Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Our discussion and analysis is intended to help the reader understand our results of operations and financial condition and is provided as an addition to, and should be read in connection with, our condensed consolidated financial statements and the accompanying notes included elsewhere in this Quarterly Report on Form 10-Q.
Our Company
We are a leading manufacturer and distributor of fresh foodservice and food merchandising products and fresh beverage cartons in North America. We produce a broad range of on-trend and feature-rich products that protect, package and display food and beverages for today’s consumers. Our products include containers, drinkware (such as hot and cold cups and lids), cartons for fresh refrigerated beverage products, tableware, meat and poultry trays, paper products, liquid packaging board, serviceware, prepared food trays and egg cartons. Our products, many of which are made with recycled, recyclable or renewable materials, are sold to a diversified mix of customers, including restaurants, foodservice distributors, retailers, food and beverage producers, packers and processors. As of March 31, 2023, we report our business in three reportable segments: Foodservice, Food Merchandising and Beverage Merchandising. Refer to Note 18, Segment Information, for additional details.
Business Environment
During the first quarter of 2023, we experienced a continued moderation in consumer demand for certain of our products, primarily driven by sustained high levels of inflation and general macroeconomic uncertainty. While we have not seen a material economic contraction to-date, these pressures may continue to impact consumer demand and thus our customers’ purchasing decisions and order patterns throughout the remainder of 2023.
Our input costs have largely stabilized and have begun to moderate in certain circumstances as compared to recent periods, and our pricing strategy continues to provide us with flexibility to effectively manage our margins through cost recovery mechanisms and strategic competitive pricing.
We also believe that through the Beverage Merchandising Restructuring, we will continue to solidify our leadership position in large, growing end markets while prioritizing our distinctive core strengths. In this dynamic environment, we remain focused on servicing our customers and improving manufacturing productivity across our business.
Elevated interest rates and the resulting volatility within the capital markets over recent periods have created uncertainty with respect to the economic outlook. If economic conditions were to deteriorate, a further decline in consumer spending may result, which could lead to a meaningful decline in demand for our products in the remainder of 2023 and beyond.
Recent Developments and Items Impacting Comparability
Beverage Merchandising Restructuring
On March 6, 2023, we announced the Beverage Merchandising Restructuring, a plan approved by our Board of Directors to take significant restructuring actions related to our Beverage Merchandising operations. We expect these actions to increase our production efficiency, streamline our management structure and reduce our ongoing capital expenditures and overhead costs.
We expect that the Beverage Merchandising Restructuring will enable us to maintain our strong position in the liquid packaging market by increasing our overall productivity over time and optimizing our manufacturing footprint. We also expect it to result in our exit from the uncoated freesheet paper market.
As part of these restructuring actions, we implemented a new operating and reporting structure during the second quarter of 2023. Therefore, as of the second quarter, we will begin to analyze the results of our business through the following reportable segments: Foodservice; and Food and Beverage Merchandising. As a result of this change, beginning with our Quarterly Report on Form 10-Q for the quarter ending June 30, 2023, we will report our results in these two reportable segments.
We also continue to explore strategic alternatives for our Pine Bluff, Arkansas mill and our Waynesville, North Carolina facility. We have not set a timetable in relation to this process.
The operations impacted by the Beverage Merchandising Restructuring did not qualify for presentation as discontinued operations.
Refer to Note 3, Restructuring, Asset Impairment and Other Related Charges, and Note 18, Segment Information, for additional details.
24
Dispositions
On January 4, 2022, we entered into a definitive agreement with SIG Schweizerische Industrie-Gesellschaft GmbH to sell Beverage Merchandising Asia. The transaction closed on August 2, 2022, and we received proceeds of $336 million.
During 2022, we committed to a plan to sell our remaining closures businesses included in the Other operating segment. We completed the sale of a substantial portion of these businesses on October 31, 2022, and the remaining operations in the first quarter of 2023, all for an immaterial amount.
On March 29, 2022, we completed the sale of our equity interests in Naturepak Beverage, our 50% joint venture with Naturepak Limited, to affiliates of Elopak ASA. We received proceeds of $47 million and recognized a gain on the sale of our equity interests of $27 million during the three months ended March 31, 2022.
None of these dispositions qualify for presentation as discontinued operations.
