bpg10q.htm


SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549
 
FORM 10-Q
 
 [X]     Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
For the quarterly period ended January 2, 2016
or
 [   ]     Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
    
BPG LOGO
 
Commission File Number 001-35672
BERRY PLASTICS GROUP, INC.
(Exact name of registrant as specified in its charter)
 
Delaware
20-5234618
(State or other jurisdiction
of incorporation or organization)
(IRS employer
identification number)
   
101 Oakley Street
Evansville, Indiana
 
47710
(Address of principal executive offices)
(Zip code)
  
Registrant’s telephone number, including area code:  (812) 424-2904  
 
Securities registered pursuant to Section 12(b) of the Act:
 
Indicate by check mark whether the registrant:  (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) have been subject to such filing requirements for the past 90 days.  Yes [X ]  No [  ]  
  
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes [ X]  No [  ]  
  
Indicate by check mark whether the registrant is a large accelerated filer, accelerated filer, or non-accelerated filer.  See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):          
      Large accelerated filer [  X  ]           Accelerated filer [    ]              Non-accelerated filer [    ] Small reporting company [    ] 
  
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934).             Yes[    ]   No[ X ]  
 
Class
 
Outstanding at February 11, 2016
Common Stock, $.01 par value per share
 
120.5 million shares
 
 
1

 
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
 
This Form 10-Q includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933  and Section 21E of the Securities Exchange Act of 1934, as amended, with respect to our financial condition, results of operations and business and our expectations or beliefs concerning future events.  The forward-looking statements include, in particular, statements about our plans, strategies and prospects under the heading "Management’s Discussion and Analysis of Financial Condition and Results of Operations".  You can identify forward-looking statements because they 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, our financial condition, or our recent acquisition of AVINTIV Inc. (“Avintiv”) and integration thereof.  All statements we make relating to our estimated and projected earnings, margins, costs, expenditures, cash flows, growth rates and financial results or to our expectations regarding future industry trends are forward-looking statements.  In addition, we, through our senior management, from time to time make forward-looking public statements concerning our expected future operations and performance and other developments.  These forward-looking statements are subject to risks and uncertainties that may change at any time, and, therefore, our actual results may differ materially from those that we expected.  We derive many of our forward-looking statements from our operating budgets and forecasts, which are based upon many detailed assumptions.  While we believe that our assumptions are reasonable, we caution that it is very difficult to predict the impact of known factors, and it is impossible for us to anticipate all factors that could affect our actual results.  All forward-looking statements are based upon information available to us on the date of this Form 10-Q. 
 
Readers should carefully review the factors discussed in our most recent Form 10-K in the section titled “Risk Factors” and other risk factors identified from time to time in our periodic filings with the Securities and Exchange Commission.
 
 
2

 
Berry Plastics Group, Inc.
Form 10-Q Index
For Quarterly Period Ended January 2, 2016  
 
     
Page No.
Part I.
Financial Information
 
 
Item 1
Financial Statements
 
      4
      5
      6
      7
      8
 
Item 2
  20
 
Item 3
  26
 
Item 4
  27
Part II
Other Information
 
 
Item 1
  27
 
Item 1A
  27
 
Item 6
  29
      30
 
 
3

 
Part I.  Financial Information
 
Item 1.     Financial Statements
Berry Plastics Group, Inc.
Consolidated Statements of Income
(Unaudited)
(in millions of dollars, except per share amounts)
 
   
Quarterly Period Ended
 
   
January 2, 2016
   
December 27, 2014
 
Net sales
  $ 1,612     $ 1,220  
Costs and expenses:
               
Cost of goods sold
    1,320       1,037  
Selling, general and administrative
    154       85  
Amortization of intangibles
    36       25  
Restructuring and impairment charges
    16       45  
Operating income
    86       68  
Other expense (income), net
    4       (1 )
Interest expense, net
    75       53  
Income before income taxes
    7       16  
Income tax expense
    3       3  
Net income
  $ 4     $ 13  
 
Net income per share:
               
Basic
  $ 0.03     $ 0.11  
Diluted
    0.03       0.11  
Outstanding weighted-average shares:
               
Basic
    120.1       118.2  
Diluted
    124.9       122.9  

 Berry Plastics Group, Inc.
Consolidated Statements of Comprehensive Income (Loss)
(Unaudited)
(in millions of dollars) 
 
   
Quarterly Period Ended
 
   
January 2,
2016
   
December 27,
2014
 
Net income
  $ 4     $ 13  
Currency translation
    (29 )     (14 )
Interest rate hedges
    4       (7 )
Provision for income taxes related to other comprehensive income items
    (1 )     2  
Comprehensive income (loss)
  $ (22 )   $ (6 )
 
See notes to consolidated financial statements.
 
