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Item 7. Management’s Discussion and Analysis

2021-02-12 compared with 2020-03-10 · 161 added, 171 removed, 294 unchanged (53% of the section changed)

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERAT IONS

Our discussion and analysis is intended to help the reader understand our results of operations and financial condition and is provided as an addition to, and should be read in connection with, our combined financial statements and the accompanying notes included elsewhere in this Annual Report on Form 10-K.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Our management’s discussion and analysis is intended to help the reader understand our results of operations and financial condition and is provided as an addition to, and should be read in connection with, our consolidated financial statements and the accompanying notes included elsewhere in this Annual Report on Form 10-K.

Tabular dollars are presented in millions.

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In addition, from time to time we have entered into hedging agreements, including commodity derivative contracts, to hedge commodity prices primarily related to aluminum, diesel and benzene with the objective of obtaining more predictable costs for these commodities.

The realized and unrealized gains or losses arising from derivative instruments are recognized in cost of sales.

Furthermore, since we distribute our products and receive raw materials primarily by rail and truck, reduced availability of rail or trucking capacity and fluctuations in freight and handling costs have caused us to incur increased expenses in prior periods.

Where applicable, we also adjust the prices of our products in response to fluctuations in production and distribution costs.

The realized and unrealized gains or losses arising from commodity derivative instruments are recognized in cost of sales.

Where possible, we also adjust the prices of our products in response to fluctuations in production and distribution costs.

Our operating results are also impacted by energy-related cost movements, including those impacting both our manufacturing operations and transportation and utility costs.

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See “Business - Competition” for more detail on our competitors.

Portions of our business are moderately seasonal.

Portions of our business historically have been moderately seasonal.

Overall, our strongest sales are in our fourth quarter and our weakest sales are in our first quarter.

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holidays in our fourth quarter, primarily due to the holiday use of Reynolds Wrap, Reynolds Oven Bags and Reynolds Parchment Paper.

Our tableware products generally have higher sales in the second quarter of the year, primarily due to outdoor summertime use of disposable plates, cups and bowls.

Our tableware products generally have higher sales in the second quarter of the year, primarily due to outdoor summertime use of disposable plates, cups and bowls, however, our tableware products seasonality trends in 2020 were different from historical seasonality trends due to fewer social gatherings as a result of COVID-19.

Sustainability

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We offer a broad line of products made with recycled, renewable, recyclable and compostable materials.

For instance, we recently launched 75% Unbleached Compostable Parchment Paper and redesigned our Hefty party cups to reduce the plastic by 10% while maintaining strength.

We intend to continue sustainability innovation to ensure that we are at the leading edge of recyclability, renewability and compostability in order to offer our customers environmentally sustainable choices.

Our Separation from RGHL Group

Prior to our Corporate Reorganization and IPO completed on February 4, 2020, we operated as part of RGHL Group’s broader corporate organization rather than as a stand-alone public company.

RGHL Group performed or supported various corporate services for us, including executive management, supply chain, information technology, legal, finance and accounting, human resources, risk management, tax, treasury and other services.

In addition, we have sold products to, and purchased products from, RGHL Group.

Historically, these transactions involving RGHL Group may not have always been consummated on terms equivalent to those in an arm’s-length transaction.

Sales to RGHL Group of products that we manufacture have been reflected as related party net revenues in our combined financial statements.

Certain related party transactions are settled in cash and are reflected as related party receivables and payables in our combined balance sheets.

Prior to our Corporate Reorganization and IPO, certain related party transactions with RGHL Group were settled by either non-cash capital contributions from RGHL Group to us or non-cash capital distributions from us and were included as part of RGHL Group’s net investment in our combined balance sheets.

We also utilize manufacturing and warehousing facilities and resources managed by RGHL Group to conduct our business.

The expenses associated with these transactions are included in cost of sales in our combined statements of income.

We believe that the assumptions and methodologies underlying the allocation of these expenses from RGHL Group are reasonable.

We intend to continue sustainability innovation in our efforts to be at the leading edge of recyclability, renewability and compostability in order to offer our customers environmentally sustainable choices.

Our Separation from PEI Group (previously known as RGHL Group)

Prior to our Corporate Reorganization and IPO completed on February 4, 2020, we operated as part of PEI Group’s broader corporate organization rather than as a stand-alone public company.

PEI Group performed or supported various corporate services for us, including executive management, supply chain, information technology, legal, finance and accounting, human resources, risk management, tax, treasury and other services.

In addition, we have sold products to, and purchased products from, PEI Group.

Historically, these transactions involving PEI Group may not have always been consummated on terms equivalent to those in an arm’s-length transaction.

Sales to PEI Group of products that we manufacture have been reflected as related party net revenues in our consolidated financial statements.

Certain related party transactions are reflected as related party receivables and payables in our consolidated balance sheets and are settled in cash.

Prior to our Corporate Reorganization and IPO, certain related party transactions with PEI Group were settled by either non-cash capital contributions from PEI Group to us or non-cash capital distributions from us and were included as part of PEI Group’s net investment in our balance sheet.

We also utilize manufacturing and warehousing facilities and resources managed by PEI Group to conduct our business.

The expenses associated with these transactions are included in cost of sales in our consolidated statements of income.

We believe that the assumptions and methodologies underlying the allocation of these expenses from PEI Group are reasonable.

However, such allocations do not necessarily reflect what the results of operations and financial position would have been had we operated as a stand-alone public company during the periods presented.

In conjunction with our separation from RGHL Group, we entered into a transition services agreement with Reynolds Group Holdings Inc.

whereby RGHL Group will continue to provide certain administrative services to us, including information technology services;

In conjunction with our separation from PEI Group, we entered into a transition services agreement with a subsidiary of PEI Group whereby PEI Group will continue to provide certain administrative services to us, including information technology services;

accounting, treasury, financial reporting and transaction support;

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tax, legal and compliance related services;

and other corporate services for up to 24 months.

and other corporate services for up to 24 months beginning on February 4, 2020.

