BERRY GLOBAL GROUP, INC.
10-Qs and 10-Ks
PROXIES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended June 27, 2015
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Commission File Number 001-35672
BERRY PLASTICS GROUP, INC.
(
Exact name of registrant as specified in its charter
)
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Delaware
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20-5234618
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(State or other jurisdiction
of incorporation or organization)
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(IRS employer
identification number)
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101 Oakley Street
Evansville, Indiana
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47710
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(Address of principal executive offices)
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(Zip code)
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Registrant’s telephone number, including area code: (812) 424-2904
Securities registered pursuant to Section 12(b) of the Act:
Indicate by check mark whether
the
registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) have been subject to such filing requirements for the past 90 days. Yes [X ] No [ ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [ X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, accelerated filer, or non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer [ X ] Accelerated filer [ ] Non-accelerated filer [ ]
Small reporting company [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes[ ] No[ X ]
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Class
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Outstanding at August 3, 2015
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Common Stock, $.01 par value per share
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119.8 million shares
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CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
This Form 10-Q includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 with respect to our financial condition, results of operations and business and our expectations or beliefs concerning future events. The forward-looking statements include, in particular, statements about our plans, strategies and prospects under the heading "Management’s Discussion and Analysis of Financial Condition and Results of Operations". You can identify forward-looking statements because they contain words such as “believes,” “expects,” “may,” “will,” “should,” “would,” “could,” “seeks,” “approximately,” “intends,” “plans,” “estimates,” “outlook,” “anticipates” or “looking forward” or similar expressions that relate to our strategy, plans or intentions. All statements we make relating to our estimated and projected earnings, margins, costs, expenditures, cash flows, growth rates and financial results or to our expectations regarding future industry trends are forward-looking statements. In addition, we, through our senior management, from time to time make forward-looking public statements concerning our expected future operations and performance and other developments. These forward-looking statements are subject to risks and uncertainties that may change at any time, and, therefore, our actual results may differ materially from those that we expected. We derive many of our forward-looking statements from our operating budgets and forecasts, which are based upon many detailed assumptions. While we believe that our assumptions are reasonable, we caution that it is very difficult to predict the impact of known factors, and it is impossible for us to anticipate all factors that could affect our actual results. All forward-looking statements are based upon information available to us on the date of this Form 10-Q.
Readers should carefully review the factors discussed in our most recent Form 10-K in the section titled “Risk Factors” and other risk factors identified from time to time in our periodic filings with the Securities and Exchange Commission.
2
Berry Plastics Group, Inc.
Form 10-Q Index
For Quarterly Period Ended June 27, 2015
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Page No.
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Part I.
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Financial Information
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Item 1.
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Item 2.
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Item 3.
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Item 4.
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Part II.
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Other Information
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Item 1.
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Item 1A.
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Item 6.
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3
Part I. Financial Information
Berry Plastics Group, Inc.
Consolidated Statements of Income (Loss)
(Unaudited)
(in millions of dollars, except per share amounts)
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Quarterly Period Ended
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Three Quarterly Periods Ended
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|||||||||||||||
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June 27,
2015 |
June 28,
2014 |
June 27,
2015 |
June 28,
2014 |
|||||||||||||
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Net sales
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$ | 1,241 | $ | 1,298 | $ | 3,685 | $ | 3,648 | ||||||||
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Costs and expenses:
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||||||||||||||||
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Cost of goods sold
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1,003 | 1,089 | 3,037 | 3,076 | ||||||||||||
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Selling, general and administrative
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92 | 85 | 266 | 244 | ||||||||||||
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Amortization of intangibles
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22 | 26 | 70 | 77 | ||||||||||||
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Restructuring and impairment charges
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3 | 15 | 11 | 28 | ||||||||||||
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Operating income
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121 | 83 | 301 | 223 | ||||||||||||
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Debt extinguishment
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94 | 33 | 94 | 35 | ||||||||||||
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Other expense (income), net
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2 | (2 | ) | 2 | (3 | ) | ||||||||||
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Interest expense, net
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47 | 56 | 152 | 168 | ||||||||||||
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Income (loss) before income taxes
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(22 | ) | (4 | ) | 53 | 23 | ||||||||||
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Income tax expense (benefit)
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(9 | ) | (19 | ) | 15 | (10 | ) | |||||||||
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Consolidated net income (loss)
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$ | (13 | ) | $ | 15 | $ | 38 | $ | 33 | |||||||
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Net income (loss) per share:
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||||||||||||||||
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Basic
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$ | (0.11 | ) | $ | 0.13 | $ | 0.32 | $ | 0.28 | |||||||
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Diluted
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(0.11 | ) | 0.12 | 0.31 | 0.27 | |||||||||||
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Outstanding weighted-average shares:
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||||||||||||||||
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Basic
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119.5 | 117.3 | 118.9 | 116.6 | ||||||||||||
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Diluted
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119.5 | 121.5 | 123.7 | 120.8 | ||||||||||||
Berry Plastics Group, Inc.
Consolidated Statements of Comprehensive Income (Loss)
(Unaudited)
(in millions of dollars)
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Quarterly Period Ended
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Three Quarterly Periods Ended
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|||||||||||||||
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June 27, 2015
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June 28, 2014
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June 27, 2015
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June 28, 2014
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Consolidated net income (loss)
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$ | (13 | ) | $ | 15 | $ | 38 | $ | 33 | |||||||
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Currency translation
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2 | 4 | (32 | ) | — | |||||||||||
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Interest rate hedge
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2 | (10 | ) | (18 | ) | (6 | ) | |||||||||
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Provision for income taxes related to other comprehensive income items
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— | 3 | 6 | 1 | ||||||||||||
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Comprehensive income (loss)
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$ | (9 | ) | $ | 12 | $ | (6 | ) | $ | 28 | ||||||
See notes to consolidated financial statements.
4
Berry Plastics Group, Inc.
(in millions of dollars)
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June 27,
2015 |
September 27,
2014 |
|||||||
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Assets
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(Unaudited)
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|||||||
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Current assets:
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||||||||
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Cash and cash equivalents
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$ | 62 | $ | 129 | ||||
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Accounts receivable
(less allowance of $3)
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473 | 491 | ||||||
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Inventories:
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||||||||
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Finished goods
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323 | 353 | ||||||
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Raw materials and supplies
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251 | 251 | ||||||
| 574 | 604 | |||||||
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Deferred income taxes
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181 | 166 | ||||||
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Prepaid expenses and other current assets
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38 | 42 | ||||||
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Total current assets
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1,328 | 1,432 | ||||||
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Property, plant, and equipment, net
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1,301 | 1,364 | ||||||
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Goodwill, intangible assets and deferred costs, net
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2,381 | 2,471 | ||||||
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Other assets
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1 | 1 | ||||||
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Total assets
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$ | 5,011 | $ | 5,268 | ||||
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Liabilities
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||||||||
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Current liabilities:
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||||||||
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Accounts payable
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$ | 353 | $ | 395 | ||||
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Accrued expenses and other current liabilities
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302 | 314 | ||||||
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Current portion of long-term debt
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39 | 58 | ||||||
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Total current liabilities
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694 | 767 | ||||||
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Long-term debt, less current portion
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3,669 | 3,860 | ||||||
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Deferred income taxes
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406 | 386 | ||||||
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Other long-term liabilities
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316 | 356 | ||||||
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Total liabilities
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5,085 | 5,369 | ||||||
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Redeemable non-controlling interest
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13 | 13 | ||||||
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Stockholders’ equity (deficit)
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||||||||
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Common stock
(119.5 and 118.0 shares issued, respectively)
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1 | 1 | ||||||
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Additional paid-in capital
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400 | 367 | ||||||
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Non-controlling interest
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3 | 3 | ||||||
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Accumulated deficit
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(404 | ) | (442 | ) | ||||
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Accumulated other comprehensive loss
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(87 | ) | (43 | ) | ||||
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Total stockholders’ equity (deficit)
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(87 | ) | (114 | ) | ||||
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Total liabilities and stockholders’ equity (deficit)
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$ | 5,011 | $ | 5,268 | ||||
See notes to consolidated financial statements.
5
Berry Plastics Group, Inc.
For the Three Quarterly Periods Ended June 27, 2015 and June 28, 2014
(Unaudited)
(in millions of dollars)
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Common Stock
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Additional Paid-in Capital
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Non-controlling Interest
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Accumulated Other Comprehensive Loss
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Accumulated Deficit
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Total
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|||||||||||||||||||
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Balance at September 28, 2013
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$ | 1 | $ | 322 | $ | 3 | $ | (18 | ) | $ | (504 | ) | $ | (196 | ) | |||||||||
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Proceeds from issuance of common stock
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— | 13 | — | — | — | 13 | ||||||||||||||||||
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Obligation under tax receivable agreement
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— | 13 | — | — | — | 13 | ||||||||||||||||||
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Stock compensation expense
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— | 12 | — | — | — | 12 | ||||||||||||||||||
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Consolidated net income
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— | 33 | 33 | |||||||||||||||||||||
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Interest rate hedge, net of tax
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— | — | — | (5 | ) | — | (5 | ) | ||||||||||||||||
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Balance at June 28, 2014
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$ | 1 | $ | 360 | $ | 3 | $ | (23 | ) | $ | (471 | ) | $ | (130 | ) | |||||||||
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Balance at September 27, 2014
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$ | 1 | $ | 367 | $ | 3 | $ | (43 | ) | $ | (442 | ) | $ | (114 | ) | |||||||||
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Proceeds from issuance of common stock
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— | 16 | — | — | — | 16 | ||||||||||||||||||
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Stock compensation expense
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— | 17 | — | — | — | 17 | ||||||||||||||||||
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Consolidated net income
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— | — | — | — | 38 | 38 | ||||||||||||||||||
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Interest rate hedge, net of tax
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— | — | — | (12 | ) | — | (12 | ) | ||||||||||||||||
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Currency translation
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— | — | — | (32 | ) | — | (32 | ) | ||||||||||||||||
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Balance at June 27, 2015
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$ | 1 | $ | 400 | $ | 3 | $ | (87 | ) | $ | (404 | ) | $ | (87 | ) | |||||||||
See notes to consolidated financial statements.
6
Berry Plastics Group, Inc.
