BERRY GLOBAL GROUP, INC.
10-Ks and 10-Qs
PROXIES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended June 30, 2018
Commission File Number 001-35672
BERRY GLOBAL GROUP, INC.
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A Delaware corporation
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101 Oakley Street, Evansville, Indiana, 47710
(812) 424-2904
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IRS employer identification number
20-5234618
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Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934 (the "Exchange 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 Exchange Act 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
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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes
No
Indicate by check mark whether the registrant is a large accelerated filer, accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 12b-2 of the Exchange Act. Yes
☐
No
☐
Indicate by check mark whether the registrant is a shell company as defined in Rule 12b-2 of the Exchange Act.
Yes
No
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Class
|
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Outstanding at August 3, 2018
|
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Common Stock, $.01 par value per share
|
|
131.8 million shares
|
1
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, as amended, 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." These statements 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, intentions, or expectations. 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 Global Group, Inc.
Form 10-Q Index
For Quarterly Period Ended June 30, 2018
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Part I.
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Financial Information
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Page No.
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Item 1.
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Financial Statements:
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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
Item 1. Financial Statements
Berry Global Group, Inc.
(Unaudited)
(in millions of dollars, except per share amounts)
|
|
Quarterly Period Ended
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Three Quarterly Periods Ended
|
||||||||||||||
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June 30, 2018
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July 1, 2017
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June 30, 2018
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July 1, 2017
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||||||||||||
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Net sales
|
$
|
2,072
|
$
|
1,906
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$
|
5,815
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$
|
5,214
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||||||||
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Costs and expenses:
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||||||||||||||||
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Cost of goods sold
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1,690
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1,518
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4,733
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4,177
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||||||||||||
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Selling, general and administrative
|
119
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128
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366
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373
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||||||||||||
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Amortization of intangibles
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40
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40
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116
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113
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||||||||||||
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Restructuring and impairment charges
|
7
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8
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33
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18
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||||||||||||
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Operating income
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216
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212
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567
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533
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||||||||||||
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Other expense (income), net
|
3
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(1
|
)
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17
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18
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|||||||||||
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Interest expense, net
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67
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68
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195
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203
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||||||||||||
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Income before income taxes
|
146
|
145
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355
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312
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||||||||||||
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Income tax expense (benefit)
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36
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38
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(8
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)
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82
|
|||||||||||
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Net income
|
$
|
110
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$
|
107
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$
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363
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$
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230
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||||||||
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||||||||||||||||
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Net income per share:
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||||||||||||||||
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Basic
|
$
|
0.84
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$
|
0.82
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$
|
2.76
|
$
|
1.82
|
||||||||
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Diluted
|
0.81
|
0.79
|
2.67
|
1.75
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||||||||||||
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Outstanding weighted-average shares:
|
||||||||||||||||
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Basic
|
131.7
|
129.9
|
131.3
|
126.6
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||||||||||||
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Diluted
|
135.4
|
135.2
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135.8
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131.4
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||||||||||||
Consolidated Statements of Comprehensive Income
(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 30, 2018
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July 1, 2017
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June 30, 2018
|
July 1, 2017
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||||||||||||
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Net income
|
$
|
110
|
$
|
107
|
$
|
363
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$
|
230
|
||||||||
|
Currency translation
|
(92
|
)
|
24
|
(109
|
)
|
4
|
||||||||||
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Pension and other postretirement benefits
|
—
|
—
|
(1
|
)
|
13
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|||||||||||
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Interest rate hedges
|
6
|
(1
|
)
|
47
|
23
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|||||||||||
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Provision for income taxes
|
(2
|
)
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—
|
(13
|
)
|
(8
|
)
|
|||||||||
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Other comprehensive income (loss), net of tax
|
(88
|
)
|
23
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(76
|
)
|
32
|
||||||||||
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Comprehensive income
|
$
|
22
|
$
|
130
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$
|
287
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$
|
262
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||||||||
See notes to consolidated financial statements.
4
Berry Global Group, Inc.
(in millions of dollars)
|
|
June 30, 2018
|
September 30, 2017
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||||||
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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
|
$
|
365
|
$
|
306
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||||
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Accounts receivable (less allowance of $13)
|
932
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847
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||||||
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Inventories:
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||||||||
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Finished goods
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557
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428
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||||||
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Raw materials and supplies
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398
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334
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||||||
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955
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762
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||||||
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Prepaid expenses and other current assets
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85
|
89
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||||||
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Total current assets
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2,337
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2,004
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||||||
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Property, plant, and equipment, net
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2,507
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2,366
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||||||
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Goodwill and intangible assets, net
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4,157
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4,061
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||||||
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Other assets
|
41
|
45
|
||||||
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Total assets
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$
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9,042
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$
|
8,476
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||||
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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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$
|
726
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$
|
638
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||||
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Accrued expenses and other current liabilities
|
401
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463
|
||||||
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Current portion of long-term debt
|
35
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33
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||||||
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Total current liabilities
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1,162
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1,134
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||||||
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Long-term debt, less current portion
|
5,910
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5,608
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||||||
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Deferred income taxes
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334
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419
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||||||
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Other long-term liabilities
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297
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300
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||||||
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Total liabilities
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7,703
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7,461
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||||||
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Stockholders' equity
|
||||||||
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||||||||
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Common stock (131.8 and 130.9 million shares issued, respectively)
|
1
|
1
|
||||||
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Additional paid-in capital
|
860
|
823
|
||||||
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Non-controlling interest
|
3
|
3
|
||||||
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Retained earnings
|
619
|
256
|
||||||
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Accumulated other comprehensive loss
|
(144
|
)
|
(68
|
)
|
||||
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Total stockholders' equity
|
1,339
|
1,015
|
||||||
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Total liabilities and stockholders' equity
|
$
|
9,042
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$
|
8,476
|
||||
See notes to consolidated financial statements.
5
Berry Global Group, Inc.
(Unaudited)
(in millions of dollars)
|
|
Three Quarterly Periods Ended
|
|||||||
|
|
June 30, 2018
|
July 1, 2017
|
||||||
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Cash Flows from Operating Activities:
|
||||||||
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Net income
|
$
|
363
|
$
|
230
|
||||
|
Adjustments to reconcile net cash provided by operating activities:
|
||||||||
|
Depreciation
|
281
|
270
|
||||||
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Amortization of intangibles
|
116
|
113
|
||||||
|
Non-cash interest expense
|
6
|
6
|
||||||
|
Settlement of interest rate hedges
|
30
|
—
|
||||||
|
Deferred income tax
|
(71
|
)
|
39
|
|||||
|
Stock compensation expense
|
20
|
16
|
||||||
|
Other non-cash operating activities, net
|
15
|
26
|
||||||
|
Changes in working capital
|
(240
|
)
|
(113
|
)
|
||||
|
Changes in other assets and liabilities
|
36
|
(7
|
)
|
|||||
|
Net cash from operating activities
|
556
|
580
|
||||||
|
Cash Flows from Investing Activities:
|
||||||||
|
Additions to property, plant and equipment
|
(270
|
)
|
(201
|
)
|
||||
|
Proceeds from sale of assets
|
3
|
4
|
||||||
|
Acquisition of business, net of cash acquired
|
(474
|
)
|
(515
|
)
|
||||
|
Other investing activities, net
|
—
|
(1
|
)
|
|||||
|
Net cash from investing activities
|
(741
|
)
|
(713
|
)
|
||||
|
Cash Flows from Financing Activities:
|
||||||||
|
Proceeds from long-term borrowings
|
497
|
545
|
||||||
|
Repayments on long-term borrowings
|
(224
|
)
|
(427
|
)
|
||||
|
Proceeds from issuance of common stock
|
17
|
26
|
||||||
|
Payment of tax receivable agreement
|
(37
|
)
|
(60
|
)
|
||||
|
Debt financing costs
|
(1
|
)
|
(4
|
)
|
||||
|
Net cash from financing activities
|
252
|
80
|
||||||
|
Effect of exchange rate changes on cash
|
(8
|
)
|
5
|
|||||
|
Net change in cash
|
59
|
(48
|
)
|
|||||
|
Cash and cash equivalents at beginning of period
|
306
|
323
|
||||||
|
Cash and cash equivalents at end of period
|
$
|
365
|
$
|
275
|
||||
See notes to consolidated financial statements.
6
Berry Global Group, Inc.
(Unaudited)
(tables in millions of dollars, except per share data)
1. Basis of Presentation
The accompanying unaudited Condensed Consolidated Financial Statements of Berry Global Group, Inc. ("the Company," "we," or "Berry") 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 preparing financial statements in conformity with GAAP, we must make estimates and assumptions that affect the reported amounts and disclosures at the date of the financial statements and during the reporting period. Actual results could differ from those estimates. Certain reclassifications have been made to prior periods to conform to current reporting. 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 Company's most recent Form 10-K filed with the Securities and Exchange Commission.
2. Recently Issued Accounting Pronouncements
Changes to GAAP are established by the Financial Accounting Standards Board ("FASB") in the form of accounting standards updates to the FASB's Accounting Standards Codification. During fiscal 2018, with the exception of the below, there have been no developments to the recently adopted accounting pronouncements from those disclosed in the Company's 2017 Annual Report on Form 10-K that are considered to have a material impact on our unaudited consolidated financial statements.
Revenue Recognition
In May 2014, the 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. For public entities, the provisions of the new standard are effective for annual reporting periods beginning after December 15, 2017 and interim periods therein. An entity can apply the new revenue standard on a full retrospective approach to each prior reporting period presented or on a modified retrospective approach with the cumulative effect of initially applying the standard recognized at the date of initial application in retained earnings.
The Company has evaluated a substantial portion of its contracts with key customers and is evaluating the provisions under the five-step model specified by the new standard. While the Company continues to evaluate the potential impacts of the new standard, based on procedures to date we do not expect a material impact to the consolidated financial statements. Adoption of the new standard will result in expanded revenue disclosures. The Company plans to adopt the new standard which will be effective for the Company beginning in fiscal 2019 using the modified retrospective approach.
Hedges
In August 2017, the FASB issued ASU 2017-12, Targeted Improvements to Accounting for Hedging Activities in order to more closely align the results of hedge accounting with risk management activities through changes to the designation and measurement guidance. The new standard is effective for interim and annual periods beginning after December 15, 2018. The effect of adoption should be reflected on all active hedges as of the beginning of the fiscal year of adoption. The Company has chosen to early adopt this standard for fiscal 2018, and the adoption of this standard did not have a material impact on the consolidated financial statements.
Comprehensive Income
In February 2018, the FASB issued ASU 2018-02, Income Statement - Reporting Comprehensive Income. The new standard allows for a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. The new standard is effective for interim and annual periods beginning after December 15, 2018. The Company is currently evaluating the impact of this standard.
7
3. Acquisitions
AEP Industries Inc.
