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BERRY GLOBAL GROUP, INC. - Quarter Report: 2017 December (Form 10-Q)

 

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549
 
FORM 10-Q
 
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended December 30, 2017
Commission File Number 001-35672
 
 
 

 



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

Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934 (the "Exchange Act"):
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) have been subject to such filing requirements for the past 90 days.  Yes   No   
  
Indicate by check mark whether the registrant has submitted electronically 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 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 whether the registrant is a large accelerated filer, accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company.  See definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer         Accelerated filer       Non-accelerated filer  Smaller reporting company      Emerging growth company
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 12b-2 of the Exchange Act.    Yes      No  

Indicate by check mark whether the registrant is a shell company as defined in Rule 12b-2 of the Exchange Act.  
Yes     No  
 
Class
 
Outstanding at February 7, 2018
Common Stock, $.01 par value per share
 
131.2 million shares
 
1

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

2

Berry Global Group, Inc.
Form 10-Q Index
For Quarterly Period Ended December 30, 2017
 
Part I.
Financial Information
Page No.
 
Item 1.
Financial Statements:
 
    Consolidated Statements of Income and Comprehensive Income 4
 
 
    Consolidated Statements of Cash Flows 6
 
 
 
Item 2.
 
Item 3.
 
Item 4.
Part II.
Other Information
 
 
Item 1.
 
Item 1A.
 
Item 6.
 
 
3

Part I. Financial Information
 
Item 1.
Financial Statements
 
Berry Global Group, Inc.
Consolidated Statement of Income
(Unaudited)
(in millions of dollars, except per share amounts)
 
 
 
Quarterly Period Ended
 
 
 
December 30, 2017
   
December 31, 2016
 
Net sales 
 
$
1,776
   
$
1,502
 
Costs and expenses:
               
Cost of goods sold 
   
1,447
     
1,206
 
Selling, general and administrative 
   
117
     
113
 
Amortization of intangibles 
   
38
     
33
 
Restructuring and impairment charges
   
11
     
4
 
Operating income 
   
163
     
146
 
Other expense (income), net 
   
9
     
(1
)
Interest expense, net 
   
62
     
68
 
Income before income taxes 
   
92
     
79
 
Income tax expense (benefit)
   
(71
)
   
28
 
Net income 
 
$
163
   
$
51
 
 
               
Net income per share:
               
Basic 
 
$
1.24
   
$
0.42
 
Diluted 
   
1.20
     
0.40
 
Outstanding weighted-average shares:
               
Basic 
   
131.0
     
122.0
 
Diluted 
   
136.0
     
127.8
 
 
Consolidated Statements of Comprehensive Income
(Unaudited)
(in millions of dollars) 
 
 
 
Quarterly Period Ended
 
 
 
December 30, 2017
   
December 31, 2016
 
Net income 
 
$
163
   
$
51
 
Currency translation 
   
(24
)
   
(45
)
Pension and other postretirement benefits
   
(1
)
   
 
Interest rate hedges 
   
17
     
17
 
Provision for income taxes
   
(4
)
   
(6
)
Other comprehensive loss, net of tax
   
(12
)
   
(34
)
Comprehensive income 
 
$
151
   
$
17
 
 
See notes to consolidated financial statements.

4

Berry Global Group, Inc.
Consolidated Balance Sheets
(in millions of dollars)
 
 
 
December 30, 2017
   
September 30, 2017
 
Assets
 
(Unaudited)
       
             
Current assets:
           
Cash and cash equivalents 
 
$
228
   
$
306
 
Accounts receivable (less allowance of $13)
   
780
     
847
 
Inventories:
               
Finished goods 
   
498
     
428
 
Raw materials and supplies 
   
380
     
334
 
 
   
878
     
762
 
Prepaid expenses and other current assets 
   
95
     
89
 
Total current assets 
   
1,981
     
2,004
 
Property, plant, and equipment, net 
   
2,363
     
2,366
 
Goodwill and intangible assets, net
   
4,024
     
4,061
 
Other assets 
   
52
     
45
 
Total assets 
 
$
8,420
   
$
8,476
 
                 
Liabilities
               
                 
Current liabilities:
               
Accounts payable 
 
$
666
   
$
638
 
Accrued expenses and other current liabilities 
   
454
     
463
 
Current portion of long-term debt 
   
34
     
33
 
Total current liabilities 
   
1,154
     
1,134
 
Long-term debt, less current portion 
   
5,502
     
5,608
 
Deferred income taxes 
   
276
     
419
 
Other long-term liabilities 
   
314
     
300
 
Total liabilities 
   
7,246
     
7,461
 
                 
Stockholders' equity
               
 
               
Common stock (131.1 and 130.9 million shares issued, respectively)
   
1
     
1
 
Additional paid-in capital 
   
831
     
823
 
Non-controlling interest 
   
3
     
3
 
Retained earnings
   
419
     
256
 
Accumulated other comprehensive loss 
   
(80
)
   
(68
)
Total stockholders' equity
   
1,174
     
1,015
 
Total liabilities and stockholders' equity
 
$
8,420
   
$
8,476
 
 
See notes to consolidated financial statements.

5

Berry Global Group, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
(in millions of dollars)
 
 
 
Quarterly Period Ended
 
 
 
December 30, 2017
   
December 31, 2016
 
Cash Flows from Operating Activities:
           
Net income
 
$
163
   
$
51
 
Adjustments to reconcile net cash provided by operating activities:
               
Depreciation 
   
91
     
87
 
Amortization of intangibles 
   
38
     
33
 
Non-cash interest expense 
   
3
     
1
 
Deferred income tax 
   
(121
)
   
14
 
Stock compensation expense 
   
4
     
3
 
Other non-cash operating activities, net 
   
6
     
(1
)
Changes in working capital 
   
(66
)
   
(43
)
Changes in other assets and liabilities 
   
35
     
(2
)
Net cash from operating activities 
   
153
     
143
 
                 
Cash Flows from Investing Activities:
               
Additions to property, plant and equipment 
   
(94
)
   
(65
)
Proceeds from sale of assets 
   
3
     
2
 
Other investing activities, net
   
     
(1
)
Net cash from investing activities
   
(91
)
   
(64
)
                 
Cash Flows from Financing Activities:
               
Repayments on long-term borrowings 
   
(108
)
   
(10
)
Proceeds from issuance of common stock 
   
4
     
5
 
Payment of tax receivable agreement 
   
(37
)
   
(60
)
Net cash from financing activities 
   
(141
)
   
(65
)
Effect of exchange rate changes on cash 
   
1
     
(6
)
Net change in cash 
   
(78
)
   
8
 
Cash and cash equivalents at beginning of period 
   
306
     
323
 
Cash and cash equivalents at end of period 
 
$
228
   
$
331
 
 
See notes to consolidated financial statements.


6

Berry Global Group, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
(tables in millions of dollars, except per share data)
 
1. 
Basis of Presentation
 
The accompanying unaudited Condensed Consolidated Financial Statements of Berry Global Group, Inc. ("the Company," "we," or "Berry") have been prepared in accordance with accounting principles generally accepted in the United States ("GAAP") pursuant to the rules and regulations of the Securities and Exchange Commission for interim reporting.  Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements.  In preparing financial statements in conformity with GAAP, we must make estimates and assumptions that affect the reported amounts and disclosures at the date of the financial statements and during the reporting period.  Actual results could differ from those estimates.  Certain reclassifications have been made to prior periods to conform with current reporting.  In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included, and all subsequent events up to the time of the filing have been evaluated.  For further information, refer to the Company's most recent Form 10-K filed with the Securities and Exchange Commission.
 
