REYNOLDS CONSUMER PRODUCTS 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 combined financial statements and the accompanying notes contained in our Annual Report on Form 10-K for the year endedDecember 31, 2019 . 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 acrossthe 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.
We manage our operations in four operating and reportable segments: Reynolds Cooking & Baking, Hefty Waste & Storage, Hefty Tableware and Presto Products.
Our Separation from RGHL Group
Prior to our Corporate Reorganization and IPO completed on February 4, 2020 , we
operated as part of RGHL Group's broader corporate organization rather than as a
stand-alone public company. RGHL 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, RGHL Group . Historically, these transactions involving
RGHL Group may not have always been consummated on terms equivalent to those in
an arm's-length transaction. Sales to RGHL Group of products that we manufacture
have been reflected as related party net revenues in our condensed consolidated
financial statements. Certain related party transactions are reflected as
related party receivables and payables in our condensed consolidated balance
sheets and are settled in cash. Prior to our Corporate Reorganization and IPO,
certain related party transactions with RGHL Group were settled by either
non-cash capital contributions from RGHL Group to us or non-cash capital
distributions from us and were included as part of RGHL Group's net investment
in our condensed consolidated balance sheets. We also utilize manufacturing and
warehousing facilities and resources managed by RGHL Group to conduct our
business. The expenses associated with these transactions are included in cost
of sales in our condensed consolidated statements of income. We believe that the
assumptions and methodologies underlying the allocation of these expenses from
RGHL 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 from RGHL Group , we entered into a transition
services agreement with Reynolds Group Holdings Inc. whereby RGHL 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. 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 with RGHL Group , as reflected in our condensed consolidated
financial statements included elsewhere in this Quarterly Report on Form 10-Q,
may be materially different from the arrangements that we have entered into as
part of our separation from RGHL Group .
On February 4, 2020 , in conjunction with our Corporate Reorganization and IPO,
we entered into the Term Loan Facility and Revolving Facility (together, the
"External Debt Facilities") and repaid portions of the related party borrowings
owed to RGHL Group that were reflected on our condensed consolidated balance
sheets. RGHL Group contributed the remaining balance of related party borrowings
owed by us to RGHL 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 under RGHL Group's Credit Agreement was
reallocated and we were released as a borrower and guarantor from such
facilities and released as a guarantor of RGHL Group's outstanding senior notes.
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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 the Centers 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
enhanced 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. We did not experience a material
increase in costs during the first quarter of 2020 as a result of COVID-19,
however costs incurred in the first quarter of 2020 are not representative of
what we expect to incur moving forward.
During the first quarter of 2020, we experienced increased demand due to the
consumer response to the COVID-19 pandemic which contributed to an increase in
net sales. This was due to both increased usage as consumers shifted to spending
more time at home and pantry stocking of certain of our products. The duration
of the COVID-19 pandemic 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 spread
of COVID-19 in North America . See "Risk Factors."
Non-GAAP Measures
In this Quarterly Report on Form 10-Q 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 unrealized gains and losses on
derivatives, factoring discounts (pre-IPO), the allocated related party
management fee (pre-IPO) and IPO transaction-related costs. We define Adjusted
Net Income and Adjusted Earnings Per Share as Net Income and Earnings Per Share
calculated in accordance with GAAP, plus the sum of IPO transaction-related
costs, the impact of tax legislation changes under the CARES Act enacted March
27, 2020 and any unrealized gains or losses on derivatives.
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 Earnings Per Share as
supplemental metrics 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 metrics 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.
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:
Three months ended March 31,
2020 2019
(in millions)
Net income - GAAP $ 26 $ 17
Income tax expense 39 5
Interest expense, net 27 68
Depreciation and amortization 24 21
Factoring discount (1) - 5
Allocated related party management fee (2) - 2
IPO transaction-related costs (3) 14 -
Unrealized losses (gains) on derivatives (4) 4 (7 )
Other 1 (1 )
Adjusted EBITDA (Non-GAAP) $ 135 $ 110
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(1) Reflects the loss on sale that we incurred when we sold our
receivables through
in this facility ceased upon the completion of our Corporate Reorganization
and IPO.
