9999 Cavendish Blvd., Suite 200, Ville St. Laurent, Quebec, Canada, H4M 2X5
Indicate
by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F:
Form 20-F x Form 40-F ☐
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1): ☐
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7): ☐
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Operating
profit before manufacturing facility closures, restructuring and other related charges
25,238
21,945
22,537
20,187
Manufacturing facility closures, restructuring and other related charges
3,875
304
1,583
5,777
Operating
profit
21,363
21,641
20,954
14,410
Finance costs (income)
Interest
8,565
7,693
6,713
3,952
Other
finance expense (income), net
798
(655)
2,854
(1,497)
9,363
7,038
9,567
2,455
Earnings
before income tax expense
12,000
14,603
11,387
11,955
Income tax expense (benefit)
Current
5,977
1,175
(323)
(496)
Deferred
(439)
2,896
1,093
2,742
5,538
4,071
770
2,246
Net
earnings
6,462
10,532
10,617
9,709
Net earnings (loss) attributable to:
Company shareholders
6,566
10,491
10,634
9,663
Non-controlling
interests
(104)
41
(17)
46
6,462
10,532
10,617
9,709
Earnings
per share attributable to Company shareholders
Basic
0.11
0.18
0.18
0.16
Diluted
0.11
0.18
0.18
0.16
Weighted
average number of common shares outstanding
Basic
58,760,473
58,652,366
58,831,432
58,817,410
Diluted
58,955,643
58,924,107
59,055,824
59,081,293
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This
Management’s Discussion and Analysis (“MD&A”) is intended to provide the reader with a better understanding of the business, strategy and performance of Intertape Polymer Group Inc. (the “Company”), as well as how it manages certain risks and capital resources. This MD&A, which has been prepared as of August 12, 2020, should be read in conjunction with the Company’s unaudited interim condensed consolidated financial statements and notes thereto as of and for the three and six months ended June 30, 2020 and 2019 and “Item 5 Operating and Financial Review and Prospects (Management’s Discussion & Analysis)” located in the Company’s
annual report on Form 20-F for the year ended December 31, 2019 and the other statements contained in the Company’s filings with the Canadian securities regulators and the US Securities and Exchange Commission. It should also be read together with the text below on forward-looking statements in the section entitled “Forward-Looking Statements”.
For the purposes of preparing this MD&A, the Company considers the materiality of information. Information is considered material if the Company believes at the time of preparing this MD&A that: (i) such information results in, or
would reasonably be expected to result in, a significant change in the market price or value of the common shares of the Company; (ii) there is a substantial likelihood that a reasonable investor would consider it important in making an investment decision; and/or (iii) it would significantly alter the total mix of information available to investors. The Company evaluates materiality with reference to all relevant circumstances, including potential market sensitivity.
Except where otherwise indicated, all financial information presented in this MD&A, including tabular amounts, is prepared in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board (“IFRS”
or “GAAP”) and is expressed in US dollars ("USD"). Variance, ratio and percentage changes in this MD&A are based on unrounded numbers and therefore can give rise to rounding differences.
This MD&A contains certain non-GAAP financial measures and key performance indicators as defined under applicable securities legislation, including adjusted net earnings (loss), adjusted earnings (loss) per share, EBITDA, adjusted EBITDA, and free cash flows (please see the "Adjusted Net Earnings (Loss)" section below for a description and reconciliation of adjusted net earnings (loss) and adjusted earnings (loss) per share, “EBITDA and Adjusted EBITDA” section below for a description and reconciliation of EBITDA and adjusted EBITDA, and the “Cash Flows” section below for a description and reconciliation of free cash flows). In determining these measures, the
Company excludes certain items which are otherwise included in determining the comparable GAAP financial measures. The Company believes such non-GAAP financial measures are key performance indicators that improve the period-to-period comparability of the Company’s results and provide investors with more insight into, and an additional tool to understand and assess, the performance of the Company's ongoing core business operations. As required by applicable securities legislation, the Company has provided definitions of those measures and reconciliations of those measures to the most directly comparable GAAP financial measures. Investors
and other readers are encouraged to review the related GAAP financial measures and the reconciliation of non-GAAP financial measures to their most directly comparable GAAP financial measures set forth below in the section entitled "Non-GAAP Financial Measures and Key Performance Indicators" and should consider non-GAAP financial measures and key performance indicators only as a supplement to, and not as a substitute for or as a superior measure to, measures of financial performance prepared in accordance with GAAP.
Overview
The Company develops, manufactures and sells a variety of paper-and-film based pressure sensitive and water-activated
tapes, polyethylene and specialized polyolefin films, protective packaging, engineered coated products and packaging machinery for industrial and retail use. The Company provides packaging and protective solutions for industrial markets in North America, Europe and other geographies.
The Company’s products primarily consist of carton sealing tapes, including pressure-sensitive and water-activated tapes; packaging equipment; industrial and performance specialty tapes, including masking, duct, electrical, foil, process indicator, sheathing, sports and reinforced filament tapes; protective packaging solutions, including inflatable systems, mailer products, bubble cushioning, paper void fill, thermal solutions and protective foam roll stock; stencil products;
shrink film; stretch wrap; lumber wrap, structure fabrics, geomembrane fabrics; and non-manufactured flexible intermediate bulk containers. Most of the Company’s products are made from similar processes. A vast majority of the Company’s products, while brought to market through various distribution channels, generally have similar economic characteristics.
The Company has assembled a broad range of products by leveraging its manufacturing technologies, research and development capabilities, global sourcing expertise and strategic acquisitions. Over the years, the Company has made a number of
strategic acquisitions intended to offer a broader range of products to better serve its markets. The Company’s extensive
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product line permits the Company to offer tailored solutions to a wide range of end markets including food processing, general manufacturing, fulfillment, transportation, building and construction, consumer, oil and gas, agriculture, aerospace, appliance, sports and entertainment, marine, composites military and medical applications. The Company's largest end markets
as of December 31, 2019 were: general manufacturing, fulfillment/e-commerce, food and beverage, building and construction, retail and transportation(1).
The Company's unique bundle of products positions it to serve the market with a broad and comprehensive range of packaging, protective and industrial product solutions. The Company believes that its broad and unique product bundle is a key competitive advantage. The portfolio of products is valuable to the Company’s customers as it contributes to the flexibility of its distributor partners by allowing them to offer a solutions-oriented
approach to address specific end user needs, create operating efficiencies and lower operating costs. Management believes this flexibility is unique to the Company and differentiates the Company from its competitors.
COVID-19
Beginning in December 2019, a new strain of the coronavirus (COVID-19) spread rapidly through the world, including the United States, Canada, India and Europe (where, collectively, significant portions of the Company’s operations are located and its sales occur). The impact of the virus varies
from region to region and from day to day.
The Company has implemented measures to prioritize the health and safety of its employees while protecting its assets, customers, suppliers and shareholders. The following is an overview of the status of the Company's efforts as of the time of this filing as well as a discussion of certain risks to its business associated with COVID-19:
•The Company's facilities are open and operating having qualified as essential under the applicable government orders and guidelines. Alternative capacity exists across all major product lines that would enable the continuation of
operations if certain facilities were required to close, however, in most cases this alternative capacity would produce less than current run rates. Management has and will continue to adjust production plans to align with demand and slow down as deemed necessary in order to manage working capital and associated cost levels. Management has successfully mitigated minor supply chain challenges experienced to date and continues to work closely with suppliers as supply chain risk mitigation plans are refined.
•The Company's four facilities in India adhered to the government issued shutdown announced March 24th until each facility was deemed essential and allowed to re-open in phases beginning in the month of April. These facilities are now operating and there are no significant restrictions limiting production.
•Management
has put measures in place to enable employees to work safely according to United States Centers for Disease Control and Prevention and other applicable social distancing guidelines, wearing protective face coverings provided by the Company where required, and strongly encouraging employees to wear them in jurisdictions where they are not already required, and completing health interviews prior to entry on a regular basis. Cleaning and sanitization of the equipment and facilities has been increased significantly in the context of COVID-19 and the Company is supporting remote work arrangements for approximately 20% of its workforce in North America. The remote work arrangements have not had any significant effect on the Company's
ability to conduct its day-to-day operations.
