Notes to Condensed Consolidated Financial Statements
Note 1 - Nature of Operations and Basis of Presentation
Amcor plc ("Amcor" or the "Company") is a public limited company incorporated under the Laws of the Bailiwick of Jersey. The Company's history dates back more than 150 years, with origins in both Australia and the United States of America. Today, Amcor is a global leader in developing and producing responsible packaging for food, beverage, pharmaceutical, medical, home and personal-care, and other consumer goods end markets. The Company's innovation excellence and global packaging expertise enables the Company to solve packaging challenges around the world every day, producing packaging that is more functional, appealing, and cost effective for its customers and their consumers and importantly, more sustainable for the environment.
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States ("U.S. GAAP") for interim financial information. Consistent with these requirements, this Form 10-Q does not include all the information required by U.S. GAAP for complete financial statements. Further, the year-end condensed consolidated balance sheet data as of June 30, 2022 was derived from audited financial statements but does not include all disclosures required by U.S. GAAP. It is management's opinion, however, that all material and recurring adjustments have been made that are necessary for a fair statement of its interim financial position, results of operations, and cash flows. For further information, this Form 10-Q should be read in conjunction with the audited consolidated financial statements and accompanying notes in the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2022.
There have been no material changes to the accounting policies followed by the Company during the current fiscal year. The Company reclassified prior year comparative figures in the condensed consolidated balance sheets to conform to the current year's presentation. This change in presentation did not have an impact on the Company’s financial condition or operating results. Certain amounts in the Company's notes to unaudited condensed consolidated financial statements may not add or recalculate due to rounding.
Note 2 - New Accounting Guidance
Recently Adopted Accounting Standards
In November 2021, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2021-10, Government Assistance (Topic 832) that adds certain disclosure requirements for entities that receive government assistance. The standard is effective for annual periods beginning after December 15, 2021 with early adoption permitted. The Company adopted ASU 2021-10 on July 1, 2022, and the adoption did not have a material impact on the Company's condensed consolidated financial statements. ASU 2021-10 may have a material impact on the Company’s disclosures in the future, if government assistance provided to the Company were to become material.
Accounting Standards Not Yet Adopted
In September 2022, the FASB issued Accounting Standards Update ("ASU") 2022-04 that adds certain disclosure requirements for entities that use supplier finance programs in connection with the purchase of goods and services. The new standard's requirement to disclose the key terms of supplier finance programs is effective for all interim and annual periods beginning with the Company's fiscal year ending June 30, 2024. The new standard does not affect the recognition, measurement, or financial statement presentation of supplier finance program obligations. Early adoption is permitted. The Company is currently evaluating the impact that this new guidance may have on its consolidated financial statements.
The Company considers the applicability and impact of all ASUs issued by the FASB. The Company determined at this time that all other ASUs not yet adopted are either not applicable or are expected to have a minimal impact on its results of operation, financial position, and disclosures.
Note 3 - Held for Sale
During the fourth quarter of fiscal year 2022, the Company classified the assets and liabilities of its Russian operations as held for sale as a result of the Company's decision to sell its three manufacturing facilities in Russia ("Russian business"), and recorded an impairment of $90 million. In the first quarter of fiscal year 2023, the Company has obtained indicative bids on which basis the expected fair value less costs to sell the Russian business has been updated, which did not result in a change to the previously recognized impairment. The Russian business is part of the Company’s Flexibles segment and is expected to be sold within fiscal year 2023. The disposal of the Russian business will not represent a strategic shift that will have a major effect on the Company's operations and financial results, and therefore does not qualify for reporting as a discontinued operation.
Major classes of assets and liabilities of the Russian business classified as held for sale were as follows:
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($ in millions) | | September 30, 2022 | | June 30, 2022 |
Cash and cash equivalents | | $ | 49 | | | $ | 75 | |
Trade receivables, net | | 79 | | | 66 | |
Inventories, net | | 37 | | | 40 | |
Prepaid expenses and other current assets | | 26 | | | 36 | |
Property, plant, and equipment, net | | 47 | | | 49 | |
Goodwill | | 16 | | | 16 | |
Total assets held for sale | | 254 | | | 282 | |
Less accumulated impairment (1) | | (90) | | | (90) | |
Total assets held for sale, net | | $ | 164 | | | $ | 192 | |
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Trade payables | | 37 | | | 65 | |
Total current liabilities held for sale | | $ | 37 | | | $ | 65 | |
(1) Inclusive of accumulated other comprehensive loss related to the Russian business.
This table excludes other non-material assets and liabilities that are held for sale but not part of the Russian business.