In January 2017, the Company acquired AEP Industries Inc. ("AEP") for a purchase price of $791 million, net of cash acquired. A portion of the purchase price consisted of issuing 6.4 million of Berry common shares which were valued at $324 million at the time of closing. AEP manufactures and markets an extensive and diverse line of polyethylene and polyvinyl chloride flexible plastic packaging products for consumer, industrial, and agricultural applications. The acquired business is operated in our Engineered Materials segment. To finance the purchase, the Company entered into an incremental assumption agreement to increase the commitments under the Company's existing term loan credit agreement by $500 million due 2024.
Unaudited pro forma net sales were $5.5 billion for the three quarterly periods ended July 1, 2017. The unaudited pro forma net income was $232 million for the three quarterly periods ended July 1, 2017. The unaudited pro forma net sales and net income assume that the AEP acquisition had occurred at the beginning of the period.
Adchem Corp.
In June 2017, the Company acquired Adchem Corp.'s ("Adchem") tapes business for a purchase price of $49 million, which the Company financed using existing liquidity. Adchem is a leader in the development of high performance adhesive tape systems for the automotive, construction, electronics, graphic arts, medical and general tape markets. The acquired business is operated in our Engineered Materials segment.
Clopay Plastic Products Company, Inc.
In February 2018, the Company acquired Clopay Plastic Products Company, Inc. ("Clopay") for a purchase price of $474 million, which is preliminary and subject to adjustment. Clopay is an innovator in the development of printed breathable films, elastic films, and laminates with product offerings uniquely designed for applications used in a number of markets including: hygiene, healthcare, construction and industrial protective apparel. The acquired business is operated within our Health, Hygiene & Specialties segment. To finance the purchase, the Company issued $500 million aggregate principal amount of 4.5% second priority notes through a private placement offering.
The 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 preliminary fair values at the acquisition date. The results of Clopay have been included in the consolidated results of the Company since the date of the acquisition. The Company has not finalized the allocation of the purchase price to the fair value of the assets acquired and liabilities assumed. The Company has recognized Goodwill on this transaction primarily as a result of expected cost synergies, and expects Goodwill to be deductible for tax purposes. The following table summarizes the preliminary purchase price allocation and estimated fair values of the assets acquired and liabilities assumed at the date of the acquisition:
|
Working capital (a)
|
$
|
70
|
||
|
Property and equipment
|
164
|
|||
|
Intangible assets
|
118
|
|||
|
Goodwill
|
123
|
|||
|
Other assets and long-term liabilities
|
(1
|
)
|
||
|
(a) Includes a $3 million step up of inventory to fair value
|
||||
4. Accounts Receivable Factoring Agreements
The Company has entered into various factoring agreements, both in the U.S. and at a number of foreign subsidiaries, to sell certain receivables to unrelated third-party financial institutions. The Company accounts for these transactions in accordance with ASC 860, "Transfers and Servicing" ("ASC 860"). ASC 860 allows for the ownership transfer of accounts receivable to qualify for sale treatment when the appropriate criteria is met, which permits the Company to present the balances sold under the program to be excluded from Accounts receivable, net on the Consolidated Balance Sheets. Receivables are considered sold when (i) they are transferred beyond the reach of the Company and its creditors, (ii) the purchaser has the right to pledge or exchange the receivables, and (iii) the Company has surrendered control over the transferred receivables. In addition, the Company provides no other forms of continued financial support to the purchaser of the receivables once the receivables are sold.
There were no amounts outstanding from financial institutions related to U.S. based programs at June 30, 2018 or September 30, 2017. Gross amounts factored under these U.S. based programs at June 30, 2018 and September 30, 2017 were $108 million and $129 million, respectively. The fees associated with transfer of receivables for all programs were not material for any of the periods presented.
8
5. Restructuring and Impairment Charges
The Company incurred restructuring costs related to severance charges associated with acquisition integrations and facility exit costs. The tables below set forth the significant components of the restructuring charges recognized, by segment:
|
|
Quarterly Period Ended
|
Three Quarterly Periods Ended
|
||||||||||||||
|
June 30, 2018
|
July 1, 2017
|
June 30, 2018
|
July 1, 2017
|
|||||||||||||
|
Engineered Materials
|
$
|
2
|
$
|
2
|
$
|
4
|
$
|
4
|
||||||||
|
Health, Hygiene & Specialties
|
4
|
4
|
26
|
8
|
||||||||||||
|
Consumer Packaging
|
1
|
2
|
3
|
6
|
||||||||||||
|
Consolidated
|
$
|
7
|
$
|
8
|
$
|
33
|
$
|
18
|
||||||||
The table below sets forth the activity with respect to the restructuring accrual at June 30, 2018:
|
|
Employee Severance and Benefits
|
Facility Exit
Costs
|
Total
|
|||||||||
|
Balance at September 30, 2017
|
$
|
14
|
$
|
5
|
$
|
19
|
||||||
|
Charges
|
31
|
2
|
33
|
|||||||||
|
Cash payments
|
(30
|
)
|
(3
|
)
|
(33
|
)
|
||||||
|
Balance at June 30, 2018
|
$
|
15
|
$
|
4
|
$
|
19
|
||||||
6. 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 30, 2018
|
September 30, 2017
|
||||||
|
Employee compensation
|
$
|
109
|
$
|
147
|
||||
|
Accrued taxes
|
73
|
90
|
||||||
|
Rebates
|
54
|
58
|
||||||
|
Interest
|
38
|
36
|
||||||
|
Tax receivable agreement obligation
|
24
|
35
|
||||||
|
Restructuring
|
19
|
19
|
||||||
|
Accrued operating expenses
|
84
|
78
|
||||||
|
$
|
401
|
$
|
463
|
|||||
The following table sets forth the totals included in Other long-term liabilities on the Consolidated Balance Sheets:
|
|
June 30, 2018
|
September 30, 2017
|
||||||
|
Pension liability
|
$
|
53
|
$
|
56
|
||||
|
Lease retirement obligation
|
43
|
37
|
||||||
|
Deferred purchase price
|
41
|
46
|
||||||
|
Transition tax
|
36
|
—
|
||||||
|
Sale-lease back deferred gain
|
22
|
24
|
||||||
|
Derivative instruments
|
16
|
27
|
||||||
|
Tax receivable agreement obligation
|
13
|
34
|
||||||
|
Other
|
73
|
76
|
||||||
|
|
$
|
297
|
$
|
300
|
||||
7.
Long-Term Debt
Long-term debt consists of the following:
|
|
Maturity Date
|
June 30, 2018
|
September 30, 2017
|
||||||
|
Term loan
|
February 2020
|
$
|
800
|
$
|
1,000
|
||||
|
Term loan
|
January 2021
|
814
|
814
|
||||||
|
Term loan
|
October 2022
|
1,645
|
1,645
|
||||||
|
Term loan
|
January 2024
|
494
|
498
|
||||||
|
Revolving line of credit
|
May 2020
|
—
|
—
|
||||||
|
5
1
/
2
% Second Priority Senior Secured Notes
|
May 2022
|
500
|
500
|
||||||
|
6% Second Priority Senior Secured Notes
|
October 2022
|
400
|
400
|
||||||
|
5
1
/
8
% Second Priority Senior Secured Notes
|
July 2023
|
700
|
700
|
||||||
|
4
1
/
2
% Second Priority Senior Secured Notes
|
February 2026
|
500
|
—
|
||||||
|
Debt discounts and deferred fees
|
(46
|
)
|
(48
|
)
|
|||||
|
Capital leases and other
|
Various
|
138
|
132
|
||||||
|
Total long-term debt
|
|
5,945
|
5,641
|
||||||
|
Current portion of long-term debt
|
|
(35
|
)
|
(33
|
)
|
||||
|
Long-term debt, less current portion
|
|
$
|
5,910
|
$
|
5,608
|
||||
9
The Company was in compliance with all debt covenants for all periods presented.
Debt discounts and deferred financing fees are presented net of Long-term debt, less the current portion on the Consolidated Balance Sheets and are amortized to Interest expense through maturity.
4
1
/
2
% Second Priority Senior Secured Notes
In January 2018, the Company issued $500 million aggregate principal amount of 4.50% second priority senior secured notes due 2026. Interest on these notes is due semiannually in February and August. The Company recognized $4 million of debt discount related to this offering. The net proceeds were used to fund the Clopay acquisition.
Term Loans
In November 2017, February 2018, and May 2018, the Company executed agreements to reduce interest rates under certain term loans. The term loans with a maturity date of February 2020 and January 2021 bear interest at LIBOR plus 1.75%. The term loans with a maturity date of October 2022 and January 2024 bear interest at LIBOR plus 2.00%.
During fiscal 2018, the Company has made $224 million of repayments on long-term borrowings using existing liquidity.
8.
Financial Instruments and Fair Value Measurements
In the normal course of business, the Company is exposed to certain risks arising from business operations and economic factors. The Company may use derivative financial instruments to help manage market risk and reduce the exposure to fluctuations in interest rates and foreign currencies. These financial instruments are not used for trading or other speculative purposes. 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. Any identified ineffectiveness, or changes in the fair value of a derivative not designated as a hedge, is recorded to the Consolidated Statements of Income.
Cross-Currency Swaps
In November 2017, the Company entered into certain cross-currency swap agreements with a notional amount of 250 million euro to effectively convert a portion of our fixed-rate U.S. dollar denominated term loans, including the monthly interest payments, to fixed-rate euro-denominated debt. The swap agreements mature in May 2022. The risk management objective is to manage foreign currency risk relating to net investments in certain European subsidiaries denominated in foreign currencies and reduce the variability in the functional currency cash flows of a portion of the Company's term loans. Changes in fair value of the derivative instruments are recognized in a component of Accumulated other comprehensive loss, to offset the changes in the values of the net investments being hedged.
Interest Rate Swaps
The primary purpose of the Company's interest rate swap activities is to manage cash flow variability associated with our outstanding variable rate term loan debt.
10
In February 2013, the Company entered into a $1 billion interest rate swap transaction with an effective date of 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 loss and is being amortized to Interest expense through the original term of the swap agreement.
During fiscal 2017 the Company modified various term loan rates and maturities. In conjunction with these modifications the Company realigned existing swap agreements which resulted in the de-designation of the original hedge and re-designation of the modified swaps as effective cash flow hedges. The amounts included in Accumulated other comprehensive loss at the date of de-designation are being amortized to Interest expense through the terms of the original swaps.
In June 2018, the Company elected to settle two of its derivative instruments with expiration dates in June 2019 and September 2021, and received $9 million and $21 million, respectively. The offset is included in Accumulated other comprehensive loss and is being amortized to Interest expense through the original expiration dates for of each of the swap agreements. The Company also entered into a $1 billion interest rate swap transaction that swaps a one-month variable LIBOR contract for a fixed annual rate of 2.808% with an effective date of June 2018 and expiration in September 2021.
