SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549  
 
FORM 10-K  
  
(Mark One)  
[X]
Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended   
 
September 29, 2012  
or  
  
[  ]
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934  for the transition period from ____ to _____   
 
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:


   
Title of Each Class
Name of Each Exchange on Which Registered
Common Stock, $0.01 par value per share
New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act:  None   
 Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes [   ]  No [X]  
  
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934.  Yes [  ]  No [ X]  
  
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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K:  [  ]  
  
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 [     ]           Accelerated filer  [     ]              Non-accelerated filer [  X  ] 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]  
 
The aggregate market value of the voting stock held by non-affiliates of the registrant on October 4, 2012, based upon the closing price of $15.20 of the registrant’s common stock as reported on the New York Stock Exchange, was approximately $600 million.  The calculation excludes shares of the registrant’s common stock held by current executive officers, directors, and affiliates whose ownership exceeds 5% outstanding at October 4, 2012.  The registrant has elected to use October 4, 2012 as the calculation date, which was the initial trading date of the registrant’s common stock on the New York Stock Exchange, since on March 30, 2012 (the last business day of the registrant’s second fiscal quarter), the registrant was a privately-held company.  
 
As of December 17, 2012, there were approximately 112,717,783 shares of the registrant’s common stock outstanding. 
 
DOCUMENTS INCORPORATED BY REFERENCE  

  
Portions of Berry Plastics Group, Inc.’s Proxy Statement for its 2013 Annual Meeting of Stockholders are incorporated by reference into Part III of this Annual Report on Form 10-K.   
   

 
 

 


CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
 
This Form 10-K for the fiscal period ending September 29, 2012, (“fiscal 2012”) and comparable periods October 1, 2011, (“fiscal 2011”) and October 2, 2010, (“fiscal 2010”) contains “forward-looking statements” which involve risks and uncertainties.  You can identify forward-looking statements because they contain words such as “believes,” “expects,” “may,” “will,” “should,” “would,” “could,” “seeks,” “approximately,” “intends,” “plans,” “estimates,” or “anticipates” or similar expressions that relate to our strategy, plans or intentions.  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-K. 
 
Important factors that could cause actual results to differ materially from our expectations, which we refer to as cautionary statements, are disclosed under “Risk Factors” and elsewhere in this Form 10-K, including, without limitation, in conjunction with the forward-looking statements included in this Form 10-K.  All forward-looking information and subsequent written and oral forward-looking statements attributable to us, or to persons acting on our behalf, are expressly qualified in their entirety by the cautionary statements.  Some of the factors that we believe could affect our results include: 
 
·  
risks associated with our substantial indebtedness and debt service; 
·  
changes in prices and availability of resin and other raw materials and our ability to pass on changes in raw material prices on a timely basis; 
·  
performance of our business and future operating results; 
·  
risks related to our acquisition strategy and integration of acquired businesses; 
·  
reliance on unpatented know-how and trade secrets; 
·  
increases in the cost of compliance with laws and regulations, including environmental, safety, and production and product laws and regulations; 
·  
risks related to disruptions in the overall economy and the financial markets may adversely impact our business; 
·  
catastrophic loss of one of our key manufacturing facilities, natural disasters, and other unplanned business interruptions; 
·  
risks of competition, including foreign competition, in our existing and future markets; 
·  
general business and economic conditions, particularly an economic downturn; 
·  
the ability of our insurance to cover fully our potential exposures; and 
·  
the other factors discussed in the section of this Form 10-K titled “Risk Factors.” 
 
We caution you that the foregoing list of important factors may not contain all of the material factors that are important to you.  In addition, in light of these risks and uncertainties, the matters referred to in the forward-looking statements contained in this Form 10-K may not in fact occur.  Accordingly, investors should not place undue reliance on those statements.  We undertake no obligation to publicly update or revise any forward-looking statement as a result of new information, future events or otherwise, except as otherwise required by law. 
  

 
-1-

 
 
TABLE OF CONTENTS  
FORM 10-K FOR THE FISCAL YEAR ENDED SEPTEMBER 29, 2012  

     
   
Page
 
PART I
 
Item 1
BUSINESS
3
Item 1A.
RISK FACTORS
8
Item 1B.
UNRESOLVED STAFF COMMENTS
14
Item 2.
PROPERTIES
14
Item 3.
LEGAL PROCEEDINGS
14
Item 4.
MINE SAFETY DISCLOSURES
15
 
PART II
 
 
Item 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER
 
 
MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES
15
Item 6
SELECTED FINANCIAL DATA
16
Item 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
 
 
RESULTS OF OPERATIONS
17
Item 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
28
Item 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
30
Item 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
 
 
AND FINANCIAL DISCLOSURE
30
Item 9A.
CONTROLS AND PROCEDURES
30
Item 9B.
OTHER INFORMATION
30
 
PART III
 
 
Item 10.
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
31
Item 11.
EXECUTIVE COMPENSATION
31
Item 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
 
 
AND RELATED STOCKHOLDER MATTERS
31
Item 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
 
 
INDEPENDENCE
31
Item 14.
PRINCIPAL ACCOUNTING FEES AND SERVICES
31
 
PART IV
 
 
Item 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
32
     
  

 
-2-

 

  
Item 1.  BUSINESS
 
(In millions of dollars, except as otherwise noted) 
 
 General
 
Berry Plastics Group, Inc. (“Berry” or the “Company”) is a leading provider of value-added plastic consumer packaging and engineered materials with a track record of delivering high-quality customized solutions to our customers.  Our products utilize our proprietary research and development platform, which includes a continually evolving library of Berry-owned molds, patents, manufacturing techniques and technologies.  We sell our solutions predominantly into consumer-oriented end-markets, such as food and beverage, healthcare, and personal care.  We believe our customers look to us for solutions that have high consumer impact in terms of form, function, and branding.  Representative examples of our products include thermoform drink cups, thin-wall containers, blow-molded bottles, specialty closures, prescription vials, specialty plastic films, tapes products, and corrosion protection materials.   
 
We believe that we have created one of the largest product libraries in our industry, allowing us to be a comprehensive solution provider to our customers.  We have more than 13,000 customers, which consist of a diverse mix of leading national, mid-sized regional and local specialty businesses.  The size and scope of our customer network allows us to introduce new products we develop or acquire to a vast audience that is familiar with, and we believe partial to, our brand.  In fiscal 2012, no single customer represented more than 3% of net sales and our top ten customers represented less than 17% of net sales.  We believe our manufacturing processes and our ability to leverage our scale to reduce expenses on items, such as raw materials, position us as a low-cost manufacturer relative to our competitors.  For example, we believe based on management estimates that we are one of the largest global purchasers of plastic resins, at more than 2.5 billion pounds per year, which gives us scaled purchasing savings. 
 
We organize our business into four operating divisions: Rigid Open Top, Rigid Closed Top, (which together make up our Rigid Packaging business), Engineered Materials, and Flexible Packaging.  Additional financial information about our business segments is provided in “Management's Discussion and Analysis of Financial Condition and Results of Operations” and the “Notes to Consolidated Financial Statements,” which are included elsewhere in this Form 10-K.   
 
Acquisitions 
 
Rexam Specialty and Beverage Closures 
 
In September 2011, we acquired 100% of the capital stock of Rexam SBC.  The aggregate purchase price was $351 ($340, net of cash acquired).  Rexam SBC’s primary products include plastic closures, fitments and dispensing closure systems, and jars.  The business is operated in our Rigid Packaging business.  To finance the purchase, we used cash on hand and existing credit facilities.  The Rexam SBC 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 estimated fair values at the acquisition date. 
 
STOPAQ®
 
In June 2012, the Company acquired 100% of the shares of Frans Nooren Beheer B.V. and its operating companies (“Stopaq”) for a purchase price of $65 ($62, net of cash acquired).  Stopaq is the inventor and manufacturer of patented visco-elastic technologies for use in corrosion prevention, sealing and insulation applications ranging from pipelines to subsea piles to rail and cable joints.  The newly added business is operated in our Engineered Materials segment.  To finance the purchase, the Company used cash on hand and existing credit facilities.  The Stopaq acquisition has been accounted for under the purchase method of accounting, and accordingly, the preliminary purchase price has been allocated to the identifiable assets and liabilities based on estimated fair values at the acquisition date. 
 
Recent Developments  
 
In October 2012, we completed our initial public offering selling 29,411,764 shares of common stock at $16.00 per share.   We used proceeds of our initial public offering, net of underwriting fees, of $444 and cash on hand to repurchase all $455 of 11% Senior Subordinated Notes due September 15, 2016.  In connection with the initial public offering, we entered into an income tax receivable agreement that provides for the payment by us to our pre-initial public offering stockholders, option holders and holders of our stock appreciation rights of 85% of the amount of cash savings, if any, in U.S. federal, foreign, state and local income tax that we actually realize (or are deemed to realize in the case of a change of control) as a result of the utilization of our and our subsidiaries’ net operating losses attributable to periods prior to the initial public offering.  We expect to pay between $300 and $350 in cash related to this agreement, based on our current taxable income estimates. 
 

 
-3-

 
 
Product Overview 
 
Rigid Packaging 
 
Our Rigid Packaging business primarily consists of containers, foodservice items, housewares, closures, overcaps, bottles, prescription vials, and tubes.  The largest end uses for our packages are consumer-oriented end markets such as food and beverage, retail mass marketers, healthcare, personal care and household chemical.  Many of our products are manufactured from proprietary molds that we develop and own, which we believe would result in significant costs to our customers to switch to a different supplier.  In addition to a complete product line, we have sophisticated decorating capabilities and in-house graphic arts and tooling departments, which allow us to integrate ourselves into, and, we believe, add significant value to, our customers’ packaging design processes.  Our primary competitors include Airlite, Letica, Polytainers, Silgan, Aptar Group, and Reynolds.  These competitors individually only compete on certain of our products, whereas we offer the entire selection of rigid products described below. 
 
 Containers.  We manufacture a collection of nationally branded container products and also seek to develop customized container products for niche applications by leveraging of our state-of-the-art design, decoration and graphic arts capabilities.  We believe this mix allows us to both achieve significant economies of scale, while also maintaining an attractive portfolio of specialty products.  Our container capacities range from four ounces to five gallons and are offered in various styles with accompanying lids, bails and handles, some of which we produce, as well as a wide array of decorating options.  We have long-standing supply relationships with many of the nation’s leading food and consumer products companies, including Dannon, Dean Foods, Conagra, Kraft, Kroger, and Unilever.  
 
Foodservice.  We believe that we are one of the largest providers of large size thermoformed polypropylene (“PP”) and injection-molded plastic drink cups in the United States.  We believe we are the leading producer of 30 ounce or larger thermoformed PP drink cups and offer a product line with sizes ranging from 12 to 52 ounces.  Our thermoform process uses PP instead of more expensive polystyrene (“PS”) or polyethylene terephthalate (“PET”) in producing deep draw drink cups to generate a cup with a competitive cost advantage versus thermoformed PS or PET drink cups.  Additionally, we produce injection-molded plastic cups that range in size from 12 to 64 ounces.  Primary markets for our plastic drink cups are quick service and family dining restaurants, convenience stores, stadiums and retail stores.  Many of our cups are decorated, often as promotional items, and we believe we have a reputation in the industry for innovative, state-of-the-art graphics.  Selected drink cup customers and end users include Hardee’s, McDonald’s, Quik Trip, Starbucks, Subway, Wendy’s, and Yum! Brands. 
 
Housewares.  Our participation in the housewares market is focused on producing semi-disposable plastic home and party and plastic garden products.  Examples of our products include plates, bowls, pitchers, tumblers and outdoor flowerpots.  We sell virtually all of our products in this market through major national retail marketers and national chain stores, such as Walmart.  PackerWare is our recognized brand name in these markets and PackerWare branded products are often co-branded by our customers.  Our strategy in this market has been to provide high value to consumers at a relatively modest price, consistent with the key price points of the retail marketers.  We believe outstanding service and the ability to deliver products with timely combination of color and design further enhance our position in this market. 
 
Closures and Overcaps.  We believe we are a leading producer of closures and overcaps across several of our product lines, including continuous-thread and child-resistant closures, as well as aerosol overcaps.  We currently sell our closures into numerous end markets, including vitamin/nutritional, chemical, healthcare, food/beverage, specialty and personal care.  In addition to traditional closures, we are a provider of a wide selection of custom closure solutions including fitments and plugs for medical applications, cups and spouts for liquid laundry detergent, and dropper bulb assemblies for medical and personal care applications.  Further, we believe that we are the leading domestic producer of injection-molded aerosol overcaps.  Our aerosol overcaps are used in a wide variety of consumer goods including spray paints, household and personal care products, insecticides and numerous other commercial and consumer products.  We believe our technical expertise and manufacturing capabilities provide us a low-cost position that has allowed us to become a leading provider of high-quality closures and overcaps to a diverse set of leading companies.  We believe our manufacturing advantage is driven by our position on the forefront of various technologies, including the latest in single- and bi-injection processes, precise reproduction of colors, automation and vision technology, and proprietary packing technology that minimizes freight cost and warehouse space.  A majority of our overcaps and closures are manufactured from proprietary molds, which we design, develop, and own.  In addition to these molds, we utilize state-of-the art lining, assembly, and decorating equipment to enhance the value and performance of our products in the market.  Our closure and aerosol overcap customers include McCormick, Bayer, Coca-Cola, Diageo, Shell Oil, Johnson and Johnson, Pepsico, Wyeth, Kraft, Sherwin-Williams, and S.C. Johnson. 
 
Bottles and Prescription Containers.  Our bottle and prescription container businesses target markets similar to our closure business.  We believe, based on management estimates, that we are the leading supplier of spice containers in the United States and have a leadership position in various food and beverage, vitamin and nutritional markets, as well as selling bottles
 

 
-4-

 

into prescription and pharmaceutical applications.  Additionally, we believe we are a leading supplier in the prescription container market, supplying a complete line of amber containers with both one-piece and two-piece child-resistant closures.  We offer an extensive line of stock polyethylene (“PE”) and PET bottles for the vitamin and nutritional markets.  Our design capabilities, along with internal engineering strength give us the ability to compete on customized designs to provide desired differentiation from traditional packages.  We also offer our customers decorated bottles with hot stamping, silk screening and labeling.  We sell these products to personal care, pharmaceutical, food and consumer product customers, including McCormick, Pepsico, Carriage House, Perrigo, CVS, NBTY, Target Stores, John Paul Mitchell, and Novartis. 
 
Tubes.  We believe that we are one of the largest suppliers of extruded plastic squeeze tubes in the United States.  We offer a complete line of tubes in a wide variety of sizes.  We have also introduced laminate tubes to complement our extruded tube business.  Our focus and investments are made to ensure that we are able to meet the increasing trend towards large diameter tubes with high-end decoration.  We have several proprietary designs in this market that combine tube and closure that we believe are viewed as very innovative both in appearance and functionality, as well as from a sustainability standpoint.  The majority of our tubes are sold in the personal care market, focusing on products like facial/cold creams, shampoos, conditioners, bath/shower gels, lotions, sun care, hair gels, and anti-aging creams.  We also sell our tubes into the pharmaceutical and household chemical markets.  We believe that our ability to provide creative package designs, combined with a complementary line of closures, makes us a preferred supplier for many customers in our target markets including Kao Brands, L’Oreal, Avon, and Procter & Gamble. 
 
Engineered Materials 
 
Our Engineered Materials business primarily consists of pipeline corrosion protection solutions, specialty tapes and adhesives, polyethylene based film products and can liners.  Our primary competitors include AEP, Sigma and 3M.  The Engineered Materials business primarily includes the following product groups: 
 
 Corrosion Protection Products.  We believe we are a leading global producer of anti-corrosion products to infrastructure, rehabilitation and new pipeline projects throughout the world.  We believe our products deliver superior performance across all climates and terrains for the purpose of sealing, coupling, and rehabilitation and corrosion protection of pipelines.  Products include heat-shrinkable coatings, single- and multi-layer sleeves, pipeline coating tapes, anode systems for cathodic protection, visco-elastic, and epoxy coatings.  These products are used in oil, gas, and water supply and construction applications.  Our customers primarily include contractors managing discrete construction projects around the world as well as distributors and applicators.  Our corrosion protection products customers include Tyco Electronics, Northwest Pipe, Stopaq, and Midwestern Pipeline Products. 
 