4

 
Berry Plastics Group, Inc.
Consolidated Balance Sheets
 (in millions of dollars)
 
   
January 2,
2016
   
September 26, 2015
 
Assets
 
(Unaudited)
       
Current assets:
           
Cash and cash equivalents
  $ 282     $ 228  
Accounts receivable (less allowance of $9 and $3, respectively)
    625       434  
           Inventories:
               
Finished goods
    391       309  
Raw materials and supplies
    290       213  
      681       522  
Deferred income taxes
          162  
Prepaid expenses and other current assets
    104       37  
Total current assets
    1,692       1,383  
Property, plant, and equipment, net
    2,297       1,294  
Goodwill, intangible assets and deferred costs, net
    3,701       2,349  
Other assets
    20       2  
Total assets
  $ 7,710     $ 5,028  
 
Liabilities
               
 
Current liabilities:
               
Accounts payable
  $ 510     $ 330  
Accrued expenses and other current liabilities
    454       338  
Current portion of long-term debt
    82       37  
Total current liabilities
    1,046       705  
Long-term debt, less current portion
    6,066       3,648  
Deferred income taxes
    333       387  
Other long-term liabilities
    332       341  
Total liabilities
    7,777       5,081  
 
Redeemable non-controlling interest
    12       12  
                 
Stockholders’ equity (deficit)
               
                 
Common stock (120.4 and 119.9 shares issued, respectively)
    1       1  
Additional paid-in capital
    414       406  
Non-controlling interest
    3       3  
Accumulated deficit
    (352 )     (356 )
Accumulated other comprehensive loss
    (145 )     (119 )
Total stockholders’ equity (deficit)
    (79 )     (65 )
Total liabilities and stockholders’ equity (deficit)
  $ 7,710     $ 5,028  
 
See notes to consolidated financial statements.
 
5

 
Berry Plastics Group, Inc.
Consolidated Statement of Changes in Stockholders’ Equity (Deficit)
For the Quarterly Period Ended January 2, 2016 and December 27, 2014
(Unaudited)
(in millions of dollars)
   
Common Stock
   
Additional Paid-in Capital
   
Non-controlling Interest
   
Accumulated Other Comprehensive Loss
   
Accumulated Deficit
   
Total
 
Balance at September 27, 2014
  $ 1     $ 367     $ 3     $ (43 )   $ (442 )   $ (114 )
Proceeds from issuance of common stock
          7                         7  
Stock compensation expense
          7                         7  
Net income
                            13       13  
Interest rate hedge, net of tax
                      (5 )           (5 )
Currency translation
                      (14 )           (14 )
Balance at December 27, 2014
  $ 1     $ 381     $ 3     $ (62 )   $ (429 )   $ (106 )
 
Balance at September 26, 2015
  $ 1     $ 406     $ 3     $ (119 )   $ (356 )   $ (65 )
Proceeds from issuance of common stock
          7                         7  
Stock compensation expense
          4                         4  
Purchase of non-controlling interest
          (3 )                       (3 )
Net income
                            4       4  
Interest rate hedge, net of tax
                      3             3  
Currency translation
                      (29 )           (29 )
Balance at January 2, 2016
  $ 1     $ 414     $ 3     $ (145 )   $ (352 )   $ (79 )
 
 
See notes to consolidated financial statements.
 
6

 
Berry Plastics Group, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
(in millions of dollars)
 
   
Quarterly Period Ended
 
   
January 2,
2016
   
December 27,
2014
 
Cash Flows from Operating Activities:
           
Net income
  $ 4     $ 13  
Adjustments to reconcile net cash provided by operating activities:
               
Depreciation
    103       66  
Amortization of intangibles
    36       25  
Non-cash interest expense
    3       2  
Deferred income tax
    (8 )     3  
Stock compensation expense
    4       7  
Impairment of long-lived assets
          2  
Other non-cash items
    7       (2 )
           Changes in working capital
    37       (14 )
           Changes in other assets and liabilities
    5       (2 )
Net cash from operating activities
    191       100  
 
Cash Flows from Investing Activities:
               
Additions to property, plant and equipment
    (93 )     (35 )
Proceeds from sale of assets
    4       10  
Acquisition of businesses, net of cash acquired
    (2,286 )      
Net cash from investing activities
    (2,375 )     (25 )
 
Cash Flows from Financing Activities:
               
Proceeds from long-term borrowings
    2,492        
Repayments on long-term borrowings
    (100 )     (116 )
Proceeds from issuance of common stock
    7       7  
Payment of tax receivable agreement
    (57 )     (39 )
Debt financing costs
    (36 )      
Purchase of non-controlling interest
    (66 )      
Net cash from financing activities
    2,240       (148 )
Effect of exchange rate changes on cash
    (2 )     (3 )
Net change in cash
    54       (76 )
Cash and cash equivalents at beginning of period
    228       129  
Cash and cash equivalents at end of period
  $ 282     $ 53  
 
See notes to consolidated financial statements.
 
7

 
Berry Plastics Group, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
(tables in millions of dollars, except per share data)
1.  Basis of Presentation
 
The accompanying unaudited Condensed Consolidated Financial Statements of Berry Plastics Group, Inc. (“the Company”) 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 of assets, liabilities, revenues, expenses, and related disclosures at the date of the financial statements and during the reporting period. Actual results could differ from those estimates. 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 consolidated financial statements and footnotes thereto included in the Company’s most recent Form 10-K filed with the Securities and Exchange Commission.
 
2.  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 the first fiscal quarter of 2016, with the exception of the below, there have been no developments to the recently adopted accounting pronouncements from those disclosed in the Company’s 2015 Annual Report on Form 10-K that are considered to have a material impact on our unaudited consolidated financial statements.
 
