Reynolds Consumer Products Inc. 10-K

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page Report of Independent Registered Public Accounting Firm (PCAOB ID 238 ) 41 Consolidated Statements of Income for the years ended December 31, 2021, 2020 and 2019 43 Consolidated Statements of Comprehensive Income for the years ended December 31, 2021, 2020 and 2019 44 Consolidated Balance Sheets as of December 31, 2021 and 2020 45 Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2021, 2020 and 2019 46 Consolidated Statements of Cash Flows for the years ended December 31, 2021, 2020 and 2019 47 Notes to the Consolidated Financial Statements 48 40 Report of Independent Registered Public Accounting Firm To the Board of Directors and Stockholders of Reynolds Consumer Products Inc. Opinions on the Financial Statements and Internal Control over Financial Reporting We have audited the accompanying consolidated balance sheets of Reynolds Consumer Products Inc. and its subsidiaries (the “Company”) as of December 31, 2021 and 2020, and the related consolidated statements of income, comprehensive income, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2021, including the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO. Basis for Opinions The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management's Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. Definition and Limitations of Internal Control over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. 41 Critical Audit Matters The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Revenue Recognition including Sales Incentives As disclosed in the consolidated financial statements, the Company recorded net revenues of $3,556 million for the year ended December 31, 2021. As described in Note 2 to the consolidated financial statements, consideration in contracts with customers is variable due to anticipated reductions such as discounts, allowances and trade promotions. Accordingly, revenues are recorded net of estimated sales incentives, based on known or expected adjustments. The transaction price is estimated based on the amount of consideration to which management believes they will be entitled. The principal considerations for our determination that performing procedures relating to revenue recognition including sales incentives is a critical audit matter are a high degree of auditor effort in performing procedures and evaluating audit evidence related to contractual terms in customer arrangements to determine the amount of consideration. Addressin g the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of certain controls relating to revenues and sales incentives. These procedures also included, among others, (i) evaluating contractual terms in customer arrangements that impact management’s determination of the consideration including sales incentives related to the product; (ii) evaluating revenue transactions by testing the issuance and settlement of invoices and credit memos; (iii) tracing transactions not settled to a detailed listing of accounts receivable; (iv) sampling outstanding customer invoice balances at year end by obtaining and inspecting source documents, including invoices, sales contracts, and subsequent cash receipts; and (v) testing the completeness and accuracy of data provided by management. /s/ PricewaterhouseCoopers LLP Chicago, Illinois February 9, 2022 We have served as the Company’s auditor since 2015. 42 Reynolds Consumer Products Inc. Consolidated Statements of Income For the Years Ended December 31 (in millions, except for per share data) 2021 2020 2019 Net revenues $ 3,445 $ 3,147 $ 2,883 Related party net revenues 111 116 149 Total net revenues 3,556 3,263 3,032 Cost of sales ( 2,745 ) ( 2,290 ) ( 2,152 ) Gross profit 811 973 880 Selling, general and administrative expenses ( 320 ) ( 358 ) ( 305 ) Other expense, net ( 13 ) ( 29 ) ( 65 ) Income from operations 478 586 510 Interest expense, net ( 48 ) ( 70 ) ( 209 ) Income before income taxes 430 516 301 Income tax expense ( 106 ) ( 153 ) ( 76 ) Net income $ 324 $ 363 $ 225 Earnings per share Basic $ 1.54 $ 1.78 $ 1.45 Diluted $ 1.54 $ 1.77 $ 1.45 Weighted average shares outstanding: Basic 209.8 204.5 155.5 Diluted 209.8 204.5 155.5 See accompanying notes to the consolidated financial statements. 43 Reynolds Consumer Products Inc. Consolidated Statements of Comprehensive Income For the Years Ended December 31 (in millions) 2021 2020 2019 Net income $ 324 $ 363 $ 225 Other comprehensive income (loss), net of income taxes: Currency translation adjustment — — 1 Employee benefit plans 4 ( 3 ) ( 6 ) Interest rate derivatives 5 ( 1 ) — Other comprehensive income (loss), net of income taxes 9 ( 4 ) ( 5 ) Comprehensive income $ 333 $ 359 $ 220 See accompanying notes to the consolidated financial statements. 44 Reynolds Consumer Products Inc. Consolidated Balance Sheets As of December 31 (in millions, except for per share data) 2021 2020 Assets Cash and cash equivalents $ 164 $ 312 Accounts receivable, net 316 292 Other receivables 12 9 Related party receivables 10 8 Inventories 583 419 Other current assets 19 13 Total current assets 1,104 1,053 Property, plant and equipment, net 677 612 Operating lease right-of-use assets, net 55 61 Goodwill 1,879 1,879 Intangible assets, net 1,061 1,092 Other assets 36 25 Total assets $ 4,812 $ 4,722 Liabilities Accounts payable $ 261 $ 185 Related party payables 38 41 Current portion of long-term debt 25 25 Accrued and other current liabilities 160 181 Total current liabilities 484 432 Long-term debt 2,087 2,208 Long-term operating lease liabilities 46 51 Deferred income taxes 351 326 Long-term postretirement benefit obligation 50 53 Other liabilities 38 37 Total liabilities $ 3,056 $ 3,107 Commitments and contingencies (Note 13) Stockholders’ equity Common stock, $ 0.001 par value; 2,000 shares authorized; 210 shares issued and outstanding — — Additional paid-in capital 1,381 1,381 Accumulated other comprehensive income 10 1 Retained earnings 365 233 Total stockholders' equity 1,756 1,615 Total liabilities and stockholders' equity $ 4,812 $ 4,722 See accompanying notes to the consolidated financial statements. 45 Reynolds Consumer Products Inc. Consolidated Statements of Stockholders’ Equity (in millions, except for per share data) 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 — — — 225 — 225 Other comprehensive loss, net of income taxes — — — — ( 5 ) ( 5 ) Net transfers (to) from Parent — — — ( 11 ) — ( 11 ) Balance as of December 31, 2019 $ — $ — $ — $ ( 823 ) $ 5 $ ( 818 ) Net income — — 357 6 — 363 Other comprehensive loss, net of income taxes — — — — ( 4 ) ( 4 ) 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 ($ 0.59 per share declared) — — ( 124 ) — — ( 124 ) Other — 4 — — — 4 Balance as of December 31, 2020 $ — $ 1,381 $ 233 $ — $ 1 $ 1,615 Net income — — 324 — — 324 Other comprehensive income, net of income taxes — — — — 9 9 Dividends ($ 0.92 per share declared and paid) — — ( 192 ) — — ( 192 ) Balance as of December 31, 2021 $ — $ 1,381 $ 365 $ — $ 10 $ 1,756 See accompanying notes to the consolidated financial statements. 46 Reynolds Consumer Products Inc. Consolidated Statements of Cash Flows For the Years Ended December 31 (in millions) 2021 2020 2019 Cash provided by operating activities Net income $ 324 $ 363 $ 225 Adjustments to reconcile net income to operating cash flows: Depreciation and amortization 109 99 91 Deferred income taxes 22 67 1 Unrealized (gains) losses on commodity derivatives — — ( 9 ) Stock compensation expense 4 5 — Change in assets and liabilities: Accounts receivable, net ( 24 ) ( 279 ) 2 Other receivables ( 3 ) ( 2 ) 6 Related party receivables ( 2 ) 5 ( 27 ) Inventories ( 165 ) — 2 Accounts payable 71 54 ( 6 ) Related party payables ( 3 ) ( 28 ) ( 89 ) Related party accrued interest payable — ( 18 ) 133 Income taxes payable ( 7 ) 7 72 Accrued and other current liabilities ( 15 ) 38 9 Other assets and liabilities ( 1 ) 8 ( 7 ) Net cash provided by operating activities 310 319 403 Cash used in investing activities Acquisition of property, plant and equipment ( 141 ) ( 143 ) ( 109 ) Advances to related parties — — ( 170 ) Repayments from related parties — — 151 Net cash used in investing activities ( 141 ) ( 143 ) ( 128 ) Cash (used in) provided by financing activities Repayment of long-term debt ( 125 ) ( 218 ) ( 21 ) Dividends paid ( 192 ) ( 124 ) — Proceeds from long-term debt, net of discounts — 2,472 — Repayments of PEI Group Credit Agreement — ( 8 ) — Advances from related parties — 240 67 Repayments to related parties — ( 3,627 ) ( 141 ) Deferred debt transaction costs — ( 28 ) ( 4 ) Proceeds from IPO settlement facility — 1,168 — Repayment of IPO settlement facility — ( 1,168 ) — Issuance of common stock — 1,410 — Equity issuance costs — ( 69 ) — Net transfers from (to) Parent — ( 14 ) ( 97 ) Net cash (used in) provided by financing activities ( 317 ) 34 ( 196 ) Cash and cash equivalents: (Decrease) increase in cash and cash equivalents ( 148 ) 210 79 Balance as of beginning of the year 312 102 23 Balance as of end of the year $ 164 $ 312 $ 102 Cash paid: Interest - long-term debt 41 60 103 Interest - related party borrowings — 23 6 Income taxes 91 76 4 Significant non-cash investing and financing activities Refer to Note 7 - Leases for details of non-cash additions to operating lease right-of-use assets, net as a result of changes in operating lease liabilities. Refer to Note 17 - Related Party Transactions for details of significant non-cash investing and financing activities. See accompanying notes to the consolidated financial statements. 