Tape Products.  We believe we are a leading North American manufacturer of cloth and foil tape products.  Other tape products include high-quality, high-performance liners of splicing and laminating tapes, flame-retardant tapes, vinyl-coated and carton sealing tapes, electrical, double-faced cloth, masking, mounting, OEM, and medical and specialty tapes.  These products are sold under the NationalTM, Nashua®, and Polyken® brands in the United States.  Tape products are sold primarily through distributors and directly to end users and are used predominantly in industrial, HVAC, automotive, construction, and retail market applications.  In addition to serving our core tape end markets, we believe we are also a leading producer of tapes in the niche aerospace, construction and medical end markets.  We believe that our success in serving these additional markets is principally due to a combination of technical and manufacturing expertise leveraged in favor of customized applications.  Our tape products customers include Home Depot and RH Elliott. 
 
Retail Bags.  We manufacture and sell a diversified portfolio of PE-based film products to end users in the retail markets.  These products are sold under leading brands such as Ruffies® and Film-Gard®.  Our products include drop cloths and retail trash bags.  These products are sold primarily through wholesale outlets, hardware stores and home centers, paint stores, and mass merchandisers.  Our retail trash bag customers include, Walmart, True Value, and ACE. 
 
FIBC.  We manufacture customized PP-based, woven and sewn containers for the transportation and storage of raw materials such as seeds, titanium dioxide, clay, and resin pellets.  Our FIBC customers include Texene LLC and Pioneer Hi-Bred Intl. 
 
PVC Films.  We believe, based on management estimates, that we are a world leader in PVC films offering a broad array of PVC meat film.  Our products are used primarily to wrap fresh meats, poultry, and produce for supermarket applications.  In addition, we offer a line of boxed products for food service and retail sales.  We service many of the leading supermarket chains, club stores, and wholesalers including Kroger, Publix, Walmart/Sams, Costco, and SuperValu.  We believe we are a leading innovator and specialize in lighter gauge sustainable solutions like our recent Revolution™ product line offering. 
 
Institutional Can Liners.  We sell trash-can liners and food bags for offices, restaurants, schools, hospitals, hotels, municipalities, and manufacturing facilities.  We also sell products under the Big City®, Hospi-Tuff®, Plas-Tuff®, Rhino-X®, and Steel-Flex® brands.  Our institutional customers include Unisource and Gordon Food Service. 
 

 
-5-

 
 
Stretch Films.  We produce both hand and machine-wrap stretch films, which are used by end users to wrap products and packages for storage and shipping.  We sell stretch film products to distributors, retail, and industrial end users under the MaxTech® and PalleTech® brands.  Our stretch films customers include XPEDX and Unisource. 
 
Flexible Packaging 
 
Our Flexible Packaging division consists of high barrier, multilayer film products as well as finished flexible packages such as printed bags and pouches.  The largest end uses for our flexible products are consumer-oriented end markets such as food and beverage, medical, and personal care.  Our primary competitors include Printpak, Tredegar, and Bemis.  The Flexible Packaging division includes the following product groups: 
 
 Barrier/Sealant Films.  We manufacture and sell a wide range of highly specialized, made-to-order film products ranging from mono layer to coextruded films having up to nine layers, lamination films sold primarily to flexible packaging converters and used for peelable lid stock, stand-up pouches, pillow pouches, and other flexible packaging formats.  We also manufacture barrier films used for cereal, cookie, cracker, and dry mix packages that are sold directly to food manufacturers like Kraft and Ralcorp.  We also manufacture films for specialized industrial applications ranging from lamination film for carpet padding to films used in solar panel construction. 
 
Personal Care Films.  We believe we are a major supplier of component and packaging films used for personal care hygiene applications predominantly sold in North America and Latin America.  The end use applications include disposable baby diapers, feminine care, adult incontinence, hospital and tissue, and towel products.  Our personal care customers include Kimberly Clark, SCA, Johnson and Johnson, First Quality, and other leading private label manufacturers.  Our “Lifetime of Solutions™” approach promotes an innovation pipeline that seeks to integrate both product and equipment design into leading edge customer and consumer solutions. 
 
Printed Products.  We are a converter of printed bags, pouches, and rollstock.  Our manufacturing base includes integrated extrusion that combines with printing, laminating, bagmaking, Innolok®, and laser-score converting processes.  We believe we are a leading supplier of printed film products for the fresh bakery, tortilla, and frozen vegetable markets with brands such as SteamQuick® Film, Freshview™ bags, and Billboard™ SUPs.  Our customers include Mission Foods and Kellogg’s. 
 
Coated and Laminated Packaging.  We manufacture specialty coated and laminated products for a wide variety of packaging applications.  The key end markets and applications for our products include food, consumer, healthcare, industrial and military pouches, roll wrap, multi-wall bags, and fiber drum packaging.  Our products are sold under the MarvelGuard™ and MarvelSeal™ brands and are predominately sold to converters who transform them into finished goods.  Our coated and laminated packaging customers include Covidien and Morton Salt. 
 
Marketing and Sales 
 
We reach our large and diversified base of over 13,000 customers through our direct field sales force of dedicated professionals and the strategic use of distributors.  Our field sales, production and support staff meet with customers to understand their needs and improve our product offerings and services.  Our scale enables us to dedicate certain sales and marketing efforts to particular products, customers or geographic regions, when applicable, which enables us to develop expertise that we believe is valued by our customers.  In addition, because we serve common customers across segments, we have the ability to efficiently utilize our sales and marketing resources to minimize costs.  Highly skilled customer service representatives are strategically located throughout our facilities to support the national field sales force.  In addition, telemarketing representatives, marketing managers, and sales/marketing executives oversee the marketing and sales efforts.  Manufacturing and engineering personnel work closely with field sales personnel and customer service representatives to satisfy customers’ needs through the production of high-quality, value-added products and on-time deliveries. 
 
We believe that we have differentiated ourselves from competitors by building a reputation for high-quality products, customer service and innovation.  Our sales team monitors customer service in an effort to ensure that we remain the primary supplier for our key accounts.  This strategy requires us to develop and maintain strong relationships with our customers, including end users as well as distributors and converters.  We have a technical sales team with significant knowledge of our products and processes, particularly in specialized products.  This knowledge enables our sales and marketing team to work closely with our research and development organization and our customers to co-develop products and formulations to meet specific performance requirements.  This partnership approach enables us to further expand our relationships with our existing customer base, develop relationships with new customers and increase sales of new products. 
 

 
-6-

 


Research, Product Development and Design  
 
We believe our technology base and research and development support are among the best in the plastics packaging industry.  Using three-dimensional computer-aided design technologies, our full-time product designers develop innovative product designs and models for the packaging market.  We can simulate the molding environment by running unit-cavity prototype molds in small injection-molding, thermoform, compression and blow molding machines for research and development of new products.  Production molds are then designed and outsourced for production by various companies with which we have extensive experience and established relationships or built by our in-house tooling division located in Evansville, Indiana.  Our engineers oversee the mold-building process from start to finish.  Many of our customers work in partnership with our technical representatives to develop new, more competitive products.  We have enhanced our relationships with these customers by providing the technical service needed to develop products combined with our internal graphic arts support.  We also utilize our in-house graphic design department to develop color and styles for new rigid products.  Our design professionals work directly with our customers to develop new styles and use computer-generated graphics to enable our customers to visualize the finished product. 
 
Additionally, at our major technical centers, including the Berry Research and Design Center in Evansville, Indiana, as well as facilities in Lancaster, Pennsylvania; Homer, Louisiana; and Chippewa Falls, Wisconsin; we prototype new ideas, conduct research and development of new products and processes, and qualify production systems that go directly to our facilities and into production.  We also have technical center, complete product testing and quality laboratories at our Lancaster, Pennsylvania facility.  At our pilot plant in Homer, Louisiana, we are able to experiment with new compositions and processes with a focus on minimizing waste and improving productivity.  With this combination of manufacturing simulation and quality systems support we are able to improve time to market and reduce cost.  We spent $25, $20, and $21 on research and development in fiscal 2012, 2011 and 2010, respectively. 
 
Sources and Availability of Raw Materials
 
The most important raw material purchased by us is plastic resin. Our plastic resin purchasing strategy is to conduct business with only high-quality, dependable suppliers.  We believe that we have maintained strong relationships with our key suppliers and expect that such relationships will continue into the foreseeable future. The resin market is a global market and, based on our experience, we believe that adequate quantities of plastic resins will be available at market prices, but we can provide no assurances as to such availability or the prices thereof.  
 
We also purchase various other materials, including natural and butyl rubber, tackifying resins, chemicals and adhesives, paper and packaging materials, polyester staple, raw cotton, linerboard and kraft, woven and non-woven cloth, and foil. These materials are generally available from a number of suppliers.  
 
Employees 
 
At the end of fiscal 2012, we employed over 15,000 employees.  Approximately 11% of our employees are covered by collective bargaining agreements.  Four of our 12 agreements, covering approximately 1,200 employees, were scheduled for renegotiation in fiscal 2012, and each of them was renegotiated.  The remaining agreements expire after fiscal 2012.  Our relations with employees remain satisfactory and there have been no significant work stoppages or other labor disputes during the past three years. 
 
Patents, Trademarks and Other Intellectual Property 
 
We rely on a combination of patents, trade secrets, unpatented know-how, trademarks, copyrights and other intellectual property rights, nondisclosure agreements and other protective measures to protect our proprietary rights.  While we consider our intellectual property to be important to our business in the aggregate, we do not believe that any individual item of our intellectual property portfolio is material to our current business.  The remaining duration of our patents ranges from one to 17 years. 
 
We employ various methods, including confidentiality and non-disclosure agreements with third parties, employees and consultants, to protect our trade secrets and know-how.  We have licensed, and may license in the future, patents, trademarks, trade secrets, and similar proprietary rights to and from third parties. 
 
Environmental Matters and Government Regulation 
 
Our past and present operations and our past and present ownership and operations of real property are subject to extensive and changing federal, state, local, and foreign environmental laws and regulations pertaining to the discharge of materials into the environment, handling and disposition of wastes, and cleanup of contaminated soil and ground water, or otherwise relating to the protection of the environment.  We believe that we are in substantial compliance with applicable environmental
 

 
-7-

 
 
laws and regulations.  However, we cannot predict with any certainty that we will not in the future incur liability, which could be significant under environmental statutes and regulations with respect to noncompliance with environmental laws, contamination of sites formerly or currently owned or operated by us (including contamination caused by prior owners and operators of such sites) or the off-site disposal of regulated materials, which could be material. 
 
We may from time to time be required to conduct remediation of releases of regulated materials at our owned or operated facilities.  None of our pending remediation projects are expected to result in material costs.  Like any manufacturer, we are also subject to the possibility that we may receive notices of potential liability in connection with materials that were sent to third-party recycling, treatment, and/or disposal facilities under the Federal Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended (“CERCLA”), and comparable state statutes, which impose liability for investigation and remediation of contamination without regard to fault or the legality of the conduct that contributed to the contamination, and for damages to natural resources.  Liability under CERCLA is retroactive, and, under certain circumstances, liability for the entire cost of a cleanup can be imposed on any responsible party.  No such notices are currently pending which are expected to result in material costs. 
 
The Food and Drug Administration (“FDA”) regulates the material content of direct-contact food and drug packages, including certain packages we manufacture pursuant to the Federal Food, Drug and Cosmetics Act.  Certain of our products are also regulated by the Consumer Product Safety Commission (“CPSC”) pursuant to various federal laws, including the Consumer Product Safety Act and the Poison Prevention Packaging Act.  Both the FDA and the CPSC can require the manufacturer of defective products to repurchase or recall such products and may also impose fines or penalties on the manufacturer.  Similar laws exist in some states, cities and other countries in which we sell our products.  In addition, laws exist in certain states restricting the sale of packaging with certain levels of heavy metals, imposing fines and penalties for noncompliance.  Although we use FDA approved resins and pigments in our products that directly contact food and drug products and believe they are in material compliance with all such applicable FDA regulations, and we believe our products are in material compliance with all applicable requirements, we remain subject to the risk that our products could be found not to be in compliance with such requirements. 
 
The plastics industry, including us, is subject to existing and potential federal, state, local and foreign legislation designed to reduce solid wastes by requiring, among other things, plastics to be degradable in landfills, minimum levels of recycled content, various recycling requirements, disposal fees, and limits on the use of plastic products.  In particular, certain states have enacted legislation requiring products packaged in plastic containers to comply with standards intended to encourage recycling and increased use of recycled materials.  In addition, various consumer and special interest groups have lobbied from time to time for the implementation of these and other similar measures.  We believe that the legislation promulgated to date and such initiatives to date have not had a material adverse effect on us.  There can be no assurance that any such future legislative or regulatory efforts or future initiatives would not have a material adverse effect on us. 
 
Available Information 
 
We make available, free of charge, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments, if any, to those reports through our internet website as soon as practicable after they have been electronically filed with or furnished to the SEC.  Our internet address is www.berryplastics.com.  The information contained on our website is not being incorporated herein.   
 
Item 1A.   RISK FACTORS
 
Our substantial indebtedness could affect our ability to meet our obligations and may otherwise restrict our activities. 
 
We have a significant amount of indebtedness.  As of the end of 2012 fiscal year, we had total indebtedness (including current portion) of $4,471 with cash and cash equivalents totaling $87.  We would have been able to borrow a further $426 under the revolving portion of our senior secured credit facilities, subject to the solvency of our lenders to fund their obligations and our borrowing base calculations.  We are permitted by the terms of our debt instruments to incur substantial additional indebtedness, subject to the restrictions therein.  Our inability to generate sufficient cash flow to satisfy our debt obligations, or to refinance our obligations on commercially reasonable terms, would have a material adverse effect on our business, financial condition and results of operations. 
 
Our substantial indebtedness could have important consequences.  For example, it could: 
 
·  
limit our ability to borrow money for our working capital, capital expenditures, debt service requirements or other corporate purposes; 
·  
require us to dedicate a substantial portion of our cash flow to payments on our indebtedness, which would reduce the amount of cash flow available to fund working capital, capital expenditures, product development and other corporate requirements; 

 
-8-

 

·  
increase our vulnerability to general adverse economic and industry conditions; and 
·  
limit our ability to respond to business opportunities, including growing our business through acquisitions. 
 
In addition, the credit agreements and indentures governing our current indebtedness contain, and any future debt instruments would likely contain, financial and other restrictive covenants, which will impose significant operating and financial restrictions on us, including restrictions on our ability to, among other things: 
 
·  
incur or guarantee additional debt; 
·  
pay dividends and make other restricted payments; 
·  
create or incur certain liens; 
·  
make certain investments; 
·  
engage in sales of assets and subsidiary stock; 
·  
enter into transactions with affiliates; 
·  
transfer all or substantially all of our assets or enter into merger or consolidation transactions; and 
·  
make capital expenditures. 
 
As a result of these covenants, we will be limited in the manner in which we conduct our business, and we may be unable to engage in favorable business activities or finance future operations or capital needs.  Furthermore, a failure to comply with these covenants could result in an event of default, which, if not cured or waived, could have a material adverse effect on our business, financial condition, and results of operations. 
 
Increases in resin prices or a shortage of available resin could harm our financial condition and results of operations. 
 
To produce our products, we use large quantities of plastic resins.  Plastic resins are subject to price fluctuations, including those arising from supply shortages and changes in the prices of natural gas, crude oil and other petrochemical intermediates from which resins are produced.  Over the past several years, we have at times experienced rapidly increasing resin prices.  If rapid increases in resin prices continue, our revenue and profitability may be materially and adversely affected, both in the short term as we attempt to pass through changes in the price of resin to customers under current agreements and in the long term as we negotiate new agreements or if our customers seek product substitution. 
 
We source plastic resin primarily from major industry suppliers.  We have long-standing relationships with certain of these suppliers but have not entered into a firm supply contract with any of them.  We may not be able to arrange for other sources of resin in the event of an industry-wide general shortage of resins used by us, or a shortage or discontinuation of certain types of grades of resin purchased from one or more of our suppliers.  In addition, the largest supplier of the Company’s total resin material requirements represented approximately 20% of purchases during fiscal 2012.  Any such shortage may materially negatively impact our competitive position versus companies that are able to better or more cheaply source resin. 
 
We may not be able to compete successfully and our customers may not continue to purchase our products. 
 
