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 16 - Related Party Transactions for details of significant non-cash investing and financing activities.
Notes to the Combined Financial Statements
Note 1 - Description of Business and Basis of Presentation
Description of Business:
Reynolds Consumer Group (“we”, “us” or “our”) produce and sell products across three broad categories: cooking products, waste & storage products and tableware. We sell our products under brands such as Reynolds and Hefty, and also under store brands. Our product portfolio includes aluminum foil, wraps, disposable bakeware, trash bags, food storage bags and disposable tableware. We report four business segments: Reynolds Cooking & Baking; Hefty Waste & Storage; Hefty Tableware; and Presto Products.
Basis of Presentation:
Prior to the completion of our corporate reorganization and initial public offering (“IPO”) on February 4, 2020, we operated as part of Reynolds Group Holdings Limited (“RGHL”) and not as a stand-alone entity. We represented the business that was reported as the Reynolds Consumer Products segment in the consolidated financial statements of RGHL and its subsidiaries (collectively, “RGHL Group” or the “Parent”). In conjunction with our corporate reorganization and IPO, we separated from RGHL Group on February 4. 2020. Our combined financial statements present the results of operations, financial position and cash flows prepared on a stand-alone basis and have been derived from the consolidated financial statements and accounting records of RGHL Group. All revenues and costs as well as assets and liabilities that are either legally attributable to us or directly associated with our business activities are included in our combined financial statements. Intercompany transactions, profits and balances between our combined entities have been eliminated. Our combined financial statements include Reynolds Consumer Products Inc., the entity whose shares were issued to the public in our IPO. Refer to Note 17 – Subsequent Events for further information.
Our combined financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”).
Our combined statements of income include allocations of certain expenses for services provided by RGHL Group, including, but not limited to, general corporate expenses related to group wide functions including executive management, finance, legal, tax, information technology and a portion of a related party management fee incurred by RGHL Group. Total costs allocated to us for these functions were $41 million, $40 million and $37 million for the years ended December 31, 2019, 2018 and 2017, respectively, and were primarily included in selling, general and administrative expenses in our combined statements of income. These amounts include costs of $22 million, $21 million and $20 million for the years ended December 31, 2019, 2018 and 2017, respectively, that were not historically allocated to us as part of RGHL Group's normal monthly reporting process. Additionally, in the year ended December 31, 2019 costs of $28 million 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 combined 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.
The allocations referred to above may not, however, reflect all actual expenses we would have incurred and may not reflect the combined results of operations, financial position and cash flows had we operated as a stand-alone company during the years presented. The amount of actual costs that may have been incurred if we were a stand-alone company would depend on a number of factors, including our chosen organizational structure, which functions were performed by our employees or outsourced and strategic decisions made in areas such as information technology and infrastructure.
RGHL Group centrally managed substantially all of our financial resources. We financed our operating and capital requirements through a combination of cash provided by operations, RGHL Group's external borrowings that we have incurred and intercompany funding with RGHL Group. We were a borrower under a portion of RGHL Group's external borrowings and therefore a portion of this third-party debt is reflected as long-term debt on our combined balance sheets. Refer to Note 6 - Debt and Borrowing Arrangements for further information. Our intercompany funding with RGHL Group, which is subject to various legal agreements with RGHL Group, is reflected in related party borrowings on our combined balance sheets. We also advanced surplus cash to RGHL Group as part of its cash management activities. The balance of these amounts is reflected in non-current related party receivables in our combined balance sheets. Refer to Note 16 - Related Party Transactions for further information.
47
Reynolds Consumer Group
Notes to the Combined Financial Statements
Net Parent deficit represents the Parent’s interest in our net assets. As a direct ownership relationship did not exist between the various entities of our combined group, a Net Parent deficit account is shown in our combined financial statements. The majority of transactions between us and RGHL Group have a history of settlement or were settled for cash in conjunction with our separation from RGHL Group and IPO. These transactions have been reflected in our combined balance sheets as related party receivables and payables. Transactions that did not have a history of settlement are reflected in equity (deficit) in our combined balance sheets as Net Parent deficit and, when cash is utilized (contributed), in our combined statements of cash flows as a financing activity in net transfers from (to) Parent. Refer to Note 16 - Related Party Transactions for further information.
Note 2 - Summary of Significant Accounting Policies
Use of Estimates:
We prepare our combined financial statements in accordance with GAAP, which requires us to make estimates and assumptions that affect a number of amounts in our combined financial statements. Significant accounting policy elections, estimates and assumptions include, among others, benefit plan assumptions, valuation assumptions of goodwill and intangible assets, useful lives of long-lived assets, sales incentives and income taxes. 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 combined 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 combined financial statements.
Currency Translation:
Our combined 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 equity (deficit) within accumulated other comprehensive income and transaction gains and losses in other expense, net in our combined 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, 2019 and 2018 were $7 million and $4 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. Substantially all of our U.S. accounts receivables had been transferred in their entirety to RGHL Group and were accounted for as a sale in accordance with our accounts receivable factoring arrangement described below. The allowance for doubtful accounts related to the accounts receivable of our non-U.S. operations was less than $1 million in each of the years presented.
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. VIEs must be evaluated quantitatively and qualitatively to determine the primary beneficiary, which is the reporting entity that has (a) the power to direct activities of a VIE that most significantly impact the VIE's economic performance and (b) the obligation to absorb losses of the VIE that could potentially be significant to the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE. The primary beneficiary is required to consolidate the VIE for financial reporting purposes. To determine a VIE's primary beneficiary, we perform a qualitative assessment to determine which party, if any, has the power to direct activities of the VIE and the obligation to absorb losses and or receive its benefits. This assessment involves identifying the activities that most significantly impact the VIE's economic performance and determine whether we, or another party, has the power to direct those activities. In each of the years presented, we had a variable interest in one VIE related to our factoring arrangement with RGHL Group, described below.
48
Reynolds Consumer Group
Notes to the Combined Financial Statements
Transfers of Financial Assets:
We account for transfers of financial assets, such as non-recourse accounts receivable factoring arrangements, when we have 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 RGHL Group in exchange for cash. We transferred sold accounts receivables in their entirety to RGHL Group and satisfied all of the conditions to report the transfer of financial assets in their entirety as a sale. We continued to collect the receivables sold, acting solely as a collecting agent on behalf of RGHL Group, and received income of $1 million in each of the years presented for this service. We have not recognized any assets or liabilities related to the servicing arrangement as of December 31, 2019 and 2018. The SPE is 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. The principal amount of receivables sold under this arrangement was $3,252 million, $3,101 million and $2,952 million during the years ended December 31, 2019, 2018 and 2017, respectively, and represented substantially all of our U.S. accounts receivable. The balance of receivables sold, and still outstanding, was $264 million as of both December 31, 2019 and 2018. The incremental costs of factoring receivables under this arrangement are included in other expense, net in our combined statements of income. Refer to Note 11 - Other Expense, Net for additional information. The proceeds from the sales of receivables are included in cash from operating activities in our combined statements of cash flows.
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 combined statements of income.
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 combined 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. On January 1, 2019, we began to record operating leases on our combined balance sheet. 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.
49
Reynolds Consumer Group
Notes to the Combined Financial Statements
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 combined statements of income. All operating lease cash payments are recorded within cash flows from operating activities in the combined statements of cash flows. Our lease agreements do not include significant restrictions, covenants or residual value guarantees.
Prior to January 1, 2019, we classified leases at inception date as either a capital lease or an operating lease. A lease was a capital lease if any of the following conditions exist: (a) ownership was transferred to the lessee by the end of the lease term, (b) there was a bargain purchase option, (c) the lease term was at least 75% of the property’s estimated remaining economic life, or (d) the present value of the minimum lease payments at the beginning of the lease term was 90% or more of the fair value of the leased property to the lessor at the inception date. We had no capital leases during any of the years presented. We accounted for all other leases as operating leases wherein rental payments are expensed on a straight-line basis over their respective lease term.
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:
On January 1, 2018 we adopted the requirements of ASC Topic 606 Revenue from Contracts with Customers, which contains a new revenue recognition framework, on a modified retrospective basis. Our accounting policies for revenue recognition for the current year and previous years are presented below.
From January 1, 2018, 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 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.
50
Reynolds Consumer Group
Notes to the Combined Financial Statements
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.
Prior to January 1, 2018, we recognized revenue when the sales price was determinable and the risks and rewards of ownership had transferred to the customer as determined by the shipping terms. Revenues were recorded net of sales incentives, which were based on historical promotional experience.
