BERRY GLOBAL GROUP, INC. - Quarter Report: 2020 June (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 27, 2020
OR
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from __________ to __________
Commission File Number 001-35672
![graphic](https://www.sec.gov/Archives/edgar/data/0001378992/000114036120017149/image1.jpg)
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 Exchange Act:
Title of each class |
Trading Symbol(s) |
Name of each exchange on which registered |
Common Stock, $0.01 par value per share |
BERY |
New York Stock Exchange |
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 for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer ☒ |
Accelerated Filer ☐ |
Non-accelerated Filer ☐ |
Smaller Reporting Company ☐ |
Emerging Growth Company ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
There were 132.6 million shares of common stock outstanding at July 31, 2020.
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, as amended, 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, and 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.
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 June 27, 2020
Part I. |
Financial Information |
Page No. |
|
Item 1. |
Financial Statements: |
||
4 |
|||
5 |
|||
6 |
|||
7 |
|||
8 |
|||
Item 2. |
17 |
||
Item 3. |
24 |
||
Item 4. |
25 |
||
Part II. |
Other Information |
||
Item 1. |
26 |
||
Item 1A. |
26 |
||
Item 2. |
28 |
||
Item 6. |
29 |
||
30 |
3
Part I. Financial Information
Item 1. | Financial Statements |
Consolidated Statements of Income
(Unaudited)
(in millions of dollars, except per share amounts)
Quarterly Period Ended |
Three Quarterly Periods Ended |
|||||||||||||||
June 27, 2020 |
June 29, 2019 |
June 27, 2020 |
June 29, 2019 |
|||||||||||||
Net sales |
$ |
2,910 |
$ |
1,937 |
$ |
8,701 |
$ |
5,859 |
||||||||
Costs and expenses: |
||||||||||||||||
Cost of goods sold |
2,272 |
1,559 |
6,959 |
4,737 |
||||||||||||
Selling, general and administrative |
198 |
125 |
631 |
392 |
||||||||||||
Amortization of intangibles |
74 |
38 |
226 |
119 |
||||||||||||
Restructuring and transaction activities |
19 |
— |
55 |
35 |
||||||||||||
Operating income |
347 |
215 |
830 |
576 |
||||||||||||
Other (income) expense, net |
(7 |
) |
136 |
6 |
159 |
|||||||||||
Interest expense, net |
110 |
71 |
339 |
201 |
||||||||||||
Income before income taxes |
244 |
8 |
485 |
216 |
||||||||||||
Income tax expense (benefit) |
53 |
(5 |
) |
121 |
41 |
|||||||||||
Net income |
$ |
191 |
$ |
13 |
$ |
364 |
$ |
175 |
||||||||
Net income per share: |
||||||||||||||||
Basic |
$ |
1.44 |
$ |
0.10 |
$ |
2.75 |
$ |
1.34 |
||||||||
Diluted |
1.42 |
0.10 |
2.71 |
1.31 |
||||||||||||
Outstanding weighted-average shares: |
||||||||||||||||
Basic |
132.5 |
131.5 |
132.4 |
131.0 |
||||||||||||
Diluted |
134.2 |
134.2 |
134.3 |
134.0 |
Consolidated Statements of Comprehensive Income
(Unaudited)
(in millions of dollars)
Quarterly Period Ended |
Three Quarterly Periods Ended |
|||||||||||||||
June 27, 2020 |
June 29, 2019 |
June 27, 2020 |
June 29, 2019 |
|||||||||||||
Net income |
$ |
191 |
$ |
13 |
$ |
364 |
$ |
175 |
||||||||
Other comprehensive income (loss), net of tax: |
||||||||||||||||
Currency translation |
11 |
10 |
(54 |
) |
12 |
|||||||||||
Pension |
— |
— |
(1 |
) |
— |
|||||||||||
Derivative instruments |
(13 |
) |
(35 |
) |
(109 |
) |
(67 |
) |
||||||||
Other comprehensive income (loss) |
(2 |
) |
(25 |
) |
(164 |
) |
(55 |
) |
||||||||
Comprehensive income (loss) |
$ |
189 |
$ |
(12 |
) |
$ |
200 |
$ |
120 |
See notes to consolidated financial statements.
4
Consolidated Balance Sheets
(in millions of dollars)
June 27, 2020 |
September 28, 2019 |
|||||||
(Unaudited) |
||||||||
Assets |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ |
906 |
$ |
750 |
||||
Accounts receivable (less allowance of 28 and 28, respectively) |
1,471 |
1,526 |
||||||
Finished goods |
750 |
743 |
||||||
Raw materials and supplies |
568 |
581 |
||||||
Prepaid expenses and other current assets |
162 |
157 |
||||||
Total current assets |
3,857 |
3,757 |
||||||
Noncurrent assets: |
||||||||
Property, plant, and equipment |
4,481 |
4,714 |
||||||
Goodwill and intangible assets |
7,720 |
7,831 |
||||||
Right-of-use assets |
563 |
— |
||||||
Other assets |
110 |
167 |
||||||
Total assets |
$ |
16,731 |
$ |
16,469 |
||||
Liabilities and stockholders' equity |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ |
981 |
$ |
1,159 |
||||
Accrued employee costs |
267 |
214 |
||||||
Other current liabilities |
677 |
562 |
||||||
Current portion of long-term debt |
70 |
104 |
||||||
Total current liabilities |
1,995 |
2,039 |
||||||
Noncurrent liabilities: |
||||||||
Long-term debt, less current portion |
10,690 |
11,261 |
||||||
Deferred income taxes |
673 |
803 |
||||||
Employee benefit obligations |
307 |
327 |
||||||
Operating lease liabilities |
468 |
— |
||||||
Other long-term liabilities |
729 |
421 |
||||||
Total liabilities |
14,862 |
14,851 |
||||||
Stockholders' equity: |
||||||||
Common stock (132.7 and 132.3 million shares issued, respectively) |
1 |
1 |
||||||
Additional paid-in capital |
1,005 |
949 |
||||||
Retained earnings |
1,413 |
1,054 |
||||||
Accumulated other comprehensive loss |
(550 |
) |
(386 |
) |
||||
Total stockholders' equity |
1,869 |
1,618 |
||||||
Total liabilities and stockholders' equity |
$ |
16,731 |
$ |
16,469 |
See notes to consolidated financial statements.
5
Consolidated Statements of Changes in Stockholders' Equity
(Unaudited)
(in millions of dollars)
Quarterly Period Ended |
Common Stock |
Additional Paid-in Capital |
Accumulated Other Comprehensive Loss |
Retained Earnings |
Total |
|||||||||||||||
Balance at March 28, 2020 |
$ |
1 |
$ |
976 |
$ |
(548 |
) |
$ |
1,222 |
$ |
1,651 |
|||||||||
Net income |
— |
— |
— |
191 |
191 |
|||||||||||||||
Other comprehensive loss |
— |
— |
(2 |
) |
— |
(2 |
) |
|||||||||||||
Share-based compensation |
— |
4 |
— |
— |
4 |
|||||||||||||||
Proceeds from issuance of common stock |
— |
3 |
— |
— |
3 |
|||||||||||||||
Acquisition(a) |
— |
22 |
— |
— |
22 |
|||||||||||||||
Balance at June 27, 2020 |
$ |
1 |
$ |
1,005 |
$ |
(550 |
) |
$ |
1,413 |
$ |
1,869 |
|||||||||
Balance at March 30, 2019 |
$ |
1 |
$ |
904 |
$ |
(186 |
) |
$ |
812 |
$ |
1,531 |
|||||||||
Net income |
— |
— |
— |
13 |
13 |
|||||||||||||||
Other comprehensive loss |
— |
— |
(25 |
) |
— |
(25 |
) |
|||||||||||||
Share-based compensation |
— |
4 |
— |
— |
4 |
|||||||||||||||
Proceeds from issuance of common stock |
— |
23 |
— |
— |
23 |
|||||||||||||||
Common stock repurchased and retired |
— |
— |
— |
— |
— |
|||||||||||||||
Balance at June 29, 2019 |
$ |
1 |
$ |
931 |
$ |
(211 |
) |
$ |
825 |
$ |
1,546 |
Three Quarterly Periods Ended |
Common Stock |
Additional Paid-in Capital |
Accumulated Other Comprehensive Loss |
Retained Earnings |
Total |
|||||||||||||||
Balance at September 28, 2019 |
$ |
1 |
$ |
949 |
$ |
(386 |
) |
$ |
1,054 |
$ |
1,618 |
|||||||||
Net income |
— |
— |
— |
364 |
364 |
|||||||||||||||
Other comprehensive loss |
— |
— |
(164 |
) |
— |
(164 |
) |
|||||||||||||
Share-based compensation |
— |
28 |
— |
— |
28 |
|||||||||||||||
Proceeds from issuance of common stock |
— |
6 |
— |
— |
6 |
|||||||||||||||
Acquisition(a) |
— |
22 |
— |
— |
22 |
|||||||||||||||
Adoption of lease accounting standard |
— |
— |
— |
(5 |
) |
(5 |
) |
|||||||||||||
Balance at June 27, 2020 |
$ |
1 |
$ |
1,005 |
$ |
(550 |
) |
$ |
1,413 |
$ |
1,869 |
|||||||||
Balance at September 29, 2018 |
$ |
1 |
$ |
870 |
$ |
(156 |
) |
$ |
719 |
$ |
1,434 |
|||||||||
Net income |
— |
— |
— |
175 |
175 |
|||||||||||||||
Other comprehensive loss |
— |
— |
(55 |
) |
— |
(55 |
) |
|||||||||||||
Share-based compensation |
— |
21 |
— |
— |
21 |
|||||||||||||||
Proceeds from issuance of common stock |
— |
43 |
— |
— |
43 |
|||||||||||||||
Common stock repurchased and retired |
— |
(3 |
) |
— |
(69 |
) |
(72 |
) |
||||||||||||
Balance at June 29, 2019 |
$ |
1 |
$ |
931 |
$ |
(211 |
) |
$ |
825 |
$ |
1,546 |
(a) | Represents noncontrolling interest (see Note 4). |
See notes to consolidated financial statements.
