# Ranpak Holdings Corp. (PACK) FY 2021 MD&A

Verbatim Item 7 Management's Discussion and Analysis from Ranpak Holdings Corp.'s 10-K for fiscal year 2021.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1712463/000095017022002310/pack-20211231.htm
Accession: 0000950170-22-002310
Filing date: 2022-02-28
Report date: 2021-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary. Published MD&A gate trimmed front/tail over-capture.
Confidence: high

Company profile: /company/PACK/
All MD&A years: /company/PACK/mda/
Next year: /company/PACK/mda/fy2022/ (FY 2022)

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The information in this Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read together with our consolidated financial statements and related notes set forth in Part II, Item 8, as well as the discussion included in Part I, Item 1A, “Risk Factors,” of this Report. All amounts and percentages are approximate due to rounding.

Cautionary Notice Regarding Forward-Looking Statements

All statements other than statements of historical fact included in this Report, including, without limitation, statements under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” regarding our financial position, business strategy and the plans and objectives of management for future operations, are forward-looking statements. When used in this Report, words such as “may,” “should,” “could,” “would,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “continue,” or the negative of such terms or other similar expressions, as they relate to us or our management, identify forward-looking statements. Factors that might cause or contribute to such a discrepancy include, but are not limited to, those described in our other SEC filings. Such forward-looking statements are based on the beliefs of management, as well as assumptions made by, and information currently available to, our management. No assurance can be given that results in any forward-looking statement will be achieved and actual results could be affected by one or more factors, which could cause them to differ materially. The cautionary statements made in this Report should be read as being applicable to all forward-looking statements whenever they appear in this Report. For these statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act. Actual results could differ materially from those contemplated by the forward-looking statements as a result of certain factors detailed in our filings with the SEC. All subsequent written or oral forward-looking statements attributable to us or persons acting on our behalf are qualified in their entirety by this paragraph.

The forward-looking statements contained in this Report and the Exhibits attached hereto 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. Should one or more of these risks or uncertainties materialize, they could cause our actual results to differ materially from the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified in the section titled, “Risk Factors” included elsewhere in this Report. Except as required by law, 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.

Overview

We are a leading provider of environmentally sustainable, systems-based, product protection solutions and end-of-line automation solutions for e-commerce and industrial supply chains. Since our inception in 1972, we have delivered high quality protective packaging solutions, while maintaining our commitment to environmental sustainability. We assemble our PPS systems and provide the 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 provide end-of-line automation systems that solve challenges, including optimization, customization, and efficiency, facing end-users of our products. We are a global business that generated approximately 64.9% of our 2021 net revenue outside of the United States.

As of December 31, 2021, we had an installed base of approximately 133.2 thousand protective packaging systems serving a diverse set of distributors and end-users. We generated net revenue of $383.9 million and $298.2 million in 2021 and 2020, respectively.

The Ranpak Business Combination

On June 3, 2019, we consummated the acquisition of all outstanding and issued equity interests of Rack Holdings, Inc. (“Rack Holdings”) pursuant to a stock purchase agreement (the “Ranpak Business Combination”) for consideration of $794.9 million, which reflects a post-closing adjustment of $0.7 million for net working capital and additional consideration, and €140.0 million ($160.8 million) in cash, (i) $341.5 million and €140.0 million of which, respectively, was used by Rack Holdings L.P. (“Seller”) to repay outstanding indebtedness and unpaid transaction expenses as contemplated by the stock purchase agreement and (ii) the remainder of which was paid to the Seller.

The Ranpak Business Combination was financed, in part, with debt of approximately $534.6 million, which became Ranpak’s direct obligation upon the consummation of the Ranpak Business Combination. Upon the consummation of the Ranpak Business

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Combination on June 3, 2019, Rack Holdings’ then-existing debt, which amounted to approximately $487.6 million as of such date, was repaid in full. In December 2019, the Company closed a public offering of its Class A common stock generating net proceeds of approximately $107.7 million that was used to pay down the First Lien Dollar Term Facility. The closing of the Ranpak Business Combination also resulted in the elimination of certain non-recurring expenses incurred prior to the Ranpak Business Combination, which amounted to $35.4 million for 2019.

Except as otherwise provided herein, our financial statement presentation for 2019 is distinguished between the 1H 2019 Predecessor Period and the Successor Period.

Effects 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 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 (loss).

We hedge some of our exposure to foreign currency translation with a cross-currency swap. Refer to Note 12, “Derivative Instruments” to the consolidated financial statements included elsewhere in this Report for additional information. Significant currency fluctuations could impact the comparability of our 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.”

Acquisitions and Investments in Small Businesses

In 2021, we acquired Recycold and strategically invested in Pickle and Creapaper. In 2020, we acquired intangible assets from a European manufacturer in an asset acquisition. All amounts associated with these transactions are immaterial to this Report. Please refer to Note 9, “Goodwill, Long-Lived, and Intangible Assets, net” to our consolidated financial statements included elsewhere in this Report for further detail.

While recent acquisitions have been relatively small, any significant future business acquisitions may impact the comparability of our results in future periods with those for prior periods.

