of drugs and prices thereof that will be paid by their insurance systems could affect future sales to the pharmaceutical industry and thereby adversely affect prices of and demand for our pharmaceutical products.
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We may be adversely affected by the transition away from the London Interbank Offered Rate (“LIBOR”) or other Interbank Rates (IBORs) to Risk Free Rates for our variable rate loans, derivative contracts and other financial assets and liabilities.We have loans, derivative contracts and other financial instruments which are directly or indirectly dependent on LIBOR to establish their interest rate and/or value. The U.K. Financial Conduct Authority, which is the LIBOR administrator's regulator, announced in 2017 that it would no longer compel banks to submit rates for the calculation of LIBOR after 2021. However, for U.S. dollar LIBOR, it now appears that the relevant date may be deferred to June 30, 2023 for the most common tenors (overnight and one, three, six and 12 months). As to those tenors, the LIBOR administrator has published a consultation regarding its intention to cease publication of U.S. dollar LIBOR as of June 30, 2023 (instead of December 31, 2021, as previously expected), apparently based on continued rate submissions from banks. An extension to 2023 would mean that many legacy U.S. dollar LIBOR contracts would terminate before related LIBOR rates cease to be published. Although the foregoing may provide some sense of timing, there is no assurance that LIBOR, of any particular currency and tenor, will continue to be published until any particular date, and it appears highly likely that LIBOR will be discontinued or modified after December 31, 2021 or June 30, 2023, depending on the currency and tenor.
The transition from LIBOR may cause us to incur increased costs and additional risk. Uncertainty as to the nature of alternative reference rates and as to potential changes in or other reforms to LIBOR may adversely affect LIBOR rates and the value of LIBOR-based loans. If LIBOR rates are no longer available, any successor or replacement interest rates may perform differently, which may affect our net interest expense, change our market risk profile and require changes to our risk, pricing and hedging strategies. We will continue our impact assessment and monitor regulatory developments during the transition period.
General Risk Factors
Ownership by Certain Significant Stockholders.Currently, Aptar has four institutional stockholders who each own between 6% and 11% of our outstanding common stock. None of these stockholders have direct representation on our Board of Directors. If one of these stockholders decides to sell significant volumes of our stock, this could put downward pressure on the price of the stock.
We could be subject to changes in tax rates, the adoption of new tax legislation or rules or exposure to additional tax liabilities. Due to economic and political conditions, tax rates in the various jurisdictions in which we operate may be subject to change. Our effective tax rate could be affected by changes in the mix of earnings in countries with differing statutory tax rates, changes in the valuation of deferred tax assets and liabilities, the introduction of new taxes, or changes in tax laws or their interpretation. While no formal proposals exist, currently discussed tax rate changes in the U.S. would have a materially adverse impact on our reported tax expense and operating results.
We are also subject to examination of our returns and other tax matters by the U.S. Internal Revenue Service and other tax authorities and governmental bodies. We regularly assess the likelihood of an adverse outcome resulting from these examinations to determine the adequacy of its provision for taxes. There can be no assurance as to the outcome of these examinations. If our effective tax rates were to increase in jurisdictions where we have significant operations, or if the ultimate determination of taxes owed is for an amount in excess of amounts previously accrued, our financial condition and operating results could be materially adversely affected.
ITEM 1B. UNRESOLVED STAFF COMMENTS
We have no unresolved comments from the SEC.
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ITEM 2. PROPERTIES
We lease or own our principal offices and manufacturing facilities. None of the owned principal properties is subject to a lien or other encumbrance material to our operations. We believe that existing operating leases will be renegotiated as they expire, will be acquired through purchase options or that suitable alternative properties will be leased on acceptable terms. We consider the condition and extent of utilization of our manufacturing facilities and other properties to be generally good, and the capacity of our plants to be adequate for the needs of our business. We manufacture products in 49 locations, with 19 of those facilities serving two segments and 5 serving all three of our segments. The locations of our manufacturing facilities, by geographic region/country, are set forth below:
Rest of Europe 9 2 8 5
Latin America 8 1 8 3
Our head corporate office is located in Crystal Lake, Illinois. We also have sales personnel, service facilities, and corporate offices in locations in addition to those listed above.
ITEM 3. LEGAL PROCEEDINGS
In the normal course of business, we are subject to a number of lawsuits and claims both actual and potential in nature. While management believes the resolution of these claims and lawsuits will not have a material adverse effect on our financial position or results of operations or cash flows, claims and legal proceedings are subject to inherent uncertainties, and unfavorable outcomes could occur that could include amounts in excess of any accruals which management has established. Were such unfavorable final outcomes to occur, it is possible that they could have a material adverse effect on our financial position, results of operations and cash flows. Please refer to Note 13 - Commitments and Contingencies in Item 8 – Consolidated Financial Statements and Supplementary Data for further discussion of contingencies affecting our business.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
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PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
MARKET FOR REGISTRANT’S COMMON EQUITY
Our Common Stock is traded on the New York Stock Exchange under the symbol “ATR”. As of February 15, 2021, there were approximately 180 holders of record of our Common Stock. A substantially greater number of holders of our Common Stock are “street name” or beneficial holders, whose shares of record are held by banks, brokers, and other financial institutions.