6
Consolidated Statements of Cash Flows
(Unaudited)
(in millions of dollars)
Three Quarterly Periods Ended |
||||||||
June 27, 2020 |
June 29, 2019 |
|||||||
Cash Flows from Operating Activities: |
||||||||
Net income |
$ |
364 |
$ |
175 |
||||
Adjustments to reconcile net cash provided by operating activities: |
||||||||
Depreciation |
412 |
278 |
||||||
Amortization of intangibles |
226 |
119 |
||||||
Non-cash interest |
18 |
(4 |
) |
|||||
Loss on foreign exchange forward contracts |
— |
156 |
||||||
Deferred income tax |
30 |
(16 |
) |
|||||
Share-based compensation expense |
28 |
21 |
||||||
Other non-cash operating activities, net |
23 |
9 |
||||||
Changes in working capital |
(93 |
) |
(169 |
) |
||||
Changes in other assets and liabilities |
(29 |
) |
2 |
|||||
Net cash from operating activities |
979 |
571 |
||||||
Cash Flows from Investing Activities: |
||||||||
Additions to property, plant and equipment, net |
(419 |
) |
(271 |
) |
||||
Settlement of net investment hedges |
281 |
— |
||||||
Other investing activities |
(14 |
) |
2 |
|||||
Net cash from investing activities |
(152 |
) |
(269 |
) |
||||
Cash Flows from Financing Activities: |
||||||||
Proceeds from long-term borrowings |
1,202 |
— |
||||||
Repayments on long-term borrowings |
(1,859 |
) |
(383 |
) |
||||
Proceeds from issuance of common stock |
6 |
43 |
||||||
Repurchase of common stock |
— |
(74 |
) |
|||||
Payment of tax receivable agreement |
— |
(16 |
) |
|||||
Debt financing costs |
(16 |
) |
— |
|||||
Net cash from financing activities |
(667 |
) |
(430 |
) |
||||
Effect of exchange rate changes on cash |
(4 |
) |
2 |
|||||
Net change in cash |
156 |
(126 |
) |
|||||
Cash and cash equivalents at beginning of period |
750 |
381 |
||||||
Cash and cash equivalents at end of period |
$ |
906 |
$ |
255 |
See notes to consolidated financial statements.
7
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. The Company has recast certain prior period amounts to conform to current reporting. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included, and all subsequent events up to the time of the filing have been evaluated. For further information, refer to the Company's most recent Form 10-K filed with the Securities and Exchange Commission.
2. Recent 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 2020, with the exception of the below, there have been no developments to the recently adopted accounting pronouncements from those disclosed in the Company's 2019 Annual Report on Form 10-K that are considered to have a material impact on our unaudited consolidated financial statements.
Leases
Effective September 29, 2019, the Company adopted ASU 2016-02, Leases (Topic 842), including all related amendments, using the modified retrospective approach and recognized the cumulative effect of adoption to retained earnings. Under the new standard, the lessee of an operating lease is required to: 1) recognize a right-of-use asset and a lease liability in the statement of financial position, 2) recognize a single lease cost allocated over the lease term generally on a straight-line basis, and 3) classify all cash payments within operating activities on the statement of cash flows. See Note 6. Leases for more information.
Credit Losses
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326) and issued subsequent amendments to the initial guidance. The new standard requires entities to measure all expected credit losses for most financial assets held at the reporting date based on an expected loss model, which includes historical experience, current conditions, and reasonable and supportable forecasts. The new standard also requires enhanced disclosure. The new standard will be effective for the Company beginning fiscal 2021. The Company is in the process of evaluating this new standard, however, the Company does not anticipate this to have a material impact.
Defined Benefit Plans
In August 2018, the FASB issued ASU 2018-14, Changes to the Disclosure Requirements for Defined Benefit Plans. The new standard removes requirements to disclose the amounts in accumulated other comprehensive income expected to be recognized as components of net periodic benefit cost over the next fiscal year and the effects of a one-percentage-point changes in assumed health care cost trend rates. The standard also adds requirements to disclose the reasons for significant gains and losses related to changes in the benefit obligations for the period and the accumulated benefit obligation ("ABO") for plans with ABOs in excess of plan assets. The new standard will be effective for the Company beginning fiscal 2022. The Company is currently evaluating the impact of the adoption of this standard to our disclosures.
Income Taxes
In December 2019, the FASB issued ASU 2019-12, Income Taxes - Simplifying the Accounting for Income Taxes (Topic 740). The new guidance eliminates certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. It also clarifies and simplifies other aspects of the accounting for income taxes. The new standard will be effective for the Company beginning fiscal 2022. The Company is currently evaluating the impact of the adoption of this standard to our disclosures.
8
Reference Rate Reform
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform - Facilitation of the Effects of Reference Rate Reform on Financial Reporting (Topic 848). This standard provides temporary optional expedients and exceptions to the GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burdens of the expected market transition from LIBOR and other interbank offered rates to alternative reference rates, such as SOFR. ASU 2020-04 is effective upon issuance and generally can be applied through the end of calendar year 2022. The Company is currently evaluating the impact and whether it plans to adopt the optional expedients and exceptions provided under this new standard.
3. Revenue and Accounts Receivable
Our revenues are primarily derived from the sale of plastic packaging products to customers. Revenue is recognized when performance obligations are satisfied, in an amount reflecting the consideration to which the Company expects to be entitled. We consider the promise to transfer products to be our sole performance obligation. If the consideration agreed to in a contract includes a variable amount, we estimate the amount of consideration we expect to be entitled to in exchange for transferring the promised goods to the customer using the most likely amount method. Our main source of variable consideration are customer rebates. The accrual for customer rebates was $93 million and $114 million at June 27, 2020 and September 28, 2019, respectively, and is included in Other current liabilities on the Consolidated Balance Sheets. The Company disaggregates revenue based on reportable business segment, geography, and significant product line. Refer to Note 10. Segment and Geographic Data for further information.
The Company has entered into various qualifying factoring agreements to sell certain receivables to third-party financial institutions. The transfer of receivables is accounted for as a sale, without recourse. Net sales available under qualifying U.S. based programs were $242 million and $241 million for the quarterly period ended June 27, 2020 and June 29, 2019, respectively. Net sales available under qualifying U.S. based programs were $700 million and $656 million for the three quarterly periods ended June 27, 2020 and June 29, 2019, respectively. There were no amounts outstanding from financial institutions related to these programs. The fees associated with the transfer of receivables for all programs were not material for any of the periods presented.
4. Acquisitions and Dispositions
RPC Group Plc
In July 2019, the Company completed the acquisition of the entire outstanding share capital of RPC Group Plc (“RPC”), for aggregate consideration of $6.1 billion. RPC is a leading plastic product design and engineering company for packaging and select non-packaging markets, with 189 sites in 34 countries. RPC develops and manufactures a diverse range of products for a wide variety of customers, including many household names, and enjoys strong market positions in many of the end markets it serves and the geographical areas in which it operates. It uses a wide range of polymer conversion techniques in both rigid and flexible plastics manufacture, and is one of the largest plastic converters in Europe. The international based facilities are operated within the Consumer Packaging International segment with the remaining U.S. based facilities operated within the Consumer Packaging North America segment. The results of RPC have been included in the consolidated results of the Company since the date of the acquisition.
