INTERTAPE POLYMER GROUP INC. | ||||||
Date: March 13, 2019 | By: | /s/ Jeffrey Crystal | ||||
Jeffrey Crystal, Chief Financial Officer |
• | Revenue increased more than 17% to $1,053.0 million for the year ended December 31, 2018 |
• | IPG Net Earnings decreased $17.5 million to $46.8 million for the year ended December 31, 2018 |
• | IPG Adjusted Net Earnings decreased $1.5 million to $62.2 million for the year ended December 31, 2018 |
• | Adjusted EBITDA increased 9% to $140.9 million for the year ended December 31, 2018 |
• | Revenue increased 21.2% to $287.7 million primarily due to additional revenue from the Polyair(1) and Airtrax(2) acquisitions, an increase in average selling price, including the impact of product mix, and an increase in sales volume. |
• | Gross margin decreased to 19.7% from 22.8% primarily due to an unfavourable product mix and the dilutive gross margins of the Polyair and Airtrax acquisitions, partially offset by a decrease in certain plant-related operating costs. |
• | Selling, general and administrative expenses ("SG&A") decreased 7.8% to $31.5 million primarily due to a decrease in share-based compensation of $6.0 million mainly driven by a decrease in the fair value of cash-settled awards and a decrease in employee related costs mainly related to discretionary employee benefit contributions, partially offset by additional SG&A from the Polyair acquisition. |
• | Income tax expense increased $3.2 million to $0.8 million primarily due to the non-recurrence of a favourable adjustment in the fourth quarter of 2017, partially offset by the lower US corporate tax rate effective in 2018 both related to new US tax reform legislation. |
• | Net earnings attributable to the Company's shareholders ("IPG Net Earnings") decreased $10.7 million to $10.6 million. The decrease was primarily due to (i) foreign exchange losses in the fourth quarter of 2018, (ii) an increase in interest expense and (iii) an increase in income tax expense, partially offset by a decrease in SG&A and an increase in gross profit. |
• | Adjusted net earnings(3) decreased $3.7 million to $14.2 million primarily due to foreign exchange losses in the fourth quarter of 2018 and an increase in interest expense, partially offset by a decrease in income tax expense. |
• | Adjusted EBITDA(3) increased 8% to $38.5 million primarily due to adjusted EBITDA contributed by the Polyair acquisition and a decrease in SG&A, partially offset by a decrease in gross profit. |
• | Cash flows from operating activities increased $10.9 million to $70.2 million primarily due to a greater increase in accounts payable and accrued liabilities resulting from the timing of payments near the end of the fourth quarter of 2018 compared to 2017, partially offset by an increase in inventories. |
• | Free cash flows(3) increased by $6.7 million to $52.0 million primarily due to an increase in cash flows from operating activities, partially offset by an increase in capital expenditures. |
• | Revenue increased 17.2% to $1,053.0 million primarily due to additional revenue from the Cantech(4), Polyair, and Airtrax acquisitions and an increase in average selling price, including the impact of product mix. |
• | Gross margin decreased to 20.8% from 22.4% primarily due to the dilutive gross margins of the Cantech and Polyair acquisitions, unfavourable product mix, and an increase in medical costs partially offset by a decrease in certain plant-related operating costs. |
• | SG&A increased 13.8% to $122.5 million primarily due to (i) additional SG&A from the Polyair, Cantech and Airtrax acquisitions, (ii) an increase in employee-related costs to support growth initiatives in the business and (iii) an increase in variable compensation, partially offset by a decrease in share-based compensation mainly driven by a decrease in the fair value of cash-settled awards. |