•Employee health coverage has been enhanced to include the cost of COVID-19 testing and treatment at no additional cost to employees and the higher risk workforce or those experiencing illness of any kind are strongly encouraged to stay at home or shelter in place. As a result, the current absentee rate at facilities in North America is approximately 10%, which has not resulted in experiencing any material level of production disruption.
•Cash and expense management initiatives to date include a company-wide salaried position hiring freeze, applicable to positions vacated as a result of both normal attrition and terminations, the postponement of annual pay increases for salaried staff, the delay of non-essential capital projects and suspension of business travel and other discretionary
spending. In the second quarter of 2020, certain positions were eliminated as part of an employee restructuring initiative. This restructuring initiative resulted in cash charges for termination benefits of $2.7 million and is expected to yield estimated annual savings of $4.7 million in wages, salaries, and other short-term benefits with the effect of additional adjusted EBITDA of approximately $1.8 million in 2020. Minimal additional charges are expected to be incurred in the third quarter of 2020 as this initiative is completed. Further cost saving measures may be taken should the impact of the virus be worse than currently anticipated.
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•Cash and loan availability
was $340.5 million at the conclusion of the second quarter. Typically, due to the normal seasonality of the business, cash flows from operating activities and free cash flows (a non-GAAP financial measure defined and reconciled later in this document) are at their lowest in the first quarter, in a negative position, before progressively increasing each quarter throughout the year. In the second quarter of 2020, the Company generated cash flows from operating activities of $40.5 million and free cash flows of $35.3 million primarily through effective management of working capital, including inventory management and cost savings initiatives, and planned reductions in capital expenditures as a precautionary measure. Loan covenants were well within their limits with the consolidated secured net leverage ratio at 1.76, compared to the covenant
maximum of 3.70, and the consolidated interest coverage ratio at 5.75, compared to the covenant minimum of 2.75 as of June 30, 2020. Loan availability was $326.1 million as of June 30, 2020 which does not include the incremental accordion feature of $200.0 million available on the Company's credit facility (subject to the credit agreement's terms and lender approval). Additionally, the 2018 Credit Facility (defined later in this document) has over three years remaining until maturity and the Senior Unsecured Notes (defined later in this document) have over six years remaining until maturity. See "Liquidity and Borrowings" below for more information.
There continues to be significant macroeconomic uncertainty, and the
Company expects the COVID-19 pandemic is likely to have a materially negative impact on the global economy for the remainder of 2020 (and perhaps beyond). For the Company, the pandemic could materially impact the Company’s ability to manufacture, source (including the delivery of raw materials to its facilities) or distribute its products both domestically and internationally and reduce demand for its products, any of which could have a significant negative impact on the Company’s financial results in 2020 and beyond. Given the dynamic nature of the pandemic (including its duration and the severity of its impact on the global economy and the applicable governmental responses), the extent to which the COVID-19 pandemic
impacts the Company’s results will depend on unknown future developments and any further impact on the global economy and the markets in which the Company operates and sells its products, all of which remain highly uncertain and cannot be accurately predicted at this time.
Financial Highlights
The Company reported a 9.4% decrease in revenue for the second quarter of 2020 compared to the second quarter of 2019 and a 4.7% decrease in revenue for the first six months of 2020 compared
to the same period in 2019. The decrease in revenue in both periods was primarily due to a decrease in volume/mix and lower selling prices. The decrease in volume/mix was primarily due to the net impact of COVID-19 on demand.
Gross margin decreased to 21.1% in the second quarter of 2020 compared to 21.9% in the second quarter of 2019 primarily due to the unfavorable impact of unabsorbed overhead costs related to production slowdowns in the second quarter of 2020 to manage inventory levels at facilities that experienced COVID-19 related declines in demand. This unfavourable impact was partially offset by a net decrease in all other plant-related operating costs driven by cost savings initiatives. Gross margin decreased to 21.1% in the first six months of 2020 compared to 21.4% for the same period in 2019 primarily due to the unfavorable impact of unabsorbed overhead costs related to production slowdowns in the second quarter
of 2020 and an unfavourable product mix. These unfavourable impacts were partially offset by an increase in spread between selling prices and combined raw material and freight costs.
Net earnings attributable to the Company's shareholders ("IPG Net Earnings") increased to $14.8 million ($0.25 basic and diluted earnings per share) for the second quarter of 2020 from $6.6 million ($0.11 basic and diluted earnings per share) for the second quarter of 2019, and increased to $29.1 million ($0.49 basic and diluted earnings per share) for the first six months of 2020 from $17.1 million ($0.29 basic and diluted earnings per share) for the same period in 2019. The increase in both periods
was primarily due to (i) a gain resulting from a fair value adjustment to the Company's contingent consideration related to the Nortech Acquisition (2), (ii) a decrease in selling, general and administrative expenses ("SG&A") mainly driven by decreases in travel expenses and variable compensation both related to the impacts of COVID-19, and (iii) a decrease in income tax expense mainly driven by the non-recurrence of the Proposed Tax Assessment (3) recorded in the second quarter of 2019. These favourable impacts were partially offset by a decrease in gross profit.
Adjusted
net earnings (4) decreased to $13.2 million ($0.22 basic and diluted adjusted earnings per share (4)) for the second quarter of 2020 from $14.6 million ($0.25 basic and diluted adjusted earnings per share) for the second quarter of 2019. The decrease was primarily due to a decrease in gross profit, partially offset by decreases in (i) SG&A, (ii) income tax expense mainly driven by a favourable mix of earnings between jurisdictions, and (iii) interest expense resulting from a lower average cost of debt.
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Adjusted net earnings decreased to $26.1 million ($0.44 basic and diluted adjusted earnings per share) for
the first six months of 2020 from $26.8 million ($0.46 basic and diluted adjusted earnings per share) for the same period in 2019. The decrease was primarily due to a decrease in gross profit, partially offset by decreases in (i) income tax expense mainly driven by the favourable treatment of interest deductions related to the restructuring of intercompany debt, (ii) SG&A and (iii) interest expense.
Adjusted EBITDA (4) decreased to $40.4 million for the second quarter of 2020 from $44.2 million for the second quarter of 2019, and decreased to $77.9 million for the first six months of 2020 from $82.5 million for the same period in 2019. The decrease in both periods was primarily due to a decrease in gross profit, partially offset by a decrease in SG&A.
(1)Represents
management estimates as the Company does not have access to exact point of sale data.
(2)"Nortech Acquisition" refers to the acquisition by the Company of substantially all of the operating assets of Nortech Packaging LLC and Custom Assembly Solutions, Inc. (together "Nortech") on February 11, 2020. See "Nortech Acquisition and Integration Update" below.
(3)"Proposed Tax Assessment" refers to a proposed state income tax assessment and the related interest expense recognized in the second quarter of 2019 totalling $2.3 million resulting from the denial of the utilization of certain net operating
losses generated in tax years 2000-2006.
(4)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 and Key Performance Indicators" below.
