Berry (BERY) - 2021 Q3 - Quarterly Report

Part I. Financial Information Item 1. Financial Statements Berry Global Group, Inc.'s unaudited consolidated financial statements and explanatory notes for the periods ended July 3, 2021 Consolidated Statements of Income and Comprehensive Income Consolidated Statements of Income (Quarterly) | Metric (in millions of dollars) | July 3, 2021 | June 27, 2020 | | :------------------------------ | :----------- | :------------ | | Net sales | 3,675 | 2,910 | | Operating income | 343 | 347 | | Income before income taxes | 253 | 244 | | Net income | 194 | 191 | | Basic Net income per share | 1.44 | 1.44 | | Diluted Net income per share | 1.40 | 1.42 | Consolidated Statements of Income (Three Quarterly Periods) | Metric (in millions of dollars) | July 3, 2021 | June 27, 2020 | | :------------------------------ | :----------- | :------------ | | Net sales | 10,181 | 8,701 | | Operating income | 980 | 830 | | Income before income taxes | 678 | 485 | | Net income | 505 | 364 | | Basic Net income per share | 3.76 | 2.75 | | Diluted Net income per share | 3.67 | 2.71 | Consolidated Statements of Comprehensive Income | Metric (in millions of dollars) | Quarterly July 3, 2021 | Quarterly June 27, 2020 | Three Quarterly July 3, 2021 | Three Quarterly June 27, 2020 | | :------------------------------ | :--------------------- | :---------------------- | :--------------------------- | :---------------------------- | | Net income | 194 | 191 | 505 | 364 | | Other comprehensive income (loss)| 89 | (2) | 265 | (164) | | Comprehensive income | 283 | 189 | 770 | 200 | Consolidated Balance Sheets Consolidated Balance Sheet Highlights (in millions of dollars) | Metric | July 3, 2021 | September 26, 2020 | | :---------------------- | :----------- | :----------------- | | Total current assets | 4,588 | 3,817 | | Total assets | 17,577 | 16,701 | | Total current liabilities | 2,879 | 2,183 | | Total liabilities | 14,624 | 14,609 | | Total stockholders' equity | 2,953 | 2,092 | - Cash and cash equivalents increased from $750 million at September 26, 2020, to $804 million at July 3, 2021[10] - Long-term debt, less current portion, decreased from $10,162 million at September 26, 2020, to $9,469 million at July 3, 2021[10] Consolidated Statements of Changes in Stockholders' Equity Changes in Stockholders' Equity (Three Quarterly Periods Ended July 3, 2021) | Metric (in millions of dollars) | Balance at Sep 26, 2020 | Net Income | Other Comprehensive Income | Share-based Compensation | Proceeds from Issuance of Common Stock | Balance at July 3, 2021 | | :------------------------------ | :---------------------- | :--------- | :------------------------- | :----------------------- | :------------------------------------- | :---------------------- | | Common Stock | 1 | — | — | — | — | 1 | | Additional Paid-in Capital | 1,034 | — | — | 34 | 57 | 1,125 | | Accumulated Other Comprehensive Loss | (551) | — | 265 | — | — | (286) | | Retained Earnings | 1,608 | 505 | — | — | — | 2,113 | | Total | 2,092 | 505 | 265 | 34 | 57 | 2,953 | Consolidated Statements of Cash Flows Consolidated Statements of Cash Flows (Three Quarterly Periods) | Metric (in millions of dollars) | July 3, 2021 | June 27, 2020 | | :------------------------------ | :----------- | :------------ | | Net cash from operating activities | 912 | 979 | | Net cash from investing activities | (355) | (152) | | Net cash from financing activities | (534) | (667) | | Net change in cash | 54 | 156 | | Cash and cash equivalents at end of period | 804 | 906 | Notes to Consolidated Financial Statements 1. Basis of Presentation - The unaudited Condensed Consolidated Financial Statements are prepared in accordance with GAAP for interim reporting, involving estimates and assumptions[18] - The Company's U.S. based results for fiscal 2021 include an extra week in the first quarter compared to fiscal 2020[18] - In October 2020, the Company reorganized portions of its four operating segments to better align for future growth, recasting prior period amounts to conform to this new structure[18] 2. Recent Accounting Pronouncements - The Company adopted ASU 2016-13, Financial Instruments - Credit Losses (Topic 326), in fiscal 2021 with no material impact[19] - ASU 2018-14, Changes to the Disclosure Requirements for Defined Benefit Plans, will be effective for fiscal 2022, with the impact on disclosures currently being evaluated[20] - ASU 2019-12, Income Taxes - Simplifying the Accounting for Income Taxes (Topic 740), will be effective for fiscal 2022, with the impact on financial statements currently being evaluated[20] - ASU 