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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | 12 Months Ended
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Dec. 31, 2017
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | 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” or “Company” 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 of three market‑focused lines of business which are Beauty + Home, Pharma 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 20 Restructuring Initiatives for further details). The primary focus of the plan will be the Beauty + Home segment; however, certain global general and administrative functions will also be addressed. During 2017, we recognized approximately $2.2 million of restructuring costs related to this plan with approximately $0.5 million being reported within the Beauty + Home segment and $1.7 million being reported within the Food + Beverage segment. CHANGE IN ACCOUNTING PRINCIPLE During the second quarter of 2015, the Company changed its inventory valuation method for certain operating entities in its North American business to the first-in first-out (“FIFO”) method from the last-in first-out (“LIFO”) method. Prior to the change, the Company utilized two methods of inventory costing: LIFO for inventories in these operating entities and FIFO for inventories in other operating entities. The Company believes that the FIFO method is preferable as it better reflects the current value of inventory on the Company's Consolidated Balance Sheet, provides better matching of revenues and expenses, results in uniformity across the Company's global operations with respect to the method of inventory accounting and improves comparability with the Company's peers. The cumulative pre-tax effect of this change is a gain of approximately $7.4 million and was recognized as a decrease to Cost of sales (exclusive of depreciation and amortization). The effect of the change on Net Income Attributable to AptarGroup was approximately $4.8 million, representing approximately $0.08 per diluted share. We have determined that this change is not material to the Company's previously issued financial statements and that the cumulative effect of the change is not material to current operations or to the trend of reported results of operations. Therefore, we conclude it was appropriate to recognize the cumulative effect of the change as an operating item in the current period's Consolidated Statement of Income and not to adopt the change by retrospective application. ACCOUNTING ESTIMATES The financial statements are prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”). This process requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. CASH MANAGEMENT The Company considers all investments that are readily convertible to known amounts of cash with an original maturity of three months or less when purchased to be cash equivalents. INVENTORIES Inventories are stated at lower of cost or net realizable value. Costs included in inventories are raw materials, direct labor and manufacturing overhead. As discussed above, the Company changed its inventory valuation method for certain operating entities in its North American business to the FIFO method from the LIFO method during the second quarter of 2015 resulting in all entities utilizing the FIFO method at the end of 2015. INVESTMENTS IN AFFILIATED COMPANIES The Company accounts for its investments in 20% to 50% owned affiliated companies using the equity method. There were no dividends received from affiliated companies in 2017, 2016 and 2015. During the fourth quarter of 2016, we sold our investment in an injectable drug delivery device company for a $2.0 million gain. During the first quarter of 2017, we acquired a 20% minority interest in Kali Care, Inc. (”Kali Care”) for $5.0 million. Kali Care is a Silicon Valley-based technology company, which provides digital monitoring systems for ophthalmic medication (see Note 19 Acquisitions for further details). The Company accounts for its investments less than 20% on the cost method. PROPERTY AND DEPRECIATION Properties are stated at cost. Depreciation is determined on a straight‑line basis over the estimated useful lives for financial reporting purposes and accelerated methods for income tax reporting. Generally, the estimated useful lives are 10 to 40 years for buildings and improvements and 3 to 15 years for machinery and equipment. FINITE‑LIVED INTANGIBLE ASSETS Finite‑lived intangibles, consisting of patents, acquired technology, customer relationships and license agreements acquired in purchase transactions, are capitalized and amortized over their useful lives which range from 3 to 20 years. GOODWILL Management believes the excess purchase price over the fair value of the net assets acquired (“goodwill”) in purchase transactions has continuing value. Goodwill is not amortized and must be tested annually, or more frequently as circumstances dictate, for impairment. The annual goodwill impairment test may first consider qualitative factors to determine whether it is more likely than not (i.e., greater than 50 percent chance) that the fair value of a reporting unit is less than its book value. This is sometimes referred to as the “step zero” approach and is an optional step in the