Pension Partial Settlement Transactions
On September 20, 2022 and February 24, 2022, using PPPE assets, we purchased non-participating group annuity contracts from insurance companies and transferred a portion of the PPPE’s projected benefit obligations. In each instance, the respective insurance companies have assumed responsibility for pension benefits and annuity administration. The following table provides details regarding each transaction:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions) |
|
|
|
|
Transaction Date |
|
Reporting Period |
|
Assets Transferred |
|
|
Projected Benefit Obligations Transferred |
|
|
Settlement Gain Recognized |
|
|
Number of Participants Impacted |
|
September 20, 2022 |
|
Q3 2022 |
|
$ |
629 |
|
|
$ |
656 |
|
|
$ |
47 |
|
|
|
10,200 |
|
February 24, 2022 |
|
Q1 2022 |
|
|
1,260 |
|
|
|
1,257 |
|
|
|
10 |
|
|
|
13,300 |
|
Non-GAAP Measures – Adjusted EBITDA
In addition to financial measures determined in accordance with GAAP, we make use of the non-GAAP financial measure Adjusted EBITDA to evaluate and manage our business and to plan and make near-term and long-term operating and strategic decisions.
Adjusted EBITDA is defined as net (loss) income calculated in accordance with GAAP, plus the sum of income tax expense, net interest expense, depreciation and amortization and further adjusted to exclude certain items, including but not limited to restructuring, asset impairment and other related charges, gains or losses on the sale of businesses and noncurrent assets, non-cash pension income or expense, operational process engineering-related consultancy costs, business acquisition and integration costs and purchase accounting adjustments, unrealized gains or losses on derivatives, foreign exchange gains or losses on cash and gains or losses on certain legal settlements.
We present Adjusted EBITDA because it is a key measure used by our management team to evaluate our operating performance, generate future operating plans, make strategic decisions and incentivize and reward our employees. Accordingly, we believe that Adjusted EBITDA provides useful information to investors and others in understanding and evaluating our operating results in the same manner as our management team and Board of Directors. We also believe that using Adjusted EBITDA facilitates operating performance comparisons on a period-to-period basis because it excludes variations primarily caused by changes in the items noted above. In addition, our chief operating decision maker, who is our President and Chief Executive Officer, uses Adjusted EBITDA of each reportable segment to evaluate the operating performance of such segments.
Our use of Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP. Instead, you should consider it alongside other financial performance measures, including our net (loss) income and other GAAP results. In addition, in evaluating Adjusted EBITDA, you should be aware that in the future we will incur expenses such as those that are the subject of adjustments made in deriving Adjusted EBITDA, and you should not infer from our presentation of Adjusted EBITDA that our future results will not be affected by
25
these expenses or any unusual or non-recurring items. The following is a reconciliation of our net (loss) income, the most directly comparable GAAP financial measure, to Adjusted EBITDA for each of the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31, |
|
(In millions) |
|
2023 |
|
|
2022 |
|
Net (loss) income (GAAP) |
|
$ |
(133 |
) |
|
$ |
43 |
|
Income tax (benefit) expense |
|
|
(19 |
) |
|
|
36 |
|
Interest expense, net |
|
|
63 |
|
|
|
49 |
|
Depreciation and amortization (excluding restructuring-related charges) |
|
|
84 |
|
|
|
84 |
|
Beverage Merchandising Restructuring charges(1) |
|
|
187 |
|
|
|
— |
|
Other restructuring and asset impairment charges (reversals)(2) |
|
|
(1 |
) |
|
|
— |
|
Gain on sale of businesses and noncurrent assets(3) |
|
|
— |
|
|
|
(27 |
) |
Non-cash pension expense (income)(4) |
|
|
1 |
|
|
|
(10 |
) |
Operational process engineering-related consultancy costs(5) |
|
|
— |
|
|
|
3 |
|
Business integration costs6) |
|
|
— |
|
|
|
4 |
|
Unrealized losses (gains) on commodity derivatives |
|
|
2 |
|
|
|
(5 |
) |
Foreign exchange losses on cash |
|
|
4 |
|
|
|
2 |
|
Costs associated with legacy facility(7) |
|
|
— |
|
|
|
3 |
|
Other |
|
|
1 |
|
|
|
— |
|
Adjusted EBITDA (Non-GAAP) |
|
$ |
189 |
|
|
$ |
182 |
|
(1)Reflects charges related to the Beverage Merchandising Restructuring, including $90 million of accelerated depreciation expense. Refer to Note 3, Restructuring, Asset Impairment and Other Related Charges, for additional details.