(Unaudited)
(in millions of dollars)
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Three Quarterly Periods Ended
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||||||||
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June 27,
2015
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June 28,
2014
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|||||||
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Cash Flows from Operating Activities:
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||||||||
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Consolidated net income
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$ | 38 | $ | 33 | ||||
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Adjustments to reconcile net cash provided by operating activities:
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Depreciation
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193 | 184 | ||||||
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Amortization of intangibles
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70 | 77 | ||||||
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Non-cash interest expense
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5 | 5 | ||||||
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Deferred income tax
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12 | (15 | ) | |||||
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Debt extinguishment
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94 | 35 | ||||||
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Stock compensation expense
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17 | 12 | ||||||
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Impairment of long-lived assets
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2 | 6 | ||||||
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Other non-cash items
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3 | — | ||||||
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Changes in operating assets and liabilities:
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||||||||
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Accounts receivable, net
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10 | (21 | ) | |||||
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Inventories
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22 | (35 | ) | |||||
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Prepaid expenses and other assets
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(4 | ) | 2 | |||||
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Accounts payable and other liabilities
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(70 | ) | 87 | |||||
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Net cash provided by operating activities
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392 | 370 | ||||||
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Cash Flows from Investing Activities:
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||||||||
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Additions to property, plant and equipment
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(124 | ) | (172 | ) | ||||
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Proceeds from sale of assets
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18 | 5 | ||||||
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Acquisition of business, net of cash acquired
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— | (225 | ) | |||||
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Net cash used in investing activities
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(106 | ) | (392 | ) | ||||
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Cash Flows from Financing Activities:
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||||||||
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Proceeds from long-term borrowings
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702 | 1,664 | ||||||
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Repayments on long-term borrowings
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(940 | ) | (1,675 | ) | ||||
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Proceeds from issuance of common stock
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16 | 13 | ||||||
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Payment of tax receivable agreement
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(39 | ) | (32 | ) | ||||
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Debt financing costs
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(87 | ) | (44 | ) | ||||
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Net cash used in financing activities
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(348 | ) | (74 | ) | ||||
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Effect of exchange rate changes on cash
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(5 | ) | (1 | ) | ||||
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Net change in cash
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(67 | ) | (97 | ) | ||||
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Cash and cash equivalents at beginning of period
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129 | 142 | ||||||
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Cash and cash equivalents at end of period
|
$ | 62 | $ | 45 | ||||
See notes to consolidated financial statements.
7
Berry Plastics Group, Inc.
(Unaudited)
(tables in millions of dollars, except per share data)
1. Basis of Presentation
The accompanying unaudited Consolidated Financial Statements of Berry Plastics Group, Inc. (“the Company”) have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) pursuant to the rules and regulations of the Securities and Exchange Commission for interim reporting. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included, and all subsequent events up to the time of the filing have been evaluated. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s most recent Form 10-K filed with the Securities and Exchange Commission.
2. Recently Issued Accounting Pronouncements
Revenue Recognition
In May 2014, the Financial Accounting Standards Board (FASB) issued a final standard on revenue recognition. Under the new standard, an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In order to do so, an entity would follow the five-step process for in-scope transactions: 1) identify the contract with a customer, 2) identify the separate performance obligations in the contract, 3) determine the transaction price, 4) allocate the transaction price to the separate performance obligations in the contract, and 5) recognize revenue when (or as) the entity satisfies a performance obligation. For public entities, the provisions of the new standard are effective for annual reporting periods beginning after December 15, 2017 and interim periods therein. Early adoption for annual reporting periods beginning after December 15, 2016 is permitted. An entity can apply the new revenue standard retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying the standard recognized at the date of initial application in retained earnings. There are areas within the standard that are currently under review and reconsideration by the FASB, which could lead to future updates to the standard. As the outcomes of this process could lead to changes to the standard, we are still in the process of determining our approach to the adoption of this new standard, and the anticipated impact to the consolidated financial statements.
Classification of Debt Issuance Costs
In April 2015, the FASB issued Accounting Standards Update No. 2015-03, Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. This standard amends existing guidance to require the presentation of debt issuance costs in the balance sheet as a deduction from the carrying amount of the related debt liability instead of a deferred charge. It is effective for annual reporting periods beginning after December 15, 2015, but early adoption is permitted. The Company expects this new guidance will reduce total assets and total long-term debt on its consolidated balance sheets by amounts classified as deferred costs, but does not expect this update to have any other effect on its consolidated financial statements.
3. Acquisitions
Rexam Healthcare Containers and Closures
In June 2014, the Company acquired Rexam’s Healthcare Containers and Closures business (“C&C”) for a purchase price of $130 million, net of cash acquired. The C&C business produces bottles, closures, and specialty products for pharmaceutical and over-the-counter healthcare applications. The C&C acquisition has been accounted for under the purchase method of accounting, and accordingly, the purchase price has been allocated to the identifiable assets and liabilities based on their fair values at the acquisition date. The acquired assets and assumed liabilities consisted of working capital of $29 million, property and equipment of $85 million, non-current deferred tax asset of $3 million, intangible assets of $9 million, goodwill of $7 million, and other long-term liabilities of $3 million.
8
4. Restructuring and Impairment Charges
The Company incurred restructuring costs related to severance, asset impairment, and facility exit costs of $3 million and $15 million for the quarterly periods ended and $11 million and $28 million for the three quarterly periods ended June 27, 2015 and June 28, 2014, respectively. The tables below set forth the significant components of the restructuring charges recognized, by segment
:
|
Quarterly Period Ended
|
Three Quarterly Periods Ended
|
|||||||||||||||
|
June 27,
2015 |
June 28,
2014 |
June 27,
2015 |
June 28,
2014 |
|||||||||||||
|
Rigid Open Top
|
$ | 1 | $ | 11 | $ | 3 | $ | 13 | ||||||||
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Rigid Closed Top
|
— | — | 3 | 1 | ||||||||||||
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Engineered Materials
|
1 | 2 | 1 | 6 | ||||||||||||
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Flexible Packaging
|
1 | 2 | 4 | 8 | ||||||||||||
|
Consolidated
|
$ | 3 | $ | 15 | $ | 11 | $ | 28 | ||||||||
The table below sets forth the activity with respect to the restructuring accrual at June 27, 2015:
|
Severance and termination benefits
|
Facilities exit costs and other
|
Non-cash
|
Total
|
|||||||||||||
|
Balance at September 27, 2014
|
$ | 5 | $ | 8 | $ | — | $ | 13 | ||||||||
|
Charges
|
3 | 6 | 2 | 11 | ||||||||||||
|
Non-cash asset impairment
|
— | — | (2 | ) | (2 | ) | ||||||||||
|
Cash payments
|
(5 | ) | (6 | ) | — | (11 | ) | |||||||||
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Balance at June 27, 2015
|
$ | 3 | $ | 8 | $ | — | $ | 11 | ||||||||
5. Accrued Expenses, Other Current Liabilities and Other Long-Term Liabilities
The following table sets forth the totals included in Accrued expenses and other current liabilities on the Consolidated Balance Sheets:
|
June 27, 2015
|
September 27, 2014
|
|||||||
|
Employee compensation, payroll and other taxes
|
$ | 90 | $ | 99 | ||||
|
Interest
|
22 | 44 | ||||||
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Rebates
|
49 | 50 | ||||||
|
Restructuring
|
11 | 13 | ||||||
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Tax receivable agreement obligation
|
55 | 39 | ||||||
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Other
|
75 | 69 | ||||||
| $ | 302 | $ | 314 | |||||
The following table sets forth the totals included in Other long-term liabilities on the Consolidated Balance Sheets:
|
June 27, 2015
|
September 27, 2014
|
|||||||
|
Lease retirement obligation
|
$ | 32 | $ | 31 | ||||
|
Sale-lease back deferred gain
|
28 | 30 | ||||||
|
Pension liability
|
42 | 45 | ||||||
|
Tax receivable agreement obligation
|
179 | 234 | ||||||
|
Other
|
35 | 16 | ||||||
| $ | 316 | $ | 356 | |||||
The Company made $39 million of payments related to the income tax receivable agreement ("TRA") in the first fiscal quarter of 2015, of which Apollo Global Management, LLC received $33 million. The TRA provides for the payment to TRA holders 85% of the amount of cash savings, if any, in U.S. federal, foreign, state and local income tax that are actually realized as a result of the utilization of our net operating losses attributable to periods prior to the initial public offering.
9
6. Long-Term Debt
Long-term debt consists of the following:
|
Maturity Date
|
June 27, 2015
|
September 27, 2014
|
|||||||
|
Term loan
|
February 2020
|
$ | 1,372 | $ | 1,383 | ||||
|
Term loan
|
January 2021
|
1,019 | 1,122 | ||||||
|
Revolving line of credit
|
May 2020
|
9 | — | ||||||
|
5
1
/
8
% Second Priority Senior Secured Notes
|
July 2023
|
700 | — | ||||||
|
5
1
/
2
% Second Priority Senior Secured Notes
|
May 2022
|
500 | 500 | ||||||
|
9¾% Second Priority Senior Secured Notes
|
Retired
|
— | 800 | ||||||
|
Debt discounts
|
(24 | ) | (20 | ) | |||||
|
Capital leases and other
|
Various
|
132 | 133 | ||||||
|
Total long-term debt
|
3,708 | 3,918 | |||||||
|
Current portion of long-term debt
|
(39 | ) | (58 | ) | |||||
|
Long-term debt, less current portion
|
$ | 3,669 | $ | 3,860 | |||||
The Company’s senior secured credit facilities consist of $2.4 billion of term loans and a $650 million asset based revolving line of credit. The Company was in compliance with all covenants as of June 27, 2015.
In October 2014, the Company elected to make a voluntary one-time $100 million principal payment on the outstanding term loan using existing liquidity.
Revolving Line of Credit
In May 2015, the Company amended the credit agreement relating to its existing $650 million secured, revolving credit facility to extend the maturity date of the revolving credit facility from June 2016 to May 2020 and to reduce interest margins and certain commitment fees.
5
1
/
8
% Second Priority Senior Secured Notes
In June 2015, the Company issued $700 million of 5
1
/
8
% second priority senior secured notes due July 2023. Interest on the 5
1
/
8
% second priority senior secured notes is due semi-annually on January 15 and July 15. Proceeds from the issuance and existing liquidity were used to satisfy and discharge all of the outstanding 9¾% second priority senior secured notes. The Company recognized a $94 million loss on extinguishment of debt, including $83 million of early tender and redemption costs and an $11 million write-off of deferred financing fees.
7. Financial Instruments and Fair Value Measurements
As part of the overall risk management, the Company uses derivative instruments to reduce exposure to changes in interest rates attributed to the Company’s floating-rate borrowings. For those derivative instruments that are designated and qualify as hedging instruments, the Company must designate the hedging instrument, based upon the exposure being hedged, as a fair value hedge, cash flow hedge, or a hedge of a net investment in a foreign operation. To the extent hedging relationships are found to be effective, as determined by FASB guidance, changes in the fair value of the derivatives are offset by changes in the fair value of the related hedged item and recorded to Accumulated other comprehensive loss. Management believes hedge effectiveness is evaluated properly in preparation of the financial statements.
Cash Flow Hedging Strategy
For derivative instruments that are designated and qualify as cash flow hedges, the effective portion of the gain or loss on the derivative instrument is reported as a component of Accumulated other comprehensive loss and reclassified into earnings in the same line item associated with the forecasted transaction and in the same period or periods during which the hedged transaction affects earnings. The categorization of the framework used to price these derivative instruments is considered a Level 3, due to the subjective nature of the unobservable inputs used to determine the fair value.
10
In February 2013, the Company entered into an interest rate swap transaction to manage cash flow variability associated with $1 billion of outstanding variable rate term loan debt. The agreement swapped the greater of a three-month variable LIBOR contract or 1.00% for a fixed three-year rate of 2.355%, with an effective date in May 2016 and expiration in May 2019. In June 2013, the Company elected to settle this derivative instrument and received $16 million as a result of this settlement. The offset is included in Accumulated other comprehensive income and will be amortized to Interest expense from May 2016 through May 2019, the original term of the swap agreement.