47 Reynolds Consumer Products Inc. Notes to the Consolidated Financial Statements Note 1 - Description of Business and Basis of Presentation 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 and 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: We have prepared the accompanying audited consolidated financial statements in accordance with United States generally accepted accounting principles ("GAAP"). 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 Pactiv Evergreen Inc. (“PEI”) and not as a stand-alone entity. We represented the business that was previously reported as the Reynolds Consumer Products segment in the consolidated financial statements of PEI and its subsidiaries (collectively, “PEI 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 PEI Group on February 4, 2020. All financial information presented after our Corporate Reorganization and IPO represents the consolidated financial statements of our company. Our consolidated statements of income include allocations of certain expenses for services provided by PEI Group prior to our separation in February 2020, 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 PEI Group. Total costs allocated to us for these functions were $ 2 million and $ 41 million for the years ended December 31, 2020 and 2019, respectively, and were primarily included in selling, general and administrative expenses in our consolidated statements of income. These amounts include costs of $ 1 million and $ 22 million for the years ended December 31, 2020 and 2019, respectively, that were not historically allocated to us as part of PEI Group's normal monthly reporting process. Additionally, in the years ended December 31, 2020 and 2019, costs of $ 2 million and $ 28 million, respectively, were allocated to us related to the IPO process that cannot be deferred and offset against the IPO proceeds, as well as costs related to our preparations to operate as a stand-alone public company, which were included in other expense, net in our 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. Net Parent deficit represented the former Parent’s interest in our net assets. As a direct ownership relationship did not exist between the various entities of our previously combined group, a Net Parent deficit account was shown in our previously combined financial statements. The majority of transactions between us and PEI Group have a history of settlement or were settled for cash in conjunction with our separation from PEI Group and IPO. These transactions have been reflected in our consolidated balance sheets as related party receivables and payables. Transactions that did not have a history of settlement were reflected in equity (deficit) in our previously combined balance sheets as Net Parent deficit and, when cash was utilized (contributed), in our consolidated statements of cash flows as a financing activity in net transfers from (to) Parent. Refer to Note 17 - Related Party Transactions for further information. Initial Public Offering: On February 4, 2020, we completed our separation from PEI 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 PEI Group and IPO, we reclassified PEI 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 PEI Group were contributed as additional paid-in capital without the issuance of any additional shares. 48 Reynolds Consumer Products Inc. Notes to the Consolidated Financial Statements Note 2 - Summary of Significant Accounting Policies Use of Estimates: We prepare our consolidated financial statements in accordance with GAAP, which requires us to make estimates and assumptions that affect a number of amounts in our consolidated financial statements. Significant accounting policy elections, estimates and assumptions include, among others, valuation assumptions of goodwill and intangible assets, useful lives of long-lived assets, sales incentives, income taxes and benefit plan assumptions. We base our estimates on historical experience and other assumptions that we believe are reasonable. If actual amounts differ from estimates, we include the revisions in our consolidated results of operations in the period the actual amounts become known. Historically, the aggregate differences, if any, between our estimates and actual amounts in any year have not had a material effect on our consolidated financial statements. Currency Translation: Our consolidated financial statements are presented in U.S. dollars, which is our reporting currency. We translate the results of operations of our subsidiaries with functional currencies other than the U.S. dollar using average exchange rates during each period and translate balance sheet accounts using exchange rates at the end of each period. We record currency translation adjustments as a component of stockholders’ equity within accumulated other comprehensive income and transaction gains and losses in other expense, net in our consolidated statements of income. Cash and Cash Equivalents: Cash and cash equivalents include demand deposits with banks and all highly liquid investments with original maturities of three months or less. We maintain our bank accounts with a relatively small number of high quality financial institutions. Cash balances held by non-U.S. entities as of December 31, 2021 and 2020 were $ 7 million and $ 9 million, respectively. Accounts Receivable: Accounts receivable are recorded at face amounts less an allowance for doubtful accounts. The allowance is an estimate based on historical collection experience, current economic and market conditions and a review of the current status of each customer’s trade accounts receivable balance. We evaluate the aging of the accounts receivable balances and the financial condition of our customers to estimate the amount of accounts receivable that may not be collected in the future and record the appropriate provision. The allowance for doubtful accounts was not material as of December 31, 2021 and 2020. Inventories: We value our inventories using the first-in, first-out method. Inventory is valued at actual cost, which includes raw materials, supplies, direct labor and manufacturing overhead associated with production. Inventory is stated at the lower of cost or net realizable value, which includes any costs to sell or dispose. In addition, appropriate consideration is given to obsolescence, excessive inventory levels, product deterioration and other factors in evaluating net realizable value. Long-Lived Assets: Property, plant and equipment are stated at historical cost less depreciation, which is computed using the straight-line method over the estimated useful lives of the assets. Machinery and equipment are depreciated over periods ranging from 5 to 20 years and buildings and building improvements over periods ranging from 15 to 40 years. Finite-lived intangible assets, which primarily consist of customer relationships, are stated at historical cost and amortized using the straight-line method (which reflects the pattern of how the assets’ economic benefits are consumed) over the assets' estimated useful lives which range from 18 to 20 years. Expenditures for maintenance and repairs are expensed as incurred. When property, plant or equipment is sold or otherwise disposed of, the related cost and accumulated depreciation is removed from the respective accounts and any gain or loss realized on disposition is reflected in other expense, net in our consolidated statements of income. 