In addition, we entered into a transition services agreement with Rank Group Limited whereby, upon our request, Rank Group Limited will provide certain administrative services to us, including financial reporting, consulting and compliance services, insurance procurement and human resources support, legal and corporate secretarial support, and related services for up to 24 months.

At the conclusion of these transitional arrangements, we will have to perform these services with internal resources or contract with third party providers.

The previous arrangements we had with RGHL Group, as reflected in our combined financial statements included elsewhere in this Annual Report on Form 10-K, may be materially different from the arrangements that we have entered into as part of our separation from RGHL Group.

On February 4, 2020, i n conjunction with our Corporate Reorganization and IPO, we entered into the Term Loan Facility and Revolving Facility (together, the “External Debt Faciliti es”) and repaid portions of the related party borrowings owed to RGHL Group that were reflected on our combined balance sheets.

RGHL Group contributed the remaining balance of related party borrowings owed by us to RGHL Group as additional paid-in capital without the issuance of any additional shares prior to the closing of our IPO.

In addition, all indebtedness that we had borrowed under RGHL Group’s Credit Agreement was reallocated and we were released as a borrower and guarantor from such facilities and released as a guarantor of RGHL Group’s outstanding senior notes.

The previous arrangements we had with PEI Group may be materially different from the arrangements that we have entered into as part of our separation from PEI Group.

On February 4, 2020, i n conjunction with our Corporate Reorganization and IPO, we entered into new external debt facilities ( “ External Debt Faciliti es”), consisting of a $2,475 million senior secured term loan facility (“Term Loan Facility”) and a $250 million senior secured revolving credit facility (“Revolving Facility”) , and repaid portions of the related party borrowings owed to PEI Group that were reflected on our balance sheet prior to that date.

PEI Group contributed the remaining balance of related party borrowings owed by us to PEI Group as additional paid-in capital without the issuance of any additional shares prior to the closing of our IPO.

In addition, all indebtedness that we had borrowed under PEI Group’s Credit Agreement was reallocated and we were released as a borrower and guarantor from such facilities and released as a guarantor of PEI Group’s outstanding senior notes.

Public Company Expenses

As a newly public company, we will be implementing additional procedures and processes for the purpose of addressing the standards and requirements applicable to public companies.

In particular, we expect our accounting, legal and personnel-related expenses and directors’ and officers’ insurance costs to increase as we continue to establish more comprehensive compliance and governance functions, establish, maintain and review internal controls over financial reporting in accordance with the Sarbanes-Oxley Act, and prepar e and distribute periodic reports in accordance with SEC rules.

Our financial statements from fiscal year 2020 onward will reflect the impact of these expenses.

In conjunction with our Corporate Reorganization and IPO, we will assume responsibility for all of our stand-alone public company costs, including the costs of certain corporate services currently provided by RGHL Group.

In addition, as we transition away from the corporate services currently provided by RGHL Group, we have incurred, and will continue to incur, non-recurring transitional costs during fiscal year 2019 to fiscal year 2022, with the majority of these costs expected to be incurred during fiscal year 2020.

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, to our non-executive directors and to certain employees, to incentivize their performance and align their interests with ours.

The maximum number of shares of common stock initially available for issuance under the equity incentive awards granted pursuant to the plan is equal to 10,485,025 shares, which includes 165,992 shares of common stock underlying restricted stock units that have been issued pursuant to retention agreements entered into with senior management.

We will commence recognizing stock-based compensation expense during the first quarter of fiscal year 2020.

Components of the Combined Statements of Income

Our revenues are derived primarily from the sale of our products to third parties, net of any sales incentives.

Sales incentives include discounts, allowances and trade promotions.

Revenue is recognized when control over products transfers to our customers, which generally occurs upon delivery or shipment of the products.

Related Party Net Revenues

Related party net revenues are derived from the sale of our products to RGHL Group.

Our related party revenues are recognized primarily in our Reynolds Cooking & Baking segment.

Cost of Sales

Cost of sales consists primarily of the cost of materials, packaging, labor and overhead associated with our manufacturing operations.

Also included within cost of sales are the freight and logistics-related costs of delivering our products to our customers.

Selling, General and Administrative Expenses

Selling, general and administrative expenses consist primarily of general and administrative costs associated with all of our non-manufacturing personnel and advertising costs.

The general and administrative costs include wages, benefits, travel expenses, legal fees, R&D costs and any professional fees or consulting services.

Advertising costs include programs to support new and existing product lines.

Our selling, general and administrative expenses include amounts that are allocated to us for services provided by RGHL Group, including, but not limited to, general corporate expenses related to group wide functions such as executive management, finance, legal, tax and information technology.

For further information, refer to Note 1 - Description of Business and Basis of Presentation in our combined financial statements included elsewhere in this Annual Report on Form 10-K.

Other Expense, Net

Other expense, net includes the factoring discount on the sale of our U.S.

trade receivables through RGHL Group’s securitization facility, the allocated related party management fee and transaction-related costs.

The factoring arrangements and allocation of related party management fee ceased upon our IPO.

Interest Expense, Net

Interest expense, net consists primarily of interest on external debt and related party borrowings, net of interest income primarily on related party receivables.

In conjunction with our Corporate Reorganization and IPO, these historical items of interest expense and interest income have been replaced with interest expense associated with the External Debt Facilities.

Income Tax (Expense) Benefit

Income tax (expense) benefit consists of an estimate of federal, state and foreign income taxes based on enacted tax rates, as adjusted for allowable credits, deductions and uncertain tax positions.

During the periods presented, our U.S.

operations were included in a consolidated U.S.

federal return as well as certain state and local tax returns filed by RGHL Group.

The income tax (expense) benefit has been calculated on a separate return basis.

In the future, as a stand-alone entity, we will file tax returns on our own behalf and our effective tax rate and deferred taxes may be different from those in the historical periods.