2.
Recently Issued Accounting Pronouncements
 
Changes to GAAP are established by the Financial Accounting Standards Board ("FASB") in the form of accounting standards updates to the FASB's Accounting Standards Codification.  During fiscal 2018, with the exception of the below, there have been no developments to the recently adopted accounting pronouncements from those disclosed in the Company's 2017 Annual Report on Form 10-K that are considered to have a material impact on our unaudited consolidated financial statements.

Revenue Recognition
 
In May 2014, the Financial Accounting Standards Board (FASB) issued a final standard on revenue recognition.  Under the new standard, an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.  For public entities, the provisions of the new standard are effective for annual reporting periods beginning after December 15, 2017 and interim periods therein.  An entity can apply the new revenue standard on a full retrospective approach to each prior reporting period presented or on a modified retrospective approach with the cumulative effect of initially applying the standard recognized at the date of initial application in retained earnings.

The Company plans to adopt the new standard, which at a minimum will result in expanded revenue disclosures, using the modified retrospective approach, and is currently evaluating the impact to the consolidated financial statements which will be effective for the Company beginning in fiscal 2019.

Hedges

In August 2017, the FASB issued ASU 2017-12, Targeted Improvements to Accounting for Hedging Activities in order to more closely align the results of hedge accounting with risk management activities through changes to the designation and measurement guidance.  The new guidance is effective for interim and annual periods beginning after December 15, 2018.  The effect of adoption should be reflected on all active hedges as of the beginning of the fiscal year of adoption.  The Company has chosen to early adopt this guidance for fiscal 2018, and the adoption of this guidance did not have a material impact on any of its active hedges.

3.
Acquisitions
 
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 for 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.

7

The acquisition has been accounted for under the purchase method of accounting, and accordingly, the purchase price has been allocated to the identifiable assets and liabilities based on fair values at the acquisition date.  The results of AEP have been included in the consolidated results of the Company since the date of the acquisition.  The Company has recognized Goodwill on this transaction primarily as a result of expected cost synergies, and does not expect Goodwill to be deductible for tax purposes.  The following table summarizes the allocation of purchase price and the fair values of the assets acquired and liabilities assumed at the date of the acquisition:

Working capital (a)
 
$
139
 
Property and equipment
   
223
 
Intangible assets
   
214
 
Goodwill
   
347
 
Historical AEP debt assumed
   
(7
)
Other assets and long-term liabilities
   
(125
)
(a) Includes a $5 million step up of inventory to fair value
 

Unaudited pro forma net sales and net income were $1.8 billion and $51 million, respectively, for the quarterly period ended December 31, 2016.  The unaudited pro forma net sales and net income assume that the AEP acquisition had occurred at the beginning of the period.

Adchem Corp.

In June 2017, the Company acquired Adchem Corp.'s ("Adchem") tapes business for a purchase price of $49 million, which the Company financed using existing liquidity.  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.  The acquisition has been accounted for under the purchase method of accounting and accordingly, the purchase price has been allocated to the identifiable assets and liabilities based on preliminary estimates of fair value at the acquisition date.  The results of Adchem have been included in the consolidated results of the Company since the date of the acquisition.  The Company has not finalized the allocations of the purchase price to the fair value of deferred taxes (including assessment of uncertain tax positions), fixed assets, and certain working capital accounts.  The assets acquired and liabilities assumed consisted of working capital of $10 million, property and equipment of $2 million, intangible assets of $22 million, and goodwill of $15 million.  The Company has recognized Goodwill on this transaction primarily as a result of expected cost synergies, and expects Goodwill to be deductible for tax purposes.

4. 
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 December 30, 2017 or September 30, 2017.  Gross amounts factored under these U.S. based programs at December 30, 2017 and September 30, 2017 were $118 million and $129 million, respectively.  The fees associated with transfer of receivables for all programs were not material for any of the periods presented.

5. 
Restructuring and Impairment Charges
 
The Company incurred restructuring costs related to severance and facility exit costs of $11 million and $4 million for the quarterly periods ended December 30, 2017 and December 31, 2016, respectively.  The costs incurred in the quarter relate primarily to severance charges associated with acquisition integrations.  The tables below set forth the significant components of the restructuring charges recognized, by segment:
 
 
 
Quarterly Period Ended
 
   
December 30, 2017
   
December 31, 2016
 
Consumer Packaging 
 
$
1
   
$
2
 
Health, Hygiene & Specialties 
   
10
     
2
 
Engineered Materials 
   
     
 
Consolidated 
 
$
11
   
$
4
 

8

The table below sets forth the activity with respect to the restructuring accrual at December 30, 2017:

 
 
Employee Severance and Benefits
   
Facility Exit
Costs
   
Total
 
Balance at September 30, 2017
 
$
14
   
$
5
   
$
19
 
Charges 
   
10
     
1
     
11
 
Cash payments 
   
(7
)
   
(1
)
   
(8
)
Balance at December 30, 2017
 
$
17
   
$
5
   
$
22
 

6.
Accrued Expenses, Other Current Liabilities and Other Long-Term Liabilities
 
The following table sets forth the totals included in Accrued expenses and other current liabilities on the Consolidated Balance Sheets:
 
 
 
December 30, 2017
   
September 30, 2017
 
Employee compensation
 
$
122
   
$
147
 
Accrued taxes
   
107
     
90
 
Rebates
   
59
     
58
 
Interest 
   
34
     
36
 
Tax receivable agreement obligation
   
24
     
35
 
Restructuring
   
22
     
19
 
Accrued operating expenses
   
86
     
78
 
   
$
454
   
$
463
 
 
The following table sets forth the totals included in Other long-term liabilities on the Consolidated Balance Sheets:
 
 
 
December 30, 2017
   
September 30, 2017
 
Pension liability 
 
$
53
   
$
56
 
Deferred purchase price
   
46
     
46
 
Lease retirement obligation
   
42
     
37
 
Transition tax
   
36
     
 
Interest rate swaps
   
26
     
27
 
Sale-lease back deferred gain
   
23
     
24
 
Tax receivable agreement obligation
   
13
     
34
 
Other 
   
75
     
76
 
 
 
$
314
   
$
300
 
 
7.  Long-Term Debt
 
Long-term debt consists of the following:
 
 Maturity Date   December 30, 2017      September 30, 2017  
Term loan 
February 2020
 
$
900
   
$
1,000
 
Term loan 
January 2021
   
814
     
814
 
Term loan 
October 2022
   
1,645
     
1,645
 
Term loan
January 2024
   
496
     
498
 
Revolving line of credit 
May 2020
   
     
 
5 1/8% Second Priority Senior Secured Notes
July 2023
   
700
     
700
 
5 1/2% Second Priority Senior Secured Notes
May 2022
   
500
     
500
 
6% Second Priority Senior Secured Notes
October 2022
   
400
     
400
 
Debt discounts and deferred fees 
     
(46
)
   
(48
)
Capital leases and other 
Various
   
127
     
132
 
Total long-term debt 
 
   
5,536
     
5,641
 
Current portion of long-term debt 
 
   
(34
)
   
(33
)
Long-term debt, less current portion
 
 
$
5,502
   
$
5,608
 
 
9

The Company was in compliance with all covenants for all periods presented.

