BERRY GLOBAL GROUP, INC. - Annual Report: 2016 (Form 10-K)

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended October 1, 2016

Commission File Number 001-35672

BERRY PLASTICS GROUP, INC.

  

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

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes No    

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  YesNo   

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 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   No 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. 

 

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): 

 

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 

The aggregate market value of the common stock of the registrant held by non-affiliates was approximately $4.4 billion as of April 2, 2016, the last business day of the registrant's most recently completed second fiscal quarter.  This amount excludes shares of the registrant's common stock held by current executive officers, directors, and affiliates whose ownership did not exceed 5% as of such date. The aggregate market value was computed using the $36.53 closing price per share for such stock on the New York Stock Exchange on such date. 

Portions of Berry Plastics Group, Inc.'s Proxy Statement for its 2017 Annual Meeting of Stockholders are incorporated by reference into Part III of this report.

CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS

This Form 10-K 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, 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-K.

 

All forward-looking information and subsequent written and oral forward-looking statements attributable to us, or to persons acting on our behalf, are expressly qualified in their entirety by the cautionary statements.  Some of the factors that we believe could affect our results include:

 

●	risks associated with our substantial indebtedness and debt service;

 

●	changes in prices and availability of resin and other raw materials and our ability to pass on changes in raw material prices on a timely basis;

 

●	performance of our business and future operating results;

 

●

risks related to acquisitions and integration of acquired businesses, such as the potential inability to realize the intended benefits of the acquisitions, and the potential inability to realize the anticipated cost synergies in the anticipated amounts or within the contemplated timeframes or cost expectations, or at all;

●	reliance on unpatented proprietary know-how and trade secrets;

 

●	increases in the cost of compliance with laws and regulations, including environmental, safety, production and product laws and regulations;

 

●	risks related to disruptions in the overall economy and the financial markets that may adversely impact our business;

 

●	risks of catastrophic loss of one of our key manufacturing facilities, natural disasters, and other unplanned business interruptions;

●	risks related to market acceptance of our developing technologies and products;

●	general business and economic conditions, including but not limited to change in interest rates, foreign currency translation rates, consumer confidence, trends in disposable income, changes in consumer demand for goods, and cyclical or other downturns;

●	ability of our insurance to fully cover potential exposures;

●	risks that our restructuring programs may entail greater costs or result in lower savings than anticipated;

 

●	risks of competition, including foreign competition, in our existing and future markets; and

 

●	the other factors discussed in the section titled "Risk Factors."

 

We caution readers that the foregoing list of important factors may not contain all of the material factors that are important to you.  In addition, in light of these risks and uncertainties, the matters referred to in the forward-looking statements contained in this Form 10-K may not in fact occur.  Accordingly, investors should not place undue reliance on those statements.  We undertake no obligation to publicly update or revise any forward-looking statement as a result of new information, future events or otherwise, except as otherwise required by law.

TABLE OF CONTENTS

FORM 10-K FOR THE FISCAL YEAR ENDED OCTOBER 1, 2016

Item 1.

BUSINESS

(In millions of dollars, except as otherwise noted)

 

General

 

Berry Plastics Group, Inc. ("Berry," "we," or the "Company") is a leading provider of value-added plastic consumer packaging, nonwoven specialty materials and engineered materials with a track record of delivering high-quality customized solutions to our customers. Representative examples of our products include closures, prescription vials, specialty films, adhesives, nonwovens, drink cups, containers, and bottles.  We sell our products predominantly into stable, consumer-oriented end-markets, such as healthcare, personal care, and food and beverage.

 

Our customers consist of a diverse mix of leading global, national, mid-sized regional and local specialty businesses.  The size and scope of our customer network allows us to introduce new products we develop or acquire to a vast audience that is familiar with our business.  In fiscal 2016, no single customer represented more than 5% of net sales and our top ten customers represented 19% of net sales.  We believe our manufacturing processes and our ability to leverage our scale to reduce expenses positions us as a low-cost manufacturer relative to our competitors.

 

In November 2015, the Company reorganized into three operating segments: Health, Hygiene & Specialties, Consumer Packaging, and Engineered Materials.  The new structure is designed to align us with our customers, provide improved service, drive future growth and to facilitate future cost saving synergies. The Consumer Packaging segment primarily consists of containers, foodservice items, closures, overcaps, bottles, prescription vials, tubes, and printed films.  The Health, Hygiene & Specialties segment primarily consists of nonwoven specialty materials used in hygiene, infection prevention, personal care, industrial, construction, and filtration applications.  The Company included 100% of the acquired Avintiv business in the Health, Hygiene & Specialties segment in order to maintain management continuity and limit business integration risk. The Engineered Materials segment primarily consists of pipeline corrosion protection solutions, tapes and adhesives, polyethylene based film products, can liners, and specialty coated and laminated products.  The Company has recast all prior period amounts to conform to this new reporting structure. Additional financial information about our business segments is provided in "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the "Notes to Consolidated Financial Statements," which are included elsewhere in this Form 10-K.

 

Recent Acquisitions

  

AVINTIV Inc.

 

In October 2015, the Company acquired 100% of the capital stock of AVINTIV Inc. ("Avintiv") for a purchase price of $2.26 billion, net of cash acquired.  Avintiv was one of the world's leading developers, producers, and marketers of nonwoven specialty materials used in hygiene, infection prevention, personal care, industrial, construction, and filtration applications.  With 23 locations in 14 countries, an employee base of over 4,500 people as of the acquisition date, the broadest range of process technologies in the nonwoven industry, and strategically located manufacturing facilities, Avintiv was positioned as a global supplier to many of the same leading consumer and industrial product manufacturers as Berry's existing business.  To finance the purchase, the Company issued $400 million aggregate principal amount of 6.0% second priority senior secured notes due 2022 and entered into an incremental assumption agreement to increase the commitments under the Company's existing term loan credit agreement by $2.1 billion due 2022.  The results of Avintiv have been included in the consolidated results of the Company since the date of the acquisition.

Providência Non-Controlling Interest

 

At the time of our Avintiv acquisition, Avintiv owned a 71.25% controlling interest in Providência, their Brazilian subsidiary.  In the January 2, 2016 quarter, the Company acquired the remaining 28.75% non-controlling ownership interest of Providência for $66 million.  As a result of this transaction, Providência became a wholly-owned subsidiary and the Company recorded $3 million to Additional paid-in capital.

 

AEP Industries Inc.

 

In August, 2016, the Company entered into a definitive merger agreement to acquire all of the outstanding shares of AEP Industries Inc. ("AEP") in a cash and stock merger transaction (the "AEP Transaction") for an estimated aggregate consideration to stockholders of AEP of approximately $294 million in cash and 6.7 million shares of common stock of the Company.  An all-cash transaction would imply a purchase price of approximately $735 million, including the assumption of approximately $147 million of net debt as of July 31, 2016.  AEP manufactures and markets an extensive and diverse line of polyethylene and polyvinyl chloride flexible plastic packaging products with consumer, industrial, and agricultural applications.  AEP's flexible plastic packaging films are used in the packaging, transportation, beverage, food, automotive, pharmaceutical, chemical, electronics, and textile industries.  Consummation of the merger is subject to customary regulatory approvals and approval by AEP stockholders.  AEP reported $1.1 billion of net sales for its fiscal year ended October 31, 2015, and will be operated within the Engineered Materials segment upon completion of the transaction.  The Company expects to realize annual cost synergies of approximately $50 million from the AEP Transaction.

 

Recent Developments

Term Loans

In June 2016, the Company entered into an incremental assumption agreement and amendment to lower the interest rates under certain of the existing term loans.  The term loan maturing in January 2021 bears interest at LIBOR plus 2.50% per annum with a LIBOR floor of 1.00%.  The term loan maturing in October 2022 bears interest at LIBOR plus 2.75% per annum with a LIBOR floor of 1.00%. Additionally, if the Company is able to achieve a net first lien secured leverage ratio below 3.0 to 1.0, the interest rate on the term loan maturing in October 2022 will be reduced to LIBOR plus 2.50%. All other terms remain unchanged.  The term loans are considered to be a loan syndication and as a result, a portion of the existing term loans were modified and a portion were considered to be extinguished.  The Company recorded $4 million to loss on debt extinguishment, reflecting the write-off of deferred financing fees and debt discounts, net of amortization associated with the portion of the debt that was considered extinguished.  The Company also capitalized an incremental $2 million of debt discount related to this assumption agreement.

 

Segment Overview

 

Consumer Packaging

 

Our Consumer Packaging segment primarily consists of the following product groups:

 

Containers.  We manufacture a collection of nationally branded container products which range from four ounces to five gallons and are offered in various styles with accompanying lids, bails and handles, as well as a wide array of decorating options.

 

Foodservice.  We believe we are one of the largest providers of large size thermoformed polypropylene ("PP") and injection-molded plastic drink cups and lids in the United States.  We manufacture plastic cups for both hot and cold applications that range in size from 12 to 64 ounces, primarily for quick service and family dining restaurants, convenience stores, stadiums, and retail stores.

 

Closures and Overcaps.  We believe we are a leading producer of closures and overcaps across several of our product lines, including continuous-thread and child-resistant closures, as well as aerosol overcaps.  We sell our closures into numerous end markets, including household chemical, healthcare, food and beverage, and personal care.

 

Bottles and Prescription Vials.  Our bottle and prescription vial businesses target markets are similar to our closure business.  We believe we are a leader in various food and beverage, vitamin and nutritional, and prescription vial markets.

 

Tubes.  We offer a complete line of extruded and laminate tubes in a wide variety of sizes. We believe we are one of the largest suppliers of extruded plastic squeeze tubes in the United States.  The majority of our tubes are sold in the personal care market, but we also sell our tubes in the pharmaceutical and household chemical markets.

 

Food and Consumer Films.  We are a converter of printed bags, pouches, and rollstock. We believe we are a leading supplier of printed film products for the fresh bakery, tortilla, and frozen vegetable markets.  We also manufacture barrier films used for cereal, cookie, cracker and dry mix packages that are sold directly to food manufacturers.

Engineered Materials

 

The Engineered Materials business primarily includes the following product groups:

 

Tape Products.  We believe we are a leading North American manufacturer of cloth and foil tape products. Other tape products include high-quality, high-performance liners of splicing and laminating tapes, flame-retardant tapes, vinyl-coated and carton sealing tapes, electrical, double-faced cloth, masking, mounting, OEM, and medical and specialty tapes.  Tape products are sold primarily through distributors and directly to end users for industrial, HVAC, automotive, construction, and retail market applications.

 

Retail Bags.  We sell a diversified portfolio of polyethylene based film products to end users in the retail markets. Our products include drop cloths and retail trash bags. These products are sold primarily through wholesale outlets, hardware stores and home centers, paint stores, and mass merchandisers.

 

PVC Films.  We believe we are a significant manufacturer of polyvinyl chloride ("PVC") films offering a broad array of PVC meat film.  Our products are used primarily to wrap fresh meats, poultry, and produce for supermarket applications.  In addition, we offer a line of boxed products for food service and retail sales.  We service many of the leading supermarket chains, club stores, and wholesalers.

 

Institutional Can Liners.  We sell trash-can liners and food bags for offices, restaurants, schools, hospitals, hotels, municipalities, and manufacturing facilities.

 

Stretch and Shrink Films.  We manufacture both hand and machine-wrap stretch films and custom shrink films, which are used to prepare products and packages for storage and shipping.  We sell stretch and shrink film products to a diverse mix of end users.

 

Converter Films.  We manufacture specialty coated and laminated products for a wide variety of packaging applications as well as a wide range of highly specialized, made-to-order film products. The key end markets and applications for our products include healthcare, industrial and military pouches, roll wrap, multi-wall bags, and fiber drum packaging.

Corrosion Protection Products.  We believe we are a leading global producer of anti-corrosion products to infrastructure, rehabilitation and new pipeline projects throughout the world. These products are used in oil, gas, and water supply and construction applications.  Our customers primarily include contractors managing discrete construction projects around the world as well as distributors and applicators.