In July 2020, the Company published its annual 2019 sustainability report, titled "We Package, We Protect & We Sustain", which provides an overview of the Company's sustainability progress in 2019 and highlights sustainability opportunities in the years ahead. Since the issuance of this report, the
Company achieved Cradle to Cradle Certified™ Silver level for Exlfilmplus® Shrink Film. The Cradle to Cradle Certified™ Product Standard is a globally recognized measure of safer, more sustainable products. The Company's other achievements in 2019 and to date in 2020 highlighted in the report include:
•Awarded the 2019 and 2020 ENERGY STAR® Partner of the Year - Sustained Excellence designation(1)
•Adopted the Cradle to Cradle Certified™ Product Standard, a globally recognized measure of safer, more sustainable products, for certain products to drive and measure the Company’s product innovation process
•Achieved
a 3.7% reduction in energy intensity in 2019 compared to 2018
•Achieved an approximately 6% reduction in carbon intensity in 2019 compared to 2018
•Achieved a 6.5% reduction in water usage in 2019 compared to 2018, primarily driven by decreases at the Truro, Nova Scotia manufacturing facility
•Signed the United Nations Global Compact (the "Compact") agreeing to adopt the ten principles governing Human Rights, Labor, Environment and Anti-Corruption; as a result, the Company expects all of its suppliers to support the Compact's principles
•Certified the recyclability of non-reinforced water-activated tape through
the Western Michigan Old Corrugated Cardboard Equivalency protocol
•Qualified reinforced water-activated tape as recyclable through internal testing based on normal recyclability yields and protocols
•Committed to the Association of Plastic Recyclers to be a Demand Champion in 2021 by reporting the Company’s impact on the demand for post-consumer resin
•Proud initial donor of the University of Florida’s “Waste-to-Syngas” initiative
(1) ENERGY STAR® is the government-backed symbol for energy efficiency, providing simple, credible and unbiased information that consumers and businesses rely
on to make well-informed decisions. Industrial, commercial, utility, state, and local organizations partner with the U.S. Environmental Protection Agency (“EPA”) to deliver cost-saving energy efficiency solutions that improve air quality and protect the climate. The ENERGY STAR Partner of the Year Award distinguishes corporate energy management programs. It is the highest level of EPA recognition. Partners must perform at a superior level of energy management and meet the following criteria: demonstrate best practices across
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the organization; prove organization-wide energy savings; and participate actively and communicate the benefits of ENERGY STAR. The ENERGY STAR Sustained Excellence Award recognizes organizations that have consistently
earned Partner of the Year for several years in a row. Annual achievements must continue to surpass those in previous years. Sustained Excellence is presented to a partner at EPA’s discretion.
Nortech Acquisition & Integration Update
On February 11, 2020, the Company completed the Nortech Acquisition. Nortech manufactures, assembles and services automated packaging machines under the Nortech Packaging and Tishma Technologies brands, and services customers worldwide across major industries including food and beverage, pharmaceutical, e-commerce, confections, personal care and cosmetics.. The custom in-feed and robotic solutions
for packaging applications that the Company acquired from Nortech are designed for cartoning, case-packing, case-erecting, pouch-packaging and palletizing. The acquisition expands the Company’s product bundle into technologies that the Company believes are increasingly critical to automation in packaging. Automation system design and service are key capabilities in growing markets like e-commerce. The acquisition provides the Company with opportunities to supply its consumable products, such as tapes, films and protective packaging to new and existing machine customers. The acquisition also added engineering automation and integrated
robotic design talent to the Company’s existing engineering and design teams. These new capabilities allow the Company to service customers experiencing growth pressures that require a customized automation solution.
The Nortech Acquisition was completed for an estimated aggregate purchase price of approximately $47.5 million, net of cash balances acquired. This amount is subject to certain post-closing adjustments and includes potential earn-out consideration of up to $12.0 million contingent upon certain future performance measures of the acquired assets to be determined following the two-year anniversary of the acquisition date. Excluding working capital adjustments, cash balances acquired and the contingent consideration noted above, the purchase price
was $36.5 million. In the twelve months prior to the acquisition date, Nortech's sales were approximately $20 million with adjusted EBITDA (as determined consistent with the Company's definition) of $5.5 million. The upfront purchase price represents an adjusted EBITDA multiple of 6.6x. The purchase price, when including the tax basis step-up value, represents an adjusted EBITDA multiple of 5.7x without any consideration given to potential revenue synergies. The potential earn-out consideration does not impact the adjusted EBITDA multiples. The Company funded the acquisition with funds available under the Company's 2018 Credit Facility (defined later in this document).
The
Nortech Acquisition’s impact on the Company’s consolidated earnings was as follows (in millions of USD):
The COVID-19 pandemic has created what management believes to be short-term changes in market conditions surrounding Nortech's legacy business including: delays in customer approvals on new machines and installations, and changes in customer capital expenditure behavior resulting in significantly fewer orders from successful lead generation. In addition, new product opportunities currently in the early design stages are expected to experience some delay. As a result of these impacts, management:
•no longer believes that any amount of payment toward the contingent consideration obligation is probable
which resulted in an $11.0 million gain from the reduction in the fair value of the contingent liability in the second quarter of 2020; and
•performed impairment testing for the Nortech asset group which did not indicate impairment or result in any impairment charge being recognized as of June 30, 2020, largely due to what management expects to be, the short-term nature of the COVID-19 pandemic's impact on the macroeconomic environment relative to the expected future cash flows and growth expected to be generated by Nortech over the long-term once market conditions have improved.
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Outlook
The
Company withdrew its revenue, adjusted EBITDA and free cash flow guidance for fiscal year 2020 in May 2020 in light of the macroeconomic uncertainty caused by COVID-19.
The Company's expectations for fiscal year 2020 capital expenditures remains the same as previously disclosed, at between $30 and $40 million, which management proactively reduced as a precautionary measure given market uncertainty caused by COVID-19.
The Company lowered the expected effective tax rate for 2020 to 20% to 25% from 25% to 30% as a result of a favourable mix of earnings between jurisdictions. This range excludes the potential impact of further changes in the mix of earnings between
jurisdictions. Cash taxes paid in 2020 are still expected to approximate income tax expense which reflects the decreased availability of tax attributes in the form of tax credits and loss carryforwards.
Results of Operations
Revenue
Revenue for the second quarter of 2020 totalled $267.8 million, a $27.8 million or 9.4% decrease from $295.6 million for the second quarter of 2019, primarily due to:
•A decrease in volume/mix of approximately 8.3% or $24.4
million primarily driven by COVID-19 related demand declines in industrial tapes, certain carton sealing tapes, and film products, partially offset by increased demand in products with significant e-commerce end market exposure including water-activated tape and protective packaging;
•The impact of lower selling prices of approximately $4.5 million primarily in film products, carton sealing tapes, and woven products; and
•An unfavourable foreign exchange impact of $1.2 million.
•These decreases were partially offset by additional revenue of $2.2 million from the Nortech Acquisition.
Revenue for the first six months of 2020 totalled $546.6 million, a $26.8 million or 4.7% decrease from $573.4 million for the same period in 2019,
primarily due to:
•A decrease in volume/mix of approximately 3.6% or $20.6 million primarily driven by COVID-19 related demand declines in industrial tapes and certain carton sealing tapes, partially offset by increased demand in products with significant e-commerce end market exposure including water-activated tape and protective packaging;
•The impact of lower selling prices of approximately $8.7 million primarily in films products, woven products, and carton sealing tapes; and
•An unfavourable foreign exchange impact of $1.8 million.
•These decreases were partially offset by additional revenue of $4.2 million from the Nortech Acquisition.
Gross
Profit and Gross Margin
Gross profit totalled $56.5 million for the second quarter of 2020, an $8.2 million or 12.7% decrease from $64.7 million for the second quarter of 2019. Gross margin was 21.1% in the second quarter of 2020 and 21.9% in the second quarter of 2019.
•Gross profit decreased primarily due to unfavourable volume/mix and the unfavorable impact of unabsorbed overhead costs related to production slowdowns in the second quarter of 2020 as demand for certain products declined. These unfavourable impacts were partially offset by a net decrease in all other plant-related operating costs driven by cost savings initiatives.
•Gross margin decreased primarily due to the unfavorable impact of unabsorbed overhead costs related to production slowdowns in the second quarter of 2020. This
unfavourable impact was partially offset by a net decrease in all other plant-related operating costs driven by cost savings initiatives.
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Gross profit totalled $115.4 million for the first six months of 2020, a $7.1 million or 5.8% decrease from $122.5 million for the same period in 2019. Gross margin was 21.1% in the first six months of 2020 and 21.4% for the same period in 2019.
•Gross profit decreased primarily due to unfavourable volume/mix and the unfavorable impact of unabsorbed overhead costs related to production slowdowns in the second quarter of 2020 as demand for certain products declined. These unfavourable impacts were partially offset by an increase in
spread between selling prices and combined raw material and freight costs.
•Gross margin decreased primarily due to the unfavorable impact of unabsorbed overhead costs related to production slowdowns in the second quarter of 2020 and an unfavourable product mix. These unfavourable impacts were partially offset by an increase in spread between selling prices and combined raw material and freight costs.
Selling, General and Administrative Expenses
SG&A for the second quarter of 2020 totalled $33.6 million, a $2.8 million or 7.8% decrease from $36.4 million for the second quarter of 2019, primarily due to a decrease in travel expenses and variable compensation both related to the impacts of COVID-19,
partially offset by an increase in share-based compensation mainly due to an increase in the fair value of cash-settled awards of $0.7 million.
