reyn-10q_20200630.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2020

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________ to __________

Commission File Number: 001-39205

 

REYNOLDS CONSUMER PRODUCTS INC.

(Exact Name of Registrant as Specified in its Charter)

 

 

Delaware

45-3464426

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer
Identification No.)

 

1900 W. Field Court

Lake Forest, Illinois 60045

(Address of principal executive offices) (Zip Code)

 

Telephone: (800) 879-5067

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading

Symbol(s)

 

Name of each exchange on which registered

Common stock, $0.001 par value

 

REYN

 

Nasdaq Global Select Market

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes  ☑    No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).     Yes  ☑    No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

  

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

  

Smaller reporting company

 

 

 

 

 

 

 

 

Emerging growth company

 

 

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes  ☐    No  

As of July 31, 2020, the registrant had 209,700,500 shares of common stock, $0.001 par value per share, outstanding.

 

 

 


Table of Contents

 

 

 

 

Page

PART I.

FINANCIAL INFORMATION

 

2

Item 1.

Financial Statements (Unaudited)

 

2

 

Condensed Consolidated Statements of Income for the three and six months ended June 30, 2020 and 2019

 

2

 

Condensed Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2020 and 2019

 

3

 

Condensed Consolidated Balance Sheets as of June 30, 2020 and December 31, 2019

 

4

 

Condensed Consolidated Statements of Stockholders’ Equity for the three and six months ended June 30, 2020 and 2019

 

5

 

Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2020 and 2019

 

6

 

Notes to Unaudited Condensed Consolidated Financial Statements

 

7

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

15

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

26

Item 4.

Controls and Procedures

 

26

PART II.

OTHER INFORMATION

 

27

Item 1.

Legal Proceedings

 

27

Item 1A.

Risk Factors

 

27

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

28

Item 3.

Defaults Upon Senior Securities

 

28

Item 4.

Mine Safety Disclosures

 

28

Item 5.

Other Information

 

28

Item 6.

Exhibits

 

29

 

Signatures

 

30

 

 

 

i


FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains certain statements that constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. In some cases, you can identify these statements by forward-looking words such as “may,” “might,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential” or “continue,” the negative of these terms and other comparable terminology. These forward-looking statements, which are subject to risks, uncertainties and assumptions about us, may include projections of our future financial performance, our anticipated growth strategies and anticipated trends in our business. These statements are only predictions based on our current expectations and projections about future events. There are important factors that could cause our actual results, level of activity, performance or achievements to differ materially from the results, level of activity, performance or achievements expressed or implied by the forward-looking statements, including those risks and uncertainties discussed in Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019 and as updated in our Quarterly Reports on Form 10-Q. You should specifically consider the numerous risks outlined in Item 1A. “Risk Factors.” These risks and uncertainties include factors related to:

 

changes in consumer preferences, lifestyle and environmental concerns;

 

relationships with our major customers, consolidation of our customer bases and loss of a significant customer;

 

competition and pricing pressures;

 

loss of, or disruption at, any of our key manufacturing facilities;

 

our suppliers of raw materials and any interruption in our supply of raw materials;

 

loss due to an accident, labor issues, weather conditions, natural disaster, the emergence of a pandemic or disease outbreak, such as coronavirus or otherwise;

 

the unknown duration and economic, operational and financial impacts of the global outbreak of the COVID-19 pandemic;

 

costs of raw materials, energy and freight, including the impact of tariffs, trade sanctions and similar matters affecting our importation of certain raw materials;

 

our ability to develop and maintain brands that are critical to our success;

 

economic downturns in our target markets; and

 

difficulty meeting our sales growth objectives and innovation goals.

Although we believe the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, level of activity, performance or achievements. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of any of these forward-looking statements. Investors are cautioned not to place undue reliance on any such forward-looking statements, which speak only as of the date they are made. We are under no duty to update any of these forward-looking statements after the date of this Quarterly Report on Form 10-Q to conform our prior statements to actual results or revised expectations.

Additional information about these factors and about the material factors or assumptions underlying such forward-looking statements is included within our Annual Report on Form 10-K for the fiscal year ended December 31, 2019 which was filed on March 10, 2020, under Part I, Item 1A. “Risk Factors” and as updated in our Quarterly Reports on Form 10-Q.


