Berry (BERY) - 2020 Q2 - Quarterly Report

Part I. Financial Information Item 1. Financial Statements Presents Berry Global Group's unaudited consolidated financial statements and detailed notes on key financial areas Consolidated Statements of Income and Comprehensive Income Consolidated Statements of Income (Quarterly & YTD, in millions of dollars, except per share amounts) | Metric | Quarterly Ended Mar 28, 2020 | Quarterly Ended Mar 30, 2019 | Two Quarterly Periods Ended Mar 28, 2020 | Two Quarterly Periods Ended Mar 30, 2019 | | :-------------------------------- | :--------------------------- | :--------------------------- | :--------------------------------------- | :--------------------------------------- | | Net sales | $2,975 | $1,950 | $5,791 | $3,922 | | Operating income | $284 | $185 | $483 | $361 | | Net income | $126 | $74 | $173 | $162 | | Basic Net income per share | $0.95 | $0.57 | $1.31 | $1.24 | | Diluted Net income per share | $0.94 | $0.55 | $1.29 | $1.21 | Consolidated Statements of Comprehensive Income (Quarterly & YTD, in millions of dollars) | Metric | Quarterly Ended Mar 28, 2020 | Quarterly Ended Mar 30, 2019 | Two Quarterly Periods Ended Mar 28, 2020 | Two Quarterly Periods Ended Mar 30, 2019 | | :--------------------------------------- | :--------------------------- | :--------------------------- | :--------------------------------------- | :--------------------------------------- | | Net income | $126 | $74 | $173 | $162 | | Other comprehensive income (loss) | $(267) | $(9) | $(162) | $(30) | | Comprehensive income (loss) | $(141) | $65 | $11 | $132 | Consolidated Balance Sheets Consolidated Balance Sheets (in millions of dollars) | Metric | March 28, 2020 | September 28, 2019 | | :----------------------------------- | :------------- | :----------------- | | Cash and cash equivalents | $953 | $750 | | Total current assets | $4,053 | $3,757 | | Total assets | $16,949 | $16,469 | | Total current liabilities | $2,202 | $2,039 | | Long-term debt, less current portion | $11,043 | $11,261 | | Total liabilities | $15,298 | $14,851 | | Total stockholders' equity | $1,651 | $1,618 | Consolidated Statements of Changes in Stockholders' Equity Changes in Stockholders' Equity (Quarterly Period Ended March 28, 2020, in millions of dollars) | Item | Common Stock | Additional Paid-in Capital | Accumulated Other Comprehensive Loss | Retained Earnings | Total | | :-------------------------------- | :----------- | :------------------------- | :----------------------------------- | :---------------- | :---- | | Balance at December 28, 2019 | $1 | $970 | $(281) | $1,096 | $1,786 | | Net income | — | — | — | $126 | $126 | | Other comprehensive loss | — | — | $(267) | — | $(267) | | Share-based compensation | — | $5 | — | — | $5 | | Proceeds from issuance of common stock | — | $1 | — | — | $1 | | Balance at March 28, 2020 | $1 | $976 | $(548) | $1,222 | $1,651 | - Total stockholders' equity decreased from $1,786 million at December 28, 2019, to $1,651 million at March 28, 2020, primarily due to a significant other comprehensive loss of $(267) million, partially offset by net income of $126 million[11] Consolidated Statements of Cash Flows Consolidated Statements of Cash Flows (Two Quarterly Periods Ended, in millions of dollars) | Activity | March 28, 2020 | March 30, 2019 | | :----------------------------------- | :------------- | :------------- | | Net cash from operating activities | $533 | $331 | | Net cash from investing activities | $(27) | $(167) | | Net cash from financing activities | $(296) | $(192) | | Net change in cash | $203 | $(28) | | Cash and cash equivalents at end of period | $953 | $353 | - Net cash from operating activities increased by $202 million YoY, while net cash used in investing activities decreased by $140 million YoY. Net cash used in financing activities increased by $104 million YoY[13] Notes to Consolidated Financial Statements 1. Basis of Presentation - The unaudited Condensed Consolidated Financial Statements are prepared in accordance with GAAP for interim reporting, relying on management's estimates and assumptions[15] - Certain prior period