Ranpak Holdings Corp. — Q3 2019 Form 10-Q
Reporting period: Quarter ended September 30, 2019. Amounts are in U.S. dollars; financial statements are unaudited. Ranpak acquired Rack Holdings on June 3, 2019, creating distinct predecessor and successor accounting periods. Accordingly, reported periods spanning the acquisition are not directly comparable; management also presents pro forma comparisons.
Business context and key financial metrics
Ranpak provides protective packaging systems and paper consumables for e-commerce and industrial supply chains. It reported one consolidated reportable segment and an installed base of 102,300 systems at quarter-end, up 7.5% year over year.
| Metric | Q3 2019 | Prior-year Q3 | Context |
|---|---|---|---|
| Net sales | $69.1 million | $65.1 million | Reported increase of 6.1%; company pro forma sales were $70.4 million versus $64.7 million, up 8.8% on a constant-currency basis. |
| Gross profit / margin | $29.5 million / 42.7% | $27.4 million / 42.0% | Pro forma gross margin was 44.2% versus 42.0%. |
| Operating income | $1.0 million | $1.9 million | Q3 SG&A rose to $17.7 million from $12.6 million. |
| Net income (loss) | $(1.6) million | $0.3 million | Basic and diluted loss per share: $0.03. |
| Interest expense | $9.5 million | $8.0 million | Increase reflected debt levels, rates and hedge-related effects. |
| EBITDA / adjusted EBITDA | $19.6 million / $22.0 million | $18.8 million / $20.6 million | Adjusted EBITDA is a non-GAAP, pro forma measure. |
For the combined first nine months of 2019, sales were $191.8 million and net loss was $31.0 million; these figures arithmetically combine predecessor and successor results and are not a single comparable GAAP reporting period. On management’s pro forma basis, nine-month sales were $196.9 million versus $188.3 million, net loss was $8.0 million versus $2.1 million, and adjusted EBITDA was $58.3 million versus $59.8 million.
At September 30, 2019, cash and cash equivalents were $13.6 million, total debt was $530.8 million (including $5.4 million current), and working capital was $32.2 million. The company had no revolver borrowings outstanding against its $45.0 million facility and reported compliance with financial covenants. Cash from operations was $(11.6) million for June 3–September 30, 2019; the filing attributes this in part to working-capital movements and payment of accrued transaction costs. Capital expenditures during that successor period were $10.5 million.
Material changes and unusual items
- The June 3 business combination was financed in part with $539.0 million of new debt; the predecessor’s approximately $495.0 million debt was repaid. The acquisition produced substantial purchase-accounting adjustments, including preliminary goodwill of $420.8 million and identifiable intangible assets of $480.8 million.
- Total business-combination transaction costs were $48.0 million, including debt issuance costs; the filing reports $7.7 million of transaction costs expensed in the combined nine-month period.
- Q3 sales growth reflected higher pricing and gains in cushioning, wrapping and automation, partly offset by lower void-fill sales. Paper costs, a principal input, increased during the nine-month comparison.
- Q3 SG&A increased year over year due to severance, stock-based compensation, growth initiatives and public-company costs. Management estimated incremental annual public-company costs of at least $2.0 million.
- The company recorded a $6.4 million derivative loss in interest expense for the successor period through September 30. It amended and expanded interest-rate swaps to a combined $250.0 million notional amount, with maturities in 2023; these are intended to reduce exposure on floating-rate debt.
Outlook, risks and contingencies
The filing gives no specific revenue, earnings or cash-flow guidance. Management said operating cash flow and available revolving capacity were expected to provide sufficient resources for current requirements, while noting that future capital needs depend on business conditions and growth.
- Paper-price changes may pressure margins, and competitive conditions could limit the ability to pass cost increases through to customers.
- Foreign-currency exposure is significant: approximately 51.9% of combined nine-month sales were denominated in currencies other than the U.S. dollar, mostly euros. The company does not currently hedge foreign-exchange transaction or translation exposure.
- Debt is principally floating-rate. A 100-basis-point change in applicable base rates was estimated to affect cash interest expense by $1.3 million for the nine-month period. The filing also describes uncertainty around the planned phaseout of LIBOR.
- Demand is seasonal, with sales typically strongest in the fourth quarter and slowest in the first quarter. The filing also identifies the risks of acquisition integration and substantial debt and covenant restrictions.
- The company stated it could not assess the effectiveness of disclosure controls as of September 30 without unreasonable effort or expense because post-acquisition controls were still being developed. It reported no material risk-factor changes from its June 2019 Form 10-Q and no legal proceedings.
- A contingent e3Neo earn-out of $2.6 million was recorded as a liability; payment depends on contractual milestones and is expected in 2020 if earned.
Important facts for investors to verify
- Reconcile the reported Q3 results with management’s pro forma, constant-currency measures and review the adjustments underlying adjusted EBITDA.
- Track cash conversion, working-capital use, capital spending and available revolver capacity against the company’s debt-service needs.
- Review the final acquisition purchase-price allocation, including valuation of acquired intangibles, goodwill and deferred taxes.
- Monitor floating-rate debt, swap accounting and interest-rate exposure, as well as foreign-exchange movements and paper-cost pass-through.
- Assess control remediation and the effect of public-company costs, stock compensation and other integration-related expenses on future results.