Aptargroup, Inc.: Form 10-Q for the period ended Sep 30, 2023

(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS, OR AS OTHERWISE INDICATED)

RESULTS OF OPERATIONS

(1) Adjusted EBITDA margin is calculated as Adjusted EBITDA divided by Reported Net Sales. See the reconciliation under "Non-U.S. GAAP Measures."

During the year ended December 31, 2022, our organizational structure consisted of three market-focused business segments: Pharma, Beauty + Home and Food + Beverage. Effective January 1, 2023, we realigned two of our segments, allowing us to better serve our customers and positioning us for long-term profitable growth. We continue to have three reporting segments; Aptar Pharma and Aptar Beauty are named for the markets they serve with multiple product platforms, while Aptar Closures is primarily named for a single product platform that serves all available markets. Previously reported amounts have been reclassified to conform to the current period presentation.

NET SALES

We reported net sales of $893.0 million for the quarter ended September 30, 2023, which represents a 7% increase compared to $836.9 million reported during the third quarter of 2022. The U.S. dollar weakened compared to the euro and other major currencies in which we operate, resulting in a positive currency translation impact of 4%. Our acquisitions of Metaphase, iD SCENT, and Gulf Closures also had a 1% positive impact on our consolidated results during the third quarter of 2023. Therefore, core sales, which excludes acquisitions and changes in foreign currency rates, increased by 2% in the third quarter of 2023 compared to the same period in 2022. Of our 2% core sales increase, half was due to strong volume growth, especially for products in our prescription, consumer healthcare and beauty applications, while inflationary price adjustments represented the other half.

Reported net sales for the first nine months of 2023 increased 5% to $2.65 billion compared to $2.53 billion for the first nine months of 2022. The average U.S. dollar exchange rate weakened compared to the euro and other major currencies in which we operate, resulting in a positive currency translation impact of 1%. Our acquisitions of Metaphase, iD SCENT, and Gulf Closures had a 1% positive impact on our consolidated results during the first nine months of 2023. Therefore, core sales, which excludes acquisitions and changes in foreign currency rates, increased by 3% in the first nine months of 2023 compared to the same period in 2022. The combination of strong volume growth, especially for products in our prescription, consumer healthcare and beauty applications as discussed above, along with price increases to recover inflationary cost increases had a positive impact on our core sales. Of our 3% core sales increase, approximately 2% was due to improved volumes and product mix while inflationary price adjustments represented the remaining 1% of the increase.

(1) Currency effects are calculated by translating last year’s amounts at this year’s foreign exchange rates.

The following table sets forth, for the periods indicated, net sales by geographic location:

For further discussion on net sales by reporting segment, please refer to the analysis of segment net sales and segment Adjusted EBITDA on the following pages.

COST OF SALES (EXCLUSIVE OF DEPRECIATION AND AMORTIZATION SHOWN BELOW)

Cost of sales (“COS”) as a percent of net sales decreased to 63.5% in the third quarter of 2023 compared to 65.3% in the third quarter of 2022. Our COS percentage was positively impacted by an improved mix of our higher-margin Pharma product sales compared to the same period in 2022. We also benefited from the moderation of inflationary cost increases, which negatively impacted prior year results. While we maintained our normal pass-through of resin cost increases and implemented general price increases to offset other cost increases during the third quarter of 2022, there is no margin on resin pass-through costs, which increased our COS as a percentage of sales. During the third quarter of 2023, lower input costs had the opposite impact, which lowered our COS as a percentage of sales.

For the first nine months of 2023, COS as a percent of net sales decreased to 64.1% compared to 64.9% in the same period in 2022, in spite of approximately $16 million of additional costs related to the validation of the new injectables expansion capacity as well as inefficiencies in the first part of the year due to the Enterprise Resource Planning ("ERP") system implementation. As discussed above, this decrease is mainly due to an improved mix of our higher-margin Pharma products and the moderation of inflationary cost increases.

SELLING, RESEARCH & DEVELOPMENT AND ADMINISTRATIVE

Selling, research & development and administrative expenses (“SG&A”) increased by approximately $2.7 million to $138.1 million in the third quarter of 2023 compared to $135.4 million during the same period in 2022. Excluding changes in foreign currency rates, SG&A decreased by approximately $2.7 million in the quarter. Incremental costs related to our acquisitions of Metaphase, iD SCENT, and Gulf Closures were $0.4 million. The current quarter decrease in SG&A is related to lower headcount and other overhead costs as part of our ongoing focus on fixed cost management. SG&A as a percentage of net sales decreased to 15.5% in the third quarter of 2023 compared to 16.2% in the same period in 2022.

SG&A increased by $11.1 million to $427.5 million in the first nine months of 2023 compared to $416.4 million during the same period in 2022. Excluding changes in foreign currency rates, SG&A increased by approximately $7.9 million in the first nine months of 2023 compared to the first nine months of 2022. Incremental costs related to our acquisitions of Metaphase, iD SCENT, and Gulf Closures were $1.1 million. Improvements from our overhead cost management initiatives for the first nine months of 2023 were more than offset by higher compensation costs, including accruals related to our current short-term and long-term incentive compensation programs, along with higher travel costs compared to 2022. SG&A as a percentage of net sales decreased to 16.1% in the first nine months of 2023 compared to 16.5% in the same period in 2022.