Debt discounts and deferred financing fees are presented net of Long-term debt, less the current portion on the Consolidated Balance Sheets and are amortized to Interest expense through maturity.

Term Loans

In November 2017, the Company executed an amendment to lower interest rates under certain term loans.  The term loans maturing in February 2020 and January 2021 bear interest at LIBOR plus 2.00% with no LIBOR floor.  The term loans maturing in October 2022 and January 2024 bear interest at LIBOR plus 2.25% with no LIBOR floor.
During fiscal 2018, the Company has made $108 million of repayments on long-term borrowings using existing liquidity.  As a result of the current year prepayments and modifications, the Company recorded a $1 million loss on debt extinguishment in Other expense (income), net, reflecting the write-off of deferred financing fees and debt discounts, net of amortization associated with the portion of debt that was considered extinguished.
8.
Financial Instruments and Fair Value Measurements

In the normal course of business, the Company is exposed to certain risks arising from business operations and economic factors.  The Company may use derivative financial instruments to help manage market risk and reduce the exposure to fluctuations in interest rates and foreign currencies.  These financial instruments are not used for trading or other speculative purposes.  For those derivative instruments that are designated and qualify as hedging instruments, the Company must designate the hedging instrument, based upon the exposure being hedged, as a fair value hedge, cash flow hedge, or a hedge of a net investment in a foreign operation.

To the extent hedging relationships are found to be effective, as determined by FASB guidance, changes in the fair value of the derivatives are offset by changes in the fair value of the related hedged item and recorded to Accumulated other comprehensive loss. Any identified ineffectiveness, or changes in the fair value of a derivative not designated as a hedge, is recorded to the Consolidated Statements of Income.

Cross-Currency Swaps

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 U.S. dollar denominated term loans, including the monthly interest payments, to fixed-rate euro-denominated debt.  The swap agreements mature in May 2022.  The risk management objective is to manage foreign currency risk relating to net investments in certain European subsidiaries denominated in foreign currencies and reduce the variability in the functional currency cash flows of a portion of the Company's term loans.  Changes in fair value of the derivative instruments are recognized in a component of Accumulated other comprehensive loss, to offset the changes in the values of the net investments being hedged.

Interest Rate Swaps

The primary purpose of the Company's interest rate swap activities is to manage cash flow variability associated with our outstanding variable rate term loan debt.
 
In February 2013, the Company entered into a $1 billion interest rate swap transaction with an effective date of May 2016 and expiration in May 2019.  In June 2013, the Company elected to settle this derivative instrument and received $16 million as a result of this settlement.  The offset is included in Accumulated other comprehensive loss and is being amortized to Interest expense from May 2016 through May 2019, the original term of the swap agreement.

During fiscal 2017 the Company modified various term loan rates and maturities.  In conjunction with these modifications the Company realigned existing swap agreements which resulted in the de-designation of the original hedge and re-designation of the modified swaps as effective cash flow hedges.  The amounts included in Accumulated other comprehensive loss at the date of de-designation are being amortized to Interest expense through the terms of the original swaps.
 
At December 30, 2017, the Company effectively had (i) a $450 million interest rate swap transaction that swaps a one-month variable LIBOR contract for a fixed annual rate of 2.00%, with an effective date in May 2017 and expiration in May 2022, (ii) a $1 billion interest rate swap transaction that swaps a one-month variable LIBOR contract for a fixed annual rate of 1.5190% with an effective date in March 2017 and expiration in June 2019, (iii) 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.

10

The Company records the fair value positions of all derivative financial instruments on a net basis by counterparty for which a master netting arrangement is utilized.  When valuing swaps the Company utilizes Level 2 inputs (substantially observable).  Balances on a gross basis as of the current period are as follows:
  
Derivatives Instruments
Hedge Designation
Balance Sheet Location
 
December 30, 2017
   
September 30, 2017
 
Cross-currency swaps
Designated
Other long-term liabilities
 
$
15
   
$
 
Interest rate swaps
Designated
Other assets
   
7
     
1
 
Interest rate swaps
Not designated
Other assets
   
8
     
13
 
Interest rate swaps
Designated
Other long-term liabilities
   
1
     
15
 
Interest rate swaps 
Not designated
Other long-term liabilities
   
10
     
13
 
 
The effect of the Company's derivative instruments on the Consolidated Statements of Income is as follows:
 
 
   
Quarterly Period Ended
 
Derivatives instruments
Statement of Operations Location
December 30, 2017
 
December 31, 2016
 
Cross-currency swaps
Interest expense, net
 
$
(1
)
 
$
 
Foreign currency swaps 
Other expense (income), net
   
     
1
 
Interest rate swaps
Interest expense, net
   
2
     
5
 
 
The amortization related to unrealized losses in Accumulated other comprehensive loss is expected to be $2 million in the next 12 months.

Non-recurring Fair Value Measurements
 
The Company has certain assets that are measured at fair value on a non-recurring basis when impairment indicators are present or when the Company completes an acquisition.  The Company adjusts certain long-lived assets to fair value only when the carrying values exceed the fair values.  The categorization of the framework used to value the assets is considered Level 3, due to the subjective nature of the unobservable inputs used to determine the fair value.  These assets that are subject to our annual impairment analysis primarily include our definite lived and indefinite lived intangible assets, including Goodwill and our property, plant and equipment.  The Company reviews Goodwill and other indefinite lived assets for impairment as of the first day of the fourth fiscal quarter each year and more frequently if impairment indicators exist.  The Company determined Goodwill and other indefinite lived assets were not impaired in our annual fiscal 2017 assessment.  An incremental sustained earnings decline of 10-15% in the Health, Hygiene & Specialties - South America reporting unit, 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.

Included in the following table are the major categories of assets measured at fair value on a non-recurring basis as of December 30, 2017 and September 30, 2017, along with the impairment loss recognized on the fair value measurement during the period:
 
 
 
As of December 30, 2017
 
 
 
Level 1
   
Level 2
   
Level 3
   
Total
   
Impairment
 
Indefinite-lived trademarks
 
$
   
$
   
$
248
   
$
248
   
$
 
Goodwill 
   
     
     
2,777
     
2,777
     
 
Definite lived intangible assets
   
     
     
999
     
999
     
 
Property, plant, and equipment
   
     
     
2,363
     
2,363
     
 
Total 
 
$
   
$
   
$
6,387
   
$
6,387
   
$
 
 
 
 
As of September 30, 2017
 
 
 
Level 1
   
Level 2
   
Level 3
   
Total
   
Impairment
 
Indefinite-lived trademarks
 
$
   
$
   
$
248
   
$
248
   
$
 
Goodwill 
   
     
     
2,775
     
2,775
     
 
Definite lived intangible assets
   
     
     
1,038
     
1,038
     
 
Property, plant, and equipment
   
     
     
2,366
     
2,366
     
2
 
Total 
 
$
   
$
   
$
6,427
   
$
6,427
   
$
2
 
 
The Company's financial instruments consist primarily of cash and cash equivalents, long-term debt, interest rate and cross-currency swap agreements, and capital lease obligations.  The fair value of our long-term indebtedness exceeded book value by $61 million as of December 30, 2017.  The Company's long-term debt fair values were determined using Level 2 inputs as other significant observable inputs were not available.  

