Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
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 condensed consolidated financial statements and the accompanying notes included elsewhere in this Quarterly Report on Form 10-Q.
Our Company
We are a leading manufacturer and distributor of fresh foodservice and food merchandising products and fresh beverage cartons in North America. We produce a broad range of on-trend and feature-rich products that protect, package and display food and beverages for today’s consumers. Our products include containers, drinkware (such as hot and cold cups and lids), cartons for fresh refrigerated beverage products, tableware, meat and poultry trays, paper products, liquid packaging board, serviceware, prepared food trays and egg cartons. Our products, many of which are made with recycled, recyclable or renewable materials, are sold to a diversified mix of customers, including restaurants, foodservice distributors, retailers, food and beverage producers, packers and processors. We report our business in three reportable segments: Foodservice, Food Merchandising and Beverage Merchandising. Refer to Note 18, Segment Information, for additional details.
Business Environment
During 2022, we experienced meaningful input cost inflation, including higher raw material and labor costs. Our pricing strategy across all of our segments, including contractual pass-through mechanisms and other pricing actions, has mitigated certain of these inflationary pressures. These pressures may also impact our customers’ purchasing decisions and order patterns throughout the remainder of 2022 and into 2023, as well as consumer mobility and discretionary spending. Additionally, while labor availability has improved during the year, a tight labor market has continued to challenge our business and our operations. Despite these headwinds, we have seen strong customer retention while renewing our focus on manufacturing productivity across all of our segments.
While strong demand for labor domestically continues to support consumer spending in the face of inflationary pressures, rising interest rates and the resulting volatility within the capital markets have created additional uncertainty with respect to the economic outlook. If economic conditions were to deteriorate, a decline in consumer spending may result, which could lead to a meaningful decline in demand for our products into 2023 and beyond.
Recent Developments and Items Impacting Comparability
Pension Partial Settlement Transactions
On September 20, 2022, February 24, 2022, and July 21, 2021, using PEPP assets, we purchased non-participating group annuity contracts from insurance companies and transferred portions of the PEPP’s projected benefit obligations. In each instance, the respective insurance companies have assumed responsibility for pension benefits and annuity administration. The following table provides details regarding each transaction:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions) |
|
|
|
|
Transaction Date |
|
Reporting Period |
|
Assets Transferred |
|
|
Projected Benefit Obligations Transferred |
|
|
Settlement Gain Recognized |
|
|
Number of Participants Impacted |
|
September 20, 2022 |
|
Q3 2022 |
|
$ |
629 |
|
|
$ |
656 |
|
|
$ |
47 |
|
|
|
10,200 |
|
February 24, 2022 |
|
Q1 2022 |
|
|
1,260 |
|
|
|
1,257 |
|
|
|
10 |
|
|
|
13,300 |
|
July 21, 2021 |
|
Q3 2021 |
|
|
941 |
|
|
|
959 |
|
|
|
22 |
|
|
|
16,300 |
|
Fabri-Kal Acquisition
On October 1, 2021, we acquired 100% of the outstanding ownership interests of Fabri-Kal for a purchase price of $378 million, including final adjustments for cash, indebtedness and working capital of $2 million paid during the nine months ended September 30, 2022. Fabri-Kal is a U.S. manufacturer of thermoformed plastic packaging products. Its products include portion cups, lids, clamshells, drink cups and yogurt containers for the institutional foodservice and consumer packaged goods markets. The acquisition includes four manufacturing facilities in the U.S. The acquisition broadened our portfolio of sustainable packaging products and expanded our manufacturing capacity to better serve our customers. The acquisition was funded with our existing cash resources and a portion of the U.S. term loans Tranche B-3 incurred in September 2021.
27
Dispositions and Exit Activities
Over recent periods, we made strategic decisions to focus on our core, business-to-business North American foodservice, food merchandising and beverage merchandising operations. Accordingly, we divested or exited certain of our non-core businesses which enables us to focus on our strategic core competencies.
On January 4, 2022, we entered into a definitive agreement with SIG Schweizerische Industrie-Gesellschaft GmbH to sell Beverage Merchandising Asia. The transaction closed on August 2, 2022, and we received preliminary proceeds of $336 million, which are subject to adjustments for cash, indebtedness and working capital as of the date of completion. We recognized a preliminary gain on sale of $239 million during the three months ended September 30, 2022. Sales of liquid packaging board to our former Beverage Merchandising Asia operations, which were previously eliminated in consolidation, are recorded as external net revenues subsequent to the transaction’s completion.
In September 2022, we committed to a plan to sell our remaining closures businesses. As a result, we classified the assets and liabilities of these businesses as held for sale and recognized a pre-tax charge to earnings of $56 million within restructuring, asset impairment and other related charges during the three months ended September 30, 2022.
On October 12, 2021, we entered into a definitive agreement for the sale of our equity interests in Naturepak Beverage, our 50% joint venture with Naturepak Limited, to affiliates of Elopak ASA. The transaction closed on March 29, 2022, and we received preliminary proceeds of $47 million, which are subject to adjustments for cash, indebtedness and working capital as of the date of completion. We recognized a preliminary gain on the sale of our equity interests of $27 million during the nine months ended September 30, 2022.
On July 28, 2021, we announced the decision to close our coated groundwood paper production line located in our Pine Bluff, Arkansas mill. On October 31, 2021, we ceased manufacturing coated groundwood paper, and we substantially completed our exit from this business during the fourth quarter of 2021. As a result of the closure, we recognized $1 million for disassembly costs during the nine months ended September 30, 2022 and $8 million for contractual termination benefits during the nine months ended September 30, 2021.
None of these dispositions qualify for presentation as discontinued operations.
Winter Storm Uri and Tropical Storm Fred
In February 2021, the Southern portion of the U.S. was impacted by Winter Storm Uri which brought record low temperatures, snow and ice and resulted in power failures, hazardous road conditions, damage to property and death and injury to individuals in those states. During most of this weather event, we were unable to fully operate some of our mills, plants and warehouses in Texas and Arkansas. During the first half of 2021, we incurred approximately $50 million of incremental costs including energy costs, primarily related to natural gas, shut-down costs and some property damage during the storm. Our Beverage Merchandising segment was impacted to the greatest degree with total incremental costs of $37 million incurred by our paper mill in Pine Bluff, Arkansas.