Inventory
 
In July 2015, the FASB issued ASU 2015-11, simplifying the Measurement of Inventory to simplify the guidance on the subsequent measurement of inventory, excluding inventory measured using last-in, first out or the retail inventory method. Under the new standard, inventory should be at the lower of cost and net realizable value. The new accounting guidance is effective for interim and annual periods beginning after December 15, 2016 with early adoption permitted. The Company has elected to early adopt this guidance, and its effect did not have a material impact on our financial statements.
 
Business Combinations
 
In September 2015, the FASB issued ASU 2015-16, Business Combinations (Topic 805)- Simplifying the accounting for Measurement-Period Adjustments, which requires that the cumulative impact of a measurement period adjustment (including the impact on prior periods) be recognized in the reporting period in which the adjustment is identified. Entities should present separately on the face of the income statement or disclose in the footnotes the portion of the measurement period adjustment recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment had been recognized as of the acquisition date. The new guidance is effective for interim and annual periods beginning after December 15, 2015 with early adoption permitted. The Company has elected to early adopt this guidance, and will consider the impact of such guidance on our recording of the AVINTIV, Inc. business combination.
 
Income Taxes
 
In November 2015, the FASB issued ASU 2015-17, “Balance Sheet Classification of Deferred Taxes”, which simplifies the presentation of deferred income taxes.  This update requires that deferred tax assets and liabilities be classified as non-current in a statement of financial position. The update is effective for financial periods beginning after December 15, 2017; however, early application is permitted. The Company adopted this standard in the first quarter of fiscal year 2016, on a prospective basis, resulting in a $175 million reclassification of our net current deferred tax asset to the net non-current deferred tax liabilities on our Consolidated Balance Sheet.
 
 
8

 
3.  Acquisition
 
AVINTIV Inc.
 
In October 2015, the Company acquired 100% of the capital stock of AVINTIV Inc. (“Avintiv”) for a purchase price of $2.26 billion, net of $195 million of cash acquired, which is preliminary and subject to adjustment.  Avintiv is one of the world’s leading developers, producers, and marketers of nonwoven specialty materials used in hygiene, infection prevention, personal care, and high-performance solutions.  The acquired business is operated in the Health, Hygiene & Specialties reporting segment.  To finance the purchase, the Company issued $400 million aggregate principal amount of 6.0% second priority senior secured notes due 2022 and entered into an incremental assumption agreement to increase the commitments under the Company’s existing term loan credit agreement by $2.1 billion due 2022.
 
The acquisition has been accounted for under the purchase method of accounting, and accordingly, the purchase price has been allocated to the identifiable assets and liabilities based on preliminary fair values at the acquisition date.  The results of Avintiv have been included in the consolidated results of the Company since the date of the acquisition. Avintiv had net sales of $437 million for the first fiscal quarter of 2016.  The Company has not finalized the allocation of the purchase price to the fair value of fixed assets, intangibles, deferred income taxes, or debt and is continuing to review all of the working capital acquired and uncertain tax positions. The Company does not expect Goodwill resulting from the acquisition to be deductible for tax purposes.  The following table summarizes the preliminary allocation of purchase price and the estimated fair values of the assets acquired and liabilities assumed at the date of the acquisition:
 
Working capital (a)
  $ 190  
Property and equipment
    986  
Intangible assets
    586  
Goodwill
    803  
Historical Avintiv debt assumed
    (53 )
Non-controlling interest
    (63 )
Deferred purchase price
    (31 )
Other assets and long-term liabilities
    (158 )
(a) Includes a $7 million step up of inventory to fair value
 

The deferred purchase price relates to certain unaccrued tax claims of  Companhia Providência Indústria e Comércio (“Providência”) at the time Providência was acquired by Avintiv.  If the claims are resolved in the Company's favor, the deferred purchase price will be paid to the legacy Providência shareholders.  However, if the Company or Providência incur actual tax liability in respect to these claims, the amount of deferred purchase price will be reduced by the amount of such actual tax liability.  The Company will be responsible for any actual tax liability in excess of the deferred purchase price and the cash consideration deposited into escrow.
 
Unaudited pro forma net sales were $1.7 billion and unaudited pro forma net losses were $7 million for the three-month period ending December 27, 2014.  The unaudited pro forma net sales and net loss assume that the Avintiv acquisition had occurred as of the beginning of the period.
 
The unaudited pro forma information presented above is for informational purposes only and is not necessarily indicative of the operating results that would have occurred had the Avintiv acquisition been consummated at the beginning of the period, nor is it necessarily indicative of future operating results.  Further, the information reflects only pro forma adjustments for additional interest expense, depreciation, and amortization, net of the applicable income tax effects.
 
