BERRY GLOBAL GROUP, INC. - Annual Report: 2017 (Form 10-K)

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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 September 30, 2017

Commission File Number 001-35672

 

BERRY GLOBAL 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): 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act.    Yes   ☐   No   ☐

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 $6.3 billion as of April 1, 2017, 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 $48.57 closing price per share for such stock on the New York Stock Exchange on such date. 

Portions of Berry Global Group, Inc.'s Proxy Statement for its 2018 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;

●	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, particularly an economic downturn;

●	ability of our insurance to fully cover potential exposures;

●	risks that our restructuring programs may entail greater implementation 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 SEPTEMBER 30, 2017

Item 1.

BUSINESS

(In millions of dollars, except as otherwise noted)

 

General

 

Berry Global Group, Inc. ("Berry," "we," or the "Company") is a leading provider of value-added engineered materials, nonwoven specialty materials and consumer packaging with a track record of delivering high-quality customized solutions to our customers.  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 2017, no single customer represented more than 5% of net sales and our top ten customers represented 16% 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.

Effective April 2017, the Company changed its name from Berry Plastics Group, Inc. to Berry Global Group, Inc.  The new name is reflected throughout this Form 10-K.  Common Shares of the Company stock continue to be traded on the New York Stock Exchange under the symbol BERY.  In addition, Berry Plastics Corporation, a wholly owned subsidiary, changed its name to Berry Global, Inc.

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 Developments

Clopay Plastic Products Company, Inc.

 

In November 2017, the Company entered into a definitive purchase agreement to acquire all of the outstanding shares of Clopay Plastic Products Company, Inc. ("Clopay") for a purchase price of approximately $475 million which is preliminary and subject to adjustment, and is intended to be funded with existing liquidity or an additional debt offering.  Clopay manufactures printed breathable films and is an innovator in the development of elastic films and laminates with product offerings uniquely designed for applications used in a number of markets including: hygiene, healthcare, construction and industrial protective apparel.  Clopay reported $461 million in sales for its fiscal year ended September 30, 2017 and will be operated within the Health, Hygiene and Specialties segment upon completion of the transaction.  The completion of the Clopay acquisition is subject to certain closing conditions and the terms and conditions of the purchase agreement.  The Company expects to realize annual cost synergies of approximately $20 million from the completion of the Clopay transaction.

 

Euro Swap

 

In November 2017, the Company entered into certain cross-currency swap agreements with a notional amount of 250 million euro to effectively convert a portion of our fixed-rate USD denominated term loans, including the monthly interest payments, to fixed rate euro-denominated debt.  The swap agreements mature May 2022.  The risk management objective is to manage foreign currency risk relating to net investments in subsidiaries denominated in foreign currencies and reduce the variability in the functional currency cash flows of a portion of the Company's term loans.   

Segment Overview

 

Engineered Materials

 

The Engineered Materials business primarily includes the following product groups:

 

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 primarily through distribution to a diverse mix of end users.

 

Converter Films.  We manufacture sealant and barrier films for various flexible packaging converters and consumer packaged goods companies. In addition, certain of our products are used for industrial applications, where converters use our films in finished products for various end market applications such as sheet mold compounding and masking.

 

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

 

 

 

Tape Products.  We manufacture 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.

 

In June 2017, the Company acquired Adchem Corp's ("Adchem") tapes business for a purchase price of $49 million.  Adchem was a leader in the development of high performance adhesive tape systems for the automotive, construction, electronics, graphic arts, medical and general tape markets.

Food and Consumer Films.  We manufacture 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.

In January 2017, the Company acquired AEP Industries Inc. ("AEP") for a purchase price of $791 million, net of cash acquired.  A portion of the purchase price consisted of issuing 6.4 million of Berry common shares which were valued at $324 million at the time of closing.  AEP manufactures and markets an extensive and diverse line of polyethylene and polyvinyl chloride flexible plastic packaging film products with consumer, industrial, and agricultural applications.

Retail Bags.  We manufacture 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 manufacture 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.

Health, Hygiene & Specialties

 

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

 

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

 

South America.  We manufacture 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 baby diapers, adult incontinence, surgical drapes, face masks, corrosion protection, cable wrap, geosynthetics, and specialty filtration products servicing the hygiene, personal care, infection prevention, and specialty industrial markets.

 

Asia.  We manufacture a wide range of products for baby care, infection prevention, and food and household packaging, predominately serving the global health, personal care and food markets.

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 manufacture large size thermoformed polypropylene ("PP") and injection-molded plastic drink cups and lids.  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 manufacture 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 service various food and beverage, vitamin and nutritional, and prescription vial markets.

 

Tubes.  We manufacture a complete line of extruded and laminate tubes in a wide variety of sizes.  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.

 

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, 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 $45 million, $48 million, and $33 million in fiscal 2017, 2016 and 2015, respectively.