At June 30, 2018, the Company effectively had (i) a $450 million interest rate swap transaction that swaps a one-month variable LIBOR contract for a fixed annual rate of 2.000%, with an effective date in May 2017 and expiration in May 2022 and (ii) a $1 billion interest rate swap transaction that swaps a one-month variable LIBOR contract for a fixed annual rate of 2.808% with an effective date in June 2018 and expiration in September 2021.
The Company records the fair value positions of all derivative financial instruments on a net basis by counterparty for which a master netting arrangement is utilized. When valuing swaps the Company utilizes Level 2 inputs (substantially observable). Balances on a gross basis as of the current period are as follows:
|
Derivative Instruments
|
Hedge Designation
|
Balance Sheet Location
|
June 30, 2018
|
September 30, 2017
|
||||||
|
Cross-currency swaps
|
Designated
|
Other long-term liabilities
|
$
|
10
|
$
|
—
|
||||
|
Interest rate swaps
|
Designated
|
Other assets
|
12
|
1
|
||||||
|
Interest rate swaps
|
Not designated
|
Other assets
|
1
|
13
|
||||||
|
Interest rate swaps
|
Designated
|
Other long-term liabilities
|
4
|
15
|
||||||
|
Interest rate swaps
|
Not designated
|
Other long-term liabilities
|
2
|
13
|
||||||
The effect of the Company's derivative instruments on the Consolidated Statements of Income is as follows:
|
|
|
Quarterly Period Ended
|
Three Quarterly Periods Ended
|
||||||||||||||
|
Derivative Instruments
|
Statements of Income Location
|
June 30, 2018
|
July 1, 2017
|
June 30, 2018
|
July 1, 2017
|
||||||||||||
|
Cross-currency swaps
|
Interest expense, net
|
$
|
(2
|
)
|
$
|
—
|
$
|
(4
|
)
|
$
|
—
|
||||||
|
Foreign currency swaps
|
Other expense, net
|
—
|
1
|
—
|
—
|
||||||||||||
|
Interest rate swaps
|
Interest expense, net
|
(1
|
)
|
5
|
2
|
15
|
|||||||||||
The amortization related to unrealized Interest rate swap interest income within Accumulated other comprehensive loss is expected to be $13 million in the next 12 months.
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 2017 assessment. However, as a result of the existence of impairment indicators in our Health, Hygiene & Specialties - South America ("HHS-SA") reporting unit during the quarter, we concluded that an interim impairment test was necessary. The reporting unit's fair value is estimated based on a market approach and a discounted cash flow analysis and is reconciled back to the current market capitalization for Berry Global Group, Inc. to ensure that the implied control premium is reasonable. Our forecasts assumed overall revenue growth of 2% increasing to 4% in the terminal year, margins consistent with historical results, a discount rate of 14% applied to the forecasted cash flows, and capital expenditure levels consistent with historical spend. The fair value of the HHS-SA reporting unit exceeded its carrying value by 5%. However, future declines in valuation market multiples, sustained lower earnings, or macroeconomic challenges could impact future impairment tests. The goodwill balance for the HHS-SA reporting unit as of June 30, 2018 was $92 million.
11
Included in the following table are the major categories of assets measured at fair value on a non-recurring basis as of June 30, 2018 and September 30, 2017, along with the impairment loss recognized on the fair value measurement during the period:
|
|
As of June 30, 2018
|
|||||||||||||||||||
|
|
Level 1
|
Level 2
|
Level 3
|
Total
|
Impairment
|
|||||||||||||||
|
Indefinite-lived trademarks
|
$
|
—
|
$
|
—
|
$
|
248
|
$
|
248
|
$
|
—
|
||||||||||
|
Goodwill
|
—
|
—
|
2,880
|
2,880
|
—
|
|||||||||||||||
|
Definite lived intangible assets
|
—
|
—
|
1,029
|
1,029
|
—
|
|||||||||||||||
|
Property, plant, and equipment
|
—
|
—
|
2,507
|
2,507
|
—
|
|||||||||||||||
|
Total
|
$
|
—
|
$
|
—
|
$
|
6,664
|
$
|
6,664
|
$
|
—
|
||||||||||
|
|
As of September 30, 2017
|
|||||||||||||||||||
|
|
Level 1
|
Level 2
|
Level 3
|
Total
|
Impairment
|
|||||||||||||||
|
Indefinite-lived trademarks
|
$
|
—
|
$
|
—
|
$
|
248
|
$
|
248
|
$
|
—
|
||||||||||
|
Goodwill
|
—
|
—
|
2,775
|
2,775
|
—
|
|||||||||||||||
|
Definite lived intangible assets
|
—
|
—
|
1,038
|
1,038
|
—
|
|||||||||||||||
|
Property, plant, and equipment
|
—
|
—
|
2,366
|
2,366
|
2
|
|||||||||||||||
|
Total
|
$
|
—
|
$
|
—
|
$
|
6,427
|
$
|
6,427
|
$
|
2
|
||||||||||
The Company's financial instruments consist primarily of cash and cash equivalents and long-term debt. The book value of our marketable long-term indebtedness exceeded fair value by $22 million as of June 30, 2018. The Company's long-term debt fair values were determined using Level 2 inputs as other significant observable inputs were not available.
9. Income Taxes
In December 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the "Tax Act"). The Tax Act significantly revises the future ongoing U.S. corporate income tax by, among other things, lowering U.S. corporate income tax rates. As the Company has a September fiscal year-end, the lower corporate income tax rate will be phased in during fiscal 2018 and will be 21% in subsequent years. Partially offsetting the lower corporate income tax, the Tax Act also eliminates certain domestic deductions that were previously included in our estimated annual tax rate. As part of the transition to the new tax system, the Tax Act (i) imposes a one-time repatriation tax on deemed repatriation of historical earnings of foreign subsidiaries and (ii) requires the Company revalue our U.S. net deferred tax liability position to the lower federal base rate of 21%. These transitional impacts resulted in a provisional transition benefit of $95 million for the first fiscal quarter, comprised of an estimated repatriation tax charge of $44 million (comprised of the U.S. repatriation taxes and foreign withholding taxes) and an estimated net deferred tax revaluation benefit of $139 million. The estimated impact of the corporate income tax net reduction along with the transitional taxes were recorded to the Consolidated Statements of Income in the Company's first fiscal quarter.
The changes included in the Tax Act are broad and complex. The final transition impacts of the Tax Act may differ from the above estimate, possibly materially, due to, among other things, changes in interpretations of the Tax Act, any legislative action to address questions that arise because of the Tax Act, any changes in accounting standards for income taxes or related interpretations in response to the Tax Act, or any updates or changes to estimates the Company has utilized to calculate the transition impacts. The Securities and Exchange Commission has issued guidance that would allow for a measurement period of up to one year after the enactment date of the Tax Act to finalize the recording of the related tax impacts. We currently anticipate finalizing and recording any resulting adjustments by the end of fiscal 2018.
The effective tax rate was 25% for the Quarter and was positively impacted by 1% from the share-based compensation excess tax benefit deduction, 1% from research and development credits, and a 2% benefit from the domestic manufacturing deduction. These favorable items were partially offset by increases of 3% from U.S. state income taxes, 2% from foreign valuation allowance, and other discrete items.
12
10. Operating Segments
The Company's operations are organized into three operating segments: Engineered Materials, Health, Hygiene & Specialties, and Consumer Packaging. The structure is designed to align us with our customers, provide optimal service, and drive future growth in a cost efficient manner. Selected information by reportable segment is presented in the following tables:
|
Quarterly Period Ended
|
Three Quarterly Periods Ended
|
|||||||||||||||
|
|
June 30, 2018
|
July 1, 2017
|
June 30, 2018
|
July 1, 2017
|
||||||||||||
|
Net sales:
|
||||||||||||||||
|
Engineered Materials
|
$
|
687
|
$
|
686
|
$
|
1,990
|
$
|
1,689
|
||||||||
|
Health, Hygiene & Specialties
|
726
|
606
|
2,009
|
1,773
|
||||||||||||
|
Consumer Packaging
|
659
|
614
|
1,816
|
1,752
|
||||||||||||
|
Total net sales
|
$
|
2,072
|
$
|
1,906
|
$
|
5,815
|
$
|
5,214
|
||||||||
|
Operating income:
|
||||||||||||||||
|
Engineered Materials
|
$
|
94
|
$
|
99
|
$
|
276
|
$
|
219
|
||||||||
|
Health, Hygiene & Specialties
|
62
|
53
|
140
|
164
|
||||||||||||
|
Consumer Packaging
|
60
|
60
|
151
|
150
|
||||||||||||
|
Total operating income
|
$
|
216
|
$
|
212
|
$
|
567
|
$
|
533
|
||||||||
|
Depreciation and amortization:
|
||||||||||||||||
|
Engineered Materials
|
$
|
26
|
$
|
30
|
$
|
82
|
$
|
73
|
||||||||
|
Health, Hygiene & Specialties
|
51
|
46
|
146
|
136
|
||||||||||||
|
Consumer Packaging
|
59
|
56
|
169
|
174
|
||||||||||||
|
Total depreciation and amortization
|
$
|
136
|
$
|
132
|
$
|
397
|
$
|
383
|
||||||||
|
|
June 30, 2018
|
September 30, 2017 | ||||||
|
Total assets:
|
||||||||
|
Engineered Materials
|
$
|
1,795
|
$
|
1,803
|
||||
|
Health, Hygiene & Specialties
|
3,963
|
3,496
|
||||||
|
Consumer Packaging
|
3,284
|
3,177
|
||||||
|
Total assets
|
$
|
9,042
|
$
|
8,476
|
||||
|
Total goodwill:
|
||||||||
|
Engineered Materials
|
$
|
550
|
$
|
545
|
||||
|
Health, Hygiene & Specialties
|
921
|
819
|
||||||
|
Consumer Packaging
|
1,409
|
1,411
|
||||||
|
Total goodwill
|
$
|
2,880
|
$
|
2,775
|
||||
Selected information by geographical region is presented in the following tables:
|
|
Quarterly Period Ended
|
Three Quarterly Periods Ended
|
||||||||||||||
|
|
June 30, 2018
|
July 1, 2017
|
June 30, 2018
|
July 1, 2017
|
||||||||||||
|
Net sales:
|
||||||||||||||||
|
North America
|
$
|
1,636
|
$
|
1,591
|
$
|
4,703
|
$
|
4,289
|
||||||||
|
South America
|
193
|
85
|
347
|
246
|
||||||||||||
|
Europe
|
181
|
165
|
577
|
482
|
||||||||||||
|
Asia
|
62
|
65
|
188
|
197
|
||||||||||||
|
Total net sales
|
$
|
2,072
|
$
|
1,906
|
$
|
5,815
|
$
|
5,214
|
||||||||
|
|
June 30, 2018
|
September 30, 2017
|
||||||
|
Long-lived assets:
|
||||||||
|
North America
|
$
|
5,598
|
$
|
5,350
|
||||
|
South America
|
343
|
371
|
||||||
|
Europe
|
459
|
467
|
||||||
|
Asia
|
305
|
284
|
||||||
|
Total Long-lived assets
|
$
|
6,705
|
$
|
6,472
|
||||
13
Selected information by product line is presented in the following tables:
|
|
Quarterly Period Ended
|
Three Quarterly Periods Ended
|
||||||||||||||
|
(in percentages)
|
June 30, 2018
|
July 1, 2017
|
June 30, 2018
|
July 1, 2017
|
||||||||||||
|
Net sales:
|
||||||||||||||||
|
Performance Materials
|
46
|
%
|
46
|
%
|
46
|
%
|
46
|
%
|
||||||||
|
Engineered Products
|
54
|
54
|
54
|
54
|
||||||||||||
|
Engineered Materials
|
100
|
%
|
100
|
%
|
100
|
%
|
100
|
%
|
||||||||
|
Health
|
16
|
%
|
22
|
%
|
17
|
%
|
22
|
%
|
||||||||
|
Hygiene
|
52
|
44
|
48
|
44
|
||||||||||||
|
Specialties
|
32
|
34
|
35
|
34
|
||||||||||||
|
Health, Hygiene & Specialties
|
100
|
%
|
100
|
%
|
100
|
%
|
100
|
%
|
||||||||
|
Rigid Open Top
|
45
|
%
|
44
|
%
|
43
|
%
|
42
|
%
|
||||||||
|
Rigid Closed Top
|
55
|
56
|
57
|
58
|
||||||||||||
|
Consumer Packaging
|
100
|
%
|
100
|
%
|
100
|
%
|
100
|
%
|
||||||||
11. Contingencies and Commitments
The Company is party to various legal proceedings involving routine claims which are incidental to its business. Although the Company's legal and financial liability with respect to such proceedings cannot be estimated with certainty, management believes that any ultimate liability would not be material to its financial statements.
