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 March 30, 2019
Commission File Number 001-35672



BERRY GLOBAL GROUP, INC.

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

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 (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 every Interactive Data File required to be submitted 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 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 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  

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

There were 131.6 million shares of common stock outstanding at May 2, 2019.

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.

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
   
Two Quarterly Periods Ended
 
 
 
March 30, 2019
   
March 31, 2018
   
March 30, 2019
   
March 31, 2018
 
Net sales 
 
$
1,950
   
$
1,967
   
$
3,922
   
$
3,743
 
Costs and expenses:
                               
Cost of goods sold 
   
1,578
     
1,596
     
3,197
     
3,043
 
Selling, general and administrative 
   
143
     
130
     
267
     
247
 
Amortization of intangibles 
   
39
     
38
     
81
     
76
 
Restructuring and impairment charges
   
5
     
15
     
16
     
26
 
Operating income 
   
185
     
188
     
361
     
351
 
Other expense, net 
   
23
     
5
     
23
     
14
 
Interest expense, net 
   
66
     
66
     
130
     
128
 
Income before income taxes 
   
96
     
117
     
208
     
209
 
Income tax expense (benefit)
   
22
     
27
     
46
     
(44
)
Net income
 
$
74
   
$
90
   
$
162
   
$
253
 
 
                               
Net income per share:
                               
Basic 
 
$
0.57
   
$
0.69
   
$
1.24
   
$
1.93
 
Diluted 
   
0.55
     
0.66
     
1.21
     
1.86
 
Outstanding weighted-average shares:
                               
Basic 
   
130.5
     
131.3
     
130.8
     
131.0
 
Diluted 
   
133.8
     
135.8
     
133.9
     
135.9
 

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

 
 
Quarterly Period Ended
   
Two Quarterly Periods Ended
 
 
 
March 30, 2019
   
March 31, 2018
   
March 30, 2019
   
March 31, 2018
 
Net income
 
$
74
   
$
90
   
$
162
   
$
253
 
Currency translation 
   
6
     
7
     
2
     
(17
)
Pension and other postretirement benefits
   
     
     
     
(1
)
Interest rate hedges 
   
(20
)
   
23
     
(43
)
   
41
 
Provision for income taxes
   
5
     
(6
)
   
11
     
(11
)
Other comprehensive income (loss), net of tax
   
(9
)
   
24
     
(30
)
   
12
 
Comprehensive income 
 
$
65
   
$
114
   
$
132
   
$
265
 

See notes to consolidated financial statements.

4

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

 
 
March 30, 2019
   
September 29, 2018
 
Assets
 
(Unaudited)
       
             
Current assets:
           
Cash and cash equivalents 
 
$
353
   
$
381
 
Accounts receivable (less allowance of $14 and $13, respectively)
   
907
     
941
 
Inventories:
               
Finished goods 
   
557
     
503
 
Raw materials and supplies 
   
372
     
384
 
 
   
929
     
887
 
Prepaid expenses and other current assets 
   
78
     
76
 
Total current assets 
   
2,267
     
2,285
 
Property, plant, and equipment, net 
   
2,449
     
2,488
 
Goodwill and intangible assets, net
   
4,201
     
4,284
 
Other assets 
   
67
     
74
 
Total assets 
 
$
8,984
   
$
9,131
 
                 
Liabilities
               
                 
Current liabilities:
               
Accounts payable 
 
$
657
   
$
783
 
Accrued expenses and other current liabilities 
   
433
     
416
 
Current portion of long-term debt 
   
37
     
38
 
Total current liabilities 
   
1,127
     
1,237
 
Long-term debt, less current portion 
   
5,690
     
5,806
 
Deferred income taxes 
   
346
     
365
 
Other long-term liabilities 
   
290
     
289
 
Total liabilities 
   
7,453
     
7,697
 
                 
Stockholders' equity
               
 
               
Common stock (130.9 and 131.4 million shares issued, respectively)
   
1
     
1
 
Additional paid-in capital 
   
901
     
867
 
Non-controlling interest 
   
3
     
3
 
Retained earnings
   
812
     
719
 
Accumulated other comprehensive loss 
   
(186
)
   
(156
)
Total stockholders' equity
   
1,531
     
1,434
 
Total liabilities and stockholders' equity
 
$
8,984
   
$
9,131
 

See notes to consolidated financial statements.