(2)Reflects a partial reversal of the initial impairment charge taken in 2022 associated with our remaining closures businesses. Refer to Note 3, Restructuring, Asset Impairment and Other Related Charges, for additional details.
(3)Reflects the gain from the sale of our equity interests in Naturepak Beverage. Refer to Note 2, Dispositions, for additional details.
(4)Reflects the non-cash pension expense (income) related to our employee benefit plans, including the pension settlement gain of $10 million recognized during the three months ended March 31, 2022. Refer to Note 10, Employee Benefits, for additional details.
(5)Reflects the costs incurred to evaluate and improve the efficiencies of our manufacturing and distribution operations.
(6)Reflects integration costs related to Fabri-Kal.
(7)Reflects costs related to a closed facility that was sold prior to our acquisition of the entity.
Results of Operations
Three Months Ended March 31, 2023 and 2022
Consolidated Results
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31, |
|
(In millions, except for %) |
|
2023 |
|
|
% of Revenue |
|
|
2022 |
|
|
% of Revenue |
|
|
Change |
|
|
% Change |
|
Net revenues |
|
$ |
1,431 |
|
|
|
100 |
% |
|
$ |
1,495 |
|
|
|
100 |
% |
|
$ |
(64 |
) |
|
|
(4 |
)% |
Cost of sales |
|
|
(1,316 |
) |
|
|
(92 |
)% |
|
|
(1,263 |
) |
|
|
(84 |
)% |
|
|
(53 |
) |
|
|
(4 |
)% |
Gross profit |
|
|
115 |
|
|
|
8 |
% |
|
|
232 |
|
|
|
16 |
% |
|
|
(117 |
) |
|
|
(50 |
)% |
Selling, general and administrative expenses |
|
|
(130 |
) |
|
|
(9 |
)% |
|
|
(142 |
) |
|
|
(9 |
)% |
|
|
12 |
|
|
|
8 |
% |
Restructuring, asset impairment and other related charges |
|
|
(73 |
) |
|
|
(5 |
)% |
|
|
— |
|
|
|
— |
% |
|
|
(73 |
) |
|
NM |
|
Other income, net |
|
|
— |
|
|
|
— |
% |
|
|
28 |
|
|
|
2 |
% |
|
|
(28 |
) |
|
NM |
|
Operating (loss) income |
|
|
(88 |
) |
|
|
(6 |
)% |
|
|
118 |
|
|
|
8 |
% |
|
|
(206 |
) |
|
NM |
|
Non-operating (expense) income, net |
|
|
(1 |
) |
|
|
— |
% |
|
|
10 |
|
|
|
1 |
% |
|
|
(11 |
) |
|
NM |
|
Interest expense, net |
|
|
(63 |
) |
|
|
(4 |
)% |
|
|
(49 |
) |
|
|
(3 |
)% |
|
|
(14 |
) |
|
|
(29 |
)% |
(Loss) income before tax |
|
|
(152 |
) |
|
|
(11 |
)% |
|
|
79 |
|
|
|
5 |
% |
|
|
(231 |
) |
|
NM |
|
Income tax benefit (expense) |
|
|
19 |
|
|
|
1 |
% |
|
|
(36 |
) |
|
|
(2 |
)% |
|
|
55 |
|
|
NM |
|
Net (loss) income |
|
$ |
(133 |
) |
|
|
(9 |
)% |
|
$ |
43 |
|
|
|
3 |
% |
|
$ |
(176 |
) |
|
NM |
|
Adjusted EBITDA(1) |
|
$ |
189 |
|
|
|
13 |
% |
|
$ |
182 |
|
|
|
12 |
% |
|
$ |
7 |
|
|
|
4 |
% |
(1)Adjusted EBITDA is a non-GAAP measure. For details, refer to Non-GAAP Measures - Adjusted EBITDA, including a reconciliation between net (loss) income and Adjusted EBITDA.
26
NM indicates that the calculation is “not meaningful”.