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 combined balance sheets and all marketing and advertising costs are recorded as an expense in the year incurred. Advertising expense was $57 million, $55 million and $56 million in the years ended December 31, 2019, 2018 and 2017, respectively. We expense product research and development costs as incurred. Research and development expense was $33 million, $29 million and $27 million in the years ended December 31, 2019, 2018 and 2017, respectively. We record marketing and advertising as well as research and development expenses in selling, general and administrative expenses.
Employee Benefit Plans:
We provide benefits to our current and retired employees. The cost for these plans is recognized in income primarily over the working life of the covered employee. We participated in a defined benefit plan sponsored by RGHL Group, which was accounted for as a multiemployer plan in our combined financial statements. We also sponsor a postretirement benefit plan which is accounted for as a single employer plan in our combined financial statements. See Note 9 - Benefit Plans for additional information.
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 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 (the “IPO Condition”) and a service-based vesting condition (the “Service Condition”). The IPO Condition was satisfied when we completed our IPO on February 4, 2020. The Service Condition will be satisfied with respect to one-third of an employee’s RSUs on each anniversary from the date of our IPO for three consecutive years, subject to the employee’s continued employment through the applicable vesting date. We account for forfeitures of outstanding but unvested grants in the period they occur. The grant date fair value of the RSUs was approximately $4 million. Although the requisite service period began in July 2019, we have not recognized any compensation expense in our combined financial statements because the IPO Condition had not been achieved as of December 31, 2019.
Financial Instruments:
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 are not a party to leveraged derivatives and, by policy, do not use financial instruments for speculative purposes.
We record derivative financial instruments on a gross basis and at fair value in our combined balance sheets in other current assets or accrued and other current liabilities due to their relatively short-term duration. Cash flows from derivative instruments are classified as operating activities in our combined 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 combined statements of income.
51
Reynolds Consumer Group
Notes to the Combined Financial Statements
Income Taxes:
During the years presented, our U.S. operations were included in consolidated U.S. federal, certain state and local tax returns filed by RGHL Group. We also file certain separate U.S. state and local and foreign income tax returns. The income tax expense (benefit) included in our combined statements of income has been calculated using the separate return basis. It is possible that we will make different tax accounting elections and assertions subsequent to our shares being issued to the public. Therefore, our income taxes, as presented in our combined financial statements, may not be indicative of our income taxes in the future. In jurisdictions where we have been included in tax returns filed by RGHL Group, any income taxes payable resulting from the related income tax expense had been reflected in the combined balance sheets in Net Parent deficit.
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:
|
•
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Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities.
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|
•
|
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.
|
|
•
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Level 3 inputs are unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.
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Our assets and liabilities measured at fair value on a recurring basis are presented in Note 8 - Financial Instruments. We have 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, 2019 and 2018 due to the short-term nature of these instruments.
Recently Adopted Accounting Guidance:
In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) ASU 2016-02, Leases (Topic 842). The ASU revises existing GAAP and outlines a new model for lessors and lessees to use in accounting for lease contracts. The guidance requires lessees to recognize an ROU asset and a lease liability on the balance sheet for all leases, with the exception of short-term leases. Lessees will classify leases as either operating (resulting in straight-line expense recognition) or finance (resulting in a front-loaded expense pattern). In July 2018, the FASB issued an ASU which allows for an alternative transition approach, which will not require adjustments to comparative prior-period amounts. Topic 842 and all related ASUs are effective for fiscal years beginning after December 15, 2018, with early adoption permitted. We adopted the new standard on January 1, 2019 on a modified
52
Reynolds Consumer Group
Notes to the Combined Financial Statements
retrospective basis using a simplified transition approach, with no adjustment made to our prior period combined financial statements. We elected to apply the package of practical expedients, including not reassessing whether expired or existing contracts contained leases, the classification of those leases and initial direct costs for any existing leases. We also elected to exclude short-term leases (term of 12 months or less) from the balance sheet presentation. The most significant impact from adopting the standard is the initial recognition of ROU assets and operating lease liabilities on our combined balance sheet. Upon adoption, we recorded ROU assets (adjusted for deferred rent) and operating lease liabilities of $37 million and $39 million, respectively, representing the present value of future lease payments with terms greater than 12 months. There was no other impact on our combined financial statements.
In February 2018, the FASB issued ASU 2018-02, Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. This guidance permits companies to reclassify to retained earnings the tax effects stranded in accumulated other comprehensive income as a result of the U.S. Tax Cuts and Jobs Act of 2017. The ASU is effective for fiscal years beginning after December 15, 2018, with early adoption permitted. We adopted the standard as of January 1, 2019 which resulted in a reclassification of $3 million of income tax expense from accumulated other comprehensive income into Net Parent deficit.
Accounting Guidance Issued But Not Yet Adopted as of December 31, 2019:
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments and subsequent amendments to the initial guidance: ASU 2019-04, Financial Instruments—Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Financial Instruments - Codification Improvements (Topic 825), ASU 2019-05, Financial Instruments - Credit Losses - Targeted Transition Relief (Topic 326) and ASU 2019-11, Codification Improvements, Financial Instruments – Credit Losses (Topic 326). These ASUs modify the impairment model to use an expected loss methodology in place of the currently used incurred loss methodology, which may result in earlier recognition of losses related to financial instruments. These ASUs are effective for fiscal years beginning after December 15, 2019, with early adoption permitted, and require a cumulative effect adjustment to the balance sheet upon adoption. The adoption of these standards will not have a material impact on our combined 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. The ASU modifies the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. The ASU is effective for fiscal years beginning after December 15, 2020, with early adoption permitted. We are currently evaluating the requirements of this guidance, which is expected to impact our disclosures but is not expected to impact the measurement and recognition of amounts in our combined 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. The adoption of this standard will not have a material impact on our combined financial statements.
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which is intended to simplify various aspects related to accounting for income taxes. This ASU removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. This ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020, with early adoption permitted. We are currently assessing the impact of this standard on our combined financial statements.
53
Reynolds Consumer Group
Notes to the Combined Financial Statements
Note 3 - Inventories
Inventories consisted of the following:
|
|
As of December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
(in millions)
|
|
Raw materials
|
|
$
|
125
|
|
|
$
|
130
|
|
Work in progress
|
|
|
47
|
|
|
|
49
|
|
Finished goods
|
|
|
217
|
|
|
|
224
|
|
Spare parts
|
|
|
29
|
|
|
|
26
|
|
Inventories
|
|
$
|
418
|
|
|
$
|
429
|
|
Note 4 - Property, Plant and Equipment, Net
Property, plant and equipment, net consisted of the following:
|
|
As of December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
(in millions)
|
|
Land and land improvements
|
|
$
|
34
|
|
|
$
|
33
|
|
Buildings and building improvements
|
|
|
131
|
|
|
|
124
|
|
Machinery and equipment
|
|
|
914
|
|
|
|
841
|
|
Construction in progress
|
|
|
100
|
|
|
|
76
|
|
Property, plant and equipment, at cost
|
|
|
1,179
|
|
|
|
1,074
|
|
Less: accumulated depreciation
|
|
|
(642
|
)
|
|
|
(610
|
)
|
Property, plant and equipment, net
|
|
$
|
537
|
|
|
$
|
464
|
|
Depreciation expense was $59 million, $55 million and $58 million for the years ended December 31, 2019, 2018 and 2017, respectively, of which $55 million, $49 million and $47 million was recognized in cost of sales, respectively, and $4 million, $6 million and $11 million was recognized in selling, general and administrative expenses, respectively.