(2) Reflects our allocation, from
by
our Corporate Reorganization and IPO.
(3) Reflects costs related to the IPO process, as well as costs related to our
separation to operate as a stand-alone public company. The
transaction-related costs are included in Other expense, net in our condensed
consolidated statements of income.
(4) Reflects the mark-to-market movements in our commodity derivatives. For
further information, refer to Note 7 - Financial Instruments in our condensed
consolidated financial statements included elsewhere in this Quarterly Report
on Form 10-Q.
The following is a reconciliation of our net income and EPS, the most directly
comparable GAAP financial measure, to Adjusted Net Income and Adjusted EPS for
the period indicated:
Three Months Ended March 31, 2020
(In millions, except for per share data) Net Income Diluted Shares Diluted EPS
As Reported - GAAP $ 26 189 $ 0.14
Assume full period impact of IPO shares (1) - 21 -
26 210 0.12
Adjustments:
Impact of tax legislation change from the CARES Act 23 210 0.11 IPO transaction-related costs (2) 11 210 0.05 Unrealized losses on derivatives (2) 3 210 0.02 Adjusted (Non-GAAP) $ 63 210$ 0.30
(1) Represents incremental shares required to adjust the weighted average shares
outstanding for the period to the actual shares outstanding as of
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.
(2) Amounts are after tax calculated using a tax rate of 25%, which is our
effective tax rate excluding the one-time discrete expense associated with
the legislation change from the CARES Act.
Results of Operations
The following discussion should be read in conjunction with our condensed
consolidated financial statements included elsewhere in this Quarterly Report on
Form 10-Q. Detailed comparisons of revenue and results are presented in the
discussions of the operating segments, which follow our consolidated results
discussion.
Aggregation of Segment Revenue and Adjusted EBITDA
Total
Reynolds Hefty Reynolds
Cooking & Waste & Hefty Presto Consumer
(In millions) Baking Storage Tableware Products Unallocated(2) ProductsNet revenues for the three months endedMarch 31 : 2020$ 243 $ 192 $ 178 $ 127 $ (10 )$ 730 2019 213 165 164 127 (4 ) 665 Adjusted EBITDA for the three months ended March 31: (1) 2020$ 40 $ 55 $ 35 $ 23 $ (18 )$ 135 2019 18 39 35 20 (2 ) 110
(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.
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Three Months Ended
2019
Total
For the three months ended March 31,
% of % of
(In millions, except for %) 2020 revenue 2019 revenue Change % change
Net revenues $ 691 95 % $ 625 94 % $ 66 11 %
Related party net revenues 39 5 % 40 6 % (1 ) (3 )%
Total net revenues 730 100 % 665 100 % 65 10 %
Cost of sales (541 ) (74 )% (492 ) (74 )% (49 ) 10 %
Gross profit 189 26 % 173 26 % 16 9 %
Selling, general and
administrative expenses (82 ) (11 )% (78 ) (12 )% (4 ) 5 %
Other expense, net (15 ) (2 )% (5 ) (1 )% (10 ) 200 %
Income from operations 92 13 % 90 14 % 2 2 %
Interest expense, net (27 ) (4 )% (68 ) (10 )% 41 (60 )%
Income before income taxes 65 9 % 22 3 % 43 195 %
Income tax expense (39 ) (5 )% (5 ) (1 )% (34 ) NM (1)
Net income $ 26 4 % $ 17 3 % $ 9 53 %
Adjusted EBITDA (2) $ 135 18 % $ 110 17 % $ 25 23 %
(1) Not meaningful
(2) Adjusted EBITDA is a non-GAAP measure. See "Non-GAAP Measures" for details,
including a reconciliation between net income and Adjusted EBITDA.
Components of Change in Net Revenues for the Three Months Ended
Price Volume/Mix Total
Reynolds Cooking & Baking (5 )% 19 % 14 %
Hefty Waste & Storage (3 )% 19 % 16 %
Hefty Tableware (3 )% 12 % 9 %
Presto Products - % - % - %
Total RCP (3 )% 13 % 10 %
Total Net Revenues. Total net revenues increased by $65 million , or 10%, to $730
million . The increase in net revenues was largely due to higher volume of $87
million , primarily from increased demand associated with the COVID-19 pandemic.
This was due to both increased usage as consumers shifted to spending more time
at home and pantry stocking of certain of our products. In addition to the
increased demand due to the COVID-19 pandemic, volume increases were driven by
both organic growth with existing customers and the soft first quarter of 2019
as a result of the unusually high demand in the fourth quarter of 2018. These
increases were partially offset by the exit of certain low margin store branded
business in the prior year and lower pricing.
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Cost of Sales. Cost of sales increased by $49 million , or 10%, to $541 million .
The increase was primarily due to stronger volumes, partially offset by lower
material and manufacturing costs.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by
Other Expense, Net. Other expense, net increased by$10 million , or 200%, to$15 million . The increase was primarily attributable to transaction-related costs associated with our IPO. Interest Expense, Net. Interest expense, net decreased by$41 million , or 60%, to$27 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) Benefit. We recognized income tax expense of$39 million on income before income taxes of$65 million (an effective tax rate of 60%) for the three months endedMarch 31, 2020 compared to income tax expense of$5 million on income before income taxes of$22 million (an effective tax rate of 23%) for the three months endedMarch 31, 2019 . The increase in the effective tax rate is due to the recognition of a$23 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 25% for the three months endedMarch 31, 2020 .
Adjusted EBITDA. Adjusted EBITDA increased by
Segment Information
Reynolds Cooking & Baking
For the three months ended March 31 ,
(In millions, except for %) 2020 2019 Change % change
Total segment net revenues $ 243 $ 213 $ 30 14 %
Segment Adjusted EBITDA 40 18 22 122 %
Segment Adjusted EBITDA Margin 16 % 8 %
Total Segment Net Revenues. Reynolds Cooking & Baking total segment net revenues
increased by $30 million , or 14%, to $243 million . The increase in net revenues
was primarily driven by the increased consumer demand associated with the
COVID-19 pandemic. In addition, volume was lower in the first quarter of 2019
due to the unusually high demand in the fourth quarter of 2018. The increased
volume was partially offset by lower pricing driven by pricing actions taken as
a result of lower material costs and increased trade promotion.
Adjusted EBITDA. Reynolds Cooking & Baking Adjusted EBITDA increased by $22
million , or 122%, to $40 million . The increase in Adjusted EBITDA was primarily
driven by the impact of the higher volume noted above and lower material and
manufacturing costs, partially offset by the impact of lower pricing, as noted
above.
