0001140361-22-028207.txt : 20220804 0001140361-22-028207.hdr.sgml : 20220804 20220804162335 ACCESSION NUMBER: 0001140361-22-028207 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 65 CONFORMED PERIOD OF REPORT: 20220702 FILED AS OF DATE: 20220804 DATE AS OF CHANGE: 20220804 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BERRY GLOBAL GROUP, INC. CENTRAL INDEX KEY: 0001378992 STANDARD INDUSTRIAL CLASSIFICATION: PLASTICS PRODUCTS, NEC [3089] IRS NUMBER: 000000000 STATE OF INCORPORATION: DE FISCAL YEAR END: 1002 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-35672 FILM NUMBER: 221136987 BUSINESS ADDRESS: STREET 1: 101 OAKLEY STREET STREET 2: PO BOX 959 CITY: EVANSVILLE STATE: IN ZIP: 47710 BUSINESS PHONE: 8124242904 MAIL ADDRESS: STREET 1: 101 OAKLEY STREET STREET 2: PO BOX 959 CITY: EVANSVILLE STATE: IN ZIP: 47710 FORMER COMPANY: FORMER CONFORMED NAME: BERRY GLOBAL GROUP INC DATE OF NAME CHANGE: 20170503 FORMER COMPANY: FORMER CONFORMED NAME: BERRY PLASTICS GROUP INC DATE OF NAME CHANGE: 20061024 10-Q 1 form10q.htm BERRY GLOBAL GROUP 10Q


UNITED STATES
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 July 2, 2022

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________ to __________

Commission File Number 001-35672
graphic

BERRY GLOBAL GROUP, INC.

A Delaware corporation
 101 Oakley Street, Evansville, Indiana, 47710
(812) 424-2904
 IRS employer identification number
20-5234618

Securities registered pursuant to Section 12(b) of the Exchange Act:

Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, $0.01 par value per share
BERY
New York Stock Exchange LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes   No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).   Yes  No 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.  See the 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 13(a) of the Exchange Act. 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes    No 

There were 125.1 million shares of common stock outstanding at August 4, 2022.





CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS

Information included or incorporated by reference in Berry Global Group, Inc.’s filings with the U.S. Securities and Exchange Commission (the “SEC”) and press releases or other public statements contains or may contain forward-looking statements.  This report includes “forward-looking” statements with respect to our financial condition, results of operations and business and our expectations or beliefs concerning future events.  These statements contain words such as “believes,” “expects,” “may,” “will,” “should,” “would,” “could,” “seeks,” “approximately,” “intends,” “plans,” “estimates,” “project,” “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.  All forward-looking statements are made only as of the date hereof, and 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.

Additionally, we caution readers that the list of important factors discussed in our most recent Form 10-K in the section titled “Risk 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 report may not in fact occur.  Accordingly, readers should not place undue reliance on those statements.

2


Berry Global Group, Inc.
Form 10-Q Index
For Quarterly Period Ended July 2, 2022

Part I.
Financial Information
Page No.
 
Item 1.
Financial Statements:
 
   
4
   
5
   
6
   
7
   
8
 
Item 2.
14
 
Item 3.
21
 
Item 4.
21
Part II.
Other Information
 
 
Item 1.
22
 
Item 1A.
22
 
Item 2.
22
 
Item 6.
23
 
24


3

Part I. Financial Information

Item 1.
Financial Statements
Berry Global Group, Inc.
Consolidated Statements of Income
(Unaudited)
(in millions of dollars, except per share amounts)

   
Quarterly Period Ended
   
Three Quarterly Periods Ended
 
   
July 2, 2022
   
July 3, 2021
   
July 2, 2022
   
July 3, 2021
 
Net sales
 
$
3,726
   
$
3,675
   
$
11,074
   
$
10,181
 
Costs and expenses:
                               
Cost of goods sold
   
3,105
     
3,049
     
9,297
     
8,273
 
Selling, general and administrative
   
215
     
207
     
657
     
668
 
Amortization of intangibles
   
63
     
72
     
196
     
219
 
Restructuring and transaction activities
   
7
     
4
     
18
     
41
 
Operating income
   
336
     
343
     
906
     
980
 
Other expense
   
7
     
14
     
13
     
45
 
Interest expense
   
70
     
76
     
212
     
257
 
Income before income taxes
   
259
     
253
     
681
     
678
 
Income tax expense
   
52
     
59
     
148
     
173
 
Net income
 
$
207
   
$
194
   
$
533
   
$
505
 
                                 
Net income per share:
                               