Note 4 - Acquisitions
On August 1, 2022, the Company completed the acquisition of 100% equity interest in DGPack s.r.o., a Czech Republic company that operates a world-class flexible packaging manufacturing plant. The initial purchase consideration amounted to $60 million and is subject to customary post-closing adjustments. The consideration includes $6 million that will be paid in the second quarter of fiscal year 2023. The acquisition is part of the Company's Flexibles reportable segment and resulted in the recognition of acquired identifiable net assets of $39 million and goodwill of $21 million. Goodwill is not deductible for tax purposes. The fair values of the identifiable net assets acquired and goodwill are based on the Company's best estimate as of September 30, 2022 and are considered preliminary. The fair value estimates were based on income, market, and cost valuation methods. The Company aims to complete the purchase price allocation as soon as practicable but no later than one year from the date of the acquisition.
Pro forma information related to the acquisition of DGPack s.r.o. has not been presented, as the effect of the acquisition on the Company's consolidated financial statements was not material.
Note 5 - Restructuring
The Company's restructuring activities in the three months ended September 30, 2022 were primarily comprised of restructuring activities related to the Russia-Ukraine conflict.
Restructuring and related expenses, net were $1 million and $8 million during the three months ended September 30, 2022 and 2021, respectively, and primarily relate to the Flexibles reporting segment. The expenses related to restructuring activities have been presented on the unaudited condensed consolidated statements of income as restructuring and related expenses, net.
An analysis of the Company's restructuring plan liability is as follows:
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($ in millions) | | Employee Costs | | Fixed Asset Related Costs | | Other Costs | | Total Restructuring Costs |
Liability balance at June 30, 2022 | | $ | 97 | | | $ | 3 | | | $ | 18 | | | $ | 118 | |
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Cash paid | | (7) | | | (1) | | | (1) | | | (9) | |
Reversal of unused amounts | | (2) | | | — | | | — | | | (2) | |
Foreign currency translation | | (5) | | | — | | | (1) | | | (6) | |
Liability balance at September 30, 2022 | | $ | 83 | | | $ | 2 | | | $ | 16 | | | $ | 101 | |
The Company expects the majority of the liability for employee, fixed asset related, and other costs as of September 30, 2022 to be paid by the end of fiscal year 2023. The accruals related to restructuring activities have been recorded on the unaudited condensed consolidated balance sheets under other current liabilities and other non-current liabilities.
Note 6 - Goodwill and Other Intangible Assets, Net
Goodwill
Changes in the carrying amount of goodwill, excluding amounts classified as held for sale, attributable to each reportable segment were as follows:
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($ in millions) | | Flexibles Segment | | Rigid Packaging Segment | | Total |
Balance as of June 30, 2022 | | $ | 4,307 | | | $ | 978 | | | $ | 5,285 | |
Acquisitions | | 21 | | | — | | | 21 | |
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Foreign currency translation | | (62) | | | (7) | | | (69) | |
Balance as of September 30, 2022 | | $ | 4,266 | | | $ | 971 | | | $ | 5,237 | |
Goodwill is not amortized but is tested for impairment annually in the fourth quarter of the fiscal year, or during interim periods if events or circumstances arise which indicate that goodwill may be impaired.
Other Intangible Assets, Net
Other intangible assets, net comprised the following:
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| | September 30, 2022 |
($ in millions) | | Gross Carrying Amount | | Accumulated Amortization and Impairment (1) | | Net Carrying Amount |
Customer relationships | | $ | 1,960 | | | $ | (556) | | | $ | 1,404 | |
Computer software | | 231 | | | (160) | | | 71 | |
Other (2) | | 319 | | | (185) | | | 134 | |
Total other intangible assets | | $ | 2,510 | | | $ | (901) | | | $ | 1,609 | |
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| | June 30, 2022 |
($ in millions) | | Gross Carrying Amount | | Accumulated Amortization and Impairment (1) | | Net Carrying Amount |
Customer relationships | | $ | 1,970 | | | $ | (529) | | | $ | 1,441 | |
Computer software | | 235 | | | (162) | | | 73 | |
Other (2) | | 323 | | | (180) | | | 143 | |
Total other intangible assets | | $ | 2,528 | | | $ | (871) | | | $ | 1,657 | |
(1)Accumulated amortization and impairment included $32 million and $33 million for September 30, 2022 and June 30, 2022, respectively, of accumulated impairment in the Other category.
(2)Other included $16 million for September 30, 2022 and June 30, 2022, respectively, of acquired intellectual property assets not yet being amortized as the related R&D projects have not yet been completed.
Amortization expenses for intangible assets were $43 million and $45 million during the three months ended September 30, 2022 and 2021, respectively.
Note 7 - Fair Value Measurements
The fair values of the Company's financial assets and financial liabilities listed below reflect the amounts that would be received to sell the assets or paid to transfer the liabilities in an orderly transaction between market participants at the measurement date (exit price).
The Company's non-derivative financial instruments primarily include cash and cash equivalents, trade receivables, trade payables, short-term debt, and long-term debt. As of September 30, 2022 and June 30, 2022, the carrying value of these financial instruments, excluding long-term debt, approximated fair value because of the short-term nature of these instruments.