As a result of the storm, certain of our suppliers with locations in the impacted areas were also unable to operate which subsequently resulted in their declaration of force majeure on meeting the supply quantities due to us. In particular, our supply of various resin types was limited, and we were required to purchase from other suppliers, and at a higher price, in order to meet our production demands for March and April of 2021. As further discussed in our Results of Operations, our cost of sales was adversely impacted for the nine months ended September 30, 2021 as the products manufactured with this higher priced material were sold.
In August 2021, the Southeastern portion of the U.S. was impacted by Tropical Storm Fred which brought severe flooding. As a result of the storm, our paper mill in Canton, North Carolina experienced a flood which resulted in the damage of certain property, plant and equipment. The mill subsequently experienced an explosion and resulting fire. Due to the extent of damage sustained from the flood, fire and related events, we were unable to fully operate our paper mill in Canton, North Carolina for several days during the third quarter of 2021. Accordingly, our Beverage Merchandising segment incurred $7 million of incremental costs, including costs related to the shut-down of the mill and to repair damaged property, plant and equipment, during the three months ended September 30, 2021.
COVID-19
We have been actively responding to the COVID-19 pandemic and its impact. During the early part of 2021, we experienced lower demand for our products and, as a result, a decline in revenues. Commencing in the second quarter of 2021 and continuing throughout 2021, volumes improved in our business, most significantly in our Foodservice segment. To date, we have not experienced significant issues across our supply chain due to the COVID-19 pandemic, including the sourcing of materials and
28
logistics service providers. As the general effects of the COVID-19 pandemic continue to change and remain unpredictable, the COVID-19 pandemic may continue to impact our results of operations in future periods as the macroeconomic environment and consumer behavior continue to evolve.
Non-GAAP Measures – Adjusted EBITDA from Continuing Operations
In addition to financial measures determined in accordance with GAAP, we make use of the non-GAAP financial measure Adjusted EBITDA from continuing operations to evaluate and manage our business and to plan and make near-term and long-term operating and strategic decisions.
Adjusted EBITDA from continuing operations is defined as net income (loss) from continuing operations calculated in accordance with GAAP, plus the sum of income tax expense, net interest expense, depreciation and amortization and further adjusted to exclude certain items, including but not limited to restructuring, asset impairment and other related charges, gains or losses on the sale of businesses and noncurrent assets, non-cash pension income or expense, operational process engineering-related consultancy costs, business acquisition and integration costs and purchase accounting adjustments, unrealized gains or losses on derivatives, foreign exchange gains or losses on cash, executive transition charges and gains or losses on certain legal settlements.
We present Adjusted EBITDA from continuing operations because it is a key measure used by our management team to evaluate our operating performance, generate future operating plans, make strategic decisions and incentivize and reward our employees. Accordingly, we believe that Adjusted EBITDA from continuing operations 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. We also believe that using Adjusted EBITDA from continuing operations facilitates operating performance comparisons on a period-to-period basis because it excludes variations primarily caused by changes in the items noted above. In addition, our chief operating decision maker, who is our President and Chief Executive Officer, uses Adjusted EBITDA of each reportable segment to evaluate the operating performance of such segments.
Our use of Adjusted EBITDA from continuing operations has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP. Instead, you should consider it alongside other financial performance measures, including our net income (loss) and other GAAP results. In addition, in evaluating Adjusted EBITDA from continuing operations, you should be aware that in the future we will incur expenses such as those that are the subject of adjustments made in deriving Adjusted EBITDA from continuing operations, and you should not infer from our presentation of Adjusted EBITDA from continuing operations that our future results will not be affected by these expenses or any unusual or non-recurring items. The following is a reconciliation of our net income (loss) from continuing operations, the most directly comparable GAAP financial measure, to Adjusted EBITDA from continuing operations for each of the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended September 30, |
|
|
For the Nine Months Ended September 30, |
|
(In millions) |
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
Net income (loss) from continuing operations (GAAP) |
|
$ |
175 |
|
|
$ |
2 |
|
|
$ |
292 |
|
|
$ |
(1 |
) |
Income tax expense (benefit) |
|
|
79 |
|
|
|
(13 |
) |
|
|
160 |
|
|
|
(26 |
) |
Interest expense, net |
|
|
59 |
|
|
|
57 |
|
|
|
158 |
|
|
|
141 |
|
Depreciation and amortization |
|
|
85 |
|
|
|
103 |
|
|
|
255 |
|
|
|
253 |
|
Restructuring, asset impairment and other related charges(1) |
|
|
57 |
|
|
|
— |
|
|
|
58 |
|
|
|
8 |
|
Gain on sale of businesses and noncurrent assets(2) |
|
|
(239 |
) |
|
|
— |
|
|
|
(266 |
) |
|
|
— |
|
Non-cash pension income(3) |
|
|
(44 |
) |
|
|
(40 |
) |
|
|
(52 |
) |
|
|
(88 |
) |
Operational process engineering-related consultancy costs(4) |
|
|
3 |
|
|
|
6 |
|
|
|
7 |
|
|
|
16 |
|
Business acquisition and integration costs and purchase accounting adjustments(5) |
|
|
— |
|
|
|
2 |
|
|
|
6 |
|
|
|
2 |
|
Unrealized losses on derivatives |
|
|
10 |
|
|
|
1 |
|
|
|
4 |
|
|
|
5 |
|
Foreign exchange losses on cash |
|
|
— |
|
|
|
— |
|
|
|
2 |
|
|
|
1 |
|
Executive transition charges(6) |
|
|
— |
|
|
|
— |
|
|
|
2 |
|
|
|
10 |
|
Gain on legal settlement(7) |
|
|
— |
|
|
|
— |
|
|
|
(15 |
) |
|
|
— |
|
Costs associated with legacy facility(8) |
|
|
— |
|
|
|
— |
|
|
|
6 |
|
|
|
— |
|
Other |
|
|
2 |
|
|
|
1 |
|
|
|
1 |
|
|
|
5 |
|
Adjusted EBITDA from continuing operations (Non-GAAP) |
|
$ |
187 |
|
|
$ |
119 |
|
|
$ |
618 |
|
|
$ |
326 |
|
29
(1)Reflects restructuring, asset impairment and other related charges (net of reversals) primarily associated with the decision to exit our remaining closures businesses for the three and nine months ended September 30, 2022 and our closure of Beverage Merchandising’s coated groundwood operations for the nine months ended September 30, 2021. Refer to Note 3, Restructuring, Asset Impairment and Other Related Charges, for additional details.