Net sales and operating income of RPC included in the Consolidated Statements of Income for the quarterly period ended June 27, 2020 were $1,092 million and $111 million, respectively. The majority of RPC activity for the quarter ended June 27, 2020, net sales of $968 million and operating income of $90 million, is operated in the Consumer Packaging International segment. Net sales and operating income of RPC included in the Consolidated Statements of Income for the three quarterly periods ended June 27, 2020 were $3,346 million and $245 million, respectively. The majority of RPC activity for the three quarterly periods ended June 27, 2020, net sales of $2,972 million and operating income of $196 million, is operated in the Consumer Packaging International segment.
The acquisition has been accounted for under the purchase method of accounting. Under this method, the assets acquired and liabilities assumed have been recorded based on fair values as of the acquisition date. The Company has recognized goodwill on this transaction primarily as a result of expected cost synergies, and expects goodwill to be partially deductible for tax purposes.
The preliminary purchase price allocation has been updated for certain measurement period adjustments based on the final valuation resulting in a $70 million increase in working capital, a $224 million decrease in property, plant and equipment, a $135 million decrease in customer relationships, a $93 million increase in trade names, a $67 million decrease in deferred tax liabilities, and a $22 million increase in noncontrolling interest. These adjustments resulted in corresponding increases to goodwill.
9
The following table summarizes the final purchase price allocation (in millions):
Consideration |
||||
Cash |
$ |
6,084 |
||
Total consideration transferred |
6,084 |
|||
Identifiable assets acquired and liabilities assumed |
||||
Working capital(a) |
770 |
|||
Property, plant and equipment |
2,151 |
|||
Identifiable intangible assets |
1,670 |
|||
Other assets |
2 |
|||
Other long-term liabilities |
(859 |
) |
||
Goodwill |
2,372 |
|||
Net assets acquired and liabilities assumed |
6,106 |
|||
Noncontrolling interest |
(22 |
) |
||
Total consideration transferred |
$ |
6,084 |
||
(a) Includes a $58 million step up of inventory to fair value |
To finance the purchase, the Company issued $1,250 million aggregate principal amount of first priority senior secured notes due 2026, $500 million aggregate principal amount of second priority senior secured notes due 2027, and entered into incremental term loans due July 2026, to fund the remainder of the purchase price.
When including RPC results for the periods prior to the acquisition date, unaudited pro forma net sales and net income were $3.3 billion and $38 million, respectively, for the quarterly period ended June 29, 2019 and $9.6 billion and $217 million, respectively, for the three quarterly periods ended June 29, 2019. The unaudited pro forma net sales and net income assume that the RPC acquisition had occurred as of the beginning of the period.
Seal For Life
In July 2019, the Company completed the sale of its Seal For Life ("SFL") business which was operated in our Health, Hygiene & Specialties reporting segment for net proceeds of $325 million. SFL recorded $96 million in net sales during fiscal 2019.
5. Restructuring and Transaction Activities
The table below includes the significant components of restructuring and transaction activities, by reporting segment:
Quarterly Period Ended |
Three Quarterly Periods Ended |
|||||||||||||||
June 27, 2020 |
June 29, 2019 |
June 27, 2020 |
June 29, 2019 |
|||||||||||||
Consumer Packaging International |
$ |
14 |
$ |
2 |
$ |
37 |
$ |
6 |
||||||||
Consumer Packaging North America |
2 |
6 |
6 |
14 |
||||||||||||
Engineered Materials |
2 |
— |
6 |
5 |
||||||||||||
Health, Hygiene & Specialties |
1 |
(8 |
) |
6 |
10 |
|||||||||||
Consolidated |
$ |
19 |
$ |
— |
$ |
55 |
$ |
35 |
The table below sets forth the activity with respect to the restructuring and transaction activities accrual at June 27, 2020:
Restructuring |
||||||||||||||||||||
Employee Severance and Benefits |
Facility Exit Costs |
Non-cash Impairment Charges |
Transaction Activities |
Total |
||||||||||||||||
Balance as of September 28, 2019 |
$ |
2 |
$ |
5 |
$ |
— |
$ |
— |
$ |
7 |
||||||||||
Charges |
24 |
1 |
2 |
28 |
55 |
|||||||||||||||
Non-cash items |
— |
— |
(2 |
) |
— |
(2 |
) |
|||||||||||||
Cash payments |
(17 |
) |
(2 |
) |
— |
(28 |
) |
(47 |
) |
|||||||||||
Balance as of June 27, 2020 |
$ |
9 |
$ |
4 |
$ |
— |
$ |
— |
$ |
13 |
10
6. Leases
During the first quarter of fiscal 2020, the Company adopted ASU 2016-02, Leases (Topic 842). The Company leases certain manufacturing facilities, warehouses, office space, manufacturing equipment, office equipment, and automobiles.
Under the new standard, we recognize right-of-use assets and lease liabilities for leases with original lease terms greater than one year based on the present value of lease payments over the lease term using our incremental borrowing rate on a collateralized basis. Short-term leases, with original lease terms of less than one year, are not recognized on the balance sheet. We are party to certain leases, namely for manufacturing facilities, which offer renewal options to extend the original lease term. Renewal options are included in the right-of-use asset and lease liability based on our assessment of the probability that the options will be exercised.
We have elected the package of practical expedients which allows the Company to not reassess: (i) whether any expired or existing contracts are or contain leases, (ii) lease classification for any expired or existing leases, and (iii) initial direct costs for any existing leases. Additionally, we have elected the practical expedient to not separate lease and non-lease components for all asset classes.
Supplemental lease information is as follows:
Leases |
Classification |
June 27, 2020 |
|||
Assets |
|||||
Operating lease right-of-use assets |
$ |
563 |
|||
Finance lease right-of-use assets |
88 |
||||
Current liabilities |
|||||
Operating lease liabilities |
$ |
111 |
|||
Finance lease liabilities |
17 |
||||
Non-current liabilities |
|||||
Operating lease liabilities |
$ |
468 |
|||
Finance lease liabilities |
71 |
Lease cost |
Quarterly Period Ended June 27, 2020 |
Three Quarterly Periods Ended June 27, 2020 |
||||||
Operating lease cost |
$ |
29 |
$ |
86 |
||||
Finance lease cost: |
||||||||
Amortization of right-of-use assets |
3 |
11 |
||||||
Interest on lease liabilities |
1 |
3 |
||||||
Total finance lease cost |
4 |
14 |
||||||
Short-term lease cost |
3 |
11 |
||||||
Total lease cost |
$ |
36 |
$ |
111 |
Cash paid for amounts included in lease liabilities |
Three Quarterly Periods Ended June 27, 2020 |
|||
Operating cash flows from operating leases |
$ |
86 |
||
Operating cash flows from finance leases |
3 |
|||
Financing cash flows from finance leases |
25 |
June 27, 2020 |
||||
Weighted-average remaining lease term - operating leases |
8 years |
|||
Weighted-average remaining lease term - finance leases |
4 years |
|||
Weighted-average discount rate - operating leases |
4.6 |
% |
||
Weighted-average discount rate - finance leases |
3.7 |
% |
Right-of-use assets obtained in exchange for new operating lease liabilities were $2 million and $15 million for the quarterly and three quarterly periods ended June 27, 2020, respectively.
