10-Q 1 bpg10q1302015.htm BERRY PLASTICS GROUP 10Q 01-30-2015 bpg10q1302015.htm


SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549

FORM 10-Q

 [X]     Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended December 27, 2014
or
 [   ]     Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
   berry plastics group logo  
 
Commission File Number 001-35672
BERRY PLASTICS GROUP, INC.
(Exact name of registrant as specified in its charter)

Delaware
20-5234618
(State or other jurisdiction  
of incorporation or organization)
(IRS employer  
identification number)
101 Oakley Street  
Evansville, Indiana
  
47710
(Address of principal executive offices)
(Zip code)
  
Registrant’s telephone number, including area code:  (812) 424-2904  
  
Securities registered pursuant to Section 12(b) of the Act:

Indicate by check mark whether the registrant:  (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) have been subject to such filing requirements for the past 90 days.  Yes [X ]  No [  ]  
  
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes [ X]  No [  ]  
  
Indicate by check mark whether the registrant is a large accelerated filer, accelerated filer, or non-accelerated filer.  See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):          
      Large accelerated filer [  X  ]           Accelerated filer [    ]              Non-accelerated filer [    ] Small reporting company [    ] 
  
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934).             Yes[    ]   No[ X ]  

Class
 
Outstanding at January 30, 2015
Common Stock, $.01 par value per share
 
118.9 million shares
 
 
 

 
 
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
 
This Form 10-Q includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933  and Section 21E of the Securities Exchange Act of 1934 with respect to our financial condition, results of operations and business and our expectations or beliefs concerning future events.  The forward-looking statements include, in particular, statements about our plans, strategies and prospects under the heading "Management’s Discussion and Analysis of Financial Condition and Results of Operations".  You can identify forward-looking statements because they contain words such as “believes,” “expects,” “may,” “will,” “should,” “would,” “could,” “seeks,” “approximately,” “intends,” “plans,” “estimates,”  “outlook,” “anticipates” or “looking forward” or similar expressions that relate to our strategy, plans or intentions.  All statements we make relating to our estimated and projected earnings, margins, costs, expenditures, cash flows, growth rates and financial results or to our expectations regarding future industry trends are forward-looking statements.  In addition, we, through our senior management, from time to time make forward-looking public statements concerning our expected future operations and performance and other developments.  These forward-looking statements are subject to risks and uncertainties that may change at any time, and, therefore, our actual results may differ materially from those that we expected.  We derive many of our forward-looking statements from our operating budgets and forecasts, which are based upon many detailed assumptions.  While we believe that our assumptions are reasonable, we caution that it is very difficult to predict the impact of known factors, and it is impossible for us to anticipate all factors that could affect our actual results.  All forward-looking statements are based upon information available to us on the date of this Form 10-Q. 
 
Readers should carefully review the factors discussed in our most recent Form 10-K in the section titled “Risk Factors” and other risk factors identified from time to time in our periodic filings with the Securities and Exchange Commission.
 
 
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Berry Plastics Group, Inc.
Form 10-Q Index
For Quarterly Period Ended December 27, 2014  

 
 
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Part I.  Financial Information

Berry Plastics Group, Inc.
Consolidated Statements of Income
(Unaudited)
(in millions of dollars, except per share amounts)

   
Quarterly Period Ended
   
December 27, 2014
   
December 28, 2013
 
Net sales
  $ 1,220     $ 1,140  
Costs and expenses:
               
Cost of goods sold
    1,037       964  
Selling, general and administrative
    86       77  
Amortization of intangibles
    25       26  
Restructuring and impairment charges
    4       10  
Operating income
    68       63  
Other income, net
    (1 )     (1 )
Interest expense, net
    53       55  
Income before income taxes
    16       9  
Income tax expense
    3       3  
Net income
  $ 13     $ 6  
 
Net income per share:
               
Basic
  $ 0.11     $ 0.05  
Diluted
    0.11       0.05  
Outstanding weighted-average shares:
               
Basic
    118.2       115.9  
Diluted
    122.9       120.5  

Berry Plastics Group, Inc.
(Unaudited)
(in millions of dollars) 

   
Quarterly Period Ended
   
December 27, 2014
   
December 28, 2013
 
Net income
  $ 13     $ 6  
Currency translation
    (14 )     (1 )
Interest rate hedges
    (7 )      
Provision for income taxes related to other comprehensive income items
    2        
Comprehensive income (loss)
  $ (6 )   $ 5  



See notes to consolidated financial statements.

