AptarGroup(ATR) - 2022 Q4 - Annual Report

Part I Business Aptar leads in drug delivery and consumer product dispensing, operating through three segments with a 2023 realignment, driven by organic growth and operational excellence - Aptar is a global leader in designing and manufacturing a wide range of drug delivery, consumer product dispensing, and active material science solutions for markets including pharmaceutical, beauty, personal care, home care, food, and beverage[7] - The company has approximately 13,500 employees in 20 countries and serves around 5,000 customers, with no single customer accounting for more than 5% of 2022 Net Sales[7][8] - Effective January 1, 2023, Aptar realigned its reporting segments from Pharma, Beauty + Home, and Food + Beverage to Aptar Pharma, Aptar Beauty, and Aptar Closures to enhance market focus and operational efficiency[19] - The company's growth strategy emphasizes organic growth, talent and leadership, excellence in core functions (innovate, produce, sell), fixed cost management, and strategic acquisitions and partnerships[14][15][16] Description of Reporting Segments Aptar's 2022 operations were structured into Pharma, Beauty + Home, and Food + Beverage segments, with Pharma leading in adjusted EBITDA and Beauty + Home in net sales 2022 Segment Financial Contribution | Segment | % of Net Sales | % of Adjusted EBITDA (excl. corporate costs) | % of Total Assets | | :--- | :--- | :--- | :--- | | Pharma | 41% | 65% | 45% | | Beauty + Home | 43% | 24% | 39% | | Food + Beverage | 16% | 11% | 13% | - The Pharma segment is a leading supplier of nasal drug delivery pumps, metered dose inhaler valves, and elastomeric components for injectables; its markets include Prescription Drug (41%), Consumer Health Care (23%), Injectables (21%), and Active Material Science Solutions (14%)[22][23][25][26][27] - The Beauty + Home segment sells pumps, closures, and aerosol valves to the beauty (51%), personal care (42%), and home care (7%) markets[29][30][31][32] - The Food + Beverage segment primarily sells dispensing closures and elastomeric flow-control components to the food (75%) and beverage (25%) markets[33][34][35] General Business Information Aptar emphasizes R&D, intellectual property, and diverse global manufacturing, with 53% of 2022 sales from Europe, managing 13,500 employees and committed to sustainability - The company emphasizes R&D to develop new, sustainable, and innovative packaging and drug delivery solutions, and it protects its innovations through patents and trademarks[36][37] - Manufacturing is geographically diverse, with the majority of production located outside the U.S; Europe is the largest region, accounting for approximately 53% of consolidated sales in 2022[39][41] - As of December 31, 2022, Aptar had approximately 13,500 full-time employees, with 49.3% covered by collective bargaining agreements, primarily in Europe and Latin America[45] - Aptar is committed to sustainability, with science-based targets to reduce Scope 1, 2, and 3 emissions and a goal to source 100% renewable electricity by 2030; the company has received high ratings from CDP and EcoVadis for its environmental performance[54][58] Risk Factors Aptar faces diverse risks including economic downturns, geopolitical instability, cybersecurity threats, supply chain disruptions, foreign currency fluctuations, and evolving environmental regulations - Operational Risks: The company is exposed to risks from deteriorating economic conditions, geopolitical conflicts (e.g., Russia's invasion of Ukraine leading to higher energy costs), global cybersecurity threats, and strong global competition[73][75][76][79] - Supply Chain and Cost Risks: Risks include higher raw material costs (plastic resin, rubber, metal), potential supply disruptions from single-sourced materials, and labor cost inflation[85][87][78] - Financial and Regulatory Risks: The company faces risks from foreign currency translation, potential impairment of its $945.6 million in goodwill, changes in tax laws, and evolving government regulations on environmental matters like recycling and material inputs[90][91][98][100] - Pandemic and Market Risks: The COVID-19 pandemic has previously affected sales and continues to pose uncertainty; Consolidation of the customer base could also lead to pricing pressures[82][83] Properties As of December 31, 2022, Aptar operates 49 manufacturing facilities globally, with 25 in Europe and its corporate headquarters in Crystal Lake, Illinois Manufacturing Facilities by Region (as of Dec 31, 2022) | Geographic Region/Country | Number of Facilities | | :--- | :--- | | France | 12 | | Germany | 6 | | Rest of Europe | 7 | | North America | 9 | | Latin America | 7 | | China | 5 | | Other Asia | 3 | | Total | 49 | Legal Proceedings Aptar is involved in routine legal proceedings, which management does not expect to materially impact its financial position, operations, or cash flows - Aptar is involved in a number of lawsuits and claims arising in the ordinary course of business, but management does not expect them to have a material adverse impact[110] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Aptar's common stock trades on the NYSE as "ATR", demonstrating a 29-year dividend growth history and active share repurchases, with $108.3 million remaining in its authorization - The company has paid an increased annual cash dividend for 29 consecutive years, with $99.5 million paid to stockholders in 2022[117] - A share repurchase program authorized up to $350 million is in place with no expiration date; as of year-end 2022, $108.3 million remained available for repurchases[119] Q4 2022 Share Repurchases | Period | Total Shares Purchased | Average Price Paid Per Share | Total Cost (approx.) | | :--- | :--- | :--- | :--- | | Q4 2022 | 191,000 | $103.65 | $19.8 million | Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) In 2022, Aptar achieved 3% reported sales growth to $3.32 billion and 9% core sales growth, with adjusted EBITDA up 2% to $617 million, while strengthening its financial position with $478.6 million cash from operations 2022 Financial Highlights vs. 2021 | Metric | 2022 | 2021 | % Change | | :--- | :--- | :--- | :--- | | Net Sales | $3.32 B | $3.23 B | +3% | | Core Sales | - | - | +9% | | Net Income | $239 M | $244 M | -2% | | Diluted EPS | $3.59 | $3.61 | -1% | | Adjusted EBITDA | $617 M | $607 M | +2% | - The 9% core sales growth was driven approximately half by volume growth, particularly in the Pharma segment, and half by price adjustments to pass through inflationary costs[127][134] - The effective tax rate increased to 28.4% in 2022 from 24.3% in 2021, primarily due to lower tax benefits from share-based compensation and increased taxes from a legal entity reorganization[146] - For the first quarter of 2023, the company expects adjusted EPS to be in the range of $0.85 to $0.93[200] Results of Operations For 2022, Aptar's reported net sales grew 3% to $3.32 billion with 9% core sales growth, while operating income increased 9% to $379.3 million, despite a slight rise in cost of sales Consolidated Statement of Income Summary (2022 vs 2021) | Line Item | 2022 (in millions) | 2021 (in millions) | % Change | | :--- | :--- | :--- | :--- | | Net Sales | $3,322.2 | $3,227.2 | +3% | | Cost of Sales | $2,158.4 | $2,070.5 | +4% | | Operating Income | $379.3 | $347.3 | +9% | | Net Income | $239.6 | $243.6 | -2% | Net Sales Growth Breakdown by Component (2022) | Component | Pharma | Beauty + Home | Food + Beverage | Total | | :--- | :--- | :--- | :--- | :--- | | Core Sales Growth | 13% | 7% | 5% | 9% | | Acquisitions | 1% | 0% | 0% | 0% | | Currency Effects | -8% | -7% | -2% | -6% | | Total Reported Growth | 6% | 0% | 3% | 3% | Liquidity and Capital Resources Aptar maintains a strong financial position with $141.7 million cash at year-end 2022, significantly improved cash from operations to $478.6 million, and a reduced Net Debt to Net Capital ratio of 33.3% Key Liquidity Metrics (2022 vs 2021) | Metric | 2022 | 2021 | | :--- | :--- | :--- | | Net Cash Provided by Operations | $478.6 M | $363.4 M | | Free Cash Flow | $196.0 M | $57.5 M | | Net Debt to Net Capital | 33.3% | 35.1% | - In March 2022, the company issued $400 million of 3.60% Senior Notes due 2032[174][298] - The company has a $600 million multi-currency revolving credit facility maturing in June 2026, with no borrowings outstanding as of December 31, 2022[176][295] - Capital investments for 2023 are expected to be in the range of $260 million to $280 million[173] Critical Accounting Estimates Management's critical accounting estimates involve significant judgment for goodwill impairment ($945.6 million), income taxes, business acquisition valuations, and pension benefit obligations, which are sensitive to actuarial assumptions - Goodwill Impairment: The company has $945.6 million in goodwill; it performed a qualitative assessment ("step zero") and concluded that no impairment was necessary for 2022[183][184][186] - Income Taxes: The calculation of tax liabilities involves significant judgment regarding uncertain tax positions and the realization of deferred tax assets ($114.8 million net of valuation allowance)[187][188] - Acquisitions: The allocation of purchase price for acquisitions like Metaphase, Voluntis, and Hengyu requires significant estimates