RANPAK HOLDINGS CORP. Cautionary Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains "forward-looking statements" within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Statements that are not historical facts are forward-looking statements. Our forward-looking statements include, but are not limited to, statements regarding our or our management team's expectations, hopes, beliefs, intentions or strategies regarding the future. In addition, any statements that refer to estimates, projections, forecasts or other characterizations of future events or circumstances, including any underlying assumptions, are forward-looking statements. The words "anticipate," "believe," "continue," "could," "estimate," "expect," "forecast," "intend," "may," "might," "plan," "possible," "potential," "predict," "project," "should," "would" and similar expressions may identify forward-looking statements, but the absence of these words does not mean that a statement is not forward-looking. The forward-looking statements contained in this Quarterly Report on Form 10-Q are based on our current expectations and beliefs concerning future developments and their potential effects on us taking into account information currently available to us. There can be no assurance that future developments affecting us will be those that we have anticipated. These forward-looking statements involve a number of risks, uncertainties (some of which are beyond our control) or other assumptions that may cause actual results or performance to be materially different from those expressed or implied by these forward-looking statements. These risks include, but are not limited to:
•
our inability to secure a sufficient supply of paper to meet our production requirements;
•
the impact of rising prices on production inputs, including labor, energy, and freight on our results of operations;
•
the impact of the price of kraft paper on our results of operations;
•
our reliance on third party suppliers;
•
the COVID-19 pandemic and associated response;
•
the high degree of competition in the markets in which we operate;
•
consumer sensitivity to increases in the prices of our products;
•
changes in consumer preferences with respect to paper products generally;
•
continued consolidation in the markets in which we operate;
•
the loss of significant end-users of our products or a large group of such end-users;
•
our failure to develop new products that meet our sales or margin expectations;
•
our future operating results fluctuating, failing to match performance or to meet expectations;
•
our ability to fulfill our public company obligations; and
•
other risks and uncertainties indicated from time to time in filings made with
the
Should one or more of these risks or uncertainties materialize, they could cause our actual results to differ materially from the forward-looking statements. We are not undertaking any obligation to update or revise any forward-looking statements whether as a result of new information, future events or otherwise. You should not take any statement regarding past trends or activities as a representation that the trends or activities will continue in the future. Accordingly, you should not put undue reliance on these statements.
Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis is intended to help the reader understand our business, financial condition, results of operations, liquidity and capital resources. You should read this discussion in conjunction with the sections entitled "Risk Factors" and "Forward-Looking Statements," and our financial statements and related notes included in this Quarterly Report on Form 10-Q as well as the section entitled, "Management's Discussion and Analysis of Financial Condition and Results of Operations" ofRanpak included in our 2021 10-K, filed with theSEC onFebruary 28, 2022 . Capitalized terms used and not defined herein have the meanings disclosed elsewhere in the Quarterly Report on Form 10-Q. The following discussion contains forward-looking statements that reflect future plans, estimates, beliefs and expected performance. The forward-looking statements are dependent upon events, risks and uncertainties that may be outside of the Company's control. The Company's actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified below and those discussed in the sections titled "Risk 23 --------------------------------------------------------------------------------
Factors" and "Cautionary Note Regarding Forward-Looking Statements" included elsewhere in this Quarterly Report on Form 10-Q.
Overview
Ranpak is a leading provider of environmentally sustainable, systems-based, product protection solutions for e-commerce and industrial supply chains. Since inception in 1972, we have delivered high quality protective packaging solutions, while maintaining commitment to environmental sustainability. We assemble our PPS systems and provide the PPS systems and paper consumables to customers, which include direct end-users and our network of exclusive paper packaging solution distributors, who in turn place the systems with and sell paper to commercial and industrial users for the conversion of paper into packaging materials. We operate manufacturing facilities inthe United States andEurope . For our Automation product lines, we currently have dedicated facilities inVirginia andthe Netherlands . R Squared Robotics, a division ofRanpak , uses three-dimensional computer vision and artificial intelligence technologies to improve end-of-line packaging and logistics functions. We are currently building one facility inthe Netherlands , with dedicated space for Automation functions, and renovating or building two facilities inthe United States , one of which will be primarily dedicated to Automation functions. We also maintain sales and administrative offices inBrazil ,France ,China ,Japan , andSingapore . We are a global business that generated approximately 64.9% of our 2021 net revenue outside ofthe United States . As ofSeptember 30, 2022 , we had an installed base of approximately 138.6 thousand PPS systems serving a diverse set of distributors and end-users. We generated net revenue of$247.1 million and$274.8 million in the nine months endedSeptember 30, 2022 and 2021, respectively. Effect of Currency Fluctuations. As a result of the geographic diversity of our operations, we are exposed to the effects of currency translation, which has affected the comparability of our results of operations between the periods presented in this report and may affect the comparability of our results of operations in future periods. Currency transaction exposure results when we generate net revenue in one currency at one time and incur expenses in another currency at another time, or when we realize gain or loss on intercompany transfers. While we seek to limit currency transaction exposure by matching the currencies in which we incur sales and expenses, we may not always be able to do so. In addition, we are subject to currency translation exposure because the operations of our subsidiaries are measured in their functional currency which is the currency of the primary economic environment in which the subsidiary operates. Any currency balances that are denominated in currencies other than the functional currency of the subsidiary are re-measured into the functional currency, with the resulting gain or loss recorded in the foreign currency (gains) losses line-item in our Unaudited Condensed Consolidated Statements of Operations. In turn, subsidiary income statement balances that are denominated in currencies other than USD are translated into USD, our functional currency, in consolidation using the average exchange rate in effect during each fiscal month during the period, with any related gain or loss recorded as foreign currency translation adjustments in other comprehensive income (loss). The assets and liabilities of subsidiaries that use functional currencies other than the USD are translated into USD in consolidation using period end exchange rates, with the effects of foreign currency translation adjustments included in accumulated other comprehensive income. We previously hedged some of our exposure to foreign currency translation with cross-currency swaps and may consider entering into such agreements in future periods. Significant currency fluctuations could impact the comparability of results between periods, while such fluctuations coupled with material mismatches in net revenue and expenses could also adversely impact our cash flows. See "Qualitative and Quantitative Disclosures About Market Risk." Seasonality. Approximately 33.8% of our net revenue in 2021, either directly or to distributors, was destined for end-users in the e-commerce sectors, whose businesses frequently follow traditional retail seasonal trends, including a concentration of sales in the holiday period in the fourth quarter. Our results tend to follow similar patterns, with the highest net revenue typically recorded in our fourth fiscal quarter and the slowest sales in our first fiscal quarter of each fiscal year. We expect this seasonality to continue in the future and, as a result, our results of operations between fiscal quarters in a given year may not be directly comparable. Impact of the COVID-19 Pandemic. The COVID-19 pandemic has resulted in changes in market and economic conditions around the world. We believe that these impacts are not unique to us and that our industry competitors have been impacted in a similar fashion. We are deemed an essential business under the Memorandum on Identification of Essential Critical Infrastructure Workers During COVID-19 Response issued by theUnited States Cybersecurity and Infrastructure Security Agency and pursuant to state decisions in states where our domestic production and distribution facilities are located. We continue to operate our production and distribution facilities, both domestically and internationally, albeit subject to measures designed to promote a safe operating environment. While we have experienced limited delays in receiving certain supplies we use to assemble our packaging systems, to date, these measures have not materially impacted the cost of producing and distributing our products, the cost and availability of raw 24 -------------------------------------------------------------------------------- materials and components, and we have encountered minimal disruption in our ability to fulfill customer orders. We continue to monitor our liquidity position closely and have extended payment terms to certain of our customers when necessary. While we do not currently expect COVID-19 to have a material impact on our business, results of operations, financial condition or liquidity, at the time of this filing, we cannot predict the extent to which we will ultimately be impacted due to the uncertain nature and duration of the COVID-19 pandemic. See "Risk Factors" in the 2021 10-K. We will continue to evaluate the nature and extent of the impact to our business, results of operations, financial condition, and cash flows.
