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 condensed consolidated financial statements and the accompanying notes included elsewhere in this Quarterly Report on Form 10-Q and our combined financial statements and the accompanying notes contained in our Annual Report on Form 10-K for the year endedDecember 31, 2019 . 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 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 External Debt Facilities, consisting of the Term Loan
Facility and the Revolving Facility, and repaid portions of the related party
borrowings owed to RGHL Group that were reflected on our condensed consolidated
balance sheet. 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. While we have experienced increased
costs in the three and nine months ended September 30, 2020 as a result of
COVID-19, they have not been material to our results of operations. However,
these costs may not be representative of what we expect to 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 in North 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 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
commodity derivatives, factoring discounts (pre-IPO), the allocated related
party management fee (pre-IPO) and IPO and separation-related 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 tax legislation changes under the CARES Act enacted on
March 27, 2020 and any unrealized gains or losses on commodity 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 EPS 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.
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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 September 30, Nine Months Ended September 30,
2020 2019 2020 2019
(in millions) (in millions)
Net income - GAAP $ 113 $ 63 $ 251 $ 135
Income tax expense 37 20 112 44
Interest expense, net 13 39 57 174
Depreciation and amortization 24 21 72 63
Factoring discount (1) - 5 - 15
Allocated related party management fee (2) - 3 - 7
IPO and separation-related costs (3) 5 11 26 12
Unrealized (gains) losses on derivatives (4) - (1 ) 1 (9 )
Other - 1 - -
Adjusted EBITDA (Non-GAAP) $ 192 $ 162 $ 519 $ 441
(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
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. These 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 6 - 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 diluted EPS, the most
directly comparable GAAP financial measures, to Adjusted Net Income and Adjusted
EPS for each of the periods indicated:
Three Months Ended September 30, 2020
(In millions, except for per share data) Net Income Diluted Shares Diluted EPS
As Reported - GAAP $ 113 210 $ 0.54 Adjustments:
IPO and separation-related costs (1) 4 210 0.02 Unrealized gains on derivatives (1) - 210 0.00 Adjusted (Non-GAAP)$ 117 210$ 0.56 Nine Months Ended September 30, 2020 (In millions, except for per share data) Net Income Diluted Shares Diluted EPS As Reported - GAAP$ 251 203$ 1.24 Assume full period impact of IPO shares (2) - 7 - Total 251 210 1.20
Adjustments:
Impact of tax legislation change from the CARES Act 23 210 0.11 IPO and separation-related costs (1) 19 210 0.09 Unrealized losses on derivatives (1) 1 210 0.00 Adjusted (Non-GAAP)$ 294 210$ 1.40
(1) Amounts are after tax calculated using a tax rate of 25% for both the three
and nine months ended
excluding the one-time discrete expense associated with the legislation
change from the CARES Act.
(2) Represents incremental shares required to adjust the weighted average shares
outstanding for the period to the actual shares outstanding as of September
30, 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.
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Results of Operations - Three Months Ended September 30, 2020
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) Products
Net revenues for the three months
ended September 30:
2020 $ 285 $ 209 $ 192 $ 136 $ 1 $ 823
2019 256 185 174 129 (3 ) 741
Adjusted EBITDA for the three months
ended
September 30: (1)
2020 $ 63 $ 65 $ 43 $ 28 $ (7 ) $ 192
2019 49 51 40 23 (1 ) 162
(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.
Three Months Ended
September 30, 2019
Total
For the Three Months Ended September 30,
(In millions, except for %) 2020 % of Revenue 2019 % of Revenue Change % Change
Net revenues $ 797 97 % $ 705 95 % $ 92 13 %
Related party net revenues 26 3 % 36 5 % (10 ) (28 )%
Total net revenues 823 100 % 741 100 % 82 11 %
Cost of sales (558 ) (68 )% (524 ) (71 )% (34 ) (6 )%
Gross profit 265 32 % 217 29 % 48 22 %
Selling, general and
administrative expenses (97 ) (12 )% (76 ) (10 )% (21 ) (28 )%
Other expense, net (5 ) (1 )% (20 ) (3 )% 15 75 %
Income from operations 163 20 % 121 16 % 42 35 %
Non-operating income, net - - 1 0 % (1 ) (100 )%
Interest expense, net (13 ) (2 )% (39 ) (5 )% 26 67 %
Income before income taxes 150 18 % 83 11 % 67 81 %
Income tax expense (37 ) (4 )% (20 ) (3 )% (17 ) (85 )%
Net income $ 113 14 % $ 63 9 % $ 50 79 %
Adjusted EBITDA (1) $ 192 23 % $ 162 22 % $ 30 19 %
(1) Adjusted EBITDA is a non-GAAP measure. See "Non-GAAP Measures" for details,
including a reconciliation between net income and Adjusted EBITDA.