2020-04, Reference Rate Reform, provides temporary optional expedients for the transition from LIBOR; the Company is evaluating its impact and adoption plans[22] 3. Revenue and Accounts Receivable - Revenue is primarily from plastic packaging product sales, recognized when performance obligations are satisfied, typically at shipment[23] - Accounts receivable, net, are presented net of an allowance for credit losses of $22 million at July 3, 2021, down from $25 million at September 26, 2020[24] - The Company sells certain receivables to third-party financial institutions through factoring agreements, with net sales available under U.S. programs of $290 million for the quarter ended July 3, 2021, and $794 million for the three quarterly periods ended July 3, 2021[25] 4. Dispositions - During fiscal 2021, the Company sold its U.S. Flexible Packaging Converting business for $140 million and its Czech Republic Reaction Injection Molding business for $22 million[26] - A net pretax loss of $22 million on these divestitures was recorded in fiscal 2021 within Restructuring and transaction activities[26] - These divested businesses generated net sales of $203 million and $41 million, respectively, in fiscal 2020[26] 5. Restructuring and Transaction Activities Restructuring and Transaction Activities by Segment (in millions of dollars) | Segment | Quarterly July 3, 2021 | Quarterly June 27, 2020 | Three Quarterly July 3, 2021 | Three Quarterly June 27, 2020 | | :------------------------------- | :--------------------- | :---------------------- | :--------------------------- | :---------------------------- | | Consumer Packaging International | 3 | 14 | 44 | 37 | | Consumer Packaging North America | — | 2 | 1 | 6 | | Health, Hygiene & Specialties | — | 1 | — | 6 | | Engineered Materials | 1 | 2 | (4) | 6 | | Consolidated | 4 | 19 | 41 | 55 | Restructuring and Transaction Activities Accrual (in millions of dollars) | Accrual Component | Balance as of Sep 26, 2020 | Charges | Non-cash items | Cash | Balance as of July 3, 2021 | | :---------------------- | :------------------------- | :------ | :------------- | :--- | :------------------------- | | Employee and Benefits | 10 | 7 | — | (14) | 3 | | Severance | 7 | 2 | — | (3) | 6 | | Facility Exit Costs | — | 1 | (1) | — | — | | Transaction Activities | — | 31 | (30) | (1) | — | | Total | 17 | 41 | (31) | (18) | 9 | 6. Leases - The Company leases manufacturing facilities, warehouses, office space, equipment, and automobiles, recognizing right-of-use assets and lease liabilities for terms over one year[29][30] Supplemental Lease Information (in millions of dollars) | Metric | July 3, 2021 | September 26, 2020 | | :----------------------------------- | :----------- | :----------------- | | Operating lease right-of-use assets | 577 | 562 | | Noncurrent operating lease liabilities | 480 | 464 | | Finance lease right-of-use assets | 62 | 78 | | Noncurrent finance lease liabilities | 41 | 59 | - Cash paid for operating leases was $85 million for the three quarterly periods ended July 3, 2021[31] 7. Long-Term Debt Long-Term Debt Composition (in millions of dollars) | Facility | Maturity Date | July 3, 2021 | September 26, 2020 | | :---------------------------------------- | :------------ | :----------- | :----------------- | | Term loan | July 2026 | 3,440 | 4,208 | | 0.95% First Priority Senior Secured Notes | February 2024 | 800 | — | | 1.57% First Priority Senior Secured Notes | January 2026 | 1,525 | — | | 1.65% First Priority Senior Secured Notes | January 2027 | 400 | — | | Total long-term debt | | 9,694 | 10,237 | | Long-term debt, less current portion | | 9,469 | 10,162 | - In fiscal 2021, the Company issued $800 million, $1,525 million, and $400 million in new senior secured notes to prepay a portion of outstanding Term loans[33] - Debt extinguishment costs of $26 million were recorded in Other expense, net, due to prepayments on Term loans and notes[34] 8. Financial Instruments and Fair Value Measurements - The Company uses derivative financial instruments, such as cross-currency swaps and interest rate swaps, to manage market risk from interest rate and foreign currency fluctuations, not for speculative purposes[35][36][38] - As of July 3, 2021, the Company had €785 million of long-term debt designated as a hedge of net investment in euro-denominated foreign subsidiaries[36][111] Derivative Instruments Fair Value (in millions of dollars) | Derivative Instruments | July 3, 2021 | September 26, 2020 | | :--------------------- | :----------- | :----------------- | | Cross-currency swaps | 419 | 270 | | Interest rate swaps | 92 | 226 | | Interest rate swaps (Not designated) | 53 | — | - The fair value of the Company's marketable long-term indebtedness exceeded book value by $126 million as of July 3, 2021, determined using Level 2 inputs[46] 9. Income Taxes - The effective tax rate for the quarter and year-to-date was negatively impacted by state taxes and global intangible low-taxed income provisions[47] 10. Segment and Geographic Data - The Company operates in four segments: Consumer Packaging International, Consumer Packaging North America, Health, Hygiene & Specialties, and Engineered Materials, with prior period amounts recast due to October 2020 realignments[48] Net Sales by Segment (in millions of dollars) | Segment | Quarterly July 3, 2021 | Quarterly June 27, 2020 | Three Quarterly July 3, 2021 | Three Quarterly June 27, 2020 | | :------------------------------- | :--------------------- | :---------------------- | :--------------------------- | :---------------------------- | | Consumer Packaging International | 1,095 | 904 | 3,143 | 2,804 | | Consumer Packaging North America | 847 | 644 | 2,264 | 1,888 | | Health, Hygiene & Specialties | 828 | 669 | 2,349 | 1,923 | | Engineered Materials | 905 | 693 | 2,425 | 2,086 | | Total net sales | 3,675 | 2,910 | 10,181 | 8,701 | Net Sales by Geographical Region (in millions of dollars) | Region | Quarterly July 3, 2021 | Quarterly June 27, 2020 | Three Quarterly July 3, 2021 | Three Quarterly June 27, 2020 | | :--------------------- | :--------------------- | :---------------------- | :--------------------------- | :---------------------------- | | United States and Canada | 1,937 | 1,430 | 5,342 | 4,648 | | Europe | 1,308 | 1,172 | 3,658 | 3,156 | | Rest of world | 430 | 308 | 1,181 | 897 | | Total net sales | 3,675 | 2,910 | 10,181 | 8,701 | 11. Contingencies and Commitments - The Company is involved in routine legal proceedings, but any ultimate liability is not expected to be material to its financial statements[54] - The Company has various purchase commitments for raw materials, supplies, and property and equipment as part of its ordinary business operations[54] 12. Share Repurchase Program - No shares were repurchased during the three quarterly periods ended July 3, 2021[55] - As of July 3, 2021, $393 million of authorized share repurchases remain available[55] 13. Basic and Diluted Net Income Per Share - Basic net income per share is calculated by dividing net income by weighted-average common shares outstanding, while diluted EPS includes common stock equivalents[56] Basic and Diluted Net Income Per Share (in millions, except per share amounts) | Metric | Quarterly July 3, 2021 | Quarterly June 27, 2020 | Three Quarterly July 3, 2021 | Three Quarterly June 27, 2020 | | :---------------------------------------------- | :--------------------- | :---------------------- | :--------------------------- | :---------------------------- | | Consolidated net income | 194 | 191 | 505 | 364 | | Weighted average common shares outstanding - basic | 135.1 | 132.5 | 134.3 | 132.4 | | Dilutive shares | 3.4 | 1.7 | 3.4 | 1.9 | | Weighted average common and common equivalent shares outstanding - diluted | 138.5 | 134.2 | 137.7 | 134.3 | | Basic EPS | 1.44 | 1.44 | 3.76 | 2.75 | | Diluted EPS | 1.40 | 1.42 | 3.67 | 2.71 | 14. Accumulated Other Comprehensive Loss Accumulated Other Comprehensive Loss Components (in millions of dollars) | Component | Balance at Sep 26, 2020 | Other Comprehensive Income (Loss) before Reclassifications | Net Amount Reclassified | Balance at July 3, 2021 | | :----------------------------------------- | :---------------------- | :--------------------------------------------------------- | :---------------------- | :---------------------- | | Currency Translation | (278) | 196 | — | (82) | | Defined Benefit Pension and Retiree Health Benefit Plans | (116) | — | — | (116) | | Derivative Instruments | (157) | 62 | 7 | (88) | | Accumulated Other Comprehensive Loss | (551) | 258 | 7 | (286) | - Accumulated other comprehensive loss improved from $(551) million at September 26, 2020, to $(286) million at July 3, 2021, primarily due to currency translation and derivative instruments[60] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management's discussion and analysis of financial condition, operational results, liquidity, and capital resources Executive Summary - Berry Global Group, Inc. operates in four segments: Consumer Packaging International, Consumer Packaging North America, Health, Hygiene & Specialties, and Engineered Materials, reorganized in October 2020 for growth and synergy[61] - The Company's acquisition