49 Reynolds Consumer Products Inc. Notes to the Consolidated Financial Statements We review long-lived assets, including finite-lived intangible assets, for recoverability on an ongoing basis. Changes in depreciation or amortization are recorded prospectively when estimates of the remaining useful lives or residual values of long-lived assets change. We also review our long-lived assets for impairment when conditions exist that indicate the carrying amount of the assets may not be fully recoverable. In those circumstances, we perform undiscounted cash flow analysis to determine if an impairment exists. When testing for asset impairment, we group assets and liabilities at the lowest level for which cash flows are separately identifiable. If an impairment loss is recorded, it is calculated as the excess of the asset’s carrying value over its estimated fair value as determined by an estimate of discounted future cash flows. Depending on the nature of the asset, impairment losses are recorded in either cost of sales or selling, general and administrative expenses in our co nsolidated statements of income. There were no impairments of long-lived assets in any of the years presented . Leases: We determine whether a contract is or contains a lease at contract inception. Right-of-use (“ROU”) assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. ROU assets are recognized at the commencement date at the value of the lease liability, adjusted for any prepayments, lease incentives received and initial direct costs incurred. Lease liabilities are recognized at the commencement date based on the present value of remaining lease payments over the lease term. Following initial recognition, operating lease liability balances are amortized using the effective interest method, while the related ROU assets are adjusted by the difference between the fixed lease expense recognized and the interest expense associated with the effective interest method in the period. Some of our leases contain non-lease components, for example common area or other maintenance costs, that relate to the lease components of the agreement. Non-lease components and the lease components to which they relate are accounted for as a single lease component as we have elected to combine lease and non-lease components for all classes of underlying assets. We recognize interest on operating lease liabilities and amortization of ROU assets as a single lease expense for operating leases on a straight-line basis over the lease term, substantially all in cost of sales in our consolidated statements of income. All operating lease cash payments are recorded within cash flows from operating activities in the consolidated statements of cash flows. Our lease agreements do not include significant restrictions, covenants or residual value guarantees. Goodwill and Indefinite-Lived Intangible Assets: Goodwill represents the excess of purchase price over the fair value of net assets acquired. We test goodwill for impairment on an annual basis in the fourth quarter and whenever events or changes in circumstances indicate that the carrying value of goodwill may not be recoverable. We assess goodwill impairment risk by performing a qualitative review of entity-specific, industry, market and general economic factors affecting our goodwill reporting units. Depending on factors such as prior-year test results, current year developments, current risk evaluations and other practical considerations, we may elect to perform quantitative testing instead. In our quantitative testing, we compare a reporting unit’s estimated fair value with its carrying value. Estimating the fair value of individual reporting units requires us to make assumptions and estimates regarding our future plans and industry and economic conditions. The key assumptions associated with determining the estimated fair value are forecasted Adjusted EBITDA and a relevant earnings multiple. Our actual results and conditions may differ over time. If the carrying value of a reporting unit’s net assets exceeds its fair value, we would recognize an impairment charge for the amount by which the carrying value exceeds the reporting unit’s fair value. Our indefinite-lived intangible assets consist of certain trade names. We test indefinite-lived intangible assets for impairment on an annual basis in the fourth quarter and whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Depending on factors such as prior-year test results, current year developments, current risk evaluations and other practical considerations, we may elect to perform quantitative testing instead. If potential impairment risk exists for a specific asset, we quantitatively test it for impairment by comparing its estimated fair value with its carrying value. We determine estimated fair value using the relief-from-royalty method, using key assumptions including planned revenue growth rates, market-based discount rates and estimates of royalty rates. If the carrying value of the asset exceeds its fair value, we consider the asset impaired and reduce its carrying value to the estimated fair value. Revenue Recognition: After assessing our customers' creditworthiness, we recognize revenue when control over products transfers to our customers, which generally occurs upon delivery or shipment of the products. We account for product shipping, handling and insurance as fulfillment activities, with revenues for these activities recorded in net revenues and costs recorded in cost of sales. Any taxes collected on behalf of government authorities are excluded from net revenues. Consideration in our contracts with customers is variable due to anticipated reductions such as discounts, allowances and trade promotions, collectively referred to as “sales incentives”. Accordingly, revenues are recorded net of estimated sales incentives, based on known or expected adjustments. The transaction price reflects our estimate of the amount of consideration to which we will be 50 Reynolds Consumer Products Inc. Notes to the Consolidated Financial Statements entitled, using an expected value method. We base these estimates principally on historical utilization and redemption rates, anticipated performance and our best judgment at the time to the extent that it is probable that a significant reversal of revenue recognized will not occur. Estimates of sales incentives are monitored and adjusted each period until the sales incentives are realized. We consider purchase orders, which in some cases are governed by master supply agreements, to be the contracts with a customer. Key sales terms, such as pricing and quantities ordered, are established frequently, so most customer arrangements and related sales incentives have a duration of one year or shorter. We generally do not have any unbilled receivables at the end of a period. Deferred revenues are not material and primarily include customer advance payments typically collected a few days before product delivery, at which time deferred revenues are reclassified and recorded as net revenues. We generally do not receive non-cash consideration for the sale of goods nor do we grant payment financing terms greater than one year. We do not incur any significant costs to obtain a contract. Marketing, Advertising and Research and Development: We promote our products with marketing and advertising programs. These programs include, but are not limited to, cooperative advertising, in-store displays and consumer marketing promotions. The costs of end-consumer marketing programs that are conducted in conjunction with our customers, such as coupons, are recorded as a reduction to revenue. We do not defer these costs on our consolidated balance sheets and all marketing and advertising costs are recorded as an expense in the year incurred. Advertising expense was $ 43 million , $ 72 million and $ 57 million in the years ended December 31, 2021, 2020 and 2019, respectively. We expense product research and development costs as incurred. Research and development expense was $ 36 million , $ 41 million and $ 33 million in the years ended December 31, 2021, 2020 and 2019, respectively. We record marketing and advertising as well as research and development expenses in selling, general and administrative expenses. Stock-based Compensation: Stock-based compensation expense is measured at the grant date based on the fair value of the award and is recognized as expense over the period in which the awards vest in accordance with applicable guidance under Accounting Standards Codification (“ASC”) 718, Compensation—Stock Compensation. In contemplation of us issuing shares to the public, we granted restricted stock units (“RSUs”) in July 2019 to certain members of management, pursuant to retention agreements entered into with these employees. These RSUs vest upon satisfaction of both a performance-based vesting condition, which was satisfied when we completed our IPO on February 4, 2020, and a service-based vesting condition, which 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. We have also granted RSUs to certain members of management and to certain members of our Board of Directors that have a service-based vesting condition. In addition, we granted performance stock units (“PSUs”) to certain members of management that have a performance-based vesting condition. We account for forfeitures of outstanding but unvested grants in the period they occur. Financial Instruments: We are exposed to certain risks relating to our ongoing business operations. To manage the volatility relating to these exposures, we enter into various derivative instruments from time to time under our risk management policies. We are not a party to leveraged derivatives and, by policy, do not use financial instruments for speculative purposes. Interest Rate Derivatives: We manage interest rate risk by using interest rate derivative instruments. Interest rate swaps (pay fixed, receive variable) are entered into as cash flow hedges to manage a portion of the interest rate risk