The carrying value of long-term debt with variable interest rates approximates its fair value. The fair value of the Company's long-term debt with fixed interest rates is based on market prices, if available, or expected future cash flows discounted at the current interest rate for financial liabilities with similar risk profiles.
The carrying value and estimated fair value of long-term debt with fixed interest rates (including fixed-rate debt with designated receive-fixed/pay-variable interest rate swaps) were as follows:
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| | September 30, 2022 | | June 30, 2022 |
| | Carrying Value | | Fair Value | | Carrying Value | | Fair Value |
($ in millions) | | | (Level 2) | | | (Level 2) |
Total long-term debt with fixed interest rates (excluding commercial paper and finance leases) | | $ | 3,867 | | | $ | 3,517 | | | $ | 3,952 | | | $ | 3,694 | |
Assets and Liabilities Measured and Recorded at Fair Value on a Recurring Basis
Additionally, the Company measures and records certain assets and liabilities, including derivative instruments and contingent purchase consideration liabilities, at fair value. The following table summarizes the fair value of these instruments, which are measured at fair value on a recurring basis, by level, within the fair value hierarchy:
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| | September 30, 2022 |
($ in millions) | | Level 1 | | Level 2 | | Level 3 | | Total |
Assets | | | | | | | | |
Commodity contracts | | $ | — | | | $ | 1 | | | $ | — | | | $ | 1 | |
Forward exchange contracts | | — | | | 7 | | | — | | | 7 | |
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Total assets measured at fair value | | $ | — | | | $ | 8 | | | $ | — | | | $ | 8 | |
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Liabilities | | | | | | | | |
Contingent purchase consideration liabilities | | $ | — | | | $ | — | | | $ | 16 | | | $ | 16 | |
Commodity contracts | | — | | | 3 | | | — | | | 3 | |
Forward exchange contracts | | — | | | 21 | | | — | | | 21 | |
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Interest rate swaps | | — | | | 102 | | | — | | | 102 | |
Total liabilities measured at fair value | | $ | — | | | $ | 126 | | | $ | 16 | | | $ | 142 | |
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| | June 30, 2022 |
($ in millions) | | Level 1 | | Level 2 | | Level 3 | | Total |
Assets | | | | | | | | |
Commodity contracts | | $ | — | | | $ | 6 | | | $ | — | | | $ | 6 | |
Forward exchange contracts | | — | | | 7 | | | — | | | 7 | |
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Total assets measured at fair value | | $ | — | | | $ | 13 | | | $ | — | | | $ | 13 | |
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Liabilities | | | | | | | | |
Contingent purchase consideration liabilities | | $ | — | | | $ | — | | | $ | 16 | | | $ | 16 | |
Commodity contracts | | — | | | 3 | | | — | | | 3 | |
Forward exchange contracts | | — | | | 17 | | | — | | | 17 | |
Interest rate swaps | | — | | | 69 | | | — | | | 69 | |
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Total liabilities measured at fair value | | $ | — | | | $ | 89 | | | $ | 16 | | | $ | 105 | |
The fair value of the commodity contracts was determined using a discounted cash flow analysis based on the terms of the contracts and observed market forward prices discounted at a currency specific rate. Forward exchange contract fair values were determined based on quoted prices for similar assets and liabilities in active markets using inputs such as currency rates and forward points. The fair value of the interest rate swaps was determined using a discounted cash flow method based on market based swap yield curves, taking into account current interest rates.
Contingent purchase consideration liabilities arise from business acquisitions. As of September 30, 2022, the Company's contingent purchase consideration liabilities consist of a $10 million liability that is contingent on future royalty income generated by Discma AG, a subsidiary acquired in March 2017, and a $6 million balance relating to consideration for small business acquisitions where payments are contingent on the Company vacating a certain property or performance criteria. The fair value of the contingent purchase consideration liabilities was determined for each arrangement individually. The fair value was determined using the income approach with significant inputs that are not observable in the market. Key assumptions include the discount rates consistent with the level of risk of achievement and probability adjusted financial projections. The expected outcomes are recorded at net present value, which requires adjustment over the life for changes in risks and probabilities. Changes arising from modifications in forecasts related to contingent consideration are expected to be immaterial.
The fair value of contingent purchase consideration liabilities is included in other current liabilities and other non-current liabilities in the unaudited condensed consolidated balance sheets.
Assets and Liabilities Measured and Recorded at Fair Value on a Nonrecurring Basis
In addition to assets and liabilities that are recorded at fair value on a recurring basis, the Company records assets and liabilities at fair value on a nonrecurring basis. These nonrecurring fair value measurements are considered to be Level 3 in the fair value hierarchy.
As further discussed in Note 3 -"Held for Sale," during the fourth quarter of fiscal year 2022, the Company met the criteria to recognize the Russian business as held for sale which resulted in the Company remeasuring the disposal group at its fair value, less cost to sell, which is considered a Level 3 fair value measurement. In the first quarter of fiscal year 2023, the Company has obtained indicative bids on which basis the expected fair value less costs to sell the Russian business has been updated, which did not result in a change to the previously recognized impairment.