5

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
   
Non-Controlling Interest
   
Accumulated Other
Comprehensive Loss
   
Retained Earnings
   
Total
 
Balance at December 30, 2017
 
$
1
   
$
831
   
$
3
   
$
(80
)
 
$
419
   
$
1,174
 
Share-based compensation expense
   
     
10
     
     
     
     
10
 
Proceeds from issuance of common stock
   
     
8
     
     
     
     
8
 
Interest rate hedges, net of tax
   
     
     
     
17
     
     
17
 
Net income attributable to the Company
   
     
     
     
     
90
     
90
 
Currency translation
   
     
     
     
7
     
     
7
 
Pension
   
     
     
     
     
     
 
Balance at March 31, 2018
 
$
1
   
$
849
   
$
3
   
$
(56
)
 
$
509
   
$
1,306
 
                                                 
Balance at December 29, 2018
 
$
1
   
$
873
   
$
3
   
$
(177
)
 
$
755
   
$
1,455
 
Share-based compensation expense
   
     
14
     
     
     
     
14
 
Proceeds from issuance of common stock
   
     
15
     
     
     
     
15
 
Common stock repurchased and retired
   
     
(1
)
   
     
     
(17
)
   
(18
)
Interest rate hedges, net of tax
   
     
     
     
(15
)
   
     
(15
)
Net income attributable to the Company
   
     
     
     
     
74
     
74
 
Currency translation
   
     
     
     
6
     
     
6
 
Balance at March 30, 2019
 
$
1
   
$
901
   
$
3
   
$
(186
)
 
$
812
   
$
1,531
 


 
Two Quarterly Periods Ended
 
Common Stock
   
Additional Paid-in Capital
   
Non-Controlling Interest
   
Accumulated Other
Comprehensive Loss
   
Retained Earnings
   
Total
 
Balance at September 30, 2017
 
$
1
   
$
823
   
$
3
   
$
(68
)
 
$
256
   
$
1,015
 
Share-based compensation expense
   
     
14
     
     
     
     
14
 
Proceeds from issuance of common stock
   
     
12
     
     
     
     
12
 
Interest rate hedges, net of tax
   
     
     
     
30
     
     
30
 
Net income attributable to the Company
   
     
     
     
     
253
     
253
 
Currency translation
   
     
     
     
(17
)
   
     
(17
)
Pension
   
     
     
     
(1
)
   
     
(1
)
Balance at March 31, 2018
 
$
1
   
$
849
   
$
3
   
$
(56
)
 
$
509
   
$
1,306
 
                                                 
Balance at September 29, 2018
 
$
1
   
$
867
   
$
3
   
$
(156
)
 
$
719
   
$
1,434
 
Share-based compensation expense
   
     
17
     
     
     
     
17
 
Proceeds from issuance of common stock
   
     
20
     
     
     
     
20
 
Common stock repurchased and retired
   
     
(3
)
   
     
     
(69
)
   
(72
)
Interest rate hedges, net of tax
   
     
     
     
(32
)
   
     
(32
)
Net income attributable to the Company
   
     
     
     
     
162
     
162
 
Currency translation
   
     
     
     
2
     
     
2
 
Balance at March 30, 2019
 
$
1
   
$
901
   
$
3
   
$
(186
)
 
$
812
   
$
1,531
 

See notes to consolidated financial statements.

6

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

 
 
Two Quarterly Periods Ended
 
 
 
March 30, 2019
   
March 31, 2018
 
Cash Flows from Operating Activities:
           
Net income
 
$
162
   
$
253
 
Adjustments to reconcile net cash provided by operating activities:
               
Depreciation 
   
189
     
185
 
Amortization of intangibles 
   
81
     
76
 
Non-cash interest 
   
(3
)
   
4
 
Loss on foreign exchange forward contracts
   
18
     
 
Deferred income tax 
   
(2
)
   
(102
)
Share-based compensation expense 
   
17
     
14
 
Other non-cash operating activities, net 
   
10
     
12
 
Changes in working capital 
   
(138
)
   