Note 5 - Goodwill and Intangible Assets
Goodwill by reportable segment was as follows:
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|
Reynolds
Cooking &
Baking
|
|
|
Hefty Waste
& Storage
|
|
|
Hefty
Tableware
|
|
|
Presto
Products
|
|
|
Total
|
|
|
|
(in millions)
|
|
Balance as of December 31, 2017
|
|
$
|
794
|
|
|
$
|
505
|
|
|
$
|
282
|
|
|
$
|
298
|
|
|
$
|
1,879
|
|
Movements
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Balance as of December 31, 2018
|
|
|
794
|
|
|
|
505
|
|
|
|
282
|
|
|
|
298
|
|
|
|
1,879
|
|
Movements
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Balance as of December 31, 2019
|
|
$
|
794
|
|
|
$
|
505
|
|
|
$
|
282
|
|
|
$
|
298
|
|
|
$
|
1,879
|
|
54
Reynolds Consumer Group
Notes to the Combined Financial Statements
Intangible assets, net consisted of the following:
|
|
As of December 31, 2019
|
|
|
As of December 31, 2018
|
|
|
|
Gross
carrying
amount
|
|
|
Accumulated amortization
|
|
|
Net
|
|
|
Gross
carrying
amount
|
|
|
Accumulated amortization
|
|
|
Net
|
|
|
|
(in millions)
|
|
Finite-lived intangible assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
$
|
580
|
|
|
$
|
(313
|
)
|
|
$
|
267
|
|
|
$
|
580
|
|
|
$
|
(283
|
)
|
|
$
|
297
|
|
Trade names
|
|
|
25
|
|
|
|
(19
|
)
|
|
|
6
|
|
|
|
25
|
|
|
|
(17
|
)
|
|
|
8
|
|
Total finite-lived intangible assets
|
|
|
605
|
|
|
|
(332
|
)
|
|
|
273
|
|
|
|
605
|
|
|
|
(300
|
)
|
|
|
305
|
|
Indefinite-lived intangible assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade names
|
|
|
850
|
|
|
|
—
|
|
|
|
850
|
|
|
|
850
|
|
|
|
—
|
|
|
|
850
|
|
Total intangible assets
|
|
$
|
1,455
|
|
|
$
|
(332
|
)
|
|
$
|
1,123
|
|
|
$
|
1,455
|
|
|
$
|
(300
|
)
|
|
$
|
1,155
|
|
Amortization expense for intangible assets was $32 million for each of the years ended December 31, 2019, 2018 and 2017, and has been recognized in selling, general and administrative expenses. For the next five years, we estimate annual amortization expense of approximately $30 million each year.
Note 6 - Debt and Borrowing Arrangements
We had incurred borrowings under RGHL Group's Senior Secured Credit Agreement, as amended (the “RGHL Group Credit Agreement”).
The information presented below relates to our borrowings under the RGHL Group Credit Agreement, which represent only a portion of the total RGHL Group borrowings incurred under the RGHL Group Credit Agreement. For details regarding our borrowings with RGHL Group, refer to Note 16 - Related Party Transactions.
Long-Term Debt:
Long-term debt consisted of the following:
|
|
As of December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
(in millions)
|
|
RGHL Group U.S. Term Loan
|
|
$
|
2,017
|
|
|
$
|
2,037
|
|
Deferred financing transaction costs
|
|
|
(4
|
)
|
|
|
(5
|
)
|
Original issue discounts
|
|
|
(2
|
)
|
|
|
(2
|
)
|
|
|
|
2,011
|
|
|
|
2,030
|
|
Less: current portion
|
|
|
(21
|
)
|
|
|
(21
|
)
|
Long-term debt
|
|
$
|
1,990
|
|
|
$
|
2,009
|
|
Overview - RGHL Group Credit Agreement
The facilities under the RGHL Group Credit Agreement are comprised of (i) U.S. and European Term Loans, denominated in U.S. dollars and euro, respectively, and (ii) a Revolving Facility, denominated in U.S. dollars. For all periods presented, the Revolving Facility has only been utilized by RGHL Group in the form of letters of credit. As of December 31, 2019, RGHL Group has utilized $56 million, including $7 million for our letters of credit. We were not a borrower under the European Term Loans.
The obligations under the RGHL Group Credit Agreement are guaranteed by, and secured by the assets of, certain members of RGHL Group, including certain entities of our combined group. For further details of the guarantees and security we have provided in relation to RGHL Group’s external borrowings, refer to Note 12 - Commitments and Contingencies.
55
Reynolds Consumer Group
Notes to the Combined Financial Statements
We were a borrower under the RGHL Group U.S. Term Loan. Interest under the RGHL Group U.S. Term Loan comprises one-month LIBOR, with a floor of 0%, plus a margin of 2.75%. The weighted average contractual interest rate related to our long-term debt as of December 31, 2019, 2018 and 2017, was 5.04%, 4.77% and 4.05%, respectively. The effective interest rate of our debt obligations is not materially different from the contractual interest rate.
The RGHL Group U.S. Term Loan requires quarterly amortization payments of 0.25% of the outstanding principal as of February 5, 2017, with the balance due at maturity in February 2023. Based on our portion of the outstanding borrowings, this represented amortization payments of approximately $5 million per quarter. Borrowings under the RGHL Group U.S. Term Loan may be voluntarily repaid in whole or in part and are subject to mandatory prepayments in certain circumstances, including the requirement to make annual prepayments of both the U.S. and European Term Loans with up to 50% of excess cash flow as determined in accordance with the RGHL Group Credit Agreement. No excess cash flow prepayments were due in 2019 for the year ended December 31, 2018 or are due in 2020 for the year ended December 31, 2019.
Deferred Financing Transaction Costs and Original Issue Discounts
As of December 31, 2019 and 2018, our portion of RGHL Group’s deferred financing transaction costs, net of amortization, related to the RGHL Group U.S. Term Loan and the RGHL Group Revolving Facility were $4 million and $5 million, respectively. In addition, as of December 31, 2019 and 2018, we have recorded original issue discounts, net of accumulated amortization, of $2 million. These deferred amounts are presented as a direct reduction of the carrying amount of our long-term debt as of December 31, 2019 and 2018. Our portions of deferred financing transaction costs and original issue discounts are being amortized over the life of the RGHL Group U.S. Term Loan under the effective interest method.
Covenants
The RGHL Group Credit Agreement contains customary covenants which restrict RGHL and certain of its subsidiaries from certain activities including, among other things, incurring debt, creating liens over assets, selling or acquiring assets and making restricted payments, in each case except as permitted under the RGHL Group Credit Agreement. As of December 31, 2019, RGHL Group was in compliance with all of its covenants.
The RGHL Group Credit Agreement also contains a total secured leverage ratio covenant not to exceed 5.00 to 1.00 on a pro forma basis. This covenant only applies if the aggregate revolving credit exposure (excluding any exposure in respect of undrawn letters of credit) as of the last day of a fiscal quarter exceeds 35% of the total Revolving Facility commitments on such day.
Scheduled Maturities
Below is a schedule of required future repayments on our debt outstanding under the RGHL Group Credit Agreement as of December 31, 2019:
|
|
(in millions)
|
|
2020
|
|
|
21
|
|
2021
|
|
|
21
|
|
2022
|
|
|
21
|
|
2023
|
|
|
1,954
|
|
Total long-term debt
|
|
$
|
2,017
|
|
As detailed in Note 17 - Subsequent Events, our obligations under the RGHL Group Credit Agreement were extinguished on February 4, 2020. Details of the required future repayments of our debt outstanding following our separation from RGHL Group and IPO are presented in Note 17 - Subsequent Events.
Fair Value of Our Long-Term Debt:
The fair value of our long-term debt as of December 31, 2019 and 2018, which is a Level 2 fair value measurement, approximates the carrying value due to the variable market interest rate and the stability of RGHL Group's credit profile.
56
Reynolds Consumer Group
Notes to the Combined Financial Statements
Interest expense, net:
Interest expense, net consisted of the following:
|
|
For the Years Ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
|
(in millions)
|
|
Interest expense, RGHL Group U.S. Term Loan
|
|
$
|
101
|
|
|
$
|
97
|
|
|
$
|
85
|
|
Interest expense, related party borrowings (1)
|
|
|
140
|
|
|
|
233
|
|
|
|
258
|
|
Interest income, related party receivables (1)
|
|
|
(33
|
)
|
|
|
(52
|
)
|
|
|
(26
|
)
|
Amortization of deferred financing transaction costs
|
|
|
1
|
|
|
|
1
|
|
|
|
1
|
|
Other
|
|
|
—
|
|
|
|
1
|
|
|
|
4
|
|
Interest expense, net
|
|
$
|
209
|
|
|
$
|
280
|
|
|
$
|
322
|
|
(1)
|
Refer to Note 16 - Related Party Transactions for additional information.