Basic
 
$
1.61
   
$
1.44
   
$
4.02
   
$
3.76
 
Diluted
   
1.58
     
1.40
     
3.93
     
3.67
 






Consolidated Statements of Comprehensive Income
(Unaudited)
(in millions of dollars)

   
Quarterly Period Ended
   
Three Quarterly Periods Ended
 
   
July 2, 2022
   
July 3, 2021
   
July 2, 2022
   
July 3, 2021
 
Net income
 
$
207
   
$
194
   
$
533
   
$
505
 
Other comprehensive income, net of tax:
                               
Currency translation
   
(159
)
   
91
     
(144
)
   
196
 
Derivative instruments
   
19
     
(2
)
   
119
     
69
 
Other comprehensive (loss) income
   
(140
)
   
89
     
(25
)
   
265
 
Comprehensive income
 
$
67
   
$
283
   
$
508
   
$
770
 

See notes to consolidated financial statements.

4

Berry Global Group, Inc.
Consolidated Balance Sheets
(in millions of dollars)

   
July 2, 2022
   
October 2, 2021
 
   
(Unaudited)
       
Assets
           
Current assets:
           
Cash and cash equivalents
 
$
527
   
$
1,091
 
Accounts receivable
   
1,974
     
1,879
 
Finished goods
   
1,027
     
960
 
Raw materials and supplies
   
951
     
947
 
Prepaid expenses and other current assets
   
237
     
217
 
Total current assets
   
4,716
     
5,094
 
Noncurrent assets:
               
Property, plant and equipment
   
4,560
     
4,677
 
Goodwill and intangible assets
   
6,942
     
7,434
 
Right-of-use assets
   
522
     
562
 
Other assets
   
145
     
115
 
Total assets
 
$
16,885
   
$
17,882
 
                 
                 
Liabilities and stockholders’ equity
               
Current liabilities:
               
Accounts payable
 
$
1,518
   
$
2,041
 
Accrued employee costs
   
260
     
336
 
Other current liabilities
   
837
     
788
 
Current portion of long-term debt
   
15
     
21
 
Total current liabilities
   
2,630
     
3,186
 
Noncurrent liabilities:
               
Long-term debt
   
9,488
     
9,439
 
Deferred income taxes
   
606
     
568
 
Employee benefit obligations
   
223
     
276
 
Operating lease liabilities
   
432
     
466
 
Other long-term liabilities
   
397
     
767
 
Total liabilities
   
13,776
     
14,702
 
                 
Stockholders’ equity:
               
Common stock (125.4 and 135.5 million shares issued, respectively)
   
1
     
1
 
Additional paid-in capital
   
1,171
     
1,134
 
Retained earnings
   
2,258
     
2,341
 
Accumulated other comprehensive loss
   
(321
)
   
(296
)
Total stockholders’ equity
   
3,109
     
3,180
 
Total liabilities and stockholders’ equity
 
$
16,885
   
$
17,882
 

See notes to consolidated financial statements.

5

Berry Global Group, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
(in millions of dollars)

   
Three Quarterly Periods Ended
 
   
July 2, 2022
   
July 3, 2021
 
Cash Flows from Operating Activities:
           
Net income
 
$
533
   
$
505
 
Adjustments to reconcile net cash from operating activities:
               
Depreciation
   
424
     
420
 
Amortization of intangibles
   
196
     
219
 
Non-cash interest expense
   
11
     
26
 
Deferred income tax
   
(66
)
   
(53
)
Share-based compensation expense
   
34
     
34
 
Other non-cash operating activities, net
   
(2
)
   
60
 
Settlement of derivatives
   
69
     
 
Changes in working capital
   
(800
)
   
(278
)
Changes in other assets and liabilities
   
(54
)
   
(21
)
Net cash from operating activities
   
345
     
912
 
                 
Cash Flows from Investing Activities:
               
Additions to property, plant and equipment, net
   
(556
)
   
(520
)
Divestiture of businesses
   
125
     
165
 
Other investing activities
   
6
     
 
Net cash from investing activities
   
(425
)
   
(355
)
                 
Cash Flows from Financing Activities:
               
Proceeds from long-term borrowings
   
170
     
2,716
 
Repayments on long-term borrowings
   
(16
)
   
(3,287
)
Proceeds from issuance of common stock
   
24
     
57
 
Repurchase of common stock
   
(637
)
   
 
Debt financing costs
   
     
(20
)
Net cash from financing activities
   
(459
)
   
(534
)
Effect of currency translation on cash
   
(25
)
   
31
 
Net change in cash and cash equivalents
   
(564
)
   
54
 
Cash and cash equivalents at beginning of period
   
1,091
     
750
 
Cash and cash equivalents at end of period
 
$
527
   
$
804
 

See notes to consolidated financial statements.