associated with our floating-rate borrowings. We record interest rate derivative instruments at fair value (Level 2) and on a net basis by counterparty based on our master netting arrangements. The instruments are classified in our consolidated balance sheets in other assets or other liabilities, as applicable. Cash flows from interest rate derivative instruments are classified as operating activities in our consolidated statements of cash flows based on the nature of the derivative instrument. We have elected to use hedge accounting for our interest rate derivative instruments. Accordingly, the effective portion of the gain or loss on the open hedging instrument is recorded in other comprehensive income and is reclassified into earnings as interest expense, net when settled. We terminate derivative instruments if the underlying asset or liability matures or is repaid, or if we determine the underlying forecasted transaction is no longer probable of occurring. Commodity Derivatives: We are exposed to price risk related to forecasted purchases of certain commodities that we primarily use as raw materials. From time to time we may enter into derivative financial instruments to mitigate certain risks. We record commodity derivative financial instruments at fair value (Level 2) and on a gross basis in our consolidated balance sheets in other current assets or accrued and other current liabilities due to their relatively short-term duration. Cash flows from commodity 51 Reynolds Consumer Products Inc. Notes to the Consolidated Financial Statements derivative instruments are classified as operating activities in our c onsolidate d statements of cash flows based on the nature of the derivative instrument. Historically, we have not elected to use hedge accounting. Accordingly, any unrealized gains or losses (mark-to-market impacts) and realized gains or losses are recorded in cost of sales in our consolidated statements of income. Income Taxes: Our income tax expense includes amounts payable or refundable for the current year, the effects of deferred taxes and impacts from uncertain tax positions. We recognize deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the financial statement and tax basis of our assets and liabilities, operating loss carryforwards and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply in the years in which those differences are expected to reverse. The realization of certain deferred tax assets is dependent on generating sufficient taxable income in the appropriate jurisdiction prior to the expiration of the carryforward periods. Deferred tax assets are reduced by a valuation allowance if it is more likely than not that some portion, or all, of the deferred tax assets will not be realized. When assessing the need for a valuation allowance, we consider any carryback potential, future reversals of existing taxable temporary differences (including liabilities for unrecognized tax benefits), future taxable income and tax planning strategies. We recognize the tax benefits from uncertain tax positions only if it is more likely than not that the tax position will be sustained based on the technical merits of the position. The amount we recognize is measured as the largest amount of benefit that is greater than 50 percent likely of being realized upon resolution. Future changes related to the expected resolution of uncertain tax positions could affect tax expense in the period when the change occurs. Fair Value Measurements and Disclosures: GAAP establishes a hierarchy for measuring fair value. A financial instrument’s categorization within the hierarchy is based on the lowest level of input that is significant to the fair value measurement. The following three levels of inputs may be used to measure fair value: • Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. • Level 2 inputs include inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices in active markets for similar assets and liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of assets or liabilities. • Level 3 inputs are unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions. Our assets and liabilities measured at fair value on a recurring basis are presented in Note 8 - Financial Instruments. We had no assets or liabilities measured at fair value on a non-recurring basis in any of the years presented. In addition to fair value disclosure requirements related to financial instruments carried at fair value, accounting standards require disclosures regarding the fair value of all of our financial instruments. The carrying values of cash equivalents, accounts receivables, other receivables, related party receivables, accounts payable, related party payables and accrued and other current liabilities are reasonable estimates of their fair values as of December 31, 2021 and 2020 due to the short-term nature of these instruments. Variable Interest Entities: Variable interest entities (“VIEs”) are primarily entities that lack sufficient equity to finance their activities without additional financial support from other parties or whose equity holders, as a group, lack one or more of the following characteristics: (a) direct or indirect ability to make decisions, (b) obligation to absorb expected losses or (c) right to receive expected residual returns. Prior to our separation from PEI Group and IPO, we had a variable interest in one VIE related to our factoring arrangement with PEI Group, described below. 52 Reynolds Consumer Products Inc. Notes to the Consolidated Financial Statements Transfers of Financial Assets: Prior to our separation from PEI Group and IPO in February 2020, we accounted for transfers of financial assets, such as non-recourse accounts receivable factoring arrangements, when we surrendered control over the related assets. Determining whether control has transferred requires an evaluation of relevant legal considerations, an assessment of the nature and extent of our continuing involvement with the assets transferred and any other relevant considerations. We had a non-recourse factoring arrangement in which we sold eligible receivables to a special purpose entity (“SPE”) consolidated by PEI Group in exchange for cash. We transferred sold accounts receivables in their entirety to PEI Group and satisfied all of the conditions to report the transfer of financial assets in their entirety as a sale. The SPE was considered to be a VIE, however we were not its primary beneficiary because we did not have the power to direct any of its most significant activities through our arrangement as a collecting agent. On January 30, 2020, we repurchased all of the U.S. accounts receivable sold for $ 264 million, $ 240 million of which was settled in cash and the remaining amount used to settle certain current related party receivables. The proceeds from the sales of receivables are included in cash from operating activities in our consolidated statements of cash flows. 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 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 consolidated financial statements. 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 . This ASU modifies the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. This ASU is effective for fiscal years beginning after December 15, 2020, with early adoption permitted. We adopted the standard as of January 1, 2021 with no material impact on our consolidated financial statements. In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASC 740”), 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 adopted the standard as of January 1, 2021 with no material impact on our consolidated financial statements. Recently Issued Accounting Guidance: In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting , which provides optional expedients and exceptions to applying the guidance on contract modifications, hedge accounting, and other transactions, to simplify the accounting for transitioning from the London Interbank Offered Rate, and other interbank offered rates expected to be discontinued, to alternative reference rates. This ASU was effective upon its issuance and can be applied prospectively through December 31, 2022. We are currently assessing the impact of this standard on our consolidated financial statements. 