• | Income tax expense decreased $3.2 million to $9.8 million primarily due to the lower US corporate tax rate provided under US tax reform legislation and a net tax benefit recognized for a discretionary pension contribution(5), partially offset by the non-recurrence of a favourable adjustment in the fourth quarter of 2017 related to new US tax reform legislation. |
• | IPG Net Earnings decreased $17.5 million to $46.8 million primarily due to (i) an increase in SG&A, (ii) an increase in interest expense resulting from higher average debt outstanding and higher average cost of debt, including the impact of the Senior Unsecured Notes(6) , (iii) foreign exchange losses in 2018 and (iv) an increase in manufacturing facility closures, restructuring and other related charges mainly related to non-cash impairment charges from the closure of the Johnson City, Tennessee manufacturing facility. These unfavourable impacts were partially offset by an increase in gross profit. |
• | Adjusted net earnings decreased $1.5 million to $62.2 million primarily due to (i) an increase in interest expense, (ii) foreign exchange losses in 2018 and (iii) an increase in SG&A, partially offset by a decrease in income tax expense and an increase in gross profit. |
• | Adjusted EBITDA increased 8.7% to $140.9 million primarily due to adjusted EBITDA contributed by the Polyair and Cantech acquisitions and organic growth in gross profit. These increases were partially offset by an increase in SG&A and the non-recurrence of insurance proceeds related to the South Carolina Flood(7) of $2.1 million recorded in 2017. |
• | Cash flows from operating activities decreased in the year ended December 31, 2018 by $1.3 million to $90.8 million. Factors that decreased operating cash flows included a discretionary pension contribution in 2018, plus year over year increases in working capital. The combination of accounts receivable, inventories, other current assets and accounts payable increased working capital by $27.4 million in 2018, compared to working capital increases of $18.2 million in 2017. These items were largely offset by an increase in gross profit and decreases in income taxes paid in 2018. |
• | Free cash flows(3) increased by $8.2 million to $15.0 million due to a decrease in capital expenditures. |
(1) | "Polyair" refers to the acquisition by the Company of 100% of the outstanding equity value in Polyair Inter Pack, Inc.on August 3, 2018. |
(2) | "Airtrax" refers to the acquisition by the Company of substantially all of the assets and assumption of certain liabilities of Airtrax Polymers Private Limited on May 11, 2018 as part of a larger transaction involving Capstone Polyweave Private Limited (doing business as “Capstone”) and its minority shareholders. |
(3) | Non-GAAP financial measure. For definitions and reconciliations of non-GAAP financial measures to their most directly comparable GAAP financial measures, see “Non-GAAP Financial Measures” below. |
(4) | "Cantech" refers to the acquisition by the Company of substantially all of the assets and assumption of certain liabilities of Canadian Technical Tape Ltd., which includes the shares of Cantech Industries Inc., Cantech's US subsidiary, on July 1, 2017. |
(5) | On September 12, 2018, the Company made an $11.3 million discretionary contribution to its US defined benefit pension plans. During the year ended December 31, 2018, the Company recognized a net federal tax benefit of approximately $1.3 million primarily due to the discretionary contribution deducted on the 2017 tax return at the higher 2017 US corporate tax rate, partially offset by the reversal of the related deferred tax asset recorded using the lower US corporate tax rate provided under the new US tax reform legislation. |