 
 
 
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Berry Plastics Group, Inc.
 (in millions of dollars)
   
December 27, 2014
   
September 27, 2014
 
Assets
 
(Unaudited)
       
Current assets:
           
Cash and cash equivalents
  $ 53     $ 129  
Accounts receivable (less allowance of $3 at December 27, 2014 and $3 at September 27, 2014)
    442       491  
           Inventories:
               
Finished goods
    362       353  
Raw materials and supplies
    257       251  
      619       604  
Deferred income taxes
    249       166  
Prepaid expenses and other current assets
    39       42  
Total current assets
    1,402       1,432  
Property, plant, and equipment, net
    1,331       1,364  
Goodwill, intangible assets and deferred costs, net
    2,442       2,471  
Other assets
    1       1  
Total assets
  $ 5,176     $ 5,268  
 
Liabilities
               
 
Current liabilities:
               
Accounts payable
  $ 352     $ 395  
Accrued expenses and other current liabilities
    334       314  
Current portion of long-term debt
    56       58  
Total current liabilities
    742       767  
Long-term debt, less current portion
    3,756       3,860  
Deferred income taxes
    469       386  
Other long-term liabilities
    302       356  
Total liabilities
    5,269       5,369  
 
Redeemable non-controlling interest
    13       13  
                 
Stockholders’ equity (deficit)
               
                 
Common stock (118.8 and 118.0 shares issued, respectively)
    1       1  
Additional paid-in capital
    381       367  
Non-controlling interest
    3       3  
Accumulated deficit
    (429 )     (442 )
Accumulated other comprehensive loss
    (62 )     (43 )
Total stockholders’ equity (deficit)
    (106 )     (114 )
Total liabilities and stockholders’ equity (deficit)
  $ 5,176     $ 5,268  

See notes to consolidated financial statements.

 
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Berry Plastics Group, Inc.
For the Quarterly Period Ended December 27, 2014 and December 28, 2013
(Unaudited)
(in millions of dollars)

   
Common Stock
   
Additional Paid-in Capital
   
Non-controlling Interest
   
Accumulated Other Comprehensive Loss
   
Accumulated Deficit
   
Total
 
Balance at September 28, 2013
  $ 1     $ 322     $ 3     $ (18 )   $ (504 )   $ (196 )
Proceeds from issuance of common stock
          3                         3  
Stock compensation expense
          5                         5  
Net income
                            6       6  
Currency translation
                      (1 )           (1 )
Balance at December 28, 2013
  $ 1     $ 330     $ 3     $ (19 )   $ (498 )   $ (183 )
 
Balance at September 27, 2014
  $ 1     $ 367     $ 3     $ (43 )   $ (442 )   $ (114 )
Proceeds from issuance of common stock
          7                         7  
Stock compensation expense
          7                         7  
Net income
                            13       13  
Interest rate hedge, net of tax
                      (5 )           (5 )
Currency translation
                      (14 )           (14 )
Balance at December 27, 2014
  $ 1     $ 381     $ 3     $ (62 )   $ (429 )   $ (106 )
                                                 
 
See notes to consolidated financial statements.

 
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Berry Plastics Group, Inc.
(Unaudited)
(in millions of dollars)

   
Quarterly Period Ended
 
   
December 27,
2014
   
December 28,
2013
 
Cash Flows from Operating Activities:
           
Net income
  $ 13     $ 6  
Adjustments to reconcile net cash provided by operating activities:
               
Depreciation
    66       59  
Amortization of intangibles
    25       26  
Non-cash interest expense
    2       2  
Deferred income tax
    3       4  
Stock compensation expense
    7       5  
Impairment of long-lived assets
    2       2  
Other non-cash items
    (2 )     1  
Changes in operating assets and liabilities:
               
Accounts receivable, net
    45       51  
Inventories
    (18 )     14  
Prepaid expenses and other assets
    (5 )     (4 )
                      Accounts payable and other liabilities
    (38 )     6  
Net cash from operating activities
    100       172  
 
Cash Flows from Investing Activities:
               
Additions to property, plant and equipment
    (35 )     (47 )
Proceeds from sale of assets
    10       1  
Acquisition of business, net of cash acquired
          (67 )
Net cash from investing activities
    (25 )     (113 )
 
Cash Flows from Financing Activities:
               
Proceeds from long-term borrowings
          3  
Repayments on long-term borrowings
    (116 )     (13 )
Proceeds from issuance of common stock
    7       3  
Payment of tax receivable agreement
    (39 )     (32 )
Net cash from financing activities
    (148 )     (39 )
Effect of exchange rate changes on cash
    (3 )      
Net change in cash
    (76 )     20  
Cash and cash equivalents at beginning of period
    129       142  
Cash and cash equivalents at end of period
  $ 53     $ 162  

See notes to consolidated financial statements.

 
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Berry Plastics Group, Inc.
(Unaudited)
(tables in millions of dollars, except per share data)

1.  Basis of Presentation
 
The accompanying unaudited Consolidated Financial Statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) pursuant to the rules and regulations of the Securities and Exchange Commission for interim reporting.  Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements.  In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included, and all subsequent events up to the time of the filing have been evaluated.  For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s most recent Form 10-K filed with the Securities and Exchange Commission.

2. Recently Issued Accounting Pronouncements
 
Revenue Recognition  
 
In May 2014, the Financial Accounting Standards Board issued a final standard on revenue recognition. Under the new standard, an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In order to do so, an entity would follow the five-step process for in-scope transactions: 1) identify the contract with a customer, 2) identify the separate performance obligations in the contract, 3) determine the transaction price, 4) allocate the transaction price to the separate performance obligations in the contract, and 5) recognize revenue when (or as) the entity satisfies a performance obligation. For public entities, the provisions of the new standard are effective for annual reporting periods beginning after December 15, 2016 and early adoption is not permitted. An entity can apply the new revenue standard retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying the standard recognized at the date of initial application in retained earnings.  The Company is currently assessing the impact to the consolidated financial statements.
 