amounts have been recast to conform to current reporting[15] 2. Recent Accounting Pronouncements - Adopted ASU 2016-02, Leases (Topic 842), effective September 29, 2019, requiring recognition of right-of-use assets and lease liabilities for operating leases[17] - Evaluating the impact of ASU 2016-13 (Credit Losses, effective fiscal 2021), ASU 2018-14 (Defined Benefit Plans, effective fiscal 2022), ASU 2019-12 (Income Taxes, effective fiscal 2022), and ASU 2020-04 (Reference Rate Reform, effective upon issuance)[18][19][20][21] 3. Revenue and Accounts Receivable - Revenues are primarily derived from the sale of plastic packaging products, with customer rebates as a main source of variable consideration[22] Customer Rebates Accrual (in millions of dollars) | Date | Amount | | :---------------- | :----- | | March 28, 2020 | $121 | | September 28, 2019 | $114 | - The Company sells certain receivables to third-party financial institutions through factoring agreements, with net sales available under U.S. programs of $236 million for the quarterly period and $458 million for the two quarterly periods ended March 28, 2020[23] 4. Acquisitions and Dispositions - Completed the acquisition of RPC Group Plc in July 2019 for $6.1 billion, a leading plastic product design and engineering company[24] RPC Group Plc Contribution to Consolidated Statements of Income (in millions of dollars) | Period | Net Sales | Operating Income | | :--------------------------------------- | :-------- | :--------------- | | Quarterly Period Ended March 28, 2020 | $1,174 | $81 | | Two Quarterly Periods Ended March 28, 2020 | $2,256 | $135 | - The preliminary purchase price allocation for RPC was updated, resulting in a $211 million decrease in property, plant and equipment, a $47 million decrease in intangible assets, a $19 million increase in inventory, and an $89 million decrease in deferred tax liabilities, with corresponding increases to goodwill[27] - Completed the sale of the Seal For Life business in July 2019 for net proceeds of $325 million[31] 5. Restructuring and Transaction Activities Consolidated Restructuring and Transaction Activities (in millions of dollars) | Period | March 28, 2020 | March 30, 2019 | | :--------------------------------------- | :------------- | :------------- | | Quarterly Period Ended | $19 | $5 | | Two Quarterly Periods Ended | $36 | $16 | Restructuring and Transaction Activities Accrual (in millions of dollars) | Item | Employee Severance and Benefits | Exit Facility Costs | Non-cash Impairment Charges | Transaction Activities | Total | | :------------------------- | :------------------------------ | :------------------ | :-------------------------- | :--------------------- | :---- | | Balance as of Sep 28, 2019 | $2 | $5 | $0 | $0 | $7 | | Charges | $17 | $0 | $0 | $17 | $36 | | Cash payments | $(12) | $(1) | $0 | $(17) | $(30) | | Balance as of Mar 28, 2020 | $7 | $4 | $0 | $0 | $11 | 6. Leases - The Company adopted ASU 2016-02, Leases (Topic 842), recognizing right-of-use assets and lease liabilities for leases over one year[34][35] Supplemental Lease Information (March 28, 2020, in millions of dollars) | Item | Amount | | :--------------------------------------- | :----- | | Operating lease right-of-use assets | $574 | | Operating lease liabilities (non-current) | $479 | | Total lease cost (Two Quarterly Periods Ended) | $75 | | Weighted-average remaining lease term - operating leases | 8 years | | Weighted-average discount rate - operating leases | 4.5% | 7. Long-Term Debt Long-Term Debt (in millions of dollars) | Item | March 28, 2020 | September 28, 2019 | | :----------------------------------- | :------------- | :----------------- | | Total long-term debt | $11,115 | $11,365 | | Long-term debt, less current portion | $11,043 | $11,261 | - In January 2020, the Company issued €700 million and €375 million aggregate principal amount of first priority senior secured notes and refinanced its existing $4.25 billion Term loan, resulting in a 50 basis point interest rate reduction[39] - Debt extinguishment costs of $18 million were recorded in Other expense, net, due to the