1


PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

Reynolds Consumer Products Inc.

Condensed Consolidated Statements of Income

(in millions, except for per share data)

(Unaudited)

 

 

 

For the Three Months Ended

 

 

For the Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Net revenues

 

$

798

 

 

$

753

 

 

$

1,489

 

 

$

1,378

 

Related party net revenues

 

 

24

 

 

 

38

 

 

 

63

 

 

 

78

 

Total net revenues

 

 

822

 

 

 

791

 

 

 

1,552

 

 

 

1,456

 

Cost of sales

 

 

(570

)

 

 

(564

)

 

 

(1,111

)

 

 

(1,056

)

Gross profit

 

 

252

 

 

 

227

 

 

 

441

 

 

 

400

 

Selling, general and administrative expenses

 

 

(81

)

 

 

(77

)

 

 

(163

)

 

 

(155

)

Other expense, net

 

 

(6

)

 

 

(9

)

 

 

(21

)

 

 

(14

)

Income from operations

 

 

165

 

 

 

141

 

 

 

257

 

 

 

231

 

Interest expense, net

 

 

(17

)

 

 

(67

)

 

 

(44

)

 

 

(135

)

Income before income taxes

 

 

148

 

 

 

74

 

 

 

213

 

 

 

96

 

Income tax expense

 

 

(36

)

 

 

(19

)

 

 

(75

)

 

 

(24

)

Net income

 

$

112

 

 

$

55

 

 

$

138

 

 

$

72

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.53

 

 

$

0.35

 

 

$

0.69

 

 

$

0.46

 

Diluted

 

$

0.53

 

 

$

0.35

 

 

$

0.69

 

 

$

0.46

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

209.7

 

 

 

155.5

 

 

 

199.2

 

 

 

155.5

 

Effect of dilutive securities

 

 

0.1

 

 

 

 

 

 

 

 

 

 

Diluted

 

 

209.8

 

 

 

155.5

 

 

 

199.2

 

 

 

155.5

 

 

See accompanying notes to the condensed consolidated financial statements.

2


Reynolds Consumer Products Inc.

Condensed Consolidated Statements of Comprehensive Income

(in millions)

(Unaudited)

 

 

 

For the Three Months Ended

 

 

For the Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Net income

 

$

112

 

 

$

55

 

 

$

138

 

 

$

72

 

Other comprehensive income (loss), net of income taxes:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Currency translation adjustment

 

 

1

 

 

 

 

 

 

(1

)

 

 

 

Employee benefit plans

 

 

 

 

 

 

 

 

 

 

 

(1

)

Other comprehensive income (loss), net of income taxes

 

 

1

 

 

 

 

 

 

(1

)

 

 

(1

)

Comprehensive income

 

$

113

 

 

$

55

 

 

$

137

 

 

$

71

 

 

See accompanying notes to the condensed consolidated financial statements.

3


Reynolds Consumer Products Inc.

Condensed Consolidated Balance Sheets

(in millions, except for per share data)

 

 

 

(Unaudited)

As of June 30,

2020

 

 

As of December 31, 2019

 

Assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

392

 

 

$

102

 

Accounts receivable (net of allowance for doubtful accounts of $1 and $0)

 

 

281

 

 

 

13

 

Other receivables

 

 

10

 

 

 

7

 

Related party receivables

 

 

9

 

 

 

14

 

Inventories

 

 

385

 

 

 

418

 

Other current assets

 

 

17

 

 

 

16

 

Total current assets

 

 

1,094

 

 

 

570

 

Property, plant and equipment (net of accumulated depreciation of $672 and $642)

 

 

558

 

 

 

537

 

Operating lease right-of-use assets, net

 

 

61

 

 

 

42

 

Goodwill

 

 

1,879

 

 

 

1,879

 

Intangible assets, net

 

 

1,107

 

 

 

1,123

 

Other assets

 

 

17

 

 

 

9

 

Total assets

 

$

4,716

 

 

$

4,160

 

Liabilities

 

 

 

 

 

 

 

 

Accounts payable

 

