Reynolds Consumer Products Inc. — Q3 2020 Form 10-Q
Business context and period: The filing covers the quarter and nine months ended September 30, 2020. Reynolds makes cooking, waste and storage, and tableware products, including Reynolds and Hefty brands. It completed its separation from Pactiv Evergreen’s predecessor group and its IPO on February 4, 2020; therefore, 2019 comparative results reflect operations within the former parent structure, not a standalone public company.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Total revenue | $823m | $741m | $2,375m | $2,197m |
| Gross profit / margin | $265m / 32% | $217m / 29% | $706m / 30% | $617m / 28% |
| Operating income / margin | $163m / 20% | $121m / 16% | $420m / 18% | $352m / 16% |
| Net income / margin | $113m / 14% | $63m / 9% | $251m / 11% | $135m / 6% |
| Diluted EPS | $0.54 | $0.41 | $1.24 | $0.87 |
| Adjusted EBITDA (non-GAAP) | $192m | $162m | $519m | $441m |
| Adjusted EBITDA margin | 23% | 22% | 22% | 20% |
Q3 revenue increased 11%, while nine-month revenue grew 8%. Management attributed growth principally to increased at-home use during COVID-19 and new products. Volume/mix drove most of the increase; pricing was down 1% in Q3 and 2% year to date. Gross margin improved, with management citing lower material and manufacturing costs alongside higher sales. SG&A rose 28% in Q3 and 13% year to date, mainly from higher advertising and personnel costs.
Cash flow, debt and liquidity
- Nine-month operating cash flow was $147m, versus $146m; investing cash outflow was $85m, including $85m of property, plant and equipment purchases; financing cash inflow was $187m. Cash increased $249m to $351m.
- Operating cash flow was affected by a $275m increase in accounts receivable, including $240m of receivables repurchased from the former parent’s securitization facility.
- At September 30, cash was $351m and total current assets and current liabilities were $1,079m and $401m, respectively. Reported debt was $25m current and $2,313m long term; the term loan principal balance was $2,363m.
- The company had no revolver borrowings and $7m of letters of credit against its $250m revolving facility. It made a voluntary $100m term-loan payment in Q3 and another $100m after quarter-end. The term loan matures in 2027; the revolver matures in 2025.
- In September, interest-rate swaps fixed the LIBO rate on $1.65bn of debt at 0.18%–0.47% (effective rates including margin of 1.93%–2.22%) for periods of one to five years. Management said it was in compliance with debt covenants and expected available liquidity to meet business needs for at least 12 months.
Material changes and segment results
- Q3 Adjusted EBITDA increased 19% to $192m; nine-month Adjusted EBITDA increased 18% to $519m. Net interest expense fell to $13m in Q3 and $57m year to date, primarily following replacement of related-party borrowings with external debt at the IPO.
- Q3 revenue and Adjusted EBITDA increased across all four segments. Hefty Waste & Storage led Q3 segment EBITDA at $65m; Reynolds Cooking & Baking reported $63m, Hefty Tableware $43m, and Presto Products $28m.
- For the first nine months, Reynolds Cooking & Baking, Hefty Waste & Storage, and Presto Products increased Adjusted EBITDA. Hefty Tableware revenue rose 2%, but Adjusted EBITDA declined 5% to $120m, attributed mainly to higher advertising and logistics costs. Management described tableware demand as uneven, reflecting fewer gatherings and reduced business and restaurant demand.
- The IPO raised common-stock proceeds; the company used new term-loan financing and cash to repay related-party debt and interest, while $831m of remaining related-party borrowings was contributed to equity. September 30 stockholders’ equity was $1,551m, compared with a parent deficit of $818m at year-end 2019.
Outlook, risks and unusual items
- The company gave no specific revenue, earnings or margin guidance. Management said increased demand from a shift to at-home use continued, but its duration and magnitude were uncertain; it could not reliably predict COVID-19’s future sales or earnings effects. It did not expect COVID-19 to materially affect liquidity over the next 12 months.
- COVID-19-related costs had not been material through September, but could change. Risks include facility or supply-chain disruption, workforce impacts, higher operating and sanitation costs, demand volatility, and difficulty meeting elevated demand or adding capacity.
- Nine-month tax expense included a $23m discrete charge from remeasuring deferred tax assets following the CARES Act; the reported effective tax rate was 31%, or approximately 25% excluding that item.
- IPO and separation-related costs were $5m in Q3 and $26m year to date. Nine-month results also include the transition to standalone operations and a change in financing structure. Non-GAAP Adjusted EBITDA and Adjusted EPS exclude specified items and are not substitutes for GAAP measures.
- Transition services from the former parent may continue for up to 24 months; the company will need to provide or source those services afterward. Ongoing related-party transactions include product sales and purchases, freight and warehousing, and dividends paid to the majority shareholder.
- Management reported no pending legal proceedings for which a material outflow was considered more than remote. It cautioned that litigation outcomes could nevertheless affect future results. The company also cited consumer preference, customer concentration, competition, raw-material and freight costs, and other risks.
Important facts for investors to verify
- Whether elevated COVID-era demand persists, and how changing demand affects sales, capacity, costs and margins.
- Cash conversion and receivables: operating cash flow was nearly flat year over year despite higher net income, including the effects of the receivables repurchase.
- Debt repayment pace, interest-rate exposure after swaps, and capacity under the revolving facility and debt covenants.
- Whether the improvement in gross margin and Adjusted EBITDA is sustainable as advertising, personnel, logistics and standalone costs evolve.
- The effect of the $23m CARES Act-related tax charge and other IPO/separation items when comparing GAAP and non-GAAP results.
- Comparability of 2019 results with 2020, given the IPO, parent allocations, related-party financing and operational transition.