DEPRECIATION AND AMORTIZATION

Reported depreciation and amortization expenses increased by approximately $5.1 million to $62.7 million in the third quarter of 2023 compared to $57.6 million during the same period in 2022. Excluding changes in foreign currency rates, depreciation and amortization increased by approximately $2.6 million in the third quarter compared to the third quarter of 2022. Incremental depreciation and amortization costs related to our acquisitions of Metaphase, iD SCENT, and Gulf Closures were $0.4 million. The majority of this increase relates to higher capital spending during the current and prior years to support our growth strategy, including several new manufacturing facilities commencing production during 2023. Depreciation and amortization as a percentage of net sales increased to 7.0% in the third quarter of 2023 compared to 6.9% in the same period of the prior year.

Reported depreciation and amortization expenses increased by approximately $9.4 million to $184.2 million in the first nine months of 2023 compared to $174.8 million during the same period a year ago. Excluding changes in foreign currency rates, depreciation and amortization increased by approximately $7.8 million in the first nine months of 2023 compared to the same period a year ago. Incremental depreciation and amortization costs related to our acquisitions of Metaphase, iD SCENT, and Gulf Closures were $0.6 million. As discussed above, this increase is due to higher internal capital investments during the current and prior years. Depreciation and amortization as a percentage of net sales increased to 7.0% in the first nine months of 2023 compared to 6.9% in the same period of the prior year.

RESTRUCTURING INITIATIVES

During the third quarter of 2022, we began an initiative to better leverage our fixed cost base through growth and cost reduction measures. For the three and nine months ended September 30, 2023, we recognized $6.6 million and $20.1 million of restructuring costs related to this initiative, respectively. For the three months ended September 30, 2022, we recognized $2.3 million of restructuring costs related to this initiative. The cumulative expense incurred as of September 30, 2023 was $26.3 million.

Restructuring costs for the three and nine months ended September 30, 2023 and 2022 were as follows:

OPERATING INCOME

Operating income increased approximately $24.1 million to $119.3 million in the third quarter of 2023 compared to $95.2 million in the same period a year ago. Excluding changes in foreign currency rates, operating income increased by approximately $17.6 million in the quarter compared to the same period a year ago mainly due to the strong sales growth in our Pharma segment and the SG&A leverage mentioned above. Operating income as a percentage of net sales increased to 13.3% in the third quarter of 2023 compared to 11.4% in the prior year period.

For the first nine months of 2023, operating income increased approximately $25.8 million to $319.8 million compared to $294.1 million in the same period of the prior year. Excluding changes in foreign currency rates, operating income increased by approximately $19.9 million in the first nine months of 2023 compared to the same period a year ago as our strong Pharma segment growth and SG&A leverage mentioned above was partially offset by higher restructuring costs. Operating income as a percentage of net sales increased to 12.1% in the first nine months of 2023 compared to 11.6% for the same period in the prior year.

INTEREST EXPENSE

Interest expense increased approximately $0.2 million to $10.0 million in the third quarter of 2023 compared to $9.8 million for the same period of the prior year. This slight increase is due to the maturity of the €100 million 0.98% Senior Notes due July 2023 which was repaid using our variable interest rate revolving credit facility.

Interest expense decreased by $0.8 million to $29.9 million in the first nine months of 2023 compared to $30.7 million during the first nine months of 2022. This reduction is mainly due to the repayment of part of our private placement debt, which also included a $0.4 million make-whole payment for the early redemption during the second quarter of 2022 which did not repeat during 2023. See Note 6 - Debt of the Condensed Consolidated Financial Statements for further details.

NET OTHER INCOME (EXPENSE)

Net other income increased $1.2 million to $0.7 million of income in the third quarter of 2023 from $0.5 million of expense in the same period of the prior year. This increase is mainly due to $0.8 million of improvements in our equity investments along with $0.6 million in lower pension costs during the third quarter of 2023 compared to the third quarter of 2022.

Net other income increased $6.7 million to $4.3 million of income for the nine months ended September 30, 2023 from $2.4 million of expense in the same period of the prior year. $2.9 million of this increase is due to the change in the fair value of our PureCycle investment. As discussed in Note 18 - Investment in Equity Securities of the Condensed Consolidated Financial Statements, our investment in PureCycle was converted into shares of PCT, a publicly traded entity, during the first quarter of 2021. This investment is recorded at fair value based on observable market prices for identical assets with the change in fair value being recorded as a net investment gain or loss in the Condensed Consolidated Statements of Income. The remaining increase is due to improvements in our other equity investments along with lower pension costs as discussed above.