$

144

 

 

$

135

 

Related party payables

 

 

49

 

 

 

72

 

Related party accrued interest payable

 

 

 

 

 

18

 

Current portion of long-term debt

 

 

25

 

 

 

21

 

Income taxes payable

 

 

28

 

 

 

 

Accrued and other current liabilities

 

 

143

 

 

 

132

 

Total current liabilities

 

 

389

 

 

 

378

 

Long-term debt

 

 

2,418

 

 

 

1,990

 

Long-term related party borrowings

 

 

 

 

 

2,214

 

Long-term operating lease liabilities

 

 

52

 

 

 

35

 

Deferred income taxes

 

 

300

 

 

 

294

 

Long-term postretirement benefit obligation

 

 

48

 

 

 

48

 

Other liabilities

 

 

25

 

 

 

19

 

Total liabilities

 

$

3,232

 

 

$

4,978

 

Commitments and contingencies (Note 8)

 

 

 

 

 

 

 

 

Stockholders’ equity

 

 

 

 

 

 

 

 

Common stock, $0.001 par value; 2,000 shares authorized; 209.7 shares issued and

   outstanding

 

 

 

 

 

 

Additional paid-in capital

 

 

1,379

 

 

 

 

Net parent deficit

 

 

 

 

 

(823

)

Accumulated other comprehensive income

 

 

4

 

 

 

5

 

Retained earnings

 

 

101

 

 

 

 

Total stockholders' equity

 

 

1,484

 

 

 

(818

)

Total liabilities and stockholders' equity

 

$

4,716

 

 

$

4,160

 

 

See accompanying notes to the condensed consolidated financial statements.

4


Reynolds Consumer Products Inc.

Condensed Consolidated Statements of Stockholders’ Equity

(in millions)

(Unaudited)

 

 

Common

Stock

 

 

Additional

Paid-in

Capital

 

 

Retained

Earnings

 

 

Net Parent

(Deficit)

 

 

Accumulated

Other

Comprehensive

Income

 

 

Total

Equity

(Deficit)

 

Balance as of December 31, 2018

 

$

 

 

$

 

 

$

 

 

$

(1,034

)

 

$

7

 

 

$

(1,027

)

Adoption of new accounting principle

 

 

 

 

 

 

 

 

 

 

 

(3

)

 

 

3

 

 

 

 

Net income

 

 

 

 

 

 

 

 

 

 

 

17

 

 

 

 

 

 

17

 

Other comprehensive loss, net of income taxes

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1

)

 

 

(1

)

Net transfers (to) from Parent

 

 

 

 

 

 

 

 

 

 

 

12

 

 

 

 

 

 

12

 

Balance as of March 31, 2019

 

$

 

 

$

 

 

$

 

 

$

(1,008

)

 

$

9

 

 

$

(999

)

Adoption of new accounting principle

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

 

 

 

 

 

55

 

 

 

 

 

 

55

 

Other comprehensive loss, net of income taxes

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net transfers (to) from Parent

 

 

 

 

 

 

 

 

 

 

 

34

 

 

 

 

 

 

34

 

Balance as of June 30, 2019

 

$

 

 

$

 

 

$

 

 

$

(919

)

 

$

9

 

 

$

(910

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of December 31, 2019

 

$

 

 

$

 

 

$

 

 

$

(823

)

 

$

5

 

 

$

(818

)

Net income

 

 

 

 

 

 

 

 

20

 

 

 

6

 

 

 

 

 

 

26

 

Other comprehensive loss, net of income taxes

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2

)

 

 

(2

)

Net transfers (to) from Parent

 

 

 

 

 

 

 

 

 

 

 

855

 

 

 

 

 

 

855

 

Reclassification of net parent (deficit) in RCP

 

 

 

 

 

38

 

 

 

 

 

 

(38

)

 

 

 

 

 

 

Issuance of common stock, net of costs

 

 

 

 

 

1,339

 

 

 

 

 

 

 

 

 

 

 

 

1,339

 

Dividends ($0.15 per share declared)

 

 

 

 

 

 

 

 

(31

)

 

 

 

 

 

 

 

 

(31

)

Other

 

 

 

 

 