Components of Change in Reportable Segment Net Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Price/Mix |
|
|
Volume |
|
|
Dispositions |
|
|
FX |
|
|
Total |
|
Net revenues |
|
|
6 |
% |
|
|
(6 |
)% |
|
|
(4 |
)% |
|
|
— |
% |
|
|
(4 |
)% |
By reportable segment: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foodservice |
|
|
(1 |
)% |
|
|
(5 |
)% |
|
|
— |
% |
|
|
— |
% |
|
|
(6 |
)% |
Food Merchandising |
|
|
15 |
% |
|
|
(7 |
)% |
|
|
— |
% |
|
|
1 |
% |
|
|
9 |
% |
Beverage Merchandising |
|
|
7 |
% |
|
|
(6 |
)% |
|
|
(9 |
)% |
|
|
— |
% |
|
|
(8 |
)% |
Net Revenues. Net revenues for the three months ended March 31, 2023 decreased by $64 million, or 4%, to $1,431 million compared to the prior year period. The decrease was primarily due to lower sales volume and the impact from dispositions, primarily the disposition of Beverage Merchandising Asia on August 2, 2022. Lower sales volume was primarily due to a focus on value over volume in the Foodservice and Food Merchandising segments and the market softening amid inflationary pressures in the Beverage Merchandising and Food Merchandising segments. These decreases were partially offset by favorable pricing, due to pricing actions in the Food Merchandising and Beverage Merchandising segments and the contractual pass-through of higher material costs across all segments.
Cost of Sales. Cost of sales for the three months ended March 31, 2023 increased by $53 million, or 4%, to $1,316 million compared to the prior year period. The increase was primarily due to $112 million of charges related to the Beverage Merchandising Restructuring as well as higher manufacturing costs across all of our segments. These increases were partially offset by lower sales volume and the impact from dispositions, primarily the disposition of Beverage Merchandising Asia.
Selling, General and Administrative Expenses. Selling, general and administrative expenses for the three months ended March 31, 2023 decreased by $12 million, or 8%, to $130 million compared to the prior year period. The decrease was primarily due to lower employee-related costs.
Restructuring, Asset Impairment and Other Related Charges. Restructuring, asset impairment and other related charges for the three months ended March 31, 2023 included $74 million of charges related to the Beverage Merchandising Restructuring. Refer to Note 3, Restructuring, Asset Impairment and Other Related Charges, for additional details.
Other Income, Net. Other income, net for the three months ended March 31, 2022 included a gain of $27 million related to the sale of Naturepak Beverage.
Non-operating (Expense) Income, Net. Non-operating (expense) income, net, for the three months ended March 31, 2023 was $1 million of expense compared to $10 million of income for the three months ended March 31, 2022. The change was primarily due to a $10 million pension settlement gain recognized in the prior year period. Refer to Note 10, Employee Benefits, for additional details.
Interest Expense, Net. Interest expense, net, for the three months ended March 31, 2023 increased by $14 million, or 29%, to $63 million, compared to the prior year period. The increase was primarily due to an increase in the interest rate on our floating rate term loans. Refer to Note 8, Debt, for additional details.
Income Tax Benefit (Expense). During the three months ended March 31, 2023, we recognized a tax benefit of $19 million on a loss before tax of $152 million, compared to tax expense of $36 million on income before tax of $79 million for the prior year period. The effective tax rate was driven primarily by the inability to recognize a tax benefit on all interest expense. The effective tax rate during the prior year period was primarily attributable to a $14 million discrete expense from the sale of our equity interests in Naturepak Beverage.
Adjusted EBITDA. Adjusted EBITDA for the three months ended March 31, 2023 increased by $7 million, or 4%, to $189 million compared to the prior year period. The increase reflects favorable pricing, net of material costs passed through, and lower transportation costs, partially offset by higher manufacturing costs and lower sales volume. Higher costs included $15 million related to a scheduled cold mill outage.
27
Segment Information
Foodservice
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31, |
|
(In millions, except for %) |
|
2023 |
|
|
2022 |
|
|
Change |
|
|
% Change |
|
Total segment net revenues |
|
$ |
654 |
|
|
$ |
697 |
|
|
$ |
(43 |
) |
|
|
(6 |
)% |
Segment Adjusted EBITDA |
|
$ |
113 |
|
|
$ |
116 |
|
|
$ |
(3 |
) |
|
|
(3 |
)% |
Segment Adjusted EBITDA margin |
|
|
17 |
% |
|
|
17 |
% |
|
|
|
|
|
|
Total Segment Net Revenues. Foodservice total segment net revenues for the three months ended March 31, 2023 decreased by $43 million, or 6%, to $654 million compared to the prior year period. The decrease was primarily due to lower sales volume due to a continued focus on value over volume.