We face intense competition in the sale of our products and compete with multiple companies in each of our product lines.  We compete on the basis of a number of considerations, including price, service, quality, product characteristics and the ability to supply products to customers in a timely manner.  Our products also compete with metal, glass, paper and other packaging materials as well as plastic packaging materials made through different manufacturing processes.  Some of these competitive products are not subject to the impact of changes in resin prices which may have a significant and negative impact on our competitive position versus substitute products.  Our competitors may have financial and other resources that are substantially greater than ours and may be better able than us to withstand higher costs.  In addition, our success may depend on our ability to adapt to technological changes, and if we fail to enhance existing products and develop and introduce new products and new production technologies in a timely fashion in response to changing market conditions and customer demands, our competitive position could be materially and adversely affected.  Furthermore, some of our customers do and could in the future choose to manufacture the products they require for themselves.  Each of our product lines faces a different competitive landscape.  Competition could result in our products losing market share or our having to reduce our prices, either of which would have a material adverse effect on our business and results of operations and financial condition.  In addition, since we do not have long-term arrangements with many of our customers, these competitive factors could cause our customers to shift suppliers and/or packaging material quickly. 
 
We may pursue and execute acquisitions, which could adversely affect our business. 
 
As part of our growth strategy, we plan to consider the acquisition of other companies, assets and product lines that either complement or expand our existing business and create economic value.  We cannot assure you that we will be able to consummate any such transactions or that any future acquisitions will be consummated at acceptable prices and terms. 
 

 
-9-

 

We continually evaluate potential acquisition opportunities in the ordinary course of business, including those that could be material in size and scope.  Acquisitions involve a number of special risks, including: 
 
·  
the diversion of management’s attention and resources to the assimilation of the acquired companies and their employees and to the management of expanding operations; 
·  
the incorporation of acquired products into our product line; 
·  
problems associated with maintaining relationships with employees and customers of acquired businesses; 
·  
the increasing demands on our operational systems; 
·  
ability to integrate and implement effective disclosure controls and procedures and internal controls for financial reporting within the allowable time frame as permitted by Sarbanes-Oxley Act; 
·  
possible adverse effects on our reported operating results, particularly during the first several reporting periods after such acquisitions are completed; and 
·  
the loss of key employees and the difficulty of presenting a unified corporate image. 
 
We may become responsible for unexpected liabilities that we failed or were unable to discover in the course of performing due diligence in connection with historical acquisitions and any future acquisitions.  We have typically required selling stockholders to indemnify us against certain undisclosed liabilities.  However, we cannot assure you that indemnification rights we have obtained, or will in the future obtain, will be enforceable, collectible or sufficient in amount, scope or duration to fully offset the possible liabilities associated with the business or property acquired.  Any of these liabilities, individually or in the aggregate, could have a material adverse effect on our business, financial condition and results of operations. 
 
In addition, we may not be able to successfully integrate future acquisitions without substantial costs, delays or other problems.  The costs of such integration could have a material adverse effect on our operating results and financial condition.  Although we conduct what we believe to be a prudent level of investigation regarding the businesses we purchase, in light of the circumstances of each transaction, an unavoidable level of risk remains regarding the actual condition of these businesses.  Until we actually assume operating control of such businesses and their assets and operations, we may not be able to ascertain the actual value or understand the potential liabilities of the acquired entities and their operations.  Furthermore, we may not realize all of the cost savings and synergies we expect to achieve from our current strategic initiatives due to a variety of risks, including, but not limited to, difficulties in integrating shared services with our business, higher than expected employee severance or retention costs, higher than expected overhead expenses, delays in the anticipated timing of activities related to our cost-saving plans and other unexpected costs associated with operating our business.  If we are unable to achieve the cost savings or synergies that we expect to achieve from our strategic initiatives, it could adversely affect our business, financial condition and results of operations. 
 
We may not be successful in protecting our intellectual property rights, including our unpatented proprietary know-how and trade secrets, or in avoiding claims that we infringed on the intellectual property rights of others. 
 
In addition to relying on patent and trademark rights, we rely on unpatented proprietary know-how and trade secrets, and employ various methods, including confidentiality agreements with employees and consultants, customers and suppliers to protect our know-how and trade secrets.  However, these methods and our patents and trademarks may not afford complete protection and there can be no assurance that others will not independently develop the know-how and trade secrets or develop better production methods than us.  Further, we may not be able to deter current and former employees, contractors and other parties from breaching confidentiality agreements and misappropriating proprietary information and it is possible that third parties may copy or otherwise obtain and use our information and proprietary technology without authorization or otherwise infringe on our intellectual property rights.  Additionally, we have licensed, and may license in the future, patents, trademarks, trade secrets, and similar proprietary rights to third parties.  While we attempt to ensure that our intellectual property and similar proprietary rights are protected when entering into business relationships, third parties may take actions that could materially and adversely affect our rights or the value of our intellectual property, similar proprietary rights or reputation.  In the future, we may also rely on litigation to enforce our intellectual property rights and contractual rights, and, if not successful, we may not be able to protect the value of our intellectual property.  Any litigation could be protracted and costly and could have a material adverse effect on our business and results of operations regardless of its outcome. 
 
Our success depends in part on our ability to obtain, or license from third parties, patents, trademarks, trade secrets and similar proprietary rights without infringing on the proprietary rights of third parties.  Although we believe our intellectual property rights are sufficient to allow us to conduct our business without incurring liability to third parties, our products may infringe on the intellectual property rights of such persons.  Furthermore, no assurance can be given that we will not be subject to claims asserting the infringement of the intellectual property rights of third parties seeking damages, the payment of royalties or licensing fees and/or injunctions against the sale of our products.  Any such litigation could be protracted and costly and could have a material adverse effect on our business, financial condition and results of operations. 
 

 
-10-

 


Current and future environmental and other governmental requirements could adversely affect our financial condition and our ability to conduct our business. 
 
Our operations are subject to federal, state, local, and foreign environmental laws and regulations that impose limitations on the discharge of pollutants into the air and water, establish standards for the treatment, storage and disposal of solid and hazardous wastes and require cleanup of contaminated sites.  While we have not been required historically to make significant capital expenditures in order to comply with applicable environmental laws and regulations, we cannot predict with any certainty our future capital expenditure requirements because of continually changing compliance standards and environmental technology.  Furthermore, violations or contaminated sites that we do not know about (including contamination caused by prior owners and operators of such sites or newly discovered information) could result in additional compliance or remediation costs or other liabilities, which could be material.  We have limited insurance coverage for potential environmental liabilities associated with historic and current operations and we do not anticipate increasing such coverage in the future.  We may also assume significant environmental liabilities in acquisitions.  In addition, federal, state, local, and foreign governments could enact laws or regulations concerning environmental matters that increase the cost of producing, or otherwise adversely affect the demand for, plastic products.  Legislation that would prohibit, tax or restrict the sale or use of certain types of plastic and other containers, and would require diversion of solid wastes such as packaging materials from disposal in landfills, has been or may be introduced in the U.S. Congress, state legislatures, and other legislative bodies.  While container legislation has been adopted in a few jurisdictions, similar legislation has been defeated in public referenda in several states, local elections and many state and local legislative sessions.  Although we believe that the laws promulgated to date have not had a material adverse effect on us, there can be no assurance that future legislation or regulation would not have a material adverse effect on us.  Furthermore, a decline in consumer preference for plastic products due to environmental considerations could have a negative effect on our business. 
 
The Food and Drug Administration, which we refer to as the FDA, regulates the material content of direct-contact food and drug packages we manufacture pursuant to the Federal Food, Drug and Cosmetic Act.  Furthermore, some of our products are regulated by the Consumer Product Safety Commission, which we refer to as the CPSC, pursuant to various federal laws, including the Consumer Product Safety Act and the Poison Prevention Packaging Act.  Both the FDA and the CPSC can require the manufacturer of defective products to repurchase or recall these products and may also impose fines or penalties on the manufacturer.  Similar laws exist in some states, cities and other countries in which we sell products.  In addition, laws exist in certain states restricting the sale of packaging with certain levels of heavy metals and imposing fines and penalties for noncompliance.  Although we use FDA-approved resins and pigments in our products that directly contact food and drug products and we believe our products are in material compliance with all applicable requirements, we remain subject to the risk that our products could be found not to be in compliance with these and other requirements.  A recall of any of our products or any fines and penalties imposed in connection with noncompliance could have a materially adverse effect on us.  See “Business—Environmental Matters and Government Regulation.” 
 
In the event of a catastrophic loss of one of our key manufacturing facilities, our business would be adversely affected. 
 
While we manufacture our products in a large number of diversified facilities and maintain insurance covering our facilities, including business interruption insurance, a catastrophic loss of the use of all or a portion of one of our key manufacturing facilities due to accident, labor issues, weather conditions, natural disaster or otherwise, whether short or long-term, could have a material adverse effect on us. 
 
Goodwill and other intangibles represent a significant amount of our net worth, and a future write-off could result in lower reported net income and a reduction of our net worth. 
 
As of the of our 2012 fiscal year, the net value of our goodwill and other intangibles was $2,636.  We are no longer required or permitted to amortize goodwill reflected on our balance sheet.  We are, however, required to evaluate goodwill reflected on our balance sheet when circumstances indicate a potential impairment, or at least annually, under the impairment testing guidelines outlined in the standard.  Future changes in the cost of capital, expected cash flows, or other factors may cause our goodwill to be impaired, resulting in a non-cash charge against results of operations to write off goodwill for the amount of impairment.  If a future write-off is required, the charge could have a material adverse effect on our reported results of operations and net worth in the period of any such write-off. 
 
Disruptions in the overall economy and the financial markets may adversely impact our business. 
 
Our industry is affected by current economic factors, including the deterioration of national, regional, and local economic conditions, declines in employment levels, and shifts in consumer spending patterns.  Disruptions in the overall economy and volatility in the financial markets could reduce consumer confidence in the economy, negatively affecting consumer spending, which could be harmful to our financial position and results of operations.  As a result, decreased cash flow generated from our business may adversely affect our financial position and our ability to fund our operations.  In addition, macroeconomic disruptions, as well as the restructuring of various commercial and investment banking organizations, could adversely affect our ability to access the credit markets. The disruption in the credit markets may also adversely affect the availability of financing for our operations. There can be no assurance that government responses to the disruptions in the financial markets will restore consumer confidence, stabilize the markets, or increase liquidity and the availability of credit.
 

 
-11-

 

We had net losses in recent years and we may not be profitable in the future.  
 
We generated net income in only two of our last five fiscal years, and during the remaining three fiscal years, we incurred net losses of over $100 per year. We may not generate net income from operations in the future, and continuing net losses may limit our ability to execute our strategy. Factors contributing to our financial performance include non-cash impairment charges, depreciation/amortization on our long lived tangible and intangible assets, interest expense on our debt obligations as well as other factors more fully disclosed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” 
 
We are a holding company and rely on dividends and other payments, advances and transfers of funds from our subsidiaries to meet our obligations and pay dividends.  
 
Berry Plastics Group, Inc. has no direct operations and no significant assets other than ownership of 100% of the stock of Berry Plastics Corporation. Because Berry Plastics Group, Inc. conducts its operations through its subsidiaries, it depends on those entities for dividends and other payments to generate the funds necessary to meet its financial obligations, and to pay any dividends with respect to our common stock. Legal and contractual restrictions in the agreements governing current and future indebtedness of Berry Plastics Group, Inc.’s subsidiaries, as well as the financial condition and operating requirements of Berry Plastics Group, Inc.’s subsidiaries, may limit Berry Plastics Group, Inc.’s ability to obtain cash from its subsidiaries. The earnings from, or other available assets of, Berry Plastics Group, Inc.’s subsidiaries may not be sufficient to pay dividends or make distributions or loans to enable Berry Plastics Group, Inc. to pay dividends going forward. 
 
Apollo controls us, and its interests may conflict with or differ from your interests.  
 
Funds affiliated with our equity sponsor, Apollo Global Management, LLC (“Apollo”) indirectly beneficially own approximately 54% of our common stock. As a result, Apollo has the power to elect all of our directors. Further, under the amended and restated stockholders agreement that we entered into in connection with our initial public offering, so long as Apollo and its affiliates continue to indirectly own a significant amount of our equity, even if such amount is less than 50%, they will continue to be able to strongly influence or control our business decisions, including through the designation of up to that number of director nominees that would constitute a majority of our Board of Directors under certain circumstances and the requirement that certain matters, including mergers and acquisitions, issuance of equity and incurrence of debt, be approved by a majority of the directors nominated by Apollo voting on the matter so long as Apollo beneficially owns at least 25% of our outstanding common stock. Therefore, Apollo effectively has the ability to prevent any transaction that requires the approval of our Board of Directors or our stockholders, including the approval of significant corporate transactions such as mergers and the sale of substantially all of our assets. Thus, Apollo will continue to be able to significantly influence or effectively control our decisions which could conflict with the interests of other users of this Form 10-K.
 
We have determined that we are a “controlled company” within the meaning of the NYSE rules and, as a result, qualify for, and rely on, exemptions from certain corporate governance requirements.  
 
Funds affiliated with Apollo control a majority of our voting common stock. As a result, we qualify as a “controlled company” within the meaning of the NYSE corporate governance standards. Under the NYSE rules, a company of which more than 50% of the voting power for the election of directors is held by an individual, group or another company is a “controlled company” and may elect not to comply with certain NYSE corporate governance requirements, including:  
 
· the requirement that a majority of the Board of Directors consists of independent directors;
· the requirement that we have a nominating/corporate governance committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities;
· the requirement that we have a compensation committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities; and
· the requirement for an annual performance evaluation of the nominating/corporate governance and compensation committees.
 
We currently utilize these exemptions. As a result, we do not have a majority of independent directors nor do our nominating/corporate governance and compensation committees consist entirely of independent directors, and we are not be required to have an annual performance evaluation of the nominating/corporate governance and compensation committees. Accordingly, our stockholders may not have the same protections afforded to stockholders of companies that are subject to such corporate governance requirements. 
 

 
-12-

 

The additional requirements of having a class of publicly traded equity securities may strain our resources and distract management.
 
Upon completion of our initial public offering in October 2012, we will be subject to additional reporting requirements of the Securities Exchange Act of 1934, or the Exchange Act and the Sarbanes-Oxley Act of 2002, which we refer to as the “Sarbanes-Oxley Act.”  The Sarbanes-Oxley Act requires that we maintain effective disclosure controls and procedures and internal control for financial reporting.  Under Section 404 of the Sarbanes-Oxley Act, our independent public accountants auditing our financial statements must attest to the effectiveness of our internal control over financial reporting.  In order to continue to maintain the effectiveness of our disclosure controls and procedures and internal control over financial reporting following the consummation of this offering, significant resources and management oversight will be required.  Furthermore, if we are unable to conclude that our disclosure controls and procedures and internal control over financial reporting are effective, or if our independent public accounting firm is unable to provide us with an unqualified report as to management’s assessment of the effectiveness of our internal control over financial reporting in future years, investors may lose confidence in our financial reports and our stock price may decline.
 
In addition, the Dodd-Frank Wall Street Reform and Consumer Protection Act, which we refer to as “Dodd-Frank” and which amended the Sarbanes-Oxley Act and other federal laws, has created uncertainty for public companies, and we cannot predict with any certainty the requirements of the regulations that will ultimately be adopted under Dodd-Frank or how such regulations will affect the cost of compliance for a company with publicly traded common stock.  There is likely to be continuing uncertainty regarding compliance matters because the application of these laws and regulations, which are subject to varying interpretations, may evolve over time as new guidance is provided by regulatory and governing bodies.  We intend to invest resources to comply with these evolving laws and regulations, which may result in increased general and administrative expenses and divert management’s time and attention from other business concerns.  Furthermore, if our compliance efforts differ from the activities that regulatory and governing bodies expect or intend due to ambiguities related to interpretation or practice, we may face legal proceedings initiated by such regulatory or governing bodies and our business may be harmed.  In addition, new rules and regulations may make it more difficult for us to attract and retain qualified directors and officers and may make it more expensive for us to obtain director and officer liability insurance.
 
We are required to pay our existing owners for certain tax benefits, which amounts are expected to be material.  
 
We have entered into an income tax receivable agreement with our pre-initial public offering stockholders, option holders and holders of our stock appreciation rights that provides for the payment by us to such stockholders of 85% of the amount of cash savings, if any, in U.S. federal, foreign, state and local income tax that we and our subsidiaries actually realize as a result of the utilization of our net operating losses attributable to periods prior to our initial public offering.  
 
These payment obligations are our obligations and not obligations of any of our subsidiaries. The actual utilization of net operating losses as well as the timing of any payments under the income tax receivable agreement will vary depending upon a number of factors, including the amount, character and timing of our and our subsidiaries’ taxable income in the future.  
 
