# Reynolds Consumer Products Inc. (REYN) FY 2023 MD&A

Verbatim Item 7 Management's Discussion and Analysis from Reynolds Consumer Products Inc.'s 10-K for fiscal year 2023.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1786431/000162828024003623/reyn-20231231.htm
Accession: 0001628280-24-003623
Filing date: 2024-02-07
Report date: 2023-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/REYN/
All MD&A years: /company/REYN/mda/
Previous year: /company/REYN/mda/fy2022/ (FY 2022)
Next year: /company/REYN/mda/fy2024/ (FY 2024)

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

Description of the Company and its Business Segments

We are a market-leading consumer products company with a presence in 95% of households across the United States. We produce and sell products across three broad categories: cooking products, waste and storage products and tableware. We sell our products under iconic brands such as Reynolds and Hefty and also under store brands that are strategically important to our retail partners. Overall, across both our branded and store brand offerings, we hold the #1 or #2 U.S. market share position in the majority of product categories in which we participate. Over 65% of our revenue comes from products that are #1 in their respective categories. We have developed our market-leading position by investing in our product categories and consistently developing innovative products that meet the evolving needs and preferences of the modern consumer.

Our mix of branded and store brand products is a key competitive advantage that aligns our goal of growing the overall product categories where we have offerings. Our retail partners also measure their success in category growth, which positions us as a trusted strategic partner. Our Reynolds and Hefty brands have preeminent positions in their categories and carry strong brand recognition in household aisles.

We manage our operations in four operating and reportable segments: Reynolds Cooking & Baking, Hefty Waste & Storage, Hefty Tableware and Presto Products:

•Reynolds Cooking & Baking: Through our Reynolds Cooking & Baking segment, we sell both branded and store brand aluminum foil, disposable aluminum pans, parchment paper, freezer paper, wax paper, butcher paper, plastic wrap, baking cups, oven bags and slow cooker liners. Our branded products are sold under the Reynolds Wrap, Reynolds KITCHENS and EZ 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. With our flagship Reynolds Wrap products, we hold the #1 market position in the U.S. consumer foil market measured by retail sales and volume. We also hold the #1 market position in the Canadian branded foil market under the ALCAN brand. We have no significant branded competitor in this market. Reynolds is one of the most recognized household brands in the United States and has been the top trusted brand in the consumer foil market for over 75 years, with greater than 50% market share in most of its categories.

•Hefty Waste & Storage: Through our Hefty Waste & Storage segment, we produce both branded and store brand trash and food storage bags. Hefty is a well-recognized leader in the trash bag and food storage bag categories and our private label products offer value to our retail partners. Our branded products are sold under the Hefty Ultra Strong and Hefty Strong brands for trash bags, and as the Hefty and Baggies brands for our food storage bags. Hefty has 99% brand awareness and is most commonly identified with the Brand's famous “Hefty! Hefty! Hefty!” slogan. We have the #1 branded market share in the U.S. large black trash bag and slider bag segments, and the #2 branded market share in the tall kitchen trash bag segment. Our robust product portfolio in this segment includes a full suite of products, including sustainable solutions such as compostable bags, bags made from recycled materials and orange bags through the Hefty ReNew Program.

•Hefty Tableware: Through our Hefty Tableware segment, we sell both branded and store brand disposable and compostable plates, bowls, platters, cups and cutlery. Our Hefty branded products include dishes and party cups. Hefty branded party cups are the #1 party cup in America measured by market share. Our branded products use our Hefty brand to represent both quality and great value, and we bring this same quality and value promise to all of our store brands as well. We sell across a broad range of materials and price points in all retail channels, allowing our consumers to select the product that best suits their price, function and aesthetic needs. These materials include sustainable solutions, such as Hefty ECOSAVE and Hefty Compostable Printed Paper Plates. In 2023, we also tapped into the nostalgia trend and brought back Zoo Pals plates, garnering 3.7 billion media impressions.

•Presto Products: Through our Presto Products segment, we primarily sell store brand products in four main categories: food storage bags, trash bags, reusable storage containers and plastic wrap. Presto Products is a market leader in food storage bags and differentiates itself by providing access to category management, consumer insights, marketing, merchandising and R&D resources. Presto Products was the first in the U.S. market to offer a store branded sandwich bag made with an approximately 20% proprietary blend of plant and ocean, renewable materials. 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.

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Factors Affecting Our Results of Operations

We believe that our performance and future success depend on a number of factors that present significant opportunities for us but also pose risks and challenges, including those discussed below and in the section of this Annual Report on Form 10-K titled “Risk Factors.”

Consumer Demand for our Products

Our business is largely impacted by the demands of our customers, and our success depends on our ability to anticipate and respond to changes in consumer preferences. Our products are household staples with a presence in 95% of households across the United States.

We also expect that consumers’ desire for convenience will continue to sustain demand for our products. Today’s consumers are focused on convenience, which extends into household products that improve ease of use and provide time savings, and they are willing to pay a higher price for innovative features and functionality. While advanced features are already prevalent in many of our products, we intend to continue investing in product development to accommodate the convenience-oriented lifestyles of today’s consumers. Consumer demand is also impacted by changes in consumer lifestyle, environmental concerns and other considerations. In addition, customers’ sensitivity to price points contributes to fluctuations in demand in portions of our business.