strategy focuses on improving long-term financial performance, enhancing market positions, and expanding product lines through synergy realization[62] - In fiscal 2021, the Company completed the sale of its U.S. Flexible Packaging Converting business ($140 million proceeds) and Czech Republic Reaction Injection Molding business ($22 million proceeds), resulting in a $22 million pretax loss[63] - Plastic resin is the primary raw material; timing differences in passing cost changes to customers can impact short-term results, though the Company expects to manage raw material supplies without significant interruptions[64] - For fiscal 2021, the Company projects cash flow from operations of $1,575 million and capital spending of $700 million, expecting to offset inflation headwinds with favorable product mix and strong long-term demand[65] Results of Operations - Quarterly Performance Analysis Consolidated Quarterly Performance (July 3, 2021 vs. June 27, 2020) | Metric (in millions of dollars) | Quarter July 3, 2021 | Prior Quarter June 27, 2020 | Change | % Change | | :------------------------------ | :------------------- | :-------------------------- | :----- | :------- | | Net sales | 3,675 | 2,910 | 765 | 26% | | Cost of goods sold | 3,049 | 2,272 | 777 | 34% | | Operating income | 343 | 347 | (4) | (1)% | - Consolidated net sales growth of 26% was driven by increased selling prices ($533 million due to inflation pass-through), 5% organic volume growth, and $147 million from foreign currency, partially offset by $62 million from divestitures[68] - Consolidated operating income decreased by 1% due to a $42 million unfavorable price-cost spread and a $12 million increase in SG&A, partially offset by $24 million from organic volume growth and $23 million from foreign currency[71] - Other expense, net, increased by $21 million to $14 million, primarily due to debt extinguishment costs in the current quarter compared to a foreign currency benefit in the prior quarter[79] - Interest expense, net, decreased by $34 million (31%) to $76 million, mainly due to repayments on long-term borrowings and recent refinancing activities[80] - Comprehensive income improved by $94 million, driven by a $3 million improvement in net income, an $11 million favorable change in derivative instruments, and an $80 million favorable change in currency translation[81] Results of Operations - Year-to-Date Performance Analysis Consolidated Year-to-Date Performance (July 3, 2021 vs. June 27, 2020) | Metric (in millions of dollars) | YTD July 3, 2021 | Prior YTD June 27, 2020 | Change | % Change | | :------------------------------ | :--------------- | :---------------------- | :----- | :------- | | Net sales | 10,181 | 8,701 | 1,480 | 17% | | Cost of goods sold | 8,273 | 6,959 | 1,314 | 19% | | Operating income | 980 | 830 | 150 | 18% | - Consolidated YTD net sales growth of 17% was attributed to 5% organic volume growth, $714 million from increased selling prices (inflation pass-through), $289 million from foreign currency, and $131 million from extra shipping days, partially offset by $130 million from divestitures[83] - Consolidated YTD operating income increased by 18% due to $105 million from organic volume growth, $46 million from foreign currency, and $22 million from extra shipping days, partially offset by a $28 million increase in SG&A[85] - Other expense, net, increased by $39 million (650%) to $45 million, primarily due to debt extinguishment costs and non-operating intercompany balances[96] - Interest expense, net, decreased by $82 million (24%) to $257 million, primarily due to repayments on long-term borrowings and recent refinancing activities[96] - Comprehensive income improved by $570 million, driven by a $141 million improvement in net income, a $250 million favorable change in currency translation, and a $178 million favorable change in derivative instruments[97] Liquidity and Capital Resources - The Company had no outstanding balance on its $850 million asset-based revolving line of credit at July 3, 2021, and was in compliance with all covenants[98] - Net cash from operating activities decreased by $67 million from the Prior YTD, mainly due to changes in working capital from organic growth and inflation, partially offset by improved net income[99] - Net cash used in investing activities increased by $203 million, primarily due to higher capital expenditures and prior year derivative settlements, partially offset by divestiture proceeds[100] - Net cash used in financing activities decreased by $133 million, attributed to lower net debt repayments and higher proceeds from common