In March 2014, the Company entered into an interest rate swap transaction to manage cash flow variability associated with $1 billion of outstanding variable rate term loan debt. The agreement swaps the greater of a three-month variable LIBOR contract or 1.00% for a fixed three-year rate of 2.59%, with an effective date in February 2016 and expiration in February 2019. The Company records changes in fair value in Accumulated other comprehensive income and Deferred income taxes.
|
Derivatives instruments
|
Balance Sheet Location
|
June 27,
2015 |
September 27,
2014 |
||||||
|
Interest rate swap
|
Other long-term liabilities
|
$ | 21 | $ | 3 | ||||
Non-recurring Fair Value Measurements
The Company has certain assets that are measured at fair value on a non-recurring basis when impairment indicators are present. The assets are adjusted to fair value only when the carrying values exceed the fair values. The categorization of the framework used to price the assets is considered Level 3, due to the subjective nature of the unobservable inputs used to determine the fair value. These assets include primarily our definite lived and indefinite lived intangible assets, including Goodwill and our property plant and equipment. The Company reviews Goodwill and other indefinite lived assets for impairment as of the first day of the fourth fiscal quarter each year, and more frequently if impairment indicators exist. The Company determined Goodwill and other indefinite lived assets were not impaired in our annual fiscal 2014 assessment and no impairment indicators existed in the current quarter.
Included in the following table are the major categories of assets measured at fair value on a non-recurring basis as of June 27, 2015 and September 27, 2014, along with the impairment loss recognized on the fair value measurement during the period:
|
As of June 27, 2015
|
||||||||||||||||||||
|
Level 1
|
Level 2
|
Level 3
|
Total
|
Impairment
|
||||||||||||||||
|
Indefinite-lived trademarks
|
$ | — | $ | — | $ | 207 | $ | 207 | $ | — | ||||||||||
|
Goodwill
|
— | — | 1,654 | 1,654 | — | |||||||||||||||
|
Definite lived intangible assets
|
— | — | 511 | 511 | — | |||||||||||||||
|
Property, plant, and equipment
|
— | — | 1,301 | 1,301 | 2 | |||||||||||||||
|
Total
|
$ | — | $ | — | $ | 3,673 | $ | 3,673 | $ | 2 | ||||||||||
|
As of September 27, 2014
|
||||||||||||||||||||
|
Level 1
|
Level 2
|
Level 3
|
Total
|
Impairment
|
||||||||||||||||
|
Indefinite-lived trademarks
|
$ | — | $ | — | $ | 207 | $ | 207 | $ | — | ||||||||||
|
Goodwill
|
— | — | 1,659 | 1,659 | — | |||||||||||||||
|
Definite lived intangible assets
|
— | — | 585 | 585 | — | |||||||||||||||
|
Property, plant, and equipment
|
— | — | 1,364 | 1,364 | 7 | |||||||||||||||
|
Total
|
$ | — | $ | — | $ | 3,815 | $ | 3,815 | $ | 7 | ||||||||||
The Company’s financial instruments consist primarily of cash and cash equivalents, long-term debt, and capital lease obligations. The book value of our long-term indebtedness exceeded fair value by $24 million as of June 27, 2015. The Company’s long-term debt fair values were determined using Level 2 inputs as other significant observable inputs were not available.
11
8. Income Taxes
A reconciliation of Income tax expense (benefit), computed at the federal statutory rate, to income tax expense (benefit), as provided for in the financial statements, is as follows:
|
Quarterly Period Ended
|
Three Quarterly Periods Ended
|
|||||||||||||||
|
June 27, 2015
|
June 28, 2014
|
June 27, 2015
|
June 28, 2014
|
|||||||||||||
|
Income tax expense (benefit) computed at statutory rate
|
$ | (9 | ) | $ | (2 | ) | $ | 19 | $ | 8 | ||||||
|
Research and development credits
|
— | (18 | ) | (3 | ) | (18 | ) | |||||||||
|
Uncertain tax positions
|
— | — | — | (1 | ) | |||||||||||
|
Change in valuation allowance
|
— | 1 | — | 1 | ||||||||||||
|
Other
|
— | — | (1 | ) | — | |||||||||||
|
Income tax expense (benefit)
|
$ | (9 | ) | $ | (19 | ) | $ | 15 | $ | (10 | ) | |||||
9. Operating Segments
The Company’s operations are organized into four reportable segments: Rigid Open Top, Rigid Closed Top, Engineered Materials, and Flexible Packaging. We have manufacturing and distribution centers in the United States, Canada, Mexico, Belgium, France, Australia, Germany, Brazil, Malaysia, India, China, and the Netherlands. The North American operation represents 95% of net sales, 96% of total long-lived assets, and 95% of the total assets. Selected information by reportable segment is presented in the following table:
|
Quarterly Period Ended
|
Three Quarterly Periods Ended
|
|||||||||||||||
|
June 27, 2015
|
June 28, 2014
|
June 27, 2015
|
June 28, 2014
|
|||||||||||||
|
Net sales:
|
||||||||||||||||
|
Rigid Open Top
|
$ | 276 | $ | 303 | $ | 784 | $ | 820 | ||||||||
|
Rigid Closed Top
|
368 | 381 | 1,121 | 1,073 | ||||||||||||
|
Engineered Materials
|
359 | 371 | 1,052 | 1,081 | ||||||||||||
|
Flexible Packaging
|
238 | 243 | 728 | 674 | ||||||||||||
|
Total net sales
|
$ | 1,241 | $ | 1,298 | $ | 3,685 | $ | 3,648 | ||||||||
|
Operating income :
|
||||||||||||||||
|
Rigid Open Top
|
$ | 26 | $ | 1 | $ | 51 | $ | 20 | ||||||||
|
Rigid Closed Top
|
42 | 38 | 104 | 101 | ||||||||||||
|
Engineered Materials
|
38 | 33 | 105 | 90 | ||||||||||||
|
Flexible Packaging
|
15 | 11 | 41 | 12 | ||||||||||||
|
Total operating income
|
$ | 121 | $ | 83 | $ | 301 | $ | 223 | ||||||||
|
Depreciation and amortization:
|
||||||||||||||||
|
Rigid Open Top
|
$ | 23 | $ | 23 | $ | 68 | $ | 70 | ||||||||
|
Rigid Closed Top
|
32 | 33 | 99 | 93 | ||||||||||||
|
Engineered Materials
|
17 | 19 | 52 | 56 | ||||||||||||
|
Flexible Packaging
|
15 | 16 | 44 | 42 | ||||||||||||
|
Total depreciation and amortization
|
$ | 87 | $ | 91 | $ | 263 | $ | 261 | ||||||||
12
|
June 27,
2015 |
September 27,
2014 |
|||||||
|
Total assets:
|
||||||||
|
Rigid Open Top
|
$ | 1,760 | $ | 1,808 | ||||
|
Rigid Closed Top
|
1,850 | 1,966 | ||||||
|
Engineered Materials
|
674 | 722 | ||||||
|
Flexible Packaging
|
727 | 772 | ||||||
|
Total assets
|
$ | 5,011 | $ | 5,268 | ||||
|
Goodwill:
|
||||||||
|
Rigid Open Top
|
$ | 681 | $ | 681 | ||||
|
Rigid Closed Top
|
825 | 827 | ||||||
|
Engineered Materials
|
69 | 71 | ||||||
|
Flexible Packaging
|
79 | 80 | ||||||
|
Total goodwill
|
$ | 1,654 | $ | 1,659 | ||||
10. Contingencies and Commitments
The Company is party to various legal proceedings involving routine claims which are incidental to the business. Although the legal and financial liability with respect to such proceedings cannot be estimated with certainty, the Company believes that any ultimate liability would not be material to the business, financial condition, results of operations, or cash flows of the Company.
11. Basic and Diluted Net Income (Loss) per Share
Basic net income (loss) per share is calculated by dividing the net income (loss) attributable to common stockholders by the weighted-average number of common shares outstanding during the period, without consideration for common stock equivalents. Diluted net income (loss) per share is computed by dividing the net income (loss) attributable to common stockholders by the weighted-average number of common share equivalents outstanding for the period determined using the treasury-stock method and the if-converted method. For purposes of this calculation, stock options are considered to be common stock equivalents and are only included in the calculation of diluted net income (loss) per share when their effect is dilutive.
The following tables and discussion provide a reconciliation of the numerator and denominator of the basic and diluted net income (loss) per share computations. The calculation below provides net income (loss) on both basic and diluted basis for the quarterly periods ended June 27, 2015 and June 28, 2014:
|
Quarterly Period Ended
|
Three Quarterly Periods Ended
|
|||||||||||||||
|
(in millions, except per share amounts)
|
June 27, 2015
|
June 28, 2014
|
June 27, 2015
|
June 28, 2014
|
||||||||||||
|
Numerator
|
||||||||||||||||
|
Consolidated net income (loss)
|
$ | (13 | ) | $ | 15 | $ | 38 | $ | 33 | |||||||
|
Denominator
|
||||||||||||||||
|
Weighted average common shares outstanding - basic
|
119.5 | 117.3 | 118.9 | 116.6 | ||||||||||||
|
Dilutive shares
|
— | 4.2 | 4.8 | 4.2 | ||||||||||||
|
Weighted average common and common equivalent shares outstanding - diluted
|
119.5 | 121.5 | 123.7 | 120.8 | ||||||||||||
|
Per common share income (loss)
|
||||||||||||||||
|
Basic
|
$ | ( 0.11 | ) | $ | 0.13 | $ | 0.32 | $ | 0.28 | |||||||
|
Diluted
|
$ | ( 0.11 | ) | $ | 0.12 | $ | 0.31 | $ | 0.27 | |||||||
The effect of outstanding stock options is not included in the calculation of diluted net loss per common share for the quarterly period ended June 27, 2015 as the effect of these options would be antidilutive to the net loss available to common shareholders. Thus, the weighted average common equivalent shares used for purposes of computing diluted EPS are the same as those used to compute basic EPS for these periods. Shares excluded from the quarterly period ended June 27, 2015 calculation, as the effect of their exercise into shares of our common stock would be antidilutive, were 4.9 million.
13
12. Comprehensive Income (Loss)
Comprehensive income (loss) is comprised of Consolidated net income (loss) and Other comprehensive income (loss). Other comprehensive losses include net unrealized gains or losses resulting from currency translations of foreign subsidiaries, changes in the value of our derivative instruments and adjustments to the pension liability.