During the three months ended September 30, 2021, long-lived assets with a carrying value of $12 million were written down to a fair value of zero as the Company's Durban, South Africa, manufacturing facility was destroyed in a fire as the result of general civil unrest. In addition, other long-lived assets in South Africa, with a carrying amount of $8 million, were written down to their estimated fair value of $4 million using level 3 inputs. These expenses are included within other income/(expenses), net in the accompanying unaudited condensed consolidated statements of income.
The Company tests indefinite-lived intangibles, including goodwill, for impairment when facts and circumstances indicate the carrying value may not be recoverable. These nonrecurring fair value measurements are considered to be Level 3 in the fair value hierarchy. During the three months ended September 30, 2022, and 2021, there were no indefinite-lived intangible impairment charges recorded.
Note 8 - Derivative Instruments
The Company periodically uses derivatives and other financial instruments to hedge exposures to interest rate, commodity price, and currency risks. The Company does not hold or issue derivative instruments for speculative or trading purposes. For hedges that meet the hedge accounting criteria, the Company, at inception, formally designates and documents the instruments as a fair value hedge or a cash flow hedge of a specific underlying exposure. On an ongoing basis, the Company assesses and documents that its hedges have been and are expected to continue to be highly effective.
Interest Rate Risk
The Company's policy is to manage exposure to interest rate risk by maintaining a mixture of fixed-rate and variable-rate debt, monitoring global interest rates, and, where appropriate, hedging floating interest rate exposure or debt at fixed interest rates through various interest rate derivative instruments including, but not limited to, interest rate swaps, cross-currency interest rate swaps, and interest rate locks. For interest rate swaps that are accounted for as fair value hedges, the gains and losses related to the changes in the fair value of the interest rate swaps are included in interest expense and offset changes in the fair value of the hedged portion of the underlying debt that are attributable to the changes in market interest rates. Changes in the fair value of interest rate swaps that have not been designated as hedging instruments are reported in the accompanying unaudited condensed consolidated statements of income in other non-operating income, net.
As of September 30, 2022, and June 30, 2022, the total notional amount of the Company’s receive-fixed/pay-variable interest rate swaps accounted for as fair value hedges was $650 million.
Foreign Currency Risk
The Company manufactures and sells its products and finances operations in a number of countries throughout the world and, as a result, is exposed to movements in foreign currency exchange rates. The purpose of the Company's foreign currency hedging program is to manage the volatility associated with the changes in exchange rates.
To manage this exchange rate risk, the Company utilizes forward contracts. Contracts that qualify for hedge accounting are designated as cash flow hedges of certain forecasted transactions denominated in foreign currencies. The effective portion of the changes in fair value of these instruments is reported in accumulated other comprehensive loss ("AOCI") and reclassified into earnings in the same financial statement line item and in the same period or periods during which the related hedged transactions affect earnings. The ineffective portion is recognized in earnings over the life of the hedging relationship in the same consolidated statements of income line item as the underlying hedged item. Changes in the fair value of forward contracts that have not been designated as hedging instruments are reported in the accompanying unaudited condensed consolidated statements of income.
As of September 30, 2022, and June 30, 2022, the notional amount of the outstanding forward contracts was $0.9 billion and $1.0 billion, respectively.
Commodity Risk
Certain raw materials used in the Company's production processes are subject to price volatility caused by weather, supply conditions, political and economic variables, and other unpredictable factors. The Company's policy is to minimize exposure to price volatility by passing through the commodity price risk to customers, including the use of fixed price swaps.
The Company purchases on behalf of customers fixed price commodity swaps to offset the exposure of price volatility on the underlying sales contracts. These instruments are cash closed out on maturity and the related cost or benefit is passed through to customers. Information about commodity price exposure is derived from supply forecasts submitted by customers and these exposures are hedged by central treasury units. Changes in the fair value of commodity hedges are recognized in AOCI. The cumulative amount of the hedge is recognized in the unaudited condensed consolidated statements of income when the forecasted transaction is realized.