SG&A for the first six months of 2020 totalled $64.4 million, a $4.7 million or 6.8% decrease from $69.1 million for the same period in 2019, primarily due to (i) a decrease in travel expenses related to COVID-19 restrictions, (ii) a decrease in share-based compensation due to a decrease in the fair value of cash-settled awards of $1.8 million and (iii) a decrease in variable compensation in line with revenue and earnings performance metrics impacted by COVID-19. These expense reductions were partially offset by additional SG&A from the Nortech Acquisition.
Manufacturing Facility Closures, Restructuring and Other
Related Charges
Manufacturing facility closures, restructuring and other charges incurred in the three and six months ended June 30, 2020 totalled $3.2 million and $3.9 million, respectively. The charges for the three and six months ended June 30, 2020 were comprised of cash costs of $3.1 million and $3.3 million, respectively, and non-cash impairments of $0.1 million and $0.6 million, respectively, for inventory related to the closure of the Montreal, Quebec manufacturing facility. Cash costs incurred in both periods were mainly for termination benefits related to employee restructuring initiatives in the second quarter in response to COVID-19 uncertainties, as well as ongoing idle facility costs related to the Montreal, Quebec and Columbia, South Carolina manufacturing facilities. The
Company expects to realize estimated annual savings of $4.7 million in wages, salaries, and other short-term benefits as a result of the restructuring initiatives executed in the second quarter of 2020 with the effect of additional adjusted EBITDA of approximately $1.8 million in 2020. Minimal additional charges are expected to be incurred in the third quarter of 2020 as this initiative is completed.
Manufacturing facility closures, restructuring and other charges incurred in the three and six months ended June 30, 2019 totalled $3.9 million and $4.2 million, respectively. The charges for the three and six months ended June 30, 2019 were comprised of non-cash impairments of inventory and property, plant and equipment related to the closures of the Johnson City, Tennessee
and Montreal, Quebec manufacturing facilities totalling $2.3 million and $2.0 million, respectively, and cash costs of $1.6 million and $2.2 million, respectively, mainly for termination benefits related to the Montreal, Quebec manufacturing facility.
Finance Costs (Income)
Finance income for the second quarter of 2020 totalled $2.1 million, an $11.4 million increase from finance costs of $9.4 million in the second quarter of 2019, primarily due to a gain resulting from a fair value adjustment to the Company's contingent consideration related to the Nortech Acquisition and a decrease in interest expense. The decrease in interest expense is largely due to the non-recurrence of interest
expense resulting from the Proposed Tax Assessment recorded in the second quarter of 2019 and a lower average cost of debt.
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Finance costs for the first six months of 2020 totalled $4.6 million, an $11.8 million decrease from $16.4 million in the first six months of 2019, primarily due to a gain resulting from a fair value adjustment to the Company's contingent consideration related to the Nortech Acquisition and a decrease in interest expense. The decrease in interest expense is largely due to a lower average cost of debt and the non-recurrence of interest expense resulting from the Proposed Tax Assessment recorded in the second quarter of 2019, partially
offset by a reduction of interest capitalized to property, plant and equipment as a result of completing the larger-scale greenfield facilities in India during 2019.
Income Taxes
The Company is subject to income taxation in multiple tax jurisdictions around the world. Accordingly, the Company’s effective tax rate fluctuates depending on the geographic source of its earnings. The Company’s effective tax rate is also impacted by tax planning strategies that the
Company implements. Income tax expense is recognized in each interim period based on the best estimate of the weighted average annual income tax rate expected for the full financial year.
The table below reflects the calculation of the Company’s effective tax rate (in millions of USD):
The decrease in the effective tax rate in the three months ended June 30, 2020 as compared to the same period in 2019 was primarily due to the non-recurrence of the Proposed Tax Assessment recorded in the second quarter of 2019 and a favourable mix of earnings between jurisdictions.
The
decrease in the effective tax rate in the six months ended June 30, 2020 as compared to the same period in 2019 was primarily due to the non-recurrence of the Proposed Tax Assessment recorded in the second quarter of 2019 and the favourable treatment of interest deductions related to the restructuring of intercompany debt.
IPG Net Earnings
IPG Net Earnings totalled $14.8 million for the second quarter of 2020, an $8.3 million or 126% increase from $6.6 million for the second quarter of 2019, and totalled $29.1 million for the first six months of 2020, a $12.0 million or 70.4% increase from $17.1 million for the same period in 2019. The increase in both periods was primarily due to (i) a gain resulting from a fair
value adjustment to the Company's contingent consideration related to the Nortech Acquisition, (ii) a decrease in SG&A mainly driven by decreases in travel expenses and variable compensation, and (iii) a decrease in income tax expense mainly driven by the non-recurrence of the Proposed Tax Assessment recorded in the second quarter of 2019. These favourable impacts were partially offset by a decrease in gross profit.
Non-GAAP Financial Measures and Key Performance Indicators
The Company measures the success
of the business using a number of key performance indicators, many of which are in accordance with GAAP as described throughout this MD&A. This MD&A also contains certain non-GAAP financial measures and key performance metrics as defined under applicable securities legislation, including adjusted net earnings (loss), adjusted earnings (loss) per share, EBITDA, adjusted EBITDA, and free cash flows (please see the "Adjusted Net Earnings (Loss) and Adjusted Net Earnings (Loss) Per Share" section below for a description and reconciliation of adjusted net earnings (loss) and adjusted earnings (loss) per share, “EBITDA and Adjusted EBITDA” section below for a description and reconciliation of EBITDA and adjusted EBITDA, and the “Cash Flows” section below for a description and reconciliation of free cash flows). In determining these measures, the Company excludes
certain items which are otherwise included in determining the comparable GAAP financial measures. The Company believes such non-GAAP financial measures are key performance indicators that improve the period-to-period comparability of the Company’s results and provide investors with more insight into, and an additional tool to understand and assess, the performance of the Company's ongoing core business operations. As required by applicable securities legislation, the Company has provided definitions of those measures and reconciliations of those measures
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to
the most directly comparable GAAP financial measures. Investors and other readers are encouraged to review the related GAAP financial measures and the reconciliation of non-GAAP financial measures to their most directly comparable GAAP financial measures set forth below and should consider non-GAAP financial measures and key performance indicators only as a supplement to, and not as a substitute for or as a superior measure to, measures of financial performance prepared in accordance with GAAP.
Adjusted Net Earnings (Loss) and Adjusted Earnings (Loss) Per Share
A reconciliation of the Company’s adjusted net earnings (loss), a non-GAAP financial measure, to IPG Net Earnings, the most directly comparable GAAP financial measure, is set out in the adjusted net earnings
(loss) reconciliation table below. Adjusted net earnings (loss) should not be construed as IPG Net Earnings as determined by GAAP. The Company defines adjusted net earnings (loss) as IPG Net Earnings before (i) manufacturing facility closures, restructuring and other related charges (recoveries); (ii) advisory fees and other costs associated with mergers and acquisitions activity, including due diligence, integration and certain non-cash purchase price accounting adjustments ("M&A Costs"); (iii) share-based compensation expense (benefit); (iv) impairment of goodwill; (v) impairment (reversal of impairment) of long-lived assets and other assets; (vi) write-down on assets classified as held-for-sale; (vii) (gain) loss on disposal of property, plant, and equipment; (viii) other discrete items as shown in the table below; and (ix) the income tax effect of these items. The term
“adjusted net earnings (loss)” does not have any standardized meaning prescribed by GAAP and is therefore unlikely to be comparable to similar measures presented by other issuers. Adjusted net earnings (loss) is not a measurement of financial performance under GAAP and should not be considered as an alternative to IPG Net Earnings as an indicator of the Company’s operating performance or any other measures of performance derived in accordance with GAAP. The Company has included this non-GAAP financial measure because it believes that it allows investors to make a more meaningful comparison of the Company’s performance between periods presented by excluding certain non-operating expenses, non-cash expenses and,
where indicated, non-recurring expenses. In addition, adjusted net earnings (loss) is used by management in evaluating the Company’s performance because it believes it provides an indicator of the Company’s performance that is often more meaningful than GAAP financial measures for the reasons stated in the previous sentence.
