PACTIV EVERGREEN INC. This Management's Discussion and Analysis of Financial Condition and Results of Operations is intended to provide a reader of our financial statements with a narrative from the perspective of our management regarding our financial condition and results of operations, liquidity and certain other factors that may affect our future results. The following discussion and analysis contains forward-looking statements. It should be read in connection with the other sections of this Annual Report on Form 10-K, including the consolidated financial statements and related notes, the cautionary information contained in Forward-Looking Statements and Item 1A, Risk Factors.
Overview of Business and Strategy
For a description of our business and strategy, refer to Item 1, Business.
Recent Developments and Significant Items Affecting Comparability
Fabri-Kal Acquisition
OnOctober 1, 2021 , we acquired 100% of the outstanding ownership interests ofFabri-Kal for a purchase price of$378 million .Fabri-Kal is aU.S. manufacturer of thermoformed plastic packaging products. Its products include portion cups, lids, clamshells, drink cups and yogurt containers for the consumer packaged goods and institutional foodservice markets. The acquisition includes four manufacturing facilities inthe United States . The acquisition is expected to broaden our portfolio of sustainable packaging products and expand our manufacturing capacity to better serve our customers. The acquisition was funded with our existing cash resources and a portion of theU.S. term loans Tranche B-3 incurred inSeptember 2021 .
Dispositions
OnOctober 12, 2021 , we entered into a definitive agreement for the sale of our equity interests inNaturepak Beverage Packaging Co. Ltd. , our 50% joint venture withNaturepak Limited , to Elopak ASA. We expect to receive proceeds from the transaction of approximately$47 million , adjusted for cash, indebtedness and working capital as of the date of completion. The transaction is expected to close in the first half of 2022, subject to customary closing conditions, including regulatory approvals. OnJanuary 4, 2022 , we entered into a definitive agreement withSIG Schweizerische Industrie-Gesellschaft GmbH to sell our carton packaging and filling machinery businesses inChina ,Korea andTaiwan . We expect to receive proceeds from the transaction of approximately$335 million , adjusted for cash, indebtedness and working capital as of the date of completion. The transaction is expected to close in the second or third quarter of 2022, subject to customary closing conditions, including regulatory approvals. Neither of these dispositions qualifies for presentation as discontinued operations.
Coated Groundwood Paper Business Exit
OnJuly 28, 2021 , we announced the decision to close our coated groundwood paper production line located in ourPine Bluff, Arkansas mill. With the decline in the coated groundwood market, our decision to exit this business enables us to re-invest resources into our strategic core competency of liquid packaging board, as well as other more profitable segments across the enterprise. OnOctober 31, 2021 , we ceased manufacturing coated groundwood paper, and we substantially completed our exit from this business during the fourth quarter of 2021. As a result of the closure, we recognized in 2021 a pre-tax charge of$3 million for contractual termination benefits,$6 million for other restructuring charges and$24 million of accelerated depreciation on plant and equipment. We also expect disassembly costs and similar expenses of approximately$2 million to$4 million .
Pension Partial Settlement Transactions
OnJuly 21, 2021 , we purchased with$941 million of PEPP assets a non-participating group annuity contract from an insurance company and transferred$959 million of the PEPP's projected benefit obligations. Under the transaction, the insurance company will assume responsibility for pension benefits and annuity administration for approximately 16,300 retirees or their beneficiaries. As a result of this transaction, the PEPP's projected benefit obligations and plan assets were remeasured, and we recognized a non-cash pre-tax pension settlement gain of$22 million in 2021. OnFebruary 16, 2022 , we entered into an agreement with an insurance company to purchase a non-participating group annuity contract and transfer approximately$1,260 million of the PEPP's projected benefit obligations. The transaction closed onFebruary 24, 2022 and was funded with plan assets. Under the transaction, the insurance company assumed responsibility for pension benefits and annuity administration for approximately 13,300 retirees or their beneficiaries. As a result of this transaction, in the first quarter of 2022, we will remeasure the PEPP's projected benefit obligations and plan assets, and we expect to recognize a non-cash pre-tax pension settlement gain of approximately$25 million .
Winter Storm Uri and Tropical Storm Fred
DuringFebruary 2021 , the Southern portion ofthe United States was impacted by Winter Storm Uri which brought record low temperatures, snow and ice and resulted in power failures, hazardous road conditions, damage to property and death and injury to individuals in those states. During most of this weather event, we were unable to fully operate some of our mills, plants and warehouses 33 -------------------------------------------------------------------------------- inTexas andArkansas . During the first half of 2021, we incurred approximately$50 million of incremental costs including energy costs, primarily related to natural gas, shut-down costs and some property damage during the storm. Our Beverage Merchandising segment was impacted to the greatest degree with incremental costs of$37 million incurred by our paper mill inPine Bluff, Arkansas . As a result of the storm, certain of our suppliers with locations in the impacted areas were also unable to operate which subsequently has resulted in their declaration of force majeure on meeting the supply quantities due to us. In particular, our supply of various resin types was limited, and we were required to purchase from other suppliers, and at a higher price, in order to meet our production demands for March and April. As further discussed in our Results of Operations, our cost of sales was impacted for 2021 as the products manufactured with this higher priced material were sold. DuringAugust 2021 , the South Eastern portion ofthe United States was impacted by Tropical Storm Fred which brought severe flooding. As a result of the storm, our paper mill inCanton, North Carolina experienced a flood which resulted in the damage of certain property, plant and equipment. The mill subsequently experienced an explosion and resulting fire. Due to the extensive damage sustained from the flood, fire and related events, we were unable to fully operate our paper mill inCanton, North Carolina for several days during the third quarter of 2021. Accordingly, our Beverage Merchandising segment incurred$7 million of incremental costs, including costs related to the shut-down of the mill and to repair damaged property, plant and equipment, during 2021.