(191
)
Changes in other assets and liabilities 
   
(3
)
   
34
 
Net cash from operating activities 
   
331
     
285
 
                 
Cash Flows from Investing Activities:
               
Additions to property, plant and equipment 
   
(167
)
   
(184
)
Proceeds from sale of assets 
   
     
3
 
Acquisition of business, net of cash acquired
   
     
(474
)
Net cash from investing activities
   
(167
)
   
(655
)
                 
Cash Flows from Financing Activities:
               
Proceeds from long-term borrowings
   
     
497
 
Repayments on long-term borrowings 
   
(122
)
   
(117
)
Proceeds from issuance of common stock 
   
20
     
12
 
Repurchase of common stock
   
(74
)
   
 
Payment of tax receivable agreement 
   
(16
)
   
(37
)
Debt financing costs
   
     
(1
)
Net cash from financing activities 
   
(192
)
   
354
 
Effect of exchange rate changes on cash 
   
     
1
 
Net change in cash 
   
(28
)
   
(15
)
Cash and cash equivalents at beginning of period 
   
381
     
306
 
Cash and cash equivalents at end of period 
 
$
353
   
$
291
 

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 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 2019, with the exception of the below, there have been no developments to the recently adopted accounting pronouncements from those disclosed in the Company's 2018 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 adopted the new standard effective for fiscal 2019 using the modified retrospective approach.  The adoption of this standard did not have a material impact on the Company's consolidated financial statements.

Leases

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which increases transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements.  Under the new standard, the lessee of an operating lease will be required to do the following: 1) recognize a right-of-use asset and a lease liability in the statement of financial position, 2) recognize a single lease cost allocated over the lease term generally on a straight-line basis, and 3) classify all cash payments within operating activities on the statement of cash flows.  Companies are required to adopt this standard using a modified retrospective transition method.  Amendments in this standard are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company established a cross-functional implementation team that is progressing through inventorying its lease contracts and developing business processes and internal controls to ensure we meet the reporting and disclosure requirements of the new standard. The standard will be effective for the Company beginning fiscal 2020.

3.  Revenue Recognition

Our revenues are primarily derived from the sale of plastic packaging products to customers.  Revenue is recognized when performance obligations are satisfied, in an amount reflecting the consideration 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 sources of variable consideration are customer rebates and cash discounts.  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.  A small number of our contracts are for sales of products which are customer specific and cannot be repurposed. Sales for these products qualify for over time recognition and are immaterial to the Company.

8

Our rebate programs are individually negotiated with customers and contain a variety of different terms and conditions.  Certain rebates are calculated as flat percentages of purchases, while others included tiered volume incentives.  These rebates may be payable monthly, quarterly, or annually.  The calculation of the accrued rebate balance involves management estimates, especially where the terms of the rebate involve tiered volume levels that require estimates of expected annual sales.  These provisions are based on estimates derived from current program requirements and historical experience.  The accrual for customer rebates was $56 million and $58 million at March 30, 2019 and September 29, 2018, respectively, and is included in Accrued expenses and other current liabilities.

Due to the nature of our sales transactions, we have elected the following practical expedients: (i) Shipping and handling costs are treated as fulfillment costs. Accordingly, shipping and handling costs are classified as a component of Cost of goods sold while amounts billed to customers are classified as a component of Net Sales; (ii) We exclude sales and similar taxes that are imposed on our sales and collected from customers; (iii) As our standard payment terms are less than one year, we did not assess whether a contract has a significant financing component.

The Company disaggregates revenue based on reportable business segment, geography, and significant product line.  Refer to Note 11. Operating Segments for further information.

4.  Acquisitions

RPC Group Plc

On March 8, 2019, the Company issued an announcement pursuant to Rule 2.7 of the UK City Code on Takeovers and Mergers disclosing the terms of an all-cash firm offer for the entire issued and to be issued share capital of RPC Group Plc (“RPC”).  Pursuant to the offer, RPC shareholders will be entitled to receive 793 pence in cash for each RPC share (implying a value of approximately £3.3 billion, or $4.3 billion using the exchange rate at the time of the offer). Aggregate consideration will be approximately £5.0 billion, or $6.5 billion, including refinancing of RPC’s net debt, using the exchange rate at the time of the offer. The Company has entered into certain foreign exchange forward contracts to partially mitigate its currency exchange rate risk associated with the GBP denominated purchase price. Refer to Note 9. Financial Instruments and Fair Value Measurements for further information.