for the fair value of intangible assets such as technology and customer relationships[189][190] - Pension Benefits: Valuation of pension obligations is sensitive to changes in actuarial assumptions; a 1% decrease in the discount rate would increase the Projected Benefit Obligation (PBO) by an estimated $43.7 million[191][194] Quantitative and Qualitative Disclosures About Market Risk Aptar's primary market risk is foreign currency exchange rate fluctuations, mainly the euro, which it mitigates using forward contracts and a $203 million cross-currency interest rate swap - The company's primary market risk is foreign exchange exposure, with the euro being the most significant currency; a strengthening U.S. dollar has a dilutive effect on financial results[205] - As of December 31, 2022, the company held foreign currency forward exchange contracts with an aggregate notional amount of $52.2 million to hedge transaction exposures[345] - In July 2022, Aptar entered into a seven-year USD/EUR cross-currency interest rate swap, effectively converting $203 million of 3.60% fixed USD debt into €200 million of 2.5224% fixed EUR debt to hedge its net investment in euro-denominated assets[207][344] Financial Statements and Supplementary Data The December 31, 2022, consolidated financial statements report $3.32 billion in net sales, $239.6 million net income, $4.20 billion total assets, and an unqualified audit opinion from PricewaterhouseCoopers LLP Consolidated Financial Highlights (Year Ended Dec 31, 2022) | Metric | Amount (in millions) | | :--- | :--- | | Income Statement: | | | Net Sales | $3,322.2 | | Operating Income | $379.3 | | Net Income | $239.6 | | Balance Sheet: | | | Total Assets | $4,203.5 | | Total Liabilities | $2,135.3 | | Total Stockholders' Equity | $2,068.2 | | Cash Flow Statement: | | | Net Cash from Operations | $478.6 | | Net Cash Used by Investing | ($295.6) | | Net Cash Used by Financing | ($162.1) | Notes to Consolidated Financial Statements The notes detail accounting policies, revenue recognition, debt structure, retirement plans, derivative instruments, stock-based compensation, segment information, and recent acquisitions like Metaphase, Voluntis, and Hengyu - Note 1 (Accounting Policies): Outlines the basis of presentation, including the segment structure, impact of COVID-19, and critical accounting estimates for goodwill, taxes, and pensions[220][225] - Note 7 (Debt): Details the company's debt structure, including a $600 million revolving credit facility (undrawn at year-end) and $1.17 billion in long-term obligations; the company was in compliance with all financial covenants[295][300][303] - Note 18 (Segment Information): Provides a breakdown of sales, adjusted EBITDA, assets, and capital expenditures for the Pharma, Beauty + Home, and Food + Beverage segments for 2020-2022[378] - Note 19 (Acquisitions): Details the 2022 acquisition of Metaphase for ~$5.1 million and the 2021 acquisitions of Voluntis and Hengyu, including purchase price allocation and goodwill recorded[386][387][389] Controls and Procedures As of December 31, 2022, management, including the CEO and CFO, concluded that Aptar's disclosure controls and internal control over financial reporting were effective, a finding affirmed by PricewaterhouseCoopers LLP - Based on an evaluation as of December 31, 2022, the CEO and CFO concluded that the company's disclosure controls and procedures were effective[424] - Management concluded that the company's internal control over financial reporting was effective as of December 31, 2022, based on the COSO framework[425] - No material changes to the internal control over financial reporting occurred during the fourth quarter of 2022[427] Part III Directors, Executive Officers, Compensation, and Governance Information on directors, executive officers, compensation, and governance is incorporated by reference from the company's definitive Proxy Statement for the May 3, 2023, Annual Meeting of Stockholders - Information for Items 10 through 14 is incorporated by reference from the 2023 Proxy Statement[430][432][433][434][435] Part IV Exhibits and Financial Statement Schedules This section provides a comprehensive list of financial statements, schedules, and exhibits, including the independent auditor's report and Schedule II – Valuation and Qualifying Accounts, filed with the Form 10-K - This section contains the list of all financial statements, schedules, and exhibits filed with the Form 10-K[436] - Schedule II – Valuation and Qualifying Accounts provides a roll-forward of the allowance for expected credit losses (CECL) and the deferred tax valuation allowance for 2020, 2021, and 2022[447]