|
Note 7 - Leases
We lease certain buildings and plant and equipment. Our leases have reasonably assured remaining lease terms of up to 10 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 the lease agreement is entered into. 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 combined 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:
|
|
For the Year Ended
December 31, 2019
|
|
|
|
(in millions)
|
|
Operating lease costs
|
|
$
|
11
|
|
Variable lease costs
|
|
|
1
|
|
Short-term lease costs
|
|
|
5
|
|
Total lease costs
|
|
$
|
17
|
|
Rental expenses were $17 million and $14 million during the years ended December 31, 2018 and 2017, respectively. Future lease payments under non-cancelable leases under prior lease accounting rules (ASC 840) and under the new lease accounting rules (ASC 842) that went into effect on January 1, 2019 were as follows:
|
|
As of December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
ASC 842
|
|
|
ASC 840
|
|
|
|
(in millions)
|
|
2020
|
|
$
|
11
|
|
|
$
|
9
|
|
2021
|
|
|
10
|
|
|
|
8
|
|
2022
|
|
|
8
|
|
|
|
7
|
|
2023
|
|
|
5
|
|
|
|
4
|
|
2024
|
|
|
4
|
|
|
|
4
|
|
Thereafter
|
|
|
14
|
|
|
|
11
|
|
Total undiscounted lease payments
|
|
|
52
|
|
|
$
|
43
|
|
Less: imputed interest
|
|
|
(9
|
)
|
|
|
|
|
Operating lease liabilities
|
|
$
|
43
|
|
|
|
|
|
57
Reynolds Consumer Group
Notes to the Combined Financial Statements
As of December 31, 2019, 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 combined balance sheets were as follows:
|
|
As of December 31,
|
|
|
|
2019
|
|
|
|
(in millions)
|
|
Accrued and other current liabilities
|
|
$
|
8
|
|
Long-term operating lease liabilities
|
|
|
35
|
|
|
|
$
|
43
|
|
Operating lease right-of-use assets, net
|
|
$
|
42
|
|
During the year ended December 31, 2019, new leases resulted in the recognition of ROU assets and corresponding lease liabilities of $9 million. During the year ended December 31, 2019, cash flows from operating activities include $10 million of payments for operating lease liabilities. In addition, on November 1, 2019, we entered into new lease agreements, as part of our separation from RGHL Group, for arrangements that are directly attributable to our business and have been historically reflected in our combined financial statements.
As of December 31, 2019, the weighted average remaining lease term and weighted average discount rate for operating leases was 5.91 years and 5.15%, respectively.
Note 8 - Financial Instruments
Derivative instruments, consisting of commodity contracts, were recorded at fair value in our combined balance sheets and consisted of an asset of less than $1 million, recorded in other current assets, as of December 31, 2019 and a $9 million liability, recorded in accrued and other current liabilities, as of December 31, 2018.
Our commodity contracts are primarily commodity swaps and are all Level 2 financial assets and liabilities. Commodity derivatives are valued using an income approach based on the observable market commodity index prices less the contract rate multiplied by the notional amount or based on pricing models that rely on market observable inputs such as commodity prices. Our calculation of the fair value of these financial instruments takes into consideration the risk of non-performance, including counterparty credit risk. The majority of our derivative contracts do not have a legal right of set-off. We manage the credit risk in connection with our derivatives by limiting the amount of exposure with each counterparty and monitoring the financial condition of our counterparties.
During the years ended December 31, 2019, 2018 and 2017, we recognized an unrealized gain of $9 million, an unrealized loss of $14 million and an unrealized gain of $4 million, respectively, in cost of sales in the combined statements of income.
The following table provides the detail of outstanding commodity derivative contracts as of December 31, 2019:
Type
|
|
Unit of measure
|
|
Contracted
volume
|
|
|
Contracted
price range
|
|
Contracted date
of maturity
|
Aluminum swaps
|
|
Metric tonne
|
|
|
111
|
|
|
$1,953.50
|
|
Jan 2020
|
Aluminum Midwest Premium swaps
|
|
Metric tonne
|
|
|
111
|
|
|
$395.36
|
|
Jan 2020
|
Benzene swaps
|
|
U.S. liquid gallon
|
|
|
1,289,286
|
|
|
$2.36 - $2.55
|
|
Jan - Jun 2020
|
Diesel swaps
|
|
U.S. liquid gallon
|
|
|
3,474,126
|
|
|
$3.00 - $3.30
|
|
Jan - Dec 2020
|
Note 9 - Benefit Plans
Related Party Multiemployer Defined Benefit Plan
Prior to our separation from RGHL Group and IPO, certain of our employees participated in a defined benefit plan sponsored by RGHL Group, along with participants of RGHL Group's other businesses. This plan is accounted for as a multiemployer plan in these combined financial statements and as a result, no asset or liability was recorded by us to recognize the funded status of the plan. We recorded expense of $3 million in cost of sales for each of the years ended December 31, 2019, 2018 and 2017 relating to our employees' participation in the RGHL Group sponsored plan.
58
Reynolds Consumer Group
Notes to the Combined Financial Statements
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 $20 million, $18 million and $17 million for the years ended December 31, 2019, 2018 and 2017, 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,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
(in millions)
|
|
Accumulated postretirement benefit obligation as of January 1
|
|
$
|
47
|
|
|
$
|
52
|
|
Service cost
|
|
|
1
|
|
|
|
1
|
|
Interest cost
|
|
|
2
|
|
|
|
2
|
|
Benefits paid
|
|
|
(4
|
)
|
|
|
(3
|
)
|
Actuarial losses (gains)
|
|
|
5
|
|
|
|
(5
|
)
|
Accumulated postretirement benefit obligation as of December 31
|
|
$
|
51
|
|
|
$
|
47
|
|
The accrued benefit obligation was included in our combined balance sheets as follows:
|
|
As of December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
(in millions)
|
|
Accrued and other current liabilities
|
|
$
|
3
|
|
|
$
|
3
|
|
Long-term postretirement benefit obligation
|
|
|
48
|
|
|
|
44
|
|
|
|
$
|
51
|
|
|
$
|
47
|
|
A portion of our accrued benefit obligation has been recorded in accumulated other comprehensive income as follows:
|
|
As of
December 31,
2017
|
|
|
Changes
|
|
|
As of
December 31,
2018
|
|
|
Changes
|
|
|
As of
December 31,
2019
|
|
|
|
(in millions)
|
|
Net actuarial gain (loss)
|
|
$
|
19
|
|
|
$
|
3
|
|
|
$
|
22
|
|
|
$
|
(7
|
)
|
|
$
|
15
|
|
Deferred income tax expense (1)
|
|
|
(8
|
)
|
|
|
—
|
|
|
|
(8
|
)
|
|
|
4
|
|
|
|
(4
|
)
|
Accumulated other comprehensive income
|
|
$
|
11
|
|
|
$
|
3
|
|
|
$
|
14
|
|
|
$
|
(3
|
)
|
|
$
|
11
|
|
(1)
|
Includes the impact of the adoption of a new accounting principle on January 1, 2019.
|
We used the following weighted-average assumptions to determine our postretirement benefit obligations:
|
|
As of December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Discount rate
|
|
|
3.24
|
%
|
|
|
4.37
|
%
|
Health care cost trend rate assumed for next year
|
|
|
7.20
|
%
|
|
|
7.70
|
%
|
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.
59
Reynolds Consumer Group
Notes to the Combined Financial Statements
Assumed health care cost trend rates can impact the amounts reported for the health care plans. A one-percentage-point change in assumed health care cost trend rates would have less than a $1 million effect on the measurement of our postretirement benefit obligation and less than a $1 million effect on the annual service and interest cost.
Components of Net Periodic Postretirement Costs:
Net periodic postretirement benefit costs consisted of the following:
|
|
For the Years Ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
|
(in millions)
|
|
Service cost
|
|
$
|
1
|
|
|
$
|
1
|
|
|
$
|
1
|
|
Interest cost
|
|
|
2
|
|
|
|
2
|
|
|
|
2
|
|
Amortization of actuarial gain
|
|
|
(2
|
)
|
|
|
(2
|
)
|
|
|
(2
|
)
|
Net periodic postretirement costs
|
|
$
|
1
|
|
|
$
|
1
|
|
|
$
|
1
|
|
The service cost component of net periodic postretirement costs is recognized in cost of sales, while interest cost and amortization of actuarial gain are recognized in non-operating expense, net in the combined statements of income.
As of December 31, 2019, we expect to amortize an actuarial gain of approximately $1 million from accumulated other comprehensive income into pre-tax net periodic postretirement costs during 2020.
We used the following weighted-average assumptions to determine our net periodic postretirement health care cost:
|
|
For the Years Ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
Discount rate
|
|
|
4.37
|
%
|
|
|
3.68
|
%
|
|
|
4.24
|
%
|
Health care cost trend rate assumed for next year
|
|
|
7.70
|
%
|
|
|
8.20
|
%
|
|
|
7.20
|
%
|
Ultimate trend rate
|
|
|
4.50
|
%
|
|
|
4.50
|
%
|
|
|
4.50
|
%
|
Year that the rate reaches the ultimate trend rate
|
|
2029
|
|
|
2026
|
|
|
2024
|
|
Future Benefit Payments:
Expected contributions for the next fiscal year equal the estimated benefit payments of $3 million.