53 Reynolds Consumer Products Inc. Notes to the Consolidated Financial Statements Note 3 - Inventories Inventories consisted of the following: As of December 31, 2021 2020 (in millions) Raw materials $ 206 $ 138 Work in progress 63 54 Finished goods 276 194 Spare parts 38 33 Inventories $ 583 $ 419 Note 4 - Property, Plant and Equipment, Net Property, plant and equipment, net consisted of the following: As of December 31, 2021 2020 (in millions) Land and land improvements $ 43 $ 36 Buildings and building improvements 183 145 Machinery and equipment 1,126 1,005 Construction in progress 77 118 Property, plant and equipment, at cost 1,429 1,304 Less: accumulated depreciation ( 752 ) ( 692 ) Property, plant and equipment, net $ 677 $ 612 Depreciation expense was $ 78 million, $ 68 million and $ 59 million for the years ended December 31, 2021, 2020 and 2019, respectively, of which $ 70 million , $ 62 million and $ 55 million, respectively, was recognized in cost of sales and $ 8 million , $ 6 million and $ 4 million, respectively, was recognized in selling, general and administrative expenses. Note 5 - Goodwill and Intangible Assets Goodwill by reportable segment was as follows: Reynolds Cooking & Baking Hefty Waste & Storage Hefty Tableware Presto Products Total (in millions) Balance as of December 31, 2019 $ 794 $ 505 $ 282 $ 298 $ 1,879 Movements — — — — — Balance as of December 31, 2020 794 505 282 298 1,879 Movements — — — — — Balance as of December 31, 2021 $ 794 $ 505 $ 282 $ 298 $ 1,879 54 Reynolds Consumer Products Inc. Notes to the Consolidated Financial Statements Intangible assets, net consisted of the following: As of December 31, 2021 As of December 31, 2020 Gross carrying amount Accumulated amortization Net Gross carrying amount Accumulated amortization Net (in millions) Finite-lived intangible assets Customer relationships $ 580 $ ( 371 ) $ 209 $ 580 $ ( 342 ) $ 238 Trade names 25 ( 23 ) 2 25 ( 21 ) 4 Total finite-lived intangible assets 605 ( 394 ) 211 605 ( 363 ) 242 Indefinite-lived intangible assets Trade names 850 — 850 850 — 850 Total intangible assets $ 1,455 $ ( 394 ) $ 1,061 $ 1,455 $ ( 363 ) $ 1,092 Amortization expense for intangible assets was $ 31 million, $ 31 million and $ 32 million for the years ended December 31, 2021, 2020 and 2019, respectively, and has been recognized in selling, general and administrative expenses. For the next five years, we estimate annual amortization expense of approximately $ 28 million each year. Note 6 - Debt Long-Term Debt: Long-term debt consisted of the following: As of December 31, 2021 2020 (in millions) Term Loan Facility $ 2,132 $ 2,257 Deferred financing transaction costs ( 18 ) ( 21 ) Original issue discounts ( 2 ) ( 3 ) 2,112 2,233 Less: current portion ( 25 ) ( 25 ) Long-term debt $ 2,087 $ 2,208 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 %. During September 2020, we entered into a series of interest rate swaps to hedge a portion of the interest rate exposure resulting from these borrowings. Refer to Note 8 – Financial Instruments for further details. 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. We are currently in compliance with the covenants contained in our External Debt Facilities. 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. 55 Reynolds Consumer Products Inc. Notes to the Consolidated Financial Statements 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 payable on maturity. During the year ended December 31, 2021, we made voluntary principal payments of $ 100 million on our Term Loan Facility. Revolving Facility The Revolving Facility matures in February 2025 and includes a sub-facility for letters of credit. As of December 31, 2021, we had no outstanding borrowings under the Revolving Facility, and we had $ 8 million of letters of credit outstanding, which reduces the borrowing capacity under the Revolving Facility. Fair Value of Our Long-Term Debt The fair value of our long-term debt as of December 31, 2021, 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. Interest expense, net: Interest expense, net consisted of the following: For the Years Ended December 31, 2021 2020 2019 (in millions) Interest expense, Term Loan Facility $ 41 $ 52 $ — Amortization of deferred financing transaction costs 4 4 1 Interest expense, PEI Group U.S. Term Loan — 8 101 Interest expense, related party borrowings (1) — 5 140 Interest income, related party receivables (1) — — ( 33 ) Other 3 1 — Interest expense, net $ 48 $ 70 $ 209 (1) Refer to Note 17 – Related Party Transactions for additional information. Scheduled Maturities Below is a schedule of required future repayments on our debt outstanding as of December 31, 2021: (in millions) 2022 $ 25 2023 25 2024 25 2025 25 2026 25 Thereafter 2,007 Total long-term debt $ 2,132 56 Reynolds Consumer Products Inc. Notes to the Consolidated Financial Statements Note 7 - Leases We lease certain buildings and plant and equipment. Our leases have reasonably assured remaining lease terms of up to 8 years. Certain leases include options to renew for up to 15 years . At lease inception, we determine the lease term by assuming the exercise of those renewal options that are reasonably certain. Some leases have variable payments, however, because they are not based on an index or rate, they are not included in the measurement of ROU assets and operating lease liabilities. Variable payments for real estate leases relate primarily to common area maintenance, insurance, taxes and utilities associated with the properties. Variable payments for equipment leases relate primarily to hours, miles, or other quantifiable usage factors, which are not determinable at the time of lease inception. These variable payments are expensed as incurred. The discount rate applied to our leases in determining the present value of lease payments is our incremental borrowing rate based on the information available at the commencement date. Leases with an initial term of 12 months or less are not recorded in our consolidated balance sheets and we recognize lease expense for these leases on a straight-line basis over the lease term. We do not have finance leases. Lease costs consisted of the following: As of December 31, 2021 2020 2019 (in millions) Operating lease costs $ 15 $ 16 $ 11 Variable lease costs 1 1 1 Short-term lease costs 3 3 5 Total lease costs $ 19 $ 20 $ 17 Future lease payments under non-cancellable leases were as follows: As of December 31, 2021 (in millions) 2022 $ 14 2023 12 2024 12 2025 10 2026 6 Thereafter 11 Total undiscounted lease payments 65 Less: imputed interest ( 8 ) Operating lease liabilities $ 57 As of December 31, 2021, there were no material lease transactions that we have entered into but have not yet commenced. Operating lease liabilities and ROU assets included in our consolidated balance sheets were as follows: As of December 31, 2021 2020 (in millions) Accrued and other current liabilities $ 11 $ 13 Long-term operating lease liabilities 46 51 $ 57 $ 64 Operating lease right-of-use assets, net $ 55 $ 61 During the years ended December 31, 2021 and 2020, new leases and lease modifications resulted in the recognition of ROU assets and corresponding lease liabilities of $ 9 million and $ 31 million, respectively . During the years ended December 31, 2021, 2020 and 2019, cash flows from operating activities in the consolidated statements of cash flows reflected $ 15 million, $ 14 million, and $ 10 million, respectively, of payments for operating lease liabilities. 57 Reynolds Consumer Products Inc. Notes to the Consolidated Financial Statements As of December 31, 2021, the weighted average remaining lease term and weighted average discount rate for operating leases was 5.42 years and 5.09 %, respectively. Note 8 - Financial Instruments Interest Rate Derivatives 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, of which $ 800 million notional value was still in effect as of December 31, 2021. 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 outstanding as of December 31, 2021 cover periods ranging from one to four years . The effective portion of the gain or loss on the open hedging instrument is recorded in accumulated other comprehensive income and will be reclassified into earnings as interest expense, net when settled. The associated asset or liability on the open hedges is recorded at its fair value in other assets or other liabilities , as applicable. The effect of our interest rate derivatives on accumulated other comprehensive income and the consolidated statements of income for the year ended December 31, 2021 were not material. The fair value of our interest rate contracts designated as cash flow hedging instruments included on our consolidated balance sheets as of December 31, 2021 and 2020 was not material. Note 9 - Benefit Plans Defined Benefit Plan After our separation from PEI Group and IPO in February 2020, we established a defined benefit plan for certain of our employees. The initial liability was $ 2 million which was funded during 2020. The plan is non-contributory and eligible employees are fully vested after five years of service. The impact of the liability of the defined benefit plan on our consolidated balance sheets as of December 31, 2021 and 2020 was not material. Defined Contribution Plans We offer defined contribution plans to eligible employees in the United States as well as employees in certain other countries. Our expense relating to defined contribution plans was $ 26 million , $ 24 million and $ 20 million for the years ended December 31, 2021, 2020 and 2019, respectively. Postretirement Benefit Plan Certain of our employees in the United States participate in a postretirement benefit plan. Our postretirement benefit plan is not funded. The changes in and the