1

 

 

 

 

 

 

 

 

 

 

 

 

1

 

Balance as of March 31, 2020

 

$

 

 

$

1,378

 

 

$

(11

)

 

$

 

 

$

3

 

 

$

1,370

 

Net income

 

 

 

 

 

 

 

 

112

 

 

 

 

 

 

 

 

 

112

 

Other comprehensive income, net of income taxes

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1

 

 

 

1

 

Other

 

 

 

 

 

1

 

 

 

 

 

 

 

 

 

 

 

 

1

 

Balance as of June 30, 2020

 

$

 

 

$

1,379

 

 

$

101

 

 

$

 

 

$

4

 

 

$

1,484

 

 

See accompanying notes to the condensed consolidated financial statements.

5


Reynolds Consumer Products Inc.

Condensed Consolidated Statements of Cash Flows

(in millions)

(Unaudited)

 

 

 

Six Months Ended

 

 

 

June 30,

 

 

 

2020

 

 

2019

 

Cash provided by (used in) operating activities

 

 

 

 

 

 

 

 

Net income

 

$

138

 

 

$

72

 

Adjustments to reconcile net income to operating cash flows:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

48

 

 

 

42

 

Deferred income taxes

 

 

41

 

 

 

(2

)

Unrealized losses (gains) on derivatives

 

 

1

 

 

 

(8

)

Stock compensation expense

 

 

3

 

 

 

 

Change in assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable, net

 

 

(268

)

 

 

2

 

Other receivables

 

 

(3

)

 

 

11

 

Related party receivables

 

 

4

 

 

 

(50

)

Inventories

 

 

33

 

 

 

(52

)

Accounts payable

 

 

8

 

 

 

1

 

Related party payables

 

 

(20

)

 

 

(63

)

Related party accrued interest payable

 

 

(18

)

 

 

109

 

Income taxes payable

 

 

31

 

 

 

24

 

Accrued and other current liabilities

 

 

10

 

 

 

(6

)

Other assets and liabilities

 

 

(5

)

 

 

(2

)

Net cash provided by operating activities

 

 

3

 

 

 

78

 

Cash provided by (used in) investing activities

 

 

 

 

 

 

 

 

Acquisition of property, plant and equipment

 

 

(52

)

 

 

(41

)

Advances to related parties

 

 

 

 

 

(170

)

Repayments from related parties

 

 

 

 

 

151

 

Net cash used in investing activities

 

 

(52

)

 

 

(60

)

Cash provided by (used in) financing activities

 

 

 

 

 

 

 

 

Proceeds from long-term debt, net of discounts

 

 

2,472

 

 

 

 

Repayment of long-term debt

 

 

(6

)

 

 

 

Repayments of RGHL Group Credit Agreement

 

 

(8

)

 

 

(10

)

Advances from related parties

 

 

240

 

 

 

17

 

Repayments to related parties

 

 

(3,627

)

 

 

(46

)

Deferred debt transaction costs

 

 

(28

)

 

 

 

Proceeds from IPO settlement facility

 

 

1,168

 

 

 

 

Repayment of IPO settlement facility

 

 

(1,168

)

 

 

 

Issuance of common stock

 

 

1,410

 

 

 

 

Equity issuance costs

 

 

(69

)

 

 

 

Dividends paid

 

 

(31

)

 

 

 

Net transfers (to) from Parent

 

 

(14

)

 

 

12

 

Net cash provided by (used in) financing activities

 

 

339

 

 

 

(27

)

Effect of exchange rate on cash and cash equivalents

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

 

290

 

 

 

(9

)

Cash and cash equivalents at beginning of period

 

 

102

 

 

 

23

 

Cash and cash equivalents at end of period

 

$

392

 

 

$

14

 

 

Significant non-cash investing and financing activities

New leases resulted in the recognition of right-of-use assets and corresponding lease liabilities of $24 million and $4 million for the six months ended June 30, 2020 and 2019, respectively. Refer to Note 1 – Summary of Significant Accounting Policies and Note 11 – Related Party Transactions for details of significant non-cash investing and financing activities.

 

See accompanying notes to the condensed consolidated financial statements.