Adjusted earnings (loss) per share is also presented in the following table and is a non-GAAP financial measure. Adjusted earnings (loss) per share should not be construed as IPG Net Earnings per share as determined by GAAP. The Company defines adjusted earnings (loss) per share as adjusted net earnings (loss)
divided by the weighted average number of common shares outstanding, both basic and diluted. The term “adjusted earnings (loss) per share” does not have any standardized meaning prescribed by GAAP and is therefore unlikely to be comparable to similar measures presented by other issuers. Adjusted earnings (loss) per share is not a measurement of financial performance under GAAP and should not be considered as an alternative to IPG Net Earnings per share as an indicator of the Company’s operating performance or any other measures of performance derived in accordance with GAAP. The Company has included this non-GAAP financial measure because it believes that it allows investors to make a more meaningful comparison of the
Company’s performance between periods presented by excluding certain non-operating expenses, non-cash expenses and, where indicated, non-recurring expenses. In addition, adjusted earnings (loss) per share is used by management in evaluating the Company’s performance because it believes it provides an indicator of the Company’s performance that is often more meaningful than GAAP financial measures for the reasons stated in the previous sentence.
The following table presents M&A Costs included in IPG Net Earnings and added back to adjusted net earnings and adjusted EBITDA (in millions of USD):
M&A Costs for the three and six months ended June 30, 2020 were primarily composed of integration costs mainly associated with the Polyair Inter Pack Inc. (“Polyair”), Maiweave, LLC (“Maiweave”) and Nortech acquisitions as well as other due diligence and advisory costs on deals that did
not progress to the execution phase. The Company still expects the integration costs associated with all acquisitions completed to date to be between $3 and $4 million in 2020, excluding non-cash purchase price accounting adjustments and due diligence costs associated with evaluating merger and acquisitions opportunities.
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Adjusted Net Earnings Reconciliation to IPG Net Earnings
(In millions of USD, except per share amounts and share numbers)
Manufacturing facility closures, restructuring and other related charges
3.2
3.9
3.9
4.2
M&A
Costs
1.0
0.9
2.6
4.0
Share-based compensation expense (benefit)
3.7
3.0
(0.2)
1.6
Impairment
of long-lived assets and other assets
0.1
0.1
0.1
0.1
Loss (gain) on disposal of property, plant and equipment
0.1
(0.0)
0.2
0.1
Other
item: special income tax events(1)
—
2.3
—
2.3
Other item: change in fair value of contingent consideration liability(2)
(11.0)
—
(11.0)
—
Income
tax effect of these items
1.3
(2.2)
1.5
(2.5)
Adjusted net earnings
13.2
14.6
26.1
26.8
IPG
Net Earnings per share
Basic
0.25
0.11
0.49
0.29
Diluted
0.25
0.11
0.49
0.29
Adjusted
earnings per share
Basic
0.22
0.25
0.44
0.46
Diluted
0.22
0.25
0.44
0.46
Weighted
average number of common shares outstanding
Basic
59,009,685
58,760,473
59,009,685
58,706,718
Diluted
59,467,336
58,955,643
59,270,918
58,902,830
(1) Refers
to the Proposed Tax Assessment recorded in the second quarter of 2019.
(2) Refers to the potential earn-out consideration obligation associated with the Nortech Acquisition.
Adjusted net earnings for the second quarter of 2020 totalled $13.2 million, a $1.4 million or 9.7% decrease from $14.6 million for the second quarter of 2019. The decrease was primarily due to a decrease in gross profit, partially offset by decreases in (i) SG&A, (ii) income tax expense mainly driven by a favourable mix of earnings between jurisdictions, and (iii) interest expense resulting from a lower average cost of debt.
Adjusted net earnings for the first six months of 2020 totalled $26.1 million, a $0.7 million or 2.6% decrease from $26.8 million for the same period in 2019. The decrease was primarily due to a decrease in gross profit,
partially offset by decreases in (i) income tax expense mainly driven by the favourable treatment of interest deductions related to the restructuring of intercompany debt, (ii) SG&A and (iii) interest expense.
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EBITDA and Adjusted EBITDA
A reconciliation of the Company’s EBITDA, a non-GAAP financial measure, to net earnings (loss), the most directly comparable GAAP financial measure, is set out in the EBITDA reconciliation table below. EBITDA should not be construed as earnings (loss) before income taxes, net earnings (loss) or cash flows from operating
activities as determined by GAAP. The Company defines EBITDA as net earnings (loss) before (i) interest and other finance costs (income); (ii) income tax expense (benefit); (iii) amortization of intangible assets; and (iv) depreciation of property, plant and equipment. The Company defines adjusted EBITDA as EBITDA before (i) manufacturing facility closures, restructuring and other related charges (recoveries); (ii) advisory fees and other costs associated with mergers and acquisitions activity, including due diligence, integration and certain non-cash purchase price accounting adjustments ("M&A Costs"); (iii) share-based compensation expense (benefit); (iv) impairment of goodwill; (v) impairment (reversal of impairment) of long-lived assets and other assets; (vi) write-down on assets classified
as held-for-sale; (vii) (gain) loss on disposal of property, plant and equipment; and (viii) other discrete items as shown in the table below. The terms "EBITDA" and "adjusted EBITDA" do not have any standardized meanings prescribed by GAAP and are therefore unlikely to be comparable to similar measures presented by other issuers. EBITDA and adjusted EBITDA are not measurements of financial performance under GAAP and should not be considered as alternatives to cash flows from operating activities or as alternatives to net earnings (loss) as indicators of the Company’s operating performance or any other measures of performance derived in accordance with GAAP. The Company has included these non-GAAP financial measures because it believes that they allow investors to make a more meaningful
comparison between periods of the Company’s performance, underlying business trends and the Company’s ongoing operations. The Company further believes these measures may be useful in comparing its operating performance with the performance of other companies that may have different financing and capital structures, and tax rates. Adjusted EBITDA excludes costs that are not considered by management to be representative of the Company’s underlying core operating performance, including certain non-operating expenses, non-cash expenses and, where indicated, non-recurring expenses. In addition, EBITDA and adjusted EBITDA are used by management
to set targets and are metrics that, among others, can be used by the Company’s Human Resources and Compensation Committee to establish performance bonus metrics and payout, and by the Company’s lenders and investors to evaluate the Company’s performance and ability to service its debt, finance capital expenditures and acquisitions, and provide for the payment of dividends to shareholders. The Company experiences normal business seasonality that typically results in adjusted EBITDA that is proportionately higher in the second, third and fourth quarters of the year relative to the first quarter.
EBITDA
and Adjusted EBITDA Reconciliation to Net Earnings
Manufacturing
facility closures, restructuring and other related charges
3.2
3.9
3.9
4.2
M&A Costs
1.0
0.9
2.6
4.0
Share-based
compensation expense (benefit)
3.7
3.0
(0.2)
1.6
Impairment of long-lived assets and other assets
0.1
0.1
0.1
0.1
Loss
(gain) on disposal of property, plant and equipment
0.1
(0.0)
0.2
0.1
Adjusted EBITDA
40.4
44.2
77.9
82.5
Adjusted
EBITDA totalled $40.4 million for the second quarter of 2020, a $3.7 million or 8.5% decrease from $44.2 million for the second quarter of 2019, and totalled $77.9 million for the first six months of 2020, a $4.5 million or 5.5% decrease from $82.5 million for the same period in 2019. The decrease in both periods was primarily due to a decrease in gross profit, partially offset by a decrease in SG&A.
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Off-Balance Sheet Arrangements
There have been no material changes with respect to off-balance sheet arrangements since December
31, 2019 outside of the Company’s ordinary course of business. Reference is made to the section entitled “Off-Balance Sheet Arrangements” in the Company’s 2019 MD&A.
Working Capital
The Company experiences some business seasonality that results in the Company’s efforts to effectively manage its working capital resources. Typically, a larger investment in working capital is required in quarters
during which accounts receivable increase due to a higher level of sales invoiced toward the end of the quarter and inventory builds in anticipation of higher future sales, both of which typically occur in the first, second and third quarters and unwind in the fourth quarter. Furthermore, certain liabilities are accrued for throughout the year and are paid only during the first quarter of the following year.