stock issuance[100] - As of July 3, 2021, cash balance was $804 million (64% outside U.S.); the Company believes U.S. cash and cash flow, plus credit facilities, will meet short-term liquidity needs but expects to refinance long-term debt obligations[101] Summarized Guarantor Financial Information - Berry Global, Inc. (Issuer) has notes guaranteed by its parent, Berry Global Group, Inc. (Parent), and substantially all domestic subsidiaries, which are 100% owned[103] Summarized Guarantor Financial Information (Three Quarterly Periods Ended July 3, 2021) | Metric (in millions of dollars) | Amount | | :------------------------------ | :----- | | Net sales | 5,135 | | Gross profit | 928 | | Earnings from continuing operations | 273 | | Net income | 273 | Summarized Guarantor Balance Sheet (in millions of dollars) | Metric | July 3, 2021 | September 26, 2020 | | :---------------------- | :----------- | :----------------- | | Current assets | 2,034 | 1,417 | | Noncurrent assets | 5,778 | 6,153 | | Current liabilities | 1,470 | 841 | | Intercompany payable | 858 | 572 | | Noncurrent liabilities | 11,247 | 11,936 | Item 3. Quantitative and Qualitative Disclosures about Market Risk Disclosure of the Company's exposure to interest rate and foreign currency risks and management strategies Interest Rate Risk - The Company is exposed to interest rate risk primarily through its senior secured credit facilities, which include $3.4 billion in term loans and an $850 million revolving credit facility (no outstanding borrowings)[108] - A 0.25% change in LIBOR would increase annual interest expense by $3 million on variable rate term loans[108] - The Company uses interest rate swaps to manage interest expense variability, effectively swapping variable LIBOR contracts for fixed annual rates on portions of its debt[109] Foreign Currency Risk - As a global company, Berry Global is exposed to foreign currency risk from fluctuations, primarily between the U.S. dollar and the euro, British pound sterling, Brazilian real, Chinese renminbi, Canadian dollar, and Mexican peso[110] - A 10% decline in foreign currency exchange rates would have resulted in a $29 million unfavorable impact on Net income for the three quarterly periods ended July 3, 2021[110] - The Company uses cross-currency swaps and designates foreign currency denominated long-term debt as net investment hedges to manage foreign currency risk[111] Item 4. Controls and Procedures Evaluation of disclosure controls and procedures and reporting on changes in internal control over financial reporting Evaluation of disclosure controls and procedures - Management, with the CEO and CFO's participation, concluded that the Company's disclosure controls and procedures were effective at a reasonable assurance level as of July 3, 2021[114] Changes in internal control over financial reporting - There were no changes in internal control over financial reporting during the quarter ended July 3, 2021, that materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting[115] Part II. Other Information Item 1. Legal Proceedings Confirmation of no material changes in legal proceedings since the most recent Form 10-K filing - No material changes in legal proceedings have occurred since the disclosures in the Company's most recent Form 10-K[117] Item 1A. Risk Factors Advises investors to review risk factors from the latest Form 10-K and acknowledges non-exhaustive nature of risks - Investors are advised to carefully consider the risks described in the Company's most recent Form 10-K under 'Risk Factors'[118] - The list of risk factors in the Form 10-K may not contain all material factors, and forward-looking statements in this report may not occur[119] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds Report on share repurchase activities, including no repurchases during the quarter and remaining authorization - The Company did not repurchase any shares during the quarter ended July 3, 2021[120] - As of July 3, 2021, $393 million of authorized shares remained available for purchase under the program[120] Item 6. Exhibits List of exhibits filed with the Form 10-Q, including indentures, agreements, and certifications - The report includes exhibits such as Indenture for 1.65% First Priority Senior Secured Notes due 2027, Registration Rights Agreement, Subsidiary Guarantors, and CEO/CFO certifications[122] Signature Signature of the Chief Financial Officer, Mark W. Miles, for the filing of the report on behalf of Berry Global Group, Inc. - The report was signed by Mark W. Miles, Chief Financial Officer of Berry Global Group, Inc., on August 5, 2021[123]