Amcor plc Form 10-Q Summary
Reporting period: Quarterly and nine-month periods ended March 31, 2021. Although the request identifies “2020 Q3,” the filing is for Amcor’s third fiscal quarter of 2021 and was filed May 6, 2021. Amcor is a global flexible and rigid packaging manufacturer operating approximately 230 principal sites in more than 40 countries with approximately 47,000 employees.
Financial performance
| Metric | Three months ended March 31 | Year-over-year change | Nine months ended March 31 | Year-over-year change |
|---|---|---|---|---|
| Net sales | $3,207 million | Up 2.1% | $9,407 million | Up 0.9% |
| Gross profit | $682 million | Up 4.6% | $1,987 million | Up 9.4% |
| Gross margin | 21.3% | Up from 20.8% | 21.1% | Up from 19.5% |
| Operating income | $373 million | Up 37.6% | $956 million | Up 39.8% |
| Operating margin | 11.6% | Up from 8.6% | 10.2% | Up from 7.3% |
| Net income attributable to Amcor | $267 million | Up 47.5% | $684 million | Up 58.0% |
| Diluted EPS | $0.173 | Up from $0.114 | $0.438 | Up from $0.269 |
| Adjusted EBIT | $402 million | Up from $360 million | $1,144 million | Up from $1,059 million |
Third-quarter sales growth was primarily attributable to favorable currency impacts and raw-material pass-through. Excluding disposed operations, currency, and raw-material pass-through, sales increased approximately 0.2%, reflecting favorable price/mix partly offset by lower volumes. Nine-month underlying sales growth was approximately 2.0%, driven by favorable volumes and price/mix.
- Flexibles: Third-quarter sales increased 2.7% to $2,500 million and Adjusted EBIT increased 11.1% to $352 million; Adjusted EBIT margin rose to 14.1% from 13.0%.
- Rigid Packaging: Third-quarter sales were $707 million, broadly unchanged, while Adjusted EBIT increased 6.7% to $75 million; margin rose to 10.6% from 9.9%.
- SG&A: Decreased 8.2% in the quarter and 7.0% for the nine-month period, primarily due to Bemis-related synergies and other savings.
- Interest expense: Declined to $36 million in the quarter from $46 million and to $113 million for nine months from $158 million, reflecting lower floating rates, commercial paper usage, and repayment of higher-cost debt.
- Taxes: Nine-month effective tax rate was 21.7%, compared with 21.9% in the prior-year period.
Cash flow, debt, and liquidity
- Cash flow from operations was $617 million for the nine months, up from $470 million.
- Capital expenditures and purchases of property, plant, equipment, and intangible assets were $335 million.
- Investing cash flow was a $115 million outflow, compared with a $117 million inflow in the prior-year period, principally because prior-year disposal proceeds were higher.
- Financing cash flow was a $601 million outflow and included $556 million of dividends and $308 million of share repurchases.
- Cash and cash equivalents were $690 million at March 31, 2021, compared with $743 million at June 30, 2020.
- Total debt was $6.604 billion and net debt was $5.914 billion, compared with $6.235 billion and $5.492 billion, respectively, at June 30, 2020.
- Undrawn credit facilities totaled approximately $1.2 billion. The company had aggregate revolving facilities of $4.1 billion, of which $2.9 billion was drawn, including commercial paper.
- Amcor amended its $3.75 billion syndicated facilities, extending maturities by one year, removing the minimum interest-coverage covenant, and increasing permitted leverage thresholds. Management stated that the company was in compliance with applicable debt covenants.
Material changes and unusual items
- A $52 million gain on disposal of a non-core European hospital supplies business contributed to the quarterly restructuring and related income of $24 million, compared with a $20 million expense in the prior-year quarter.
- The company sold its AMVIG equity investment, recording a $15 million gain, and disposed of non-core businesses in India and Argentina, recording a $6 million loss.
- Bemis integration and restructuring activities remain underway. Amcor continues to target approximately $180 million of pretax synergies by fiscal 2022. Total Bemis integration costs are expected to be approximately $200 million, with estimated net cash expenditures of approximately $150 million.
- Amcor expects approximately $20 million to $30 million of cash payments for Bemis-related restructuring and related expenses during the remainder of fiscal 2021. The 2018 Rigid Packaging restructuring plan is expected to be substantially completed during fiscal 2021.
- Highly inflationary accounting for Argentine subsidiaries reduced results by $7 million in the quarter and $17 million for nine months, compared with $5 million and $23 million, respectively, in the prior-year periods.
- Amcor 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.
Outlook, risks, and contingencies
Management stated that packaging demand has remained resilient and that the company is positioned to manage the COVID-19 pandemic. Facilities have generally operated as essential businesses, but customer order patterns remain volatile and future disruptions, closures, supply-chain interruptions, and macroeconomic effects cannot be reliably estimated.
Winter storms and other factors caused supply disruptions and increased resin and raw-material price volatility during the quarter; management said the effect on third-quarter results was not material but warned that future weather, transportation, and supply events could adversely affect results.
- Key risks include COVID-19 effects, changing consumer demand, customer concentration, competition, acquisition integration, raw-material and energy prices, foreign exchange, interest rates, LIBOR transition, credit ratings, cybersecurity, labor issues, environmental obligations, litigation, and goodwill or intangible-asset impairment.
- Brazilian tax and excise matters had $11 million of recorded accruals and estimated reasonably possible exposure above the accrual of $18 million. The company had posted or deposited approximately $43 million in letters of credit, judicial insurance, and court deposits.
- Environmental remediation accruals totaled $17 million for certain U.S. sites and $50 million for other worldwide locations. Management did not consider these obligations likely to have a material adverse effect, but ultimate payments could exceed accrued amounts.
- Disclosure controls were not effective as of March 31, 2021 because of a continuing material weakness in segregation-of-duties controls within key IT systems. Management expected remediation by the end of fiscal 2021, subject to successful testing, but provided no assurance that remediation would be completed on time.
- The board declared a quarterly dividend of $0.1175 per share payable June 15, 2021. Share repurchase programs authorized up to $350 million in aggregate, subject to amendment, suspension, or discontinuation.
Investor verification checklist
- Verify the filing period and fiscal-year designation: the report covers March 31, 2021, not calendar 2020 third quarter.
- Reconcile reported operating income and earnings with Adjusted EBIT and adjusted net income, particularly the $52 million disposal gain and other excluded items.
- Monitor net debt, commercial paper usage, facility availability, covenant amendments, and maturities through fiscal 2025.
- Assess whether Bemis synergies and restructuring savings offset raw-material inflation, supply-chain volatility, and potential volume weakness.
- Track progress toward remediation of the material weakness in internal control over financial reporting.
- Review the potential outcomes of Brazilian tax matters and environmental remediation obligations, including exposures exceeding recorded accruals.