On April 18, 2019, the requisite majority of RPC shareholders voted to approve the RPC transaction. The transaction remains subject to, among other things, receipt of antitrust clearances and satisfaction of other customary closing conditions.  Antitrust approvals have been obtained in the United States, Turkey, South Africa and the European Union. Filings for the other antitrust clearances required to be obtained to satisfy the other applicable conditions (in Mexico, Russia and China) have been made.

The Company expects to complete the RPC acquisition early in the third quarter of calendar year 2019. To finance the all-cash purchase, the Company intends to obtain permanent financing prior to the completion of the acquisition.

RPC is a leading plastic product design and engineering company that works responsibly across a broad range of industries from food to technical components, healthcare to industrial with total revenue of £3.7 billion for the twelve-month period ended March 31, 2018. It is a global business with 189 operating sites in 34 countries that are strategically placed to support customers on a local, national and international basis, as well as providing multi-site security of supply. RPC manufactures in five of the major polymer conversion processes (consisting of injection molding, blow molding, thermoforming, rotational molding and blown film extrusion) allowing RPC to produce innovative and sustainable value added products.

Laddawn, Inc.

In August 2018, the Company acquired Laddawn, Inc. ("Laddawn") for a purchase price of $242 million, which is preliminary and subject to adjustment.  Laddawn is a custom bag and film manufacturer with a unique-to-industry e-commerce sales platform.  The acquired business is operated in our Engineered Materials segment.  To finance the purchase, the Company used existing liquidity.

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 estimates of fair value at the acquisition date.  The results of Laddawn 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 assets acquired and liabilities assumed consisted of working capital of $26 million, property and equipment of $39 million, intangible assets of $98 million, and goodwill of $79 million.  The working capital includes a $2 million step up of inventory to fair value.  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.

9

Clopay Plastic Products Company, Inc.

In February 2018, the Company acquired Clopay Plastic Products Company, Inc. ("Clopay") for a purchase price of $475 million.  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 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 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 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
   
125
 
Goodwill
   
111
 
Other assets and long-term liabilities
   
5
 
(a) Includes a $3 million step up of inventory to fair value

5.  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 March 30, 2019 or September 29, 2018.  Gross amounts factored under these U.S. based programs at March 30, 2019 and September 29, 2018 were $203 million and $162 million, respectively.  The fees associated with transfer of receivables for all programs were not material for any of the periods presented.

6.  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
   
Two Quarterly Periods Ended
 
   
March 30, 2019
   
March 31, 2018
   
March 30, 2019
   
March 31, 2018
 
Engineered Materials
 
$
1
   
$
2
   
$
1
   
$
2
 
Health, Hygiene & Specialties 
   
2
     
12
     
12
     
22
 
Consumer Packaging 
   
2
     
1
     
3
     
2
 
Consolidated 
 
$
5
   
$
15
   
$
16
   
$
26
 

The table below sets forth the activity with respect to the restructuring accrual at March 30, 2019:

 
 
Employee Severance and Benefits
   
Facility Exit
Costs
   
Non-cash Impairment Charges
   
Total
 
Balance at September 29, 2018
 
$
9
   
$
4
   
$
   
$
13
 
Charges 
   
6
     
3
     
7
     
16
 
Non-cash asset impairment
   
     
     
(7
)
   
(7
)
Cash payments 
   
(11
)
   
(2
)
   
     
(13
)
Balance at March 30, 2019
 
$
4
   
$
5
   
$
   
$
9
 

10

7.  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:

 
 
March 30, 2019
   
September 29, 2018
 
Employee compensation
 
$
107
   
$
113
 
Accrued taxes
   
73
     
72
 
Rebates
   
56
     
58
 
Interest 
   
46
     
49
 
Derivative instruments
   
18
     
 
Tax receivable agreement obligation
   
12
     
16
 
Restructuring
   
9
     
13
 
Accrued operating expenses
   
112
     
95
 
   
$
433
   
$
416
 

The following table sets forth the totals included in Other long-term liabilities on the Consolidated Balance Sheets:

 
 
March 30, 2019
   
September 29, 2018
 
Uncertain tax positions
 
$
70
   
$
67
 
Deferred purchase price
   
44
     
40
 
Pension liability
   
42
     
45
 
Lease retirement obligation
   
40
     
39
 
Derivative instruments
   
21
     
12
 
Sale-lease back deferred gain
   
20
     
21
 
Transition tax
   
17
     
18
 
Tax receivable agreement obligation
   
12
     
23
 
Other
   
24
     
24
 
 
 
$
290
   
$
289
 

8.  Long-Term Debt

Long-term debt consists of the following:


Maturity Date
 
March 30, 2019
   
September 29, 2018
 
Term loan 
February 2020(a)
 
$
700
   
$
800
 
Term loan 
January 2021
   
814
     
814
 
Term loan 
October 2022
   
1,545
     
1,545
 
Term loan
January 2024
   
490
     
493
 
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
     
500
 
Debt discounts and deferred fees 
     
(38
)
   
(43
)
Capital leases and other 
Various
   
116
     
135
 
Total long-term debt 
 
   
5,727
     
5,844
 
Current portion of long-term debt 
 
   
(37
)
   
(38
)
Long-term debt, less current portion
 
 
$
5,690
   
$
5,806
 

(a) The Company classifies the term loan as long-term based on our intent and ability (through the use of alternative financing including our revolving line of credit, if necessary) to refinance prior to its maturity date.

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, net through maturity.

During fiscal 2019, the Company has made $122 million of repayments on long-term borrowings using existing liquidity.
11

9.  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

The Company is party to 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.

Foreign Exchange Forward Contracts — RPC Acquisition

In connection with the announced, proposed acquisition of RPC, the Company entered into certain foreign exchange forward contracts to partially mitigate the currency exchange rate risk associated with the GBP denominated purchase price.  At March 30, 2019, the Company had outstanding forward contracts totaling £2.7 billion and are expected to settle upon the closing of the transaction. For the quarter ended March 30, 2019, the Company recognized an unrealized loss of $18 million in Other expense, net in the Consolidated Statement of Income associated with the forward contracts.

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.

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.

As of March 30, 2019, 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, (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, and (iii) a $400 million interest rate swap transaction that swaps a one-month variable LIBOR contract for a fixed annual rate of 2.533% with an effective date in February 2019 and expiration in July 2023.

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. The categorization of the framework used to value the instruments is considered Level 2, due to the analysis that incorporates observable market inputs including foreign currency spot and forward rates, various interest rate curves, and obtained from pricing data quoted by various banks, third party sources and foreign currency dealers. Balances on a gross basis are as follows:

Derivatives Instruments
Hedge Designation
Balance Sheet Location
 
March 30, 2019
   
September 29, 2018
 
Cross-currency swaps
Designated
Other assets
 
$
6
   
$
 
Cross-currency swaps
Designated
Other long-term liabilities
   
     
11
 
Interest rate swaps
Designated
Other assets
   
2
     
16
 
Interest rate swaps
Not designated
Other assets
   
     
 
Interest rate swaps
Designated
Other long-term liabilities
   
21
     
 
Interest rate swaps
Not designated
Other long-term liabilities
   
     
1
 
Foreign exchange forward contracts
Not designated
Other current liabilities
   
18
     
 

12

The effect of the Company's derivative instruments on the Consolidated Statements of Income is as follows:

 
   
Quarterly Period Ended
 
Two Quarterly Periods Ended
 
Derivative Instruments
Statements of Income Location
March 30, 2019
 
March 31, 2018
 
March 30, 2019
 
March 31, 2018
 
Cross-currency swaps
Interest expense, net
 
$
(1
)
 
$
(1
)
 
$
(3
)
 
$
(2
)
Foreign exchange forward contracts
Other expense, net
   
18
     
     
18
     
 
Interest rate swaps
Interest expense, net
   
(5
)
   
1
     
(9
)
   