 

Raw Materials

 

Our primary raw material is plastic resin.  In addition, we use other materials such as butyl rubber, adhesives, paper and packaging materials, linerboard, rayon, polyester fiber, and foil, in various manufacturing processes.  These raw materials are available from multiple sources and in general we purchase from a variety of global suppliers.  However, 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 fiscal year 2017, we employed approximately 23,000 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 2018.  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.berryglobal.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.  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. 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, 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 future acquisitions 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 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.  Although we believe our products are in material compliance with all applicable requirements, any fines and penalties imposed in connection with noncompliance or recall of any of our products 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 Global Group, Inc. has no direct operations and no significant assets other than ownership of 100% of the stock of Berry Global Corporation. Because Berry Global 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 Global Group, Inc.'s subsidiaries, as well as the financial condition and operating requirements of Berry Global Group, Inc.'s subsidiaries, may limit Berry Global Group, Inc.'s ability to obtain cash from its subsidiaries. The earnings from, or other available assets of, Berry Global Group, Inc.'s subsidiaries may not be sufficient to pay dividends or make distributions or loans to enable Berry Global 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 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 U.S. 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, proposed tax reform in the U.S. which may result in significant changes to U.S. tax rules, 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.

 

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.

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

Completion of the Clopay 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 Clopay transaction in early calendar 2018, the actual closing date will depend on the satisfaction or waiver of the applicable closing conditions.  Any delay in the completion of the Clopay transaction would defer our ability to realize the intended benefits of the Clopay transaction.

 

None

 

Item 2.

PROPERTIES

 

Our primary manufacturing facilities by geographic area were as follows at September 30, 2017:

 

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 2016 and 2017 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 Global 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.

The Company's fiscal year is based on fifty-two or fifty-three week periods.  Fiscal 2017 and fiscal 2015 were fifty-two week periods and fiscal 2016 was a fifty-three week period. 

 

Overview

 

Berry Global Group, Inc. ("Berry," "we," or the "Company") is a leading provider of value-added engineered materials, nonwoven specialty materials and consumer packaging with a track record of delivering high-quality customized solutions to our customers.  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 2017, no single customer represented more than 5% of net sales and our top ten customers represented 16% 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.  The Company's operations are organized into three operating segments: Engineered Materials, Health, Hygiene & Specialties, and Consumer Packaging.  The structure is designed to align us with our customers, provide improved service, and drive future growth in a cost efficient manner.  The Engineered Materials segment primarily consists of tapes and adhesives, polyethylene based film products, can liners, printed films, and specialty coated, and laminated products.  The Health, Hygiene & Specialties segment primarily consists of nonwoven specialty materials and films used in hygiene, infection prevention, personal care, industrial, construction and filtration applications.  The Consumer Packaging segment primarily consists of containers, foodservice items, closures, overcaps, bottles, prescription containers, and tubes.

In October 2016, the Company realigned portions of our operating segments in order to leverage geographic management teams and commercial activities.  The international portion of our Retail & Industrial product line was moved from Engineered Materials to the Specialties product line within Health, Hygiene & Specialties, resulting in a $140 million and $148 million movement in Net sales in fiscal 2016 and fiscal 2015, respectively.  Additionally, to align the newly acquired AEP business with our existing Core Films business, $306 million and $340 million of Net sales were moved from Consumer Packaging to Engineered Materials in the fiscal 2016 and fiscal 2015, respectively.  As result of these organizational realignments, we have recast prior period segment amounts.  

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 the American 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.  We believe there are long term 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.  In addition, while we continue to believe that long term dynamics of the resin markets will be an advantage to Berry, the short term challenges to regional transportation systems and higher raw material prices for certain inputs as a result of recent storm disruptions, as well as macroeconomic pressures in South America could create modest short-term headwinds for early fiscal 2018.  For fiscal 2018, we project cash flow from operations and adjusted free cash flow of $965 million and $610 million, respectively.  While we expect the recent raw material inflation to result in increases to working capital in the beginning of fiscal 2018, our annual projections assume flat working capital as we believe raw materials will normalize as the year progresses.  Additionally, our capital spending and cash interest costs are forecasted to be $320 million and $250 million, respectively.  Within our adjusted free cash flow guidance, we are also assuming cash taxes to be $210 million, including a $35 million payment in the first quarter under the Company's tax receivable agreement, along with other cash uses of $40 million related to items such as acquisition integration expenses and costs to achieve synergies.  These estimates and assumptions do not include our most recent definitive agreement to acquire Clopay.  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 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.

Clopay Plastic Products Company, Inc.

 

In November 2017, the Company entered into a definitive purchase agreement to acquire all of the outstanding shares of Clopay Plastic Products Company, Inc. ("Clopay") for a purchase price of approximately $475 million which is preliminary and subject to adjustment and is intended to be funded with existing liquidity or an additional debt offering.  Clopay manufactures printed breathable films and is an innovator in the development of elastic films and laminates with product offerings uniquely designed for applications used in a number of markets including: hygiene, healthcare, construction and industrial protective apparel.  Clopay reported $461 million in sales for its fiscal year ended September 30, 2017 and will be operated within the Health, Hygiene and Specialties segment upon completion of the transaction.  The completion of the Clopay acquisition is subject to certain closing conditions and the terms and conditions of the purchase agreement. The Company expects to realize annual cost synergies of approximately $20 million from the completion of the Clopay transaction.