6

Berry Global Group, Inc.
Consolidated Statements of Changes in Stockholders’ Equity
(Unaudited)
(in millions of dollars)

 
Quarterly Period Ended
 
Common
Stock
   
Additional
Paid-in Capital
   
Accumulated Other
Comprehensive Loss
   
Retained
Earnings
   
Total
 
Balance at April 2, 2022
 
$
1
   
$
1,174
   
$
(181
)
 
$
2,326
   
$
3,320
 
Net income
   
     
     
     
207
     
207
 
Other comprehensive income
   
     
     
(140
)
   
     
(140
)
Share-based compensation
   
     
6
     
     
     
6
 
Proceeds from issuance of common stock
   
     
2
     
     
     
2
 
Common stock repurchased and retired
   
     
(11
)
   
     
(275
)
   
(286
)
Balance at July 2, 2022
 
$
1
   
$
1,171
   
$
(321
)
 
$
2,258
   
$
3,109
 
                                         
Balance at April 3, 2021
 
$
1
   
$
1,101
   
$
(375
)
 
$
1,919
   
$
2,646
 
Net income
   
     
     
     
194
     
194
 
Other comprehensive loss
   
     
     
89
     
     
89
 
Share-based compensation
   
     
6
     
     
     
6
 
Proceeds from issuance of common stock
   
     
18
     
     
     
18
 
Balance at July 3, 2021
 
$
1
   
$
1,125
   
$
(286
)
 
$
2,113
   
$
2,953
 

 
Three Quarterly Periods Ended
 
Common
Stock
   
Additional
Paid-in Capital
   
Accumulated Other
Comprehensive Loss
   
Retained
Earnings
   
Total
 
Balance at October 2, 2021
 
$
1
   
$
1,134
   
$
(296
)
 
$
2,341
   
$
3,180
 
Net income
   
     
     
     
533
     
533
 
Other comprehensive income
   
     
     
(25
)
   
     
(25
)
Share-based compensation
   
     
34
     
     
     
34
 
Proceeds from issuance of common stock
   
     
24
     
     
     
24
 
Common stock repurchased and retired
   
     
(21
)
   
     
(616
)
   
(637
)
Balance at July 2, 2022
 
$
1
   
$
1,171
   
$
(321
)
 
$
2,258
   
$
3,109
 
                                         
Balance at September 26, 2020
 
$
1
   
$
1,034
   
$
(551
)
 
$
1,608
   
$
2,092
 
Net income
   
     
     
     
505
     
505
 
Other comprehensive income
   
     
     
265
     
     
265
 
Share-based compensation
   
     
34
     
     
     
34
 
Proceeds from issuance of common stock
   
     
57
     
     
     
57
 
Balance at July 3, 2021
 
$
1
   
$
1,125
   
$
(286
)
 
$
2,113
   
$
2,953
 


See notes to consolidated financial statements.

7

Berry Global Group, Inc.
Notes to Consolidated Financial Statements
(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 statementsIn 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.  The Company’s U.S. based results for fiscal 2022 and fiscal 2021 are based on a fifty-two and fifty-three week period, respectively.  The extra week in fiscal 2021 occurred in the first quarter.  The Company has recast certain prior period amounts 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.  Recent Accounting Pronouncements

Reference Rate Reform

In 2020, the FASB issued ASU 2020-04, Reference Rate Reform - Facilitation of the Effects of Reference Rate Reform on Financial Reporting (Topic 848).  This standard provides temporary optional expedients and exceptions to the GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burdens of the expected market transition from LIBOR and other interbank offered rates to alternative reference rates, such as SOFR.  ASU 2020-04 is effective upon issuance and generally can be applied through the end of calendar year 2022.  The Company is currently evaluating the impact and does not anticipate a material impact on consolidated financial statements or disclosures. 