Our estimated future benefit payments for our postretirement benefit plan as of December 31, 2019 were as follows:
|
|
(in millions)
|
|
2020
|
|
$
|
3
|
|
2021
|
|
|
3
|
|
2022
|
|
|
3
|
|
2023
|
|
|
3
|
|
2024
|
|
|
3
|
|
2025-2029
|
|
15
|
|
60
Reynolds Consumer Group
Notes to the Combined Financial Statements
Note 10 - Accrued and Other Current Liabilities
Accrued and other current liabilities consisted of the following:
|
|
As of December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
(in millions)
|
|
Trade promotion allowances
|
|
$
|
39
|
|
|
$
|
40
|
|
Accrued personnel costs
|
|
|
47
|
|
|
|
34
|
|
Other
|
|
|
46
|
|
|
|
49
|
|
Accrued and other current liabilities
|
|
$
|
132
|
|
|
$
|
123
|
|
Note 11 - Other Expense, Net
Other expense, net consisted of the following:
|
|
For the Years Ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
|
(in millions)
|
|
Factoring discount (1)
|
|
$
|
25
|
|
|
$
|
22
|
|
|
$
|
19
|
|
Allocated related party Management Fee (2)
|
|
|
10
|
|
|
|
10
|
|
|
|
10
|
|
Transaction-related costs (3)
|
|
|
31
|
|
|
|
—
|
|
|
|
—
|
|
Other
|
|
|
(1
|
)
|
|
|
(1
|
)
|
|
|
(1
|
)
|
Other expense, net
|
|
$
|
65
|
|
|
$
|
31
|
|
|
$
|
28
|
|
(1)
|
As discussed in Note 2 - Summary of Significant Accounting Policies, we participated in an accounts receivable factoring arrangement with RGHL Group whereby we transferred substantially all of our U.S. accounts receivable in their entirety to RGHL Group and satisfied all of the conditions to report the transfer of financial assets in their entirety as a sale. The fair value of assets received as proceeds in exchange for the transfer of accounts receivable under this factoring arrangement approximates the fair value of such receivables. We recognized losses of $25 million, $22 million and $19 million for the years ended December 31, 2019, 2018 and 2017, respectively, which represents the discount from book values at which these accounts receivable were sold to RGHL Group.
|
(2)
|
RGHL Group’s financing agreements permit the payment to related parties of management, consulting, monitoring and advising fees (the “Management Fee”) of up to 1.5% of RGHL Group’s Adjusted EBITDA (as defined in RGHL Group's financing agreements) for the previous year. We had been allocated a portion of this Management Fee based on our portion of RGHL Group's Adjusted EBITDA.
|
(3)
|
We were allocated costs during the year ended December 31, 2019 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.
|
Note 12 - 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, 2019, 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 Group
Notes to the Combined Financial Statements
Security and Guarantee Arrangements:
As of December 31, 2019, certain of our entities and other related entities within RGHL Group had guaranteed certain borrowings of RGHL Group.
Certain of our entities and other related entities within RGHL Group have granted security over their assets to support the secured obligations. The equity interests in certain of our entities had been pledged as collateral to support the secured obligations. We would only be liable under these guarantees in the event of default by RGHL Group on its obligations, the probability of which we believe is remote. As a result of these arrangements, substantially all of our assets were pledged as security for the secured obligations.
Under the RGHL Group Credit Agreement, all of the U.S. Term Loan borrowers are jointly and severally liable for the outstanding principal. The total principal balance outstanding for the U.S. Term Loan was $3,215 million and $3,248 million as of December 31, 2019 and 2018, respectively. These amounts include the $2,017 million and $2,037 million presented on our combined balance sheets as of December 31, 2019 and 2018, respectively. We have not recognized a liability for the additional outstanding principal as we would only be liable under the agreement in the event of default by RGHL Group on its obligations, which we believe is remote.
As detailed in Note 17 – Subsequent Events, as of February 4, 2020, we were fully and unconditionally released from the guarantees of RGHL Group borrowings and the security we granted was also released.
Note 13 - Accumulated Other Comprehensive Income
The following table summarizes the changes in our balances of each component of accumulated other comprehensive income. Amounts reclassified from accumulated other comprehensive income to net income (net of tax) were net gains of $2 million, $1 million and $2 million for the years ended December 31, 2019, 2018 and 2017, respectively.
|
|
For the Years Ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
|
(in millions)
|
|
Currency translation adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of beginning of period
|
|
$
|
(7
|
)
|
|
$
|
(5
|
)
|
|
$
|
(7
|
)
|
Currency translation adjustments
|
|
|
1
|
|
|
|
(2
|
)
|
|
|
2
|
|
Other comprehensive income (loss)
|
|
|
1
|
|
|
|
(2
|
)
|
|
|
2
|
|
Balance as of end of period
|
|
$
|
(6
|
)
|
|
$
|
(7
|
)
|
|
$
|
(5
|
)
|
Postretirement benefit plan:
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of beginning of period
|
|
$
|
14
|
|
|
$
|
11
|
|
|
$
|
12
|
|
Adoption of new accounting principle
|
|
|
3
|
|
|
|
—
|
|
|
|
—
|
|
Net actuarial gain (loss) arising during period
|
|
|
(5
|
)
|
|
|
5
|
|
|
|
1
|
|
Deferred tax (expense) benefit on net actuarial gain (loss)
|
|
|
1
|
|
|
|
(1
|
)
|
|
|
—
|
|
(Gains) and losses reclassified into net income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of actuarial gain
|
|
|
(2
|
)
|
|
|
(2
|
)
|
|
|
(2
|
)
|
Deferred tax benefit on reclassifications (1)
|
|
|
—
|
|
|
|
1
|
|
|
|
—
|
|
Other comprehensive income (loss)
|
|
|
(6
|
)
|
|
|
3
|
|
|
|
(1
|
)
|
Balance as of end of period
|
|
$
|
11
|
|
|
$
|
14
|
|
|
$
|
11
|
|
Accumulated other comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of beginning of period
|
|
$
|
7
|
|
|
$
|
6
|
|
|
$
|
5
|
|
Adoption of new accounting principle
|
|
|
3
|
|
|
|
—
|
|
|
|
—
|
|
Other comprehensive income (loss)
|
|
|
(5
|
)
|
|
|
1
|
|
|
|
1
|
|
Balance as of end of period
|
|
$
|
5
|
|
|
$
|
7
|
|
|
$
|
6
|
|
(1)
|
Taxes reclassified to income are recorded in income tax (expense) benefit.
|
62
Reynolds Consumer Group
Notes to the Combined Financial Statements
Note 14 - Income Taxes
During the years presented, our U.S. operations were included in the consolidated U.S. federal, certain state and local tax returns filed by RGHL Group. We also file certain separate U.S. state and local and foreign income tax returns. The income tax (expense) benefit included in our combined statements of income has been calculated using the separate return basis. In the future, as a stand-alone entity, we will file tax returns on our own behalf, and our deferred taxes and effective tax rate may differ from those in the historical periods.
