REYNOLDS CONSUMER PRODUCTS INC. Our management's 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 consolidated financial statements and the accompanying notes included elsewhere in this Annual Report on Form 10-K. Tabular dollars are presented in millions.
Description of the Company and its Business Segments
We are a market-leading consumer products company with a presence in 95% of
households across the United States . We produce and sell products across three
broad categories: cooking products, waste & storage products and tableware. We
sell our products under iconic brands such as Reynolds and Hefty and also under
store brands that are strategically important to our customers. Overall, across
both our branded and store brand offerings, we hold the #1 or #2 U.S. market
share position in the majority of product categories in which we participate. We
have developed our market-leading position by investing in our product
categories and consistently developing innovative products that meet the
evolving needs and preferences of the modern consumer.
Our mix of branded and store brand products is a key competitive advantage that aligns our goal of growing the overall product category with our customers' goals and positions us as a trusted strategic partner to our retailers. Our Reynolds and Hefty brands have preeminent positions in their categories and carry strong brand recognition in household aisles.
We manage our operations in four operating and reportable segments: Reynolds Cooking & Baking, Hefty Waste & Storage, Hefty Tableware and Presto Products:
• Reynolds Cooking & Baking: Through our Reynolds Cooking & Baking segment, we
produce branded and store brand foil, disposable aluminum pans, parchment
paper, freezer paper, wax paper, plastic wrap, baking cups, oven bags and
slow cooker liners. Our branded products are sold under the Reynolds Wrap,
Reynolds KITCHENS and E-Z Foil brands in
international markets, under the ALCAN brand in
brand outside of
• Hefty Waste & Storage: Through our Hefty Waste & Storage segment, we produce
both branded and store brand trash and food storage bags. Our products are
sold under the Hefty Ultra Strong, Hefty Strong Trash Bags, Hefty Renew and
Hefty Slider Bags brands.
• Hefty Tableware: Through our Hefty Tableware segment, we sell both branded
and store brand disposable and compostable plates, bowls, platters, cups and
cutlery. Our Hefty branded products include dishes and party cups.
• Presto Products: Through our Presto Products segment, we primarily sell
store brand products in four main categories: food storage bags, trash bags,
reusable storage containers and plastic wrap. Our Presto Products segment
also includes our specialty business, which serves other consumer products
companies by providing Fresh-Lock and Slide-Rite resealable closure systems.
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."
Consumer Demand for our Products
Our business is largely impacted by the demands of our customers, and our
success depends on our ability to anticipate and respond to changes in consumer
preferences. Our products are household staples with a presence in 95% of
households across
We also expect that consumers' desire for convenience will continue to sustain demand for our products. Today's consumers are focused on convenience, which extends into household products that improve ease of use and provide time savings, and they are willing to pay a higher price for innovative features and functionality. While advanced features are already prevalent in many of our products, we intend to continue investing in product development to accommodate the convenience-oriented lifestyles of today's consumers. Furthermore, while many consumers still prefer to purchase branded products, they are becoming increasingly comfortable purchasing store brand products across broader product categories. Branded products and store brand products accounted for 63% and 37% of our revenue, excluding business-to-business revenue, respectively, in the year endedDecember 31, 2020 . We intend to continue investing in both our branded and store brand products to grow the entire product category. Our scale across household aisles and ability to offer both branded and store brand products enable us to grow the overall category. Through our category captain level advisor roles with our retail partners, we offer marketing and consumer shopping strategies, both in store and online, which expand usage occasions and stimulate consumption. 28 --------------------------------------------------------------------------------
Raw Material, Energy and Freight Price Fluctuations
Our business is impacted by fluctuations in the prices of the raw materials, energy and freight costs incurred in manufacturing and distributing our products as well as fluctuations in logistics costs related thereto. The primary raw materials used to manufacture our products are plastic resins and aluminum, and we also use commodity chemicals and energy. We are exposed to commodity and other price risk principally from the purchase of resin, aluminum, natural gas, electricity, carton board and diesel. We distribute our products and receive raw materials primarily by rail and truck, which exposes us to fluctuations in freight and handling costs caused by reduced rail and trucking capacity. Sales contracts for our products typically do not contain pass-through mechanisms for raw material, energy and freight cost changes, but we adjust prices, where possible, in response to such price fluctuations. Resin prices have historically fluctuated with changes in the prices of crude oil and natural gas, as well as changes in refining capacity and the demand for other petroleum-based products. Aluminum prices have also historically fluctuated, as aluminum is a cyclical commodity with prices subject to global market factors. Raw material costs have also been impacted by governmental actions, such as tariffs and trade sanctions. Purchases of most of our raw materials are based on negotiated rates with suppliers, which are linked to published indices. Typically, we do not enter into long-term purchase contracts that provide for fixed quantities or prices for our principal raw materials. We use various strategies to manage our cost exposures on certain raw material purchases, and we use naturally established forecast cycles to influence the purchase of raw materials. In addition, from time to time we have entered into hedging agreements, including commodity derivative contracts, to hedge commodity prices primarily related to aluminum, diesel and benzene with the objective of obtaining more predictable costs for these commodities. The realized and unrealized gains or losses arising from commodity derivative instruments are recognized in cost of sales. Furthermore, since we distribute our products and receive raw materials primarily by rail and truck, reduced availability of rail or trucking capacity and fluctuations in freight and handling costs have caused us to incur increased expenses in certain prior periods. Where possible, we also adjust the prices of our products in response to fluctuations in production and distribution costs.
Our operating results are also impacted by energy-related cost movements, including those impacting both our manufacturing operations and transportation and utility costs.
Competitive Environment We operate in a marketplace influenced by large retailers with strong negotiating power over their suppliers. Current trends among these large retailers include increased demand for innovative new products from suppliers, requiring suppliers to maintain or reduce product prices and to deliver products within shorter lead times. We also face the threat of competition from new entrants to our markets as well as from existing competitors, including those overseas who may have lower production costs. In addition, the timing and amount in which our competitors invest in advertising and promotional spending may vary from quarter to quarter and impact our sales volumes and financial results. See "Business - Competition" for more detail on our competitors.
Seasonality
Portions of our business historically have been moderately seasonal. Overall, our strongest sales are in our fourth quarter and our weakest sales are in our first quarter. This is driven by higher levels of sales of cooking products around majorU.S. holidays in our fourth quarter, primarily due to the holiday use of Reynolds Wrap, Reynolds Oven Bags andReynolds Parchment Paper . Our tableware products generally have higher sales in the second quarter of the year, primarily due to outdoor summertime use of disposable plates, cups and bowls, however, our tableware products seasonality trends in 2020 were different from historical seasonality trends due to fewer social gatherings as a result of COVID-19. Sustainability Interest in environmental sustainability has increased over the past decade, and we expect that this may play an increasing role in consumer purchasing decisions. For instance, there have been recent concerns about the environmental impact of single-use disposable products and products made from plastic, particularly polystyrene foam, affecting our products, especially our Hefty Tableware segment. While there is a focus on environmentally friendly products, survey results indicate that in most of our product categories, consumers continue to rank performance-related purchase criteria, such as durability and ease of use, followed by price, as top considerations, rather than sustainability. As our consumers may shift towards purchasing more sustainable products, we have focused much of our innovation efforts around sustainability. We offer a broad line of products made with recycled, renewable, recyclable and compostable materials. We intend to continue sustainability innovation in our efforts to be at the leading edge of recyclability, renewability and compostability in order to offer our customers environmentally sustainable choices. 29 -------------------------------------------------------------------------------- Our Separation fromPEI Group (previously known asRGHL Group ) Prior to our Corporate Reorganization and IPO completed onFebruary 4, 2020 , we operated as part ofPEI Group's broader corporate organization rather than as a stand-alone public company.PEI Group performed or supported various corporate services for us, including executive management, supply chain, information technology, legal, finance and accounting, human resources, risk management, tax, treasury and other services. In addition, we have sold products to, and purchased products from,PEI Group . Historically, these transactions involvingPEI Group may not have always been consummated on terms equivalent to those in an arm's-length transaction. Sales toPEI Group of products that we manufacture have been reflected as related party net revenues in our consolidated financial statements. Certain related party transactions are reflected as related party receivables and payables in our consolidated balance sheets and are settled in cash. Prior to our Corporate Reorganization and IPO, certain related party transactions withPEI Group were settled by either non-cash capital contributions fromPEI Group to us or non-cash capital distributions from us and were included as part ofPEI Group's net investment in our balance sheet. We also utilize manufacturing and warehousing facilities and resources managed byPEI Group to conduct our business. The expenses associated with these transactions are included in cost of sales in our consolidated statements of income. We believe that the assumptions and methodologies underlying the allocation of these expenses fromPEI Group are reasonable. However, such allocations do not necessarily reflect what the results of operations and financial position would have been had we operated as a stand-alone public company during the periods presented. In conjunction with our separation fromPEI Group , we entered into a transition services agreement with a subsidiary ofPEI Group wherebyPEI Group will continue to provide certain administrative services to us, including information technology services; accounting, treasury, financial reporting and transaction support; human resources; procurement; tax, legal and compliance related services; and other corporate services for up to 24 months beginning onFebruary 4, 2020 . In addition, we entered into a transition services agreement with Rank Group Limited whereby, upon our request,Rank Group Limited will provide certain administrative services to us, including financial reporting, consulting and compliance services, insurance procurement and human resources support, legal and corporate secretarial support, and related services for up to 24 months. At the conclusion of these transitional arrangements, we will have to perform these services with internal resources or contract with third party providers. The previous arrangements we had withPEI Group may be materially different from the arrangements that we have entered into as part of our separation fromPEI Group . OnFebruary 4, 2020 , in conjunction with our Corporate Reorganization and IPO, we entered into new external debt facilities ( "External Debt Facilities"), consisting of a$2,475 million senior secured term loan facility ("Term Loan Facility") and a$250 million senior secured revolving credit facility ("Revolving Facility"), and repaid portions of the related party borrowings owed toPEI Group that were reflected on our balance sheet prior to that date.PEI Group contributed the remaining balance of related party borrowings owed by us toPEI Group as additional paid-in capital without the issuance of any additional shares prior to the closing of our IPO. In addition, all indebtedness that we had borrowed underPEI Group's Credit Agreement was reallocated and we were released as a borrower and guarantor from such facilities and released as a guarantor ofPEI Group's outstanding senior notes. Public Company Expenses As a newly public company in 2020, 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, related to establishing more comprehensive compliance and governance functions, establishing, maintaining and reviewing internal controls over financial reporting in accordance with the Sarbanes-Oxley Act, and preparing, filing and distributing periodic reports in accordance withSEC rules. Our financial statements from fiscal year 2020 onward reflect the impact of these expenses. In conjunction with our Corporate Reorganization and IPO, we have assumed responsibility for all of our stand-alone public company costs, including the costs of certain corporate services previously provided byPEI Group . In addition, as we transition away from the corporate services previously provided byPEI Group , we have incurred, and will continue to incur, non-recurring transitional costs. We expect the transitional costs to continue into 2021. In addition, in conjunction with our Corporate Reorganization and IPO, we established a 2020 incentive award plan for purposes of granting stock-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. We began recognizing stock-based compensation expense during the first quarter of fiscal year 2020. 30 -------------------------------------------------------------------------------- Impact of COVID-19 As we manufacture and sell products that are essential to the daily lives of consumers, we have been classified as an "essential business" and our operations have remained open throughout the COVID-19 pandemic. We have implemented policies and procedures designed to protect our employees and our customers, including implementing recommendations from theCenters for Disease Control and Prevention for social distancing in our plants, screening employees for increased temperature at certain locations, providing masks and/or face coverings, engagement of third-party vendors to clean and sanitize facilities, implementing a work from home policy for all employees who can do so, and enhancing our leave policies to ensure employees experiencing symptoms of COVID-19 stay at home. As the pandemic progresses, we remain committed to adapting our policies and procedures to ensure the safety of our employees and compliance with federal, state and local regulations. While we experienced increased costs in the year endedDecember 31, 2020 as a result of COVID-19, they were not material to our results of operations. However, these costs may not be representative of what we may incur moving forward. We continue to experience an increase in demand from a fundamental shift to more at-home use of our products driven by the consumer response to the COVID-19 pandemic. The duration and magnitude of the increased demand remains unknown, and its ongoing impact on our operations may not be consistent with our experiences to date. At this time, we are unable to predict with any certainty the nature, timing or magnitude of any changes in future sales and/or earnings attributable to the impact of COVID-19 inNorth America . We do not currently anticipate that the COVID-19 pandemic will materially impact our liquidity over the next 12 months. Non-GAAP Measures
In this Annual Report on Form 10-K we use the non-GAAP financial measures "Adjusted EBITDA", "Adjusted Net Income" and "Adjusted EPS", which are measures adjusted for the impact of specified items and are not in accordance with GAAP.
We define Adjusted EBITDA as net income calculated in accordance with GAAP, plus the sum of income tax expense, net interest expense, depreciation and amortization and further adjusted to exclude, as applicable, unrealized gains and losses on commodity derivatives, factoring discounts (pre-IPO), the allocated related party management fee (pre-IPO), IPO and separation-related costs and business rationalization costs. We define Adjusted Net Income and Adjusted EPS as Net Income and Earnings Per Share calculated in accordance with GAAP, plus the sum of IPO and separation-related costs, the impact of a tax legislation change under the CARES Act enacted onMarch 27, 2020 . We present Adjusted EBITDA because it is a key measure used by our management team to evaluate our operating performance, generate future operating plans and make strategic decisions. In addition, our chief operating decision maker uses Adjusted EBITDA of each reportable segment to evaluate the operating performance of such segments. We use Adjusted Net Income and Adjusted EPS as supplemental measures to evaluate our business' performance in a way that also considers our ability to generate profit without the impact of certain items. Accordingly, we believe presenting these measures 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. Non-GAAP information should be considered as supplemental in nature and is not meant to be considered in isolation or as a substitute for the related financial information prepared in accordance with GAAP. In addition, our non-GAAP financial measures may not be the same as or comparable to similar non-GAAP financial measures presented by other companies. 31 -------------------------------------------------------------------------------- The following is a reconciliation of our net income, the most directly comparable GAAP financial measure, to Adjusted EBITDA for each of the periods indicated: Year ended December 31, 2020 2019 2018 (in millions) Net income - GAAP$ 363 $ 225 $ 176 Income tax expense 153 76 57 Interest expense, net 70 209 280 Depreciation and amortization 99 91 87 Factoring discount (1) - 25 22 Allocated related party management fee (2) - 10 10 IPO and separation-related costs (3) 31 31 - Unrealized losses (gains) on derivatives (4) - (9 ) 14 Business rationalization costs (5) - - 4 Other 1 (3 ) (3 ) Adjusted EBITDA (Non-GAAP)$ 717 $ 655 $ 647
(1) Reflects the loss on sale that we incurred when we sold our
receivables through
this facility ceased upon the completion of our Corporate Reorganization and
IPO.
(2) Reflects our allocation, from
by
Corporate Reorganization and IPO.
(3) Reflects costs during the years ended
the IPO process, as well as costs related to our separation to operate as a
stand-alone public company.
(4) Reflects the mark-to-market movements in our commodity derivatives. For
further information, refer to Note 8 - Financial Instruments in our
consolidated financial statements included elsewhere in this Annual Report on
Form 10-K.
(5) Reflects primarily employee termination costs associated with rationalizing
our operations in Canada .
The following is a reconciliation of our net income and diluted EPS, the most
directly comparable GAAP financial measures, to Adjusted Net Income and Adjusted
EPS for the year ended December 31, 2020 :
Year Ended December 31, 2020
(In millions, except for per share data) Net Income Diluted Shares Diluted EPS
As Reported - GAAP $ 363 205 $ 1.77
Assume full period impact of IPO shares (1) - 5 -
Total 363 210 1.73
Adjustments:
Impact of tax legislation change from the CARES Act 27 210 0.13 IPO and separation-related costs (2) 23 210 0.11 Adjusted (Non-GAAP)$ 413 210$ 1.97
(1) Represents incremental shares required to adjust the weighted average shares
outstanding for the period to the actual shares outstanding as of December
31, 2020. We utilize the shares outstanding at period end as if they had been
outstanding for the full period rather than weighted average shares
outstanding over the course of the period as it is a more meaningful
calculation that provides consistency in comparability due to the additional
shares issued as a result of the IPO in the period.
(2) Amounts are after tax calculated using a tax rate of 24.6% for the year ended
discrete expense associated with the legislation change from the CARES Act.
32
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Results of Operations
The following discussion should be read in conjunction with our consolidated
financial statements included elsewhere in this Annual Report on Form 10-K.
Detailed comparisons of revenue and results are presented in the discussions of
the operating segments, which follow our consolidated results discussion.
Discussions of the year ended December 31, 2018 items and comparisons between
the year ended December 31, 2019 and the year ended December 31, 2018 can be
found in "Management's Discussion and Analysis of Financial Condition and
Results of Operations" in our Annual Report on Form 10-K filed on March 10,
2020 .
Aggregation of Segment Revenue and Adjusted EBITDA
Total
Reynolds Hefty Reynolds
Cooking & Waste & Hefty Presto Consumer
(In millions) Baking Storage Tableware Products Unallocated(2) Products
Net revenues
2020 $ 1,159 $ 818 $ 763 $ 533 $ (10 ) $ 3,263
2019 1,076 709 751 511 (15 ) 3,032
2018 1,159 696 757 539 (9 ) 3,142
Adjusted EBITDA (1)
2020 $ 254 $ 236 $ 170 $ 98 $ (41 ) $ 717
2019 209 190 178 91 (13 ) 655
2018 234 172 168 85 (12 ) 647
(1) Adjusted EBITDA is a non-GAAP measure. See "Non-GAAP Measures" for details,
including a reconciliation between net income and Adjusted EBITDA.
(2) The unallocated net revenues include elimination of intersegment revenues and
other revenue adjustments. These transactions arise primarily from sales by
Hefty Waste & Storage to Presto Products. The unallocated Adjusted EBITDA
represents corporate expenses which are not allocated to our segments.
Year Ended
Total
For the Year Ended December 31,
% of % of
(In millions, except for %) 2020 Revenue 2019 Revenue Change % Change
Net revenues $ 3,147 96 % $ 2,883 95 % $ 264 9 %
Related party net revenues 116 4 % 149 5 % (33 ) (22 )%
Total net revenues 3,263 100 % 3,032 100 % 231 8 %
Cost of sales (2,290 ) (70 )% (2,152 ) (71 )% (138 ) (6 )%
Gross profit 973 30 % 880 29 % 93 11 %
Selling, general and
administrative expenses (358 ) (11 )% (305 ) (10 )% (53 ) (17 )%
Other expense, net (29 ) (1 )% (65 ) (2 )% 36 55 %
Income from operations 586 18 % 510 17 % 76 15 %
Interest expense, net (70 ) (2 )% (209 ) (7 )% 139 67 %
Income before income taxes 516 16 % 301 10 % 215 71 %
Income tax expense (153 ) (5 )% (76 ) (3 )% (77 ) (101 )%
Net income $ 363 11 % $ 225 7 % $ 138 61 %
Adjusted EBITDA (1) $ 717 22 % $ 655 22 % $ 62 9 %
(1) Adjusted EBITDA is a non-GAAP measure. See "Non-GAAP Measures" for details,
including a reconciliation between net income and Adjusted EBITDA.
33
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Components of Change in Net Revenues for the Year Ended
Price Volume/Mix Total
Reynolds Cooking & Baking (2 )% 10 % 8 %
Hefty Waste & Storage (1 )% 16 % 15 %
Hefty Tableware 1 % 1 % 2 %
Presto Products (1 )% 5 % 4 %
Total RCP (1 )% 9 % 8 %
Total Net Revenues. Total net revenues increased by $231 million , or 8%, to
$3,263 million . The increase in net revenues was largely due to a fundamental
shift to more at-home use of our products and the introduction of several new
products. This was partially offset by the exit from certain low margin store
branded business in the prior year, a decline in related party revenue and lower
pricing.
Cost of Sales. Cost of sales increased by
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by
Other Expense, Net. Other expense, net decreased by$36 million , or 55%, to$29 million . The decrease was primarily attributable to the prior year factoring discount on the sale of ourU.S. trade receivables throughPEI Group's securitization facility and the allocated related party management fee. Interest Expense, Net. Interest expense, net decreased by$139 million , or 67%, to$70 million . The decrease was primarily due to the change in our debt structure as a result of our IPO in the first quarter of 2020. Prior to the IPO we had related party debt and associated interest expense that was replaced with our External Debt Facilities in conjunction with the IPO. Income Tax Expense. We recognized income tax expense of$153 million on income before income taxes of$516 million (an effective tax rate of 29.7%) for the year endedDecember 31, 2020 compared to income tax expense of$76 million on income before income taxes of$301 million (an effective tax rate of 25.4%) for the year endedDecember 31, 2019 . The increase in the effective tax rate was due to the recognition of a$27 million discrete tax expense associated with the remeasurement of our deferred taxes as a result of the legislation change from the CARES Act. Excluding the impact of this, our effective tax rate was 24.6% for year endedDecember 31, 2020 . Adjusted EBITDA. Adjusted EBITDA increased by$62 million , or 9%, to$717 million . The increase in Adjusted EBITDA was primarily due to increased revenue and lower material and manufacturing costs, partially offset by higher logistics costs and selling, general and administrative expenses, as discussed above. Segment Information Reynolds Cooking & Baking For the Year EndedDecember 31 ,
(In millions, except for %) 2020 2019 Change % change Total segment net revenues$ 1,159 $ 1,076 $ 83 8 % Segment Adjusted EBITDA 254 209 45 22 % Segment Adjusted EBITDA Margin 22 % 19 % Total Segment Net Revenues. Reynolds Cooking & Baking total segment net revenues increased by$83 million , or 8%, to$1,159 million . The increase in net revenues was primarily driven by increased demand, partially offset by a decline in related party revenue and lower pricing. Adjusted EBITDA. Reynolds Cooking & Baking Adjusted EBITDA increased by$45 million , or 22%, to$254 million . The increase in Adjusted EBITDA was primarily driven by increased volume and lower material and manufacturing costs, partially offset by lower pricing, as noted above, and increased logistics and advertising costs. 34
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Hefty Waste & Storage
For the Year Ended December 31 ,
(In millions, except for %) 2020 2019 Change % change
Total segment net revenues $ 818 $ 709 $ 109 15 %
Segment Adjusted EBITDA 236 190 46 24 %
Segment Adjusted EBITDA Margin 29 % 27 %
Total Segment Net Revenues. Hefty Waste & Storage total segment net revenues
increased by $109 million , or 15%, to $818 million . The increase in net revenues
was primarily driven by increased demand.
Adjusted EBITDA. Hefty Waste & Storage Adjusted EBITDA increased by $46 million ,
or 24%, to $236 million . The increase in Adjusted EBITDA was primarily driven by
increased revenue, as noted above, partially offset by increased logistics costs
and advertising spend.
Hefty Tableware
For the Year Ended December 31,
(In millions, except for %) 2020 2019 Change % change
Total segment net revenues $ 763 $ 751 $ 12 2 %
Segment Adjusted EBITDA 170 178 (8 ) (4 )%
Segment Adjusted EBITDA Margin 22 % 24 %
Total Segment Net Revenues. Hefty Tableware total segment net revenues increased
by $12 million , or 2%, to $763 million . The increase in net revenues was
primarily due to the introduction of several new products and higher pricing
driven by fewer promotions than in the prior year.
Adjusted EBITDA. Hefty Tableware Adjusted EBITDA decreased by
Presto Products
For the Year Ended December 31 ,
(In millions, except for %) 2020 2019 Change % change
Total segment net revenues $ 533 $ 511 $ 22 4 %
Segment Adjusted EBITDA 98 91 7 8 %
Segment Adjusted EBITDA Margin 18 % 18 %
Total Segment Net Revenues. Presto Products total segment net revenues increased
by $22 million , or 4%, to $533 million . The increase in net revenues was
primarily due to increased demand, partially offset by the exit of certain low
margin store branded business in the prior year.
Adjusted EBITDA. Presto Products Adjusted EBITDA increased by
Historical Cash FlowsThe following table discloses our cash flows for the years presented:
For the Year Ended December 31,
(In millions) 2020 2019
Net cash provided by operating activities $ 319 $ 403
Net cash used in investing activities (143 ) (128 )
Net cash provided by (used in) financing activities 34 (196 )
Increase in cash and cash equivalents $ 210 $ 79
35
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Cash provided by operating activities
Net cash from operating activities decreased by$84 million , or 21%, to$319 million . The change was primarily driven by a$279 million increase in accounts receivable,$240 million of which was related to accounts receivables previously sold throughPEI Group's securitization facility prior to our separation fromPEI Group , partially offset by an increase in net income and changes in related party receivables and payables.
Cash used in investing activities
Net cash used in investing activities increased by$15 million , or 12%, to$143 million . The net increase was primarily attributable to an increase of$34 million , or 31%, in the acquisition of property, plant and equipment, partially offset by the reduction in cash advanced toPEI Group as part of widerPEI Group cash management activities in the prior year. The increase in the acquisition of property, plant and equipment was primarily attributable to taking operational ownership of two facilities previously managed byPEI Group in conjunction with the IPO and expenditures associated with additional capacity in response to the increased demand we have experienced.
Cash provided by (used in) financing activities
Net cash from financing activities changed by$230 million , from an outflow of$196 million for the year endedDecember 31, 2019 to an inflow of$34 million for the year endedDecember 31, 2020 . The change in cash flows from financing activities was primarily attributable to proceeds received from the IPO and the drawdown of the Term Loan Facility partially offset by repayments of related party balances, principal repayments of the Term Loan Facility and dividends paid during fiscal year 2020. Seasonality Portions of our business historically have been moderately seasonal. Overall, our strongest sales are in our fourth quarter and our weakest sales are in our first quarter. This is driven by higher levels of sales of cooking products around majorU.S. holidays in our fourth quarter, primarily due to the holiday use of Reynolds Wrap, Reynolds Oven Bags andReynolds Parchment Paper . Our tableware products generally have higher sales in the second quarter of the year, primarily due to outdoor summertime use of disposable plates, cups and bowls, however, our tableware products seasonality trends in 2020 were different from historical seasonality trends due to fewer social gatherings as a result of COVID-19. Liquidity and Capital Resources Our principal sources of liquidity are existing cash and cash equivalents, cash generated from operating activities and available borrowings under the Revolving Facility. External Debt Facilities OnFebruary 4, 2020 , in conjunction with our Corporate Reorganization and IPO, we entered into the External Debt Facilities which consist of a$2,475 million Term Loan Facility and a Revolving Facility that provides for additional borrowing capacity of up to$250 million , reduced by amounts used for letters of credit. As ofDecember 31, 2020 , the outstanding balance under the Term Loan Facility was$2,257 million . As ofDecember 31, 2020 , we had no outstanding borrowings under the Revolving Facility, and we had$7 million of letters of credit outstanding, which reduces the borrowing capacity under the Revolving Facility. The initial borrower under the External Debt Facilities isReynolds Consumer Products LLC (the "Borrower"). The Revolving Facility includes a sub-facility for letters of credit. In addition, the External Debt Facilities provide that the Borrower has the right at any time, subject to customary conditions, to request incremental term loans or incremental revolving credit commitments in amounts and on terms set forth therein. The lenders under the External Debt Facilities are not under any obligation to provide any such incremental loans or commitments, and any such addition of or increase in loans is subject to certain customary conditions precedent and other provisions.
Interest rate and fees
Borrowings under the External Debt Facilities bear interest at a rate per annum equal to, at our option, either a base rate or a LIBO rate plus an applicable margin of 1.75%. During the year endedDecember 31, 2020 , we entered into a series of interest rate swaps which fixed the LIBO rate to an annual rate of 0.18% to 0.47% (for an annual effective interest rate of 1.93% to 2.22%, including margin) for an aggregate notional amount of$1,650 million . These interest rate swaps hedge a portion of the interest rate exposure resulting from our Term Loan Facility for periods ranging from one to five years. 36 --------------------------------------------------------------------------------
Prepayments
The Term Loan Facility contains customary mandatory prepayments, including with respect to excess cash flow, asset sale proceeds and proceeds from certain incurrences of indebtedness.
The Borrower may voluntarily repay outstanding loans under the Term Loan Facility at any time without premium or penalty, other than customary breakage costs with respect to LIBO rate loans. During the year endedDecember 31, 2020 , we made voluntary principal payments of$200 million related to the Term Loan Facility. Subsequent toDecember 31, 2020 , we made a voluntary principal payment of$100 million related to the Term Loan Facility.
Amortization and maturity
The Term Loan Facility matures inFebruary 2027 . The Term Loan Facility amortizes in equal quarterly installments of$6 million , which commenced inJune 2020 , with the balance payable on maturity. The Revolving Facility matures inFebruary 2025 . Guarantee and security All obligations under the External Debt Facilities and certain hedge agreements and cash management arrangements provided by any lender party to the External Debt Facilities or any of its affiliates and certain other persons are unconditionally guaranteed by the Company, the Borrower (with respect to hedge agreements and cash management arrangements not entered into by the Borrower) and certain of the Company's existing and subsequently acquired or organized direct or indirect material wholly-ownedU.S. restricted subsidiaries, with customary exceptions including, among other things, where providing such guarantees is not permitted by law, regulation or contract or would result in material adverse tax consequences. All obligations under the External Debt Facilities and certain hedge agreements and cash management arrangements provided by any lender party to the External Debt Facilities or any of its affiliates and certain other persons, and the guarantees of such obligations, are secured, subject to permitted liens and other exceptions, by: (i) a perfected first-priority pledge of all the equity interests of each wholly-owned material restricted subsidiary of the Company, the Borrower or a subsidiary guarantor, including the equity interests of the Borrower (limited to 65% of voting stock in the case of first-tier non-U.S. subsidiaries of the Company, the Borrower or any subsidiary guarantor) and (ii) perfected first-priority security interests in substantially all tangible and intangible personal property of the Company, the Borrower and the subsidiary guarantors (subject to certain other exclusions).
Certain covenants and events of default
The External Debt Facilities contain a number of covenants that, among other things, restrict, subject to certain exceptions, our ability and the ability of the restricted subsidiaries of the Company to: • incur additional indebtedness and guarantee indebtedness; • create or incur liens; • engage in mergers or consolidations; • sell, transfer or otherwise dispose of assets; • pay dividends and distributions or repurchase capital stock; • prepay, redeem or repurchase certain indebtedness; • make investments, loans and advances; • enter into certain transactions with affiliates;
• enter into agreements which limit the ability of our restricted subsidiaries
to incur restrictions on their ability to make distributions; and
• enter into amendments to certain indebtedness in a manner materially adverse
to the lenders.
The External Debt Facilities contain a springing financial covenant requiring
compliance with a ratio of first lien net indebtedness to consolidated EBITDA,
applicable solely to the Revolving Facility. The financial covenant is tested on
the last day of any fiscal quarter only if the aggregate principal amount of
borrowings under the Revolving Facility and drawn but unreimbursed letters of
credit exceed 35% of the total amount of commitments under the Revolving
Facility on such day.
If an event of default occurs, the lenders under the External Debt Facilities
are entitled to take various actions, including the acceleration of amounts due
under the External Debt Facilities and all actions permitted to be taken by
secured creditors.
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--------------------------------------------------------------------------------We are currently in compliance with the covenants contained in our External Debt Facilities.
During the year endedDecember 31, 2020 , our Board of Directors declared quarterly cash dividends totaling$0.59 per share. We expect to continue paying cash dividends on a quarterly basis; however, future dividends are at the discretion of our Board of Directors and will depend upon our earnings, capital requirements, financial condition, contractual limitations (including under the Term Loan Facility) and other factors.
We believe that our projected cash position, cash flows from operations and borrowings under the External Debt Facilities are sufficient to meet the needs of our business for at least the next 12 months.
Contractual Obligations
The following table summarizes our material contractual obligations as of
December 31, 2020 :
Less than One to three Three to five Greater than
(In millions) Total one year years years five years
Long-term debt (1) $ 2,512 $ 68 $ 134 $ 133 $ 2,177
Operating lease liabilities 74 16 25 19 14
Unconditional capital expenditure
obligations 17 17 - - -
Postretirement benefit plan
obligations 54 3 6 6 39
Total contractual obligations
165 $ 158$ 2,230
(1) Total obligations for long-term debt consist of the principal amounts and
interest obligations. The interest rate on the floating rate debt balances
has been assumed to be the same as the rate in effect as of
2020, including the impact of cash flow hedges.
As ofDecember 31, 2020 , our liabilities for uncertain tax positions and defined benefit pension obligations totaled$4 million . The ultimate timing of these liabilities cannot be determined; therefore, we have excluded these amounts from the contractual obligations table above. Off-Balance Sheet Arrangements
We have no material off-balance sheet obligations.
Critical Accounting Policies and Estimates
The methods, estimates and judgments we use in applying our most critical
accounting policies have a significant impact on the results we report in our
consolidated financial statements. Specific areas requiring the application of
management's estimates and judgments include, among others, assumptions
pertaining to benefit plan assumptions, valuation assumptions of goodwill and
intangible assets, useful lives of long-lived assets, sales incentives and
income taxes. Accordingly, a different financial presentation could result
depending on the judgments, estimates or assumptions that are used. 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 most critical
accounting policies and estimates are related to revenue recognition, the
valuation of goodwill and intangible 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 of our consolidated financial
statements included elsewhere in this Annual Report on Form 10-K.
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--------------------------------------------------------------------------------Revenue Recognition-Sales Incentives
We routinely commit to one-time or ongoing trade-promotion programs with our customers. Programs include discounts, allowances, shelf-price reductions, end-of-aisle or in-store displays of our products and graphics and other trade-promotion activities conducted by the customer, such as coupons. Collectively, we refer to these as sales incentives or trade promotions. Costs related to these programs are recorded as a reduction to revenue. Our trade promotion accruals are primarily based on estimated volume and incorporate historical sales and spending trends by customer and category. The determination of these estimated accruals requires judgment and may change in the future as a result of changes in customer promotion participation, particularly for new programs and for programs related to the introduction of new products. Final determination of the total cost of a promotion is dependent upon customers providing information about proof of performance and other information related to the promotional event. This process of analyzing and settling trade-promotion programs with customers could impact our results of operations and trade promotion accruals depending on how actual results of the programs compare to original estimates. Sales incentives represented 5%, 6% and 5% of total net revenues for the years endedDecember 31, 2020 , 2019 and 2018, respectively. As ofDecember 31, 2020 and 2019, we had accruals of$35 million and$39 million , respectively, reflected on our consolidated balance sheets in Accrued and other current liabilities related to sales incentive programs.
We test our goodwill and other indefinite-lived intangible assets for impairment annually in the fiscal fourth quarter unless there are indications during a different interim period that these assets may have become impaired. No impairments were identified as a result of our impairment review performed annually during the fourth quarter of fiscal years 2020, 2019 and 2018.
Our reporting units for goodwill impairment testing purposes are Reynolds Cooking & Baking, Hefty Waste & Storage, Hefty Tableware and Presto Products. No instances of impairment were identified during the fiscal year 2020 annual impairment review. All of our reporting units had fair values that significantly exceeded recorded carrying values. 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. In our evaluation of goodwill impairment, we have the option to first assess qualitative factors such as the maturity and stability of the reporting unit, the magnitude of the excess fair value over carrying value from the prior year's impairment testing, other reporting unit operating results as well as new events and circumstances impacting the operations at the reporting unit level. If the result of a qualitative test indicates a potential for impairment, a quantitative test is performed, wherein we compare the estimated fair value of each reporting unit to its carrying value. In all instances where a quantitative test was performed, the estimated fair value exceeded the carrying value of the reporting unit and none of our reporting units were at a risk of failing the quantitative test. If the estimated fair value of any reporting unit had been less than its carrying value, an impairment charge would have been recorded for the amount by which the reporting unit's carrying amount exceeds its fair value. To determine the fair value of a reporting unit as part of our quantitative test, we use a capitalization of earnings method under the income approach. Under this approach, we estimate the forecasted Adjusted EBITDA of each reporting unit and capitalize this amount using a multiple. The Adjusted EBITDA amounts are consistent with those we use in our internal planning, which gives consideration to actual business trends experienced and the long-term business strategy. The selection of a capitalization multiple incorporates consideration of comparable entity trading multiples within the same industry and recent sale and purchase transactions. Changes in such estimates or the application of alternative assumptions could produce different results.
Indefinite-Lived Intangible Assets
Our indefinite-lived intangible assets consist of certain trade names. 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. We have the option to
first assess qualitative factors such as the maturity of the trade name, the
magnitude of the excess fair value over carrying value from the prior year's
impairment testing, as well as new events and circumstances impacting the trade
name. If the result of a qualitative test indicates a potential for impairment,
a quantitative test is performed. 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 trade names. This approach requires
significant judgments in determining (i) the estimated future branded 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 fiscal year 2020 annual impairment review.
Each of our indefinite-lived intangible assets had fair values that
significantly exceeded recorded carrying values.
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--------------------------------------------------------------------------------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 occurs 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. Income Taxes Prior to our Corporate Reorganization and IPO, ourU.S. operations were included in a consolidatedU.S. federal return as well as certain state and local tax returns filed byPEI Group . We also file certain separateU.S. state and local and foreign income tax returns. The income tax expense (benefit) included in our consolidated statements of income has been calculated using the separate return basis. It is possible that we will make different tax accounting elections and assertions subsequent to our shares being issued to the public. Therefore, our income taxes, as presented in our consolidated financial statements included elsewhere in this Annual Report on Form 10-K, may not be indicative of our income taxes in the future. Where we have been included in the tax returns filed byPEI Group , any income taxes payable resulting from the separate return basis have been reflected in our consolidated balance sheets inNet Parent deficit.
Considerable management judgment is necessary to assess the inherent uncertainties related to the interpretations of complex tax laws, regulations and taxing authority rulings.
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 of our consolidated
financial statements included elsewhere in this Annual Report on Form 10-K.
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