As a newly public company in 2020, we have implemented additional procedures and processes for the purpose of addressing the standards and requirements applicable to public companies.

In particular, our accounting, legal and personnel-related expenses and directors’ and officers’ insurance costs have increased, related to establishing more comprehensive compliance and governance functions, establishing, maintaining and reviewing internal controls over financial reporting in accordance with the Sarbanes-Oxley Act, and preparing , filing and distributing periodic reports in accordance with SEC rules.

Our financial statements from fiscal year 2020 onward reflect the impact of these expenses.

In conjunction with our Corporate Reorganization and IPO, we have assumed responsibility for all of our stand-alone public company costs, including the costs of certain corporate services previously provided by PEI Group.

In addition, as we transition away from the corporate services previously provided by PEI Group, we have incurred, and will continue to incur, non-recurring transitional costs.

We expect the transitional costs to continue into 2021.

In addition, in conjunction with our Corporate Reorganization and IPO, we established a 2020 incentive award plan for purposes of granting stock-based compensation awards to certain of our senior management, to our non-executive directors and to certain employees, to incentivize their performance and align their interests with ours.

We began recognizing stock-based compensation expense during the first quarter of fiscal year 2020.

Impact of COVID-19

As we manufacture and sell products that are essential to the daily lives of consumers, we have been classified as an “essential business” and our operations have remained open throughout the COVID-19 pandemic.

We have implemented policies and procedures designed to protect our employees and our customers, including implementing recommendations from the Centers for Disease Control and Prevention for social distancing in our plants, screening employees for increased temperature at certain locations, providing masks and/or face coverings, engagement of third-party vendors to clean and sanitize facilities, implementing a work from home policy for all employees who can do so, and enhancing our leave policies to ensure employees experiencing symptoms of COVID-19 stay at home.

As the pandemic progresses, we remain committed to adapting our policies and procedures to ensure the safety of our employees and compliance with federal, state and local regulations.

While we experienced increased costs in the year ended December 31, 2020 as a result of COVID-19, they were not material to our results of operations.

However, these costs may not be representative of what we may incur moving forward.

We continue to experience an increase in demand from a fundamental shift to more at-home use of our products driven by the consumer response to the COVID-19 pandemic.

The duration and magnitude of the increased demand remains unknown, and its ongoing impact on our operations may not be consistent with our experiences to date.

At this time, we are unable to predict with any certainty the nature, timing or magnitude of any changes in future sales and/or earnings attributable to the impact of COVID-19 in North America.

We do not currently anticipate that the COVID-19 pandemic will materially impact our liquidity over the next 12 months.

Non-GAAP Measures

Certain financial measures contained in this Annual Report on Form 10-K adjust for the impact of specified items and are not in accordance with GAAP.

We use the non-GAAP financial measure “Adjusted EBITDA” in evaluating our past results and future prospects.

We define Adjusted EBITDA as net income calculated in accordance with GAAP, plus the sum of income tax expense, net interest expense, depreciation and amortization and further adjusted to exclude unrealized gains and losses on derivatives, costs associated with rationalizing operations and administrative functions, factoring discounts, defined benefit plan settlement losses, amortization of actuarial gains, the allocated related party management fee and transaction-related costs.

In this Annual Report on Form 10-K we use the non-GAAP financial measures “Adjusted EBITDA”, “Adjusted Net Income” and “Adjusted EPS”, which are measures adjusted for the impact of specified items and are not in accordance with GAAP.

We define Adjusted EBITDA as net income calculated in accordance with GAAP, plus the sum of income tax expense, net interest expense, depreciation and amortization and further adjusted to exclude, as applicable, unrealized gains and losses on commodity derivatives, factoring discounts (pre-IPO), the allocated related party management fee (pre-IPO), IPO and separation-related costs and business rationalization costs.

We define Adjusted Net Income and Adjusted EPS as Net Income and Earnings Per Share calculated in accordance with GAAP, plus the sum of IPO and separation-related costs, the impact of a tax legislation change under the CARES Act enacted on March 27, 2020.

We present Adjusted EBITDA because it is a key measure used by our management team to evaluate our operating performance, generate future operating plans and make strategic decisions.

Accordingly , we believe presenting Adjusted EBITDA in this Annual Report on Form 10-K provides useful information to investors and others in understanding and evaluating our operating results in the same manner as our management team and board of directors.

In additi on, our chief operating decision maker uses Adjusted EBITDA of each reportable segment to evaluate the operating performance of such segments.

In addition, our chief operating decision maker uses Adjusted EBITDA of each reportable segment to evaluate the operating performance of such segments.

We use Adjusted Net Income and Adjusted EPS as supplemental measures to evaluate our business’ performance in a way that also considers our ability to generate profit without the impact of certain items.

Accordingly, we believe presenting these measures provides useful information to investors and others in understanding and evaluating our operating results in the same manner as our management team and board of directors.

Non-GAAP information should be considered as supplemental in nature and is not meant to be considered in isolation or as a substitute for the related financial information prepared in accordance with GAAP.

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Net income – GAAP

Income tax expense (benefit)

Income tax expense

Interest expense, net

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Allocated related party management fee (2)

Transaction-related costs (3)

IPO and separation-related costs (3)

Unrealized losses (gains) on derivatives (4)

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Reflects the loss on sale that we incurred when we sold our U.S.

trade receivables through RGHL Group’s securitization facility.

trade receivables through PEI Group’s securitization facility.

Our participation in this facility ceased upon the completion of our Corporate Reorganization and IPO.

For further information, refer to Note 11 - Other Expense, Net in our combined financial statements included elsewhere in this Annual Report on Form 10-K.

Reflects our allocation, from RGHL Group, of a management fee that is charged by Rank Group Limited to RGHL Group, which has ceased upon the completion of our Corporate Reorganization and IPO.

For further information, refer to Note 11 - Other Expense, Net in our combined financial statements included elsewhere in this Annual Report on Form 10-K.