Key Performance Indicators and Other Factors Affecting Performance
We use the following key performance indicators and monitor the following other factors to analyze our business performance, determine financial forecasts, and help develop long-term strategic plans. PPS Systems Base - We closely track the number of PPS systems installed with end-users as it is a leading indicator of underlying business trends and near-term and ongoing net sales expectations. Our installed base of PPS systems also drives our capital expenditure budgets. The following table presents our installed base of PPS systems by product line as ofSeptember 30, 2022 and 2021: September 30, 2022 September 30, 2021 Change % Change PPS Systems (in thousands) Cushioning machines 35.4 34.9 0.5 1.4 Void-Fill machines 81.2 75.1 6.1 8.1 Wrapping machines 22.0 19.2 2.8 14.6 Total 138.6 129.2 9.4 7.3 Paper and Other Costs. Paper is a key component of our cost of goods sold and paper costs can fluctuate significantly between periods. We purchase both 100% virgin and 100% recycled paper, as well as blends, from various suppliers for conversion into the paper consumables we sell. The cost of paper supplies is our largest input cost, and we historically have negotiated supply and pricing arrangements with most of our paper suppliers annually, with a view towards mitigating fluctuations in paper cost. Nevertheless, as paper is a commodity, its price on the open market, and in turn the prices we negotiate with suppliers at a given point in time, can fluctuate significantly, and is affected by several factors outside of our control, including supply and demand and the cost of other commodities that are used in the manufacture of paper, including wood, energy and chemicals. The market for our solutions is competitive and it may be difficult to pass on increases in paper prices to our customers immediately, or at all, which has in the past, and could in the future, adversely affect our operating results. In 2021 and 2022, global inflation and other macroeconomic factors, including COVID-19 and the conflict inUkraine , have contributed to the increases in the cost of paper. Further, the conflict inUkraine has caused certain headwinds, including (i) increased energy costs, particularly inEurope ; (ii) shipping variabilities due to truck driver shortages; (iii) increased pricing for paper products as a result of decreased availability of paper products previously sourced from Russian paper mills; and (iv) increased shipping times for paper products sourced from Russian paper mills. In the third quarter of 2022, we eliminated the last of our paper products sourced fromRussia . We are beginning to see stabilization of inflationary conditions regarding paper inNorth America , however, inflationary pricing conditions inEurope remain unsteady, primarily due to the volatility in energy markets. Where we can, we will look to pass these increased market costs on to our customers to mitigate the impact of these costs. We are unable to predict our ability to pass these costs on to our customers and how much of these increases we will be able to pass on to our customers. As such, we expect some pressure on our gross margin in the medium term relative to our historical margin profile.
Results of Operations
The following tables set forth our results of operations for the three and nine months endedSeptember 30, 2022 and 2021 with line items presented in millions of dollars. Our condensed consolidated financial statements are prepared in accordance with GAAP. We have, however, also presented below Earnings Before Interest, Taxes, Depreciation and Amortization ("EBITDA") and adjusted EBITDA ("AEBITDA"), which are non-GAAP financial measures. We have included EBITDA and AEBITDA because they are key measures used by our management and Board of Directors to understand and evaluate our operating performance and trends, to prepare and approve our annual budget and to develop short- and long-term operational plans. In particular, the exclusion of certain expenses in calculating EBITDA and AEBITDA can provide a useful measure for period-to-period comparisons of our primary business operations. Adjusting AEBITDA for comparability for constant currency also assists in this comparison as it allows a better insight into the performance of our businesses that operate in currencies other than our reporting currency. Before consolidation, ourEurope /Asia financial data is derived in Euros. To calculate the adjustment that we apply to present AEBITDA on a constant currency basis, we multiply this Euro-derived data by 1.15 to reflect an exchange rate of1 Euro to1.15 USD , which we believe is a reasonable exchange rate to use to give a 25 -------------------------------------------------------------------------------- stable depiction of the business without currency fluctuations between periods, to calculateEurope /Asia data in constant currency USD. An exchange rate of 1.15 approximates the average exchange rate of the Euro to USD over the past five years. We also present non-GAAP constant currency net revenue and derive it in the same manner. We believe that EBITDA and AEBITDA provide useful information to investors and others in understanding and evaluating the Company's operating results in the same manner as our management and Board of Directors. However, EBITDA and AEBITDA have limitations as analytical tools, and you should not consider them in isolation or as substitutes for analysis of our results as reported under GAAP. In particular, EBITDA and AEBITDA should not be viewed as substitutes for, or superior to, net income (loss) prepared in accordance with GAAP as a measure of profitability or liquidity. Some of these limitations are:
•
although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and EBITDA and AEBITDA do not reflect all cash capital expenditure requirements for such replacements or for new capital expenditure requirements;
•
EBITDA and AEBITDA do not reflect changes in, or cash requirements for, our working capital needs;
•
AEBITDA does not consider the potentially dilutive impact of equity-based compensation;
•
EBITDA and AEBITDA do not reflect the impact of the recording or release of valuation allowances or tax payments that may represent a reduction in cash available to us;
•
AEBITDA does not take into account any restructuring and integration costs;
•
AEBITDA is presented on a constant currency basis and gives effect to the impact of currency fluctuations
•
while EBITDA for all periods herein has been reported without giving effect to constant currency adjustments, we have previously presented EBTIDA on a constant currency basis, which reduces its usefulness as a comparative measure to certain of our historical results that are not presented in this report; and
•
other companies, including companies in our industry, may calculate EBITDA and AEBITDA differently, which reduces their usefulness as comparative measures.