The Company has various purchase commitments for raw materials, supplies, and property and equipment incidental to the ordinary conduct of business.
12. Basic and Diluted Net Income Per Share
Basic net income per share is calculated by dividing the net income 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 per share is calculated by dividing the net income 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 per share when their effect is dilutive. There were no shares excluded from the calculations as the effect of their conversion into shares of our common stock would be antidilutive.
The following tables provide a reconciliation of the numerator and denominator of the basic and diluted net income per share calculations.
|
|
Quarterly Period Ended
|
Three Quarterly Periods Ended
|
||||||||||||||
|
(in millions, except per share amounts)
|
June 30, 2018
|
July 1, 2017
|
June 30, 2018
|
July 1, 2017
|
||||||||||||
|
Numerator
|
||||||||||||||||
|
Net income
|
$
|
110
|
$
|
107
|
$
|
363
|
$
|
230
|
||||||||
|
Denominator
|
||||||||||||||||
|
Weighted average common shares outstanding - basic
|
131.7
|
129.9
|
131.3
|
126.6
|
||||||||||||
|
Dilutive shares
|
3.7
|
5.3
|
4.5
|
4.8
|
||||||||||||
|
Weighted average common and common equivalent shares outstanding - diluted
|
135.4
|
135.2
|
135.8
|
131.4
|
||||||||||||
|
Per common share income
|
||||||||||||||||
|
Basic
|
$
|
0.84
|
$
|
0.82
|
$
|
2.76
|
$
|
1.82
|
||||||||
|
Diluted
|
$
|
0.81
|
$
|
0.79
|
$
|
2.67
|
$
|
1.75
|
||||||||
13.
Accumulated Other Comprehensive Loss
The components and activity of Accumulated other comprehensive loss are as follows:
|
Currency Translation
|
Defined Benefit Pension and Retiree Health Benefit Plans
|
Interest Rate Swaps
|
Accumulated Other
Comprehensive
Loss
|
|||||||||||||
|
Balance at September 30, 2017
|
$
|
(48
|
)
|
$
|
(16
|
)
|
$
|
(4
|
)
|
$
|
(68
|
)
|
||||
|
Other comprehensive income (loss) before reclassifications
|
(109
|
)
|
(1
|
)
|
42
|
(68
|
)
|
|||||||||
|
Net amount reclassified from accumulated other comprehensive income (loss)
|
—
|
—
|
5
|
5
|
||||||||||||
|
Provision for income taxes
|
—
|
—
|
(13
|
)
|
(13
|
)
|
||||||||||
|
Balance at June 30, 2018
|
$
|
(157
|
)
|
$
|
(17
|
)
|
$
|
30
|
$
|
(144
|
)
|
|||||
14
|
Currency Translation
|
Defined Benefit Pension and Retiree Health Benefit Plans
|
Interest Rate Swaps
|
Accumulated Other
Comprehensive
Loss
|
|||||||||||||
|
Balance at October 1, 2016
|
$
|
(82
|
)
|
$
|
(44
|
)
|
$
|
(22
|
)
|
$
|
(148
|
)
|
||||
|
Other comprehensive income (loss) before reclassifications
|
4
|
13
|
5
|
22
|
||||||||||||
|
Net amount reclassified from accumulated other comprehensive income (loss)
|
—
|
—
|
18
|
18
|
||||||||||||
|
Provision for income taxes
|
—
|
—
|
(8
|
)
|
(8
|
)
|
||||||||||
|
Balance at July 1, 2017
|
$
|
(78
|
)
|
$
|
(31
|
)
|
$
|
(7
|
)
|
$
|
(116
|
)
|
||||
14. Guarantor and Non-Guarantor Financial Information
Berry Global, Inc. ("Issuer") has notes outstanding which are fully, jointly, severally, and unconditionally guaranteed by its parent, Berry Global Group, Inc. (for purposes of this Note, "Parent") and substantially all of Issuer's domestic subsidiaries. Separate narrative information or financial statements of the guarantor subsidiaries have not been included because they are 100% owned by Parent and the guarantor subsidiaries unconditionally guarantee such debt on a joint and several basis. A guarantee of a guarantor subsidiary 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 indentures, the designation of such guarantor as an unrestricted subsidiary, the defeasance or discharge of the indenture or in the case of a restricted subsidiary that is required to guarantee after the relevant issuance date, if such guarantor no longer guarantees certain other indebtedness of the issuer. The guarantees of the guarantor subsidiaries are also limited as necessary to prevent them from constituting a fraudulent conveyance under applicable law and any guarantees guaranteeing subordinated debt are subordinated to certain other of the Company's debts. Parent also guarantees the Issuer's term loans and revolving credit facilities. The guarantor subsidiaries guarantee our term loans and are co-borrowers under our revolving credit facility. Presented below is condensed consolidating financial information for the Parent, Issuer, guarantor subsidiaries and non-guarantor subsidiaries. The Issuer and guarantor financial information includes all of our domestic operating subsidiaries; our non-guarantor subsidiaries include our foreign subsidiaries, certain immaterial domestic subsidiaries and the unrestricted subsidiaries under the Issuer's indentures. The Parent uses the equity method to account for its ownership in the Issuer in the Condensed Consolidating Supplemental Financial Statements. The Issuer 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 30, 2018
|
|||||||||||||||||||||||
|
|
Parent
|
Issuer
|
Guarantor
Subsidiaries
|
Non-
Guarantor
Subsidiaries
|
Eliminations
|
Total
|
||||||||||||||||||
|
Current assets
|
$
|
—
|
$
|
311
|
$
|
1,270
|
$
|
756
|
$
|
—
|
$
|
2,337
|
||||||||||||
|
Intercompany receivable
|
332
|
2,101
|
—
|
—
|
(2,433
|
)
|
—
|
|||||||||||||||||
|
Property, plant, and equipment, net
|
—
|
79
|
1,688
|
740
|
—
|
2,507
|
||||||||||||||||||
|
Other assets
|
1,378
|
5,995
|
4,713
|
497
|
(8,385
|
)
|
4,198
|
|||||||||||||||||
|
Total assets
|
$
|
1,710
|
$
|
8,486
|
$
|
7,671
|
$
|
1,993
|
$
|
(10,818
|
)
|
$
|
9,042
|
|||||||||||
|
|
||||||||||||||||||||||||
|
Current liabilities
|
$
|
24
|
$
|
253
|
$
|
580
|
$
|
305
|
$
|
—
|
$
|
1,162
|
||||||||||||
|
Intercompany payable
|
—
|
—
|
2,373
|
60
|
(2,433
|
)
|
—
|
|||||||||||||||||
|
Other long-term liabilities
|
347
|
6,049
|
85
|
60
|
—
|
6,541
|
||||||||||||||||||
|
Stockholders' equity
|
1,339
|
2,184
|
4,633
|
1,568
|
(8,385
|
)
|
1,339
|
|||||||||||||||||
|
Total liabilities and stockholders' equity
|
$
|
1,710
|
$
|
8,486
|
$
|
7,671
|
$
|
1,993
|
$
|
(10,818
|
)
|
$
|
9,042
|
|||||||||||
15
|
|
September 30, 2017
|
|||||||||||||||||||||||
|
|
Parent
|
Issuer
|
Guarantor
Subsidiaries
|
Non-
Guarantor
Subsidiaries
|
Eliminations
|
Total
|
||||||||||||||||||
|
Current assets
|
$
|
—
|
$
|
116
|
$
|
1,113
|
$
|
775
|
$
|
—
|
$
|
2,004
|
||||||||||||
|
Intercompany receivable
|
512
|
2,217
|
—
|
—
|
(2,729
|
)
|
—
|
|||||||||||||||||
|
Property, plant and equipment, net
|
—
|
80
|
1,564
|
722
|
—
|
2,366
|
||||||||||||||||||
|
Other assets
|
992
|
5,335
|
4,583
|
533
|
(7,337
|
)
|
4,106
|
|||||||||||||||||
|
Total assets
|
$
|
1,504
|
$
|
7,748
|
$
|
7,260
|
$
|
2,030
|
$
|
(10,066
|
)
|
$
|
8,476
|
|||||||||||
|
|
||||||||||||||||||||||||
|
Current liabilities
|
$
|
36
|
$
|
243
|
$
|
537
|
$
|
318
|
$
|
—
|
$
|
1,134
|
||||||||||||
|
Intercompany payable
|
—
|
—
|
2,667
|
62
|
(2,729
|
)
|
—
|
|||||||||||||||||
|
Other long-term liabilities
|
453
|
5,707
|
99
|
68
|
—
|
6,327
|
||||||||||||||||||
|
Stockholders' equity
|
1,015
|
1,798
|
3,957
|
1,582
|
(7,337
|
)
|
1,015
|
|||||||||||||||||
|
Total liabilities and stockholders' equity
|
$
|
1,504
|
$
|
7,748
|
$
|
7,260
|
$
|
2,030
|
$
|
(10,066
|
)
|
$
|
8,476
|
|||||||||||
Condensed Supplemental Consolidated Statements of Income
|
|
Quarterly Period Ended June 30, 2018
|
|||||||||||||||||||||||
|
|
Parent
|
Issuer
|
Guarantor
Subsidiaries
|
Non-
Guarantor
Subsidiaries
|
Eliminations
|
Total
|
||||||||||||||||||
|
Net sales
|
$
|
—
|
$
|
147
|
$
|
1,452
|
$
|
473
|
$
|
—
|
$
|
2,072
|
||||||||||||
|
Cost of goods sold
|
—
|
121
|
1,173
|
396
|
—
|
1,690
|
||||||||||||||||||
|
Selling, general and administrative
|
—
|
14
|
70
|
35
|
—
|
119
|
||||||||||||||||||
|
Amortization of intangibles
|
—
|
—
|
34
|
6
|
—
|
40
|
||||||||||||||||||
|
Restructuring and impairment charges
|
—
|
—
|
4
|
3
|
—
|
7
|
||||||||||||||||||
|
Operating income
|
—
|
12
|
171
|
33
|
—
|
216
|
||||||||||||||||||
|
Other expense (income), net
|
—
|
—
|
1
|
2
|
—
|
3
|
||||||||||||||||||
|
Interest expense, net
|
—
|
5
|
46
|
16
|
—
|
67
|
