Amcor plc: Fiscal 2020 Form 10-K Summary
Business context and reporting period
This filing is Amcor plc’s annual report for the fiscal year ended June 30, 2020, not a separate 2019 Q4 filing. Amcor is a global packaging manufacturer serving food, beverage, healthcare, pharmaceutical, personal care and other consumer markets. Its two reporting segments are Flexibles and Rigid Packaging. The fiscal 2020 results include a full year of Bemis Company, Inc., acquired on June 11, 2019, whereas fiscal 2019 included only approximately three weeks of Bemis results.
- Approximately 47,000 employees and 231 principal manufacturing facilities in more than 40 countries.
- Flexibles represented approximately 78% of fiscal 2020 consolidated sales; Rigid Packaging represented approximately 22%.
- Amcor completed the divestiture of three European medical packaging facilities acquired with Bemis during the first quarter of fiscal 2020.
Financial performance and key metrics
| Metric | Fiscal 2020 | Fiscal 2019 | Change |
|---|---|---|---|
| Net sales | $12,467.5 million | $9,458.2 million | +31.8% |
| Gross profit | $2,535.5 million | $1,799.1 million | +40.9% |
| Gross margin | 20.3% | 19.0% | +1.3 percentage points |
| Operating income | $994.0 million | $791.7 million | +25.6% |
| Operating margin | 8.0% | 8.4% | Down 0.4 percentage points |
| Net income attributable to Amcor | $612.2 million | $430.2 million | +42.3% |
| Diluted EPS | $0.382 | $0.363 | +5.2% |
| Cash flow from operating activities | $1,384.2 million | $776.1 million | +78.4% |
| Capital expenditures | $399.5 million | $332.2 million | +20.3% |
| Cash and cash equivalents | $742.6 million | $601.6 million | +23.4% |
| Total debt | $6,234.7 million | $6,103.2 million | +2.2% |
| Net debt | $5,492.1 million | $5,501.6 million | Down $9.5 million |
Adjusted EBIT from continuing operations increased to $1,497.1 million from $1,075.4 million, while adjusted net income increased to $1,027.9 million from $728.8 million. These are non-GAAP measures and exclude, among other items, restructuring, acquisition-related costs, acquired-intangible amortization, hyperinflation and certain impairments.
- Flexibles sales increased 48.5% to $9,754.7 million, primarily reflecting the full-year contribution from Bemis. Adjusted EBIT increased 63.4% to $1,335.1 million, and adjusted EBIT margin improved to 13.7% from 12.4%.
- Rigid Packaging sales decreased 6.1% to $2,716.3 million. Adjusted EBIT decreased 5.9% to $290.1 million, while the adjusted EBIT margin remained 10.7%.
- Interest expense was $206.9 million, broadly unchanged from $207.9 million. The effective tax rate declined to 22.6% from 28.4%.
- Dividends paid totaled $761.1 million. Amcor also completed a $500 million share repurchase program, repurchasing approximately 53.9 million shares.
Material changes versus the prior comparable period
- The Bemis acquisition was the principal driver of the 31.8% increase in consolidated sales and the increase in earnings. Acquisition-related impacts contributed 37.1% to the sales change after currency and raw-material pass-through effects.
- Currency translation reduced fiscal 2020 sales by approximately $274.0 million and reduced adjusted EBIT by approximately $25.4 million in Flexibles and $5.1 million in Rigid Packaging.
- Other income declined to $55.7 million from $186.4 million, primarily because fiscal 2019 included gains related to the U.S. regulatory-remedy divestiture.
- Restructuring and related expenses declined to $115.1 million from $130.8 million, but fiscal 2020 included $59.7 million of Bemis integration-plan charges and $37.5 million under the Rigid Packaging restructuring plan.
- Amcor recorded a $25.6 million impairment of its AMVIG equity-method investment, compared with $14.0 million in fiscal 2019.
- Highly inflationary accounting for Argentina reduced fiscal 2020 results by $27.7 million, compared with $30.2 million in fiscal 2019.
- Fiscal 2020 adopted the lease accounting standard, recognizing operating lease assets of $525.3 million and operating lease liabilities of $549.7 million at year-end.
- The company’s accumulated other comprehensive loss increased to $1,049.3 million from $722.4 million, primarily reflecting foreign-currency translation losses.