The Company had the following outstanding commodity contracts to hedge forecasted purchases:
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| | September 30, 2022 | | June 30, 2022 |
Commodity | | Volume | | Volume |
Aluminum | | 20,873 tons | | 17,040 tons |
PET resin | | 11,857,680 lbs. | | 16,886,520 lbs. |
The following table provides the location of derivative instruments in the unaudited condensed consolidated balance sheets:
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($ in millions) | | Balance Sheet Location | | September 30, 2022 | | June 30, 2022 |
Assets | | | | | | |
Derivatives in cash flow hedging relationships: | | | | | | |
Commodity contracts | | Other current assets | | $ | 1 | | | $ | 6 | |
Forward exchange contracts | | Other current assets | | 4 | | | 3 | |
Forward exchange contracts | | Assets held for sale, net | | 2 | | | 3 | |
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Derivatives not designated as hedging instruments: | | | | | | |
Forward exchange contracts | | Other current assets | | 1 | | | 1 | |
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Total current derivative contracts | | | | 8 | | | 13 | |
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Total non-current derivative contracts | | | | — | | | — | |
Total derivative asset contracts | | | | $ | 8 | | | $ | 13 | |
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Liabilities | | | | | | |
Derivatives in cash flow hedging relationships: | | | | | | |
Commodity contracts | | Other current liabilities | | $ | 3 | | | $ | 3 | |
Forward exchange contracts | | Other current liabilities | | 8 | | | 5 | |
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Derivatives not designated as hedging instruments: | | | | | | |
Forward exchange contracts | | Other current liabilities | | 11 | | | 11 | |
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Total current derivative contracts | | | | 22 | | | 19 | |
Derivatives in cash flow hedging relationships: | | | | | | |
Forward exchange contracts | | Other non-current liabilities | | 2 | | | 1 | |
Derivatives in fair value hedging relationships: | | | | | | |
Interest rate swaps | | Other non-current liabilities | | 102 | | | 69 | |
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Total non-current derivative contracts | | | | 104 | | | 70 | |
Total derivative liability contracts | | | | $ | 126 | | | $ | 89 | |
Certain derivative financial instruments are subject to master netting arrangements and are eligible for offset. The Company has made an accounting policy election not to offset the fair values of these instruments within the unaudited condensed consolidated balance sheets.
The following tables provide the effects of derivative instruments on AOCI and in the unaudited condensed consolidated statements of income:
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| | Location of Gain / (Loss) Reclassified from AOCI into Income (Effective Portion) | | Gain / (Loss) Reclassified from AOCI into Income (Effective Portion) |
| | | Three Months Ended September 30, | | |
($ in millions) | | | 2022 | | 2021 | | | | |
Derivatives in cash flow hedging relationships | | | | | | | | | | |
Commodity contracts | | Cost of sales | | $ | 2 | | | $ | 6 | | | | | |
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Treasury locks | | Interest expense | | (1) | | | (1) | | | | | |
Total | | | | $ | 1 | | | $ | 5 | | | | | |
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| | Location of Loss Recognized in the Unaudited Condensed Consolidated Statements of Income | | Loss Recognized in Income for Derivatives Not Designated as Hedging Instruments |
| | | Three Months Ended September 30, | | |
($ in millions) | | | 2022 | | 2021 | | | | |
Derivatives not designated as hedging instruments | | | | | | | | | | |
Forward exchange contracts | | Other income/(expenses), net | | $ | (15) | | | $ | (13) | | | | | |
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Total | | | | $ | (15) | | | $ | (13) | | | | | |
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| | Location of Loss Recognized in the Unaudited Condensed Consolidated Statements of Income | | Loss Recognized in Income for Derivatives in Fair Value Hedging Relationships |
| | | Three Months Ended September 30, | | |
($ in millions) | | | 2022 | | 2021 | | | | |
Derivatives in fair value hedging relationships | | | | | | | | | | |
Interest rate swaps | | Interest expense | | $ | (33) | | | $ | (4) | | | | | |
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Total | | | | $ | (33) | | | $ | (4) | | | | | |
Note 9 - Components of Net Periodic Benefit Cost
Net periodic benefit cost for benefit plans included the following components:
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| | Three Months Ended September 30, | | |
($ in millions) | | 2022 | | 2021 | | | | |
Service cost | | $ | 4 | | | $ | 6 | | | | | |
Interest cost | | 12 | | | 11 | | | | | |
Expected return on plan assets | | (14) | | | (16) | | | | | |
Amortization of actuarial loss | | 1 | | | 1 | | | | | |
Amortization of prior service credit | | (1) | | | (1) | | | | | |
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Net periodic benefit cost | | $ | 2 | | | $ | 1 | | | | | |
Service cost is included in operating income. All other components of net periodic benefit cost other than service cost are recorded within other non-operating income, net.
Note 10 - Income Taxes
The provision for income taxes for the three months ended September 30, 2022 and 2021 is based on the Company’s estimated annual effective tax rate for the respective fiscal years, and is applied on income before income taxes, and adjusted for specific items that are required to be recognized in the period in which they are incurred.
The effective tax rate for the three months ended September 30, 2022 decreased by 3.8 percentage points compared to the three months ended September 30, 2021 from 23.7% to 19.9% primarily due to differences in the income mix, including higher and non-deductible expenses that did not recur in the current period, and differences in the magnitude of discrete events in both periods.