||||||||||||||||||
|
Equity in net income of subsidiaries
|
(146
|
)
|
(128
|
)
|
—
|
—
|
274
|
—
|
||||||||||||||||
|
Income before income taxes
|
146
|
135
|
124
|
15
|
(274
|
)
|
146
|
|||||||||||||||||
|
Income tax expense
|
36
|
25
|
3
|
8
|
(36
|
)
|
36
|
|||||||||||||||||
|
Net income
|
$
|
110
|
$
|
110
|
$
|
121
|
$
|
7
|
$
|
(238
|
)
|
$
|
110
|
|||||||||||
|
Comprehensive net income
|
$
|
110
|
$
|
133
|
$
|
121
|
$
|
(104
|
)
|
$
|
(238
|
)
|
$
|
22
|
||||||||||
|
|
Quarterly Period Ended July 1, 2017
|
|||||||||||||||||||||||
|
|
Parent
|
Issuer
|
Guarantor
Subsidiaries
|
Non-
Guarantor
Subsidiaries
|
Eliminations
|
Total
|
||||||||||||||||||
|
Net sales
|
$
|
—
|
$
|
152
|
$
|
1,325
|
$
|
429
|
$
|
—
|
$
|
1,906
|
||||||||||||
|
Cost of goods sold
|
—
|
100
|
1,059
|
359
|
—
|
1,518
|
||||||||||||||||||
|
Selling, general and administrative
|
—
|
14
|
89
|
25
|
—
|
128
|
||||||||||||||||||
|
Amortization of intangibles
|
—
|
2
|
31
|
7
|
—
|
40
|
||||||||||||||||||
|
Restructuring and impairment charges
|
—
|
—
|
-
|
8
|
—
|
8
|
||||||||||||||||||
|
Operating income
|
—
|
36
|
146
|
30
|
—
|
212
|
||||||||||||||||||
|
Other expense (income), net
|
—
|
1
|
(1
|
)
|
(1
|
)
|
—
|
(1
|
)
|
|||||||||||||||
|
Interest expense, net
|
—
|
5
|
47
|
16
|
—
|
68
|
||||||||||||||||||
|
Equity in net income of subsidiaries
|
(145
|
)
|
(109
|
)
|
—
|
—
|
254
|
—
|
||||||||||||||||
|
Income before income taxes
|
145
|
139
|
100
|
15
|
(254
|
)
|
145
|
|||||||||||||||||
|
Income tax expense
|
38
|
32
|
—
|
6
|
(38
|
)
|
38
|
|||||||||||||||||
|
Net income
|
$
|
107
|
$
|
107
|
$
|
100
|
$
|
9
|
$
|
(216
|
)
|
$
|
107
|
|||||||||||
|
Comprehensive net income
|
$
|
107
|
$
|
102
|
$
|
100
|
$
|
37
|
$
|
(216
|
)
|
$
|
130
|
|||||||||||
16
|
|
Three Quarterly Periods Ended June 30, 2018
|
|||||||||||||||||||||||
|
|
Parent
|
Issuer
|
Guarantor
Subsidiaries
|
Non-
Guarantor
Subsidiaries
|
Eliminations
|
Total
|
||||||||||||||||||
|
Net sales
|
$
|
—
|
$
|
424
|
$
|
4,026
|
$
|
1,365
|
$
|
—
|
$
|
5,815
|
||||||||||||
|
Cost of goods sold
|
—
|
322
|
3,265
|
1,146
|
—
|
4,733
|
||||||||||||||||||
|
Selling, general and administrative
|
—
|
44
|
233
|
89
|
—
|
366
|
||||||||||||||||||
|
Amortization of intangibles
|
—
|
—
|
96
|
20
|
—
|
116
|
||||||||||||||||||
|
Restructuring and impairment charges
|
—
|
—
|
20
|
13
|
—
|
33
|
||||||||||||||||||
|
Operating income
|
—
|
58
|
412
|
97
|
—
|
567
|
||||||||||||||||||
|
Other expense (income), net
|
—
|
5
|
8
|
4
|
—
|
17
|
||||||||||||||||||
|
Interest expense, net
|
—
|
14
|
134
|
47
|
—
|
195
|
||||||||||||||||||
|
Equity in net income of subsidiaries
|
(355
|
)
|
(287
|
)
|
—
|
—
|
642
|
—
|
||||||||||||||||
|
Income before income taxes
|
355
|
326
|
270
|
46
|
(642
|
)
|
355
|
|||||||||||||||||
|
Income tax expense
|
(8
|
)
|
(37
|
)
|
4
|
25
|
8
|
(8
|
)
|
|||||||||||||||
|
Net income
|
$
|
363
|
$
|
363
|
$
|
266
|
$
|
21
|
$
|
(650
|
)
|
$
|
363
|
|||||||||||
|
Comprehensive net income
|
$
|
363
|
$
|
387
|
$
|
266
|
$
|
(79
|
)
|
$
|
(650
|
)
|
$
|
287
|
||||||||||
|
Consolidating Statement of Cash Flows
|
||||||||||||||||||||||||
|
Cash Flow from Operating Activities
|
$
|
—
|
$
|
29
|
$
|
480
|
$
|
47
|
$
|
—
|
$
|
556
|
||||||||||||
|
Cash Flow from Investing Activities
|
||||||||||||||||||||||||
|
Additions to property, plant, and equipment
|
—
|
(5
|
)
|
(194
|
)
|
(71
|
)
|
—
|
(270
|
)
|
||||||||||||||
|
Proceeds from sale of assets
|
—
|
—
|
—
|
3
|
—
|
3
|
||||||||||||||||||
|
Contributions (to)/from subsidiaries
|
(17
|
)
|
(457
|
)
|
—
|
—
|
474
|
—
|
||||||||||||||||
|
Intercompany
|
—
|
314
|
—
|
—
|
(314
|
)
|
—
|
|||||||||||||||||
|
Acquisition of business, net of cash acquired
|
—
|
—
|
(404
|
)
|
(70
|
)
|
—
|
(474
|
)
|
|||||||||||||||
|
Other investing activities, net
|
—
|
—
|
—
|
—
|
—
|
—
|
||||||||||||||||||
|
Net cash from investing activities
|
(17
|
)
|
(148
|
)
|
(598
|
)
|
(138
|
)
|
160
|
(741
|
)
|
|||||||||||||
|
|
||||||||||||||||||||||||
|
Cash Flow from Financing Activities
|
||||||||||||||||||||||||
|
Proceeds from long-term debt
|
—
|
497
|
—
|
—
|
—
|
497
|
||||||||||||||||||
|
Repayments on long-term borrowings
|
—
|
(219
|
)
|
(5
|
)
|
—
|
—
|
(224
|
)
|
|||||||||||||||
|
Proceeds from issuance of common stock
|
17
|
—
|
—
|
—
|
—
|
17
|
||||||||||||||||||
|
Payment of tax receivable agreement
|
(37
|
)
|
—
|
—
|
—
|
—
|
(37
|
)
|
||||||||||||||||
|
Contribution from Parent
|
—
|
—
|
404
|
70
|
(474
|
)
|
—
|
|||||||||||||||||
|
Debt financing costs
|
—
|
(1
|
)
|
—
|
—
|
—
|
(1
|
)
|
||||||||||||||||
|
Changes in intercompany balances
|
37
|
—
|
(291
|
)
|
(60
|
)
|
314
|
—
|
||||||||||||||||
|
Net cash from financing activities
|
17
|
277
|
108
|
10
|
(160
|
)
|
252
|
|||||||||||||||||
|
|
||||||||||||||||||||||||
|
Effect of exchange rate changes on cash
|
—
|
—
|
—
|
(8
|
)
|
—
|
(8
|
)
|
||||||||||||||||
|
|
||||||||||||||||||||||||
|
Net change in cash
|
—
|
158
|
(10
|
)
|
(89
|
)
|
—
|
59
|
||||||||||||||||
|
Cash and cash equivalents at beginning of period
|
—
|
18
|
12
|
276
|
—
|
306
|
||||||||||||||||||
|
Cash and cash equivalents at end of period
|
$
|
—
|
$
|
176
|
$
|
2
|
$
|
187
|
$
|
—
|
$
|
365
|
||||||||||||
17
|
|
Three Quarterly Periods Ended July 1, 2017
|
|||||||||||||||||||||||
|
|
Parent
|
Issuer
|
Guarantor
Subsidiaries
|
Non-
Guarantor
Subsidiaries
|
Eliminations
|
Total
|
||||||||||||||||||
|
Net sales
|
$
|
—
|
$
|
441
|
$
|
3,556
|
$
|
1,217
|
$
|
—
|
$
|
5,214
|
||||||||||||
|
Cost of goods sold
|
—
|
333
|
2,860
|
984
|
—
|
4,177
|
||||||||||||||||||
|
Selling, general and administrative
|
—
|
45
|
251
|
77
|
—
|
373
|
||||||||||||||||||
|
Amortization of intangibles
|
—
|
5
|
87
|
21
|
—
|
113
|
||||||||||||||||||
|
Restructuring and impairment charges
|
—
|
—
|
10
|
8
|
—
|
18
|
||||||||||||||||||
|
Operating income
|
—
|
58
|
348
|
127
|
—
|
533
|
||||||||||||||||||
|
Other expense (income), net
|
—
|
15
|
1
|
2
|
—
|
18
|
||||||||||||||||||
|
Interest expense, net
|
—
|
17
|
138
|
48
|
—
|
203
|
||||||||||||||||||
|
Equity in net income of subsidiaries
|
(312
|
)
|
(252
|
)
|
—
|
—
|
564
|
—
|
||||||||||||||||
|
Income before income taxes
|
312
|
278
|
209
|
77
|
(564
|
)
|
312
|
|||||||||||||||||
|
Income tax expense
|
82
|
48
|
—
|
34
|
(82
|
)
|
82
|
|||||||||||||||||
|
Net income
|
$
|
230
|
$
|
230
|
$
|
209
|
$
|
43
|
$
|
(482
|
)
|
$
|
230
|
|||||||||||
|
Comprehensive net income
|
$
|
230
|
$
|
245
|
$
|
209
|
$
|
60
|
$
|
(482
|
)
|
$
|
262
|
|||||||||||
|
Consolidating Statement of Cash Flows
|
||||||||||||||||||||||||
|
Cash Flow from Operating Activities
|
$
|
—
|
$
|
31
|
$
|
420
|
$
|
129
|
$
|
—
|
$
|
580
|
||||||||||||
|
Cash Flow from Investing Activities
|
||||||||||||||||||||||||
|
Additions to property, plant, and equipment
|
—
|
(11
|
)
|
(160
|
)
|
(30
|
)
|
—
|
(201
|
)
|
||||||||||||||
|
Proceeds from sale of assets
|
—
|
1
|
3
|
—
|
—
|
4
|
||||||||||||||||||
|
Contributions (to)/from subsidiaries
|
(26
|
)
|
(489
|
)
|
—
|
—
|
515
|
—
|
||||||||||||||||
|
Intercompany
|
—
|
280
|
—
|
—
|
(280
|
)
|
—
|
|||||||||||||||||
|
Acquisition of business, net of cash acquired
|
—
|
—
|
(515
|
)
|
—
|
—
|
(515
|
)
|
||||||||||||||||
|
Other investing activities, net
|
—
|
(1
|
)
|
—
|
—
|
—
|
(1
|
)
|
||||||||||||||||
|
Net cash from investing activities
|
(26
|
)
|
(220
|
)
|
(672
|
)
|
(30
|
)
|
235
|
(713
|
)
|
|||||||||||||
|
|
||||||||||||||||||||||||
|
Cash Flow from Financing Activities
|
||||||||||||||||||||||||
|
Proceeds from long-term debt
|
—
|
545
|
—
|
—
|
—
|
545
|
||||||||||||||||||
|
Repayments on long-term borrowings
|
—
|
(423
|
)
|
(3
|
)
|
(1
|
)
|
—
|
(427
|
)
|
||||||||||||||
|
Proceeds from issuance of common stock
|
26
|
—
|
—
|
—
|
—
|
26
|
||||||||||||||||||
|
Payment of tax receivable agreement
|
(60
|
)
|
—
|
—
|
—
|
—
|
(60
|
)
|
||||||||||||||||
|
Debt financing costs
|
—
|
(4
|
)
|
—
|
—
|
—
|
(4
|
)
|
||||||||||||||||
|
Contribution from parent
|
—
|
—
|
515
|
—
|
(515
|
)
|
—
|
|||||||||||||||||
|
Changes in intercompany balances
|
60
|
—
|
(255
|
)
|
(85
|