Cash flow, debt and liquidity
- Operating cash flow of $1,384.2 million substantially exceeded capital expenditures of $399.5 million, producing approximately $984.7 million of operating cash flow before capital expenditures.
- At June 30, 2020, Amcor had $1.8 billion of undrawn committed credit capacity. Revolving senior facilities had an aggregate limit of $4.2 billion, with $2.4 billion drawn, including commercial paper borrowings.
- The company issued $500 million of 2.63% senior unsecured notes due 2030 and €500 million of 1.125% senior unsecured notes due 2027 in June 2020. It canceled a 364-day syndicated facility after these issuances.
- Amcor remained in compliance with applicable debt covenants and reported investment-grade credit ratings, although the filing does not identify the specific ratings in the provided text.
- Commercial paper access was temporarily restricted in March 2020 during COVID-19 market disruption; the company refinanced maturities through committed bank facilities.
Outlook, management commentary, risks and unusual items
- Management stated that operations were largely classified as essential and experienced minimal operational and supply-chain disruption through fiscal year-end, but customer order patterns were volatile, particularly in the second half of fiscal 2020.
- The company could not reasonably estimate the duration, severity or ultimate financial impact of COVID-19. Potential effects include facility closures, customer shutdowns, supply-chain disruption, weaker demand, counterparty defaults, currency volatility and higher financing costs.
- Amcor continues to target approximately $180 million of annual pre-tax Bemis synergies by the end of fiscal 2022. Total Bemis integration costs are expected to be approximately $200 million, with approximately $150 million expected to be cash expenditures. The integration plan is expected to be completed by the end of fiscal 2022.
- The 2018 Rigid Packaging restructuring plan is expected to be completed during fiscal 2021. Its estimated total cost was increased by approximately $15 million in the fourth quarter of fiscal 2020, primarily due to additional non-cash impairments.
- Goodwill and other intangible assets totaled approximately $7.3 billion at June 30, 2020, including $5.3 billion of goodwill. No goodwill impairment was recorded, but valuation is sensitive to revenue growth, operating margins, terminal values, discount rates and economic conditions.
- Price and availability of resins, films, aluminum, energy and other inputs remain material risks. A hypothetical 1% increase in selected raw-material prices not passed through to customers would have reduced pre-tax income by approximately $56.9 million.
- A 1% increase in relevant floating interest rates would have reduced fiscal 2020 pre-tax income by approximately $17.1 million. The filing also highlights LIBOR transition risk, foreign-exchange risk, customer concentration, environmental regulation, litigation and cybersecurity risk.
- Management and the auditors concluded that a material weakness remained in internal control over financial reporting relating to segregation-of-duties conflicts in key IT systems. Remediation is expected by the end of fiscal 2021, although COVID-19 could delay completion. The previously reported weakness relating to U.S. GAAP technical accounting personnel was remediated.
- Pending litigation includes consolidated federal securities claims and a Missouri derivative action related to the Bemis merger. The company states that it is too early to reliably estimate potential damages and cannot assure that any damages would not be material.
- Environmental accruals included $17.1 million for U.S. remediation sites and $46.6 million for worldwide remediation obligations. Brazilian tax litigation had an $11.9 million accrual and an estimated reasonably possible exposure in excess of the accrual of $18.4 million.
Most important facts for an investor to verify
- Confirm that comparisons with fiscal 2019 are not fully comparable because Bemis contributed only a partial period in fiscal 2019.
- Assess whether the targeted $180 million of Bemis synergies and the approximately $200 million integration-cost estimate remain achievable.
- Monitor net leverage, commercial paper refinancing, debt maturities beginning in fiscal 2021, covenant compliance and the availability of committed facilities.
- Evaluate the sustainability of Flexibles margin improvement and the continuing weakness in Rigid Packaging volumes and price/mix.
- Track COVID-19 effects on customer demand, facility operations, supply chains, currencies and credit markets.
- Review the remediation of the internal-control material weakness, particularly segregation-of-duties controls across global ERP systems.
- Reassess goodwill and intangible-asset impairment sensitivity, as these assets represent a significant portion of total assets.
- Review the potential outcomes of Bemis-related securities and fiduciary-duty litigation, environmental matters and tax contingencies.
- Distinguish reported GAAP results from management’s adjusted EBIT and adjusted net income measures.