Hefty Waste & Storage
For the three months ended March 31,(In millions, except for %) 2020 2019 Change % change Total segment net revenues$ 192 $ 165 $ 27 16 % Segment Adjusted EBITDA 55 39 16 41 % Segment Adjusted EBITDA Margin 29 % 24 % 19
-------------------------------------------------------------------------------- Total Segment Net Revenues. Hefty Waste & Storage total segment net revenues increased by$27 million , or 16%, to$192 million . The increase in net revenues was primarily driven by increased consumer demand associated with the COVID-19 pandemic. In addition, growth with existing customers driven by increased marketing investments and the soft first quarter of 2019 due to the unusually high demand in the fourth quarter of 2018 contributed to the increased revenue. Adjusted EBITDA. Hefty Waste & Storage Adjusted EBITDA increased by$16 million , or 41%, to$55 million . The increase in Adjusted EBITDA was primarily driven by the higher volume, as noted above, and lower material and manufacturing costs. Hefty Tableware For the three months endedMarch 31 ,
(In millions, except for %) 2020 2019 Change % change Total segment net revenues$ 178 $ 164 $ 14 9 % Segment Adjusted EBITDA 35 35 - -% Segment Adjusted EBITDA Margin 20 % 21 %
Total Segment Net Revenues. Hefty Tableware total segment net revenues increased
by
Adjusted EBITDA. Hefty Tableware Adjusted EBITDA was flat at$35 million . The favorable impact of the increased volume was offset by unfavorable product mix and increased trade promotion spend. Presto Products For the three months endedMarch 31 ,
(In millions, except for %) 2020 2019 Change % change Total segment net revenues$ 127 $ 127 - -% Segment Adjusted EBITDA 23 20 3 15 % Segment Adjusted EBITDA Margin 18 % 16 % Total Segment Net Revenues. Presto Products total segment net revenues was flat at$127 million . Increased volume, primarily due to increased consumer demand associated with the COVID-19 pandemic was offset by the impact of the exit of certain low margin store branded business in the prior year. Adjusted EBITDA. Presto Products Adjusted EBITDA increased by$3 million , or 15%, to$23 million . The increase in Adjusted EBITDA was primarily driven by lower material and manufacturing costs. Historical Cash Flows
The following table discloses our cash flows for the periods presented:
For the three month ended
March 31,
(In millions) 2020 2019
Net cash used in operating activities $ (255 ) Net cash (used in) provided by investing activities (23 )
72
Net cash provided by financing activities 376
6
Increase (decrease) in cash and cash equivalents $ 98$ (18 )
Cash used in operating activities
Net cash used in operating activities increased by$159 million in the three months endedMarch 31, 2020 to$255 million . This increase was primarily driven by a$303 million increase in accounts receivable,$240 million of which was related to accounts receivables previously sold underRGHL Group's securitization facility prior to our separation fromRGHL Group , partially offset by changes in related party receivables and a lower net investment in inventory during the current period. 20 --------------------------------------------------------------------------------
Cash (used in) provided by investing activities
Net cash from investing activities changed by$95 million , from an inflow of$72 million for the three months endedMarch 31, 2019 to an outflow of$23 million for the three months endedMarch 31, 2020 . The net decrease was primarily attributable to net changes in cash advanced toRGHL Group as part of widerRGHL Group cash management activities in the prior period. Excluding these related party items, cash outflows from investing activities increased$8 million or 53%. This change was primarily attributable to increased capital expenditures associated with capacity expansion and cost reduction projects.
Cash provided by financing activities
Net cash from financing activities increased by$370 million in the three months endedMarch 31, 2020 to$376 million . 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. Sources of Liquidity 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. 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%. 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; provided, however, that any voluntary prepayment, refinancing or repricing of the External Debt Facilities in connection with certain repricing transactions that occur prior toAugust 4, 2020 will be subject to a prepayment premium of 1% of the principal amount of the term loans so prepaid, refinanced or repriced.
Amortization and maturity
The Term Loan Facility matures in
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 RCPI, the Borrower (with respect to hedge agreements and cash management arrangements entered into by affiliates of the Borrower) and certain of RCPI'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. 21 -------------------------------------------------------------------------------- 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 RCPI, 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 RCPI, the Borrower or any subsidiary guarantor) and (ii) perfected first-priority security interests in substantially all tangible and intangible personal property of RCPI, 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 RCPI 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 restrictedsubsidiaries 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 (commencing onJune 30, 2020 ) only if the aggregate principal amount of borrowings under the Revolving Facility and drawn but unreimbursed letters of credit exceeds 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.
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.
Critical Accounting Policies and Estimates
Accounting policies and estimates are considered critical when they require
management to make subjective and complex judgments, estimates and assumptions
about matters that have a material impact on the presentation of our financial
statements and accompanying notes. For a description of our critical accounting
policies and estimates, see our Annual Report on Form 10-K for the fiscal year
ended December 31, 2019 .
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