Pactiv(PTVE) - 2023 Q4 - Annual Report

PART I Business Pactiv Evergreen, a leading North American packaging manufacturer, restructured its Beverage Merchandising operations in 2023, focusing on strategic growth and sustainability - The company operates through two reportable segments: Foodservice and Food and Beverage Merchandising, with legacy segments combined in Q2 2023[14][15][17] Net External Revenues by Segment (Continuing Operations) | Year | Foodservice (%) | Food and Beverage Merchandising (%) | Other (%) | | :--- | :--- | :--- | :--- | | 2023 | 47 | 53 | 0 | | 2022 | 44 | 55 | 1 | | 2021 | 42 | 56 | 2 | - In 2023, a significant restructuring of Beverage Merchandising operations was initiated, including the closure of the Canton, North Carolina mill and Olmsted Falls, Ohio facility[18] - The company's top ten customers accounted for 42% of net revenues in 2023, with one customer representing approximately 10% of consolidated net revenues[23] - Primary raw materials include plastic resins, fiber, and paperboard, with commodity cost impacts mitigated by pass-through mechanisms in customer contracts, typically with a three-month lag[30][32] Research and Development Expenses | Year | R&D Expense (in millions) | | :--- | :--- | | 2023 | $45 | | 2022 | $33 | | 2021 | $22 | - The company aims for 100% of its packaging products to be from recycled, recyclable, or renewable materials by 2030, reaching approximately 66% of this goal as of 2023[49] - As of December 31, 2023, the company employed approximately 15,000 people globally, with about 25% represented by labor unions[61] Risk Factors The company faces significant risks from volatile costs, customer concentration, labor issues, substantial debt, stringent regulations, and controlling shareholder influence - The business is significantly impacted by fluctuations in raw material, energy, and freight costs, with a lead-lag effect on margins despite cost pass-through mechanisms[77][78][79] - The company has high customer concentration, with one customer accounting for about 10% of net revenues in 2023 and the top ten customers accounting for 42%[88] - Labor shortages and increased labor costs have decreased production output and increased operating expenses, with the company experiencing heightened employee turnover[93][94][95] - The company had $3,605 million of outstanding indebtedness as of December 31, 2023, with $1,680 million (47%) at variable interest rates, exposing it to interest rate risk[124][125] - The company is subject to stringent environmental regulations, including California's Plastic Pollution Prevention and Packaging Producer Responsibility Act, requiring a 25% reduction of plastics in single-use products by 2032[139][140] - Packaging Finance Limited (PFL) controls approximately 77% of the company's voting stock, enabling it to determine the outcome of all corporate actions requiring shareholder approval[172] - Due to PFL's majority control, the company is a "controlled company" under Nasdaq rules, exempt from certain corporate governance requirements like having a majority of independent directors[190] Unresolved Staff Comments The company reports no unresolved staff comments from the SEC - None[200] Cybersecurity The company maintains a cybersecurity risk management program overseen by the Audit Committee, with no material threats identified in 2023 - The Board of Directors has delegated cybersecurity risk management oversight to the Audit Committee[202] - The cybersecurity program is managed by the Senior Vice President for Business Transformation and a Chief Information Security Officer (CISO) with 42 years of experience[202][203] - In 2023, the company did not identify any cybersecurity threats that materially affected or are reasonably likely to materially affect its business, operations, or financial condition[205] Properties The company operates 56 manufacturing plants and 42 warehouses globally, with its corporate office in Lake Forest, Illinois - As of December 31, 2023, the company's global production and distribution network consisted of 56 manufacturing facilities and 42 warehouses[206] Legal Proceedings Material pending legal proceedings are disclosed in Note 14 to the consolidated financial statements - Details on material pending legal proceedings are incorporated by reference from Note 14 to the financial statements[208] Mine Safety Disclosures This item is not applicable to the company - Not applicable[209] PART II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock is listed on Nasdaq under "PTVE" since 2020, with two holders of record as of February 2024 - Common stock has been listed on the Nasdaq under the symbol "PTVE" since September 21, 2020[212] - As of February 23, 2024, there were two holders of record of the company's common stock[213] - The company completed its IPO on September 16, 2020, selling 41,026,000 shares at $14.00 per share for