 

6


 

Reynolds Consumer Products Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Note 1 – Summary of Significant Accounting Policies

Description of Business:

Reynolds Consumer Products Inc. and its subsidiaries (“we”, “us” or “our”) produce and sell products across three broad categories: cooking products, waste & storage products and tableware. We sell our products under brands such as Reynolds and Hefty, and also under store brands. Our product portfolio includes aluminum foil, wraps, disposable bakeware, trash bags, food storage bags and disposable tableware. We report four business segments: Reynolds Cooking & Baking; Hefty Waste & Storage; Hefty Tableware; and Presto Products.

Basis of Presentation:

Prior to the completion of our Corporate Reorganization, as defined in our registration statement on Form S-1 (File No. 333-234731), and initial public offering (“IPO”) on February 4, 2020, we operated as part of Reynolds Group Holdings Limited (“RGHL”) and not as a stand-alone entity. We represented the business that was reported as the Reynolds Consumer Products segment in the consolidated financial statements of RGHL and its subsidiaries (collectively, “RGHL Group” or the “Parent”). As part of our Corporate Reorganization, we reorganized the legal structure of our entities so they are all under a single parent entity, Reynolds Consumer Products Inc. In conjunction with our Corporate Reorganization and IPO, we separated from RGHL Group on February 4, 2020. We have prepared the accompanying unaudited condensed consolidated financial statements in accordance with United States generally accepted accounting principles ("GAAP") for interim financial information and the instructions to the Quarterly Report on Form 10-Q and Article 10 of Regulation S-X issued by the U.S. Securities and Exchange Commission ("SEC"). Accordingly, they do not include all of the information and notes required by GAAP for comprehensive annual financial statements.

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting policies described in our Annual Report on Form 10-K for the year ended December 31, 2019, and should be read in conjunction with the disclosures therein. In our opinion, these interim condensed consolidated financial statements reflect all adjustments, consisting of normal recurring adjustments, necessary to state fairly the financial condition, results of operations, and cash flows for the periods presented. Operating results for interim periods are not necessarily indicative of annual operating results.

Our condensed consolidated statements of income include allocations of certain expenses for services provided by RGHL Group prior to our separation, including, but not limited to, general corporate expenses related to group wide functions including executive management, finance, legal, tax, information technology and a portion of a related party management fee incurred by RGHL Group. For the three and six months ended June 30, 2020, total costs allocated to us for these functions were zero and $2 million, respectively, compared to $11 million and $20 million in the comparable prior year periods. These costs were primarily included in selling, general and administrative expenses in our condensed consolidated statements of income. For the three and six months ended June 30, 2020, these amounts included costs of zero and $1 million, respectively, compared to $6 million and $10 million in the comparable prior year periods, that were not historically allocated to us as part of RGHL Group's normal monthly reporting process. Additionally, for the three and six months ended June 30, 2020 costs of zero and $2 million, respectively, compared to $1 million in both of the comparable prior year periods, were allocated to us related to the IPO process that cannot be deferred and offset against the IPO proceeds, which are included in other expense, net in our condensed consolidated statements of income. All of these expenses have been allocated on a basis considered reasonable by management, using either specific identification, such as direct usage or headcount when identifiable, or proportional allocations determined with reference to time incurred, relative to revenues, or other reasonable methods of allocation. Amounts allocated on a proportional basis relate to certain corporate functions and are reflective of the time and effort expended in the provision of these corporate functions to us.

Initial Public Offering:

On February 4, 2020, we completed our separation from RGHL Group and the IPO of our common stock pursuant to a Registration Statement on Form S-1. In the IPO, we sold an aggregate of 54,245,500 shares of common stock, including 7,075,500 shares of common stock purchased by the underwriters on February 7, 2020 pursuant to their option to purchase additional shares, under the Registration Statement at a public offering price of $26.00 per share.

In conjunction with our separation from RGHL Group and IPO, we reclassified RGHL Group’s historical net investment in us to additional paid-in capital. Each share of our outstanding common stock, immediately prior to our IPO, was exchanged into 155,455 shares of common stock. In addition, certain related party borrowings owed to RGHL Group were contributed as additional paid-in capital without the issuance of any additional shares.