(6) | "Senior Unsecured Notes" refers to the Company's offering of $250.0 million 7% senior unsecured notes due in 2026 which closed on October 15, 2018 and resulted in net proceeds of $244.9 million used to repay a portion of the borrowings outstanding under the Company's existing credit facility. |
(7) | “South Carolina Flood” refers to significant rainfall and subsequent severe flooding on October 4, 2015 that resulted in considerable damage to and the permanent closure of the Columbia, South Carolina manufacturing facility eight to nine months in advance of the planned shutdown. |
• | On March 12, 2019, the Board of Directors declared a dividend of $0.14 per common share payable on March 29, 2019 to shareholders of record at the close of business on March 22, 2019. These dividends will be designated by the Company as "eligible dividends" as defined in Subsection 89(1) of the Income Tax Act (Canada). |
• | On December 17, 2018, the Company acquired substantially all of the operating assets of Maiweave LLC (“Maiweave”) for total cash consideration of $20.8 million. This acquisition strengthens the Company's existing product bundle, provides additional scale to support growing demand in woven products, and adds capacity that is in close proximity to growing markets. The Company estimates Maiweave generated approximately $25 million of revenue and approximately $2.5 million of adjusted EBITDA in the twelve months ending December 31, 2018, based on historical performance. The Company expects the acquisition will be accretive to earnings in 2019 excluding advisory fees and other costs associated with mergers and acquisitions activity, including due diligence, integration and certain non-cash purchase price accounting adjustments. The Company expects annualized run-rate synergies of approximately $1 million in adjusted EBITDA by the second half of 2020. Based on the acquisition price and the expected synergies, the post-transaction valuation multiple is expected to be approximately five times adjusted EBITDA. |
• | The second production line at the Midland, North Carolina manufacturing facility was successfully commissioned on schedule and on budget during the first quarter of 2019. Capital invested in 2018 in the line was approximately $8.0 million, bringing the total capital invested since inception to $13.4 million. Additional capital expenditures of approximately $1 to $2 million are expected in 2019. This expansion doubles the water-activated tape production capacity at the facility and supports growth in the e-commerce industry. The Company completed construction of the Midland manufacturing facility in 2017 and commissioned the first production line in the third quarter of 2017 for total invested capital of approximately $48 million. The first production line is operating at capacity so the second production line provides new capacity for anticipated growth. |
• | Revenue in 2019 is expected to be between $1,180 and $1,220 million, excluding the impact of any merger and acquisitions activity that takes place in 2019, and any significant fluctuations in selling prices caused by unforeseen variations in raw material prices. |