DIVIDENDS
On January 14, 2021, our Board of Directors declared a quarterly cash dividend of $0.36 per share of Common Stock, which was paid on February 17, 2021 to stockholders of record as of January 27, 2021. While we expect to continue to pay a regular quarterly dividend of $0.36 per share in 2021, the timing, declaration, amount and payment of any future cash dividends are at the discretion of the Board of Directors and will depend on our available cash, working capital, financial condition, results of operations, capital requirements, covenants in our credit facility, applicable law and other factors that our Board of Directors considers relevant.
RECENT SALES OF UNREGISTERED SECURITIES
Certain French employees are eligible to participate in the FCP Aptar Savings Plan (the “Plan”). An independent agent purchases shares of Common Stock available under the Plan for cash on the open market and we do not issue shares. We do not receive any proceeds from the purchase of Common Stock under the Plan. The agent under the Plan is Banque Nationale de Paris Paribas Fund Services. No underwriters are used under the Plan. All shares are sold in reliance upon the exemption from registration under the Securities Act of 1933 provided by Regulation S promulgated under that Act. During the quarter ended December 31, 2020, the Plan purchased 1,450 shares of our Common Stock on behalf of the participants at an average price of $118.19 per share, for an aggregate amount of $171 thousand, and sold 7,299 shares of our Common Stock on behalf of the participants at an average price of $123.98 per share, for an aggregate amount of $905 thousand. At December 31, 2020, the Plan owned 85,127 shares of our Common Stock.
ISSUER PURCHASES OF EQUITY SECURITIES
On April 18, 2019, we announced a share repurchase authorization of up to $350 million of Common Stock. This authorization replaces previous authorizations and has no expiration date. We may repurchase shares through the open market, privately negotiated transactions or other programs, subject to market conditions.
In 2020, we did not repurchase any shares. As of December 31, 2020, there was $278.5 million of authorized share repurchases available to us. Amid the COVID-19 pandemic, we have been focused on preserving our liquidity and therefore temporarily suspended our share repurchase plan 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.
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SHARE PERFORMANCE
The following graph shows a five year comparison of the cumulative total stockholder return on our Common Stock as compared to the cumulative total return of the Standard & Poor’s 500 Composite Stock Price Index and to an index of peer group companies we selected. The companies included in the peer group are: Albemarle Corporation, Ashland Global Holdings Inc., Berry Global Group, Inc., Catalent, Inc., CCL Industries Inc., Hill-Rom Holdings, Inc., ICU Medical, Inc., Ingredion Inc., International Flavors & Fragrances, Inc., McCormick & Company, Inc., Sealed Air Corporation, Sensient Technologies Corporation, Silgan Holdings, Inc., Sonoco Products Company, Stericycle, Inc., STERIS plc, Teleflex Inc. and West Pharmaceutical Services, Inc.
Comparison of 5 Year Cumulative Stockholder Returns
The graph and other information furnished in the section titled “Share Performance” under this Part II, Item 5 of this Form 10-K shall not be deemed to be “soliciting” material or to be “filed” with the Securities and Exchange Commission or subject to Regulation 14A or 14C, or to the liabilities of Section 18 of the Securities Exchange Act of 1934, as amended.
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ITEM 6. SELECTED FINANCIAL DATA
FIVE YEAR SUMMARY OF SELECTED FINANCIAL DATA
Dollars in millions, except per share data
Statement of Income Data:
Per Common Share:
Balance Sheet and Other Data:
Percentage of Net Sales:
(1)Net Debt is interest bearing debt less cash and equivalents and short-term investments.
(2)Total Capitalization is Total Stockholders' Equity plus Interest Bearing Debt.
(3)Net Capital is Total Stockholders' Equity plus Net Debt. Net Debt to Net Capital is a non-U.S. GAAP financial measure. See the reconciliation under "Non-U.S. GAAP Measures".
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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(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 page24.
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 page20. 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)
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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:
Amount inThousands $ % ofNet Sales Amount in Thousands $ % ofNet Sales
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 Net Sales. See the reconciliation under "Non-U.S. GAAP Measures".
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.
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NETSALES
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 Pharma Beauty+Home Food +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
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.
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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:
Restructuring Initiatives by Segment
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 in Asia 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 the U.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.