4.  Accounts Receivable Factoring Agreements
 
A number of the Company's foreign subsidiaries in Brazil, Colombia, France, Italy, Mexico, Netherlands, Spain, and China have entered into factoring agreements to sell certain receivables to unrelated third-party financial institutions. The Company accounts for these transactions in accordance with ASC 860, "Transfers and Servicing" ("ASC 860").  ASC 860 allows for the ownership transfer of accounts receivable to qualify for sale treatment when the appropriate criteria is met, which permits the Company to present the balances sold under the program to be excluded from Accounts receivable, net on the Consolidated Balance Sheets.  Receivables are considered sold when (i) they are transferred beyond the reach of the Company and its creditors, (ii) the purchaser has the right to pledge or exchange the receivables, and (iii) the Company has surrendered control over the transferred receivables.  In addition, the Company provides no other forms of continued financial support to the purchaser of the receivables once the receivables are sold. The table below summarizes the total amount of accounts receivable on the Consolidated Balance Sheets, sold under these factoring arrangements as of the end of the first fiscal quarter:
 
9

 
 
   
January 2, 2016
   
September 26, 2015
 
Trade receivables sold to financial institutions
  $ 45     $ -  
Net amounts advanced from financial institutions
    (40 )     -  
             Amounts due from financial institutions
  $ 5     $ -  
 
In addition to the programs described above, the Company has a U.S. based program where certain U.S. based receivables are sold to unrelated third-party financial institutions. There were no amounts outstanding from the financial institutions related to U.S. based programs at January 2, 2016.
 
The fees associated with transfer of receivables for all programs were not material for the periods ended January 2, 2016 or December 27, 2014.
 
5.  Restructuring and Impairment Charges
 
The Company incurred restructuring costs related to severance, asset impairment, and facility exit costs of $16 million and $5 million for the quarterly period ended January 2, 2016 and December 27, 2014, respectively.  The costs incurred in the quarter relate primarily to severance charges associated with the integration of the Avintiv acquisition and the closure of a manufacturing facility.  The tables below set forth the significant components of the restructuring charges recognized, by segment:
   
Quarterly Period Ended
 
   
January 2, 2016
   
December 27, 2014
 
Consumer Packaging
  $ 3     $ 2  
Health, Hygiene, & Specialties
    12       3  
Engineered Materials
    1       -  
Consolidated
  $ 16     $ 5  
 
The table below sets forth the activity with respect to the restructuring accrual at January 2, 2016:
   
Severance and termination benefits
   
Facilities exit
costs and other
   
Total
 
Balance at September 26, 2015
  $ 2     $ 8     $ 10  
Charges
    14       2       16  
Cash payments
    (1 )     (2 )     (3 )
Balance at January 2, 2016
  $ 15     $ 8     $ 23  
 
6.  Accrued Expenses, Other Current Liabilities and Other Long-Term Liabilities
 
The following table sets forth the totals included in Accrued expenses and other current liabilities on the Consolidated Balance Sheets:
   
January 2, 2016
   
September 26, 2015
 
Employee compensation, payroll and other
  $ 106     $ 95  
Interest
    40       38  
Rebates
    62       53  
Restructuring
    23       10  
Accrued taxes
    46       20  
Tax receivable agreement obligation
    77       57  
Accrued operating expenses
    100       65  
    $ 454     $ 338  
 
 
10

 
The following table sets forth the totals included in Other long-term liabilities on the Consolidated Balance Sheets:
   
January 2, 2016
   
September 26, 2015
 
Lease retirement obligation
  $ 33     $ 32  
Sale-lease back deferred gain
    27       28  
Pension liability
    76       57  
Deferred purchase price
    32        
Tax receivable agreement obligation
    98       175  
Interest rate swaps
    32       36  
Other
    34       13  
    $ 332     $ 341  
 
The Company made $57 million of payments related to the income tax receivable agreement ("TRA") in the first fiscal quarter of 2016, of which Apollo received $46 million.  The TRA provides for an annual payment to TRA holders at 85% of the amount of cash savings, if any, in U.S. federal, foreign, state and local income tax that are actually realized as a result of the utilization of our net operating losses attributable to periods prior to the initial public offering.
 
7.  Long-Term Debt
 
Long-term debt consists of the following:
 
 
Maturity Date
 
January 2, 2016
   
September 26, 2015
 
Term loan
February 2020
  $ 1,362     $ 1,369  
Term loan
January 2021
    1,019       1,019  
Term loan
 October 2022
    2,045        
Revolving line of credit
May  2020
           
51/8% Second Priority Senior Secured Notes
July 2023
    700       700  
51/2% Second Priority Senior Secured Notes
May 2022
    500       500  
6% Second Priority Senior Secured Notes
October 2022
    400        
Debt discounts and deferred fees
      (72 )     (29 )
Capital leases and other
Various
    194       126  
Total long-term debt
      6,148       3,685  
Current portion of long-term debt
      (82 )     (37 )
Long-term debt, less current portion
    $ 6,066     $ 3,648  
 
Term Loan
 
In October 2015, the Company entered into an incremental assumption agreement to increase the commitments under the  existing term loan credit agreement by $2.1 billion.  The incremental term loan bears interest at LIBOR plus 3.00% per annum with a LIBOR floor of 1.00%, matures in October 2022 and is subject to customary amortization. The proceeds from the incremental term loan, in addition to the 6% Second Priority Senior Secured Notes, were used to finance the Avintiv acquisition.  The Company recognized $11 million of debt discount and $30 million of deferred financing fees related to this assumption agreement that will be amortized to Interest expense through maturity.  Debt discounts and deferred financing fees are presented net of Long-term debt, less current portion on the Consolidated Balance Sheet.
 