(2)Reflects the gain from the sale of businesses and noncurrent assets, primarily related to the sale of Beverage Merchandising Asia and the sale of our equity interests in Naturepak Beverage. Refer to Note 2, Acquisitions and Dispositions, for additional details.
(3)Reflects the non-cash pension income related to our employee benefit plans, including the pension settlement gains of $47 million and $57 million recognized during the three and nine months ended September 30, 2022, respectively, and the pension settlement gain of $22 million recognized during the three and nine months ended September 31, 2021. Refer to Note 10, Employee Benefits, for additional details.
(4)Reflects the costs incurred to evaluate and improve the efficiencies of our manufacturing and distribution operations.
(5)Reflects acquisition and integration costs related to Fabri-Kal. Refer to Note 2, Acquisitions and Dispositions, for additional details.
(6)Reflects charges relating to key executive retirement and separation agreements in the first half of 2021 and in the second quarter of 2022.
(7)Reflects the gain, net of costs, arising from the settlement of a historical legal action.
(8)Reflects costs related to a closed facility that was sold prior to our acquisition of the entity.
Results of Operations
Three Months Ended September 30, 2022 and 2021
Consolidated Results
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended September 30, |
|
(In millions, except for %) |
|
2022 |
|
|
% of Revenue |
|
|
2021 |
|
|
% of Revenue |
|
|
Change |
|
|
% Change |
|
Net revenues |
|
$ |
1,609 |
|
|
|
100 |
% |
|
$ |
1,394 |
|
|
|
100 |
% |
|
$ |
215 |
|
|
|
15 |
% |
Cost of sales |
|
|
(1,377 |
) |
|
|
(86 |
)% |
|
|
(1,291 |
) |
|
|
(93 |
)% |
|
|
(86 |
) |
|
|
(7 |
)% |
Gross profit |
|
|
232 |
|
|
|
14 |
% |
|
|
103 |
|
|
|
7 |
% |
|
|
129 |
|
|
|
125 |
% |
Selling, general and administrative expenses |
|
|
(145 |
) |
|
|
(9 |
)% |
|
|
(104 |
) |
|
|
(7 |
)% |
|
|
(41 |
) |
|
|
(39 |
)% |
Restructuring, asset impairment and other related charges |
|
|
(57 |
) |
|
|
(4 |
)% |
|
|
— |
|
|
|
— |
% |
|
|
(57 |
) |
|
NM |
|
Other income, net |
|
|
239 |
|
|
|
15 |
% |
|
|
7 |
|
|
|
— |
% |
|
|
232 |
|
|
NM |
|
Operating income from continuing operations |
|
|
269 |
|
|
|
17 |
% |
|
|
6 |
|
|
|
— |
% |
|
|
263 |
|
|
NM |
|
Non-operating income, net |
|
|
44 |
|
|
|
3 |
% |
|
|
40 |
|
|
|
3 |
% |
|
|
4 |
|
|
|
10 |
% |
Interest expense, net |
|
|
(59 |
) |
|
|
(4 |
)% |
|
|
(57 |
) |
|
|
(4 |
)% |
|
|
(2 |
) |
|
|
(4 |
)% |
Income (loss) from continuing operations before tax |
|
|
254 |
|
|
|
16 |
% |
|
|
(11 |
) |
|
|
(1 |
)% |
|
|
265 |
|
|
NM |
|
Income tax (expense) benefit |
|
|
(79 |
) |
|
|
(5 |
)% |
|
|
13 |
|
|
|
1 |
% |
|
|
(92 |
) |
|
NM |
|
Income from continuing operations |
|
|
175 |
|
|
|
11 |
% |
|
|
2 |
|
|
|
— |
% |
|
|
173 |
|
|
NM |
|
Income (loss) from discontinued operations, net of income taxes |
|
|
1 |
|
|
|
|
|
|
(2 |
) |
|
|
|
|
|
3 |
|
|
|
|
Net income |
|
$ |
176 |
|
|
|
|
|
$ |
— |
|
|
|
|
|
$ |
176 |
|
|
|
|
Adjusted EBITDA from continuing operations(1) |
|
$ |
187 |
|
|
|
12 |
% |
|
$ |
119 |
|
|
|
9 |
% |
|
$ |
68 |
|
|
|
57 |
% |
(1)Adjusted EBITDA from continuing operations is a non-GAAP measure. For details, refer to Non-GAAP Measures - Adjusted EBITDA from continuing operations, including a reconciliation between net income (loss) from continuing operations and Adjusted EBITDA from continuing operations.
NM indicates that the calculation is “not meaningful”.