Branded products and store brand products accounted for 62% and 38% of our revenue, excluding business-to-business revenue, respectively, in the year ended December 31, 2023. We intend to continue investing in both our branded and store brand products to grow the entire product category. Our scale across household aisles and ability to offer both branded and store brand products enable us to grow the overall category. Through our category captain level advisor roles with our retail partners, we offer marketing and consumer shopping strategies, both in store and online, which expand usage occasions and stimulate consumption.

Costs for Raw Materials, Energy, Labor and Freight

Our business is impacted by fluctuations in the prices of the raw materials, energy and freight costs incurred in manufacturing and distributing our products as well as fluctuations in labor costs. The primary raw materials used to manufacture our products are plastic resins and aluminum, and we also use commodity chemicals and energy. We are exposed to commodity and other price risk principally from the purchase of resin, aluminum, natural gas, electricity, carton board and diesel. We distribute our products and receive raw materials primarily by rail and truck, which exposes us to fluctuations in labor, freight and handling costs caused by reduced rail and trucking capacity. Sales contracts for our products typically do not contain pass-through mechanisms for raw material, energy, labor and freight cost changes, but we adjust prices, where possible, in response to such price fluctuations.

Resin prices have historically fluctuated with supply and demand, changes in the prices of crude oil and natural gas, changes in refining capacity and the demand for other petroleum-based products. Aluminum prices have also historically fluctuated, as aluminum is a cyclical commodity with prices subject to global market factors. Raw material costs have also been impacted by governmental actions, such as tariffs and trade sanctions.

Purchases of most of our raw materials are based on negotiated rates with suppliers, which are linked to published indices. Typically, we do not enter into long-term purchase contracts that provide for fixed quantities or prices for our principal raw materials.

We use various strategies to manage our cost exposures on certain raw material purchases, including managing these costs through supplier negotiations and entering into contracts of varying durations, and we use naturally established forecast cycles to influence the timing of purchases of raw materials.

Furthermore, since we distribute our products and receive raw materials primarily by rail and truck, reduced availability of rail or trucking capacity and fluctuations in labor, freight and handling costs have caused us to incur increased expenses in certain periods. Where possible, we also adjust the prices of our products in response to fluctuations in production and distribution costs.

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

Competitive Environment

We operate in a marketplace influenced by large retailers with strong negotiating power over their suppliers. Current trends among these large retailers include increased demand for innovative new products from suppliers, requiring suppliers to maintain or reduce product prices and to deliver products within shorter lead times. We also face the threat of competition from new entrants to our markets as well as from existing competitors, including those overseas who may have lower production costs. In addition, the timing and amount in which our competitors invest in advertising and promotional spending may vary from quarter to quarter and impact our sales volumes and financial results. See “Business - Competition” for more detail on our competitors.

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Seasonality

Portions of our business historically have been moderately seasonal. Overall, our strongest sales are in our fourth quarter and our weakest sales are in our first quarter. This is driven by higher levels of sales of cooking products around major U.S. holidays in our fourth quarter, primarily due to the holiday use of Reynolds Wrap, Reynolds Oven Bags, Reynolds Parchment Paper and disposable aluminum pans. Our tableware products generally have higher sales in the second quarter of the year, primarily due to outdoor summertime use of disposable plates, cups and bowls.

Sustainability

Interest in environmental sustainability has increased over the past decade, and it has played, and we expect it will continue to play, an increasing role in consumer purchasing decisions. For instance, there have been recent concerns about the environmental impact of single-use disposable products and products made from plastic, particularly polystyrene foam, affecting our products, especially our Hefty Tableware segment. While there is a focus on environmentally friendly products, survey results indicate that in most of our product categories, consumers continue to rank performance-related purchase criteria, such as durability and ease of use, followed by price, as top considerations, rather than sustainability. As our consumers may shift towards purchasing more sustainable products, we have focused much of our innovation efforts around sustainability. We offer a broad line of products made with recycled, renewable, recyclable and compostable materials. We intend to continue sustainability innovation in our efforts to be at the leading edge of recyclability, renewability and compostability in order to offer our customers environmentally sustainable choices. During the year ended December 31, 2023, we acquired privately held Atacama Manufacturing Inc., which is an innovation driven company that designs, formulates, manufactures and commercializes products that include recycled or renewable, plant-based materials.

Non-GAAP Measures

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

We define Adjusted EBITDA as net income calculated in accordance with GAAP, plus the sum of income tax expense, net interest expense, depreciation and amortization and further adjusted to exclude IPO and separation-related costs, as well as other non-recurring costs. We define Adjusted Net Income and Adjusted EPS as Net Income and Earnings Per Share (“EPS”) calculated in accordance with GAAP, plus IPO and separation-related costs and other non-recurring costs.