 

Health, Hygiene & Specialties

 

The Health, Hygiene & Specialties segment is organized by geographic region as follows:

 

North America.  We manufacture a broad collection products including baby diaper components, feminine hygiene products, substrates for dryer sheets, medical garments materials, household cleaning wipes, filters and protective house wrap.  We sell our products into numerous end markets including personal care, infection prevention, and industrial, construction and filtration applications.

 

South America.  We sell components for baby diapers, feminine hygiene, specialty agriculture and industrial products.  The key end markets and application for our products include personal care, hygiene and agriculture.

 

Europe.  We manufacture a broad array of products and components of products for cable wrap, baby diapers, geosynthetics, adult incontinence, surgical drapes, face masks and specialty filtration products servicing the personal care, infection prevention, hygiene, and specialty industrial markets.

 

Asia.  We manufacture a wide range of products for baby diapers and food service predominately serving the global healthcare, personal care and food markets.

Marketing, Sales, and Competition

 

We reach our large and diversified customer base through a direct sales force of dedicated professionals and the strategic use of distributors.  Our sales, production and support staff meet with customers to understand their needs and improve our product offerings and services.  Our scale enables us to dedicate certain sales and marketing efforts to particular products or customers, when applicable, which enables us to develop expertise that we believe is valued by our customers.  In addition, because we serve common customers across segments, we have the ability to efficiently utilize our sales and marketing resources to minimize costs.

 

The major markets in which the Company sells its products are highly competitive.  Areas of competition include service, innovation, quality, and price.  This competition is significant as to both the size and the number of competing firms.  Competitors include but are not limited to Silgan, Aptar, Reynolds, Intertape, 3M, Clopay, Tredegar, Bemis, Avgol, and Fitesa.

 

Research, Product Development and Design

 

We believe our technology base and research and development support are among the best in the industries we serve.  Many of our customers work in partnership with our technical representatives to develop new, more competitive products.  Our design professionals work directly with our customers to develop new styles and use computer-generated graphics to enable our customers to visualize the finished product.  Expenditures for research and development activities were $48 million, $33 million, and $32 million in fiscal 2016, 2015 and 2014, respectively.

 

Raw Materials

 

Our primary raw material is plastic resin.  In addition, we use butyl rubber, tackifying resins, chemicals and adhesives, paper and packaging materials, linerboard, rayon, polyester fiber, and foil, in various manufacturing processes.  These raw materials are available from multiple sources and in general we purchase from a variety of global suppliers.  In certain regions we may source specific raw materials from a limited number of suppliers or on a sole-source basis.  While temporary shortages of raw materials can occur, we expect to continue to successfully manage raw material supplies without significant supply interruptions.

Employees

 

As of the end of the 2016 fiscal year, we employed approximately 21,000 employees with approximately 20% of those employees being covered by collective bargaining agreements.  The collective bargaining agreements covering a majority of these employees renew annually and as a result, are due for renegotiation in fiscal 2017.  Our relations with employees under collective bargaining agreements remain satisfactory and there have been no significant work stoppages or other labor disputes during the past three years.

 

Patents, Trademarks and Other Intellectual Property

 

We customarily seek patent and trademark protection for our products and brands while seeking to protect our proprietary know-how.  While important to our business in the aggregate, sales of any one individually patented product are not considered material to any specific segment or the consolidated results.

 

Environmental Matters and Government Regulation

 

Our past and present operations and our past and present ownership and operations of real property are subject to extensive and changing federal, state, local, and foreign environmental laws and regulations pertaining to the discharge of materials into the environment, handling and disposition of waste, and cleanup of contaminated soil and ground water, or otherwise relating to the protection of the environment. We believe that we are in substantial compliance with applicable environmental laws and regulations. However, we cannot predict with any certainty that we will not in the future incur liability with respect to noncompliance with environmental laws and regulations, contamination of sites formerly or currently owned or operated by us (including contamination caused by prior owners and operators of such sites) or the off-site disposal of regulated materials, which could be material.

 

We may from time to time be required to conduct remediation of releases of regulated materials at our owned or operated facilities. None of our pending remediation projects are expected to result in material costs. Like any manufacturer, we are also subject to the possibility that we may receive notices of potential liability in connection with materials that were sent to third-party recycling, treatment, and/or disposal facilities under the Federal Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended ("CERCLA"), and comparable state statutes, which impose liability for investigation and remediation of contamination without regard to fault or the legality of the conduct that contributed to the contamination, and for damages to natural resources. Liability under CERCLA is retroactive, and, under certain circumstances, liability for the entire cost of a cleanup can be imposed on any responsible party. We are not aware that any such notices are currently pending which are expected to result in material costs.

 

The Food and Drug Administration ("FDA") regulates the material content of direct-contact food and drug packages, including certain packages we manufacture pursuant to the Federal Food, Drug and Cosmetics Act. Certain of our products are also regulated by the Consumer Product Safety Commission ("CPSC") pursuant to various federal laws, including the Consumer Product Safety Act and the Poison Prevention Packaging Act. Both the FDA and the CPSC can require the manufacturer of defective products to repurchase or recall such products and may also impose fines or penalties on the manufacturer. Similar laws exist in some states, cities and other countries in which we sell our products. In addition, laws exist in certain states restricting the sale of packaging with certain levels of heavy metals, imposing fines and penalties for noncompliance. Although we believe that we use FDA approved resins and pigments in our products that directly contact food and drug products, and we believe our products are in material compliance with all applicable requirements, we remain subject to the risk that our products could be found not to be in compliance with such requirements.

 

The plastics industry, including us, is subject to existing and potential federal, state, local and foreign legislation designed to reduce solid waste by requiring, among other things, plastics to be degradable in landfills, minimum levels of recycled content, various recycling requirements, disposal fees, and limits on the use of plastic products. In particular, certain states have enacted legislation requiring products packaged in plastic containers to comply with standards intended to encourage recycling and increased use of recycled materials. In addition, various consumer and special interest groups have lobbied from time to time for the implementation of these and other similar measures. We believe that the legislation promulgated to date and such initiatives to date have not had a material adverse effect on us. There can be no assurance that any such future legislative or regulatory efforts or future initiatives would not have a material adverse effect on us.

 

Available Information

 

We make available, free of charge, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments, if any, to those reports through our internet website as soon as practicable after they have been electronically filed with the SEC.  Our internet address is www.berryplastics.com.  The information contained on our website is not being incorporated herein.

 

 

Item 1A.

RISK FACTORS

Our substantial indebtedness could affect our ability to meet our obligations and may otherwise restrict our activities.

We have a significant amount of indebtedness, which requires significant interest payments.  Our inability to generate sufficient cash flow to satisfy our debt obligations, or to refinance our obligations on commercially reasonable terms, would have a material adverse effect on our business, financial condition and results of operations.

Our substantial indebtedness could have important consequences.  For example, it could:



limit our ability to borrow money for our working capital, capital expenditures, debt service requirements or other corporate purposes;



increase our vulnerability to general adverse economic and industry conditions; and



limit our ability to respond to business opportunities, including growing our business through acquisitions.

In addition, the credit agreements and indentures governing our current indebtedness contain, and any future debt instruments would likely contain, financial and other restrictive covenants, which will impose significant operating and financial restrictions on us, including restrictions on our ability to, among other things, incur or guarantee additional debt; pay dividends and make other restricted payments; create or incur certain liens; make certain investments; engage in sales of assets and subsidiary stock; enter into transactions with affiliates; transfer all or substantially all of our assets or enter into merger or consolidation transactions; and make capital expenditures.

 

As a result of these covenants, we could be limited in the manner in which we conduct our business, and we may be unable to engage in favorable business activities or finance future operations or capital needs.  Furthermore, a failure to comply with these covenants could result in an event of default, which, if not cured or waived, could have a material adverse effect on our business, financial condition, and results of operations.

 

Increases in resin prices or a shortage of available resin could harm our financial condition and results of operations.

 

To produce our products, we use large quantities of plastic resins.  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. Over the past several years, we have at times experienced rapidly increasing resin prices. Historically, we have been able to successfully manage the impact of higher raw material costs by increasing our selling prices.  However, raw material inflation could materially and adversely affect our revenue and profitability in the short term as we attempt to pass through price increases to our customers and in the long term as our customers could seek alternative solutions. We may not be able to arrange for other sources of resin in the event of an industry-wide general shortage of resins used by us, or a shortage or discontinuation of certain types of grades of resin purchased from one or more of our suppliers.  Any such shortage may materially negatively impact our competitive position versus companies that are able to better or more cheaply source resin.

 

We may not be able to compete successfully and our customers may not continue to purchase our products.

 

We compete with multiple companies in each of our product lines on the basis of a number of considerations, including price, service, quality, product characteristics and the ability to supply products to customers in a timely manner.  Our products also compete with metal, glass, paper, cloth, and other materials.  Some of these competitive products are not subject to the impact of changes in resin prices, which may have a significant and negative impact on our competitive position versus substitute products.  Our competitors may have financial and other resources that are substantially greater than ours and may be better able than us to withstand higher costs.  Competition could result in our products losing market share or our having to reduce our prices, either of which could have a material adverse effect on our business, financial condition and results of operations.  In addition, since we do not have long-term arrangements with many of our customers, these competitive factors could cause our customers to shift suppliers and/or packaging material quickly.  Our success depends, in part, on our ability to respond timely to customer and market changes.

 

We may pursue and execute acquisitions, including the AEP Transaction, which could adversely affect our business.

 

As part of our growth strategy, we consider acquisitions that either complement or expand our existing business and create economic value.  We cannot assure you that we will be able to consummate any such transactions or that any future acquisitions will be consummated at acceptable prices and terms.  Acquired businesses may not achieve the levels of revenue, profit, productivity or otherwise perform as we expect.  Acquisitions involve special risks, including the potential assumption of unanticipated liabilities and contingencies as well as difficulties in integrating acquired businesses creating substantial costs, delays or other problems that could adversely affect our business, financial condition and results of operations.  Furthermore, we may not realize all of the synergies we expect to achieve from our current strategic initiatives due to a variety of risks.  If we are unable to achieve the synergies that we expect to achieve from our strategic initiatives, it could adversely affect our business, financial condition and results of operations.  Additionally, while we execute these acquisitions and related integration activities, it is possible that our attention may be diverted from our ongoing operations which may have a negative impact on our ongoing operations.

 

Current and future environmental and other governmental requirements could adversely affect our financial condition and our ability to conduct our business.

While we have not been required historically to make significant capital expenditures in order to comply with applicable environmental laws and regulations, we cannot predict with any certainty our future capital expenditure requirements because of continually changing compliance standards and environmental technology.  Furthermore, violations or contaminated sites that we do not know about (including contamination caused by prior owners and operators of such sites or newly discovered information) could result in additional compliance or remediation costs or other liabilities, which could be material.  We may also assume significant environmental liabilities in connection with acquisitions.  In addition, federal, state, local, and foreign governments could enact laws or regulations concerning environmental matters that increase the cost of producing, or otherwise adversely affect the demand for, plastic products.  Legislation that would prohibit, tax or restrict the sale or use of certain types of plastic and other containers, and would require diversion of solid waste such as packaging materials from disposal in landfills, has been or may be introduced in the U.S. Congress, state legislatures, and other legislative bodies.  Although we believe that any such laws promulgated to date have not had a material adverse effect on us, there can be no assurance that future legislation or regulation would not have a material adverse effect on us.  Furthermore, a decline in consumer preference for plastic products due to environmental considerations could have a negative effect on our business.

 

Both the FDA and the CPSC can require the manufacturer of defective products to repurchase or recall these products and may also impose fines or penalties on the manufacturer.  Similar laws exist in some states, cities and other countries in which we sell products.  In addition, laws exist in certain states restricting the sale of packaging with certain levels of heavy metals and imposing fines and penalties for noncompliance.  Although we believe we use FDA-approved resins and pigments in our products that directly contact food and drug products and we believe our products are in material compliance with all applicable requirements, we remain subject to the risk that our products could be found not to be in compliance with these and other requirements.  A recall of any of our products or any fines and penalties imposed in connection with noncompliance could have a materially adverse effect on us.  See "Business—Environmental Matters and Government Regulation."

 

In the event of a catastrophic loss of one of our key manufacturing facilities, our business would be adversely affected.