PROVISION FOR INCOME TAXES

The tax provision for interim periods is determined using the estimated annual effective consolidated tax rate, based on the current estimate of full-year earnings and related estimated full-year taxes, adjusted for the impact of discrete quarterly items.

The effective tax rate for the three months ended September 30, 2023 and 2022, respectively, was 23.4% and 36.2%. The effective tax rate for the nine months ended September 30, 2023 and 2022, respectively, was 24.6% and 31.0%. The effective tax rate for the three months ended September 30, 2023 reflects additional tax benefits from employee stock-based compensation and a benefit related to a change in the U.S. tax regulations issued during the quarter related to foreign tax credits. The effective tax rate for the three months ended September 30, 2022 reflects an out-of-period charge of $7.2 million for taxes related to a legal entity reorganization to enhance our dividend and cash management capabilities. The tax charge had an 8.5% impact on the effective tax rate for the three months ended September 30, 2022. The lower reported effective tax rate for the nine months ended September 30, 2023 reflects additional tax benefits from employee stock-based compensation, the refining of certain U.S. tax filing positions and a change in the U.S. tax regulations pertaining to foreign tax credits. As mentioned above, the tax rate for the nine months ended September 30, 2022, reflects an out-of-period charge for $7.2 million and had a 2.8% impact on the effective tax rate.

NET INCOME ATTRIBUTABLE TO APTARGROUP, INC.

We reported net income attributable to AptarGroup, Inc. of $84.3 million and $222.1 million in the three and nine months ended September 30, 2023, respectively, compared to $54.2 million and $180.3 million for the same periods in the prior year.

APTAR PHARMA SEGMENT

Operations that sell proprietary dispensing systems, drug delivery systems, sealing solutions and services to the prescription drug, consumer health care, injectables, active material science solutions and digital health markets form our Aptar Pharma segment.

(1) Adjusted EBITDA is calculated as earnings before net interest, taxes, depreciation, amortization, unallocated corporate expenses, restructuring initiatives, acquisition-related costs, net unrealized investment gains and losses related to observable market price changes on equity securities and other special items. Adjusted EBITDA margins are calculated as Adjusted EBITDA divided by Reported Net Sales. See the reconciliation under "Non-U.S. GAAP Measures."

Net sales for the Aptar Pharma segment increased 13% in the third quarter of 2023 to $389.2 million compared to $343.4 million in the third quarter of 2022. Changes in currencies positively affected net sales by 5%, while the acquisition of Metaphase did not have a significant impact during the third quarter of 2023. Therefore, core sales increased by 8% in the third quarter of 2023 compared to the third quarter of 2022. The majority of the sales growth is due to higher volumes in our prescription drug and consumer health care divisions. Core sales of our products to the prescription drug market increased 20% on strong demand for our products used on emergency medicines as customers prepare for opioid overdose reversal medications going over the counter in North America. We also continue to see strong growth in our allergic rhinitis, asthma, COPD therapies and central nervous system product sales. The 14% core sales growth in the consumer health care market was driven by higher demand for our eye care, cough and cold and nasal saline rinse solutions. Sales of our products to the injectables market increased 6% as new capacity continues to come online. Active material science solutions decreased 23% due to lower tooling sales along with a decrease in active vials used in diabetes care products and lower sales of our products used for probiotics after a period of rapid growth. Digital Health currently does not represent a significant percentage of the total Pharma sales.

Net sales for the first nine months of 2023 increased by 11% to $1.14 billion compared to $1.03 billion in the first nine months of 2022. Changes in currency rates positively impacted net sales by 1%, and the acquisition of Metaphase also had a positive 1% impact during the first nine months of 2023. Therefore, core sales increased by 9% in the first nine months of 2023 compared to the same period in the prior year. Strong core sales growth for our products to the prescription and consumer health care markets more than compensated for lower sales to the injectables and active material science solutions markets. Core sales to the prescription drug market increased 26% on continued strong demand for our allergic rhinitis, asthma and emergency medicines and central nervous system devices. The 19% core sales growth in the consumer health care market was driven by higher demand for our nasal decongestant, saline rinses, eye care and cough and cold solutions. Core sales of our products to the injectables market declined 9% primarily due to the shutdown of operations for the implementation of our new ERP system in the first quarter. In addition, we were up against strong prior year comparisons as we experienced strong sales of our elastomeric components for COVID-19 and other vaccines during the prior year period which did not repeat in the first nine months of 2023. Similarly, core sales of our active material science solutions decreased 23% mainly on strong prior year period demand for our active film products used with at-home COVID-19 antigen test kits and tooling sales that did not repeat during the first nine months of 2023. Digital Health currently does not represent a significant percentage of the total Pharma sales.

(1) Currency effects are calculated by translating last year’s amounts at this year’s foreign exchange rates.

Adjusted EBITDA in the third quarter of 2023 increased 27% to $136.3 million compared to $107.2 million in the same period of the prior year. Earnings derived from the increase in prescription and consumer health care product sales growth, along with lower overhead costs, more than compensated for the softness in active material science solutions. Our Adjusted EBITDA margin improved to 35.0% in the third quarter of 2023 from 31.2% in the third quarter of 2022 mainly on the strength of our proprietary dispensing device sales.