Reflects costs during the year ended December 31, 2019 related to the IPO process, as well as costs related to our preparations to operate as a stand-alone public company.

Reflects our allocation, from PEI Group, of a management fee that was charged by Rank Group Limited to PEI Group, which ceased upon the completion of our Corporate Reorganization and IPO.

Reflects costs during the years ended December 31, 2020 and 2019 related to the IPO process, as well as costs related to our separation to operate as a stand-alone public company.

Reflects the mark-to-market movements in our commodity derivatives.

For further information, refer to Note 8 - Financial Instruments in our combined financial statements included elsewhere in this Annual Report on Form 10-K.

For further information, refer to Note 8 - Financial Instruments in our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

Reflects primarily employee termination costs associated with rationalizing our operations in Canada.

Includes the amortization of actuarial gains related to our postretirement benefit plan.

For further information, refer to Note 9 - Benefit Plans in our combined financial statements included elsewhere in this Annual Report on Form 10-K.

Results of Operati ons

The following discussion should be read in conjunction with our combined financial statements included elsewhere in this Annual Report on Form 10-K.

Detailed comparisons of revenue and results are presented in the discussions of the operating segments, which follow our combined results discussion.

Discussion of the year ended December 31, 2018 compared with the year ended December 31, 2017 is included in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our registration statement on Form S-1, as amended, as filed with the SEC.

The following is a reconciliation of our net income and diluted EPS, the most directly comparable GAAP financial measures, to Adjusted Net Income and Adjusted EPS for the year ended December 31, 2020:

Year Ended December 31, 2020

(In millions, except for per share data)

Diluted Shares

As Reported - GAAP

Assume full period impact of IPO shares (1)

Impact of tax legislation change from the CARES Act

IPO and separation-related costs (2)

Adjusted (Non-GAAP)

Represents incremental shares required to adjust the weighted average shares outstanding for the period to the actual shares outstanding as of December 31, 2020.

We utilize the shares outstanding at period end as if they had been outstanding for the full period rather than weighted average shares outstanding over the course of the period as it is a more meaningful calculation that provides consistency in comparability due to the additional shares issued as a result of the IPO in the period.

Amounts are after tax calculated using a tax rate of 24.6% for the year ended December 31, 2020, which is our effective tax rate excluding the one-time discrete expense associated with the legislation change from the CARES Act.

Resu lts of Operations

The following discussion should be read in conjunction with our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

Detailed comparisons of revenue and results are presented in the discussions of the operating segments, which follow our consolidated results discussion.

Discussions of the year ended December 31, 2018 items and comparisons between the year ended December 31, 2019 and the year ended December 31, 2018 can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K filed on March 10, 2020.

Aggregation of Segment Revenue and Adjusted EBITDA

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See “Non-GAAP Measures” for details, including a reconciliation between net income and Adjusted EBITDA.

The unallocated net revenues represent the elimination of revenue on inter-segment transactions.

The unallocated net revenues include elimination of intersegment revenues and other revenue adjustments.

These transactions arise primarily from sales by Hefty Waste & Storage to Presto Products.

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Income before income taxes

Income tax (expense) benefit

Income tax expense

Adjusted EBITDA (1)

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Total Net Revenues .

Total net revenues decreased by $110 million, or 4%, to $3,032 million.

The decline in net revenues was largely due to volume impacts resulting from unusually high demand in the fourth quarter of 2018 as customers increased inventory levels due to uncertainty of future transportation availability, as well as the impact of lower foodservice and reroll sales, the exit of certain store branded business and lower pricing, primarily driven by increased trade promotions to support certain of our customers in achieving key retail price points.

Total net revenues increased by $231 million, or 8%, to $3,263 million.

The increase in net revenues was largely due to a fundamental shift to more at-home use of our products and the introduction of several new products.

This was partially offset by the exit from certain low margin store branded business in the prior year, a decline in related party revenue and lower pricing.

Cost of Sales .

Cost of sales decreased by $158 million, or 7%, to $2,152 million.

The decrease was primarily due to lower volume and a $71 million decrease in material and manufacturing costs.

Cost of sales increased by $138 million, or 6%, to $2,290 million.

The increase was primarily due to increased revenue and higher logistics costs, partially offset by lower material and manufacturing costs.

Selling, General and Administrative Expenses.

Selling, general and administrative expenses increased by $17 million, or 6%, to $305 million.

The increase was primarily due to increased personnel-related costs.

Selling, general and administrative expenses increased by $53 million, or 17%, to $358 million primarily due to higher personnel and advertising costs.

Other Expense, Net.

Other expense, net increased by $34 million, or 110%, to $65 million.

The increase was primarily attributable to $31 million of transaction-related costs incurred during the year ended December 31, 2019.

These costs comprise amounts associated with the IPO process that cannot be offset against the IPO proceeds, as well as costs related to our preparations to operate as a stand-alone public company.

Other expense, net decreased by $36 million, or 55%, to $29 million.

The decrease was primarily attributable to the prior year factoring discount on the sale of our U.S.

trade receivables through PEI Group’s securitization facility and the allocated related party management fee.

Interest Expense , Net .

Interest expense, net decreased by $139 million, or 67%, to $70 million.

The decrease was primarily due to a $93 million decrease in related party interest expense partially offset by a $19 million decrease in related party interest income.

The decrease in related party interest expense and income was primarily the result of a net reduction of $1,802 million in amounts outstanding under various related party borrowings and receivables resulting from our interest bearing related party receivables being used to reduce amounts outstanding under various related party borrowings in June 2019.

In conjunction with our Corporate Reorganization and IPO, we have replaced our outstanding borrowings, which comprised amounts outstanding under the RGHL Group Credit Agreement and related party borrowings, with the External Debt Facilities.

For further details regarding the External Debt Facilities refer to “-Sources of Liquidity.”

Income Tax (Expense) Benefit.