 

While we manufacture our products in a large number of diversified facilities and maintain insurance covering our facilities, including business interruption insurance, a catastrophic loss of the use of all or a portion of one of our key manufacturing facilities due to accident, labor issues, weather conditions, natural disaster or otherwise, whether short or long-term, could have a material adverse effect on us.

 

We depend on information technology systems and infrastructure to operate our business, system inadequacies or failures could harm our business.

 

We rely on the efficient and uninterrupted operation of information technology systems and networks.  These systems and networks are potentially vulnerable to damage or interruption from a variety of sources, including energy or telecommunications failures, breakdowns, natural disasters, terrorism, war, computer malware or other malicious intrusions, and random attacks.  To date, system interruptions have been infrequent and have not had a material impact on the business.  However, there can be no assurance that these efforts will prevent future interruptions that would have a material adverse effect on our business.

 

Goodwill and other intangibles represent a significant amount of our net worth, and a future write-off could result in lower reported net income and a reduction of our net worth.

 

We are required to evaluate goodwill and other indefinite lived intangible assets reflected on our balance sheet when circumstances indicate a potential impairment, or at least annually, under the impairment testing guidelines outlined in the standard.  Future changes in the market multiples, cost of capital, expected cash flows, or other factors may cause our goodwill to be impaired, resulting in a non-cash charge against results of operations to write off goodwill or indefinite lived intangible assets for the amount of impairment.  If a future write-off is required, the charge could have a material adverse effect on our consolidated net income in the period of any such write off.

 

Disruptions in the overall economy and the financial markets may adversely impact our business.

 

Our industry is affected by macroeconomic factors, including national, regional, and local economic conditions, employment levels, and shifts in consumer spending patterns.  Disruptions in the overall economy and volatility in the financial markets could reduce consumer confidence in the economy, negatively affecting consumer spending, which could be harmful to our financial position and results of operations.  In such event, decreased cash flow generated from our business may adversely affect our financial position and our ability to fund our operations.  In addition, major macroeconomic disruptions involving the financial markets could adversely affect our ability to access the credit markets and availability of financing for our operations.

 

We are a holding company and rely on dividends and other payments, advances and transfers of funds from our subsidiaries to meet our obligations and pay dividends.

 

Berry Plastics Group, Inc. has no direct operations and no significant assets other than ownership of 100% of the stock of Berry Plastics Corporation. Because Berry Plastics Group, Inc. conducts its operations through its subsidiaries, it depends on those entities for dividends and other payments to generate the funds necessary to meet its financial obligations, and to pay any dividends with respect to our common stock. Legal and contractual restrictions in the agreements governing current and future indebtedness of Berry Plastics Group, Inc.'s subsidiaries, as well as the financial condition and operating requirements of Berry Plastics Group, Inc.'s subsidiaries, may limit Berry Plastics Group, Inc.'s ability to obtain cash from its subsidiaries. The earnings from, or other available assets of, Berry Plastics Group, Inc.'s subsidiaries may not be sufficient to pay dividends or make distributions or loans to enable Berry Plastics Group, Inc. to pay dividends going forward.

 

Our international operations pose risks to our business that may not be present with our domestic operations.

 

We have expanded, and may continue to expand operations in foreign countries where we have an existing presence or enter new foreign markets and expect to increase sales of products as disposable income increases in developing markets. Foreign operations are subject to certain risks that are unique to doing business in foreign countries. These risks include fluctuations in foreign currency exchange rates, inflation, economic or political instability, shipping delays in both our products and receiving delays of raw materials, changes in applicable laws, including assessments of income and non-income related taxes, reduced protection of intellectual property and regulatory policies and various trade restrictions including potential changes to export taxes or countervailing and anti-dumping duties for exported products from these countries.  Any of these risks could have a negative impact on our ability to deliver products to customers on a competitive and timely basis. This could reduce or impair our net sales, profits, cash flows and financial position.  We are also subject to the Foreign Corrupt Practices Act and other anti-bribery laws that generally bar bribes or unreasonable gifts to foreign governments or officials. We have implemented safeguards and policies to discourage these practices by our employees and agents. However, our existing safeguards and policies to assure compliance and any future improvements may prove to be less than effective and our employees or agents may engage in conduct for which we might be held responsible. If employees violate our policies, we may be subject to regulatory sanctions. Violations of these laws or regulations could result in sanctions including fines, debarment from export privileges and penalties and could adversely affect our business, financial condition and results of operations.

 

We hold cash and cash equivalents at various foreign subsidiaries that may not be readily available to meet U.S. cash requirements.

 

Our various foreign subsidiaries hold cash and cash equivalents and these balances held outside the United States may not be readily available to meet our domestic cash requirements.  If we are unable to meet our U.S. cash requirements using cash flows from U.S. operations, cash and cash equivalents held in the U.S., or by settling loans receivable with our foreign subsidiaries, it may be necessary for us to consider repatriation of earnings held outside the U.S. This may require us to record additional income tax expense and remit additional taxes, which could have a material effect on our business, financial condition and results of operations.

We may not be successful in protecting our intellectual property rights, including our unpatented proprietary know-how and trade secrets, or in avoiding claims that we infringed on the intellectual property rights of others.

 

In addition to relying on patent and trademark rights, we rely on unpatented proprietary know-how and trade secrets, and employ various methods, including confidentiality agreements with employees and consultants, customers and suppliers to protect our know-how and trade secrets.  However, these methods and our patents and trademarks may not afford complete protection and there can be no assurance that others will not independently develop the know-how and trade secrets or develop better production methods than us.  Further, we may not be able to deter current and former employees, contractors and other parties from breaching agreements and misappropriating proprietary information and it is possible that third parties may copy or otherwise obtain and use our information and proprietary technology without authorization or otherwise infringe on our intellectual property rights.    Furthermore, no assurance can be given that we will not be subject to claims asserting the infringement of the intellectual property rights of third parties seeking damages, the payment of royalties or licensing fees and/or injunctions against the sale of our products.  Any such litigation could be protracted and costly and could have a material adverse effect on our business, financial condition and results of operations.

 

New and stricter legislation and regulations may affect our business and consolidated financial condition and results of operations.

 

Increased legislative and regulatory activity and burdens, and a more stringent manner in which they are applied (particularly in the U.S.), could significantly impact our business and the economy as a whole.  This includes, among other things, the possible taxation under U.S. law of certain income from foreign operations, compliance costs and enforcement under the Dodd-Frank Wall Street Reform and Consumer Protection Act, compliance costs and enforcement under the Sarbanes-Oxley Act, and costs associated with complying with the Patient Protection and Affordable Care Act and the regulations promulgated thereunder. Specifically, the Sarbanes-Oxley Act requires that we maintain effective disclosure controls and procedures and internal control over financial reporting.  Our independent public accountants auditing our financial statements are required to attest to the effectiveness of our internal control over financial reporting.  In order to continue to maintain the effectiveness of our disclosure controls and procedures and internal control over financial reporting significant resources and management oversight is required.

 

We may not be able to achieve cost savings as a result of our restructuring efforts and productivity and cost reduction initiatives.

 

 From time to time we enter into cost reduction plans designed to deliver cost savings and improve equipment utilization. Our ability to achieve the anticipated cost savings and other benefits from these initiatives within the expected time frame is subject to many estimates and assumptions. Additionally, there are many factors which affect our ability to achieve savings as a result of productivity and cost reduction initiatives, such as difficult economic conditions, increased costs in other areas, the effects of and costs related to newly acquired entities, mistaken assumptions, and the other risk factors set forth herein. In addition, any actual savings may be balanced by incremental costs that were not foreseen at the time of the restructuring or cost reduction initiatives. As a result, anticipated savings may not be achieved on the timetable desired or at all. Additionally, while we execute these restructuring activities to achieve these savings, it is possible that our attention may be diverted from our ongoing operations which may have a negative impact on our ongoing operations.

 

We have identified a material weakness in our internal control over financial reporting which could, if not remediated, result in material misstatements in our financial statements.

Berry Plastics Group, Inc.'s management is responsible for establishing and maintaining adequate internal controls over its financial reporting, as defined in Rule 13a-15(f) and 15d-15(f) under the Securities Exchange Act. As disclosed in Item 9A of Part II of this report, management identified a material weakness in its internal control over financial reporting related to the income tax provision process.  A material weakness is defined as a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis. As a result of this material weakness, Berry Plastics Group, Inc.'s management concluded that its internal control over financial reporting specifically related to income tax accounting was not effective as of the last day of the period covered by this report. Management is actively engaged in developing a remediation plan designed to address this material weakness. If the remedial measures are insufficient to address the material weakness or if additional material weaknesses or significant deficiencies in the internal control are discovered or occur in the future, the consolidated financial statements may contain material misstatements.

As we continue to grow and acquire businesses, including Avintiv, our processes and internal controls may become more complex and we may require significantly more resources to ensure they are designed and operating effectively.  Avinitv was not subject to the requirement to obtain an attestation report from its independent registered public accounting firm on the effectiveness of its internal control over financial reporting and Fiscal 2017 will be the first year that it is included in Berry's assessment of the effectiveness of our internal control over financial reporting.

If we fail to achieve and maintain effective internal control over financial reporting at a reasonable assurance level, we may not be able to accurately report our financial results, and may be required to restate previously published financial information which could have a material adverse effect on our operations, investor confidence in our business and the trading prices of our securities.

We are required to assess the effectiveness of our internal control over financial reporting annually, as required by Section 404 of the Sarbanes-Oxley Act.  We need to maintain our processes and systems and adapt them as our business grows and changes. This continuous process of maintaining and adapting our internal controls and complying with Section 404 is expensive, time-consuming and requires significant management attention. As we grow our business or acquire other businesses, our internal controls may become more complex and we may require significantly more resources.  The integration of acquired businesses into our internal control over financial reporting has required and will continue to require significant time and resources from our management and other personnel and will increase our compliance costs.  If we fail to achieve and maintain effective internal control over financial reporting at a reasonable assurance level, we may not be able to accurately report our financial results, and may be required to restate previously published financial information which could have a material adverse effect on our operations, investor confidence in our business and the trading prices of our securities.

The AEP Transaction may not be accretive, and may be dilutive, to Berry's earnings per share, which may negatively affect the market price of Berry common stock.

We currently expect that the AEP Transaction will be accretive to earnings per share by approximately 10% in the first full fiscal year after the transaction is completed, excluding non-recurring charges associated with transaction costs. This reflects anticipated annual cost synergies of $50 million or more. However, future events and conditions could be dilutive, including adverse changes in market conditions, additional transaction and integration related costs and other factors such as the failure to realize some or all of the benefits anticipated in the AEP Transaction. Any dilution of, or delay of any accretion to, our earnings per share could cause the price of shares of our common stock to decline or grow at a reduced rate.

The AEP Transaction is subject to conditions that may not be satisfied or completed on a timely basis, if at all; failure to complete the AEP Transaction could negatively impact our financial guidance, our stock price and our future business and financial results.

Completion of the AEP Transaction is subject to a number of conditions, each of which, unless waived, must be fulfilled in order to complete the transaction. The conditions to the closing of the transaction may not be fulfilled in a timely manner or at all, and, accordingly, the transaction may be delayed or may not be completed.  Although we expect to complete the AEP Transaction in early calendar 2017, the actual closing date will depend on the date of AEP stockholder approval and the satisfaction or waiver of each of the other applicable closing conditions.  Any delay in the completion of the AEP Transaction would defer our ability to realize the intended benefits of the AEP Transaction and would be expected to reduce our Adjusted free cash flow for fiscal year 2017 from the currently projected level.

There can be no assurance that the conditions to closing of the AEP Transaction will be satisfied or waived, that either Berry or AEP will exercise their limited termination rights described in the merger agreement, or that the AEP Transaction will be completed. If the AEP Transaction is not completed, the ongoing business of the Company could be adversely affected and the Company will be subject to a variety of risks associated with the failure to complete the transaction, including the following:

●	the market price of shares of our common stock could decline to the extent that the current market price reflects, and is positively affected by, a market assumption that the transactions contemplated by the merger agreement will be completed;

●	we may experience negative reactions from our customers, vendors and employees;

●	we will have incurred substantial expenses and will be required to pay certain costs relating to the AEP Transaction, whether or not the transaction is completed; and

●	the proposed transaction, whether or not it closes, will divert the attention of certain management and other key employees of the Company from ongoing business activities, including the pursuit of other opportunities that could be beneficial to the Company.