Adjusted EBITDA in the first nine months of 2023 increased 11% to $371.5 million compared to $333.8 million in the same period of the prior year. The positive impact of our strong core sales growth in the prescription drug and consumer healthcare divisions was partially offset by the additional expenses related to our injectables ERP system implementation early in the year and the impact of lower COVID-19 related sales in our injectables and active material science solutions divisions, as discussed above. Overall, our Adjusted EBITDA margin improved slightly to 32.7% in the first nine months of 2023 compared to 32.5% in the first nine months of 2022.

APTAR BEAUTY SEGMENT

Operations that sell dispensing systems and sealing solutions to the beauty, personal care and home care markets form our Aptar Beauty segment.

(1) Adjusted EBITDA is calculated as earnings before net interest, taxes, depreciation, amortization, unallocated corporate expenses, restructuring initiatives, acquisition-related costs, net unrealized investment gains and losses related to observable market price changes on equity securities and other special items. Adjusted EBITDA margins are calculated as Adjusted EBITDA divided by Reported Net Sales. See the reconciliation under "Non-U.S. GAAP Measures."

Reported net sales for the quarter ended September 30, 2023 increased 7% to $324.0 million compared to $303.0 million in the third quarter of the prior year. Changes in currency rates positively impacted net sales by 5% in the third quarter of 2023 while our acquisition of iD SCENT did not have a material impact on the sales in the quarter. Therefore, core sales increased 2% in the third quarter of 2023 compared to the same quarter of the prior year. Regionally, Europe delivered solid quarterly sales growth which more than compensated for the ongoing softness in demand in North America. Latin America also had good growth and Asia continued to gradually improve. Core sales of our products to the beauty market increased 14% as consumer demand for prestige and mass fragrance applications remained strong. Personal care and home care core sales decreased 15% and 24%, respectively, due to ongoing softness in demand, mainly in North America.

For the first nine months of 2023, reported net sales increased 5% to $980.0 million compared to $929.8 million in the first nine months of the prior year. Changes in currency rates positively impacted net sales by approximately 1% while our acquisition of iD SCENT did not have an impact on segment sales. Therefore, core sales increased by 4% in the first nine months of 2023 compared to the same period in the prior year. Consistent with the quarterly results, strong regional sales growth in Europe and Latin America more than offset lower North American demand. Core sales of our products to the beauty market increased 14% during the first nine months of 2023 on higher sales in both prestige and mass fragrance, along with continued growth for our facial skin care and color cosmetic solutions. Personal care core sales decreased 7% as higher demand for our sun care applications was offset by softness in baby and hair care product sales mainly due to customer destocking in North America. Core sales of our home care market products declined 23% mainly due to lower demand from our hair care and surface cleaner customers.

(1) Currency effects are calculated by translating last year’s amounts at this year’s foreign exchange rates.

Adjusted EBITDA in the third quarter of 2023 increased 12% to $41.1 million compared to $36.6 million in the same period in the prior year. This is primarily attributable to higher tooling sales, lower input costs and operational improvements, which more than compensated for lower profitability on product sales. Our Adjusted EBITDA margin improved from 12.1% in the third quarter of 2022 to 12.7% during the third quarter of 2023.

Adjusted EBITDA in the first nine months of 2023 increased 8% to $121.4 million compared to $112.3 million reported in the same period in the prior year mainly due to higher profitability on product sales, along with lower input costs and operational improvements as discussed above. Therefore, our Adjusted EBITDA margin improved from 12.1% in the first nine months of 2022 to 12.4% during the first nine months of 2023.

APTAR CLOSURES SEGMENT

Operations that sell dispensing systems, sealing solutions and food service trays to the food, beverage, personal care, home care, beauty and healthcare markets form our Aptar Closures segment. Aptar's food protection business and elastomeric flow-control technology business continue to report through the Aptar Closures segment.

(1) Adjusted EBITDA is calculated as earnings before net interest, taxes, depreciation, amortization, unallocated corporate expenses, restructuring initiatives, acquisition-related costs, net unrealized investment gains and losses related to observable market price changes on equity securities and other special items. Adjusted EBITDA margins are calculated as Adjusted EBITDA divided by Reported Net Sales. See the reconciliation under "Non-U.S. GAAP Measures."

Reported sales for the quarter ended September 30, 2023 decreased approximately 6% to $179.8 million compared to $190.4 million in the third quarter of the prior year. Changes in currency rates positively impacted net sales by 2%, while our acquisition of Gulf Closures positively impacted net sales by 1%. Therefore, core sales for the third quarter of 2023 decreased by 9% compared to the same quarter of the prior year. Approximately 3% of the decrease for the current quarter is due to the pass-through of lower input costs while the remaining 6% is due to lower product and tooling sales. Sales to the food market decreased 11% primarily on softer demand for our dairy and dry spice applications. The 3% increase in beverage market sales is mostly related to higher customer demand for our concentrate applications. Personal care sales declined 24% due to lower demand for our body and hair care closures.