11
At June 27, 2020, annual lease commitments were as follows:
Fiscal Year |
Operating Leases |
Finance Leases |
||||||
Remainder of 2020 |
$ |
35 |
$ |
8 |
||||
2021 |
108 |
22 |
||||||
2022 |
100 |
26 |
||||||
2023 |
85 |
16 |
||||||
2024 |
70 |
6 |
||||||
Thereafter |
303 |
15 |
||||||
Total lease payments |
701 |
93 |
||||||
Less: Interest |
(122 |
) |
(5 |
) |
||||
Present value of lease liabilities |
$ |
579 |
$ |
88 |
7. Long-Term Debt
Long-term debt consists of the following:
Facility |
Maturity Date |
June 27, 2020 |
September 28, 2019 |
||||||
Term loan |
$ |
1,545 |
$ |
1,545 |
|||||
Term loan |
450 |
489 |
|||||||
Term loan |
4,218 |
4,250 |
|||||||
Revolving line of credit |
— |
— |
|||||||
5.50% Second Priority Senior Secured Notes |
150 |
500 |
|||||||
6.00% Second Priority Senior Secured Notes |
200 |
400 |
|||||||
5.125% Second Priority Senior Secured Notes |
700 |
700 |
|||||||
1.00% First Priority Senior Secured Notes(a) |
786 |
— |
|||||||
4.50% Second Priority Senior Secured Notes |
500 |
500 |
|||||||
4.875% First Priority Senior Secured Notes |
1,250 |
1,250 |
|||||||
5.625% Second Priority Senior Secured Notes |
500 |
500 |
|||||||
1.50% First Priority Senior Secured Notes(a) |
421 |
— |
|||||||
Debt discounts and deferred fees |
(92 |
) |
(112 |
) |
|||||
Finance leases and other |
Various |
132 |
167 |
||||||
Retired debt |
— |
1,176 |
|||||||
Total long-term debt |
10,760 |
11,365 |
|||||||
Current portion of long-term debt |
(70 |
) |
(104 |
) |
|||||
Long-term debt, less current portion |
$ |
10,690 |
11,261 |
(a) Euro denominated
In January 2020, the Company (i) issued €700 million aggregate principal amount of 1.00% first priority senior secured notes due 2025 and €375 million aggregate principal amount of 1.50% first priority senior secured notes due 2027 (the “Euro notes”) and (ii) refinanced its existing $4.25 billion Term loan maturing in July 2026, resulting in a 50 basis point interest rate reduction. The proceeds of the Euro notes were used to prepay the entire outstanding amount of our existing euro denominated Term loan. Debt extinguishment costs of $18 million, primarily comprised of deferred debt discount and financing fees, were recorded in Other expense, net on the Consolidated Statements of Income upon the extinguishment of the euro Term loan.
The Company was in compliance with all debt covenants for all periods presented.
Debt discounts and deferred financing fees are presented net of Long-term debt, less the current portion on the Consolidated Balance Sheets and are amortized to Interest expense, net on the Consolidated Statements of Income through maturity.
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.
12
Cross-Currency Swaps
The Company is party to certain cross-currency swaps to hedge a portion of our foreign currency risk. The swap agreements mature May 2022 (€250 million), June 2024 (€1,625 million) and July 2027 (£700 million). In addition to cross-currency swaps, we hedge a portion of our foreign currency risk by designating foreign currency denominated long-term debt as net investment hedges of certain foreign operations. As of June 27, 2020, we had outstanding long-term debt of €785 million that was designated as a hedge of our net investment in certain euro-denominated foreign subsidiaries. When valuing cross-currency swaps the Company utilizes Level 2 inputs (substantially observable).
During fiscal 2020, the Company entered into transactions to cash settle existing cross-currency swaps and received proceeds of $281 million. The swap settlement impact has been included as a component of Currency translation within Accumulated other comprehensive loss. Following the settlement of the existing cross-currency swaps, we entered into new cross-currency swaps with matching notional amounts and maturity dates of the original swaps.
Interest Rate Swaps
The primary purpose of the Company’s interest rate swap activities is to manage interest expense variability associated with our outstanding variable rate term loan debt. When valuing interest rate swaps the Company utilizes Level 2 inputs (substantially observable).
As of June 27, 2020, 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 1.398%, with an expiration in June 2026, (ii) a $1 billion interest rate swap transaction that swaps a one-month variable LIBOR contract for a fixed annual rate of 1.835% with an expiration in June 2026, (iii) a $400 million interest rate swap transaction that swaps a one-month variable LIBOR contract for a fixed annual rate of 1.916% with an expiration in June 2026, (iv) a $884 million interest rate swap transaction that swaps a one-month variable LIBOR contract for a fixed annual rate of 1.857%, with an expiration in June 2024, and (v) a $473 million interest rate swap transaction that swaps a one-month variable LIBOR contract for a fixed annual rate of 2.050%, with an expiration in June 2024.
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. Balances on a gross basis are as follows:
Derivative Instruments |
Hedge Designation |
Balance Sheet Location |
June 27, 2020 |
September 28, 2019 |
||||||
Cross-currency swaps |
Designated |
Other assets |
$ |
— |
$ |
88 |
||||
Cross-currency swaps |
Designated |
Other long-term liabilities |
153 |
— |
||||||
Interest rate swaps |
Designated |
Other long-term liabilities |
228 |
81 |
The effect of the Company's derivative instruments on the Consolidated Statements of Income is as follows:
Quarterly Period Ended |
Three Quarterly Periods Ended |
||||||||||||||||
Derivative Instruments |
Statements of Income Location |
June 27, 2020 |
June 29, 2019 |
June 27, 2020 |
June 29, 2019 |
||||||||||||
Cross-currency swaps |
Interest expense, net |
$ |
(2 |
) |
$ |
(2 |
) |
$ |
(5 |
) |
$ |
(5 |
) |
||||
Cross-currency swaps |
Other expense, net |
— |
18 |
— |
18 |
||||||||||||
Foreign exchange forward contracts |
Other expense, net |
— |
120 |
— |
138 |
||||||||||||
Interest rate swaps |
Interest expense, net |
13 |
(4 |
) |
17 |
(13 |
) |
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 2019 assessment. While impairment indicators were not identified during the quarter that warranted impairment testing, the ongoing COVID-19 pandemic has created market volatility which we believe is short-term in nature. However, if we experience sustained declines in valuation market multiples, sustained lower earnings, or escalating macroeconomic challenges, the need for future impairment tests may arise.
13
Included in the following table are the major categories of assets measured at fair value on a non-recurring basis as of June 27, 2020 and September 28, 2019, along with the impairment loss recognized on the fair value measurement during the period:
As of June 27, 2020 |
||||||||||||||||||||
Level 1 |
Level 2 |
Level 3 |
Total |
Impairment |
||||||||||||||||
Indefinite-lived trademarks |
$ |
— |
$ |
— |
$ |
248 |
$ |
248 |
$ |
— |
||||||||||
Goodwill |
— |
— |
5,184 |
5,184 |
— |
|||||||||||||||
Definite lived intangible assets |
— |
— |
2,288 |
2,288 |
— |
|||||||||||||||
Property, plant, and equipment |
— |
— |
4,481 |
4,481 |
2 |
|||||||||||||||
Total |
$ |
— |
$ |
— |
$ |
12,201 |
$ |
12,201 |
$ |
2 |
As of September 28, 2019 |
||||||||||||||||||||
Level 1 |
Level 2 |
Level 3 |
Total |
Impairment |
||||||||||||||||
Indefinite-lived trademarks |
$ |
— |
$ |
— |
$ |
248 |
$ |
248 |
$ |
— |
||||||||||
Goodwill |
— |
— |
5,051 |
5,051 |
— |
|||||||||||||||
Definite lived intangible assets |
— |
— |
2,532 |
2,532 |
— |
|||||||||||||||
Property, plant, and equipment |
— |
— |
4,714 |
4,714 |
8 |
|||||||||||||||
Total |
$ |
— |
$ |
— |
$ |
12,545 |
$ |
12,545 |
$ |
8 |
The Company's financial instruments consist primarily of cash and cash equivalents, long-term debt, interest rate and cross-currency swap agreements, and finance lease obligations. The book value of our marketable long-term indebtedness exceeded fair value by $31 million as of June 27, 2020. The Company's long-term debt fair values were determined using Level 2 inputs as other significant observable inputs were not available.
9. Income Taxes
In comparison to the statutory rate, the effective tax rate for the quarter and year-to-date was modestly impacted by U.S. state income taxes, global intangible low-taxed income provisions (GILTI), uncertain tax positions and other discrete items.
10. Segment and Geographic Data
The Company's operations are organized into four reporting segments: Consumer Packaging International, Consumer Packaging North America, Engineered Materials, and Health, Hygiene & Specialties. The structure is designed to align us with our customers, provide optimal service, drive future growth, and to facilitate synergies realization.