Impact of the COVID-19 Pandemic

The COVID-19 pandemic has resulted in rapid changes in market and economic conditions around the world as COVID-19 continues to spread. We derive a significant portion of our revenue from sales of PPS systems to e-commerce end-users and demand from these end-users has been strong, offsetting reductions in demand for these products from customers in other industries. However, social distancing and similar measures adopted in many jurisdictions around the world have impacted our ability to demonstrate and install our protective packaging systems and Automation products and, as a result, such demonstrations and installations have been delayed. If social distancing measures continue for an extended period of time, growth in our protective packaging system base, acquisition of new customers and sales of Automation products may be adversely affected. 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 the United 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 social distancing and other measures 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 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

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certain of our customers when necessary, while correspondingly seeking extended terms from our key suppliers. 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 evolving and highly uncertain nature and duration of the COVID-19 pandemic. See “Risk Factors” located previously in this Report. 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 monitors 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 revenue expectations. Our installed base of PPS systems also drives our capital expenditure budgets. The following table presents our installed base of PPS systems as of December 31, 2021 and 2020:

[[GREPCENT_TABLE]]
[["","","December 31, 2021","","","December 31, 2020","","","Change","","","% Change"],["PPS Systems","","(in thousands)"],["Cushioning machines","","","35.2","","","","33.6","","","","1.6","","","","4.8"],["Void-Fill machines","","","77.5","","","","68.0","","","","9.5","","","","14.0"],["Wrapping machines","","","20.5","","","","15.8","","","","4.7","","","","29.7"],["Total","","","133.2","","","","117.4","","","","15.8","","","","13.5"]]
[[/GREPCENT_TABLE]]

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 negotiate 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, global inflation contributed to the increases in the cost of paper, though we have not experienced the full impact of the increases to date because of existing purchase arrangements. However, due to these macroeconomic conditions, we anticipate vendor apprehension in committing to lengthier purchase arrangements and we expect our cost of goods sold to increase. 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.

Results of Operations

The following tables set forth our results of operations for 2021 and 2020, presented in millions of dollars.

In addition, in our discussion below, we include certain other unaudited, non-GAAP constant currency data for 2021 and 2020. This data is based on our historical financial statements included elsewhere in this Report, 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 2021 and 2020.

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Comparison of 2021 to 2020

[[GREPCENT_TABLE]]
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[[/GREPCENT_TABLE]]

Net Revenue

The following table and the discussion that follows compares our net revenue by geographic region and by product line for 2021 and 2020 on a GAAP basis and 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 details:

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["","","2021","","","% Net revenue","","","2020","","","% Net revenue"],["North America","","$","146.9","","","","38.3","","","$","127.4","","","","42.7"],["Europe/Asia","","","237.0","","","","61.7","","","","170.8","","","","57.3"],["Net revenue","","$","383.9","","","","100.0","","","$","298.2","","","","100.0"],["Cushioning machines","","$","162.6","","","","42.4","","","$","125.7","","","","42.2"],["Void-Fill machines","","","154.5","","","","40.2","","","","125.0","","","","41.9"],["Wrapping machines","","","52.0","","","","13.5","","","","38.8","","","","13.0"],["Other","","","14.8","","","","3.9","","","","8.7","","","","2.9"],["Net revenue","","$","383.9","","","","100.0","","","$","298.2","","","","100.0"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","","Non-GAAP Constant Currency"],["","","Year Ended December 31,"],["","","2021","","","% Net revenue","","","2020","","","% Net revenue","","","$ Change","","","% Change"],["North America","","$","146.9","","","","38.9","","","$","127.4","","","","42.6","","","$","19.5","","","","15.3"],["Europe/Asia","","","230.6","","","","61.1","","","","171.5","","","","57.4","","","","59.1","","","","34.5"],["Net revenue","","$","377.5","","","","100.0","","","$","298.9","","","","100.0","","","$","78.6","","","","26.3"],["Cushioning machines","","$","159.2","","","","42.2","","","$","125.9","","","","42.1","","","$","33.3","","","","26.4"],["Void-Fill machines","","","152.2","","","","40.3","","","","125.1","","","","41.9","","","","27.1","","","","21.7"],["Wrapping machines","","","51.4","","","","13.6","","","","38.8","","","","13.0","","","","12.6","","","","32.5"],["Other","","","14.7","","","","3.9","","","","9.1","","","","3.0","","","","5.6","","","","61.5"],["Net revenue","","$","377.5","","","","100.0","","","$","298.9","","","","100.0","","","$","78.6","","","","26.3"]]
[[/GREPCENT_TABLE]]

Net revenue for 2021 was $383.9 million compared to net revenue of $298.2 million in 2020, an increase of $85.7 million or 28.7%. Net revenue was positively impacted by increases in cushioning, void-fill, wrapping, and other sales. Cushioning increased $36.9 million, or 29.4%, to $162.6 million from $125.7 million; void-fill increased $29.5 million, or 23.6%, to $154.5 million from $125.0 million; wrapping increased $13.2 million, or 34.0%, to $52.0 million from $38.8 million; and other sales increased $6.1 million, or 70.1%, to $14.8 million from $8.7 million, for 2021 compared to 2020. Other net revenue includes automated box sizing equipment and non-paper revenue from packaging systems installed in the field, such as systems accessories. The increase in net revenue was a result of an increase in the volume of our paper consumable products of approximately 21.4 percentage points (“pp”), a 1.7 pp increase in the sales of automated box sizing equipment, and a 3.1 pp increase in the price or mix of our paper consumable products.

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Constant currency net revenue was $377.5 million for 2021, a $78.6 million, or 26.3%, increase from constant currency net revenue of $298.9 million for 2020.

Net revenue in North America for 2021 totaled $146.9 million compared to net revenue in North America of $127.4 million in 2020. The increase of $19.5 million, or 15.3%, was attributable to an increase in cushioning, void-fill, wrapping, and other sales.

Net revenue in Europe/Asia for 2021 totaled $237.0 million compared to net revenue in Europe/Asia of $170.8 million in 2020. The increase of $66.2 million, or 38.8%, was driven by increases in cushioning, void-fill, wrapping, and other sales. Constant currency net revenue in Europe/Asia was $230.6 million for 2021, a $59.1 million, or 34.5%, increase from constant currency net revenue of $171.5 million for 2020.

