Ranpak Holdings Corp. — Q2 2020 Form 10-Q
Business context and reporting period
Unaudited results cover the three and six months ended June 30, 2020. Ranpak supplies paper-based protective packaging products and systems to e-commerce and industrial customers. The company reported an installed base of approximately 109,500 systems, up 9.2% from June 30, 2019, and opened an automation production facility in the Netherlands during the quarter.
Comparisons with 2019 GAAP results require caution: the June 3, 2019 business combination created separate “Successor” and “Predecessor” accounting periods. Management also provides non-GAAP pro forma comparisons that adjust for acquisition accounting and other items; these are not GAAP results.
Financial performance and position
| Metric | Q2 2020 | Six months ended June 30, 2020 |
|---|---|---|
| Revenue | $66.1 million | $129.5 million |
| Gross profit / margin | $27.0 million / 40.8% | $53.8 million / 41.5% |
| Operating loss | $2.1 million | $2.7 million |
| Net loss | $8.5 million; $0.12 per share | $12.1 million; $0.17 per share |
| Interest expense | $5.5 million | $11.7 million |
| Operating cash flow | Not provided for the quarter | $22.3 million provided |
| Capital expenditures | Not provided for the quarter | $18.2 million |
On management’s pro forma, constant-currency basis, Q2 revenue rose 13.2% to $67.8 million and adjusted EBITDA rose 13.1% to $19.0 million. For the six-month period, pro forma revenue rose 3.7% to $132.6 million, while adjusted EBITDA increased 1.6% to $37.1 million. These non-GAAP measures include adjustments and should not be treated as substitutes for GAAP results.
At June 30, 2020, cash and cash equivalents were $22.6 million, current assets $86.2 million, and current liabilities $43.0 million. Debt was $419.8 million, including $1.6 million current; the $45 million revolving facility was undrawn. The reported interest rate on the term facilities was 3.93%, down from 5.46% at year-end 2019. The company was in compliance with financial covenants. Six-month cash increased $2.9 million after operating cash inflow, capital expenditures, and debt payments.
Material changes versus comparable periods
- Management’s pro forma Q2 comparison showed revenue growth led by Europe/Asia, up 31.6%; North America declined 5.4%. Void-fill and wrapping grew, while cushioning declined.
- Pro forma Q2 gross margin fell 1.5 percentage points to 40.9%. SG&A increased 52.9% to $21.1 million, attributed to severance, equity compensation, growth initiatives, and public-company costs.
- For the first half, pro forma revenue grew 3.7%, but pro forma gross margin declined 0.9 percentage points to 41.6%; SG&A rose 51.9% to $41.0 million. Pro forma net loss widened to $12.2 million from $9.7 million.
- Year-over-year GAAP comparisons are distorted by the acquisition and purchase accounting. Management cited lower debt levels and interest rates as reasons for lower interest expense versus pro forma 2019.
Outlook, risks and unusual items
- No specific revenue or earnings guidance was provided. Management said e-commerce demand was strong and offset weaker demand from some other industries. COVID-19 restrictions delayed equipment demonstrations and installations; management could not predict the pandemic’s ultimate effects and continued monitoring liquidity.
- Key risks include paper supply and kraft-paper prices, reliance on suppliers, competition, customer price sensitivity, demand and customer concentration, product development, foreign exchange, and COVID-19. Paper is a major input cost; the company noted difficulty may arise in passing cost increases to customers.
- Six-month selling and administrative costs included increased public-company costs and non-cash stock compensation. An e3NEO settlement of approximately $1.6 million was agreed; $0.2 million was expensed and $0.8 million paid in Q2, with approximately $0.6 million accrued at quarter-end.
- Interest-rate swaps with $250 million notional hedged approximately 92% of the dollar term facility. The reported derivative liability increased to $16.4 million from $5.0 million at year-end 2019.
- The company concluded COVID-related impairment indicators did not require goodwill or indefinite-lived intangible asset impairment at June 30. No material litigation or environmental contingency accruals were reported.
- Disclosure controls were deemed ineffective at June 30 because of material weaknesses in internal control over financial reporting. The filing also describes corrections to previously issued 2019 interim statements, which management concluded were not material to those statements.
Important facts for investors to verify
- Review the material weaknesses, remediation progress, and the nature and scope of the 2019 interim-statement corrections.
- Assess whether revenue growth, especially in Europe/Asia and e-commerce-related demand, is sustainable and whether delayed equipment installations recover.
- Track SG&A growth, gross-margin pressure, paper costs, and the difference between GAAP performance and management’s adjusted EBITDA.
- Monitor cash generation, capital spending, debt service, covenant compliance, and availability under the undrawn revolver.
- Evaluate currency and interest-rate exposure, including the swap liability, and the potential impact of ongoing COVID-19 disruption.