 

7


 

Note 2 – New Accounting Standards

Recently Adopted Accounting Guidance:

In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This ASU and subsequent amendments to the initial guidance modify the impairment model to use an expected loss methodology in place of the previously used incurred loss methodology, which may result in earlier recognition of losses related to financial instruments. This change is effective for fiscal years beginning after December 15, 2019, with early adoption permitted, and requires a cumulative effect adjustment to the balance sheet upon adoption. We adopted these requirements as of January 1, 2020 with no material impact on our condensed consolidated financial statements.

In August 2018, the FASB issued ASU 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract, which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs for internal-use software. This ASU is effective for fiscal years beginning after December 15, 2019, with early adoption permitted. We adopted the standard as of January 1, 2020 with no material impact on our condensed consolidated financial statements.

Accounting Guidance Issued But Not Yet Adopted:

In August 2018, the FASB issued ASU 2018-14, Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20) Disclosure - Framework - Changes to the Disclosure Requirements for Defined Benefit Plans.  The ASU modifies the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. The ASU is effective for fiscal years beginning after December 15, 2020, with early adoption permitted. We are currently evaluating the requirements of this guidance, which is expected to impact our disclosures but is not expected to impact the measurement and recognition of amounts in our consolidated financial statements.

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which is intended to simplify various aspects related to accounting for income taxes. This ASU removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. This ASU is effective for fiscal years beginning after December 15, 2020, with early adoption permitted. We are currently assessing the impact of this standard on our consolidated financial statements.

Note 3 – Inventories

Inventories consisted of the following:

 

 

June 30,

2020

 

 

December 31,

2019

 

 

 

(in millions)

 

Raw materials

 

$

126

 

 

$

125

 

Work in progress

 

 

48

 

 

 

47

 

Finished goods

 

 

181

 

 

 

217

 

Spare parts

 

 

30

 

 

 

29

 

Inventories

 

$

385

 

 

$

418

 

 

Note 4 – Debt

Long-term debt consisted of the following:

 

 

 

June 30,

2020

 

 

December 31,

2019

 

 

 

(in millions)

 

Term loan facility

 

$

2,469

 

 

$

 

RGHL Group U.S. Term Loan

 

 

 

 

 

2,017

 

Deferred financing transaction costs

 

 

(23

)

 

 

(4

)

Original issue discounts

 

 

(3

)

 

 

(2

)

 

 

 

2,443

 

 

 

2,011

 

Less: current portion

 

 

(25

)

 

 

(21

)

Long-term debt

 

$

2,418

 

 

$

1,990

 

 

8


 

External Debt Facilities

In February 2020, we entered into new external debt facilities (“External Debt Facilities”), which consist of (i) a $2,475 million senior secured term loan facility (“Term Loan Facility”); and (ii) a $250 million senior secured revolving credit facility (“Revolving Facility”). In addition, on February 4, 2020 we entered into, and extinguished, a $1,168 million facility (“IPO Settlement Facility”). The proceeds from the Term Loan Facility and IPO Settlement Facility, net of transaction costs and original issue discounts, together with available cash, were used to repay accrued related party interest and a portion of the related party loans payable.

Borrowings under the External Debt Facilities bear interest at a rate per annum equal to, at our option, either a base rate or a LIBO rate plus an applicable margin of 1.75%.

The External Debt Facilities contain a springing financial covenant requiring compliance with a ratio of first lien net indebtedness to consolidated EBITDA, applicable solely to the Revolving Facility. The financial covenant is tested on the last day of any fiscal quarter only if the aggregate principal amount of borrowings under the Revolving Facility and drawn but unreimbursed letters of credit exceed 35% of the total amount of commitments under the Revolving Facility on such day.

If an event of default occurs, the lenders under the External Debt Facilities are entitled to take various actions, including the acceleration of amounts due under the External Debt Facilities and all actions permitted to be taken by secured creditors.

Term Loan Facility

The Term Loan Facility matures in February 2027. The Term Loan Facility amortizes in equal quarterly installments of $6 million, which commenced in June 2020, with the balance being payable on maturity.