3
 

The amortization related to unrealized losses in Accumulated other comprehensive loss is expected to be $7 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 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 2018 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 March 30, 2019 and September 29, 2018, along with the impairment loss recognized on the fair value measurement during the period:
 
 
As of March 30, 2019
 
 
 
Level 1
   
Level 2
   
Level 3
   
Total
   
Impairment
 
Indefinite-lived trademarks
 
$
   
$
   
$
248
   
$
248
   
$
 
Goodwill 
   
     
     
2,938
     
2,938
     
 
Definite lived intangible assets
   
     
     
1,015
     
1,015
     
 
Property, plant, and equipment
   
     
     
2,449
     
2,449
     
7
 
Total 
 
$
   
$
   
$
6,650
   
$
6,650
   
$
7
 

 
 
As of September 29, 2018
 
 
 
Level 1
   
Level 2
   
Level 3
   
Total
   
Impairment
 
Indefinite-lived trademarks
 
$
   
$
   
$
248
   
$
248
   
$
 
Goodwill 
   
     
     
2,944
     
2,944
     
 
Definite lived intangible assets
   
     
     
1,092
     
1,092
     
 
Property, plant, and equipment
   
     
     
2,488
     
2,488
     
 
Total 
 
$
   
$
   
$
6,772
   
$
6,772
   
$
-
 

The Company's financial instruments consist primarily of cash and cash equivalents, long-term debt, interest rate and cross-currency swap agreements, foreign exchange forward contracts, and capital lease obligations.  The book value of our marketable long-term indebtedness exceeded fair value by $10 million as of March 30, 2019.  The Company's long-term debt fair values were determined using Level 2 inputs as other significant observable inputs were not available.  

10.  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 transitional impacts of the Tax Act resulted in a transition benefit of $95 million in the six month period ended March 31, 2018.
13

The effective tax rate was 23% for the quarterly period ended March 30, 2019 and was positively impacted by 4% from the share-based compensation excess tax benefit deduction, 1% from research and development credits, and other discrete items.  These favorable items were offset by increases of 4% from U.S. state income taxes, 2% from foreign valuation allowance, and other discrete items.

The effective tax rate was 22% for the two quarterly periods ended March 30, 2019 and was positively impacted by 3% from the share-based compensation excess tax benefit, 1% from research and development credits, and other discrete items.  These favorable items were partially offset by increases of 4% from U.S. state taxes, 2% from foreign valuation allowance, and other discrete items.

11.  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
   
Two Quarterly Periods Ended
 
 
 
March 30, 2019
   
March 31, 2018
   
March 30, 2019
   
March 31, 2018
 
Net sales:
                       
Engineered Materials  
 
$
628
   
$
655
   
$
1,297
   
$
1,303
 
Health, Hygiene & Specialties 
   
683
     
706
     
1,385
     
1,283
 
Consumer Packaging 
   
639
     
606
     
1,240
     
1,157
 
Total net sales 
 
$
1,950
   
$
1,967
   
$
3,922
   
$
3,743
 
Operating income:
                               
Engineered Materials 
 
$
74
   
$
94
   
$
168
   
$
182
 
Health, Hygiene & Specialties 
   
57
     
41
     
106
     
78
 
Consumer Packaging 
   
54
     
53
     
87
     
91
 
Total operating income
 
$
185
   
$
188
   
$
361
   
$
351
 
Depreciation and amortization:
                               
Engineered Materials 
 
$
29
   
$
27
   
$
60
   
$
56
 
Health, Hygiene & Specialties 
   
50
     
49
     
104
     
95
 
Consumer Packaging 
   
53
     
56
     
106
     
110
 
 Total depreciation and amortization
 
$
132
   
$
132
   
$
270
   
$
261
 

 
 
March 30, 2019
   
September 29, 2018
 
Total assets:
           
Engineered Materials 
 
$
1,997
   
$
1,998
 
Health, Hygiene & Specialties 
   
3,772
     
3,913
 
Consumer Packaging 
   
3,215
     
3,220
 
Total assets 
 
$
8,984
   
$
9,131
 
                 
Total goodwill:
               