AEP Industries Inc.

In January 2017, the Company acquired AEP Industries Inc. ("AEP") for a purchase price of $791 million, net of cash acquired.  A portion of the purchase price consisted of issuing 6.4 million of Berry common shares which were valued at $324 million at the time of closing.  AEP manufactures and markets an extensive and diverse line of polyethylene and polyvinyl chloride flexible plastic packaging products with consumer, industrial, and agricultural applications.  The acquired business is operated in our Engineered Materials segment.  To finance the purchase, the Company entered into an incremental assumption agreement to increase the commitments under the Company's existing term loan credit agreement by $500 million due 2024.  The Company expects annual cost synergies of approximately $80 million from the AEP transaction with full realization expected in fiscal 2018.

Adchem Corp

In June 2017, the Company acquired Adchem Corp's ("Adchem") tapes business for a purchase price of $49 million.  Adchem is a leader in the development of high performance adhesive tape systems for the automotive, construction, electronics, graphic arts, medical and general tape markets.  The acquired business is operated in our Engineered Materials segment.  To finance the purchase, the Company used existing liquidity.

 

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.  The Company estimates that approximately $80 million of annual cost synergies were realized from the Avintiv acquisition.

 

Discussion of Results of Operations for Fiscal 2017 Compared to Fiscal 2016

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, acquisition related costs, and other business optimization costs.  Tables present dollars in millions.

 

The net sales increase of $606 million is primarily attributed to acquisition net sales of $788 million and selling price increases of $60 million due to the pass through of higher resin prices, partially offset by a negative $136 million impact from a 2% base volume decline, $98 million from extra days in fiscal 2016, and a slight negative impact from foreign currency changes.

 

The operating income increase of $151 million is primarily attributed to acquisition operating income of $62 million, a $36 million decrease in integration and restructuring costs, a $35 million decrease in selling, general and administrative expense related to synergies and cost reductions, a $24 million improvement in our product mix and price/cost spread, a $16 million decrease in depreciation and amortization, and slight benefits from improved productivity in manufacturing and changes in foreign currency.  These improvements were partially offset by a $20 million impact from the base volume decline and $10 million from extra days in fiscal 2016.

 

 

Net sales in the Engineered Materials segment increased by $748 million primarily attributed to acquisition net sales of $788 million, and selling price increases of $67 million due to the pass through of higher resin prices, partially offset by a $79 million negative impact from base volume declines, and $30 million from extra days in fiscal 2016.  The base volume decline is primarily attributed to our decisions to rationalize certain lower margin products that we acquired from AEP in order to maximize earnings.

 

The operating income increase of $134 million is primarily attributed to acquisition operating income of $62 million, a $71 million improvement in our product mix and price/cost spread, a $13 million decrease in selling, general and administrative expenses, and slight benefits from improved productivity in manufacturing and changes in foreign currency, partially offset by a negative $8 million impact from lower base volumes, a $6 million increase in depreciation and amortization expense, and $4 million from extra days in fiscal 2016.

 

Net sales in the Health, Hygiene & Specialties segment decreased by $31 million primarily attributed to extra days in fiscal 2016 of $25 million, selling price decreases of $23 million, and a slightly negative impact from foreign currency changes, partially offset by a $26 million positive impact from base volume improvements.

The operating income increase of $20 million is primarily attributed to a $27 million decrease in business integration and restructuring costs associated with the Avintiv acquisition, a $13 million improvement in productivity in manufacturing, a $12 million decrease in depreciation and amortization expense, a $5 million impact from base volumes, a $5 million decrease in selling, general and administrative expenses, and a slight benefit from changes in foreign currency. These improvements were partially offset by a $45 million decrease in our product mix and price/cost spread primarily related to inflation and market pressures within our South American business.

 

Net sales in the Consumer Packaging segment decreased by $111 million primarily attributed to an $83 million negative impact from base volumes and $43 million from extra days in fiscal 2016, partially offset by selling price increases of $15 million due to the pass through of higher resin prices.  The volume decline was primarily attributed to general market softness and our continued focus on volume, price, and mix in order to optimize earnings.

 

The operating income decrease of $3 million is primarily attributed to a base volume decline of $17 million, an $11 million negative impact from productivity in manufacturing, $5 million from extra days in fiscal 2016, and a slight decrease in our product mix and price/cost spread, partially offset by a $17 million decrease in selling, general and administrative expenses related to synergies from cost reductions, a $10 million decrease in depreciation and amortization expense, and a $5 million decrease in business integration and restructuring expense.