prepayment of the euro Term loan[39] - The Company was in compliance with all debt covenants for all periods presented[40] 8. Financial Instruments and Fair Value Measurements - The Company uses cross-currency swaps to hedge foreign currency risk and interest rate swaps to manage interest expense variability on variable rate term loan debt[41][42][44] - In March 2020, the Company cash settled existing cross-currency swaps, receiving $246 million, and subsequently entered into new matching swaps[42] Effect of Derivative Instruments on Consolidated Statements of Income (Two Quarterly Periods Ended March 28, 2020, in millions of dollars) | Derivative Instrument | Statements of Income Location | Amount | | :-------------------- | :---------------------------- | :----- | | Cross-currency swaps | Interest expense, net | $(3) | | Foreign exchange forward contracts | Other expense, net | $0 | | Interest rate swaps | Interest expense, net | $34 | - Goodwill and other indefinite-lived assets were not impaired in fiscal 2019, but the ongoing COVID-19 pandemic creates market volatility that could necessitate future impairment tests[48] 9. Income Taxes - The effective tax rate for the quarter and year-to-date period was negatively impacted by 2% from uncertain tax positions and 2% from global intangible low-taxed income provisions[52] 10. Segment and Geographic Data Net Sales by Reportable Segment (Quarterly Period Ended March 28, 2020, in millions of dollars) | Segment | Net Sales | | :-------------------------------- | :-------- | | Consumer Packaging International | $1,095 | | Consumer Packaging North America | $706 | | Engineered Materials | $598 | | Health, Hygiene & Specialties | $576 | | Total net sales | $2,975 | Operating Income by Reportable Segment (Quarterly Period Ended March 28, 2020, in millions of dollars) | Segment | Operating Income | | :-------------------------------- | :--------------- | | Consumer Packaging International | $61 | | Consumer Packaging North America | $83 | | Engineered Materials | $88 | | Health, Hygiene & Specialties | $52 | | Total operating income | $284 | Net Sales by Geographical Region (Quarterly Period Ended March 28, 2020, in millions of dollars) | Region | Net Sales | | :--------------------------- | :-------- | | United States and Canada | $1,705 | | Europe | $981 | | Rest of world | $289 | | Total net sales | $2,975 | 11. Contingencies and Commitments - The Company is party to routine legal proceedings, with no ultimate liability expected to be material to financial statements[57] - Various purchase commitments for raw materials, supplies, and property and equipment exist in the ordinary course of business[57] 12. Share Repurchase Program - No shares were repurchased during the two quarterly periods ended March 28, 2020[58] - Authorized share repurchases of $393 million remain available to the Company[58] 13. Basic and Diluted Net Income Per Share Basic and Diluted Net Income Per Share (in millions, except per share amounts) | Metric | Quarterly Ended Mar 28, 2020 | Quarterly Ended Mar 30, 2019 | Two Quarterly Periods Ended Mar 28, 2020 | Two Quarterly Periods Ended Mar 30, 2019 | | :----------------------------------------------------------------- | :--------------------------- | :--------------------------- | :--------------------------------------- | :--------------------------------------- | | Consolidated net income | $126 | $74 | $173 | $162 | | Weighted average common shares outstanding - basic | 132.4 | 130.5 | 132.4 | 130.8 | | Weighted average common and common equivalent shares outstanding - diluted | 134.1 | 133.8 | 134.2 | 133.9 | | Basic per common share income | $0.95 | $0.57 | $1.31 | $1.24 | | Diluted per common share income | $0.94 | $0.55 | $1.29 | $1.21 | - 7.1 million shares were excluded from the diluted net income per share calculation for both the three and six months ended March 28, 2020, as their effect would be anti-dilutive[59] 14. Accumulated Other Comprehensive Loss Accumulated Other Comprehensive Loss (Quarterly Period Ended March 28, 2020, in millions of dollars) | Component | Balance at Dec 28, 2019 | Other comprehensive