Cost of Goods Sold

Cost of goods sold for 2021 totaled $235.0 million, an increase of $59.4 million, or 33.8%, compared to $175.6 million in 2020. The change was due to higher volumes associated with higher paper sales, as well as increased paper and freight costs, and an increase in depreciation of $7.5 million over the prior year. Constant currency cost of goods sold increased by $55.4 million, or 31.5%, to $231.3 million in 2021 from $175.9 million for 2020. As a result, on a constant currency basis, net revenue minus cost of goods sold as a percentage of net revenue decreased by 2.4 pp to 38.7% in 2021 from 41.2% for the comparable period in 2020.

Selling, General, and Administrative (“SG&A”) Expenses

SG&A expenses for 2021 were $98.3 million, an increase of $25.8 million, or 35.6%, from $72.5 million in 2020. Constant currency SG&A expenses increased by $24.3 million, or 33.3%, to $97.2 million in 2021 from $72.9 million for the comparable period in 2020, largely due to increases in stock compensation expense from the 2021 LTIP PRSUs, as well as increased growth headcount and associated compensation. As a percentage of constant currency net revenue, constant currency SG&A increased to 25.7% in 2021 from 24.4% in 2020.

Transaction Costs

Transaction costs associated with the 2021 Recycold acquisition were immaterial. We incurred transaction costs of $2.2 million associated with the Warrant Exchange (herein defined) and other transactions in 2020.

Depreciation and Amortization

Depreciation and amortization expenses for 2021 were $35.0 million, an increase of $3.5 million, or 11.1%, from $31.5 million in 2020 due to an increase in capital expenditures. Constant currency depreciation and amortization expenses increased by $3.0 million, or 9.5%, to $34.7 million in 2021 from $31.7 million for 2020. As a percentage of constant currency net revenue, constant currency depreciation and amortization expenses decreased to 9.2% in 2021 from 10.6% in 2020.

Other Operating Expense, Net

Other operating expense, net, for 2021 was $3.4 million, a decrease of $1.3 million, or 27.7%, from $4.7 million in 2020. Constant currency other operating expense, net, was not impacted by constant currency adjustments in 2021 and 2020. The change in other operating expense, net was largely driven by capitalization of certain research and development costs in 2021. As a percentage of constant currency net revenue, constant currency other operating expense, net, decreased to 0.9% in 2021 from 1.6% in 2020.

Interest Expense

Interest expense for 2021 was $22.4 million, a decrease of $7.8 million, or 25.8%, from $30.2 million in 2020. The change was due to decreased debt levels, partially offset by accelerated amortization of approximately $0.3 million of deferred financing costs in the June 2021 Prepayment (herein defined) and interest expense on new finance leases. The Exit Payment (herein defined), which was accrued in 2020, was paid in the first quarter of 2021. Constant currency interest expense was $22.3 million in 2021 compared to $30.1 million in 2020. As a percentage of constant currency net revenue, constant currency interest expense decreased to 5.9% in 2021 from 10.1% in 2020.

Foreign Currency (Gain) Loss

Foreign currency gain for 2021 was $5.3 million, a change of $11.4 million, or 186.9%, from foreign currency loss of $6.1 million in 2020 due to favorable movements in Euro exchange rates. Constant currency foreign currency gain was $6.3 million in 2021 compared to $6.2 million in 2020. As a percentage of constant currency net revenue, constant currency foreign currency gain decreased to 1.7% in 2021 from 2.1% in 2020.

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Income Tax Benefit

Income tax benefit for 2021 was $2.1 million, or an effective tax rate of 42.7%. Income tax benefit was $1.2 million in 2020, or an effective tax rate of 6.2%. The fluctuation in the effective tax rate between periods was primarily attributable to a jurisdictional mix of income, benefits derived from stock-based compensation, return to provision adjustments, uncertain tax positions, and the U.S. foreign derived intangible income deduction, tax credits available in the U.S., and income in foreign jurisdictions that are taxed at different rates than the U.S. statutory tax rate.

Net Loss

Net loss for 2021 decreased $20.6 million to $2.8 million from a net loss of $23.4 million in 2020. Constant currency net loss was $2.9 million in 2021 compared to constant currency net loss of $23.4 million for 2020. The change was due to the reasons discussed above.

Constant Currency EBITDA and AEBITDA

EBITDA for 2021 was $90.0 million, an increase of $22.1 million, or 32.5%, from $67.9 million in 2020. Adjusting for unusual, infrequent, or nonrecurring costs, constant currency AEBITDA for 2021 and 2020 totaled $117.8 million and $93.7 million, respectively, an increase of $24.1 million, or 25.7%.

Comparison of 2020 to 2019

Discussions of 2019 items and comparisons between 2020 and 2019 that are not included in this Report can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of our Annual Report on Form 10-K for 2020.

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.

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The following tables and related notes reconcile certain non-GAAP measures, including the non-GAAP constant currency measures, to GAAP information presented in this Report for 2021 and 2020:

[[GREPCENT_TABLE]]
[["","","Year Ended December 31, 2021"],["","","As reported","","","Constant Currency(3)","","","Non-GAAP"],["Net revenue","","$","383.9","","","$","(6.4",")","","$","377.5"],["Cost of goods sold","","","235.0","","","","(3.7",")","","","231.3"],["Gross profit","","","148.9","","","","(2.7",")","","","146.2"],["Selling, general and administrative expenses","","","98.3","","","","(1.1",")","","","97.2"],["Depreciation and amortization expense","","","35.0","","","","(0.3",")","","","34.7"],["Other operating expense, net","","","3.4","","","","-","","","","3.4"],["Income from operations","","","12.2","","","","(1.3",")","","","10.9"],["Interest expense","","","22.4","","","","(0.1",")","","","22.3"],["Foreign currency gain","","","(5.3",")","","","(1.0",")","","","(6.3",")"],["Loss before income tax benefit","","","(4.9",")","","","(0.2",")","","","(5.1",")"],["Income tax benefit","","","(2.1",")","","","(0.1",")","","","(2.2",")"],["Net loss","","$","(2.8",")","","$","(0.1",")","","","(2.9",")"],["Constant currency-effected add(1):"],["Depreciation and amortization expense - COS","","","","","","","","","38.1"],["Depreciation and amortization expense - D&A","","","","","","","","","34.7"],["Interest expense","","","","","","","","","22.3"],["Income tax benefit","","","","","","","","","(2.2",")"],["Constant currency EBITDA","","","","","","","","","90.0"],["Constant currency-effected adjustments(2):"],["Unrealized gain translation","","","","","","","","","(5.4",")"],["Non-cash impairment losses","","","","","","","","","1.8"],["M&A, restructuring, severance","","","","","","","","","1.1"],["Amortization of restricted stock units","","","","","","","","","22.5"],["Other adjustments","","","","","","","","","7.8"],["Constant currency AEBITDA","","","","","","","","$","117.8"]]
[[/GREPCENT_TABLE]]

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[[GREPCENT_TABLE]]
[["","","Year Ended December 31, 2020"],["","","As reported","","","Constant Currency(3)","","","Non-GAAP"],["Net revenue","","$","298.2","","","$","0.7","","","$","298.9"],["Cost of goods sold","","","175.6","","","","0.3","","","","175.9"],["Gross profit","","","122.6","","","","0.4","","","","123.0"],["Selling, general and administrative expenses","","","72.5","","","","0.4","","","","72.9"],["Transaction costs","","","2.2","","","","-","","","","2.2"],["Depreciation and amortization expense","","","31.5","","","","0.2","","","","31.7"],["Other operating expense, net","","","4.7","","","","-","","","","4.7"],["Income from operations","","","11.7","","","","(0.2",")","","","11.5"],["Interest expense","","","30.2","","","","(0.1",")","","","30.1"],["Foreign currency loss","","","6.1","","","","0.1","","","","6.2"],["Loss before income tax benefit","","","(24.6",")","","","(0.2",")","","","(24.8",")"],["Income tax benefit","","","(1.2",")","","","(0.2",")","","","(1.4",")"],["Net loss","","$","(23.4",")","","$","-","","","","(23.4",")"],["Constant currency-effected add(1):"],["Depreciation and amortization expense - COS","","","","","","","","","31.1"],["Depreciation and amortization expense - D&A","","","","","","","","","31.6"],["Interest expense","","","","","","","","","30.1"],["Income tax benefit","","","","","","","","","(1.5",")"],["Constant currency EBITDA","","","","","","","","","67.9"],["Constant currency-effected adjustments(2):"],["Unrealized loss translation","","","","","","","","","5.9"],["Constant currency","","","","","","","","","(0.3",")"],["Non-cash impairment losses","","","","","","","","","2.5"],["M&A, restructuring, severance","","","","","","","","","5.9"],["Amortization of restricted stock units","","","","","","","","","7.2"],["Warrant Exchange costs","","","","","","","","","2.2"],["Other adjustments","","","","","","","","","2.4"],["Constant currency AEBITDA","","","","","","","","$","93.7"]]
[[/GREPCENT_TABLE]]

37

[[GREPCENT_TABLE]]
[["","","Non-GAAP Constant Currency"],["","","Year Ended December 31,"],["","","2021","","","2020","","","$ Change","","","% Change"],["Net revenue","","$","377.5","","","$","298.9","","","$","78.6","","","","26.3"],["Cost of goods sold","","","231.3","","","","175.9","","","","55.4","","","","31.5"],["Gross profit","","","146.2","","","","123.0","","","","23.2","","","","18.9"],["Selling, general and administrative expenses","","","97.2","","","","72.9","","","","24.3","","","","33.3"],["Transaction costs","","","-","","","","2.2","","","","(2.2",")","","","(100.0",")"],["Depreciation and amortization expense","","","34.7","","","","31.7","","","","3.0","","","","9.5"],["Other operating expense, net","","","3.4","","","","4.7","","","","(1.3",")","","","(27.7",")"],["Income from operations","","","10.9","","","","11.5","","","","(0.6",")","","","(5.2",")"],["Interest expense","","","22.3","","","","30.1","","","","(7.8",")","","","(25.9",")"],["Foreign currency (gain) loss","","","(6.3",")","","","6.2","","","","(12.5",")","","","(201.6",")"],["Loss before income tax benefit","","","(5.1",")","","","(24.8",")","","","19.7","","","","(79.4",")"],["Income tax benefit","","","(2.2",")","","","(1.4",")","","","(0.8",")","","","57.1"],["Net loss","","","(2.9",")","","","(23.4",")","","","20.5","","","","(87.6",")"],["Constant currency-effected add(1):"],["Depreciation and amortization expense - COS","","","38.1","","","","31.1","","","","7.0","","","","22.5"],["Depreciation and amortization expense - D&A","","","34.7","","","","31.6","","","","3.1","","","","9.8"],["Interest expense","","","22.3","","","","30.1","","","","(7.8",")","","","(25.9",")"],["Income tax benefit","","","(2.2",")","","","(1.5",")","","","(0.7",")","","","46.7"],["Constant currency-effected EBITDA","","","90.0","","","","67.9","","","","22.1","","","","32.5"],["Constant currency-effected adjustments(2):"],["Unrealized (gain) loss translation","","","(5.4",")","","","5.9","","","","(11.3",")","","","(191.5",")"],["Constant currency","","","-","","","","(0.3",")","","","0.3","","","","(100.0",")"],["Non-cash impairment losses","","","1.8","","","","2.5","","","","(0.7",")","","","(28.0",")"],["M&A, restructuring, severance","","","1.1","","","","5.9","","","","(4.8",")","","","(81.4",")"],["Amortization of restricted stock units","","","22.5","","","","7.2","","","","15.3","","","","212.5"],["Warrant Exchange costs","","","-","","","","2.2","","","","(2.2",")","","","(100.0",")"],["Other adjustments","","","7.8","","","","2.4","","","","5.4","","","","225.0"],["Constant currency-effected AEBITDA","","$","117.8","","","$","93.7","","","$","24.1","","","","25.7"]]
[[/GREPCENT_TABLE]]

(see subsequent footnotes)

(1)
Reconciliations of EBITDA and AEBITDA for each period presented are to net (loss) income, the nearest GAAP equivalent, and accordingly include the adjustments shown in the “Constant Currency” column to net (loss) income of each table.