Net sales for the first nine months of 2023 decreased by 7% to $533.1 million compared to $570.5 million in the first nine months of 2022. Changes in currency rates had no impact on net sales while our acquisition of Gulf Closures positively impacted net sales by 1%. Therefore, core sales decreased by 8% in the first nine months of 2023 compared to the same period in the prior year. Approximately half of the 8% core sales decrease is due to passing through lower input costs. Tooling sales and volumes were also lower as customers continued to work through their inventory levels, primarily in North America. Core sales to the food and personal care markets decreased 8% and 20%, respectively, while core sales to the beverage market increased 2% in the first nine months of 2023 compared to the same period of the prior year. For the food market, we were up against strong prior year period comparisons, mainly for sauces and condiment applications and our food service packaging products. The personal care market was also negatively impacted with lower sales of our body and hair care applications. The beverage market reported growth mainly from higher demand for our juice applications.

(1) Currency effects are calculated by translating last year’s amounts at this year’s foreign exchange rates.

(2) Other includes beauty, home care and healthcare markets.

Adjusted EBITDA in the third quarter of 2023 increased 18% to $27.6 million compared to $23.5 million reported in the same period of the prior year. Operational improvements, along with lower SG&A costs were able to compensate for the lower product sales noted above. Approximately one third of our sales decrease was due to passing through lower input costs. These pass-throughs typically do not carry any margin, but the lower sales favorably impact our Adjusted EBITDA margin. Therefore, our Adjusted EBITDA margin improved from 12.3% in the third quarter of 2022 to 15.4% during the third quarter of 2023.

Adjusted EBITDA in the first nine months of 2023 increased 18% to $81.4 million compared to $69.0 million reported in the same period of the prior year. Our profitability was positively impacted by a focus on operational improvements and containing costs within our new segment structure. As discussed above, approximately half of our sales decrease was due to passing through lower input costs. As these pass-throughs typically do not carry any margin, the lower sales favorably impact our Adjusted EBITDA margin. This led to our Adjusted EBITDA margin improving from 12.1% in the first nine months of 2022 to 15.3% during the first nine months of 2023.

CORPORATE & OTHER

In addition to our three reporting segments, we assign certain costs to “Corporate & Other,” which is presented separately in Note 16 – Segment Information of the Notes to the Condensed Consolidated Financial Statements. For Corporate & Other, Adjusted EBITDA (which excludes net interest, taxes, depreciation, amortization, restructuring initiatives, acquisition-related costs, net unrealized investment gains and losses related to observable market price changes on equity securities and other special items) primarily includes certain professional fees, compensation and information system costs which are not allocated directly to our reporting segments.

For the quarter ended September 30, 2023, Corporate & Other Adjusted EBITDA decreased to $11.7 million of expense from $13.5 million of expense in the third quarter of 2022. This expense decrease is due to approximately $4.2 million of realized gains on the sale of PCT shares related to the PureCycle investment partially offset by higher professional fees for corporate projects and higher incentive compensation costs, including accruals related to our current short-term and equity compensation programs.

Corporate & Other Adjusted EBITDA in the first nine months of 2023 increased to $46.0 million of expense compared to $45.2 million of expense reported in the same period of the prior year. As mentioned above, this increase is mainly related to higher incentive compensation costs along with higher professional fees for corporate projects.

NON-U.S. GAAP MEASURES

In addition to the information presented herein that conforms to accounting principles generally accepted in the United States of America ("U.S. GAAP"), we also present financial information that does not conform to U.S. GAAP, which are referred to as non-U.S. GAAP financial measures. Management may assess our financial results both on a U.S. GAAP basis and on a non-U.S. GAAP basis. We believe it is useful to present these non-U.S. GAAP financial measures because they allow for a better period over period comparison of operating results by removing the impact of items that, in management’s view, do not reflect our core operating performance. These non-U.S. GAAP financial measures should not be considered in isolation or as a substitute for U.S. GAAP financial results, but should be read in conjunction with the unaudited Condensed Consolidated Statements of Income and other information presented herein. Investors are cautioned against placing undue reliance on these non-U.S. GAAP measures. Further, investors are urged to review and consider carefully the adjustments made by management to the most directly comparable U.S. GAAP financial measure to arrive at these non-U.S. GAAP financial measures.

In our Management’s Discussion and Analysis, we exclude the impact of foreign currency translation when presenting net sales and other information, which we define as “constant currency.” Changes in net sales excluding the impact of foreign currency translation is a non-U.S. GAAP financial measure. As a worldwide business, it is important that we take into account the effects of foreign currency translation when we view our results and plan our strategies. Consequently, when our management looks at our financial results to measure the core performance of our business, we may exclude the impact of foreign currency translation by translating our prior period results at current period foreign currency exchange rates. As a result, our management believes that these presentations are useful internally and may be useful to investors. We also exclude the impact of material acquisitions when comparing results to prior periods. Changes in operating results excluding the impact of acquisitions are non-U.S. GAAP financial measures. We believe it is important to exclude the impact of acquisitions on period over period results in order to evaluate performance on a more comparable basis.