Components of Change in Reportable Segment Net Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Price/Mix |
|
|
Volume |
|
|
Acquisitions |
|
|
Dispositions |
|
|
Total |
|
Net revenues |
|
|
17 |
% |
|
|
(8 |
)% |
|
|
8 |
% |
|
|
(2 |
)% |
|
|
15 |
% |
By reportable segment: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foodservice |
|
|
16 |
% |
|
|
(8 |
)% |
|
|
19 |
% |
|
|
— |
% |
|
|
27 |
% |
Food Merchandising |
|
|
20 |
% |
|
|
(4 |
)% |
|
|
— |
% |
|
|
— |
% |
|
|
16 |
% |
Beverage Merchandising |
|
|
16 |
% |
|
|
(5 |
)% |
|
|
— |
% |
|
|
(6 |
)% |
|
|
5 |
% |
30
Net Revenues. Net revenues for the three months ended September 30, 2022 increased by $215 million, or 15%, to $1,609 million compared to the prior year period. The increase was primarily due to favorable pricing, due to the contractual pass-through of higher material costs and pricing actions across all of our segments. In addition, the Foodservice segment’s acquisition of Fabri-Kal on October 1, 2021 contributed $114 million of incremental sales for the three months ended September 30, 2022 as compared to the prior year period. These increases were partially offset by lower sales volume, primarily due to strong sales volume in the prior year period as businesses and restaurants re-opened post-COVID-19 lockdowns in our Foodservice segment, the market softening amid inflationary pressures in our Food Merchandising segment and our strategic exit from the coated groundwood business in our Beverage Merchandising segment in December 2021, and the impact from the disposition of Beverage Merchandising Asia on August 2, 2022.
Cost of Sales. Cost of sales for the three months ended September 30, 2022 increased by $86 million, or 7%, to $1,377 million compared to the prior year period. The increase was primarily due to the Foodservice segment’s acquisition of Fabri-Kal and higher material and manufacturing costs across all of our segments. These increases were partially offset by lower sales volume.
Selling, General and Administrative Expenses. Selling, general and administrative expenses for the three months ended September 30, 2022 increased by $41 million, or 39%, to $145 million compared to the prior year period. The increase was primarily due to higher employee-related costs and higher costs related to the Foodservice segment’s acquisition of Fabri-Kal.
Restructuring, Asset Impairment and Other Related Charges. Restructuring, asset impairment and other related charges for the three months ended September 30, 2022 included a $56 million impairment charge related to the decision to exit our remaining closures businesses. Refer to Note 3, Restructuring, Asset Impairment and Other Related Charges, for additional details.
Other Income, Net. Other income, net for the three months ended September 30, 2022 increased by $232 million to $239 million compared to the prior year period. The increase was primarily attributable to the $239 million preliminary gain on the sale of Beverage Merchandising Asia, which was completed during the three months ended September 30, 2022.
Non-operating Income, Net. Non-operating income, net, for the three months ended September 30, 2022 increased by $4 million, or 10%, to $44 million compared to the prior year period. The increase was primarily due to a $47 million pension settlement gain recognized in the current year period compared to a $22 million pension settlement gain recognized in the prior year period, partially offset by lower ongoing net periodic benefit income. Refer to Note 10, Employee Benefits, for additional details.
Interest Expense, Net. Interest expense, net, for the three months ended September 30, 2022 increased by $2 million, or 4%, to $59 million, compared to the prior year period. The increase was primarily due to an increase in the interest rate on our floating rate term loans and an increase in principal amounts outstanding under our senior secured notes. These increases were partially offset by $14 million of fees and third party costs incurred in the prior year period that did not recur. Refer to Note 8, Debt, for additional details.
Income Tax Expense. During the three months ended September 30, 2022, we recognized a tax expense of $79 million on income from continuing operations before tax of $254 million, compared to tax benefit of $13 million on a loss from continuing operations before tax of $11 million for the prior year period. The effective tax rate is primarily due to the tax impacts from the sale of our businesses. The effective tax rate during the prior year period was primarily attributable to our overall projected earnings subject to taxation at varying rates in the jurisdictions in which we operate.
Adjusted EBITDA from Continuing Operations. Adjusted EBITDA from continuing operations for the three months ended September 30, 2022 increased by $68 million, or 57%, to $187 million compared to the prior year period. The increase reflects favorable pricing, net of material costs passed through, and the impact from the acquisition of Fabri-Kal, partially offset by higher manufacturing and employee-related costs and lower sales volume.
Segment Information
Foodservice
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended September 30, |
|
(In millions, except for %) |
|
2022 |
|
|
2021 |
|
|
Change |
|
|
% Change |
|
Total segment net revenues |
|
$ |
756 |
|
|
$ |
594 |
|
|
$ |
162 |
|
|
|
27 |
% |
Segment Adjusted EBITDA |
|
$ |
113 |
|
|
$ |
64 |
|
|
$ |
49 |
|
|
|
77 |
% |
Segment Adjusted EBITDA margin |
|
|
15 |
% |
|
|
11 |
% |
|
|
|
|
|
|
Total Segment Net Revenues. Foodservice total segment net revenues for the three months ended September 30, 2022 increased by $162 million, or 27%, to $756 million compared to the prior year period. The increase was primarily due to the acquisition of Fabri-Kal on October 1, 2021, which contributed $114 million of incremental sales for the three months ended September 30,
31
2022 as compared to the prior year period, and favorable pricing, due to the contractual pass-through of higher material costs and pricing actions taken to offset higher input costs. These increases were partially offset by lower sales volume, primarily due to strong sales volume in the prior year period as businesses and restaurants re-opened post-COVID-19 lockdowns.
Adjusted EBITDA. Foodservice Adjusted EBITDA for the three months ended September 30, 2022 increased by $49 million, or 77%, to $113 million compared to the prior year period. The increase was primarily due to favorable pricing, net of material costs passed through, and the impact from the acquisition of Fabri-Kal, partially offset by higher manufacturing costs, lower sales volume and higher employee-related costs.
Food Merchandising
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended September 30, |
|
(In millions, except for %) |
|
2022 |
|
|
2021 |
|
|
Change |
|
|
% Change |
|
Total segment net revenues |
|
$ |
455 |
|
|
$ |
391 |
|
|
$ |
64 |
|
|
|
16 |
% |
Segment Adjusted EBITDA |
|
$ |
70 |
|
|
$ |
49 |
|
|
$ |
21 |
|
|
|
43 |
% |
Segment Adjusted EBITDA margin |
|
|
15 |
% |
|
|
13 |
% |
|
|
|
|
|
|
Total Segment Net Revenues. Food Merchandising total segment net revenues for the three months ended September 30, 2022 increased by $64 million, or 16%, to $455 million compared to the prior year period. The increase was primarily due to favorable pricing, due to pricing actions taken to offset higher input costs and the contractual pass-through of higher material costs, partially offset by lower sales volume, primarily due to the market softening amid inflationary pressures.