None

Item 2.

PROPERTIES

 

We lease or own our principal offices and manufacturing facilities.  We believe that our property and equipment is well-maintained, in good operating condition and adequate for our present needs.

 

Principal manufacturing facilities - United States - 76; China - 8, Mexico - 5, Canada - 4, France - 4, India - 3, Brazil - 3, The Netherlands – 2, Germany - 2, United Kingdom - 2, Australia, Malaysia, Argentina, Colombia, Italy, Belgium, and Spain.  The Evansville, Indiana facility serves as our world headquarters.

 

Leased facilities - Evansville, Indiana; Lawrence, Kansas; Phillipsburg, New Jersey; Bowling Green, Kentucky; Jackson, Tennessee; Anaheim, California; Cranbury, New Jersey; Easthampton, Massachusetts; Hanover, Maryland; Baltimore, Maryland; Westerloo, Belgium; Baroda, India; Louisville, Kentucky; Peosta, Iowa; Quad Cities, Iowa; Syracuse, New York; Phoenix, Arizona; Aurora, Illinois; Lathrop, California; Tacoma, Washington; Bloomington, Indiana; Chippewa Falls, Wisconsin; Orillia, Canada; Mexico City, Mexico; Preston, Australia; Johor, Malaysia; Pewaukee, Wisconsin; Smyrna, Tennessee; Des Moines, Iowa; Milwaukee, Wisconsin; Schaumburg, Illinois; Washington, New Jersey; Tlalnepantla, Mexico; Aberdare, United Kingdom; Maldon, United Kingdom; Berlin, Germany.

 

Item 3.

LEGAL PROCEEDINGS

 

Berry is party to various legal proceedings involving routine claims which are incidental to our business. Although our legal and financial liability with respect to such proceedings cannot be estimated with certainty, we believe that any ultimate liability would not be material to the business, financial condition, results of operations or cash flows.

 

Item 4.

MINE SAFETY DISCLOSURES

 

Not applicable.

PART II

 

Item 5.

MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER

 

Our common stock is listed on the New York Stock Exchange under the symbol "BERY".  The following table sets forth, for the periods indicated, the high and low sales prices per share of our common stock reported on the New York Stock Exchange.

 

 

As of the date of this filing there were fewer than 500 active record holders of the common stock, but we estimate the number of beneficial stockholders to be much higher as a number of our shares are held by brokers or dealers for their customers in street name.

 

During fiscal 2015 and 2016 we did not declare or pay any cash dividends on our common stock. Any future determination as to the declaration and payment of dividends, if any, will depend on then existing conditions, contractual requirements and other factors our board of directors may deem relevant.  Our debt instruments and agreements contain covenants that may restrict our ability to pay dividends on our common stock, as well as the ability of our subsidiaries to pay dividends to us.

 

Item 6.

SELECTED FINANCIAL DATA

 

 

Item 7.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion should be read in conjunction with the consolidated financial statements of Berry Plastics Group, Inc. and its subsidiaries and the accompanying notes thereto, which information is included elsewhere herein.  This discussion contains forward-looking statements and involves numerous risks and uncertainties, including, but not limited to, those described in the "Risk Factors" section.  Our actual results may differ materially from those contained in any forward-looking statements.  Segment level discussion of the results is disclosed in a manner consistent with the organization structure at the end of the presented period.

 

Overview

 

Berry Plastics Group, Inc. ("Berry," "we," or the "Company") is a leading provider of value-added plastic consumer packaging, nonwoven specialty materials and engineered materials with a track record of delivering high-quality customized solutions to our customers.  Representative examples of our products include closures, prescription vials, specialty films, adhesives, nonwovens, drink cups, containers, and bottles. We sell our products predominantly into stable, consumer-oriented end-markets, such as healthcare, personal care, and food and beverage.

 

Our customers consist of a diverse mix of leading global, national, mid-sized regional and local specialty businesses.  The size and scope of our customer network allows us to introduce new products we develop or acquire to a vast audience that is familiar with our business.  In fiscal 2016, no single customer represented more than 5% of net sales and our top ten customers represented 19% of net sales.  We believe our manufacturing processes and our ability to leverage our scale to reduce expenses positions us as a low-cost manufacturer relative to our competitors.

Executive Summary

 

Business.  In November 2015, the Company reorganized into three operating segments: Health, Hygiene & Specialties, Consumer Packaging, and Engineered Materials.  The new structure is designed to align us with our customers, provide improved service, drive future growth and to facilitate future cost saving synergies. The Consumer Packaging segment primarily consists of containers, foodservice items, closures, overcaps, bottles, prescription vials, tubes, and printed films.  The Health, Hygiene & Specialties segment primarily consists of nonwoven specialty materials used in hygiene, infection prevention, personal care, industrial, construction, and filtration applications.  The Company included 100% of the acquired Avintiv business in the Health, Hygiene & Specialties segment in order to maintain management continuity and limit business integration risk. The Engineered Materials segment primarily consists of pipeline corrosion protection solutions, tapes and adhesives, polyethylene based film products, can liners, and specialty coated and laminated products.  The Company has recast all prior period amounts to conform to this new reporting structure.

Raw Material Trends.  Our primary raw material is plastic resin.  Polypropylene and polyethylene account for approximately 90% of our plastic resin 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 price per pound, as published by market indexes, were as follows:

 

 

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 in the short term 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.  Historically, there has been a very tight correlation between oil prices and the cost of our key raw materials, polyethylene and polypropylene.  During fiscal 2016, capacity expansions in polyethylene in North America have benefited the Company.  Overall, we continue to believe that these current trends in global oil and resin markets will be positive for the Company.  We believe the fiscal 2017 volume environment in the markets we serve will remain consistent with fiscal 2016 which will be partially offset by one less week of operations in fiscal 2017 compared to fiscal 2016.  Additionally, we believe there are growth opportunities within the health, pharmaceuticals, personal care and food packaging markets existing outside of North America, especially in Asia, where expected per capita consumption increases should result in organic market growth.  For fiscal 2017, we project cash flow from operations and adjusted free cash flow of $925 million and $550 million, respectively, assuming the AEP Transaction is completed on February 1, 2017.  These estimates assume $80 million of tax payments, $60 million of business integration costs, constant currency rates, no impact to working capital, and no change in short term interest rates.  The AEP Transaction is subject to a number of closing conditions, and may not be completed as of such time or at all.  The $550 million of adjusted free cash flow includes $315 million of additions to property, plant and equipment and $60 million of payments under our tax receivable agreement.  For the definition of Adjusted free cash flow and further information related to Adjusted free cash flow as a non-GAAP financial measure, see "Liquidity and Capital Resources."

 

Recent Developments

 

Term Loans

In June 2016, the Company entered into an incremental assumption agreement and amendment to lower the interest rates under certain of the existing term loans.  The term loan maturing in January 2021 now bears interest at LIBOR plus 2.50% per annum with a LIBOR floor of 1.00%.  The term loan maturing in October 2022 now bears interest at LIBOR plus 2.75% per annum with a LIBOR floor of 1.00%. Additionally, if the Company is able to achieve a net first lien secured leverage ratio below 3.0 to 1.0, the interest rate on the term loan maturing in October 2022 will be reduced to LIBOR plus 2.50%. All other terms remain unchanged.  The term loans are considered to be a loan syndication and as a result, a portion of the existing term loans were modified and a portion were considered to be extinguished.  The Company recorded $4 million to loss on debt extinguishment, reflecting the write-off of deferred financing fees and debt discounts, net of amortization associated with the portion of the debt that was considered extinguished.  The Company also capitalized an incremental $2 million of debt discount related to this assumption agreement.

 

Recent Acquisitions

 

Our acquisition strategy is focused on improving our long-term financial performance, enhancing our market positions, and expanding our existing and complementary product lines. We seek to obtain businesses for attractive post-synergy multiples, creating value for our stockholders from synergy realization, leveraging the acquired products across our customer base, creating new platforms for future growth, and assuming best practices from the businesses we acquire. 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.

 

 

In fiscal 2014, the Company completed 3 acquisitions which included the Rexam Healthcare Containers and Closures business ("C&C") for a purchase price of $133 million, net of cash acquired, Graphic Flexible Packaging LLC's flexible plastics and films business for a purchase price of $61 million, net of cash acquired, and a controlling interest (75%) in Qingdao P&B Co., Ltd. for a purchase price of $35 million, net of cash acquired. The Company acquired the remaining non-controlling interest in fiscal 2016.

 

 

AVINTIV Inc.

 

In October 2015, the Company acquired 100% of the capital stock of AVINTIV Inc. ("Avintiv") for a purchase price of $2.26 billion, net of cash acquired.  Avintiv was one of the world's leading developers, producers, and marketers of nonwoven specialty materials used in hygiene, infection prevention, personal care, industrial, construction, and filtration applications.  With 23 locations in 14 countries, an employee base of over 4,500 people, the broadest range of process technologies in the nonwoven industry, and strategically located manufacturing facilities, Avintiv was positioned as a global supplier to many of the same leading consumer and industrial product manufacturers as Berry's existing business.  To finance the purchase, the Company issued $400 million aggregate principal amount of 6.0% second priority senior secured notes due 2022 and entered into an incremental assumption agreement to increase the commitments under the Company's existing term loan credit agreement by $2.1 billion due 2022.  The results of Avintiv have been included in the consolidated results of the Company since the date of the acquisition.

Providência Non-Controlling Interest

 

At the time of our Avintiv acquisition, Avintiv owned a 71.25% controlling interest in Providência, their Brazilian subsidiary.  In the January 2, 2016 quarter, the Company acquired the remaining 28.75% non-controlling ownership interest of Providência for $66 million.  As a result of this transaction, Providência became a wholly-owned subsidiary, and the Company recorded $3 million to Additional paid-in capital.

Recent Developments

AEP Industries Inc.

 

In August, 2016, the Company entered into a definitive merger agreement to acquire all of the outstanding shares of AEP Industries Inc. ("AEP") in a cash and stock merger transaction (the "AEP Transaction") for an estimated aggregate consideration to stockholders of AEP of approximately $294 million in cash and 6.7 million shares of common stock of the Company.  An all-cash transaction would imply a purchase price of approximately $735 million, including the assumption of approximately $147 million of net debt as of July 31, 2016.  AEP manufactures and markets an extensive and diverse line of polyethylene and polyvinyl chloride flexible plastic packaging products with consumer, industrial, and agricultural applications.  AEP's flexible plastic packaging films are used in the packaging, transportation, beverage, food, automotive, pharmaceutical, chemical, electronics, and textile industries.  Consummation of the merger is subject to customary regulatory approvals and approval by AEP stockholders.  AEP reported $1.1 billion of net sales for its fiscal year ended October 31, 2015, and will be operated within the Engineered Materials segment upon completion of the transaction.  The Company expects to realize annual cost synergies of approximately $50 million from the AEP Transaction.

 

Discussion of Results of Operations for Fiscal 2016 Compared to Fiscal 2015

Consistent with historical presentation, acquisition (businesses acquired in the last twelve months) sales and operating income disclosed within this section represents the historical results from acquisitions for the comparable prior year period.  The remaining change disclosed represents the changes from the prior period on a combined basis.  Business integration expenses consist of restructuring and impairment charges, manufacturing inefficiencies associated with cost reduction plans, major innovation start-up and other business optimization costs.  The Company's fiscal year is based on fifty-two or fifty-three week periods.  Fiscal 2016 is a fifty-three week period and Fiscal 2015 was a fifty-two week period.  Tables present dollars in millions.

 

The net sales increase of $1,608 million from fiscal 2015 is primarily attributed to acquisition net sales of $1,935 million, partially offset by a $237 million decline in selling prices due to the pass through of lower raw material costs, a negative $29 million impact from a less than 1% base volume decline, and a $61 million negative impact from foreign currency changes.