The decrease was primarily due to the change in our debt structure as a result of our IPO in the first quarter of 2020.

Prior to the IPO we had related party debt and associated interest expense that was replaced with our External Debt Facilities in conjunction with the IPO.

Income Tax Expense.

We recognized income tax expense of $153 million on income before income taxes of $516 million (an effective tax rate of 29.7%) for the year ended December 31, 2020 compared to income tax expense of $76 million on income before income taxes of $301 million (an effective tax rate of 25.4%) for the year ended December 31, 2019.

The increase in the effective tax rate was due to the recognition of a $27 million discrete tax expense associated with the remeasurement of our deferred taxes as a result of the legislation change from the CARES Act.

Excluding the impact of this, our effective tax rate was 24.6% for year ended December 31, 2020.

Adjusted EBITDA.

Adjusted EBITDA increased by $62 million, or 9%, to $717 million.

The increase in Adjusted EBITDA was primarily due to l ower material and manufacturing costs which were partially offset by lower volume, higher personnel-related costs and lower pricing.

The increase in Adjusted EBITDA was primarily due to increased revenue and lower material and manufacturing costs, partially offset by higher logistics costs and selling, general and administrative expenses , as discussed above.

Segment Information

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Total Segment Net Revenues .

Reynolds Cooking & Baking total segment net revenues decreased by $83 million, or 7%, to $1,076 million.

The decline in net revenues was due to $64 million of lower volume, largely attributable to unusually high demand in the fourth quarter of 2018 as customers increased inventory levels due to uncertainty of future transportation availability, lower foodservice and reroll sales as well as lower pricing, primarily driven by increased trade promotions.

Reynolds Cooking & Baking total segment net revenues increased by $83 million, or 8%, to $1,159 million.

The increase in net revenues was primarily driven by increased demand, partially offset by a decline in related party revenue and lower pricing.

Adjusted EBITDA .

Reynolds Cooking & Baking Adjusted EBITDA decreased by $25 million, or 11% , to $209 million .

The decrease in Adjusted E BITDA was primarily driven by the impact of lower volume and lower pricing partially offset by lower material and manufacturing costs .

Reynolds Cooking & Baking Adjusted EBITDA increased by $45 million, or 22%, to $254 million.

The increase in Adjusted EBITDA was primarily driven by increased volume and lower material and manufacturing costs, partially offset by lower pricing, as noted above, and increased logistics and advertising costs.

Hefty Waste & Storage

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Hefty Waste & Storage total segment net revenues increased by $109 million, or 15%, to $818 million.

The increase was primarily due to an $8 million increase in volume resulting largely from strong sales of both branded and store brand trash bags as we gained incremental business and experienced strong growth with existing customers partially offset by the volume impact of unusually high demand in the fourth quarter of 2018.

The increase in net revenues was primarily driven by increased demand.

Adjusted EBITDA.

Hefty Waste & Storage Adjusted EBITDA increased by $46 million, or 24%, to $236 million.

The increase in Adjusted EBITDA was primarily driven by lower material and manufacturing costs, partially offset by increased personnel, advertising and logistics costs.

The increase in Adjusted EBITDA was primarily driven by increased revenue, as noted above, partially offset by increased logistics costs and advertising spend.

Hefty Tableware

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Total Segment Net Revenues.

Hefty Tableware total segment net revenues decreased by $6 million, or 1%, to $751 million.

The decrease was primarily due to $15 million in lower volume due to the exit of certain store brand business, partially offset by new product growth at several of our major customers.

The decrease was partially offset by the full year impact of the price increases taken in 2018.

Hefty Tableware total segment net revenues increased by $12 million, or 2%, to $763 million.

The increase in net revenues was primarily due to the introduction of several new products and higher pricing driven by fewer promotions than in the prior year.

Adjusted EBITDA.

Hefty Tableware Adjusted EBITDA increased $10 million, or 6%, to $178 million.

The increase in Adjusted EBITDA was primarily attributable to lower material and manufacturing costs and the full year impact of the 2018 price increases, partially offset by the impact of lower volume.

Hefty Tableware Adjusted EBITDA decreased by $8 million, or 4%, to $170 million.

The decrease in Adjusted EBITDA was primarily driven by increased logistics costs and advertising spend, partially offset by the increased revenue, as noted above.

Presto Products

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Total Segment Net Revenues.

Presto Products total segment net revenues decreased by $28 million, or 5%, to $511 million.

The decrease was primarily due to $31 million in lower volume driven by the exit of certain low margin store branded business, partially offset by strong sales with existing customers and growth within our eCommerce business as we have become the sole supplier for certain store brand products.

Presto Products total segment net revenues increased by $22 million, or 4%, to $533 million.

The increase in net revenues was primarily due to increased demand, partially offset by the exit of certain low margin store branded business in the prior year.

Adjusted EBITDA .

Presto Products Adjusted EBITDA increased by $7 million, or 8%, to $98 million.

The increase in Adjusted EBITDA was primarily driven by lower material and manufacturing costs partially offset by the impact of lower volume.

The increase in Adjusted EBITDA was primarily driven by increased revenue, as noted above.

Historical Cash Flows

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Net cash used in investing activities

Net cash (used in) provided by financing activities

Net cash provided by (used in) financing activities

Increase in cash and cash equivalents

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Net cash from operating activities decreased by $84 million, or 21%, to $319 million.

The decrease in net cash inflows from operating activities was primarily attributable to the settlement of related party payables in preparation for our IPO, partially offset by a lower net investment in inventory during the current period.

The change was primarily driven by a $279 million increase in accounts receivable, $240 million of which was related to accounts receivables previously sold through PEI Group’s securitization facility prior to our separation from PEI Group, partially offset by an increase in net income and changes in related party receivables and payables.

Cash used in investing activities

Net cash used in investing activities decreased by $426 million, or 77%, to $128 million.