The components of income before income tax were as follows:
|
|
For the Years Ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
|
(in millions)
|
|
Income before income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
300
|
|
|
$
|
236
|
|
|
$
|
210
|
|
International
|
|
|
1
|
|
|
|
(3
|
)
|
|
|
8
|
|
Total income before income taxes
|
|
$
|
301
|
|
|
$
|
233
|
|
|
$
|
218
|
|
Significant components of income tax expense were as follows:
|
|
For the Years Ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
|
(in millions)
|
|
Current
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
68
|
|
|
$
|
67
|
|
|
$
|
64
|
|
State
|
|
|
8
|
|
|
|
12
|
|
|
|
8
|
|
Foreign
|
|
|
—
|
|
|
|
—
|
|
|
|
2
|
|
Total current income tax expense (benefit)
|
|
|
76
|
|
|
|
79
|
|
|
|
74
|
|
Deferred
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
3
|
|
|
|
(15
|
)
|
|
|
(164
|
)
|
State
|
|
|
(3
|
)
|
|
|
(7
|
)
|
|
|
7
|
|
Foreign
|
|
|
—
|
|
|
|
—
|
|
|
|
(1
|
)
|
Total deferred income tax expense (benefit)
|
|
|
—
|
|
|
|
(22
|
)
|
|
|
(158
|
)
|
Total income tax expense (benefit)
|
|
$
|
76
|
|
|
$
|
57
|
|
|
$
|
(84
|
)
|
63
Reynolds Consumer Group
Notes to the Combined Financial Statements
A reconciliation of income taxes computed at the U.S. Federal statutory income tax rate of 21% for 2019 and 2018, and 35% for 2017, to our income tax expense (benefit) was as follows:
|
|
For the Years Ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
|
(in millions)
|
|
U.S. Federal income tax expense at the statutory rate
|
|
$
|
63
|
|
|
$
|
50
|
|
|
$
|
76
|
|
U.S. State income tax expense
|
|
|
2
|
|
|
|
3
|
|
|
|
9
|
|
Tax differential on foreign earnings
|
|
|
—
|
|
|
|
—
|
|
|
|
(1
|
)
|
Non-deductible compensation
|
|
|
2
|
|
|
|
2
|
|
|
|
3
|
|
Non-deductible stewardship costs
|
|
|
1
|
|
|
|
2
|
|
|
|
3
|
|
Non-deductible transaction costs
|
|
|
3
|
|
|
|
—
|
|
|
|
—
|
|
U.S. tax reform
|
|
|
—
|
|
|
|
—
|
|
|
|
(172
|
)
|
Manufacturing tax benefits
|
|
|
—
|
|
|
|
—
|
|
|
|
(5
|
)
|
Return to provision adjustments
|
|
|
3
|
|
|
|
—
|
|
|
|
—
|
|
Uncertain tax positions
|
|
|
1
|
|
|
|
—
|
|
|
|
—
|
|
Other
|
|
|
1
|
|
|
|
—
|
|
|
|
3
|
|
Total income tax expense (benefit)
|
|
$
|
76
|
|
|
$
|
57
|
|
|
$
|
(84
|
)
|
While our foreign activities are conducted through corporations, in these combined financial statements, these foreign corporations are not foreign controlled subsidiaries. Accordingly, there are no undistributed earnings of foreign subsidiaries.
Tax Reform
On December 22, 2017, the President of the United States signed into law the Tax Cuts and Jobs Act (the "Act"), which included the reduction of the U.S. federal tax rate from a maximum of 35% to a flat rate of 21%, effective January 1, 2018. The reduction in the tax rate resulted in a tax benefit of $172 million related to the remeasurement of net deferred tax liabilities that is recognized in the combined statements of income for the year ended December 31, 2017.
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,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
(in millions)
|
|
Deferred tax assets
|
|
|
|
|
|
|
|
|
Employee benefits
|
|
$
|
21
|
|
|
$
|
16
|
|
Inventory
|
|
|
7
|
|
|
|
5
|
|
Derivatives
|
|
|
—
|
|
|
|
2
|
|
Reserves
|
|
|
1
|
|
|
|
1
|
|
Tax losses
|
|
|
3
|
|
|
|
5
|
|
Tax credits
|
|
|
2
|
|
|
|
3
|
|
Interest (1)
|
|
|
32
|
|
|
|
23
|
|
Total deferred tax assets
|
|
|
66
|
|
|
|
55
|
|
Valuation allowance
|
|
|
(3
|
)
|
|
|
(3
|
)
|
Total deferred tax assets after valuation allowance
|
|
|
63
|
|
|
|
52
|
|
Deferred tax liabilities
|
|
|
|
|
|
|
|
|
Intangible assets
|
|
|
(287
|
)
|
|
|
(288
|
)
|
Property, plant, and equipment
|
|
|
(70
|
)
|
|
|
(60
|
)
|
Total deferred tax liabilities
|
|
|
(357
|
)
|
|
|
(348
|
)
|
Net deferred tax liabilities
|
|
$
|
(294
|
)
|
|
$
|
(296
|
)
|
(1)
|
As a result of the Act, $95 million and $36 million of interest expense was not deductible for the years ended December 31, 2018 and 2019, respectively, and has been deferred.
|
64
Reynolds Consumer Group
Notes to the Combined Financial Statements
State and foreign net operating loss and tax credit carryforwards, presented on a gross basis, were as follows:
|
|
As of December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
(in millions)
|
|
State and foreign net operating loss carryforwards
|
|
|
|
|
|
|
|
|
Expires within 5 years
|
|
$
|
—
|
|
|
$
|
1
|
|
Expires after 5 years or no expiration
|
|
|
53
|
|
|
|
79
|
|
Total net operating loss carryforwards
|
|
$
|
53
|
|
|
$
|
80
|
|
Tax credit carryforwards
|
|
|
|
|
|
|
|
|
Expires within 5 years
|
|
$
|
3
|
|
|
$
|
3
|
|
Total tax credit carryforwards
|
|
$
|
3
|
|
|
$
|
3
|
|
Deferred tax assets related to state and foreign net operating loss carryovers and state tax credit carryovers are available to offset future state 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 were $3 million as of both December 31, 2019 and 2018. 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.
The following table summarizes the activity related to our gross unrecognized tax benefits:
|
|
For the Years Ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
|
(in millions)
|
|
Balance at beginning of the year
|
|
$
|
1
|
|
|
$
|
1
|
|
|
$
|
—
|
|
Increase associated with tax positions taken during the
current year
|
|
|
1
|
|
|
|
—
|
|
|
|
1
|
|
Ending unrecognized tax benefits
|
|
$
|
2
|
|
|
$
|
1
|
|
|
$
|
1
|
|
Accrued interest and penalties related to unrecognized tax benefits have been recorded in income tax expense. No expense for accrued interest and penalties was recognized during the years ended December 31, 2019, 2018 and 2017.
Each year we file income tax returns in the various national, state and local 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.
For the period through to December 31, 2019, we were part of consolidated U.S. federal tax returns filed by RGHL Group. Under a Tax Matters Agreement, entered into as part of our corporate reorganization prior to our IPO, RGHL Group has retained responsibility for all U.S. federal tax matters for periods through to and including December 31, 2019.
State income tax returns are generally subject to examination for a period of 3 to 5 years after filing of the respective return. We are currently subject to a separate company New Jersey state income tax audit for the years 2013 through 2015.
The open tax years for our Canadian income taxes are 2014 and forward. The open tax years for our Chinese income taxes are 2015 and forward. We have no current or recent tax audits in either Canada or China.
65
Reynolds Consumer Group
Notes to the Combined Financial Statements
Taxes Paid
Taxes paid were $4 million, $8 million and $7 million for the years ended December 31, 2019, 2018 and 2017, respectively.
Our U.S. entities were members of a consolidated U.S. tax entity group for federal and certain state tax returns. 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 was recognized directly as a movement in Net Parent deficit.
Note 15 - 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. ASC 280 Segment Reporting establishes the standards for reporting information about segments in financial statements. In applying the criteria set forth in ASC 280, and in conjunction with a management realignment in June 2019, 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, 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 products are sold under the Hefty Ultra Strong, Hefty Strong Trash Bags, Hefty Renew and Hefty Slider Bags brands.
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 exclude unrealized gains and losses on derivatives, costs associated with rationalizing operations and administrative functions, factoring discounts, amortization of actuarial gains, the allocated related party Management Fee and transaction-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.