 

The operating income increase of $173 million from fiscal 2015 is primarily attributed to a $117 million improvement in our product mix and price/cost spread including contribution from sourcing synergies, acquisition operating income of $118 million, and $10 million from net productivity improvements in manufacturing.  These improvements were partially offset by a $55 million increase in depreciation and amortization expense primarily related to purchase accounting adjustments associated with the Avintiv acquisition, a $12 million negative impact from foreign currency changes, a $6 million impact from the less than 1% base volume declines, and a slight increase in selling, general and administrative expenses.

 

 

Net sales in the Consumer Packaging segment decreased by $102 million from fiscal 2015 primarily attributed to selling price decreases of $100 million due to the pass through of lower resin prices.  Increased shipping days in the first quarter had approximately 2.0% favorable impact on volumes partially offset by product light-weighting, product redesign and softer consumer packaged food demand.

 

The operating income decrease of $4 million from fiscal 2015 is primarily attributed to a $17 million increase in selling, general and administrative expenses primarily attributed to increased shipping days in the first quarter and higher accrued performance-based bonus expense, a $23 million increase in depreciation and amortization expense, and a slight decline in operating performance in manufacturing partially offset by a $20 million improvement in our product mix and price/cost spread and a $20 million decrease in business integration expenses.  The decrease in business integration costs is the result of costs associated with the 2014 cost reduction plan recognized in fiscal 2015.

 

 

Net sales in the Health, Hygiene & Specialties segment increased by $1,757 million from fiscal 2015 primarily attributed to acquisition net sales of $1,935 million partially offset by selling price decreases of $84 million due to the pass through of lower resin prices, a $47 million unfavorable impact from foreign currency, and a negative $49 million impact from a 2.0% volume decline.  The volume decline is primarily attributed to a negative impact due to decreased shipping days in Avintiv's prior year December quarter, strategic pricing actions and improvements in the product mix in Europe.

The operating income increase of $138 million from fiscal 2015 is primarily attributed to acquisition operating income of $118 million, a $61 million improvement in our product mix and price/cost spread including contribution from sourcing synergies, an $10 million increase from net productivity improvements in manufacturing, and a $12 million decrease in selling, general and administrative expenses, partially offset by a $36 million increase in depreciation and amortization expense primarily related to purchase accounting adjustments associated with the Avintiv acquisition, $7 million from base volume declines, an $10 million increase in business integration costs, and a $10 million unfavorable impact from foreign currency changes.  The increase in business integration expenses is the result of restructuring costs associated with the Avintiv acquisition and a $2 million impairment charge related to plant shutdowns.

 

Net sales in the Engineered Materials segment decreased by $47 million from fiscal 2015 primarily attributed to selling price decreases of $53 million due to the pass through of lower resin prices and a $14 million unfavorable impact from currency translation partially offset by a $21 million impact from a 1.5% base volume improvement.  Increased shipping days in the first quarter had approximately 2.0% impact on fiscal 2016 volumes.

 

The operating income increase of $39 million from fiscal 2015 is primarily attributed to a $36 million improvement in our product mix and price/cost spread, $2 million in base volume increases, a $4 million decrease in depreciation and amortization expense, a $3 million decrease in selling, general and administrative expenses, and a $3 million improvement in productivity in manufacturing, partially offset by a $6 million non-cash legal reserve, and negative impact from foreign currency changes.  The improvement in selling, general and administrative expenses is primarily attributed cost reduction efforts partially offset by increased shipping days in the first quarter and higher accrued performance-based bonus expense.

 

 

Debt extinguishment decreased by $90 million from fiscal 2015 primarily due to tender and redemption costs associated with the discharge of the 9¾% second priority senior secured notes in fiscal 2015 compared with the amendments of our term loans that occurred in Fiscal 2016.

 

 

The other expense (income) decrease of $23 million from fiscal 2015 is primarily the result of translation gains of $27 million related to the remeasurement of non-operating intercompany balances, partially offset by $5 million in financing fees associated with the Avintiv acquisition.

 

Interest expense increased $100 million from fiscal 2015 primarily as the result of the increased borrowings under the term loans and the 6% second priority senior secured notes issued in October 2015 to finance the Avintiv acquisition, partially offset by the net interest savings from the retirement of the 9¾% second priority senior secured notes and corresponding issuance of the 5¹/₈% second priority senior secured notes in June 2015.

 

 

The income tax expense increase of $36 million from fiscal 2015 is primarily attributed to an increase in Income before income taxes.  Our effective tax rate was 23% in Fiscal 2016.  Our Fiscal 2016 effective tax rate was lower than our statutory rate primarily due to favorable U.S. permanent items, including the adoption of the new share-based compensation guidance related to excess tax benefit deductions, favorable foreign rate differentials and the U.S. research and development credit, partially offset by state taxes and foreign income taxed in the U.S.

 

Changes in Comprehensive Income

 

The $197 million increase in comprehensive income from fiscal 2015 is primarily attributed to a $150 increase in net income, $44 million decrease in currency translation losses, and a $12 million favorable change in the fair value of interest rate hedges, net of tax.  Currency translation losses are primarily related to non-U.S. subsidiaries with a functional currency other than the U.S. Dollar whereby assets and liabilities are translated from the respective functional currency into U.S. Dollars using period-end exchange rates.  The change in currency translation losses were primarily attributed to locations utilizing the Euro, Pound Sterling, and Brazilian Real as their functional currency.  As part of the overall risk management, the Company uses derivative instruments to reduce exposure to changes in interest rates attributed to the Company's floating-rate borrowings and records changes to the fair value of these instruments in Accumulated other comprehensive income.  The change in fair value of these instruments in fiscal 2016 versus fiscal 2015 is primarily attributed to a change in the forward interest curve between measurement dates.

 

Discussion of Results of Operations for Fiscal 2015 Compared to Fiscal 2014

Consistent with historical presentation, acquisition (businesses acquired in the last twelve months) sales and operating income disclosed within this section represents the historical results from acquisitions for the comparable prior year period.  The remaining change disclosed represents the changes from the prior period on a combined basis.  Business integration expenses consist of restructuring and impairment charges, manufacturing inefficiencies associated with cost reduction plans, major innovation start-up and other business optimization costs.  Tables present dollars in millions.

 

 

 

The net sales decrease of $77 million from fiscal 2014 is primarily attributed to a 3% base volume decline primarily related to soft customer demand, selling price decreases of 2% due to the pass through of lower raw material costs, and a 1% negative impact from foreign currency changes partially offset by net sales from businesses acquired in the last twelve months.

The operating income increase of $92 million from fiscal 2014 is primarily attributed to a $42 million improvement in the relationship of net selling price to raw material and freight costs, $6 million of operating income from businesses acquired in the last twelve months, a $17 million decrease in depreciation and amortization expense, a $19 million improvement in operating performance in manufacturing, and a $56 million decrease in business integration expenses. The $56 million decrease in business integration expenses primarily consisted of a decrease in restructuring and impairment costs of $17 million and a $39 million decrease in costs attributed primarily to manufacturing inefficiencies associated with the 2014 cost reduction plan and acquisition integration costs. These improvements were partially offset by $26 million from base volume declines, a $15 million increase in selling, general and administrative expenses, and a $7 million negative impact from foreign currency changes.  Business integration expenses consist of restructuring and impairment charges, manufacturing inefficiencies associated with cost reduction plans, major innovation start-up and other business optimization costs.

 

 

Net sales in the Consumer Packaging segment decreased by $34 million from fiscal 2014 primarily due to a 3% base volume decline and selling price decreases of 2% due to the pass through of lower raw material costs, partially offset by acquisition volume of 4% attributed to the United States portion of the Healthcare Containers and Closures business purchased from Rexam ("C&C").  The base volume decline is primarily related to a decline in dairy container product sales due to soft customer demand and general market softness in our closure product offerings.

The operating income increase of $65 million from fiscal 2014 primarily is attributed to $19 million of improvement in the relationship of net selling price to raw material and freight costs, an $8 million improvement in operating performance in manufacturing, a $7 million decrease in depreciation and amortization expense, and a $53 million decrease in business integration expenses.  The $53 million decrease primarily consisted of a decrease in restructuring and impairment costs of $13 million and a $40 million decrease in costs attributed to manufacturing inefficiencies associated with the 2014 cost reduction plan.  These improvements were partially offset by $20 million in base volume declines.

 

 

Net sales in the Health, Hygiene & Specialties segment increased by $52 million from fiscal 2014 primarily as a result of acquisition volume of 19% primarily attributed to the international C&C business and net selling price increases of 4%, partially offset by a volume decline of 4%, and a 6% negative impact from foreign currency changes.

The operating income increase of $11 million from fiscal 2014 is primarily attributed to an $8 million improvement in operating performance in manufacturing, $8 million of improvement in the relationship of net selling price to raw material and freight costs, and an $8 million benefit from businesses acquired in the last 12 months , partially offset by an $8 million increase in selling, general, and administrative expenses, $2 million in base volume declines, and a $4 million negative impact from foreign currency changes.

 

 

 

Net sales in the Engineered Materials segment decreased by $95 million from fiscal 2014 primarily as a result of selling price decreases of 2% due to the pass through of lower raw material costs, a 2% base volume decline, and a 2% negative impact from foreign currency. The base volume decline is primarily attributed to general market softness and lost import revenues in our home and party product offerings.

The operating income increase of $16 million from fiscal 2014 is primarily attributed to a $15 million improvement in the relationship of net selling price to raw material and freight costs, a $3 million improvement in operating performance in manufacturing, a decrease in restructuring and impairment costs of $4 million, and a $10 million decrease in depreciation and amortization expense, partially offset by a $7 million increase in selling, general, and administrative expenses, a $3 million negative impact from foreign currency changes, and $4 million in base volume declines.

 

 

Debt extinguishment increase of $59 million from fiscal 2014 primarily due to tender and redemption costs associated with the discharge of the 9¾% second priority senior secured notes in fiscal 2015 compared to the various costs related to the discharge of the 9½% second priority senior secured notes in fiscal 2014.

 

 

The other expense (income) increase of $8 million from fiscal 2014 is primarily the result of losses realized on the sale and disposal of assets in fiscal 2015 compared to gains on the sale of assets in fiscal 2014.

 

 

Interest expense decreased $30 million from fiscal 2014 primarily as the result of the retirement of the 9 ³/₄% second priority senior secured notes and corresponding issuance of the 5¹/₈% second priority senior secured notes in June 2015 as well as the retirement of the 9½% second priority senior secured notes and corresponding issuance of the 5½% second priority senior secured notes in May 2014.

 

 

We recorded an income tax expense of $36 million in fiscal 2015.  The effective tax rate for fiscal 2015 compared to fiscal 2014 is impacted by discrete items, the inclusion of certain international entities for which a full valuation allowance is recognized, and $20 million of federal and state research and development tax credits recognized in fiscal 2014.

 

Changes in Comprehensive Income

 

The $27 million decrease in comprehensive income from fiscal 2014 is primarily attributed to a $29 million increase in currency translation losses and a $19 million unfavorable change in the fair value of interest rate hedges, net of tax partially offset by a $24 million increase in net income.  Currency translation losses are primarily related to non-U.S. subsidiaries with a functional currency other than the U.S. Dollar whereby assets and liabilities are translated from the respective functional currency into U.S. Dollars using period-end exchange rates.  The change in currency translation losses were primarily attributed to locations utilizing the Euro, Canadian Dollar, Mexican Peso, and Brazilian Real as their functional currency.  As part of the overall risk management, the Company uses derivative instruments to reduce exposure to changes in interest rates attributed to the Company's floating-rate borrowings and records changes to the fair value of these instruments in Accumulated other comprehensive income.  The change in fair value of these instruments in fiscal 2015 versus fiscal 2014 is primarily attributed to a change in the forward interest curve between measurement dates.