11

 
6% Second Priority Senior Secured Notes
 
In October 2015, the Company issued $400 million of 6% second priority senior secured notes due October 2022.  Interest on these notes is due semi-annually in April and October.  The proceeds from these notes, in addition to the incremental term loan, were used to finance the Avintiv acquisition. The Company recognized $5 million of deferred financing fees related to this debt issuance that will be amortized to Interest expense 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.  For those derivative instruments that are designated and qualify as hedging instruments, the Company must designate the hedging instrument, based upon the exposure being hedged, as a fair value hedge, cash flow hedge, or a hedge of a net investment in a foreign operation.  To the extent hedging relationships are found to be effective, as determined by FASB guidance, changes in the fair value of the derivatives are offset by changes in the fair value of the related hedged item and recorded to Accumulated other comprehensive loss.  Management believes hedge effectiveness is evaluated properly in preparation of the financial statements.
 
Foreign Currency Forward Contracts Not Designated as Hedges
 
The primary purposes of our foreign currency hedging activities is to manage the potential changes in value associated with the changes in foreign currencies related to foreign currency-denominated interest-bearing intercompany loans.  The changes in fair value of these derivative contracts are recognized in other income, net, on our consolidated statements of operations and are largely offset by the remeasurement of the underlying intercompany loan.  These contracts are entered into and settled within the given reporting period.
 
Cash Flow Hedging Strategy
 
For derivative instruments that are designated and qualify as cash flow hedges, the effective portion of the gain or loss on the derivative instrument is reported as a component of Accumulated other comprehensive loss and reclassified into earnings in the same line item associated with the forecasted transaction and in the same period or periods during which the hedged transaction affects earnings.  The categorization of the framework used to price these derivative instruments is considered a Level 3, due to the subjective nature of the unobservable inputs used to determine the fair value.
 
In February 2013, the Company entered into an interest rate swap transaction to manage cash flow variability associated with $1 billion of outstanding variable rate term loan debt. The agreement swapped the greater of a three-month variable LIBOR contract or 1.00% for a fixed three-year rate of 2.355%, with an effective date in May 2016 and expiration in May 2019.  In June 2013, the Company elected to settle this derivative instrument and received $16 million as a result of this settlement.  The offset is included in Accumulated other comprehensive income and will be amortized to Interest expense from May 2016 through May 2019, the original term of the swap agreement.
 
In March 2014, the Company entered into an interest rate swap transaction to manage cash flow variability associated with $1 billion of outstanding variable rate term loan debt. The agreement swaps the greater of a three-month variable LIBOR contract or 1.00% for a fixed three-year rate of 2.59%, with an effective date in February 2016 and expiration in February 2019.  The Company records changes in fair value in Accumulated other comprehensive income and Deferred income taxes.
 
Derivatives instruments
Balance Sheet Location
 
January 2, 
2016
   
September 26, 2015
 
Interest rate swap
Other long-term liabilities
  $ 32     $ 36  
 
The Fair Value Measurements and Disclosures section of the ASC defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, and establishes a framework for measuring fair value.  This section also establishes a three-level hierarchy (Level 1, 2, 3) for fair value measurements based upon the observability of inputs to the valuation of an asset or liability as of the measurement date.  This section also requires the consideration of the counterparty’s or the Company’s nonperformance risk when assessing fair value.
 
12

 
The Company’s interest rate swap fair values were determined using Level 2 inputs as other observable inputs were not available.
 
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.  The assets are adjusted to fair value only when the carrying values exceed the fair values.  The categorization of the framework used to price the assets is considered Level 3, due to the subjective nature of the unobservable inputs used to determine the fair value.  These assets include primarily 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 2015 assessment and as a result of the segment reorganization that occurred during the quarter, the Company conducted the qualitative assessment and determined it was more likely than not that the fair value of each reporting units exceeded the carrying amount as of the measurement date. No further impairment indicators were identified in the quarter.
 
Included in the following table are the major categories of assets measured at fair value on a non-recurring basis as of January 2, 2016 and September 26, 2015, along with the impairment loss recognized on the fair value measurement during the period:
   
As of January 2, 2016
 
   
Level 1
   
Level 2
   
Level 3
   
Total
   
Impairment
 
Indefinite-lived trademarks
  $     $     $ 207     $ 207     $  
Goodwill
                2,459       2,459        
Definite lived intangible assets
                1,031       1,031        
Property, plant, and equipment
                2,297       2,297        
Total
  $     $     $ 5,994     $ 5,994     $  
 
   
As of September 26, 2015
 
   
Level 1
   
Level 2
   
Level 3
   
Total
   
Impairment
 
Indefinite-lived trademarks
  $     $     $ 207     $ 207     $  
Goodwill
                1,652       1,652        
Definite lived intangible assets
                486       486        
Property, plant, and equipment
                1,294       1,294       2  
Total
  $     $     $ 3,639     $ 3,639     $ 2  
 
The Company’s financial instruments consist primarily of cash and cash equivalents, long-term debt, and capital lease obligations.  The fair value of our marketable long-term indebtedness exceeded book value by $60 million as of January 2, 2016.  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
 
The Company’s effective tax rate was 51% and 21% for the quarterly period ended January 2, 2016 and December 27, 2014, respectively.  Income tax expense in the quarterly period ended January 2, 2016 was higher than our statutory rate was primarily due to valuation allowances recorded in foreign and state jurisdictions and non-deductible transaction costs.
 