EBITDA - EBITDA is a non-GAAP financial measure that we calculate as net income (loss), adjusted to exclude: benefit from (provision for) income taxes; interest expense; and depreciation and amortization. AEBITDA - AEBITDA is a non-GAAP financial measure that we present on a constant currency basis and calculate as net income (loss), adjusted to exclude: benefit from (provision for) income taxes; interest expense; depreciation and amortization; stock-based compensation expense; and, in certain periods, certain other income and expense items; as further adjusted to reflect the performance of the business on a constant currency basis. In addition, in our discussion below, we include certain other unaudited, non-GAAP constant currency data for the three and nine months endedSeptember 30, 2022 and 2021. This data is based on our historical financial statements included elsewhere in this Quarterly Report on Form 10-Q, adjusted (where applicable) to reflect a constant currency presentation between periods for the convenience of readers. We reconcile this data to our GAAP data for the same period under "Presentation and Reconciliation of GAAP to Non-GAAP Measures" for the three and nine months endedSeptember 30, 2022 and 2021. 26 --------------------------------------------------------------------------------
Comparison of Third Quarter of 2022 to Third Quarter of 2021
Three Months Ended
2022 % Net revenue 2021 % Net revenue
Net revenue $ 77.8 - $ 97.1 -
Cost of goods sold 53.4 68.6 59.1 60.9
Gross profit 24.4 31.4 38.0 39.1
Selling, general and
administrative expenses 26.8 34.4 27.1 27.9
Depreciation and
amortization expense 7.8 10.0 8.7 9.0
Other operating expense
(income), net 1.5 1.9 (0.1 ) (0.1 )
Income (loss) from
operations (11.7 ) (15.0 ) 2.3 2.4
Interest expense 5.3 6.8 5.5 5.7
Foreign currency gain (1.2 ) (1.5 ) (1.5 ) (1.5 )
Other non-operating
income, net (4.0 ) (5.1 ) - -
Loss before income tax
benefit (11.8 ) (15.2 ) (1.7 ) (1.8 )
Income tax benefit (3.1 ) (4.0 ) (0.3 ) (0.3 )
Net loss $ (8.7 ) (11.2 ) $ (1.4 ) (1.4 )
Non-GAAP
EBITDA $ 9.6 $ 22.3
AEBITDA (Constant
Currency) $ 16.6 $ 28.5
Net Revenue
The following tables and the discussion that follows compare our net revenue by
geographic region and by product line for the third quarter of 2022 and 2021 on
a GAAP basis and on a non-GAAP constant currency basis as described above and in
the discussion below. See also "Presentation and Reconciliation of GAAP to
Non-GAAP Measures" for further detail:
Three Months Ended September 30,
2022 % Net revenue 2021 % Net revenue
North America $ 33.4 42.9 $ 37.3 38.4
Europe/Asia 44.4 57.1 59.8 61.6
Net revenue $ 77.8 100.0 $ 97.1 100.0
Cushioning machines $ 33.4 42.9 $ 40.9 42.1
Void-Fill machines 31.3 40.2 39.5 40.7
Wrapping machines 9.6 12.3 12.6 13.0
Other 3.5 4.6 4.1 4.2
Net revenue $ 77.8 100.0 $ 97.1 100.0
Non-GAAP Constant Currency
Three Months Ended September 30,
2022 % Net revenue 2021 % Netrevenue $ Change % Change North America$ 33.4 39.7$ 37.3 39.0$ (3.9 ) (10.5 ) Europe/Asia 50.7 60.3 58.3 61.0 (7.6 ) (13.0 ) Net revenue$ 84.1 100.0$ 95.6 100.0$ (11.5 ) (12.0 ) Cushioning machines$ 36.6 43.5$ 40.2 42.1$ (3.6 ) (9.0 ) Void-Fill machines 33.5 39.8 39.1 40.9 (5.6 ) (14.3 ) Wrapping machines 9.9 11.8 12.5 13.1 (2.6 ) (20.8 ) Other 4.1 4.9 3.8 3.9 0.3 7.9 Net revenue$ 84.1 100.0$ 95.6 100.0$ (11.5 ) (12.0 ) 27
-------------------------------------------------------------------------------- Net revenue for the third quarter of 2022 was$77.8 million compared to net revenue of$97.1 million in the third quarter of 2021, a decrease of$19.3 million or 19.9% year over year. Net revenue was negatively impacted by decreases in cushioning, void-fill, and wrapping. In addition to currency headwinds, which contributed 7.6 points of pressure, revenue from all product categories was negatively affected by lower economic activity; lower e-Commerce use due to the opening up of economies; the impact inflationary pressures are having on consumer and corporate budgets; and tightening inventory management in response to uncertainties in the European economic environment. The impact of the Omicron variant of COVID-19 that previously limited customer visits has waned through the third quarter of 2022. Cushioning decreased$7.5 million , or 18.3%, to$33.4 million from$40.9 million ; void-fill decreased$8.2 million , or 20.8%, to$31.3 million from$39.5 million ; wrapping decreased$3.0 million , or 23.8%, to$9.6 million from$12.6 million ; and other sales decreased$0.6 million , or 14.6%, to$3.5 million from$4.1 million for the third quarter of 2022 compared to the third quarter of 2021. Other net revenue includes automated box sizing equipment and non-paper revenue from packaging systems installed in the field, such as systems accessories. The decrease in net revenue is quantified by a decrease in the volume of sales of our paper consumable products of approximately 26.8 percentage points ("pp"), partially offset by a 14.4 pp increase in the price or mix of our paper consumable products, and an increase of 0.3 pp in sales of automated box sizing equipment. Net revenue inNorth America for the third quarter of 2022 totaled$33.4 million compared to net revenue inNorth America of$37.3 million in the third quarter of 2021. The decrease of$3.9 million , or 10.5%, was primarily attributable to decreases in wrapping and void-fill sales, partially offset by increases in cushioning sales. Net revenue inEurope /Asia for the third quarter of 2022 totaled$44.4 million compared to net revenue inEurope /Asia of$59.8 million in the third quarter of 2021. The decrease of$15.4 million , or 25.8%, was driven by lower cushioning, void-fill, and wrapping sales as well as currency headwinds. Constant currency net revenue inEurope /Asia was$50.7 million for the third quarter of 2022, a$7.6 million , or 13.0%, decrease from constant currency net revenue of$58.3 million for the third quarter of 2021.
Cost of Goods Sold
Cost of goods sold for the third quarter of 2022 totaled$53.4 million , a decrease of$5.7 million , or 9.6%, compared to$59.1 million in the third quarter of 2021. The change was primarily due to lower sales volumes and a decrease in depreciation of$1.5 million over the prior year. Additionally, currency rate fluctuations accounted for approximately 8.6% of the decrease over prior year. We continued to experience increased manufacturing input costs during the third quarter of 2022, primarily driven by increases in the price of paper inNorth America andEurope . This resulted in our implementation of additional pricing actions in the third quarter of 2022.