COVID-19
We have been actively responding to the COVID-19 pandemic and its impact. Our highest priorities continue to be the safety of our employees and working with our employees and network of suppliers and customers to help maintain the food supply chain as an essential business. As we are a part of the global food supply chain, we have taken a number of actions to promote the health and safety of our employees and customers in order to maintain the availability of our products to meet the needs of our customers. To date, we have not experienced significant issues within our supply chain due to the COVID-19 pandemic, including the sourcing of materials and logistics service providers. During the first half of fiscal year 2020, which was impacted by widespread lockdowns, "stay-at-home" orders and other measures that restricted consumer mobility, we experienced a significant decrease in demand and revenues as many of our customers experienced lower demand. Our Foodservice segment experienced a significant decline in net revenues due to the closure or reduced activity of restaurants and other food-serving institutions. Our Food Merchandising segment experienced a strong market demand for many of our products as people continue to eat more at home, while there was a decline in demand for other products, such as bakery and snack containers typically used in many of the group gatherings that were either canceled or scaled back due to restrictions and concerns over COVID-19. Within our Beverage Merchandising segment, sales of fresh beverage cartons remained relatively constant with declines in sales of school milk cartons offset by higher demand in the retail segment, while sales in the paper markets declined due to a decrease in demand of printed publications and advertising and demand for liquid packaging board softened. During the second half of fiscal year 2020 and throughout fiscal year 2021, volumes steadily improved in our business, most significantly in our Foodservice segment, as the availability of vaccines and inoculation rates increased, consumer mobility increased and the economies in which we operate started to recover. Additionally, we have adapted along with our customers as COVID-19 restrictions were lifted, or subsequently reinstated, and as consumer behavior required more take-out and online ordering options. As the general effects of the COVID-19 pandemic continue to change and remain unpredictable, the COVID-19 pandemic will continue to impact our results of operations in future periods as the macroeconomic environment changes and consumer behavior continues to evolve. We continue to proactively manage our business in response to the evolving impacts of the pandemic, and we will continue to communicate with and support our employees and customers, to monitor and take steps to further safeguard our supply chain, operations and assets, to protect our liquidity and financial position, to work toward our strategic priorities and to monitor our financial performance as we seek to position ourselves to withstand the current uncertainty related to this pandemic.
IPO and Reorganization
During the year endedDecember 31, 2020 , and prior to our IPO, we distributed two of our former segments. OnSeptember 21, 2020 , we completed the IPO of our common stock pursuant to a Registration Statement on Form S-1 (File No. 333-248250). We were able to utilize existing cash on hand, the proceeds from the Reynolds Consumer Products ("RCP") segment and theGraham Packaging Company ("GPC") segment prior to their distribution and the sale of our common stock to pay down$6,694 million of outstanding debt, as well as refinance$2,250 million of our outstanding borrowings to extend our maturity profile and to lower our costs of borrowing in future periods. In conjunction with our IPO and the distributions of the RCP and GPC segments, we incurred approximately$47 million and$7 million of strategic review and transaction related costs during the years endedDecember 31, 2020 and 2019, respectively. Additionally, we historically had been charged a management fee from Rank which upon our IPO is no longer incurred. We incurred$45 million to terminate the management fee arrangement during the year endedDecember 31, 2020 . The total management fees within continuing operations for the years endedDecember 31, 2020 and 2019 were$49 million and$10 million , respectively. Refer to Note 18, Related Party Transactions, to the consolidated financial statements for additional details. 34 -------------------------------------------------------------------------------- As a public company, we implemented additional procedures and processes for the purpose of addressing the standards and requirements applicable to public companies. In particular, our accounting, legal and personnel-related expenses and directors' and officers' insurance costs have increased as we establish more comprehensive compliance and governance functions, establish, maintain and review internal controls over financial reporting in accordance with the Sarbanes-Oxley Act and prepare and distribute periodic reports in accordance withSEC rules. In addition, in connection with our IPO, we established thePactiv Evergreen Inc. Equity Incentive Plan (the "Equity Incentive Plan") for purposes of granting equity based compensation awards to certain of our senior management, to our non-executive directors and to certain employees to incentivize their performance and align their interests with ours. Refer to Note 19, Equity Based Compensation, to the consolidated financial statements for additional details.
Discontinued Operations
The operations of our former RCP and GPC segments and our former North American and Japanese closures businesses are presented as discontinued operations for all years presented. The cash flows related to these discontinued operations remain included within our consolidated statement of cash flows until the date in which they were distributed or sold. Refer to Note 3, Discontinued Operations, to the consolidated financial statements for additional details.
CARES Act
The Coronavirus Aid, Relief and Economic Security Act (the "CARES Act") was enacted inMarch 2020 . Retroactive provisions of the CARES Act entitled us to utilize additional deferred interest deductions, which lowered our taxable income for the year endedDecember 31, 2019 . The CARES Act also increased the allowable interest deductions for the year endedDecember 31, 2020 . We recognized a tax benefit in continuing operations in the year endedDecember 31, 2020 of$112 million which was primarily driven by adjusting our taxable income for the year endedDecember 31, 2019 and changes in our valuation allowance, both as a result of the CARES Act.
Summary of Results
Our results for the year endedDecember 31, 2021 reflect a recovery in volumes as demand for our products returned to near pre-pandemic levels, inflationary pressures on our supply chain, including higher material, logistics and manufacturing costs, and the impact of certain weather-related events. During the second half of 2021, we began to recover higher material, logistics and labor costs through the realization of price increases due to traditional contractual cost pass-through price increases and pricing actions. Our results for the year endedDecember 31, 2021 also reflect one quarter of results relating to our acquisition ofFabri-Kal , which closed onOctober 1, 2021 . Our net revenues increased 16% to$5,437 million for the year endedDecember 31, 2021 compared to$4,689 million for the year endedDecember 31, 2020 , driven by favorable pricing, primarily due to higher material costs passed through to customers, as well as higher volumes due to higher demand as markets continue to recover from the COVID-19 pandemic. Net income from continuing operations was$33 million for the year endedDecember 31, 2021 compared to a net loss of$10 million for the year endedDecember 31, 2020 . The change was primarily driven by$180 million of lower interest expense driven by lower average debt outstanding in the current year period and a lower loss on extinguishment of debt,$49 million of related party management fees in the comparative period,$35 million of higher non-operating income driven by a pension settlement gain and$19 million of lower restructuring, asset impairment and other charges. These increases were partially offset by$146 million of lower gross profit due to higher manufacturing costs, including$50 million of additional costs incurred related to the impact of Winter Storm Uri, higher logistics and material costs, net of higher costs passed through to customers. In addition, income tax benefit was lower by$108 million driven primarily by the impacts of the CARES Act in the prior year. Our Adjusted EBITDA from continuing operations decreased 14% to$531 million compared to the year endedDecember 31, 2020 . The decrease was primarily due to higher manufacturing, logistics and material costs, net of higher costs passed through to customers. These decreases were partially offset by higher sales volume. Adjusted EBITDA for the year endedDecember 31, 2021 included$50 million of additional costs incurred related to the impact of Winter Storm Uri. Adjusted EBITDA from continuing operations is a non-GAAP measure. For details, refer to Non-GAAP Measures - Adjusted EBITDA from Continuing Operations, including a reconciliation between net income (loss) from continuing operations and Adjusted EBITDA from continuing operations. Our capital expenditures related to continuing operations were$282 million for the year endedDecember 31, 2021 compared to$282 million for the year endedDecember 31, 2020 . We invested$88 million and$110 million in our Strategic Investment Program during the years endedDecember 31, 2021 and 2020, respectively.
Factors Affecting Our Results of Operations
We believe that our performance and future success depend on a number of factors
that present significant opportunities for us but also pose risks and
challenges, including those discussed below and in the section of this Annual
Report on Form 10-K titled "Risk Factors."
