Amcor plc Form 10-Q Summary
Reporting period: Quarter and nine months ended March 31, 2020, filed May 11, 2020. The request metadata identifies “2019 Q3,” but the filing is for fiscal 2020 third quarter. Amcor is a global packaging company operating approximately 250 sites in more than 40 countries, with Flexible and Rigid Packaging segments. The financial statements are unaudited and prepared under U.S. GAAP.
Financial Results and Key Metrics
| Metric | Three months ended March 31 | Nine months ended March 31 |
|---|---|---|
| Net sales | $3,141.0 million, up 36.0% | $9,324.8 million, up 36.0% |
| Gross profit / margin | $652.0 million / 20.8% | $1,816.0 million / 19.5% |
| Operating income / margin | $271.2 million / 8.6% | $684.1 million / 7.3% |
| Net income attributable to Amcor | $181.5 million | $433.1 million |
| Diluted EPS | $0.114 | $0.269 |
| Adjusted EBIT | $360.2 million | $1,059.2 million |
| Adjusted net income from continuing operations | $246.6 million | $719.4 million |
- Cash flow: Nine-month operating cash flow was $470.3 million, compared with $121.4 million in the prior-year period. Investing cash flow was an inflow of $116.4 million, including $424.9 million of divestiture proceeds. Financing cash flow was an outflow of $589.9 million.
- Liquidity: Cash and cash equivalents were $537.8 million at March 31, 2020. Undrawn credit facilities totaled approximately $1.4 billion. The company stated that operating cash flow, cash and available borrowings should fund operations, capital expenditures, commitments and dividends into the foreseeable future.
- Debt: Total debt was $6,521.6 million and net debt was $5,983.8 million, versus $6,103.2 million and $5,501.6 million, respectively, at June 30, 2019. Amcor reported compliance with applicable debt covenants.
- Dividends and repurchases: The company paid a quarterly dividend of $0.115 per share and repurchased approximately $478.2 million, or 51.5 million shares, during the nine months.
- Taxes: The nine-month effective tax rate increased to 21.9% from 18.5%, primarily due to nondeductible restructuring and transaction costs and a greater contribution from higher-tax jurisdictions following the Bemis acquisition.
Material Changes Versus the Prior Comparable Period
- Reported sales and earnings increased primarily because the June 2019 acquisition of Bemis contributed approximately 40.5% of third-quarter sales growth and 40.8% of nine-month sales growth.
- Flexibles third-quarter sales increased 54.4% and adjusted EBIT increased 87.1%; adjusted EBIT margin improved to 13.4% from 11.1%. For nine months, Flexibles adjusted EBIT increased 74.2% to $946.8 million.
- Rigid Packaging third-quarter sales declined 3.6%, while adjusted EBIT increased 2.3% and margin improved to 10.1% from 9.5%. For nine months, sales declined 4.3% and adjusted EBIT declined 7.7% to $201.5 million.
- Nine-month diluted EPS declined to $0.269 from $0.301 because the number of shares increased substantially following the all-stock Bemis acquisition, despite higher net income.
- Operating margin declined to 7.3% from 8.5% for the nine-month period. SG&A rose to 11.1% of sales from 9.1%, reflecting the acquired Bemis cost base and transaction and integration costs.
- Net debt increased by approximately $482 million from June 30, 2019. Accumulated other comprehensive loss increased to $1,057.9 million, primarily due to a $308.3 million nine-month foreign-currency translation loss.
Outlook, Commentary, Risks and Unusual Items
- COVID-19: Amcor reported minimal operational disruption through March 31, 2020 because most facilities were considered essential. However, customer order patterns were volatile, North and Latin American Rigid Packaging volumes were adversely affected in April by lower convenience and on-the-go traffic, and future disruptions, facility closures, supply-chain issues and financing-market constraints could be material. The duration and financial impact could not be reasonably estimated.
- Bemis integration: Management continues to target approximately $180 million of pretax synergies by fiscal 2022. Total integration costs are expected to be approximately $200 million, including $165 million of restructuring and related costs and $35 million of general integration costs. Approximately $20 million to $30 million of additional cash payments were expected during the remainder of fiscal 2020.
- Restructuring: Third-quarter restructuring and related expense was $20.1 million; the cumulative expense incurred under the material plans was $192.6 million. The 2018 Rigid Packaging plan is expected to conclude in fiscal 2021, while the Bemis integration plan is expected to conclude by fiscal 2022.
- Divestitures and discontinued operations: The company completed the required EC Remedy divestiture for $397.1 million and recorded an $8.8 million loss. Nine-month discontinued operations loss was $7.7 million.
- Accounting and impairment: Adoption of the lease standard added $569.8 million of operating lease assets and $590.5 million of lease liabilities at adoption. No goodwill impairment trigger was identified at March 31, 2020. Amcor’s AMVIG investment was approximately 20% below carrying value, but management concluded the decline was temporary; future COVID-19-related uncertainty could result in an impairment.
- Legal and control matters: Bemis-related appraisal, securities and fiduciary-duty litigation remains pending, and the company cannot reliably estimate potential damages. Management concluded disclosure controls were ineffective because two previously identified material weaknesses remained, involving U.S. GAAP and SEC reporting expertise and segregation-of-duties controls in key IT systems.
Investor Verification Priorities
- Verify the extent to which reported growth, margins and cash flow are attributable to Bemis acquisition accounting versus organic operating performance.
- Monitor COVID-19 effects on Rigid Packaging demand, customer shutdowns, supply-chain continuity, plant utilization and refinancing conditions.
- Reconcile reported net income and EPS with adjusted EBIT and adjusted net income, including restructuring, acquisition costs, acquired-intangible amortization and hyperinflation adjustments.
- Assess leverage, upcoming debt maturities, commercial-paper availability, covenant headroom and the planned refinancing of existing obligations.
- Track realization of the $180 million Bemis synergy target against the estimated $200 million integration cost.
- Review the remediation of the two material weaknesses and subsequent auditor conclusions regarding internal control over financial reporting.
- Evaluate potential AMVIG impairment, Bemis-related litigation exposure, Brazilian tax contingencies and foreign-currency effects.