Engineered Materials 
 
$
630
   
$
632
 
Health, Hygiene & Specialties 
   
899
     
902
 
Consumer Packaging 
   
1,409
     
1,410
 
Total goodwill
 
$
2,938
   
$
2,944
 

Selected information by geography is presented in the following tables:

 
Quarterly Period Ended
 
Two Quarterly Periods Ended
 
 
March 30, 2019
 
March 31, 2018
 
March 30, 2019
 
March 31, 2018
 
Net sales:
               
North America
 
$
1,595
   
$
1,601
   
$
3,200
   
$
3,067
 
South America
   
88
     
80
     
184
     
154
 
Europe
   
210
     
226
     
414
     
396
 
Asia
   
57
     
60
     
124
     
126
 
Total net sales
 
$
1,950
   
$
1,967
   
$
3,922
   
$
3,743
 

14

 
 
March 30, 2019
   
September 29, 2018
 
Long-lived assets:
           
North America 
 
$
5,653
   
$
5,764
 
South America 
   
327
     
320
 
Europe 
   
437
     
463
 
Asia 
   
300
     
299
 
Total Long-lived assets
 
$
6,717
   
$
6,846
 

Selected information by product line is presented in the following tables:

 
 
Quarterly Period Ended
   
Two Quarterly Periods Ended
 
   
March 30, 2019
   
March 31, 2018
   
March 30, 2019
   
March 31, 2018
 
Net sales:
                       
Performance Materials
   
40
     
45
     
39
     
46
 
Engineered Products
   
60
     
55
     
61
     
54
 
Engineered Materials
   
100
%
   
100
%
   
100
%
   
100
%
                                 
Health
   
17
     
18
     
17
     
19
 
Hygiene
   
51
     
43
     
52
     
43
 
Specialties
   
32
     
39
     
31
     
38
 
Health, Hygiene & Specialties
   
100
%
   
100
%
   
100
%
   
100
%
                                 
Rigid Open Top
   
43
     
41
     
44
     
42
 
Rigid Closed Top
   
57
     
59
     
56
     
58
 
Consumer Packaging
   
100
%
   
100
%
   
100
%
   
100
%

12.  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.
15

13.  Share Repurchase Program

In fiscal 2018, the Company announced a $500 million share repurchase program.  Berry may repurchase shares through the open market, privately negotiated transactions, or other programs, subject to market conditions.  This authorization has no expiration date and may be suspended at any time.

During the quarterly period ended March 30, 2019, the Company repurchased approximately 380 thousand shares for $18 million. For the two quarterly periods ended March 30, 2019, the Company repurchased approximately 1,512 thousand shares for $72 million. As of March 30, 2019, $393 million of authorized share repurchases remain available to the Company.

14.  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.   For the three and six months ended March 30, 2019, 2 million and 5 million shares, respectively, were excluded from the diluted net income per share calculation as their effect would be anti-dilutive.

The following tables provide a reconciliation of the numerator and denominator of the basic and diluted net income per share calculations.

 
 
Quarterly Period Ended
   
Two Quarterly Periods Ended
 
(in millions, except per share amounts)
 
March 30, 2019
   
March 31, 2018
   
March 30, 2019
   
March 31, 2018
 
Numerator
                       
Net income
 
$
74
   
$
90
   
$
162
   
$
253
 
Denominator
                               
Weighted average common shares outstanding - basic
   
130.5
     
131.3
     
130.8
     
131.0
 
Dilutive shares
   
3.3
     
4.5
     
3.1
     
4.9
 
Weighted average common and common equivalent shares outstanding - diluted
   
133.8
     
135.8
     
133.9
     
135.9
 
                                 
Per common share income
                               
Basic
 
$
0.57
   
$
0.69
   
$
1.24
   
$
1.93
 
Diluted
 
$
0.55
   
$
0.66
   
$
1.21
   
$
1.86
 

15.  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
   
Interest
Rate Swaps
   
Accumulated Other
Comprehensive
Loss
 
Balance at December 29, 2018
 
$
(179
)
 
$
(13
)
 
$
15
   
$
(177
)
Other comprehensive income (loss) before reclassifications 
   
6
     
     
(16
)
   
(10
)
Net amount reclassified from accumulated other comprehensive income (loss)  
   