The balances related to each component of Other comprehensive income (loss) during the nine months ended June 27, 2015 were as follows:
|
Currency Translation
|
Defined Benefit Pension and Retiree Health Benefit Plans
|
Derivative Instruments
|
Accumulated Other Comprehensive Loss
|
|||||||||||||
|
Balance at September 27, 2014
|
$ | (36 | ) | $ | (15 | ) | $ | 8 | $ | (43 | ) | |||||
|
Other comprehensive loss
|
(32 | ) | — | (18 | ) | (50 | ) | |||||||||
|
Tax expense
|
— | — | 6 | 6 | ||||||||||||
|
Balance at June 27, 2015
|
$ | (68 | ) | $ | (15 | ) | $ | (4 | ) | $ | (87 | ) | ||||
13. Guarantor and Non-Guarantor Financial Information
Berry Plastics Corporation (“Issuer”) has notes outstanding which are fully, jointly, severally, and unconditionally guaranteed by substantially all of Berry’s domestic subsidiaries. Separate narrative information or financial statements of the guarantor subsidiaries have not been included because they are 100% owned by the parent company and the guarantor subsidiaries unconditionally guarantee such debt on a joint and several basis. A guarantee of a guarantor of the securities will terminate upon the following customary circumstances: the sale of the capital stock of such guarantor if such sale complies with the indenture, the designation of such guarantor as an unrestricted subsidiary, the defeasance or discharge of the indenture, as a result of the holders of certain other indebtedness foreclosing on a pledge of the shares of a guarantor subsidiary or if such guarantor no longer guarantees certain other indebtedness of the issuer. The guarantees are also limited as necessary to prevent them from constituting a fraudulent conveyance under applicable law and guarantees guaranteeing subordinated debt are subordinated to certain other of the Company’s debts. Presented below is condensed consolidating financial information for the parent, issuer, guarantor subsidiaries and non-guarantor subsidiaries. Our issuer and guarantor financial information includes all of our domestic operating subsidiaries, our non-guarantor subsidiaries include our foreign subsidiaries and BP Parallel, LLC. Berry Plastics Group, Inc. uses the equity method to account for its ownership in Berry Plastics Corporation in the Condensed Consolidating Supplemental Financial Statements. Berry Plastics Corporation uses the equity method to account for its ownership in the guarantor and non-guarantor subsidiaries. All consolidating entries are included in the eliminations column along with the elimination of intercompany balances.
Condensed Supplemental Consolidated Balance Sheet
|
June 27, 2015
|
||||||||||||||||||||||||
|
Parent
|
Issuer
|
Guarantor
Subsidiaries
|
Non—
Guarantor
Subsidiaries
|
Eliminations
|
Total
|
|||||||||||||||||||
|
Current assets
|
181 | 99 | 837 | 211 | — | 1,328 | ||||||||||||||||||
|
Intercompany receivable
|
— | 3,135 | — | 102 | (3,237 | ) | — | |||||||||||||||||
|
Property, plant, and equipment, net
|
— | 81 | 1,114 | 106 | — | 1,301 | ||||||||||||||||||
|
Other assets
|
106 | 1,458 | 2,172 | 106 | (1,460 | ) | 2,382 | |||||||||||||||||
|
Total assets
|
$ | 287 | $ | 4,773 | $ | 4,123 | $ | 525 | $ | (4,697 | ) | $ | 5,011 | |||||||||||
|
|
||||||||||||||||||||||||
|
Current liabilities
|
50 | 177 | 379 | 88 | — | 694 | ||||||||||||||||||
|
Intercompany payable
|
(274 | ) | — | 3,511 | — | (3,237 | ) | — | ||||||||||||||||
|
Other long-term liabilities
|
585 | 3,761 | 38 | 7 | — | 4,391 | ||||||||||||||||||
|
Redeemable non-controlling interest
|
13 | — | — | 13 | (13 | ) | 13 | |||||||||||||||||
|
Stockholders’ equity (deficit)
|
(87 | ) | 835 | 195 | 417 | (1,447 | ) | (87 | ) | |||||||||||||||
|
Total liabilities and stockholders’ equity (deficit)
|
$ | 287 | $ | 4,773 | $ | 4,123 | $ | 525 | $ | (4,697 | ) | $ | 5,011 | |||||||||||
14
|
September 27, 2014
|
||||||||||||||||||||||||
|
Parent
|
Issuer
|
Guarantor
Subsidiaries
|
Non—
Guarantor
Subsidiaries
|
Eliminations
|
Total
|
|||||||||||||||||||
|
Current assets
|
166 | 171 | 901 | 194 | — | 1,432 | ||||||||||||||||||
|
Intercompany receivable
|
— | 3,343 | — | 87 | (3,430 | ) | — | |||||||||||||||||
|
Property, plant and equipment, net
|
— | 84 | 1,162 | 118 | — | 1,364 | ||||||||||||||||||
|
Other assets
|
69 | 1,357 | 2,227 | 125 | (1,306 | ) | 2,472 | |||||||||||||||||
|
Total assets
|
$ | 235 | $ | 4,955 | $ | 4,290 | $ | 524 | $ | (4,736 | ) | $ | 5,268 | |||||||||||
|
|
||||||||||||||||||||||||
|
Current liabilities
|
35 | 212 | 435 | 85 | — | 767 | ||||||||||||||||||
|
Intercompany payable
|
(319 | ) | — | 3,749 | — | (3,430 | ) | — | ||||||||||||||||
|
Other long-term liabilities
|
620 | 3,934 | 42 | 6 | — | 4,602 | ||||||||||||||||||
|
Redeemable non-controlling interest
|
13 | — | — | 13 | (13 | ) | 13 | |||||||||||||||||
|
Stockholders’ equity (deficit)
|
(114 | ) | 809 | 64 | 420 | (1,293 | ) | (114 | ) | |||||||||||||||
|
Total liabilities and stockholders’ equity (deficit)
|
$ | 235 | $ | 4,955 | $ | 4,290 | $ | 524 | $ | (4,736 | ) | $ | 5,268 | |||||||||||
Condensed Supplemental Consolidated Statements of Operations
|
Quarterly Period Ended June 27, 2015
|
||||||||||||||||||||||||
|
Parent
|
Issuer
|
Guarantor
Subsidiaries
|
Non-
Guarantor
Subsidiaries
|
Eliminations
|
Total
|
|||||||||||||||||||
|
Net sales
|
$ | — | $ | 155 | $ | 961 | $ | 125 | $ | — | $ | 1,241 | ||||||||||||
|
Cost of goods sold
|
— | 121 | 773 | 109 | — | 1,003 | ||||||||||||||||||
|
Selling, general and administrative
|
— | 17 | 63 | 12 | — | 92 | ||||||||||||||||||
|
Amortization of intangibles
|
— | 2 | 18 | 2 | — | 22 | ||||||||||||||||||
|
Restructuring and impairment charges
|
— | — | 3 | — | — | 3 | ||||||||||||||||||
|
Operating income
|
— | 15 | 104 | 2 | — | 121 | ||||||||||||||||||
| Debt extinguishment | — | 94 | — | — | — | 94 | ||||||||||||||||||
|
Other expense (income), net
|
— | (2) | 3 | 1 | — | 2 | ||||||||||||||||||
|
Interest expense, net
|
— | 6 | 37 | 4 | — | 47 | ||||||||||||||||||
|
Equity in net income of subsidiaries
|
22 | (60 | ) | — | — | 38 | — | |||||||||||||||||
|
Income (loss) before income taxes
|
(22 | ) | (23 | ) | 64 | (3 | ) | (38 | ) | (22 | ) | |||||||||||||
|
Income tax expense (benefit)
|
(9 | ) | (10 | ) | — | 1 | 9 | (9 | ) | |||||||||||||||
|
Consolidated net income (loss)
|
$ | (13 | ) | $ | (13 | ) | $ | 64 | $ | (4 | ) | $ | (47 | ) | $ | (13 | ) | |||||||
|
Comprehensive net income (loss)
|
$ | (13 | ) | $ | (11 | ) | $ | 64 | $ | (2 | ) | $ | (47 | ) | $ | (9 | ) | |||||||
|
Quarterly Period Ended June 28, 2014
|
||||||||||||||||||||||||
|
Parent
|
Issuer
|
Guarantor
Subsidiaries
|
Non-
Guarantor
Subsidiaries
|
Eliminations
|
Total
|
|||||||||||||||||||
|
Net sales
|
$ | — | $ | 165 | $ | 1,019 | $ | 114 | $ | — | $ | 1,298 | ||||||||||||
|
Cost of goods sold
|
— | 145 | 854 | 90 | — | 1,089 | ||||||||||||||||||
|
Selling, general and administrative
|
— | 13 | 62 | 10 | — | 85 | ||||||||||||||||||
|
Amortization of intangibles
|
— | 3 | 21 | 2 | — | 26 | ||||||||||||||||||
|
Restructuring and impairment charges
|
— | — | 15 | — | — | 15 | ||||||||||||||||||
|
Operating income
|
— | 4 | 67 | 12 | — | 83 | ||||||||||||||||||
|
Debt extinguishment
|
— | 33 | — | — | — | 33 | ||||||||||||||||||
|
Other income, net
|
— | — | (2 | ) | — | — | (2 | ) | ||||||||||||||||
|
Interest expense, net
|
10 | 7 | 43 | (35 | ) | 31 | 56 | |||||||||||||||||
|
Equity in net income of subsidiaries
|
(6 | ) | (73 | ) | — | — | 79 | — | ||||||||||||||||
|
Income (loss) before income taxes
|
(4 | ) | 37 | 26 | 47 | (110 | ) | (4 | ) | |||||||||||||||
|
Income tax expense (benefit)
|
(19 | ) | (7 | ) | — | 1 | 6 | (19 | ) | |||||||||||||||
|
Consolidated net income (loss)
|
$ | 15 | $ | 44 | $ | 26 | $ | 46 | $ | (116 | ) | $ | 15 | |||||||||||
|
Comprehensive net income (loss)
|
$ | 15 | $ | 39 | $ | 26 | $ | 48 | $ | (116 | ) | $ | 12 | |||||||||||
15
|
Three Quarterly Periods Ended June 27, 2015
|
||||||||||||||||||||||||
|
Parent
|
Issuer
|
Guarantor
Subsidiaries
|
Non-
Guarantor
Subsidiaries
|
Eliminations
|
Total
|
|||||||||||||||||||
|
Net sales
|
$ | — | $ | 464 | $ | 2,871 | $ | 350 | $ | — | $ | 3,685 | ||||||||||||
|
Cost of goods sold
|
— | 394 | 2,366 | 277 | — | 3,037 | ||||||||||||||||||
|
Selling, general and administrative
|
— | 50 | 183 | 33 | — | 266 | ||||||||||||||||||
|
Amortization of intangibles
|
— | 6 | 58 | 6 | — | 70 | ||||||||||||||||||
|
Restructuring and impairment charges
|
— | — | 11 | — | — | 11 | ||||||||||||||||||
|
Operating income
|
— | 14 | 253 | 34 | — | 301 | ||||||||||||||||||
| Debt extinguishment | — | 94 | — | — | — | 94 | ||||||||||||||||||
|
Other expense (income), net
|
— | (1) | 2 | 1 | — | 2 | ||||||||||||||||||
|
Interest expense, net
|
— | 19 | 119 | 14 | — | 152 | ||||||||||||||||||
|
Equity in net income of subsidiaries
|
(53 | ) | (148 | ) | — | — | 201 | — | ||||||||||||||||
|
Income (loss) before income taxes
|
53 | 50 | 132 | 19 | (201 | ) | 53 | |||||||||||||||||
|
Income tax expense (benefit)
|
15 | 12 | — | 3 | (15 | ) | 15 | |||||||||||||||||
|
Consolidated net income (loss)
|
$ | 38 | $ | 38 | $ | 132 | $ | 16 | $ | (186 | ) | $ | 38 | |||||||||||
|
Comprehensive net income (loss)
|
$ | 38 | $ | 26 | $ | 132 | $ | (16 | ) | $ | (186 | ) | $ | (6 | ) | |||||||||
|
Consolidating Statement of Cash Flows
|
||||||||||||||||||||||||
|
Cash Flow from Operating Activities
|
$ | — | $ | (35 | ) | $ | 407 | $ | 20 | $ | — | $ | 392 | |||||||||||
|
Cash Flow from Investing Activities
|
||||||||||||||||||||||||
|
Additions to property, plant, and equipment
|
— | (11 | ) | (110 | ) | (3 | ) | — | (124 | ) | ||||||||||||||
|
Proceeds from sale of assets
|
— | — | 13 | 5 | — | 18 | ||||||||||||||||||
|