Selected information by reportable segment is presented in the following tables:
Quarterly Period Ended |
Three Quarterly Periods Ended |
|||||||||||||||
June 27, 2020 |
June 29, 2019 |
June 27, 2020 |
June 29, 2019 |
|||||||||||||
Net sales: |
||||||||||||||||
Consumer Packaging International |
$ |
1,020 |
$ |
52 |
$ |
3,125 |
$ |
153 |
||||||||
Consumer Packaging North America |
718 |
652 |
2,104 |
1,892 |
||||||||||||
Engineered Materials |
564 |
630 |
1,747 |
1,910 |
||||||||||||
Health, Hygiene & Specialties |
608 |
603 |
1,725 |
1,904 |
||||||||||||
Total net sales |
$ |
2,910 |
$ |
1,937 |
$ |
8,701 |
$ |
5,859 |
||||||||
Operating income: |
||||||||||||||||
Consumer Packaging International |
$ |
89 |
$ |
(1 |
) |
$ |
195 |
$ |
(2 |
) |
||||||
Consumer Packaging North America |
93 |
73 |
226 |
168 |
||||||||||||
Engineered Materials |
81 |
83 |
239 |
250 |
||||||||||||
Health, Hygiene & Specialties |
84 |
60 |
170 |
160 |
||||||||||||
Total operating income |
$ |
347 |
$ |
215 |
$ |
830 |
$ |
576 |
||||||||
Depreciation and amortization: |
||||||||||||||||
Consumer Packaging International |
$ |
79 |
$ |
4 |
$ |
240 |
$ |
12 |
||||||||
Consumer Packaging North America |
62 |
50 |
190 |
156 |
||||||||||||
Engineered Materials |
25 |
27 |
80 |
87 |
||||||||||||
Health, Hygiene & Specialties |
43 |
46 |
128 |
142 |
||||||||||||
Total depreciation and amortization |
$ |
209 |
$ |
127 |
$ |
638 |
$ |
397 |
14
Selected information by geographical region is presented in the following tables:
Quarterly Period Ended |
Three Quarterly Periods Ended |
|||||||||||||||
June 27, 2020 |
June 29, 2019 |
June 27, 2020 |
June 29, 2019 |
|||||||||||||
Net sales: |
||||||||||||||||
United States and Canada |
$ |
1,430 |
$ |
1,556 |
$ |
4,648 |
$ |
4,672 |
||||||||
Europe |
1,172 |
200 |
3,156 |
614 |
||||||||||||
Rest of world |
308 |
181 |
897 |
573 |
||||||||||||
Total net sales |
$ |
2,910 |
$ |
1,937 |
$ |
8,701 |
$ |
5,859 |
Selected information by product line is presented in the following tables:
Quarterly Period Ended |
Three Quarterly Periods Ended |
|||||||||||||||
June 27, 2020 |
June 29, 2019 |
June 27, 2020 |
June 29, 2019 |
|||||||||||||
Net sales: |
||||||||||||||||
Packaging |
84 |
100 |
82 |
100 |
||||||||||||
Non-packaging |
16 |
— |
18 |
— |
||||||||||||
Consumer Packaging International |
100 |
% |
100 |
% |
100 |
% |
100 |
% |
||||||||
Rigid Open Top |
44 |
47 |
45 |
45 |
||||||||||||
Rigid Closed Top |
56 |
53 |
55 |
55 |
||||||||||||
Consumer Packaging North America |
100 |
% |
100 |
% |
100 |
% |
100 |
% |
||||||||
Core Films |
38 |
40 |
38 |
40 |
||||||||||||
Retail & Industrial |
62 |
60 |
62 |
60 |
||||||||||||
Engineered Materials |
100 |
% |
100 |
% |
100 |
% |
100 |
% |
||||||||
Health |
22 |
15 |
19 |
15 |
||||||||||||
Hygiene |
52 |
52 |
53 |
54 |
||||||||||||
Specialties |
26 |
33 |
28 |
31 |
||||||||||||
Health, Hygiene & Specialties |
100 |
% |
100 |
% |
100 |
% |
100 |
% |
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, we believe that any ultimate liability would not be material to our financial statements.
The Company has various purchase commitments for raw materials, supplies, and property and equipment incidental to the ordinary conduct of business.
12. Share Repurchase Program
No shares were repurchased during the three quarterly periods ended June 27, 2020. Authorized share repurchases of $393 million remain available to the Company.
13. Basic and Diluted Net Income Per Share
Basic net income per share is calculated by dividing the net income attributable to common stockholders by the weighted-average number of common shares outstanding during the period, without consideration for common stock equivalents. Diluted net income per share is calculated by dividing the net income attributable to common stockholders by the weighted-average number of common share equivalents outstanding for the period determined using the treasury-stock method and the if-converted method. For purposes of this calculation, stock options are considered to be common stock equivalents and are only included in the calculation of diluted net income per share when their effect is dilutive. For the three and nine months ended June 27, 2020, 7.1 million and 7.1 million shares, respectively, were excluded from the diluted net income per share calculation as their effect would be anti-dilutive.
15
The following tables provide a reconciliation of the numerator and denominator of the basic and diluted net income per share calculations.
Quarterly Period Ended |
Three Quarterly Periods Ended |
|||||||||||||||
(in millions, except per share amounts) |
June 27, 2020 |
June 29, 2019 |
June 27, 2020 |
June 29, 2019 |
||||||||||||
Numerator |
||||||||||||||||
Consolidated net income |
$ |
191 |
$ |
13 |
$ |
364 |
$ |
175 |
||||||||
Denominator |
||||||||||||||||
Weighted average common shares outstanding - basic |
132.5 |
131.5 |
132.4 |
131.0 |
||||||||||||
Dilutive shares |
1.7 |
2.7 |
1.9 |
3.0 |
||||||||||||
Weighted average common and common equivalent shares outstanding - diluted |
134.2 |
134.2 |
134.3 |
134.0 |
||||||||||||
Per common share income |
||||||||||||||||
Basic |
$ |
1.44 |
$ |
0.10 |
$ |
2.75 |
$ |
1.34 |
||||||||
Diluted |
$ |
1.42 |
$ |
0.10 |
$ |
2.71 |
$ |
1.31 |
14. Accumulated Other Comprehensive Loss
The components and activity of Accumulated other comprehensive loss are as follows:
Quarterly Period Ended |
Currency Translation |
Defined Benefit Pension and Retiree Health Benefit Plans |
Derivative Instruments |
Accumulated Other Comprehensive Loss |
||||||||||||
Balance at March 28, 2020 |
$ |
(344 |
) |
$ |
(57 |
) |
$ |
(147 |
) |
$ |
(548 |
) |
||||
Other comprehensive income (loss), net of tax before reclassifications |
11 |
— |
(23 |
) |
(12 |
) |
||||||||||
Net amount reclassified from accumulated other comprehensive loss |
— |
— |
10 |
10 |
||||||||||||
Balance at June 27, 2020 |
$ |
(333 |
) |
$ |
(57 |
) |
$ |
(160 |
) |
$ |
(550 |
) |
Currency Translation |
Defined Benefit Pension and Retiree Health Benefit Plans |
Derivative Instruments |
Accumulated Other Comprehensive Loss |
|||||||||||||
Balance at March 30, 2019 |
$ |
(173 |
) |
$ |
(13 |
) |
$ |
— |
$ |
(186 |
) |
|||||
Other comprehensive income (loss), net of tax before reclassifications |
10 |
— |
(32 |
) |
(22 |
) |
||||||||||
Net amount reclassified from accumulated other comprehensive loss |
— |
— |
(3 |
) |
(3 |
) |
||||||||||
Balance at June 29, 2019 |
$ |
(163 |
) |
$ |
(13 |
) |
$ |
(35 |
) |
$ |
(211 |
) |
Three Quarterly Periods Ended |
Currency Translation |
Defined Benefit Pension and Retiree Health Benefit Plans |
Derivative Instruments |
Accumulated Other Comprehensive Loss |
||||||||||||
Balance at September 28, 2019 |
$ |
(279 |
) |
$ |
(56 |
) |
$ |
(51 |
) |
$ |
(386 |
) |
||||
Other comprehensive loss, net of tax before reclassifications |
(54 |
) |
(1 |
) |
(126 |
) |
(181 |
) |
||||||||
Net amount reclassified from accumulated other comprehensive loss |
— |
— |
17 |
17 |
||||||||||||
Balance at June 27, 2020 |
$ |
(333 |
) |
$ |
(57 |
) |
$ |
(160 |
) |
$ |
(550 |
) |
Currency Translation |
Defined Benefit Pension and Retiree Health Benefit Plans |
Derivative Instruments |
Accumulated Other Comprehensive Loss |
|||||||||||||
Balance at September 29, 2018 |
$ |
(175 |
) |
$ |
(13 |
) |
$ |
32 |
$ |
(156 |
) |
|||||
Other comprehensive income (loss), net of tax before reclassifications |
12 |
— |
(59 |
) |
(47 |
) |
||||||||||
Net amount reclassified from accumulated other comprehensive loss |
— |
— |
(8 |
) |
(8 |
) |
||||||||||
Balance at June 29, 2019 |
$ |
(163 |
) |
$ |
(13 |
) |
$ |
(35 |
) |
$ |
(211 |
) |
16
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 our most recent Form 10-K in the section titled "Risk Factors", Item 1A of the our Quarterly Report on Form 10-Q for the quarter ended March 28, 2020, and other risk factors identified from time to time in our subsequent 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 2019 and fiscal 2020 are fifty-two week periods.