We expect that the payments we make under this income tax receivable agreement will be material. Assuming no material changes in the relevant tax law, and that we and our subsidiaries earn sufficient income to realize the full tax benefits subject to the income tax receivable agreement, we expect that future payments under the income tax receivable agreement will aggregate to between $300 and $350.  
 
Upon completion of our initial public offering in October 2012, we will record a liability in excess of $300, which represents the full obligation for our recognized deferred tax assets, with an offset to Additional Paid in Capital. We expect to record a stock compensation charge in connection with our initial public offering related to the income tax receivable agreement for the payments to option holders and holders of our stock appreciation rights.  Any future changes in the realizability of our net operating loss carry forwards that were generated prior to our initial public offering will impact the amount of the liability that will be paid to our pre-initial public offering shareholders, option holders or holders of our stock appreciation rights. Changes in the realizability of these tax assets are recorded in income tax expense (benefit) and any changes in the obligation under the income tax receivable agreement is recorded in other income (expense). Based on our current taxable income estimates, we expect to repay the majority of this obligation by the end of our 2016 fiscal year.  
 
In addition, the income tax receivable agreement provides that upon certain mergers, stock and asset sales, other forms of business combinations or other changes of control, the income tax receivable agreement will terminate and we will be required to make a payment equal to the present value of future payments under the income tax receivable agreement, which payment would be based on certain assumptions, including those relating to our and our subsidiaries’ future taxable income. In these situations, our obligations under the income tax receivable agreement could have a substantial negative impact on our liquidity and could have the effect of delaying, deferring or preventing certain mergers, asset sales, other forms of business combinations or other changes of control.  
 
 
-13-

 

For tax reasons, special timing rules will apply to payments associated with stock options and stock appreciation rights. Such payments will generally be deemed invested in a notional account rather than made on the scheduled payment dates, and the account will be distributed on the fifth anniversary of the initial public offering.  
 
Our counterparties under this agreement will not reimburse us for any payments previously made under the income tax receivable agreement if such benefits are subsequently disallowed (although future payments would be adjusted to the extent possible to reflect the result of such disallowance). As a result, in certain circumstances, payments could be made under the income tax receivable agreement in excess of our cash tax savings. 
 
Our operating subsidiary Berry Plastics Corporation identified a prior deficiency in its disclosure controls and procedures. 
 
Under applicable SEC regulations, management of a reporting company, with the participation of the principal executive officer and principal financial officer, must periodically evaluate the Company’s “disclosure controls and procedures,” which are defined generally as controls and other procedures of a reporting company designed to ensure that information required to be disclosed by the reporting company in its periodic reports filed with the SEC is recorded, processed, summarized, and reported on a timely basis.  In conjunction with a review of the SEC of our wholly owned subsidiary Berry Plastics Corporation’s fiscal 2011 annual report, our Chief Executive Officer and Chief Financial Officer concluded that the design and operation of Berry Plastics Corporation’s disclosure controls and procedures were not effective to ensure that information required to be disclosed was reported at the acceptable level of detail for the period covered by the fiscal 2011 annual report.  We identified deficient disclosure in the section “Critical Accounting Policy and Estimates:  Goodwill and Other Indefinite Lived Intangible Assets.”  In that disclosure, we did not provide readers with sufficient information explaining the factors that led to the recognition of the goodwill impairment charge, along with the future implications to our business.  We also identified deficient disclosure in the section “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”  In that disclosure, we did not provide readers with sufficient informative narrative explanations of our financial statements.  In addition, we identified deficient disclosure in our condensed consolidating financial statements, in which we did not provide appropriate disclosure and presentation of certain intercompany activity.  To remediate these deficiencies, in addition to our historical disclosure controls and procedures, we have begun a more comprehensive review and approval procedure of disclosures related to our “Critical Accounting Policies and Estimates” and “Management’s Discussion and Analysis” to ensure the level of information we disclose provides readers with a sufficient level of detail to understand these policies and estimates.  We believe that these actions remediated the weakness in our disclosure controls and procedures; however, we cannot assure you that additional deficiencies in our disclosure controls and procedures will not occur in the future. 
 
Item 1B.   UNRESOLVED STAFF COMMENTS 
 
None 
 
Item 2.  PROPERTIES
 
We lease or own our principal offices and manufacturing facilities.  We believe that our property and equipment is well-maintained, in good operating condition and adequate for our present needs.  As of the end of fiscal 2012, the locations of our principal manufacturing facilities, by country, are as follows:  United States—68 locations (38 Rigid Packaging, 19 Engineered Materials, 11 Flexible Packaging); Canada—4 locations (1 Rigid Packaging, 2 Engineered Materials, 1 Flexible Packaging); Mexico—3 locations (2 Engineered Materials, 1 Flexible Packaging); India, The Netherlands and Belgium (Engineered Materials); Germany and Australia (Engineered Materials); and Brazil and Malaysia (Rigid Packaging).  The Evansville, Indiana facility serves as our world headquarters. 
 
We lease our facilities in the following locations:  Evansville, Indiana; Louisville, Kentucky; Lawrence, Kansas; Peosta, Iowa; Phoenix, Arizona; Quad Cities, Iowa; Phillipsburg, New Jersey; Bloomington, Indiana; Chicago, Illinois; Bowling Green, Kentucky; Syracuse, New York; Jackson, Tennessee; Anaheim, California; Aurora, Illinois; Cranbury, New Jersey; Charlotte, North Carolina; Easthampton, Massachusetts; Lathrop, California; Hanover, Maryland; Tacoma, Washington; Baltimore, Maryland; Chippewa Falls, Wisconsin; Atlanta, Georgia; Mexico City, Mexico; and Dunkirk, New York. 
 
Item 3.  LEGAL PROCEEDINGS
 
We are party to various legal proceedings involving routine claims which are incidental to our business. Although our legal and financial liability with respect to such proceedings cannot be estimated with certainty, we believe that any ultimate liability would not be material to the business, financial condition, results of operations or cash flows. 
 

 
-14-

 


Item 4.  MINE SAFETY DISCLOSURES
 
Not applicable. 
 
PART II
 
Item 5.  MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER 
 
As of the end of fiscal 2012, there was no established public trading market for any class of common stock of Berry.  In October 2012 the Company completed an initial public offering, selling 29,411,764 shares of common stock and listing our shares on the New York Stock Exchange under the symbol "BERY".   
 
As of December 17, 2012 there were approximately 375 record holders of the common stock but, we estimate the number of beneficial stockholders to be much higher as a number of our shares are held by brokers or dealers for their customers in street name. 
 
During fiscal 2012 we did not declare or pay any cash dividends on our common stock. Any future determination as to the declaration and payment of dividends, if any, will be at the discretion of our board of directors and will depend on then existing conditions, including our financial condition, operating results, contractual restrictions, capital requirements, business prospects, and other factors our board of directors may deem relevant.  
 
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
 
None.
 
Recent Sales of Unregistered Securities.
 
Set forth below in chronological order is certain information regarding securities issued by the Company during the period covered by this report in transactions that were not registered under the Securities Act of 1933, as amended (the “Securities Act”), including the consideration, if any, received by the Company for such issuances. None of these transactions involved any underwriters or any public offerings. Each of these transactions was exempt from registration under the Securities Act pursuant to Section 4(2) of the Securities Act or Regulation D or Rule 701 promulgated thereunder, as transactions by an issuer not involving a public offering. With respect to each transaction listed below, no general solicitation was made by either the Registrant or any person acting on its behalf; the recipient of our securities agreed that the securities would be subject to the standard restrictions applicable to a private placement of securities under applicable state and federal securities laws; and appropriate legends were affixed to the certificates issued in such transactions. The numbers included below reflect the 12.25-for-1 stock split that was effective upon the consummation of the Company’s initial public offering.  
 
·  
On November 28, 2011, the Company issued 44,026 shares of its common stock to a certain key employee at a purchase price of $7.22 per share.  
·  
On January 1, 2012, the Company granted stock options to certain key employees pursuant to its 2006 Equity Incentive Plan to purchase 149,131 shares of its common stock at an exercise price of $8.16 per share.  
·  
On March 1, 2012, the Company issued 49,000 shares of its common stock to a certain key employee at a purchase price of $8.16 per share.  
·  
On May 1, 2012, the Company issued 24,500 shares of its common stock to a certain key employee at a purchase price of $8.16 per share and 21,572 shares of its common stock to a certain key employee at a purchase price of $6.18 per share.  
·  
On May 15, 2012, the Company issued 1,911 shares of its common stock to a certain key employee at a purchase price of $8.16 per share, 18,166 shares of its common stock to a certain key employee at a purchase price of $8.48 per share, and 4,361 shares of its common stock to a certain key employee at a purchase price of $9.21 per share.  
·  
On May 17, 2012, the Company issued 612 shares of its common stock to a certain key employee at a purchase price of $4.37 per share and 1,457 shares of its common stock to a certain key employee at a purchase price of $9.21 per share.  
·  
On June 1, 2012, the Company granted stock options to certain key employees pursuant to its 2006 Equity Incentive Plan to purchase 176,130 shares of its common stock at an exercise price of $10.24 per share.  
·  
On July 9, 2012, the Company issued 21,572 shares of its common stock to a certain key employee at a purchase price of $6.18 per share.  
·  
On August 8, 2012, the Company issued 10,265 shares of its common stock to a certain key employee at a purchase price of $6.18 per share.  
·  
On August 15, 2012, the Company issued 1,898 shares of its common stock to a certain key employee at a purchase price of $4.37 per share, 1,960 shares of its common stock to a certain key employee at a purchase price of $8.16 per share,

 
-15-

 


·  
4,361 shares of its common stock to a certain key employee at a purchase price of $9.21 per share, and 4,532 shares of its common stock to a certain key employee at a purchase price of $9.21 per share. 
·  
On August 22, 2012, the Company issued 12,462 shares of its common stock to a certain key employee at a purchase price of $8.16 per share.  
·  
On August 25, 2012, the Company issued 1,335 shares of its common stock to a certain key employee at a purchase price of $8.48 per share and 1,335 shares of its common stock to a certain key employee at a purchase price of $8.48 per share.  
·  
On August 31, 2012, the Company issued 11,760 shares of its common stock to a certain key employee at a purchase price of $8.16 per share.  
·  
On September 13, 2012, the Company issued 1,911 shares of its common stock to a certain key employee at a purchase price of $8.16 per share and 4,189 shares of its common stock to a certain key employee at a purchase price of $9.21 per share. 
 
Use of Proceeds
 
On October 3, 2012, our registration statement on form S-1 (File No. 333-180294) was declared effective for our initial public offering pursuant to which we sold 29,411,764 shares of common stock, par value $0.01 per share, at a public offering price of $16.00 per share for an aggregate offering price of $471. Merrill Lynch, Pierce, Fenner & Smith Incorporated and Citigroup Global Markets Inc. acted as joint bookrunning managers and representatives of the underwriters for the offering, BofA Merrill Lynch, Citigroup, Barclays, Deutsche Bank Securities, Credit Suisse, Goldman, Sachs & Co. and Baird acted as joint book-running managers for the offering. Lazard Capital Markets, Wells Fargo Securities, SunTrust Robinson Humphrey, Lebenthal & Co., LLC and Apollo Global Securities acted as co-managers for the offering.  
 
Upon completion of our initial public offering, we received net proceeds of $444, after deducting underwriting discounts and commissions.  The expenses incurred in connection with the initial public offering totaled approximately $32.
 
For equity compensation plan information refer to Item 12 in Part III of this Form 10-K.  
 
Item 6.  SELECTED FINANCIAL DATA
 
                               
                               
   
Fiscal 2012
   
Fiscal 2011
   
Fiscal 2010
   
Fiscal 2009
   
Fiscal 2008
 
Statement of Operations Data:
                             
Net sales
  $ 4,766     $ 4,561     $ 4,257     $ 3,187     $ 3,513  
Cost of goods sold
    3,949       3,878       3,667       2,641       3,019  
Selling, general and administrative
    308       275       272       229       247  
Amortization of intangibles
    109       106       107       96       93  
Restructuring and impairment charges (a)
    31       221       41       11       10  
Other operating expenses
    44       39       46       24       33  
Operating income
    325       42       124       186       111  
Other expense (income) (b)
    (7 )     61       (27 )     (373 )      
Net interest expense
    328       327       313       304       321  
Net income (loss) from continuing operations before income taxes
    4       (346 )     (162 )     255       (210 )
Income tax benefit
    2       (47 )     (49 )     99       (72 )
Discontinued operations, net of tax
                      4        
Net income (loss)
  $ 2     $ (299 )   $ (113 )   $ 152     $ (138 )
Comprehensive income (loss)
  $ 3     $ (324 )   $ (112 )   $ 128     $ (154 )
Net income (loss) available to Common Stockholders:
                                       
Basic
  $ 0.02     $ (3.55 )   $ (1.34 )   $ 1.80     $ (1.63 )
Diluted
    0.02       (3.55 )     (1.34 )     1.79       (1.63 )
Balance Sheet Data (at period end):
                                       
Cash and cash equivalents
  $ 87     $ 42     $ 148     $ 10     $ 190  
Property, plant and equipment
    1,216       1,250       1,146       875       863  
Total assets
    5,106       5,217       5,344       4,216       4,766  
Long-term debt obligations, less current portion
    4,431       4,581       4,397       3,422       4,124  
Total liabilities
    5,558       5,668       5,474       4,236       4,923  
Redeemable shares
    23       16       11              
Stockholders’ equity (deficit)
    (475 )     (467 )     (141 )     (20 )     (157 )
Cash Flow and other Financial Data:
                                       
Net cash from operating activities
  $ 479     $ 327     $ 112     $ 413     $ 10  
Net cash from investing activities
    (255 )     (523 )     (852 )     (195 )     (656 )
Net cash from financing activities
    (179 )     90       878       (398 )     821  

(a)  
Includes a goodwill impairment charge of $165 in fiscal 2011
(b)  
Includes a loss on extinguishment of debt of $68 in fiscal 2011 and $368 on gain related to the repurchase of debt in fiscal 2009 
 

 
-16-

 


Item 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
You should read the following discussion in conjunction with the consolidated financial statements of Berry Plastics Group, Inc. and its subsidiaries and the accompanying notes thereto, which information is included elsewhere herein.  This discussion contains forward-looking statements and involves numerous risks and uncertainties, including, but not limited to, those described in the “Risk Factors” section.  Our actual results may differ materially from those contained in any forward-looking statements. 
 
Overview 
 
Berry Plastics Group, Inc. (“Berry” or the “Company”) is a leading provider of value-added plastic consumer packaging and engineered materials with a track record of delivering high-quality customized solutions to our customers.  Our products utilize our proprietary research and development platform, which includes a continually evolving library of Berry-owned molds, patents, manufacturing techniques and technologies.  We sell our solutions predominantly into consumer-oriented end-markets, such as food and beverage, healthcare and personal care.  We believe our customers look to us for solutions that have high consumer impact in terms of form, function and branding.  Representative examples of our products include thermoform drink cups, thin-wall containers, blow-molded bottles, specialty closures, prescription vials, specialty plastic films, tape products and corrosion protection solutions.   
 
We believe that we have created one of the largest product libraries in our industry, allowing us to be a comprehensive solution provider to our customers.  We have more than 13,000 customers, which consist of a diverse mix of leading national, mid-sized regional and local specialty businesses.  The size and scope of our customer network allow us to introduce new products we develop or acquire to a vast audience that is familiar with, and we believe partial to, our brand.  In fiscal 2012, no single customer represented more than 3% of net sales and our top ten customers represented less than 17% of net sales.  We believe our manufacturing processes and our ability to leverage our scale to reduce expenses on items, such as raw materials, position us as a low-cost manufacturer relative to our competitors.  For example, we believe based on management estimates that we are one of the largest global purchasers of plastic resins, at more than 2.5 billion pounds per year, which gives us scaled purchasing savings. 
 
 Executive Summary 
 
Business.  We operate in the following four segments: Rigid Open Top, Rigid Closed Top (together our Rigid Packaging business), Engineered Materials, and Flexible Packaging.  The Rigid Packaging business sells primarily containers, foodservice items, housewares, closures, overcaps, bottles, prescription containers, and tubes.  Our Engineered Materials segment sells specialty tapes, adhesives, pipeline corrosive protection solutions, polyethylene based film products, and waste bags.  The Flexible Packaging segment sells primarily high barrier, multilayer film products as well as printed bags and pouches. 
 