(Contributions) distributions to/from subsidiaries
|
(16 | ) | 16 | — | — | — | — | |||||||||||||||||
|
Intercompany advances (repayments)
|
— | 282 | — | — | (282 | ) | — | |||||||||||||||||
|
Acquisition of business, net of cash acquired
|
— | — | — | — | — | — | ||||||||||||||||||
|
Net cash from investing activities
|
(16 | ) | 288 | (97 | ) | 2 | (282 | ) | (106 | ) | ||||||||||||||
|
Cash Flow from Financing Activities
|
||||||||||||||||||||||||
|
Proceeds from long-term debt
|
— | 702 | — | — | — | 702 | ||||||||||||||||||
|
Proceeds from issuance of common stock
|
16 | — | — | — | — | 16 | ||||||||||||||||||
|
Payment of tax receivable agreement
|
(39 | ) | — | — | — | — | (39 | ) | ||||||||||||||||
|
Repayments on long-term borrowings
|
— | (937 | ) | — | (3 | ) | — | (940 | ) | |||||||||||||||
|
Debt financing costs
|
— | (87 | ) | — | — | — | (87 | ) | ||||||||||||||||
|
Changes in intercompany balances
|
39 | — | (321 | ) | — | 282 | — | |||||||||||||||||
|
Net cash from financing activities
|
16 | (322 | ) | (321 | ) | (3 | ) | 282 | (348 | ) | ||||||||||||||
|
Effect of exchange rate changes on cash
|
— | — | — | (5 | ) | — | (5 | ) | ||||||||||||||||
|
Net change in cash
|
— | (70 | ) | (11 | ) | 14 | — | (67 | ) | |||||||||||||||
|
Cash and cash equivalents at beginning of period
|
— | 70 | 15 | 44 | — | 129 | ||||||||||||||||||
|
Cash and cash equivalents at end of period
|
$ | — | $ | — | $ | 4 | $ | 58 | $ | — | $ | 62 | ||||||||||||
16
|
Three Quarterly Periods Ended June 28, 2014
|
||||||||||||||||||||||||
|
Parent
|
Issuer
|
Guarantor
Subsidiaries
|
Non—
Guarantor
Subsidiaries
|
Eliminations
|
Total
|
|||||||||||||||||||
|
Net sales
|
$ | — | $ | 466 | $ | 2,884 | $ | 298 | $ | — | $ | 3,648 | ||||||||||||
|
Cost of goods sold
|
— | 417 | 2,424 | 235 | — | 3,076 | ||||||||||||||||||
|
Selling, general and administrative
|
— | 47 | 172 | 25 | — | 244 | ||||||||||||||||||
|
Amortization of intangibles
|
— | 7 | 64 | 6 | — | 77 | ||||||||||||||||||
|
Restructuring and impairment charges
|
— | — | 28 | — | — | 28 | ||||||||||||||||||
|
Operating income (loss)
|
— | (5 | ) | 196 | 32 | — | 223 | |||||||||||||||||
|
Debt extinguishment
|
— | 35 | — | — | — | 35 | ||||||||||||||||||
|
Other income, net
|
— | (1 | ) | (2 | ) | — | — | (3 | ) | |||||||||||||||
|
Interest expense, net
|
34 | 20 | 133 | (102 | ) | 83 | 168 | |||||||||||||||||
|
Equity in net income of subsidiaries
|
(57 | ) | (196 | ) | — | — | 253 | — | ||||||||||||||||
|
Income (loss) before income taxes
|
23 | 137 | 65 | 134 | (336 | ) | 23 | |||||||||||||||||
|
Income tax expense (benefit)
|
(10 | ) | 29 | — | 3 | (32 | ) | (10 | ) | |||||||||||||||
|
Consolidated net income (loss)
|
$ | 33 | $ | 108 | $ | 65 | $ | 131 | $ | (304 | ) | $ | 33 | |||||||||||
|
Comprehensive net income (loss)
|
$ | 33 | $ | 105 | $ | 65 | $ | 129 | $ | (304 | ) | $ | 28 | |||||||||||
|
Consolidating Statement of Cash Flows
|
||||||||||||||||||||||||
|
Cash Flows from Operating Activities
|
$ | — | $ | 29 | $ | 316 | $ | 25 | $ | — | $ | 370 | ||||||||||||
|
Cash Flows from Investing Activities
|
||||||||||||||||||||||||
|
Additions to property, plant, and equipment
|
— | (10 | ) | (155 | ) | (7 | ) | — | (172 | ) | ||||||||||||||
|
Proceeds from sale of assets
|
— | — | 5 | — | — | 5 | ||||||||||||||||||
|
(Contributions) distributions to/from subsidiaries
|
727 | (6 | ) | — | — | (721 | ) | — | ||||||||||||||||
|
Proceeds from sale of investments
|
— | — | — | 721 | (721 | ) | — | |||||||||||||||||
|
Intercompany advances (repayments)
|
— | (93 | ) | — | — | 93 | — | |||||||||||||||||
|
Acquisition of businesses, net of cash acquired
|
— | — | (135 | ) | (90 | ) | — | (225 | ) | |||||||||||||||
|
Net cash from investing activities
|
727 | (109 | ) | (285 | ) | 624 | (1,349 | ) | (392 | ) | ||||||||||||||
|
Cash Flows from Financing Activities
|
||||||||||||||||||||||||
|
Proceeds from long-term borrowings
|
— | 1,664 | — | — | — | 1,664 | ||||||||||||||||||
|
Proceeds from issuance of common stock
|
13 | — | — | — | — | 13 | ||||||||||||||||||
|
Payment of tax receivable agreement
|
(32 | ) | — | — | — | — | (32 | ) | ||||||||||||||||
|
Debt financing costs
|
— | (44 | ) | — | — | — | (44 | ) | ||||||||||||||||
|
(Contributions) distributions to/from subsidiaries
|
— | — | — | (721 | ) | 721 | — | |||||||||||||||||
|
Repayments on long-term borrowings
|
(740 | ) | (1,656 | ) | — | — | 721 | (1,675 | ) | |||||||||||||||
|
Changes in intercompany balances
|
32 | — | (30 | ) | 91 | (93 | ) | — | ||||||||||||||||
|
Net cash from financing activities
|
(727 | ) | (36 | ) | (30 | ) | (630 | ) | 1,349 | (74 | ) | |||||||||||||
|
Effect of exchange rate changes on cash
|
— | — | — | (1 | ) | — | (1 | ) | ||||||||||||||||
|
Net change in cash
|
— | (116 | ) | 1 | 18 | — | (97 | ) | ||||||||||||||||
|
Cash and cash equivalents at beginning of period
|
— | 116 | — | 26 | — | 142 | ||||||||||||||||||
|
Cash and cash equivalents at end of period
|
$ | — | $ | — | $ | 1 | $ | 44 | $ | — | $ | 45 | ||||||||||||
17
In July 2015, the Company announced its intention to enter into a definitive agreement to acquire AVINTIV Inc. (“AVINTIV”) from Blackstone Group LP for a purchase price of $2.45 billion in cash on a debt-free, cash-free basis. AVINTIV Inc. is one of the world’s leading developers, producers, and marketers of nonwoven specialty materials used in hygiene, infection prevention, personal care, and high-performance solutions.
With 23 locations in 14 countries, an employee base of over 4,500 people, and the broadest range of process technologies in the industry, AVINTIV’s strategically located manufacturing facilities position it as a global supplier to many of the same leading consumer and industrial product manufacturers that the Company supplies. AVINTIV’s manufacturing facilities are strategically located worldwide near many key customers and utilize similar key raw materials as the Company’s existing business.
18
This discussion contains forward-looking statements and involves numerous risks and uncertainties, including, but not limited to, those described in our most recent Form 10-K in the section titled “Risk Factors” and other risk factors identified from time to time in our periodic filings with the SEC. As a result, our actual results may differ materially from those contained in any forward-looking statements. You should read the explanation of the qualifications and limitations on these forward-looking statements referenced within this report.
Executive Summary
Business.
We operate in the following four segments: Rigid Open Top, Rigid Closed Top, Engineered Materials, and Flexible Packaging. The Rigid Open Top segment sell primarily containers and foodservice items. The Rigid Closed Top segment sells closures, overcaps, bottles, prescription containers, and tubes. Our Engineered Materials segment primarily sells pipeline corrosion protection solutions, tapes and adhesives, polyethylene based film products, and can liners. The Flexible Packaging segment primarily sells high barrier, multilayer film products as well as finished flexible packages such as printed bags and pouches.
Acquisitions.
We maintain an opportunistic acquisition strategy, which is focused on improving our long-term financial performance, enhancing our market positions, and expanding our product lines, or in some cases, providing us with a new or complementary product line. In our acquisitions, we seek to obtain businesses for attractive post-synergy multiples, creating value for our stockholders from synergy realization, leveraging the acquired products across our customer base, creating new platforms for future growth, and assuming best practices from the businesses we acquire. The Company has included the expected benefits of acquisition integrations and restructuring plans within our unrealized synergies, which are in turn recognized in earnings after an acquisition has been fully integrated or the restructuring plan is completed. While the expected benefits on earnings is estimated at the commencement of each transaction, once the execution of the plan and integration occur, we are generally unable to accurately estimate or track what the ultimate effects have been due to system integrations and movements of activities to multiple facilities. As historical business combinations and restructuring plans have not allowed us to accurately separate realized synergies compared to what was initially identified, we measure the synergy realization based on the overall segment profitability post integration.
Recent Development.
In July 2015, we announced our intention to enter into a definitive agreement to acquire AVINTIV Inc. (“AVINTIV”) from Blackstone Group LP for a purchase price of $2.45 billion in cash on a debt-free, cash-free basis. AVINTIV is one of the world’s leading developers, producers, and marketers of nonwoven specialty materials used in hygiene, infection prevention, personal care, and high-performance solutions.
With 23 locations in 14 countries, an employee base of over 4,500 people, and the broadest range of process technologies in the industry, AVINTIV’s strategically located manufacturing facilities position it as a global supplier to many of the same leading consumer and industrial product manufacturers that the Company supplies. AVINTIV’s manufacturing facilities are strategically located worldwide near many key customers and utilize similar key raw materials as the Company’s existing business.
The AVINTIV transaction, which is subject to customary closing conditions, is expected to close by the end of calendar year 2015. We have secured committed debt financing while all funding options are being evaluated.
Raw Material Trends.