 

 

Liquidity and Capital Resources

 

Senior Secured Credit Facility

 

We manage our global cash requirements considering (i) available funds among the many subsidiaries through which we conduct business, (ii) the geographic location of our liquidity needs, and (iii) the cost to access international cash balances.  We have senior secured credit facilities consisting of $4.1 billion of term loans and a $650 million asset based revolving line of credit.  The revolving credit facility matures in May 2020, $1.9 billion of the term loans mature in October 2022, $814 million of the term loans mature in January 2021, and the remaining $1.4 billion of term loans mature in February 2020.  The availability under the revolving line of credit is the lesser of $650 million or an amount determined by a defined borrowing base which is calculated based on net eligible amounts of accounts receivable and inventory.  At the end of fiscal 2016, the Company had no outstanding balance on the revolving credit facility and unused borrowing capacity of $536 million under the revolving line of credit.  The Company was in compliance with all covenants at the end of fiscal 2016.

 

Despite not having financial maintenance covenants, our debt agreements contain certain negative covenants.  The failure to comply with these negative covenants could restrict our ability to incur additional indebtedness, effect acquisitions, enter into certain significant business combinations, make distributions or redeem indebtedness.  The term loan facility contains a negative covenant first lien secured leverage ratio covenant of 4.0 to 1.0 on a pro forma basis for a proposed transaction, such as an acquisition or incurrence of additional first lien debt.  As of October 1, 2016, our first lien debt of $4.2 billion less domestic cash and cash equivalents of $108 million divided by our four quarters ended Adjusted EBITDA resulted in a first lien secured leverage ratio of 3.4 to 1.0.

 

A key financial metric utilized in the calculation of the first lien leverage ratio is Adjusted EBITDA (defined as "EBITDA" in the Company's senior secured credit facilities, but referred to herein as Adjusted EBITDA).  The following table reconciles (i) our Adjusted EBITDA to net income and (ii) our Adjusted Free Cash Flow to cash flow from operating activities for fiscal 2016:

 

(a)

Includes business optimization and integration expenses

Adjusted EBITDA and Adjusted free cash flow, as presented in this document, are supplemental financial measures that are not required by, or presented in accordance with, generally accepted accounting principles in the United States ("GAAP").  Adjusted EBITDA and Adjusted free cash flow are not GAAP financial measures and should not be considered as an alternative to operating or net income or cash flows from operating activities, in each case determined in accordance with GAAP.  Adjusted EBITDA is used by our lenders for debt covenant compliance.

 

We define "Adjusted free cash flow" as cash flow from operating activities less additions to property, plant and equipment and payments under the tax receivable agreement. We believe Adjusted Free Cash Flow is useful to an investor in evaluating our liquidity because Adjusted free cash flow and similar measures are widely used by investors, securities analysts and other interested parties in our industry to measure a company's liquidity without regard to revenue and expense recognition, which can vary depending upon accounting methods.

 

These non-GAAP financial measures may be calculated differently by other companies, including other companies in our industry, limiting their usefulness as comparative measures.

 

Contractual Obligations and Off Balance Sheet Transactions

 

Our contractual cash obligations at the end of fiscal 2016 are summarized in the following table which does not give any effect to the tax receivable agreement, including the $60 million payment made in October 2016, or income taxes payable as we cannot reasonably estimate the timing of future cash outflows associated with those commitments.

 

(a)	Includes anticipated interest of $20 million over the life of the capital leases.

(b)	Based on applicable interest rates in effect end of fiscal 2016.

(c)

Pension and other postretirement contributions have been included in the above table for the next fiscal year.  The amount is the estimated contributions to our defined benefit plans.  The assumptions used by the actuary in calculating the projection includes weighted average return on pension assets of approximately 7.25% for fiscal 2016.  The estimation may vary based on the actual return on our plan assets.  See footnotes to the Consolidated Financial Statements of this Form 10-K for more information on these obligations.

Cash Flows from Operating Activities

Net cash provided by operating activities increased $220 million from fiscal 2015 primarily attributed to higher net income, depreciation, and amortization partially offset by lower debt extinguishment charges.

 

Net cash provided by operating activities increased $107 million to $637 million in fiscal 2015.  The change is primarily attributed to improved operating performance and improved working capital. The working capital improvement was primarily attributed to declining resin prices during fiscal 2015.

 

Cash Flows from Investing Activities

 

Net cash used in investing activities increased $2,414 million from fiscal 2015 primarily attributed to the Avintiv acquisition and higher capital expenditures to support the larger consolidated business.

 

Net cash used in investing activities decreased $257 million to $165 million in fiscal 2015 primarily as a result of decreased acquisition activity and lower capital expenditures.

 

Cash Flows from Financing Activities

 

Net cash provided by financing activities increased $2,182 million from fiscal 2015 primarily attributed to incremental financing related to the Avintiv acquisition, partially offset by the $78 million purchase of non-controlling interest and repayment of $524 million on long-term borrowings.

 

Net cash used in financing activities increased $246 million to $365 million in fiscal 2015.  The change is primarily attributed to an increase in long-term debt repayments and increased debt financing costs related to the discharge of the 9¾% second priority senior secured notes.

 

Liquidity Outlook

 

Tax receivable agreement – In connection with the initial public offering, the Company entered into an income tax receivable agreement ("TRA") that provides for the payment to pre-initial public offering stockholders, option holders and holders of our stock appreciation rights, 85% of the amount of cash savings, if any, in U.S. federal, foreign, state and local income tax that are actually realized (or are deemed to be realized in the case of a change of control) as a result of the utilization of our and our subsidiaries' net operating losses attributable to periods prior to the initial public offering.  The total TRA balance at the end of fiscal 2016 was $174 million, prior to the $60 million payment made in October of 2016.

 

At the end of fiscal 2016, our cash balance was $323 million, of which approximately 67% was located outside the U.S.  The Company has deemed cash located outside the US to be indefinitely reinvested and will use for future international expansion.  We believe our existing U.S. based cash and cash flow from U.S. operations, together with available borrowings under our senior secured credit facilities, will be adequate to meet our liquidity needs over the next twelve months.  We do not expect our free cash flow to be sufficient to cover all long-term debt obligations and intend to refinance these obligations prior to maturity.  However, we cannot predict our future results of operations and our ability to meet our obligations involves numerous risks and uncertainties, including, but not limited to, those described in the "Risk Factors" section in this Form 10-K.

 

Critical Accounting Policies and Estimates

 

We disclose those accounting policies that we consider to be significant in determining the amounts to be utilized for communicating our consolidated financial position, results of operations and cash flows in the first note to our consolidated financial statements included elsewhere herein.  Our discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States.  The preparation of financial statements in conformity with these principles requires management to make estimates and assumptions that affect amounts reported in the financial statements and accompanying notes.  Our estimates and judgments are based on historical experience and on various other factors that are believed to be reasonable under the circumstances.  Actual results may differ from these estimates under different assumptions or conditions.

 

Revenue Recognition.  Revenue from the sales of products is recognized at the time title and risks and rewards of ownership pass to the customer (either when the products reach the free-on-board shipping point or destination depending on the contractual terms), there is persuasive evidence of an arrangement, the sales price is fixed and determinable and collection is reasonably assured.

 

Accrued Rebates.  We offer various rebates to our customers in exchange for their purchases.  These rebate programs are individually negotiated with our customers and contain a variety of different terms and conditions.  Certain rebates are calculated as flat percentages of purchases, while others include tiered volume incentives.  These rebates may be payable monthly, quarterly, or annually.  The calculation of the accrued rebate balance involves significant 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.  We use all available information when calculating these reserves.  Our accrual for customer rebates was $54 million and $53 million as of the end of fiscal 2016 and 2015, respectively.

 

Impairments of Long-Lived Assets.  In accordance with the guidance from the FASB for the impairment or disposal of long-lived assets we review long-lived assets for impairment whenever events or changes in circumstances indicate the carrying amount of such assets may not be recoverable.  Impairment losses are recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amounts.  The impairment loss is measured by comparing the fair value of the asset to its carrying amount.  We recognized non-cash asset impairment of long-lived assets of $3 million, $2 million and $7 million in fiscal 2016, 2015 and 2014, respectively.

Goodwill and Other Indefinite Lived Intangible Assets.  Due to the segment realignment that occurred as a result of the Avinitv acquisition, we elected to complete a step 1 evaluation of goodwill in order to (1) reset the values of our new reporting units for future qualitative assessments and (2) determine if the carrying value of any reporting unit exceeded its fair value.  This evaluation was completed on the first day of the fourth fiscal quarter of fiscal 2016.  We utilized a discounted cash flow analysis in combination with a comparable company market approach to determine the fair value of each reporting unit.  For purposes of conducting our evaluation, we have seven reporting units, Health, Hygiene & Specialties ("HHS") – North America, HHS – South America, HHS – Europe, HHS – Asia, Consumer Packaging, Engineered Materials, and Tapes.  We determined that each of the components within our respective reporting units should be aggregated and tested at the respective level as one reporting unit.  We reached this conclusion because within each of our reporting units, we have similar products, production processes, markets served, geographic region, and/or management oversight which allows us to share assets and resources across the components.  We regularly re-align our production equipment and manufacturing facilities in order to take advantage of cost savings opportunities, obtain synergies and create manufacturing efficiencies.  We utilize our research and development centers, design center, tool shops, and graphics center which all provide benefits to each of the reporting units and work on new products that can benefit multiple components.  We also believe that the goodwill is recoverable from the overall operations of the unit given the synergies from leveraging the combined resources, common raw materials, common research and development, similar margins, management oversight and similar distribution methodologies.  Our discounted cash flow analysis included overall growth rates within Consumer Packaging, Engineered Materials, and Tapes of 0-3% (terminal year 3%) and overall growth rates within the HHS regions of 2-8% (terminal year 3%), and capital spending consistent with historical levels.  There were no indicators of impairment in the fourth quarter that required us to perform a test for the recoverability of goodwill.

 

After the completion of the step 1 evaluation we determined that the fair value of each of our reporting units was greater than the carrying value.  This conclusion was further supported by the increased valuations within the packaging industry and projected future operating results of our reporting units.  The identified increased valuations within our industry is supported by the Company's increase in stock price throughout fiscal 2016, market capitalization, and total enterprise value.  Future declines in our peer company and our market capitalizations and total enterprise value along with lower valuation market multiples, significant declines in operating performance, or significant declines in sales, specifically in our HHS reporting units which primarily consist of our recently acquired Avintiv business, could impact future impairment tests or may require a more frequent assessment.

 

The Company's goodwill, fair value and carrying value of our reporting units are as follows:

 

 

We also performed our annual impairment test for fiscal 2016 of our indefinite lived intangible assets, which relates to the "Berry Plastics," "Reemay," "Typar," and "Chicopee" trade names.  We performed a quantitative assessment for the Berry Plastics tradename, which totaled $207 million at October 1, 2016 and used the qualitative screen for the recently acquired Avintiv tradenames that were valued on October 1, 2015 when acquired.  The fair value is estimated based on the income approach using the revenue streams associated with each trade name. Our forecasted revenue growth for the Berry trade name ranged from 0-3% through and including the terminal year.  In conducting our qualitative screen, we did not observe any changes in our long-term forecasted revenue growth for the Reemay and Typar trade names which ranged from 3-4%, and for the Chicopee trade name which was 1%.  Given the recent acquisitions of the Reemay, Typar and Chicopee trade names, future declines in revenue or operating performance could impact future impairment tests and our ability to recover the fair value of our indefinite lived tradenames.

 

Deferred Taxes and Effective Tax Rates.  We estimate the effective tax rates ("ETR") and associated liabilities or assets for each of our legal entities of ours in accordance with authoritative guidance.  We use tax planning to minimize or defer tax liabilities to future periods.  In recording ETRs and related liabilities and assets, we rely upon estimates, which are based upon our interpretation of United States and local tax laws as they apply to our legal entities and our overall tax structure.  Audits by local tax jurisdictions, including the United States Government, could yield different interpretations from our own and cause the Company to owe more taxes than originally recorded.  For interim periods, we accrue our tax provision at the ETR that we expect for the full year.  As the actual results from our various businesses vary from our estimates earlier in the year, we adjust the succeeding interim periods' ETRs to reflect our best estimate for the year-to-date results and for the full year.  As part of the ETR, if we determine that a deferred tax asset arising from temporary differences is not likely to be utilized, we will establish a valuation allowance against that asset to record it at its expected realizable value.  In multiple foreign jurisdictions, the Company believes that it will not generate sufficient future taxable income to realize the related tax benefits.  The Company has provided a full valuation allowance against its foreign net operating losses included within the deferred tax assets in multiple foreign jurisdictions.  The Company has not provided a valuation allowance on its federal net operating losses in the United States because it has determined that future reversals of its temporary taxable differences will occur in the same periods and are of the same nature as the temporary differences giving rise to the deferred tax assets.  Changes in our valuation allowance could also impact our tax receivable agreement obligation.  Our valuation allowance against deferred tax assets was $82 million and $29 million as of the end of fiscal 2016 and 2015, respectively.