11

9. 
Income Taxes
 
In December 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the "Tax Act"). The Tax Act significantly revises the future ongoing U.S. corporate income tax by, among other things, lowering U.S. corporate income tax rates.  As the Company has a September fiscal year-end, the lower corporate income tax rate will be phased in during fiscal 2018 and will be 21% in subsequent years.  Partially offsetting the lower corporate income tax, the Tax Act also eliminates certain domestic deductions that were previously included in our estimated annual tax rate.  The estimated impact of the corporate income tax net reduction along with the transitional taxes, discussed below, were recorded to the Consolidated Statements of Income in the quarter.

As part of the transition to the new tax system, the Tax Act (i) imposes a one-time repatriation tax on deemed repatriation of historical earnings of foreign subsidiaries and (ii) requires the Company revalue our U.S. net deferred tax liability position to the lower federal base rate of 21%.  These transitional impacts resulted in a provisional transition benefit of $95 million for the quarter, comprised of an estimated repatriation tax charge of $44 million (comprised of the U.S. repatriation taxes and foreign withholding taxes) and an estimated net deferred tax revaluation benefit of $139 million.  After exclusion of this benefit, the effective tax rate was 26% for the Quarter and was positively impacted by 3% from the share-based compensation excess tax benefit deduction and a 2% benefit from the domestic manufacturing deduction.  These favorable items were partially offset by increases of 3% from U.S. state income taxes, 2% from foreign valuation allowance, 1% from higher tax rates in foreign jurisdictions, and other discrete items.

The changes included in the Tax Act are broad and complex.  The final transition impacts of the Tax Act may differ from the above estimate, possibly materially, due to, among other things, changes in interpretations of the Tax Act, any legislative action to address questions that arise because of the Tax Act, any changes in accounting standards for income taxes or related interpretations in response to the Tax Act, or any updates or changes to estimates the Company has utilized to calculate the transition impacts.  The Securities and Exchange Commission has issued guidance that would allow for a measurement period of up to one year after the enactment date of the Tax Act to finalize the recording of the related tax impacts.  We currently anticipate finalizing and recording any resulting adjustments by the end of fiscal 2018.

10. 
Operating Segments
 
The Company's operations are organized into three operating segments: Engineered Materials, Health, Hygiene & Specialties, and Consumer Packaging.  The structure is designed to align us with our customers, provide optimal service, and drive future growth in a cost efficient manner.  Selected information by reportable segment is presented in the following tables: 

 
 
Quarterly Period Ended
 
 
 
December 30, 2017
   
December 31, 2016
 
Net sales:
           
Engineered Materials  
 
$
648
   
$
383
 
Health, Hygiene & Specialties 
   
577
     
570
 
Consumer Packaging 
   
551
     
549
 
Total net sales 
 
$
1,776
   
$
1,502
 
Operating income:
               
Engineered Materials  
 
$
88
   
$
53
 
Health, Hygiene & Specialties 
   
37
     
59
 
Consumer Packaging 
   
38
     
34
 
Total operating income
 
$
163
   
$
146
 
Depreciation and amortization:
               
Engineered Materials  
 
$
29
   
$
17
 
Health, Hygiene & Specialties 
   
46
     
44
 
Consumer Packaging 
   
54
     
59
 
 Total depreciation and amortization
 
$
129
   
$
120
 

 
 
December 30, 2017
   
September 30, 2017
 
Total assets:
           
Engineered Materials
 
$
1,753
   
$
1,803
 
Health, Hygiene & Specialties 
   
3,475
     
3,496
 
Consumer Packaging 
   
3,192
     
3,177
 
Total assets 
 
$
8,420
   
$
8,476
 
 
 
12

Selected information by geography is presented in the following tables:
 
 
Quarterly Period Ended
 
 
December 30, 2017
 
December 31, 2016
 
Net sales:
       
North America
 
$
1,466
   
$
1,204
 
South America
   
74
     
80
 
Europe
   
170
     
149
 
Asia
   
66
     
69
 
Total net sales
 
$
1,776
   
$
1,502
 
                 
 
December 30, 2017
 
September 30, 2017
 
Long-lived assets:
               
North America
 
$
5,313
   
$
5,350
 
South America
   
358
     
371
 
Europe
   
470
     
467
 
Asia
   
298
     
284
 
Total long-lived assets:
 
$
6,439
   
$
6,472
 

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

 
 
Quarterly Period Ended
 
 
 
December 30, 2017
   
December 31, 2016
 
Net sales:
           
Performance Materials
   
45
     
73
 
Engineered Products
   
55
     
27
 
Engineered Materials
   
100
%
   
100
%
                 
Health
   
19
     
20
 
Hygiene
   
44
     
46
 
Specialties
   
37
     
34
 
Health, Hygiene & Specialties
   
100
%
   
100
%
                 
Rigid Open Top
   
43
     
42
 
Rigid Closed Top
   
57
     
58
 
Consumer Packaging
   
100
%
   
100
%

Goodwill  

The changes in the carrying amount of goodwill by reportable segment are as follows: 
 
 
 
Engineered Materials
   
Health, Hygiene
& Specialties
   
Consumer Packaging
   
Total
 
Balance as of September 30, 2017
 
$
545
   
$
819
   
$
1,411
   
$
2,775
 
Acquisitions, net
   
4
     
     
     
4
 
Foreign currency translation adjustment
   
     
(2
)
   
     
(2
)
Balance as of December 30, 2017
 
$
549
   
$
817
   
$
1,411
   
$
2,777
 


11. 
Contingencies and Commitments
 
The Company is party to various legal proceedings involving routine claims which are incidental to its business.  Although the Company's legal and financial liability with respect to such proceedings cannot be estimated with certainty, management believes that any ultimate liability would not be material to its financial statements.
 
The Company has various purchase commitments for raw materials, supplies, and property and equipment incidental to the ordinary conduct of business.
 
13

 
12. 
Basic and Diluted Net Income Per Share
 
Basic net income per share is calculated by dividing the net income attributable to common stockholders by the weighted-average number of common shares outstanding during the period, without consideration for common stock equivalents.  Diluted net income per share is calculated by dividing the net income attributable to common stockholders by the weighted-average number of common share equivalents outstanding for the period determined using the treasury-stock method and the if-converted method.  For purposes of this calculation, stock options are considered to be common stock equivalents and are only included in the calculation of diluted net income per share when their effect is dilutive.  There were no shares excluded from the calculations as the effect of their conversion into shares of our common stock would be antidilutive.
 
The following tables provide a reconciliation of the numerator and denominator of the basic and diluted net income per share calculations.
 