Adjusted EBITDA. Food Merchandising Adjusted EBITDA for the three months ended September 30, 2022 increased by $21 million, or 43%, to $70 million compared to the prior year period. The increase was primarily due to favorable pricing, net of material costs passed through, partially offset by higher manufacturing and employee-related costs and lower sales volume.
Beverage Merchandising
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended September 30, |
|
(In millions, except for %) |
|
2022 |
|
|
2021 |
|
|
Change |
|
|
% Change |
|
Total segment net revenues |
|
$ |
422 |
|
|
$ |
403 |
|
|
$ |
19 |
|
|
|
5 |
% |
Segment Adjusted EBITDA |
|
$ |
26 |
|
|
$ |
16 |
|
|
$ |
10 |
|
|
|
63 |
% |
Segment Adjusted EBITDA margin |
|
|
6 |
% |
|
|
4 |
% |
|
|
|
|
|
|
Total Segment Net Revenues. Beverage Merchandising total segment net revenues for the three months ended September 30, 2022 increased by $19 million, or 5%, to $422 million compared to the prior year period. The increase was primarily due to favorable pricing, due to pricing actions taken to offset higher input costs and the contractual pass-through of higher material costs. The increase was partially offset by the impact from the disposition of Beverage Merchandising Asia on August 2, 2022 and lower sales volume, primarily due to our strategic exit from the coated groundwood business in December 2021.
Adjusted EBITDA. Beverage Merchandising Adjusted EBITDA for the three months ended September 30, 2022 increased by $10 million, or 63%, to $26 million compared to the prior year period. The increase was primarily due to favorable pricing, net of material costs passed through, and the benefit related to prior year period costs of $7 million from Tropical Storm Fred. These items were partially offset by higher manufacturing costs, including $8 million due to a scheduled cold mill outage, and higher employee-related costs.
32
Nine Months Ended September 30, 2022 and 2021
Consolidated Results
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended September 30, |
|
(In millions, except for %) |
|
2022 |
|
|
% of Revenue |
|
|
2021 |
|
|
% of Revenue |
|
|
Change |
|
|
% Change |
|
Net revenues |
|
$ |
4,744 |
|
|
|
100 |
% |
|
$ |
3,910 |
|
|
|
100 |
% |
|
$ |
834 |
|
|
|
21 |
% |
Cost of sales |
|
|
(3,972 |
) |
|
|
(84 |
)% |
|
|
(3,549 |
) |
|
|
(91 |
)% |
|
|
(423 |
) |
|
|
(12 |
)% |
Gross profit |
|
|
772 |
|
|
|
16 |
% |
|
|
361 |
|
|
|
9 |
% |
|
|
411 |
|
|
|
114 |
% |
Selling, general and administrative expenses |
|
|
(435 |
) |
|
|
(9 |
)% |
|
|
(345 |
) |
|
|
(9 |
)% |
|
|
(90 |
) |
|
|
(26 |
)% |
Restructuring, asset impairment and other related charges |
|
|
(58 |
) |
|
|
(1 |
)% |
|
|
(8 |
) |
|
|
— |
% |
|
|
(50 |
) |
|
NM |
|
Other income, net |
|
|
279 |
|
|
|
6 |
% |
|
|
18 |
|
|
|
— |
% |
|
|
261 |
|
|
NM |
|
Operating income from continuing operations |
|
|
558 |
|
|
|
12 |
% |
|
|
26 |
|
|
|
1 |
% |
|
|
532 |
|
|
NM |
|
Non-operating income, net |
|
|
52 |
|
|
|
1 |
% |
|
|
88 |
|
|
|
2 |
% |
|
|
(36 |
) |
|
|
(41 |
)% |
Interest expense, net |
|
|
(158 |
) |
|
|
(3 |
)% |
|
|
(141 |
) |
|
|
(4 |
)% |
|
|
(17 |
) |
|
|
(12 |
)% |
Income (loss) from continuing operations before tax |
|
|
452 |
|
|
|
10 |
% |
|
|
(27 |
) |
|
|
(1 |
)% |
|
|
479 |
|
|
NM |
|
Income tax (expense) benefit |
|
|
(160 |
) |
|
|
(3 |
)% |
|
|
26 |
|
|
|
1 |
% |
|
|
(186 |
) |
|
NM |
|
Income (loss) from continuing operations |
|
|
292 |
|
|
|
6 |
% |
|
|
(1 |
) |
|
|
— |
% |
|
|
293 |
|
|
NM |
|
Income (loss) from discontinued operations, net of income taxes |
|
|
1 |
|
|
|
|
|
|
(6 |
) |
|
|
|
|
|
7 |
|
|
|
|
Net income (loss) |
|
$ |
293 |
|
|
|
|
|
$ |
(7 |
) |
|
|
|
|
$ |
300 |
|
|
|
|
Adjusted EBITDA from continuing operations(1) |
|
$ |
618 |
|
|
|
13 |
% |
|
$ |
326 |
|
|
|
8 |
% |
|
$ |
292 |
|
|
|
90 |
% |
(1)Adjusted EBITDA from continuing operations is a non-GAAP measure. For details, refer to Non-GAAP Measures - Adjusted EBITDA from continuing operations, including a reconciliation between net income (loss) from continuing operations and Adjusted EBITDA from continuing operations.