Raw Material Trends.  Our primary raw material is plastic resin.  Polypropylene and polyethylene account for approximately 90% of our plastic resin purchases based on the pounds purchased.  Plastic resins are subject to price fluctuations, including those arising from supply shortages and changes in the prices of natural gas, crude oil and other petrochemical intermediates from which resins are produced.  The average industry prices, as published in Chem Data, per pound were as follows by fiscal year:
 
   
Polyethylene Butene Film
   
Polypropylene
 
   
2012
   
2011
   
2010
   
2012
   
2011
   
2010
 
1st quarter
  $ .68     $ .68     $ .71     $ .79     $ .78     $ .70  
2nd quarter
    .76       .72       .67       .88       .95       .82  
3rd quarter
    .72       .79       .68       .85       1.08       .84  
4th quarter
    .68       .73       .62       .71       .98       .77  
We expect, if demand remains consistent with recent quarters, plastic resin prices to trend flat to slightly down in the first fiscal quarter of 2013.  Due to differences in the timing of passing through resin cost changes to our customers on escalator/de-escalator programs, segments are negatively impacted in the short term when plastic resin costs increase and are positively impacted when plastic resin costs decrease.  Recently, the Company has made progress towards shortening these timing lags, but we still have a number of customers whose prices adjust quarterly or less frequent based on various index prices.  This timing lag in passing through raw material cost changes could affect our results as plastic resin costs fluctuate. 
 
Outlook.  The Company is impacted by general economic and industrial growth, plastic resin availability and affordability, and general industrial production.  Our business has both geographic and end market diversity, which reduces the effect of any one of these factors on our overall performance.  Our results are affected by our ability pass through raw material cost changes to our customers, improve manufacturing productivity and adapt to volume changes of our customers. We seek to improve our overall profitability by implementing cost reduction programs for our manufacturing, selling and general and administrative expenses. Looking forward to the first fiscal quarter of 2013, we believe overall economic activity will continue to remain sluggish, but modestly positive, as it has been for the past three quarters. Despite headwinds we will be facing and assuming volumes remain consistent, we anticipate profitability, as defined as adjusted EBITDA less pro forma adjustments, will improve versus the first fiscal quarter of 2012.
 
 
-17-

 

Recent Developments  
 
In October 2012, we completed our initial public offering selling 29,411,764 shares of common stock at $16.00 per share.   We used proceeds of our initial public offering, net of underwriting fees, of $444 and cash on hand to repurchase all $455 of 11% Senior Subordinated Notes due September 15, 2016.  In connection with the initial public offering, we entered into an income tax receivable agreement that provides for the payment by us to our pre-initial public offering stockholders, option holders and holders of our stock appreciation rights of 85% of the amount of cash savings, if any, in U.S. federal, foreign, state and local income tax that we actually realize (or are deemed to realize in the case of a change of control) as a result of the utilization of our and our subsidiaries’ net operating losses attributable to periods prior to the initial public offering.  We expect to pay between $300 and $350 in cash related to this agreement, based on our current taxable income estimates. 
 
Acquisitions, Disposition and Facility Rationalizations 
 
We have a long history of acquiring and integrating companies, having completed eleven transactions in the last six years.  We maintain an opportunistic acquisition strategy, which is focused on improving our long-term financial performance, enhancing our market positions and expanding our product lines or, in some cases, providing us with a new or complementary product line.  In our acquisitions, we seek to obtain businesses for attractive post-synergy multiples, creating value for our stockholders from synergy realization, leveraging the acquired products across our customer base, creating new platforms for future growth, and assuming best practices from the businesses we acquire. 
 
The Company has included the expected benefits of acquisition integrations within our unrealized synergies, which are in turn recognized in earnings after an acquisition has been fully integrated.  While the expected benefits on earnings is estimated at the commencement of each transaction, once the execution of the plan and integration occur, we are generally unable to accurately estimate or track what the ultimate effects have been due to system integrations and movements of activities to multiple facilities.  As historical business combinations have not allowed us to accurately separate realized synergies compared to what was initially identified, we measure the synergy realization based on the overall segment profitability post integration.  In connection with our acquisitions, we have in the past and may in the future incur charges related to reductions and rationalizations. 
 
We also include the expected impact of our restructuring plans within our unrealized synergies which are in turn recognized in earnings after the restructuring plans are completed.  While the expected benefits on earnings is estimated at the commencement of each plan, due to the nature of the matters we are generally unable to accurately estimate or track what the ultimate effects have been due to movements of activities to multiple facilities. 
 
Rexam Specialty and Beverage Closures 
 
In September 2011, the Company acquired 100% of the capital stock of Rexam SBC.  The aggregate purchase price was $351 ($340, net of cash acquired).  Rexam SBC’s primary products include plastic closures, fitments and dispensing closure systems, and jars.  The business is operated in our Rigid Packaging business.  To finance the purchase, the Company used cash on hand and existing credit facilities.  The Rexam SBC 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 estimated fair values at the acquisition date. 
 
Stopaq® 
 
In June 2012, the Company acquired 100% of the shares of Frans Nooren Beheer B.V. and its operating companies (“Stopaq”) for a purchase price of $65 ($62, net of cash acquired).  Stopaq is the inventor and manufacturer of patented visco-elastic technologies for use in corrosion prevention, sealing and insulation applications ranging from pipelines to subsea piles to rail and cable joints.  The newly added business is operated in our Engineered Materials reporting segment.  To finance the purchase, the Company used cash on hand and existing credit facilities.  The Stopaq acquisition has been accounted for under the purchase method of accounting, and accordingly, the preliminary purchase price has been allocated to the identifiable assets and liabilities based on estimated fair values at the acquisition date. 
 
Plant Rationalizations 
 
 
-18-

 
 
During fiscal 2012, the Company announced the intention to shut down three facilities in its Rigid Closed Top, Engineered Materials and Flexible Packaging divisions.  The affected Rigid Closed Top, Engineered Materials, and Flexible Packaging business accounted for approximately $14, $71, and $24 of annual net sales, respectively, with the majority of the operations transferred to other facilities.   
 
Discussion of Results of Operations for Fiscal 2012 Compared to Fiscal 2011  
 
Net Sales.  Net sales increased from $4,561 in fiscal 2011 to $4,766 in fiscal 2012.  This increase is primarily attributed to net sales from acquired businesses of 10% partially offset by a volume decline of 6%.  The following discussion in this section provides a comparison of net sales by business segment.   
 
   
Fiscal Year
             
   
2012
   
2011
   
$ Change
   
% Change
 
Net sales:
                       
Rigid Open Top
  $ 1,229     $ 1,261     $ (32 )     (3 %)
Rigid Closed Top
    1,438       1,053       385       37 %
Rigid Packaging
  $ 2,667     $ 2,314     $ 353       15 %
Engineered Materials
    1,362       1,451       (89 )     (6 %)
Flexible Packaging
    737       796       (59 )     (7 %)
Total net sales
  $ 4,766     $ 4,561     $ 205       4 %
 
Net sales in the Rigid Open Top business decreased from $1,261 in fiscal 2011 to $1,229 in fiscal 2012 as a result of a volume decline of 4% partially offset by a net selling price increases of 1%.  The volume decline is primarily attributed to the Company pursuing a strategy to improve profitability in products with historically lower margins.  Net sales in the Rigid Closed Top business increased from $1,053 in fiscal 2011 to $1,438 in fiscal 2012 primarily as a result of net sales attributed to the Rexam SBC acquisition of 41% partially offset by a volume decline of 4%.  The volume decline is primarily attributed to general market softness.  The Engineered Materials business net sales decreased from $1,451 in fiscal 2011 to $1,362 in fiscal 2012 as a result of a volume decline of 8% partially offset by net selling price increases of 1% and net sales from acquired businesses of 1%.  The volume decline is primarily attributed to a decrease in sales volumes due to the strategy we implemented in fiscal 2011 to improve profitability in products with historically lower margins.  Net sales in the Flexible Packaging business decreased from $796 in fiscal 2011 to $737 in fiscal 2012 as a result of a volume decline of 10% partially offset by 3% net selling price increases.  The volume decline is primarily due to a decrease in sales volumes due to the strategy implemented in fiscal 2011 discussed above. 
 
Operating Income.  Operating income increased from $42 (1% of net sales) in fiscal 2011 to $325 (7% of net sales) in fiscal 2012.  This increase, excluding the impact from acquisitions, is primarily attributed to $59 from the relationship of net selling price to raw material costs, $29 decrease of depreciation expense, $11 decrease in amortization expense, $188 decrease in business integration and impairment charges, and $35 of improved manufacturing efficiencies partially offset by $27 from volume declines described above, $4 of increased selling, general and administrative expenses and $8 of operating loss from acquisitions.  The operating income from acquisitions for periods without comparable prior year activity was negative $8 which includes $29 of selling, general and administrative expenses, $28 of business integration expenses, $37 of depreciation expense and $14 of amortization expense.  The following discussion in this section provides a comparison of operating income by business segment. 
 
   
Fiscal Year
             
   
2012
   
2011
   
$ Change
   
% Change
 
Operating income (loss):
                       
Rigid Open Top
  $ 159     $ 155     $ 4       3 %
Rigid Closed Top
    95       77       18       23 %
Rigid Packaging
  $ 254     $ 232     $ 22       9 %
Engineered Materials
    70       (71 )     141       199 %
Flexible Packaging
    1       (119 )     120       101 %
Total operating income
  $ 325     $ 42     $ 283       674 %
 
Operating income for the Rigid Open Top business increased from $155 (12% of net sales) in fiscal 2011 to $159 (13% of net sales) in fiscal 2012.  This increase is primarily attributed to a $26 improvement in the relationship of net selling price to raw material costs and $12 reduction of depreciation and amortization expense partially offset by a decline in manufacturing efficiencies of $6, $17 increase in business integration expenses, volume declines described above of $7 and $4 increase of selling, general and administrative expenses. Operating income for the Rigid Closed Top business increased from $77 (7% of net sales) in fiscal 2011 to $95 (7% of net sales) in fiscal 2012.  This increase is primarily attributed to a $28 increase of manufacturing efficiencies, $5 reduction of selling, general and administrative expense, $4 from acquisition volume and $9 reduction of depreciation and amortization expense partially offset by $2 decrease
 

 
-19-

 
 
in the relationship of net selling price to raw material costs, $9 from the volume decline described above and $17 of increased business integration expense. Operating income for the Engineered Materials business improved from a loss of $71 (-5% of net sales) in fiscal 2011 to $70 (5% of net sales) in fiscal 2012.  This increase is primarily attributed to a $18 improvement in the relationship of net selling price to raw material costs, $14 of improved operating performance in manufacturing, $4 reduction of depreciation and amortization expense and $127 decrease in business integration and impairment charges partially offset by $8 of volume decline described above, $12 loss from acquisition volume and $2 increase in selling, general and administrative expenses.  Operating loss for the Flexible Packaging business improved from a loss of  $119 (-15% of net sales) in fiscal 2011 to $1 (0% of net sales) in fiscal 2012.  This improvement is primarily attributed to a $17 improvement in the relationship of net selling price to raw material costs, $96 reduction of business integration and impairment charges and $16 reduction of depreciation and amortization expense partially offset by $4 from the volume decline described above, $4 increase of selling, general and administrative expense, and a $1 decline in manufacturing efficiencies.   
 
Other Expense (Income) Net. Other expense (income) improved from expense of $61 in fiscal 2011 to income of $7 in fiscal 2012.  Fiscal 2011 other expense is primarily related to the loss on extinguishment of debt of $68 attributed to the write-off of deferred fees, debt discount and the premiums paid related to the debt extinguishment of the Company’s 8⅞% Second Priority Senior Secured Notes partially offset by a gain attributed to the fair value adjustment for our interest rate swaps.  The fiscal 2012 other income is primarily a contract settlement. 
 
Interest Expense, Net.  Interest expense increased slightly from $327 in fiscal 2011 to $328 in fiscal 2012. 
 
Income Tax Expense (Benefit).  Fiscal 2012, we recorded an income tax expense of $2 or an effective tax rate of 50% compared to an income tax benefit of $47 or an effective tax rate of 14% in fiscal 2011 due to the relative impact of permanent items on the pre-tax income and establishment of valuation allowance for certain foreign losses where benefits are not expected to be realized.
 
Net Income (Loss).  Net income (loss) improved from a net loss of $299 in fiscal 2011 to net income of $2 in fiscal 2012 for the reasons discussed above. 
 
 Discussion of Results of Operations for Fiscal 2011 Compared to Fiscal 2010 
 
Net Sales.  Net sales increased to $4,561 for fiscal 2011 from $4,257 for fiscal 2010.  This increase is primarily attributed to  increased selling prices of 9% as a result of higher plastic resin costs as noted in the “Raw Material Trends” section above and the Company pursuing a strategy to improve product profitability in markets with historically lower margins and acquisition volume growth of 5% partially offset by a base volume decline of 7%.  The following discussion in this section provides a comparison of net sales by business segment.
 
   
Fiscal Year
             
   
2011
   
2010
   
$ Change
   
% Change
 
Net sales:
                       
Rigid Open Top
  $ 1,261     $ 1,160     $ 101       9 %
Rigid Closed Top
    1,053       970       83       9 %
Rigid Packaging
  $ 2,314     $ 2,130     $ 184       9 %
Engineered Materials
    1,451       1,457       (6 )     0 %
Flexible Packaging
    796       670       126       19 %
Total net sales
  $ 4,561     $ 4,257     $ 304       7 %
 
Net sales in the Rigid Open Top business increased from $1,160 in fiscal 2010 to $1,261 in fiscal 2011 as a result of net selling price increases of 10% due to the factors noted above and acquisition growth attributed to Superfos Packaging, Inc. (“Superfos”) of 1% partially offset by a base volume decline.  The base volume decline is primarily attributed to a decrease in sales volumes in various container products due to market softness partially offset by continued volume growth in thermoforming drink cups as capital investments from prior periods provided additional capacity.  Net sales in the Rigid Closed Top business increased from $970 in fiscal 2010 to $1,053 in fiscal 2011 as a result of net selling price increases of 6% due to the factors noted above and acquisition volume growth attributed to Rexam SBC of 4% partially offset by a base volume decline.  The base volume decline is primarily attributed to a decrease in sales volumes in closures and tubes due to softness in the personal care market.  Net sales in the Engineered Materials business decreased from $1,457 in fiscal 2010 to $1,451 in fiscal 2011 as a result of a base volume decline of 11% partially offset by acquisition volume growth attributed to Pliant Corporation (“Pliant”) and Filmco of 3% and net selling price increases of 8% due to the factors listed above.  The base volume decline is primarily attributed to a decrease in sales volumes in bags, sheeting, institutional can liners and stretch film.  The bags and sheeting decreases were primarily due to the loss of the private label Wal-Mart waste bag business and our
 

 
-20-

 
 
decision to exit certain sheeting businesses during fiscal 2010.  The declines in institutional can liners and stretch film were primarily attributed to the Company strategically addressing products with profitability that was lower than the value we believed our product provided to our customers.  Net sales in the Flexible Packaging business increased from $670 in fiscal 2010 to $796 in fiscal 2011 primarily as a result of net selling price increases of 13% due to the factors listed above and acquisition growth attributed to Pliant of 19% partially offset by a base volume decline of 13%.  The base volume decline is primarily attributed to a decrease in sales volumes in personal care films and barrier films.  These declines were primarily attributed to the Company strategically addressing products with profitability that was lower than the value we believed our products provided to our customers. 
 
Operating Income.  Operating income decreased from $124 in fiscal 2010 to $42 in fiscal 2011.  This decrease is primarily attributed to a $165 non-cash goodwill impairment, $11 increase integration and business optimization expenses excluding acquisition activity for periods without comparable prior year activity, $15 increase in depreciation expense excluding acquisition activity for periods without comparable prior year activity, and $13 from base volume decline described above partially offset by $61 from the relationship of net selling price to raw material costs, $5 decrease in amortization expense excluding acquisition activity for periods without comparable prior year activity, $9 of operating income from acquisitions for periods without comparable prior year activity, and $48 of improved operating performance.  The operating income from acquisition for periods without comparable prior year activity includes $2 of selling, general and administrative expenses and $4 of amortization expense.  The following discussion in this section provides a comparison of operating income by business segment.
 
