Ranpak Holdings Corp. — Q1 2020 Form 10-Q
Business context and reporting period. Ranpak provides paper-based protective packaging systems and consumables for e-commerce and industrial supply chains. This unaudited report covers the three months ended March 31, 2020. The company’s June 2019 acquisition created a new accounting basis, so Q1 2020 “Successor” results and Q1 2019 “Predecessor” results are not directly comparable; management also presents selected pro forma comparisons.
Key financial results
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Net sales | $63.4 million | $66.1 million |
| Gross profit / margin | $26.8 million / 42.3% | $28.2 million / 42.7% |
| Operating income (loss) | ($0.6) million | $2.2 million |
| Net loss | ($3.6) million | ($3.4) million |
| Net loss per Class A and C share | ($0.05) | Not directly comparable |
| Operating cash flow | $11.6 million | $13.6 million |
| Capital expenditures | $10.3 million | $6.5 million |
- Reported sales declined 4.1%. Paper revenue was $53.4 million, machine lease revenue $8.5 million, and other revenue $1.5 million.
- SG&A rose 37.1% to $19.6 million, attributed to severance, non-cash stock compensation, growth initiatives, and public-company costs. Depreciation and amortization fell 29.9% to $7.5 million; interest expense fell 23.5% to $6.2 million.
- Management reported EBITDA of $15.4 million and adjusted EBITDA of $18.1 million, both non-GAAP measures. Adjusted EBITDA was down 8.1% from $19.7 million on management’s pro forma comparison.
- Cash and equivalents were $20.2 million at March 31, versus $19.7 million at year-end. Total debt was $424.6 million, including $1.5 million current; long-term debt was $415.5 million net of financing costs and current portion. The $45 million revolving facility was undrawn. The reported term-loan interest rate was 4.74%.
- Current assets were $68.8 million and current liabilities $28.9 million. Operating cash flow less reported capital expenditures was approximately $1.3 million.
Changes versus prior period
- Sales fell 4.1% as lower cushioning and void-fill sales and lower paper prices outweighed growth in wrapping and automation. North American sales declined 9.4%; Europe/Asia sales were approximately flat as reported.
- On management’s pro forma, constant-currency comparison, sales declined 4.6% and adjusted EBITDA declined 8.1%. These are non-GAAP comparisons and should be considered alongside reported results.
- Gross margin decreased 0.4 percentage points on reported results. Higher SG&A more than offset lower depreciation and interest expense, and the company moved from operating income to an operating loss.
- Protective packaging systems installed grew 8.5% year over year to 106,900, including 30.8% growth in wrapping machines.
- Debt declined from $428.2 million at December 31, 2019. In December 2019, net proceeds of $107.7 million from a share offering were used to pay down debt.
Outlook, risks, and unusual items
- COVID-19: Ranpak’s facilities remained operational as an essential business; management reported strong e-commerce demand offsetting weaker demand from other industries and minimal disruption to order fulfillment to date. However, demonstrations and installations of systems and automation equipment were delayed, and continued restrictions, workforce illness, supplier interruptions, logistics constraints, or weaker end-user demand could materially affect results. Management said the ultimate impact could not be predicted. No numerical earnings guidance was provided.
- Liquidity and debt: Management believed operating cash flow and available revolving capacity would cover current requirements, while noting that capital needs could rise and COVID-related market volatility could make new financing more difficult or costly. Credit facilities carry restrictive covenants; the company reported compliance at March 31, 2020. Excess-cash-flow mandatory prepayments were deferred to begin with fiscal 2021.
- Interest-rate and currency exposure: $250 million of interest-rate swaps hedged floating-rate debt; their fair-value liability was $15.1 million. A $7.8 million after-tax unrealized swap loss was recorded in other comprehensive loss. The company did not hedge foreign-currency translation or transaction exposure; 57.2% of quarterly sales were denominated in currencies other than U.S. dollars, substantially in euros.
- Contingency: A settlement related to the e3NEO acquisition’s unearned earn-out was approximately $1.6 million. About $1.4 million was accrued at March 31; the remaining $0.2 million was approved and expensed in April. Approximately $0.8 million was paid in April.
- Controls and leadership: Management concluded disclosure controls were ineffective at March 31 because of material weaknesses previously reported in the 2019 Form 10-K. The CFO was scheduled to leave on May 15, 2020; the chief of staff was to serve as interim CFO during a search.
- Other: Goodwill and indefinite-lived intangible asset assessments performed in light of COVID-19 found fair value exceeded carrying value as of March 31. Management reported no material litigation accruals and no off-balance-sheet arrangements.
Important facts for investors to verify
- How revenue, paper pricing, e-commerce demand, and delayed equipment installations evolve as pandemic conditions change.
- Whether elevated SG&A and lower adjusted EBITDA persist, and how management’s non-GAAP adjustments reconcile to GAAP results.
- Cash generation after capital expenditures, debt service, and the e3NEO settlement; available revolver capacity and covenant headroom.
- The status and remediation of the disclosed material weaknesses, including any effects of the CFO transition.
- Potential earnings and equity effects from foreign exchange movements, interest rates, swap valuations, and the significant goodwill and intangible asset balances.