3.  Acquisitions
 
Rexam Healthcare Containers and Closures
 
In June 2014, the Company acquired Rexam’s Healthcare Containers and Closures business (“C&C”) for a purchase price of $130 million, net of cash acquired.  The C&C business produces bottles, closures and specialty products for pharmaceutical and over-the-counter healthcare applications.  The C&C acquisition has been accounted for under the purchase method of accounting, and accordingly, the purchase price has been allocated to the identifiable assets and liabilities based on estimated fair values at the acquisition date.  The acquired assets and assumed liabilities consisted of working capital of $30 million, property and equipment of $84 million, non-current deferred tax benefit of $4 million, intangible assets of $9 million, and goodwill of $6 million and other long-term liabilities of $3 million.  The Company has not finalized the purchase price allocation to the fair values of fixed assets, intangibles, or deferred income taxes and is reviewing the working capital acquired.
 
4.  Restructuring and Impairment Charges
 
The Company incurred restructuring costs related to severance, asset impairment and facility exit costs of $4 million and $10 million for the quarterly period ended  December 27, 2014 and December 28, 2013, respectively.  The tables below set forth the significant components of the restructuring charges recognized, by segment:
 
 
 
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Quarterly Period Ended
 
   
December 27, 2014
   
December 28, 2013
 
Rigid Open Top
  $     $ 1  
Rigid Closed Top
    1        
Engineered Materials
          3  
Flexible Packaging
    3       6  
Consolidated
  $ 4     $ 10  

 
The table below sets forth the activity with respect to the restructuring accrual at December 27, 2014:
 
   
Severance and termination benefits
   
Facilities exit costs and other
   
Non-cash
   
Total
 
Balance at September 27, 2014
  $ 5     $ 8     $     $ 13  
Charges
    1       1       2       4  
Non-cash asset impairment
                (2 )     (2 )
Cash payments
    (3 )     (1 )           (4 )
Balance at December 27, 2014
  $ 3     $ 8     $     $ 11  

5.  Accrued Expenses, Other Current Liabilities and Other Long-Term Liabilities
 
The following table sets forth the totals included in Accrued expenses and other current liabilities on the Consolidated Balance Sheets:
 
   
December 27, 2014
   
September 27, 2014
 
Employee compensation, payroll and other taxes
  $ 86     $ 99  
Interest
    55       44  
Rebates
    57       50  
Tax receivable agreement obligation
    60       39  
Other
    76       82  
    $ 334     $ 314  

The following table sets forth the totals included in Other long-term liabilities on the Consolidated Balance Sheets:
 
   
December 27, 2014
   
September 27, 2014
 
Lease retirement obligation
  $ 31     $ 31  
Sale-lease back deferred gain
    29       30  
Pension liability
    44       45  
Tax receivable agreement obligation
    174       234  
Other
    24       16  
    $ 302     $ 356  

The Company made $39 million of payments related to the income tax receivable agreement ("TRA") in the first fiscal quarter of 2015, of which Apollo Global Management, LLC received $33 million.  The TRA provides for the payment to TRA holders 85% of the amount of cash savings, if any, in U.S. federal, foreign, state and local income tax that are actually realized as a result of the utilization of our net operating losses attributable to periods prior to the initial public offering.
 
 
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6.  Long-Term Debt
 
Long-term debt consists of the following:
 
Maturity Date
 
December 27, 2014
   
September 27, 2014
 
Term loan
February 2020
  $ 1,379     $ 1,383  
Term loan
January 2021
    1,019       1,122  
Revolving line of credit
June 2016
           
9¾% Second Priority Senior Secured Notes
January 2021
    800       800  
5½% Second Priority Senior Secured Notes
May 2022
    500       500  
Capital leases and other
          Various
    114       113  
        3,812       3,918  
Less current portion of long-term debt
      (56 )     (58 )
      $ 3,756     $ 3,860  
 
The Company’s senior secured credit facilities consist of $2.4 billion of term loans and a $650 million asset based revolving line of credit. The Company was in compliance with all covenants as of December 27, 2014.
 
In October 2014, the Company elected to make a voluntary one-time $100 million principal payment on the outstanding term loan using existing liquidity.
 
7.  Financial Instruments and Fair Value Measurements
 
As part of the overall risk management, the Company uses derivative instruments to reduce exposure to changes in interest rates attributed to the Company’s floating-rate borrowings.  For those derivative instruments that are designated and qualify as hedging instruments, the Company must designate the hedging instrument, based upon the exposure being hedged, as a fair value hedge, cash flow hedge, or a hedge of a net investment in a foreign operation.  To the extent hedging relationships are found to be effective, as determined by FASB guidance, changes in the fair value of the derivatives are offset by changes in the fair value of the related hedged item and recorded to Accumulated other comprehensive loss.  Management believes hedge effectiveness is evaluated properly in preparation of the financial statements.
 