We present earnings before net interest and taxes (“EBIT”) and earnings before net interest, taxes, depreciation and amortization (“EBITDA”). We also present our adjusted earnings before net interest and taxes (“Adjusted EBIT”) and adjusted earnings before net interest, taxes, depreciation and amortization (“Adjusted EBITDA”), both of which exclude restructuring initiatives, acquisition-related costs, purchase accounting adjustments related to acquisitions and investments and net unrealized investment gains and losses related to observable market price changes on equity securities. Our Outlook is also provided on a non-U.S. GAAP basis because certain reconciling items are dependent on future events that either cannot be controlled, such as exchange rates and changes in the fair value of equity investments, or reliably predicted because they are not part of our routine activities, such as restructuring and acquisition costs.

We provide a reconciliation of Net Debt to Net Capital as a non-U.S. GAAP measure. “Net Debt” is calculated as interest-bearing debt less cash and equivalents and short-term investments while “Net Capital” is calculated as stockholders’ equity plus Net Debt. Net Debt to Net Capital measures a company’s financial leverage, which gives users an idea of a company's financial structure, or how it is financing its operations, along with insight into its financial strength. We believe that it is meaningful to take into consideration the balance of our cash, cash equivalents and short-term investments when evaluating our leverage. If needed, such assets could be used to reduce our gross debt position.

Finally, we provide a reconciliation of free cash flow as a non-U.S. GAAP measure. Free cash flow is calculated as cash provided by operating activities less capital expenditures plus proceeds from government grants related to capital expenditures. We use free cash flow to measure cash flow generated by operations that is available for dividends, share repurchases, acquisitions and debt repayment. We believe that it is meaningful to investors in evaluating our financial performance and measuring our ability to generate cash internally to fund our initiatives.

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FOREIGN CURRENCY

Because of our international presence, movements in exchange rates may have a significant impact on the translation of the financial statements of our foreign subsidiaries. Our primary foreign exchange exposure is to the euro, but we also have foreign exchange exposure to the Chinese yuan, Brazilian real, Mexican peso, Swiss franc and other Asian, European and South American currencies. A weakening U.S. dollar has an additive effect. In some cases, we sell products denominated in a currency different from the currency in which the related costs are incurred. Conversely, a strengthening U.S. dollar relative to foreign currencies has a dilutive translation effect on our financial statements. Any changes in exchange rates on such inter-country sales could materially impact our results of operations. During the third quarter and for the nine months ended September 30, 2023, the U.S. dollar weakened compared to all European currencies except the Russian ruble and most Asian currencies. This resulted in an additive impact on our translated results during the third quarter and year-to-date period of 2023 when compared to the third quarter and year-to-date period of 2022.

QUARTERLY TRENDS

Our results of operations in the last quarter of the year typically are negatively impacted by customer plant shutdowns in December. Several of the markets we serve are impacted by the seasonality of underlying consumer products. This, in turn, may have an impact on our net sales and results of operations for those markets. The diversification of our product portfolio minimizes fluctuations in our overall quarterly financial statements and results in an immaterial seasonality impact on our Condensed Consolidated Financial Statements when viewed quarter over quarter.

Generally, we have incurred higher stock-based compensation expense in the first quarter compared with the rest of the fiscal year due to the timing and recognition of stock-based expense from substantive vesting for retirement eligible employees. As of September 30, 2023, our estimated stock option expense on a pre-tax basis for the year 2023 compared to 2022 is as follows:

LIQUIDITY AND CAPITAL RESOURCES

Given our current 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 to meet our business requirements in the foreseeable future. We have historically used cash flow from operations, our revolving and other credit facilities, proceeds from stock options and debt, as needed, as our primary sources of liquidity. Our primary uses of cash are to invest in equipment and facilities that are necessary to support our growth, pay quarterly dividends to stockholders, to make acquisitions and repurchase shares of our common stock that will contribute to the achievement of our strategic objectives. Due to uncertain macroeconomic conditions, including rising interest rates and the inflationary environment, in the event that customer demand decreases significantly for a prolonged period of time and adversely impacts our cash flows from operations, we would have the ability to restrict and significantly reduce capital expenditure levels and share repurchases, as well as reevaluate our acquisition strategy. A prolonged and significant reduction in capital expenditure levels could increase future repairs and maintenance costs as well as have a negative impact on operating margins if we were unable to invest in new innovative products.

Cash and equivalents and restricted cash increased to $152.1 million at September 30, 2023 from $142.7 million at December 31, 2022. Total short and long-term interest-bearing debt of $1.2 billion at September 30, 2023 was consistent with the $1.2 billion at December 31, 2022. The ratio of our Net Debt (interest-bearing debt less cash and equivalents) to Net Capital (stockholders’ equity plus Net Debt) decreased to 31.5% at September 30, 2023 from 33.3% at December 31, 2022. See the reconciliation under "Non-U.S. GAAP Measures."

