Amcor plc Form 10-Q Summary
Business context and reporting period
Amcor is a global packaging company producing flexible and rigid packaging across more than 40 countries, with approximately 50,000 employees and 250 sites. This report covers the three months ended September 30, 2019, the first quarter of fiscal 2020, compared with the three months ended September 30, 2018.
The period includes the first full quarter contribution from the June 11, 2019 acquisition of Bemis Company, Inc., completed in an all-stock transaction valued at approximately $5.2 billion. Bemis contributed approximately $970 million of net sales and a $6 million net loss, including transaction and integration costs.
Financial results and key metrics
| Metric | Q1 FY2020 | Q1 FY2019 | Change |
|---|---|---|---|
| Net sales | $3,140.7 million | $2,262.4 million | 38.8% increase |
| Gross profit | $546.7 million | $393.8 million | 38.8% increase |
| Gross margin | 17.4% | 17.4% | Unchanged |
| Operating income | $140.6 million | $177.5 million | 20.8% decrease |
| Operating margin | 4.5% | 7.8% | Down 3.3 percentage points |
| Net income attributable to Amcor | $66.0 million | $98.4 million | 32.9% decrease |
| Diluted EPS | $0.04 | $0.08 | Decrease |
| Adjusted EBIT | $335.1 million | $211.4 million | 58.5% increase |
| Adjusted net income from continuing operations | $218.1 million | $128.0 million | Increase |
Reported sales growth primarily reflects the Bemis acquisition. On a pro forma basis, including Bemis and adjusting for divested remedy businesses, comparable sales declined approximately 1.0% excluding currency effects, reflecting unfavorable volumes of 0.4% and pricing, raw-material pass-through and mix effects of 0.6%.
Flexibles sales increased 58.5% to $2,430.8 million and adjusted EBIT increased 84.4% to $290.5 million, with adjusted EBIT margin improving to 12.0% from 10.3%. Rigid Packaging sales declined 2.5% to $710.6 million, while adjusted EBIT increased 3.2% to $70.5 million and margin improved to 9.9% from 9.4%.
Operating results were reduced by $83.6 million of material acquisition-related costs and other items, $68.3 million of acquired-intangible amortization, $17.3 million of restructuring charges and a $15.4 million adverse impact from hyperinflationary accounting in Argentina. The effective tax rate increased to 22.9% from 17.8%.
Cash flow, debt and liquidity
- Operating cash flow was an outflow of $89.4 million, improving from an outflow of $305.8 million in the prior-year quarter.
- Investing cash flow was $284.1 million, including $397.1 million of proceeds from the divestiture of the EC Remedy businesses.
- Capital expenditures and purchases of intangible assets were $115.4 million.
- Financing cash flow was an outflow of $306.2 million, including $1.805 billion of long-term debt repayments, $160.6 million of short-term debt repayment and $58.3 million of share buybacks and cancellations.
- Cash and cash equivalents declined to $480.2 million from $601.6 million at June 30, 2019.
- Total debt was $5.773 billion and net debt was $5.292 billion at September 30, 2019, compared with $6.103 billion and $5.502 billion, respectively, at June 30, 2019.
- Undrawn credit facilities totaled approximately $2.4 billion. Management stated that operating cash flow, available cash and credit facilities should provide sufficient liquidity for operations, capital expenditures and other commitments.
- The company was in compliance with applicable debt covenants at September 30, 2019.
Material changes, outlook and unusual items
- Management continues to target approximately $180 million of pretax Bemis synergies by the end of fiscal 2022. Total Bemis integration restructuring costs are expected to be approximately $200 million, including approximately $150 million of cash expenditures.
- Approximately $80 million of Bemis integration cash payments were expected during the balance of fiscal 2020. The separate Rigid Packaging restructuring plan is expected to cost approximately $95 million, with $15 million to $20 million of additional cash payments expected during the remainder of fiscal 2020.
- The EC Remedy divestiture closed August 8, 2019, generated $397.1 million of proceeds and produced an $8.8 million loss recorded in discontinued operations. Discontinued operations reduced quarterly net income by $7.7 million after tax.
- Adoption of ASC 842 on July 1, 2019 added $569.8 million of operating lease assets and $590.5 million of operating lease liabilities; management does not expect a material change in lease expense.
- The acquisition purchase-price allocation remains preliminary and may be materially adjusted until finalized within one year of closing.
- The board approved a $500 million share buyback program; approximately $58.2 million, or 5.8 million shares, had been repurchased and canceled during the quarter. A quarterly dividend of $0.12 per share was declared.
Risks, contingencies and controls
- Key risks include integration and realization of Bemis synergies, customer concentration and demand changes, competition, raw-material and energy prices, foreign exchange, interest rates, credit ratings, leverage, goodwill and intangible-asset impairment, global economic conditions, cybersecurity, labor issues and environmental or regulatory liabilities.
- Brazilian tax disputes had a recorded accrual of $15.3 million and estimated reasonably possible exposure in excess of the accrual of $25.5 million. Amcor had provided $42.2 million of letters of credit and deposited $13.1 million with courts.
- Bemis-related appraisal and shareholder litigation is pending. The company stated that potential damages cannot currently be reliably estimated and could be material if claims are successful.
- Management disclosed two material weaknesses in internal control over financial reporting related to U.S. GAAP technical accounting and reporting capabilities, and segregation-of-duties and period-end reporting controls. Disclosure controls and procedures were therefore concluded to be ineffective as of September 30, 2019; remediation was in progress and had not yet been completed.
Investor verification points
- Verify the sustainability of reported sales and earnings growth after separating Bemis acquisition effects, divestitures, currency and other adjustments.
- Track realization of the targeted $180 million Bemis synergies against integration costs and restructuring cash requirements.
- Assess debt reduction, free cash flow conversion and covenant headroom, particularly after the acquisition-related increase in leverage.
- Review the final Bemis purchase-price allocation and any resulting changes to goodwill, intangible assets, amortization and deferred taxes.
- Monitor remediation and auditor conclusions regarding the two disclosed material weaknesses in internal controls.
- Evaluate outcomes and potential financial exposure from the Brazilian tax matters and Bemis-related litigation.