Our primary raw material is plastic resin. Polypropylene and polyethylene account for approximately 90% of our plastic resin purchases based on the pounds purchased. Plastic resins are subject to price fluctuations, including those arising from supply shortages and changes in the prices of natural gas, crude oil and other petrochemical intermediates from which resins are produced. The three month simple average, as published in Chem Data, price per pound were as follows by fiscal year:
|
Polyethylene Butene Film
|
Polypropylene
|
|||||||||||||||||||||||
|
Fiscal Quarter
|
2015
|
2014
|
2013
|
2015
|
2014
|
2013
|
||||||||||||||||||
|
1st quarter
|
$ | .86 | $ | .82 | $ | .69 | $ | .92 | $ | .89 | $ | .76 | ||||||||||||
|
2nd quarter
|
.75 | .85 | .74 | .73 | .95 | .96 | ||||||||||||||||||
|
3rd quarter
|
.76 | .86 | .77 | .68 | .91 | .84 | ||||||||||||||||||
|
4th quarter
|
— | .87 | .79 | — | .92 | .89 | ||||||||||||||||||
19
Due to differences in the timing of passing through resin cost changes to our customers on escalator/de-escalator programs, segments are negatively impacted in the short term when plastic resin costs increase and are positively impacted when plastic resin costs decrease. This timing lag in passing through raw material cost changes could affect our results as plastic resin costs fluctuate.
Outlook.
The Company is impacted by general economic and industrial growth, plastic resin availability and affordability, and general industrial production. Our business has both geographic and end market diversity, which reduces the effect of any one of these factors on our overall performance. Our results are affected by our ability to pass through raw material cost changes to our customers, improve manufacturing productivity and adapt to volume changes of our customers. Consumer demand for packaged food products has been under pressure for over two years. This has put pressure on industry margins and asset utilization rates, which the Company has been able to partially offset by pricing actions, asset consolidations, introduction of new products and synergies from acquisitions. During the first half of the year we received a favorable impact on cash from operating activities from the declining resin prices. If oil prices stabilize, we would expect this benefit from falling resin prices to diminish.
Results of Operations
Comparison of the Quarterly Period Ended June 27, 2015 (the “Quarter”) and the Quarterly Period Ended June 28, 2014 (the “Prior Quarter”)
|
Consolidated Overview
|
||||||||||||||||
|
Quarter
|
Prior Quarter
|
$ Change
|
% Change
|
|||||||||||||
|
Net sales
|
$ | 1,241 | $ | 1,298 | $ | (57 | ) | (4 | %) | |||||||
|
Operating income
|
$ | 121 | $ | 83 | $ | 38 | 46 | % | ||||||||
|
Operating income percentage of net sales
|
10 | % | 6 | % | ||||||||||||
The net sales decrease of $57 million is primarily attributed to a 2% volume decline primarily attributed to soft customer demand, selling price decreases of 5% due to the pass through of lower raw material costs, and a 1% negative impact from foreign currency changes partially offset by net sales from acquisition volume attributed to the Healthcare Containers and Closures business purchased from Rexam (“C&C”) in the last twelve months of 4%.
The operating income increase of $38 million is primarily attributed to a $14 million improvement in the relationship of net selling price to raw material costs, $3 million of operating income from the C&C business acquired in the last twelve months, a $6 million decrease in depreciation and amortization expense and a $25 million decrease in business integration expenses. The $25 million decrease in business integration expenses primarily consisted of a decrease in restructuring and impairment costs of $12 million and a $13 million decrease in costs attributed to manufacturing inefficiencies associated with the 2014 cost reduction plan. These improvements were partially offset by $5 million from base volume declines, a $2 million increase in selling, general and administrative expenses, and a $2 million negative impact from foreign currency changes. Business integration expenses consist of restructuring and impairment charges, manufacturing inefficiencies associated with cost reduction plans, major innovation start-up and other business optimization costs. Acquisition operating income (loss) is generally analyzed in total until the acquisition has been included in our results for a full year.
|
Rigid Open Top
|
||||||||||||||||
|
Quarter
|
Prior Quarter
|
$ Change
|
% Change
|
|||||||||||||
|
Net sales
|
$ | 276 | $ | 303 | $ | (27 | ) | (9 | %) | |||||||
|
Operating income
|
$ | 26 | $ | 1 | $ | 25 | 2,500 | % | ||||||||
|
Operating income percentage of net sales
|
9 | % | 0 | % | ||||||||||||
Net sales in the Rigid Open Top segment decreased by $27 million from the Prior Quarter as a result of a volume decline of 4% and selling price decreases of 5% due to the pass through of lower raw material costs. The volume decline is primarily related to a decline in dairy container product sales.
The operating income increase of $25 million in the Rigid Open Top segment from the Prior Quarter is primarily attributed to a $6 million improvement in the relationship of net selling price to raw material costs, a decrease in restructuring and impairment costs of $10 million and a $12 million decrease in costs primarily attributed to manufacturing inefficiencies associated with the 2014 cost reduction plan. These improvements were partially offset by $2 million in base volume declines and a $1 million increase in selling, general and administrative expenses.
20
|
Rigid Closed Top
|
||||||||||||||||
|
Quarter
|
Prior Quarter
|
$ Change
|
% Change
|
|||||||||||||
|
Net sales
|
$ | 368 | $ | 381 | $ | (13 | ) | (3 | %) | |||||||
|
Operating income
|
$ | 42 | $ | 38 | $ | 4 | 11 | % | ||||||||
|
Operating income percentage of net sales
|
11 | % | 10 | % | ||||||||||||
Net sales in the Rigid Closed Top segment decreased by $13 million from the Prior Quarter as a result of volume decline of 5% and selling price decreases of 7% due to the pass through of lower raw material costs, partially offset by C&C acquisition volume of 9%. The volume decline is primarily related to general market softness in our closure product offerings.
The operating income increase of $4 million in the Rigid Closed Top segment from the Prior Quarter is primarily attributed to $2 million of operating income from the C&C acquisition, $4 million of improvement in the relationship of net selling price to raw material costs, and a $2 million decrease in depreciation and amortization expense partially offset by $5 million from base volume declines.
|
Engineered Materials
|
||||||||||||||||
|
Quarter
|
Prior Quarter
|
$ Change
|
% Change
|
|||||||||||||
|
Net sales
|
$ | 359 | $ | 371 | $ | (12 | ) | (3 | %) | |||||||
|
Operating income
|
$ | 38 | $ | 33 | $ | 5 | 15 | % | ||||||||
|
Operating income percentage of net sales
|
11 | % | 9 | % | ||||||||||||
Net sales in the Engineered Materials segment decreased by $12 million from the Prior Quarter primarily as a result of selling price decreases of 4% due to the pass through of lower raw material costs and a 2% negative impact from foreign currency changes partially offset by 3% in base volume increases.
The operating income increase of $5 million in the Engineered Materials segment from the Prior Quarter is primarily attributed to a $1 million improvement in the relationship of net selling price to raw material costs, $3 million from base volume increases, and a $2 million decrease in depreciation and amortization expense partially offset by a $1 million negative impact from foreign currency changes.
|
Flexible Packaging
|
||||||||||||||||
|
Quarter
|
Prior Quarter
|
$ Change
|
% Change
|
|||||||||||||
|
Net sales
|
$ | 238 | $ | 243 | $ | (5 | ) | (2 | %) | |||||||
|
Operating income
|
$ | 15 | $ | 11 | $ | 4 | 36 | % | ||||||||
|
Operating income percentage of net sales
|
6 | % | 5 | % | ||||||||||||
Net sales in the Flexible Packaging segment decreased by $5 million from the Prior Quarter primarily as a result of a 2% base volume decline, selling price decreases of 4% due to the pass through of lower raw material costs, and a 3% negative impact from foreign currency changes, partially offset by C&C acquisition volume of 7%. The volume decline was primarily attributed to soft customer demand in our converter product offerings.
The operating income increase of $4 million in the Flexible Packaging segment from the Prior Quarter is primarily attributed to a $3 million improvement in the relationship of net selling price to raw material costs, $1 million of operating income from the C&C acquisition, and a $2 million decrease in depreciation and amortization expense partially offset by $1 million from base volume declines and a $1 million negative impact from foreign currency changes.
|
Other expense (income)
|
||||||||||||||||
|
Quarter
|
Prior Quarter
|
$ Change
|
% Change
|
|||||||||||||
|
Other expense (income), net
|
$ | 2 | $ | (2 | ) | $ | 4 | 200 | % | |||||||
The other expense (income) increase of $4 million from the Prior Quarter is primarily the result of losses realized on the sale and disposal of assets in the Quarter compared to gains on the sale of assets in the Prior Quarter.
|
Interest expense
|
||||||||||||||||
|
Quarter
|
Prior Quarter
|
$ Change
|
% Change
|
|||||||||||||
|
Interest expense, net
|
$ | 47 | $ | 56 | $ | (9 | ) | (16 | %) | |||||||
21
Interest expense decreased from $56 million in the Prior Quarter to $47 million in the Quarter primarily as the result of the retirement of the 9¾% second priority senior secured notes and corresponding issuance of the 5
1
/
8
% second priority senior secured notes in June 2015 as well as the retirement of the 9½% second priority senior secured notes and corresponding issuance of the 5½% second priority senior secured notes in May 2014.
|
Income tax expense (benefit)
|
|||||||
|
Quarter
|
Prior Quarter
|
$ Change
|
% Change
|
||||
|
Income tax expense (benefit)
|
$ (9)
|
$ (19)
|
$ 10
|
53%
|
For the Quarter, we recorded an income tax benefit of $9 million. The effective tax rate for the Quarter compared to the Prior Quarter is impacted by discrete items, the inclusion of certain international entities for which a full valuation allowance is recognized, and $18 million of federal and state research and development tax credits recognized in the Prior Quarter.
Comparison of the Three Quarterly Periods Ended June 27, 2015 (the “YTD”) and the Three Quarterly Periods Ended June 28, 2014 (the “Prior YTD”)
|
Consolidated Overview
|
||||||||||||||||
|
YTD
|
Prior YTD
|
$ Change
|
% Change
|
|||||||||||||
|
Net sales
|
$ | 3,685 | $ | 3,648 | $ | 37 | 1 | % | ||||||||
|
Operating income
|
$ | 301 | $ | 223 | $ | 78 | 35 | % | ||||||||
|
Operating income percentage of net sales
|
8 | % | 6 | % | ||||||||||||
The net sales increase of $37 million from the Prior YTD is primarily attributed to net sales from businesses acquired in the last twelve months of 5% partially offset by a 3% volume decline primarily related to soft customer demand and selling price decreases of 1% due to the pass through of lower raw material costs.
The operating income increase of $78 million from the Prior YTD is primarily attributed to a $33 million improvement in the relationship of net selling price to raw material costs, $6 million of operating income from businesses acquired in the last twelve months, a $6 million decrease in depreciation and amortization expense, a $13 million improvement in operating performance in manufacturing, and a $49 million decrease in business integration expenses. The $49 million decrease in business integration expenses primarily consisted of a decrease in restructuring and impairment costs of $17 million and a $32 million decrease in costs attributed primarily to manufacturing inefficiencies associated with the 2014 cost reduction plan and acquisition integration costs. These improvements were partially offset by $20 million from base volume declines, a $4 million increase in selling, general and administrative expenses, and a $5 million negative impact from foreign currency changes. Business integration expenses consist of restructuring and impairment charges, manufacturing inefficiencies associated with cost reduction plans, major innovation start-up and other business optimization costs. Acquisition operating income (loss) is generally analyzed in total until the acquisition has been included in our results for a full year.
|
Rigid Open Top
|
||||||||||||||||
|
YTD
|
Prior YTD
|
$ Change
|
% Change
|
|||||||||||||
|
Net sales
|
$ | 784 | $ | 820 | $ | (36 | ) | (4 | %) | |||||||
|
Operating income
|
$ | 51 | $ | 20 | $ | 31 | 155 | % | ||||||||
|
Operating income percentage of net sales
|
7 | % | 2 | % | ||||||||||||
Net sales in the Rigid Open Top segment decreased by $36 million from the Prior YTD primarily as a result of a volume decline of 4%. The volume decline is primarily related to a decline in dairy container product sales.