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Components of Change in Net Revenues for the Three Months Ended
Price Volume/Mix Total
Reynolds Cooking & Baking - % 11 % 11 %
Hefty Waste & Storage (3 )% 16 % 13 %
Hefty Tableware 2 % 8 % 10 %
Presto Products - % 5 % 5 %
Total RCP (1 )% 12 % 11 %
Total Net Revenues. Total net revenues increased by $82 million , or 11%, to $823
million . The increase was primarily driven by increased consumer demand from a
fundamental shift to more at-home use of our products and the impact of several
new products, partially offset by a $10 million decline in related party
revenue.
Cost of Sales. Cost of sales increased by $34 million , or 6%, to $558 million .
The increase was primarily due to increased demand, as noted above, 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 decreased by$15 million , or 75%, to$5 million . The decrease was primarily attributable to the factoring discount on the sale of ourU.S. trade receivables throughRGHL Group's securitization facility and the allocated related party management fee in the comparable prior period partially offset by IPO and separation-related costs during the current period. Interest Expense, Net. Interest expense, net decreased by$26 million , or 67%, to$13 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$37 million on income before income taxes of$150 million (an effective tax rate of 25%) for the three months endedSeptember 30, 2020 compared to income tax expense of$20 million on income before income taxes of$83 million (an effective tax rate of 24%) for the three months endedSeptember 30, 2019 . The increase in the effective tax rate was due an increase in non-deductible items.
Adjusted EBITDA. Adjusted EBITDA increased by
Segment InformationReynolds Cooking & Baking
For the Three Months Ended (In millions, except for %) 2020 2019 Change % Change Total segment net revenues$ 285 $ 256 $ 29 11 % Segment Adjusted EBITDA 63 49 14 29 % Segment Adjusted EBITDA Margin 22 % 19 % Total Segment Net Revenues. Reynolds Cooking & Baking total segment net revenues increased by$29 million , or 11%, to$285 million . The increase in net revenues was primarily driven by increased consumer demand, partially offset by a decline in related party revenue.
Adjusted EBITDA. Reynolds Cooking & Baking Adjusted EBITDA increased by
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Hefty Waste & Storage
For the Three Months Ended September 30,
(In millions, except for %) 2020 2019 Change % Change
Total segment net revenues $ 209 $ 185 $ 24 13 %
Segment Adjusted EBITDA 65 51 14 27 %
Segment Adjusted EBITDA Margin 31 % 28 %
Total Segment Net Revenues. Hefty Waste & Storage total segment net revenues
increased by $24 million , or 13%, to $209 million . The increase in net revenues
was primarily driven by increased consumer demand.
Adjusted EBITDA. Hefty Waste & Storage Adjusted EBITDA increased by $14 million ,
or 27%, to $65 million . The increase in Adjusted EBITDA was primarily driven by
increased revenue and lower material and manufacturing costs, partially offset
by higher advertising costs.
Hefty Tableware
For the Three Months Ended September 30,
(In millions, except for %) 2020 2019 Change % Change
Total segment net revenues $ 192 $ 174 $ 18 10 %
Segment Adjusted EBITDA 43 40 3 8 %
Segment Adjusted EBITDA Margin 22 % 23 %
Total Segment Net Revenues. Hefty Tableware total segment net revenues increased
by
Adjusted EBITDA. Hefty Tableware Adjusted EBITDA increased by$3 million , or 8%, to$43 million . The increase in Adjusted EBITDA was primarily driven by increased revenue, as discussed above, partially offset by increased advertising and logistics costs. Presto Products For the Three Months Ended September 30, (In millions, except for %) 2020 2019 Change % Change Total segment net revenues$ 136 $ 129 $ 7 5 % Segment Adjusted EBITDA 28 23 5 22 % Segment Adjusted EBITDA Margin 21 % 18 %
Total Segment Net Revenues. Presto Products total segment net revenues increased
by
Adjusted EBITDA. Presto Products Adjusted EBITDA increased by$5 million , or 22%, to$28 million . The increase in Adjusted EBITDA was primarily driven by increased revenue and lower material and manufacturing costs. Results of Operations - Nine Months EndedSeptember 30, 2020 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. 20
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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 for the nine months ended
September 30 :
2020 $ 824 $ 604 $ 556 $ 401 $ (10 ) $ 2,375
2019 744 533 545 387 (12 ) 2,197
Adjusted EBITDA for the nine months
ended
September 30: (1)
2020 $ 169 $ 183 $ 120 $ 80 $ (33 ) $ 519
2019 116 142 126 67 (10 ) 441
(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.