Cash Flow Hedging Strategy
 
For derivative instruments that are designated and qualify as cash flow hedges, the effective portion of the gain or loss on the derivative instrument is reported as a component of Accumulated other comprehensive loss and reclassified into earnings in the same line item associated with the forecasted transaction and in the same period or periods during which the hedged transaction affects earnings.  The categorization of the framework used to price these derivative instruments is considered a Level 3, due to the subjective nature of the unobservable inputs used to determine the fair value.
 
In February 2013, the Company entered into an interest rate swap transaction to manage cash flow variability associated with $1 billion of outstanding variable rate term loan debt. The agreement swapped the greater of a three-month variable LIBOR contract or 1.00% for a fixed three-year rate of 2.355%, with an effective date in May 2016 and expiration in May 2019.  In June 2013, the Company elected to settle this derivative instrument and received $16 million as a result of this settlement.  The offset is included in Accumulated other comprehensive income and will be amortized to Interest expense from May 2016 through May 2019, the original term of the swap agreement.

In March 2014, the Company entered into an interest rate swap transaction to manage cash flow variability associated with $1 billion of outstanding variable rate term loan debt. The agreement swaps the greater of a three-month variable LIBOR contract or 1.00% for a fixed three-year rate of 2.59%, with an effective date in February 2016 and expiration in February 2019.  The Company records changes in fair value in Accumulated other comprehensive income and Deferred income taxes.

Derivatives instruments
Balance Sheet Location
 
December 27, 2014
   
September 27, 2014
 
Interest rate swap
Other long-term liabilities
  $ 10     $ 3  
 
 
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Non-recurring Fair Value Measurements
 
The Company has certain assets that are measured at fair value on a non-recurring basis when impairment indicators are present.  The assets are adjusted to fair value only when the carrying values exceed the fair values.  The categorization of the framework used to price the assets is considered Level 3, due to the subjective nature of the unobservable inputs used to determine the fair value.  These assets include primarily our definite lived and indefinite lived intangible assets, including Goodwill and our property plant and equipment.  The Company reviews Goodwill and other indefinite lived assets for impairment as of the first day of the fourth fiscal quarter each year, and more frequently if impairment indicators exist. The Company determined Goodwill and other indefinite lived assets were not impaired in our annual fiscal 2014 assessment and no impairment indicators existed in the current quarter.
 
Included in the following table are the major categories of assets measured at fair value on a non-recurring basis as of December 27, 2014 and September 27, 2014, along with the impairment loss recognized on the fair value measurement during the period:
 
   
As of December 27, 2014
 
   
Level 1
   
Level 2
   
Level 3
   
Total
   
Impairment
 
Indefinite-lived trademarks
  $     $     $ 207     $ 207     $  
Goodwill
                1,657       1,657        
Definite lived intangible assets
                559       559        
Property, plant, and equipment
                1,331       1,331       2  
Total
  $     $     $ 3,754     $ 3,754     $ 2  


   
As of September 27, 2014
 
   
Level 1
   
Level 2
   
Level 3
   
Total
   
Impairment
 
Indefinite-lived trademarks
  $     $     $ 207     $ 207     $  
Goodwill
                1,659       1,659        
Definite lived intangible assets
                585       585        
Property, plant, and equipment
                1,364       1,364       7  
Total
  $     $     $ 3,815     $ 3,815     $ 7  

The Company’s financial instruments consist primarily of cash and cash equivalents, long-term debt and capital lease obligations.  The fair value of our long-term indebtedness exceeded book value by $29 million as of December 27, 2014.  The Company’s long-term debt fair values were determined using Level 2 inputs as other significant observable inputs were not available.    
 
8.  Income Taxes
 
The Company's effective tax rate was 21% and 29% for the quarterly period ended December 27, 2014 and December 28, 2013, respectively.  The primary reason the expense was lower than our statutory rate was the extension of the research and development tax credit through the end of calendar 2014.  A reconciliation of Income tax expense, computed at the federal statutory rate, to Income tax expense, as provided for in the financial statements, is as follows:
 
   
Quarterly Period Ended
 
   
December 27, 2014
   
December 28,
2013
 
Income tax expense computed at statutory rate
  $ 6     $ 3  
Research and development credits
    (3 )      
Uncertain tax position
          (1 )
Other
          1  
Income tax expense
  $ 3     $ 3  
 
 
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9.  Operating Segments
 
The Company's operations are organized into four reportable segments: Rigid Open Top, Rigid Closed Top, Engineered Materials, and Flexible Packaging.  We have manufacturing and distribution centers in the United States, Canada, Mexico, Belgium, France, Australia, Germany, Brazil, Malaysia, India, China, and the Netherlands. The North American operation represents 95% of net sales, 96% of total long-lived assets, and 95% of the total assets.  Selected information by reportable segment is presented in the following table: 
 
   
Quarterly Period Ended
 
   
December 27, 2014
   
December 28, 2013
 
Net sales:
           