net proceeds of $546 million, with an additional $23 million from underwriters' option exercise[215] Reserved This item is reserved and not applicable - Not applicable[222] Management's Discussion and Analysis of Financial Condition and Results of Operations In 2023, net revenues decreased 11% to $5.51 billion, resulting in a $222 million net loss, while Adjusted EBITDA increased 7% to $840 million - In Q2 2023, the company combined its legacy Food Merchandising and Beverage Merchandising segments into a new Food and Beverage Merchandising segment, with all prior period information recast[226][227] - On February 29, 2024, the company announced a new "Footprint Optimization" restructuring plan to improve manufacturing and warehousing efficiency[234] - The Beverage Merchandising Restructuring, announced in March 2023, involved closing the Canton, NC mill and Olmsted Falls, OH facility to streamline operations[232][235] Summary of Results - 2023 vs 2022 | Metric | 2023 | 2022 | Change | Change % | | :--- | :--- | :--- | :--- | :--- | | Net Revenues | $5,510M | $6,220M | ($710M) | (11%) | | Net (Loss) Income from Cont. Ops | ($222M) | $319M | ($541M) | (170%) | | Adjusted EBITDA from Cont. Ops | $840M | $785M | $55M | 7% | | Capital Expenditures | $285M | $258M | $27M | 10% | Comparison of Results of Operations for 2023 with 2022 In 2023, net revenues decreased 11% to $5.51 billion, leading to a $222 million net loss, despite a 7% increase in Adjusted EBITDA to $840 million Consolidated Results (2023 vs. 2022) | (In millions) | 2023 | 2022 | Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Total net revenues | $5,510 | $6,220 | $(710) | (11)% | | Gross profit | $733 | $997 | $(264) | (26)% | | Operating income from continuing operations | $28 | $637 | $(609) | (96)% | | (Loss) income from continuing operations | $(222) | $319 | $(541) | (170)% | | Adjusted EBITDA from continuing operations | $840 | $785 | $55 | 7% | - The 11% decrease in net revenues was primarily due to the Canton mill closure, lower sales volume from a focus on value over volume, and the disposition of Beverage Merchandising Asia[274] - Cost of sales decreased by 9%, less than the revenue decline, due to $299 million in charges from the Beverage Merchandising Restructuring and higher manufacturing costs[275] - Restructuring charges increased by $113 million to $171 million, primarily due to the Beverage Merchandising Restructuring[277] - Foodservice segment Adjusted EBITDA was flat at $463 million, as lower material and transportation costs were offset by higher manufacturing costs and lower sales volume[285][287] - Food and Beverage Merchandising segment Adjusted EBITDA increased 10% to $453 million, driven by favorable pricing and lower transportation costs, offsetting higher manufacturing costs and lower volume[288][289] Comparison of Results of Operations for 2022 with 2021 In 2022, net revenues grew 14% to $6.22 billion, with income from continuing operations increasing to $319 million and Adjusted EBITDA rising 48% to $785 million Consolidated Results (2022 vs. 2021) | (In millions) | 2022 | 2021 | Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Total net revenues | $6,220 | $5,437 | $783 | 14% | | Gross profit | $997 | $574 | $423 | 74% | | Operating income from continuing operations | $637 | $119 | $518 | 435% | | Income from continuing operations | $319 | $33 | $286 | 867% | | Adjusted EBITDA from continuing operations | $785 | $531 | $254 | 48% | - The 14% revenue increase was driven by favorable pricing (18% impact) and acquisitions (6% impact), partially offset by lower volume (-8% impact) and dispositions (-2% impact)[293] - Other income increased by $261 million, primarily due to a $239 million gain on the sale of Beverage Merchandising Asia and a $27 million gain on the sale of the Naturepak Beverage joint venture[297] - Foodservice segment Adjusted EBITDA increased 60% to $463 million, driven by favorable pricing and the Fabri-Kal acquisition[304][306] - Food and Beverage Merchandising segment Adjusted EBITDA increased 49% to $412 million, primarily due to favorable pricing and the non-recurrence of prior year costs from Winter Storm Uri and Tropical Storm Fred[307][308] Liquidity and Capital Resources The company maintained $365 million in liquidity at year-end 2023, with operating cash flow increasing to $534 million, while reducing debt by $547 million Cash Flow Summary | (In millions) | 2023 | 2022 | | :--- | :--- | :--- | | Net cash provided by operating activities | $534 | $414 | | Net cash (used in) provided by investing activities | $(272) | $102 | | Net cash used in financing activities | $(633) | $(193) | Liquidity Position as of Year-End | (In millions) | Dec 31, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Cash and cash equivalents | $164 | $531 | | Availability under revolving credit facility | $201 | $200 | | Total Liquidity | $365 | $731 | - Total principal debt outstanding was $3,605 million as of December 31, 2023, of which $1,680 million is subject to variable interest rates[316] - In 2023, the company repaid an aggregate of $535 million of its U.S. term loans Tranche B-2[319] - The company anticipates incurring approximately $300 million in capital expenditures during 2024[326] Critical Accounting Policies, Estimates and Assumptions Critical accounting policies involve significant estimates for pension plans, goodwill impairment, long-lived assets, and income taxes, which can materially impact financial results - The most critical accounting policies and estimates relate to defined benefit pension plans, goodwill and indefinite-lived intangible assets, other long-lived assets, and income taxes[330] - The company's largest pension plan, the PPPE, is highly sensitive to changes in the discount rate; a 50-basis-point decrease would increase the defined benefit obligation by $55 million as of December 31, 2023[332][337] - Goodwill is tested for impairment annually using a quantitative assessment comparing the fair value of each reporting unit (Foodservice, Food Merchandising, Beverage Merchandising) to its carrying value, with no impairment recognized in 2023[339][340][343] - Significant judgment is required for income taxes, particularly in assessing the need for a valuation allowance against deferred tax assets, with deferred interest expense deductions being one of the largest[347][348] Quantitative and Qualitative Disclosures about Market Risk The company manages market risks from interest rates, foreign currency, and commodity prices through debt structure, swaps, and derivatives - The company is exposed to interest rate risk on its variable-rate borrowings, with $1,000 million in interest rate swap agreements as of December 31, 2023, to hedge a portion of this exposure[352][354] - A hypothetical 100 basis point (1%) increase in interest rates would result in an estimated $7 million increase in annual interest expense, based on debt levels as of December 31, 2023[355] - The company is exposed to commodity price risk for materials like resin, natural gas, electricity, wood, and diesel, periodically using futures and swaps to manage this risk[358][359] Financial Statements and Supplementary Data This section presents the audited consolidated financial statements for 2023, including key figures for revenues, net loss, assets, debt, and cash flows Consolidated Statement of (Loss) Income Highlights (2023) | (In millions, except per share) | 2023 | | :--- | :--- | | Total net revenues | $5,510 | | Gross profit | $733 | | Operating income from continuing operations | $28 | | Net (loss) income | $(220) | | Diluted (loss) per share | $(1.26) | Consolidated Balance Sheet Highlights (as of Dec 31, 2023) | (In millions) | 2023 | | :--- | :--- | | Total current assets | $1,589 | | Total assets | $6,395 | | Total current liabilities | $796 | | Long-term debt | $3,571 | | Total liabilities | $5,046 | | Total equity | $1,349 | Consolidated Statement of Cash Flows Highlights (2023) | (In millions) | 2023 | | :--- | :--- | | Net cash provided by operating activities | $534 | | Net cash used in investing activities | $(272) | | Net cash used in financing activities | $(633) | | Net decrease in cash | $(370) | Note 3. Acquisitions and Dispositions This note details the 2021 Fabri-Kal acquisition for $378 million and 2022 dispositions of Beverage Merchandising Asia and Naturepak Beverage - On October 1, 2021, the company acquired Fabri-Kal, a manufacturer of thermoformed plastic packaging, for a purchase price of $378 million[442] - The company sold its Beverage Merchandising Asia business on August 2, 2022, for proceeds of $336 million, recognizing a gain on sale of $239 million[451] - In Q3 2022, the company committed to selling its remaining closures businesses and recognized a related impairment charge of $56 million[453] Note 4. Restructuring, Asset Impairment and Other Related Charges This note details the 2023 Beverage Merchandising restructuring, incurring $470 million in charges from mill closures and workforce reductions - The Beverage Merchandising Restructuring announced on March 6, 2023, included the closure of the Canton, NC mill and the Olmsted Falls, OH facility, resulting in a workforce reduction of approximately 1,300 employees[457][459] Beverage Merchandising Restructuring Charges (2023) | Charge Type | Incurred in 2023 (in millions) | Total Expected (in millions) | | :--- | :--- | :--- | | Non-cash Charges | | | | Accelerated depreciation | $274 | $280 | | Other non-cash | $50 | $45 - $50 | | Cash Charges | | | | Severance & related costs | $43 | $45 | | Exit, disposal & transition | $103 | $105 - $115 | | Total Charges | $470 | $475 - $490 | Note 9. Debt As of December 31, 2023, total principal debt was $3.605 billion, a decrease from 2022, with $535 million repaid