amount of the accumulated postretirement benefit obligation were as follows: As of December 31, 2021 2020 (in millions) Accumulated postretirement benefit obligation as of January 1 $ 54 $ 51 Service cost 1 1 Interest cost 1 2 Benefits paid ( 3 ) ( 4 ) Actuarial (gains) losses ( 5 ) 4 Accumulated postretirement benefit obligation as of December 31 $ 48 $ 54 58 Reynolds Consumer Products Inc. Notes to the Consolidated Financial Statements The accrued benefit obligation was included in our consolidated balance sheets as follows: As of December 31, 2021 2020 (in millions) Accrued and other current liabilities $ 3 $ 3 Long-term postretirement benefit obligation 45 51 $ 48 $ 54 A portion of our accrued benefit obligation has been recorded in accumulated other comprehensive income as follows: As of December 31, 2019 Changes As of December 31, 2020 Changes As of December 31, 2021 (in millions) Net actuarial gain (loss) $ 15 $ ( 5 ) $ 10 $ 5 $ 15 Deferred income tax (expense) benefit ( 4 ) 2 ( 2 ) ( 1 ) ( 3 ) Accumulated other comprehensive income $ 11 $ ( 3 ) $ 8 $ 4 $ 12 We used the following weighted-average assumptions to determine our postretirement benefit obligations: As of December 31, 2021 2020 Discount rate 2.90 % 2.54 % Health care cost trend rate assumed for next year 6.60 % 6.90 % Ultimate trend rate 4.50 % 4.50 % Year that the rate reaches the ultimate trend rate 2029 2029 The year-end discount rate for our plan reflects a weighted-average rate from a high-quality corporate bond yield curve that matches the expected duration of the benefit payments. Changes in our discount rates were primarily the result of changes in bond yields year-over-year. Our expected health care cost trend rate is based on historical costs and long-term expectations. Components of Net Periodic Postretirement Costs: Our total net periodic pension and postretirement benefit cost for each of the years ended December 31, 2021, 2020 and 2019 was not material. Prior to the separation from PEI Group in February 2020, our net periodic benefit costs included only our other postretirement benefit plan. After the separation, total net periodic benefit costs include all costs associated with our defined benefit and other postretirement plans. The service cost component of net periodic postretirement costs, interest cost and amortization of actuarial gain are recognized in cost of sales in the consolidated statements of income. We used the following weighted-average assumptions to determine our net periodic postretirement health care cost: For the Years Ended December 31, 2021 2020 2019 Discount rate 2.54 % 3.24 % 4.37 % Health care cost trend rate assumed for next year 6.90 % 7.20 % 7.70 % Ultimate trend rate 4.50 % 4.50 % 4.50 % Year that the rate reaches the ultimate trend rate 2029 2029 2029 Future Benefit Payments: Expected contributions for the next fiscal year equal the estimated benefit payments of $ 3 million. 59 Reynolds Consumer Products Inc. Notes to the Consolidated Financial Statements Our estimated future benefit payments for our postretirement benefit plan as of December 31, 2021 were as follows: (in millions) 2022 $ 3 2023 3 2024 3 2025 3 2026 3 2027-2031 14 Note 10 - 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, which was satisfied when we completed our IPO on February 4, 2020, and a service-based vesting condition, which 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 in February 2020, we established an equity incentive 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. We have granted RSUs to certain employees and non-employee directors that have a service-based vesting condition. In addition, we have granted performance stock units (“PSUs”) to certain members of management that have a performance-based vesting condition. We account for forfeitures of outstanding but unvested grants in the period they occur. A maximum of 10.5 million shares of common stock were initially available for issuance under equity incentive awards granted pursuant to the plan . In the years ended December 31, 2021 and 2020, 0.2 million and 0.3 million RSUs and 0.2 million and 0.2 million PSUs were granted, respectively. A summary of activity for RSUs and PSUs for the years ended December 31, 2021 and 2020, is as follows (in millions, except for per share data): Shares Weighted-Average Grant-Date Fair Value Per Share Unvested, at January 1, 2020 — $ — Granted 0.5 29 Forfeited ( 0.1 ) 27 Vested — — Unvested, at December 31, 2020 0.4 $ 29 Granted 0.3 30 Forfeited — — Vested ( 0.1 ) 28 PSU performance adjustment ( 0.2 ) 30 Unvested, at December 31, 2021 0.4 $ 29 Unrecognized compensation expense relating to unvested RSUs and PSUs as of December 31, 2021, was $ 6 million, which is expected to be recognized over a weighted average period of 1.4 years. There were stock-based compensation awards representing 0.4 million shares outstanding at December 31, 2021 and 2020. Stock-based compensation expense was $ 4 million and $ 5 million for the years ended December 31, 2021 and 2020, respectively. 60 Reynolds Consumer Products Inc. Notes to the Consolidated Financial Statements Note 11 - Accrued and Other Current Liabilities Accrued and other current liabilities consisted of the following: As of December 31, 2021 2020 (in millions) Trade promotion allowances $ 40 $ 35 Accrued personnel costs 34 63 Other 86 83 Accrued and other current liabilities $ 160 $ 181 Note 12 - Other Expense, Net Other expense, net consisted of the following: For the Years Ended December 31, 2021 2020 2019 (in millions) Factoring discount (1) $ — $ — $ 25 Allocated related party management fee (2) — — 10 IPO and separation-related costs (3) 14 31 31 Other ( 1 ) ( 2 ) ( 1 ) Other expense, net $ 13 $ 29 $ 65 (1) Reflects the loss on sale that we incurred when we sold our U.S. trade receivables through PEI Group’s securitization facility. Our participation in this facility ceased upon the completion of our Corporate Reorganization and IPO. (2) Reflects our allocation, from PEI Group, of a management fee that was charged by Rank to PEI Group, which ceased upon the completion of our Corporate Reorganization and IPO. (3) Reflects costs related to our separation to operate as a stand-alone public company and the IPO process. Note 13 - 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 December 31, 2021, there were no legal proceedings pending other than those for which we have determined that the possibility of a material outflow is remote. 61 Reynolds Consumer Products Inc. Notes to the Consolidated Financial Statements Note 14 - Accumulated Other Comprehensive Income The following table summarizes the changes in our balances of each component of accumulated other comprehensive income. For the Years Ended December 31, 2021 2020 2019 (in millions) Currency translation adjustments: Balance as of beginning of period $ ( 6 ) $ ( 6 ) $ ( 7 ) Currency translation adjustments — — 1 Other comprehensive income — — 1 Balance as of end of period $ ( 6 ) $ ( 6 ) $ ( 6 ) Employee benefit plans: Balance as of beginning of period $ 8 $ 11 $ 14 Adoption of new accounting principle — — 3 Net actuarial gain (loss) arising during period 6 ( 4 ) ( 5 ) Deferred tax (expense) benefit on net actuarial gain (loss) ( 1 ) 2 1 (Gains) and losses reclassified into net income: Amortization of actuarial gain ( 1 ) ( 1 ) ( 2 ) Other comprehensive income (loss) 4 ( 3 ) ( 6 ) Balance as of end of period $ 12 $ 8 $ 11 Interest rate derivatives: Balance as of beginning of period $ ( 1 ) $ — $ — Gain (loss) arising during period, net of income tax 5 ( 1 ) — Other comprehensive income (loss) 5 ( 1 ) — Balance as of end of period $ 4 $ ( 1 ) $ — Accumulated other comprehensive income Balance as of beginning of period $ 1 $ 5 $ 7 Adoption of new accounting principle — — 3 Other comprehensive income (loss) 9 ( 4 ) ( 5 ) Balance as of end of period $ 10 $ 1 $ 5 Note 15 - Income Taxes Prior to our separation from PEI Group and IPO in February 2020, our U.S. operations were included in the U.S. federal consolidated and 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. For the periods prior to the separation, income tax (expense) benefit are presented in the consolidated financial statements as if we filed tax returns on a stand-alone basis. Upon separation from PEI 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. The components of income before income tax were as follows: For the Years Ended December 31, 2021 2020 2019 (in millions) Income before income taxes: United States $ 424 $ 511 $ 300 International 6 5 1 Total income before income taxes $ 430 $ 516 $ 301 62 Reynolds Consumer Products Inc. Notes to the Consolidated Financial Statements Significant components of income tax expense were as follows: For the Years Ended December 31, 2021 2020 2019 (in millions) Current United States Federal $ 69 $ 70 $ 68 State 14 14 8 Foreign 1 1 — Total current income tax expense 84 85 76 Deferred United States Federal 19 54 3 State 3 13 ( 3 ) Foreign — 1 — Total deferred income tax expense 22 68 — Total