Selling, General and Administrative Expenses ("SG&A")
SG&A for the third quarter of 2022 was$26.8 million , a decrease of$0.3 million , or 1.1%, from$27.1 million in the third quarter of 2021. The change in SG&A was primarily due to decreased headcount and associated compensation. Additionally, currency rate fluctuations accounted for approximately 4.8% of the decrease over prior year.
Depreciation and Amortization
Depreciation and amortization expenses for the third quarter of 2022 were$7.8 million , a decrease of$0.9 million , or 10.3%, from$8.7 million in the third quarter of 2021 primarily due to a decrease in depreciation of computer software. Additionally, currency rate fluctuations accounted for approximately 4.6% of the decrease over prior year.
Other Operating Expense (Income), Net
Other operating expense, net for the third quarter of 2022 was$1.5 million , a change of$1.6 million from income of$0.1 million in the third quarter of 2021. The change in other operating expense (income), net was primarily due to an increase in research and development costs.
Interest Expense
Interest expense for the third quarter of 2022 was$5.3 million , a decrease of$0.2 million , or 3.6%, from$5.5 million in the third quarter of 2021. The change was due to a decrease in debt in the third quarter of 2022 compared to the third quarter of 2021. Additionally, currency rate fluctuations accounted for approximately 1.8% of the decrease over prior year.
Foreign Currency Gain
Foreign currency gain for the third quarter of 2022 was$1.2 million , a change of$0.3 million , or 20.0%, from foreign currency gain of$1.5 million in the third quarter of 2021 due to the volatility in Euro exchange rates compared to USD. 28 --------------------------------------------------------------------------------
Other Non-Operating Expense (Income), Net
Other non-operating income, net for the third quarter of 2022 was$3.9 million and represents the unrealized gain on our investment in a small private business. Other non-operating income, net was not material for the third quarter of 2021. Income Tax Benefit Income tax benefit for the third quarter of 2022 was$3.1 million , or an effective tax rate of 26.8%. Income tax benefit was$0.3 million in the third quarter of 2021, or an effective tax rate of 16.1%. The fluctuation in the effective tax rate between periods was primarily attributable to a jurisdictional mix of income. The effective tax rate differs from theU.S. federal statutory rate due primarily to benefits derived from stock-based compensation, theU.S. foreign derived intangible income deduction, tax credits available in theU.S. , and income in foreign jurisdictions that are taxed at different rates than theU.S. statutory tax rate.
Net Loss
Net loss for the third quarter of 2022 increased$7.3 million to$8.7 million from a net loss of$1.4 million in the third quarter of 2021. The change was due to the reasons discussed above.
EBITDA and AEBITDA
EBITDA for the third quarter of 2022 was
Comparison of Nine Months EndedSeptember 30, 2022 to Nine Months EndedSeptember 30, 2021 Nine Months Ended September 30, 2022 % Net revenue 2021 % Net revenue Net revenue$ 247.1 -$ 274.8 - Cost of goods sold 169.8 68.7 164.8 60.0 Gross profit 77.3 31.3 110.0 40.0 Selling, general and administrative expenses 86.8 35.1 70.8 25.8 Depreciation and amortization expense 24.0 9.7 26.1 9.5 Other operating expense, net 3.4 1.4 2.0 0.7 Income (loss) from operations (36.9 ) (14.9 ) 11.1 4.0 Interest expense 15.2 6.2 17.1 6.2 Foreign currency gain (4.1 ) (1.7 ) (3.9 ) (1.4 ) Other non-operating income, net (4.0 ) (1.6 ) - - Loss before income tax benefit (44.0 ) (17.8 ) (2.1 ) (0.8 ) Income tax benefit (9.9 ) (4.0 ) (1.8 ) (0.7 ) Net loss$ (34.1 ) (13.8 )$ (0.3 ) (0.1 ) Non-GAAP EBITDA$ 23.9 $ 69.4 AEBITDA (Constant Currency)$ 53.9 $ 82.1 Net Revenue The following tables and the discussion that follows compare our net revenue by geographic region and by product line for the nine months endedSeptember 30, 2022 and 2021 on a GAAP basis and on a non-GAAP constant currency basis as described above and in the discussion below. See also "Presentation and Reconciliation of GAAP to Non-GAAP Measures" for further detail: Nine Months Ended September 30, 2022 % Net revenue 2021 % Net revenue North America$ 98.6 39.9$ 101.1 36.8 Europe/Asia 148.5 60.1 173.7 63.2 Net revenue$ 247.1 100.0$ 274.8 100.0 Cushioning machines$ 107.2 43.4$ 118.9 43.3 Void-Fill machines 97.4 39.4 109.3 39.8 Wrapping machines 30.8 12.5 36.3 13.2 Other 11.7 4.7 10.3 3.7 Net revenue$ 247.1 100.0$ 274.8 100.0 29
--------------------------------------------------------------------------------
Non-GAAP Constant Currency
Nine Months Ended September 30,
2022 % Net revenue 2021 % Net revenue $ Change % Change
North America $ 98.6 38.1 $ 101.1 37.7 $ (2.5 ) (2.5 )
Europe/Asia 160.4 61.9 167.0 62.3 (6.6 ) (4.0 )
Net revenue $ 259.0 100.0 $ 268.1 100.0 $ (9.1 ) (3.4 )
Cushioning machines $ 113.2 43.7 $ 115.5 43.1 $ (2.3 ) (2.0 )
Void-Fill machines 101.4 39.2 107.0 39.9 (5.6 ) (5.2 )
Wrapping machines 31.5 12.2 35.7 13.3 (4.2 ) (11.8 )
Other 12.9 4.9 9.9 3.7 3.0 30.3
Net revenue $ 259.0 100.0 $ 268.1 100.0 $ (9.1 ) (3.4 )
Net revenue for the nine months ended September 30, 2022 was $247.1 million
compared to net revenue of $274.8 million in the nine months ended September 30,
2021 , a decrease of $27.7 million or 10.1%. Net revenue was negatively impacted
by currency headwinds, as well as decreases in cushioning, void-fill, wrapping,
slightly offset by an increase in other sales. Revenue from all product
categories was negatively affected by lower economic activity; lower e-Commerce
use due to the opening up of economies; the impact inflationary pressures are
having on consumer and corporate budgets; and tightening inventory management in
response to uncertainties in the European economic environment. In addition to
currency headwinds, revenue from all product categories was negatively affected
by our global transition to a new cloud-based ERP system, particularly in the
first quarter of 2022. The ERP system transition created certain obstacles that
affected operations, including scheduled downtime for cutting over to the new
ERP system; processing and shipping inefficiencies associated with using a new
ERP system; and, while transitioning to the new ERP system, the delay of pricing
increases to help offset input cost pressures. Additionally, the impact of the
Omicron variant of COVID-19 limited customer visits in the first quarter of
2022; however, this impact waned during the second and third quarters of 2022.