on term loans Debt Composition as of Dec 31, 2023 | Debt Instrument | Principal Amount (in millions) | | :--- | :--- | | Credit Agreement | $1,680 | | 4.000% Senior Secured Notes due 2027 | $1,000 | | 4.375% Senior Secured Notes due 2028 | $500 | | Pactiv Debentures | $384 | | Other | $41 | | Total Principal | $3,605 | - During 2023, the company repaid a total of $535 million of its U.S. term loans Tranche B-2[478] Scheduled Debt Maturities (as of Dec 31, 2023) | Year | Principal Amount (in millions) | | :--- | :--- | | 2024 | $15 | | 2025 | $233 | | 2026 | $706 | | 2027 | $1,183 | | 2028 | $1,457 | | Thereafter | $11 | Note 20. Segment Information In Q2 2023, segments were reorganized into Foodservice and Food and Beverage Merchandising, with the US accounting for 90.5% of 2023 net revenues - In Q2 2023, the company implemented a new operating structure, creating two reportable segments: Foodservice and Food and Beverage Merchandising, with all prior periods recast[568][571] Segment Performance (2023) | (In millions) | Foodservice | Food and Beverage Merchandising | | :--- | :--- | :--- | | Total segment net revenues | $2,571 | $3,020 | | Adjusted EBITDA | $463 | $453 | Net Revenues by Geography (2023) | Region | Net Revenues (in millions) | | :--- | :--- | | United States | $4,986 | | Rest of North America | $522 | | Other | $2 | | Total | $5,510 | Note 21. Subsequent Events On February 29, 2024, the company announced a "Footprint Optimization" restructuring plan, targeting $35 million in cost savings by 2026 - On February 29, 2024, the company announced a new restructuring plan called the "Footprint Optimization" to improve operating efficiency[588] - The plan is expected to result in estimated run-rate cost savings of $35 million by 2026[588] - Expected costs to implement the plan include $50-$65 million in cash charges, $20-$40 million in non-cash charges, and $40-$45 million in capital expenditures, primarily during 2024 and 2025[588] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants on accounting and financial disclosure - None[590] Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2023 - The CEO and CFO concluded that disclosure controls and procedures were effective as of December 31, 2023[591] - Management concluded that the company's internal control over financial reporting was effective as of December 31, 2023, based on the COSO framework[595] - During Q4 2023, a legacy ERP system was migrated to the company's primary ERP system as part of the Beverage Merchandising Restructuring[596] Other Information This section discloses the "Footprint Optimization" plan, a new board election, and executive compensation changes - The Footprint Optimization plan, approved February 28, 2024, is expected to incur total charges ranging from $70 million to $105 million[600] - On February 28, 2024, Linda K. Massman was elected to the Board of Directors and will serve on the Audit Committee[601] - On February 27-28, 2024, the Compensation Committee and Board approved compensation increases for the CEO and other executive officers, including base salary and incentive target adjustments for 2024[604] Disclosure Regarding Foreign Jurisdictions that Prevent Inspections This item is not applicable to the company - None[607] PART III Directors, Executive Officers and Corporate Governance Information on directors, executive officers, and corporate governance is incorporated by reference from the 2024 Proxy Statement - Information is incorporated by reference to the company's 2024 Proxy Statement[610] Executive Compensation Information on executive compensation is incorporated by reference from the company's 2024 Proxy Statement - Information is incorporated by reference to the company's 2024 Proxy Statement[613] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information on security ownership is incorporated by reference from the company's 2024 Proxy Statement - Information is incorporated by reference to the company's 2024 Proxy Statement[614] Certain Relationships and Related Transactions, and Director Independence Information on related party transactions and director independence is incorporated by reference from the 2024 Proxy Statement - Information is incorporated by reference to the company's 2024 Proxy Statement[615] Principal Accounting Fees and Services Information on principal accounting fees and services is incorporated by reference from the company's 2024 Proxy Statement - Information is incorporated by reference to the company's 2024 Proxy Statement[616] PART IV Exhibits and Financial Statement Schedules This section lists financial statements, schedules, and exhibits filed as part of the Annual Report on Form 10-K - This item contains the index to the financial statements and a list of all exhibits filed with the report[619][621] Form 10-K Summary The company has not provided a summary for Form 10-K in this section - None[627]