The Company uses Days Inventory to measure inventory performance. Days Inventory increased to 76 for the second quarter of 2020 from 72 for the second quarter of 2019. Days Inventory increased to 71 for the six months ended June 30, 2020 from 70 for the same period in 2019. Inventories increased $11.1 million to $196.0 million as of June
30, 2020 from $184.9 million as of December 31, 2019, primarily due to additional inventory resulting from the Nortech Acquisition and inventory pre-purchased in order to manage anticipated increases in certain raw material prices, partially offset by adjustments to inventory levels to align with demand due to the impacts of COVID-19.
The calculations are shown in the following table:
Cost
of sales ÷ Days in period = Cost of sales per day
(Beginning inventory + Ending inventory) ÷ 2 = Average inventory
Average inventory ÷ Cost of goods sold per day = Days inventory
For
purposes of this calculation inventory excludes items considered parts and supplies
(1)In millions of USD
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The Company uses Days Sales Outstanding (“DSO”) to measure the performance of its trade receivables. DSO increased to 47 in the second
quarter of 2020 from 44 in the second quarter of 2019. DSO increased to 46 for the six months ended June 30, 2020 from 45 for the same period in 2019. Trade receivables increased $4.8 million to $138.0 million as of June 30, 2020 from $133.2 million as of December 31, 2019, primarily due to the impact of the Nortech Acquisition and the timing of revenue invoiced in the second quarter of 2020 compared to the fourth quarter of 2019.
The calculations are shown in the following tables:
Accounts payable and accrued liabilities decreased $23.4 million to $121.7 million as of June 30, 2020 from $145.1 million as of December 31, 2019, primarily due to the timing of payments for inventory as well as SG&A, partially offset by additional accounts payables and accrued liabilities resulting from the Nortech Acquisition.
Liquidity and Borrowings
Liquidity
The Company relies upon cash flows from operations and funds available under its credit facilities to meet working
capital requirements, as well as to fund capital expenditures, business acquisitions, dividends, share repurchases, obligations under its other debt instruments, and other general corporate activities.
The Company’s liquidity risk management processes attempt to maintain a sufficient amount of cash and ensure that the Company has financing sources for a sufficient authorized amount. The Company establishes budgets, cash estimates and cash management policies with a goal of ensuring it has the necessary funds to fulfill its obligations for the foreseeable future.
The
Company believes it has sufficient cash on hand, and that it will generate sufficient funds from cash flows from operating activities, to meet its ongoing expected capital expenditures, working capital and discretionary dividend payment funding needs for at least the next twelve months. In addition, funds available under the borrowings may be used, as needed, to fund more significant strategic initiatives.
As of June 30, 2020, the Company had $14.4 million of cash and $326.1 million of loan availability (comprised of committed funding of $317.5 million and uncommitted funding of $8.6 million), yielding total cash and loan availability of $340.5 million compared to total cash and loan availability of $406.0 million as of December
31, 2019.
The Company's total outstanding borrowings and lease liabilities increased $66.6 million to $581.6 million ($576.2 million net of unamortized debt issue costs of $5.4 million) as of June 30, 2020 from $515.0 million ($508.8 million net of unamortized debt issue costs of $6.2 million) as of December 31, 2019. The incremental borrowings are primarily to fund the Nortech Acquisition in February 2020 and to support the Company's seasonal working capital needs.
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Senior
Unsecured Notes
The Company's $250.0 million Senior Unsecured Notes, issued in October 2018, are due October 15, 2026 and bear interest at a fixed rate of 7.00% per annum, payable semi-annually in cash in arrears on April 15 and October 15 of each year, beginning on April 15, 2019. As of June 30, 2020, the Senior Unsecured Notes outstanding balance amounted to $250.0 million ($246.2 million net of $3.8 million in unamortized debt issue costs).
2018 Credit Facility
Pursuant to a credit agreement executed in June 2018 with a syndicated lending group, and a subsequent amendment executed in July 2019, the
Company has a five-year $600.0 million credit facility ("2018 Credit Facility") comprised of a $400.0 million revolving credit facility (“2018 Revolving Credit Facility”) and a $200.0 million term loan (“2018 Term Loan”).
The 2018 Term Loan amortizes $65.0 million until March 2023 ($5.0 million in 2018, $10.0 million in 2019, $12.5 million in 2020, $15.0 million in 2021, $17.5 million in 2022, and $5.0 million in 2023), and the remaining balance of the 2018 Credit Facility is due upon maturity in June 2023. Any repayments of borrowings under the 2018 Term Loan are not available to be borrowed again in the future.
The 2018 Credit Facility also includes an incremental accordion feature of $200.0 million, which enables the Company to increase the limit of this facility (subject
to the credit agreement's terms and lender approval) if needed. The 2018 Credit Facility bears an interest rate based, at the Company’s option, on the London Inter-bank Offered Rate ("LIBOR") (or a lender-approved comparable or successor rate), the Federal Funds Rate, or Bank of America’s prime rate, plus a spread varying between 25 and 250 basis points (175 and 150 basis points as of June 30, 2020 and December 31, 2019, respectively) depending on the debt instrument's benchmark interest rate and the consolidated secured net leverage ratio.
The 2018 Credit Facility has two financial covenants, a consolidated secured net leverage ratio and a consolidated interest coverage ratio. In July 2019, the
Company and its syndicated lending group amended the 2018 Revolving Credit Facility to, among other things, revise the two financial covenant thresholds to account for the associated impacts of new lease accounting guidance implemented on January 1, 2019 requiring operating leases to be accounted for as borrowings (with corresponding interest payments). The amendment provides that the consolidated secured net leverage ratio must not be more than 3.70 to 1.00 (previously 3.50 to 1.00), with an allowable temporary increase to 4.20 to 1.00 (previously 4.00 to 1.00) for the quarter in which the Company consummates an acquisition with a price not less than $50 million and the following three quarters. The amendment also provides that the consolidated interest coverage ratio must not be less than 2.75 to 1.00 (previously 3.00 to 1.00). The
Company was in compliance with the consolidated secured net leverage ratio and consolidated interest coverage ratio, which were 1.76 and 5.75, respectively, as of June 30, 2020. In addition, the 2018 Credit Facility has certain non-financial covenants, such as covenants regarding indebtedness, investments, and asset dispositions. The Company was in compliance with all covenants as of and for the six months ended June 30, 2020.
As of June 30, 2020, the 2018 Term Loan's outstanding principal balance amounted to $180.0 million and the 2018 Revolving Credit Facility’s outstanding principal balance amounted to $80.2 million, for a total gross outstanding
principal balance under the 2018 Credit Facility of $260.2 million (net outstanding principal balance of $258.6 million, net of unamortized debt issue costs of $1.6 million). Standby letters of credit totalled $2.4 million resulting in total utilization under the 2018 Credit Facility of $262.5 million. Accordingly, unused availability under the 2018 Credit Facility as of June 30, 2020 amounted to $317.5 million. The Company's capacity to borrow available funds under the 2018 Credit Facility may be limited because of the secured net leverage ratio covenant and other restrictions as defined in the Company's credit agreement.
Other Borrowings
As
of June 30, 2020, the Company's credit facilities denominated in Indian Rupee ("INR") had a gross outstanding balance of INR 1,662.5 million ($22.0 million) and net outstanding balance of INR 1,660.5 million ($22.0 million), net of unamortized debt issue costs of INR 2.0 million (less than $0.1 million). Including INR 8.8 million ($0.1 million) in outstanding letters of credit, total utilization under these credit facilities amounted to INR 1,671.4 million ($22.1 million). Any repayment of term loan borrowings under the credit facilities denominated in INR are not available to be borrowed again in the future. Unused availability under these credit facilities as of June 30, 2020 amounted to INR 650.6 million ($8.6 million). All unused availability was uncommitted.
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Cash
Flows
The Company’s net working capital on the balance sheet increased in the first quarter of 2020 due to the effect of a business acquisition. However, working capital amounts acquired are not included in cash flows from operating activities under IFRS. As such, the discussions below regarding 2020 working capital items appropriately exclude this effect.