At December 31, 2020, under currently enacted laws, we do not have a balance of foreign earnings that will be subject to U.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 potential U.S. state taxation. During 2020, we removed our assertion that pre-2020 earnings in Italy, 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 of December 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 $214.0 million in 2020 compared to $242.2 million reported in 2019.
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PHARMA SEGMENT
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.
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
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".
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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
Adjusted 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 Reported Net 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.
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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. GAAPMEASURES
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.
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Consolidated Pharma Beauty + Home Food + Beverage Corporate & Other Net Interest
Reported income taxes 87,065
Adjustments:
Transaction costs related to acquisitions 4,812 210 4,602
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Consolidated Pharma Beauty + Home Food + Beverage Corporate & Other Net Interest
Reported income taxes 99,842
Adjustments:
Net Debt to Net Capital Reconciliation December 31, 2020 December 31, 2019
Notes payable, revolving credit facility and overdrafts $ 52,200 $ 44,259
Less:
Short-term investments 243 —
Net Debt to Net Capital 32.0 % 37.8 %
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Free Cash Flow Reconciliation December 31, 2020 December 31, 2019
Less:
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 debtof $1.17 billionat 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 NetDebt (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 page24.
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.
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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:
Notes payable, revolving credit facility and overdrafts (2) 52,200 52,200 — — —
(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 of December 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.
In March 2020, the FASB issued ASU 2020-4, which provides optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments to this update apply only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. The new standard is effective upon issuance and can be adopted any time prior to December 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.
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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
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:
Discount rate:
Expected long‐term rate of return on plan assets:
Rate of compensation increase:
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%.
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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.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RISKS
A significant number of our operations are located outside of the United States. Because of this, movements in exchange rates may have a significant impact on the translation of the financial condition and results of operations of our subsidiaries. Our primary foreign exchange exposure is to the euro, but we also have foreign exchange exposure to the Chinese yuan, Brazilian real, Mexican peso, Swiss franc and other Asian, European and South American currencies. A strengthening U.S. dollar relative to foreign currencies has a dilutive translation effect on our financial condition and results of operations. Conversely, a weakening U.S. dollar relative to foreign currencies has an additive translation effect on our financial condition and results of operations. Additionally, in some cases, we sell products denominated in a currency different from the currency in which the related costs are incurred. Any changes in exchange rates on such inter-country sales may impact our results of operations.
The table below provides information as of December 31, 2020 about our forward currency exchange contracts. The majority of the contracts expire before the end of the first quarter of 2021.
In thousands
As of December 31, 2020, we have recorded the fair value of foreign currency forward exchange contracts of $0.3 million in prepaid and other and $0.1 million in accounts payable, accrued and other liabilities in the Consolidated Balance Sheets. Aptar also entered into a EUR/USD floating-to-fixed cross currency swap on July 20, 2017 to effectively hedge the foreign exchange and interest rate exposure on the $280 million bank term loan drawn by its wholly owned UK subsidiary. The fair value of this cash flow hedge is $8.3 million and is reported in accounts payable, accrued and other liabilities in the Consolidated Balance Sheets.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
AptarGroup, Inc.
CONSOLIDATED STATEMENTS OF INCOME
In thousands, except per share amounts
Operating Expenses:
Other (Expense) Income:
Net Income Attributable to Noncontrolling Interests (50) (25) (21)
Net Income Attributable to AptarGroup, Inc. per Common Share:
See accompanying notes to consolidated financial statements.
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AptarGroup, Inc.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
In thousands
Other Comprehensive Income:
Changes in treasury locks, net of tax — — 17
Changes in derivative gains (losses), net of tax 315 (37) 1,547
Defined benefit pension plan, net of tax
Amortization of net loss included in net income, net of tax 5,920 332 4,991
Comprehensive Income Attributable to Noncontrolling Interests (60) (21) (5)
See accompanying notes to consolidated financial statements.
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AptarGroup, Inc.
CONSOLIDATED BALANCE SHEETS
In thousands
Assets
Short-term investments 243 —
Total Cash and equivalents and Short-term investments 300,380 241,970
See accompanying notes to consolidated financial statements.
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AptarGroup, Inc.
CONSOLIDATED BALANCE SHEETS
In thousands, except share and per share amounts
Liabilities and Stockholders’ Equity
Notes payable, revolving credit facility and overdrafts $ 52,200 $ 44,259
Accounts payable, accrued and other liabilities 662,463 573,028
Deferred and other non-current liabilities 68,528 23,250
Commitments and contingencies — —
AptarGroup, Inc. stockholders’ equity
Noncontrolling interests in subsidiaries 396 336
See accompanying notes to consolidated financial statements.
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AptarGroup, Inc.