loss before reclassifications | Net amount reclassified from AOCI | Provision for income taxes | Balance at Mar 28, 2020 | | :--------------------------------------- | :---------------------- | :------------------------------------------------ | :-------------------------------- | :------------------------- | :---------------------- | | Currency Translation | $(187) | $(109) | — | — | $(344) | | Defined Benefit and Retiree Benefit Plans | $(56) | $(1) | — | — | $(57) | | Derivative Instruments | $(38) | $(181) | $35 | $37 | $(147) | | Accumulated Other Comprehensive Loss | $(281) | $(291) | $35 | $37 | $(548) | - Accumulated other comprehensive loss increased significantly from $(281) million at December 28, 2019, to $(548) million at March 28, 2020, primarily driven by currency translation and derivative instruments[62] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses financial condition, operations, COVID-19 impact, segments, acquisitions, and liquidity Executive Summary - The COVID-19 pandemic has resulted in lower customer demand in food service and industrials, partially offset by higher consumer demand in healthcare, hygiene, and food product categories[64] - The Company's operations are organized into four reporting segments: Consumer Packaging International, Consumer Packaging North America, Engineered Materials, and Health, Hygiene & Specialties[65] - The RPC Group Plc acquisition, completed in July 2019 for $6.1 billion, is expected to realize annual cost synergies of $150 million, with an estimated $75 million in fiscal 2020[67] - For fiscal 2020, the Company projects cash flow from operations of at least $1,400 million and free cash flow of at least $800 million[71] Results of Operations Consolidated Overview (Quarterly Period Ended March 28, 2020 vs March 30, 2019, in millions of dollars) | Metric | Mar 28, 2020 | Mar 30, 2019 | Change | % Change | | :-------------------------------- | :----------- | :----------- | :----- | :------- | | Net sales | $2,975 | $1,950 | $1,025 | 53% | | Operating income | $284 | $185 | $99 | 54% | - Quarterly net sales growth was primarily driven by $1,174 million from acquisitions and a 2% base volume increase, partially offset by $148 million lower selling prices due to resin costs[73] - Quarterly operating income increase was primarily due to $81 million from acquisitions, $11 million decrease in business integration costs, and $9 million decrease in SG&A, partially offset by a $9 million negative impact from price-cost spread[74] Consolidated Overview (Two Quarterly Periods Ended March 28, 2020 vs March 30, 2019, in millions of dollars) | Metric | Mar 28, 2020 | Mar 30, 2019 | Change | % Change | | :-------------------------------- | :----------- | :----------- | :----- | :------- | | Net sales | $5,791 | $3,922 | $1,869 | 48% | | Operating income | $483 | $361 | $122 | 34% | - YTD net sales growth was primarily attributed to $2,256 million from acquisitions, partially offset by $330 million lower selling prices due to resin costs and $52 million from divestiture sales[85] - YTD operating income increase was primarily due to $135 million from acquisitions, $17 million decrease in business integration costs, and $16 million decrease in depreciation and amortization, partially offset by a $29 million negative impact from price-cost spread[86] Liquidity and Capital Resources - Net cash from operating activities increased $202 million from the Prior YTD, primarily due to improved net income prior to non-cash activities related to the RPC acquisition[99] - Net cash used in investing activities decreased $140 million from the Prior YTD, primarily due to proceeds from the settlement of cross-currency derivatives, partially offset by increased capital expenditures[99] Free Cash Flow (Two Quarterly Periods Ended March 28, 2020, in millions of dollars) | Metric | Amount | | :------------------------------------------ | :----- | | Cash flow from operating activities | $533 | | Additions to property, plant and equipment, net | $(263) | | Free cash flow | $270 | - At March 28, 2020, the cash balance was $953 million, with approximately 