Components of Change in Reportable Segment Net Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Price/Mix |
|
|
Volume |
|
|
Acquisitions |
|
|
Dispositions |
|
|
FX |
|
|
Total |
|
Net revenues |
|
|
22 |
% |
|
|
(8 |
)% |
|
|
9 |
% |
|
|
(1 |
)% |
|
|
(1 |
)% |
|
|
21 |
% |
By reportable segment: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foodservice |
|
|
25 |
% |
|
|
(7 |
)% |
|
|
21 |
% |
|
|
— |
% |
|
|
— |
% |
|
|
39 |
% |
Food Merchandising |
|
|
21 |
% |
|
|
(5 |
)% |
|
|
— |
% |
|
|
— |
% |
|
|
— |
% |
|
|
16 |
% |
Beverage Merchandising |
|
|
18 |
% |
|
|
(7 |
)% |
|
|
— |
% |
|
|
(2 |
)% |
|
|
— |
% |
|
|
9 |
% |
Net Revenues. Net revenues for the nine months ended September 30, 2022 increased by $834 million, or 21%, to $4,744 million compared to the prior year period. The increase was primarily due to favorable pricing, due to the contractual pass-through of higher material costs and pricing actions across all of our segments. In addition, the Foodservice segment’s acquisition of Fabri-Kal on October 1, 2021 contributed $337 million of incremental sales for the nine months ended September 30, 2022 as compared to the prior year period. These increases were partially offset by lower sales volume, primarily due to strong sales volume in the prior year period as businesses and restaurants re-opened post-COVID-19 lockdowns in our Foodservice segment, labor and related impacts in our Food Merchandising segment and our strategic exit from the coated groundwood business in our Beverage Merchandising segment in December 2021.
Cost of Sales. Cost of sales for the nine months ended September 30, 2022 increased by $423 million, or 12%, to $3,972 million compared to the prior year period. The increase was primarily due to higher material and manufacturing costs across all of our segments, as well as the Foodservice segment’s acquisition of Fabri-Kal. These increases were partially offset by lower sales volume and the benefit related to prior year period costs of $50 million from Winter Storm Uri.
Selling, General and Administrative Expenses. Selling, general and administrative expenses for the nine months ended September 30, 2022 increased by $90 million, or 26%, to $435 million compared to the prior year period. The increase was primarily due to higher employee-related costs and higher costs related to the Foodservice segment’s acquisition of Fabri-Kal.
Restructuring, Asset Impairment and Other Related Charges. Restructuring, asset impairment and other related charges for the nine months ended September 30, 2022 increased by $50 million to $58 million. The increase was primarily attributable to a $56 million impairment charge related to the decision to exit our remaining closures businesses. Refer to Note 3, Restructuring, Asset Impairment and Other Related Charges, for additional details.
Other Income, Net. Other income, net for the nine months ended September 30, 2022 increased by $261 million to $279 million compared to the prior year period. The increase was primarily attributable to the $239 million gain on the sale of Beverage
33
Merchandising Asia, the $27 million gain on the sale of our equity interests in Naturepak Beverage and the $15 million gain, net of costs, arising from the settlement of a historical legal action, partially offset by lower transition service agreement income.
Non-operating Income, Net. Non-operating income, net, for the nine months ended September 30, 2022 decreased by $36 million, or 41%, to $52 million compared to the prior year period. The decrease was primarily due to lower ongoing net periodic benefit income, partially offset by $57 million of pension settlement gains recognized in the current year period compared to a $22 million pension settlement gain recognized in the prior year period. Refer to Note 10, Employee Benefits, for additional details.
Interest Expense, Net. Interest expense, net, for the nine months ended September 30, 2022 increased by $17 million, or 12%, to $158 million, compared to the prior year period, primarily due to an increase in the interest rate on our floating rate term loans and a net increase in principal amounts outstanding under our senior secured notes. These increases were partially offset by $14 million of fees and third party costs incurred in the prior year period that did not recur. Refer to Note 8, Debt, for additional details.
Income Tax (Expense) Benefit. During the nine months ended September 30, 2022, we recognized a tax expense of $160 million on income from continuing operations before tax of $452 million, compared to tax benefit of $26 million on a loss from continuing operations before tax of $27 million for the prior year period. The effective tax rate is primarily due to the inability to recognize a tax benefit on all interest expense and the tax impacts from the sales of our businesses. The effective tax rate during the prior year period was primarily attributable to the partial release of our valuation allowance for deferred interest deductions, which was partially offset by varying tax rates among the jurisdictions in which we operate.
Adjusted EBITDA from Continuing Operations. Adjusted EBITDA from continuing operations for the nine months ended September 30, 2022 increased by $292 million, or 90%, to $618 million compared to the prior year period. The increase reflects favorable pricing, net of material costs passed through, and the impact from the acquisition of Fabri-Kal, partially offset by higher manufacturing and employee-related costs, lower sales volume and higher logistics costs. The increase in Adjusted EBITDA also included the benefit related to prior year period costs of $50 million from Winter Storm Uri.
Segment Information
Foodservice
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended September 30, |
|
(In millions, except for %) |
|
2022 |
|
|
2021 |
|
|
Change |
|
|
% Change |
|
Total segment net revenues |
|
$ |
2,244 |
|
|
$ |
1,619 |
|
|
$ |
625 |
|
|
|
39 |
% |
Segment Adjusted EBITDA |
|
$ |
394 |
|
|
$ |
187 |
|
|
$ |
207 |
|
|
|
111 |
% |
Segment Adjusted EBITDA margin |
|
|
18 |
% |
|
|
12 |
% |
|
|
|
|
|
|
Total Segment Net Revenues. Foodservice total segment net revenues for the nine months ended September 30, 2022 increased by $625 million, or 39%, to $2,244 million compared to the prior year period. The increase was primarily due to favorable pricing, due to the contractual pass-through of higher material costs and pricing actions taken to offset higher input costs. In addition, the acquisition of Fabri-Kal on October 1, 2021 contributed $337 million of incremental sales for the nine months ended September 30, 2022 as compared to the prior year period. These increases were partially offset by lower sales volume, primarily due to strong sales volume in the prior year period as businesses and restaurants re-opened post-COVID-19 lockdowns.
Adjusted EBITDA. Foodservice Adjusted EBITDA for the nine months ended September 30, 2022 increased by $207 million, or 111%, to $394 million compared to the period year period. The increase was primarily due to favorable pricing, net of material costs passed through, and the impact from the acquisition of Fabri-Kal, partially offset by higher manufacturing costs, lower sales volume and higher employee-related costs.