(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; and other items deemed by management to be unusual, infrequent, or non-recurring.

(3)
Effect of Euro constant currency adjustment to a rate of €1.00 to $1.15 on each line item is as follows:

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["","","2021","","","2020"],["Net revenue","","$","(6.4",")","","$","0.7"],["Cost of goods sold","","","(3.7",")","","","0.3"],["Gross profit","","","(2.7",")","","","0.4"],["Selling, general and administrative expenses","","","(1.1",")","","","0.4"],["Depreciation and amortization expense","","","(0.3",")","","","0.2"],["Other operating expense, net","","","-","","","","-"],["Loss from operations","","","(1.3",")","","","(0.2",")"],["Interest expense","","","(0.1",")","","","(0.1",")"],["Foreign currency gain","","","(1.0",")","","","0.1"],["Loss before income tax expense (benefit)","","","(0.2",")","","","(0.2",")"],["Income tax expense (benefit)","","","(0.1",")","","","(0.2",")"],["Net loss","","$","(0.1",")","","$","-"]]
[[/GREPCENT_TABLE]]

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.

38

We believe that our estimated cash from operations 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 protective packaging 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. To the extent that we execute acquisitions or partnerships as part of our growth strategy, we would expect to fund those with a combination of cash on hand, borrowings, and issuances of equity. 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 could make obtaining new equity or debt financing more difficult or expensive.

We had $103.9 million in cash and cash equivalents as of December 31, 2021 and $48.5 million as of December 31, 2020. We sold approximately 5.3 million shares of Class A common stock in the May 2021 Equity Offering (herein defined) for net proceeds of $103.4 million. We used $70.0 million of proceeds from the May 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 First Lien Dollar Term Facility in the June 2021 Prepayment (herein defined).

Including finance lease liabilities and excluding deferred financing costs, we had $406.5 million in debt, $2.2 million of which was classified as short-term, as of December 31, 2021, compared to $439.8 million in debt, $1.7 million of which was classified as short-term, as of December 31, 2020. At December 31, 2021, we did not have amounts outstanding under our $45.0 million revolving credit facility, and we had no borrowings under such facility through February 28, 2022.

Debt Profile

The material terms of the Facilities are summarized in Note 11, “Long-Term Debt” to the consolidated financial statements included elsewhere in this Report.

The aggregate principal amount of the senior secured credit facilities consists of a $378.2 million dollar-denominated first lien term facility (the “First Lien Dollar Term Facility”), a €140.0 million ($152.6 million equivalent) euro-denominated first lien term facility (the “First Lien Euro Term Facility” and, together with the First Lien Dollar Term Facility, the “First Lien Term Facility”) (with the ability to reduce the First Lien Dollar Term Facility and correspondingly increase the First Lien Euro Term Facility in an amount of up to €60.0 million) and a $45.0 million revolving facility (the “Revolving Facility” and together with the First Lien Term Facility, the “Facilities”) (including the right to bring in additional lenders to provide commitments with respect to the Revolving Facility in an amount of up to $30.0 million and additional borrowing capacity available for letters of credit in an amount of up to $5.0 million), a $100.0 million first lien contingency term facility and a $100.0 million second lien contingency term facility. Our credit facilities are secured by substantially all of our assets.

Each of the First Lien Term Facility, and the first lien contingency term facility accrue interest at a rate of LIBOR plus 3.75% (assuming a first lien net leverage ratio of less than 5.00:1.00). The second lien contingency term facility accrues interest at a rate of LIBOR plus 7.50%. No amounts have been drawn on under the second lien contingency. The first lien term facility and first lien contingency term facility mature on the seventh anniversary of the date of the closing of the Ranpak Business Combination, June 3, 2026. The Revolving Facility matures on the fifth anniversary of the date of the Closing June 3, 2024. The second lien contingency term facility matures on the eighth anniversary of the date of the Closing, June 3, 2027, but was not available for us to borrow against at December 31, 2021.

The revolving facility includes borrowing capacity available for letters of credit of up to $5 million. Any issuance of letters of credit will reduce the amount available under the revolving facility.

In addition, the debt financing provides the borrowers with the option to increase commitments under the debt financing in an aggregate amount not to exceed the greater of $95 million and 100% of trailing-twelve months consolidated EBITDA, 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 Ranger Pledgor LLC, a Delaware limited liability company (“Holdings”), Ranger Packaging LLC, a Delaware limited liability company (the “U.S. Borrower”), and Ranpak B.V., a private limited liability company under the laws of the Netherlands (the “Dutch Borrower” and together with the U.S. Borrower, the “Borrowers”) under the Facilities and certain of its obligations under hedging arrangements and cash management arrangements are unconditionally guaranteed by Holdings and each

39

existing and subsequently acquired or organized direct or indirect wholly-owned U.S. organized restricted subsidiary of Holdings (together with Holdings, the “U.S. Guarantors”) and (ii) the Dutch Borrower under the Facilities are unconditionally guaranteed by the U.S. Borrower, the U.S. Guarantors and each existing and subsequently acquired or organized direct or indirect wholly-owned Dutch organized restricted subsidiary of Holdings (the “Dutch Guarantors”, and together with the U.S. Guarantors, 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 the U.S. Borrower and U.S. Guarantors under the Facilities were not secured by assets of the Dutch Borrower or any Dutch Guarantor.

