Business context and reporting period
Reynolds Consumer Products Inc. filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2020. The company sells cooking, waste and storage, and tableware products under brands including Reynolds and Hefty, as well as private labels. Its four reportable segments are Reynolds Cooking & Baking, Hefty Waste & Storage, Hefty Tableware, and Presto Products.
The company completed its separation from Reynolds Group Holdings Limited (RGHL) and its IPO on February 4, 2020. Comparisons with 2019 therefore reflect different financing and ownership structures; certain earlier-period expenses were allocated from RGHL and may not reflect the costs of operating independently.
Financial performance and position
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Total net revenue | $822 million | $791 million | $1,552 million | $1,456 million |
| Gross profit | $252 million | $227 million | $441 million | $400 million |
| Income from operations | $165 million | $141 million | $257 million | $231 million |
| Net income | $112 million | $55 million | $138 million | $72 million |
| Diluted EPS | $0.53 | $0.35 | $0.69 | $0.46 |
| Adjusted EBITDA (non-GAAP) | $193 million | $169 million | $328 million | $279 million |
Margins improved year over year: gross margin was 31% versus 29% in Q2 and 28% versus 27% for the first half; operating margin was 20% versus 18% and 17% versus 16%, respectively. Net margin was 14% versus 7% in Q2 and 9% versus 5% for the first half. Adjusted EBITDA margin was 23% versus 21% in Q2 and 21% versus 19% for the first half.
- Cash flow: First-half operating cash flow was $3 million, down from $78 million; investing cash outflow was $52 million versus $60 million; financing provided $339 million versus a $27 million outflow. Cash increased by $290 million to $392 million. The operating-cash-flow decline was principally associated with a $268 million increase in accounts receivable, including $240 million of receivables previously sold through RGHL’s securitization facility.
- Debt and liquidity: At June 30, carrying value of debt was $2.443 billion, including $25 million current, and cash was $392 million. The company had no Revolving Facility borrowings and $7 million of letters of credit outstanding against its $250 million facility. Management said cash, operating cash flows, and available facility borrowings should meet business needs for at least 12 months.
- Balance sheet: Total assets were $4.716 billion and stockholders’ equity was $1.484 billion at June 30, versus a reported $818 million net parent deficit at year-end 2019. The change reflects the IPO, separation transactions, and reclassification of parent balances, among other items.
Material changes versus the prior comparable period
- Q2 revenue rose 4%; first-half revenue rose 7%. Management attributed the increase mainly to pandemic-related consumer demand, partly offset by lower related-party revenue, the prior-year exit of certain low-margin store-brand business, and lower pricing.
- Q2 segment revenue increased in Cooking & Baking (7%), Hefty Waste & Storage (11%), and Presto Products (5%), but decreased in Hefty Tableware (10%). For the first half, the respective changes were +10%, +14%, +3%, and -2%.
- Q2 Adjusted EBITDA increased 14%; first-half Adjusted EBITDA increased 18%, reflecting stronger revenue and lower material and manufacturing costs. Tableware performance weakened amid fewer gatherings and lower foodservice demand; its first-half Adjusted EBITDA fell 9%.
- Net interest expense declined to $17 million in Q2 from $67 million and to $44 million for the first half from $135 million, primarily because IPO-related refinancing replaced related-party debt. The comparison is affected by the company’s pre-IPO capital structure.
- First-half GAAP tax expense included a $23 million discrete charge from remeasurement of a deferred tax asset following the CARES Act. The company reported first-half Adjusted Net Income of $178 million and Adjusted EPS of $0.85, non-GAAP measures that exclude specified items and assume the IPO shares were outstanding for the full period.
Outlook, risks, contingencies, and unusual items
- The company remained open as an essential business and reported pandemic-related demand increases in three segments, while Tableware faced lower demand tied to restrictions on gatherings and foodservice. It reported increased COVID-19 costs in Q2 but said those costs may not represent future costs.
- Management said the duration and financial effects of COVID-19 remained uncertain and it could not predict the nature, timing, or magnitude of future sales or earnings changes. It did not provide quantitative earnings or revenue guidance, and did not anticipate a material liquidity impact over the next 12 months.
- Risks include pandemic-related facility, workforce, supply-chain, customer and demand disruption; raw-material, energy and freight costs; customer concentration and pricing pressure; competition; and changes in consumer preferences. The company noted no material change in market-risk exposure during the first half.
- The $2.475 billion Term Loan Facility matures in February 2027; quarterly amortization began in June. The $250 million revolving facility matures in February 2025 and has a springing leverage covenant that applies only when facility usage exceeds the stated threshold. Subsequent to quarter-end, the company voluntarily repaid $100 million of term-loan principal.
- The board approved a $0.22-per-share cash dividend on July 30, payable August 31, 2020. The company reported no pending legal proceedings for which a material outflow was considered more than remote and said existing matters were not expected to have a material adverse effect, while acknowledging actual outcomes may differ.
Important facts for investors to verify
- Whether pandemic-driven demand and improved margins persist, particularly in Cooking & Baking, Waste & Storage, and Presto, and whether Tableware recovers.
- How operating cash flow develops as receivables normalize, given the first-half $3 million operating cash flow and the securitization-related receivables increase.
- Debt repayment, interest costs, and covenant headroom after the $100 million post-quarter term-loan payment; confirm current debt and cash balances in subsequent filings.
- The sustainability of reported earnings relative to non-GAAP adjustments, including IPO/separation costs and the $23 million CARES Act-related tax item.
- Changes in related-party purchases, sales, service arrangements, and costs as transition services end and the company operates independently.