 

Based on a critical assessment of our accounting policies and the underlying judgments and uncertainties affecting the application of those policies, we believe that our consolidated financial statements provide a meaningful and fair perspective of the Company and its consolidated subsidiaries.  This is not to suggest that other risk factors such as changes in economic conditions, changes in material costs, our ability to pass through changes in material costs, and others could not materially adversely impact our consolidated financial position, results of operations and cash flows in future periods.

 

Item 7A.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Interest Rate Sensitivity

We are exposed to market risk from changes in interest rates primarily through our senior secured credit facilities.  At October 1, 2016, our senior secured credit facilities are comprised of (i) $4.1 billion term loans and (ii) a $650 million revolving credit facility with no borrowings outstanding.  Borrowings under our senior secured credit facilities bear interest, at our option, at either (1) an alternate base rate or (2) an adjusted LIBOR rate for a one-, two-, three- or six month interest period, or a nine- or twelve-month period, if available to all relevant lenders, in each case, plus an applicable margin.  The alternate base rate is the greater of (i) in the case of our term loans, Credit Suisse's prime rate or, in the case of our revolving credit facility, Bank of America's prime rate and (ii) one-half of 1.0% over the weighted average of rates on overnight Federal Funds as published by the Federal Reserve Bank of New York.  At October 1, 2016, the LIBOR rate of 0.93% applicable to the term loans was below the LIBOR floor of 1.00. A 0.25% change in LIBOR would not have a material impact on our interest expense.

In February 2013, the Company entered into an interest rate swap transaction to protect $1 billion of outstanding variable rate term loan debt from future interest rate volatility. The agreement swapped the greater of a three-month variable LIBOR contract or 1.00% for a fixed annual 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 loss and Deferred income taxes and is being 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 protect $1 billion of outstanding variable rate term loan debt from future interest rate volatility.  The agreement swaps the greater of a three-month variable LIBOR contract or 1.00% for a fixed annual 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.

In September 2015, the Company entered into an interest rate swap transaction to protect $1 billion of outstanding variable rate term loan debt from future interest rate volatility. The agreement swapped the greater of a three-month variable LIBOR contract or 1.00% for a fixed annual rate of 1.7185%, with an effective date in December 2015 and expiration in June 2019. The Company records changes in fair value in Accumulated other comprehensive income.

Foreign Currency Exchange Rates

 

As a global company, we face foreign currency risk exposure from fluctuating currency exchange rates, primarily the U.S. dollar against the euro, Brazilian real, Argentine peso, Chinese yuan, Canadian dollar and Mexican peso.  Significant fluctuations in currency rates can have a substantial impact, either positive or negative, on our revenue, cost of sales, and operating expenses.  As there is uncertainty in the future movements in foreign exchange rates, significant fluctuations could negatively impact our future consolidated results of operations.  Currency translation gains and losses are primarily related to non-U.S. subsidiaries with a functional currency other than U.S. Dollars whereby assets and liabilities are translated from the respective functional currency into U.S. Dollars using period-end exchange rates and impact our comprehensive income (loss).  While future consolidated results of operations could be materially impacted by fluctuations in currency rates, we attempt to manage our foreign currency risk on our anticipated cash movements by entering into foreign currency forward contracts to offset potential foreign exchange gains or losses.  A 10% change in our foreign currency forward contracts would not result in a material change to our financial statements.

Item 8.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

Index to Financial Statements

 

 

Index to Financial Statement Schedules

 

All schedules have been omitted because they are not applicable or not required or because the required information is included in the consolidated financial statements or notes thereto.

 

Item 9.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

 

None.

 

Item 9A.

CONTROLS AND PROCEDURES

 

Evaluation of disclosure controls and procedures.

 

We maintain "disclosure controls and procedures," as such term is defined in Rule 13a-15(e) under the Exchange Act, that are designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognizes that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Additionally, in designing disclosure controls and procedures, our management was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures.

 

In connection with the preparation of this Form 10-K, management evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of October 1, 2016.  As further described below, management identified a material weakness in the design and operating effectiveness of controls related to the income tax accounting process. As a result, our Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were not effective as of October 1, 2016.  Notwithstanding this material weakness, management concluded that the consolidated financial statements included in this Annual Report present fairly, in all material respects, the financial position of the Company at October 1, 2016 in conformity with GAAP and our external auditors have issued an unqualified opinion on our consolidated financial statements as of and for the year ended October 1, 2016.

 

Management's Report on Internal Controls over Financial Reporting

 

Management is responsible for establishing and maintaining adequate internal control over financial reporting. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.  Also, projection of any evaluation of effectiveness to future periods is subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.  In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control — Integrated Framework (2013 Framework).  Based on this assessment, management concluded that, as of October 1, 2016, the Company's internal control over financial reporting was not effective, due to the material weakness described below.  A material weakness is a deficiency or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim consolidated financial statements will not be prevented or detected on a timely basis.

The Company identified a material weakness related to the process to prepare and review our income tax provision on a timely basis. The material weakness relates to deficiencies in the design and operation of controls within the income tax accounting process due, in part, to the increased complexity in the legal entity structure of the business following the Avintiv acquisition.

We acquired Avintiv during fiscal 2016, and management has excluded Avintiv's internal control over financial reporting from our assessment of the effectiveness of our internal control as of October 1, 2016. Avintiv represents approximately 23% of our consolidated assets as of October 1, 2016 and approximately 27% of our consolidated net sales for fiscal 2016.

Remediation Plan

Management will implement additional processes, controls and procedures relating to the timely preparation of our income tax accounting in order to address the material weakness through the integration of processes, implementation of policies, and improved documentation procedures.

 

Changes in Internal Controls over Financial Reporting

 

In October 2015, we acquired 100% of the capital stock of Avintiv which added 23 facilities, 18 of which are located outside the U.S.  There were no changes in our internal control over financial reporting that occurred during the quarter ended October 1, 2016 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting, except for the integration of the Avintiv operations into Berry's control structure.  The Company is in the process of migrating Avintiv's operations into their shared service center, migrating information technology platforms and standardizing control procedures across the overall operations and expect this to continue during Fiscal 2017.

 

Item 9B.

OTHER INFORMATION

 

None.

 

PART III

 

Item 10.

DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

 

The information required by this Item, with the exception of the Code of Ethics disclosure below, is incorporated herein by reference to our definitive Proxy Statement to be filed in connection with the 2016 Annual Meeting of Stockholders.

 

Code of Ethics

 

We have a Code of Business Ethics that applies to all directors and employees, including our Chief Executive Officer and senior financial officers.  These standards are designed to deter wrongdoing and to promote the highest ethical, moral, and legal conduct of all employees. We also have adopted a Supplemental Code of Ethics, which is in addition to the standards set by our Code of Business Ethics, in order to establish a higher level of expectation for the most senior leaders of the Company.  The Supplemental Code of Ethics sets the expectations as to how our senior leaders conduct themselves in dealings with the Company, customers, suppliers and coworkers and it further defines our commitment to compliance with the Company's policies, procedures and government regulations. Our Code of Business Ethics and Supplemental Code of Ethics can be obtained, free of charge, by contacting our corporate headquarters or can be obtained from the Corporate Governance section of the Investors page on the Company's internet site.

 

Item 11.

EXECUTIVE COMPENSATION

 

The information required by this Item is incorporated herein by reference to our definitive Proxy Statement to be filed in connection with the 2017 Annual Meeting of Stockholders.

Item 12.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

 

The information required by this Item, is incorporated herein by reference to our definitive Proxy Statement to be filed in connection with the 2017 Annual Meeting of Stockholders.

 

Item 13.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE

 

The information required by this Item is incorporated herein by reference to our definitive Proxy Statement to be filed in connection with the 2017 Annual Meeting of Stockholders.

 

Item 14.

PRINCIPAL ACCOUNTANT FEES AND SERVICES

 

The information required by this Item is incorporated herein by reference to our definitive Proxy Statement to be filed in connection with the 2017 Annual Meeting of Stockholders.

 

PART IV

 

Item 15.

EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

 

1.

Financial Statements

 

The financial statements listed under Item 8 are filed as part of this report.

 

2.

Financial Statement Schedules

 

Schedules have been omitted because they are either not applicable or the required information has been disclosed in the financial statements or notes thereto.

 

3.

Exhibits

 

The exhibits listed on the Exhibit Index immediately following the signature page of this annual report are filed as part of this report.

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders

Berry Plastics Group, Inc.

 

We have audited the accompanying consolidated balance sheets of Berry Plastics Group, Inc. as of October 1, 2016, and September 26, 2015, and the related consolidated statements of income, comprehensive income, changes in stockholders' equity (deficit) and cash flows for each of the three years in the period ended October 1, 2016. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Berry Plastics Group, Inc. at October 1, 2016, and September 26, 2015, and the consolidated results of its operations and its cash flows for each of the three years in the period ended October 1, 2016, in conformity with U.S. generally accepted accounting principles.

 

As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for the balance sheet classification of deferred income taxes and employee share-based payments in 2016.

 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Berry Plastics Group, Inc.'s internal control over financial reporting as of October 1, 2016, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission "(2013 framework)" and our report dated November 30, 2016, expressed an adverse opinion thereon.

 

/s/ Ernst & Young LLP

 

Indianapolis, Indiana

November 30, 2016

 

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders

Berry Plastics Group, Inc.

We have audited Berry Plastics Group, Inc.'s internal control over financial reporting as of October 1, 2016, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission "(2013 framework)" (the COSO criteria). Berry Plastics Group, Inc.'s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management's Report on Internal Controls over Financial Reporting. Our responsibility is to express an opinion on the company's internal control over financial reporting based on our audit.

 

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

 

A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company's annual or interim financial statements will not be prevented or detected on a timely basis.  Management has identified a material weakness in controls related to the Company's income tax accounting process.  We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Berry Plastics Group, Inc. as of October 1, 2016 and September 26, 2015, and the related consolidated statements of income, comprehensive income, changes in stockholders' equity (deficit) and cash flows for each of the three years in the period ended October 1, 2016.  This material weakness was considered in determining the nature, timing and extent of audit tests applied in our audit of the 2016 financial statements, and this report does not affect our report dated November 30, 2016, which expressed an unqualified opinion on those financial statements.

As indicated in the accompanying Management's Report on Internal Controls over Financial Reporting, management's assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of Avintiv Inc., which are included in the 2016 consolidated financial statements of Berry Plastics Group, Inc. and constituted 23% of total assets as of October 1, 2016 and 27% of net sales for the year then ended.  Our audit of internal control over financial reporting of Berry Plastics Group, Inc. also did not include an evaluation of internal control over financial reporting of Avintiv Inc.

In our opinion, because of the effect of the material weakness described above on the achievement of the objectives of the control criteria, Berry Plastics Group, Inc. has not maintained effective internal control over financial reporting as of October 1, 2016, based on the COSO criteria.

 

/s/ Ernst & Young LLP

 

Indianapolis, Indiana

November 30, 2016

Berry Plastics Group, Inc.

Consolidated Statements of Income

(in millions of dollars)

Berry Plastics Group, Inc.

Consolidated Statements of Comprehensive Income

(in millions of dollars)

 

See notes to consolidated financial statements.

 

Berry Plastics Group, Inc.

Consolidated Balance Sheets

(in millions of dollars)

  

See notes to consolidated financial statements.

 

Berry Plastics Group, Inc.

Consolidated Statements of Changes in Stockholders' Equity (Deficit)

(in millions of dollars)

 

 

See notes to consolidated financial statements.

Berry Plastics Group, Inc.

   Consolidated Statements of Cash Flows

(in millions of dollars)

See notes to consolidated financial statements.

