Ranpak Holdings Corp. — Q3 2023 Form 10-Q
Business context and reporting period. Ranpak provides paper-based protective packaging consumables, packaging systems and automation for e-commerce and industrial supply chains. This unaudited filing covers the three and nine months ended September 30, 2023; amounts are in U.S. dollars unless noted. Ranpak reported one reportable segment and an installed base of approximately 142,000 PPS systems, up 2.5% year over year.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Net revenue | $82.8 million | $77.8 million | $245.9 million | $247.1 million |
| Gross profit / margin | $31.5 million / 38.0% | $24.4 million / 31.4% | $89.2 million / 36.3% | $77.3 million / 31.3% |
| Operating income (loss) | $1.6 million | $(11.7) million | $(2.9) million | $(36.9) million |
| Net loss | $(3.3) million | $(8.7) million | $(17.8) million | $(34.1) million |
| Loss per share, basic and diluted | $(0.04) | $(0.11) | $(0.22) | $(0.42) |
- Revenue and mix: Q3 revenue rose 6.4% reported, but 1.9% on a constant-currency basis. Nine-month revenue declined 0.5% reported and 1.5% constant currency. Q3 growth in cushioning, void-fill and other sales was partly offset by lower wrapping revenue. For the nine months, cushioning and other sales increased, while void-fill and wrapping declined.
- Profitability: Gross profit improved as lower input costs, including paper, reduced cost of goods sold. SG&A fell 22.0% in Q3 and 25.8% year to date, primarily reflecting lower stock-based compensation expense, including reductions related to 2021 LTIP performance awards. Reported SG&A and earnings comparisons are materially affected by these compensation adjustments.
- Non-GAAP measures: EBITDA was $18.8 million in Q3 and $47.1 million year to date, versus $9.6 million and $23.9 million, respectively, in 2022. Constant-currency adjusted EBITDA (AEBITDA) was $18.0 million in Q3, up 8.4%, but $52.1 million year to date, down 3.3%. These are company-defined non-GAAP measures and should not be treated as substitutes for GAAP results or cash flow.
- Cash flow and investment: Nine-month operating cash flow was $23.0 million, compared with cash used of $9.5 million in 2022. Investing cash outflow was $32.0 million, including $34.9 million of capital expenditures, partly offset by $2.9 million from the sale of the Heerlen facility. Financing cash outflow was $1.4 million. Cash declined $10.7 million to $52.1 million. Operating cash flow less capital expenditures was approximately negative $11.9 million.
- Debt and liquidity: Debt including finance leases and before deferred financing costs was $400.0 million; cash was $52.1 million. The $45.0 million revolving facility had no borrowings and $43.7 million of net availability after letters of credit at September 30. The company reported compliance with financial covenants. Dollar and euro term-facility rates were 9.43% and 7.66%, respectively, up from 7.88% and 5.25% at year-end 2022.
Material changes and notable items
- Higher interest rates increased interest expense 28.3% in Q3 to $6.8 million and 21.1% for the first nine months to $18.4 million. The company also cited financing-cost amortization and the June 2023 maturity of a $50 million interest-rate swap.
- Management reduced estimated expense for performance-based stock awards by approximately $13.0 million in Q2 and a further $6.5 million in Q3. The filing reports a Q3 stock-based compensation expense credit of $5.1 million versus $6.7 million of expense in Q3 2022.
- Debt amendments replaced LIBOR-based terms with SOFR-based terms and extended the revolving facility maturity to June 2025. The term facility matures in June 2026. The company recorded approximately $5 million of expected exit fees associated with the amendments.
- New operating leases commenced for a 15-year Netherlands headquarters and manufacturing facility and a 10-year Shelton, Connecticut facility. The Heerlen property sale generated $2.9 million proceeds and a reported $0.2 million disposal loss.
Outlook, risks and controls
- No specific numerical revenue or earnings guidance is provided in the supplied filing text. Management expects interest on the credit facilities to increase and anticipates some continued gross-margin pressure in the medium term relative to historical margins. The company typically has its strongest sales in Q4 and slowest in Q1 because of e-commerce seasonality.
- Management cited lower economic activity, inflationary pressure on customer budgets, increased business sponsoring costs, and continuing volatility in European energy and paper markets. Key risks include paper supply and pricing, input-cost inflation, competition, customer price sensitivity, foreign exchange, and the effects of the war in Ukraine.
- Ranpak’s disclosure controls and procedures were deemed ineffective because of material weaknesses in internal control over financial reporting identified in its 2022 Form 10-K. Remediation is underway; management said it believed certain weaknesses could be remediated by year-end 2023, but noted timing could slip and effectiveness must be demonstrated through testing.
- The company reported no legal proceedings requiring disclosure and no contingency accruals for the periods presented. It stated that ordinary-course litigation and environmental matters were not expected to materially affect its financial condition, liquidity or cash flows.
Key facts for investors to verify
- Whether revenue and volume trends improve, particularly in wrapping and Europe/Asia; reported Q3 growth was stronger than constant-currency growth.
- How much margin improvement is sustainable after lower paper/input costs and whether cost increases can be passed on to customers.
- Whether the stock-award expense reversals are nonrecurring and how performance-award assumptions affect reported SG&A and earnings.
- Debt-service exposure to higher floating interest rates, swap coverage after the June 2023 swap maturity, covenant headroom and the approximately $5 million of expected exit fees.
- Whether operating cash flow can cover capital spending and debt service while cash balances are declining.
- Progress and independent testing of remediation for the material weaknesses in internal control over financial reporting.