Note 11 - Shareholders' Equity
The changes in ordinary and treasury shares during the three months ended September 30, 2022 and 2021 were as follows:
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| | Ordinary Shares | | Treasury Shares |
(shares and $ in millions) | | Number of Shares | | Amount | | Number of Shares | | Amount |
Balance as of June 30, 2021 | | 1,538 | | | $ | 15 | | | 3 | | | $ | (29) | |
Share buy-back / cancellations | | (5) | | | — | | | | | |
Options exercised and shares vested | | | | | | (10) | | | 110 | |
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Purchase of treasury shares | | | | | | 11 | | | (131) | |
Balance as of September 30, 2021 | | 1,533 | | | $ | 15 | | | 4 | | | $ | (50) | |
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Balance as of June 30, 2022 | | 1,489 | | | $ | 15 | | | 2 | | | $ | (18) | |
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Options exercised and shares vested | | | | | | (14) | | | 171 | |
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Purchase of treasury shares | | | | | | 16 | | | (202) | |
Balance as of September 30, 2022 | | 1,489 | | | $ | 15 | | | 4 | | | $ | (49) | |
The changes in the components of accumulated other comprehensive loss during the three months ended September 30, 2022 and 2021 were as follows:
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| | Foreign Currency Translation | | Net Investment Hedge | | Pension | | Effective Derivatives | | Total Accumulated Other Comprehensive Loss |
($ in millions) | | (Net of Tax) | | (Net of Tax) | | (Net of Tax) | | (Net of Tax) | |
Balance as of June 30, 2021 | | $ | (691) | | | $ | (13) | | | $ | (54) | | | $ | (8) | | | $ | (766) | |
Other comprehensive income / (loss) before reclassifications | | (94) | | | — | | | — | | | 2 | | | (92) | |
Amounts reclassified from accumulated other comprehensive loss | | — | | | — | | | — | | | (4) | | | (4) | |
Net current period other comprehensive loss | | (94) | | | — | | | — | | | (2) | | | (96) | |
Balance as of September 30, 2021 | | $ | (785) | | | $ | (13) | | | $ | (54) | | | $ | (10) | | | $ | (862) | |
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Balance as of June 30, 2022 | | $ | (892) | | | $ | (13) | | | $ | 40 | | | $ | (15) | | | $ | (880) | |
Other comprehensive loss before reclassifications | | (161) | | | — | | | — | | | (6) | | | (167) | |
Amounts reclassified from accumulated other comprehensive loss | | — | | | — | | | — | | | (1) | | | (1) | |
Net current period other comprehensive loss | | (161) | | | — | | | — | | | (7) | | | (168) | |
Balance as of September 30, 2022 | | $ | (1,053) | | | $ | (13) | | | $ | 40 | | | $ | (22) | | | $ | (1,048) | |
The following tables provide details of amounts reclassified from accumulated other comprehensive loss:
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| | Three Months Ended September 30, | | |
($ in millions) | | 2022 | | 2021 | | | | |
Amortization of pension: | | | | | | | | |
Amortization of prior service credit | | $ | (1) | | | $ | (1) | | | | | |
Amortization of actuarial loss | | 1 | | | 1 | | | | | |
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Total before tax effect | | — | | | — | | | | | |
Tax effect on amounts reclassified into earnings | | — | | | — | | | | | |
Total net of tax | | $ | — | | | $ | — | | | | | |
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(Gains) / losses on cash flow hedges: | | | | | | | | |
Commodity contracts | | $ | (2) | | | $ | (6) | | | | | |
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Treasury locks | | 1 | | | 1 | | | | | |
Total before tax effect | | (1) | | | (5) | | | | | |
Tax effect on amounts reclassified into earnings | | — | | | 1 | | | | | |
Total net of tax | | $ | (1) | | | $ | (4) | | | | | |
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Forward contracts to purchase own shares
The Company's employee share plans require the delivery of shares to employees in the future when rights vest or vested options are exercised. The Company currently acquires shares on the open market to deliver shares to employees to satisfy vesting or exercising commitments. This exposes the Company to market price risk.
To manage the market price risk, the Company has entered into forward contracts for the purchase of its ordinary shares. As of September 30, 2022, the Company had forward contracts outstanding that mature between March 2023 and May 2023 to purchase 11 million shares at a weighted average price of $12.45. As of June 30, 2022, the Company had forward contracts outstanding that mature between November 2022 and June 2023 to purchase 14 million shares at a weighted average price of $12.67. During the quarter ended September 30, 2022, forward contracts related to 9 million shares were settled, which were outstanding as of June 30, 2022.
The forward contracts to purchase the Company's own shares are classified as a current liability. Equity is reduced by an amount equal to the fair value of the shares at inception. The carrying value of the forward contracts at each reporting period was determined based on the present value of the cost required to settle the contracts.
Note 12 - Segments
The Company's business is organized and presented in the two reportable segments outlined below:
Flexibles: Consists of operations that manufacture flexible and film packaging in the food and beverage, medical and pharmaceutical, fresh produce, snack food, personal care, and other industries.
Rigid Packaging: Consists of operations that manufacture rigid containers for a broad range of predominantly beverage and food products, including carbonated soft drinks, water, juices, sports drinks, milk-based beverages, spirits and beer, sauces, dressings, spreads and personal care items, and plastic caps for a wide variety of applications.