Changes in Consumer Demand - Our sales are driven by consumer buying habits in
the markets that our customers serve and by the volume of sales made from our
customers to consumers. Consequently, we are exposed to changes in consumer
demand patterns and customer requirements in numerous industries. Changes in
consumer preferences for products in the industries that we serve or the
packaging formats in which such products are delivered, whether as a result of
changes in cost, convenience or health, environmental
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and social concerns and perceptions, may result in a decline in the demand for
certain of our products. For example, certain of our products are used for dairy
and fresh juice, and as sales of those beverages have generally declined over
recent years, we have had to find new markets for these products. On the other
hand, changing preferences for products and packaging formats may also result in
increased demand for other products we manufacture. For instance, the growth in
consumer preference for organic meat, poultry and free-range eggs outpaces the
growth in consumer preference for conventional meat, poultry and standard eggs.
Organic meat, poultry and eggs are often packaged in PET or molded fiber, which
may drive a shift from polystyrene foam packaging for these products toward
higher value PET and molded fiber substrates.
Enhancements in Automation to Control Fluctuations in Labor Costs and
Availability - As labor costs rise and as the availability of labor fluctuates,
we have focused on increasing automation to reduce our reliance on labor. We
commenced a systematic automation program in 2017 to lower labor costs,
eliminate repetitive tasks and increase efficiency, which we substantially
completed in 2020. Our automation strategy includes implementing end of
production line automation and palletizing, introducing automated vehicles,
changing work flow and work cells to streamline processes and integrating
collaborative robots with our employees. Although we have automated a portion of
our operations, we are committed to further investments in automation, including
recent initiatives focused on the automation of repetitive manual tasks to
increase operating efficiency and consistency, while mitigating our exposure to
the impact of fluctuations in the cost and availability of labor.
Sustainability - Interest in environmental sustainability has increased over the
past decade, and we expect that sustainability will play an increasing role in
customer and consumer purchasing decisions. There have been recent concerns
about the environmental impact of single-use products and products made from
plastic, particularly polystyrene foam. Governmental authorities in the U.S. and
abroad continue to implement legislation aimed at reducing the amount of plastic
and other materials incapable of being recycled or composted. This type of
legislation, as well as voluntary initiatives similarly aimed at reducing the
level of single-use packaging waste, could reduce demand for certain products.
In addition, state and local bans on polystyrene foam foodservice packaging may
drive a shift to the use of higher value substrates, such as paper, molded
fiber, polypropylene and polyethylene terephthalate.
Some consumer products companies, including some of our customers, have
responded to these governmental initiatives and to perceived environmental or
sustainability concerns of consumers by using only recyclable or compostable
containers. As our customers may shift towards purchasing more sustainable
products, we have focused much of our innovation efforts around sustainability.
Across our business, we believe we are well positioned to benefit from growth in
fiber-based, recycled, recyclable and/or compostable packaging. For instance, in
Foodservice, we continue to develop and introduce new products under our
EarthChoice, Greenware and Recycleware brands. In Food Merchandising, we are the
largest producer of molded fiber egg cartons in the U.S. and believe we are
positioned to benefit from shifts toward fiber and away from foam polystyrene.
Our Food Merchandising segment continues to produce new sustainable product
innovations, such as our recycled PET meat and poultry trays and egg cartons. In
Beverage Merchandising, we continue to develop new fiber-based beverage cartons.
We intend to continue sustainability-driven innovation to ensure that we are at
the leading edge of recyclable, renewable and compostable products in order to
offer our customers environmentally sustainable choices. For fiscal year 2021,
approximately 64% of our net revenues were derived from products made with
recycled, recyclable or renewable materials, and our goal is 100% by 2030.
We expect to incur additional capital expenditures and research and development
costs as a result of developing these products and/or increasing manufacturing
of existing sustainable products.
Food Safety - Food safety remains a top concern among our customers and
consumers, and packaging plays a critical role in keeping food safe. Within food
processing and retail, consumers increasingly value enhanced packaging features
such as tamper-evident containers to ensure freshness and food safety. Within
foodservice, providers value tamper-evident packaging due to increased customer
concerns around food quality and safety. In addition, the growth of food
delivery is creating a greater need for tamper-evident seals and packaging
formats to ensure consumer safety. We expect that the desire for safe packaging
will play an increasing role in customer purchasing decisions and create
significant new product opportunities for us.
Raw Materials and Energy Prices - Our results of operations and the gross
profits corresponding to each of our segments are impacted by changes in the
costs of our raw materials and energy prices. Resin prices have historically
fluctuated based on changes in supply and demand and influenced by the prices of
crude oil and monomers, which may be impacted by extreme weather conditions and
the demand for other end uses. The prices of raw wood and wood chips may
fluctuate due to external conditions such as weather, product scarcity and
commodity market fluctuations and changes in governmental policies and
regulations. Purchases of most of our raw materials are based on negotiated
rates with suppliers, which are tied to published indices. Many of the raw
materials utilized by our mills are purchased on the spot market. The prices for
some of our raw materials, particularly resins, and the prices that we pay to
purchase aluminum products have fluctuated significantly in recent years. Prices
for raw wood and wood chips have fluctuated less than the prices of resins. Raw
wood and wood chips are typically purchased from sources close to our mills and,
as a result, prices are established locally based on factors such as local
competitive conditions and weather conditions. Management expects continued
volatility in raw material prices and such volatility may impact our results of
operations.
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Historical index prices of resin from
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We are also sensitive to energy-related cost movements, particularly those that
affect transportation and utility costs. Historically, we have been able to
mitigate the effect of higher energy-related costs with productivity
improvements and other cost reductions. However, significant spikes in energy
costs due to abnormal weather conditions may not be recovered through such means
and could have a significant impact to our profitability. For example, in the
first quarter of 2021, the impact of Winter Storm Uri increased energy costs for
our facilities in the southern half of the U.S. Refer to the Recent Developments
and Significant Items Affecting Comparability section for further details
regarding Winter Storm Uri's impact on our business.
We use various strategies to manage cost exposures on certain raw material
purchases with the objective of obtaining more predictable costs for these
commodities. From time to time we enter into hedging agreements for some of our
raw materials and energy sources to minimize the impact of price fluctuations.
We generally enter into commodity financial instruments or derivatives to hedge
commodity prices primarily related to resin, natural gas and diesel. Although we
continue to take steps to minimize the impact of the volatility of raw material
prices through commodity hedging, fixed supplier pricing, reducing the lag time
in contractual raw material cost pass-through mechanisms and entering into
additional indexed customer contracts that include raw material cost
pass-through provisions, these efforts may prove to be inadequate.