In the first nine months of 2023, our operations provided approximately $355.6 million in net cash flow compared to $306.3 million for the same period a year ago. In both periods, cash flow from operations was primarily derived from earnings before depreciation and amortization.

We used $239.3 million in cash for investing activities during the first nine months of 2023 compared to $222.4 million during the same period a year ago. During 2023, approximately $9.4 million was utilized to fund the iD SCENT acquisition, $5.2 million was utilized to fund the remaining payment on the Hengyu acquisition and $1.5 million was utilized to fund the Gulf Closures acquisition. Our investment in capital projects net of government grant proceeds increased $22.1 million during the first nine months of 2023 compared to the first nine months of 2022 primarily due to the $17.1 million in grant proceeds received in 2022 offsetting a portion of our capital expenditures. Our 2023 estimated cash outlays for capital expenditures net of government grant proceeds are expected to be approximately $300 million.

Financing activities used $94.0 million in cash during the first nine months of 2023 compared to $80.1 million in cash used by financing activities during the same period a year ago. During the first nine months of 2023, we paid $76.7 million of dividends, received $39.7 million from stock option exercises and purchased $37.3 million of treasury stock. Additionally, we paid our outstanding contingent consideration obligation for Fusion of $25.3 million of which $22.8 million was treated as a financing outflow and repaid $117.3 million of long-term debt. During the first nine months of 2022, we received proceeds from long-term obligations of $406.6 million primarily from the issuance of $400 million of our 3.60% Senior Notes due March 2032 and we repaid $93.5 million related to our revolving credit facility, redeemed all $75.0 million of our 3.25% senior unsecured notes and repaid $125.0 million of our 3.49% senior unsecured notes.

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 borrowing on this facility is permitted over a quarter end date. As such, no balance was utilized under this arrangement as of September 30, 2023.

On June 30, 2021, we entered into an amended and restated multi-currency revolving credit facility (the "revolving credit facility") with a syndicate of banks to replace the then-existing facility maturing July 2022 (the "prior credit facility") and to amend and restate the unsecured term loan facility extended to our wholly-owned UK subsidiary under the prior credit facility (as amended, the "amended term facility"). The revolving credit facility matures in June 2026, subject to a maximum of two one-year extensions in certain circumstances, and provides for unsecured financing of up to $600 million available in the U.S. and to our wholly-owned UK subsidiary. The amended term facility matured in July 2022 and was repaid in full. The revolving credit facility can be drawn in various currencies including USD, EUR, GBP, and CHF to the equivalent of $600 million, which may be increased by up to $300 million subject to the satisfaction of certain conditions. As of September 30, 2023, $44.5 million and €75.0 million ($79.3 million) was utilized under the revolving credit facility in the U.S. and no balance was utilized by our wholly-owned UK subsidiary. As of December 31, 2022, no balance was utilized under the revolving credit facility in the U.S. and no balance was utilized by our wholly-owned UK subsidiary.

There are no compensating balance requirements associated with our revolving credit facility. Each borrowing under the revolving credit facility will bear interest at rates based on SOFR (in the case of USD), EURIBOR (in the case of EUR), SONIA (in the case of GBP), SARON (in the case of CHF), prime rates or other similar rates, in each case plus an applicable margin. In May 2023 the revolving credit facility was amended to make SOFR the default borrowing rate for USD. The revolving credit facility also provides mechanics relating to a transition away from designated benchmark rates for other available currencies and the replacement of any such applicable benchmark by a replacement alternative benchmark rate or mechanism for loans made in the applicable currency. A facility fee on the total amount of the revolving credit facility is also payable quarterly, regardless of usage. The applicable margins for borrowings under the revolving credit facility and the facility fee percentage may change from time to time depending on changes in our consolidated leverage ratio. Credit facility balances are included in notes payable, revolving credit facility and overdrafts on the Condensed Consolidated Balance Sheets.

Our revolving credit facility and corporate long-term obligations require us to satisfy certain financial and other covenants including:

(1) Definitions of ratios are included as part of the revolving credit facility agreement and private placement agreements.

Based upon the above consolidated leverage ratio covenant, we would have the ability to borrow approximately an additional $1.2 billion before the 3.50 to 1.00 maximum ratio requirement would be exceeded.

On July 6, 2022, we entered into an agreement to swap approximately $200 million of our fixed USD debt to fixed EUR debt which would generate interest savings of approximately $0.5 million per quarter based upon exchange rates as of the transaction date.

On October 12, 2023, the Board of Directors declared a quarterly cash dividend of $0.41 per share payable on November 16, 2023 to stockholders of record as of October 26, 2023.

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.