3.  Revenue and Accounts Receivable


Our revenues are primarily derived from the sale of non-woven, flexible and rigid products to customers.  Revenue is recognized when performance obligations are satisfied, in an amount reflecting the consideration to which the Company expects to be entitled.  We consider the promise to transfer products to be our sole performance obligation.  If the consideration agreed to in a contract includes a variable amount, we estimate the amount of consideration we expect to be entitled to in exchange for transferring the promised goods to the customer using the most likely amount method.  Our main source of variable consideration is customer rebates.  There are no material instances where variable consideration is constrained and not recorded at the initial time of sale.  Generally, our revenue is recognized at a point in time for standard promised goods at the time of shipment, when title and risk of loss pass to the customer.  The accrual for customer rebates was $101 million and $104 million at July 2, 2022 and October 2, 2021, respectively, and is included in Other current liabilities on the Consolidated Balance Sheets.  The Company disaggregates revenue based on reportable business segment, geography, and significant product line.  Refer to Note 10. Segment and Geographic Data for further information.


Accounts receivable are presented net of allowance for credit losses of $19 million and $21 million at July 2, 2022 and October 2, 2021, respectively.  The Company records its current expected credit losses based on a variety of factors including historical loss experience and current customer financial condition.  The changes to our current expected credit losses, write-off activity, and recoveries were not material for any of the periods presented.


The Company has entered into various factoring agreements, including customer-based supply chain financing programs, to sell certain receivables to third-party financial institutions.  Agreements which result in true sales of the transferred receivables, which occur when receivables are transferred without recourse to the Company, are reflected as a reduction of accounts receivable on the consolidated balance sheets and the proceeds are included in the cash flows from operating activities in the consolidated statements of cash flows.  The fees associated with the transfer of receivables for all programs were not material for any of the periods presented.


4.  Disposition

During fiscal 2022, the Company completed the sale of its rotational molding business, which was operated in the Consumer Packaging International segment for net proceeds of $108 million.  In fiscal 2021, the rotational molding business recorded net sales of $146 million.

8

5.  Restructuring and Transaction Activities

The table below includes the significant components of restructuring and transaction activities, by reporting segment:

   
Quarterly Period Ended
   
Three Quarterly Periods Ended
 
   
July 2, 2022
   
July 3, 2021
   
July 2, 2022
   
July 3, 2021
 
Consumer Packaging International
 
$
3
   
$
3
   
$
10
   
$
44
 
Consumer Packaging North America
   
1
     
     
4
     
1
 
Health, Hygiene & Specialties
   
3
     
     
2
     
 
Engineered Materials
   
     
1
     
2
     
(4
)
Consolidated
 
$
7
   
$
4
   
$
18
   
$
41
 

The table below sets forth the activity with respect to the restructuring and transaction activities accrual at July 2, 2022:

 
Restructuring
             
   
Employee Severance
and Benefits
   
Facility
Exit Costs
   
Transaction
Activities
   
Total
 
Balance as of October 2, 2021
 
$
6
   
$
5
   
$
   
$
11
 
Charges
   
4
     
7
     
7
     
18
 
Cash
   
(6
)
   
(9
)
   
(7
)
   
(22
)
Balance as of July 2, 2022
 
$
4
   
$
3
   
$
   
$
7
 

6.  Leases

The Company leases certain manufacturing facilities, warehouses, office space, manufacturing equipment, office equipment, and automobiles.

We recognize right-of-use assets and lease liabilities for leases with original lease terms greater than one year based on the present value of lease payments over the lease term using our incremental borrowing rate on a collateralized basis.  Short-term leases, with original lease terms of less than one year, are not recognized on the balance sheet.  We are party to certain leases, namely for manufacturing facilities, which offer renewal options to extend the original lease term.  Renewal options are included in the right-of-use asset and lease liability based on our assessment of the probability that the options will be exercised.