annual goodwill impairment analysis. Management has performed this qualitative assessment as of December 31, 2017 for all four of our reporting units. Based on our review of macroeconomic, industry, and market events and circumstances as well as the overall financial performance of the reporting units, we determined that it was more likely than not that the fair value of goodwill attributed to all four of our reporting units was greater than its carrying amount. Therefore no impairment of goodwill has been recorded. IMPAIRMENT OF LONG‑LIVED ASSETS Long‑lived assets, such as property, plant and equipment and finite‑lived intangibles, are evaluated for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. An impairment loss is recognized when estimated undiscounted future cash flows expected to result from the use of the asset plus net proceeds expected from disposition of the asset (if any) are less than the carrying value of the asset. DERIVATIVES INSTRUMENTS AND HEDGING ACTIVITIES Derivative financial instruments are recorded in the consolidated balance sheets at fair value as either assets or liabilities. Changes in the fair value of derivatives are recorded in each period in earnings or accumulated other comprehensive income, depending on whether a derivative is designated and effective as part of a hedge transaction. RETIREMENT OF COMMON STOCK During 2017, the Company repurchased 1.9 million shares of common stock, of which 512 thousand shares were immediately retired. During 2016, the Company repurchased and immediately retired 1.7 million shares of common stock. Common stock was reduced by the number of shares retired at $0.01 par value per share. The Company allocates the excess purchase price over par value between additional paid-in capital and retained earnings. RESEARCH & DEVELOPMENT EXPENSES Research and development costs, net of any customer funded research and development or government research and development credits, are expensed as incurred. These costs amounted to $68.2 million, $66.2 million and $67.1 million in 2017, 2016 and 2015, respectively. INCOME TAXES The Company computes taxes on income in accordance with the tax rules and regulations of the many taxing authorities where the income is earned. The income tax rates imposed by these taxing authorities may vary substantially. Taxable income may differ from pretax income for financial accounting purposes. To the extent that these differences create timing differences between the tax basis of an asset or liability and its reported amount in the financial statements, an appropriate provision for deferred income taxes is made. The Company has recorded a net provisional charge in the current period related to the impact of the U.S. legislation enacted on December 22, 2017, commonly referred to as the Tax Cuts and Jobs Act (the “TCJA”). These provisional amounts are recorded in accordance with SAB 118, which was issued by the SEC shortly after enactment of the TCJA. The Company will reflect, within the one year measurement period provided, the income tax effects of the TCJA in the reporting period in which the accounting under ASC Topic 740 is complete. The Company considers numerous factors to determine which foreign earnings are permanently reinvested in foreign operations. These include the financial requirements of the U.S. parent company and those of our foreign subsidiaries, the U.S. funding needs for dividend payments and stock repurchases, and the tax consequences of remitting earnings to the U.S. The TCJA imposed a one-time transition tax on all unremitted foreign earnings. The Company recognized a provisional charge of $31.6 million during 2017, representing the estimate of the Company’s obligation for this new tax. Therefore, as of December 31, 2017, the Company does not have a balance of earnings that have not been subject to U.S. federal taxation. For investment holdings outside the U.S., the Company maintains its assertion that the cash and distributable reserves at its non-U.S. affiliates are indefinitely reinvested. As such, the Company does not provide for the withholding and local income taxes that would become due if the amounts were distributed. The Company provides a liability for the amount of unrecognized tax benefits from uncertain tax positions. This liability is provided whenever the Company determines that a tax benefit will not meet a more-likely-than-not threshold for recognition. See Note 5 for more information. TRANSLATION OF FOREIGN CURRENCIES The functional currencies of the majority of the Company's foreign operations are the local currencies. Assets and liabilities of the Company’s foreign operations are translated into U.S. dollars at the rates of exchange on the balance sheet date. Sales and expenses are translated at the average rates of exchange prevailing during the year. The related translation adjustments are accumulated in a separate section of Stockholders’ Equity. Realized and unrealized foreign currency transaction gains and losses are reflected in income, as a component of miscellaneous income and expense, and represented losses of $5.0 million, $326 thousand and $3.9 million in 2017, 2016 and 2015, respectively. STOCK BASED COMPENSATION Accounting standards require the application of the non‑substantive vesting approach