Rigid Open Top
  $ 257     $ 261  
Rigid Closed Top
    373       332  
Engineered Materials
    349       342  
Flexible Packaging
    241       205  
               Total net sales
  $ 1,220     $ 1,140  
Operating income (loss):
               
Rigid Open Top
  $ 7     $ 13  
Rigid Closed Top
    21       30  
Engineered Materials
    32       25  
Flexible Packaging
    8       (5 )
               Total operating income
  $ 68     $ 63  
Depreciation and amortization:
               
Rigid Open Top
  $ 23     $ 23  
Rigid Closed Top
    36       30  
Engineered Materials
    17       19  
Flexible Packaging
    15       13  
               Total depreciation and amortization
  $ 91     $ 85  

   
December 27, 2014
   
September 27, 2014
 
Total assets:
           
Rigid Open Top
  $ 1,804     $ 1,808  
Rigid Closed Top
    1,910       1,966  
Engineered Materials
    713       722  
Flexible Packaging
    749       772  
Total assets
  $ 5,176     $ 5,268  
Goodwill:
               
Rigid Open Top
  $ 681     $ 681  
Rigid Closed Top
    826       827  
Engineered Materials
    70       71  
Flexible Packaging
    80       80  
                 Total goodwill
  $ 1,657     $ 1,659  

10.  Contingencies and Commitments
 
The Company is party to various legal proceedings involving routine claims which are incidental to the business.  Although the legal and financial liability with respect to such proceedings cannot be estimated with certainty, the Company believes that any ultimate liability would not be material to the business, financial condition, results of operations, or cash flows of the Company.
 
 
-12-

 
11. 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 computed 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. The Company’s redeemable common stock is included in the weighted-average number of common shares outstanding for calculating basic and diluted net income per share.
 
The following tables and discussion provide a reconciliation of the numerator and denominator of the basic and diluted net income per share computations.  The calculation below provides net income on both basic and diluted basis for the quarterly period ended December 27, 2014 and December 28, 2013:
 
   
Quarterly Period Ended
 
(in millions, except per share amounts)
 
December 27, 2014
   
December 28, 2013
 
Numerator
           
Net income
  $ 13     $ 6  
Denominator
               
Weighted average common shares outstanding - basic
    118.2       115.9  
Dilutive shares
    4.7       4.6  
Weighted average common and common equivalent shares outstanding - diluted
    122.9       120.5  
                 
Per common share income
               
Basic
  $ 0.11     $ 0.05  
Diluted
  $ 0.11     $ 0.05  

12.  Comprehensive Income
 
Comprehensive income is comprised of net income and other comprehensive income (loss).  Other comprehensive losses include net unrealized gains or losses resulting from currency translations of foreign subsidiaries, changes in the value of our derivative instruments and adjustments to the pension liability.  
 
The balances related to each component of other comprehensive income (loss) during the three months ended December 27, 2014 were as follows: 
 
   
Currency Translation
   
Defined Benefit Pension and Retiree Health Benefit Plans
   
 
Interest Rate Hedges
   
Accumulated Other Comprehensive Loss
 
Balance at September 27, 2014
  $ (36 )   $ (15 )   $ 8     $ (43 )
Other comprehensive loss
    (14 )           (7 )     (21 )
Tax expense
                2       2  
Balance at December 27, 2014
  $ (50 )   $ (15 )   $ 3     $ (62 )
 
 
-13-

13. Guarantor and Non-Guarantor Financial Information
 
Berry Plastics Corporation (“Issuer”) has notes outstanding which are fully, jointly, severally, and unconditionally guaranteed by substantially all of Berry’s domestic subsidiaries. Separate narrative information or financial statements of the guarantor subsidiaries have not been included because they are 100% owned by the parent company and the guarantor subsidiaries unconditionally guarantee such debt on a joint and several basis. A guarantee of a guarantor of the securities will terminate upon the following customary circumstances:  the sale of the capital stock of such guarantor if such sale complies with the indenture, the designation of such guarantor as an unrestricted subsidiary, the defeasance or discharge of the indenture, as a result of the holders of certain other indebtedness foreclosing on a pledge of the shares of a guarantor subsidiary or if such guarantor no longer guarantees certain other indebtedness of the issuer.  The guarantees are also limited as necessary to prevent them from constituting a fraudulent conveyance under applicable law and guarantees guaranteeing subordinated debt are subordinated to certain other of the Company’s debts.  Presented below is condensed consolidating financial information for the parent, issuer, guarantor subsidiaries and non-guarantor subsidiaries.  Our issuer and guarantor financial information includes all of our domestic operating subsidiaries, our non-guarantor subsidiaries include our foreign subsidiaries and BP Parallel, LLC. Berry Plastics Group, Inc. uses the equity method to account for its ownership in Berry Plastics Corporation in the Condensed Consolidating Supplemental Financial Statements.  Berry Plastics Corporation uses the equity method to account for its ownership in the guarantor and non-guarantor subsidiaries.  All consolidating entries are included in the eliminations column along with the elimination of intercompany balances.
     