Food Merchandising
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended September 30, |
|
(In millions, except for %) |
|
2022 |
|
|
2021 |
|
|
Change |
|
|
% Change |
|
Total segment net revenues |
|
$ |
1,303 |
|
|
$ |
1,121 |
|
|
$ |
182 |
|
|
|
16 |
% |
Segment Adjusted EBITDA |
|
$ |
208 |
|
|
$ |
163 |
|
|
$ |
45 |
|
|
|
28 |
% |
Segment Adjusted EBITDA margin |
|
|
16 |
% |
|
|
15 |
% |
|
|
|
|
|
|
Total Segment Net Revenues. Food Merchandising total segment net revenues for the nine months ended September 30, 2022 increased by $182 million, or 16%, to $1,303 million compared to the prior year period. The increase was primarily due to favorable pricing, due to the contractual pass-through of higher material costs and pricing actions taken to offset higher input costs, partially offset by lower sales volume, primarily due to labor and related impacts.
34
Adjusted EBITDA. Food Merchandising Adjusted EBITDA for the nine months ended September 30, 2022 increased by $45 million, or 28%, to $208 million compared to the prior year period. The increase was primarily due to favorable pricing, net of material costs passed through, partially offset by higher manufacturing costs, lower sales volume and higher employee-related and logistics costs.
Beverage Merchandising
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended September 30, |
|
(In millions, except for %) |
|
2022 |
|
|
2021 |
|
|
Change |
|
|
% Change |
|
Total segment net revenues |
|
$ |
1,245 |
|
|
$ |
1,147 |
|
|
$ |
98 |
|
|
|
9 |
% |
Segment Adjusted EBITDA |
|
$ |
79 |
|
|
$ |
(1 |
) |
|
$ |
80 |
|
|
NM |
|
Segment Adjusted EBITDA margin |
|
|
6 |
% |
|
|
— |
% |
|
|
|
|
|
|
Total Segment Net Revenues. Beverage Merchandising total segment net revenues for the nine months ended September 30, 2022 increased by $98 million, or 9%, to $1,245 million compared to the nine months ended September 30, 2021. The increase was primarily due to favorable pricing, due to pricing actions taken to offset higher input costs and the contractual pass-through of higher material costs, and favorable product mix. These increases were partially offset by lower sales volume, primarily due to our strategic exit from the coated groundwood business in December 2021, and the impact from the disposition of Beverage Merchandising Asia on August 2, 2022.
Adjusted EBITDA. Beverage Merchandising Adjusted EBITDA for the nine months ended September 30, 2022 increased by $80 million to $79 million compared to the prior year period. The increase reflected favorable pricing, net of material costs passed through, and the benefit related to prior year period costs of $37 million from Winter Storm Uri and $7 million from Tropical Storm Fred. These items were partially offset by higher manufacturing and employee-related costs and lower sales volume.
Liquidity and Capital Resources
We manage our capital structure in an effort to most effectively execute our strategic priorities and maximize shareholder value. We believe that we have sufficient liquidity to support our ongoing operations and to re-invest in our business to drive future growth. Our projected operating cash flows, cash on-hand and available capacity under our revolving credit facility are our primary sources of liquidity for the next 12 months. We expect our liquidity to fund capital expenditures, payments of interest and principal on our debt and distributions to shareholders that require approval by our Board of Directors. Additionally, we may utilize portions of our excess cash to repurchase certain amounts of our long-term debt prior to maturity depending on market conditions, among other factors.
Cash flows
Our cash flows for the nine months ended September 30, 2022 and 2021 were as follows:
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended September 30, |
|
(In millions) |
|
2022 |
|
|
2021 |
|
Net cash provided by operating activities |
|
$ |
241 |
|
|
$ |
190 |
|
Net cash provided by (used in) investing activities |
|
|
196 |
|
|
|
(201 |
) |
Net cash (used in) provided by financing activities |
|
|
(79 |
) |
|
|
173 |
|
Effect of exchange rate on cash and cash equivalents |
|
|
(6 |
) |
|
|
(3 |
) |
Net increase in cash and cash equivalents |
|
$ |
352 |
|
|
$ |
159 |
|
Net cash flows increased $193 million, or 121%, compared to the prior year period primarily due to proceeds from the disposition of Beverage Merchandising Asia and our equity interests in Naturepak Beverage, and higher net cash provided by operating activities. These items were partially offset by net cash provided by various debt financing transactions undertaken during the prior year period. Net cash provided by operating activities increased as compared to the prior year period primarily due to favorable pricing, net of material costs passed through, the impact from the acquisition of Fabri-Kal and prior year period costs from Winter Storm Uri, partially offset by a strategic inventory build during the current year period and higher cash tax and interest payments.
During the nine months ended September 30, 2022, our primary sources of cash were $364 million in combined proceeds related to the sale of Beverage Merchandising Asia and our equity interests in Naturepak Beverage, and $241 million of net cash provided by operating activities. The net cash provided by operating activities reflects income from operations, partially offset by $132 million of cash interest payments and $64 million of cash taxes. Our primary uses of cash for the same period were $169 million in capital expenditures and $54 million of dividends paid.
35
During the nine months ended September 30, 2021, our primary sources of cash were $1,015 million of proceeds from debt issued under the U.S. term loans Tranche B-3, $500 million of proceeds from the issuance of our 4.375% Notes and $190 million of net cash provided by operating activities. The net cash provided by operating activities reflects income from operations and a net tax refund of $25 million, partially offset by $99 million of cash interest payments. Our primary uses of cash for the same period were the repayment of $1,207 million of U.S. term loans Tranche B-1, $199 million in capital expenditures, repayment of the remaining $59 million aggregate principal amount of the 5.125% senior secured notes at a price of 101.281% and $53 million of dividends paid.
Dividends
We paid cash dividends of $54 million and $53 million during the nine months ended September 30, 2022 and 2021, respectively. On November 3, 2022, our Board of Directors declared a dividend of $0.10 per share to be paid on December 15, 2022 to shareholders of record as of November 30, 2022.