• | Adjusted EBITDA for 2019 is expected to be between $164 and $174 million. As in previous years, the Company expects adjusted EBITDA to be proportionately higher in the second, third and fourth quarters of the year relative to the first quarter due to the effects of normal seasonality. This estimate includes the expected impact of new accounting guidance for leases whereby operating lease rent expense will be classified as amortization of the right-of-use asset and interest expense on the related lease obligation, both of which are items excluded from the non-GAAP measure adjusted EBITDA, estimated to be between $6 and $7 million for the year ended December 31, 2019. For the year ended December 31, 2018, rent expense included in adjusted EBITDA was $4.6 million related to operating leases that will be accounted for as right-of-use assets as of January 1, 2019. |
• | Total capital expenditures for 2019 are expected to be between $45 and $55 million. |
• | Excluding the potential impact of changes in the mix of earnings between jurisdictions, the Company expects a 25% to 30% effective tax rate for 2019 and cash taxes paid in 2019 to be two thirds of the income tax expense in 2019, as a result of the anticipated changes in the tax treatment of intercompany debt. |
Three months ended December 31 (unaudited) | Years ended December 31, | |||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||
$ | $ | $ | $ | |||||||||
Revenue | 287,656 | 237,404 | 1,053,019 | 898,126 | ||||||||
Cost of sales | 231,015 | 183,381 | 834,136 | 696,719 | ||||||||
Gross profit | 56,641 | 54,023 | 218,883 | 201,407 | ||||||||
Selling, general and administrative expenses | 31,460 | 34,125 | 122,466 | 107,592 | ||||||||
Research expenses | 2,644 | 2,889 | 12,024 | 11,601 | ||||||||
34,104 | 37,014 | 134,490 | 119,193 | |||||||||
Operating profit before manufacturing facility closures, restructuring and other related charges | 22,537 | 17,009 | 84,393 | 82,214 | ||||||||
Manufacturing facility closures, restructuring and other related charges | 1,583 | 466 | 7,060 | 1,359 | ||||||||
Operating profit | 20,954 | 16,543 | 77,333 | 80,855 | ||||||||
Finance costs (income) | ||||||||||||
Interest | 6,713 | 2,525 | 17,072 | 7,246 | ||||||||
Other expense (income), net | 2,854 | (4,693 | ) | 3,810 | (3,398 | ) | ||||||
9,567 | (2,168 | ) | 20,882 | 3,848 | ||||||||
Earnings before income tax expense (benefit) | 11,387 | 18,711 | 56,451 | 77,007 | ||||||||
Income tax expense (benefit) | ||||||||||||
Current | (323 | ) | (1,064 | ) | 934 | 6,635 | ||||||
Deferred | 1,093 | (1,405 | ) | 8,868 | 6,414 | |||||||
770 | (2,469 | ) | 9,802 | 13,049 | ||||||||
Net earnings | 10,617 | 21,180 | 46,649 | 63,958 | ||||||||
Net earnings (loss) attributable to: | ||||||||||||
Company shareholders | 10,634 | 21,319 | 46,753 | 64,224 | ||||||||
Non-controlling interests | (17 | ) | (139 | ) | (104 | ) | (266 | ) | ||||
10,617 | 21,180 | 46,649 | 63,958 | |||||||||
Earnings per share attributable to Company shareholders | ||||||||||||
Basic | 0.18 | 0.36 | 0.79 | 1.09 | ||||||||
Diluted | 0.18 | 0.36 | 0.79 | 1.08 |
Three months ended December 31 (unaudited) | Years ended December 31, | |||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||
$ | $ | $ | $ | |||||||||
OPERATING ACTIVITIES | ||||||||||||
Net earnings | 10,617 | 21,180 | 46,649 | 63,958 | ||||||||
Adjustments to net earnings | ||||||||||||
Depreciation and amortization | 13,064 | 9,867 | 44,829 | 36,138 | ||||||||
Income tax expense (benefit) | 770 | (2,469 | ) | 9,802 | 13,049 | |||||||
Interest expense | 6,713 | 2,525 | 17,072 | 7,246 | ||||||||
Non-cash charges in connection with manufacturing facility closures, restructuring and other related charges | 901 | 149 | 6,136 | 133 | ||||||||
(Reversals of impairment) impairment of inventories | (248 | ) | 760 | 716 | 801 | |||||||
Share-based compensation expense | 371 | 6,358 | 1,914 | 3,291 | ||||||||
Pension, post-retirement and other long-term employee benefits | 680 | 655 | 2,695 | 2,730 | ||||||||