Supplemental lease information is as follows:

Leases
Classification
 
July 2, 2022
   
October 2, 2021
 
Operating leases:
             
Operating lease right-of-use assets
Right-of-use assets
 
$
522
   
$
562
 
Current operating lease liabilities
Other current liabilities
   
107
     
113
 
Noncurrent operating lease liabilities
Operating lease liability
   
432
     
466
 
Finance leases:
                 
Finance lease right-of-use assets
Property, plant, and equipment, net
 
$
40
   
$
57
 
Current finance lease liability
Current portion of long-term debt
   
10
     
14
 
Noncurrent finance lease liabilities
Long-term debt, less current portion
   
27
     
38
 

         
Three Quarterly Periods Ended
 
Lease Type
Cash Flow Classification
 
Lease Expense Category
   
July 2, 2022
   
July 3, 2021
 
Operating
Operating
 
Lease cost
   
$
100
   
$
85
 
Finance
Operating
 
Interest expense
     
1
     
2
 
Finance
Financing
  -
     
14
     
19
 
Finance
-
 
Amortization of right-of-use assets
     
7
     
9
 

Right-of-use assets obtained in exchange for new operating lease liabilities were $5 million and $26 million for the quarterly and three quarterly periods ended July 2, 2022, respectively.

9

7.  Long-Term Debt

Long-term debt consists of the following:

Facility
Maturity Date
 
July 2, 2022
   
October 2, 2021
 
Term loan
July 2026
 
$
3,440
     
3,440
 
Revolving line of credit
May 2024
   
170
     
 
0.95% First Priority Senior Secured Notes
February 2024
   
800
     
800
 
1.00% First Priority Senior Secured Notes (a)
July 2025
   
734
     
810
 
1.57% First Priority Senior Secured Notes
January 2026
   
1,525
     
1,525
 
4.875% First Priority Senior Secured Notes
July 2026
   
1,250
     
1,250
 
1.65% First Priority Senior Secured Notes
January 2027
   
400
     
400
 
1.50% First Priority Senior Secured Notes (a)
July 2027
   
393
     
434
 
4.50% Second Priority Senior Secured Notes
February 2026
   
300
     
300
 
5.625% Second Priority Senior Secured Notes
July 2027
   
500
     
500
 
Debt discounts and deferred fees
     
(65
)
   
(77
)
Finance leases and other
Various
   
56
     
78
 
Total long-term debt
     
9,503
     
9,460
 
Current portion of long-term debt
     
(15
)
   
(21
)
Long-term debt, less current portion
   
$
9,488
     
9,439
 
(a)
Euro denominated 

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, net on the Consolidated Statements of Income through maturity. 


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.

Cross-Currency Swaps

The Company is party to certain cross-currency swaps to hedge a portion of our foreign currency risk.  The Company settled its €250 million swap agreement which matured May 2022 for proceeds of $6 million.  As of July 2, 2022, the swap agreements mature June 2024 (€1,625 million) and July 2027 (£700 million).  In addition to cross-currency swaps, we hedge a portion of our foreign currency risk by designating foreign currency denominated long-term debt as net investment hedges of certain foreign operations.  As of July 2, 2022, we had outstanding long-term debt of €785 million that was designated as a hedge of our net investment in certain euro-denominated foreign subsidiaries.  When valuing cross-currency swaps the Company utilizes Level 2 inputs (substantially observable).

Interest Rate Swaps

The primary purpose of the Company’s interest rate swap activities is to manage interest expense variability associated with our outstanding variable rate term loan debt.  When valuing interest rate swaps the Company utilizes Level 2 inputs (substantially observable).

During fiscal 2022, the Company elected to cash settle existing interest rate swaps and received net proceeds of $69 million.  The offset is included in Accumulated other comprehensive loss and is being amortized to Interest expense through the term of the original swaps.  Additionally, the Company entered into $450 million and $400 million interest rate swap transactions that swap a one-month variable LIBOR contract for a fixed annual rate.

As of July 2, 2022, 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 2.765%, with an expiration in June 2026, (ii) a $400 million interest rate swap transaction that swaps a one-month variable LIBOR contract for a fixed annual rate of 2.733% with an expiration in June 2026, (iii) a $884 million interest rate swap transaction that swaps a one-month variable LIBOR contract for a fixed annual rate of 1.857%, with an expiration in June 2024, and (iv) a $473 million interest rate swap transaction that swaps a one-month variable LIBOR contract for a fixed annual rate of 2.050%, with an expiration in June 2024.

