Business context and reporting period
Reynolds Consumer Products Inc. filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2022. The company sells cooking, waste and storage, and tableware products under brands including Reynolds and Hefty, as well as store brands. Its reportable segments are Reynolds Cooking & Baking, Hefty Waste & Storage, Hefty Tableware, and Presto Products. Financial amounts below are in millions unless noted.
Financial performance and liquidity
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Total net revenues | $967 | $905 | $2,729 | $2,534 |
| Gross profit | $178 | $182 | $530 | $582 |
| Gross margin | 18% | 20% | 19% | 23% |
| Income from operations | $83 | $100 | $249 | $328 |
| Net income | $48 | $66 | $152 | $220 |
| Diluted EPS | $0.23 | $0.31 | $0.72 | $1.05 |
| Adjusted EBITDA (non-GAAP) | $116 | $132 | $346 | $420 |
| Net interest expense | $20 | $12 | $48 | $36 |
Revenue grew 7% in Q3 and 8% year to date, principally from pricing actions, partly offset by lower volume. Material costs rose $81 in Q3 and $283 year to date; cost of sales increased 9% and 13%, respectively. Q3 operating margin was 9% versus 11% a year earlier; year-to-date operating margin was 9% versus 13%.
For the nine months, operating cash flow was $118 (prior year $122), capital expenditures were $86 ($101), and cash after capital expenditures was approximately $32 ($21). Dividends paid were $144. Cash fell to $33 at September 30 from $164 at year-end 2021, partly reflecting dividends and debt repayments. Inventory increased to $796 from $583.
At September 30, reported long-term debt was $2,071, with a $25 current portion; debt carrying value before current classification was $2,096. Term-loan principal was $2,113. Cash was $33. The $250 revolving facility had no borrowings and $7 of letters of credit outstanding. The company reported compliance with debt covenants. Interest-rate swaps hedged $1,150 of term-loan exposure.
Material changes and segment results
- Q3: Net income declined 27% and Adjusted EBITDA declined 12% year over year. Lower volume, higher personnel and advertising costs, and operating cost inflation weighed on earnings.
- Nine months: Net income declined 31% and Adjusted EBITDA declined 18%. Price increases lagged higher material, manufacturing and logistics costs, alongside lower volume and increased advertising costs.
- Reynolds Cooking & Baking: Nine-month revenue declined 1% to $889 and segment Adjusted EBITDA fell 42% to $97; lower volume and delayed cost recovery were key factors.
- Hefty Waste & Storage: Nine-month revenue rose 8% to $704 and Adjusted EBITDA rose 6% to $135.
- Hefty Tableware: Nine-month revenue rose 20% to $701, while Adjusted EBITDA declined 31% to $72 as cost increases outpaced pricing.
- Presto Products: Nine-month revenue rose 6% to $447 and Adjusted EBITDA rose 29% to $67, primarily from pricing actions and their timing.
Outlook, risks and unusual items
The filing provides no specific numerical earnings or revenue guidance. Management said projected cash, operating cash flow (including factoring proceeds), and available revolver capacity are expected to cover debt service, capital spending, and working-capital needs for the foreseeable future, while cautioning that future cash generation and borrowing availability are not assured. The company expects to continue quarterly dividends, subject to board discretion and financial and contractual constraints; a $0.23-per-share dividend was declared for payment November 30, 2022.
Management cited significant material, manufacturing, logistics, labor and freight cost pressures, and lower volumes. Reynolds Cooking & Baking experienced unplanned equipment downtime during Q3, affecting throughput of non-retail shipments and manufacturing costs and delaying the reduction of higher-cost aluminum inventory; management described most issues as temporary and said operational changes were underway. Interest expense rose with higher interest rates. The filing also identifies customer concentration, competition, supply interruptions, consumer preferences, and economic conditions among relevant risks.
A receivables factoring agreement entered in May permits sales of up to $190; $70 was outstanding under the arrangement at September 30. Factoring proceeds are classified as operating cash flow. Related-party sales to Pactiv Evergreen Group were $77 year to date, while purchases were $294. The company reported no pending legal proceedings for which a material outflow was considered more than remote and no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether pricing continues to offset material, manufacturing and logistics inflation, and whether volume stabilizes.
- Whether the Q3 equipment downtime and higher-cost aluminum inventory issues are resolved as management expects.
- How much operating cash flow depends on receivables factoring, and whether the facility remains available on acceptable terms.
- The effect of higher interest rates on debt costs despite the $1,150 notional amount of interest-rate swaps.
- Inventory levels, cash balances, dividend capacity, and compliance with debt covenants.
- Non-GAAP Adjusted EBITDA and segment figures are supplemental measures; compare them with GAAP results and the company’s reconciliations.