These amounts and movements were primarily attributable to changes in net cash advanced to RGHL Group as part of wider RGHL Group cash management activities , prior to our IPO .

Excluding these related party items, cash outflows from investing activities increased by $27 million, or 33%, to $109 million for the year ended December 31, 2019 from $82 million for the year ended December 31, 2018.

This increase was primarily attributable to increased capital expenditures associated with increased capacity and cost reduction projects.

Cash (used in) provided by financing activities

Net cash from financing activities decreased by $220 million, from an inflow of $24 million for the year ended December 31, 2018 to an outflow of $196 million for the year ended December 31, 2019.

The change in cash flows from financing activities was primarily attributable to (i) payments to RGHL Group, as part of the Corporate Reorganization prior to our IPO, and (ii) changes in related party balances as part of wider RGHL Group cash management activities.

Portions of our business are moderately seasonal.

Net cash used in investing activities increased by $15 million, or 12%, to $143 million.

The net increase was primarily attributable to an increase of $34 million, or 31%, in the acquisition of property, plant and equipment, partially offset by the reduction in cash advanced to PEI Group as part of wider PEI Group cash management activities in the prior year.

The increase in the acquisition of property, plant and equipment was primarily attributable to taking operational ownership of two facilities previously managed by PEI Group in conjunction with the IPO and expenditures associated with additional capacity in response to the increased demand we have experienced.

Cash provided by (used in) financing activities

Net cash from financing activities changed by $230 million, from an outflow of $196 million for the year ended December 31, 2019 to an inflow of $34 million for the year ended December 31, 2020.

The change in cash flows from financing activities was primarily attributable to proceeds received from the IPO and the drawdown of the Term Loan Facility partially offset by repayments of related party balances, principal repayments of the Term Loan Facility and dividends paid during fiscal year 2020.

Portions of our business historically have been moderately seasonal.

Overall, our strongest sales are in our fourth quarter and our weakest sales are in our first quarter.

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holidays in our fourth quarter, primarily due to the holiday use of Reynolds Wrap, Reynolds Oven Bags and Reynolds Parchment Paper.

Our tableware products generally have higher sales in the second quarter of the year, primarily due to outdoor summertime use of disposable plates, cups and bowls.

Sources of Liquidity

Liquidity and Capital Resources

Our principal sources of liquidity are existing cash and cash equivalents, cash generated from operating activities and available borrowings under the Revolving Facility.

External Debt Facilities

On February 4, 2020, in conjunction with our Corporate Reorganization and IPO, we entered into External Debt Facilities which consist of a $2,475 million Term Loan Facility and a Revolving Facility that provides for additional borrowing capacity of up to $250 million, reduced by amounts used for letters of credit.

On February 4, 2020, in conjunction with our Corporate Reorganization and IPO, we entered into the External Debt Facilities which consist of a $2,475 million Term Loan Facility and a Revolving Facility that provides for additional borrowing capacity of up to $250 million, reduced by amounts used for letters of credit.

As of December 31, 2020, the outstanding balance under the Term Loan Facility was $2,257 million.

As of December 31, 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.

The initial borrower under the External Debt Facilities is Reynolds Consumer Products LLC (the “Borrower”).

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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%.

During the year ended December 31, 2020, we entered into a series of interest rate swaps which fixed the LIBO rate to an annual rate of 0.18% to 0.47% (for an annual effective interest rate of 1.93% to 2.22%, including margin) for an aggregate notional amount of $1,650 million.

These interest rate swaps hedge a portion of the interest rate exposure resulting from our Term Loan Facility for periods ranging from one to five years.

The Term Loan Facility contains customary mandatory prepayments, including with respect to excess cash flow, asset sale proceeds and proceeds from certain incurrences of indebtedness.

The Borrower may voluntarily repay outstanding loans under the Term Loan Facility at any time without premium or penalty, other than customary breakage costs with respect to LIBO rate loans.

provided, however, that any voluntary prepayment, refinancing or repricing of the External Debt Facilities in connection with certain repricing transactions that occur prior to the six-month anniversary of the closing of the Term Loan Facility will be subject to a prepayment premium of 1.00% of the principal amount of the term loans so prepaid, refinanced or repriced.

During the year ended December 31, 2020 , we made voluntary principal payments of $200 million related to the Term Loan Facility.

Subsequent to December 31, 2020, we made a voluntary principal payment of $100 million related to the Term Loan Facility.

Amortization and maturity

The Term Loan Facility amortizes in equal quarterly installments in an aggregate annual amount equal to 1.00% of the original principal amount thereon, with the balance payable in February 2027.

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 payable on maturity.

The Revolving Facility matures in February 2025.

Guarantee and security

All obligations under the External Debt Facilities and certain hedge agreements and cash management arrangements provided by any lender party to the External Debt Facilities or any of its affiliates and certain other persons are unconditionally guaranteed by RCPI, the Borrower (with respect to hedge agreements and cash management arrangements not entered into by the Borrower) and certain of RCPI’s existing and subsequently acquired or organized direct or indirect material wholly-owned U.S.

All obligations under the External Debt Facilities and certain hedge agreements and cash management arrangements provided by any lender party to the External Debt Facilities or any of its affiliates and certain other persons are unconditionally guaranteed by the Company, the Borrower (with respect to hedge agreements and cash management arrangements not entered into by the Borrower) and certain of the Company’s existing and subsequently acquired or organized direct or indirect material wholly-owned U.S.

restricted subsidiaries, with customary exceptions including, among other things, where providing such guarantees is not permitted by law, regulation or contract or would result in material adverse tax consequences.

All obligations under the External Debt Facilities and certain hedge agreements and cash management arrangements provided by any lender party to the External Debt Facilities or any of its affiliates and certain other persons, and the guarantees of such obligations, are secured, subject to permitted liens and other exceptions, by:

(i) a perfected first-priority pledge of all the equity interests of each wholly-owned material restricted subsidiary of RCPI, the Borrower or a subsidiary guarantor, including the equity interests of the Borrower (limited to 65% of voting stock in the case of first-tier non-U.S.

subsidiaries of RCPI, the Borrower or any subsidiary guarantor) and (ii) perfected first-priority security interests in substantially all tangible and intangible personal property of RCPI, the Borrower and the subsidiary guarantors (subject to certain other exclusions).