10

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. Balances on a gross basis are as follows:

Derivative Instruments
Hedge Designation
Balance Sheet Location
 
July 2, 2022
   
October 2, 2021
 
Cross-currency swaps
Designated
Other assets
 
$
18
   
$
 
Cross-currency swaps
Designated
Other long-term liabilities
   
40
     
323
 
Interest rate swaps
Designated
Other assets
   
34
     
 
Interest rate swaps
Designated
Other long-term liabilities
   
     
82
 
Interest rate swaps
Not designated
Other assets
   
7
     
 
Interest rate swaps
Not designated
Other long-term liabilities
   
81
     
49
 

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
 
July 2, 2022
   
July 3, 2021
   
July 2, 2022
   
July 3, 2021
 
Cross-currency swaps
Interest expense
 
$
(5
)
 
$
(2
)
 
$
(12
)
 
$
(6
)
Interest rate swaps
Interest expense
   
11
     
18
     
35
     
52
 

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 or when the Company completes an acquisition.  The Company adjusts certain long-lived assets to fair value only when the carrying values exceed the fair values.  The categorization of the framework used to value the assets is considered Level 3, due to the subjective nature of the unobservable inputs used to determine the fair value.  These assets that are subject to our annual impairment analysis primarily include 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 2021 assessment.  No impairment indicators were identified in the current quarter.

Included in the following table are the major categories of assets measured at fair value on a non-recurring basis as of July 2, 2022 and October 2, 2021, along with the impairment loss recognized on the fair value measurement during the period:

   
As of July 2, 2022
 
   
Level 1
   
Level 2
   
Level 3
   
Total
   
Impairment
 
Indefinite-lived trademarks
 
$
   
$
   
$
248
   
$
248
   
$
 
Goodwill
   
     
     
4,969
     
4,969
     
 
Definite lived intangible assets
   
     
     
1,725
     
1,725
     
 
Property, plant, and equipment
   
     
     
4,560
     
4,560
     
 
Total
 
$
   
$
   
$
11,502
   
$
11,502
   
$
 

   
As of October 2, 2021
 
   
Level 1
   
Level 2
   
Level 3
   
Total
   
Impairment
 
Indefinite-lived trademarks
 
$
   
$
   
$
248
   
$
248
   
$
 
Goodwill
   
     
     
5,192
     
5,192
     
 
Definite lived intangible assets
   
     
     
1,994
     
1,994
     
 
Property, plant, and equipment
   
     
     
4,677
     
4,677
     
1
 
Total
 
$
   
$
   
$
12,111
   
$
12,111
   
$
1
 

The Company’s financial instruments consist primarily of cash and cash equivalents, long-term debt, interest rate and cross-currency swap agreements, and finance lease obligations.  The book value of our marketable long-term indebtedness exceeded fair value by $456 million as of July 2, 2022.  The Company’s long-term debt fair values were determined using Level 2 inputs (substantially observable). 

9.  Income Taxes

On a year-to-date comparison to the statutory rate, the higher effective tax rate was negatively impacted by state taxes and global intangible low-taxed income provisions, partially offset by other discrete items.

11

10.  Segment and Geographic Data

The Company’s operations are organized into four reporting segments: Consumer Packaging International, Consumer Packaging North America, Health, Hygiene & Specialties, and Engineered Materials.  The structure is designed to align us with our customers, provide optimal service, drive future growth, and to facilitate synergies realization.

Selected information by reportable segment is presented in the following tables:

 
Quarterly Period Ended
   
Three Quarterly Periods Ended
 
   
July 2, 2022
   
July 3, 2021
   
July 2, 2022
   
July 3, 2021
 
Net sales:
                       
Consumer Packaging International
 
$
1,096
   
$
1,095
   
$
3,290
   
$
3,143
 
Consumer Packaging North America
   
927
     
847
     
2,659
     
2,264
 
Health, Hygiene & Specialties
   
788
     
828
     
2,429
     
2,349
 
Engineered Materials
   
915
     
905
     
2,696
     
2,425
 
Total net sales
 
$
3,726
   
$
3,675
   
$
11,074
   
$
10,181
 
Operating income:
                               
Consumer Packaging International
 
$
82
   
$
79
   
$
248
   
$
214
 
Consumer Packaging North America
   
104
     
76
     
235
     
212
 
Health, Hygiene & Specialties
   
56
     
113
     
186
     
323
 
Engineered Materials
   
94
     
75
     
237
     
231
 
Total operating income
 
$
336
   
$
343
   
$
906
   
$
980
 
Depreciation and amortization:
                               
Consumer Packaging International
 
$
78
   
$
88
   
$
242
   
$
258
 
Consumer Packaging North America
   
53
     
53
     
160
     
164
 
Health, Hygiene & Specialties
   
44
     
43
     
133
     
130
 
Engineered Materials
   
28
     
28
     
85
     
87
 
 Total depreciation and amortization
 
$
203
   
$
212
   
$
620
   
$
639
 

Selected information by geographical region is presented in the following tables:

 
Quarterly Period Ended
   
Three Quarterly Periods Ended
 
   
July 2, 2022
   
July 3, 2021
   
July 2, 2022
   
July 3, 2021
 
Net sales:
                       
United States and Canada
 
$
2,030
   
$
1,937
   
$
5,978
   
$
5,342
 
Europe
   
1,320
     
1,308
     
3,937
     
3,658
 
Rest of world
   
376
     
430
     
1,160
     
1,181
 
Total net sales
 
$
3,726
   
$
3,675
   
$
11,074
   
$
10,181
 

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, we believe that any ultimate liability would not be material to our financial statements.

The Company has various purchase commitments for raw materials, supplies, and property and equipment incidental to the ordinary conduct of business.

12.  Share Repurchase Program

During the quarterly period ended July 2, 2022, the Company repurchased and retired 5,114 thousand shares for $286 million.  For the three quarterly periods ended July 2, 2022, the Company repurchased and retired 10,870 thousand shares for $637 million.  Authorized share repurchases of $414 million remain available to the Company. 


13.  Basic and Diluted Earnings Per Share

Basic net income or earnings per share ("EPS") 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.

12

Diluted EPS includes the effects of options and restricted stock units, if dilutive.

The following tables provide a reconciliation of the numerator and denominator of the basic and diluted EPS calculations:

   
Quarterly Period Ended
   
Three Quarterly Periods Ended
 
(in millions, except per share amounts)
 
July 2, 2022
   
July 3, 2021
   
July 2, 2022
   
July 3, 2021
 
Numerator
                       
Consolidated net income
 
$
207
   
$
194
   
$
533
   
$
505
 
Denominator
                               
Weighted average common shares outstanding - basic
   
128.6
     
135.1
     
132.6
     
134.3
 
Dilutive shares
   
2.1
     
3.4
     
3.0
     
3.4
 
Weighted average common and common equivalent shares outstanding - diluted
   
130.7
     
138.5
     
135.6
     
137.7
 
                                 
Per common share earnings
                               
Basic
 
$
1.61
   
$
1.44
   
$
4.02
   
$
3.76
 
Diluted
 
$
1.58
   
$
1.40
   
$
3.93
   
$
3.67
 

1.2 million shares were excluded from the diluted EPS calculation for the quarterly and three quarterly periods ended July 2, 2022 as their effect would be anti-dilutive.  No shares were excluded for the quarterly and three quarterly periods ended July 3, 2021. 

14.  Accumulated Other Comprehensive Loss

The components and activity of Accumulated other comprehensive loss are as follows:

Quarterly Period Ended
 
Currency
Translation
   
Defined Benefit
Pension and Retiree
Health Benefit Plans
   
Derivative
Instruments
   
Accumulated Other
Comprehensive Loss
 
Balance at April 2, 2022
 
$
(139
)
 
$
(67
)
 
$
25
   
$
(181
)
Other comprehensive income (loss) before reclassifications
   
(159
)
   
     
18
     
(141
)
Net amount reclassified
   
     
     
1
     
1
 
Balance at July 2, 2022
 
$
(298
)
 
$
(67
)
 
$
44
   
$
(321
)

   
Currency
Translation
   
Defined Benefit
Pension and Retiree
Health Benefit Plans
   
Derivative
Instruments
   
Accumulated Other
Comprehensive Loss
 
Balance at April 3, 2021
 
$
(173
)
 
$
(116
)
 
$
(86
)
 
$
(375
)
Other comprehensive income (loss) before reclassifications
   
91
     
     
(5
)
   
86
 
Net amount reclassified
   
     
     
3
     
3
 
Balance at July 3, 2021
 
$
(82
)
 
$
(116
)
 
$
(88
)
 
$
(286
)

Three Quarterly Periods Ended
 
Currency
Translation
   
Defined Benefit
Pension and Retiree
Health Benefit Plans
   
Derivative
Instruments
   
Accumulated Other
Comprehensive Loss
 
Balance at October 2, 2021
 
$
(154
)
 
$
(67
)
 
$
(75
)
 
$
(296
)
Other comprehensive income (loss) before reclassifications
   
(144
)
   