which means that an award is fully vested when the employee’s retention of the award is no longer contingent on providing future service. Under this approach, compensation costs are recognized over the requisite service period of the award instead of ratably over the vesting period stated in the grant. As such, costs are recognized immediately if the employee is retirement eligible on the date of grant or over the period from the date of grant until retirement eligibility if retirement eligibility is reached before the end of the vesting period stated in the grant. See Note 15 for more information. REVENUE RECOGNITION Product and Tooling Sales. The Company’s policy is to recognize revenue from product sales when the price is fixed and determinable, when the title and risk of loss has transferred to the customer, when the Company has no remaining obligations regarding the transaction and when collection is reasonably assured. The majority of the Company’s products shipped from the U.S. transfers title and risk of loss when the goods leave the Company’s shipping location. The majority of the Company’s products shipped from non‑U.S. operations transfer title and risk of loss when the goods reach their destination. Tooling revenue is also recognized when the title and risk of loss transfers to the customer. Services and Other. The Company invoices customers for certain services. The Company also receives revenue from other sources such as license, exclusivity or royalty agreements. Revenue is recognized when services are rendered or rights to use assets can be reliably measured and when collection is reasonably assured. License, exclusivity and royalty revenues are typically recognized when the contractual terms of each agreement are met. Service and other revenue is not material to the Company’s results of operations for any of the years presented. ADOPTION OF RECENT ACCOUNTING PRONOUNCEMENTS Changes to U.S. GAAP are established by the FASB in the form of accounting standards updates to the FASB’s Accounting Standards Codification. In August 2017, the FASB issued new guidance to improve the accounting for hedging activities. The guidance changes the financial reporting of hedging relationships to better portray the economic results of an entity’s risk management activities in its financial statements. In addition, the guidance makes certain targeted improvements to simplify the application of the hedge accounting guidance in current GAAP. The new standard is effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years. However, early application is permitted in any interim period after the issuance of this guidance. The Company adopted this standard in the third quarter of 2017. See details in Note 10 – Derivative Instruments and Hedging Activities. In August 2016, the FASB issued guidance on the classification of certain cash receipts and cash payments within the statement of cash flows. This guidance provides clarification for the following types of transactions: debt prepayment or extinguishment costs, settlement of zero-coupon debt instruments or other debt instruments with coupon rates that are insignificant in relation to the effective interest rate of the borrowing, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of corporate-owned life insurance, distributions received from equity method investees and beneficial interest in securitization transactions. The guidance also clarifies how the predominance principle should be applied when cash receipts and cash payments have aspects of more than one class of cash flows. The guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. However, early adoption is permitted and an entity that elects early adoption must adopt all of the amendments on a retrospective basis in the period of adoption. The Company adopted this standard in the fourth quarter of 2017. In March 2016, the FASB issued guidance that changes the accounting for certain aspects of share-based payments to employees. The guidance requires the recognition of the income tax effects of awards in the income statement when the awards vest or are settled, thus eliminating additional paid in capital pools. The guidance also allows for the employer to repurchase more of an employee’s shares for tax withholding purposes without triggering liability accounting. In addition, the guidance allows for a policy election to account for forfeitures as they occur rather than on an estimated basis. The new standard is effective for fiscal years and interim periods beginning after December 15, 2016. The Company has prospectively adopted the standard resulting in $10.4 million of additional tax deductions that would have been previously recorded in stockholders’ equity now being reported as a reduction in tax expense for the year ended December 31, 2017. The amount of excess tax benefits and deficiencies recognized in the provision for income taxes will fluctuate from period to period based on the price of the Company’s stock, the volume of share-based instruments settled or vested, and the value assigned to share-based instruments under U.S. GAAP. We have also prospectively adopted the standard for the presentation of the consolidated statements of cash flows. The impact of excess tax benefits from exercise of stock options is now shown