(i) a perfected first-priority pledge of all the equity interests of each wholly-owned material restricted subsidiary of the Company, the Borrower or a subsidiary guarantor, including the equity interests of the Borrower (limited to 65% of voting stock in the case of first-tier non-U.S.

subsidiaries of the Company, the Borrower or any subsidiary guarantor) and (ii) perfected first-priority security interests in substantially all tangible and intangible personal property of the Company, the Borrower and the subsidiary guarantors (subject to certain other exclusions).

Certain covenants and events of default

The External Debt Facilities contain a number of covenants that, among other things, restrict, subject to certain exceptions, our ability and the ability of the restricted subsidiaries of RCPI to:

The External Debt Facilities contain a number of covenants that, among other things, restrict, subject to certain exceptions, our ability and the ability of the restricted subsidiaries of the Company to:

incur additional indebtedness and guarantee indebtedness;

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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 (commencing on June 30, 2020 ) only if the aggregate principal amount of borrowings under the Revolving F acility and drawn but unreimbursed letters of credit exceeds 35 % of the total amount of commitments under the Revolving Facility on such day.

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.

We believe that our projected cash position, cash flows from operations and borrowings under the External Debt Facilities are sufficient to meet the needs of our business.

We are currently in compliance with the covenants contained in our External Debt Facilities.

During the year ended December 31, 2020 , our Board of Directors declared quarterly cash dividends totaling $0.59 per share.

We expect to continue paying cash dividends on a quarterly basis;

however, future dividends are at the discretion of our Board of Directors and will depend upon our earnings, capital requirements, financial condition, contractual limitations (including under the Term Loan Facility) and other factors.

We believe that our projected cash position, cash flows from operations and borrowings under the External Debt Facilities are sufficient to meet the needs of our business for at least the next 12 months.

Contractual Obligations

The following table summarizes our material contractual obligations as of December 31, 2019, on a historical basis:

The following table summarizes our material contractual obligations as of December 31, 2020:

(In millions)

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Long-term debt (1)

Related party borrowings, including accrued interest (1)

Operating lease liabilities

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Total contractual obligations

Total obligations for long-term debt and related party borrowings consist of the principal amounts, fixed and floating rate interest obligations, including related party accrued interest payable as of December 31, 2019.

The interest rates on the floating rate debt balances have been assumed to be the same as the rates in effect as of December 31, 2019.

In conjunction with o ur Corporate Reorganization and IPO, we have settled the existing long-term debt and related party borrowings and we have entered into a Term Loan Facility, with repayments of $25 million (less than one year), $50 million (one to three years), $50 million (three to five years) and $2,350 million (greater than five years).

As of December 31, 2019, our liabilities for uncertain tax positions totaled $2 million.

Total obligations for long-term debt consist of the principal amounts and interest obligations.

The interest rate on the floating rate debt balances has been assumed to be the same as the rate in effect as of December 31, 2020, including the impact of cash flow hedges.

As of December 31, 2020, our liabilities for uncertain tax positions and defined benefit pension obligations totaled $4 million.

The ultimate timing of these liabilities cannot be determined;

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Critical Accounting Policies and Estimates

The methods, estimates and judgments we use in applying our most critical accounting policies have a significant impact on the results we report in our combined financial statements.

The methods, estimates and judgments we use in applying our most critical accounting policies have a significant impact on the results we report in our consolidated financial statements.

Specific areas requiring the application of management’s estimates and judgments include, among others, assumptions pertaining to benefit plan assumptions, valuation assumptions of goodwill and intangible assets, useful lives of long-lived assets, sales incentives and income taxes.

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Our most critical accounting policies and estimates are related to revenue recognition, the valuation of goodwill and intangible assets and income taxes.

A summary of our significant accounting policies and use of estimates is contained in Note 2 - Summary of Significant Accounting Policies of our combined financial statements included elsewhere in this Annual Report on Form 10-K.

A summary of our significant accounting policies and use of estimates is contained in Note 2 - Summary of Significant Accounting Policies of our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

Revenue Recognition-Sales Incentives

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Our trade promotion accruals are primarily based on estimated volume and incorporate historical sales and spending trends by customer and category.

The determination of these estimated accruals requires judgment and may change in the future as a result of changes in customer promotion participation, particularly for new programs and

for programs related to the introduction of new products.

The determination of these estimated accruals requires judgment and may change in the future as a result of changes in customer promotion participation, particularly for new programs and for programs related to the introduction of new products.

Final determination of the total cost of a promotion is dependent upon customers providing information about proof of performance and other information related to the promotional event.

This process of analyzing and settling trade-promotion programs with customers could impact our results of operations and trade promotion accruals depending on how actual results of the programs compare to original estimates.

Sales incentives represented 6% , 5 % and 6% of total net revenues for the 2019, 2018 and 2017 fiscal years, respectively.

As of December 31, 2019 and 2018, we had accruals of $39 million and $40 million, respectively, reflected on our combined balance sheets in Accrued and other current li abilities related to sales incentive programs.

Sales incentives represented 5%, 6% and 5% of total net revenues for the years ended December 31, 2020, 2019 and 2018, respectively.

As of December 31, 2020 and 2019, we had accruals of $35 million and $39 million, respectively, reflected on our consolidated balance sheets in Accrued and other current liabilities related to sales incentive programs.

Goodwill, Indefinite-Lived Intangible Assets and Long-Lived Assets

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operations were included in a consolidated U.S.

federal return as well as certain state and local tax returns filed by RGHL Group.

federal return as well as certain state and local tax returns filed by PEI Group.