Other consists of the Company's undistributed corporate expenses including executive and functional compensation costs, equity method and other investments, intercompany eliminations, and other business activities.
The accounting policies of the reportable segments are the same as those in the unaudited condensed consolidated financial statements.
The following table presents information about reportable segments:
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| | Three Months Ended September 30, | | |
($ in millions) | | 2022 | | 2021 | | | | |
Sales including intersegment sales | | | | | | | | |
Flexibles | | $ | 2,779 | | | $ | 2,634 | | | | | |
Rigid Packaging | | 933 | | | 786 | | | | | |
Other | | — | | | — | | | | | |
Total sales including intersegment sales | | 3,712 | | | 3,420 | | | | | |
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Intersegment sales | | | | | | | | |
Flexibles | | — | | | — | | | | | |
Rigid Packaging | | — | | | — | | | | | |
Other | | — | | | — | | | | | |
Total intersegment sales | | — | | | — | | | | | |
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Net sales | | $ | 3,712 | | | $ | 3,420 | | | | | |
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Adjusted earnings before interest and taxes ("Adjusted EBIT") | | | | | | | | |
Flexibles | | $ | 353 | | | $ | 339 | | | | | |
Rigid Packaging | | 66 | | | 62 | | | | | |
Other | | (27) | | | (20) | | | | | |
Adjusted EBIT | | 392 | | | 381 | | | | | |
Less: Material restructuring programs (1) | | — | | | (7) | | | | | |
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Add/(Less): Material acquisition costs and other (2) | | 1 | | | (2) | | | | | |
Less: Amortization of acquired intangible assets from business combinations (3) | | (40) | | | (41) | | | | | |
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Less: Impact of hyperinflation (4) | | (8) | | | (2) | | | | | |
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Less: Property and other losses, net (5) | | — | | | (28) | | | | | |
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Less: Russia-Ukraine conflict impacts (6) | | (3) | | | — | | | | | |
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Interest income | | 9 | | | 5 | | | | | |
Interest expense | | (59) | | | (40) | | | | | |
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Income before income taxes | | $ | 292 | | | $ | 266 | | | | | |
(1)Material restructuring programs includes restructuring and related expenses for the 2019 Bemis Integration Plan for the three months ended September 30, 2021.
(2)Material acquisition costs and other includes costs / releases of accruals associated with the Bemis transaction.
(3)Amortization of acquired intangible assets from business combinations includes amortization expenses related to all acquired intangible assets from past acquisitions.
(4)Impact of hyperinflation includes the adverse impact of highly inflationary accounting for subsidiaries in Argentina where the functional currency was the Argentine Peso.
(5)Property and other losses, net includes property and related business losses primarily associated with the destruction of the Company's Durban, South Africa, facility during general civil unrest in July 2021, net of insurance recovery.
(6)Russia-Ukraine conflict impacts include incremental costs incurred in connection with the conflict.
The following table disaggregates net sales, excluding intersegment sales, by geography in which the Company operates based on manufacturing or selling operations:
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| | Three Months Ended September 30, |
| | 2022 | | 2021 |
($ in millions) | | Flexibles | | Rigid Packaging | | Total | | Flexibles | | Rigid Packaging | | Total |
North America | | $ | 1,106 | | | $ | 726 | | | $ | 1,832 | | | $ | 1,019 | | | $ | 629 | | | $ | 1,648 | |
Latin America | | 285 | | | 207 | | | 492 | | | 256 | | | 157 | | | 413 | |
Europe | | 955 | | | — | | | 955 | | | 938 | | | — | | | 938 | |
Asia Pacific | | 433 | | | — | | | 433 | | | 421 | | | — | | | 421 | |
Net sales | | $ | 2,779 | | | $ | 933 | | | $ | 3,712 | | | $ | 2,634 | | | $ | 786 | | | $ | 3,420 | |
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Note 13 - Earnings Per Share Computations
The Company applies the two-class method when computing its earnings per share ("EPS"), which requires that net income per share for each class of share be calculated assuming all of the Company's net income is distributed as dividends to each class of share based on their contractual rights.
Basic EPS is computed by dividing net income available to ordinary shareholders by the weighted-average number of ordinary shares outstanding after excluding the ordinary shares to be repurchased using forward contracts. Diluted EPS includes the effects of share options, restricted shares, performance rights, performance shares, and share rights, if dilutive.
