Amcor plc Form 10-K Summary
Business context and reporting period
Amcor is a global packaging manufacturer with two reporting segments: Flexibles and Rigid Packaging. Products include flexible packaging, rigid containers, specialty cartons and closures, primarily serving food, beverage, pharmaceutical, medical, personal care and other consumer markets.
The filing covers the fiscal year ended June 30, 2019, not a standalone “2018 Q4” filing. Fiscal 2019 includes Bemis results from the June 11, 2019 acquisition date. The June 2019 quarter therefore includes approximately three weeks of Bemis activity.
Financial performance and position
| Metric | FY2019 | FY2018 | Change |
|---|---|---|---|
| Net sales | $9,458.2 million | $9,319.1 million | +1.5% |
| Gross profit | $1,799.1 million | $1,856.8 million | -3.1% |
| Gross margin | 19.0% | 19.9% | -0.9 percentage points |
| Operating income | $791.7 million | $993.9 million | -20.3% |
| Operating margin | 8.4% | 10.7% | -2.3 percentage points |
| Net income attributable to Amcor | $430.2 million | $575.2 million | -25.2% |
| Diluted EPS | $0.36 | $0.49 | -26.5% |
| Adjusted net income | $729.5 million | $697.3 million | +4.6% |
| Cash flow from operations | $776.1 million | $871.4 million | -10.9% |
| Capital expenditures | $332.2 million | $365.0 million | -9.0% |
Flexibles represented approximately 70% of consolidated sales and generated adjusted EBIT of $817.2 million, compared with $801.3 million in the prior year. Rigid Packaging generated adjusted EBIT of $308.2 million, compared with $298.3 million.
At June 30, 2019, cash and cash equivalents were $601.6 million. Total debt was $6.1 billion and net debt was $5.5 billion, up from $4.2 billion in 2018, primarily because of the Bemis transaction. The company had $2.7 billion of undrawn credit facilities and stated that operating cash flow and available facilities were sufficient to fund operations, capital expenditures and other commitments.
Quarterly information relevant to the requested period
The filing reports the June 2019 quarter, compared with June 2018. June 2019 net sales were $2,596.3 million versus $2,452.8 million, gross profit was $528.3 million versus $527.4 million, net income attributable to Amcor was $80.6 million versus $230.0 million, and diluted EPS was $0.06 versus $0.19. The filing text does not provide a separate quarter labeled “2018 Q4” beyond this comparative June-quarter information.
Material changes versus the prior comparable period
- Net sales increased modestly, reflecting 3.1% constant-currency growth in legacy Amcor operations, including 2.3% favorable pricing and 0.8% volume/mix growth. Currency translation reduced reported sales by $368.9 million, partly offset by $215.4 million of Bemis sales.
- Reported profitability declined because of Bemis transaction and integration costs, restructuring, impairment charges, hyperinflationary accounting in Argentina and other unusual items. Adjusted net income increased despite the reported decline.
- SG&A increased 25.9% to $999.0 million, largely because of Bemis transaction-related costs.
- Restructuring and related expenses increased to $130.8 million from $40.2 million, including $64.1 million for the Rigid Packaging plan and $47.9 million for the Bemis integration plan.
- Other income included a $159.1 million gain from the sale of three U.S. medical packaging facilities required as a Bemis merger remedy.
- The effective tax rate increased to 28.4% from 16.4%, primarily due to the non-deductibility of certain transaction costs and taxation of the U.S. remedy sale.
Guidance, outlook, risks and unusual items
- Management targeted approximately $180 million of annual pretax net synergies from the Bemis acquisition by the end of fiscal 2022. Estimated total pretax integration costs were $200 million, including approximately $150 million of cash costs.
- The Rigid Packaging restructuring plan was expected to cost approximately $95 million and be completed in fiscal 2020. The Bemis integration plan was expected to be completed by the end of fiscal 2022.
- The company expects fiscal 2020 pension expense before tax of approximately $6.3 million.
- Adoption of the new lease standard on July 1, 2019 was expected to increase operating lease assets and liabilities by approximately $600 million to $800 million, with an immaterial income-statement impact and an estimated $75 million reduction to retained earnings from derecognized sale-leaseback gains.
- Key risks include Bemis integration and synergy execution, elevated leverage, variable interest rates, foreign exchange, raw-material and energy prices, customer concentration, competitive pricing, economic weakness, environmental regulation, litigation and cybersecurity.
- A 1% increase in variable interest rates would increase annual interest expense by approximately $40 million based on $4.0 billion of variable-rate debt. A 1% increase in selected raw-material prices not passed to customers would have reduced pretax income by approximately $41.4 million in fiscal 2019.
- Management disclosed two material weaknesses in internal control over financial reporting related to U.S. GAAP technical expertise and segregation of duties in key information-technology systems. Remediation was in progress, and disclosure controls were concluded to be ineffective as of June 30, 2019.
- Pending Bemis-related shareholder and merger litigation could result in material damages, although the filing states that exposure could not yet be reliably estimated.
Important facts for investors to verify
- Reconcile reported results with adjusted net income and adjusted EBIT, particularly the $143.1 million of material acquisition costs and other items excluded from adjusted results.
- Assess whether the targeted $180 million Bemis synergies are achieved on schedule and whether integration costs remain within the estimated $200 million.
- Monitor net debt, refinancing requirements, covenant compliance and the effect of LIBOR replacement and interest-rate changes.
- Evaluate the sustainability of earnings after excluding the $159.1 million U.S. remedy gain and other nonrecurring items.
- Follow remediation of the two material weaknesses and management’s subsequent assessment under Sarbanes-Oxley Section 404.
- Review the final Bemis purchase-price allocation, goodwill and intangible-asset valuations, which were preliminary at June 30, 2019.
- Confirm the post-period sale of the European Commission remedy assets for approximately $394 million and the approved $500 million share buyback.