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
Years Ended December 31, 2020, 2019 and 2018
In thousands
AptarGroup, Inc. Stockholders’ Equity
Adoption of revenue recognition standard 2,937 — — — — — 2,937
Reclassification of stranded tax effects 6,658 (6,658) — — — — —
Foreign currency translation adjustments — (62,898) — — — (16) (62,914)
Changes in treasury locks, net of tax — 17 — — — — 17
Changes in derivative gains (losses), net of tax — 1,547 — — — — 1,547
Cash dividends declared on common stock (82,346) — — — — — (82,346)
Treasury stock purchased — — — (3,905) — — (3,905)
Foreign currency translation adjustments — (8,723) — — — (4) (8,727)
Changes in derivative gains (losses), net of tax — (37) — — — — (37)
Cash dividends declared on common stock (90,208) — — — — — (90,208)
Treasury stock purchased — — — (86,497) — — (86,497)
Adoption of CECL standard (1,377) — — — — — (1,377)
Foreign currency translation adjustments — 79,099 — — — 10 79,109
Changes in derivative gains (losses), net of tax — 315 — — — — 315
Cash dividends declared on common stock (92,658) — — — — — (92,658)
See accompanying notes to consolidated financial statements.
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AptarGroup, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
In thousands, brackets denote cash outflows
Cash Flows from Operating Activities:
Adjustments to reconcile net income to net cash provided by operations:
Loss (gain) on disposition of fixed assets 2,627 344 (770)
Net gain on remeasurement of equity securities (64) — (6,500)
Change in fair value of contingent consideration 5,230 — —
Retirement and deferred compensation plan liabilities (7,267) (3,956) (22,762)
Cash Flows from Investing Activities:
Proceeds from sale of property, plant and equipment 5,261 4,301 4,466
Insurance proceeds — — 10,631
Purchase of short-term investments (243) — —
Acquisition of intangible assets, net (6,092) (4,806) (611)
Proceeds from sale of investment in equity securities — 16,487 —
Cash Flows from Financing Activities:
Payment of contingent consideration obligation (2,765) — —
Common stock repurchased and retired — — (57,786)
Supplemental Cash Flow Disclosure:
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Restricted cash included in the line item prepaid and other on the Consolidated Balance Sheets as shown below represents amounts held in escrow related to the Fusion acquisition in 2020, the Noble acquisition in 2019 and the CSP Technologies acquisition in 2018.
Restricted cash included in prepaid and other 4,833 5,003 5,000
See accompanying notes to consolidated financial statements.
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AptarGroup, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Share and per Share Amounts, or as Otherwise Indicated)
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of AptarGroup, Inc. and our subsidiaries. The terms “AptarGroup”, “Aptar”, “Company”, “we”, “us” or “our” as used herein refer to AptarGroup, Inc. and our subsidiaries. All significant intercompany accounts and transactions have been eliminated. Certain previously reported amounts have been reclassified to conform to the current period presentation.
AptarGroup’s organizational structure consists ofthreemarket-focused business segments which are Pharma, Beauty + Home and Food + Beverage. This is a strategic structure which allows us to be more closely aligned with our customers and the markets in which they operate.
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 (see Note 21 – Restructuring Initiatives for further details). The primary focus of the plan is the Beauty + Home segment; however, certain global general and administrative functions have also been addressed. During 2020, 2019 and 2018, we recognized approximately$26.5 million,$20.5 million and$63.8 million, respectively, of restructuring costs related to this plan.
Beginning July 1, 2018, we have applied highly inflationary accounting for our Argentinian subsidiary pursuant to U.S. GAAP. We have changed the functional currency from the Argentinian peso to the U.S. dollar. We remeasure our peso denominated assets and liabilities using the official rate. In September 2019, the President of Argentina reinstituted exchange controls restricting foreign currency purchases in an attempt to stabilize Argentina’s financial markets. As a result of these currency controls, a legal mechanism known as the Blue Chip Swap emerged in Argentina for reporting entities to transfer U.S. dollars. The Blue Chip Swap rate has diverged significantly from Argentina’s “official rate” due to the economic environment. During the second quarter of 2020, we transferred U.S. dollars into Argentina through the Blue Chip Swap method and we recognized a gain of $1.0 million. This gain helped to offset foreign currency losses due to our Argentinian peso exposure and devaluation against the U.S. dollar. Our Argentinian operations contributed approximately less than 2.0%of consolidated net assets and revenues at and for the year ended December 31, 2020.
There are many uncertainties regarding the current COVID-19 pandemic, 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. The pandemic has impacted certain markets within our business, our operations and our financial results during the year ended December 31, 2020 including an overall reduction to net sales within those markets. No impairments were recorded as of December 31, 2020 related to the COVID-19 pandemic. While the disruption is currently expected to be temporary, there is uncertainty around the duration. Due to significant uncertainty surrounding the situation, future results could change and therefore our results could be materially impacted.
ACCOUNTING ESTIMATES