We present Adjusted EBITDA because it is a key measure used by our management team to evaluate our operating performance, generate future operating plans and make strategic decisions. In addition, our chief operating decision maker uses Adjusted EBITDA of each reportable segment to evaluate the operating performance of such segments. We use Adjusted Net Income and Adjusted EPS as supplemental measures to evaluate our business’ performance in a way that also considers our ability to generate profit without the impact of certain items. Accordingly, we believe presenting these measures provides useful information to investors and others in understanding and evaluating our operating results in the same manner as our management team and board of directors.

Non-GAAP information should be considered as supplemental in nature and is not meant to be considered in isolation or as a substitute for the related financial information prepared in accordance with GAAP. In addition, our non-GAAP financial measures may not be the same as or comparable to similar non-GAAP financial measures presented by other companies.

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The following table presents a reconciliation of our net income, the most directly comparable GAAP financial measure, to Adjusted EBITDA:

[[GREPCENT_TABLE]]
[["","For the Years Ended December 31,"],["","2023","","2022","","2021"],["","(in millions)"],["Net income \u2013 GAAP","$","298","","","$","258","","","$","324"],["Income tax expense","95","","","80","","","106"],["Interest expense, net","119","","","76","","","48"],["Depreciation and amortization","124","","","117","","","109"],["IPO and separation-related costs (1)","\u2014","","","12","","","14"],["Other","\u2014","","","3","","","\u2014"],["Adjusted EBITDA (Non-GAAP)","$","636","","","$","546","","","$","601"]]
[[/GREPCENT_TABLE]]

(1)Reflects costs during the years ended December 31, 2022 and 2021 related to our separation to operate as a stand-alone public company as well as costs related to the IPO process. No such costs were incurred during the year ended December 31, 2023.

The following table presents a reconciliation of our net income and diluted EPS, the most directly comparable GAAP financial measures, to Adjusted Net Income and Adjusted EPS:

[[GREPCENT_TABLE]]
[["","Year Ended December 31, 2023","","Year Ended December 31, 2022","","Year Ended December 31, 2021"],["(in millions, except for per share data)","Net Income","","Diluted Shares","","Diluted EPS","","Net Income","","Diluted Shares","","Diluted EPS","","Net Income","","Diluted Shares","","Diluted EPS"],["As Reported - GAAP","$","298","","","210","","","$","1.42","","","$","258","","","210","","","$","1.23","","","$","324","","","210","","","$","1.54"],["Adjustments:"],["IPO and separation-related costs (1)","\u2014","","","\u2014","","","\u2014","","","9","","","210","","","0.04","","","11","","","210","","","0.05"],["Other (1)","\u2014","","","\u2014","","","\u2014","","","2","","","210","","","0.01","","","\u2014","","","\u2014","","","\u2014"],["Adjusted (Non-GAAP)","$","298","","","210","","","$","1.42","","","$","269","","","210","","","$","1.28","","","$","335","","","210","","","$","1.59"]]
[[/GREPCENT_TABLE]]

(1)Amounts are after tax, calculated using a tax rate of 23.6% for the year ended December 31, 2022 and 24.6% for the year ended December 31, 2021, which is our effective tax rate for the periods presented.

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Results of Operations

The following discussion should be read in conjunction with our consolidated financial statements included elsewhere in this Annual Report on Form 10-K. Detailed comparisons of revenue and results are presented in the discussions of the operating segments, which follow our consolidated results discussion.

Certain discussions in this section provide a breakdown of net revenues between our retail business and our non-retail business. Our retail business net revenues consist of sales to grocery stores, mass merchants, warehouse clubs, discount chains, dollar stores, drug stores, home improvement stores, military outlets and eCommerce retailers. Our non-retail business net revenues consist of sales to food service customers, which are classified as related party revenues, and industrial customers.

Discussions of the year ended December 31, 2022 items and comparisons between the year ended December 31, 2022 and the year ended December 31, 2021 can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K filed on February 8, 2023.

Aggregation of Segment Revenue and Adjusted EBITDA

[[GREPCENT_TABLE]]
[["(in millions)","Reynolds Cooking & Baking","","Hefty Waste & Storage","","Hefty Tableware","","Presto Products","","Unallocated\u207d\u00b2\u207e","","Total Reynolds Consumer Products"],["Net revenues"],["2023","$","1,273","","","$","942","","","$","967","","","$","593","","","$","(19)","","","$","3,756"],["2022","1,287","","","946","","","1,000","","","604","","","(20)","","","3,817"],["Adjusted EBITDA (1)"],["2023","$","184","","","$","261","","","$","174","","","$","112","","","$","(95)","","","$","636"],["2022","142","","","207","","","134","","","96","","","(33)","","","546"]]
[[/GREPCENT_TABLE]]

(1)Adjusted EBITDA is a non-GAAP measure. See “Non-GAAP Measures” for details, including a reconciliation between net income and Adjusted EBITDA.

(2)The unallocated net revenues include elimination of intersegment revenues and other revenue adjustments. The unallocated Adjusted EBITDA represents the combination of corporate expenses which are not allocated to our segments and other unallocated revenue adjustments.