   
Fiscal Year
             
   
2011
   
2010
   
$ Change
   
% Change
 
Operating income (loss):
                       
Rigid Open Top
  $ 155     $ 124     $ 31       25 %
Rigid Closed Top
    77       73       4       5 %
Rigid Packaging
  $ 232     $ 197     $ 35       18 %
Engineered Materials
    (71 )     4       (75 )     (1,875 %)
Flexible Packaging
    (119 )     (77 )     (42 )     (55 %)
Total operating income
  $ 42     $ 124     $ (82 )     (66 %)
 
Operating income for the Rigid Open Top business increased from $124 (11% of net sales) for fiscal 2010 to $155 (12% of net sales) in fiscal 2011.  This increase is primarily attributed to $19 of improved operating performance in manufacturing, $22 from the relationship of net selling price to raw material costs and $4 reduction of business optimization expense partially offset by $9 of higher selling, general and administrative expenses and $9 of higher depreciation and amortization expense.  Operating income for the Rigid Closed Top business increased from $73 (8% of net sales) for fiscal 2010 to $77 (7% of net sales) in fiscal 2011.  This increase is primarily attributed to $16 of improved operating performance in manufacturing partially offset by a $2 negative relationship of net selling price to raw material costs, $3 of higher selling, general and administrative costs, $5 increase in restructuring costs and $4 decline from base volume partially offset by $4 of operating income from acquisitions.  Engineered Materials operating income declined from $4 (0% of net sales) of operating income for fiscal 2010 to $71 (negative 5% of net sales) of operating loss in fiscal 2011.  This decline is primarily attributed to an $88 non-cash goodwill impairment charge in fiscal 2011, $11 increase of integration and business optimization costs and $2 from base volume decline described above as the majority of the segment’s costs are variable partially offset by $12 of improved operating performance, $9 improvement from the relationship of net selling price to raw material costs, $6 of lower selling, general and administrative expenses.  Operating loss for the Flexible Packaging business increased from $77 (negative 11% of net sales) for fiscal 2010 to $119 (negative 15% of net sales) in fiscal 2011.  This increase is primarily attributed to a $77 non-cash goodwill impairment charge in fiscal 2011 and $7 from base volume decline partially offset by $1 of improved operating performance, $32 improvement in the relationship of net selling price to raw material costs, $5 from acquisitions and $4 of lower selling, general and administrative expenses. 
 
Other Expense (Income), Net.  Other expense of $61 recorded in fiscal 2011 is primarily attributed to a $68 loss on extinguishment of debt attributed to the write-off of $14 of deferred financing fees, $17 of non-cash debt discount and $37 of premiums paid related to the debt extinguishment of the Company’s 8-7⁄8% Second Priority Senior Secured Notes.  Other income recorded in fiscal 2010 is primarily attributed to a $13 gain related to the repurchase of debt and a $13 gain attributed to the fair value adjustment for our interest rate swaps.  See Note 3 to the Consolidated Financial Statements for further discussion on debt repurchases and Note 4 to the Consolidated Financial Statements for further discussion of financial instruments and fair value measurements. 
 
Interest Expense.  Interest expense increased from $313 in fiscal 2010 to $327 in fiscal 2011 primarily as a result of increased borrowings to fund acquisitions. 
 
 
-21-

 
 
Income Tax Benefit.  For fiscal 2011, we recorded an income tax benefit of $47 or an effective tax rate of 14% compared to an income tax benefit of $49 or an effective tax rate of 30% in fiscal 2010.  The effective tax rate is less than the statutory rate primarily attributed to the non-cash goodwill impairment charge in fiscal 2011 which is not tax deductible and the establishment of a valuation allowance for certain foreign operating losses where the benefits are not expected to be realized. 
 
Net Loss.  Net loss was $299 for fiscal 2011 compared to $113 for fiscal 2010 for the reasons discussed above. 
 
Discussion of Results of Operations for Fiscal 2010 Compared to Fiscal 2009 
 
Net Sales.  Net sales increased to $4,257 for fiscal 2010 from $3,187 for fiscal 2009.  This increase includes base volume growth of 7% due to the Company electing to aggressively protect market share during a soft economic period and acquisition volume growth of 27% attributed to Pliant and Superfos.  The following discussion in this section provides a comparison of net sales by business segment.
 
   
Fiscal Year
             
   
2010
   
2009
   
$ Change
   
% Change
 
Net sales:
                       
Rigid Open Top
  $ 1,160     $ 1,028     $ 132       13 %
Rigid Closed Top
    970       857       113       13 %
Rigid Packaging
  $ 2,130     $ 1,885     $ 245       13 %
Engineered Materials
    1,457       1,219       238       19 %
Flexible Packaging
    670       83       587       707 %
Total net sales
  $ 4,257     $ 3,187     $ 1,070       34 %
 
Net sales in the Rigid Open Top business increased from $1,028 in fiscal 2009 to $1,160 in fiscal 2010 as a result of base volume growth of 9% and acquisition growth attributed to Superfos.  The base volume growth is primarily attributed to increased sales volumes in various container products and continued volume growth in thermoforming drink cups resulting in the Company electing to expand our thermoformed drink cup capacity with significant capital investment in fiscal 2010.  Net sales in the Rigid Closed Top business increased from $857 in fiscal 2009 to $970 in fiscal 2010 primarily as a result of base volume growth of 14% partially offset by net selling price decreases of 1%.  The base volume growth is primarily attributed to increased sales volumes in closures and bottles due to factors listed above.  Net sales in the Engineered Materials business increased from $1,219 in fiscal 2009 to $1,457 in fiscal 2010 primarily as a result of acquisition volume growth attributed to Pliant.  Net sales in the Flexible Packaging business increased from $83 in fiscal 2009 to $670 in fiscal 2010 primarily as a result of acquisition volume growth attributed to Pliant and a base volume growth of 6% due to factors listed above. 
 
Operating Income.  Operating income decreased from $186 in fiscal 2009 to $124 in fiscal 2010.  This decrease is primarily attributed to $13 increase integration and business optimization expenses excluding acquisition activity for periods without comparable prior year activity, $31 of operating losses from acquisitions for periods without comparable prior year activity, $11 increase in depreciation expense excluding acquisition activity for periods without comparable prior year activity and $72 from the relationship of net selling price to raw material costs partially offset by $47 from base volume growth described above, $6 decrease in amortization expense excluding acquisition activity for periods without comparable prior year activity, $6 of lower selling general and administrative expense excluding the impact of acquisition activity for periods without comparable prior year activity and $3 of improved operating performance.  The operating loss from acquisition for periods without comparable prior year activity includes $49 of selling, general and administrative expenses, $40 of integration and business optimization expense and $17 of amortization expense.  The following discussion in this section provides a comparison of operating income by business segment.
 
   
Fiscal Year
             
   
2010
   
2009
   
$ Change
   
% Change
 
Operating income (loss):
                       
Rigid Open Top
  $ 124     $ 114     $ 10       9 %
Rigid Closed Top
    73       58       15       26 %
Rigid Packaging
  $ 197     $ 172     $ 25       15 %
Engineered Materials
    4       27       (23 )     (85 %)
Flexible Packaging
    (77 )     (13 )     (64 )     (492 %)
Total operating income
  $ 124     $ 186     $ (62 )     (33 %)
 
Operating income for the Rigid Open Top business increased from $114 (11% of net sales) for fiscal 2009 to $124 (11% of net sales) in fiscal 2010.  The increase is attributed to $21 increase from base volume growth, $5 of lower selling, general and administrative expenses, $18 reduction of integration and business optimization expense and $6 from acquisitions partially offset by a $28 negative relationship of net selling price to raw material cost, $6 increase in
 
 
-22-

 
 
depreciation expense and an $8 decline in operations.  Operating income for the Rigid Closed Top business increased from $58 (7% of net sales) for fiscal 2009 to $73 (8% of net sales) in fiscal 2010.  The increase is primarily attributable to $27 from base volume growth and $2 from improved operating performance in manufacturing partially offset by a $12 negative relationship of net selling price to raw material cost.  Operating income for the Engineered Materials business decreased from $27 (2% of net sales) for fiscal 2009 to $4 (0% of net sales) in fiscal 2010.  The decline is primarily attributable to a $31 negative relationship of net selling price to raw material cost partially offset by $8 of improved operating performance in manufacturing, $7 higher depreciation and amortization expense and $2 lower selling, general and administrative expenses.  Operating loss for the Flexible Packaging business increased from $13 (negative 16% of net sales) for fiscal 2009 to $77 (negative 11% of net sales) in fiscal 2010.  The increased operating loss is primarily attributable to $37 from acquisitions, including $26 of transaction costs, and $33 increase of integration and business optimization expense partially offset by $7 lower depreciation and amortization expense. 
 
Other Income.  Other income recorded in fiscal 2010 is primarily attributed to a $13 gain related to the repurchase of debt and a $13 gain attributed to the fair value adjustment for our interest rate swaps.  Other income recorded in fiscal 2009 is primarily attributed to a $368 gain related to the repurchase of debt and a $6 gain attributed to the fair value adjustment for our interest rate swaps.  See Note 3 to the Consolidated Financial Statements for further discussion debt repurchases and Note 4 to the Consolidated Financial Statements for further discussion of financial instruments and fair value measurements. 
 
Interest Expense.  Interest expense increased by $9 in fiscal 2010 primarily as a result of increased borrowings partially offset by a decline in borrowing rates on variable rate debt partially attributed to the swap agreement that expired in November 2009. 
 
Income Tax Expense (Benefit).  For fiscal 2010, we recorded an income tax benefit of $49 or an effective tax rate of 30%, which is a change of $148 from the income tax expense of $99 or an effective tax rate of 39% in fiscal 2009.  The effective tax rate is different than the statutory rate primarily attributed to the relative impact to permanent items and establishment of valuation allowance for certain foreign operating losses where the benefits are not expected to be realized. 
 
Net Income (Loss).  Net loss was $113 for fiscal 2010 compared to a net income of $152 for fiscal 2009 for the reasons discussed above. 
 
Income Tax Matters 
 
The Company had unused United States federal operating loss carryforwards to offset future taxable income of $911 which begin to expire in 2026 through 2031.  As of fiscal year end 2012, the Company had foreign net operating loss carryforwards of $129, which will be available to offset future taxable income.  Alternative minimum tax credit carryforwards of $9 are available to the Company indefinitely to reduce future years’ U.S. federal income taxes.  The net operating losses are subject to an annual limitation under guidance from the Internal Revenue Code, however the annual limitation is in excess of the net operating loss, so effectively no limitation exists.  As part of the effective tax rate calculation, if we determine that a deferred tax asset arising from temporary differences is not likely to be utilized, we will establish a valuation allowance against that asset to record it at its expected realizable value.  The Company has not provided a valuation allowance on its net federal net operating loss carryforwards in the United States because it has determined that future reversals of its temporary taxable differences will occur in the same periods and are of the same nature as the temporary differences giving rise to the deferred tax assets.  Our valuation allowance against deferred tax assets was $51 and $43 at the end of fiscal 2012 and 2011, respectively, related to certain foreign and state operating loss carryforwards. 
 
Liquidity and Capital Resources  
 
Berry Plastics Corporation Senior Secured Credit Facility 
 
Our wholly owned subsidiary Berry Plastics Corporation’s senior secured credit facilities consist of a $1,200 term loan and a $650 asset-based revolving line of credit (“Credit Facility”).  The term loan matures in April 2015 and the revolving line of credit matures in June 2016, subject to certain conditions.  The availability under the revolving line of credit is the lesser of $650 or a defined borrowing base which is calculated based on available accounts receivable and inventory.  The revolving line of credit allows up to $130 of letters of credit to be issued instead of borrowings under the revolving line of credit.  At the end of fiscal 2012, the Company had $73 outstanding on the revolving credit facility, $50 outstanding letters of credit and a $101 borrowing base reserve providing unused borrowing capacity of $426 under the revolving line of credit.  The Company was in compliance with all covenants at the end of fiscal 2012. 
 
Berry Plastics Corporation’s fixed charge coverage ratio, as defined in the revolving credit facility, is calculated based on a numerator consisting of Adjusted EBITDA less pro forma adjustments, income taxes paid in cash and capital expenditures, and a denominator consisting of scheduled principal payments in respect of indebtedness for borrowed money, interest expense and certain distributions.  Berry Plastics Corporation is obligated to sustain a minimum
 

 
-23-

 
 
fixed charge coverage ratio of 1.0 to 1.0 under the revolving credit facility at any time when the aggregate unused capacity under the revolving credit facility is less than 10% of the lesser of the revolving credit facility commitments and the borrowing base (and for 10 business days following the date upon which availability exceeds such threshold) or during the continuation of an event of default.  At the end of fiscal 2012, the Company had unused borrowing capacity of $426 under the revolving credit facility and thus was not subject to the minimum fixed charge coverage ratio covenant.  Our fixed charge coverage ratio was 1.7 to 1.0  at the end of fiscal 2012. 
 
Despite not having financial maintenance covenants, Berry Plastics Corporation’s debt agreements contain certain negative covenants.  The failure to comply with these negative covenants could restrict Berry Plastics Corporation’s ability to incur additional indebtedness, effect acquisitions, enter into certain significant business combinations, make distributions or redeem indebtedness.  The term loan facility contains a negative covenant first lien secured leverage ratio covenant of 4.0 to 1.0 on a pro forma basis for a proposed transaction, such as an acquisition or incurrence of additional first lien debt.  Berry Plastics Corporation’s first lien secured leverage ratio was 2.8 to 1.0 at the end of fiscal 2012. 
 
A key financial metric utilized in the calculation of the first lien leverage ratio is Adjusted EBITDA as defined in the Company’s senior secured credit facilities.  The following table reconciles our Adjusted EBITDA for fiscal 2012, quarterly periods ended September 29, 2012 to net loss.
 
         
Quarterly Period Ended
 
   
Fiscal 2012
   
September 29, 2012
 
Adjusted EBITDA                                                                    
  $ 803     $ 215  
Net interest expense                                                                    
    (328 )     (81 )
Depreciation and amortization                                                                    
    (355 )     (93 )
Income tax benefit (expense)                                                                    
    (2 )     (9 )
Business optimization and other expense                                                                    
    (53 )     (5 )
Restructuring and impairment                                                                    
    (31 )     (1 )
Pro forma acquisitions                                                                    
    (6 )      
Unrealized cost savings                                                                    
    (26 )     (3 )
Net loss                                                                    
  $ 2     $ 23  
Cash flow from operating activities                                                                    
  $ 479     $ 201  
Net additions to property, plant and equipment
    (200 )     (42 )
Adjusted free cash flow                                                                    
  $ 279     $ 159  
Cash flow from investing activities                                                                    
    (255 )     (42 )
Cash flow from financing activities                                                                    
    (179 )     (111 )
 
While the determination of appropriate adjustments in the calculation of Adjusted EBITDA is subject to interpretation under the terms of the Credit Facility, management believes the adjustments described above are in accordance with the covenants in the Credit Facility.  Adjusted EBITDA should not be considered in isolation or construed as an alternative to our net income (loss) or other measures as determined in accordance with GAAP.  In addition, other companies in our industry or across different industries may calculate bank covenants and related definitions differently than we do, limiting the usefulness of our calculation of Adjusted EBITDA as a comparative measure. 
 

 
-24-

 


Contractual Obligations and Off Balance Sheet Transactions 
 
Our contractual cash obligations at the end of fiscal 2012 are summarized in the following table which does not give any affect to the use of proceeds from the Company's initial public offering to redeem long-term debt or the effect of the tax receivable agreement.
 
   
Payments due by period as of the end of fiscal 2012
 
   
Total
   
< 1 year
   
1-3 years
   
4-5 years
   
> 5 years
 
Long-term debt, excluding capital leases
  $ 4,393     $ 16     $ 2,052     $ 1,025     $ 1,300  
Capital leases (a)
    104       30       50       17       7  
Fixed interest rate payments (b)
    1,287       249       443       308       287  
Variable interest rate payments (c)
    144       49       94       1        
Operating leases
    289       46       68       56       119  
Funding of pension and other postretirement obligations (d)
    8       8                    
Total contractual cash obligations
  $ 6,225     $ 398     $ 2,707     $ 1,407     $ 1,713  
(a)  
Includes anticipated interest of $17 over the life of the capital leases. 
(b)  
Includes variable rate debt subject to interest rate swap agreements. 
(c)  
Based on applicable interest rates in effect end of fiscal 2012.   
(d)  
Pension and other postretirement contributions have been included in the above table for the next year.  The amount is the estimated contributions to our defined benefit plans.  The assumptions used by the actuary in calculating the projection includes weighted average return on pension assets of approximately 8% for 2012.  The estimation may vary based on the actual return on our plan assets.  See Note 9 to the Consolidated or Combined Financial Statements of this Form 10-K for more information on these obligations.  
 