income tax expense $ 106 $ 153 $ 76 A reconciliation of income taxes computed at the U.S. Federal statutory income tax rate of 21 % for 2021, 2020 and 2019, to our income tax expense was as follows: For the Years Ended December 31, 2021 2020 2019 (in millions) U.S. Federal income tax expense at the statutory rate $ 90 $ 108 $ 63 U.S. State income tax expense 15 17 2 Non-deductible expenses — 2 6 CARES Act — 27 — Return to provision adjustments 1 ( 2 ) 3 Other — 1 2 Total income tax expense $ 106 $ 153 $ 76 63 Reynolds Consumer Products Inc. Notes to the Consolidated Financial Statements Deferred Tax Assets and Liabilities Deferred income taxes result from temporary differences between the amount of assets and liabilities recognized for financial reporting and tax purposes. The components of our net deferred income tax liability were as follows: As of December 31, 2021 2020 (in millions) Deferred tax assets Employee benefits $ 26 $ 24 Lease obligations 13 15 Inventory 9 7 Reserves 4 2 Tax losses 4 4 Tax credits — 4 Total deferred tax assets 56 56 Valuation allowance ( 6 ) ( 5 ) Total deferred tax assets after valuation allowance 50 51 Deferred tax liabilities Intangible assets ( 293 ) ( 291 ) Property, plant and equipment ( 93 ) ( 72 ) Lease right-of-use assets ( 13 ) ( 14 ) Other ( 2 ) — Total deferred tax liabilities ( 401 ) ( 377 ) Net deferred tax liabilities $ ( 351 ) $ ( 326 ) State and foreign net operating loss carryforwards, presented on a gross basis, and tax credit carryforwards were as follows: As of December 31, 2021 2020 (in millions) State and foreign net operating loss carryforwards Expires within 5 years $ — $ — Expires after 5 years or no expiration 42 49 Total net operating loss carryforwards $ 42 $ 49 Tax credit carryforwards Expires within 5 years $ — $ 4 Total tax credit carryforwards $ — $ 4 Deferred tax assets related to state and foreign net operating loss carryforwards and state tax credit carryforwards are available to offset future state and foreign taxable earnings. We have provided a valuation allowance to reduce the carrying value of certain of these deferred tax assets, as we have concluded that, based on the available evidence, it is more likely than not that the deferred tax assets will not be fully realized. Valuation allowances relating to these losses were $ 4 million and $ 5 million as of December 31, 2021 and 2020, respectively. There were no material changes in valuation allowances in any of the years presented. Uncertain Tax Positions ASC 740 prescribes a recognition threshold of more-likely-than not to be sustained upon examination as it relates to the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements. Our policy is to include interest and penalties related to gross unrecognized tax benefits in income tax expense. 64 Reynolds Consumer Products Inc. Notes to the Consolidated Financial Statements The following table summarizes the activity related to our gross unrecognized tax benefits: For the Years Ended December 31, 2021 2020 2019 (in millions) Balance as of beginning of the year $ 4 $ 2 $ 1 Increase associated with tax positions taken during the current year 1 2 1 Ending unrecognized tax benefits $ 5 $ 4 $ 2 Each year we file income tax returns in the various federal, state, local and foreign income taxing jurisdictions in which we operate. Foreign jurisdictions comprise Canada and China. Our income tax returns are subject to examination and possible challenge by the tax authorities. Although ultimate timing is uncertain, the net amount of tax liability for unrecognized tax benefits may change within the next twelve months due to changes in audit status, settlements of tax assessments and other events. Prior to February 4, 2020, we were part of consolidated U.S. federal tax returns filed by PEI Group. Under a Tax Matters Agreement, entered into as part of our corporate reorganization prior to our IPO, PEI Group has retained responsibility for all U.S. federal tax matters for periods to and including February 4, 2020. Taxes Paid Taxes paid were $ 91 million, $ 76 million and $ 4 million for the years ended December 31, 2021, 2020 and 2019, respectively. Prior to our separation from PEI Group and IPO, our U.S. entities were members of a consolidated U.S. tax entity group for federal and certain state tax returns filed by the PEI Group. For periods prior to our separation, the current U.S. federal and state tax liabilities of our U.S. entities was aggregated with the other members of the consolidated U.S. tax entity group and settled on a net basis by a related party. There was no formal tax sharing agreement. The settlement of our current U.S. federal and state taxes for the periods prior to our separation were recognized directly as a movement in Net Parent deficit. Note 16 - Segment Information Our Chief Executive Officer, who has been identified as our Chief Operating Decision Maker ("CODM"), has evaluated how he views and measures our performance. In applying the criteria set forth in the standards for reporting information about segments in financial statements, we have determined that 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 CODM monitors performance, allocates capital and makes strategic and operational decisions. Our segments are described as follows: Reynolds Cooking & Baking Our Reynolds Cooking & Baking segment produces branded and store brand foil, disposable aluminum pans, parchment paper, freezer paper, wax paper, butcher paper, plastic wrap, baking cups, oven bags and slow cooker liners. Our branded products are sold under the Reynolds Wrap, Reynolds KITCHENS and E-Z Foil brands in the United States and selected international markets, under the ALCAN brand in Canada and under the Diamond brand outside of North America. Hefty Waste & Storage Our Hefty Waste & Storage segment produces both branded and store brand trash and food storage bags. Our branded products are sold under the Hefty Ultra Strong and Hefty Strong brands for trash bags, and as the Hefty and Baggies brands for our food storage bags. 65 Reynolds Consumer Products Inc. Notes to the Consolidated Financial Statements Hefty Tableware Our Hefty Tableware segment sells both branded and store brand disposable and compostable plates, bowls, platters, cups and cutlery. Our Hefty branded products include dishes and party cups. Presto Products Our Presto Products segment primarily sells store brand products in four main categories: food storage bags, trash bags, reusable storage containers and plastic wrap. Our Presto Products segment also includes our specialty business, which serves other consumer products companies by providing Fresh-Lock and Slide-Rite resealable closure systems. Information by Segment 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 e xclude unrealized gains on commodity derivatives, factoring discounts, the allocated related party management fee and IPO and separation-related costs. Total assets by segment are those assets directly associated with the respective operating activities, comprising inventory, property, plant and equipment and operating lease right-of-use assets. Other assets, such as cash, accounts receivable and intangible assets, are monitored on an entity-wide basis and not included in segment information that is regularly reviewed by our CODM. The accounting policies applied by our segments are the same as those described in Note 2 - Summary of Significant Accounting Policies. Transactions between segments are at negotiated prices. Reynolds Cooking & Baking Hefty Waste & Storage Hefty Tableware Presto Products Segment total Unallocated (1) Total 2021 (in millions) Net revenues $ 1,314 $ 876 $ 815 $ 560 $ 3,565 $ ( 9 ) $ 3,556 Intersegment revenues — 8 — 4 12 ( 12 ) — Total segment net revenues 1,314 884 815 564 3,577 ( 21 ) 3,556 Adjusted EBITDA 255 173 137 69 634 Depreciation and amortization 21 18 16 21 76 33 109 Capital expenditures 42 22 19 53 136 5 141 Total assets 562 290 165 247 1,264 3,548 4,812 Reynolds Cooking & Baking Hefty Waste & Storage Hefty Tableware Presto Products Segment total Unallocated (1) Total 2020 (in millions) Net revenues $ 1,159 $ 809 $ 763 $ 532 $ 3,263 $ — $ 3,263 Intersegment revenues — 9 — 1 10 ( 10 ) — Total segment net revenues 1,159 818 763 533 3,273 ( 10 ) 3,263 Adjusted EBITDA 254 236 170 98 758 Depreciation and amortization 20 15 14 19 68 31 99 Capital expenditures 33 30 24 38 125 18 143 Total assets 433 248 157 204 1,042 3,680 4,722 66 Reynolds Consumer Products Inc. Notes to the Consolidated Financial Statements Reynolds Cooking & Baking Hefty Waste & Storage Hefty Tableware Presto Products Segment total Unallocated (1) Total 2019 (in millions) Net revenues $ 1,076 $ 695 $ 751 $ 510 $ 3,032 $ — $ 3,032 Intersegment revenues — 14 — 1 15 ( 15 ) — Total segment net revenues 1,076 709 751 511 3,047 ( 15 ) 3,032 Adjusted EBITDA 209 190 178 91 668 Depreciation and amortization 20 13 9 21 63 28 91 Capital expenditures (2) 34 41 6 24 105 8 113 (1) Unallocated includes the elimination of intersegment