Year Ended December 31, 2023 Compared with the Year Ended December 31, 2022

Total Reynolds Consumer Products

[[GREPCENT_TABLE]]
[["","For the Years Ended December 31,"],["(in millions, except for %)","2023","","% of Revenue","","2022","","% of Revenue","","Change","","% Change"],["Net revenues","$","3,673","","","98","","%","$","3,716","","","97","","%","$","(43)","","","(1)","%"],["Related party net revenues","83","","","2","","%","101","","","3","","%","(18)","","","(18)","%"],["Total net revenues","3,756","","","100","","%","3,817","","","100","","%","(61)","","","(2)","%"],["Cost of sales","(2,814)","","","(75)","","%","(3,041)","","","(80)","","%","227","","","7","%"],["Gross profit","942","","","25","","%","776","","","20","","%","166","","","21","%"],["Selling, general and administrative expenses","(430)","","","(11)","","%","(340)","","","(9)","","%","(90)","","","(26)","%"],["Other expense, net","\u2014","","","\u2014","","%","(22)","","","(1)","","%","22","","","100","%"],["Income from operations","512","","","14","","%","414","","","11","","%","98","","","24","%"],["Interest expense, net","(119)","","","(3)","","%","(76)","","","(2)","","%","(43)","","","(57)","%"],["Income before income taxes","393","","","10","","%","338","","","9","","%","55","","","16","%"],["Income tax expense","(95)","","","(3)","","%","(80)","","","(2)","","%","(15)","","","(19)","%"],["Net income","$","298","","","8","","%","$","258","","","7","","%","$","40","","","16","%"],["Adjusted EBITDA (1)","$","636","","","17","","%","$","546","","","14","","%","$","90","","","16","%"]]
[[/GREPCENT_TABLE]]

(1)Adjusted EBITDA is a non-GAAP measure. See “Non-GAAP Measures” for details, including a reconciliation between net income and Adjusted EBITDA.

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Components of Change in Net Revenues for the Year Ended December 31, 2023 vs. the Year Ended December 31, 2022

[[GREPCENT_TABLE]]
[["","Price","","Volume/Mix","","Total"],["Reynolds Cooking & Baking","\u2014","","%","(1)","","%","(1)","","%"],["Hefty Waste & Storage","2","","%","(2)","","%","\u2014","","%"],["Hefty Tableware","5","","%","(8)","","%","(3)","","%"],["Presto Products","\u2014","","%","(2)","","%","(2)","","%"],["Total RCP","2","","%","(4)","","%","(2)","","%"]]
[[/GREPCENT_TABLE]]

Total Net Revenues. Total net revenues decreased by $61 million, or 2%, to $3,756 million. The 2% decrease was driven by a 2% volume decline and 1% lower pricing in our non-retail business, as well as a 2% volume decline in our retail business, partially offset by 3% higher pricing in our retail business. This resulted in a net revenue decline of $71 million in our non-retail business, which is in our Reynolds Cooking & Baking segment, partially offset by a $10 million increase in net revenue in our retail business across all segments.

Cost of Sales. Cost of sales decreased by $227 million, or 7%, to $2,814 million. The decrease was primarily driven by lower volume and lower material and manufacturing costs, as well as lower logistics costs.

Selling, General and Administrative Expenses. Selling, general and administrative expenses ("SG&A") increased by $90 million, or 26%, to $430 million, primarily due to higher personnel costs, increased investment in advertising and higher professional fees.

Other Expense, Net. Other expense, net decreased by $22 million, or 100%, to $0 million. The decrease was primarily attributable to IPO and separation-related costs in the prior year period that did not reoccur in the current year period.

Interest Expense, Net. Interest expense, net increased by $43 million, or 57%, to $119 million. The increase was primarily due to higher interest rates, partially offset by the lower principal balance on our term loan facility.

Income Tax Expense. We recognized income tax expense of $95 million on income before income taxes of $393 million (an effective tax rate of 24.1%) for the year ended December 31, 2023 compared to income tax expense of $80 million on income before income taxes of $338 million (an effective tax rate of 23.6%) for the year ended December 31, 2022.

Adjusted EBITDA. Adjusted EBITDA increased by $90 million, or 16%, to $636 million. The increase in Adjusted EBITDA was primarily due to previously implemented pricing actions and lower material and manufacturing costs, as well as lower logistics costs, partially offset by higher SG&A.

Segment Information

Reynolds Cooking & Baking

[[GREPCENT_TABLE]]
[["","For the Years Ended December 31,"],["(in millions, except for %)","2023","","2022","","Change","","% Change"],["Retail net revenues","$","1,076","","","$","1,019","","","$","57","","","6","","%"],["Non-retail net revenues","197","","","268","","","(71)","","","(26)","","%"],["Total segment net revenues","$","1,273","","","$","1,287","","","$","(14)","","","(1)","","%"],["Segment Adjusted EBITDA","$","184","","","$","142","","","$","42","","","30","","%"],["Segment Adjusted EBITDA Margin","14","","%","11","%"]]
[[/GREPCENT_TABLE]]

Total Segment Net Revenues. Reynolds Cooking & Baking total segment net revenues decreased by $14 million, or 1%, to $1,273 million. The decrease in net revenues was due to a $71 million decline in our non-retail business, partially offset by a $57 million increase in our retail business.