The Revolving Facility requires the borrowers to maintain a maximum first lien net leverage ratio 9.10:1.00 based on the amount of the initial first lien term loans under the debt financing actually borrowed on the closing date based on providing at least a 35% cushion to consolidated EBITDA for the most recent four fiscal quarter periods ending prior to the date of the closing. This “springing” financial covenant is tested on the last day of each fiscal quarter, but only if on such date the sum of (i) the principal amount of outstanding revolving loans under the Revolving Facility, (ii) drawings on letters of credit under the Revolving Facility and (iii) the face amount of non-cash collateralized letters of credit under the Revolving Facility in excess of an amount to be set forth in the definitive documentation with respect to the debt financing exceeds 35% of the total revolving commitments under the Revolving Facility.

The senior secured credit facilities also contain a number of customary negative covenants. Such covenants, among other things, will limit or restrict the ability of each of the borrowers, their restricted subsidiaries, and where applicable, the direct parent holding companies of the borrowers, to:

•
incur additional indebtedness, issue disqualified stock and make guarantees;

•
incur liens on assets;

•
engage in mergers or consolidations or fundamental changes;

•
sell assets;

•
pay dividends and distributions or repurchase capital stock;

•
make investments, loans and advances, including acquisitions;

•
amend organizational documents;

•
enter into certain agreements that would restrict the ability to pay dividends;

•
repay certain junior indebtedness;

•
engage in transactions with affiliates; and

•
in the case of the direct parent holding companies of the borrowers, engage in activities other than passively holding the equity interests in the borrowers.

The aforementioned restrictions are subject to certain exceptions including (i) the ability to incur additional indebtedness, liens, investments, dividends and distributions, and prepayments of junior indebtedness subject, in each case, to compliance with certain financial metrics and certain other conditions and (ii) a number of other traditional exceptions that grant the borrowers continued flexibility to operate and develop their businesses. The senior secured credit facilities also contain certain customary representations and warranties, affirmative covenants and events of default.

Under the First Lien Term Facility agreement, our lower leverage ratio at December 31, 2020 required us to pay our lenders an $8.2 million exit payment fee (the “Exit Payment”), which was paid in the first quarter of 2021.

Amendment to First Lien Credit Facilities

On February 14, 2020, the U.S. Borrower, the Dutch Borrower, Holdings, certain other subsidiaries of Holdings, certain lenders party to Amendment No. 1 (herein defined) and Goldman Sachs Lending Partners LLC (the “Administrative Agent”) entered into the Amendment No. 1 to First Lien Credit Agreement (“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 ending December 31, 2021 (instead of the fiscal year ending December 31, 2020) and (y) the aggregate amount per fiscal year of capital stock of any parent

40

company of the U.S. Borrower that is held by directors, officers, management, employees, independent contractors or consultants of the U.S. Borrower (or any parent company or subsidiary thereof) that the U.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

On July 1, 2020, in the following order, (i) Rack Holdings Inc. merged with and into Ranger Packaging LLC, with Ranger Packaging LLC as the surviving entity of such merger and (ii) Ranger Packaging LLC merged with and into Ranpak Corp., with Ranpak Corp. as the surviving entity of such merger (clauses (i) and (ii) collectively, the “Reorganization”). Contemporaneously with the Reorganization, Ranger Packaging LLC, Ranpak Corp., Ranger Pledgor LLC, certain other subsidiaries of Ranger Pledgor LLC and Goldman Sachs Lending Partners LLC entered into the Borrower Assumption Agreement whereby, among other things, Ranpak Corp. assumed all obligations, liabilities and rights of Ranger Packaging LLC as the U.S. Borrower under the Facilities.

Permitted Exit Payment

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). On July 28, 2021, we entered into the Permitted Exit Payment 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. On July 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:

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["","","2021","","","2020"],["Net cash provided by operating activities","","$","54.3","","","$","63.8"],["Net cash used in investing activities","","","(69.8",")","","","(34.5",")"],["Net cash provided by (used in) financing activities","","","72.0","","","","(1.6",")"],["Effect of Exchange Rate Changes on Cash","","","(1.1",")","","","1.1"],["Net Increase in Cash and Cash Equivalents","","","55.4","","","","28.8"],["Cash and Cash Equivalents, beginning of period","","","48.5","","","","19.7"],["Cash and Cash Equivalents, end of period","","$","103.9","","","$","48.5"]]
[[/GREPCENT_TABLE]]

Cash Flows Provided by Operating Activities

Net cash provided by operating activities was $54.3 million in 2021. Cash provided by operating activities was $63.8 million in 2020. The changes in operating cash flows are largely due to cash earnings and increases in working capital.

Cash Flows Used in Investing Activities

Net cash used in investing activities was $69.8 million in 2021. Cash used in investing activities was $34.5 million in 2020. The changes are primarily due to cash used for capital expenditures for converter equipment, the Recycold acquisition and investments in Pickle and Creapaper.

Cash Flows Provided (Used in) by Financing Activities

Net cash provided by financing activities was $72.0 million in 2021 and reflects the May 2021 Equity Offering net proceeds of $103.4 million, offset by the June 2021 Prepayment of $20.9 million, and the $8.2 million Exit Payment. Net cash used in financing activities was $1.6 million in 2020 and reflects debt repayments.

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.

The table below presents our significant enforceable and legally binding obligations and future commitments as of December 31, 2021.