Cash flows from operating activities increased in the second quarter of 2020 by $8.6 million to $40.5 million from $31.9 million in the second quarter of 2019 primarily due to an increase in cash flows from working capital items, partially offset by a decrease in operating profit.
Cash
flows from operating activities increased in the first six months of 2020 by $11.0 million to $24.4 million from $13.4 million in the same period in 2019 primarily due to a decrease in cash flows used for working capital items, partially offset by a decrease in operating profit and an increase in federal income taxes paid.
The changes in working capital items in both periods are primarily due to timing differences in payments and cash receipts, the impacts of COVID-19 on demand, as well as the related working capital management strategies implemented in response to COVID-19 uncertainties, including inventory management and cost savings initiatives. Additional discussion on working capital changes is provided in the section entitled "Working Capital" above.
Cash flows used for investing activities
decreased in the second quarter of 2020 by $5.3 million to $5.4 million from $10.7 million in the second quarter of 2019, primarily due to a decrease in capital expenditures as a result of the Company proactively reducing its capital expenditures as a precautionary measure given market uncertainty caused by COVID-19.
Cash flows used for investing activities increased in the first six months of 2020 by $20.2 million to $49.3 million from $29.1 million in the same period in 2019, primarily due to the Nortech Acquisition in the first quarter of 2020, partially offset by a decrease in capital expenditures as discussed above.
Cash flows used for financing activities increased in the second quarter of 2020 by $20.4 million to an outflow of $41.0 million from an outflow of $20.6 million in the second quarter
of 2019 primarily due to an increase in net debt repayments.
Cash flows from financing activities increased in the first six months of 2020 by $24.8 million to an inflow of $33.4 million from an inflow of $8.6 million in the same period in 2019 primarily due to greater net borrowings in 2020 to fund the Nortech Acquisition, partially offset by incremental cash flows from working capital items.
The Company is including free cash flows (a non-GAAP financial measure as defined and reconciled below) because it is used by management and investors in evaluating the Company’s performance and liquidity. Free cash flows does not have any standardized meaning prescribed by GAAP and is therefore unlikely to be comparable to
similar measures presented by other issuers. Free cash flows should not be interpreted to represent the total cash movement for the period as detailed in the Company's financial statements, or to represent residual cash flow available for discretionary purposes, as it excludes other mandatory expenditures such as debt service. The Company experiences normal business seasonality that typically results in cash flows from operating activities and free cash flows that are negative in the first quarter and progressively increase each quarter throughout the year with the majority being generated in the fourth quarter in line with required working capital investments discussed in the section entitled "Working Capital".
Free cash flows, defined by the
Company as cash flows from operating activities less purchases of property, plant and equipment, increased in the second quarter of 2020 by $14.8 million to $35.3 million from $20.5 million in the second quarter of 2019 primarily due to an increase in cash flows from operating activities and a decrease in capital expenditures.
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Free cash flows increased in the first six months of 2020 by $27.6 million to $11.7 million from negative $15.9 million in the same period in 2019 primarily due to a decrease in capital expenditures and an increase in cash flows from operating activities.
A reconciliation of free cash flows to cash flows from operating activities, the most directly comparable GAAP financial
measure, is set forth below.
Free Cash Flows Reconciliation to Cash Flows from Operating Activities
Capital expenditures totalled $5.2 million and $12.7 million in the three and six months ended June 30, 2020 and were funded primarily by cash flows from operations. The Company had commitments to suppliers to purchase machinery and equipment totalling approximately $8.5 million as of June 30, 2020 that are expected to be paid out in the next twelve months and will be funded by borrowings and cash flows from operations. The Company proactively reduced its planned capital expenditures in 2020 as a precautionary measure given market uncertainty caused by COVID-19. As such, these capital expenditures and commitments are primarily for maintenance needs
and other funds committed for initiatives supporting the efficiency and effectiveness of operations.
Contractual Obligations
There have been no material changes with respect to contractual obligations since December 31, 2019 outside of the Company’s ordinary course of business. Reference is made to the section entitled “Contractual Obligations” in the Company’s 2019 MD&A.
The Company's share-based compensation plans include: stock options, Performance Share Units ("PSU"), Restricted Share Units ("RSU") and Deferred Share Units ("DSU").
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The table below summarizes share-based compensation activity that occurred during the following periods:
(1) The
table below provides further information regarding the PSUs settled and adjusted by performance factor included in the table above. The number of "Target Shares" reflects 100% of the PSUs granted and the number of PSUs settled reflects the performance adjustments to the Target Shares:
The number of PSUs granted subsequent to December 31, 2019 which will be eligible to vest can range from 0% to 175% of the Target Shares as determined by multiplying the number of PSUs awarded by the adjustment factors as follows:
•25% based on the Company's total shareholder return ("TSR") ranking relative to the S&P North America SmallCap Materials (Industry Group) Index (the "Index Group") over the measurement period as set out in the table below;
•25% based on the
Company's TSR ranking relative to a specified peer group of companies ("Peer Group") over the measurement period as set out in the table below; and
•50% based on the Company's average return on invested capital over the measurement period as compared to internally developed thresholds (the “ROIC Performance”) as set out in the table below.
The number of PSUs granted subsequent to December 31, 2017 and prior to December 31, 2019
which will be eligible to vest can range from 0% to 175% of the Target Shares as determined by multiplying the number of PSUs awarded by the adjustment factors as follows:
•50% based on the Company's TSR ranking relative to the Peer Group over the measurement period as set out in the table below; and
•50% based on the Company's the ROIC Performance as set out in the table below.
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The relative TSR performance adjustment factor is determined
as follows:
TSR Ranking Relative to the Index Group/Peer Group
Percent of Target Shares Vested
90th percentile or higher
200
%
75th percentile
150
%
50th percentile
100
%
25th
percentile
50
%
Less than the 25th percentile
0
%
The ROIC Performance adjustment factor is determined as follows:
ROIC Performance
Percent of Target Shares Vested
1st Tier
0
%
2nd
Tier
50
%
3rd Tier
100
%
4th Tier
150
%
The TSR performance and ROIC Performance adjustment factors between the numbers set out in the two tables above are interpolated on a straight-line basis.
The performance period is the period from January 1st in the year of grant through December 31st of the third calendar year following the date of grant. The PSUs are expensed over the
vesting period beginning from the date of grant through February 15th of the fourth calendar year following the date of grant.
As of June 30, 2020, $6.4 million was recorded in share-based compensation liabilities, current, and $1.9 million was recorded in share-based compensation liabilities, non-current.
The table below presents the share-based compensation expense (benefit) recorded in earnings in SG&A by award type (in millions of USD):
On
June 30, 2020the Company paid cash dividends of $0.1475 per common share to shareholders of record at the close of business June 15, 2020 for an aggregate amount of $8.7 million.
The dividends paid and payable in 2020 by the
Company are “eligible dividends” as defined in subsection 89(1) of the Income Tax Act (Canada).
The Company renewed its normal course issuer bid ("NCIB"), under which the Company has the ability to repurchase for cancellation up to 4,000,000 common shares of the Company at prevailing market prices over a twelve-month period starting on July 23, 2020 and ending on July 22, 2021. As of August 12, 2020, no shares have been repurchased under the NCIB.
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Financial
Risk, Objectives and Policies
Interest Rate Risk
The Company is exposed to a risk of changes in cash flows due to the fluctuations in interest rates on its variable rate borrowings. To minimize the potential long-term cost of floating rate borrowings, the Company entered into interest rate swap agreements.
The Company was party to the following interest rate swap agreements designated as hedging instruments as of June 30, 2020 (in millions of USD):
A foreign currency exposure arises from Intertape Polymer Group Inc.'s net investment in its USD functional currency subsidiary, IPG (US) Holdings Inc. The risk arises from the fluctuations in the USD and CDN current exchange rate, which causes the amount of the net investment in IPG (US) Holdings Inc. to vary. The Company's Senior Unsecured Notes are being used to hedge the Company’s exposure to the USD foreign exchange risk on this investment.