The operating income increase of $31 million in the Rigid Open Top segment from the Prior YTD is primarily attributed to $12 million of improvement in the relationship of net selling price to raw material costs, a $1 million decrease in depreciation and amortization expense, and a $32 million decrease in business integration expenses primarily consisted of a decrease in restructuring and impairment costs of $10 million and a $22 million decrease in costs attributed to manufacturing inefficiencies associated with the 2014 cost reduction plan. These improvements were partially offset by $7 million in base volume declines, a $3 million increase in selling, general and administrative expenses, and a $4 million decline in operating performance in manufacturing.
22
|
Rigid Closed Top
|
||||||||||||||||
|
YTD
|
Prior YTD
|
$ Change
|
% Change
|
|||||||||||||
|
Net sales
|
$ | 1,121 | $ | 1,073 | $ | 48 | 4 | % | ||||||||
|
Operating income
|
$ | 104 | $ | 101 | $ | 3 | 3 | % | ||||||||
|
Operating income percentage of net sales
|
9 | % | 9 | % | ||||||||||||
Net sales in the Rigid Closed Top segment increased by $48 million from the Prior YTD primarily as a result of acquisition volume of 10% attributed to the United States portion of the Healthcare Containers and Closures business purchased from Rexam (“C&C”), partially offset by a volume decline of 3% and selling price decreases of 3% due to the pass through of lower raw material costs. The volume decline is primarily attributed to general market softness in our closure product offerings.
The operating income increase of $3 million in the Rigid Closed Top segment from the Prior YTD is primarily attributed to a $5 million improvement in operating performance in manufacturing, $5 million of improvement in the relationship of net selling price to raw material costs, $3 million decrease in business integration expenses attributed to acquisition integration, and a $5 million decline in selling, general, and administrative expenses, partially offset by $3 million of operating losses from the C&C acquisition, an increase in restructuring and impairment costs of $2 million, and $10 million in base volume declines.
|
Engineered Materials
|
||||||||||||||||
|
YTD
|
Prior YTD
|
$ Change
|
% Change
|
|||||||||||||
|
Net sales
|
$ | 1,052 | $ | 1,081 | $ | (29 | ) | (3 | )% | |||||||
|
Operating income
|
$ | 105 | $ | 90 | $ | 15 | 17 | % | ||||||||
|
Operating income percentage of net sales
|
10 | % | 8 | % | ||||||||||||
Net sales in the Engineered Materials segment decreased by $29 million from the Prior YTD primarily as a result of a 1% base volume decline and a 2% negative impact from foreign currency. The volume decline is primarily attributed to general market softness and lost import revenues in our home and party product offerings.
The operating income increase of $15 million in the Engineered Materials segment from the Prior YTD is primarily attributed to a decrease in restructuring and impairment costs of $5 million, a $4 million improvement in operating performance in manufacturing, a $7 million improvement in the relationship of net selling price to raw material costs, and a $4 million decrease in depreciation and amortization expense, partially offset by a $2 million increase in selling, general, and administrative expenses and a $2 million negative impact from foreign currency changes.
|
Flexible Packaging
|
||||||||||||||||
|
YTD
|
Prior YTD
|
$ Change
|
% Change
|
|||||||||||||
|
Net sales
|
$ | 728 | $ | 674 | $ | 54 | 8 | % | ||||||||
|
Operating income
|
$ | 41 | $ | 12 | $ | 29 | 242 | % | ||||||||
|
Operating income percentage of net sales
|
6 | % | 2 | % | ||||||||||||
Net sales in the Flexible Packaging increased $54 million from the Prior YTD primarily as a result of acquisition volume of 13% and selling price increases of 1% partially offset by a 3% base volume decline and a 3% negative impact from foreign currency changes.
The operating income increase of $29 million in the Flexible Packaging segment from the Prior YTD is primarily attributed to a $8 million improvement in operating performance in manufacturing, a $10 million improvement in the relationship of net selling price to raw material costs, a $9 million benefit from businesses acquired in the last 12 months, a decrease in restructuring and impairment costs of $4 million, and a $7 million decrease of costs primarily associated with manufacturing inefficiencies associated with the 2014 cost reduction plan partially offset by $3 million from base volume declines, $4 million increased in selling general and administrative expenses, and a $3 million negative impact from foreign currency changes.
|
Other expense, (income), net
|
||||||||||||||||
|
YTD
|
Prior YTD
|
$ Change
|
% Change
|
|||||||||||||
|
Other expense (income), net
|
$ | 2 | $ | (3 | ) | $ | 5 | 267 | % | |||||||
23
The other expense (income) increase of $5 million from the Prior Quarter is primarily the result of losses realized on the sale and disposal of assets in the Quarter compared to gains on the sale of assets in the Prior Quarter.
|
Interest expense
|
|||||||
|
YTD
|
Prior YTD
|
$ Change
|
% Change
|
||||
|
Interest expense, net
|
$ 152
|
$ 168
|
$ (16)
|
(10%)
|
Interest expense decreased from $168 million in the Prior YTD to $152 million in the YTD primarily as the result of the retirement of the 9¾% second priority senior secured notes and corresponding issuance of the 5
1
/
8
% second priority senior secured notes in June 2015as well as the retirement of the 9½% second priority senior secured notes and corresponding issuance of the 5½% second priority senior secured notes in May 2014.
|
Income tax expense (benefit)
|
|||||||
|
YTD
|
Prior YTD
|
$ Change
|
% Change
|
||||
|
Income tax expense (benefit)
|
$ 15
|
$ (10)
|
$ 25
|
250%
|
For the YTD we recorded income tax expense of $15 million. The effective tax rate for the YTD compared to the Prior YTD is impacted by discrete items, the inclusion of certain international entities for which a full valuation allowance is recognized, and $18 million of federal and state research and development tax credits recognized in the Prior YTD.
Liquidity and Capital Resources
Senior Secured Credit Facility
We manage our global cash requirements considering (i) available funds among the many subsidiaries through which we conduct business, (ii) the geographic location of our liquidity needs, and (iii) the cost to access international cash balances. Our U.S. operations generate sufficient cash flows to fund their liquidity needs and do not depend on cash located outside the U.S. for their operation. In the U.S., we have a $650 million asset based revolving line of credit. In May 2015, the Company amended the credit agreement relating to its revolving credit facility to extend the maturity date from June 2016 to May 2020 and to reduce interest margins and certain commitment fees. The availability under the revolving line of credit is the lesser of $650 million or a defined borrowing base which is calculated based on eligible accounts receivable and inventory.
Our fixed charge coverage ratio, as defined in the revolving credit facility, is calculated based on a numerator consisting of adjusted EBITDA less pro forma adjustments, income taxes paid in cash and capital expenditures, and a denominator consisting of scheduled principal payments in respect of indebtedness for borrowed money, interest expense and certain distributions. We are obligated to sustain a minimum fixed charge coverage ratio of 1.0 to 1.0 under the revolving credit facility at any time when the aggregate unused capacity under the revolving credit facility is less than 10% of the lesser of the revolving credit facility commitments and the borrowing base (and for 10 business days following the date upon which availability exceeds such threshold) or during the continuation of an event of default. Our fixed charge ratio was 2.8 to 1.0 at June 27, 2015.
Despite not having financial maintenance covenants, our debt agreements contain certain negative covenants. The failure to comply with these negative covenants could restrict our ability to incur additional indebtedness, effect acquisitions, enter into certain significant business combinations, make distributions or redeem indebtedness. The term loan facility contains a negative covenant first lien secured leverage ratio covenant of 4.0 to 1.0 on a pro forma basis for a proposed transaction, such as an acquisition or incurrence of additional first lien debt. Our first lien secured leverage ratio was 3.0 to 1.0 at June 27, 2015. In addition to its regular principal payments, in October 2014, the Company elected to make a voluntary one-time $100 million principal payment on the outstanding term loan,
using
existing liquidity.
A key financial metric utilized in the calculation of the first lien leverage ratio is adjusted EBITDA (defined as “EBITDA” in the Company’s senior secured credit facilities, but referred herein as Adjusted EBITDA). The following table reconciles (i) our Adjusted EBITDA to operating income and (ii) our Adjusted Free Cash Flow to cash flow from operating activities, in each case, for the four quarters and quarterly period ended June 27, 2015:
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|
June 27, 2015
|
||||||||
|
Four Quarters Ended
|
Quarterly Period Ended
|
|||||||
|
Adjusted EBITDA
|
$ | 830 | $ | 220 | ||||
|
Depreciation and amortization
|
(360 | ) | (87 | ) | ||||
|
Business optimization and other expense
(a)
|
(54 | ) | (8 | ) | ||||
|
Restructuring and impairment
|
(13 | ) | (3 | ) | ||||
|
Pro forma acquisitions
|
— | — | ||||||
|
Unrealized cost savings
|
(9 | ) | (1 | ) | ||||
|
Operating income
|
$ | 394 | $ | 121 | ||||
|
Cash flow from operating activities
|
$ | 552 | $ | 180 | ||||
|
Net additions to property, plant and equipment
|
(135 | ) | (40 | ) | ||||
|
Payments of tax receivable agreement
|
(39 | ) | — | |||||
|
Adjusted free cash flow
|
$ | 378 | $ | 140 | ||||
|
Cash flow from investing activities
|
(136 | ) | (40 | ) | ||||
|
Cash flow from financing activities
|
(393 | ) | (197 | ) | ||||
|
(a)
Includes business optimization, integration expenses and non-cash charges
|
||||||||
Adjusted EBITDA and Adjusted Free Cash Flow, as presented in this document, are supplemental financial measures that are not required by, or presented in accordance with, generally accepted accounting principles in the United States (“GAAP”). Adjusted EBITDA and Adjusted Free Cash Flow are not GAAP financial measures and should not be considered as an alternative to operating or net income or cash flows from operating activities, in each case determined in accordance with GAAP. We define “Adjusted EBITDA” as operating income before depreciation, amortization, and certain restructuring and business optimization charges and as adjusted for unrealized cost reductions and acquired businesses, including unrealized synergies, which are more particularly defined in our credit documents and the indentures governing our notes. Adjusted EBITDA is used by our lenders for debt covenant compliance purposes and by our management as one of several measures to evaluate management performance. While the determination of appropriate adjustments in the calculation of Adjusted EBITDA is subject to interpretation under the terms of our credit facilities, management believes the adjustments described above are in accordance with the covenants in such credit facilities. Adjusted EBITDA eliminates certain charges that we believe do not reflect operations and underlying operational performance. Although we use Adjusted EBITDA as a financial measure to assess the performance of our business, the use of Adjusted EBITDA has important limitations, including that (1) Adjusted EBITDA does not represent funds available for dividends, reinvestment or other discretionary uses; (2) Adjusted EBITDA does not reflect cash outlays for capital expenditures or contractual commitments; (3) Adjusted EBITDA does not reflect changes in, or cash requirements for, working capital; (4) Adjusted EBITDA does not reflect the interest expense or the cash requirements necessary to service interest or principal payments on indebtedness; (5) Adjusted EBITDA does not reflect income tax expense or the cash necessary to pay income taxes; (6) Adjusted EBITDA excludes depreciation and amortization and, although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and Adjusted EBITDA does not reflect cash requirements for such replacements; and (7) Adjusted EBITDA does not reflect the impact of earnings or charges resulting from matters we consider not to be indicative of our ongoing operations.