Our Credit Agreement and Notes limit the ability to make dividend payments, subject to specified exceptions. Our Board of Directors must review and approve future dividend payments and will determine whether to declare additional dividends based on our operating performance, expected future cash flows, debt levels, liquidity needs and investment opportunities.
Financing and capital resources
As of September 30, 2022, we had $4,258 million of total principal amount of borrowings. Refer to Note 8, Debt, for additional details. As of September 30, 2022, the underlying one month LIBO rate for amounts borrowed under our Credit Agreement was 3.12%. Based on this rate, our 2022 annual cash interest obligations on our borrowings are expected to be approximately $215 million. Of our total debt, $2,233 million is subject to variable interest rates, representing borrowings drawn under our Credit Agreement. Based on our outstanding debt commitments as of September 30, 2022 and all other variables remaining constant, a 100 basis point increase (decrease) in interest rates would result in a $22 million per annum increase (decrease) in interest expense on the term loans under our Credit Agreement.
Under the Credit Agreement, we may incur additional indebtedness either by satisfying certain incurrence tests or by incurring such additional indebtedness under certain specific categories of permitted debt. Incremental senior secured indebtedness under the Credit Agreement and senior secured or unsecured notes in lieu thereof are permitted to be incurred up to an aggregate principal amount of $750 million subject to pro forma compliance with the Credit Agreement’s total secured leverage ratio covenant. In addition, we may incur senior secured indebtedness in an unlimited amount as long as our total secured leverage ratio does not exceed 4.50 to 1.00 on a pro forma basis, and (in the case of incremental senior secured indebtedness under the Credit Agreement only) we are in pro forma compliance with the Credit Agreement’s total secured leverage ratio covenant. The incurrence of unsecured indebtedness, including the issuance of senior notes, and unsecured subordinated indebtedness is also permitted (subject to the terms of the Credit Agreement) if the fixed charge coverage ratio is at least 2.00 to 1.00 on a pro forma basis.
Under the respective indentures governing the Notes, we may incur additional indebtedness either by satisfying certain incurrence tests or by incurring such additional indebtedness under certain specific categories of permitted debt. Indebtedness may be incurred under the incurrence tests if the fixed charge coverage ratio is at least 2.00 to 1.00 on a pro forma basis or the consolidated total leverage ratio is no greater than 5.50 to 1.00 and the liens securing first lien secured indebtedness do not exceed a 4.10 to 1.00 consolidated secured first lien leverage ratio.
We are required to make annual prepayments of term loans with up to 50% of excess cash flow (which will be reduced to 25% or 0% if specified senior secured first lien leverage ratios are met) as determined in accordance with the Credit Agreement. No excess cash flow prepayments were made in 2021 or will be due in 2022 for the year ended December 31, 2021.
Liquidity and working capital
Our liquidity position is summarized in the table below:
|
|
|
|
|
|
|
|
|
(In millions, except for current ratio) |
|
As of September 30, 2022 |
|
|
As of December 31, 2021 |
|
Cash and cash equivalents(1) |
|
$ |
559 |
|
|
$ |
197 |
|
Availability under revolving credit facility |
|
|
200 |
|
|
|
206 |
|
|
|
$ |
759 |
|
|
$ |
403 |
|
Working capital(2) |
|
|
1,386 |
|
|
|
1,043 |
|
Current ratio |
|
|
2.4 |
|
|
|
2.3 |
|
36
(1)Excludes $7 million and $17 million of cash classified as held for sale as of September 30, 2022 and December 31, 2021, respectively.
(2)Includes $162 million of assets classified as held for sale as of December 31, 2021 and $24 million and $31 million of liabilities classified as held for sale as of September 30, 2022 and December 31, 2021, respectively.
As of September 30, 2022, we had $559 million of cash and cash equivalents on-hand, with a further $7 million of cash and cash equivalents classified within current assets held for sale. We also had $200 million available for drawing under our revolving credit facility, net of $50 million utilized in the form of letters of credit under the facility. Our next debt maturity is $276 million of Pactiv Debentures due in December 2025, excluding amortization payments related to our U.S. term loans tranche B-2 and B-3 under our Credit Agreement.
We believe that we have sufficient liquidity to support our ongoing operations in the next 12 months and to invest in future growth to create further value for our shareholders. Our primary drivers of increased liquidity for the nine months ended September 30, 2022 were $364 million in proceeds from the sale of Beverage Merchandising Asia and our equity interests in Naturepak Beverage, and net operating cash flows of $241 million. These sources of additional liquidity were partially offset by capital expenditures of $169 million during the year. We currently anticipate incurring a total of approximately $260 million in capital expenditures during fiscal year 2022.
During 2022, our working capital increased $343 million, or 33%, primarily due to cash proceeds from our recent divestitures and our strategic inventory build during the year. Our working capital position provides us the flexibility for further consideration of strategic initiatives, including reinvestment in our business and deleveraging of our balance sheet. As a result, we may utilize portions of our excess cash to repurchase certain amounts of our long-term debt prior to maturity depending on market conditions, among other factors.
Our ability to borrow under our revolving credit facility or to incur additional indebtedness may be limited by the terms of such indebtedness or other indebtedness, including the Credit Agreement and the Notes. The Credit Agreement and the respective indentures governing the Notes generally allow our subsidiaries to transfer funds in the form of cash dividends, loans or advances within the Company.
Other than short-term leases executed in the normal course of business, we have no material off-balance sheet obligations.
Critical Accounting Policies, Estimates and Assumptions
The most critical accounting policies and estimates are those that are most important to the portrayal of our financial condition and results of operations and require us to make the most difficult and subjective judgments, often estimating the outcome of future events that are inherently uncertain. Our significant accounting policies are described in Note 2, Summary of Significant Accounting Policies, to our consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2021. Our critical accounting estimates are described in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2021.
Recent Accounting Pronouncements
New accounting standards that we have recently adopted, as well as accounting standards that have been recently issued but not yet adopted by us, is included in Note 1, Nature of Operations and Basis of Presentation.
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