41

[[GREPCENT_TABLE]]
[["","","","","","Payments due by Period"],["","","Total","","","Less than 1 Year","","","1-3 Years","","","3-5 Years","","","More than 5 Years"],["Contractual Obligations"],["First Lien Term Facility(1)","","$","405.0","","","$","1.6","","","$","3.2","","","$","400.2","","","$","-"],["Operating leases(2)","","","17.4","","","","2.9","","","","5.1","","","","3.5","","","","5.9"],["Finance leases(2)","","","35.1","","","","2.4","","","","4.2","","","","3.5","","","","25.0"],["Capital commitments(3)","","","2.4","","","","2.4","","","","-","","","","-","","","","-"],["Other non-current liabilities reflected on the registrant's balance sheet under GAAP(4)","","","0.7","","","","0.1","","","","0.4","","","","-","","","","0.2"],["Total","","$","460.6","","","$","9.4","","","$","12.9","","","$","407.2","","","$","31.1"],["(1) Consists of cash obligations under the First Lien Term Facility, which are described in more detail in Note 11, \"Long-Term Debt\" in the notes to our Consolidated Financial Statements. Interest payments on the First Lien Term Facility are calculated quarterly using variable interest rates based on market indices and, as a result, are not readily determinable for this analysis."],["(2) Includes estimated lease obligations for our new facilities in Shelton, Connecticut and Kerkrade, The Netherlands. Lease inception occurred in 2021, however, lease commencement is not anticipated until sometime between the fourth quarter of 2022 and first quarter of 2023."],["(3) Associated with the renovation of our global headquarters in Concord Township, Ohio and our new facilities in Shelton, Connecticut and Kerkrade, The Netherlands."],["(4) Asset retirement obligation. See Note 18, \"Asset Retirement Obligation\" in the notes to our Consolidated Financial Statements for further detail."]]
[[/GREPCENT_TABLE]]

Off-Balance Sheet Arrangements

We did not have any off-balance sheet arrangements as of December 31, 2021.

Critical Accounting Policies and Estimates

Our accounting principles and the methods of applying these principles are in accordance with U.S. GAAP, which often require the judgment of management in the selection and application of certain accounting principles and methods. We consider the following accounting policies to be critical to understanding our financial statements because the application of these policies requires significant judgment on the part of management, which could have a material impact on our financial statements. The following accounting policies include estimates that require management’s subjective or complex judgments about the effects of matters that are inherently uncertain. For information on our significant accounting policies, including the policies discussed below, see Note 2, “Basis of Presentation and Summary of Significant Accounting Policies” to the audited consolidated financial statements included elsewhere in this Report.

Revenue Recognition. Revenue from contracts with customers is recognized using a five-step model consisting of the following: (i) identify the contract with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) we satisfy a performance obligation. Performance obligations are satisfied when we transfer control of a good or service to a customer, which can occur over time or at a point in time. The amount of revenue recognized is based on the consideration to which we expect to be entitled in exchange for those goods or services, including the expected value of variable consideration. The customer’s ability and intent to pay the transaction price is assessed in determining whether a contract exists with the customer. If collectability of substantially all of the consideration in a contract is not probable, consideration received is not recognized as revenue unless the consideration is nonrefundable and we no longer have an obligation to transfer additional goods or services to the customer or collectability becomes probable.

We sell our products to end-users primarily through an established distributor network and direct sales to select end-users. Sales taxes collected from customers and remitted to governmental authorities are accounted for on a net basis and therefore are excluded from net revenue on the Consolidated Statements of Operations.

Charges for rebates and other allowances are recognized as a deduction from revenue on an accrual basis in the period in which the associated revenue is recorded. When we estimate our rebate accruals, we consider customer-specific contractual commitments including stated rebate rates and history of actual rebates paid. Our rebate accruals are reviewed at each reporting period and adjusted to reflect data available at that time. We adjust the accruals to reflect any differences between estimated and actual amounts. These adjustments impact the amount of net revenue recognized by us in the period of adjustment. Charges for rebates and other allowances were approximately 7.4% and 10.9% of revenue in 2021 and 2020, respectively. Refer to Note 8, “Revenue Recognition, Contracts with Customers,” of the Notes to consolidated financial statements for further discussion of revenue.

We recognize incremental costs to fulfill a contract as an asset if such incremental costs are expected to be recovered, relate directly to a contract or anticipated contract, and generate or enhance resources that will be used to satisfy performance obligations in the future.

We recognize incremental costs to obtain a contract as an expense when incurred if the amortization period of the asset that otherwise would have been recognized is one year or less. For example, we generally expense sales commissions when incurred because the contract term is less than one year. These costs are recorded within sales and marketing expenses.

42

Goodwill and Identifiable Intangible Assets, net. Goodwill represents the excess of the total purchase consideration over the fair value of the underlying net assets, largely arising from the assembled workforce, new customers and the replacement of customer and technology attrition. Goodwill is not subject to amortization but is tested for impairment annually as of October 1st, through a qualitative or quantitative assessment and when events and circumstances indicate that the estimated fair value of a reporting unit may no longer exceed its carrying value. If the carrying value of the reporting unit exceeds its fair value, an impairment loss is recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit.

Identifiable intangible assets consist primarily of patents, customer/distributor relationships, and trademarks. We amortize definite-lived identifiable assets over the shorter of their stated or statutory duration or their estimated useful lives, generally ranging from 10 to 15 years, on a straight-line basis and periodically review them for impairment. Trademarks are accounted for as indefinite-lived intangible assets and, accordingly, are not subject to amortization.