Revolving Facility

The Revolving Facility matures in February 2025 and includes a sub-facility for letters of credit. As of June 30, 2020, we had no outstanding borrowings under the Revolving Facility, and we had $7 million of letters of credit outstanding, which reduces the borrowing capacity under the Revolving Facility.

Reallocation of Borrowings Under the RGHL Group Credit Agreement

Amounts outstanding under the RGHL Group Credit Agreement were reallocated to an entity within RGHL Group and on February 4, 2020, we were fully and unconditionally released from the security and guarantee arrangements relating to RGHL Group’s borrowings.

Fair Value of Our Long-Term Debt

The fair value of our long-term debt as of June 30, 2020, which is a Level 2 fair value measurement, approximates the carrying value due to the variable market interest rate and the stability of our credit profile.

Note 5 – Income Taxes

Prior to our separation from RGHL Group and IPO, our U.S. operations were included in the U.S. federal consolidated and certain state and local tax returns filed by RGHL Group.  We also file certain separate U.S. state and local and foreign income tax returns. For the periods prior to separation, income tax (expense) benefit and deferred tax balances are presented in these condensed consolidated statements of income as if we filed tax returns on a stand-alone basis. Income tax payable balances as of December 31, 2019, were classified within “net parent deficit” on the condensed consolidated balance sheet since RGHL Group is legally liable for the tax. Upon separation from RGHL Group, becoming a separate taxable entity and the change from carve-out financial statements to consolidated financial statements, we have remeasured certain deferred taxes. These adjustments have been recognized directly in equity.

Our income tax expense for the three and six months ended June 30, 2020 incorporates an expected annualized effective tax rate of approximately 24% excluding the impact of discrete items, compared to 26% and 25% in the comparable prior year periods. Our income tax expense for the six months ended June 30, 2020 includes an incremental discrete expense of $23 million due to the remeasurement of our deferred tax asset associated with the deductibility of interest expense as a result of the enactment, subsequent to our separation from RGHL Group, of the Coronavirus Aid, Relief and Economic Security (“CARES”) Act on March 27, 2020. The retroactive components of the CARES Act are expected to change RGHL Group’s U.S. federal consolidated tax return for the year ended December 31, 2019, which will reduce the benefits of future tax deductions that we received at the time of separation from RGHL Group.

9


 

Note 6 – Financial Instruments

Derivative instruments, consisting of commodity contracts, were recorded at fair value in our condensed consolidated balance sheets and consisted of a liability of $1 million, recorded in accrued and other current liabilities, and an asset of $1 million, recorded in other current assets, as of June 30, 2020 and December 31, 2019, respectively.

Our commodity contracts are primarily commodity swaps and are all Level 2 financial assets and liabilities. Commodity derivatives are valued using an income approach based on the observable market commodity index prices less the contract rate multiplied by the notional amount or based on pricing models that rely on market observable inputs such as commodity prices. Our calculation of the fair value of these financial instruments takes into consideration the risk of non-performance, including counterparty credit risk. The majority of our derivative contracts do not have a legal right of set-off. We manage the credit risk in connection with our derivatives by limiting the amount of exposure with each counterparty and monitoring the financial condition of our counterparties.

For the three and six months ended June 30, 2020, we recognized an unrealized gain of $3 million and an unrealized loss of $1 million, respectively, compared to unrealized gains of $1 million and $8 million in the comparable prior year periods, in cost of sales in the condensed consolidated statements of income.

The following table provides the detail of outstanding commodity derivative contracts as of June 30, 2020:

 

 

Type

 

Unit of measure

 

Contracted

volume

 

 

Contracted

price range

 

Contracted date

of maturity

Benzene swaps

 

U.S. liquid gallon

 

 

924,809

 

 

$1.09-$2.50

 

Aug 2020 - Nov 2020

Diesel swaps

 

U.S. liquid gallon

 

 

3,035,859

 

 

$2.30-$3.16

 

Jul 2020 - Jun 2021

 

Note 7 Stock-based Compensation

We granted restricted stock units (“RSUs”) in July 2019 to certain members of management, pursuant to retention agreements entered into with these employees (the “IPO Grants”). These RSUs vest upon satisfaction of both a performance-based vesting condition (the “IPO Condition”) and a service-based vesting condition (the “Service Condition”). The IPO Condition was satisfied when we completed our IPO on February 4, 2020. The Service Condition will be satisfied with respect to one-third of an employee’s RSUs on each anniversary from the date of our IPO for three consecutive years, subject to the employee’s continued employment through the applicable vesting date.