Loss (gain) on foreign exchange | 2,226 | (3,103 | ) | 1,933 | (2,578 | ) | ||||||
Other adjustments for non-cash items | 665 | (1,480 | ) | 928 | (1,958 | ) | ||||||
Income taxes paid, net | (1,238 | ) | (436 | ) | (1,577 | ) | (6,452 | ) | ||||
Contributions to defined benefit plans | (328 | ) | (915 | ) | (13,802 | ) | (4,143 | ) | ||||
Cash flows from operating activities before changes in working capital items | 34,193 | 33,091 | 117,295 | 112,215 | ||||||||
Changes in working capital items | ||||||||||||
Trade receivables | 10,905 | 9,418 | (9,660 | ) | (6,847 | ) | ||||||
Inventories | (5,409 | ) | 441 | (30,388 | ) | (9,969 | ) | |||||
Other current assets | (1,812 | ) | (752 | ) | (6,523 | ) | 89 | |||||
Accounts payable and accrued liabilities and share-based compensation liabilities, current | 31,459 | 17,407 | 19,215 | (1,493 | ) | |||||||
Provisions | 833 | (350 | ) | 859 | (1,863 | ) | ||||||
35,976 | 26,164 | (26,497 | ) | (20,083 | ) | |||||||
Cash flows from operating activities | 70,169 | 59,255 | 90,798 | 92,132 | ||||||||
INVESTING ACTIVITIES | ||||||||||||
Acquisition of subsidiaries, net of cash acquired | (20,802 | ) | — | (165,763 | ) | (67,027 | ) | |||||
Purchases of property, plant and equipment | (18,159 | ) | (13,960 | ) | (75,781 | ) | (85,312 | ) | ||||
Purchase of intangible assets | (705 | ) | (1,868 | ) | (1,558 | ) | (1,914 | ) | ||||
Other investing activities | (388 | ) | 303 | (173 | ) | 1,338 | ||||||
Cash flows from investing activities | (40,054 | ) | (15,525 | ) | (243,275 | ) | (152,915 | ) | ||||
FINANCING ACTIVITIES | ||||||||||||
Proceeds from borrowings | 312,089 | 39,578 | 991,917 | 257,021 | ||||||||
Repayment of borrowings | (308,617 | ) | (82,576 | ) | (762,622 | ) | (162,107 | ) | ||||
Payments of debt issue costs | (5,101 | ) | (683 | ) | (7,862 | ) | (683 | ) | ||||
Interest paid | (2,830 | ) | (2,806 | ) | (10,901 | ) | (7,360 | ) | ||||
Proceeds from exercise of stock options | 455 | — | 618 | 1,362 | ||||||||
Repurchases of common shares | (2,160 | ) | (1,014 | ) | (2,160 | ) | (7,451 | ) | ||||
Dividends paid | (8,089 | ) | (8,368 | ) | (32,776 | ) | (33,199 | ) | ||||
Cash outflow from capital transactions with non-controlling interest in Capstone | — | — | (2,630 | ) | — | |||||||
Acquisition of non-controlling interest in Powerband through settlement of call option | (9,869 | ) | — | (9,869 | ) | — | ||||||
Other financing activities | 263 | 668 | 452 | 154 | ||||||||
Cash flows from financing activities | (23,859 | ) | (55,201 | ) | 164,167 | 47,737 | ||||||
Net increase (decrease) in cash | 6,256 | (11,471 | ) | 11,690 | (13,046 | ) | ||||||
Effect of foreign exchange differences on cash | (242 | ) | (220 | ) | (2,132 | ) | 1,183 | |||||
Cash, beginning of period | 12,637 | 20,784 | 9,093 | 20,956 | ||||||||
Cash, end of period | 18,651 | 9,093 | 18,651 | 9,093 |
December 31, 2018 | December 31, 2017 | |||||
$ | $ | |||||
ASSETS | ||||||
Current assets | ||||||
Cash | 18,651 | 9,093 | ||||
Trade receivables | 129,285 | 106,634 | ||||
Inventories | 190,675 | 146,804 | ||||
Other current assets | 24,395 | 16,188 | ||||
363,006 | 278,719 | |||||
Property, plant and equipment | 377,076 | 313,520 | ||||
Goodwill | 107,714 | 41,690 | ||||
Intangible assets | 122,389 | 47,318 | ||||
Deferred tax assets | 25,069 | 27,627 | ||||
Other assets | 9,586 | 6,998 | ||||
Total assets | 1,004,840 | 715,872 | ||||
LIABILITIES | ||||||
Current liabilities | ||||||
Accounts payable and accrued liabilities | 154,838 | 104,812 | ||||
Share-based compensation liabilities, current | 5,066 | 10,265 | ||||
Call option redemption liability | — | 12,725 | ||||
Provisions, current | 2,262 | 657 | ||||