Berry Plastics Group, Inc.

Notes to Consolidated Financial Statements

(in millions of dollars, except as otherwise noted)

 

1.  Basis of Presentation and Summary of Significant Accounting Policies

 

Background

 

Berry Plastics Group, Inc. ("Berry," "we," or the "Company") is a leading provider of value-added plastic consumer packaging, nonwoven specialty materials and engineered materials with a track record of delivering high-quality customized solutions to our customers.  Representative examples of our products include closures, prescription vials, specialty films, adhesives, nonwovens, drink cups, containers, and bottles.  We sell our products predominantly into stable, consumer-oriented end-markets, such as healthcare, personal care, and food and beverage.

 

Basis of Presentation

 

Periods presented in these financial statements include fiscal periods ending October 1, 2016 ("fiscal 2016"), September 26, 2015 ("fiscal 2015"), and September 27, 2014 ("fiscal 2014").  Prior to the acquisition of Avintiv, Inc., the Company operated in four operating segments: Rigid Open top, Rigid Closed top, Engineered Materials and Flexible Packaging.  In November 2015, Berry realigned its reporting structure, and now through its wholly-owned subsidiaries operates in three operating segments: Health, Hygiene & Specialties, Consumer Packaging, and Engineered Materials.  The Company has recast all prior period amounts to conform to this new reporting structure.  The Company's customers are located principally throughout the United States, without significant concentration with any one customer.  The Company performs periodic credit evaluations of its customers' financial condition and generally does not require collateral.  The Company's fiscal year is based on fifty-two or fifty-three week periods.  Fiscal 2016 is a fifty-three week period and Fiscal 2015 and Fiscal 2014 are fifty-two week periods.  The Company has evaluated subsequent events through the date the financial statements were issued.

 

The consolidated financial statements include the accounts of Berry and its subsidiaries, all of which includes our wholly owned and majority owned subsidiaries. Intercompany accounts and transactions have been eliminated in consolidation.  Where our ownership of consolidated subsidiaries is less than 100% the non-controlling interests are reflected in Non-controlling interest and Redeemable non-controlling interests.

 

Revenue Recognition

 

Revenue from the sales of products is recognized at the time title and risks and rewards of ownership pass to the customer, there is persuasive evidence of an arrangement, the sales price is fixed and determinable and collection is reasonably assured.  Provisions for certain rebates, sales incentives, trade promotions, coupons, product returns and discounts to customers are accounted for as reductions in gross sales to arrive at net sales.  In accordance with the Revenue Recognition standards of the Accounting Standards Codification ("Codification" or "ASC"), the Company provides for these items as reductions of revenue at the later of the date of the sale or the date the incentive is offered.  These provisions are based on estimates derived from current program requirements and historical experience.

 

Shipping, handling, purchasing, receiving, inspecting, warehousing, and other costs of distribution are presented in Cost of goods sold in the Consolidated Statements of Income.  The Company classifies amounts charged to its customers for shipping and handling in Net sales in the Consolidated Statements of Income.

 

Purchases of Raw Materials and Concentration of Risk

 

The Company's most significant raw material used in the production of its products is plastic resin.  The largest supplier of the Company's total resin material requirements represented approximately 16% of purchases in fiscal 2016.  The Company uses a variety of suppliers to meet its resin requirements.

 

Research and Development

 

Research and development costs are expensed when incurred.  The Company incurred research and development expenditures of $48 million, $33 million, and $32 million in fiscal 2016, 2015, and 2014, respectively.

 

Stock-Based Compensation

 

The compensation guidance of the FASB requires that the compensation cost relating to share-based payment transactions be recognized in financial statements based on alternative fair value models.  The share-based compensation cost is measured based on the fair value of the equity or liability instruments issued.  The Company's share-based compensation plan is more fully described in Note 12.  The Company recorded total stock compensation expense of $20 million, $21 million, and $15 million for fiscal 2016, 2015, and 2014, respectively.

 

The Company utilizes the Black-Scholes option valuation model for estimating the fair value of the stock options.  The model allows for the use of a range of assumptions.  Expected volatilities utilized in the Black-Scholes model are based on implied volatilities from traded stocks of peer companies. Similarly, the dividend yield is based on historical experience and the estimate of future dividend yields.  The risk-free interest rate is derived from the U.S. Treasury yield curve in effect at the time of grant.  The Company's options have a ten year contractual life.  For purposes of the valuation model in fiscal years 2016, 2015, and 2014, the Company used the simplified method for determining the granted options expected lives (see footnote 12).

 

Foreign Currency

 

For the non-U.S. subsidiaries that account in a functional currency other than U.S. Dollars, assets and liabilities are translated into U.S. Dollars using period-end exchange rates.  Sales and expenses are translated at the average exchange rates in effect during the period.  Foreign currency translation gains and losses are included as a component of Accumulated other comprehensive income (loss) within stockholders' equity (deficit).  Gains and losses resulting from foreign currency transactions are included in the Consolidated Statements of Income.

 

Cash and Cash Equivalents

 

All highly liquid investments purchased with a maturity of three months or less from the time of purchase are considered to be cash equivalents.

 

Allowance for Doubtful Accounts

 

The Company's accounts receivable and related allowance for doubtful accounts are analyzed in detail on a quarterly basis and all significant customers with delinquent balances are reviewed to determine future collectability.  The determinations are based on legal issues (such as bankruptcy status), past history, current financial and credit agency reports, and the experience of the credit representatives.  Reserves are established in the quarter in which the Company makes the determination that the account is deemed uncollectible.  The Company maintains additional reserves based on its historical bad debt experience.  The following table summarizes the activity for fiscal years ended for the allowance for doubtful accounts:

 

Accounts Receivable Factoring Agreements

 

A number of the Company's foreign subsidiaries have entered into factoring agreements 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. The table below summarizes the total amount of accounts receivable on the Consolidated Balance Sheets, sold under these factoring arrangements:

 

 

In addition to the programs described above, the Company has a U.S. based program where certain U.S. based receivables are sold to unrelated third-party financial institutions.  There were no amounts outstanding from the financial institutions related to U.S. based programs at October 1, 2016.  The fees associated with transfer of receivables for all programs were not material for any of the periods presented.

Inventories

 

Inventories are stated at the lower of cost or market and are valued using the first-in, first-out method.  Management periodically reviews inventory balances, using recent and future expected sales to identify slow-moving and/or obsolete items. The cost of spare parts is charged to cost of goods sold when purchased.  We evaluate our reserve for inventory obsolescence on a quarterly basis and review inventory on-hand to determine future salability.  We base our determinations on the age of the inventory and the experience of our personnel.  We reserve inventory that we deem to be not salable in the quarter in which we make the determination.  We believe, based on past history and our policies and procedures, that our net inventory is salable.  Inventory as of fiscal 2016 and 2015 was:

Property, Plant and Equipment

 

Property, plant and equipment are stated at cost.  Depreciation is computed primarily by the straight-line method over the estimated useful lives of the assets ranging from 5 to 25 years for buildings and improvements, 2 to 10 years for machinery, equipment, and tooling and over the term of the agreement for capital leases.  Leasehold improvements are depreciated over the shorter of the useful life of the improvement or the lease term.  Repairs and maintenance costs are charged to expense as incurred.  The Company capitalized interest of $6 million in each of fiscal 2016, 2015, and 2014, respectively.  Property, plant and equipment as of fiscal 2016 and 2015 was:

 

Long-lived Assets

 

Long-lived assets, including property, plant and equipment and definite lived intangible assets are reviewed for impairment in accordance with ASC 360, "Property, Plant and Equipment," whenever facts and circumstances indicate that the carrying amount may not be recoverable.  Specifically, this process involves comparing an asset's carrying value to the estimated undiscounted future cash flows the asset is expected to generate over its remaining life.  If this process were to result in the conclusion that the carrying value of a long-lived asset would not be recoverable, a write-down of the asset to fair value would be recorded through a charge to operations.  Fair value is determined based upon discounted cash flows or appraisals as appropriate.  Long-lived assets that are held for sale are reported at the lower of the assets' carrying amount or fair value less costs related to the assets' disposition.  We recorded impairment charges totaling $3 million, $2 million, and $7 million to property, plant and equipment assets to their net realizable valuables in connection with facility shutdowns during fiscal years 2016, 2015, and 2014, respectively.

 

Goodwill

 

The Company follows the principles provided by ASC 350, "Intangibles - Goodwill and Other."  Goodwill is not amortized but rather reviewed annually for impairment.  In connection with the Company's segment re-alignment, the Company performed a goodwill assessment before and after the segment realignment to determine if any impairment was present, noting that in each case the fair value of the reporting unit for each of historical reporting units exceeded its carrying value.  The Company performed their annual impairment evaluation on the first day of the fourth fiscal quarter.  For purposes of conducting our annual goodwill impairment test, the Company determined that we have seven reporting units, Health, Hygiene & Specialties ("HHS") – North America, HHS – South America, HHS – Europe, HHS – Asia, Consumer Packaging, Engineered Materials, and Tapes.  We determined that each of the components within our respective reporting units should be aggregated for our Consumer Packaging, Engineered Materials and Tapes reporting units.  We reached this conclusion because within each of these three reporting units, we have similar products, management oversight, production processes, markets served, and/or common geographic region which allow us to share resources across the product lines.  We regularly re-align our production equipment and manufacturing facilities in order to take advantage of cost savings opportunities, obtain synergies and create

manufacturing efficiencies.  In addition, we utilize our research and development centers, design center, tool shops, and graphics center which all provide benefits to each of the reporting units and work on new products that can benefit multiple product lines.  We also believe that the goodwill is recoverable from the overall operations of the unit given our synergies from leveraging the combined resources, common raw materials, common research and development, similar margins and similar distribution methodologies.  In our HHS segment, we operate in four geographical regions where our management teams for each geography oversee the operations and allocate the resources across the entire region.  In fiscal year 2016, and due to the segment realignment, the Company opted to perform a step 1 quantitative evaluation in accordance with ASC 350 to establish a baseline for the fair value of each reporting unit.  The Company utilizes a combination of the discounted cash flow analysis and comparable company valuation methods to determine the fair values of its reporting units in accordance with ASC 820.  The Company determined that the fair value of each reporting unit exceeded its  carrying amount.  In fiscal year 2015, the Company applied the qualitative assessment and determined that it is more likely than not that the fair value of each reporting unit exceeded its carrying amount.  In fiscal 2014, the Company applied the qualitative assessment to determine whether it is more likely than not that the fair value of the reporting unit may be less than the carrying amount, and due to the decline in operating income in the Rigid Open Top reporting unit, we completed step 1 of the impairment test which indicated no impairment existed.  The Company has recognized cumulative goodwill impairment charges of $165 million, which occurred in Fiscal 2011.

 

The changes in the carrying amount of goodwill by reportable segment are as follows:

 

 

Deferred Financing Fees

 

Deferred financing fees are amortized to interest expense using the effective interest method over the lives of the respective debt agreements.  Pursuant to ASC 835-30 the Company presents $75 million of its debt issuance costs on the balance sheet as a deduction from the carrying amount of the related debt liability instead of a deferred charge. In addition, the remaining $4 million of deferred charges, which relate to the Company's revolving line of credit, are presented in Other assets.

 

Intangible Assets

 

Customer relationships are being amortized using an accelerated amortization method which corresponds with the customer attrition rates used in the initial valuation of the intangibles over the estimated life of the relationships which range from 10 to 15 years.  Trademarks that are expected to remain in use, which are indefinite lived intangible assets, are required to be reviewed for impairment annually.  Technology intangibles are being amortized using the straight-line method over the estimated life of the technology which range from 8 to 14 years.  License intangibles are being amortized using the straight-line method over the life of the license which is 10 years.  The Company evaluates the remaining useful life of intangible assets on a periodic basis to determine whether events and circumstances warrant a revision to the remaining useful life.  The Company has certain tradenames that total approximately $248 million that are indefinite lived and we test annually for impairment on the first day of the fourth quarter.  We completed the annual impairment test of our indefinite lived trade names utilizing the relief from royalty method on the first day of the fourth quarter for each of our indefinite lived assets and noted no impairment in Fiscal 2016, 2015 and 2014.