 

In addition, in conjunction with our Corporate Reorganization and IPO, we have established a 2020 incentive award plan for purposes of granting stock-based compensation awards to certain of our senior management, our non-executive directors and to certain employees, to incentivize their performance and align their interests with ours. A maximum of 10.5 million shares of common stock are initially available for issuance under equity incentive awards granted pursuant to the plan. In the three and six months ended June 30, 2020, 0.1 million and 0.3 million shares were granted, respectively.

 

At June 30, 2020, there were approximately 0.5 million shares outstanding. For the three and six months ended June 30, 2020, stock-based compensation expense was $2 million and $3 million, respectively, and zero in the comparable prior year periods.

 

Note 8 – Commitments and Contingencies

Legal Proceedings:

We are from time to time party to litigation, legal proceedings and tax examinations arising from our operations. Most of these matters involve allegations of damages against us relating to employment matters, personal injury and commercial or contractual disputes. We record estimates for claims and proceedings that constitute a present obligation when it is probable that an outflow of resources will be required to settle the obligation and a reliable estimate of such obligation can be made. While it is not possible to predict the outcome of any of these matters, based on our assessment of the facts and circumstances, we do not believe any of these matters, individually or in the aggregate, will have a material adverse effect on our financial position, results of operations or cash flows. However, actual outcomes may differ from those expected and could have a material effect on our financial position, results of operations or cash flows in a future period.

As of June 30, 2020, there were no legal proceedings pending other than those for which we have determined that the possibility of a material outflow is remote.

10


 

Note 9 Segment Reporting

We have four reportable segments - Reynolds Cooking & Baking, Hefty Waste & Storage, Hefty Tableware and Presto Products. The key factors used to identify these reportable segments are the organization and alignment of our internal operations and the nature of our products.  This reflects how our Chief Operating Decision Maker (“CODM”) monitors performance, allocates capital and makes strategic and operational decisions. We present segment adjusted EBITDA ("Adjusted EBITDA") as this is the financial measure by which management and our CODM allocate resources and analyze the performance of our reportable segments. Adjusted EBITDA represents each segment's earnings before interest, tax, depreciation and amortization and is further adjusted to exclude unrealized gains and losses on derivatives, costs associated with rationalizing operations and administrative functions, factoring discounts (pre-IPO), amortization of actuarial gains, the allocated related party management fee (pre-IPO) and IPO and separation-related costs.

 

 

 

Reynolds

Cooking

& Baking

 

 

Hefty

Waste &

Storage

 

 

Hefty

Tableware

 

 

Presto

Products

 

 

Segment

Total

 

 

Unallocated(1)

 

 

Total

 

Three Months Ended June 30, 2020

 

(in millions)

 

 

 

 

 

Net revenues

 

$

295

 

 

$

201

 

 

$

186

 

 

$

137

 

 

$

819

 

 

$

3

 

 

$

822

 

Intersegment revenues

 

 

 

 

 

2

 

 

 

 

 

 

1

 

 

 

3

 

 

 

(3

)

 

 

 

Total segment net revenues

 

 

295

 

 

 

203

 

 

 

186

 

 

 

138

 

 

 

822

 

 

 

 

 

 

822

 

Adjusted EBITDA

 

 

66

 

 

 

63

 

 

 

43

 

 

 

28

 

 

 

200

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

4

 

 

 

3

 

 

 

4

 

 

 

5

 

 

 

16

 

 

 

8

 

 

 

24

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reynolds

Cooking

& Baking

 

 

Hefty

Waste &

Storage

 

 

Hefty

Tableware

 

 

Presto

Products

 

 

Segment

Total

 

 

Unallocated(1)

 

 

Total

 

Three Months Ended June 30, 2019

 

(in millions)

 

 

 

 

 

Net revenues

 

$

275

 

 

$

178

 

 

$