65% located outside the U.S. The Company expects to refinance long-term debt obligations prior to maturity[102] Summarized Guarantor Financial Information - Berry Global, Inc.'s outstanding notes are fully, jointly, severally, and unconditionally guaranteed by its parent, Berry Global Group, Inc., and substantially all of its domestic subsidiaries[104] Summarized Guarantor Financial Information (Two Quarterly Periods Ended March 28, 2020, in millions of dollars) | Metric | Amount | | :-------------------------------- | :----- | | Net sales | $2,848 | | Gross profit | $626 | | Net income | $92 | Summarized Guarantor Balance Sheet (in millions of dollars) | Metric | March 28, 2020 | September 28, 2019 | | :------------------- | :------------- | :----------------- | | Current assets | $1,671 | $856 | | Noncurrent assets | $5,353 | $5,469 | | Current liabilities | $953 | $436 | | Noncurrent liabilities | $12,502 | $12,341 | Item 3. Quantitative and Qualitative Disclosures about Market Risk Details market risk exposure from interest rates and foreign currency, and derivative use for risk management - The Company is exposed to interest rate risk through $6.2 billion in term loans and an $850 million revolving credit facility; a 0.25% change in LIBOR would increase annual interest expense by $8 million[109] - Interest rate swaps are used to manage interest rate volatility, effectively fixing LIBOR rates on various term loans[110] - Foreign currency risk arises from fluctuations against the U.S. dollar, primarily with the euro, British pound sterling, Brazilian real, Chinese renminbi, Canadian dollar, and Mexican peso[111] - Cross-currency swaps and designated foreign currency denominated long-term debt are used to hedge foreign currency risk[112] Item 4. Controls and Procedures Management affirmed disclosure controls effectiveness; COVID-19 impacted RPC internal control integration - The Chief Executive Officer and Chief Financial Officer concluded that the design and operation of disclosure controls and procedures were effective at the reasonable assurance level as of March 28, 2020[115] - The COVID-19 pandemic has negatively impacted integration activities for implementing standardized internal control procedures over financial reporting within the recently acquired RPC business[116] Part II. Other Information Item 1. Legal Proceedings No material changes in legal proceedings reported since the most recent Form 10-K filing - No material changes in legal proceedings have occurred since the items disclosed in the Company's most recent Form 10-K[118] Item 1A. Risk Factors Advises on Form 10-K risks and highlights COVID-19's potential adverse impact on business and liquidity - The ongoing COVID-19 pandemic could continue to have a material adverse impact on the Company's business, financial condition, liquidity, and results of operations due to its uncertain duration, severity, governmental actions, and global economic recovery[120][121] - Other significant risks include substantial indebtedness, changes in raw material prices, risks related to acquisitions and divestitures, international business risks (including foreign currency exchange rates), and the phase-out of LIBOR[122] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds Reports no equity repurchases this quarter and details remaining authorized repurchase amount - No shares were repurchased by the Company during the quarter ended March 28, 2020[125] - $393 million of authorized shares remained available for purchase under the program as of March 28, 2020[125] Item 6. Exhibits Lists all Form 10-Q exhibits, including governance, debt instruments, and executive certifications - Exhibits include Amended and Restated Bylaws, Indenture for Senior Secured Notes, Rule 13a-14(a)/15d-14(a) and Section 1350 Certifications of the Chief Executive Officer and Chief Financial Officer, and various Inline XBRL documents[127] Signature Provides the formal signature block, confirming due authorization and signing for Berry Global Group, Inc - The report was signed by Mark W. Miles, Chief Financial Officer of Berry Global Group, Inc., on May 1, 2020[129]