)
|
280
|
—
|
||||||||||||||||
|
Net cash from financing activities
|
26
|
118
|
257
|
(86
|
)
|
(235
|
)
|
80
|
||||||||||||||||
|
|
||||||||||||||||||||||||
|
Effect of exchange rate changes on cash
|
—
|
—
|
—
|
5
|
—
|
5
|
||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Net change in cash
|
—
|
(71
|
)
|
5
|
18
|
—
|
(48
|
)
|
||||||||||||||||
|
Cash and cash equivalents at beginning of period
|
—
|
102
|
5
|
216
|
—
|
323
|
||||||||||||||||||
|
Cash and cash equivalents at end of period
|
$
|
—
|
$
|
31
|
$
|
10
|
$
|
234
|
$
|
—
|
$
|
275
|
||||||||||||
15. Subsequent Events
In August 2018, the Company announced that its Board has authorized a $500 million share repurchase program. Share repurchases, if any, will be made through open market purchases, privately negotiated transactions, Rule 10b5-1 plans, or other transactions in accordance with applicable securities laws and in such amounts at such times as we deem appropriate based upon prevailing market and business conditions and other factors. The share repurchase program has no expiration date and may be suspended at any time.
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 Securities and Exchange Commission. As a result, our actual results may differ materially from those contained in any forward-looking statements. The forward-looking statements referenced within this report should be read with the explanation of the qualifications and limitations included herein. Fiscal 2017 and fiscal 2018 are fifty-two week periods.
Executive Summary
Business.
The Company's operations are organized into three operating segments: Engineered Materials, Health, Hygiene & Specialties, and Consumer Packaging. The structure is designed to align us with our customers, provide optimal service, and drive future growth in a cost efficient manner. The Engineered Materials segment primarily consists of tapes and adhesives, polyethylene based film products, can liners, printed films, and specialty coated, and laminated products. The Health, Hygiene & Specialties segment primarily consists of nonwoven specialty materials and films used in hygiene, healthcare, infection prevention, personal care, industrial, construction and filtration applications. The Consumer Packaging segment primarily consists of containers, foodservice items, closures, overcaps, bottles, prescription containers, and tubes.
Acquisitions.
Our acquisition strategy is focused on improving our long-term financial performance, enhancing our market positions, and expanding our existing and complementary product lines. 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. 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 attempt to measure the synergy realization based on the overall segment profitability post integration.
AEP Industries Inc.
In January 2017, the Company acquired AEP Industries Inc. ("AEP") for a purchase price of $791 million, net of cash acquired. A portion of the purchase price consisted of issuing 6.4 million of Berry common shares which were valued at $324 million at the time of closing. AEP manufactures and markets an extensive and diverse line of polyethylene and polyvinyl chloride flexible plastic packaging products for consumer, industrial, and agricultural applications. The acquired business is operated in our Engineered Materials segment. To finance the purchase, the Company entered into an incremental assumption agreement to increase the commitments under the Company's existing term loan credit agreement by $500 million due 2024. The Company expects annual cost synergies of approximately $80 million from the AEP transaction with full realization expected in fiscal 2018.
Adchem Corp.
In June 2017, the Company acquired Adchem Corp.'s ("Adchem") tapes business for a purchase price of $49 million. Adchem is a leader in the development of high performance adhesive tape systems for the automotive, construction, electronics, graphic arts, medical and general tape markets. The acquired business is operated in our Engineered Materials segment. To finance the purchase, the Company used existing liquidity.
Clopay Plastic Products Company, Inc.
In February 2018, the Company acquired Clopay Plastic Products Company, Inc. ("Clopay") for a purchase price of $474 million, which is preliminary and subject to adjustment. Clopay is an innovator in the development of printed breathable films, elastic films, and laminates with product offerings uniquely designed for applications used in a number of markets including: hygiene, healthcare, construction and industrial protective apparel. Clopay is operated in our Health, Hygiene & Specialties segment. The Company expects to realize annual cost synergies of approximately $40 million. To finance the purchase, the Company used the proceeds from the $500 million second priority senior secured notes (see Note 7).
Raw Material Trends.
Our primary raw material is plastic resin consisting primarily of polyethylene and polypropylene. 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 price per pound, as published by U.S. market indexes, were as follows:
19
|
|
Polyethylene Butene Film
|
Polypropylene
|
||||||||||||||
|
Fiscal quarter
|
2018
|
2017
|
2018
|
2017
|
||||||||||||
|
1st quarter
|
$
|
.68
|
$
|
.56
|
$
|
.71
|
$
|
.56
|
||||||||
|
2nd quarter
|
.69
|
.58
|
.75
|
.67
|
||||||||||||
|
3rd quarter
|
.68
|
.60
|
.76
|
.61
|
||||||||||||
|
4th quarter
|
—
|
.62
|
—
|
.62
|
||||||||||||
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. We believe there are long term growth opportunities within the health, pharmaceuticals, personal care and food packaging markets existing in developing countries, where expected per capita consumption increases should result in organic market growth. In addition, while we continue to believe that long term dynamics of the resin markets will be an advantage to Berry, the short term challenges to regional transportation systems and higher raw material prices in part as a result of resin supply disruptions, as well as macroeconomic pressures in South America have created headwinds during fiscal 2018. For fiscal 2018 we project an Adjusted free cash flow target of $630 million. This includes $987 million of cash flow from operations, partially offset by net capital expenditures of $320 million and the $37 million tax receivable payment that was made in the first fiscal quarter. This guidance includes reduced capital spending of $20 million along with $30 million of lower cash taxes and other cash costs. The implied earning reduction is being driven by the ongoing cost inflation vs. the timing lag of passing along these cost increases. For the definition of Adjusted free cash flow and further information related to Adjusted free cash flow as a non-GAAP financial measure, see "Liquidity and Capital Resources."
Results of Operations
Comparison of the Quarterly Period Ended June 30, 2018 (the "Quarter") and the Quarterly Period Ended July 1, 2017 (the "Prior Quarter")
Acquisition (Adchem and Clopay) sales and operating income disclosed within this section represents the results from acquisitions for the current period. Business integration expenses consist of restructuring and impairment charges, acquisition related costs, and other business optimization costs. Tables present dollars in millions.
|
Consolidated Overview
|
||||||||||||||||
|
|
Quarter
|
Prior Quarter
|
$ Change
|
% Change
|
||||||||||||
|
Net sales
|
$
|
2,072
|
$
|
1,906
|
$
|
166
|
9
|
%
|
||||||||
|
Operating income
|
$
|
216
|
$
|
212
|
$
|
4
|
2
|
%
|
||||||||
|
Operating income percentage of net sales
|
10
|
%
|
11
|
%
|
||||||||||||
Net sales increased by $166 million from the Prior Quarter primarily attributed to acquisition net sales of $125 million, selling price increases of $37 million due to the pass through of higher resin prices, a $14 million favorable impact from foreign currency changes, and a 1% base volume improvement, partially offset by a core sales decline of $19 million in legacy AEP locations as a result of business rationalizations.