 
 
Quarterly Period Ended
 
(in millions, except per share amounts)
 
December 30, 2017
   
December 31, 2016
 
Numerator
           
Consolidated net income
 
$
163
   
$
51
 
Denominator
               
Weighted average common shares outstanding - basic
   
131.0
     
122.0
 
Dilutive shares
   
5.0
     
5.8
 
Weighted average common and common equivalent shares outstanding - diluted
   
136.0
     
127.8
 
                 
Per common share income
               
Basic
 
$
1.24
   
$
0.42
 
Diluted
 
$
1.20
   
$
0.40
 

13.  Accumulated Other Comprehensive Loss
 
The components and activity of Accumulated other comprehensive loss are as follows: 
 
   
Currency Translation
   
Defined Benefit Pension and Retiree Health Benefit Plans
   
Interest Rate Swaps
   
Accumulated Other
Comprehensive
Loss
 
Balance at September 30, 2017 
 
$
(48
)
 
$
(16
)
 
$
(4
)
 
$
(68
)
Other comprehensive income (loss) before reclassifications 
   
(24
)
   
(1
)
   
14
     
(11
)
Net amount reclassified from accumulated other comprehensive income (loss)  
   
     
     
3
     
3
 
Provision for income taxes
   
     
     
(4
)
   
(4
)
Balance at December 30, 2017
 
$
(72
)
 
$
(17
)
 
$
9
   
$
(80
)

   
Currency Translation
   
Defined Benefit Pension and Retiree Health Benefit Plans
   
Interest Rate Swaps
   
Accumulated Other
Comprehensive
Loss
 
Balance at October 1, 2016
 
$
(82
)
 
$
(44
)
 
$
(22
)
 
$
(148
)
Other comprehensive income (loss) before reclassifications 
   
(45
)
   
     
12
     
(33
)
Net amount reclassified from accumulated other comprehensive income (loss)  
   
     
     
5
     
5
 
Provision for income taxes
   
     
     
(6
)
   
(6
)
Balance at December 31, 2016
 
$
(127
)
 
$
(44
)
 
$
(11
)
 
$
(182
)
 

 
14

14. 
Guarantor and Non-Guarantor Financial Information 
 
Berry Global, Inc. ("Issuer") has notes outstanding which are fully, jointly, severally, and unconditionally guaranteed by its parent, Berry Global Group, Inc. (for purposes of this Note, "Parent") and substantially all of Issuer's domestic subsidiaries.  Separate narrative information or financial statements of the guarantor subsidiaries have not been included because they are 100% owned by Parent and the guarantor subsidiaries unconditionally guarantee such debt on a joint and several basis.  A guarantee of a guarantor subsidiary of the securities will terminate upon the following customary circumstances:  the sale of the capital stock of such guarantor if such sale complies with the indentures, the designation of such guarantor as an unrestricted subsidiary, the defeasance or discharge of the indenture or in the case of a restricted subsidiary that is required to guarantee after the relevant issuance date, if such guarantor no longer guarantees certain other indebtedness of the issuer.  The guarantees of the guarantor subsidiaries are also limited as necessary to prevent them from constituting a fraudulent conveyance under applicable law and any guarantees guaranteeing subordinated debt are subordinated to certain other of the Company's debts.  Parent also guarantees the Issuer's term loans and revolving credit facilities.  The guarantor subsidiaries guarantee our term loans and are co-borrowers under our revolving credit facility.  Presented below is condensed consolidating financial information for the Parent, Issuer, guarantor subsidiaries and non-guarantor subsidiaries.  The Issuer and guarantor financial information includes all of our domestic operating subsidiaries; our non-guarantor subsidiaries include our foreign subsidiaries, certain immaterial domestic subsidiaries and the unrestricted subsidiaries under the Issuer's indentures.  The Parent uses the equity method to account for its ownership in the Issuer in the Condensed Consolidating Supplemental Financial Statements.  The Issuer uses the equity method to account for its ownership in the guarantor and non-guarantor subsidiaries.  All consolidating entries are included in the eliminations column along with the elimination of intercompany balances.

Condensed Supplemental Consolidated Balance Sheet

 
 
December 30, 2017
 
 
 
Parent
   
Issuer
   
Guarantor
Subsidiaries
   
Non—
Guarantor
Subsidiaries
   
Eliminations
   
Total
 
Current assets
   
     
126
     
1,127
     
728
     
     
1,981
 
Intercompany receivable
   
334
     
2,286
     
     
     
(2,620
)
   
 
Property, plant, and equipment, net
   
     
73
     
1,564
     
726
     
     
2,363
 
Other assets
   
1,152
     
5,401
     
4,555
     
528
     
(7,560
)
   
4,076
 
Total assets
 
$
1,486
   
$
7,886
   
$
7,246
   
$
1,982
   
$
(10,180
)
 
$
8,420
 
 
                                               
Current liabilities
   
24
     
279
     
560
     
291
     
     
1,154
 
Intercompany payable
   
     
     
2,571
     
49
     
(2,620
)
   
 
Other long-term liabilities
   
288
     
5,649
     
90
     
65
     
     
6,092
 
Stockholders' equity
   
1,174
     
1,958
     
4,025
     
1,577
     
(7,560
)
   
1,174
 
Total liabilities and stockholders' equity
 
$
1,486
   
$
7,886
   
$
7,246
   
$
1,982
   
$
(10,180
)
 
$
8,420
 

 
 
September 30, 2017
 
 
 
Parent
   
Issuer
   
Guarantor
Subsidiaries
   
Non—
Guarantor
Subsidiaries
   
Eliminations
   
Total
 
Current assets
   
     
116
     
1,113
     
775
     
     
2,004
 
Intercompany receivable
   
512
     
2,217
     
     
     
(2,729
)
   
 
Property, plant and equipment, net
   
     
80
     
1,564
     
722
     
     
2,366
 
 Other assets
   
992
     
5,335
     
4,583
     
533
     
(7,337
)
   
4,106
 
 Total assets
 
$
1,504
   
$
7,748
   
$
7,260
   
$
2,030
   
$
(10,066
)
 
$
8,476
 
 
                                               
Current liabilities
   
36
     
243
     
537
     
318
     
     
1,134
 
Intercompany payable
   
     
     
2,667
     
62
     
(2,729
)
   
 
Other long-term liabilities
   
453
     
5,707
     
99
     
68
     
     
6,327
 
Stockholders' equity
   
1,015
     
1,798
     
3,957
     
1,582
     
(7,337
)
   
1,015
 
Total liabilities and stockholders' equity
 
$
1,504
   
$
7,748
   
$
7,260
   
$
2,030
   
$
(10,066
)
 
$
8,476
 
 
15

Condensed Supplemental Consolidated Statements of Operations

 
 
Quarterly Period Ended December 30, 2017
 
 
 
Parent
   
Issuer
   
Guarantor
Subsidiaries
   
Non-
Guarantor
Subsidiaries
   
Eliminations
   
Total
 
Net sales
 
$
   
$
138
   
$
1,225
   
$
413
   
$
   
$
1,776
 
Cost of goods sold
   
     
106
     
989
     
352
     
     
1,447
 
Selling, general and administrative
   
     
12
     
80
     
25
     
     
117
 
Amortization of intangibles
   
     
     
31
     
7
     
     
38
 
Restructuring and impairment charges
   
     
     
7
     
4
     
     
11
 
Operating income
   
     
20
     
118
     
25
     
     
163
 
Other expense (income), net
   
     
5
     
7
     
(3
)
   