     
113
     
(31
)
Net amount reclassified
   
     
     
6
     
6
 
Balance at July 2, 2022
 
$
(298
)
 
$
(67
)
 
$
44
   
$
(321
)

   
Currency
Translation
   
Defined Benefit
Pension and Retiree
Health Benefit Plans
   
Derivative
Instruments
   
Accumulated Other
Comprehensive Loss
 
Balance at September 26, 2020
 
$
(278
)
 
$
(116
)
 
$
(157
)
 
$
(551
)
Other comprehensive income before reclassifications
   
196
     
     
62
     
258
 
Net amount reclassified
   
     
     
7
     
7
 
Balance at July 3, 2021
 
$
(82
)
 
$
(116
)
 
$
(88
)
 
$
(286
)

13

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

Executive Summary

Business.  The Company’s operations are organized into four operating segments: Consumer Packaging International, Consumer Packaging North America, Health, Hygiene & Specialties, and Engineered Materials.  The structure is designed to align us with our customers, provide improved service, drive future growth, and to facilitate synergies realization.  The Consumer Packaging International segment primarily consists of containers, closures and dispensing systems, pharmaceutical devices and packaging, bottles and canisters, and technical components.  The Consumer Packaging North America segment primarily consists of containers and pails, foodservice, closures, overcaps, bottles, prescription vials, and tubes.  The Health, Hygiene & Specialties segment primarily consists of nonwoven specialty materials, tapes and adhesives, and films used in hygiene, infection prevention, personal care, industrial, construction, and filtration applications.  The Engineered Materials segment primarily consists of stretch and shrink films, converter films, institutional can liners, food and consumer films, retail bags, and agriculture films.

Raw Material Trends.  Our primary raw material is polymer resin.  In addition, we use other materials such as butyl rubber, adhesives, paper and packaging materials, linerboard, rayon, polyester fiber, and foil, in various manufacturing processes.  While temporary industry-wide shortages of raw materials have occurred, we have historically been able to manage the supply chain disruption by working closely with our suppliers and customers.  Supply shortages can lead to increased raw material price volatility, which we have experienced in recent quarters.  Raw material price changes are generally passed on to customers through contractual price mechanisms over time and other means.  We expect supply chain challenges to continue throughout fiscal 2022 and will continue to work closely with our suppliers and customers in an effort to minimize any impact.

Outlook.  The Company is affected by general economic and industrial growth, raw material availability, cost inflation, supply chain disruptions, and general industrial production.  The COVID-19 pandemic has resulted in both advantaged and disadvantaged products within all segments.  During fiscal 2022, we have experienced a headwind as the advantaged products, particularly in our Health, Hygiene & Specialties segment, related to the COVID-19 pandemic moderated while recovery of disadvantaged products lags with the ultimate impact being affected by both the duration certain products remain advantaged and timing of when disadvantaged products normalize.  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 and other cost changes to our customers, improve manufacturing productivity and adapt to volume changes of our customers.  We believe that by providing advantaged products in targeted markets, our underlying long-term demand fundamental in all divisions will remain strong as we focus on delivering protective solutions that enhance consumer safety and execute on the Company’s mission statement of “Always Advancing to Protect What’s Important.”  For fiscal 2022, we project cash flow from operations of $1.5 billion, which assumes the benefit from the lag in recovery of inflation, an investment in working capital from inflation and additional inventory due to supply chain disruptions, and free cash flow of $750 million.  Projected fiscal 2022 free cash flow assumes $750 million of capital spending.  In addition, we repurchased approximately 11 million shares for $637 million in fiscal 2022 YTD and expect to purchase at least $700 million of shares in fiscal 2022.  For the calculation of free cash flow and further information related to free cash flow as a non-GAAP financial measure, see “Liquidity and Capital Resources.”

14


Results of Operations

Comparison of the Quarterly Period Ended July 2, 2022 (the “Quarter”) and the Quarterly Period Ended July 3, 2021 (the “Prior Quarter”)

Business integration expenses consist of restructuring and impairment charges, divestiture related costs, and other business optimization costs.  Tables present dollars in millions.

Consolidated Overview
                 
   
Quarter
   
Prior Quarter
   
$ Change
   
% Change
 
Net sales
 
$
3,726
   
$
3,675
   
$
51
     
1
%
Cost of goods sold
   
3,105
     
3,049
     
56
     
2
%
Other operating expenses
   
285