Cushioning decreased $11.7 million , or 9.8%, to $107.2 million from $118.9
million ; void-fill decreased $11.9 million , or 10.9%, to $97.4 million from
$109.3 million ; wrapping decreased $5.5 million , or 15.2%, to $30.8 million from
$36.3 million ; and other sales increased $1.4 million , or 13.6%, to $11.7
million from $10.3 million , for the nine months ended September 30, 2022
compared to the nine months ended September 30, 2021 . The decrease in net
revenue is quantified by a decrease in the volume of sales of our paper
consumable products of approximately 21.7 pp, offset by a 17.0 pp increase in
the price or mix of our paper consumable products, and an increase of 1.2 pp in
sales of automated box sizing equipment. Constant currency net revenue was
$259.0 million for the nine months ended September 30, 2022 , a $9.1 million , or
3.4%, decrease from constant currency net revenue of $268.1 million for the nine
months ended September 30, 2021 .
Net revenue in North America for the nine months ended September 30, 2022
totaled $98.6 million compared to net revenue in North America of $101.1 million
in the nine months ended September 30, 2021 . The decrease of $2.5 million , or
2.5%, was primarily attributable to a decrease in void-fill, wrapping, and other
sales, partially offset by an increase in cushioning sales.
Net revenue in Europe /Asia for the nine months ended September 30, 2022 totaled
$148.5 million compared to net revenue in Europe /Asia of $173.7 million in the
nine months ended September 30, 2021 . The decrease of $25.2 million , or 14.5%,
was driven by lower cushioning, void-fill, and wrapping sales as well as
currency headwinds. Constant currency net revenue in Europe /Asia was $160.4
million for the nine months ended September 30, 2022 , a $6.6 million , or 4.0%,
decrease from constant currency net revenue of $167.0 million for the nine
months ended September 30, 2021 .
Cost of Goods Sold
Cost of goods sold for the nine months endedSeptember 30, 2022 totaled$169.8 million , an increase of$5.0 million , or 3.0%, compared to$164.8 million in the nine months endedSeptember 30, 2021 . The change was primarily due to increased paper costs and an increase in depreciation of$0.4 million over the prior year, partially offset by an approximate 7.5% decrease due to currency rate fluctuations over prior year. We experienced increased manufacturing input costs in 2022, primarily driven by increased paper costs compared to 2021. As previously noted, we implemented additional pricing actions in the third quarter of 2022. SG&A SG&A for the nine months endedSeptember 30, 2022 was$86.8 million , an increase of$16.0 million , or 22.6%, from$70.8 million in the nine months endedSeptember 30, 2021 . The change in SG&A was largely due to increases in stock compensation expense from the 2021 LTIP PRSUs, increased headcount and associated compensation and ERP system implementation costs, partially offset by an approximate 5.4% decrease due to currency rate fluctuations over prior year. As previously noted, our lower volumes and continued pressure on margins led to headcount reductions and deferral of certain initiatives later in 2022. 30 --------------------------------------------------------------------------------
Depreciation and Amortization
Depreciation and amortization expenses for the nine months endedSeptember 30, 2022 were$24.0 million , a decrease of$2.1 million , or 8.0%, from$26.1 million in the nine months endedSeptember 30, 2021 , primarily due to a decrease in depreciation of computer software. Additionally, currency rate fluctuations accounted for approximately 3.1% of the decrease over prior year.
Other Operating Expense, Net
Other operating expense, net, for the nine months endedSeptember 30, 2022 was$3.4 million , an increase of$1.4 million , or 70.0%, from$2.0 million in the nine months endedSeptember 30, 2021 . The change in other operating expense (income), net was largely driven by increases in research and development costs in 2022, partially offset by an approximate 5.0% decrease due to currency rate fluctuations over prior year.
Interest Expense
Interest expense for the nine months endedSeptember 30, 2022 was$15.2 million , a decrease of$1.9 million , or 11.1%, from$17.1 million in the nine months endedSeptember 30, 2021 . The change was due to a decrease in debt during the nine months endedSeptember 30, 2022 compared to the nine months endedSeptember 30, 2021 . Additionally, currency rate fluctuations accounted for approximately 1.8% of the decrease over prior year.
Foreign Currency Gain
Foreign currency gain for the nine months endedSeptember 30, 2022 was$4.1 million , a change of$0.2 million , or 5.1%, from foreign currency gain of$3.9 million in the nine months endedSeptember 30, 2021 due to the volatility in Euro exchange rates compared to USD.
Other Non-Operating Expense (Income), Net
Other non-operating income, net for the nine months endedSeptember 30, 2022 was$3.9 million and represents the unrealized gain on our investment in a small private business. Other non-operating income, net was not material for the nine months endedSeptember 30, 2021 .
Income Tax Benefit
Income tax benefit for the nine months endedSeptember 30, 2022 was$9.9 million , or an effective tax rate of 22.6%. Income tax benefit was$1.8 million in the nine months endedSeptember 30, 2021 , or an effective tax rate of 89.1%. The fluctuation in the effective tax rate between periods was primarily attributable to a jurisdictional mix of income. The effective tax rate differs from theU.S. federal statutory rate due primarily to benefits derived from stock-based compensation, theU.S. foreign derived intangible income deduction, tax credits available in theU.S. , and income in foreign jurisdictions that are taxed at different rates than theU.S. statutory tax rate.
Net Loss
Net loss for the nine months endedSeptember 30, 2022 increased$33.8 million to$34.1 million from net loss of$0.3 million in the nine months endedSeptember 30, 2021 . The change was due to the reasons discussed above.
EBITDA and AEBITDA
EBITDA for the nine months endedSeptember 30, 2022 was$23.9 million , a decrease of$45.5 million , or 65.6%, from$69.4 million in the nine months endedSeptember 30, 2021 . Adjusting for one-time costs, AEBITDA for the nine months endedSeptember 30, 2022 and 2021 totaled$53.9 million and$82.1 million , respectively, a decrease of$28.2 million , or 34.3%.
Presentation and Reconciliation of GAAP to Non-GAAP Measures
As noted above, we believe that in order to better understand the performance of
the Company, providing non-GAAP financial measures to users of our financial
information is helpful. We believe presentation of these non-GAAP measures is
useful because they are many of the key measures that allow management to
evaluate more effectively our operating performance and compare the results of
our operations from period to period and against peers without regard to
financing methods or capital structure. Management does not consider these
non-GAAP measures in isolation or as an alternative to similar financial
measures determined in accordance with GAAP. The computations of EBITDA and
AEBITDA may not be comparable to other similarly titled measures of other
companies. These non-GAAP financial measures should not be considered as
alternatives to, or more meaningful than, measures of financial performance as
determined in accordance with GAAP or as indicators of operating performance.
