Business context and reporting period
Ranpak Holdings Corp. provides paper-based protective packaging systems and consumables for e-commerce and industrial supply chains. This unaudited Form 10-Q covers the quarter ended June 30, 2019. On June 3, the company completed its acquisition of Rack Holdings, the operating business, and began reporting separate “Predecessor” and “Successor” periods under acquisition accounting. Those periods use different accounting bases and are not directly comparable; combined and pro forma figures below are management-presented comparisons.
Key financial metrics
| Measure | Q2 2019 | Comparison |
|---|---|---|
| Combined net sales | $56.6 million | Down 13.2% from $65.2 million in Q2 2018 |
| Pro forma net sales | $59.9 million | Filing comparisons vary: a table shows an 8.1% decline versus $65.2 million; MD&A narrative cites a 6.5% decline on a constant-currency basis versus $64.1 million |
| Combined net loss | $26.1 million as stated in MD&A | Filing’s separate period results imply a different combined amount; verify the underlying calculation |
| Pro forma net loss | $6.1 million | Compared with $1.9 million net income in Q2 2018 |
| Pro forma Adjusted EBITDA | $16.9 million | Down 19.9% from $21.1 million |
| Pro forma gross margin | 42.5% | Down about 0.5 percentage point from the comparable 2018 measure |
For the six months, combined net sales were $122.7 million, down 3.3% from $126.8 million; pro forma sales were $126.5 million, up 2.6% on a constant-currency basis. Combined net loss was $29.5 million; pro forma net loss was $8.6 million versus $5.1 million in the comparable 2018 pro forma period. Pro forma Adjusted EBITDA was $36.3 million, down 7.2% from $39.2 million.
The reported cash-flow periods straddle the acquisition and should not be treated as a single comparable quarter. Successor-period operating cash flow was a $24.6 million outflow, which management attributed to working-capital changes and payment of accrued transaction costs; Predecessor-period operating cash flow was $24.5 million positive. Successor investing cash outflow was $947.6 million, primarily reflecting the acquisition. At June 30, cash was $11.5 million; current assets were $59.6 million and current liabilities were $24.2 million.
Gross debt was $537.4 million, with $526.7 million reported as long-term debt after deferred financing costs. The company had no borrowings on its $45 million revolving facility and reported compliance with financial covenants. The first-lien term loans mature seven years after the June 2019 closing; the revolver matures in five years. The company reported a $5.4 million fair-value loss on its interest-rate swap in the Successor period.
Material changes versus the prior comparable period
- Q2 pro forma sales declined, primarily from lower paper-consumable volumes; price increases partially offset the volume decline. Void-fill and cushioning sales fell, while wrapping sales increased.
- Q2 pro forma Adjusted EBITDA declined 19.9%. Pro forma gross margin weakened amid higher paper costs; SG&A rose, including costs supporting growth and public-company operations.
- Q2 combined interest expense was $20.1 million versus $7.8 million in Q2 2018. On a pro forma basis, interest expense was $8.5 million versus $7.8 million; the filing cites debt levels, higher rates, prior hedge termination and financing-related items.
- The installed base of packaging systems increased 7.6% year over year to 100,200 units as of June 30.
Outlook, commentary, risks and unusual items
- No specific revenue, profit or cash-flow guidance is provided. Management says operating cash flow and available revolver capacity are expected to cover current requirements, while noting capital expenditures may rise with growth.
- Management cites seasonality: roughly one-third of sales are connected to e-commerce end users, with sales typically strongest in Q4 and weakest in Q1. Paper is the largest input cost, and price increases may not be passed through promptly or fully.
- The acquisition created a new accounting basis. Purchase-price allocation and working-capital adjustments were preliminary; acquired goodwill was approximately $462.9 million and identifiable intangible assets were preliminarily valued at $450.9 million.
- Transaction costs related to the business combination totaled $48.0 million, including debt issuance costs; the filing also identifies $35.4 million of non-recurring expenses in the six months. Inventory and deferred-revenue fair-value adjustments affected reported results.
- Key risks include reliance on a limited number of qualified paper suppliers, paper-price volatility, competition and customer demand, foreign-exchange exposure, tariffs affecting China-sourced components, substantial floating-rate debt and related covenants, and integration and goodwill-impairment risk. The filing reports no legal proceedings and no off-balance-sheet arrangements.
- Management could not assess the effectiveness of disclosure controls as of June 30, citing the recent acquisition and the preliminary stage of post-combination controls development. On August 9, CEO J. Mark Borseth resigned; Executive Chairman Omar M. Asali was appointed CEO. The separation agreement provides approximately $0.8 million in salary and benefit continuation and modifies certain equity grants.
Important facts for investors to verify
- Reconcile the filing’s inconsistent Q2 sales comparisons and combined net-loss figures against the detailed financial statements and pro forma schedules.
- Review post-closing purchase-price adjustments, final fair values of acquired assets and liabilities, and the cash and debt funding of the transaction.
- Monitor cash generation, working-capital requirements, paper costs and the company’s ability to pass through price increases.
- Assess debt-service capacity, floating-rate exposure, swap valuation and covenant headroom; the reported undrawn revolver was $45 million.
- Track internal-control remediation, integration progress, management changes and any subsequent adjustments to transaction-related costs or accounting estimates.