Cash Flows from Operating Activities 
 
Net cash from operating activities was $479 for fiscal 2012 compared to $327 of cash flows provided by operating activities for fiscal 2011.  The change is primarily the result of improved profitability, excluding non-cash charges.   
 
Net cash provided by operating activities was $327 for fiscal 2011 compared to $112 of cash flows provided by operating activities for fiscal 2010.  The change is primarily the result of an improvement in working capital and improved profitability, excluding non-cash charges. 
 
Net cash provided by operating activities was $112 for fiscal 2010 compared to $413 of cash flows provided by operating activities for fiscal 2009.  The change is primarily the result of a change in working capital and acquisition costs incurred of $22 in fiscal 2010.  The working capital change is primarily attributed to higher volumes and increased raw material costs. 
 
Cash Flows from Investing Activities 
 
Net cash used for investing activities was $255 for fiscal 2012 compared to net cash used of $523 for fiscal 2011.  The change is primarily a result of the acquisitions in fiscal 2011 partially offset by higher capital expenditures fiscal 2012.  Our capital expenditures are forecasted to be approximately $230 to $250 for fiscal 2013 and will be funded from cash flows from operating activities and existing liquidity.   
 
Net cash used for investing activities was $523 for fiscal 2011 compared to net cash used of $852 for fiscal 2010.  The change is primarily a result of the acquisitions and higher capital spending in fiscal 2010 partially offset by the acquisitions of Rexam SBC and Filmco in fiscal 2011. 
 
Net cash used for investing activities was $852 for fiscal 2010 compared to net cash used of $195 for fiscal 2009.  The change is primarily a result of the acquisitions in fiscal 2010. 
 
Cash Flows from Financing Activities 
 
Net cash used for financing activities was $179 for fiscal 2012 compared to $90 of cash provided by financing activities for fiscal 2011.  This change is primarily attributed to the net cash used for repayment of the revolving line of credit in fiscal 2012. 
 
Net cash provided by financing activities was $90 for fiscal 2011 compared to net cash provided by financing activities of $878 for fiscal 2010.  This change is primarily attributed to the issuance of the 9-3⁄4% Second Priority Notes in fiscal 2010 partially offset by borrowing on the existing line of credit to fund the Rexam SBC acquisition in fiscal 2011. 
 

 
-25-

 

Net cash provided by financing activities was $878 for fiscal 2010 compared to net cash used for financing activities of $398 for fiscal 2009.  This change is primarily attributed to the $620 debt issued in November 2009 in order to fund the Pliant acquisition and $500 of 9-1⁄2% Second Priority Notes in April 2010. 
 
In connection with the initial public offering, we entered into an income tax receivable agreement that will provide for the payment by us to our existing stockholders, option holders and holders of our stock appreciation rights of 85% of the amount of cash savings, if any, in U.S. federal, foreign, state and local income tax that we actually realize (or are deemed to realize in the case of a change of control) as a result of the utilization of our and our subsidiaries’ net operating losses attributable to periods prior to this offering.  We expect to pay between $300 and $350 in cash related to this agreement, based on our current taxable income estimates, and will record a liability on our consolidated balance sheet for 85% of our net operating losses.  We do not expect material payments related to this agreement to occur during fiscal 2013.
 
Based on our current level of operations, we believe that cash flow from operations and available cash, together with available borrowings under our senior secured credit facilities, will be adequate to meet our short-term liquidity needs over the next twelve months.  We base such belief on historical experience and the funds available under the senior secured credit facility.  In addition we believe that we have the business strategy and resources to generate free cash flow from operations in the long term.  We do not expect this free cash flow to be sufficient to cover all long-term debt obligations and intend to refinance these obligations prior to maturity.  However, we cannot predict our future results of operations and our ability to meet our obligations involves numerous risks and uncertainties, including, but not limited to, those described in the “Risk Factors” section in this Form 10-K.  In particular, increases in the cost of resin which we are unable to pass through to our customers on a timely basis or significant acquisitions could severely impact our liquidity.  At the end of fiscal 2012, our cash balance was $87, and we had unused borrowing capacity of $426 under our revolving line of credit. 
 
Critical Accounting Policies and Estimates 
 
We disclose those accounting policies that we consider to be significant in determining the amounts to be utilized for communicating our consolidated financial position, results of operations and cash flows in the first note to our consolidated financial statements included elsewhere herein.  Our discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States.  The preparation of financial statements in conformity with these principles requires management to make estimates and assumptions that affect amounts reported in the financial statements and accompanying notes.  Actual results are likely to differ from these estimates, but management does not believe such differences will materially affect our financial position or results of operations.  We believe that the following accounting policies are the most critical because they have the greatest impact on the presentation of our financial condition and results of operations. 
 
Revenue Recognition.  Revenue from the sales of products is recognized at the time title and risks and rewards of ownership pass to the customer (either when the products reach the free-on-board shipping point or destination depending on the contractual terms), there is persuasive evidence of an arrangement, the sales price is fixed and determinable and collection is reasonably assured. 
 
Accrued Rebates.  We offer various rebates to our customers in exchange for their purchases.  These rebate programs are individually negotiated with our customers and contain a variety of different terms and conditions.  Certain rebates are calculated as flat percentages of purchases, while others include tiered volume incentives.  These rebates may be payable monthly, quarterly, or annually.  The calculation of the accrued rebate balance involves significant management estimates, especially where the terms of the rebate involve tiered volume levels that require estimates of expected annual sales.  These provisions are based on estimates derived from current program requirements and historical experience.  We use all available information when calculating these reserves.  Our accrual for customer rebates was $68 and $60 as of  the end of fiscal 2012 and 2011, respectively. 
 
Impairments of Long-Lived Assets.  In accordance with the guidance from the FASB for the impairment or disposal of long-lived assets we review long-lived assets for impairment whenever events or changes in circumstances indicate the carrying amount of such assets may not be recoverable.  Impairment losses are recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets’ carrying amounts.  The impairment loss is measured by comparing the fair value of the asset to its carrying amount.  We recognized non-cash asset impairment of long-lived assets of $20, $35 and $19 in fiscal 2012, 2011 and 2010, respectively.
 
Goodwill and Other Indefinite Lived Intangible Assets.  We are required to perform a review for impairment of goodwill and other indefinite lived intangibles to evaluate whether events and circumstances have occurred that may indicate a potential impairment, or on an annual basis.  Goodwill is measured to determine if the carrying value of the reporting unit exceeds its fair value on an annual basis, and if any potential impairment is warranted at a Step 2 test level. Other indefinite lived intangibles are considered to be impaired if the carrying value exceeds the fair value.
 

 
-26-

 
 
In accordance with our policy, we completed our most recent annual evaluation for impairment of goodwill as of the first day of the fourth fiscal quarter of 2012.  We utilized a six year discounted cash flow analysis with a terminal year in combination with a comparable company market approach to determine the fair value of our reporting units.  At the end of fiscal 2012, we had four operating segments, Rigid Open Top, Rigid Closed Top (collectively Rigid Packaging), Engineered Materials and Flexible Packaging.  For purposes of conducting our annual goodwill impairment test, we have determined that we have five reporting units, Rigid Open Top, Rigid Closed Top, Engineered Films, Flexible Packaging and Tapes.  Engineered Films and Tapes operations comprise the Engineered Materials operating segment.  We determined that each of the components within our respective reporting units have similar economic characteristics and therefore should be aggregated and tested at the respective level as one reporting unit.  We reached this conclusion because within each of our reporting units, we have similar products and production processes which allow us to share assets and resources across the product lines.  We regularly re-align our production equipment and manufacturing facilities in order to take advantage of cost savings opportunities, obtain synergies and create manufacturing efficiencies.  In addition, we utilize our research and development centers, design center, tool shops, and graphics center which all provide benefits to each of the reporting units and work on new products that can not only benefit one product line, but can benefit multiple product lines.  We also believe that the goodwill is recoverable from the overall operations of the unit given the similarity in production processes, synergies from leveraging the combined resources, common raw materials, common research and development, similar margins and similar distribution methodologies.  Our Tapes reporting unit did not have any goodwill until it completed its acquisition of Stopaq in the fourth quarter of fiscal 2012.  There were no indicators of impairment in the fourth quarter that required us to perform a test for the recoverability of goodwill.
 
The Company’s goodwill, fair value and carrying value of our reporting units are as follows:
 
   
Fair Value
July 1, 2012
   
Carrying Value
July 1, 2012
   
Goodwill as of
September 29, 2012
 
Rigid Open Top
  $ 2,140     $ 1,651     $ 681  
Rigid Closed Top
    2,485       1,778       832  
Engineered Films
    785       489       55  
Tapes
    345       223       18  
Flexible Packaging
    580       452       40  
                    $ 1,626  
In fiscal 2011, we recorded an impairment charge of approximately $165 million related to our operations that are now included in our Engineered Films and Flexible Packaging reporting units.  This impairment was driven by volume declines that we were experiencing in our Flexible Packaging and Engineered Films operations driven by softness in volumes and strategic decisions by the Company to exit non-profitable products across these reporting units along with other products across our entire Company.  In fiscal 2011, we experienced a base volume declines in our Flexible Packaging and Engineered Films segments.  These volume declines occurred because of a pricing strategy that we implemented in our second fiscal quarter and continued throughout the remainder of fiscal 2011.  These price increases drove declines in our overall volumes when comparing fiscal 2011 to fiscal 2010.  These declines in net sales volume resulted in an assumed lower sales volume base to grow future earnings during year one through year six of our discounted cash flow model, which resulted in a lower estimated carrying value and ultimately an impairment charge being recognized.
 
We have completed our annual impairment test for our Open Top, Closed Top, Flexible Packaging and Engineered Films reporting units, noting no impairment in any of the four reporting units.  Our forecasts include overall growth of 3-5% through and including the terminal year, which is 3%.  Growth by reporting unit varies from year-to-year between segments.  Our Engineered Materials and Flexible Films segments both experienced significant growth in 2012 (18% and 14% respectively).  This strong growth in earnings provided significant improvement in our cash flows, was higher than our anticipated results in our prior year impairment tests and will provide a higher base to grow our future operating cash flows.  Our Open Top and Closed Top reporting units experienced overall growth rates were higher than our prior year forecasts driven by the successful integration of the Rexam operations in the Closed Top reporting unit and continued operational success in the Open Top reporting unit.  Our capital expenditure levels are consistent with the levels that we forecasted in the prior year in the current year.  All of our reporting units fair values substantially exceed the carrying value, which we define as the fair value exceeding the carrying value by 30%.  A significant decline in our revenue and earnings or a significant decline in the price of common stock could result in an impairment charge in the future.  We also performed our annual impairment test for fiscal 2012 of our indefinite lived intangible assets, which primarily relate to our Rigid Packaging business.  The cash flow assumptions, growth rates and risks to these cash flows are similar to those used in our analysis to determine the fair value of our combined Rigid Packaging businesses. The annual impairment test did not result in any impairment as the fair value exceeded the carrying value.
 

 
-27-

 
 
Given the uncertainty in economic trends, revenue and earnings growth, the cost of capital and other risk factors discussed under the heading “Risk Factors”, there can be no assurance that when we complete our future annual or other periodic reviews for impairment of goodwill that an additional material impairment charge will not be recorded as a result.  In addition, historically we have grown our business by acquiring and integrating companies into our existing operations.  We may not, however, achieve the expected benefits of integrating such acquisitions into our business that we anticipated at the time of the transaction or at the time that we performed our annual impairment tests, which may impact the overall recoverability of our goodwill and indefinite lived intangible assets in future periods.  We believe based on our current forecasts and estimates that we will not recognize any future impairment charge, but given the current uncertainty in the economic trends, our forecasts and estimates could change quickly and materially in future periods and differ substantially from actual results.   
 
Deferred Taxes and Effective Tax Rates.  We estimate the effective tax rates (“ETR”) and associated liabilities or assets for each legal entity of ours in accordance with authoritative guidance.  We use tax planning to minimize or defer tax liabilities to future periods.  In recording ETRs and related liabilities and assets, we rely upon estimates, which are based upon our interpretation of United States and local tax laws as they apply to our legal entities and our overall tax structure.  Audits by local tax jurisdictions, including the United States Government, could yield different interpretations from our own and cause the Company to owe more taxes than originally recorded.  For interim periods, we accrue our tax provision at the ETR that we expect for the full year.  As the actual results from our various businesses vary from our estimates earlier in the year, we adjust the succeeding interim periods’ ETRs to reflect our best estimate for the year-to-date results and for the full year.  As part of the ETR, if we determine that a deferred tax asset arising from temporary differences is not likely to be utilized, we will establish a valuation allowance against that asset to record it at its expected realizable value.  In multiple foreign jurisdictions, the Company believes that it will not generate sufficient future taxable income to realize the related tax benefits.  The Company has provided a full valuation allowance against its foreign net operating losses included within the deferred tax assets in multiple foreign jurisdictions.  The Company has not provided a valuation allowance on its federal net operating losses in the United States because it has determined that future reversals of its temporary taxable differences will occur in the same periods and are of the same nature as the temporary differences giving rise to the deferred tax assets.  Our valuation allowance against deferred tax assets was $51 and $43 as of the end of fiscal 2012 and 2011, respectively. 
 
Based on a critical assessment of our accounting policies and the underlying judgments and uncertainties affecting the application of those policies, we believe that our consolidated financial statements provide a meaningful and fair perspective of the Company and its consolidated subsidiaries.  This is not to suggest that other risk factors such as changes in economic conditions, changes in material costs, our ability to pass through changes in material costs, and others could not materially adversely impact our consolidated financial position, results of operations and cash flows in future periods. 
 
Item 7A.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
Interest Rate Sensitivity 
 
We are exposed to market risk from changes in interest rates primarily through our senior secured credit facilities, senior secured first priority notes, second priority senior secured notes and senior unsecured term loan.  Our senior secured credit facilities are comprised of (i) a $1,200 term loan and (ii) a $650 revolving credit facility.  At the end of fiscal 2012, the Company had $73 outstanding on the revolving credit facility.  The net outstanding balance of the term loan was $1,134 at the end of fiscal 2012.  Borrowings under our senior secured credit facilities bear interest, at our option, at either an alternate base rate or an adjusted LIBOR rate for a one-, two-, three- or six-month interest period, or a nine- or twelve-month period, if available to all relevant lenders, in each case, plus an applicable margin.  The alternate base rate is the mean the greater of (i) in the case of our term loan, Credit Suisse’s prime rate or, in the case of our revolving credit facility, Bank of America’s prime rate and (ii) one-half of 1.0% over the weighted average of rates on overnight Federal Funds as published by the Federal Reserve Bank of New York.  Our $681 of senior secured first priority notes accrue interest at a rate per annum, reset quarterly, equal to LIBOR plus 4.75%.  Our second priority senior secured floating rate notes of $210 bear interest at a rate of LIBOR plus 3.875% per annum, which resets quarterly.  Our senior unsecured term loan bears interest based on (1) a fluctuating rate per annum equal to the higher of (a) the Federal Funds Rate plus ½ of 1% and (b) the rate of interest in effect for such day as publicly announced from time to time by Credit Suisse as its “prime rate” plus 525 basis points or (2) LIBOR plus 625 basis points. 
 
At the end of fiscal 2012, the LIBOR rate of 0.36% was applicable to the term loan, first priority senior secured floating rate notes second priority senior secured floating rate notes and senior unsecured term loan.  If the LIBOR rate increases 0.25% and 0.50%, we estimate an annual increase in our interest expense of $3 and $6, respectively. 
 
 
-28-

 

In November 2010, the Company entered into two separate interest rate swap transactions to protect $1 billion of the outstanding variable rate term loan debt from future interest rate volatility.  The first agreement had a notional amount of $500 and became effective in November 2010.  The agreement swaps three-month variable LIBOR contracts for a fixed three-year rate of 0.8925% and expires in November 2013.  The second agreement had a notional amount of $500 and became effective in December 2010.  The agreement swaps three-month variable LIBOR contracts for a fixed three-year rate of 1.0235% and expires in November 2013.  The counterparties to these agreements are with global financial institutions.  In August 2011, the Company began utilizing one-month LIBOR contracts for the underlying senior secured credit facility.  The Company’s change in interest rate selection caused us to lose hedge accounting on both of the interest rate swaps.  The Company recorded subsequent changes in fair value in the Consolidated Statement of Operations and will amortize the unrealized losses to Interest expense through the end of the respective swap agreements.  A 0.25% change in LIBOR would not have a material impact on the fair value of the interest rate swaps. 
 