within cash flows from operating activities instead of cash flows from financing activities. In addition, the Company has elected to continue its current practice of estimating expected forfeitures. In March 2016, the FASB issued guidance that eliminates the requirement that an investor retrospectively apply equity method accounting when an investment that it had accounted for by another method initially qualifies for the equity method. The guidance requires that an equity method investor add the cost of acquiring the additional interest in the investee to the current basis of the investor’s previously held interest and adopt the equity method of accounting as of the date the investment becomes qualified for equity method accounting. The new standard is effective for fiscal years and interim periods beginning after December 15, 2016. The adoption of the new rules did not have an impact on our financial statements. In July 2015, the FASB issued new guidance for simplifying the measurement of inventory. The core principle of the guidance is that an entity should measure inventory at the lower of cost or net realizable value. This standard is effective for annual reporting periods beginning after December 15, 2016. The Company adopted the requirements of the standard and the impact was not material to our current year financial statements. In May 2014, the FASB amended the guidance for recognition of revenue from customer contracts. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in the amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In August 2015, the FASB decided to defer the effective date by one year to December 15, 2017 for annual reporting periods beginning after that date. The FASB also decided to allow early adoption of the standard, but not before the original effective date of December 15, 2016. Subsequent to the initial standards, the FASB has also issued several ASUs to clarify specific revenue recognition topics. We continue to evaluate the impact the adoption of this standard will have on our Consolidated Financial Statements. The majority of our revenues are derived from product sales and tooling sales. We are also evaluating our service, license, exclusivity and royalty arrangements, which need to be reviewed individually to ensure proper accounting under the new standard. To date, our internal project team has reviewed a substantial portion of contracts. We believe the pronouncement will mainly impact the timing of when we account for both product and tooling sales. We currently recognize revenue for these contracts when the title and risk of loss transfers to the customer. Under the new guidance, we will recognize revenue for certain contracts over the time required to manufacture the product or build the tool. We also continue to progress in updating our internal controls along with reviewing and developing the additional disclosures required by the standard. We will adopt the modified retrospective transition method for implementing this guidance in the first quarter of 2018. Other accounting standards that have been issued by the FASB or other standards-setting bodies did not have a material impact on our consolidated financial statements. REVISION OF PRIOR PERIOD FINANCIAL STATEMENTS During the second quarter of 2017, the Company determined that the impact of restricted stock unit (RSU) vesting was incorrectly presented in the Condensed Consolidated Statement of Cash Flows. The effect of correcting this error resulted in a reduction to Net Cash Provided by Operations with a corresponding increase to Net Cash (Used) Provided by Financing Activities. As this correction represented a reclassification between two accounts within the Condensed Consolidated Statement of Cash Flows, the Condensed Consolidated Statements of Income, the Condensed Consolidated Balance Sheet and the Condensed Consolidated Statements of Changes in Equity were not impacted by this change. The Company determined the correction was not material to previously issued financial statements but was significant enough to revise. Following is a summary of the previously reported financial statement line items impacted by this revision of all periods and statements included in this report:
|  | As Previously |  |  |  |  |  |  |
|  | Reported |  | Adjustment |  | As Revised |
Revised Consolidated Statements of Cash Flows |  |  |  |  |  |  |  |  |  |
Year Ended December 31, 2016 |  |  |  |  |  |  |  |  |  |
Retirement and deferred compensation plan liabilities |  | $ | (7,486) |  | $ | (1,894) |  | $ | (9,380) |
Net Cash Provided by Operations |  |  | 327,193 |  |  | (1,894) |  |  | 325,299 |
Proceeds from stock option exercises |  |  | 53,453 |  |  | 1,894 |  |  | 55,347 |
Net Cash Provided (Used) by Financing Activities |  |  | (31,609) |  |  | 1,894 |  |  | (29,715) |
Year Ended December 31, 2015 |  |  |  |  |  |  |  |  |  |
Retirement and deferred compensation plan liabilities |  | $ | (29,576) |  | $ | (756) |  | $ | (30,332) |
Net Cash Provided by Operations |  |  | 324,515 |  |  | (756) |  |  | 323,759 |
Proceeds from stock option exercises |  |  | 64,003 |  |  | 756 |  |  | 64,759 |
Net Cash Provided (Used) by Financing Activities |  |  | (33,066) |  |  | 756 |  |  | (32,310) |

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