Condensed Supplemental Consolidated Balance Sheet
 
 
   
December 27, 2014
 
   
Parent
   
Issuer
   
Guarantor
Subsidiaries
   
Non—
Guarantor
Subsidiaries
   
Eliminations
   
Total
 
Current assets
    250       99       863       190             1,402  
Intercompany receivable
          3,321             97       (3,418 )      
Property, plant, and equipment, net
          81       1,139       111             1,331  
Other assets
    76       1,370       2,207       118       (1,328 )     2,443  
Total assets
  $ 326     $ 4,871     $ 4,209     $ 516     $ (4,746 )   $ 5,176  
 
                                               
Current liabilities
    57       216       393       76             742  
Intercompany payable
    (282 )           3,700             (3,418 )      
Other long-term liabilities
    644       3,838       38       7             4,527  
Non-controlling interest
    13                   13       (13 )     13  
Stockholders’ equity (deficit)
    (106 )     817       78       420       (1,315 )     (106 )
Total liabilities and stockholders’ equity (deficit)
  $ 326     $ 4,871     $ 4,209     $ 516     $ (4,746 )   $ 5,176  
  
   
September 27, 2014
 
   
Parent
   
Issuer
   
Guarantor
Subsidiaries
   
Non—
Guarantor
Subsidiaries
   
Eliminations
   
Total
 
Current assets
    166       171       901       194             1,432  
Intercompany receivable
          3,343             87       (3,430 )      
Property, plant and equipment, net
          84       1,162       118             1,364  
Other assets
    69       1,357       2,227       125       (1,306 )     2,472  
Total assets
  $ 235     $ 4,955     $ 4,290     $ 524     $ (4,736 )   $ 5,268  
 
                                               
Current liabilities
    35       212       435       85             767  
Intercompany payable
    (319 )           3,749             (3,430 )      
Other long-term liabilities
    620       3,934       42       6             4,602  
Non-controlling interest        13         —        —       13       (13)       13  
Stockholders’ equity (deficit)
    (114 )     809       64       420       (1,293 )     (114 )
Total liabilities and stockholders’ equity (deficit)
  $ 235     $ 4,955     $ 4,290     $ 524     $ (4,736 )   $ 5,268  
 
-14-

 
   
Condensed Supplemental Consolidated Statements of Operations 
 
 
     Quarterly Period Ended December 27, 2014  
   
Parent
   
Issuer
   
Guarantor
Subsidiaries
   
Non-
Guarantor
Subsidiaries
   
Eliminations
   
Total
 
Net sales
  $     $ 159     $ 948     $ 113     $     $ 1,220  
Cost of goods sold
          147       809       81             1,037  
Selling, general and administrative
          16       60       10             86  
Amortization of intangibles
          2       21       2             25  
Restructuring and impairment charges
                4                   4  
Operating income (loss)
          (6 )     54       20             68  
Other income, net
          (1 )                       (1 )
Interest expense, net
          7       41       5             53  
Equity in net income of subsidiaries
    (16 )     (28 )                 44        
Income (loss) before income taxes
    16       16       13       15       (44 )     16  
Income tax expense (benefit)
    3       2             1       (3 )     3  
Net income (loss)
  $ 13     $ 14     $ 13     $ 14     $ (41 )   $ 13  
Comprehensive  income (loss)
  $ 13     $ 13     $ 9     $     $ (41 )   $ (6 )
 
Consolidating Statement of Cash Flows
                                   
Cash Flow from Operating Activities
  $     $ (16 )   $ 102     $ 14     $     $ 100  
Cash Flow from Investing Activities
                                               
Additions to  property, plant, and equipment
          (3 )     (30 )     (2 )           (35 )
Proceeds from sale of assets
                10                   10  
(Contributions) distributions to/from subsidiaries
    (7 )     7                          
Intercompany advances (repayments)
          55                   (55 )      
Acquisition of business, net of cash acquired
                                   
Net cash from investing activities
    (7 )     59       (20 )     (2 )     (55 )     (25 )
                                                 
Cash Flow from Financing Activities
                                               
Proceeds from issuance of common stock
    7                               7  
Payment of tax receivable agreement
    (39 )                             (39 )
Repayments on long-term borrowings
          (115 )           (1 )           (116 )
Changes in intercompany balances
    39             (91 )     (3 )     55        
Net cash provided from financing activities
    7       (115 )     (91 )     (4 )     55       (148 )
Effect of exchange rate on cash
                      (3 )           (3 )
Net change in cash
          (72 )     (9 )     5             (76 )
Cash and cash equivalents at beginning of period
          70       15       44             129  
Cash and cash equivalents at end of period
  $     $ (2 )   $ 6     $ 49     $     $ 53  
 
-15-

 
   
Quarterly Period Ended December 28, 2013
 
   
Parent
   
Issuer
   
Guarantor
Subsidiaries
   
Non-
Guarantor
Subsidiaries
   
Eliminations
   
Total
 
Net sales
  $     $ 146     $ 907     $ 87     $     $ 1,140  
Cost of goods sold
          131       762       71             964  
Selling, general and administrative
          19       51       7             77  
Amortization of intangibles
          3       21       2             26  
Restructuring and impairment charges
                10                   10  
Operating income (loss)
          (7 )     63       7             63  
Debt extinguishment
                                   