31
--------------------------------------------------------------------------------
The following tables and related notes reconcile certain non-GAAP measures,
including the non-GAAP constant currency measures, to GAAP information presented
in this Quarterly Report on Form 10-Q for the three and nine months ended
Three Months Ended September 30,
2022 2021 $ Change % Change
Net revenue $ 77.8 $ 97.1 $ (19.3 ) (19.9 )
Cost of goods sold 53.4 59.1 (5.7 ) (9.6 )
Gross profit 24.4 38.0 (13.6 ) (35.8 )
Selling, general and
administrative expenses 26.8 27.1 (0.3 ) (1.1 )
Depreciation and
amortization expense 7.8 8.7 (0.9 ) (10.3 )
Other operating expense
(income), net 1.5 (0.1 ) 1.6 (1,600.0 )
Income (loss) from
operations (11.7 ) 2.3 (14.0 ) (608.7 )
Interest expense 5.3 5.5 (0.2 ) (3.6 )
Foreign currency gain (1.2 ) (1.5 ) 0.3 (20.0 )
Other non-operating
income, net (4.0 ) - (4.0 ) -
Loss before income tax
benefit (11.8 ) (1.7 ) (10.1 ) 594.1
Income tax benefit (3.1 ) (0.3 ) (2.8 ) 933.3
Net loss (8.7 ) (1.4 ) (7.3 ) 521.4
Depreciation and
amortization expense - COS 8.3 9.8 (1.5 ) (15.3 )
Depreciation and
amortization expense - D&A 7.8 8.7 (0.9 ) (10.3 )
Interest expense 5.3 5.5 (0.2 ) (3.6 )
Income tax benefit (3.1 ) (0.3 ) (2.8 ) 933.3
EBITDA(1) 9.6 22.3 (12.7 ) (57.0 )
Adjustments(2):
Unrealized gain
translation (1.3 ) (1.6 ) 0.3 (18.8 )Non-cash impairment losses 0.3 0.3 - - M&A, restructuring, severance 0.1 0.1 - - Amortization of restricted stock units 6.7 6.9 (0.2 ) (2.9 ) Amortization of cloud-based software implementation costs(3) 0.7 - 0.7 - Cloud-based software implementation costs 1.7 - 1.7 - Unrealized gain on investment in small private business (3.9 ) - (3.9 ) - Other adjustments 0.8 0.9 (0.1 ) (11.1 ) Constant currency 1.9 (0.4 ) 2.3 (575.0 ) Constant Currency AEBITDA(1) $ 16.6 $ 28.5$ (11.9 ) (41.8 ) 32
--------------------------------------------------------------------------------
Nine Months Ended September 30,
2022 2021 $ Change % Change
Net revenue $ 247.1 $ 274.8 $ (27.7 ) (10.1 )
Cost of goods sold 169.8 164.8 5.0 3.0
Gross profit 77.3 110.0 (32.7 ) (29.7 )
Selling, general and
administrative expenses 86.8 70.8 16.0 22.6
Depreciation and
amortization expense 24.0 26.1 (2.1 ) (8.0 )
Other operating expense,
net 3.4 2.0 1.4 70.0
Income (loss) from
operations (36.9 ) 11.1 (48.0 ) (432.4 )
Interest expense 15.2 17.1 (1.9 ) (11.1 )Foreign currency gain (4.1 ) (3.9 ) (0.2 ) 5.1 Other non-operating income, net (4.0 ) - (4.0 ) - Loss before income tax benefit (44.0 ) (2.1 ) (41.9 ) 1,995.2 Income tax benefit (9.9 ) (1.8 ) (8.1 ) 450.0 Net loss (34.1 ) (0.3 ) (33.8 ) 11,266.7 Depreciation and amortization expense - COS 28.7 28.3 0.4 1.4 Depreciation and amortization expense - D&A 24.0 26.1 (2.1 ) (8.0 ) Interest expense 15.2 17.1 (1.9 ) (11.1 ) Income tax benefit (9.9 ) (1.8 ) (8.1 ) 450.0 EBITDA(1) 23.9 69.4 (45.5 ) (65.6 ) Adjustments(2): Unrealized gain translation (4.2 ) (4.2 ) - - Non-cash impairment losses 0.5 1.0 (0.5 ) (50.0 ) M&A, restructuring, severance 1.7 0.4 1.3 325.0 Amortization of restricted stock units 20.8 14.3 6.5 45.5 Amortization of cloud-based software implementation costs(3) 2.1 - 2.1 - Cloud-based software implementation costs 6.5 - 6.5 - Unrealized gain on investment in small private business (3.9 ) - (3.9 ) - Other adjustments 3.3 3.3 - - Constant currency 3.2 (2.1 ) 5.3 (252.4 ) Constant Currency AEBITDA(1) $ 53.9 $ 82.1$ (28.2 ) (34.3 )
(see subsequent footnotes)
(1) Reconciliations of EBITDA and AEBITDA for each period presented are to net (loss) income, the nearest GAAP equivalent.
(2) Adjustments are related to non-cash unusual or infrequent costs such as: effects of non-cash foreign currency remeasurement or adjustment; impairment of returned machines; costs associated with the evaluation of acquisitions; costs associated with executive severance; costs associated with restructuring actions such as plant rationalization or realignment, reorganization, and reductions in force; costs associated with the implementation of the global ERP system; and other items deemed by management to be unusual, infrequent, or non-recurring.
(3) Represents amortization of capitalized costs related to the implementation of the global ERP system, which are included in SG&A.