Adjusted EBITDA. Foodservice Adjusted EBITDA for the three months ended March 31, 2023 decreased by $3 million, or 3%, to $113 million compared to the prior year period. The decrease was primarily due to higher manufacturing costs and lower sales volume, mostly offset by lower material costs, net of costs passed through, and lower transportation costs.
Food Merchandising
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31, |
|
(In millions, except for %) |
|
2023 |
|
|
2022 |
|
|
Change |
|
|
% Change |
|
Total segment net revenues |
|
$ |
440 |
|
|
$ |
404 |
|
|
$ |
36 |
|
|
|
9 |
% |
Segment Adjusted EBITDA |
|
$ |
93 |
|
|
$ |
60 |
|
|
$ |
33 |
|
|
|
55 |
% |
Segment Adjusted EBITDA margin |
|
|
21 |
% |
|
|
15 |
% |
|
|
|
|
|
|
Total Segment Net Revenues. Food Merchandising total segment net revenues for the three months ended March 31, 2023 increased by $36 million, or 9%, to $440 million compared to the prior year period. The increase was primarily due to favorable pricing, due to pricing actions taken to offset higher input costs including pricing benefit from the extension of key business, and the contractual pass-through of higher material costs, partially offset by lower sales volume, primarily due to a focus on value over volume and the market softening amid inflationary pressures.
Adjusted EBITDA. Food Merchandising Adjusted EBITDA for the three months ended March 31, 2023 increased by $33 million, or 55%, to $93 million compared to the prior year period. The increase was primarily due to favorable pricing, net of material costs passed through, partially offset by higher manufacturing costs and lower sales volume.
Beverage Merchandising
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31, |
|
(In millions, except for %) |
|
2023 |
|
|
2022 |
|
|
Change |
|
|
% Change |
|
Total segment net revenues |
|
$ |
370 |
|
|
$ |
403 |
|
|
$ |
(33 |
) |
|
|
(8 |
)% |
Segment Adjusted EBITDA |
|
$ |
1 |
|
|
$ |
24 |
|
|
$ |
(23 |
) |
|
|
(96 |
)% |
Segment Adjusted EBITDA margin |
|
|
— |
% |
|
|
6 |
% |
|
|
|
|
|
|
Total Segment Net Revenues. Beverage Merchandising total segment net revenues for the three months ended March 31, 2023 decreased by $33 million, or 8%, to $370 million compared to the prior year period. The decrease was primarily due to the impact from the disposition of Beverage Merchandising Asia on August 2, 2022 and lower sales volume primarily due to the market softening amid inflationary pressures. These decreases were partially offset by favorable pricing, due to pricing actions taken to offset higher input costs and the contractual pass-through of higher material costs.
Adjusted EBITDA. Beverage Merchandising Adjusted EBITDA for the three months ended March 31, 2023 decreased by $23 million, or 96%, to $1 million compared to the prior year period. The decrease was primarily due to higher manufacturing costs and the impact from the disposition of Beverage Merchandising Asia, partially offset by favorable pricing, net of material costs passed through. Higher costs included $15 million related to a scheduled cold mill outage.
28
Liquidity and Capital Resources
We manage our capital structure in an effort to most effectively execute our strategic priorities and maximize shareholder value. We believe that we have sufficient liquidity to support our ongoing operations and to re-invest in our business to drive future growth. Our projected operating cash flows, cash on-hand and available capacity under our revolving credit facility are our primary sources of liquidity for the next 12 months. We expect our liquidity to fund capital expenditures, payments of interest and principal on our debt, cash-based restructuring charges and distributions to shareholders that require approval by our Board of Directors. Additionally, we may utilize portions of our excess cash to repurchase certain amounts of our long-term debt prior to maturity depending on market conditions, among other factors.