Borrowings, current | 14,389 | 14,979 | ||||
176,555 | 143,438 | |||||
Borrowings, non-current | 485,596 | 264,484 | ||||
Pension, post-retirement and other long-term employee benefits | 14,898 | 29,298 | ||||
Share-based compensation liabilities, non-current | 4,125 | 4,984 | ||||
Non-controlling interest put options | 10,499 | — | ||||
Deferred tax liabilities | 42,321 | 13,769 | ||||
Provisions, non-current | 4,194 | 3,221 | ||||
Other liabilities | 5,224 | 1,956 | ||||
743,412 | 461,150 | |||||
EQUITY | ||||||
Capital stock | 350,267 | 350,759 | ||||
Contributed surplus | 17,074 | 17,530 | ||||
Deficit | (95,814 | ) | (106,687 | ) | ||
Accumulated other comprehensive loss | (21,680 | ) | (13,469 | ) | ||
Total equity attributable to Company shareholders | 249,847 | 248,133 | ||||
Non-controlling interests | 11,581 | 6,589 | ||||
Total equity | 261,428 | 254,722 | ||||
Total liabilities and equity | 1,004,840 | 715,872 |
Three months ended December 31, | Year ended December 31, | ||||||||||
2018 | 2017 | 2018 | 2017 | ||||||||
$ | $ | $ | $ | ||||||||
IPG Net Earnings | 10.6 | 21.3 | 46.8 | 64.2 | |||||||
Manufacturing facility closures, restructuring and other related charges | 1.6 | 0.5 | 7.1 | 1.4 | |||||||
M&A Costs | 2.5 | 2.2 | 9.5 | 7.5 | |||||||
Share-based compensation expense | 0.4 | 6.4 | 1.9 | 3.3 | |||||||
Impairment of long-lived assets and other assets | 0.0 | 0.2 | 0.1 | 0.2 | |||||||
Loss on disposal of property, plant and equipment | 0.0 | 0.0 | 0.2 | 0.3 | |||||||
Income tax effect of these items | (0.9 | ) | (3.1 | ) | (3.3 | ) | (3.5 | ) | |||
Other item: special income tax events(1) | — | (9.6 | ) | — | (9.6 | ) | |||||
Adjusted net earnings | 14.2 | 17.9 | 62.2 | 63.7 | |||||||
IPG Net Earnings per share | |||||||||||
Basic | 0.18 | 0.36 | 0.79 | 1.09 | |||||||
Diluted | 0.18 | 0.36 | 0.79 | 1.08 | |||||||
Adjusted earnings per share | |||||||||||
Basic | 0.24 | 0.30 | 1.06 | 1.08 | |||||||
Diluted | 0.24 | 0.30 | 1.05 | 1.07 | |||||||
Weighted average number of common shares outstanding | |||||||||||
Basic | 58,831,432 | 58,831,518 | 58,815,526 | 59,072,119 | |||||||
Diluted | 59,055,824 | 59,154,509 | 59,084,175 | 59,587,769 |
(1) | Represents the impact of the net tax benefit in the fourth quarter of 2017 resulting mainly from the remeasurement of the US net deferred tax liability using the lower US corporate tax rate provided under the TCJA. |
Three months ended December 31, | Year ended December 31, | |||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||
$ | $ | $ | $ | |||||||||
Net earnings | 10.6 | 21.2 | 46.6 | 64.0 | ||||||||
Interest and other finance costs (income) | 9.6 | (2.2 | ) | 20.9 | 3.8 | |||||||
Income tax expense (benefit) | 0.8 | (2.5 | ) | 9.8 | 13.0 | |||||||
Depreciation and amortization | 13.1 | 9.9 | 44.8 | 36.1 | ||||||||
EBITDA | 34.0 | 26.4 | 122.2 | 117.0 | ||||||||
Manufacturing facility closures, restructuring and other related charges | 1.6 | 0.5 | 7.1 | 1.4 | ||||||||
M&A Costs | 2.5 | 2.2 | 9.5 | 7.5 | ||||||||
Share-based compensation expense | 0.4 | 6.4 | 1.9 | 3.3 | ||||||||
Impairment of long-lived assets and other assets | — | 0.2 | 0.1 | 0.2 | ||||||||
Loss on disposal of property, plant and equipment | — | — | 0.2 | 0.3 | ||||||||
Adjusted EBITDA | 38.5 | 35.7 | 140.9 | 129.6 |
Three months ended December 31, | Year ended December 31, | |||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||
$ | $ | $ | $ | |||||||||
Cash flows from operating activities | 70.2 | 59.3 | 90.8 | 92.1 | ||||||||
Less purchases of property, plant and equipment | (18.2 | ) | (14.0 | ) | (75.8 | ) | (85.3 | ) | ||||
Free cash flows | 52.0 | 45.3 | 15.0 | 6.8 |
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