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| | Three Months Ended September 30, | | | | |
(in millions, except per share amounts) | | 2022 | | 2021 | | | | | | | | |
Numerator | | | | | | | | | | | | |
Net income attributable to Amcor plc | | $ | 232 | | | $ | 202 | | | | | | | | | |
Distributed and undistributed earnings attributable to shares to be repurchased | | (2) | | | — | | | | | | | | | |
Net income available to ordinary shareholders of Amcor plc—basic and diluted | | $ | 230 | | | $ | 202 | | | | | | | | | |
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Denominator | | | | | | | | | | | | |
Weighted-average ordinary shares outstanding | | 1,485 | | | 1,534 | | | | | | | | | |
Weighted-average ordinary shares to be repurchased by Amcor plc | | (11) | | | (4) | | | | | | | | | |
Weighted-average ordinary shares outstanding for EPS—basic | | 1,474 | | | 1,530 | | | | | | | | | |
Effect of dilutive shares | | 12 | | | 4 | | | | | | | | | |
Weighted-average ordinary shares outstanding for EPS—diluted | | 1,486 | | | 1,534 | | | | | | | | | |
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Per ordinary share income | | | | | | | | | | | | |
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Basic earnings per ordinary share | | $ | 0.156 | | | $ | 0.131 | | | | | | | | | |
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Diluted earnings per ordinary share | | $ | 0.155 | | | $ | 0.131 | | | | | | | | | |
Certain outstanding share options were excluded from the diluted earnings per share calculation because they were anti-dilutive. The excluded share options for the three months ended September 30, 2022 and 2021 represented an aggregate of 9 million and 2 million shares, respectively.
Note 14 - Contingencies and Legal Proceedings
Contingencies - Brazil
The Company's operations in Brazil are involved in various governmental assessments and litigation, principally related to claims for excise and income taxes. The Company vigorously defends its positions and believes it will prevail on most, if not all, of these matters. The Company does not believe that the ultimate resolution of these matters will materially impact the Company's consolidated results of operations, financial position, or cash flows. Under customary local regulations, the Company's Brazilian subsidiaries may need to post cash or other collateral if a challenge to any administrative assessment proceeds to the Brazilian court system; however, the level of cash or collateral already pledged or potentially required to be pledged would not significantly impact the Company's liquidity. At September 30, 2022 and June 30, 2022, the Company had recorded accruals of $12 million, included in other non-current liabilities. The Company has estimated a reasonably possible loss exposure in excess of the accrual of $20 million at September 30, 2022 and June 30, 2022. The litigation process is subject to many uncertainties and the outcome of individual matters cannot be accurately predicted. The Company routinely assesses these matters as to the probability of ultimately incurring a liability and records the best estimate of the ultimate loss in situations where the likelihood of an ultimate loss is probable. The Company's assessments are based on its knowledge and experience, but the ultimate outcome of any of these matters may differ from the Company's estimates.
As of September 30, 2022, the Company has provided letters of credit of $36 million, judicial insurance of $1 million, and deposited cash of $11 million with the courts to continue to defend the cases.
Contingencies - Environmental Matters
The Company, along with others, has been identified as a potentially responsible party ("PRP") at several waste disposal sites under U.S. federal and related state environmental statutes and regulations and may face potentially material environmental remediation obligations. While the Company benefits from various forms of insurance policies, actual coverage may not, or only partially, cover the total potential exposures. The Company has recorded $17 million aggregate accruals for its share of estimated future remediation costs at these sites.
In addition to the matters described above, the Company has also recorded aggregate accruals of $40 million for potential liabilities for remediation obligations at various worldwide locations that are owned or operated by the Company, or were formerly owned or operated.
The SEC requires the Company to disclose certain information about proceedings arising under federal, state, or local environmental provisions if the Company reasonably believes that such proceedings may result in monetary sanctions above a stated threshold. Pursuant to SEC regulations, the Company uses a threshold of $1 million or more for purposes of determining whether disclosure of any such proceedings is required. Applying this threshold, there are no environmental matters required to be disclosed for the three months ended September 30, 2022.
While the Company believes that its accruals are adequate to cover its future obligations, there can be no assurance that the ultimate payments will not exceed the accrued amounts. Nevertheless, based on the available information, the Company does not believe that its potential environmental obligations will have a material adverse effect upon its liquidity, results of operations, or financial condition.
Other Matters
In the normal course of business, the Company is subject to legal proceedings, lawsuits, and other claims. While the potential financial impact with respect to these ordinary course matters is subject to many factors and uncertainties, management believes that any financial impact to the Company from these matters, individually and in the aggregate, would not have a material adverse effect upon its liquidity, results of operations, or financial condition.
Note 15 - Subsequent Events
On November 1, 2022, the Company's Board of Directors declared a quarterly cash dividend of $0.1225 per share to be paid on December 13, 2022 to shareholders of record as of November 23, 2022. Amcor has received a waiver from the Australian Securities Exchange ("ASX") settlement operating rules, which will allow Amcor to defer processing conversions between ordinary share and CHESS Depositary Instrument ("CDI") registers from November 23, 2022 to November 24, 2022, inclusive.
At the end of October 2022, the Company entered into interest rate swap contracts for a total notional amount of $1.25 billion. Under the terms of the contracts, the Company will pay a weighted-average fixed rate of interest of 4.53% and receive a variable rate of interest, based on compound overnight SOFR, for the period from November 2022 through June 2023, settled monthly. The Company expects that the interest rate swap contracts will effectively hedge the SOFR component for $1.25 billion of ongoing USD commercial paper issuances at 4.53%.