Other income, net
          (1 )                       (1 )
Interest expense, net
    13       6       44       (33 )     25       55  
Equity in net income of subsidiaries
    (22 )     (58 )                 80        
Income (loss) before income taxes
    9       46       19       40       (105 )     9  
Income tax expense (benefit)
    3       16             1       (17 )     3  
Net income (loss)
  $ 6     $ 30     $ 19     $ 39     $ (88 )   $ 6  
Comprehensive  income (loss)
  $ 6     $ 30     $ 19     $ 38     $ (88 )   $ 5  

Consolidating Statement of Cash Flows
                                   
Cash Flow from Operating Activities
  $     $     $ 162     $ 10     $     $ 172  
Cash Flow from Investing Activities
                                               
Additions to  property, plant, and equipment
          (2 )     (44 )     (1 )           (47 )
Proceeds from sale of assets
                1                   1  
(Contributions) distributions to/from subsidiaries
    (3 )     3                          
Intercompany advances (repayments)
          30                   (30 )      
Acquisition of business, net of cash acquired
                (62 )     (5)             (67 )
Net cash from investing activities
    (3 )     31       (105 )     (6 )     (30 )     (113 )
                                                 
Cash Flow from Financing Activities
                                               
Proceeds from long-term borrowings
                      3             3  
Proceeds from issuance of common stock
    3                               3  
Payment of tax receivable agreement
    (32 )                             (32 )
Repayments on long-term borrowings
          (13 )                       (13 )
Changes in intercompany balances
    32             (57 )     (5 )     30        
Net cash provided from financing activities
    3       (13 )     (57 )     (2 )     30       (39 )
Effect of exchange rate on cash
                                   
Net change in cash
          18             2             20  
Cash and cash equivalents at beginning of period
          116             26             142  
Cash and cash equivalents at end of period
  $     $ 134     $     $ 28     $     $ 162  
 
 
This discussion contains forward-looking statements and involves numerous risks and uncertainties, including, but not limited to, those described in our most recent Form 10-K in the section titled “Risk Factors” and other risk factors identified from time to time in our periodic filings with the SEC.  As a result, our actuals may differ materially from those contained in any forward-looking statements.  You should read the explanation of the qualifications and limitations on these forward-looking statements referenced within this report.
 
Executive Summary

Business.  We operate in the following four segments: Rigid Open Top, Rigid Closed Top, Engineered Materials, and Flexible Packaging.  The Rigid Open Top segment businesses sell primarily containers and foodservice items.  The Rigid Closed Top segment sells closures, overcaps, bottles, prescription containers, and tubes.  Our Engineered Materials segment primarily sells pipeline corrosion protection solutions, tapes and adhesives, PE-based film products, and can liners.  The Flexible Packaging segment primarily sells high barrier, multilayer film products as well as finished flexible packages such as printed bags and pouches.

Acquisitions. We maintain an opportunistic acquisition strategy, which is focused on improving our long-term financial performance, enhancing our market positions, and expanding our product lines, or in some cases, providing us with a new or complementary product line.  In our acquisitions, we seek to obtain businesses for attractive post-synergy multiples, creating value for our stockholders from synergy realization, leveraging the acquired products across our customer base, creating new platforms for future growth, and assuming best practices from the businesses we acquire.  The Company has included the expected benefits of acquisition integrations and restructuring plans within our unrealized synergies, which are in turn recognized in earnings after an acquisition has been fully integrated or the restructuring plan is completed.  While the expected benefits on earnings is estimated at the commencement of each transaction, once the execution of the plan and integration occur, we are generally unable to accurately estimate or track what the ultimate effects have been due to system integrations and movements of activities to multiple facilities.  As historical business combinations and restructuring plans have not allowed us to accurately separate realized synergies compared to what was initially identified, we measure the synergy realization based on the overall segment profitability post integration.

Raw Material Trends. Our primary raw material is plastic resin.  Polypropylene and polyethylene account for approximately 90% of our plastic resin purchases based on the pounds purchased.  Plastic resins are subject to price fluctuations, including those arising from supply shortages and changes in the prices of natural gas, crude oil and other petrochemical intermediates from which resins are produced.  The three month simple average, as published in Chem Data, price per pound were as follows by fiscal year:
 
   
Polyethylene Butene Film
   
Polypropylene
 
   
2015
   
2014
   
2013
   
2015
   
2014
   
2013
 
1st quarter
  $ .86     $ .82     $ .69     $ .92     $ .89     $ .76  
2nd quarter
          .85       .74             .95       .96  
3rd quarter
          .86       .77             .91       .84  
4th quarter
          .87       .79             .92       .89  

Due to differences in the timing of passing through resin cost changes to our customers on escalator/de-escalator programs, segments are negatively impacted in the short term when plastic resin costs increase and are positively impacted when plastic resin costs decrease.  This timing lag in passing through raw material cost changes could affect our results as plastic resin costs fluctuate. 
 