CONTINGENCIES

The Company, in the normal course of business, is subject to a number of lawsuits and claims both actual and potential in nature. Please refer to Note 12 - Commitments and Contingencies of the Notes to Condensed Consolidated Financial Statements for a discussion of contingencies affecting our business.

RECENTLY ISSUED ACCOUNTING STANDARDS

We have reviewed the recently issued ASUs to the FASB’s Accounting Standards Codification that have future effective dates. Standards that have been adopted during 2023 are discussed in Note 1 – Summary of Significant Accounting Policies of the Notes to Condensed 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 Condensed Consolidated Financial Statements upon adoption.

OUTLOOK

In the fourth quarter, we expect continued growth in our proprietary pharma drug delivery systems and continued improvement in our injectables division’s performance as new capacity continues to come online. Our fragrance dispensing solutions experienced strong growth in the first nine months of the year and we anticipate sales for these dispensing solutions to finish strong in 2023. Our Beauty and Closures segments will be aided by the improving environment in North America as we start to move past the destocking caused by elevated inventory levels.

We expect earnings per share for the fourth quarter of 2023, excluding any restructuring expenses, changes in the fair value of equity investments and acquisition costs, to be in the range of $1.06 to $1.14 and this guidance is based on an effective tax rate range of 24% to 26%.

FORWARD-LOOKING STATEMENTS

Certain statements in Management’s Discussion and Analysis and other sections of this Form 10-Q are forward-looking and involve a number of risks and uncertainties, including certain statements set forth in the Significant Developments, Restructuring Initiatives, Quarterly Trends, Liquidity and Capital Resources, Contingencies and Outlook sections of this Form 10-Q. Words such as “expects,” “anticipates,” “believes,” “estimates,” “future,” “potential”, "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:

• geopolitical conflicts worldwide including the invasion of Ukraine by the Russian military and the recent events in the Middle East and the resulting indirect impact on demand from our customers selling their products into these countries, as well as rising input costs and certain supply chain disruptions;
• lower demand and asset utilization due to an economic recession either globally or in key markets we operate within;
• economic conditions worldwide, including inflationary conditions and potential deflationary conditions in other regions we rely on for growth;
• the execution of our fixed cost initiatives, including our optimization initiative;
• 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, transportation cost as a result of supply chain disruptions and labor shortages, and other input costs (particularly resin, metal, anodization costs and energy costs);
• 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;
• our ability to successfully implement facility expansions and new facility projects;
• our ability to offset inflationary impacts with cost containment, productivity initiatives and price increases;
• changes in capital availability or cost, including rising interest rates;
• volatility of global credit markets;
• our ability to identify potential new acquisitions and to successfully acquire and integrate such operations, including the successful integration of the businesses we have acquired, including contingent consideration valuation;
• our ability to build out acquired businesses and integrate the product/service offerings of the acquired entities into our existing product/service portfolio;
• 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; 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 Item 1A (Risk Factors) of Part I included in our Annual Report on Form 10-K for the year ended December 31, 2022 for additional risks and uncertainties that may cause our actual results or other events to differ materially from those expressed or implied in such forward-looking statements.

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 weakening U.S. dollar relative to foreign currencies has an additive translation effect on our financial condition and results of operations. Conversely, a strengthening U.S. dollar relative to foreign currencies has a dilutive translation effect on our financial condition and results of operations. Additionally, in some cases, we sell products denominated in a currency different from the currency in which the related costs are incurred. Any changes in exchange rates on such inter-country sales may impact our results of operations.

The table below provides information as of September 30, 2023 about our forward currency exchange contracts. The majority of the contracts expire before the end of the fourth quarter of 2023.

As of September 30, 2023, we have recorded the fair value of foreign currency forward exchange contracts of $0.4 million in prepaid and other and $0.3 million in accounts payable, accrued and other liabilities on the Condensed Consolidated Balance Sheets. On July 6, 2022, we entered into a seven year USD/EUR fixed-to-fixed cross currency interest rate swap to effectively hedge the interest rate exposure relating to $203 million of the $400 million 3.60% Senior Notes due March 2032 which were issued by AptarGroup, Inc. on March 7, 2022. This USD/EUR swap agreement exchanged $203 million of fixed-rate 3.60% USD debt to €200 million of fixed-rate 2.5224% EUR debt. The fair value of this net investment hedge is $12.0 million reported in accounts payable, accrued and other liabilities on the Condensed Consolidated Balance Sheets.

DISCLOSURE CONTROLS AND PROCEDURES

Management has evaluated, with the participation of the chief executive officer and chief financial officer of the Company, the effectiveness of our disclosure controls and procedures (as that term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) as of September 30, 2023. Based on that evaluation, the chief executive officer and chief financial officer have concluded that these controls and procedures were effective as of such date.

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

During the fiscal quarter ended September 30, 2023, we implemented ERP systems at three operating units. Consequently, the control environments have been modified at these locations to incorporate the controls contained within the new ERP systems. Except for the foregoing, no changes in our internal control over financial reporting (as such term is defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) occurred during our fiscal quarter ended September 30, 2023 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.