Adjusted EBITDA. Reynolds Cooking & Baking Adjusted EBITDA increased by $42 million, or 30%, to $184 million. The increase in Adjusted EBITDA was primarily driven by the optimization of our retail product portfolio mix, lower material and manufacturing costs and lower logistics costs, partially offset by an increased investment in advertising.

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Hefty Waste & Storage

[[GREPCENT_TABLE]]
[["","For the Years Ended December 31,"],["(in millions, except for %)","2023","","2022","","Change","","% Change"],["Total segment net revenues","$","942","","","$","946","","","$","(4)","","","\u2014","","%"],["Segment Adjusted EBITDA","261","","","207","","","54","","","26","","%"],["Segment Adjusted EBITDA Margin","28","","%","22","","%"]]
[[/GREPCENT_TABLE]]

Total Segment Net Revenues. Hefty Waste & Storage total segment net revenues decreased by $4 million, to $942 million. The decrease in net revenues was primarily due to lower volume, mostly offset by higher pricing due to previously implemented pricing actions.

Adjusted EBITDA. Hefty Waste & Storage Adjusted EBITDA increased by $54 million, or 26%, to $261 million. The increase in Adjusted EBITDA was primarily driven by higher pricing due to previously implemented pricing actions and lower material and manufacturing costs, as well as lower logistics costs, partially offset by lower volume and an increased investment in advertising.

Hefty Tableware

[[GREPCENT_TABLE]]
[["","For the Years Ended December 31,"],["(in millions, except for %)","2023","","2022","","Change","","% Change"],["Total segment net revenues","$","967","","","$","1,000","","","$","(33)","","","(3)","","%"],["Segment Adjusted EBITDA","174","","","134","","","40","","","30","","%"],["Segment Adjusted EBITDA Margin","18","","%","13","","%"]]
[[/GREPCENT_TABLE]]

Total Segment Net Revenues. Hefty Tableware total segment net revenues decreased by $33 million, or 3%, to $967 million. The decrease in net revenues was primarily due to lower volume, partially offset by higher pricing due to previously implemented pricing actions.

Adjusted EBITDA. Hefty Tableware Adjusted EBITDA increased by $40 million, or 30%, to $174 million. The increase in Adjusted EBITDA was primarily driven by higher pricing due to previously implemented pricing actions and lower material and manufacturing costs, as well as lower logistics costs, partially offset by lower volume and an increased investment in advertising.

Presto Products

[[GREPCENT_TABLE]]
[["","For the Years Ended December 31,"],["(in millions, except for %)","2023","","2022","","Change","","% Change"],["Total segment net revenues","$","593","","","$","604","","","$","(11)","","","(2)","","%"],["Segment Adjusted EBITDA","112","","","96","","","16","","","17","","%"],["Segment Adjusted EBITDA Margin","19","","%","16","","%"]]
[[/GREPCENT_TABLE]]

Total Segment Net Revenues. Presto Products total segment net revenues decreased by $11 million, or 2%, to $593 million. The decrease in net revenues was primarily due to lower volume.

Adjusted EBITDA. Presto Products Adjusted EBITDA increased by $16 million, or 17%, to $112 million. The increase in Adjusted EBITDA was primarily driven by lower material and manufacturing costs, as well as lower logistics costs, partially offset by lower volume.

Seasonality

Portions of our business historically have been moderately seasonal. Overall, our strongest sales are in our fourth quarter and our weakest sales are in our first quarter. This is driven by higher levels of sales of cooking products around major U.S. holidays in our fourth quarter, primarily due to the holiday use of Reynolds Wrap, Reynolds Oven Bags, Reynolds Parchment Paper and disposable aluminum pans. Our tableware products generally have higher sales in the second quarter of the year, primarily due to outdoor summertime use of disposable plates, cups and bowls.

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Liquidity and Capital Resources

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

The following table discloses our cash flows for the years presented:

[[GREPCENT_TABLE]]
[["","For the Years Ended December 31,"],["(in millions)","2023","","2022"],["Net cash provided by operating activities","$","644","","","$","219"],["Net cash used in investing activities","(110)","","","(128)"],["Net cash used in financing activities","(457)","","","(217)"],["Increase (decrease) in cash and cash equivalents","$","77","","","$","(126)"]]
[[/GREPCENT_TABLE]]

Cash provided by operating activities

Net cash from operating activities increased by $425 million, or 194%, to $644 million. The increase was primarily driven by improved earnings and the benefit of various working capital reduction initiatives.

Cash used in investing activities

Net cash used in investing activities decreased by $18 million, or 14%, to $110 million. The decrease was driven primarily by decreased cash outlays for capital expenditures.

Cash used in financing activities

Net cash used in financing activities increased by $240 million, or 111%, to $457 million. The increase was primarily attributable to voluntary principal payments related to our Term Loan Facility that were made throughout the year ended December 31, 2023.