 

Debt extinguishment increased by $6 million as a result of the fiscal 2017 term loan modifications.

 

 

The other expense (income) increase of $26 million is primarily attributed to a $10 million non-cash defined benefit pension plan settlement, a $6 million charge related to a valuation adjustment to the TRA in fiscal 2017, and a year over year decline of $17 million in transactional foreign currency gains related to the remeasurement of non-operating intercompany balances.

 

The interest expense decrease of $22 million is primarily attributed to reduced interest rates resulting from the term loan modifications.

 

The income tax expense increase of $37 million is primarily attributed to improved income before income taxes.  Our effective tax rate was 24% in fiscal 2017.  Our fiscal 2017 effective tax rate was lower than the U.S. federal statutory rate of 35% primarily due to a 2% benefit from lower tax rates in foreign jurisdictions, a 2% benefit from the U.S. research and development credit, a 7% benefit from share based compensation related to excess tax benefit deductions, and a 1% benefit from the Section 199 deduction.  These favorable items were partially offset by an increase of 1% from the foreign valuation allowance.

 

The $213 million increase in comprehensive income is primarily attributed to a $104 million increase in net income, a $47 million increase due to unrealized gains on the Company's pension plans, net of tax, a $35 million increase in currency translation gains, and a $27 million favorable change in the fair value of interest rate hedges, net of tax.  Currency translation gains 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 gains were primarily attributed to locations utilizing the Euro, Pound Sterling, and Brazilian Real as their functional currency.  Unrealized gains on pension plans in the current period were primarily attributable to actuarial gains from an increase in the underlying discount rate.  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 2017 versus fiscal 2016 is primarily attributed to a change in the forward interest curve between measurement dates.

 

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.  Tables present dollars in millions.

 

 

The net sales increase of $1,608 million 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 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 Engineered Materials segment decreased by $74 million primarily attributed to selling price decreases of $73 million due to the pass through of lower resin prices and an $8 million unfavorable impact from currency translation partially offset by a $9 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 $33 million is primarily attributed to a $39 million improvement in our product mix and price/cost spread, a $2 million improvement in productivity in manufacturing, and a slight decrease in selling, general and administrative expenses, 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.

 

Net sales in the Health, Hygiene & Specialties segment increased by $1,750 million primarily attributed to acquisition net sales of $1,935 million partially offset by selling price decreases of $86 million due to the pass through of lower resin prices, a $53 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 $137 million is primarily attributed to acquisition operating income of $118 million, a $63 million improvement in our product mix and price/cost spread including contribution from sourcing synergies, an $13 million increase from net productivity improvements in manufacturing, and a $11 million decrease in selling, general and administrative expenses, partially offset by a $40 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 $11 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 Consumer Packaging segment decreased by $68 million primarily attributed to selling price decreases of $78 million due to the pass through of lower resin prices, partially offset by improved base volumes.  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 increase of $3 million is primarily attributed to a $19 million decrease in business integration and restructuring expenses, and a $15 million improvement in our product mix and price/cost spread, partially offset by a $15 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 $14 million increase in depreciation and amortization expense, and a $4 million decline in operating performance in manufacturing. The decrease in business integration costs is the result of costs associated with the 2014 cost reduction plan recognized in fiscal 2015.  

 

Debt extinguishment decreased by $90 million 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 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 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.

 

 

Our effective tax rate was 23% in fiscal 2016.  Our fiscal 2016 effective tax rate was lower than the U.S. federal statutory rate of 35% primarily due to a 5% benefit from the new share-based compensation accounting standard related to excess tax benefit deductions, a 5% benefit from lower tax rates in foreign jurisdictions, a 3% benefit from the U.S. research and development credit, a 3% benefit from a deemed liquidation of an investment which resulted in a worthless stock deduction, and a 3% benefit from the realization of foreign currency losses on the conversion of intercompany debt (not expected to be repaid in the foreseeable future) to equity.  These favorable items were partially offset by increases of 3% from U.S. state income taxes and 2% from the inclusion of foreign income for amounts subject to Subpart F and Section 956 of the U.S. tax code.

The $197 million increase in comprehensive income is primarily attributed to a $150 million increase in net income, a $44 million decrease in currency translation losses, and a $12 million favorable change in the fair value of interest rate hedges, net of tax, partially offset by an increase in unrealized losses on the Company's pension plans of $9 million, 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.  Unrealized losses on pension plans in the current period were primarily attributable to actuarial losses from the reduction in the underlying discount rate and application of the new mortality tables.  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.

 

Liquidity and Capital Resources

 

Term Loans

In January 2017, in order to finance the AEP acquisition, the Company entered into an incremental assumption agreement to increase the commitments under the existing term loan credit agreement by $500 million, maturing in January 2024.  Based on market conditions, from time to time, the Company may reprice existing term loans in order to lower interest rates.  As a result of repricing activities, each of the Company's term loans currently bear interest at LIBOR plus 2.25% with a 0% LIBOR floor.  All other terms remain unchanged (see footnote 3 to the Notes to the Consolidated Financial Statements incorporated herein).