     
9
 
Interest expense, net
   
     
5
     
43
     
14
     
     
62
 
Equity in net income of subsidiaries
   
(92
)
   
(72
)
   
     
     
164
     
 
Income before income taxes
   
92
     
82
     
68
     
14
     
(164
)
   
92
 
Income tax expense
   
(71
)
   
(81
)
   
     
10
     
71
     
(71
)
Consolidated net income
 
$
163
   
$
163
   
$
68
   
$
4
   
$
(235
)
 
$
163
 
Comprehensive net income
 
$
163
   
$
160
   
$
68
   
$
(5
)
 
$
(235
)
 
$
151
 
                                                 
Consolidating Statement of Cash Flows
                                               
Cash Flow from Operating Activities
 
$
   
$
35
   
$
139
   
$
(21
)
 
$
   
$
153
 
Cash Flow from Investing Activities
                                               
Additions to  property, plant, and equipment
   
     
(3
)
   
(61
)
   
(30
)
   
     
(94
)
Proceeds from sale of assets
   
     
     
     
3
     
     
3
 
(Contributions) distributions to/from subsidiaries
   
(4
)
   
4
     
     
     
     
 
Intercompany advances (repayments)
   
     
69
     
     
     
(69
)
   
 
Net cash from investing activities
   
(4
)
   
70
     
(61
)
   
(27
)
   
(69
)
   
(91
)
 
                                               
Cash Flow from Financing Activities
                                               
Repayments on long-term borrowings
   
     
(106
)
   
(2
)
   
     
     
(108
)
Proceeds from issuance of common stock
   
4
     
     
     
     
     
4
 
Payment of tax receivable agreement
   
(37
)
   
     
     
     
     
(37
)
Changes in intercompany balances
   
37
     
     
(86
)
   
(20
)
   
69
     
 
Net cash from financing activities
   
4
     
(106
)
   
(88
)
   
(20
)
   
69
     
(141
)
 
                                               
Effect of exchange rate changes on cash
   
     
     
     
1
     
     
1
 
 
                                               
Net change in cash
   
     
(1
)
   
(10
)
   
(67
)
   
     
(78
)
Cash and cash equivalents at beginning of period
   
     
18
     
12
     
276
     
     
306
 
Cash and cash equivalents at end of period
 
$
   
$
17
   
$
2
   
$
209
   
$
   
$
228
 
 

 
 
Quarterly Period Ended December 31, 2016
 
 
 
Parent
   
Issuer
   
Guarantor
Subsidiaries
   
Non—
Guarantor
Subsidiaries
   
Eliminations
   
Total
 
Net sales
 
$
   
$
143
   
$
979
   
$
380
   
$
   
$
1,502
 
Cost of goods sold
   
     
116
     
789
     
301
     
     
1,206
 
Selling, general and administrative
   
     
42
     
75
     
(4
)
   
     
113
 
Amortization of intangibles
   
     
2
     
25
     
6
     
     
33
 
Restructuring and impairment charges
   
     
     
4
     
     
     
4
 
Operating income (loss)
   
     
(17
)
   
86
     
77
     
     
146
 
Other income, net
   
     
4
     
     
(5
)
   
     
(1
)
Interest expense, net
   
     
6
     
45
     
17
     
     
68
 
Equity in net income of subsidiaries
   
(79
)
   
(92
)
   
     
     
171
     
 
Income before income taxes
   
79
     
65
     
41
     
65
     
(171
)
   
79
 
Income tax expense
   
28
     
14
     
     
14
     
(28
)
   
28
 
Consolidated net income
 
$
51
   
$
51
   
$
41
   
$
51
   
$
(143
)
 
$
51
 
Comprehensive net income
 
$
51
   
$
62
   
$
41
   
$
6
   
$
(143
)
 
$
17
 
 
16

                                                 
Consolidating Statement of Cash Flows
                                               
Cash Flow from Operating Activities
 
$
   
$
(19
)
 
$
120
   
$
42
   
$
   
$
143
 
Cash Flow from Investing Activities
                                               
Additions to property, plant, and equipment
   
     
(2
)
   
(50
)
   
(13
)
   
     
(65
)
Proceeds from sale of assets
   
     
1
     
1
     
     
     
2
 
(Contributions) distributions to/from subsidiaries
   
(5
)
   
5
     
     
     
     
 
Intercompany advances (repayments)
   
     
39
     
     
     
(39
)
   
 
Other investing activities, net
   
     
(1
)
   
     
     
     
(1
)
Net cash from investing activities
   
(5
)
   
42
     
(49
)
   
(13
)
   
(39
)
   
(64
)
 
                                               
Cash Flow from Financing Activities
                                               
Repayments on long-term borrowings
   
     
(9
)
   
(1
)
   
     
     
(10
)
Proceeds from issuance of common stock
   
5
     
     
     
     
     
5
 
Payment of tax receivable agreement
   
(60
)
   
     
     
     
     
(60
)
Changes in intercompany balances
   
60
     
     
(67
)
   
(32
)
   
39
     
 
Net cash from financing activities
   
5
     
(9
)
   
(68
)
   
(32
)
   
39
     
(65
)
 
                                               
Effect of exchange rate changes on cash
   
     
     
     
(6
)
   
     
(6
)
 
                                               
Net change in cash
   
     
14
     
3
     
(9
)
   
     
8
 
Cash and cash equivalents at beginning of period
   
     
102
     
5
     
216
     
     
323
 
Cash and cash equivalents at end of period
 
$
   
$
116
   
$
8
   
$
207
   
$
   
$
331
 

15. Subsequent Events

In January 2018, the Company issued $500 million aggregate principal amount of 4.50% second priority senior secured notes due 2026 (the "Notes") through a private placement offering.  The net proceeds from the Notes were used to fund the acquisition of Clopay Plastic Products Company, Inc. ("Clopay").

In February 2018, the Company acquired Clopay for a purchase price of $475 million, which is preliminary and subject to adjustment.  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 will be operated within the Health, Hygiene and Specialties segment.
17

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
 
This discussion contains forward-looking statements and involves numerous risks and uncertainties, including, but not limited to, those described in our most recent Form 10-K in the section titled "Risk Factors" and other risk factors identified from time to time in our periodic filings with the Securities and Exchange Commission.  As a result, our actual results may differ materially from those contained in any forward-looking statements.  The forward-looking statements referenced within this report should be read with the explanation of the qualifications and limitations included herein.  Fiscal 2017 and fiscal 2018 are fifty-two week periods.
 
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 optimal 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.

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.  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.

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.   

Clopay Plastic Products Company, Inc.
 
In February 2018, the Company acquired Clopay for a purchase price of $475 million, which is preliminary and subject to adjustment.  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 will be operated within the Health, Hygiene and Specialties segment.  The Company expects to realize annual cost synergies of approximately $20 million from the completion of the Clopay transaction.  To finance the purchase, the Company used the proceeds from the $500 million Notes (see footnote 15).