We also file certain separate U.S.

state and local and foreign income tax returns.

The income tax expense (benefit) included in our combined statements of income has been calculated using the separate return basis.

The income tax expense (benefit) included in our consolidated statements of income has been calculated using the separate return basis.

It is possible that we will make different tax accounting elections and assertions subsequent to our shares being issued to the public.

Therefore, our income taxes, as presented in our combined financial statements included elsewhere in this Annual Report on Form 10-K, may not be indicative of our income taxes in the future.

Where we have been included in the tax returns filed by RGHL Group, any income taxes payable resulting from the separate return basis have been reflected in our combined balance sheets in Net Parent deficit.

Therefore, our income taxes, as presented in our consolidated financial statements included elsewhere in this Annual Report on Form 10-K, may not be indicative of our income taxes in the future.

Where we have been included in the tax returns filed by PEI Group, any income taxes payable resulting from the separate return basis have been reflected in our consolidated balance sheets in Net Parent deficit.

Considerable management judgment is necessary to assess the inherent uncertainties related to the interpretations of complex tax laws, regulations and taxing authority rulings.

Recent Accounting Pronouncements

New accounting guidance that we have recently adopted, as well as accounting guidance that has been recently issued but not yet adopted by us, is included in Note 2 - Summary of Significant Accounting Policies of our combined financial statements included elsewhere in this Annual Report on Form 10-K.

QUANTITATIVE AN D QUALITAT IVE DISCLOSURES ABOUT MARKET RISK

New accounting guidance that we have recently adopted, as well as accounting guidance that has been recently issued but not yet adopted by us, is included in Note 2 - Summary of Significant Accounting Policies of our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

QUANTITATIVE AND QUALITAT IVE DISCLOSURES ABOUT MARKET RISK

In the normal course of business, we are subject to risks from adverse fluctuations in interest rates and commodity prices.

We have historically managed commodity price risks through commodity derivatives.

We are not a party to leveraged derivatives and, by policy, do not use financial instruments for speculative purposes.

The extent to which we use derivative instruments is dependent upon our access to them in the financial markets, the costs associated with entering into such arrangements and our use of other risk management methods, such as establishing sales arrangements that permit the pass-through of changes in commodity prices to customers.

Our objective in managing our exposure to market risk is to limit the impact on earnings and cash flow.

Interest Rate Risk

We had significant debt commitments outstanding as of December 31, 2019.

These on-balance sheet financial instruments, to the extent they accrue interest at variable interest rates, expose us to interest rate risk.

Prior to our Corporate Reorganization and IPO, our interest rate risk arose primarily on significant borrowings that were drawn under our portion of the RGHL Group Credit Agreement and certain related party borrowings.

In conjunction with our Corporate Reorganization and IPO all of our obligations under the historical debt commitments, both those with third party financial institutions and those with RGHL Group, have been settled.

Based on the outstanding borrowings under the Term Loan Facility as of the closing of our IPO with all other variables remaining constant, a 100 -basis point increase (decrease) in the interest rates under the Term Loan Facility would result in a $25 million increase (decrease) in interest expense, per annum, on our borrowings.

We had significant variable rate debt commitments outstanding as of December 31, 2020, which accrue interest at the LIBO rate plus an applicable margin of 1.75%.

These on-balance sheet financial instruments expose us to interest rate risk.

During September 2020, we entered into a series of interest rate swaps which fixed the LIBO rate to an annual rate of 0.18% to 0.47% (for an annual effective interest rate of 1.93% to 2.22%, including margin) for an aggregate notional amount of $1,650 million.

These interest rate swaps hedge a portion of the interest rate exposure resulting from our Term Loan Facility.

We classified these instruments as cash flow hedges.

Our cash flow hedge contracts are for periods ranging from one to five years.

Our average variable rate for an aggregate notional amount of $1,650 million is a one month LIBO rate plus an applicable margin of 1.75%.

The fair value of our interest rate swaps included on our consolidated balance sheets as of December 31, 2020 was not material.

(in millions)

Pay fixed / receive variable notional

Average pay rate

Based on the unhedged outstanding borrowings under the Term Loan Facility as of December 31, 2020, a 100 -basis point increase (decrease) in the interest rates under the Term Loan Facility would result in a $6 million increase (decrease) in interest expense, per annum, on our borrowings.

Commodity Risk

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We use various strategies to manage cost exposures on certain material purchases with the objective of obtaining more predictable costs for these commodities.

From time to time, we enter into hedging agreements, including commodity derivative contracts, to hedge commodity prices primarily related to aluminum, diesel and benzene.

From time to time, we enter into hedging agreements, including commodity derivative contracts, to hedge commodity prices primarily related to diesel and benzene.

We enter into futures and swaps to reduce our exposure to commodity price fluctuations.

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Contracted date

Aluminum swaps

Aluminum Midwest Premium swaps

Benzene swaps

liquid gallon

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Jan - Jun 2021

liquid gallon

$3.00 - $3.30

Jan - Dec 2020

Commodity derivative contracts are valued using 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.

As of December 31, 2020, the estimated fair values of the outstanding commodity derivative contracts were a net asset of less than $1 million.

During the year ended December 31, 2019, we recognized a $9 million unrealized gain and a $9 million realized loss in cost of sales in the combined statement of income related to commodity derivatives.

A 10% upward (downward) movement in the price curve used to value the commodity derivative contracts, applied as of December 31, 2019, would have resulted in an increase (decrease) of less than $1 million in unrealized gains recognized in the combined statements of income assuming all other variables remain constant.

During the year ended December 31, 2020, we recognized a $4 million realized gain in cost of sales in the consolidated statement of income related to commodity derivatives and no unrealized gain or loss.

A 10% upward (downward) movement in the price curve used to value the commodity derivative contracts, applied as of December 31, 2020, would have resulted in an increase (decrease) of less than $1 million in unrealized gains recognized in the consolidated statements of income assuming all other variables remain constant.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis