PACTIV EVERGREEN INC. Our discussion and analysis is intended to help the reader understand our results of operations and financial condition and is provided as an addition to, and should be read in connection with, our condensed consolidated financial statements and the accompanying notes included elsewhere in this Quarterly Report on Form 10-Q.
Description of the Company and its Business Segments
We are a leading manufacturer and distributor of fresh foodservice and food merchandising products and fresh beverage cartons inNorth America . We produce a broad range of on-trend and feature-rich products that protect, package and display food and beverages for today's consumers. Our products, many of which are made with recycled, recyclable or renewable materials, are sold to a diversified mix of customers, including restaurants, foodservice distributors, retailers, food and beverage producers, packers and processors. We report our business in three reportable segments: Foodservice, Food Merchandising and Beverage Merchandising. Our Foodservice segment manufactures a broad range of products that enable consumers to eat and drink where they want and when they want with convenience. Our Food Merchandising segment manufactures products that protect and attractively display food while preserving freshness. Our Beverage Merchandising segment manufactures cartons for fresh refrigerated beverage products, primarily serving dairy (including plant-based, organic and specialties), juice and other specialty beverage end-markets.
Recent Developments and Items Impacting Comparability
Pension Partial Settlement Transactions
OnFebruary 24, 2022 , we purchased with$1,260 million of PEPP assets a non-participating group annuity contract from an insurance company and transferred$1,257 million of the PEPP's projected benefit obligations. 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, the PEPP's projected benefit obligations and plan assets were remeasured, and we recognized a non-cash pre-tax pension settlement gain of$10 million in the six months endedJune 30, 2022 . 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 the third quarter of 2021.
Fabri-Kal Acquisition
OnOctober 1, 2021 , we acquired 100% of the outstanding ownership interests ofFabri-Kal for a purchase price of$378 million , including final adjustments for cash, indebtedness and working capital of$2 million paid during the six months endedJune 30, 2022 .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 institutional foodservice and consumer packaged goods 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
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 . The transaction closed onAugust 2, 2022 , and we received preliminary proceeds of$336 million , which are subject to adjustments for cash, indebtedness and working capital as of the date of completion. We expect to recognize gain on sale in the third quarter of 2022. 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 affiliates of Elopak ASA. The transaction closed onMarch 29, 2022 , and we received preliminary proceeds of$47 million , which are subject to adjustments for cash, indebtedness and working capital as of the date of completion. We recognized a gain on the sale of our equity interests of$27 million during the six months endedJune 30, 2022 .
Neither of these dispositions qualifies for presentation as discontinued operations.
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--------------------------------------------------------------------------------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$1 million for disassembly costs in the three months endedJune 30, 2022 and$8 million for contractual termination benefits in the three months endedJune 30, 2021 .
Winter Storm Uri
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 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 total 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 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 of 2021. As further discussed in our Results of Operations, our cost of sales was impacted for the three and six months endedJune 30, 2021 as the products manufactured with this higher priced material were sold. 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 early part of 2021, prior to the widespread availability of vaccines during which various measures restricted consumer mobility, we experienced lower demand for our products and, as a result, decreased revenues. Our Foodservice segment experienced lower net revenues due to the closure or reduced activity of restaurants and other food-serving institutions. 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 sector, 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. Commencing in the second quarter of 2021, as the availability of vaccines and inoculation rates improved and measures that restricted consumer mobility were lifted, volumes improved in our business, most significantly in our Foodservice segment. 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.
How We Assess the Performance of Our Business and Use of Non-GAAP Measures
In addition to financial measures determined in accordance with GAAP, we make
use of the non-GAAP financial measure Adjusted EBITDA from continuing operations
to evaluate and manage our business and to plan and make near-term and long-term
operating and strategic decisions.
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--------------------------------------------------------------------------------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
and integration costs and purchase accounting adjustments, unrealized gains or
losses on derivatives, foreign exchange gains or losses on cash, executive
transition charges and gains or losses on certain legal settlements.
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 periods indicated:
For the Three Months Ended For the Six Months Ended
June 30, June 30,
(In millions) 2022 2021 2022 2021
Net income (loss) from continuing
operations (GAAP) $ 74 $ 8 $ 117 $ (3 )
Income tax expense (benefit) 45 5 81 (13 )
Interest expense, net 50 42 99 84
Depreciation and amortization 86 77 170 150
Restructuring, asset impairment and other
related charges(1) 1 10 1 8
Gain on sale of businesses and noncurrent
assets(2) - - (27 ) -
Non-cash pension expense (income)(3) 2 (25 ) (8 ) (48 )
Operational process engineering-related
consultancy costs(4) 1 7 4 10
Business acquisition and integration costs
and purchase accounting adjustments(5) 2 - 6 -
Unrealized (gains) losses on
derivatives(6) (1 ) 3 (6 ) 4
Foreign exchange losses on cash(7) - 1 2 1
Executive transition charges(8) 2 - 2 10
Gain on legal settlement(9) (15 ) - (15 ) -
Costs associated with legacy sold
facility(10) 3 - 6 -
Other (1 ) 2 (1 ) 4
Adjusted EBITDA from continuing operations
(Non-GAAP) $ 249 $ 130 $ 431 $ 207
(1)
Reflects restructuring, asset impairment and other related charges (net of
reversals) primarily associated with our closure of Beverage Merchandising's
coated groundwood operations. Refer to Note 3, Restructuring, Asset Impairment
and Other Related Charges, for additional details.
(2)
Reflects the gain from the sale of businesses and noncurrent assets, primarily related to the sale of our equity interests inNaturepak Beverage Packaging Co. Ltd. Refer to Note 2, Acquisitions and Dispositions, for additional details.
(3)
Reflects the non-cash pension expense (income) related to our employee benefit plans, including the pension settlement gain of$10 million recognized during the six months endedJune 30, 2022 . Refer to Note 10, Employee Benefits, for additional details.
(4)
Reflects the costs incurred to evaluate and improve the efficiencies of our manufacturing and distribution operations.
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--------------------------------------------------------------------------------(5)
Reflects integration costs related to the acquisition of
(6)
Reflects the mark-to-market movements in our commodity derivatives. Refer to Note 9, Financial Instruments, for additional details.
(7)
Reflects foreign exchange losses on cash, primarily on
(8)
Reflects charges relating to key executive retirement and separation agreements in the first half of 2021 and in the second quarter of 2022.
(9)
Reflects the gain, net of costs, arising from the settlement of a historical legal action.
(10)
Reflects costs related to a closed facility, sold prior to our acquisition of the entity.
Results of Operations Three Months EndedJune 30, 2022 compared with the Three Months EndedJune 30, 2021 Consolidated Results For the Three Months Ended June 30, % of % of (In millions, except for %) 2022 Revenue 2021 Revenue Change % Change Net revenues$ 1,640 100 %$ 1,352 100 %$ 288 21 % Cost of sales (1,332 ) (81 )% (1,202 ) (89 )% (130 ) (11 )% Gross profit 308 19 % 150 11 % 158 105 % Selling, general and administrative expenses (148 ) (9 )% (115 ) (9 )% (33 ) (29 )% Restructuring, asset impairment and other related charges (1 ) - % (10 ) (1 )% 9 90 % Other income, net 12 1 % 5 - % 7 NM Operating income from continuing operations 171 10 % 30 2 % 141 NM Non-operating (expense) income, net (2 ) - % 25 2 % (27 ) NM Interest expense, net (50 ) (3 )% (42 ) (3 )% (8 ) (19 )% Income from continuing operations before tax 119 7 % 13 1 % 106 NM Income tax expense (45 ) (3 )% (5 ) - % (40 ) NM Income from continuing operations 74 5 % 8 1 % 66 NM Loss from discontinued operations, net of income taxes - (1 ) 1 Net income$ 74 $ 7 $ 67 Adjusted EBITDA from continuing operations(1)$ 249 15 %$ 130 10 %$ 119 92 % (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.
NM indicates that the calculation is "not meaningful".
Components of Change in Reportable Segment Net Revenues for the Three Months
Ended
Price/Mix Volume Acquisitions FX Total
Net revenues 23 % (10 )% 9 % (1 )% 21 %
By reportable segment:
Foodservice 27 % (9 )% 21 % - % 39 %
Food Merchandising 20 % (6 )% - % - % 14 %
Beverage Merchandising 19 % (9 )% - % (1 )% 9 %
Net Revenues. Net revenues for the three months ended June 30, 2022 increased by
$288 million , or 21%, to $1,640 million compared to the three months ended June
30, 2021 . The increase was primarily due to favorable pricing, due to the
contractual pass-through of higher material costs and pricing actions across all
of our segments. In addition, the Foodservice segment's acquisition of Fabri-Kal
on October 1, 2021 contributed $121 million of incremental sales for the three
months ended June 30, 2022 as compared to the three months ended June 30, 2021 .
These increases were partially offset by lower sales volume, primarily due to
strong prior year period sales volume as businesses and restaurants re-opened
post-COVID-19 lockdowns in our Foodservice segment, labor and related impacts in
our Food Merchandising segment and our strategic exit from the coated groundwood
business in our Beverage Merchandising segment in December 2021 .
Cost of Sales. Cost of sales for the three months ended June 30, 2022 increased
by $130 million , or 11%, to $1,332 million compared to the three months ended
June 30, 2021 . The increase was primarily due to higher material and
manufacturing costs
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across all of our segments as well as the Foodservice segment's acquisition of
Selling, General and Administrative Expenses. Selling, general and administrative expenses for the three months endedJune 30, 2022 increased by$33 million , or 29%, to$148 million compared to the three months endedJune 30, 2021 . The increase was primarily due to higher employee-related costs and higher costs related to the Foodservice segment's acquisition ofFabri-Kal . Restructuring, Asset Impairment and Other Related Charges. Restructuring, asset impairment and other related charges for the three months endedJune 30, 2022 andJune 30, 2021 included a$1 million and$8 million charge, respectively, related to our strategic exit from the coated groundwood operations. Refer to Note 3, Restructuring, Asset Impairment and Other Related Charges, for additional details. Other Income, Net. Other income, net for the three months endedJune 30, 2022 increased by$7 million to$12 million compared to the three months endedJune 30, 2021 . The increase was primarily attributable to the$15 million gain, net of costs, arising from the settlement of a historical legal action, partially offset by lower transition service agreement income. Non-operating (Expense) Income, Net. Non-operating (expense) income, net, for the three months endedJune 30, 2022 was$2 million of expense compared to$25 million of income for the three months endedJune 30, 2021 . The change reflects the net impact of lower gross plan assets and liabilities due to the completion of multiple pension partial settlement transactions as well as a decrease in the expected return on assets and in increase in discount rates due to changes in market conditions. Interest Expense, Net. Interest expense, net, for the three months endedJune 30, 2022 increased by$8 million , or 19%, to$50 million , compared to the three months endedJune 30, 2021 . The increase was primarily due to an increase in principal amounts outstanding under our senior secured notes. Refer to Note 8, Debt, for additional details. Income Tax Expense. During the three months endedJune 30, 2022 , we recognized a tax expense of$45 million on income from continuing operations before tax of$119 million , compared to tax expense of$5 million on income from continuing operations before tax of$13 million for the three months endedJune 30, 2021 . The effective tax rate during the three months endedJune 30, 2022 was primarily attributable to our overall projected earnings subject to taxation at varying rates in the jurisdictions in which we operate and limitations on the ability to recognize a tax benefit on all interest expense. The effective tax rate during the three months endedJune 30, 2021 was primarily attributable to our overall projected earnings subject to taxation at varying rates in the jurisdictions in which we operate. Adjusted EBITDA from Continuing Operations. Adjusted EBITDA from continuing operations for the three months endedJune 30, 2022 increased by$119 million to$249 million compared to the three months endedJune 30, 2021 . The increase reflects favorable pricing, net of raw material costs passed through, and the impact from the acquisition ofFabri-Kal , partially offset by higher manufacturing and employee-related costs and lower sales volume. Segment Information Foodservice For the Three Months Ended June 30, (In millions, except for %) 2022 2021 Change % Change Total segment net revenues$ 791 $ 571 $ 220 39 % Segment Adjusted EBITDA$ 165 $ 62 $ 103 166 % Segment Adjusted EBITDA margin 21 % 11 % Total Segment Net Revenues. Foodservice total segment net revenues for the three months endedJune 30, 2022 increased by$220 million , or 39%, to$791 million compared to the three months endedJune 30, 2021 . The increase was primarily due to favorable pricing, due to the contractual pass-through of higher material costs and pricing actions taken to offset higher input costs. In addition, the acquisition ofFabri-Kal onOctober 1, 2021 contributed$121 million of incremental sales for the three months endedJune 30, 2022 as compared to the three months endedJune 30, 2021 . These increases were partially offset by lower sales volume as the prior year period had strong sales volume as businesses and restaurants re-opened post-COVID-19 lockdowns. Adjusted EBITDA. Foodservice Adjusted EBITDA for the three months endedJune 30, 2022 increased by$103 million to$165 million compared to the three months endedJune 30, 2021 . The increase was primarily due to favorable pricing, net of material costs passed through, and the impact from the acquisition ofFabri-Kal , partially offset by higher manufacturing costs, lower sales volume and higher employee-related costs. 31 --------------------------------------------------------------------------------
Food Merchandising
For the Three Months Ended June 30,
(In millions, except for %) 2022 2021 Change % Change
Total segment net revenues $ 444 $ 388 $ 56 14 %
Segment Adjusted EBITDA $ 78 $ 59 $ 19 32 %
Segment Adjusted EBITDA margin 18 % 15 %
Total Segment Net Revenues. Food Merchandising total segment net revenues for
the three months ended June 30, 2022 increased by $56 million , or 14%, to $444
million compared to the three months ended June 30, 2021 . The increase was
primarily due to favorable pricing, due to pricing actions taken to offset
higher input costs and the contractual pass-through of higher material costs,
partially offset by lower sales volume, primarily due to labor and related
impacts.
Adjusted EBITDA. Food Merchandising Adjusted EBITDA for the three months ended
June 30, 2022 increased by $19 million , or 32%, to $78 million compared to the
three months ended June 30, 2021 . The increase was primarily due to favorable
pricing, net of material costs passed through, partially offset by higher
manufacturing costs and lower sales volume.
Beverage Merchandising
For the Three Months Ended June 30,
(In millions, except for %) 2022 2021 Change % Change
Total segment net revenues $ 420 $ 387 $ 33 9 %
Segment Adjusted EBITDA $ 29 $ 15 $ 14 93 %
Segment Adjusted EBITDA margin 7 % 4 %
Total Segment Net Revenues. Beverage Merchandising total segment net revenues
for the three months ended June 30, 2022 increased by $33 million , or 9%, to
$420 million compared to the three months ended June 30, 2021 . The increase was
primarily due to favorable pricing, due to pricing actions taken to offset
higher input costs and the contractual pass-through of higher material costs,
and favorable product mix. These increases were partially offset by lower sales
volume, primarily due to our strategic exit from the coated groundwood business
in December 2021 .
Adjusted EBITDA. Beverage Merchandising Adjusted EBITDA for the three months
ended June 30, 2022 increased by $14 million , or 93%, to $29 million compared to
the three months ended June 30, 2021 . The increase was primarily due to
favorable pricing, net of material costs passed through, partially offset by
higher manufacturing costs, including $11 million due to a scheduled annual pulp
mill outage, higher employee-related costs and lower sales volume.
Six Months Ended June 30, 2022 compared with the Six Months Ended June 30, 2021
Consolidated Results
For the Six Months Ended June 30,
% of % of
(In millions, except for %) 2022 Revenue 2021 Revenue Change % Change
Net revenues $ 3,135 100 % $ 2,516 100 % $ 619 25 %
Cost of sales (2,595 ) (83 )% (2,258 ) (90 )% (337 ) (15 )%
Gross profit 540 17 % 258 10 % 282 109 %
Selling, general and
administrative expenses (290 ) (9 )% (241 ) (10 )% (49 ) (20 )%
Restructuring, asset impairment
and other related charges (1 ) - % (8 ) - % 7 88 %
Other income, net 40 1 % 11 - % 29 NM
Operating income from continuing
operations 289 9 % 20 1 % 269 NM
Non-operating income, net 8 - % 48 2 % (40 ) (83 )%
Interest expense, net (99 ) (3 )% (84 ) (3 )% (15 ) (18 )%
Income (loss) from continuing
operations before tax 198 6 % (16 ) (1 )% 214 NM
Income tax (expense) benefit (81 ) (3 )% 13 1 % (94 ) NM
Income (loss) from continuing
operations 117 4 % (3 ) - % 120 NM
Loss from discontinued
operations, net of income taxes - (4 ) 4
Net income (loss) $ 117 $ (7 ) $ 124
Adjusted EBITDA from continuing
operations(1) $ 431 14 % $ 207 8 % $ 224 108 %
(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.
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Components of Change in Reportable Segment Net Revenues for the Six Months Ended
Price/Mix Volume Acquisitions Total
Net revenues 24 % (8 )% 9 % 25 %
By reportable segment:
Foodservice 29 % (6 )% 22 % 45 %
Food Merchandising 22 % (6 )% - % 16 %
Beverage Merchandising 18 % (7 )% - % 11 %
Net Revenues. Net revenues for the six months ended June 30, 2022 increased by
$619 million , or 25%, to $3,135 million compared to the six months ended June
30, 2021 . The increase was primarily due to favorable pricing, due to the
contractual pass-through of higher material costs and pricing actions across all
of our segments. In addition, the Foodservice segment's acquisition of Fabri-Kal
on October 1, 2021 contributed $223 million of incremental sales for the six
months ended June 30, 2022 as compared to the six months ended June 30, 2021 .
These increases were partially offset by lower sales volume, primarily due to
strong sales volume in the prior year period as businesses and restaurants
re-opened post-COVID-19 lockdowns in our Foodservice segment, labor and related
impacts in our Food Merchandising segment and our strategic exit from the coated
groundwood business in our Beverage Merchandising segment in December 2021 .
Cost of Sales. Cost of sales for the six months ended June 30, 2022 increased by
$337 million , or 15%, to $2,595 million compared to the six months ended June
30, 2021 . The increase was primarily due to higher material, manufacturing and
logistics costs across all of our segments, partially offset by the benefit
related to prior year period costs of $50 million from Winter Storm Uri and $16
million due to a scheduled cold mill outage that did not recur, as well as the
Foodservice segment's acquisition of Fabri-Kal . These increases were partially
offset by lower sales volume.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the six months ended June 30, 2022 increased by $49
million , or 20%, to $290 million compared to the six months ended June 30, 2021 .
The increase was primarily due to higher employee-related costs and higher costs
related to the Foodservice segment's acquisition of Fabri-Kal .
Restructuring, Asset Impairment and Other Related Charges. Restructuring, asset
impairment and other related charges for the six months ended June 30, 2022 and
June 30, 2021 included a $1 million and $8 million charge, respectively, related
to our strategic exit from the coated groundwood operations. Refer to Note 3,
Restructuring, Asset Impairment and Other Related Charges, for additional
details.
Other Income, Net. Other income, net for the six months ended June 30, 2022
increased by $29 million to $40 million compared to the six months ended June
30, 2021 . The increase was primarily attributable to the $27 million gain on the
sale of our equity interests in Naturepak Beverage Packaging Co. Ltd. and the
$15 million gain, net of costs, arising from the settlement of a historical
legal action, partially offset by lower transition service agreement income.
Non-operating Income, Net. Non-operating income, net, for the six months ended
June 30, 2022 decreased by $40 million , or 83%, to $8 million compared to $48
million for the six months ended June 30, 2021 . The decrease reflects the net
impact of lower gross plan assets and liabilities due to the completion of
multiple pension partial settlement transactions as well as a decrease in the
expected return on assets and in increase in discount rates due to changes in
market conditions. Non-operating income, net for the six months ended June 30,
2022 also included a $10 million pension settlement gain.
Interest Expense, Net. Interest expense, net, for the six months ended June 30,
2022 increased by $15 million , or 18%, to $99 million , compared to the six
months ended June 30, 2021 , primarily due to a net increase in principal amounts
outstanding under our senior secured notes and an increase in the interest rate
on our floating rate term loans. Refer to Note 8, Debt, for additional details.
Income Tax (Expense) Benefit. During the six months ended June 30, 2022 , we
recognized a tax expense of $81 million on income from continuing operations
before tax of $198 million , compared to tax benefit of $13 million on a loss
from continuing operations before tax of $16 million for the six months ended
June 30, 2021 . The effective tax rate during the six months ended June 30, 2022
was driven primarily by a $14 million discrete expense from the sale of our
equity interests in Naturepak Beverage Packaging Co. Ltd. , as well as the mix of
income taxed at varying rates among the jurisdictions in which we operate and
the inability to recognize a tax benefit on all interest expense. The effective
tax rate during the six months ended June 30, 2021 was primarily attributable to
the partial release of our valuation allowance for deferred interest deductions,
which was partially offset by varying tax rates among the jurisdictions in which
we operate.
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Adjusted EBITDA from Continuing Operations. Adjusted EBITDA from continuing
operations for the six months ended June 30, 2022 increased by $224 million to
$431 million compared to the six months ended June 30, 2021 . The increase
reflects favorable pricing, net of material costs passed through, and the impact
from the acquisition of Fabri-Kal , partially offset by higher manufacturing
costs, lower sales volume and higher employee-related and logistics costs. The
increase in Adjusted EBITDA also includes the benefit related to prior year
period costs of $50 million from Winter Storm Uri.
Segment Information
Foodservice
For the Six Months Ended June 30,
(In millions, except for %) 2022 2021 Change % Change
Total segment net revenues $ 1,488 $ 1,025 $ 463 45 %
Segment Adjusted EBITDA $ 281 $ 123 $ 158 128 %
Segment Adjusted EBITDA margin 19 % 12 %
Total Segment Net Revenues. Foodservice total segment net revenues for the six
months ended June 30, 2022 increased by $463 million , or 45%, to $1,488 million
compared to the six months ended June 30, 2021 . The increase was primarily due
to favorable pricing, due to the contractual pass-through of higher material
costs and pricing actions taken to offset higher input costs. In addition, the
acquisition of Fabri-Kal on October 1, 2021 contributed $223 million of
incremental sales for the six months ended June 30, 2022 as compared to the six
months ended June 30, 2021 . These increases were partially offset by lower sales
volume, primarily due to strong sales volume in the prior year period as
businesses and restaurants re-opened post-COVID-19 lockdowns.
Adjusted EBITDA. Foodservice Adjusted EBITDA for the six months ended June 30,
2022 increased by $158 million to $281 million compared to the six months ended
June 30, 2021 . The increase was primarily due to favorable pricing, net of
material costs passed through, and the impact from the acquisition of Fabri-Kal ,
partially offset by higher manufacturing costs, lower sales volume and higher
employee-related costs.
Food Merchandising
For the Six Months Ended June 30,
(In millions, except for %) 2022 2021 Change % Change
Total segment net revenues $ 848 $ 730 $ 118 16 %
Segment Adjusted EBITDA $ 138 $ 114 $ 24 21 %
Segment Adjusted EBITDA margin 16 % 16 %
Total Segment Net Revenues. Food Merchandising total segment net revenues for
the six months ended June 30, 2022 increased by $118 million , or 16%, to $848
million compared to the six months ended June 30, 2021 . The increase was
primarily due to favorable pricing, due to the contractual pass-through of
higher material costs and pricing actions taken to offset higher input costs,
partially offset by lower sales volume, primarily due to labor and related
impacts.
Adjusted EBITDA. Food Merchandising Adjusted EBITDA for the six months ended
June 30, 2022 increased by $24 million , or 21%, to $138 million compared to the
six months ended June 30, 2021 . The increase was primarily due to favorable
pricing, net of material costs passed through, partially offset by higher
manufacturing costs, lower sales volume and higher logistics and
employee-related costs.
Beverage Merchandising
For the Six Months Ended June 30,
(In millions, except for %) 2022 2021 Change % Change
Total segment net revenues $ 823 $ 744 $ 79 11 %
Segment Adjusted EBITDA $ 53 $ (17 ) $ 70 NM
Segment Adjusted EBITDA margin 6 % (2 )%
Total Segment Net Revenues. Beverage Merchandising total segment net revenues
for the six months ended June 30, 2022 increased by $79 million , or 11%, to $823
million compared to the six months ended June 30, 2021 . The increase was
primarily due to favorable pricing, due to pricing actions taken to offset
higher input costs and the contractual pass-through of higher material costs,
and favorable product mix. These increases were partially offset by lower sales
volume, primarily due to our strategic exit from the coated groundwood business
in December 2021 .
Adjusted EBITDA. Beverage Merchandising Adjusted EBITDA for the six months ended
June 30, 2022 increased by $70 million to $53 million compared to the six months
ended June 30, 2021 . The increase reflects favorable pricing, net of material
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costs passed through, and the benefit related to prior year period costs of
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, cash proceeds received from the sale of Beverage Merchandising Asia inAugust 2022 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 provided by operating activities increased by$44 million to$166 million for the six months endedJune 30, 2022 compared to$122 million for the six months endedJune 30, 2021 . The increase was primarily driven by higher cash earnings and favorable changes in accounts payable, accrued expenses and accounts receivable balances. These increases were partially offset by planned inventory build activity,$67 million of higher tax payments due to the comparative period including the receipt of a refund and higher interest payments.
Cash used in investing activities
Net cash used in investing activities decreased by$68 million to$69 million for the six months endedJune 30, 2022 compared to$137 million for the six months endedJune 30, 2021 . The decrease was primarily attributable to$47 million of cash received from the sale of our equity interests inNaturepak Beverage Packaging Co. Ltd. Property, plant and equipment additions were$114 million during the six months endedJune 30, 2022 , compared to$131 million during the six months endedJune 30, 2021 , with the decrease reflecting the timing of spend.
Cash used in financing activities
Net cash used in financing activities decreased by$49 million to$53 million for the six months endedJune 30, 2022 compared to$102 million for the six months endedJune 30, 2021 . The decrease was primarily attributable to the$59 million redemption of the remaining portion of our 5.125% senior secured notes during the six months endedJune 30, 2021 .
Dividends
We paid cash dividends of
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 of
Our 2022 annual cash interest obligations on our borrowings are expected to be approximately$201 million . As ofJune 30, 2022 , the underlying one month LIBO rate for amounts borrowed under our Credit Agreement was 1.67%. As ofJune 30, 2022 , we had$246 million of cash and cash equivalents on hand, with a further$9 million of cash and cash equivalents classified within current assets held for sale and we received$336 million of preliminary cash proceeds from our sale of Beverage Merchandising Asia inAugust 2022 . 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$265 million of capital expenditures during fiscal year 2022. 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 35 -------------------------------------------------------------------------------- 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 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 2021 or will be due in 2022 for the year endedDecember 31, 2021 .
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 most critical accounting policies and estimates are those that are most important to the portrayal of our financial condition and results of operations and require us to make the most difficult and subjective judgments, often estimating the outcome of future events that are inherently uncertain. Our significant accounting policies are described in Note 2, Summary of Significant Accounting Policies, to our consolidated financial statements in our Annual Report on Form 10-K for the year endedDecember 31, 2021 . Our critical accounting estimates are described in 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, 2021 .
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 1, Nature of Operations and Basis of Presentation.
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