Ranpak Holdings Corp. — Q3 2022 Form 10-Q
Reporting period: Unaudited results for the three and nine months ended September 30, 2022, compared with the same periods in 2021. Ranpak provides protective packaging systems, paper consumables and automation solutions. Amounts are in U.S. dollars; financial statement amounts are in millions unless noted.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net revenue | $77.8 | $97.1 | $247.1 | $274.8 |
| Gross profit / margin | $24.4 / 31.4% | $38.0 / 39.1% | $77.3 / 31.3% | $110.0 / 40.0% |
| Operating income (loss) | $(11.7) | $2.3 | $(36.9) | $11.1 |
| Net income (loss) | $(8.7) | $(1.4) | $(34.1) | $(0.3) |
| EBITDA (non-GAAP) | $9.6 | $22.3 | $23.9 | $69.4 |
| Adjusted EBITDA, constant currency (non-GAAP) | $16.6 | $28.5 | $53.9 | $82.1 |
- Revenue and margins: Q3 revenue fell 19.9% year over year; constant-currency revenue fell 12.0%. Nine-month revenue fell 10.1% reported and 3.4% at constant currency. Gross margin contracted sharply in both periods.
- Revenue mix and geography: Q3 declines affected cushioning, void-fill and wrapping. Europe/Asia revenue was $44.4 million, down 25.8% reported, including currency effects; North America was $33.4 million, down 10.5%. For the nine months, Europe/Asia revenue was down 14.5% reported and North America down 2.5%.
- Cash flow: Operating cash flow was $(9.5) million for the first nine months, versus $40.8 million generated in 2021. Investing cash flow was $(27.1) million, including $34.0 million of capital expenditures, partly offset by $10.0 million received from settlement of net investment hedges. Financing cash flow was $(4.3) million. Cash declined $42.6 million to $61.3 million.
- Liquidity and debt: Current assets were $164.4 million and current liabilities $46.4 million. Long-term debt on the balance sheet was $379.6 million; the filing reports $384.7 million of debt including finance leases and excluding deferred financing costs, with $2.0 million classified as short-term. No revolving borrowings were outstanding; $43.2 million of revolving capacity remained available after letters of credit. The company reported compliance with financial covenants.
- Interest and shares: Q3 interest expense was $5.3 million and nine-month expense $15.2 million. The dollar term facility’s stated rate rose to 6.32% from 3.85% at year-end 2021. Loss per share was $(0.11) for Q3 and $(0.42) for the nine months.
Material changes and management commentary
- Management attributed weaker sales to lower economic activity, reduced e-commerce use as economies reopened, inflation pressure on consumer and corporate budgets, and tighter customer inventory management, particularly amid European uncertainty. Foreign exchange was a significant reported-revenue headwind.
- For the nine-month period, the global ERP implementation affected operations through transition downtime, processing and shipping inefficiencies, and delayed price increases. Management also cited Omicron-related limits on customer visits in Q1; that impact waned in subsequent quarters.
- Paper and other manufacturing input costs pressured margins. Ranpak implemented additional pricing actions in Q3, but said it expected some gross-margin pressure in the medium term and could not predict how much cost inflation it could pass on to customers. Management reported some stabilization in North American paper inflation, while European pricing conditions remained unsettled, partly due to energy-market volatility.
- SG&A rose 22.6% for the first nine months, driven principally by stock compensation, employee costs and ERP implementation expenses. Management said lower volumes and continued margin pressure led to headcount reductions and deferral of certain initiatives later in 2022.
- Ranpak recorded approximately $3.9 million of non-operating unrealized gain on an investment in a small private business. Interim impairment testing, triggered by declining markets and the share-price decline, found no impairment. However, management said the European goodwill reporting unit’s fair value was close to carrying value; a 92-basis-point lower long-term growth rate or 74-basis-point higher discount rate in the sensitivity analysis would have resulted in an impairment charge.
Outlook, risks and contingencies
- The filing provides no specific revenue, earnings or cash-flow guidance. Management said cash and available revolving capacity were expected to cover current requirements, while noting that future capital needs depend on multiple factors and that financing could become more difficult or costly.
- Key disclosed risks include paper supply and pricing, inflation in labor, energy and freight, reliance on suppliers, customer sensitivity to price increases, competition, changing consumer preferences, foreign exchange, and the effects of the Ukraine conflict and COVID-19. Ranpak said it eliminated its remaining Russian-sourced paper products in Q3 2022.
- Interest-rate exposure is material: management stated that a hypothetical 100-basis-point change in applicable base rates would have affected nine-month cash interest expense by $5.9 million. Debt and swaps referenced USD LIBOR tenors scheduled to transition in June 2023; the filing said the transition’s effects could adversely affect interest obligations.
- A $50.0 million Class A share repurchase program was authorized in July 2022, with a 36-month term; timing and amount are discretionary and subject to debt restrictions. The filing does not state that repurchases had occurred.
- Ordinary-course litigation and environmental matters were disclosed, with no related accruals considered necessary. Management believed known contingencies would not materially affect financial condition, liquidity or cash flows. Disclosure controls were deemed effective; the company continued to assess controls affected by the ERP implementation.
Important facts for investors to verify
- Whether pricing actions and any easing in paper costs can stabilize gross margin while sales volumes remain pressured.
- Whether the ERP transition’s operating and financial effects have been resolved, and whether delayed pricing or fulfillment issues recur.
- Cash generation, capital spending and liquidity trends, including use of revolving capacity and compliance with debt covenants.
- Debt refinancing and interest-rate exposure as rates rise and LIBOR-linked debt and swaps transition in 2023.
- Assumptions behind the European goodwill valuation and whether continued weak markets could trigger impairment.
- Execution and funding implications of the $50.0 million repurchase authorization alongside the company’s investment and liquidity needs.