Cash flows
Our cash flows for the three months ended March 31, 2023 and 2022 were as follows:
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31, |
|
(In millions) |
|
2023 |
|
|
2022 |
|
Net cash provided by operating activities |
|
$ |
88 |
|
|
$ |
120 |
|
Net cash used in investing activities |
|
|
(60 |
) |
|
|
(5 |
) |
Net cash used in financing activities |
|
|
(135 |
) |
|
|
(27 |
) |
Effect of exchange rate on cash and cash equivalents |
|
|
1 |
|
|
|
— |
|
Net (decrease) increase in cash and cash equivalents |
|
$ |
(106 |
) |
|
$ |
88 |
|
Net cash flows were an outflow of $106 million in the current year period compared to an inflow of $88 million in the prior year period primarily due to $110 million of early debt repayments and repurchases in January and February 2023, proceeds received for the sale of Naturepak Beverage during the prior year period and lower net cash provided by operating activities. Net cash provided by operating activities decreased as compared to the prior year period primarily due to higher incentive compensation payments as well as higher cash interest payments, partially offset by the strategic inventory build during the prior year period that did not recur.
During the three months ended March 31, 2023, our primary source of cash was $88 million of net cash provided by operating activities. The net cash provided by operating activities reflects income from operations, partially offset by $44 million of cash interest payments and $7 million of cash taxes. Our primary uses of cash for the same period were $110 million of early debt repayments and repurchases, $63 million of capital expenditures and $18 million of dividends paid.
During the three months ended March 31, 2022, our primary sources of cash were $120 million of net cash provided by operating activities and $47 million of proceeds from the sale of Naturepak Beverage. The net cash provided by operating activities reflects income from operations, partially offset by $22 million of cash interest payments and $19 million of cash taxes. Our primary uses of cash for the same period were $50 million of capital expenditures and $18 million of dividends paid.
Dividends
During each of the three months ended March 31, 2023 and 2022, we paid cash dividends of $18 million. On May 5, 2023, our Board of Directors declared a dividend of $0.10 per share to be paid on June 15, 2023 to shareholders of record as of May 31, 2023.
Our Credit Agreement and Notes limit the ability to make dividend payments, subject to specified exceptions. Our Board of Directors must review and approve future dividend payments and will determine whether to declare additional dividends based on our operating performance, expected future cash flows, debt levels, liquidity needs and investment opportunities.
Financing and capital resources
As of March 31, 2023, we had $4,045 million of total principal amount of borrowings. Refer to Note 8, Debt, for additional details. Of our total debt, $2,115 million is subject to variable interest rates, representing borrowings drawn under our Credit Agreement. As of March 31, 2023, the underlying one-month LIBO rate for amounts borrowed under our Credit Agreement was 4.84%. During the fourth quarter of 2022, we entered into derivative financial instruments with large institutions that fixed the LIBO rate at a weighted average rate of 4.12% for an aggregate notional amount of $1,000 million to hedge a portion of the interest rate exposure resulting from our U.S. term loans and classified the instruments as cash flow hedges. Our cash flow hedge contracts mature in October 2025.
During January and February of 2023, we repaid and repurchased an aggregate of $110 million of our U.S. term loans Tranche B-2.
29
In April 2023, we amended the Credit Agreement and our interest rate swap agreements, replacing the LIBOR-based reference rate with a Secured Overnight Financing Rate (“SOFR”) based reference rate, effective for interest and swap payments for the period commencing April 28, 2023. The weighted average fixed rate of 4.120% for our interest rate swap agreements was unchanged as a result of these amendments.
Based on the one-month LIBO rate as of March 31, 2023, and including the impact of our interest rate swap agreements, our 2023 annual cash interest obligations on our borrowings are expected to be approximately $260 million.
Under the Credit Agreement, we may incur additional indebtedness either by satisfying certain incurrence tests or by incurring such additional indebtedness under certain specific categories of permitted debt. Incremental senior secured indebtedness under the Credit Agreement and senior secured or unsecured notes in lieu thereof are permitted to be incurred up to an aggregate principal amount of $750 million subject to pro forma compliance with the Credit Agreement’s total secured leverage ratio covenant. In addition, we may incur senior secured indebtedness in an unlimited amount as long as our total secured leverage ratio does not exceed 4.50 to 1.00 on a pro forma basis, and (in the case of incremental senior secured indebtedness under the Credit Agreement only) we are in pro forma compliance with the Credit Agreement’s total secured leverage ratio covenant. The incurrence of unsecured indebtedness, including the issuance of senior notes, and unsecured subordinated indebtedness is also permitted (subject to the terms of the Credit Agreement) if the fixed charge coverage ratio is at least 2.00 to 1.00 on a pro forma basis.