Liquidity and Capital Resources
Liquidity describes the ability of a company to generate sufficient cash flows to meet the cash requirements of its business operations, including working capital needs, capital expenditures, debt service, acquisitions, other commitments and contractual obligations. We evaluate liquidity in terms of cash flows from operations and other sources and the sufficiency of such cash flows to fund our operating, investing and financing activities. We believe that our cash balances together with borrowing capacity under the revolving portion of the Facilities will provide us with sufficient resources to cover our current requirements. Our main liquidity needs relate to capital expenditures and expenses for the production and maintenance of PPS systems placed at end-user facilities, working capital, including the purchase of paper raw materials, and payments of principal and interest on our outstanding debt. We expect our capital expenditures to increase as we continue to grow our business, expand our manufacturing footprint, and upgrade our existing systems and facilities. We continue to evaluate our inventory requirements and adjust according to our volume forecasts. Our future capital requirements and the adequacy of available funds will depend on many factors, and if we are unable to obtain needed additional funds, we may have to reduce our operating costs or incur additional debt, which could impair our growth prospects and/or otherwise negatively impact our business. Further, volatility in the equity and credit markets resulting from the COVID-19 pandemic, the conflict inUkraine , or other macroeconomic factors could make obtaining new equity or debt financing more difficult or expensive. 33 -------------------------------------------------------------------------------- We had$61.3 million in cash and cash equivalents as ofSeptember 30, 2022 and$103.9 million as ofDecember 31, 2021 . We sold approximately 5.3 million shares of Class A common stock in theMay 2021 Equity Offering for net proceeds of$103.4 million . We used$70.0 million of proceeds from theMay 2021 Equity Offering to invest in a money market fund to generate short-term cash returns. Additionally, we prepaid$20.9 million of principal on the FirstLien Dollar Term Facility in theJune 2021 Prepayment. Including finance lease liabilities and excluding deferred financing costs, we had$384.7 million in debt,$2.0 million of which was classified as short-term, as ofSeptember 30, 2022 , compared to$406.5 million in debt,$2.2 million of which was classified as short-term, as ofDecember 31, 2021 . AtSeptember 30, 2022 , we did not have amounts outstanding under our$45.0 million revolving credit facility, and we had no borrowings under such facility throughNovember 1, 2022 . Share Repurchase Program OnJuly 26, 2022 , the Directors authorized a general share repurchase program of our Class A common stock of up to$50.0 million , with a 36-month expiration. These Class A common stock repurchases may occur in transactions that may include, without limitation, tender offers, open market purchases, accelerated share repurchases, negotiated block purchases, and transactions effected through plans under Rule 10b5-1 of the Securities Exchange Act of 1934. The timing and actual amount of shares repurchased will depend on a variety of different factors and may be modified, suspended or terminated at any time at the discretion of the Directors.
Debt Profile
The material terms of the Facilities are summarized in Note 7, "Long-Term Debt" to the unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q. InJune 2019 , Holdings, theU.S. Borrower, and the Dutch Borrower entered into the Facilities. The First Lien Term Facility matures in 2026 and the Revolving Facility matures in 2024. As ofSeptember 30, 2022 andDecember 31, 2021 , no amounts were outstanding under the Revolving Facility. Borrowings under the Facilities, at the Borrowers' option, bear interest at either (i) an adjusted eurocurrency rate or (ii) a base rate, in each case plus an applicable margin. The applicable margin is 3.75% with respect to eurocurrency borrowings and base rate borrowings as ofSeptember 30, 2022 andDecember 31, 2021 , (in each case, assuming a first lien net leverage ratio of less than 5.00:1.00), subject to a leverage-based step-up to an applicable margin equal to 4.00% for eurocurrency borrowings. Global interest rates have risen meaningfully in 2022 and we expect interest on our Facilities to increase. The Revolving Facility includes borrowing capacity available for standby letters of credit of up to$5.0 million . Any issuance of letters of credit will reduce the amount available under the Revolving Facility. As ofSeptember 30, 2022 , we had$1.8 million committed to outstanding letters of credit, leaving net availability under the Revolving Facility at$43.2 million . The Facilities will provide the Borrowers with the option to increase commitments under the Facilities in an aggregate amount not to exceed the greater of$95.0 million and 100% of trailing-twelve months Consolidated EBITDA (as defined in the definitive documentation with respect to the Facilities), plus any voluntary prepayments of the debt financing (and, in the case of the Revolving Facility, to the extent such voluntary prepayments are accompanied by permanent commitment reductions under the Revolving Facility), plus unlimited amounts subject to the relevant net leverage ratio tests and certain other conditions. The obligations of (i) theU.S. Borrower under the Facilities and certain of its obligations under hedging arrangements and cash management arrangements are unconditionally guaranteed by Holdings and the Guarantors, in each case, other than certain excluded subsidiaries. The Facilities are secured by (i) a first priority pledge of the equity interests of the Borrowers and of each direct, wholly-owned restricted subsidiary of any Borrower or any Guarantor and (ii) a first priority security interest in substantially all of the assets of the Borrowers and the Guarantors (in each case, subject to customary exceptions), provided that obligations of theU.S. Borrower andU.S. Guarantors under the Facilities were not secured by assets of the Dutch Borrower or any Dutch Guarantor. The Facilities impose restrictions that require the Company to comply with or maintain certain financial tests and ratios. Such agreements restrict our ability to, among other things: (i) declare dividends or redeem or repurchase capital stock, including with respect to Class A common stock; (ii) prepay, redeem or purchase other debt; (iii) incur liens; (iv) make loans, guarantees, acquisitions and other investments; (v) incur additional indebtedness; (vi) engage in sale and leaseback transactions; (vii) amend or otherwise alter debt and other material agreements; (viii) engage in mergers, acquisitions and asset sales; (ix) engage in transactions with affiliates; and (x) enter into arrangements that would prohibit us from granting liens or restrict our ability to pay dividends, make loans or transfer assets among our subsidiaries. 34 --------------------------------------------------------------------------------
Amendment to First Lien Credit Facilities
OnFebruary 14, 2020 , theU.S. Borrower, the Dutch Borrower, Holdings, certain other subsidiaries of Holdings, certain lenders party to Amendment No. 1 and the Administrative Agent entered into Amendment No. 1. Among other things, the Amendment No. 1 amends the Facilities such that (x) the requirement of the Borrowers to apply a percentage of excess cash flow to mandatorily prepay term loans under the Facilities commences with the fiscal year endingDecember 31, 2021 (instead of the fiscal year endingDecember 31, 2020 ) and (y) the aggregate amount per fiscal year of capital stock of any parent company of theU.S. Borrower that is held by directors, officers, management, employees, independent contractors or consultants of theU.S. Borrower (or any parent company or subsidiary thereof) that theU.S. Borrower may repurchase, redeem, retire or otherwise acquire or retire for value has been increased to the greater of$10.0 million and 10% of Consolidated AEBITDA (as defined in the Facilities) (increased from the greater of$7.0 million and 7% of Consolidated AEBITDA) as of the last day of the most recently ended quarter for which financial statements have been delivered.
Borrower Assumption Agreement
OnJuly 1, 2020 , contemporaneously with the Reorganization,Ranger Packaging LLC ,Ranpak Corp. ,Ranger Pledgor LLC , certain other subsidiaries ofRanger Pledgor LLC andGoldman Sachs Lending Partners LLC entered into the Borrower Assumption Agreement whereby, among other things,Ranpak Corp. assumed all obligations, liabilities and rights ofRanger Packaging LLC as theU.S. Borrower under the Facilities. Permitted Exit Payment Additionally, as a result of making the Exit Payment to our lenders, we became eligible to enter into the Permitted Exit Payment Amendment (as defined in the Credit Agreement) to the Credit Agreement which, among other things, would introduce additional exceptions to the negative covenant that restricts the ability of the Borrowers and their restricted subsidiaries from paying dividends and distributions or repurchasing capital stock. OnJuly 28, 2021 , the Permitted Exit Payment Amendment to the Credit Agreement became effective.
Cash Flows
The following table sets forth our summary cash flow information for the periods
indicated:
Nine Months Ended September 30,
2022 2021
Net cash provided by (used in) operating
activities $ (9.5 ) $ 40.8
Net cash used in investing activities (27.1 ) (50.7 )
Net cash provided by (used in) financing
activities (4.3 ) 72.6
Effect of Exchange Rate Changes on Cash (1.7 ) (0.8 )
Net Increase (Decrease) in Cash and Cash
Equivalents (42.6 ) 61.9
Cash and Cash Equivalents, beginning of
period 103.9 48.5
Cash and Cash Equivalents, end of period $ 61.3 $ 110.4
Cash Flows Provided by (Used in) Operating Activities
Net cash used in operating activities was$9.5 million in the nine months endedSeptember 30, 2022 . Cash provided by operating activities was$40.8 million in the nine months endedSeptember 30, 2021 . The changes in operating cash flows are largely due to the decreases in cash earnings due to increased input costs, increased SG&A, currency headwinds, investments in working capital, and the unrealized gain on our investment in a small private business.
Cash Flows Used in Investing Activities
Net cash used in investing activities was$27.1 million in the nine months endedSeptember 30, 2022 and reflects cash received in termination of our cross-currency swaps, cash used for production of converter equipment and the renovation of our global headquarters inConcord ,Ohio , and an investment in a small private business. Cash used in investing activities was$50.7 million in the nine months endedSeptember 30, 2021 and reflects cash used for production of converter equipment, technology infrastructure improvements, and our investments in small private businesses.
Cash Flows Provided by (Used in) Financing Activities
Net cash used in financing activities was$4.3 million in the nine months endedSeptember 30, 2022 and reflects debt repayments, payments on finance lease liabilities, and tax payments for withholdings on stock compensation. Net cash provided by financing 35 -------------------------------------------------------------------------------- activities was$72.6 million in the nine months endedSeptember 30, 2021 and reflects theMay 2021 Equity Offering net proceeds of$103.4 million , offset by theJune 2021 Prepayment of$20.9 million , and the$8.2 million Exit Payment.
Contractual Obligations and Other Commitments
We lease production and administrative facilities as well as automobiles, machinery and equipment. We have various contractual obligations and commercial commitments that are recorded as liabilities in our condensed consolidated financial statements. Other items, such as purchase obligations and other executory contracts, are not recognized as liabilities, but are required to be disclosed. There have been no significant changes outside the ordinary course of business to our "Contractual Obligations" table in "Management's Discussion and Analysis of Financial Condition and Results of Operations" of the 2021 10-K.
Off-Balance Sheet Arrangements
We did not have any off-balance sheet arrangements as of
Critical Accounting Policies
Our unaudited condensed consolidated financial statements have been prepared in conformity with GAAP, which requires management to make estimates and assumptions that affect the reported amount of assets and liabilities at the date of our financial statements and the reported amounts of revenues and expenses during the reporting period. While we do not believe that the reported amounts would be materially different, application of these policies involves the exercise of judgment and the use of assumptions as to future uncertainties and, as a result, actual results could differ from these estimates. We evaluate our estimates and judgments on an ongoing basis. We base our estimates on experience and various other assumptions that we believe are reasonable under the circumstances. All of our significant accounting policies, including certain critical accounting policies and estimates, are disclosed in our 2021 10-K.
Impairment of
We periodically review goodwill and indefinite-lived intangible assets for possible impairment whenever there is evidence that events or changes in circumstances indicate that the carrying value of our goodwill reporting units or identifiable indefinite-lived intangible assets may be less than their fair values. Additionally, we review our long-lived asset groups whenever there is evidence that events or changes in circumstances indicate the carrying value of our asset groups may not be recoverable. If events or circumstances exist, including a continuation of current market conditions, that indicate that the carrying value of our goodwill reporting units or identifiable indefinite-lived intangible assets may be less than their fair values, or the carrying amount of our long lived-asset groups may no longer be recoverable, we may recognize a non-cash impairment of goodwill, identifiable indefinite-lived intangible assets, or long-lived asset groups, which could have a material adverse effect on our consolidated financial condition or results of operations in future periods. For additional information on our accounting principles with respect to goodwill, identifiable indefinite-lived intangible assets, and long-lived assets, please see "Management Discussion & Analysis - Critical Accounting Policies" in our 2021 10-K. As previously noted, declining market conditions and the decline in our share price triggered interim testing for impairment as ofSeptember 1, 2022 . The test for goodwill used unobservable inputs that required significant judgement and were performed using a combination of the Discounted Cash Flow Method and the Guideline Public Company Method in order to determine fair value. The test for indefinite-lived intangible assets also used unobservable inputs that required significant judgement and were performed using the Relief from Royalty Method in order to determine fair value. The evaluation of our asset groups used unobservable inputs that required significant judgement and were performed using an undiscounted cash flow analysis. Upon completion of these tests, we concluded that each area was not impaired. However, the test for one of our goodwill reporting units that encompasses our business inEurope indicated that fair value of the reporting unit was close to approximating carrying value. The unobservable inputs that required significant judgment include estimates and assumptions affected by conditions specific to our businesses, economic conditions related to the industries in which we operate, and conditions in the global economy. Changes in these estimates and assumptions, especially considering the volatility in European markets in 2022, may result in an impairment charge for the goodwill reporting unit that encompasses our business inEurope . The assumptions that have the most significant effect on the fair values of our goodwill reporting units derived using the Discounted Cash Flow Method are (i) the expected long-term growth rate of our reporting units' cash flows and (i) the weighted average cost of capital ("WACC") for each reporting unit. A hypothetical decrease in the expected long-term growth rate by approximately 92 basis points would have resulted in a charge in the reporting unit that encompasses our business inEurope . Separately, a hypothetical increase in the WACC by approximately 74 basis points would have resulted in a charge in the reporting unit that encompasses our business inEurope . 36 -------------------------------------------------------------------------------- We believe that our estimates and assumptions are reasonable but are subject to change from period to period. Actual results of operations and other factors may differ from the estimates used and it is possible that differences could be significant. A change in the estimates we use could result in a decline in the estimated fair values derived as of theSeptember 1, 2022 interim testing. If we fail an impairment test, any non-cash impairment charge may have an adverse effect on our results of operations and financial condition. We will continue to monitor events and circumstances for indicators of impairment in our reporting units, indefinite-lived intangible assets, and asset groups.
Recently Issued and Adopted Accounting Pronouncements
For recently issued and adopted accounting pronouncements, see Note 2, "Basis of
Presentation and Summary of Significant Accounting Policies" to the unaudited
condensed consolidated financial statements included elsewhere in this Quarterly
Report on Form 10-Q.
37--------------------------------------------------------------------------------
© Edgar Online, source