External Debt Facilities

In February 2020, we entered into the External Debt Facilities which consists of a $2,475 million Term Loan Facility and a Revolving Facility that provides for additional borrowing capacity of up to $250 million, reduced by amounts used for letters of credit. In February 2023, we amended the External Debt Facilities (“Amendment No. 1”) which replaced the benchmark from the London Interbank Offered Rate (“LIBOR”) to the Secured Overnight Financing Rate (“SOFR”). Additionally, in November 2023, we further amended the External Debt Facilities (“Amendment No. 2”) to extend the maturity date of the Revolving Facility by one year. Other than the foregoing, the material terms of the External Debt Facilities, as amended by Amendment No. 1 and Amendment No. 2 (“Amended External Debt Facilities”) remain unchanged.

As of December 31, 2023, the outstanding balance under the Term Loan Facility was $1,845 million. As of December 31, 2023, we had no outstanding borrowings under the Revolving Facility, and we had $6 million of letters of credit outstanding, which reduces the borrowing capacity under the Revolving Facility.

The borrower under the Amended External Debt Facilities is Reynolds Consumer Products LLC (the “Borrower”). The Revolving Facility includes a sub-facility for letters of credit. In addition, the Amended External Debt Facilities provide that the Borrower has the right at any time, subject to customary conditions, to request incremental term loans or incremental revolving credit commitments in amounts and on terms set forth therein. The lenders under the Amended External Debt Facilities are not under any obligation to provide any such incremental loans or commitments, and any such addition of or increase in loans is subject to certain customary conditions precedent and other provisions.

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Interest rate and fees

Borrowings under the Amended External Debt Facilities bear interest at a rate per annum equal to, at our option, either a base rate plus an applicable margin of 0.75% or a SOFR rate plus an applicable margin of 1.75%.

During 2020 and 2022, we entered into a series of interest rate swaps to fix the LIBOR of our External Debt Facilities. In February 2023, we amended our interest rate swaps to replace the interest rate benchmark from LIBOR to SOFR. Other than the foregoing, the material terms of the interest rate swap agreements remained unchanged, and our election to use practical expedients under Accounting Standards Update (“ASU”) 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, and ASU 2021-01, Reference Rate Reform (Topic 848): Scope, resulted in no material impacts on the consolidated financial statements. The aggregate notional amount of our interest rate swaps still in effect as of December 31, 2023 was $1,150 million, and the SOFR is fixed at an annual rate of 0.40% to 3.40% (for an annual effective interest rate of 2.15% to 5.15%, including margin). These interest rate swaps hedge a portion of the interest rate exposure resulting from our Term Loan Facility for periods ranging from two to three years.

Prepayments

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

The Borrower may voluntarily repay outstanding loans under the Term Loan Facility at any time without premium or penalty, other than customary breakage costs with respect to SOFR based loans. During the year ended December 31, 2023, we made voluntary principal payments of $250 million related to the Term Loan Facility, which were not subject to a prepayment premium.

Amortization and maturity

The Term Loan Facility matures in February 2027. The Term Loan Facility amortizes in equal quarterly installments of $6 million, which commenced in June 2020, with the balance payable on maturity. During the year ended December 31, 2023, we made voluntary principal payments of $250 million related to our Term Loan Facility, which were first applied to pay the remaining quarterly amortization payments in full, with the residual balance applied to the outstanding principal balance due at maturity.

As amended, the Revolving Facility matures in February 2026.

Guarantee and security

All obligations under the Amended External Debt Facilities and certain hedge agreements and cash management arrangements provided by any lender party to the Amended External Debt Facilities or any of its affiliates and certain other persons are unconditionally guaranteed by Reynolds Consumer Products Inc. (“RCPI”), the Borrower (with respect to hedge agreements and cash management arrangements not entered into by the Borrower) and certain of RCPI’s existing and subsequently acquired or organized direct or indirect material wholly-owned U.S. restricted subsidiaries, with customary exceptions including, among other things, where providing such guarantees is not permitted by law, regulation or contract or would result in material adverse tax consequences.

All obligations under the Amended External Debt Facilities and certain hedge agreements and cash management arrangements provided by any lender party to the Amended External Debt Facilities or any of its affiliates and certain other persons, and the guarantees of such obligations, are secured, subject to permitted liens and other exceptions, by: (i) a perfected first-priority pledge of all the equity interests of each wholly-owned material restricted subsidiary of RCPI, the Borrower or a subsidiary guarantor, including the equity interests of the Borrower (limited to 65% of voting stock in the case of first-tier non-U.S. subsidiaries of RCPI, the Borrower or any subsidiary guarantor) and (ii) perfected first-priority security interests in substantially all tangible and intangible personal property of RCPI, the Borrower and the subsidiary guarantors (subject to certain other exclusions).

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Certain covenants and events of default

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

•incur additional indebtedness and guarantee indebtedness;

•create or incur liens;

•engage in mergers or consolidations;

•sell, transfer or otherwise dispose of assets;

•pay dividends and distributions or repurchase capital stock;

•prepay, redeem or repurchase certain indebtedness;

•make investments, loans and advances;

•enter into certain transactions with affiliates;

•enter into agreements which limit the ability of our restricted subsidiaries to incur restrictions on their ability to make distributions; and

•enter into amendments to certain indebtedness in a manner materially adverse to the lenders.