Raw Material Trends.  Our primary raw material is plastic resin consisting primarily of polypropylene and polyethylene. 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 U.S. market indexes, was as follows:
 
18

 
 
Polyethylene Butene Film
   
Polypropylene
 
 
 
2018
   
2017
   
2016
   
2018
   
2017
   
2016
 
1st quarter
 
$
.87
   
$
.75
   
$
.69
   
$
.84
   
$
.69
   
$
.70
 
2nd quarter
   
     
.77
     
.66
     
     
.80
     
.75
 
3rd quarter
   
     
.79
     
.73
     
     
.74
     
.71
 
4th quarter
   
     
.81
     
.75
     
     
.75
     
.71
 
 
Due to differences in the timing of passing through resin cost changes to our customers on escalator/de-escalator programs, segments are negatively impacted in the short term when plastic resin costs increase and are positively impacted when plastic resin costs decrease. This timing lag in passing through raw material cost changes could affect our results as plastic resin costs fluctuate. 
 
Outlook.  The Company is impacted by general economic and industrial growth, plastic resin availability and affordability, and general industrial production.  Our business has both geographic and end-market diversity, which reduces the effect of any one of these factors on our overall performance.  Our results are affected by our ability to pass through raw material cost changes to our customers, improve manufacturing productivity and adapt to volume changes of our customers.  We believe there are long term growth opportunities within the health, pharmaceuticals, personal care and food packaging markets existing in developing countries, 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 in part as a result of resin supply disruptions, as well as macroeconomic pressures in South America could create short-term headwinds for early fiscal 2018.  For fiscal 2018, including the impact from the recent Clopay transaction, we project cash flow from operations and adjusted free cash flow of $1,007 million and $630 million, respectively.  Our fiscal 2018 projections assume negative $40 million in working capital due to the recent raw material inflation, $340 million of capital spending and cash interest costs of $250 million.  Within our adjusted free cash flow guidance, we are also assuming cash taxes to be $160 million, including the $37 million payment made in the first quarter under the Company's tax receivable agreement and an estimated $50 million of cash tax savings related to the Tax Cuts and Jobs Act ( the "Tax Act"), along with other cash uses of $50 million related to items such as acquisition integration expenses and costs to achieve synergies.  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."
 
Results of Operations
 
Comparison of the Quarterly Period Ended December 30, 2017 (the "Quarter") and the Quarterly Period Ended December 31, 2016 (the "Prior Quarter")
 
Acquisition (businesses acquired in the last twelve months) sales and operating income disclosed within this section represents the results from acquisitions for the current period.  Business integration expenses consist of restructuring and impairment charges, acquisition related costs, and other business optimization costs.  Tables present dollars in millions.
 
Consolidated Overview
               
 
Quarter
 
Prior Quarter
 
$ Change
 
% Change
 
Net sales
 
$
1,776
   
$
1,502
   
$
274
     
18
%
Operating income
 
$
163
   
$
146
   
$
17
     
12
%
Operating income percentage of net sales
   
9
%
   
10
%
               
 
The net sales increase of $274 million from Prior Quarter is primarily attributed to acquisition net sales of $267 million, an $18 million favorable impact from currency translation, and increases in selling prices due to the pass through of higher resin prices.  These increase are partially offset by a 1% base volume decline.

The operating income increase of $17 million from Prior Quarter is primarily attributed to acquisition operating income of $26 million, and an $11 million decrease in selling, general, and administrative expenses from cost reductions, and a $7 million decrease in depreciation and amortization. These increases are partially offset by an $18 million unfavorable impact from under recovery of higher cost of goods sold, a $5 million increase in business integration and restructuring costs, and a $4 million unfavorable impact from the volume decline.
Engineered Materials
               
 
Quarter
 
Prior Quarter
 
$ Change
 
% Change
 
Net sales
 
$
648
   
$
383
   
$
265
     
69
%
Operating income
 
$
88
   
$
53
   
$
35
     
66
%
Percentage of net sales
   
14
%
   
14
%
               
 
19

Net sales in the Engineered Materials segment increased by $265 million from Prior Quarter primarily attributed to acquisition net sales of $267 million and a $6 million increase in selling prices due to the pass through of higher resin prices, partially offset by a 2% base volume decline.
 
The operating income increase of $35 million from Prior Quarter is primarily attributed to acquisition operating income of $26 million, a $4 million favorable impact from improvement in price cost spread, and a $4 million decrease in depreciation and amortization.
 
Health, Hygiene & Specialties
               
 
Quarter
 
Prior Quarter
 
$ Change
 
% Change
 
Net sales
 
$
577
   
$
570
   
$
7
     
1
%
Operating income
 
$
37
   
$
59
   
$
(22
)
   
(37
%)
Percentage of net sales
   
6
%
   
10
%
               
 
Net sales in the Health, Hygiene & Specialties segment increased by $7 million from Prior Quarter primarily attributed to a $16 million favorable impact from currency translation, partially offset by a 1% base volume decline. 
 
The operating income decrease of $22 million from Prior Quarter is primarily attributed to a $17 million negative impact from under recovery of higher cost of goods sold related to inflation and market pressure in South America, a $6 million increase in business integration and restructuring costs, and a slight increase in depreciation and amortization expense, partially offset by a $4 million decrease in selling, general and administrative expenses.
 
Consumer Packaging
               
 
Quarter
 
Prior Quarter
 
$ Change
 
% Change
 
Net sales
 
$
551
   
$
549
   
$
2
     
0
%
Operating income
 
$
38
   
$
34
   
$
4
     
12
%
Percentage of net sales
   
7
%
   
6
%
               
 
Net sales in the Consumer Packaging segment increased by $2 million from Prior Quarter primarily attributed to an $8 million impact from selling price increases due to the pass through of higher resin prices, partially offset by a 1% base volume decline.
 
The operating income increase of $4 million from Prior Quarter is primarily attributed to a $5 million decrease in depreciation and amortization expense and a $5 million decrease in selling, general and administrative expense, partially offset by a $5 million unfavorable impact from under recovery of higher cost of goods sold.
 
Other expense (income), net
               
 
Quarter
 
Prior Quarter
 
$ Change
 
% Change
 
Other expense (income), net
 
$
9
   
$
(1
)
 
$
10
     
1,000
%
 
The other expense (income), net increase of $10 million from Prior Quarter is primarily attributed to a $4 million tax receivable agreement revaluation as a result of tax reform, a $3 million loss on asset disposal in the Quarter and unfavorable foreign currency changes related to the remeasurement of non-operating intercompany balances.
 
Interest expense, net
               
 
Quarter
 
Prior Quarter
 
$ Change
 
% Change
 
Interest expense, net
 
$
62
   
$
68
   
$
(6
)
   
(9
%)
 
The interest expense decrease of $6 million from Prior Quarter is primarily attributed to lower interest rates on our term loans as a result of term loan modifications and reduced indebtedness.

Income tax expense (benefit)
               
 
Quarter
 
Prior Quarter
 
$ Change
 
% Change
 
Income tax expense (benefit)
 
$
(71
)
 
$
28
   
$
(99
)
   
(354
%)
 
The income tax expense (benefit) decrease of $99 million from the Prior Quarter is primarily attributed to the $95 million provisional transition benefit recorded in the Quarter as a result of the recent U.S. tax legislation more fully described in footnote 9. After exclusion of the transitional benefit, the effective tax rate was 26% for the Quarter and was positively impacted by 3% from the share-based compensation excess tax benefit deduction and a 2% benefit from the domestic manufacturing deduction. These favorable items were partially offset by increases of 3% from U.S. state income taxes, 2% from foreign valuation allowance, 1% from higher tax rates in foreign jurisdictions, and other discrete items.
 