10.  Operating Segments
 
In November 2015 the Company reorganized into three operating segments: Health, Hygiene & Specialties, Consumer Packaging, and Engineered Materials.  The new structure is designed to better align us with our customers, provide improved service, drive future growth and to facilitate future cost saving synergies.  Selected information by reportable segment is presented in the following tables, with prior period amounts recast to conform to the new structure: 
 
 
13

 
 
   
Quarterly Period Ended
 
   
January 2, 2016
   
December 27, 2014
 
Net sales:
           
Consumer Packaging
  $ 683     $ 712  
Health, Hygiene, & Specialties
    564       129  
Engineered Materials
    365       379  
               Total net sales
  $ 1,612     $ 1,220  
Operating income:
               
Consumer Packaging
  $ 43     $ 30  
Health, Hygiene, & Specialties
    5       7  
Engineered Materials
    38       31  
               Total operating income
  $ 86     $ 68  
Depreciation and amortization:
               
Consumer Packaging
  $ 67     $ 63  
Health, Hygiene, & Specialties
    54       7  
Engineered Materials
    18       21  
               Total depreciation and amortization
  $ 139     $ 91  
 
 
   
January 2,
 2016
   
September 26, 2015
 
Total assets:
           
Consumer Packaging
  $ 3,617     $ 3,832  
Health, Hygiene, & Specialties
    3,370       385  
Engineered Materials
    723       811  
                  Total assets
  $ 7,710     $ 5,028  
Goodwill:
               
Consumer Packaging
  $ 1,519     $ 1,520  
Health, Hygiene, & Specialties
    857       48  
Engineered Materials
    83       84  
                  Total goodwill
  $ 2,459     $ 1,652  
 
Selected information by geography is presented in the following tables:
 
   
Quarterly Period Ended
 
   
January 2, 2016
   
December 27, 2014
 
Net sales:
           
North America
  $ 1,307     $ 1,168  
South America
    79       2  
Europe
    157       32  
Asia
    69       18  
               Total net sales
  $ 1,612     $ 1,220  
 
   
January 2, 2016
   
September 26, 2015
 
Long-lived assets:
           
North America
  $ 4,268     $ 3,510  
South America
    781       79  
Europe
    270       51  
Asia
    699       5  
                  Total Long-lived assets
  $ 6,018     $ 3,645  
 
 
 
14

 
Goodwill  
 
In connection with the change in reporting segments, the Company allocated the goodwill to the new segments under the provisions of ASC 350.  The changes in the carrying amount of goodwill by reportable segment due to the current year realignment are as follows:  
 
   
Rigid Open Top
   
Rigid Closed Top
   
Engineered Materials
   
Flexible Packaging
   
Consumer
Packaging
   
Health, Hygiene & Specialties
   
Total
 
Balance as of September 26, 2015
  $ 681     $ 823     $ 69     $ 79     $ -     $ -     $ 1,652  
Segment reorganization
    (681 )     (823 )     15       (79 )     1,520       48       -  
Acquisitions, net
    -       -       -       -       -       821       821  
Foreign currency translation adjustment
    -       -       (1 )     -       (1 )     (12 )     (14 )
Balance as of January 2, 2016
  $ -     $ -     $ 83     $ -     $ 1,519     $ 857     $ 2,459  
 
11.  Contingencies and Commitments
 
In July 2012, Berry Plastics Corporation (“BPC”) was sued by a customer for breach of contract, breach of express warranty, and breach of implied warranties. The customer alleged that in December 2007 and January 2008 BPC supplied the customer with defective woven polypropylene fabric used to manufacture containers that it then sold to its customers. In November 2015, a jury rendered a judgment in favor of the customer in the amount of $7.2 million. The Company believes the judgment is fully insured and intends to appeal the judgement and file certain post-trial motions.
 
The Company is party to various legal proceedings in addition to the above involving routine claims which are incidental to its business.  Although the Company’s legal and financial liability with respect to such proceedings cannot be estimated with certainty, management believes that any ultimate liability would not be material to its financial statements.  The Company has various purchase commitments for raw materials, supplies and property and equipment incidental to the ordinary conduct of business.
 
12.  Basic and Diluted Net Income per Share
 
Basic net income per share is calculated by dividing the net income attributable to common stockholders by the weighted-average number of common shares outstanding during the period, without consideration for common stock equivalents. Diluted net income per share is computed 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.
 
The following tables and discussion provide a reconciliation of the numerator and denominator of the basic and diluted net income per share computations.  The calculation below provides net income on both basic and diluted basis for the quarterly period ended January 2, 2016 and December 27, 2014:
 
   
Quarterly Period Ended
 
(in millions, except per share amounts)
 
January 2, 2016
   
December 27, 2014
 
Numerator
           
Consolidated net income
  $ 4     $ 13  
Denominator
               
Weighted average common shares outstanding - basic
    120.1       118.2  
Dilutive shares
    4.8       4.7  
Weighted average common and common equivalent shares outstanding - diluted
    124.9       122.9  
                 
Per common share income
               
Basic
  $ 0.03     $ 0.11  
Diluted
  $ 0.03     $ 0.11  
 
 
15

 
13.  Accumulated Other Comprehensive Income (Loss)
 
Comprehensive income (loss) is comprised of Consolidated net income (loss) and Other comprehensive income (loss).  Other comprehensive losses include net unrealized gains or losses resulting from currency translations of foreign subsidiaries, changes in the value of our derivative instruments and adjustments to the pension liability.  
 