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

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

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

Accounts Receivable Factoring

We are party to a factoring agreement with JP Morgan Chase Bank, N.A. to sell certain accounts receivable up to $95 million. We had no outstanding balance owed under the factoring arrangement as of December 31, 2023. The outstanding balance owed under the factoring arrangement as of December 31, 2022 was $15 million. Transactions under this agreement are accounted for as sales of accounts receivable, and the receivables sold are removed from the consolidated balance sheet at the time of the sales transaction. We classify proceeds received from the sales of accounts receivable as an operating cash flow in the consolidated statement of cash flows. We record the discount as other expense, net in the consolidated statement of income.

Supply Chain Financing

During the year ended December 31, 2023, we initiated a voluntary Supply Chain Finance program (the “SCF”) with a global financial institution (the “SCF Bank”). Under the SCF, qualifying suppliers may elect to sell their receivables from us to the SCF Bank. These participating suppliers negotiate their receivables sales arrangements directly with the SCF Bank. We are not party to those agreements, nor do we provide any security or other forms of guarantees to the SCF Bank. The participation in the program is at the sole discretion of the supplier, we have no economic interest in a supplier’s decision to enter into the agreement and have no direct financial relationship with the SCF Bank, as it relates to the SCF. Once a qualifying supplier elects to participate in the SCF and reaches an agreement with the SCF Bank, they elect which individual invoices they sell to the SCF Bank.

The terms of our payment obligations are not impacted by a supplier’s participation in the SCF and as such, the SCF has no impact on our balance sheets, cash flows or liquidity. Our payment terms with our suppliers for similar services and materials within individual markets are consistent between suppliers that elect to participate in the SCF and those that do not participate.

All outstanding amounts related to suppliers participating in the SCF are recorded within accounts payable in the consolidated balance sheet and associated payments are included as an operating cash flow in the consolidated statement of cash flows. As of December 31, 2023, the amount of obligations outstanding that we have confirmed as valid under the SCF was $19 million.

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Dividends

During the year ended December 31, 2023, cash dividends totaling $0.92 per share were declared and paid. On January 25, 2024, a quarterly cash dividend of $0.23 per share was declared and is to be paid on February 29, 2024. We expect to continue paying cash dividends on a quarterly basis; however, future dividends are at the discretion of our Board of Directors and will depend upon our earnings, capital requirements, financial condition, contractual limitations (including under the Amended External Debt Facilities) and other factors.

****

We believe that our projected cash position, cash flows from operations, including proceeds from factored receivables, and available borrowings under the Revolving Facility are sufficient to meet debt service, capital expenditures and working capital needs for the foreseeable future. However, we cannot ensure that our business will generate sufficient cash flow from operations or that future borrowings will be available under our borrowing agreements in amounts sufficient to pay indebtedness or fund other liquidity needs. Actual results of operations will depend on numerous factors, many of which are beyond our control as further discussed in “Item 1A. Risk Factors”.

Contractual Obligations

The following table summarizes our material contractual obligations as of December 31, 2023:

[[GREPCENT_TABLE]]
[["(in millions)","Total","","Less than one year","","One to three years","","Three to five years","","Greater than five years"],["Long-term debt (1)","$","2,262","","","$","135","","","$","270","","","$","1,857","","","$","\u2014"],["Operating lease liabilities (2)","119","","","21","","","43","","","26","","","29"],["Finance lease liabilities","22","","","2","","","4","","","4","","","12"],["Unconditional capital expenditure obligations","40","","","40","","","\u2014","","","\u2014","","","\u2014"],["Postretirement benefit plan obligations","16","","","2","","","4","","","2","","","8"],["Total contractual obligations","$","2,459","","","$","200","","","$","321","","","$","1,889","","","$","49"]]
[[/GREPCENT_TABLE]]

(1)Total obligations for long-term debt consist of the principal amounts and interest obligations. The interest rate on the floating rate debt balances has been assumed to be the same as the rate in effect as of December 31, 2023.

(2)Total operating lease liabilities include $55 million in commitments related to operating leases executed that have not yet commenced.

As of December 31, 2023, our liabilities for uncertain tax positions and defined benefit pension obligations totaled $13 million. The ultimate timing of these liabilities cannot be determined; therefore, we have excluded these amounts from the contractual obligations table above.

Off-Balance Sheet Arrangements

We have no material off-balance sheet obligations.

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Critical Accounting Estimates

The methods, estimates and judgments we use in applying our most critical accounting policies have a significant impact on the results we report in our consolidated financial statements. Critical accounting estimates are those that involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on our financial condition and results of operations. Specific areas requiring the application of management’s estimates and judgments include, among others, assumptions pertaining to valuation assumptions of goodwill and intangible assets, useful lives of long-lived assets and sales incentives. Accordingly, a different financial presentation could result depending on the judgments, estimates or assumptions that are used. A summary of our significant accounting policies and use of estimates is contained in Note 2 - Summary of Significant Accounting Policies of our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

We believe that the accounting estimates and assumptions described below involve significant subjectivity and judgment, and changes to such estimates or assumptions could have a material impact on our financial condition or operating results. Therefore, we consider an understanding of the variability and judgment required in making these estimates and assumptions to be critical in fully understanding and evaluating our reported financial results.