Executive Summary
COVID-19. The ongoing pandemic has impacted various businesses and supply chains, including travel restrictions and the extended shutdown of certain industries in various countries. Due to the nature of the majority of our products, geographic footprint and end market diversity, on a consolidated net sales basis we have been modestly impacted with lower customer demand in food service and industrials being offset by higher consumer demand in our healthcare, hygiene and food product categories. Additionally, the impact of travel and safety restriction related to the pandemic has negatively impacted various integration activities and back office functions. The Company will continue to evaluate the potential impacts and closely monitor developments as they arise.
Business. The Company's operations are organized into four reporting segments: Consumer Packaging International, Consumer Packaging North America, Engineered Materials and Health, Hygiene & Specialties. The structure is designed to align us with our customers, provide optimal service, drive future growth, and to facilitate synergies realization. The Consumer Packaging International segment primarily consists of containers, closures, dispensing systems, pharmaceutical devices and packaging, polythene films, and technical components and includes the international portion of the recently acquired RPC Group Plc (“RPC”) business. The Consumer Packaging North America segment primarily consists of containers, foodservice items, closures, overcaps, bottles, prescription vials, and tubes. The Engineered Materials segment primarily consists of tapes and adhesives, polyethylene-based film products, can liners, 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.
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.
RPC Group Plc
In July 2019, the Company completed the acquisition of RPC for aggregate consideration of $6.1 billion. RPC is a leading plastic product design and engineering company for packaging and select non-packaging markets, with 189 sites in 34 countries. RPC develops and manufactures a diverse range of products for a wide variety of customers, including many household names, and enjoys strong market positions in many of the end markets it serves and the geographical areas in which it operates. It uses a wide range of polymer conversion techniques and is also one of the largest plastic recyclers in Europe. The international based facilities are operated within the Consumer Packaging International segment with the remaining U.S. based facilities operated within the Consumer Packaging North America segment. The Company expects to realize annual cost synergies of $150 million of which an estimated $85 million is expected to be realized in fiscal 2020. See Note 4 to the Consolidated Financial Statements for further details on the acquisition of RPC.
Seal For Life
In July 2019, the Company completed the sale of our Seal For Life ("SFL") business which was operated in our Health, Hygiene & Specialties segment for net proceeds of $325 million. SFL recorded $96 million in net sales during fiscal 2019.
17
Raw Material Trends. Our primary raw material is plastic resin. Polypropylene and polyethylene account for approximately 90% of our plastic resin pounds purchased. The three month simple average price per pound, as published by U.S. market indices, were as follows:
Polyethylene Butene Film |
Polypropylene |
|||||||||||||||||||||||
2020 |
2019 |
2018 |
2020 |
2019 |
2018 |
|||||||||||||||||||
1st quarter |
$ |
.58 |
$ |
.64 |
$ |
.68 |
$ |
.58 |
$ |
.76 |
$ |
.71 |
||||||||||||
2nd quarter |
.59 |
.61 |
.69 |
.53 |
.63 |
.75 |
||||||||||||||||||
3rd quarter |
.56 |
.63 |
.68 |
.48 |
.62 |
.76 |
||||||||||||||||||
4th quarter |
— |
.59 |
.66 |
— |
.62 |
.85 |
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 and competitor behaviors related to passing through raw material cost changes could affect our results as plastic resin costs fluctuate.
Outlook. The Company is affected 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 and other cost changes to our customers, improve manufacturing productivity and adapt to volume changes of our customers, including those changes being impacted by the current COVID-19 pandemic. Based on current market conditions we believe portions of our Consumer Packaging segments and our Engineered Materials segment will continue to see volume pressure in the near-term as they are more highly indexed to food service and industrials markets. We also believe our Health, Hygiene, & Specialties segment will continue to have strong volumes for the duration of fiscal 2020 as a result of strong demand for healthcare products. We continue to believe our underlying long-term demand fundamentals in all divisions remain intact as we continue our focus on delivering protective solutions that enhance consumer safety and execute on the Company’s mission statement of “Always Advancing to Protect What’s Important”. For fiscal 2020, we project cash flow from operations and free cash flow of $1,450 million and $830 million, respectively. The free cash flow assumes an estimated $620 million of capital spending, cash taxes of $170 million, cash interest costs of $430 million, and other cash uses of $50 million related to changes in working capital, acquisition integration expenses and costs to achieve synergies. For the definition of free cash flow and further information related to free cash flow as a non-GAAP financial measure, see “Liquidity and Capital Resources”.
Results of Operations
Comparison of the Quarterly Period Ended June 27, 2020 (the "Quarter") and the Quarterly Period Ended June 29, 2019 (the "Prior Quarter")
Acquisition 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 |
$ |
2,910 |
$ |
1,937 |
$ |
973 |
50 |
% |
||||||||
Operating income |
$ |
347 |
$ |
215 |
$ |
132 |
61 |
% |
||||||||
Operating income percentage of net sales |
12 |
% |
11 |
% |
The net sales growth is primarily attributed to acquisition net sales of $1,092 million and a base volume increase of 2%. These increases were partially offset by lower selling prices of $99 million due to the pass through of lower resin costs, a $19 million unfavorable impact from foreign currency changes and Prior Quarter divestiture sales of $34 million.
The operating income increase is primarily attributed to acquisition operating income of $111 million, a $34 million favorable impact from cost productivity and product mix, a $12 million increase due to the base volume growth, and a $6 million decrease in depreciation and amortization. These improvements were partially offset by a $10 million increase in business integration costs, a $5 million unfavorable impact from foreign currency changes and Prior Quarter divestiture operating income of $9 million.
Consumer Packaging International |
||||||||||||||||
Quarter |
Prior Quarter |
$ Change |
% Change |
|||||||||||||
Net sales |
$ |
1,020 |
$ |
52 |
$ |
968 |
— |
|||||||||
Operating income (loss) |
$ |
89 |
$ |
(1 |
) |
$ |
90 |
— |
||||||||
Operating income percentage of net sales |
9 |
% |
(2 |
)% |
The net sales and operating income growth in the Consumer Packaging International segment is primarily attributed to the RPC acquisition.
18
Consumer Packaging North America |
||||||||||||||||
Quarter |
Prior Quarter |
$ Change |
% Change |
|||||||||||||
Net sales |
$ |
718 |
$ |
652 |
$ |
66 |
10 |
% |
||||||||
Operating income |
$ |
93 |
$ |
73 |
$ |
20 |
27 |
% |
||||||||
Operating income percentage of net sales |
13 |
% |
11 |
% |
The net sales growth in the Consumer Packaging North America segment is primarily attributed to acquisition net sales of $117 million related to the U.S. portion of the acquired RPC business, partially offset by lower selling prices of $51 million due to the pass through of lower resin costs.
The operating income increase is primarily attributed to acquisition operating income of $19 million.
Engineered Materials |
||||||||||||||||
Quarter |
Prior Quarter |
$ Change |
% Change |
|||||||||||||
Net sales |
$ |
564 |
$ |
630 |
$ |
(66 |
) |
(10 |
)% |
|||||||
Operating income |
$ |
81 |
$ |
83 |
$ |
(2 |
) |
(2 |
)% |
|||||||
Operating income percentage of net sales |
14 |
% |
13 |
% |
The net sales decrease in the Engineered Materials segment is primarily attributed to a 8% base volume decline reflecting the impact of COVID-19 and lower selling prices of $24 million due to the pass through of lower resin costs, partially offset by acquisition net sales of $7 million.
The operating income decrease is primarily attributed to a $6 million unfavorable impact from the base volume decline, partially offset by cost productivity and a decrease in depreciation and amortization.
Health, Hygiene & Specialties |
||||||||||||||||
Quarter |
Prior Quarter |
$ Change |
% Change |
|||||||||||||
Net sales |
$ |
608 |
$ |
603 |
$ |
5 |
1 |
% |
||||||||
Operating income |
$ |
84 |
$ |
60 |
$ |
24 |
40 |
% |
||||||||
Operating income percentage of net sales |
14 |
% |
10 |
% |
The net sales growth in the Health, Hygiene & Specialties segment is primarily attributed to base volume growth of 14%, partially offset by lower selling prices of $24 million due to the pass through of lower resin costs, a $19 million unfavorable impact from foreign currency changes, and Prior Quarter sales of $34 million related to the divested SFL business.
The operating income increase is primarily attributed to a $28 million favorable impact from cost productivity and product mix and an $18 million favorable impact from the base volume increase. These increases were partially offset by a $9 million increase in business integration costs, a $5 million unfavorable impact from foreign currency changes, and Prior Quarter operating income of $9 million related to the divested SFL business.
