Ranpak (PACK) - 2019 Q4 - Annual Report

Part I Business Ranpak provides sustainable, systems-based product protection solutions, generating over 90% of its $269.5 million 2019 net sales from recurring paper consumables through a 'razor/razor-blade' model - Ranpak operates a 'razor/razor-blade' business model, providing proprietary packaging systems and deriving over 90% of its net sales from high-margin, recurring paper consumables designed exclusively for these systems[24][38] 2019 Net Sales Breakdown | Category | Percentage of Net Sales | Source Chunk | | :--- | :--- | :--- | | By Product Line | | | | Cushioning | 45.7% | [25] | | Void-Fill | 41.7% | [25] | | Wrapping | 9.9% | [31] | | Automation | 2.7% | [31] | | By Geography | | | | North America | 48.9% | [30] | | Europe | 45.2% | [30] | | Asia & Other | 5.9% | [30] | | By Sales Channel | | | | Distributor Network | 86.0% | [27] | | Direct to End-Users | 14.0% | [28] | | By End Market | | | | E-commerce | ~34.0% | [76] | | Automotive Aftermarket | ~10.0% | [77] | | IT/Electronics | ~7.0% | [78] | | Machinery | ~7.0% | [79] | | Home Goods | ~7.0% | [80] | - The company has a global presence with over 104,600 installed systems serving approximately 33,000 end-users as of December 31, 2019, through a distribution network of approximately 250 distributors worldwide[24][40] - Ranpak emphasizes its environmentally sustainable product portfolio, with paper consumables that are fiber-based, biodegradable, renewable, and curb-side recyclable, with a majority made from recycled content and sourced from SFI or FSC certified suppliers[24][26] Risk Factors The company faces significant operational, financial, and internal control risks, including supply chain dependencies, foreign currency exposure, and a material weakness in financial reporting - A material weakness in internal control over financial reporting was identified as of December 31, 2019, due to insufficient trained professionals, rendering disclosure controls ineffective[183][616] - Ranpak is heavily reliant on a limited number of paper suppliers, with approximately 60% of its North American raw paper requirements purchased from a single supplier in 2019[103] - Reliance on third-party suppliers, with a majority of components and systems originating from China, exposes the business to operational disruptions and potential U.S.-China trade barriers[107][108][128] - A substantial portion of operations are international, with 54.8% of 2019 sales generated outside the United States, exposing the company to foreign currency fluctuations and political instability[125][131] - The company's largest single end-user, an e-commerce company, accounted for approximately 10.0% of net sales in 2019 and has internal initiatives to reduce packaging consumables[118] Unresolved Staff Comments The company reports no unresolved staff comments from the SEC - None[200] Properties Global headquarters in Ohio and European headquarters in The Netherlands, with system assembly and paper conversion facilities across the U.S. and Europe - The company's global headquarters is in Concord Township, Ohio, and its European headquarters is in Heerlen, The Netherlands[201] - Manufacturing, assembly, and paper conversion facilities are located in Concord, OH; Kansas City, MO; Raleigh, NC; Reno, NV; Heerlen, The Netherlands; and Nyrany, Czech Republic[202] Legal Proceedings The company reports no material legal proceedings - None[205] Mine Safety Disclosures This item is not applicable to the company's operations - Not applicable[206] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's Class A Common Shares and warrants trade on the NYSE, with no cash dividends paid or planned due to debt covenants - The company's Class A Common Shares and warrants trade on the NYSE under the symbols 'PACK' and 'PACK.WS'[208] - The company has not paid cash dividends and does not plan to in the foreseeable future, with dividend payments restricted by covenants in its debt facilities[210] Selected Financial Data Financial data is presented as Predecessor and Successor periods due to the June 2019 business combination, showing 2019 combined net sales of $269.5 million and a net loss of $36.2 million - Financial data is presented on a Predecessor (before June 3, 2019) and Successor (after June 3, 2019) basis due to the business combination, making direct year-over-year comparisons complex[217] Selected Historical Financial Data (in millions) | Metric | 2019 (Combined) | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | :--- | | Net sales (in millions) | $269.5 | $267.9 | $244.1 | $224.7 | | Gross profit (in millions) | $110.9 | $114.6 | $112.4 | $104.4 | | Operating income (in millions) | $2.2 | $11.0 | $31.2 | $16.7 | | Net (loss) income (in millions) | $(36.2) | $(8.6) | $27.7 | $(10.8) | | Total assets (in millions) | $1,104.4 | $792.7 | $833.3 | $813.2 | | Total liabilities (in millions) | $572.6 | $596.3 | $621.1 | $648.6 | | Total shareholders' equity (in millions) | $531.8 | $196.4 | $212.3 | $164.6 | Management's Discussion and Analysis of Financial Condition and Results of Operations The June 2019 business combination impacted financial results, with 2019 combined net sales increasing to $269.5 million, but net loss widening to $36.2 million, while Adjusted EBITDA slightly increased to $87.3 million - The financial results are split into a Predecessor period (Jan 1 - Jun 2, 2019) and a Successor period (Jun 3 - Dec 31, 2019) due to the business combination, with acquisition accounting making the periods not directly comparable[254][258] Comparison of 2019 (Combined) vs. 2018 Performance (in millions) | Metric | 2019 (Combined) | 2018 | Change (%) | | :--- | :--- | :--- | :--- | | Net Sales (in millions) | $269.5 | $267.9 | +0.6% | | Gross Profit (in millions) | $110.9 | $114.6 | -3.2% | | SG&A Expenses (in millions) | $61.5 | $53.2 | +15.7% | | Net Loss (in millions) | $(36.2) | $(8.6) | +324.1% | | Adjusted EBITDA (in millions) | $87.3 | $84.6 | +3.2% | - The installed base of protective packaging systems grew by 7.3% to 104,600 units at the end of 2019 from 97,500 units at the end of 2018[238][240] - Following