Business Context and Reporting Period
Amcor plc is a global packaging company producing flexible packaging, rigid containers, specialty cartons and closures for food, beverage, pharmaceutical, medical, personal-care and other markets. This unaudited Form 10-Q covers the three and six months ended December 31, 2021, representing the second quarter and first half of fiscal 2022. Results are presented under U.S. GAAP in U.S. dollars.
Key Financial Metrics
| Metric | Three Months Ended December 31, 2021 | Prior Year | Six Months Ended December 31, 2021 | Prior Year |
|---|---|---|---|---|
| Net sales | $3,507 million | $3,103 million | $6,927 million | $6,200 million |
| Gross profit | $645 million | $651 million | $1,295 million | $1,305 million |
| Gross margin | 18.4% | 21.0% | 18.7% | 21.0% |
| Operating income | $322 million | $307 million | $618 million | $583 million |
| Operating margin | 9.2% | 9.9% | 8.9% | 9.4% |
| Net income attributable to Amcor | $225 million | $219 million | $427 million | $417 million |
| Diluted EPS | $0.148 | $0.139 | $0.279 | $0.265 |
| Adjusted EBIT | $388 million | $385 million | $769 million | $743 million |
Cash Flow, Balance Sheet and Liquidity
- Six-month operating cash flow was $323 million, down from $442 million, primarily because higher raw-material costs increased working capital.
- Investing cash outflow was $265 million versus $76 million in the prior-year period, including $255 million of property, plant and equipment and intangible-asset purchases. The prior year benefited from divestiture proceeds.
- Financing cash outflow was $235 million versus $409 million, reflecting higher net commercial-paper borrowings, partly offset by debt repayments, dividends and share repurchases.
- Cash and cash equivalents were $626 million at December 31, 2021, compared with $850 million at June 30, 2021.
- Total debt was $6.669 billion and net debt was $6.043 billion, compared with $6.289 billion and $5.439 billion, respectively, at June 30, 2021.
- Undrawn credit facilities totaled approximately $0.9 billion. Revolving senior facilities had a $3.8 billion aggregate limit, of which $2.9 billion was drawn, including commercial-paper borrowings.
- Amcor was in compliance with applicable debt covenants, including a leverage-ratio limit of 3.9 times, at December 31, 2021. Management stated that available operating cash flow, credit facilities and commercial-paper access should fund operations, capital expenditures, dividends and authorized repurchases into the foreseeable future.
Material Changes Versus the Prior Comparable Period
- Quarterly sales increased 13% and six-month sales increased 11.7%. Excluding raw-material pass-through, currency, and disposed or ceased operations, underlying sales growth was 3.4% in the quarter and 2.1% for the six months, driven by volume and price/mix.
- Gross profit declined modestly despite higher sales, and gross margin contracted by 2.6 percentage points in both the quarter and six-month period, primarily because of the timing of passing through higher raw-material and related costs.
- Operating income increased 4.9% for the quarter and 6.0% for the six months, helped by lower SG&A and restructuring costs. Operating margins nevertheless declined because of gross-margin pressure.
- Flexibles quarterly adjusted EBIT increased 3.2% to $352 million, while its margin declined to 13.0% from 13.9%. Six-month adjusted EBIT increased 5.8% to $691 million, with margin declining to 12.9% from 13.5%.
- Rigid Packaging quarterly adjusted EBIT decreased 11.3% to $55 million, and six-month adjusted EBIT decreased 12.7% to $117 million. Margins declined to 6.9% and 7.4%, respectively, primarily because of unfavorable plant-cost and volume impacts.
- Restructuring and related expense declined to $10 million from $23 million in the quarter and to $18 million from $46 million for the six months, reflecting completion of the Rigid Packaging restructuring plan and lower Flexibles costs.
- Six-month earnings benefited from lower restructuring and SG&A costs but were partly offset by $27 million of net property and related business losses associated primarily with the Durban, South Africa facility destruction.
- Equity income from affiliates fell to zero from $19 million because Amcor sold its AMVIG investment in September 2020.
Guidance, Outlook, Commentary and Risks
- Management continued to target at least $180 million of pretax synergies from the Bemis integration by the end of fiscal 2022. Total Bemis integration costs are expected to be approximately $230 million to $250 million, with approximately $60 million to $65 million of restructuring-related cash payments expected during the balance of fiscal 2022.
- Supply shortages and price volatility for resins and other raw materials continued in both segments. Labor shortages, transportation constraints, energy shortages and weather disruptions contributed to the inability to fulfill the complete order book in the first half of fiscal 2022. Management does not expect the underlying market volatility to abate in the near term.
- The COVID-19 pandemic had not materially disrupted operations or liquidity through the reporting date, and most facilities remained operational as essential businesses. However, future outbreaks, restrictions and supply-chain disruptions remain uncertain.
- A July 2021 fire destroyed Amcor’s Durban manufacturing facility during civil unrest. The company recorded $43 million of related losses and expenses in the first quarter, recognized a $20 million insurance receivable for probable recoveries, and expects additional insurance proceeds, although timing and amount remain uncertain.
- The company recorded a $9 million expense related to a commitment to sell non-core assets, a $3 million non-cash pension settlement loss, and $4 million of hyperinflation-related losses for the six months.
- The Board declared a quarterly dividend of $0.12 per share payable March 15, 2022, and approved an additional $200 million share repurchase authorization on February 1, 2022, supplementing the $400 million authorization approved in August 2021. Repurchase timing and volume may change.
- Principal risks include customer demand and concentration, competition, raw-material and energy availability and pricing, supply-chain disruption, COVID-19, international operations and foreign exchange, interest rates and debt levels, credit ratings, litigation and environmental obligations, information technology, labor, tax and regulatory changes, ESG expectations, and potential goodwill or intangible-asset impairments.
- Brazilian tax and excise matters had $11 million of accrued liabilities and estimated reasonably possible exposure above accruals of $18 million. Environmental remediation accruals totaled $65 million globally. Management did not believe these matters would materially affect liquidity, results or financial condition.
Most Important Facts for Investors to Verify
- Whether raw-material pass-through mechanisms catch up with cost inflation sufficiently to restore gross margins.
- Whether Rigid Packaging plant performance and volume execution improve, given its significant adjusted EBIT and margin declines.
- The timing and amount of insurance recoveries related to the Durban fire.
- Actual remaining cash costs and realized synergies from the Bemis integration plan.
- Net debt progression, commercial-paper reliance, covenant headroom and availability under the $0.9 billion of undrawn facilities.
- Whether operating cash flow improves as working-capital pressure from higher raw-material costs moderates.
- The effect of announced dividends and share repurchases on liquidity, leverage and per-share earnings.
- Potential outcomes of Brazilian tax litigation, environmental remediation obligations and other contingencies.