Resin Cost Sensitivity 
 
We are exposed to market risk from changes in plastic resin prices that could impact our results of operations and financial condition.  Our plastic resin purchasing strategy is to deal with only high-quality, dependable suppliers.  We believe that we have maintained strong relationships with these key suppliers and expect that such relationships will continue into the foreseeable future.  The resin market is a global market and, based on our experience, we believe that adequate quantities of plastic resins will be available at market prices, but we can give you no assurances as to such availability or the prices thereof.  If the price of resin increased or decreased by 5% this would result in a material change to our cost of goods sold. 
 

 
-29-

 


Item 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
Index to Financial Statements
Report of Independent Registered Public Accounting Firm
33
Consolidated Balance Sheets as of fiscal 2012 and 2011
34
Consolidated Statements of Operations and Comprehensive Income (Loss) for fiscal 2012, 2011 and 2010
35
Consolidated Statements of Changes in Stockholders' Equity as of fiscal 2012, 2011 and 2010
 
36
Consolidated Statements of Cash Flows for fiscal 2012, 2011 and 2010
37
Notes to Consolidated Financial Statements
38
Index to Financial Statement Schedules
All schedules have been omitted because they are not applicable or not required or because the required information is included in the consolidated financial statements or notes thereto.
 
Item 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
 
None. 
 
Item 9A.  CONTROLS AND PROCEDURES
 
Evaluation of disclosure controls and procedures. 
 
We maintain “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) under the Exchange Act, that are designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognizes that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Additionally, in designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. Based on their evaluation at the end of the period covered by this Form 10-K, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective at the reasonable assurance level.
 
Management’s Report on Internal Control over Financial Reporting 
 
This Annual Report on Form 10-K does not include a report of management’s assessment regarding internal control over financial reporting or an attestation report of our registered public accounting firm due to a transition period established by the rules of the SEC for newly public companies.
 
Item 9B.  OTHER INFORMATION 
 
None 
 

 
-30-

 

PART III
 
 
 
Item 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
 
The information required by this Item, with the exception of the Code of Ethics disclosure below, is incorporated herein by reference to our definitive Proxy Statement to be filed in connection with the 2012 Annual Meeting of Stockholders. 
 
Code of Ethics 
 
We have a Code of Business Ethics that applies to all employees, including our Chief Executive Officer and senior financial officers.  These standards are designed to deter wrongdoing and to promote the highest ethical, moral, and legal conduct of all employees. Our Code of Business Ethics can be obtained, free of charge, by contacting our corporate headquarters or can be obtained from the Corporate Governance section of the Company’s internet site.  
 
Item 11.  EXECUTIVE COMPENSATION  
 
 The information required by this Item is incorporated herein by reference to our definitive Proxy Statement to be filed in connection with the 2012 Annual Meeting of Stockholders. 
 
 Item 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
 
 The information required by this Item, is incorporated herein by reference to our definitive Proxy Statement to be filed in connection with the 2012 Annual Meeting of Stockholders.  
 
 Item 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
 
 The information required by this Item is incorporated herein by reference to our definitive Proxy Statement to be filed in connection with the 2012 Annual Meeting of Stockholders. 
 
Item 14.  PRINCIPAL ACCOUNTING FEES AND SERVICES
 
The information required by this Item is incorporated herein by reference to our definitive Proxy Statement to be filed in connection with the 2012 Annual Meeting of Stockholders.

 
-31-

 
 
PART IV  
 
  
 
Item 15.  EXHIBITS AND FINANCIAL STATEMENT SCHEDULES  
 
    
 
1.
Financial Statements  
  
 
The financial statements listed under Item 8 are filed as part of this report.  
  
 
2.
Financial Statement Schedules  
  
 
Schedules have been omitted because they are either not applicable or the required information has been disclosed in the financial statements or notes thereto.  
  
 
3.
Exhibits  
  
 
The exhibits listed on the Exhibit Index immediately following the signature page of this annual report are filed as part of this report.  

 
-32-

 
 
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM  
 
  
 
The Board of Directors and Stockholders  
 
Berry Plastics Group, Inc. 
 
We have audited the accompanying consolidated balance sheets of Berry Plastics Group, Inc. as of September 29, 2012 and October 1, 2011, and the related consolidated statements of operations and comprehensive income (loss), changes in stockholders' equity (deficit), and cash flows for each of the three years in the period ended September 29, 2012. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.  
 
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.  
 
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Berry Plastics Group, Inc. at September 29, 2012 and October 1, 2011, and the consolidated results of its operations and its cash flows for the three years in the period ended September 29, 2012, in conformity with U.S. generally accepted accounting principles.  
 
  
 
/s/ Ernst and Young LLP  
 
   
 
Indianapolis, Indiana  
 
December 17, 2012
 
 
 
   
 
   
 

 
-33-

 

Berry Plastics Group, Inc.
Consolidated Balance Sheets
       (in millions of dollars, except share data)  
 
   
September 29, 2012
   
October 1, 2011
 
Assets
           
Current assets:
           
 Cash and cash equivalents
  $ 87     $ 42  
 Accounts receivable (less allowance for doubtful accounts of $3 and $4
   at September 29, 2012 and October 1, 2011, respectively)
    455       543  
 Inventories
    535       578  
 Deferred income taxes
    114       62  
 Prepaid expenses and other current assets
    42       30  
Total current assets
    1,233       1,255  
Property, plant and equipment
    1,216       1,250  
Goodwill, intangible assets and deferred costs
    2,636       2,704  
Other assets
    21       8  
Total assets
  $ 5,106     $ 5,217  
                 
Liabilities and stockholders' equity (deficit)
               
Current liabilities:
               
 Accounts payable
  $ 306     $ 352  
 Accrued expenses and other current liabilities
    300       286  
 Current portion of long-term debt
    40       46  
Total current liabilities
    646       684  
Long-term debt, less current portion
    4,431       4,581  
Deferred income taxes
    315       233  
Other long-term liabilities
    166       170  
Total liabilities
    5,558       5,668  
Commitments and contingencies
               
Redeemable shares
    23       16  
Stockholders' equity (deficit):
               
 Common stock: $0.01 par value: 400,000,000 shares authorized; 84,696,218  shares issued as of September 29, 2012 and October 1, 2011 and 83,188,488 and 83,863,047 shares outstanding as of September 29, 2012 and October 1, 2011
    1       1  
 Paid-in capital
    131       142  
 Notes receivable-common stock
    (2 )     (2 )
 Non controlling interest
    3       3  
 Accumulated deficit
    (561 )     (563 )
 Accumulated other comprehensive loss
    (47 )     (48 )
Total stockholders' equity (deficit)
    (475 )     (467 )
Total liabilities and stockholders' equity (deficit)
  $ 5,106     $ 5,217  
  
 See notes to consolidated financial statements.
 
 
 
-34-

 

Berry Plastics Group, Inc.
Consolidated Statements of Operations
(in millions of dollars, except share data) 
 
   
Fiscal years ended
 
   
September 29, 2012
   
October 1, 2011
   
October 2, 2010
 
Net sales
  $ 4,766     $ 4,561     $ 4,257  
Costs and expenses:
                       
 Cost of goods sold
    3,949       3,878       3,667  
 Selling, general and administrative
    308       275       272  
 Amortization of intangibles
    109       106       107  
 Restructuring and impairment charges
    31       221       41  
 Other operating expenses
    44       39       46  
Operating income
    325       42       124  
                         
Other expense (income)
    (7 )     61       (27 )
Interest expense
    328       327       313  
Income (loss) before income taxes
    4       (346 )     (162 )
Income tax expense (benefit)
    2       (47 )     (49 )
Net income (loss)
  $ 2     $ (299 )   $ (113 )
                         
Comprehensive income (loss):
                       
   Currency translation
    6       (10 )     6  
   Interest rate hedges
    4       (8 )     -  
Defined benefit pension and retiree health benefit plans
    (14 )     (14 )     (12 )
Provision for income taxes related to other comprehensive income items
    5       7       7  
Comprehensive income (loss)
  $ 3     $ (324 )   $ (112 )
                         
Net income (loss) per share:
                       
   Basic
  $ 0.02     $ (3.55 )   $ (1.34 )
   Diluted
  $ 0.02     $ (3.55 )   $ (1.34 )
                         
Weighted-average number of shares outstanding: (in thousands)
                       
   Basic
    83,435       84,121       84,525  
   Diluted
    86,644       84,121       84,525  
  
See notes to consolidated financial statements.

 
-35-

 

Berry Plastics Group, Inc.
      Consolidated Statements of Changes in Stockholders' Equity (Deficit)   
(in millions of dollars)  
 
 
Common Stock
 
Paid-in Capital
 
Notes Receivable-Common Stock
 
Non Controlling Interest
 
Accumulated Other Comprehensive Loss
 
Accumulated Deficit
 
Total
 
Balance at September 26, 2009
$
 1
 
$
 160
 
$
 (2)
 
$
 -
 
$
 (28)
 
$
 (151)
 
$
 (20)
 
Stock compensation expense
 
 -
   
 1
   
 -
   
 -
   
 -
   
 -
   
 1
 
Interest rate hedge amortization
 
 -
   
 -
   
 -
   
 -
   
 4
   
 -
   
 4
 
Fair value adjustment of redeemable stock
 
 -
   
 (14)
   
 -
   
 -
   
 -
   
 -
   
 (14)
 
Net loss
 
 -
   
 -
   
 -
   
 -
   
 -
   
 (113)
   
 (113)
 
Currency translation
 
 -
   
 -
   
 -
   
 -
   
 6
   
 -
   
 6
 
Defined benefit pension and retiree health benefit plans, net of tax
 
 -
   
 -
   
 -
   
 -
   
 (5)
   
 -
   
 (5)
 
Balance at October 2, 2010
 
 1
   
 147
 
 -
 (2)
 
 -
 -
 
 -
 (23)
   
 (264)
   
 (141)
 
Stock compensation expense
 
 -
   
 2
 
 -
 -
   
 -
   
 -
   
 -
   
 2
 
Non controlling interest
 
 -
   
 -
   
 -
   
 3
   
 -
   
 -
   
 3
 
Fair value adjustment of redeemable stock
 
 -
   
 (7)
   
 -
   
 -
   
 -
   
 -
   
 (7)
 
Net loss
 
 -
   
 -
   
 -
   
 -
   
 -
   
 (299)
   
 (299)
 
Currency translation
 
 -
   
 -
   
 -
   
 -
   
 (10)
   
 -
   
 (10)
 
Interest rate hedges, net of tax
 
 -
   
 -
   
 -
   
 -
   
 (6)
   
 -
   
 (6)
 
Defined benefit pension and retiree health benefit plans, net of tax
 
 -
   
 -
   
 -
   
 -
   
 (9)
   
 -
   
 (9)
 
Balance at October 1, 2011
 
 1
 
 -
 142
 
 -
 (2)
 
 -
 3
 
 -
 (48)
 
 -
 (563)
 
 -
 (467)
 
Stock compensation expense
 
 -
   
 2
   
 -
   
 -
   
 -
   
 -
   
 2
 
Interest rate hedge amortization
 
 -
   
 -
   
 -
   
 -
   
 3
   
 -
   
 3
 
Fair value adjustment of redeemable stock
 
 -
   
 (13)
   
 -
   
 -
   
 -
   
 -
   
 (13)
 
Treasury stock, net
 
 -
   
 -
   
 -
   
 -
   
 -
   
 -
   
 -
 
Net income
 
 -
   
 -
   
 -
   
 -
   
 -
   
 2
   
 2
 
Currency translation
 
 -
   
 -
   
 -
   
 -
   
 6
   
 -
   
 6
 
Defined benefit pension and retiree health benefit plans, net of tax
 
 -
   
 -
   
 -
   
 -
   
 (8)
   
 -
   
 (8)
 
Balance at September 29, 2012
$
 1
 
$
 131
 
$
 (2)
 
$
 3
 
$
 (47)
 
$
 (561)
 
$
 (475)
 
  
See notes to consolidated financial statements.
  
 
-36-

 
 
Berry Plastics Group, Inc. 
   Consolidated Statements of Cash Flows  
(in millions of dollars)  

   
Fiscal years ended
 
   
September 29, 2012
   
October 1, 2011
   
October 2, 2010
 
                   
Cash Flows from Operating Activities:
                 
Net income (loss)
  $ 2     $ (299 )   $ (113 )
Adjustments to reconcile net cash from operating activities:
                       
Depreciation
    246       238       210  
Amortization of intangibles
    109       106       107  
Non-cash interest expense
    24       21       31  
Write-off of deferred financing fees and loss on extinguishment of debt
    -       68       1  
Non-cash gain on debt repurchase
    (1 )     (4 )     (13 )
Deferred income taxes
    1       (51 )     (52 )
Impairment of long-lived assets and goodwill
    20       200       19  
Other non-cash  items
    6       (3 )     (14 )
Changes in operating assets and liabilities:
                       
Accounts receivable, net
    95       (11 )     (41 )
Inventories
    37       59       (118 )
Prepaid expenses and other assets
    (7 )     25       12  
Accounts payable and other liabilities
    (53 )     (22 )     83  
Net cash from operating activities
    479       327       112  
                         
Cash Flows from Investing Activities:
                       
Additions to property, plant and equipment
    (230 )     (160 )     (223 )
Proceeds from disposal of assets
    30       5       29  
Acquisitions of business, net of cash acquired
    (55 )     (368 )     (658 )
Net cash from investing activities
    (255 )     (523 )     (852 )
                         
Cash Flows from Financing Activities:
                       
Proceeds from long-term borrowings
    2       995       1,097  
Purchase of common stock
    (6 )     (2 )     (3 )
Repayment of long-term debt
    (175 )     (880 )     (178 )
Debt financing costs
    -       (23 )     (38 )
Net cash from financing activities
    (179 )     90       878  
Effect of currency translation on cash
    -       -       -  
Net increase (decrease) in cash and cash equivalents
    45       (106 )     138  
Cash and cash equivalents at beginning of period
    42       148       10  
Cash and cash equivalents at end of period
  $ 87     $ 42     $ 148  
  
See notes to consolidated financial statements.
  
   

 
-37-

 

Berry Plastics Group, Inc.
Notes to Consolidated Financial Statements  
(in millions of dollars, except as otherwise noted)  
  
 
1.  Basis of Presentation and Summary of Significant Accounting Policies  
 
Background  
 
Berry Plastics Group, Inc. (“Berry” or the “Company”) is a leading provider of value-added plastic consumer packaging and engineered materials with a track record of delivering high-quality customized solutions to our customers.  Representative examples of our products include thermoform drink cups, thin-wall containers, blow-molded bottles, specialty closures, prescription vials, specialty plastic films, adhesives and corrosion protection materials.  We sell our solutions predominantly into consumer-oriented end-markets, such as food and beverage, healthcare and personal care.   
 
Initial Public Offering and Stock Split 
 
In October 2012, we filed an initial public offering and sold 29,411,764 shares of common stock at $16.00 per share.   Proceeds, net of underwriting fees, of $444 and cash from operations were used to repurchase $455 of 11% Senior Subordinated Notes due September 2016.  In conjunction with the initial public offering the Company executed a 12.25 for one stock split of the Company’s common stock.  The effect of the stock split on outstanding shares and earnings per share has been retroactively applied to all periods presented.   
 
Basis of Presentation  
 
Berry is majority owned by affiliates of Apollo Management, L.P. (“Apollo”) and Graham Partners (“Graham”).  Periods presented in these financial statements include fiscal periods ending September 29, 2012 (“fiscal 2012”), October 1, 2011 (“fiscal 2011”), and October 2, 2010 (“fiscal 2010”).  Berry, through its wholly-owned subsidiaries operates in four primary segments:  Rigid Open Top, Rigid Closed Top, Engineered Materials, and Flexible Packaging.  The Company’s customers are located principally throughout the United States, without significant concentration in any one region or with any one customer.  The Company performs periodic credit evaluations of its customers’ financial condition and generally does not require collateral.  The Company’s fiscal year is based on fifty-two or fifty-three week periods.  Fiscal 2010 represents a fifty-three week period. The Company has evaluated subsequent events through the date the financial statements were issued.    
 
Consolidation   
 
The consolidated financial statements include the accounts of Berry and its subsidiaries, all of which includes our wholly owned and majority owned subsidiaries. Intercompany accounts and transactions have been eliminated in consolidation.  Where ou