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.  In March 2017, we entered into an agreement to increase our asset-based revolving line of credit that matures in May 2020 by $100 million to $750 million.  At the end of fiscal 2017, there was no outstanding balance on the revolving credit facility.  The Company was in compliance with all covenants at the end of fiscal 2017 (see footnote 3 to the Notes to the Consolidated Financial Statements incorporated herein).

  

Contractual Obligations and Off Balance Sheet Transactions

 

Our contractual cash obligations at the end of fiscal 2017 are summarized in the following table which does not give any effect to the tax receivable agreement, or income taxes payable as we cannot reasonably estimate the timing of future cash outflows associated with those commitments.

 

(a)	Includes anticipated interest of $15 million over the life of the capital leases.

(b)	Based on applicable interest rates in effect end of fiscal 2017.

Cash Flows from Operating Activities

Net cash provided by operating activities increased $118 million from fiscal 2016 primarily attributed to improved net income before depreciation, amortization and other non-cash charges.

 

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

 

Cash Flows from Investing Activities

 

Net cash used in investing activities decreased $1,805 million from fiscal 2016 primarily attributed to the Avintiv acquisition in fiscal 2016, partially offset by the AEP and Adchem acquisitions in fiscal 2017.

 

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.

 

Cash Flows from Financing Activities

 

Net cash from financing activities decreased $2,043 million from fiscal 2016 primarily attributed to 2016 net borrowings related to the Avintiv acquisition and $78 million purchase of noncontrolling interest, partially offset by a higher TRA payment in fiscal 2017.

 

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.

Adjusted Free Cash Flow

 

We define "Adjusted free cash flow" as cash flow from operating activities less net additions to property, plant and equipment and payments of the tax receivable agreement.

Based on our definition, our consolidated adjusted free cash flow is summarized as follows:

Adjusted free cash flow, as presented in this document, is a supplemental financial measure that is not required by, or presented in accordance with, generally accepted accounting principles in the U.S. ("GAAP").  Adjusted free cash flow is not a GAAP financial measure and should not be considered as an alternative to cash flow from operating activities or any other measure determined in accordance with GAAP.   We use Adjusted free cash flow as a measure of liquidity because it assists us in assessing our company's ability to fund its growth through its generation of cash, and believe it is useful to investors for such purpose. In addition, Adjusted free cash flow and similar measures are widely used by investors, securities analysts and other interested parties in our industry to measure a company's liquidity.  Adjusted free cash flow may be calculated differently by other companies, including other companies in our industry, limiting its usefulness as a comparative measure.

Liquidity Outlook

  

At the end of fiscal 2017, our cash balance was $306 million, of which approximately 92% was located outside the U.S.  The Company has deemed cash located outside the U.S. 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 U.S.  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 $58 million and $54 million as of the end of fiscal 2017 and 2016, 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 $2 million, $3 million and $2 million in fiscal 2017, 2016 and 2015, respectively.

Goodwill and Other Indefinite Lived Intangible Assets.  We evaluate goodwill using a qualitative assessment to determine whether it is more likely than not that the fair value of any reporting unit is less that the carrying amount.  If we determine that the fair value of the reporting unit may be less than its carrying amount, we evaluate the goodwill of that reporting unit using the one-step impairment test.  Otherwise, we conclude that no impairment is indicated and no further impairment test is performed.

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.  

In conducting a qualitative assessment, we analyze a variety of events or factors that may influence the fair value of the reporting unit, including, but not limited to the results of prior quantitative tests performed; changes in the carrying amount of the reporting unit; operating results; relevant market data for both the Company and its peer companies; industry outlooks; macroeconomic conditions; liquidity; changes in key personnel; and our competitive position.  Significant judgment is used to evaluate the totality of these events and factors to make the determination of whether it is more likely than not that the fair value of the reporting unit is less than its carrying value.

We completed our qualitative screen as of the first day of the fourth fiscal quarter and determined that it was more likely than not that the fair value of each of our reporting, with the exception of HHS-South America and HHS-Asia, was greater than the carrying value.  We reached this conclusion based on the increased valuations within the packaging industry and operating results of our reporting units, in addition to leveraging the step one test performed in fiscal 2016 in conjunction with the Avintiv acquisition and our segment re-alignment.  The identified increased valuations within the plastics industry is supported by the Company's increase in stock price, market capitalization, and total enterprise value.

Based on the results of prior year quantitative tests performed and macroeconomic pressures in South America, we concluded that step one was necessary for the HHS – South America and HHS – Asia reporting units.  The reporting unit's fair value is estimated based on a market approach and a discounted cash flow analysis and is reconciled back to the current market capitalization for Berry Global Group to ensure that the implied control premium is reasonable.  Our forecasts included overall revenue growth of 4-8% through and including the terminal year, which is 4%, and capital expenditure levels consistent with historical spend.  The fair value of the HHS – South America and HHS – Asia reporting unit exceeded their carrying value by 9% and 49%, respectively, and thus no impairment was recorded.  However, an incremental sustained declines of 10%-15% in earnings, or future declines in our peer companies, market capitalizations, or total enterprise value, as well as lower valuation market multiples could impact future impairment tests or may require a more frequent assessment.   