Pricing - Revenue is directly impacted by changes in raw material costs as a
result of raw material cost pass-through mechanisms in many of the customer
pricing agreements entered into by our segments. Generally, the contractual
price adjustments do not occur simultaneously with commodity price fluctuations,
but rather on a mutually agreed upon schedule, which often causes a lead-lag
effect, during which margins are negatively impacted in the short term when raw
material costs increase and positively impacted in the short term when raw
material costs decrease. Historically, the average lag time in implementing raw
material cost pass-through mechanisms has been between three and four months. We
use price increases, where possible, to mitigate the effects of raw material
cost increases for customers that are not subject to raw material cost
pass-through agreements.
Competitive Environment - The markets in which we sell our products historically
have been, and continue to be, highly competitive. Areas of competition include
service, innovation, quality, sustainability and price. While we have long-term
relationships with many of our customers, the underlying contracts may be re-bid
or renegotiated from time to time, and we may not be successful in renewing on
favorable terms or at all, as pricing and other competitive pressures may
occasionally result in the loss of a customer relationship. The loss of business
from our larger customers, or the renewal of business on less favorable terms,
may have a significant impact on our operating results.
COVID-19 - As previously discussed, we believe the macroeconomic impacts of the COVID-19 pandemic will continue to impact our results.
Commitment to Operational Excellence - In light of increased manufacturing costs
incurred in recent years and continuing margin pressure throughout the packaging
industry, we have programs in place that are designed to improve productivity,
reduce costs and increase profitability. We intend to reduce our operational
costs by implementing a series of operational performance and cost reduction
programs as part of our Strategic Project Management Office ("SPMO")
initiatives. Our SPMO initiatives include increasing
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--------------------------------------------------------------------------------productivity through machine reliability and automation, particularly in our paper mills, as well as improving operations through a number of digital initiatives and integrating our supply chain.
Financing Costs - We regularly evaluate our variable and fixed rate debt as we finance our ongoing working capital and capital expenditures and other investments. During the fiscal year 2021, we completed a refinancing resulting in the repayment of$1,207 million of debt that was due in 2023, and our next scheduled significant maturity is$276 million due inDecember 2025 . We also will continue to focus on reducing our financing costs through repayments of our outstanding borrowings. Our weighted average interest rate on our total debt as ofDecember 31, 2021 was 4.3%, compared to 4.0% and 5.1% as ofDecember 31, 2020 and 2019, respectively. Refer to Note 10, Debt, to the consolidated financial statements for additional information.
Public Company Costs - As a public company, we have implemented additional
procedures and processes for the purpose of addressing the standards and
requirements applicable to public companies. In particular, our accounting,
legal and personnel-related expenses and directors' and officers' insurance
costs have increased as we establish more comprehensive compliance and
governance functions, establish, maintain and review internal controls over
financial reporting in accordance with the Sarbanes-Oxley Act and prepare and
distribute periodic reports in accordance with
Elevated Past Capital Expenditures - In the last several years, our level of capital expenditures has been elevated due to our strategic and growth initiatives and certain extraordinary maintenance capital expenditures. As our Strategic Investment Program concludes, we expect our annual capital expenditures to normalize.
Non-GAAP Measures - Adjusted EBITDA from Continuing Operations
Adjusted EBITDA from continuing operations is defined as net income (loss) from
continuing operations calculated in accordance with GAAP, plus the sum of income
tax expense, net interest expense, depreciation and amortization and further
adjusted to exclude certain items, including but not limited to restructuring,
asset impairment and other related charges, gains or losses on the sale of
businesses and noncurrent assets, non-cash pension income or expense,
operational process engineering-related consultancy costs, business acquisition
costs and purchase accounting adjustments, unrealized gains or losses on
derivatives, foreign exchange gains or losses on cash, executive transition
charges, goodwill impairment charges, related party management fees and
strategic review and transaction-related costs.
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We present Adjusted EBITDA from continuing operations because it is a key
measure used by our management team to evaluate our operating performance,
generate future operating plans, make strategic decisions and incentivize and
reward our employees. Accordingly, we believe that Adjusted EBITDA from
continuing operations provides useful information to investors and others in
understanding and evaluating our operating results in the same manner as our
management team and Board of Directors. We also believe that using Adjusted
EBITDA from continuing operations facilitates operating performance comparisons
on a period-to-period basis because it excludes variations primarily caused by
changes in the items noted above. In addition, our chief operating decision
maker, who is our President and Chief Executive Officer, uses Adjusted EBITDA of
each reportable segment to evaluate the operating performance of such segments.
Our use of Adjusted EBITDA from continuing operations has limitations as an
analytical tool, and you should not consider it in isolation or as a substitute
for analysis of our results as reported under GAAP. Instead, you should consider
it alongside other financial performance measures, including our net income
(loss) and other GAAP results. In addition, in evaluating Adjusted EBITDA from
continuing operations, you should be aware that in the future we will incur
expenses such as those that are the subject of adjustments made in deriving
Adjusted EBITDA from continuing operations, and you should not infer from our
presentation of Adjusted EBITDA from continuing operations that our future
results will not be affected by these expenses or any unusual or non-recurring
items. The following is a reconciliation of our net income (loss) from
continuing operations, the most directly comparable GAAP financial measure, to
Adjusted EBITDA from continuing operations for each of the years indicated:
For the Years Ended December 31,
(In millions) 2021 2020 2019
Net income (loss) from continuing operations
(GAAP) $ 33 $ (10 ) $ (240 )
Income tax (benefit) expense (4 ) (112 ) 84
Interest expense, net 191 371 433
Depreciation and amortization 344 289 273
Restructuring, asset impairment and other
related charges(1) 9 28 46
(Gain) loss on sale of business and
noncurrent assets(2) - (1 ) 22
Non-cash pension (income) expense(3) (101 ) (71 ) 6
Operational process engineering related
consultancy costs(4) 21 13 27
Business acquisition costs and purchase
accounting adjustments(5) 15 - -
Unrealized losses (gains) on derivatives(6) 7 (10 ) (4 )
Foreign exchange losses on cash(7) 2 15 8
Executive transition charges(8) 10 - -
Goodwill impairment charges(9) - 6 16
Related party management fee(10) - 49 10
Strategic review and transaction-related
costs(11) - 47 7
Other 4 1 3
Adjusted EBITDA from continuing operations
(Non-GAAP) $ 531 $
615
(1) Reflects restructuring, asset impairment and other related charges (net of
reversals) primarily associated with the closure of Beverage Merchandising's
coated groundwood operations, our corporate operations and the remaining
closures businesses that are not reported within discontinued operations.
Refer to Note 5, Restructuring, Asset Impairment and Other Related Charges,
to the consolidated financial statements for additional details.
(2) Reflects the gain or loss from the sale of businesses and noncurrent assets,
primarily in our Other segment during 2019.
(3) Reflects the non-cash pension (income) expense related to our employee
benefit plans.
(4) Reflects the costs incurred to evaluate and improve the efficiencies of our
manufacturing and distribution operations.