Other (income) expense, net |
||||||||||||||||
Quarter |
Prior Quarter |
$ Change |
% Change |
|||||||||||||
Other (income) expense, net |
$ |
(7 |
) |
$ |
136 |
$ |
(143 |
) |
(105 |
)% |
The other (income) expense improvement is primarily attributed to non-recurring, unfavorable foreign currency changes related to the foreign exchange forward contracts entered into as a part of the RPC acquisition in the Prior Quarter.
Interest expense, net |
||||||||||||||||
Quarter |
Prior Quarter |
$ Change |
% Change |
|||||||||||||
Interest expense, net |
$ |
110 |
$ |
71 |
$ |
39 |
55 |
% |
The interest expense increase is primarily attributed to the incremental debt facilities entered into as part of the RPC acquisition.
Income tax expense (benefit) |
||||||||||||||||
Quarter |
Prior Quarter |
$ Change |
% Change |
|||||||||||||
Income tax expense (benefit) |
$ |
53 |
$ |
(5 |
) |
$ |
58 |
— |
The income tax expense increase is primarily attributed to higher pre-tax book income and the Prior Quarter included a loss on foreign exchange forward contracts resulting in a $30 million income tax benefit.
19
Changes in Comprehensive Income
The $201 million improvement in comprehensive income from the Prior Quarter was primarily attributed to a $178 million improvement in net income and a $22 million favorable change in the fair value of derivative instruments, net of tax. As part of the overall risk management, the Company uses derivative instruments to (i) reduce our exposure to changes in interest rates attributed to the Company’s borrowings and (ii) reduce foreign currency exposure to translation of certain foreign operations. The Company records changes to the fair value of these instruments in Accumulated other comprehensive loss. The change in fair value of these instruments in fiscal 2020 versus fiscal 2019 is primarily attributed to the change in the forward interest and foreign exchange curves between measurement dates.
Comparison of the Three Quarterly Periods Ended June 27, 2020 (the "YTD") and the Three Quarterly Periods Ended June 29, 2019 (the "Prior YTD")
Acquisition 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 |
||||||||||||||||
YTD |
Prior YTD |
$ Change |
% Change |
|||||||||||||
Net sales |
$ |
8,701 |
$ |
5,859 |
$ |
2,842 |
49 |
% |
||||||||
Operating income |
$ |
830 |
$ |
576 |
$ |
254 |
44 |
% |
||||||||
Operating income percentage of net sales |
10 |
% |
10 |
% |
The net sales growth is primarily attributed to acquisition net sales of $3,346 million and a base volume increase of 1%, partially offset by lower selling prices of $429 million due to the pass through of lower resin costs, Prior YTD divestiture sales of $86 million and a $32 million unfavorable impact from foreign currency changes.
The operating income increase is primarily attributed to acquisition operating income of $245 million, a $22 million decrease in depreciation and amortization, a $16 million favorable impact from the base volume increase, and a $7 million decrease in business integration costs. These improvements were partially offset by a $9 million increase in selling, general and administrative expenses and Prior YTD divestiture operating income of $25 million.
Consumer Packaging International |
||||||||||||||||
YTD |
Prior YTD |
$ Change |
% Change |
|||||||||||||
Net sales |
$ |
3,125 |
$ |
153 |
$ |
2,972 |
— |
|||||||||
Operating income |
$ |
195 |
$ |
(2 |
) |
$ |
197 |
— |
||||||||
Operating income percentage of net sales |
6 |
% |
(1 |
)% |
The net sales and operating income growth in the Consumer Packaging International segment is attributed to the RPC acquisition.
Consumer Packaging North America |
||||||||||||||||
YTD |
Prior YTD |
$ Change |
% Change |
|||||||||||||
Net sales |
$ |
2,104 |
$ |
1,892 |
$ |
212 |
11 |
% |
||||||||
Operating income |
$ |
226 |
$ |
168 |
$ |
58 |
35 |
% |
||||||||
Operating income percentage of net sales |
11 |
% |
9 |
% |
The net sales growth in the Consumer Packaging North America segment is primarily attributed to acquisition net sales of $356 million related to the U.S. portion of the acquired RPC business and a 1% base volume improvement, partially offset by lower selling prices of $161 million due to the pass through of lower resin costs.
The operating income increase is primarily attributed to acquisition operating income of $47 million and an $8 million favorable impact from cost productivity and product mix.
20
Engineered Materials |
||||||||||||||||
YTD |
Prior YTD |
$ Change |
% Change |
|||||||||||||
Net sales |
$ |
1,747 |
$ |
1,910 |
$ |
(163 |
) |
(9 |
)% |
|||||||
Operating income |
$ |
239 |
$ |
250 |
$ |
(11 |
) |
(4 |
)% |
|||||||
Operating income percentage of net sales |
14 |
% |
13 |
% |
The net sales decrease in the Engineered Materials segment is primarily attributed to lower selling prices of $123 million due to the pass through of lower resin costs and a 3% base volume decline as a result of COVID-19, partially offset by acquisition net sales of $18 million.
The operating income decrease is primarily attributed to a $12 million unfavorable impact from price cost spread and an $8 million unfavorable impact from the base volume decline, partially offset by an $8 million decrease in depreciation and amortization.
Health, Hygiene & Specialties |
||||||||||||||||
YTD |
Prior YTD |
$ Change |
% Change |
|||||||||||||
Net sales |
$ |
1,725 |
$ |
1,904 |
$ |
(179 |
) |
(9 |
)% |
|||||||
Operating income |
$ |
170 |
$ |
160 |
$ |
10 |
6 |
% |
||||||||
Operating income percentage of net sales |
10 |
% |
8 |
% |
The net sales decrease in the Health, Hygiene & Specialties segment is primarily attributed to lower selling prices of $145 million due to the pass through of lower resin costs and Prior YTD sales of $86 million related to the divested SFL business, partially offset by a 5% base volume increase.
The operating income increase is primarily attributed to a $23 million favorable impact from the base volume increase, a $9 million favorable impact from cost productivity and product mix, and a $10 million decrease in depreciation and amortization. These increases were partially offset by Prior YTD operating income of $25 million related to the divested SFL business.
Other expense, net |
||||||||||||||||
YTD |
Prior YTD |
$ Change |
% Change |
|||||||||||||
Other expense, net |
$ |
6 |
$ |
159 |
$ |
(153 |
) |
(105 |
)% |
Other expense in the YTD includes $26 million of debt extinguishment costs, primarily a result of the prepayment of the entire outstanding amount of our existing euro denominated term loan, partially offset by favorable foreign currency changes associated with the remeasurement of non-operating intercompany balances. The Prior YTD primarily contains non-recurring, unfavorable foreign currency changes related to the foreign exchange forward contracts entered into as a part of the RPC acquisition.
Interest expense, net |
||||||||||||||||
YTD |
Prior YTD |
$ Change |
% Change |
|||||||||||||
Interest expense, net |
$ |
339 |
$ |
201 |
$ |
138 |
69 |
% |
The interest expense increase is primarily attributed to the incremental debt facilities entered into as part of the RPC acquisition.
Income tax expense |
||||||||||||||||
YTD |
Prior YTD |
$ Change |
% Change |
|||||||||||||
Income tax expense |
$ |
121 |
$ |
41 |
$ |
80 |
195 |
% |
The income tax expense increase is primarily attributed to higher pre-tax book income and the Prior YTD included a loss on foreign exchange forward contracts resulting in a $30 million income tax benefit.
21
Changes in Comprehensive Income
The $80 million improvement in comprehensive income from the Prior YTD was primarily attributed to a $189 million improvement in net income, partially offset by a $66 million unfavorable change in currency translation and a $42 million unfavorable change in the fair value of derivative instruments, net of tax. 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 YTD was primarily attributed to locations utilizing the euro, British pound sterling, Brazilian real, Canadian dollar, Chinese renminbi and Mexican peso as the functional currency. As part of the overall risk management, the Company uses derivative instruments to (i) reduce our exposure to changes in interest rates attributed to the Company’s borrowings and (ii) reduce foreign currency exposure to translation of certain foreign operations. The Company records changes to the fair value of these instruments in Accumulated other comprehensive loss. The change in fair value of these instruments in fiscal 2020 versus fiscal 2019 is primarily attributed to the change in the forward interest and foreign exchange curves 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. At the end of the Quarter, the Company had no outstanding balance on its $850 million asset-based revolving line of credit that matures in May 2024. The Company was in compliance with all covenants at the end of the Quarter (see Note 7).
Cash Flows
Net cash from operating activities increased $408 million from the Prior YTD primarily attributed to improved net income prior to non-cash activities.
Net cash used in investing activities decreased $117 million from the Prior YTD primarily attributed to proceeds from the settlement of cross-currency derivatives partially offset by increased capital expenditures as a result of the RPC acquisition.
Net cash used in financing activities increased $237 million from the Prior YTD primarily attributed to higher net debt repayments partially offset by lower share repurchase activity.