The Company's fair value, carrying value, and goodwill balance for reporting units subject to step 1 of the annual goodwill impairment test for fiscal 2017 are as follows: 

 

We also performed our annual impairment test for fiscal 2017 of our indefinite lived intangible assets, which relates to the "Berry Global," "Reemay," "Typar," and "Chicopee" trade names.  We performed a qualitative screen for the Berry Global tradename, which totaled $207 million at September 30, 2017 and a quantitative assessment 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%.  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 U.S. and local tax laws as they apply to our legal entities and our overall tax structure.  Audits by local tax jurisdictions, including the U.S. 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 U.S. 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 $93 million and $82 million as of the end of fiscal 2017 and 2016, 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 September 30, 2017, our senior secured credit facilities are comprised of $4.0 billion in term loans and a $750 million revolving credit facility with no borrowings outstanding.  The borrowings under the senior secured credit facilities bear interest at a rate equal to an applicable margin plus LIBOR.  The applicable margin for LIBOR rate borrowings under the revolving credit facility ranges from 1.25% to 1.75%, and the margin for all of the term loans are 2.25% per annum with a 0% LIBOR floor.  At September 30, 2017, the LIBOR rate of approximately 1.23% was applicable to the term loans.  A 0.25% change in LIBOR would increase our annual interest expense by $4 million on variable rate term loans.

We seek to minimize interest rate volatility risk through regular operating and financing activities and, when deemed appropriate, through the use of derivative financial instruments. These financial instruments are not used for trading or other speculative purposes.  As of year-end, the Company effectively had (1) a $450 million interest rate swap transaction that swaps a one-month variable LIBOR contract for a fixed annual rate of 2.00%, with an effective date in May 2017 and expiration in May 2022, (2) a $1 billion interest rate swap transaction that swaps a one-month variable LIBOR contract for a fixed annual rate of 1.5190% with an effective date in March 2017 and expiration in June 2019, (3) a $1 billion interest rate swap transaction that swaps a one-month variable LIBOR contract for a fixed annual rate of 2.0987% with an effective date in February 2017 and expiration in September 2021.

Foreign Currency Exchange Rates

 

As a global company, we face foreign currency risk exposure from fluctuating currency exchange rates, primarily the U.S. dollar against the euro, Brazilian real, Argentine peso, Chinese 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.  Currency translation gains and losses are primarily related to non-U.S. subsidiaries with a functional currency other than U.S. dollars whereby assets and liabilities are translated from the respective functional currency into U.S. dollars using period-end exchange rates and impact our Comprehensive income.  A 10% decline in foreign currency exchange rates would have a negative $6 million impact on our Net Income.  While future consolidated results of operations could be materially impacted by future fluctuations in currency rates, we may attempt to manage our foreign currency risk on our anticipated cash movements by entering into foreign currency forward contracts to offset potential foreign exchange gains or losses.  As of year-end we had no outstanding foreign currency contracts as these contracts are typically entered into and settled within the given quarter.

In November 2017, we entered into certain cross-currency swap agreements with a notional amount of 250 million euro to effectively convert a portion of our fixed-rate USD denominated term loans, including the monthly interest payments, to fixed rate euro-denominated debt.  The swap agreements mature May 2022.  The risk management objective is to manage foreign currency risk relating to net investments in subsidiaries denominated in euros and reduce the variability in the functional currency cash flows of a portion of our term loans.

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 September 30, 2017.  Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that the Company's disclosure controls and procedures were effective as of September 30, 2017.

 

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). The Company acquired AEP and Adchem during fiscal 2017, and management has excluded AEP and Adchem's internal control over financial reporting from our assessment of the effectiveness of our internal control as of September 30, 2017.  AEP and Adchem represent approximately 8% of our consolidated assets as of September 30, 2017 and approximately 11% of our consolidated net sales for fiscal 2017.

Based on this assessment, management concluded that as of September 30, 2017, the Company's internal control over financial reporting was effective.  In addition, Ernst & Young LLP as of September 30, 2017, the Company's independent registered public accounting firm, provided an attestation report on the Company's internal control over financial reporting.  

Changes in Internal Controls over Financial Reporting

 

During fiscal 2017, we developed and implemented new control procedures designed to address the ineffectiveness identified as of the end of fiscal 2016 related to the timeliness of our annual income tax provision process and the adequacy of written documentation around aspects of our foreign tax provisions.  These changes included allocating resources internally to allow us to accelerate the timing of the completion of foreign tax provisions and increasing the level of written documentation related to all aspects of the income tax provision process.