     
     
(4
)
   
(4
)
Provision for income taxes
   
     
     
5
     
5
 
Balance at March 30, 2019
 
$
(173
)
 
$
(13
)
 
$
   
$
(186
)


   
Currency
Translation
   
Defined Benefit
Pension and Retiree
Health Benefit Plans
   
Interest
Rate Swaps
   
Accumulated Other
Comprehensive
Loss
 
Balance at December 30, 2017
 
$
(72
)
 
$
(17
)
 
$
9
   
$
(80
)
Other comprehensive income (loss) before reclassifications 
   
7
     
     
21
     
28
 
Net amount reclassified from accumulated other comprehensive income (loss)  
   
     
     
2
     
2
 
Provision for income taxes
   
     
     
(6
)
   
(6
)
Balance at March 31, 2018
 
$
(65
)
 
$
(17
)
 
$
26
   
$
(56
)

16

Two Quarterly Periods Ended
 
Currency
Translation
   
Defined Benefit
Pension and Retiree
Health Benefit Plans
   
Interest
Rate Swaps
   
Accumulated Other
Comprehensive
Loss
 
Balance at September 29, 2018
 
$
(175
)
 
$
(13
)
 
$
32
   
$
(156
)
Other comprehensive income (loss) before reclassifications 
   
2
     
     
(38
)
   
(36
)
Net amount reclassified from accumulated other comprehensive income (loss)  
   
     
     
(5
)
   
(5
)
Provision for income taxes
   
     
     
11
     
11
 
Balance at March 30, 2019
 
$
(173
)
 
$
(13
)
 
$
   
$
(186
)

   
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 
   
(17
)
   
(1
)
   
35
     
17
 
Net amount reclassified from accumulated other comprehensive income (loss)  
   
     
     
6
     
6
 
Provision for income taxes
   
     
     
(11
)
   
(11
)
Balance at March 31, 2018
 
$
(65
)
 
$
(17
)
 
$
26
   
$
(56
)

16.  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.
17

Condensed Supplemental Consolidated Balance Sheet

 
 
March 30, 2019
 
 
 
Parent
   
Issuer
   
Guarantor
Subsidiaries
   
Non-
Guarantor
Subsidiaries
   
Eliminations
   
Total
 
Current assets
 
$
   
$
258
   
$
1,255
   
$
754
   
$
   
$
2,267
 
Intercompany receivable
   
225
     
1,867
     
     
12
     
(2,104
)
   
 
Property, plant, and equipment, net
   
     
79
     
1,659
     
711
     
     
2,449
 
Other assets
   
1,675
     
6,376
     
4,776
     
479
     
(9,038
)
   
4,268
 
Total assets
 
$
1,900
   
$
8,580
   
$
7,690
   
$
1,956
   
$
(11,142
)
 
$
8,984
 
 
                                               
Current liabilities
 
$
12
   
$
264
   
$
581
   
$
270
   
$
   
$
1,127
 
Intercompany payable
   
     
     
2,104
     
     
(2,104
)
   
 
Other long-term liabilities
   
357
     
5,851
     
59
     
59
     
     
6,326
 
Stockholders' equity
   
1,531
     
2,465
     
4,946
     
1,627
     
(9,038
)
   
1,531
 
Total liabilities and stockholders' equity
 
$
1,900
   
$
8,580
   
$
7,690
   
$
1,956
   
$
(11,142
)
 
$
8,984
 

 
 
September 29, 2018
 
 
 
Parent
   
Issuer
   
Guarantor
Subsidiaries
   
Non-
Guarantor
Subsidiaries
   
Eliminations
   
Total
 
Current assets
 
$
   
$
249
   
$
1,240
   
$
796
   
$
   
$
2,285
 
Intercompany receivable
   
296
     
1,907
     
     
49
     
(2,252
)
   
 
Property, plant and equipment, net
   
     
79
     
1,684
     
725
     
     
2,488
 
 Other assets
   
1,544
     
6,247
     
4,849
     
487
     
(8,769
)
   
4,358
 
 Total assets
 
$
1,840
   
$
8,482
   
$
7,773
   
$
2,057
   
$
(11,021
)
 
$
9,131