(5) Reflects
million inventory fair value step-up that was expensed within cost of sales
during 2021. Refer to Note 4, Acquisitions and Dispositions, to the
consolidated financial statements for additional details.
(6) Reflects the mark-to-market movements in our commodity derivatives. Refer to
Note 12, Financial Instruments, to the consolidated financial statements for
additional details.
(7) Reflects foreign exchange losses on cash, primarily on
held in non-
(8) Reflects charges relating to key executive retirement and separation
agreements during 2021.
(9) Reflects goodwill impairment charges in respect of our remaining closures
operations. Refer to Note 5, Restructuring, Asset Impairment and Other
Related Charges, to the consolidated financial statements for additional
details.
(10) Reflects the related party management fee charged by Rank to us and the fee
to terminate this arrangement upon our IPO. Refer to Note 18,
Transactions, to the consolidated financial statements for additional
details. Following our IPO, we are no longer charged the related party
management fee.
(11) Reflects costs incurred for strategic reviews of our businesses, primarily
in anticipation of and in connection with the IPO, as well as other costs
related to our IPO, that cannot be offset against the proceeds of the IPO.
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--------------------------------------------------------------------------------Results of Operations
The following discussion compares our results of operations for 2021 with 2020:
Consolidated Results
For the Years Ended December 31,
% of % of
(In millions, except for %) 2021 Revenue 2020 Revenue Change % Change
Net revenues $ 5,437 100 % $ 4,689 100 % $ 748 16 %
Cost of sales (4,863 ) (89 )% (3,969 ) (85 )% (894 ) (23 )%
Gross profit 574 11 % 720 15 % (146 ) (20 )%
Selling, general and
administrative expenses (466 ) (9 )% (470 ) (10 )% 4 1 %
Goodwill impairment charges - - % (6 ) - % 6 NM
Restructuring, asset impairment
and other related charges (9 ) - % (28 ) (1 )% 19 68 %
Other income (expense), net 20 - % (33 ) (1 )% 53 NM
Operating income from continuing
operations 119 2 % 183 4 % (64 ) (35 )%
Non-operating income, net 101 2 % 66 1 % 35 53 %
Interest expense, net (191 ) (4 )% (371 ) (8 )% 180 49 %
Income (loss) from continuing
operations before tax 29 1 % (122 ) (3 )% 151 NM
Income tax benefit 4 - % 112 2 % (108 ) (96 )%
Income (loss) from continuing
operations 33 1 % (10 ) - % 43 NM
Loss from discontinued
operations, net of income taxes (8 ) (15 ) 7
Net income (loss) $ 25 $ (25 ) $ 50
Adjusted EBITDA from continuing
operations(1) $ 531 10 % $ 615 13 %
NM indicates that the calculation is not meaningful.
(1) Adjusted EBITDA from continuing operations is a non-GAAP measure. For
details, refer to Non-GAAP Measures - Adjusted EBITDA from Continuing
Operations, including a reconciliation between net income (loss) from
continuing operations and Adjusted EBITDA from continuing operations.
Components of Change in Reportable Segment Net Revenues for 2021 Compared with
2020
Price/Mix Volume Acquisitions Dispositions FX Total
Net revenues 10 % 4 % 2 % (1 )% 1 % 16 %
By reportable segment:
Foodservice 14 % 8 % 6 % - % 1 % 29 %
Food Merchandising 12 % (3 )% - % - % 1 % 10 %
Beverage Merchandising 2 % 4 % - % - % - % 6 %
Net Revenues. Net revenues for the year ended December 31, 2021 increased by
$748 million , or 16%, to $5,437 million compared to the year ended December 31,
2020 . The increase was primarily due to favorable pricing, primarily due to
higher material costs passed through to customers within our Foodservice and
Food Merchandising segments, as well as higher sales volume within our
Foodservice and Beverage Merchandising segments, largely due to higher demand as
markets continue to recover from the COVID-19 pandemic. In addition, the
Foodservice segment's acquisition of Fabri-Kal on October 1, 2021 contributed
$106 million of incremental sales for the year ended December 31, 2021 as
compared to the year ended December 31, 2020 .
Cost of Sales. Cost of sales for the year ended December 31, 2021 increased by
$894 million , or 23%, to $4,863 million compared to the year ended December 31,
2020 . The increase was primarily due to higher materials and manufacturing
costs, including $54 million of increased depreciation expense primarily related
to accelerated depreciation due to the closure of Beverage Merchandising's
coated groundwood operations as well as $50 million of incremental costs related
to the impact of Winter Storm Uri, higher sales volume and higher logistics
costs. In addition, the Foodservice segment's acquisition of Fabri-Kal on
October 1, 2021 contributed $108 million of incremental cost of sales for the
year ended December 31, 2021 as compared to the year ended December 31, 2020 .
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the year ended December 31, 2021 decreased by $4
million , or 1%, to $466 million compared to the year ended December 31, 2020 .
The decrease was primarily due to $47 million of lower strategic review and
transaction costs, partially offset by $11 million of higher costs related to
the Foodservice segment's acquisition of Fabri-Kal , $10 million of charges
related to executive transition agreements, higher operational consultancy costs
and higher costs related to employees and professional services.
Goodwill Impairment Charges.
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Restructuring, Asset Impairment and Other Related Charges. Restructuring, asset
impairment and other related charges for the year ended December 31, 2021
decreased by $19 million to $9 million compared to the year ended December 31,
2020 . Refer to Note 5, Restructuring, Asset Impairment and Other Related
Charges, to the consolidated financial statements for additional details.
Other Income (Expense), Net. During the year ended December 31, 2021 , we
recognized $20 million of income compared to $33 million of expense for the year
ended December 31, 2020 . The change was primarily attributable to $49 million of
related party management fees that were incurred in the prior year period and
$15 million of foreign exchange losses on cash in the prior year period on U.S.
dollar cash balances held by foreign entities with a non-U.S. dollar functional
currency which were redomiciled to the U.S. upon our initial public offering,
partially offset by $10 million of lower transition service agreement income.
Refer to Note 14, Other Income (Expense), Net, to the consolidated financial
statements for additional details.
Non-operating Income, Net. Non-operating income, net for the year ended December
31, 2021 increased by $35 million to $101 million compared to the year ended
December 31, 2020 . The increase was primarily due to the $22 million pension
settlement gain recognized in the current year period and a decrease in interest
cost on benefit plans, largely as a result of a decrease in interest rates.
Interest Expense, Net. Interest expense, net for the year ended December 31,
2021 decreased by $180 million , or 49%, to $191 million , compared to the year
ended December 31, 2020 , primarily due to the reduction in principal amounts
outstanding under our notes and term loans as well as a $61 million decrease in
the loss on the extinguishment of debt. Refer to Note 10, Debt, to the
consolidated financial statements for additional details.