revenues, other revenue adjustments and certain corporate costs, depreciation and amortization and assets not allocated to segments. Unallocated assets are comprised of cash, accounts receivable, other receivables, entity-wide property, plant and equipment, entity-wide operating lease ROU assets, goodwill, intangible assets, related party receivables and other assets. (2) Until October 31, 2019, the property, plant and equipment included in our Hefty Tableware segment was contributed to us from PEI Group. No capital expenditures were incurred by us in relation to these items. On November 1, 2019, as part of our separation from PEI Group, we acquired the legal title to these assets. The following table presents a reconciliation of segment Adjusted EBITDA to consolidated GAAP income before income taxes: For the Years Ended December 31, 2021 2020 2019 (in millions) Segment Adjusted EBITDA $ 634 $ 758 $ 668 Corporate / unallocated expenses ( 33 ) ( 41 ) ( 13 ) 601 717 655 Adjustments to reconcile to GAAP income before income taxes Depreciation and amortization ( 109 ) ( 99 ) ( 91 ) Interest expense, net ( 48 ) ( 70 ) ( 209 ) Factoring discount — — ( 25 ) Allocated related party management fee — — ( 10 ) IPO and separation-related costs ( 14 ) ( 31 ) ( 31 ) Unrealized gains on derivatives — — 9 Other — ( 1 ) 3 Consolidated GAAP income before income taxes $ 430 $ 516 $ 301 Information in Relation to Products Net revenues by product line are as follows: For the Years Ended December 31, 2021 2020 2019 (in millions) Waste and storage products (1) $ 1,448 $ 1,351 $ 1,220 Cooking products 1,314 1,159 1,076 Tableware 815 763 751 Unallocated ( 21 ) ( 10 ) ( 15 ) Net revenues $ 3,556 $ 3,263 $ 3,032 (1) Waste and storage products are comprised of our Hefty Waste & Storage and Presto Products segments. 67 Reynolds Consumer Products Inc. Notes to the Consolidated Financial Statements Our different product lines are generally sold to a common group of customers. For all product lines, there is a relatively short time period between the receipt of the order and the transfer of control over the goods to the customer. Geographic Data Geographic data for net revenues (recognized based on location of our business operations) and long-lived assets (representing property, plant and equipment) are as follows: For the Years Ended December 31, 2021 2020 2019 (in millions) Net revenues: United States $ 3,495 $ 3,206 $ 2,982 Other 61 57 50 Net revenues $ 3,556 $ 3,263 $ 3,032 As of December 31, 2021 2020 (in millions) Long-lived assets United States $ 671 $ 606 Other 6 6 Long-lived assets $ 677 $ 612 Entity-wide Disclosures Net revenues from our largest customer and its affiliates were 44 %, 43 % and 43 % of total net revenues for the years ended December 31, 2021, 2020 and 2019, respectively. The net revenues from our largest customer were recognized across all of our segments. No other customers accounted for 10% or more of our total net revenues in any of the years presented. Note 17 - Related Party Transactions We historically operated as part of PEI Group. In preparation for our IPO in February 2020, PEI Group transferred its interest in us to Packaging Finance Limited (“PFL”). PFL owns the majority of our outstanding common stock and owns the majority of the outstanding common stock of PEI Group. In addition to the pre-IPO allocation of expenses for certain services related to group wide functions provided by PEI Group discussed in Note 1 – Description of Business and Basis of Presentation, other transactions between us and PEI Group are described below. On-going Related Party Transactions For the years ended December 31, 2021, 2020 and 2019, revenues from products sold to PEI Group were $ 111 million, $ 116 million and $ 149 million, respectively. For the years ended December 31, 2021, 2020 and 2019, products purchased from PEI Group were $ 343 million, $ 330 million and $ 438 million, respectively. For the years ended December 31, 2021, 2020 and 2019, PEI Group charged us freight and warehousing costs of $ 60 million, $ 80 million and $ 134 million, respectively, which were included in cost of sales. The resulting related party receivables and payables are settled regularly with PEI Group in the normal course of business. Furthermore, $ 143 million and $ 92 million of dividends were paid to PFL during the years ended December 31, 2021 and 2020, respectively. Transactions Related to our Separation from PEI Group On November 1, 2019, as part of our separation from PEI Group, we acquired the legal title to certain property, plant and equipment and inventories from PEI Group for cash consideration of $ 112 million which represented fair market value and is presented within net transfers from (to) Parent in our consolidated statements of cash flows. These assets are directly attributable to our business and have been historically reflected in our consolidated financial statements, at their respective net book values, within our Hefty Tableware segment. We had written interest-bearing loan agreements in place with PEI Group. In June 2019, all of our non-current related party receivables and a portion of current related party receivables were used to reduce the balances outstanding of various related party borrowings, related party accrued interest payable and related party payables. As a result of this process, we net settled related party borrowings of $ 1,714 million, related party accrued interest payable of $ 655 million and related party payables of $ 94 million. Accordingly, we had 68 Reynolds Consumer Products Inc. Notes to the Consolidated Financial Statements no related party long-term receivables as of December 31, 2019. Related party borrowings were $ 2,214 million as of December 31, 2019. Related party accrued i nterest payable was $ 18 million as of December 31, 2019. We remit ted accrued interest payable on the borrowings to PEI Group as and when requested in conjunction with its cash management activities. Interest expense and income related to these loan agreements w ere accrued based on the written l oan agreements. During the year ended December 31, 2019, we borrowed $ 98 million ($ 31 million non-cash), from PEI Group and repaid borrowings of $ 141 million. In addition, during the year ended December 31, 2019, $ 36 million of accrued interest was capitalized into related pa rty borrowings. During the year ended December 31, 2019, we advanced loans of $ 170 million to PEI Group and received repayments of $ 151 million. The weighted average contractual interest rate related to our related party borrowings as of December 31, 2019 was 2.20 % . On January 30, 2020, we repurchased all of the U.S. accounts receivable that we previously sold through PEI Group’s securitization facility for $ 264 million, $ 240 million of which was settled in cash and the remaining amount used to settle certain current related party receivables. The cash to purchase these receivables was provided by an increase in related party borrowings, which was subsequently settled as discussed below. On January 30, 2020, our outstanding borrowings, net of deferred financing transaction costs and original issue discounts plus accrued interest incurred under the PEI Group Credit Agreement were reallocated to an entity within PEI Group and on February 4, 2020, we were fully and unconditionally released from the security and guarantee arrangements relating to PEI Group’s borrowings. This reallocation resulted in a payment to PEI Group of $ 8 million for accrued interest and an increase of $ 2,001 million in related party borrowings, which was subsequently settled as discussed below. On February 4, 2020, we repaid $ 3,627 million of related party borrowings and $ 22 million of related party accrued interest owed to PEI Group and capitalized, as additional paid-in capital without the issuance of any additional shares, the remaining $ 831 million balance of the related party borrowings owed to PEI Group. On February 4, 2020, 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; human resources; procurement; tax, legal and compliance related services; and other corporate services for up to 24 months. In addition, we entered into a transition services agreement with Rank Group Limited (an affiliate of PEI Group) 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. For the years ended December 31, 2021 and 2020, we incurred $ 6 million and $ 10 million, respectively, related to transition services which was included in selling, general and administrative expenses in our consolidated statements of income. Note 18 - Subsequent Events Quarterly Cash Dividend On January 27, 2022, our Board of Directors approved a cash dividend of $ 0.23 per common share to be paid on February 28, 2022 to shareholders of record on February 14, 2022 . Except as described above, there have been no events subsequent to December 31, 2021 which would require accrual or disclosure in these consolidated financial statements. 69 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None.