Reynolds Consumer Products Inc. — Q2 2023 Form 10-Q
Business context and period. The company manufactures branded and store-brand cooking, waste and storage, and tableware products, including Reynolds and Hefty products. This unaudited quarterly filing covers the three and six months ended June 30, 2023; comparisons are with the corresponding 2022 periods. Financial amounts below are in millions unless noted.
Key financial results
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Total net revenue | $940 | $917 | $1,814 | $1,762 |
| Gross profit (margin) | $228 (24%) | $184 (20%) | $384 (21%) | $352 (20%) |
| Operating income | $120 | $86 | $171 | $166 |
| Net income | $66 | $52 | $83 | $104 |
| Diluted EPS | $0.32 | $0.25 | $0.40 | $0.50 |
| Adjusted EBITDA (non-GAAP) | $150 | $118 | $232 | $230 |
Q2 revenue rose 3%; net income rose 27%. Six-month revenue also increased 3%, while net income declined 20%. Q2 gross margin improved to 24% from 20%; six-month margin increased to 21% from 20%. Interest expense was $31 in Q2 versus $16, and $60 for six months versus $28. The filing attributes the Q2 earnings improvement principally to pricing actions and lower material and logistics costs; the first-half earnings decline reflected higher material and manufacturing costs, SG&A and interest expense.
Cash flow and liquidity. Operating cash flow for the first half was $207, up from $101, primarily due to working-capital reductions. Investing cash outflow was $51, mainly capital expenditures; financing cash outflow was $111, including $96 of dividends and $12 of debt repayment. Cash was $83 at June 30, 2023, versus $38 at year-end 2022. Current assets were $1,146 and current liabilities $465.
Debt. Long-term debt carrying value was $2,056, including a $25 current portion; the term loan’s reported principal balance was $2,095. No revolving borrowings were outstanding; $6 of letters of credit reduced capacity under the $250 revolving facility. The term loan matures in February 2027 and the revolver in February 2025. The company reported compliance with debt covenants. After quarter-end, it voluntarily repaid $100 of term-loan principal.
Material changes and segment performance
- Q2: Reynolds Cooking & Baking revenue increased 9% and segment Adjusted EBITDA rose 11%. Hefty Waste & Storage revenue declined 4%, but EBITDA increased 35%. Hefty Tableware revenue rose 5% and EBITDA 80%. Presto Products revenue fell 3%, while EBITDA increased 12%.
- First half: Cooking & Baking revenue rose 7%, but EBITDA fell 33%, primarily due to material and manufacturing costs. Waste & Storage revenue declined 1% while EBITDA rose 29%; Tableware revenue rose 6% and EBITDA 58%; Presto revenue declined 1% while EBITDA rose 7%.
- Management said pricing actions supported revenue in both periods. Higher Reynolds Cooking & Baking volume was offset by lower volume in the other three segments. Q2 cost of sales fell 3%, while first-half cost of sales increased 1%. SG&A rose 18% in Q2 and 22% year to date.
Adjusted EBITDA is a non-GAAP measure; first-half corporate and unallocated expenses increased to $51 from $17, limiting the improvement in consolidated Adjusted EBITDA despite higher segment totals.
Outlook, risks and unusual items
The filing provides no quantified earnings or revenue guidance. Management stated that projected cash, operating cash flows and available revolver borrowings are expected to meet debt service, capital expenditure and working-capital needs for the foreseeable future, while cautioning that future cash generation and borrowing availability are not assured. The board declared a $0.23-per-share dividend for payment August 31, 2023; future dividends remain discretionary.
- Risks identified include consumer preference changes, customer concentration or loss, competition and pricing pressure, supply or facility disruptions, raw-material, energy, labor and freight costs, inflation, economic downturns, and interest-rate changes. The company reported no material change in risk factors from its 2022 Form 10-K and no material change in market-risk exposure during the first half.
- Interest expense increased substantially amid higher rates. Interest-rate swaps with $1,150 notional hedge part of term-loan exposure; their weighted-average effective rate was 4.38% as of June 30.
- IPO and separation-related costs were absent in 2023, compared with $3 in Q2 2022 and $7 in the first half of 2022. The company also transitioned its debt benchmark from LIBOR to SOFR in February 2023, with no material financial-statement impact reported.
- Legal matters include employment, consumer, personal-injury and commercial disputes; management did not expect them to have a material adverse effect based on its assessment, though outcomes could differ. Supplier-finance obligations confirmed as valid were not material.
- Related-party sales to PEI Group were $40 for the first half, while purchases were $199; the company paid $71 of first-half dividends to majority shareholder PFL.
Important facts for investors to verify
- Whether pricing and cost reductions can sustain improved quarterly margins as volume declines in several segments and first-half Cooking & Baking profitability weakened.
- How higher interest costs affect earnings and cash generation, and the amount of debt remaining after the subsequent $100 principal repayment.
- Whether working-capital-driven operating cash flow is repeatable and sufficient alongside capital spending, dividends and debt service.
- The sustainability of dividend payments and the effect of debt covenants or other contractual restrictions.
- Related-party transaction terms and exposures, including PEI Group purchases and dividends paid to PFL.