Amcor plc — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended December 31, 2019. The filing was signed February 11, 2020. The requested “2019 Q2” corresponds to Amcor’s fiscal Q2 2020.
Business Context
Amcor is a global packaging company with approximately 50,000 employees and 250 sites in more than 40 countries. It operates through Flexibles and Rigid Packaging segments. Results include the Bemis acquisition, completed June 11, 2019, which materially increased scale, debt, share count and reported revenue.
Key Financial Metrics
| Metric | Three months ended Dec. 31, 2019 | Three months ended Dec. 31, 2018 | Six months ended Dec. 31, 2019 | Six months ended Dec. 31, 2018 |
|---|---|---|---|---|
| Net sales | $3,043.1 million | $2,285.4 million | $6,183.8 million | $4,545.6 million |
| Gross profit | $617.3 million | $453.0 million | $1,164.0 million | $844.6 million |
| Gross margin | 20.3% | 19.8% | 18.8% | 18.6% |
| Operating income | $272.3 million | $221.5 million | $412.9 million | $399.0 million |
| Operating margin | 8.9% | 9.7% | 6.7% | 8.8% |
| Net income attributable to Amcor | $185.6 million | $138.6 million | $251.6 million | $237.0 million |
| Diluted EPS | $0.115 | $0.120 | $0.155 | $0.204 |
| Adjusted EBIT | $364.0 million | $282.0 million | $699.0 million | $493.4 million |
- Cash flow: Six-month operating cash flow was $342.0 million versus $234.7 million in the prior-year period. Investing activities provided $194.0 million, including divestiture proceeds; capital expenditures and intangible asset purchases were $206.6 million.
- Liquidity: Cash and cash equivalents were $673.8 million at December 31, 2019, compared with $601.6 million at June 30, 2019. Undrawn credit facilities totaled approximately $1.9 billion.
- Debt: Total debt was $6,210.7 million and net debt was $5,536.9 million, compared with $6,103.2 million and $5,501.6 million, respectively, at June 30, 2019. The company reported compliance with applicable debt covenants.
- Taxes: The six-month effective tax rate increased to 20.5% from 17.5%, primarily due to nondeductible restructuring and transaction costs and higher earnings in higher-tax jurisdictions.
Material Changes Versus the Prior Comparable Period
- Reported sales increased 33.2% in the quarter and 36.0% for the six-month period, primarily because of Bemis. On a comparable basis, including Bemis in the prior period and adjusting for divestitures, sales declined 3.9% in the quarter and 2.4% year to date, excluding currency effects.
- Comparable sales were pressured by lower raw-material pass-through, unfavorable price/mix and lower volumes. Currency reduced quarterly sales by $38.2 million and six-month sales by $89.0 million.
- Flexibles adjusted EBIT increased to $329.4 million in the quarter from $211.4 million and to $619.9 million for six months from $368.9 million. Flexibles margins improved to 13.6% and 12.8%, respectively.
- Rigid Packaging adjusted EBIT declined to $59.5 million in the quarter from $80.2 million and to $130.0 million for six months from $148.5 million. The six-month margin declined to 9.7% from 10.6%.
- Net income increased, but diluted EPS declined because the Bemis stock consideration increased the diluted weighted-average share count by approximately 40%.
- SG&A increased substantially, partly due to the acquired Bemis cost base and transaction and integration costs. Restructuring expense declined year over year but remained material at $24.1 million in the quarter and $41.7 million for six months.
Guidance, Outlook, Risks and Unusual Items
- Bemis integration: Management targets approximately $180 million of pretax synergies by the end of 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 $150 million is expected to be cash-based.
- Restructuring: The company expects approximately $50 million to $60 million of Bemis integration cash payments during the balance of fiscal 2020. The separate Rigid Packaging restructuring plan is expected to be materially completed during fiscal 2020.
- Divestitures: The EC Remedy divestiture generated $397.1 million of proceeds and an $8.8 million loss reported in discontinued operations. The six-month loss from discontinued operations was $7.7 million.
- Inflation: Hyperinflationary accounting for Argentine subsidiaries reduced results by $3.1 million in the quarter and $18.5 million for six months.
- Contingencies: Brazilian tax matters had a recorded accrual of $15.9 million and estimated reasonably possible exposure above the accrual of $26.4 million. The company had provided $43.6 million of letters of credit and deposited $13.5 million with courts.
- Litigation: Bemis-related appraisal, securities and fiduciary-duty lawsuits remain pending. Management stated that damages cannot currently be reliably estimated and could be material if claims succeed.
- Internal controls: Management concluded that disclosure controls were not effective as of December 31, 2019 because two material weaknesses identified during the conversion to U.S. GAAP remained outstanding. Remediation efforts are underway.
- Other risks: Key risks include Bemis integration, customer concentration and demand, competition, raw-material and energy prices, foreign exchange and interest rates, debt refinancing, goodwill and intangible-asset impairment, litigation, labor and regulatory matters, and information technology controls.
- Dividend: The board declared a quarterly dividend of $0.115 per share on February 11, 2020, payable March 24, 2020.
Investor Verification Priorities
- Verify the extent to which reported growth is acquisition-driven versus organic, including comparable sales, volume and price/mix trends.
- Track realization of the $180 million Bemis synergy target against the projected $200 million integration cost.
- Assess leverage, debt maturities, refinancing requirements, interest-rate exposure and remaining credit availability.
- Monitor whether Rigid Packaging performance stabilizes and whether Flexibles margin gains persist after integration costs decline.
- Review the two material weaknesses in internal controls and subsequent remediation testing.
- Evaluate exposure from Bemis-related litigation, Brazilian tax proceedings and other contingencies.
- Reconcile GAAP earnings and EPS with adjusted EBIT and adjusted net income, particularly acquisition amortization, restructuring, inventory fair-value step-up and other excluded items.