We define “Adjusted Free Cash Flow” as cash flow from operating activities less additions to property, plant and equipment and payments of the tax receivable agreement. We use Adjusted Free Cash Flow as a measure of liquidity because it assists us in assessing our company’s ability to fund its growth through its generation of cash. We believe Adjusted Free Cash Flow is useful to an investor in evaluating our liquidity because Adjusted Free Cash Flow and similar measures are widely used by investors, securities analysts and other interested parties in our industry to measure a company’s liquidity without regard to revenue and expense recognition, which can vary depending upon accounting methods. Although we use Adjusted Free Cash Flow as a liquidity measure to assess our ability to generate cash, the use of Adjusted Free Cash Flow has important limitations, including that: (1) Adjusted Free Cash Flow does not reflect the cash requirements necessary to service principal payments on our indebtedness; and (2) Adjusted Free Cash Flow removes the impact of accrual basis accounting on asset accounts and non-debt liability accounts. Our projected Adjusted Free Cash flow for fiscal 2015 assumes $619 million of cash flow from operations, $180 million of net additions to property, plant, and equipment and $39 million of payment under our tax receivable agreement.
25
These non-GAAP financial measures may be calculated differently by other companies, including other companies in our industry, limiting their usefulness as comparative measures. Because of these limitations, you should consider Adjusted EBITDA and Adjusted Free Cash Flow alongside other performance measures and liquidity measures, including operating income, various cash flow metrics, net income and our other GAAP results.
Tax Receivable Agreement
The Company made $39 million of payments related to the income tax receivable agreement ("TRA") in the first fiscal quarter of 2015, of which Apollo Global Management, LLC received $33 million. The $39 million payment represents the only TRA payment required in fiscal 2015.
Cash Flows
Net cash provided by operating activities increased from $370 million in the Prior YTD to $392 million in the YTD. The change is primarily attributed to improved operating performance partially offset by an increase in working capital needs primarily as a result of timing on accounts payable and other liabilities, including $30 million of accrued interest paid in June 2015 on the retired 9¾ % second priority notes.
Net cash used in investing activities decreased from $392 million in the Prior YTD to $106 million in the YTD primarily as a result of lower capital expenditures in the YTD and the acquisition of Graphic Flexible Packaging LLC’s flexible plastics and films business, Qingdao P&B Co. Ltd, and Rexam’s Healthcare Containers and Closures business in the Prior YTD. Our capital expenditures are forecasted at $180 million for fiscal 2015 and will be funded from cash flows from operating activities and existing liquidity.
Net cash used in financing activities increased from $74 million in the Prior YTD compared to $348 million in the YTD. The change is primarily attributed to a $100 million voluntary principal payment made on our term debt, and use of existing liquidity as part of the issuance of the $700 million of 5
1
/
8
% second priority senior secured notes and subsequent retirement of all the outstanding 9¾% second priority senior secured notes in the current YTD.
Based on our current level of operations, we believe that cash flow from operations and available cash, together with available borrowings under our senior secured credit facilities, will be adequate to meet our short-term liquidity needs over the next twelve months. We base such belief on historical experience and the funds available under the revolving credit facility. However, we cannot predict our future results of operations and our ability to meet our obligations involves numerous risks and uncertainties, including, but not limited to, those described in the “Risk Factors” section of our most recent Form 10-K filed with the SEC. In particular, increases in the cost of resin which we are unable to pass through to our customers on a timely basis or significant acquisitions could severely impact our liquidity.
Interest Rate Sensitivity
We are exposed to market risk from changes in interest rates primarily through our senior secured credit facilities. Our senior secured credit facilities are comprised of (i) $2.4 billion term loans and (ii) a $650 million revolving credit facility. At June 27, 2015, the Company had a $9 million outstanding balance on the revolving credit facility. Borrowings under our senior secured credit facilities bear interest, at our option, at either an alternate base rate or an adjusted LIBOR rate for a one-, two-, three- or six month interest period, or a nine- or twelve-month period, if available to all relevant lenders, in each case, plus an applicable margin. The alternate base rate is the greater of (i) in the case of our term loans, Credit Suisse’s prime rate or, in the case of our revolving credit facility, Bank of America's prime rate and (ii) one-half of 1.0% over the weighted average of rates on overnight Federal Funds as published by the Federal Reserve Bank of New York. At June 27, 2015, the LIBOR rate of 0.33% applicable to the term loan was below the LIBOR floor of 1.00%. LIBOR would have to change by more than 1% to have a material impact on our interest expense.
In March 2014, the Company entered into an interest rate swap transaction to manage cash flow variability associated with $1 billion of outstanding variable rate term loan debt. The agreement swaps the greater of a three-month variable LIBOR contract or 1.00% for a fixed three-year rate of 2.59%, with an effective date in February 2016 and expiration in February 2019. The Company records any changes in fair value in Accumulated other comprehensive income and Deferred income taxes.
Resin Cost Sensitivity
We are exposed to market risk from changes in plastic resin prices that could impact our results of operations and financial condition. Our plastic resin purchasing strategy is to deal with only high-quality, dependable suppliers. We believe that we have maintained strong relationships with these key suppliers and expect that such relationships will continue into the foreseeable future. The resin market is a global market and, based on our experience, we believe that adequate quantities of plastic resins will be available at market prices, but we can give you no assurances as to such availability or the prices thereof. If the price of resin increased or decreased by 5% it would result in a material change to our cost of goods sold.
26
|
(a)
|
Evaluation of disclosure controls and procedures.
|
Under applicable SEC regulations, management of a reporting company, with the participation of the principal executive officer and principal financial officer, must periodically evaluate the company’s “disclosure controls and procedures,” which are defined generally as controls and other procedures of a reporting company designed to ensure that information required to be disclosed by the reporting company in its periodic reports filed with the commission (such as this Form 10-Q) is recorded, processed, summarized, and reported on a timely basis.
The Company's management, with the participation of the Chief Executive Officer and the Chief Financial Officer, carried out an evaluation of the effectiveness of the design and operation of the disclosure controls and procedures as of June 27, 2015. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of June 27, 2015, the design and operation of our disclosure controls and procedures were effective at the reasonable assurance level
|
(b)
|
Changes in internal controls.
|
There were no changes in our internal control over financial reporting that occurred during the quarter ended June 27, 2015 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Part II. Other Information
There have been no material changes in legal proceedings from the items disclosed in our Form 10-K filed with the Securities and Exchange Commission.
You should carefully consider the risks described in our most recent Form 10-K filed with the SEC, including those under the heading “Risk Factors” and other information contained in this Quarterly Report before investing in our securities. Realization of any of these risks could have a material adverse effect on our business, financial condition, cash flows and results of operations. There were no material changes in the Company’s risk factors since described in our most recent Form 10-K filed with the SEC.
All forward-looking information and subsequent written and oral forward-looking statements attributable to us, or to persons acting on our behalf, are expressly qualified in their entirety by the cautionary statements. Some of the factors that we believe could affect our results include:
|
·
|
risks associated with our substantial indebtedness and debt service;
|
|
·
|
changes in prices and availability of resin and other raw materials and our ability to pass on changes in raw material prices on a timely basis;
|
|
·
|
performance of our business and future operating results;
|
|
·
|
risks related to our acquisition strategy and integration of acquired businesses;
|
|
·
|
reliance on unpatented know-how and trade secrets;
|
|
·
|
increases in the cost of compliance with laws and regulations, including environmental, safety, and production and product laws and regulations;
|
|
·
|
risks related to disruptions in the overall economy and the financial markets that may adversely impact our business;
|
|
·
|
catastrophic loss of one of our key manufacturing facilities, natural disasters, and other unplanned business interruptions;
|
|
·
|
risks of competition, including foreign competition, in our existing and future markets;
|
|
·
|
general business and economic conditions, particularly an economic downturn;
|
|
·
|
risks that our restructuring program may entail greater implementation costs or result in lower cost savings than anticipated;
|
|
·
|
the ability of our insurance to cover fully our potential exposures; and
|
|
·
|
the other factors discussed in our most recent Form 10-K in the section titled “Risk Factors.”
|
27
We caution readers that the foregoing list of important factors may not contain all of the material factors that are important to you. In addition, in light of these risks and uncertainties, the matters referred to in the forward-looking statements contained in this Form 10-Q may not in fact occur. Accordingly, investors should not place undue reliance on those statements. We undertake no obligation to publicly update or revise any forward-looking statement as a result of new information, future events or otherwise, except as otherwise required by law.
|
Item 6.
|
|
|
4.1
|
Supplemental Indenture, dated June 5, 2015, to the Indenture dated as of November 19, 2010, among Berry Plastics Corporation, the guarantors party thereto and U.S. Bank National Association, as Trustee, relating to the 9.75% Second Priority Senior Secured Fixed Rate Notes due 2021 (incorporated by reference to Exhibit 4.1 to the Company’s Form 8-K filed with the SEC on June 5, 2015).
|
|
4.2
|
Indenture, dated June 5, 2015, by and among Berry Plastics Corporation, the guarantors party thereto and U.S. Bank National Association, as Trustee, relating to the 5.125% second priority senior secured notes due 2023 (incorporated by reference to Exhibit 4.2 to the Company’s Form 8-K filed with the SEC on June 5, 2015).
|
|
10.1
|
Amendment No. 4 to the Amended and Restated Credit Agreement, dated as of May 14, 2015, by and among Berry Plastics Group, Inc., Berry Plastics Corporation, certain domestic subsidiaries party thereto, Bank of America, N.A., as collateral agent and administrative agent, the lenders party thereto, and the financial institutions party thereto (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed with the SEC on May 14, 2015).
|
|
31.1
|
Rule 13a-14(a)/15d-14(a) Certification of the Chief Executive Officer
|
|
31.2
|
Rule 13a-14(a)/15d-14(a) Certification of the Chief Financial Officer
|
|
32.1
|
Section 1350 Certification of the Chief Executive Officer
|
|
32.2
|
Section 1350 Certification of the Chief Financial Officer
|
|
101.
|
Interactive Data Files
|
28
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| Berry Plastics Group, Inc. | |||
|
|
By:
|
/s/ Mark W. Miles | |
| Mark W. Miles | |||
| August 3, 2015 | Chief Financial Officer | ||
29
TABLE OF CONTENTS
Part I. Financial InformationprintItem 1. Financial StatementsprintItem 2. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsprintItem 3. Quantitative and Qualitative Disclosures About Market RiskprintItem 4. Controls and ProceduresprintPart II. Other InformationprintItem 1. Legal ProceedingsprintItem 6. Exhibitsprint