Revenue Recognition-Sales Incentives

We routinely commit to one-time or ongoing trade-promotion programs with our customers. Programs include discounts, allowances, shelf-price reductions, end-of-aisle or in-store displays of our products and graphics and other trade-promotion activities conducted by the customer, such as coupons. Collectively, we refer to these as sales incentives or trade promotions. Costs related to these programs are recorded as a reduction to revenue. Our trade promotion accruals are primarily based on estimated volume and incorporate historical sales and spending trends by customer and category. The determination of these estimated accruals requires judgment and may change in the future as a result of changes in customer promotion participation, particularly for new programs and for programs related to the introduction of new products. Final determination of the total cost of a promotion is dependent upon customers providing information about proof of performance and other information related to the promotional event. This process of analyzing and settling trade-promotion programs with customers could impact our results of operations and trade promotion accruals depending on how actual results of the programs compare to original estimates. Sales incentives represented 5%, 4%, and 4% of total net revenues for the years ended December 31, 2023, 2022 and 2021, respectively. As of December 31, 2023 and 2022, we had accruals of $40 million and $38 million, respectively, reflected on our consolidated balance sheets in Accrued and other current liabilities related to sales incentive programs.

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

We test our goodwill and other indefinite-lived intangible assets for impairment annually in the fiscal fourth quarter unless there are indications during a different interim period that these assets may have become impaired. No impairments were identified as a result of our impairment review performed annually during the fourth quarter of fiscal years 2023, 2022 and 2021.

Goodwill

Our reporting units for goodwill impairment testing purposes are Reynolds Cooking & Baking, Hefty Waste & Storage, Hefty Tableware and Presto Products. No instances of impairment were identified during the fiscal year 2023 annual impairment review. All of our reporting units had fair values that significantly exceeded recorded carrying values. However, future changes in the judgments, assumptions and estimates that are used in the impairment testing for goodwill as described below could result in significantly different estimates of the fair values.

In our evaluation of goodwill impairment, we have the option to first assess qualitative factors such as the maturity and stability of the reporting unit, the magnitude of the excess fair value over carrying value from the prior year’s impairment testing, other reporting unit operating results as well as new events and circumstances impacting the operations at the reporting unit level. If the result of a qualitative test indicates a potential for impairment, or if we voluntarily elect, a quantitative test is performed, wherein we compare the estimated fair value of each reporting unit to its carrying value. In all instances where a quantitative test was performed, the estimated fair value exceeded the carrying value of the reporting unit and none of our reporting units were at a risk of failing the quantitative test. If the estimated fair value of any reporting unit had been less than its carrying value, an impairment charge would have been recorded for the amount by which the reporting unit’s carrying amount exceeds its fair value.

To determine the fair value of a reporting unit as part of our quantitative test, we use a capitalization of earnings method under the income approach. Under this approach, we estimate the forecasted Adjusted EBITDA of each reporting unit and capitalize this amount using a multiple. The Adjusted EBITDA amounts are consistent with those we use in our internal planning, which gives consideration to actual business trends experienced and the long-term business strategy. The selection of a capitalization multiple incorporates consideration of comparable entity trading multiples within the same industry and recent sale and purchase transactions. Changes in such estimates or the application of alternative assumptions could produce different results.

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Indefinite-Lived Intangible Assets

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. We have the option to first assess qualitative factors such as the maturity of the trade name, the magnitude of the excess fair value over carrying value from the prior year’s impairment testing, as well as new events and circumstances impacting the trade name. If the result of a qualitative test indicates a potential for impairment, or if we voluntarily elect, a quantitative test is performed. If the carrying amount of such asset exceeds its estimated fair value, an impairment charge is recorded for the difference between the carrying amount and the estimated fair value. When a quantitative test is performed we use a relief from royalty computation under the income approach to estimate the fair value of our trade names. This approach requires significant judgments in determining (i) the estimated future branded revenue from the use of the asset; (ii) the relevant royalty rate to be applied to these estimated future cash flows; and (iii) the appropriate discount rates applied to those cash flows to determine fair value. Changes in such estimates or the use of alternative assumptions could produce different results. No instances of impairment were identified during the fiscal year 2023 annual impairment review. Each of our indefinite-lived intangible assets had fair values that significantly exceeded recorded carrying values.

Long-Lived Assets

Long-lived assets, including finite-lived intangible assets, are reviewed for possible impairment whenever events or changes in circumstances occur that indicate that the carrying amount of an asset (or asset group) may not be recoverable. Our impairment review requires significant management judgment, including estimating the future success of product lines, future sales volumes, revenue and expense growth rates, alternative uses for the assets and estimated proceeds from the disposal of the assets. We review business plans for possible impairment indicators. Impairment occurs when the carrying amount of the asset (or asset group) exceeds its estimated future undiscounted cash flows. When impairment is indicated, an impairment charge is recorded for the difference between the asset’s carrying value and its estimated fair value. Depending on the asset, estimated fair value may be determined either by use of a discounted cash flow model or by reference to estimated selling values of assets in similar condition. The use of different assumptions would increase or decrease the estimated fair value of assets and would increase or decrease any impairment measurement.

Recent Accounting Pronouncements

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

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