Outlook. The Company is impacted by general economic and industrial growth, plastic resin availability and affordability, and general industrial production. Our business has both geographic and end market diversity, which reduces the effect of any one of these factors on our overall performance. Our results are affected by our ability to pass through raw material cost changes to our customers, improve manufacturing productivity and adapt to volume changes of our customers.  Consumer demand for packaged food products has been under pressure for over two years.  During this same period our raw material costs have experienced inflation.  This combination has put pressure on industry margins and asset utilization rates, which the Company has been able to partially offset by pricing actions, asset consolidations, introduction of new products and synergies from acquisitions.  In 2014, commodity grain prices began to fall significantly, and then in December 2014 oil prices dropped precipitously. Just as raw material price increases have negatively impacted our working capital over the past two years, we expect that the trend of decreasing resin prices, to the extent it continues, will have a favorable impact on cash from operating activities over the next several quarters.
-17-

Results of Operations
 
Comparison of the Quarterly Period Ended December 27, 2014 (the “Quarter”) and the Quarterly Period Ended December 28, 2013 (the “Prior Quarter”)

Consolidated Overview
                       
   
Quarter
   
Prior Quarter
   
$ Change
   
% Change
 
Net sales
  $ 1,220     $ 1,140     $ 80       7 %
Operating income
  $ 68     $ 63     $ 5       8 %
Operating income percentage of net sales
    6 %     6 %                

Net sales increased from $1,140 million in the Prior Quarter to $1,220 million in the Quarter.  This increase is primarily attributed to net sales from businesses acquired in the last twelve months of 6% and selling price increases of 3% due to higher resin prices shown above and general price increases to cover non-resin related cost inflation partially offset by a 2% volume decline primarily related to soft customer demand.

Operating income increased from $63 million in the Prior Quarter to $68 million in the Quarter.  This increase is primarily attributed to a $4 million improvement in the relationship of net selling price to raw material costs, $5 million improvement in operating performance in manufacturing, and a $6 million decrease in business integration expenses.  Business integration expenses consist of restructuring and impairment charges and other business optimization costs.  These improvements are partially offset by $7 million from base volume declines and operating losses from businesses acquired in the last twelve months.  Acquisition operating income (loss) is generally analyzed in total until the acquisition has been included in our results for a full year.

Rigid Open Top
                       
   
Quarter
   
Prior Quarter
   
$ Change
   
% Change
 
Net sales
  $ 257     $ 261     $ (4 )     (2 %)
Operating income
  $ 7     $ 13     $ (6 )     (46 %)
Operating income percentage of net sales
    3 %     5 %                

Net sales in the Rigid Open Top segment decreased from $261 million in the Prior Quarter to $257 million in the Quarter as a result of a volume decline of 6%.  The volume decline is related to general market softness and the Company entering into new agreements in the Prior Quarter with several existing thermoformed drink cup customers where our prior contracts provided high market shares at those accounts.  The volume decline was partially offset by net selling price increases of 5% due to the pass through of higher raw material and freight costs.

Operating income for the Rigid Open Top segment decreased from $13 million in the Prior Quarter to $7 million in the Quarter.  This decrease is primarily attributed to $3 million from base volume declines, $1 million decline in operating performance in manufacturing, and $1 million of increased business integration expenses.
 
Rigid Closed Top
                       
   
Quarter
   
Prior Quarter
   
$ Change
   
% Change
 
Net sales
  $ 373     $ 332     $ 41       12 %
Operating income
  $ 21     $ 30     $ (9 )     (30 %)
Operating income percentage of net sales
    6 %     9 %                

Net sales in the Rigid Closed Top segment increased from $332 million in the Prior Quarter to $373 million in the Quarter primarily as a result of acquisition volume of 11% attributed to the United States portion of the Healthcare Containers and Closures business purchased from Rexam (“C&C”).

Operating income for the Rigid Closed Top segment decreased from $30 million in the Prior Quarter to $21 million in the Quarter. This decrease is primarily attributed to $8 million of operating losses from the C&C acquisition as a result of business integration expenses and $3 million in increased depreciation and amortization partially offset by a $5 million decline in selling, general, and administrative expenses driven by synergies from the C&C acquisition.
 
-18-

 
Engineered Materials
                       
   
Quarter
   
Prior Quarter
   
$ Change
   
% Change
 
Net sales
  $ 349     $ 342     $ 7       2 %
Operating income
  $ 32     $ 25     $ 7       28 %
Operating income percentage of net sales
    9 %     7 %                

The Engineered Materials segment net sales increased from $342 million in the Prior Quarter to $349 million in the Quarter primarily as a result of net selling price increases of 3% due to the pass through of higher raw material costs partially offset by a 1% base volume decline primarily attributed to soft customer demand in our corrosion protection and housewares products.

Operating income for the Engineered Materials segment improved from $25 million in the Prior Quarter to $32 million in the Quarter.  This increase is primarily attributed to a $3 million reduction in business integration costs, a $2 million improvement in operating performance in manufacturing and a $2 million decrease in depreciation and amortization expense.

Flexible Packaging