Nine Months Ended
September 30, 2019
Total
For the Nine Months Ended September 30,
(In millions, except for %) 2020 % of Revenue 2019 % of Revenue Change % Change
Net revenues $ 2,286 96 % $ 2,083 95 % $ 203 10 %
Related party net revenues 89 4 % 114 5 % (25 ) (22 )%
Total net revenues 2,375 100 % 2,197 100 % 178 8 %
Cost of sales (1,669 ) (70 )% (1,580 ) (72 )% (89 ) (6 )%
Gross profit 706 30 % 617 28 % 89 14 %
Selling, general and
administrative expenses (260 ) (11 )% (231 ) (11 )% (29 ) (13 )%
Other expense, net (26 ) (1 )% (34 ) (2 )% 8 24 %
Income from operations 420 18 % 352 16 % 68 19 %
Non-operating income, net - - 1 0 % (1 ) (100 %)
Interest expense, net (57 ) (2 )% (174 ) (8 )% 117 67 %
Income before income taxes 363 15 % 179 8 % 184 103 %
Income tax expense (112 ) (5 )% (44 ) (2 )% (68 ) (155 )%
Net income $ 251 11 % $ 135 6 % $ 116 86 %
Adjusted EBITDA (1) $ 519 22 % $ 441 20 % $ 78 18 %
(1) 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 Nine Months Ended
Price Volume/Mix Total
Reynolds Cooking & Baking (3 )% 14 % 11 %
Hefty Waste & Storage (2 )% 15 % 13 %
Hefty Tableware 1 % 1 % 2 %
Presto Products (1 )% 5 % 4 %
Total RCP (2 )% 10 % 8 %
Total Net Revenues. Total net revenues increased by $178 million , or 8%, to
$2,375 million . The increase in net revenues was largely due to changes in
consumer behavior driven by the COVID-19 pandemic. In the nine months ended
September 30, 2020 , all business segments experienced elevated consumer demand
associated with a fundamental shift to more at-home use of our products. This
was
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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$89 million , or 6%, to$1,669 million . The increase was primarily due to increased revenue, as noted above, 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 decreased by$8 million , or 24%, to$26 million . The decrease was primarily attributable to the factoring discount on the sale of ourU.S. trade receivables throughRGHL Group's securitization facility and the allocated related party management fee in the comparable prior period, partially offset by IPO and separation-related costs during the current period. Interest Expense, Net. Interest expense, net decreased by$117 million , or 67%, to$57 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$112 million on income before income taxes of$363 million (an effective tax rate of 31%) for the nine months endedSeptember 30, 2020 compared to income tax expense of$44 million on income before income taxes of$179 million (an effective tax rate of 25%) for the nine months endedSeptember 30, 2019 . The increase in the effective tax rate was 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 nine months endedSeptember 30, 2020 . Adjusted EBITDA. Adjusted EBITDA increased by$78 million , or 18%, to$519 million . The increase in Adjusted EBITDA was primarily due to increased revenue and lower material and manufacturing costs, partially offset by higher selling, general and administrative expenses, as discussed above. Segment Information Reynolds Cooking & Baking For the Nine Months EndedSeptember 30 ,
(In millions, except for %) 2020 2019 Change % Change Total segment net revenues$ 824 $ 744 $ 80 11 % Segment Adjusted EBITDA 169 116 53 46 % Segment Adjusted EBITDA Margin 21 % 16 % Total Segment Net Revenues. Reynolds Cooking & Baking total segment net revenues increased by$80 million , or 11%, to$824 million . The increase in net revenues was primarily driven by increased consumer demand, partially offset by a decline in related party revenue and lower pricing.
Adjusted EBITDA. Reynolds Cooking & Baking Adjusted EBITDA increased by
Hefty Waste & Storage
For the Nine Months Ended September 30,
(In millions, except for %) 2020 2019 Change % Change
Total segment net revenues $ 604 $ 533 $ 71 13 %
Segment Adjusted EBITDA 183 142 41 29 %
Segment Adjusted EBITDA Margin 30 % 27 %
Total Segment Net Revenues. Hefty Waste & Storage total segment net revenues
increased by $71 million , or 13%, to $604 million . The increase in net revenues
was primarily driven by increased consumer demand.
