Amcor plc Form 10-Q Summary
Business Context and Reporting Period
Amcor plc is a global packaging company serving food, beverage, pharmaceutical, medical, personal care and consumer goods markets through flexible and rigid packaging operations. The company employs approximately 47,000 people at approximately 230 manufacturing sites in more than 40 countries.
This report covers the three and six months ended December 31, 2020, representing fiscal second quarter and first half of fiscal 2021. Comparisons are primarily with the corresponding 2019 periods. Results were affected by COVID-19, Bemis integration activities, restructuring, foreign currency movements and highly inflationary accounting in Argentina.
Key Financial Metrics
| Metric | Three Months Ended Dec. 31, 2020 | Three Months Ended Dec. 31, 2019 | Six Months Ended Dec. 31, 2020 | Six Months Ended Dec. 31, 2019 |
|---|---|---|---|---|
| Net sales | $3,103 million | $3,043 million | $6,200 million | $6,184 million |
| Gross profit | $651 million | $617 million | $1,305 million | $1,164 million |
| Gross margin | 21.0% | 20.3% | 21.0% | 18.8% |
| Operating income | $307 million | $272 million | $583 million | $413 million |
| Operating margin | 9.9% | 8.9% | 9.4% | 6.7% |
| Net income attributable to Amcor | $219 million | $186 million | $417 million | $252 million |
| Diluted EPS | $0.139 | $0.115 | $0.265 | $0.155 |
| Operating cash flow | Not separately provided | Not separately provided | $442 million | $342 million |
At December 31, 2020, cash and cash equivalents were $755 million, total debt was $6.485 billion and net debt was $5.730 billion. Undrawn credit facilities totaled approximately $1.3 billion. The company stated that it was in compliance with applicable debt covenants and expected operating cash flow, available cash, credit facilities and commercial paper access to fund operations, capital expenditures, dividends and share repurchases.
Capital expenditures and purchases of property, plant and equipment and intangible assets totaled $218 million in the first six months, compared with $207 million in the prior-year period. Dividends paid were $374 million, and share repurchases totaled approximately $75 million, including transaction costs.
Material Changes Versus the Prior Comparable Period
- Second-quarter sales increased 2.0% to $3.103 billion; first-half sales increased 0.3% to $6.200 billion. Excluding disposals, currency and raw-material pass-through, underlying first-half sales increased approximately 2.9%, driven by volume.
- Second-quarter net income attributable to Amcor increased 18% to $219 million; first-half net income increased 65% to $417 million.
- Gross margin improved to 21.0% in both the quarter and first half, versus 20.3% and 18.8%, respectively, in the prior-year periods. Improvements reflected higher volumes, Bemis synergies and the non-recurrence of prior-year purchase-accounting inventory and backlog amortization.
- Interest expense declined $15 million in the quarter and $35 million in the first half, primarily due to lower rates, commercial paper usage and repayment of higher-cost debt.
- Flexibles first-half adjusted EBIT increased 8.4% to $653 million, with margin rising to 13.5% from 12.4%. Rigid Packaging adjusted EBIT increased 5.7% to $134 million, with margin rising to 9.9% from 9.5%.
- First-half operating cash flow increased $100 million, or 29%, to $442 million, although investing cash flow changed from a $194 million inflow to a $76 million outflow because the prior-year period included higher disposal proceeds.
- Net debt increased from $5.492 billion at June 30, 2020 to $5.730 billion at December 31, 2020.
- The company adopted the current expected credit loss standard on July 1, 2020, reducing trade receivables by $7 million and retained earnings by $5 million after tax.
Guidance, Outlook, Risks and Unusual Items
Management did not provide a clear quantitative full-year earnings or sales guidance figure in the filing. The company continued to target approximately $180 million of pretax Bemis-related synergies by the end of fiscal 2022. Total pretax costs under the Bemis Integration Plan are expected to be approximately $200 million, with approximately $50 million to $55 million of related cash payments expected during the remainder of fiscal 2021.
The 2018 Rigid Packaging Restructuring Plan is expected to be substantially completed during fiscal 2021. Restructuring and related expenses were $46 million in the first half, and the restructuring liability was $79 million at December 31, 2020.
Amcor reported isolated COVID-19-related operational disruptions but stated that most facilities continued operating as essential services and that no material supply-chain disruptions had occurred through the reporting date. Management cautioned that the duration and severity of the pandemic, demand volatility, government restrictions and macroeconomic recovery could materially affect future results.
Other notable items included a $15 million gain on the sale of the AMVIG equity investment, a $6 million loss on disposals of non-core businesses, and an $11 million adverse impact from hyperinflationary accounting in Argentina during the first half. The first-half effective tax rate increased to 22.3% from 20.5%.
Brazilian tax litigation had recorded accruals of $13 million and estimated reasonably possible exposure in excess of accruals of $19 million. Environmental accruals totaled $64 million across U.S. and worldwide remediation matters. Management did not expect these matters to have a material adverse effect, but ultimate payments could exceed recorded accruals.
Disclosure controls were not effective at December 31, 2020 because of a previously reported material weakness involving segregation-of-duties controls in key IT systems. Management expected remediation by the end of fiscal 2021, subject to testing and potential COVID-19-related delays. The filing stated that the deficiency had not resulted in a financial statement misstatement.
On February 2, 2021, the board declared a $0.1175 per-share quarterly dividend and approved an additional $200 million share buyback program expected to be completed within twelve months, subject to market conditions.
Most Important Facts for Investors to Verify
- Confirm the sustainability of the substantial first-half margin and earnings improvement after excluding Bemis-related, restructuring, disposal, currency and purchase-accounting effects.
- Monitor COVID-19 impacts on customer demand, plant operations, labor availability and supply chains.
- Assess leverage, refinancing requirements and commercial paper dependence given $5.730 billion of net debt and senior facilities maturing between fiscal 2022 and 2024.
- Track progress toward the $180 million Bemis synergy target, remaining integration costs and restructuring cash expenditures.
- Verify remediation of the material internal-control weakness and the results of planned second-half fiscal 2021 testing.
- Evaluate exposure to foreign exchange, raw-material prices, interest rates, LIBOR transition, Argentine inflation and international operating risks.
- Review the potential outcomes of Brazilian tax matters and environmental remediation obligations, including exposures above recorded accruals.
- Consider the effect of the new $200 million buyback and ongoing dividends on liquidity, leverage and share count.