Income Tax Benefit. During the year ended December 31, 2021 , we recognized a tax
benefit of $4 million on income from continuing operations before tax of $29
million , compared to a tax benefit of $112 million on a loss from continuing
operations before tax of $122 million for the year ended December 31, 2020 . The
effective tax rate during the year ended December 31, 2021 was primarily
attributable to the release of valuation allowances, mainly in relation to the
deductibility of deferred interest deductions, and a benefit related to the
reversal of deferred taxes on unremitted earnings. The effective tax rate during
the year ended December 31, 2020 was primarily attributable to the release of
valuation allowances, mainly in relation to the deductibility of deferred
interest deductions, and a benefit related to the carryback of the 2019 U.S.
federal taxable loss to a 35% tax rate year pursuant to the CARES Act.
Loss from Discontinued Operations, Net of Income Taxes. Loss from discontinued
operations, net of income taxes for the year ended December 31, 2021 represented
charges primarily related to certain historical tax agreements from previously
divested businesses. Loss from discontinued operations, net of income taxes for
the year ended December 31, 2020 included one month of results of our former RCP
segment and eight and a half months of results of our former GPC segment. Refer
to Note 3, Discontinued Operations, to the consolidated financial statements for
additional details.
Adjusted EBITDA from Continuing Operations. Adjusted EBITDA from continuing
operations for the year ended December 31, 2021 decreased by $84 million , or
14%, to $531 million compared to the year ended December 31, 2020 . The decrease
was primarily due to higher manufacturing, logistics and material costs, net of
higher costs passed through to customers. These higher costs were partially
offset by higher sales volume. Adjusted EBITDA for the year ended December 31,
2021 included $50 million of additional costs incurred related to the impact of
Winter Storm Uri.
Segment Information
Foodservice
For the Years Ended December 31,
(In millions, except for %) 2021 2020 Change % Change
Total segment net revenues $ 2,341 $ 1,811 $ 530 29 %
Segment Adjusted EBITDA $ 291 $ 241 $ 50 21 %
Segment Adjusted EBITDA margin 12 % 13 %
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Total Segment Net Revenues. Foodservice total segment net revenues for the year
ended December 31, 2021 increased by $530 million , or 29%, to $2,341 million
compared to the year ended December 31, 2020 . The increase was primarily due to
favorable pricing, primarily due to higher costs passed through to customers, as
well as higher sales volume due to markets reopening after initial COVID-19
restrictions. In addition, the acquisition of Fabri-Kal on October 1, 2021
contributed $106 million of incremental sales for the year ended December 31,
2021 as compared to the year ended December 31, 2020 .
Adjusted EBITDA. Foodservice Adjusted EBITDA for the year ended December 31,
2021 increased by $50 million , or 21%, to $291 million compared to the year
ended December 31, 2020 . The increase was primarily due to favorable pricing and
higher sales volume, partially offset by higher material, manufacturing and
logistics costs.
Food Merchandising
For the Years Ended December 31,
(In millions, except for %) 2021 2020 Change % Change
Total segment net revenues $ 1,531 $ 1,396 $ 135 10 %
Segment Adjusted EBITDA $ 232 $ 252 $ (20 ) (8 )%
Segment Adjusted EBITDA margin 15 % 18 %
Total Segment Net Revenues. Food Merchandising total segment net revenues for
the year ended December 31, 2021 increased by $135 million , or 10%, to $1,531
million compared to the year ended December 31, 2020 . The increase was primarily
due to favorable pricing, primarily due to higher costs passed through to
customers, partially offset by lower sales volumes, primarily due to labor
shortages.
Adjusted EBITDA. Food Merchandising Adjusted EBITDA for the year ended December
31, 2021 decreased by $20 million , or 8%, to $232 million compared to the year
ended December 31, 2020 . The decrease was primarily due to higher material
costs, net of higher costs passed through to customers, higher manufacturing and
logistics costs and lower sales volume.
Beverage Merchandising
For the Years Ended December 31,
(In millions, except for %) 2021 2020 Change % Change
Total segment net revenues $ 1,559 $ 1,469 $ 90 6 %
Segment Adjusted EBITDA $ 44 $ 148 $ (104 ) (70 )%
Segment Adjusted EBITDA margin 3 % 10 %
Total Segment Net Revenues. Beverage Merchandising total segment net revenues
for the year ended December 31, 2021 increased by $90 million , or 6%, to $1,559
million compared to the year ended December 31, 2020 . The increase was primarily
due to higher sales volume and favorable pricing due to the market recovery from
the COVID-19 pandemic.
Adjusted EBITDA. Beverage Merchandising Adjusted EBITDA for the year ended
December 31, 2021 decreased by $104 million , or 70%, to $44 million compared to
the year ended December 31, 2020 . The decrease was primarily driven higher
material, manufacturing and logistics costs, partially offset by favorable
pricing and higher sales volume. Manufacturing costs for the year ended December
31, 2021 included $37 million of additional costs incurred related to the impact
of Winter Storm Uri and $7 million incurred related to the impact of Tropical
Storm Fred.
Comparison of Results of Operations for 2020 with 2019
For a discussion of results of operations for 2020 compared to 2019, refer to Part II, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year endedDecember 31, 2020 .
Liquidity and Capital Resources
We believe that we have sufficient liquidity to support our ongoing operations and to invest in future growth to create value for our shareholders. Our projected operating cash flows, existing cash balances and available capacity under our revolving credit facility are our primary sources of liquidity for the next 12 months and are expected to be used for, among other things, capital expenditures, payment of interest and principal on our long-term debt obligations and distributions to shareholders that require approval by our Board of Directors. Additionally, we may continue to utilize long-term debt issuances for our funding requirements.
Cash provided by operating activities
Net cash from operating activities increased by$8 million to$261 million for the year endedDecember 31, 2021 compared to$253 million for the year endedDecember 31, 2020 . Cash provided by operating activities for the year endedDecember 31, 2020 included$175 million related to discontinued operations. The$183 million increase related to our continuing operations was primarily driven by$247 million of lower cash outflows related to interest payments and a$121 million contribution to the PEPP in 2020 that did not recur in 2021, partially offset by an unfavorable change in working capital balances and lower cash earnings. 42 --------------------------------------------------------------------------------
Cash used in investing activities
Net cash used in investing activities increased by$304 million to$658 million for the year endedDecember 31, 2021 , compared to$354 million for the year endedDecember 31, 2020 . Cash used in investing activities for the year endedDecember 31, 2020 included$122 million related to discontinued operations. The$426 million increase related to our continuing operations was primarily attributable to the$374 million acquisition ofFabri-Kal and$47 million of lower proceeds received from the sale of property, plant and equipment.
