Reynolds Consumer Products Inc. — FY2019 Form 10-K Summary
Business context and reporting period
The filing covers the fiscal year ended December 31, 2019. Reynolds Consumer Products manufactures and sells cooking, waste and storage, and tableware products under brands including Reynolds and Hefty, as well as store brands. Reportable segments are Reynolds Cooking & Baking, Hefty Waste & Storage, Hefty Tableware, and Presto Products. Approximately 99% of 2019 sales were in North America and 98% were in the United States.
The historical financial statements are combined statements because the business operated as part of Reynolds Group Holdings Limited (“RGHL”) before its February 2020 corporate reorganization and IPO. The company began regular-way Nasdaq trading under “REYN” on January 31, 2020, completed the separation and IPO on February 4, 2020, and therefore was not operating as a standalone public company during 2019.
Key financial metrics
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Total net revenue | $3,032 million | $3,142 million | Down 4% |
| Gross profit | $880 million | $832 million | Up 6% |
| Gross margin | 29% | 26% | Up 3 percentage points |
| Income from operations | $510 million | $513 million | Down 1% |
| Operating margin | 17% | 16% | Up 1 percentage point |
| Net income | $225 million | $176 million | Up 28% |
| Net margin | 7% | 6% | Up 1 percentage point |
| Adjusted EBITDA | $655 million | $647 million | Up 1% |
| Adjusted EBITDA margin | 22% | 21% | Up 1 percentage point |
| Net cash provided by operating activities | $403 million | $530 million | Down 24% |
| Capital expenditures | $109 million | $82 million | Up 33% |
External net revenue was $2,883 million, with related-party revenue of $149 million. Earnings per share were $1.45 basic and diluted, compared with $1.13 in 2018. The effective tax rate was 25%, compared with 24% in 2018.
At December 31, 2019, cash and cash equivalents were $102 million, inventories were $418 million, and total assets were $4.160 billion. Historical debt included $2.011 billion of long-term debt and $2.214 billion of related-party borrowings. Historical equity was a deficit of $818 million, reflecting the pre-IPO combined-company structure.
Material changes versus the prior comparable period
- Revenue declined $110 million, primarily because of unusually high fourth-quarter 2018 customer inventory purchases, lower foodservice and reroll sales, exited store-brand business, and increased trade promotions and lower pricing.
- Cost of sales declined 7%, including a $71 million reduction in material and manufacturing costs, which more than offset the revenue decline and expanded gross margin.
- Interest expense declined $71 million to $209 million, mainly because related-party borrowings and receivables were netted in June 2019, reducing related-party interest expense.
- Other expense increased $34 million to $65 million, including $31 million of IPO and standalone-public-company preparation costs.
- Operating cash flow decreased $127 million, primarily because of settlement of related-party payables in preparation for the IPO. Excluding related-party investing activity, cash investment outflows increased to $109 million, largely for capacity expansion and cost-reduction projects.
- Segment performance was mixed: Reynolds Cooking & Baking revenue fell 7% and Adjusted EBITDA fell 11%; Hefty Waste & Storage revenue rose 2% and Adjusted EBITDA rose 10%; Hefty Tableware revenue fell 1% and Adjusted EBITDA rose 6%; and Presto Products revenue fell 5% while Adjusted EBITDA rose 7%.
Guidance, outlook, management commentary, risks and unusual items
The filing does not provide a clear formal full-year 2020 revenue or earnings guidance range. Management expects demand to benefit from convenience-oriented household consumption, innovation, branded and store-brand offerings, and sustainability-focused products. It also expects public-company expenses and standalone transition costs to increase, with most transition costs expected in 2020.
Following the IPO, the company received net IPO proceeds of $1.336 billion from the sale of 54.2455 million shares at $26.00 per share. It entered into a $2.475 billion senior secured term loan facility maturing in February 2027 and a $250 million revolving facility maturing in February 2025. The revolver was undrawn at closing. The company stated that projected cash, operating cash flow, and available borrowings were expected to be sufficient for business needs. A 100-basis-point change in term-loan interest rates would affect annual interest expense by approximately $25 million.
- Customer concentration is significant: Walmart represented 30% and Sam’s Club 13% of 2019 total revenue; the top ten customers represented 68%.
- Raw materials, energy, freight, tariffs, trade restrictions, and limited pass-through mechanisms may pressure margins. Key inputs include aluminum, plastic resins, diesel, natural gas, electricity, and carton board.
- Environmental concerns and potential restrictions on plastics, polystyrene foam, single-use products, recycling, and packaging could reduce demand or increase costs.
- The company has operational concentration risks, including facilities that are sole producers of certain inputs or products, and exposure to supply interruptions, labor issues, severe weather, and pandemics.
- PFL controlled approximately 74% of voting power after the IPO, giving it substantial control over board composition, dividends, strategic transactions, and other stockholder matters. The company is a Nasdaq “controlled company” and relies on related governance exemptions.
- Goodwill of $1.879 billion and indefinite-lived trade names of $850 million were material balance-sheet assets. No impairment was identified in 2019, but impairment testing depends on forecasts, valuation multiples, royalty rates, and discount rates.
- The 2019 results include $31 million of IPO and standalone-company preparation costs, $25 million of factoring discounts, and $10 million of allocated related-party management fees. Factoring and the allocated management fee ceased upon completion of the IPO.
- The company adopted ASC 842 lease accounting in 2019, recognizing $42 million of operating lease right-of-use assets and $43 million of operating lease liabilities at year-end.
- Legal reserves were not significant, and management stated that pending matters were not expected to have a material adverse effect. The filing nevertheless notes environmental, tax, product-liability, litigation, cybersecurity, and contractual risks.
Important facts for investors to verify
- Reconcile post-IPO debt, interest expense, mandatory amortization, covenant requirements, and available liquidity with the historical combined-company debt presentation.
- Assess the sustainability of gross-margin and Adjusted EBITDA improvements after commodity costs, pricing, trade promotions, public-company expenses, and transition costs normalize.
- Monitor revenue and margin trends in Reynolds Cooking & Baking, the largest pressured segment in 2019, and the effect of discontinued or exited store-brand business.
- Evaluate Walmart and Sam’s Club concentration, customer bargaining power, contract renewal terms, and the consequences of losing or repricing a major account.
- Review the impact of the RGHL separation, transition-services agreements, related-party transactions, Pactiv supply and logistics arrangements, and the Tax Matters Agreement.
- Verify the company’s ability to fund capital expenditures, dividends, debt service, and working capital while operating with substantial secured leverage and variable-rate debt.
- Track regulatory and consumer responses to plastic waste, polystyrene, recyclability, compostability, and sustainability claims.