66
Reynolds Consumer Group
Notes to the Combined Financial Statements
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
|
|
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
|
|
Total assets
|
|
|
395
|
|
|
|
251
|
|
|
|
137
|
|
|
|
182
|
|
|
|
965
|
|
|
|
3,195
|
|
|
|
4,160
|
|
|
|
Reynolds
Cooking
& Baking
|
|
|
Hefty
Waste &
Storage
|
|
|
Hefty
Tableware
|
|
|
Presto
Products
|
|
|
Segment
total
|
|
|
Unallocated(1)
|
|
|
Total
|
|
2018
|
|
(in millions)
|
|
Net revenues
|
|
$
|
1,159
|
|
|
$
|
687
|
|
|
$
|
757
|
|
|
$
|
539
|
|
|
$
|
3,142
|
|
|
$
|
—
|
|
|
$
|
3,142
|
|
Intersegment revenues
|
|
|
—
|
|
|
|
9
|
|
|
|
—
|
|
|
|
—
|
|
|
|
9
|
|
|
|
(9
|
)
|
|
|
—
|
|
Total segment net revenues
|
|
|
1,159
|
|
|
|
696
|
|
|
|
757
|
|
|
|
539
|
|
|
|
3,151
|
|
|
|
(9
|
)
|
|
|
3,142
|
|
Adjusted EBITDA
|
|
|
234
|
|
|
|
172
|
|
|
|
168
|
|
|
|
85
|
|
|
|
659
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
16
|
|
|
|
13
|
|
|
|
8
|
|
|
|
20
|
|
|
|
57
|
|
|
|
30
|
|
|
|
87
|
|
Capital expenditures (2)
|
|
|
35
|
|
|
|
21
|
|
|
|
1
|
|
|
|
18
|
|
|
|
75
|
|
|
|
7
|
|
|
|
82
|
|
Total assets
|
|
|
393
|
|
|
|
190
|
|
|
|
135
|
|
|
|
163
|
|
|
|
881
|
|
|
|
5,540
|
|
|
|
6,421
|
|
|
|
Reynolds
Cooking
& Baking
|
|
|
Hefty
Waste &
Storage
|
|
|
Hefty
Tableware
|
|
|
Presto
Products
|
|
|
Segment
total
|
|
|
Unallocated(1)
|
|
|
Total
|
|
2017
|
|
(in millions)
|
|
Net revenues
|
|
$
|
1,068
|
|
|
$
|
628
|
|
|
$
|
731
|
|
|
$
|
530
|
|
|
$
|
2,957
|
|
|
$
|
—
|
|
|
$
|
2,957
|
|
Intersegment revenues
|
|
|
—
|
|
|
|
10
|
|
|
|
—
|
|
|
|
1
|
|
|
|
11
|
|
|
|
(11
|
)
|
|
|
—
|
|
Total segment net revenues
|
|
|
1,068
|
|
|
|
638
|
|
|
|
731
|
|
|
|
531
|
|
|
|
2,968
|
|
|
|
(11
|
)
|
|
|
2,957
|
|
Adjusted EBITDA
|
|
|
251
|
|
|
|
149
|
|
|
|
183
|
|
|
|
83
|
|
|
|
666
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
14
|
|
|
|
14
|
|
|
|
8
|
|
|
|
19
|
|
|
|
55
|
|
|
|
35
|
|
|
|
90
|
|
Capital expenditures (2)
|
|
|
20
|
|
|
|
18
|
|
|
|
—
|
|
|
|
17
|
|
|
|
55
|
|
|
|
1
|
|
|
|
56
|
|
(1)
|
Unallocated includes eliminations of intersegment revenues, unallocated depreciation and amortization and unallocated assets, which are comprised of cash, accounts receivable, other receivables, entity-wide property, plant and equipment, entity-wide operating lease right-of-use 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 RGHL Group. No capital expenditures were incurred by us in relation to these items. Refer to Note 16 - Related Party Transactions for additional information. On November 1, 2019, as part of our separation from RGHL Group, we acquired the legal title to these assets.
|
67
Reynolds Consumer Group
Notes to the Combined Financial Statements
The following table presents a reconciliation of segment Adjusted EBITDA to combined GAAP income before income taxes:
|
|
For the Years Ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
|
(in millions)
|
|
Segment Adjusted EBITDA
|
|
$
|
668
|
|
|
$
|
659
|
|
|
$
|
666
|
|
Corporate / unallocated expenses
|
|
|
(13
|
)
|
|
|
(12
|
)
|
|
|
(10
|
)
|
|
|
|
655
|
|
|
|
647
|
|
|
|
656
|
|
Adjustments to reconcile to GAAP income before income
taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
(91
|
)
|
|
|
(87
|
)
|
|
|
(90
|
)
|
Interest expense, net
|
|
|
(209
|
)
|
|
|
(280
|
)
|
|
|
(322
|
)
|
Factoring discount
|
|
|
(25
|
)
|
|
|
(22
|
)
|
|
|
(19
|
)
|
Allocated related party Management Fee
|
|
|
(10
|
)
|
|
|
(10
|
)
|
|
|
(10
|
)
|
Transaction-related costs
|
|
|
(31
|
)
|
|
|
-
|
|
|
|
-
|
|
Unrealized gains (losses) on derivatives
|
|
|
9
|
|
|
|
(14
|
)
|
|
|
4
|
|
Business rationalization costs
|
|
|
—
|
|
|
|
(4
|
)
|
|
|
(2
|
)
|
Other
|
|
|
3
|
|
|
|
3
|
|
|
|
1
|
|
Combined GAAP income before income taxes
|
|
$
|
301
|
|
|
$
|
233
|
|
|
$
|
218
|
|
Information in Relation to Products
Net revenues by product line are as follows:
|
|
For the Years Ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
|
(in millions)
|
|
Waste and storage products (1)
|
|
$
|
1,205
|
|
|
$
|
1,226
|
|
|
$
|
1,158
|
|
Cooking products
|
|
|
1,076
|
|
|
|
1,159
|
|
|
|
1,068
|
|
Tableware
|
|
|
751
|
|
|
|
757
|
|
|
|
731
|
|
Net revenues
|
|
$
|
3,032
|
|
|
$
|
3,142
|
|
|
$
|
2,957
|
|
(1)
|
Waste and storage products are comprised of our Hefty Waste & Storage and Presto Products segments.
|
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,
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
|
(in millions)
|
|
Net revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
2,982
|
|
|
$
|
3,079
|
|
|
$
|
2,862
|
|
Other
|
|
|
50
|
|
|
|
63
|
|
|
|
95
|
|
Net revenues
|
|
$
|
3,032
|
|
|
$
|
3,142
|
|
|
$
|
2,957
|
|
68
Reynolds Consumer Group
Notes to the Combined Financial Statements
|
|
As of December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
(in millions)
|
|
Long-lived assets
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
534
|
|
|
$
|
462
|
|
Other
|
|
|
3
|
|
|
|
2
|
|
Long-lived assets
|
|
$
|
537
|
|
|
$
|
464
|
|
Entity-wide Disclosures
Net revenues from our largest customer and its affiliates were 43%, 40% and 39% of total net revenues for the years ended December 31, 2019, 2018 and 2017, 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 periods presented. As a result of our participation in RGHL Group's factoring arrangement, there were no outstanding receivables with this customer as of December 31, 2019 and 2018.
Note 16 - Related Party Transactions
Our parent is RGHL, the ultimate parent is Packaging Holdings Limited, and the ultimate shareholder is Mr. Graeme Hart.
In addition to the allocation of expenses for certain services related to group wide functions provided by RGHL Group discussed in Note 1 - Description of Business and Basis of Presentation, other transactions between us and RGHL Group are described below. As indicated, certain transactions are reflected in equity (deficit) in our combined balance sheets as Net Parent deficit and in our combined statements of cash flows as a financing activity in net transfers from Parent.
For the years ended December 31, 2019, 2018 and 2017, revenues from product sold to RGHL Group were $149 million, $161 million and $148 million, respectively, and the related costs of sales were $145 million, $155 million and $144 million, respectively. For each of the years ended December 31, 2019, 2018 and 2017, we charged RGHL Group $2 million of our warehousing costs, which were included in cost of sales. Current related party receivables were $14 million and $30 million as of December 31, 2019 and 2018, respectively. For the years ended December 31, 2019, 2018 and 2017, products purchased from RGHL Group were $438 million, $511 million and $492 million, respectively. For the years ended December 31, 2019, 2018 and 2017, RGHL Group charged us $134 million, $143 million and $120 million, respectively, of their freight and warehousing costs, which were included in cost of sales. Current related party payables were $72 million and $268 million as of December 31, 2019 and 2018, respectively. These related party receivables and payables are settled regularly with RGHL Group in the normal course of business.
On November 1, 2019, as part of our separation from RGHL Group, we acquired the legal title to certain property, plant and equipment and inventories from RGHL Group for cash consideration of $112 million which represented fair market value and is presented within net transfers from (to) Parent in our combined statements of cash flows. These assets are directly attributable to our business and have been historically reflected in our combined financial statements, at their respective net book values, within our Hefty Tableware segment. During the periods presented up until October 31, 2019, RGHL Group incurred capital expenditures on property, plant and equipment related to our Hefty Tableware segment of $14 million, $17 million and $5 million, respectively. We acquired the legal title to these assets on November 1, 2019.