During the years ended
Cash provided by (used in) financing activities
Net cash from financing activities changed by$858 million to$147 million of cash provided by financing activities for the year endedDecember 31, 2021 compared to net cash used in financing activities of$711 million for the year endedDecember 31, 2020 . During the year endedDecember 31, 2021 , cash provided by financing activities primarily consisted of the incurrence of$1,504 million of debt, net of transaction costs, net of our repayment of$1,207 million ofU.S. term loans Tranche B-1, the$59 million redemption of the remaining portion of our 5.125% Notes and the payment of$71 million of dividends. During the year endedDecember 31, 2020 , cash used in financing activities was primarily attributable to the repayment of$8,944 million of our pre-existing debt and$110 million of cash held by RCP and GPC at the time of distribution, net of the incurrence of$7,812 million of debt, net of transaction costs, primarily attributable to the incurrence of debt by RCP and GPC immediately prior to distribution, and our proceeds of$569 million related to our IPO.
Dividends
We paid cash dividends of$71 million during the year endedDecember 31, 2021 , and there were no dividends paid during the year endedDecember 31, 2020 . Our Board of Directors approved a dividend of$0.10 per share onFebruary 22, 2022 to be paid onMarch 15, 2022 to shareholders of record as ofMarch 4, 2022 . Our Credit Agreement and Notes limit the ability to make dividend payments, subject to specified exceptions. Our Board of Directors must review and approve future dividend payments and will determine whether to declare additional dividends based on our operating performance, expected future cash flows, debt levels, liquidity needs and investment opportunities.
Debt and Liquidity
As ofDecember 31, 2021 , we had$4,279 million of total principal amount of borrowings. Refer to Note 10, Debt, to the consolidated financial statements and Risk Factors - Risks Relating to Liquidity and Indebtedness-We have significant debt, which could adversely affect our financial condition and ability to operate our business for additional details. Our 2022 annual cash interest obligations on our borrowings are expected to be approximately$180 million . As ofDecember 31, 2021 , the underlying one month LIBO rate for amounts under our Credit Agreement was 0.10%. As ofDecember 31, 2021 , we had$197 million of cash and cash equivalents on hand, with a further$17 million of cash and cash equivalents classified within current assets held for sale. We also had$206 million available for drawing under our revolving credit facility. We believe that our existing cash balances, projected operating cash flows together with our available capacity under our revolving credit facility are sufficient to fund our principal debt payments, interest expense, working capital needs and expected capital expenditures for the next 12 months. Our next significant near term maturity of borrowings is$276 million of Pactiv Debentures due inDecember 2025 . We currently anticipate incurring approximately$290 million of capital expenditures during fiscal year 2022. We do not currently anticipate that the COVID-19 pandemic will materially impact our liquidity over the next 12 months. Our ability to borrow under our revolving credit facility or our local working capital facilities or to incur additional indebtedness may be limited by the terms of such indebtedness or other indebtedness, including the Credit Agreement and the Notes. The Credit Agreement and the respective indentures governing the Notes generally allow our subsidiaries to transfer funds in the form of cash dividends, loans or advances within the Company. Under the Credit Agreement, we may incur additional indebtedness either by satisfying certain incurrence tests or by incurring such additional indebtedness under certain specific categories of permitted debt. Incremental senior secured indebtedness under the Credit Agreement and senior secured or unsecured notes in lieu thereof are permitted to be incurred up to an aggregate principal amount of$750 million subject to pro forma compliance with the Credit Agreement's total secured leverage ratio covenant. In addition, we may incur senior secured indebtedness in an unlimited amount as long as our total secured leverage ratio does not exceed 4.50 to 1.00 on a pro forma basis and (in the case of incremental senior secured indebtedness under the Credit Agreement only) we are in pro forma compliance with the Credit Agreement's total secured leverage ratio covenant. The incurrence of unsecured indebtedness, including the issuance of senior notes, and unsecured subordinated indebtedness is also permitted (subject to the terms of the Credit Agreement) if the fixed charge coverage ratio is at least 2.00 to 1.00 on a pro forma basis. Under the respective indentures governing the Notes, we may incur additional indebtedness either by satisfying certain incurrence tests or by incurring such additional indebtedness under certain specific categories of permitted debt. Indebtedness may be incurred under the 43 -------------------------------------------------------------------------------- incurrence tests if the fixed charge coverage ratio is at least 2.00 to 1.00 on a pro forma basis or the consolidated total leverage ratio is no greater than 5.50 to 1.00 and the liens securing first lien secured indebtedness do not exceed a 4.10 to 1.00 consolidated secured first lien leverage ratio. We are required to make annual prepayments of term loans with up to 50% of excess cash flow (which will be reduced to 25% or 0% if specified senior secured first lien leverage ratios are met) as determined in accordance with the Credit Agreement. No excess cash flow prepayments were made in 2019, 2020, 2021 or will be due in 2022 for the year endedDecember 31, 2021 .
Other Liquidity Matters
Material contractual obligations arising in the normal course of business primarily consist of long-term debt and related interest payments, leases, contributions for post-employment benefit obligations and unconditional capital expenditure obligations. We do not expect to make a contribution to the PEPP during the year endingDecember 31, 2022 . Expected contributions during the year endingDecember 31, 2022 for all other defined benefit plans are estimated to be$3 million . Future contributions to defined benefit plans will be dependent on future plan asset returns and interest rates and are highly sensitive to changes. Furthermore, as ofDecember 31, 2021 , our liabilities for pensions and uncertain tax positions totaled$52 million , and the ultimate timing of these liabilities cannot be determined. Refer to Note 10, Debt, Note 11, Leases, Note 13, Employee Benefits, and Note 17, Income Taxes, to the consolidated financial statements for additional details regarding our material contractual obligations.
Other than short-term leases entered into in the normal course of business, we have no material off-balance sheet obligations.
Critical Accounting Policies, Estimates and Assumptions
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and related notes. Critical accounting estimates are those that involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on our financial condition and results of operations. These assumptions affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the consolidated financial statements and the reported amounts of net revenues and expenses during the reporting period. Our most critical accounting policies and estimates are related to our defined benefit pension plans, goodwill and indefinite-lived intangible assets, other long-lived assets and income taxes. A summary of our significant accounting policies and use of estimates is contained in Note 2, Summary of Significant Accounting Policies, to the consolidated financial statements. We believe that the accounting estimates and assumptions described below involve significant subjectivity and judgment, and changes to such estimates or assumptions could have a material impact on our financial condition or operating results. Therefore, we consider an understanding of the variability and judgment required in making these estimates and assumptions to be critical to fully understanding and evaluating our reported financial results.