In fiscal 2017, we acquired 100% of the capital stock of AEP which added 14 facilities, 1 of which is located outside the U.S, as well as Adchem Corp's tapes business which added 1 facility.  The Company is in the process of migrating AEP and Adchem'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 2018.

There were no changes in our internal control over financial reporting that occurred during the quarter ended September 30, 2017 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting, except as described above.

 

Item 9B.

OTHER INFORMATION

 

None.

 

PART III

 

Item 10.

DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

 

Except as set forth below, the information required by this Item is incorporated herein by reference to our definitive Proxy Statement to be filed in connection with the 2018 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 2018 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 2018 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 2018 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 2018 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.

Item 16.

FORM 10-K SUMMARY

None.

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders

Berry Global Group, Inc.

 

We have audited the accompanying consolidated balance sheets of Berry Global Group, Inc. (formerly known as Berry Plastics Group, Inc.) as of September 30, 2017, and October 1, 2016, 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 September 30, 2017. 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 Global Group, Inc. at September 30, 2017, and October 1, 2016, and the consolidated results of its operations and its cash flows for each of the three years in the period ended September 30, 2017, in conformity with U.S. generally accepted accounting principles.

  

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Berry Global Group, Inc.'s internal control over financial reporting as of September 30, 2017, 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 21, 2017, expressed an unqualified opinion thereon.

 

/s/ Ernst & Young LLP

 

Indianapolis, Indiana

November 21, 2017

 

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders

Berry Global Group, Inc.

We have audited Berry Global Group, Inc.'s (formerly known as Berry Plastics Group, Inc.) internal control over financial reporting as of September 30, 2017, 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 Global 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.

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 internal controls of AEP Industries, Inc. and Adchem Corp., which are included in the 2017 consolidated financial statements of Berry Global Group, Inc. and constituted 8% of total assets as of September 30, 2017 and 11% of net sales for the year then ended. Our audit of internal control over financial reporting of Berry Global Group, Inc. also did not include an evaluation of internal control over financial reporting of AEP and Adchem.

In our opinion, Berry Global Group, Inc. maintained, in all material respects, effective internal control over financial reporting as of September 30, 2017, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Berry Global Group, Inc. as of September 30, 2017 and October 1, 2016, 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 September 30, 2017 of Berry Global Group, Inc. and our report dated November 21, 2017 expressed an unqualified opinion thereon.

 

/s/ Ernst & Young LLP

 

Indianapolis, Indiana

November 21, 2017

Berry Global Group, Inc.

Consolidated Statements of Income

(in millions of dollars)

Berry Global Group, Inc.

Consolidated Statements of Comprehensive Income

(in millions of dollars)

 

See notes to consolidated financial statements.

 

Berry Global Group, Inc.

Consolidated Balance Sheets

(in millions of dollars)

  

See notes to consolidated financial statements.

 

Berry Global Group, Inc.

Consolidated Statements of Changes in Stockholders' Equity (Deficit)

(in millions of dollars)

 

 

See notes to consolidated financial statements.

Berry Global Group, Inc.

   Consolidated Statements of Cash Flows

(in millions of dollars)

See notes to consolidated financial statements.

Berry Global 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 Global Group, Inc. ("Berry," "we," or the "Company") is a leading provider of value-added engineered materials, nonwoven specialty materials and consumer packaging with a track record of delivering high-quality customized solutions to our customers.  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.  

Effective April 2017, the Company changed its name from Berry Plastics Group, Inc. to Berry Global Group, Inc.  The new name is reflected throughout this Form 10-K.  Common Shares of the Company stock continue to be traded on the New York Stock Exchange under the symbol BERY.  In addition, Berry Plastics Corporation, a wholly owned subsidiary, changed its name to Berry Global, Inc.

Basis of Presentation

 

Periods presented in these financial statements include fiscal periods ending September 30, 2017 ("fiscal 2017"), October 1, 2016 ("fiscal 2016"), and September 26, 2015 ("fiscal 2015").  The Company's customers are located principally throughout the U.S., without significant concentration with any one customer.  The Company performs periodic credit evaluations of its customers' financial condition and generally does not require collateral.  Fiscal 2017 and fiscal 2015 were fifty-two week periods, and fiscal 2016 was a fifty-three week period.  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.

 

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 15% of purchases in fiscal 2017.  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 $45 million, $48 million, and $33 million in fiscal 2017, 2016, and 2015, 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, $20 million, and $21 million for fiscal 2017, 2016, and 2015, 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 2017, 2016, and 2015, 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.  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

The Company has entered into various factoring agreements, both in the U.S. and at a number of foreign subsidiaries, to sell certain receivables to unrelated third-party financial institutions. The Company accounts for these transactions in accordance with ASC 860, "Transfers and Servicing" ("ASC 860").  ASC 860 allows for the ownership transfer of accounts receivable to qualify for sale treatment when the appropriate criteria is met, which permits the Company to present the balances sold under the program to be excluded from Accounts receivable, net on the Consolidated Balance Sheets.  Receivables are considered sold when (i) they are transferred beyond the reach of the Company and its creditors, (ii) the purchaser has the right to pledge or exchange the receivables, and (iii) the Company has surrendered control over the transferred receivables.  In addition, the Company provides no other forms of continued financial support to the purchaser of the receivables once the receivables are sold.