Under the respective indentures governing the Notes, we may incur additional indebtedness either by satisfying certain incurrence tests or by incurring such additional indebtedness under certain specific categories of permitted debt. Indebtedness may be incurred under the incurrence tests if the fixed charge coverage ratio is at least 2.00 to 1.00 on a pro forma basis or the consolidated total leverage ratio is no greater than 5.50 to 1.00 and the liens securing first lien secured indebtedness do not exceed a 4.10 to 1.00 consolidated secured first lien leverage ratio.
We are required to make annual prepayments of term loans with up to 50% of excess cash flow (which will be reduced to 25% or 0% if specified senior secured first lien leverage ratios are met) as determined in accordance with the Credit Agreement. No excess cash flow prepayments were made in 2022 or will be due in 2023 for the year ended December 31, 2022.
Liquidity and working capital
Our liquidity position is summarized in the table below:
|
|
|
|
|
|
|
|
|
(In millions, except for current ratio) |
|
As of March 31, 2023 |
|
|
As of December 31, 2022 |
|
Cash and cash equivalents(1) |
|
$ |
427 |
|
|
$ |
531 |
|
Availability under revolving credit facility |
|
|
200 |
|
|
|
200 |
|
|
|
$ |
627 |
|
|
$ |
731 |
|
Working capital(2) |
|
|
1,153 |
|
|
|
1,305 |
|
Current ratio |
|
|
2.3 |
|
|
|
2.4 |
|
(1)Excludes $2 million of cash classified as held for sale as of December 31, 2022.
(2)Includes $6 million of assets and $3 million of liabilities classified as held for sale as of December 31, 2022.
As of March 31, 2023, we had $427 million of cash and cash equivalents on-hand. We also had $200 million available for drawing under our revolving credit facility, net of $50 million utilized in the form of letters of credit under the facility. Our next debt maturity is $217 million of Pactiv Debentures due in December 2025, excluding amortization payments related to our U.S. term loans tranche B-3 under our Credit Agreement.
30
We believe that we have sufficient liquidity to support our ongoing operations in the next 12 months and to invest in future growth to create further value for our shareholders. Our primary drivers of decreased liquidity for the three months ended March 31, 2023 were $110 million of debt repayments and repurchases, $63 million of capital expenditures and $18 million of dividends paid. These drivers of decreased liquidity were partially offset by net operating cash flows of $88 million during the three months ended March 31, 2023. We currently anticipate incurring a total of approximately $280 million in capital expenditures and cash restructuring charges in the range of $120 million to $130 million during 2023.
During the three months ended March 31, 2023, our working capital decreased $152 million, or 12%, primarily due to $110 million of early debt repayments and repurchases, capital expenditures and dividend payments, which were partially offset by income from operations. Our working capital position provides us the flexibility for further consideration of strategic initiatives, including reinvestment in our business and deleveraging of our balance sheet. As a result, we may utilize portions of our excess cash to repurchase certain amounts of our long-term debt prior to maturity depending on market conditions, among other factors.
Our ability to borrow under our revolving credit facility or to incur additional indebtedness may be limited by the terms of such indebtedness or other indebtedness, including the Credit Agreement and the Notes. The Credit Agreement and the respective indentures governing the Notes generally allow our subsidiaries to transfer funds in the form of cash dividends, loans or advances within the Company.
Other than short-term leases executed in the normal course of business, we have no material off-balance sheet obligations.
Critical Accounting Policies, Estimates and Assumptions
The most critical accounting policies and estimates are those that are most important to the portrayal of our financial condition and results of operations and require us to make the most difficult and subjective judgments, often estimating the outcome of future events that are inherently uncertain. Our significant accounting policies are described in Note 2, Summary of Significant Accounting Policies, to our consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2022. Our critical accounting estimates are described in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2022.
Recent Accounting Pronouncements
New accounting standards that we have recently adopted, as well as accounting standards that have been recently issued but not yet adopted by us, is included in Note 1, Nature of Operations and Basis of Presentation.
31