Share Repurchases
No shares were repurchased during the quarter. Authorized share repurchases of $393 million remain available to the Company.
Free Cash Flow
We define "Free cash flow" as cash flow from operating activities less net additions to property, plant and equipment.
Based on our definition, our consolidated Free cash flow is summarized as follows:
Three Quarterly Periods Ended |
||||
June 27, 2020 |
||||
Cash flow from operating activities |
$ |
979 |
||
Additions to property, plant and equipment, net |
(419 |
) |
||
Free cash flow |
$ |
560 |
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"). 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 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, 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. Free cash flow may be calculated differently by other companies, including other companies in our industry, limiting its usefulness as a comparative measure.
22
Liquidity Outlook
At June 27, 2020, our cash balance was $906 million, of which approximately 60% 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.
Summarized 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 section, “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 summarized financial information for the Parent, Issuer and guarantor subsidiaries on a combined basis, after intercompany transactions have been eliminated.
Three Quarterly Periods Ended |
||||
June 27, 2020 |
||||
Net sales |
$ |
4,361 |
||
Gross profit |
932 |
|||
Earnings from continuing operations |
189 |
|||
Net income |
$ |
189 |
Includes $20 million of income associated with intercompany activity with non-guarantor subsidiaries.
June 27, 2020 |
September 28, 2019 |
|||||||
Assets |
||||||||
Current assets |
$ |
1,674 |
$ |
1,237 |
||||
Noncurrent assets |
6,339 |
5,088 |
||||||
Liabilities |
||||||||
Current liabilities |
$ |
915 |
$ |
862 |
||||
Noncurrent liabilities |
12,391 |
11,915 |
Includes $475 million of intercompany payables due to non-guarantor subsidiaries as of June 27, 2020 and $45 million of intercompany receivables due from non-guarantor subsidiaries as of September 28, 2019.
23
Interest Rate Risk
We are exposed to market risk from changes in interest rates primarily through our senior secured credit facilities. Our senior secured credit facilities are comprised of (i) $6.2 billion term loans and (ii) a $850 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 1.50%, and the margin for term loans is 2.00% per annum. As of period end, the LIBOR rate of approximately 0.18% was applicable to the term loans. A 0.25% change in LIBOR would increase our annual interest expense by $8 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. At period end, 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 1.398%, with an expiration in June 2026, (ii) a $1 billion interest rate swap transaction that swaps a one-month variable LIBOR contract for a fixed annual rate of 1.835% with an expiration in June 2026, (iii) a $400 million interest rate swap transaction that swaps a one-month variable LIBOR contract for a fixed annual rate of 1.916% with an expiration in June 2026, (iv) a $884 million interest rate swap transaction that swaps a one-month variable LIBOR contract for a fixed annual rate of 1.857%, with an expiration in June 2024, and (v) a $473 million interest rate swap transaction that swaps a one-month variable LIBOR contract for a fixed annual rate of 2.050%, with an expiration in June 2024.
Foreign Currency Risk
As a global company, we face foreign currency risk exposure from fluctuating currency exchange rates, primarily the U.S. dollar against the euro, British pound sterling, Brazilian real, Chinese renminbi, 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 had a $20 million unfavorable impact on our Net income for the three quarterly periods ended June 27, 2020.
The Company is party to certain cross-currency swaps to hedge a portion of our foreign currency risk. The swap agreements mature May 2022 (€250 million), June 2024 (€1,625 million) and July 2027 (£700 million). In addition to cross-currency swaps, we hedge a portion of our foreign currency risk by designating foreign currency denominated long-term debt as net investment hedges of certain foreign operations. As of June 27, 2020, we had outstanding long-term debt of €785 million that was designated as a hedge of our net investment in certain euro-denominated foreign subsidiaries.
24
(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 the end of the period covered by this report. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that the design and operation of our disclosure controls and procedures were effective at the reasonable assurance level as of the end of the period covered by this report.
(b) Changes in internal controls.
The impact of travel and safety restriction related to the COVID-19 pandemic has negatively impacted various integration activities including the ongoing process of implementing standardized internal control procedures over financial reporting within the recently acquired RPC business. We will continue to evaluate the potential impacts and closely monitor developments as they arise and will continue to respond accordingly.
There were no other changes in our internal control over financial reporting that occurred during the quarter ended that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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Part II. Other Information
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.
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 and our Quarterly Report on Form 10-Q for the quarter ended March 28, 2020, 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.
The ongoing COVID-19 pandemic could continue to have an adverse impact on our business, financial condition, liquidity, and results of operations, which may be material.
The ongoing COVID-19 pandemic has impacted demand for some of our products and we may not be successful in allocating resources to address rapidly shifting demand among our product lines. Additionally, the impact of travel and safety restrictions related to the COVID-19 pandemic has had and is expected to continue to have an adverse effect on certain integration activities, including the ongoing process of implementing standardized internal control procedures within the recently acquired RPC business. The extent to which the ongoing COVID-19 pandemic adversely impacts our business, financial condition, liquidity and results of operations will depend on future developments that are highly uncertain and cannot be predicted, including, but not limited to, the duration of the pandemic, the severity of the COVID-19 virus, potential actions taken by various governmental authorities in response to the pandemic, and the timing of recovery of the global economy. As a result, we cannot at this time predict the overall impact of the COVID-19 pandemic, but it could have a material adverse impact on our business, financial condition, liquidity, and results of operations. To the extent the COVID-19 pandemic adversely affects our business, financial condition, liquidity, or results of operations, it may also have the effect of heightening many of the other risks described in the “Risk Factors” section of our most recent Form 10-K.
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 to our customers on a timely basis; |
● | risks related to acquisitions or divestitures and integration of acquired businesses and their operations, and realization of anticipated cost savings and synergies; |
● | risk related to international business, including as a result of the RPC transaction, including foreign currency exchange rate risk and the risks of compliance with applicable export controls, sanctions, anti-corruption laws and regulations; |
● | uncertainty regarding the United Kingdom’s withdrawal from the European Union and the outcome of future arrangements between the United Kingdom and the European Union; |
● | reliance on unpatented proprietary know-how and trade secrets; |
● | the phase-out of the London Interbank Offered Rate (LIBOR), or the replacement of LIBOR with a different reference rate or modification of the method used to calculate LIBOR, which may adversely affect interest rates; |
● | increases in the cost of compliance with laws and regulations, including environmental, safety, anti-plastic legislation, production and product laws and regulations; |
● | employee shutdowns or strikes or the failure to renew effective bargaining agreements; |
● | risks related to disruptions in the overall economy and the financial markets that may adversely impact our business, including as a result of the COVID-19 pandemic; |
● | risk of catastrophic loss of one of our key manufacturing facilities, natural disasters, and other unplanned business interruptions; |
● | risks related to the failure of, inadequacy of, or cybersecurity attacks on our information technology systems and infrastructure; |
● | risks related to market acceptance of our developing technologies and products; |
● | general business and economic conditions, particularly an economic downturn; |
● | risks that our restructuring programs may entail greater implementation costs or result in lower cost savings than anticipated; |
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● | ability of our insurance to fully cover potential exposures; |
● | risks related to future write-offs of our substantial goodwill; |
● | risks of competition, including foreign competition, in our existing and future markets; |
● | 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.
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Issuer Repurchases of Equity Securities
During the quarter, the Company did not repurchase any shares. As of June 27, 2020, $393 million of authorized shares remained available to purchase under the program.
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Exhibit No. |
Description of Exhibit |
|
31.1* |
Rule 13a-14(a)/15d-14(a) Certification of the Chief Executive Officer. |
|
31.2* |
Rule 13a-14(a)/15d-14(a) Certification of the Chief Financial Officer. |
|
32.1* |
Section 1350 Certification of the Chief Executive Officer. |
|
32.2* |
Section 1350 Certification of the Chief Financial Officer. |
|
101.INS |
Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document). |
|
101.SCH |
Inline XBRL Taxonomy Extension Schema Document. |
|
101.CAL |
Inline XBRL Taxonomy Extension Calculation Linkbase Document. |
|
101.DEF |
Inline XBRL Taxonomy Extension Definition Linkbase Document. |
|
101.LAB |
Inline XBRL Taxonomy Extension Label Linkbase Document. |
|
101.PRE |
Inline XBRL Taxonomy Extension Presentation Linkbase Document. |
|
104 |
Cover Page Interactive Date File (formatted as Inline XBRL and contained in Exhibit 101). |
* Filed herewith
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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. |
|||
July 31, 2020 |
By: |
/s/ Mark W. Miles |
|
Mark W. Miles |
|||
Chief Financial Officer |
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