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Adjusted EBITDA. Hefty Waste & Storage Adjusted EBITDA increased by $41 million ,
or 29%, to $183 million . The increase in Adjusted EBITDA was primarily driven by
increased revenue, as noted above, and lower material and manufacturing costs.
Hefty Tableware
For the Nine Months Ended September 30,
(In millions, except for %) 2020 2019 Change % Change
Total segment net revenues $ 556 $ 545 $ 11 2 %
Segment Adjusted EBITDA 120 126 (6 ) (5 )%
Segment Adjusted EBITDA Margin 22 % 23 %
Total Segment Net Revenues. Hefty Tableware total segment net revenues increased
by $11 million , or 2%, to $556 million . The increase in net revenues was
primarily due to increased consumer demand and the impact of several new
products. As it relates to the COVID-19 demand, we experienced elevated demand
in our first quarter at the onset of the pandemic. During the second quarter, we
experienced a decline in revenue due to fewer large gatherings, particularly
around summer holidays and end of school events, as well as lower demand for
business and restaurant items sold by certain retail partners. In the third
quarter of 2020, there was a modest increase as certain COVID-19 - related
restrictions were eased.
Adjusted EBITDA. Hefty Tableware Adjusted EBITDA decreased by
Presto Products
For the Nine Months Ended September 30,
(In millions, except for %) 2020 2019 Change % Change
Total segment net revenues $ 401 $ 387 $ 14 4 %
Segment Adjusted EBITDA 80 67 13 19 %
Segment Adjusted EBITDA Margin 20 % 17 %
Total Segment Net Revenues. Presto Products total segment net revenues increased
by $14 million , or 4%, to $401 million . The increase in net revenues was
primarily due to increased consumer demand, partially offset by the exit from
certain low margin store branded business in the prior year.
Adjusted EBITDA. Presto Products Adjusted EBITDA increased by $13 million , or
19%, to $80 million . The increase in Adjusted EBITDA was primarily driven by
increased revenue, as noted above, and lower material and manufacturing costs.
Historical Cash FlowsThe following table discloses our cash flows for the periods presented:
For the Nine Months Ended
September 30,
(In millions) 2020 2019
Net cash provided by operating activities $ 147 $ 146
Net cash used in by investing activities (85 ) (93 )
Net cash provided by (used in) financing activities 187 (61 )
Increase (decrease) in cash and cash equivalents $ 249
$ (8 )
Cash provided by operating activities
Net cash provided by operating activities increased by$1 million to$147 million in the nine months endedSeptember 30, 2020 . The change was primarily driven by an increase in net income, a lower net investment in inventory and changes in related party receivables and payables, partially offset by a$275 million increase in accounts receivable,$240 million of which was related to accounts receivables previously sold throughRGHL Group's securitization facility prior to our separation fromRGHL Group . 23 --------------------------------------------------------------------------------
Cash used in investing activities
Net cash used in investing activities decreased by$8 million to$85 million in the nine months endedSeptember 30, 2020 . The net decrease was primarily attributable to cash advanced toRGHL Group as part of widerRGHL Group cash management activities in the prior year period. In addition to these related party items, cash outflows related to the acquisition of property, plant and equipment that increased by$11 million , or 15%. This change was primarily attributable to taking operational ownership of two facilities previously managed by a related party 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$248 million , from an outflow of$61 million for the nine months endedSeptember 30, 2019 to an inflow of$187 million for the nine months endedSeptember 30, 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 the 2020 period. 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. 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%. DuringSeptember 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 effective interest rate of 1.93% to 2.22%, including margin) for an aggregate notional amount of$1,650 million to hedge a portion of the interest rate exposure resulting from our Term Loan Facility for periods ranging from one to five years.
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 quarter endedSeptember 30, 2020 , we made a voluntary principal payment of$100 million related to the Term Loan Facility. Subsequent toSeptember 30, 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 being payable on maturity. The Revolving Facility matures inFebruary 2025 . Outstanding borrowings As ofSeptember 30, 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. As ofSeptember 30, 2020 , the outstanding balance under the Term Loan Facility was$2,363 million . 24 --------------------------------------------------------------------------------
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 byReynolds Consumer Products Inc. ("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. 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 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.
We are currently in compliance with the covenants contained in our External Debt Facilities.
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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