Business context and reporting period
Reynolds Consumer Products Inc. filed this unaudited Form 10-Q for the three months ended March 31, 2020, compared with the first quarter of 2019. The company sells cooking, waste and storage, and tableware products under brands including Reynolds and Hefty, as well as store brands. It reports four segments: 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. The 2020 quarter therefore includes IPO, new financing, and separation-related changes; historical allocations and related-party arrangements may not reflect the costs of operating as a standalone public company.
Financial results and liquidity
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Total net revenue | $730 million | $665 million |
| Gross profit / margin | $189 million / 26% | $173 million / 26% |
| Income from operations | $92 million | $90 million |
| Net income | $26 million | $17 million |
| Diluted EPS | $0.14 | $0.11 |
| Adjusted EBITDA (non-GAAP) | $135 million | $110 million |
| Cash used in operating activities | $255 million | $96 million |
Revenue increased 10%, with volume up 13% and pricing down 3%. Management attributed much of the volume growth to pandemic-related demand, including more at-home use and pantry stocking. Adjusted EBITDA rose 23%; its margin was 18%, versus 17% a year earlier. Gross margin remained 26%, while operating income increased modestly.
Cash and cash equivalents were $200 million at March 31, 2020, compared with $102 million at year-end 2019. Cash used in operations increased largely because accounts receivable rose $303 million, including $240 million of receivables repurchased from RGHL’s securitization facility in connection with the separation. Capital expenditures were $23 million. Management said projected cash, operating cash flow, and available revolving borrowings should meet business needs for at least 12 months.
At quarter-end, long-term debt was $2.423 billion, with a $25 million current portion; the new term loan had $2.475 billion principal outstanding. The company also had a $250 million revolving facility with no borrowings and $7 million of letters of credit outstanding. Current assets were $973 million and current liabilities $385 million. The new term loan matures in February 2027; quarterly installments of $6 million were scheduled to begin in June 2020. The revolving facility matures in February 2025.
Material changes versus the prior comparable period
- Revenue grew $65 million, primarily on higher volume. Segment revenue rose 14% at Reynolds Cooking & Baking, 16% at Hefty Waste & Storage, and 9% at Hefty Tableware; Presto Products revenue was flat.
- Segment Adjusted EBITDA increased to $153 million from $112 million. Growth was strongest in Reynolds Cooking & Baking and Hefty Waste & Storage; Hefty Tableware was flat and Presto Products improved.
- Net interest expense declined to $27 million from $68 million, primarily due to the refinancing and separation from RGHL-related debt.
- Income tax expense was $39 million, versus $5 million, including a $23 million discrete charge from CARES Act-related deferred-tax remeasurement. The reported effective tax rate was 60%; excluding that item, management reported approximately 25%.
- The company issued 54.2 million IPO shares at $26 per share, generating $1.336 billion of net proceeds. It also borrowed under new external facilities and repaid related-party borrowings; remaining related-party debt was contributed to additional paid-in capital.
Outlook, risks, contingencies, and unusual items
The company reported that it remained open as an essential business and had not experienced a material COVID-19 cost increase in Q1, but said first-quarter costs were not representative of expected future costs. It could not predict the duration or future effects of the pandemic on sales or earnings. No specific earnings or revenue guidance is provided in the filing.
Management cited potential COVID-19-related disruptions to facilities, supply chains, customers, and third-party suppliers; changes in demand as pantry stocking eases or restrictions change; and higher employee-protection and operating costs. Other disclosed risks include customer concentration, competition and pricing pressure, raw-material and freight costs, and facility or workforce disruptions. The filing reports no pending legal proceedings for which a material outflow was considered more than remote, while noting outcomes of future matters can differ from estimates.
Unusual items include $14 million of IPO and separation-related costs in the Adjusted EBITDA reconciliation and the $23 million CARES Act tax charge. The company also continued to rely on transition services from RGHL and Rank Group for up to 24 months after separation. Its revolving facility has a springing leverage covenant that applies only if specified utilization exceeds 35% of commitments.
Important facts for investors to verify
- Whether pandemic-driven demand and pantry stocking persisted, reversed, or shifted by product category after Q1.
- The size and timing of the receivables-related working-capital outflow, including the effect of the $240 million repurchase, and the company’s subsequent operating cash flow.
- Debt service, interest costs, covenant headroom, and actual availability under the revolving facility.
- The standalone cost structure as transition services end, and the comparability of pre-IPO allocated costs with future expenses.
- The effects of CARES Act tax changes and other tax-related adjustments on future reported results and cash taxes.
- How non-GAAP Adjusted EBITDA and Adjusted EPS reconcile to GAAP results; Q1 2020 Adjusted EPS was $0.30 versus reported diluted EPS of $0.14.