Employee Benefit Plans-Defined benefit retirement plans
We have several non-contributory defined benefit retirement plans. Our defined benefit pension obligations are concentrated in the PEPP, which, as ofDecember 31, 2021 , represented 98% of our defined benefit plan obligations. We assumed this plan in a business combination in 2010. As a result, while persons who are not current employees do not accrue benefits under this plan, the total number of beneficiaries covered by this plan is much larger than if it only provided benefits to our current and retired employees. We measure changes in funded status using actuarial models which utilize an attribution approach that generally spreads individual events either over the estimated service lives of the remaining employees in the plan or, for plans where participants will not earn additional benefits by rendering future service, over the plan participants' estimated remaining lives. Net pension and postretirement benefit income or expense is actuarially determined using assumptions which include expected long-term rates of return on plan assets, discount rates and mortality rates. We use a mix of actual historical rates, expected rates and external data to determine the assumptions used in the actuarial models. While we believe that our assumptions are reasonable and appropriate, significant differences in actual experience or inaccuracies in assumptions may materially affect our benefit plan obligations and future benefit plan expense. The discount rates utilized to measure the pension obligations use the yield on corporate bonds that are denominated in the currency in which the benefits will be paid, have maturity dates approximating the terms of our obligations and are based on the yield on high-quality bonds. Our largestU.S. benefit plan obligation is highly sensitive to changes in the discount rate. As a sensitivity measure, a fifty-basis point change in our discount rates or the expected rate of return on plan assets would have the following effects, increase/(decrease), on our benefit plans: As of December 31, 2021 Fifty-Basis-Point (In millions) Increase Decrease
Effect of change in discount rate on defined benefit obligation
$ (167 ) $ 183
Effect of change in discount rate on pension cost 11 (12 )
Effect of change in expected rate of return on plan
assets on pension cost (16 ) 16
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We test goodwill and indefinite-lived intangible assets for impairment on an annual basis in the fourth quarter and whenever events or circumstances indicate that the carrying value may not be recoverable. We may perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount.
Our reporting units for goodwill impairment testing purposes are Foodservice, Food Merchandising and Beverage Merchandising. The goodwill related to the remaining components of our former closures businesses was fully impaired during the third quarter of 2020. Refer to Note 5, Restructuring, Asset Impairment and Other Related Charges, to the consolidated financial statements for additional details. No instances of impairment were identified during the 2021 annual impairment review. However, future changes in the judgments, assumptions and estimates that are used in the impairment testing for goodwill as described below could result in significantly different estimates of the fair values, and a reasonably possible unexpected deterioration in financial performance may result in an impairment charge. In our evaluation of goodwill impairment, we may perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. As part of this assessment, we consider various factors, including the excess of prior year estimates of fair value compared to carrying value, the effect of market or industry changes and the reporting units' actual results compared to projected results. We may bypass the qualitative assessment for any reporting unit in any period and proceed directly with the quantitative calculation in Step 1, where we compare the estimated fair value of each reporting unit to its carrying value. If the estimated fair value of any reporting unit is less than its carrying value, an impairment charge would be recorded for the amount by which the reporting unit's carrying amount exceeds its fair value.
Indefinite-Lived Intangible Assets
Our indefinite-lived intangible assets consist primarily of certain trademarks. We test indefinite-lived intangible assets for impairment on an annual basis in the fourth quarter and whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. If the carrying amount of such asset exceeds its estimated fair value, an impairment charge is recorded for the difference between the carrying amount and the estimated fair value. When a quantitative test is performed, we use a relief from royalty computation under the income approach to estimate the fair value of our trademarks. This approach requires significant judgments in determining (i) the estimated future revenue from the use of the asset; (ii) the relevant royalty rate to be applied to these estimated future cash flows; and (iii) the appropriate discount rates applied to those cash flows to determine fair value. Changes in such estimates or the use of alternative assumptions could produce different results. No instances of impairment were identified during the 2021 annual impairment review in respect of the indefinite-lived intangible assets attributable to our segments. Each of our indefinite-lived intangible assets had fair values that significantly exceeded their recorded carrying values.
Long-Lived Assets
Long-lived assets, including finite-lived intangible assets, are reviewed for possible impairment whenever events or changes in circumstances occur that indicate that the carrying amount of an asset (or asset group) may not be recoverable. Our impairment review requires significant management judgment, including estimating the future success of product lines, future sales volumes, revenue and expense growth rates, alternative uses for the assets and estimated proceeds from the disposal of the assets. We review business plans for possible impairment indicators. Impairment is indicated when the carrying amount of the asset (or asset group) exceeds its estimated future undiscounted cash flows. When impairment is indicated, an impairment charge is recorded for the difference between the asset's carrying value and its estimated fair value. Depending on the asset, estimated fair value may be determined either by use of a discounted cash flow model or by reference to estimated selling values of assets in similar condition. The use of different assumptions would increase or decrease the estimated fair value of assets and would increase or decrease any impairment measurement. No instances of impairment were identified during 2021.
Income Taxes
Significant judgment is required in determining our worldwide income tax provision. In the ordinary course of an international business, there are many transactions and calculations where the ultimate tax outcome is uncertain. Some of these uncertainties arise from examinations in various jurisdictions and assumptions and estimates used in evaluating the need for a valuation allowance. We are subject to income taxes in both theU.S. and numerous foreign jurisdictions. We compute our provision for income taxes using the asset and liability method, under which deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities and for operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using the currently enacted tax rates that are expected to apply to taxable income for the years in which those tax assets and liabilities are expected to be realized or settled. Significant judgments are required in order to determine the expected realization of these deferred tax assets. In assessing the need for a valuation allowance, we evaluate all significant available positive and negative evidence, including historical operating results, estimates of future taxable income and the existence of prudent and feasible tax planning strategies. Changes in the expectations regarding the realization of deferred tax assets 45 -------------------------------------------------------------------------------- have in the past materially impacted our reported tax expense, and future changes in expectations could materially impact income tax expense in future periods. One of our largest deferred tax assets is generated from book to tax differences related to the treatment of interest expense, for which the deductibility for tax purposes is deferred. The future recoverability of this deferred tax asset is based on forecasted taxable income which includes the reversal of existing taxable temporary differences. We continuously review issues raised in connection with all ongoing examinations and open tax years to evaluate the adequacy of our tax liabilities. We evaluate uncertain tax positions under a two-step approach. The first step is to evaluate the uncertain tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained upon examination based on its technical merits. For those positions that meet the recognition criteria, the second step is to measure the tax benefit as the largest amount that is more than fifty percent likely of being realized. We believe our recorded tax liabilities are adequate to cover all open tax years based on our assessment. This assessment relies on estimates and assumptions and involves significant judgments about future events. To the extent that our view as to the outcome of these matters changes, we will adjust income tax expense in the period in which such determination is made. We classify interest and penalties related to income taxes as income tax expense.
Recent Accounting Pronouncements
New accounting guidance that we have recently adopted, as well as accounting
guidance that has been recently issued but not yet adopted by us, is included in
Note 2, Summary of Significant Accounting Policies, to the consolidated
financial statements.
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