20

Changes in Comprehensive Income (Loss)
 
The $134 million improvement in Comprehensive income (loss) from Prior Quarter is primarily attributed to a $112 million improvement in Net income and a $21 million favorable change in currency translation, which is net of a negative $15 million related to the cross-currency swap.  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.  The change in currency translation in the Quarter was primarily attributed to locations utilizing the euro as the functional currency.  As part of the overall risk management, the Company uses derivative instruments to reduce exposure to (i) changes in interest rates attributed to the Company's floating-rate borrowings and (ii) currency risk related to net investments in foreign subsidiaries.  The change in fair value of these instruments is included in Accumulated other comprehensive loss.  The $2 million favorable change in fair value of these instruments in the Quarter versus Prior Quarter is primarily attributed to an increase in the forward interest curve between measurement dates.

Liquidity and Capital Resources
  
Senior Secured Credit Facility
 
We manage our global cash requirements considering (i) available funds among the many subsidiaries through which we conduct business, (ii) the geographic location of our liquidity needs, and (iii) the cost to access international cash balances.  We have a $750 million asset-based revolving line of credit that matures in May 2020.  At the end of the Quarter, the Company had no outstanding balance on the revolving credit facility.  The Company was in compliance with all covenants at the end of the Quarter (see footnote 7 to the Notes to the Consolidated Financial Statements incorporated herein).
  
Cash Flows
 
Net cash from operating activities increased $10 million from the Prior Quarter primarily attributed to improved net income before depreciation, amortization and the net impact of the recently announced U.S. tax legislation, partially offset by an increase in working capital due to higher raw material costs.
 
Net cash from investing activities increased $27 million from the Prior Quarter primarily attributed to increased capital expenditures compared to the Prior Quarter.

Net cash from financing activities increased $76 million from the Prior Quarter primarily attributed to increased repayments on our term loans partially offset by lower tax receivable agreement payments.

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:

   
Quarterly Period Ended
 
   
December 30, 2017
   
December 31, 2016
 
Cash flow from operating activities
 
$
153
   
$
143
 
Additions to property, plant and equipment, net
   
(91
)
   
(63
)
Payments of tax receivable agreement
   
(37
)
   
(60
)
Adjusted free cash flow
 
$
25
   
$
20
 

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.

21

Liquidity Outlook
  
At December 30, 2017, our cash balance was $228 million, of which approximately 90% was located outside the U.S.  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 of our most recent Form 10-K filed with the Securities and Exchange Commission and in this Form 10-Q, if any.

22

Item 3. 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 December 30, 2017, our senior secured credit facilities are comprised of (i) $3.9 billion term loans and (ii) a $750 million revolving credit facility with no borrowings outstanding.  Borrowings under our 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 the term loans range from 2.00% to 2.25% per annum with a 0% LIBOR floor.  At December 30, 2017, the LIBOR rate of approximately 1.56% 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 December 30, 2017, the Company effectively had (i) a $450 million interest rate swap transaction that swaps a one-month variable LIBOR contract for a fixed annual rate of 2.00%, with an effective date in May 2017 and expiration in May 2022, (ii) a $1 billion interest rate swap transaction that swaps a one-month variable LIBOR contract for a fixed annual rate of 1.5190% with an effective date in March 2017 and expiration in June 2019, (iii) 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.

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 U.S. dollar 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 certain European subsidiaries denominated in foreign currencies and reduce the variability in the functional currency cash flows of a portion of the Company's term loans.  In the future, 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.
23

Item 4.
Controls and Procedures
 
(a)
Evaluation of disclosure controls and procedures.
 
Under applicable Securities and Exchange Commission regulations, management of a reporting company, with the participation of the principal executive officer and principal financial officer, must periodically evaluate the company's "disclosure controls and procedures," which are defined generally as controls and other procedures of a reporting company designed to ensure that information required to be disclosed by the reporting company in its periodic reports filed with the commission (such as this Form 10-Q) is recorded, processed, summarized, and reported on a timely basis.
The Company's management, with the participation of the Chief Executive Officer and the Chief Financial Officer, carried out an evaluation of the effectiveness of the design and operation of the disclosure controls and procedures as of December 30, 2017.  Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of December 30, 2017, the design and operation of our disclosure controls and procedures were effective at the reasonable assurance level.
 
(b)
Changes in internal controls.
 
There were no changes in our internal control over financial  reporting that occurred during the quarter ended December 30, 2017 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.


24

Part II. Other Information
 
Item 1.
Legal Proceedings
 
There have been no material changes in legal proceedings from the items disclosed in our Form 10-K filed with the Securities and Exchange Commission.
 
Item 1A.
Risk Factors
 
Before investing in our securities, we recommend that investors carefully consider the risks described in our most recent Form 10-K filed with the Securities and Exchange Commission, including those under the heading "Risk Factors" and other information contained in this Quarterly Report.  Realization of any of these risks could have a material adverse effect on our business, financial condition, cash flows and results of operations.  In addition to the Company's risk factors described in our most recent Form 10-K filed with the Securities and Exchange Commission, investors should consider the following risk factor.

The final impacts of the Tax Cuts and Jobs Act could be materially different from our current estimates.

The Tax Cuts and Jobs Act was signed into law in December 2017. The new law made numerous changes to federal corporate tax law that we expect will significantly reduce our effective tax rate in future periods.  The changes included in the Tax Act are broad and complex. The final transition impacts of the Tax Act may differ from our current estimates, possibly materially, due to, among other things, changes in interpretations of the Tax Act, any legislative action to address questions that arise because of the Tax Act, any changes in accounting standards for income taxes or related interpretations in response to the Tax Act, or any updates or changes to estimates the Company has utilized to calculate the transition impacts.

Forward-looking Statements and Other Factors Affecting Future Results.

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 our acquisition strategy and integration of acquired businesses; 
reliance on unpatented know-how and trade secrets; 
increases in the cost of compliance with laws and regulations, including environmental, safety, and production and product laws and regulations; 
risks related to disruptions in the overall economy and the financial markets that may adversely impact our business; 
catastrophic loss of one of our key manufacturing facilities, natural disasters, and other unplanned business interruptions; 
risks of competition, including foreign competition, in our existing and future markets; 
risks related to the market acceptance of our developing technologies and products;
general business and economic conditions, particularly an economic downturn; 
risks that our restructuring program may entail greater implementation costs or result in lower cost savings than anticipated;
the ability of our insurance to cover fully our potential exposures;
new legislation or new regulations and the Company's corresponding interpretations of either may affect our business and consolidated financial condition and results of operations; and
the other factors discussed in our most recent Form 10-K and in this Form 10-Q 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-Q 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.

25


Item 6.
Exhibits
 
 
3.1
4.1
10.1*
10.2*
31.1* 
31.2* 
32.1* 
32.2* 
101. 
Interactive Data Files.
 
Filed herewith.

26

SIGNATURE
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
Berry Global Group, Inc.
 
 
 
 
 
February 7, 2018
By:
/s/ Mark W. Miles
 
 
 
Mark W. Miles
 
 
 
Chief Financial Officer
 
 

27