The balances related to each component of other comprehensive income (loss) during the three months ended January 2, 2016 were as follows: 
 
   
Currency Translation
   
Defined Benefit Pension and Retiree Health Benefit Plans
   
 
 
Interest Rate Hedges
   
Accumulated Other Comprehensive Loss
 
Balance at September 26, 2015
  $ (81 )   $ (25 )   $ (13 )   $ (119 )
Other comprehensive loss
    (29 )           4       (25 )
Tax expense
                (1 )     (1 )
Balance at January 2, 2016
  $ (110 )   $ (25 )   $ (10 )   $ (145 )
 
14. Purchase of Non-controlling Interest
 
At the time of our acquisition of Avintiv, it indirectly owned a 71.25% controlling interest in Providência their Brazilian subsidiary that they acquired in 2014.  In the January 2, 2016 quarter, the Company, through a wholly-owned subsidiary, acquired the remaining 28.75% non-controlling ownership interest of Providência for $66 million of cash.  As a result of this transaction, Providência became a wholly-owned subsidiary of the Company and the Company recorded $3 million to Additional paid-in capital.
 
15.  Guarantor and Non-Guarantor Financial Information  
 
Berry Plastics Corporation (“Issuer”) has notes outstanding which are fully, jointly, severally, and unconditionally guaranteed by substantially all of Berry’s domestic subsidiaries.  Separate narrative information or financial statements of the guarantor subsidiaries have not been included because they are 100% owned by the parent company and the guarantor subsidiaries unconditionally guarantee such debt on a joint and several basis.  A guarantee of a guarantor 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 indenture, the designation of such guarantor as an unrestricted subsidiary, the defeasance or discharge of the indenture, as a result of the holders of certain other indebtedness foreclosing on a pledge of the shares of a guarantor subsidiary or if such guarantor no longer guarantees certain other indebtedness of the issuer.  The guarantees are also limited as necessary to prevent them from constituting a fraudulent conveyance under applicable law and guarantees guaranteeing subordinated debt are subordinated to certain other of the Company’s debts.  Presented below is condensed consolidating financial information for the parent, issuer, guarantor subsidiaries and non-guarantor subsidiaries.  Our issuer and guarantor financial information includes all of our domestic operating subsidiaries, excluding those domestic facilities acquired in the Avintiv acquisition owned by foreign subsidiaries, and our non-guarantor subsidiaries include our foreign subsidiaries, the Avintiv domestic facilities mentioned above, and BP Parallel, LLC. Berry Plastics Group, Inc. uses the equity method to account for its ownership in Berry Plastics Corporation in the Condensed Consolidating Supplemental Financial Statements.  Berry Plastics Corporation uses the equity method to account for its ownership in the guarantor and non-guarantor subsidiaries.  All consolidating entries are included in the eliminations column along with the elimination of intercompany balances.
 
16

 
Condensed Supplemental Consolidated Balance Sheet

 
   
January 2, 2016
 
   
Parent
   
Issuer
   
Guarantor
Subsidiaries
   
Non—
Guarantor
Subsidiaries
   
Eliminations
   
Total
 
Current assets
    1       162       855       674             1,692  
Intercompany receivable
    376       3,122             63       (3,561 )      
Property, plant, and equipment, net
          77       1,342       878             2,297  
 Other assets
    64       3,865       4,307       1,287       (5,802 )     3,721  
 Total assets
  $ 441     $ 7,226     $ 6,504     $ 2,902     $ (9,363 )   $ 7,710  
 
                                               
Current liabilities
    77       184       440       345             1,046  
Intercompany payable
                3,455       106       (3,561 )      
Other long-term liabilities
    431       6,158       81       61             6,731  
Non-controlling interest
    12                   12       (12 )     12  
Stockholders’ equity (deficit)
    (79 )     884       2,528       2,378       (5,790 )     (79 )
Total liabilities and stockholders’ equity (deficit)
  $ 441     $ 7,226     $ 6,504     $ 2,902     $ (9,363 )   $ 7,710  
 
 
   
September 26, 2015
 
   
Parent
   
Issuer
   
Guarantor
Subsidiaries
   
Non—
Guarantor
Subsidiaries
   
Eliminations
   
Total
 
Current assets
    162       257       767       197             1,383  
Intercompany receivable
    329       2,963             83       (3,375 )      
Property, plant and equipment, net
          79       1,111       104             1,294  
 Other assets
    75       1,553       2,152       102       (1,531 )     2,351  
 Total assets
  $ 566     $ 4,852     $ 4,030     $ 486     $ (4,906 )   $ 5,028  
 
                                               
Current liabilities
    57       205       366       77             705  
Intercompany payable
                3,375             (3,375 )      
Other long-term liabilities
    562       3,769       39       6             4,376  
Non-controlling interest
    12                               12  
Stockholders’ equity (deficit)
    (65 )     878       250       403       (1,531 )     (65 )
Total liabilities and stockholders’ equity (deficit)
  $ 566     $ 4,852     $ 4,030     $ 486     $ (4,906 )   $ 5,028  
 