We use the acquisition method of accounting for all business combinations and do not amortize goodwill or intangible assets with indefinite useful lives. Goodwill and intangible assets with indefinite useful lives are tested for possible impairment annually during the fourth quarter of each fiscal year or more frequently if events or changes in circumstances indicate that the asset might be impaired. We assess, use estimates, and make judgments regarding a variety of factors that may impact the fair value of the goodwill reporting unit or the intangible asset being tested. Such estimates and judgments include business plans, anticipated future cash flows, economic projections, and other market data. These estimates and judgments include, but are not limited to, projected revenues, operating margin, and discount rate. Because there are inherent uncertainties in these estimates and judgments, significant differences between these estimates and actual data may result in future impairment charges and could materially adversely affect our financial condition or results of operations.

We tested our goodwill reporting units and indefinite-lived intangible assets for impairment as of our annual testing date using a quantitative approach. We concluded the fair value of our goodwill reporting units and indefinite-lived intangible assets exceed their carrying values and were not impaired. See Note 9, “Goodwill, Long-Lived and Identifiable Intangible Assets, net” of the Notes to consolidated financial statements for further details.

Impairment of Long-Lived Assets. We review our long-lived assets, including definite-lived intangible assets and property, plant, and equipment, for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. For long-lived assets, except goodwill, an impairment loss is indicated when the undiscounted future cash flows estimated to be generated by the asset group are not sufficient to recover the unamortized balance of the asset group. If indicators exist, the loss is measured as the excess of carrying value over the asset groups’ fair value, as determined based on discounted future cash flows, asset appraisals or market values of similar assets.

The determination of asset groups’ undiscounted cash flows requires the use of estimates and judgments. Subsequent changes in undiscounted cash flows and their estimates and judgments could impact the determination of whether impairment exists in the future and whether the effects could materially adversely affect our financial condition or results of operations.

We tested our asset groups for impairment as of our annual testing date using a quantitative approach. We concluded that the carrying amounts of our asset groups were recoverable and not impaired. See Note 5, “Property, Plant and Equipment, net” of the Notes to consolidated financial statements for further details.

Derivative Financial Instruments. We use derivatives as part of the normal business operations to manage our exposure to fluctuations in interest rates associated with variable interest rate debt and adverse fluctuations in foreign currency exchange rates and to decrease the volatility of cash flows affected by these fluctuations. We have established policies and procedures that govern the risk management of these exposures.

We use interest rate swap contracts to manage interest rate exposures. Derivatives are recorded in the Consolidated Balance Sheets at fair value in accrued expenses and other non-current liabilities. Changes in the fair value of derivatives designated as cash flow hedges are recorded in accumulated other comprehensive income (loss), and subsequently reclassified into earnings in the period the hedged forecasted transaction affects earnings. If a derivative is deemed to be ineffective, the change in fair value of the derivative is recognized directly in earnings. The changes in the fair values of derivatives not designated as hedges are recognized directly in earnings, as a component of interest expense. Prior to September 25, 2019, we did not apply hedge accounting to our outstanding interest rate swap, and changes in fair value were recorded directly to interest expense.

We hedge some of our exposure to foreign currency translation with a cross-currency swap, designated as a net investment hedge. A cross-currency swap involves the receipt of fixed-rate amounts from a counterparty in exchange for us making fixed-rate payments over the life of the contract without exchange of the underlying notional amounts. The change in fair value of the cross-currency swap is recorded in currency translation in other comprehensive income (loss) and accumulated other comprehensive income (loss).

43

Components of the cross-currency swap excluded from the assessment of effectiveness are amortized out of accumulated other comprehensive income (loss) and into interest expense over the life of the cross-currency swap to its maturity.

See Note 12, “Derivative Instruments,” of the Notes to consolidated financial statements for further details.

Income Taxes. We account for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, we determine deferred tax assets and liabilities on the basis of the differences between the financial statement and tax bases of assets and liabilities by using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.

We recognize deferred tax assets to the extent that we believe that these assets are more likely than not to be realized. In making such a determination, management considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations. If we determine that we would be able to realize our deferred tax assets in the future in excess of their net recorded amount, we would make an adjustment to the deferred tax asset valuation allowance, which would reduce the provision for income taxes.

We record uncertain tax positions in accordance with ASC Topic 740, Income Taxes (“ASC 740”) on the basis of a two-step process in which (i) we determine whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and (ii) for those tax positions that meet the more-likely than-not recognition threshold, we recognize the largest amount of tax benefit that is more than 50 percent likely to be realized upon ultimate settlement with the related tax authority.

Emerging Growth Company. Section 102(b)(1) of the Jumpstart Our Business Startups Act of 2012 (“JOBS Act”) exempts an Emerging Growth Company (“EGC”) from being required to comply with new or revised financial accounting standards until private companies (that is, those that have not had a Securities Act of 1933, as amended, registration statement declared effective or do not have a class of securities registered under the Exchange Act) are required to comply with the new or revised financial accounting standards. The JOBS Act provides that a company can elect to opt out of the extended transition period and comply with the requirements that apply to non-emerging growth companies but any such election to opt out is irrevocable. Previously, we elected not to opt out of such extended transition period which means that when a standard is issued or revised and it has different application dates for public or private companies, we, as an EGC, were allowed to adopt the new or revised standard at the time private companies adopt the new or revised standard. This may make comparison of our financial statements with another public company that is not an EGC or that is an EGC which has opted out of using the extended transition period, difficult or impossible because of the potential differences in accounting standards used.

As of June 30, 2021, our aggregate worldwide market value of voting and non-voting common equity held by non-affiliates exceeded $700 million. As we meet all other applicable criteria in the Securities Exchange Act of 1934, as amended, we lost EGC status and became a large accelerated filer as of December 31, 2021. Accordingly, all accounting standards have been adopted to comply with the public company timeline at this point.

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 audited consolidated financial statements included elsewhere in this Report.