We have written interest-bearing loan agreements in place with RGHL Group which are presented as related party long-term receivables and related party borrowings on our combined balance sheets. Prior to our separation from RGHL Group, these balances were expected to be settled in cash. In June 2019, 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 no related party long-term receivables as of December 31, 2019. Related party long-term receivables were $2,401 million as of December 31, 2018. During the year ended December 31, 2017, $162 million of related party long-term receivables from RGHL Group were offset against current income taxes payable. Related party borrowings were $2,214 million and $3,950 million as of December 31, 2019 and 2018, respectively. Related party accrued interest payable was $18 million and $576 million as of December 31, 2019 and 2018, respectively. We remit accrued interest payable to RGHL Group as and when requested in conjunction with its cash management activities. Interest expense and income related to these loan agreements are discussed in Note 6 - Debt and Borrowing Arrangements and are accrued based on the written loan agreements. During the years ended December 31, 2019, 2018 and 2017 we borrowed $98 million ($31 million non-cash), $338 million and $416 million, respectively, from RGHL Group and repaid borrowings of $141 million, $314 million and $456 million ($3 million non-cash), respectively. In addition, during the year ended December 31, 2019, $36 million of accrued interest was capitalized into related party borrowings. During the years ended December 31, 2019, 2018 and 2017 we advanced loans of $170 million, $537 million and $508 million, respectively, to RGHL Group and received repayments of $151 million, $65 million and $200 million, respectively.
69
Reynolds Consumer Group
Notes to the Combined Financial Statements
The weighted average contractual interest rate related to our related party borrowings as of December 31, 2019, 2018 and 2017, was 2.20%, 6.00% and 6.28%, respectively. Below is a schedule of maturity of our related party borrowings as of December 31, 2019. The fair value of our related party borrowings as of December 31, 2019 and 2018, which is a Level 2 fair value measurement, approximates the carrying value.
|
|
(in millions)
|
|
2022
|
|
$
|
1,549
|
|
2023
|
|
|
665
|
|
Related party borrowings
|
|
$
|
2,214
|
|
As discussed in Note 2 - Summary of Significant Accounting Policies, we also participated in RGHL Group's accounts receivable factoring arrangement whereby certain of our accounts receivable were sold at a discount to RGHL Group. Costs for participating in the factoring arrangement are disclosed in Note 11 - Other Expense, Net.
In addition, our U.S. entities were members of a consolidated U.S. tax entity group for federal and certain state tax returns. 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 was recognized directly as a movement in Net Parent deficit.
Note 17 - Subsequent Events
On February 4, 2020 we completed our separation from RGHL Group and an 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. We received net proceeds of $1,336 million in the IPO, after deducting underwriting discounts and commissions of $67 million and other expenses of $7 million.
In conjunction with our separation from RGHL Group and IPO, subsequent to December 31, 2019, we entered into the following transactions:
Legal entity 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 this, we acquired from RGHL Group the issued capital of certain non-U.S. entities that are part of Reynolds Consumer Products for $15 million in cash.
Reclassification of Net Parent investment to additional paid-in capital and establishment of share capital
We reclassified RGHL Group’s historical net investment in us to additional paid-in capital and established share capital consisting of shares of common stock. Each share of our outstanding common stock, immediately prior to our IPO, was exchanged into 155,455 shares of common stock.
Repurchase of accounts receivables previously sold to RGHL Group
As detailed in Note 2 – Summary of Significant Accounting Policies, we have historically sold all of our U.S. accounts receivable to an entity within RGHL Group. These factoring arrangements with RGHL Group ceased upon our separation from RGHL Group and IPO. On January 30, 2020, we repurchased all of the U.S. accounts receivable that we previously sold through RGHL 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.
70
Reynolds Consumer Group
Notes to the Combined Financial Statements
Reallocation of borrowings under the RGHL Group Credit Agreement
As detailed in Note 6 – Debt and Borrowing Arrangements, as of December 31, 2019, we had incurred $2,017 million of borrowings under the RGHL Group Credit Agreement. On January 30, 2020, our outstanding borrowings, net of deferred financing transaction costs and original issue discounts plus accrued interest incurred under the RGHL Group Credit Agreement were reallocated to an entity within RGHL Group and on February 4, 2020, we were fully and unconditionally released from the security and guarantee arrangements relating to RGHL Group’s borrowings as discussed in Note 12 – Commitments and Contingencies. This reallocation resulted in a payment to RGHL Group of $8 million for accrued interest and an increase in related party borrowings, which was subsequently settled as discussed below.
New external debt
On February 4, 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”); (ii) a $250 million senior secured revolving credit facility (“Revolving Facility”); and (iii) a $1,168 million facility which was drawn and repaid on February 4, 2020 (“IPO Settlement Facility”).
The Term Loan Facility matures in February 2027. The Revolving Facility matures in February 2025, is undrawn and includes a sub-facility for letters of credit. Borrowings under the External Debt Facilities bear interest at a rate per annum equal to, at our option, either a base rate or a LIBO rate plus an applicable margin of 1.75%. The Term Loan Facility amortizes in equal quarterly installments in an aggregate annual amount equal to 1.00% of the original principal amount thereon, with the balance being payable on maturity.
The proceeds from the Term Loan Facility and the IPO Settlement Facility, net of transaction costs, together with available cash, were used to repay accrued related party interest and a portion of the related party loans payable.
Settlement of related party borrowings and accrued interest
On February 4, 2020, we repaid related party borrowings and accrued interest owing to RGHL Group of $1,375 million and capitalized, as additional paid-in capital without the issuance of any additional shares, the remaining balance of the related party borrowings owing to RGHL Group.
Transition services agreements
On February 4, 2020, in conjunction with our separation from RGHL Group, we entered into a transition services agreement with Reynolds Group Holdings Inc. whereby RGHL Group will continue to provide certain administrative services to us, including information technology services; 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 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.
Basic and diluted earnings per share
Basic and diluted earnings per share is computed by dividing the net income for the year by the weighted average number of common shares outstanding during the year. The weighted average number of shares outstanding for the basic and diluted earnings per share for the year is based on the number of shares of common stock outstanding on February 4, 2020, immediately prior to our IPO.
71
Reynolds Consumer Group
Notes to the Combined Financial Statements
The following table presents earnings per share information for each of the three years in the period ended December 31, 2019:
|
|
For the Years Ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
|
(in millions, except share and per share data)
|
|
Net income
|
|
$
|
225
|
|
|
$
|
176
|
|
|
$
|
302
|
|
Earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.45
|
|
|
$
|
1.13
|
|
|
$
|
1.94
|
|
Diluted
|
|
$
|
1.45
|
|
|
$
|
1.13
|
|
|
$
|
1.94
|
|
Shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
155,455,000
|
|
|
|
155,455,000
|
|
|
|
155,455,000
|
|
Diluted
|
|
|
155,455,000
|
|
|
|
155,455,000
|
|
|
|
155,455,000
|
|
Quarterly cash dividend
On March 5, 2020, the Company declared a cash dividend for the first quarter of 2020 of $0.15 per common share, which will be paid on April 30, 2020 to shareholders of record as of March 16, 2020.
Except as described above, there have been no events subsequent to December 31, 2019 which would require accrual or disclosure in these combined financial statements.
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following is selected quarterly financial data for the years ended December 31, 2019 and 2018:
|
|
2019
|
|
|
2018
|
|
|
|
1st
Quarter
|
|
|
2nd
Quarter
|
|
|
3rd
Quarter
|
|
|
4th
Quarter
|
|
|
1st
Quarter
|
|
|
2nd
Quarter
|
|
|
3rd
Quarter
|
|
|
4th
Quarter
|
|
|
|
(in millions, except per share data)
|
|
Total net revenues
|
|
$
|
665
|
|
|
$
|
791
|
|
|
$
|
741
|
|
|
$
|
835
|
|
|
$
|
665
|
|
|
$
|
798
|
|
|
$
|
772
|
|
|
$
|
907
|
|
Gross profit
|
|
|
173
|
|
|
|
227
|
|
|
|
217
|
|
|
|
263
|
|
|
|
148
|
|
|
|
211
|
|
|
|
207
|
|
|
|
266
|
|
Net income (loss)
|
|
|
17
|
|
|
|
55
|
|
|
|
63
|
|
|
|
90
|
|
|
|
(3
|
)
|
|
|
48
|
|
|
|
47
|
|
|
|
84
|
|
Earnings (loss) per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
0.11
|
|
|
|
0.35
|
|
|
|
0.41
|
|
|
|
0.58
|
|
|
|
(0.02
|
)
|
|
|
0.31
|
|
|
|
0.30
|
|
|
|
0.54
|
|
Diluted
|
|
|
0.11
|
|
|
|
0.35
|
|
|
|
0.41
|
|
|
|
0.58
|
|
|
|
(0.02
|
)
|
|
|
0.31
|
|
|
|
0.30
|
|
|
|
0.54
|
|
72