The operating income increase of $4 million from the Prior Quarter was primarily attributed to a $12 million decrease in selling, general and administrative expense due to synergies and cost reductions, acquisition operating income of $9 million, a $4 million decrease in depreciation and amortization, a $2 million impact from the base volume improvement, and a $3 million favorable impact from foreign currency changes, partially offset by a $20 million negative impact from under recovery of higher cost of goods sold, and a $7 million earnings decline from legacy AEP locations.
|
Engineered Materials
|
||||||||||||||||
|
|
Quarter
|
Prior Quarter
|
$ Change
|
% Change
|
||||||||||||
|
Net sales
|
$
|
687
|
$
|
686
|
$
|
1
|
0
|
%
|
||||||||
|
Operating income
|
$
|
94
|
$
|
99
|
$
|
(5
|
)
|
(5
|
)%
|
|||||||
|
Percentage of net sales
|
14
|
%
|
14
|
%
|
||||||||||||
Net sales in the Engineered Materials segment increased by $1 million from the Prior Quarter primarily attributed to selling price increases of $8 million due to the pass through of higher resin prices, acquisition net sales of $7 million, a $2 million favorable impact from foreign currency changes, and a slight base volume improvement, partially offset by a core sales decline of $19 million in legacy AEP locations as a result of business rationalizations.
20
The operating income decrease of $5 million from the Prior Quarter was primarily attributed to a $7 million earnings decline from legacy AEP locations, and a $5 million increase in business integration expenses, partially offset by a $4 million decrease in depreciation and amortization, and a $3 million decrease in selling, general and administrative expense.
|
Health, Hygiene & Specialties
|
||||||||||||||||
|
|
Quarter
|
Prior Quarter
|
$ Change
|
% Change
|
||||||||||||
|
Net sales
|
$
|
726
|
$
|
606
|
$
|
120
|
20
|
%
|
||||||||
|
Operating income
|
$
|
62
|
$
|
53
|
$
|
9
|
17
|
%
|
||||||||
|
Percentage of net sales
|
9
|
%
|
9
|
%
|
||||||||||||
Net sales in the Health, Hygiene & Specialties segment increased $120 million from the Prior Quarter primarily attributed to acquisition net sales of $118 million, selling price increases of $9 million due to the pass through of higher resin prices, and a $12 million favorable impact from foreign currency changes, partially offset by a 3% base volume decline.
The operating income increase of $9 million from the Prior Quarter was primarily attributed to acquisition operating income of $8 million, a $5 million decrease in selling, general, and administrative expense, a $5 million decrease in business integration expenses, a $3 million favorable impact from foreign currency changes, and a $2 million decrease in depreciation and amortization, partially offset by an $11 million negative impact from under recovery of higher cost of goods sold, and a $3 million negative impact from the base volume decline.
|
Consumer Packaging
|
||||||||||||||||
|
|
Quarter
|
Prior Quarter
|
$ Change
|
% Change
|
||||||||||||
|
Net sales
|
$
|
659
|
$
|
614
|
$
|
45
|
7
|
%
|
||||||||
|
Operating income
|
$
|
60
|
$
|
60
|
$
|
—
|
—
|
|||||||||
|
Percentage of net sales
|
9
|
%
|
10
|
%
|
||||||||||||
Net sales in the Consumer Packaging segment increased by $45 million from the Prior Quarter primarily attributed to a 4% base volume improvement and selling price increases of $20 million due to the pass through of higher resin prices.
Operating income was flat compared to the Prior Quarter and was positively impacted by a $4 million improvement in volume, and a $4 million decrease in selling, general and administrative expense, offset by a $7 million negative impact from under recovery of higher cost of goods sold.
|
Other expense (income), net
|
||||||||||||||||
|
|
Quarter
|
Prior Quarter
|
$ Change
|
% Change
|
||||||||||||
|
Other expense (income), net
|
$
|
3
|
$
|
(1
|
)
|
$
|
4
|
400
|
%
|
|||||||
The other expense increase of $4 million from the Prior Quarter was primarily attributed to unfavorable foreign currency changes related to the remeasurement of non-operating intercompany balances.
|
Interest expense, net
|
||||||||||||||||
|
|
Quarter
|
Prior Quarter
|
$ Change
|
% Change
|
||||||||||||
|
Interest expense, net
|
$
|
67
|
$
|
68
|
$
|
(1
|
)
|
(1
|
%)
|
|||||||
The interest expense decrease of $1 million from the Prior Quarter was primarily attributed to reduced interest rates resulting from the term loan modifications, partially offset by additional expense attributed to the $500 million 4.5% second priority senior secured notes (see Note 7).
|
Income tax expense (benefit)
|
||||||||||||||||
|
|
Quarter
|
Prior Quarter
|
$ Change
|
% Change
|
||||||||||||
|
Income tax expense (benefit)
|
$
|
36
|
$
|
38
|
$
|
(2
|
)
|
(5
|
%)
|
|||||||
The income tax expense decrease of $2 million from the Prior Quarter was primarily attributed to the lower statutory rate as a result of the recent U.S. tax legislation more fully described in Note 9, partially offset by a reduced share-based compensation excess tax benefit deduction. The effective tax rate was 25% for the Quarter and was positively impacted by 1% from the share-based compensation excess tax benefit deduction, 1% from research and development credits, and a 2% benefit from the domestic manufacturing deduction, and other discrete items. These favorable items were partially offset by increases of 3% from U.S. state income taxes, 2% from foreign valuation allowance, and other discrete items.
21
Changes in Comprehensive Income
The $108 million decline in comprehensive income from the Prior Quarter was primarily attributed to a $116 million unfavorable change in currency translation, partially offset by a $3 million improvement in net income and a $5 million favorable change in interest rate hedges, net of tax. Currency translation gains and losses are primarily related to non-U.S. subsidiaries with a functional currency other than U.S. dollars whereby assets and liabilities are translated from the respective functional currency into U.S. dollars using period-end exchange rates. The change in currency translation in the Quarter was primarily attributed to locations utilizing the euro, Brazilian real, Mexican peso, and renminbi as the functional currency. 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 and records changes to the fair value of these instruments in Accumulated other comprehensive loss. The favorable change in fair value of these instruments in the Quarter versus Prior Quarter is primarily attributed to an increase in the forward interest curve between measurement dates.
Comparison of the Three Quarterly Periods Ended June 30, 2018 (the "YTD") and the Three Quarterly Periods Ended July 1, 2017 (the "Prior YTD")
Acquisition sales and operating income disclosed within this section represents the results from acquisitions for the current period. Business integration expenses consist of restructuring and impairment charges, acquisition related costs, and other business optimization costs. Tables present dollars in millions.
|
Consolidated Overview
|
||||||||||||||||
|
|
YTD
|
Prior YTD
|
$ Change
|
% Change
|
||||||||||||
|
Net sales
|
$
|
5,815
|
$
|
5,214
|
$
|
601
|
12
|
%
|
||||||||
|
Operating income
|
$
|
567
|
$
|
533
|
$
|
34
|
6
|
%
|
||||||||
|
Operating income percentage of net sales
|
10
|
%
|
10
|
%
|
||||||||||||
The net sales increase of $601 million from the Prior YTD was primarily attributed to acquisition net sales of $497 million, selling price increases of $100 million due to the pass through of higher resin prices, and a $66 million favorable impact from foreign currency changes, partially offset by a 1% base volume decline and a core sales decline of $19 million in legacy AEP locations as a result of business rationalization.
The operating income increase of $34 million from the Prior YTD was primarily attributed to acquisition operating income of $54 million, a $36 million decrease in selling, general and administrative expense related to synergies and cost reductions, an $18 million decrease in depreciation and amortization, and a $10 million favorable impact from foreign currency changes. These improvements were partially offset by a $63 million negative impact from under recovery of higher cost of goods sold, an $8 million increase in business integration, a $7 million earnings decline from legacy AEP locations, and a $6 million impact from the lower base volumes.
|
Engineered Materials
|
||||||||||||||||
|
|
YTD
|
Prior YTD
|
$ Change
|
% Change
|
||||||||||||
|
Net sales
|
$
|
1,990
|
$
|
1,689
|
$
|
301
|
18
|
%
|
||||||||
|
Operating income
|
$
|
276
|
$
|
219
|
$
|
57
|
26
|
%
|
||||||||
|
Operating income percentage of net sales
|
14
|
%
|
13
|
%
|
||||||||||||
Net sales in the Engineered Materials segment increased by $301 million from the Prior YTD primarily attributed to acquisition net sales of $307 million, selling price increases of $33 million due to the pass through of higher resin prices, and a $7 million favorable impact from foreign currency changes, partially offset by a 2% base volume decline and a core sales decline of $19 million in legacy AEP locations as a result of business rationalization.
The operating income increase of $57 million from the Prior YTD was primarily attributed to acquisition operating income of $41 million, a $13 million decrease in depreciation and amortization, an $8 million decrease in selling, general and administrative expense, a $3 million improvement in our product mix and price/cost spread, and a $3 million decrease in business integration expenses, partially offset by a negative $5 million impact from lower base volumes, and a $7 million earnings decline from legacy AEP locations.
22
|
Health, Hygiene & Specialties
|
||||||||||||||||
|
|
YTD
|
Prior YTD
|
$ Change
|
% Change
|
||||||||||||
|
Net sales
|
$
|
2,009
|
$
|
1,773
|
$
|
236
|
13
|
%
|
||||||||
|
Operating income
|
$
|
140
|
$
|
164
|
$
|
(24
|
)
|
(15
|
%)
|
|||||||
|
Operating income percentage of net sales
|
7
|
%
|
9
|
%
|
||||||||||||
Net sales in the Health, Hygiene & Specialties segment increased by $236 million from the Prior YTD primarily attributed to acquisition net sales of $190 million, a $59 million favorable impact from foreign currency changes, and selling price increases of $21 million due to the pass through of higher resin prices, partially offset by a 2% base volume decline.
The operating income decrease of $24 million from the Prior YTD was primarily attributed to a $41 million negative impact from under recovery of higher cost of goods sold and market pressure in South America, a $14 million increase in business integration expenses primarily attributed to the Clopay acquisition, and a $5 million negative impact from the base volume decline. These improvements were partially offset by a $14 million decrease in selling, general and administrative expense, acquisition operating income of $13 million, and a $9 million favorable impact from foreign currency changes.
|
Consumer Packaging
|
||||||||||||||||
|
|
YTD
|
Prior YTD
|
$ Change
|
% Change
|
||||||||||||
|
Net sales
|
$
|
1,816
|
$
|
1,752
|
$
|
64
|
4
|
%
|
||||||||
|
Operating income
|
$
|
151
|
$
|
150
|
$
|
1
|
1
|
%
|
||||||||
|
Operating income percentage of net sales
|
8
|
%
|
9
|
%
|
||||||||||||
Net sales in the Consumer Packaging segment increased by $64 million from the Prior YTD primarily attributed to selling price increases of $46 million due to the pass through of higher resin prices and a 1% base volume improvement.