There were no amounts outstanding from financial institutions related to U.S. based programs at September 30, 2017 or October 1, 2016.  Gross amounts factored under these U.S. based programs at September 30, 2017 and October 1, 2016 were $129 million and $118 million, respectively.  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 2017 and 2016 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 $7 million, $6 million, and $6 million in fiscal 2017, 2016, and 2015, respectively.  Property, plant and equipment as of fiscal 2017 and 2016 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 $2 million, $3 million, and $2 million to property, plant and equipment assets to their net realizable valuables in connection with facility shutdowns during fiscal years 2017, 2016, and 2015, 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 2017, the Company applied the qualitative assessment to determine whether it is more likely than not that the fair value of the reporting units may be less than the carrying amount, and concluded that it was more likely than not that the fair value of each reporting unit exceeded the carrying amount except for the HHS-South America and HHS-Asia reporting units due to prior year quantitative tests performed and macroeconomic pressures in South America.  The Company completed step 1 in fiscal 2017, which concluded the fair value of the HHS – South America and HHS – Asia reporting units exceeded their carrying value by 9% and 49%, respectively, and thus no impairment was recorded.  However, an incremental sustained decline of 10%-15% in earnings, or future declines in our peer companies, market capitalizations, or total enterprise value, as well as lower valuation market multiples could impact future impairment tests or may require a more frequent assessment.  In fiscal year 2016, 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 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.  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 $48 million of debt issuance and deferred financing 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 $3 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 5 to 15 years. Definite lived trademarks are being amortized using the straight-line method over the estimated life of the asset which is not more than 15 years.  Other intangibles, which include technology and licenses, are being amortized using the straight-line method over the estimated life of the asset which ranges from 5 to 14 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.  Trademarks that are expected to remain in use, which are indefinite lived intangible assets, are required to be reviewed for impairment annually.  The Company has certain trademarks 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 2017, 2016 and 2015.

 

		Customer Relationships				Trademarks				Other Intangibles				Accumulated Amortization				Total
Balance as of fiscal 2015		$	1,159			$	281			$	106			$	(853	)		$	693
Adjustment for income taxes			(3	)			—				—				—				(3	)
Foreign currency translation adjustment			11				—				1				(2	)			10
Amortization expense			—				—				—				(143	)			(143	)
Acquisition intangibles			523				45				75				—				643
Balance as of fiscal 2016		$	1,690			$	326			$	182			$	(998	)		$	1,200
Adjustment for income taxes			—				1				—				—				1
Foreign currency translation adjustment			6				(1	)			1				(3	)			3
Amortization expense			—				—				—				(154	)			(154	)
Acquisition intangibles			226				9				1				—				236
Balance as of fiscal 2017		$	1,922			$	335			$	184			$	(1,155	)		$	1,286

 

Insurable Liabilities

 

The Company records liabilities for the self-insured portion of workers' compensation, health, product, general and auto liabilities.  The determination of these liabilities and related expenses is dependent on claims experience.  For most of these liabilities, claims incurred but not yet reported are estimated based upon historical claims experience.

Income Taxes

The Company accounts for income taxes under the asset and liability approach, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequence of events that have been recognized in the Company's financial statements or income tax returns.  Income taxes are recognized during the period in which the underlying transactions are recorded.  Deferred taxes, with the exception of non-deductible goodwill, are provided for temporary differences between amounts of assets and liabilities as recorded for financial reporting purposes and such amounts as measured by tax laws.  If the Company determines that a deferred tax asset arising from temporary differences is not likely to be utilized, the Company will establish a valuation allowance against that asset to record it at its expected realizable value.  The Company recognizes uncertain tax positions when it is more likely than not that the tax position will be sustained upon examination by relevant taxing authorities, based on the technical merits of the position.  The amount recognized is measured as the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement.  The Company's effective tax rate is dependent on many factors including:  the impact of enacted tax laws in jurisdictions in which the Company operates; the amount of earnings by jurisdiction, due to varying tax rates in each country; and the Company's ability to utilize foreign tax credits related to foreign taxes paid on foreign earnings that will be remitted to the U.S.

 

Comprehensive Income (Loss)

 

Comprehensive income (loss) is comprised of net income (loss) and other comprehensive income (loss).  Other comprehensive losses include net unrealized gains or losses resulting from currency translations of foreign subsidiaries, changes in the value of our derivative instruments and adjustments to the pension liability.

 

The accumulated balances related to each component of other comprehensive income (loss) were as follows (amounts below are net of taxes):