the business combination, total debt was $428.2 million as of December 31, 2019, with $107.7 million from a public stock offering used to pay down debt in December 2019[312][313] Quantitative and Qualitative Disclosures About Market Risk The company is exposed to interest rate risk from its $428.2 million floating-rate debt, foreign currency risk from 54.8% of 2019 non-USD sales, and commodity price risk for paper - The company has significant interest rate risk from its $428.2 million in floating-rate debt, where a 100 basis point change in rates would alter annual cash interest expense by approximately $1.3 million, partially hedged by $250.0 million in interest rate swaps[360][361] - Ranpak is exposed to foreign currency risk, with 54.8% of its net sales for the combined year ended December 31, 2019, denominated in currencies other than the U.S. dollar, primarily the Euro[366] - The company faces commodity price risk from fluctuations in the cost of paper, managed by negotiating annual fixed-price contracts with suppliers rather than using derivative instruments[367] Financial Statements and Supplementary Data This section presents the audited consolidated financial statements for 2019, including Statements of Operations, Balance Sheets, and Cash Flows, presented on both Predecessor and Successor bases Consolidated Statements of Operations The 2019 Consolidated Statement of Operations shows combined net sales of $269.5 million and a net loss of $36.2 million, split between Predecessor and Successor periods 2019 Consolidated Statement of Operations Summary (in millions) | Period | Net Sales (in millions) | Gross Profit (in millions) | Income (Loss) from Operations (in millions) | Net (Loss) (in millions) | | :--- | :--- | :--- | :--- | :--- | | Successor (Jun 3 - Dec 31) | $163.1 | $65.7 | $8.1 | $(17.2) | | Predecessor (Jan 1 - Jun 2) | $106.4 | $45.2 | $(5.9) | $(19.0) | | FY 2018 (Predecessor) | $267.9 | $114.6 | $11.0 | $(8.6) | | FY 2017 (Predecessor) | $244.1 | $112.4 | $31.2 | $27.7 | Consolidated Balance Sheets The Consolidated Balance Sheet as of December 31, 2019, shows total assets of $1,104.4 million, driven by goodwill and intangibles, and total shareholders' equity of $531.8 million Consolidated Balance Sheet Highlights (in millions) | Account | Dec 31, 2019 (Successor) (in millions) | Dec 31, 2018 (Predecessor) (in millions) | | :--- | :--- | :--- | | Cash and cash equivalents | $19.7 | $17.5 | | Goodwill | $448.8 | $355.7 | | Intangible assets, net | $458.6 | $293.7 | | Total Assets | $1,104.4 | $792.7 | | Long-term debt | $418.8 | $494.9 | | Total Liabilities | $572.6 | $596.3 | | Total Shareholders' Equity | $531.8 | $196.4 | Consolidated Statements of Cash Flows For combined 2019, net cash from operations was $26.3 million, while investing activities used $667.9 million, primarily for the acquisition, and financing provided $651.0 million 2019 Consolidated Cash Flow Summary (in millions) | Cash Flow Activity | Successor Period (Jun 3 - Dec 31) (in millions) | Predecessor Period (Jan 1 - Jun 2) (in millions) | Combined 2019 Total (in millions) | | :--- | :--- | :--- | :--- | | Net cash provided by operating activities | $9.6 | $16.7 | $26.3 | | Net cash used in investing activities | $(657.1) | $(10.8) | $(667.9) | | Net cash provided by (used in) financing activities | $665.4 | $(14.4) | $651.0 | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure No changes in or disagreements with accountants on accounting and financial disclosure - None[614] Controls and Procedures Management concluded that disclosure controls and procedures were ineffective as of December 31, 2019, due to material weaknesses in internal control over financial reporting, with a remediation plan underway - Management concluded that disclosure controls and procedures were not effective as of December 31, 2019[616] - Material weaknesses identified in Control Environment, Risk Assessment, and Control Activities components of the COSO framework[619] - The weaknesses were attributed to insufficient staff with public company and US GAAP expertise, leading to errors in previously issued interim financial statements related to the accounting for the Ranpak Business Combination[619] - A remediation plan has been developed, which includes hiring qualified personnel and engaging a third-party firm to assist in designing and implementing effective internal controls[621] Other Information No other information for this item - None[623] Part III Directors, Executive Officers and Corporate Governance Information on directors, executive officers, and corporate governance is incorporated by reference from the 2020 Proxy Statement - Information is incorporated by reference from the company's 2020 Proxy Statement[625] Executive Compensation Information on executive compensation is incorporated by reference from the 2020 Proxy Statement - Information is incorporated by reference from the company's 2020 Proxy Statement[627] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information on security ownership and related stockholder matters is incorporated by reference from the 2020 Proxy Statement - Information is incorporated by reference from the company's 2020 Proxy Statement[628] Certain Relationships and Related Party Transactions and Director Independence Information on related party transactions and director independence is incorporated by reference from the 2020 Proxy Statement - Information is incorporated by reference from the company's 2020 Proxy Statement[630] Principal Accounting Fees and Services Information on principal accounting fees and services is incorporated by reference from the 2020 Proxy Statement - Information is incorporated by reference from the company's 2020 Proxy Statement[631] Part IV Exhibits and Financial Statement Schedules This section lists all exhibits filed as part of the Form 10-K, including consolidated financial statements, schedules, and other required documents - This item lists all exhibits filed as part of the Form 10-K, including financial statements and schedules[633][635] Form 10-K Summary No Form 10-K summary is provided - None[640]