The operating income increase of $1 million from the Prior YTD was primarily attributed to a $14 million decrease in selling, general and administrative expense related to cost reductions, a $6 million decrease in depreciation and amortization, a $3 million decrease in business integration expenses, and a $3 million impact from the base volume improvement, partially offset by a negative $25 million impact from under recovery of higher cost of goods sold.
|
Other expense (income), net
|
||||||||||||||||
|
|
YTD
|
Prior YTD
|
$ Change
|
% Change
|
||||||||||||
|
Other expense (income), net
|
$
|
17
|
$
|
18
|
$
|
(1
|
)
|
6
|
%
|
|||||||
The other expense decrease of $1 million from the Prior YTD was primarily attributed to non-recurring prior year charges, partially offset by unfavorable foreign currency changes related to the remeasurement of non-operating intercompany balances and a tax receivable agreement revaluation recorded in the current year as a result of tax reform.
|
Interest expense, net
|
||||||||||||||||
|
|
YTD
|
Prior YTD
|
$ Change
|
% Change
|
||||||||||||
|
Interest expense, net
|
$
|
195
|
$
|
203
|
$
|
(8
|
)
|
(4
|
%)
|
|||||||
The interest expense decrease of $8 million from the Prior YTD was primarily attributed to reduced interest rates resulting from term loan modifications, partially offset by additional expense attributed to the $500 million 4.5% second priority senior secured notes (see Note 7).
|
Income tax expense (benefit)
|
||||||||||||||||
|
|
YTD
|
Prior YTD
|
$ Change
|
% Change
|
||||||||||||
|
Income tax expense (benefit)
|
$
|
(8
|
)
|
$
|
82
|
$
|
(90
|
)
|
(110
|
%)
|
||||||
The income tax expense decrease of $90 million from the Prior YTD was primarily attributed to the $95 million provisional transition benefit recorded in the Company's first fiscal Quarter as a result of the recent U.S. tax legislation more fully described in Note 9. After the exclusion of the tax reform benefit, our year-to-date effective tax rate was 25% and was positively impacted by 2% from the share-based compensation excess tax benefit, 1% from research and development credits, and a 2% benefit from the domestic manufacturing deduction. These favorable items were partially offset by increases of 3% from U.S. state taxes, 2% from foreign valuation allowance, and other discrete items.
Changes in Comprehensive Income
The $25 million improvement in comprehensive income from the Prior YTD was primarily attributed to a $133 million improvement in net income, and a $19 million favorable change in the fair value of interest rate hedges, net of tax, partially offset by a $113 million unfavorable change in currency translation, and a $14 million change due to a non-cash defined benefit pension plan settlement in the Prior YTD. Currency translation gains and losses are primarily related to non-U.S. subsidiaries with a functional currency other than U.S. dollars whereby assets and liabilities are translated from the respective functional currency into U.S. dollars using period-end exchange rates. The change in currency translation in the YTD was primarily attributed to locations utilizing the euro, Brazilian real, Mexican peso and renminbi as the functional currency. 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 and records changes to the fair value of these instruments in Accumulated other comprehensive loss. The favorable change in fair value of these instruments in the YTD versus Prior YTD is primarily attributed to an increase in the forward interest curve between measurement dates.
23
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. We have a $750 million asset-based revolving line of credit that matures in May 2020. At the end of the Quarter, the Company had no outstanding balance on the revolving credit facility. The Company was in compliance with all debt covenants at the end of the Quarter (see Note 7).
Cash Flows
Net cash from operating activities decreased $24 million from the Prior YTD primarily attributed to an increase in working capital due to higher raw material costs, partially offset by the settlement of interest rate hedges and improved net income before depreciation, amortization and the net impact of the recently announced U.S. tax legislation.
Net cash from investing activities decreased $28 million from the Prior YTD primarily attributed to increased capital expenditures, partially offset by lower acquisition spending compared to the Prior YTD.
Net cash from financing activities increased $172 million from the Prior YTD primarily attributed to increased long-term borrowings, net of repayments, and lower tax receivable agreement payments.
Adjusted Free Cash Flow
We define "Adjusted free cash flow" as cash flow from operating activities less net additions to property, plant and equipment and payments of the tax receivable agreement.
Based on our definition, our YTD consolidated Adjusted free cash flow is summarized as follows:
|
June 30, 2018
|
July 1, 2017
|
|||||||
|
Cash flow from operating activities
|
$
|
556
|
$
|
580
|
||||
|
Additions to property, plant and equipment, net
|
(267
|
)
|
(197
|
)
|
||||
|
Payments of tax receivable agreement
|
(37
|
)
|
(60
|
)
|
||||
|
Adjusted free cash flow
|
$
|
252
|
$
|
323
|
||||
Adjusted free cash flow, as presented in this document, is a supplemental financial measure that is not required by, or presented in accordance with, generally accepted accounting principles in the U.S. ("GAAP"). Adjusted free cash flow is not a GAAP financial measure and should not be considered as an alternative to cash flow from operating activities or any other measure determined in accordance with GAAP. 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, and believe it is useful to investors for such purpose. In addition, 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. Adjusted free cash flow may be calculated differently by other companies, including other companies in our industry, limiting its usefulness as a comparative measure.
Share Repurchase Program
In August 2018, the Company announced that its Board has authorized a $500 million share repurchase program. Share repurchases, if any, will be made through open market purchases, privately negotiated transactions, Rule 10b5-1 plans, or other transactions in accordance with applicable securities laws and in such amounts at such times as we deem appropriate based upon prevailing market and business conditions and other factors. The share repurchase program has no expiration date and may be suspended at any time.
24
Liquidity Outlook
At June 30, 2018, our cash balance was $365 million, of which approximately 50% was located outside the U.S. We believe our existing U.S. based cash and cash flow from U.S. operations, together with available borrowings under our senior secured credit facilities, will be adequate to meet our liquidity needs over the next twelve months. We do not expect our free cash flow to be sufficient to cover all long-term debt obligations and intend to refinance these obligations prior to maturity. 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 Securities and Exchange Commission and in this Form 10-Q, if any.
25
Interest Rate Sensitivity
We are exposed to market risk from changes in interest rates primarily through our senior secured credit facilities. At June 30, 2018, our senior secured credit facilities are comprised of (i) $3.8 billion term loans and (ii) a $750 million revolving credit facility with no borrowings outstanding. Borrowings under our senior secured credit facilities bear interest at a rate equal to an applicable margin plus LIBOR. The applicable margin for LIBOR rate borrowings under the revolving credit facility ranges from 1.25% to 1.75%, and the margin for the term loans range from 1.75% to 2.00% per annum with a 0% LIBOR floor. At June 30, 2018, the LIBOR rate of approximately 2.10% was applicable to the term loans. A 0.25% change in LIBOR would increase our annual interest expense by $6 million on variable rate term loans.
We seek to minimize interest rate volatility risk through regular operating and financing activities and, when deemed appropriate, through the use of derivative financial instruments. These financial instruments are not used for trading or other speculative purposes.
As of June 30, 2018, the Company effectively had (i) a $450 million interest rate swap transaction that swaps a one-month variable LIBOR contract for a fixed annual rate of 2.000%, with an effective date in May 2017 and expiration in May 2022 and (ii) a $1 billion interest rate swap transaction that swaps a one-month variable LIBOR contract for a fixed annual rate of 2.808% with an effective date in June 2018 and expiration in September 2021.
Foreign Currency Exchange Rates
As a global company, we face foreign currency risk exposure from fluctuating currency exchange rates, primarily the U.S. dollar against the euro, Brazilian real, Argentine peso, Chinese renminbi, Canadian dollar and Mexican peso. Significant fluctuations in currency rates can have a substantial impact, either positive or negative, on our revenue, cost of sales, and operating expenses. Currency translation gains and losses are primarily related to non-U.S. subsidiaries with a functional currency other than U.S. dollars whereby assets and liabilities are translated from the respective functional currency into U.S. dollars using period-end exchange rates and impact our Comprehensive income. A 10% decline in foreign currency exchange rates would have a negative $10 million impact on our annual Net income.
In November 2017, the Company entered into certain cross-currency swap agreements with a notional amount of 250 million euro to effectively convert a portion of our fixed-rate U.S. dollar denominated term loans, including the monthly interest payments, to fixed rate euro-denominated debt. The swap agreements mature May 2022. The risk management objective is to manage foreign currency risk relating to net investments in certain European subsidiaries denominated in foreign currencies and reduce the variability in the functional currency cash flows of a portion of the Company's term loans. In the future, we may attempt to manage our foreign currency risk on our anticipated cash movements by entering into foreign currency forward contracts to offset potential foreign exchange gains or losses.
26
(a) Evaluation of disclosure controls and procedures.
Under applicable Securities and Exchange Commission 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 30, 2018. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of June 30, 2018, 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 30, 2018 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
27
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.
Before investing in our securities, we recommend that investors carefully consider the risks described in our most recent Form 10-K filed with the Securities and Exchange Commission, including those under the heading "Risk Factors" and other information contained in this Quarterly Report. Realization of any of these risks could have a material adverse effect on our business, financial condition, cash flows and results of operations. In addition to the Company's risk factors described in our most recent Form 10-K filed with the Securities and Exchange Commission, investors should consider the following risk factor.
The final impacts of the Tax Cuts and Jobs Act could be materially different from our current estimates
.
The Tax Cuts and Jobs Act was signed into law in December 2017. The new law made numerous changes to federal corporate tax law that we expect will significantly reduce our effective tax rate in future periods. The changes included in the Tax Act are broad and complex (See Note 9). The final transition impacts of the Tax Act may differ from our current estimates, possibly materially, due to, among other things, changes in interpretations of the Tax Act, any legislative action to address questions that arise because of the Tax Act, any changes in accounting standards for income taxes or related interpretations in response to the Tax Act, or any updates or changes to estimates the Company has utilized to calculate the transition impacts.
Forward-looking Statements and Other Factors Affecting Future Results.
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;
|
| ● |
risks related to the market acceptance of our developing technologies and products;
|
| ● |
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;
|
|
●
|
new legislation or new regulations and the Company's corresponding interpretations of either may affect our business and consolidated financial condition and results of operations; and
|
| ● |
the other factors discussed in our most recent Form 10-K and in this Form 10-Q in the section titled "Risk Factors."
|
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.
28
|
Exhibits
|
|
|
|
|
|
10.1*
|
Incremental Assumption Agreement, dated as of May 16, 2018, by and among Berry Global Group, Inc., Berry Global, Inc. and certain of its subsidiaries referenced therein, Credit Suisse AG, Cayman Islands Branch, as administrative agent for the lenders under the term loan credit agreement referenced therein, Citibank, N.A., as initial Term S lender, and Citibank, N.A., as initial Term T lender.
|
|
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.
|
|
*
|
Filed herewith.
|
29
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 Global Group, Inc.
|
|
|
|
|
|
|
|
|
August 3, 2018
|
By:
|
/s/ Mark W. Miles
|
|
|
|
|
Mark W. Miles
|
|
|
|
|
Chief Financial Officer
|
|
30
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 1A. Risk FactorsprintItem 6. Exhibitsprint