 
 
17

 

   
Quarterly Period Ended January 2, 2016
 
   
Parent
   
Issuer
   
Guarantor
Subsidiaries
   
Non-
Guarantor
Subsidiaries
   
Eliminations
   
Total
 
Net sales
  $     $ 150     $ 992     $ 470     $     $ 1,612  
Cost of goods sold
          123       815       382             1,320  
Selling, general and administrative
          56       75       23             154  
Amortization of intangibles
          2       26       8             36  
Restructuring and impairment charges
                15       1             16  
Operating income (loss)
          (31 )     61       56             86  
Other expense (income), net
          (1 )     (4 )     9             4  
Interest expense, net
          9       46       20             75  
Equity in net income of subsidiaries
    (7 )     (33 )                 40        
Income (loss) before income taxes
    7       (6 )     19       27       (40 )     7  
Income tax expense (benefit)
    3       (8 )           12       (4 )     3  
Net income (loss)
  $ 4     $ 2     $ 19     $ 15     $ (36 )   $ 4  
Comprehensive  income (loss)
  $ 4     $ 5     $ 19     $ (14 )   $ (36 )   $ (22 )

Consolidating Statement of Cash Flows
                                   
Cash Flow from Operating Activities
  $     $ (30 )   $ 153     $ 68     $     $ 191  
Cash Flow from Investing Activities
                                               
Additions to  property, plant, and equipment
          (3 )     (80 )     (10 )           (93 )
Proceeds from sale of assets
                4                   4  
(Contributions) distributions to/from subsidiaries
    (7 )     (2,253 )                 2,260        
Intercompany advances (repayments)
          (162 )                 162        
Acquisition of business, net of cash acquired
                (291 )     (1,995 )           (2,286 )
Net cash from investing activities
    (7 )     (2,418 )     (367 )     (2,005 )     2,392       (2,375 )
                                                 
Cash Flow from Financing Activities
                                               
Proceeds from long-term borrowings
          2,489             3             2,492  
Purchase of non-controlling interest
                (66 )                 (66 )
Proceeds from issuance of common stock
    7                               7  
Payment of tax receivable agreement
    (57 )                             (57 )
Repayments on long-term borrowings
          (70 )           (30 )           (100 )
Contribution from parent
                291       1,969       (2,260 )      
Debt financing costs
          (36 )                       (36 )
Changes in intercompany balances
    57             7       98       (162 )      
Net cash provided from financing activities
    7       2,383       232       2,040       (2,392 )     2,240  
Effect of exchange rate on cash
                      (2 )           (2 )
Net change in cash
          (65 )     18       101             54  
Cash and cash equivalents at beginning of period
          163             65             228  
Cash and cash equivalents at end of period
  $     $ 98     $ 18     $ 166     $     $ 282  
 
 
18

 
   
Quarterly Period Ended December 27, 2014
 
   
Parent
   
Issuer
   
Guarantor
Subsidiaries
   
Non-Guarantor
Subsidiaries
   
Eliminations
   
Total
 
Net sales
  $     $ 159     $ 948     $ 113     $     $ 1,220  
Cost of goods sold
          147       809       81             1,037  
Selling, general and administrative
          16       59       10             85  
Amortization of intangibles
          2       21       2             25  
Restructuring and impairment charges
                5                   5  
Operating income (loss)
          (6 )     54       20             68  
Other income, net
          (1 )                       (1 )
Interest expense, net
          7       41       5             53  
Equity in net income of subsidiaries
    (16 )     (28 )                 44        
Income (loss) before income taxes
    16       16       13       15       (44 )     16  
Income tax expense (benefit)
    3       2             1       (3 )     3  
Net income (loss)
  $ 13     $ 14     $ 13     $ 14     $ (41 )   $ 13  
Comprehensive  income (loss)
  $ 13     $ 13     $ 9     $     $ (41 )   $ (6 )
 
Consolidating Statement of Cash Flows
                                   
Cash Flow from Operating Activities
  $     $ (16 )   $ 102     $ 14     $     $ 100  
Cash Flow from Investing Activities
                                               
Additions to  property, plant, and equipment
          (3 )     (30 )     (2 )           (35 )
Proceeds from sale of assets
                10                   10  
(Contributions) distributions to/from subsidiaries
    (7 )     7                          
Intercompany advances (repayments)
          55                   (55 )      
Acquisition of business, net of cash acquired
                                   
Net cash from investing activities
    (7 )     59       (20 )     (2 )     (55 )     (25 )
                                                 
Cash Flow from Financing Activities
                                               
Proceeds from long-term borrowings
                                   
Proceeds from issuance of common stock
    7                               7  
Payment of tax receivable agreement
    (39 )                             (39 )
Repayments on long-term borrowings
          (115 )           (1 )           (116 )
Changes in intercompany balances
    39             (91 )     (3 )     55        
Net cash provided from financing activities
    7       (115 )     (91 )     (4 )     55       (148 )
Effect of exchange rate on cash
                      (3 )           (3 )
Net change in cash
          (72 )     (9 )     5             (76 )
Cash and cash equivalents at beginning of period
          70       15       44             129  
Cash and cash equivalents at end of period
  $     $ (2 )   $ 6     $ 49     $