The changes in value related to the net investment in IPG (US) Holdings, Inc., designated as the hedged item, and the Senior Unsecured Notes designated as a hedging instrument, in the hedge of a net investment, are as follows:
(Loss)/gain
from change in value of IPG (US) Holdings, Inc. used for calculating hedge ineffectiveness
(8.6)
(3.9)
11.4
(8.6)
Gain/(loss) from change in value of the Senior Unsecured Notes used for calculating hedge ineffectiveness
8.6
4.5
(11.4)
9.8
Gain/(loss)
from Senior Unsecured Notes recognized in other comprehensive income
8.6
3.9
(11.4)
8.6
Gain from hedge ineffectiveness recognized in earnings in finance (income) costs, in other finance (income) expense, net
—
0.6
—
1.2
The
cumulative amounts included in the foreign currency translation reserve recognized in other comprehensive income related to the net investment in IPG (US) Holdings, Inc., designated as the hedged item in the net investment hedge, is a loss of $10.5 million for the six months ended June 30, 2020 (a gain of $0.9 million as of December 31, 2019).
Legal Matters
The Company is engaged from time-to-time in various legal proceedings and claims that have arisen in the ordinary course of business. The outcome of all of the proceedings and claims against the
Company is subject to future resolution, including the uncertainties of litigation. Based on information currently known to the Company and after consultation with external legal counsel, management believes that the probable ultimate resolution of any such proceedings and claims, individually or in the aggregate, will not have a material adverse effect on the financial condition of the Company, taken as a whole, and accordingly, no material amounts have been recorded as of June 30, 2020.
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Critical
Accounting Judgments, Estimates and Assumptions
The preparation of the financial statements requires management to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Significant changes in the underlying assumptions could result in significant changes to these estimates. Consequently, management reviews these estimates on a regular basis. Revisions to accounting estimates are recognized in the period in which the estimates are revised and in any future periods affected. The judgments, estimates and assumptions applied in the financial statements were the same as those applied in the Company’s most recent annual audited consolidated financial statements, except for (i) the estimate of the provision for
income taxes, which is determined in the financial statements using the estimated weighted average annual effective income tax rate applied to the earnings before income tax expense of the interim period, which may have to be adjusted in a subsequent interim period of the financial year if the estimate of the annual income tax rate changes, and (ii) the re-measurement of the defined benefit liability, which is required at year-end and if triggered by significant market fluctuations or for plan amendment or settlement during interim periods. The financial statements should be read in conjunction with the Company’s 2019 annual audited consolidated financial statements.
The Company is closely monitoring the impacts
of the COVID-19 pandemic as a trigger for changes in critical accounting judgments, estimates and assumptions. As of June 30, 2020, and as a result of impacts from COVID-19, the Company recorded (i) a fair value adjustment to its contingent consideration related to the Nortech Acquisition that was originally recorded in the first quarter of 2020, (ii) a re-measurement of its defined benefit liability as a result of a 40 and 60 basis point decrease in discount rates from December 31, 2019 for Canadian and US plans, respectively and (iii) certain termination benefits as a result of restructuring in response to COVID-19 uncertainties. There were no other material impairments, changes to allowance for credit losses, restructuring charges or other changes in critical accounting judgments,
estimates and assumptions that it can directly attribute to COVID-19 or otherwise.
On March 29, 2018, the IASB issued its revised Conceptual Framework for Financial Reporting ("Conceptual Framework"). This replaces the previous version of the Conceptual Framework issued in 2010. The revised Conceptual Framework became effective on January 1, 2020. The revised Conceptual Framework does not constitute a substantial revision from the
previously effective guidance but does provide additional guidance on topics not previously covered such as presentation and disclosure, revised definitions of an asset and a liability, as well as new guidance on measurement and derecognition. There was no material impact to the Company’s financial statements as a result of adopting the revised Conceptual Framework.
On September 26, 2019, the IASB published Interest Rate Benchmark Reform (Amendments to IFRS 9, IAS 39 and IFRS 7) in response to the ongoing reform of interest rate benchmarks around the world. The objective of the amendments is to modify specific hedge accounting requirements so that entities would apply those hedge accounting requirements assuming that the interest rate benchmark
on which the hedged cash flows and cash flows of the hedging instrument are based is not altered as a result of interest rate benchmark reform. The amendments became effective on January 1, 2020. There was no material impact to the Company’s financial statements as a result of adopting Interest Rate Benchmark Reform (Amendments to IFRS 9, IAS 39 and IFRS 7).
In the current period, the Company has applied a number of other amendments to IFRS Standards and Interpretations issued by the IASB that are effective for an annual period that begins on or after January 1, 2020. Their adoption has not had any material impact on the
disclosures or on the amounts reported in these financial statements.
New Standards and Interpretations Issued but Not Yet Effective
Certain new standards, amendments and interpretations, and improvements to existing standards have been published by the IASB but are not yet effective and have not been adopted early by the Company. Management anticipates that all the relevant pronouncements will be adopted in the first reporting period following the date of application. Information on new standards, amendments and interpretations, and improvements to existing standards, which could potentially impact the Company’s financial statements, are detailed as follows:
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On
January 23, 2020, the IASB published Classification of Liabilities as Current or Non-current (Amendments to IAS 1), which includes narrow-scope amendments to IAS 1 Presentation of Financial Statements. The objective of the amendments is to clarify how to classify debt and other liabilities as current or non-current depending on the rights that exist at the end of the reporting period. The amendments include clarifying the classification requirements for debt a company might settle by converting it into equity. The amendments are effective on January 1, 2023 and will be applied retrospectively. Management is currently assessing, but has not yet determined, the impact on the Company’s financial
statements.
On May 14, 2020, the IASB published Property, Plant and Equipment: Proceeds Before Intended Use (Amendments to IAS 16), which prohibits deducting amounts received from selling items produced while preparing the asset for its intended use from the cost of property, plant and equipment. Instead, such sales proceeds and related costs will be recognized in earnings. The amendments are effective on January 1, 2022. Management is currently assessing, but has not yet determined, the impact on the Company’s financial statements.
On May 14, 2020, the IASB published Onerous
Contracts - Cost of Fulfilling a Contract (Amendments to IAS 37), which specifies which costs a Company includes when assessing whether a contract will be loss-making. The amendments are effective on January 1, 2022. Management is currently assessing, but has not yet determined, the impact on the Company’s financial statements.
On May 14, 2020, the IASB published Annual Improvements to IFRS Standards 2018 - 2020,
which amends IFRS 1, IFRS 9, IAS 41, and the Illustrative Examples accompanying IFRS 16. These are minor amendments that clarify, simplify or remove redundant wordings in the standards. The amendments are effective on January 1, 2022. Management is currently assessing, but has not yet determined, the impact on the Company’s financial statements.
On May 28, 2020, the IASB published Covid-19-Related Rent Concessions (Amendment to IFRS 16), which amends IFRS 16, Leases, to provide lessees with a practical expedient that relieves lessees from assessing whether a COVID-19-related rent concession is a lease modification. The amendments are effective for annual
reporting periods beginning on or after June 1, 2020 and will be applied retrospectively. Management has completed its analysis of the guidance and does not currently expect it to materially impact the Company’s financial statements.
Certain other new standards and interpretations have been issued but are not expected to have a material impact on the Company’s financial statements.
Internal Control Over Financial Reporting
In accordance with the Canadian Securities Administrators’ National Instrument 52-109,
“Certification of Disclosure in Issuers’ Annual and Interim Filings” (“NI 52-109”), the Company has filed interim certificates signed by the Chief Executive Officer (“CEO”) and the Chief Financial Officer ("CFO") that, among other things, report on the design of disclosure controls and procedures and design of internal control over financial reporting. With regards to the annual certification requirements of NI 52-109, the Company relies on the statutory exemption contained in section 8.1 of NI 52-109, which allows it to file with the Canadian securities regulatory authorities the certificates required under the Sarbanes-Oxley Act of 2002 at the same time such certificates are required to be filed in the United States of America.
The
Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in its annual filings, interim filings or other reports filed or submitted by the Company under securities legislation is recorded, processed, summarized and reported within the time periods specified in securities legislation and that such information is accumulated and communicated to the Company's management including the CEO and CFO as appropriate to allow timely decision regarding required disclosure. The Company has also established internal control over financial reporting which is designed to provide reasonable assurance regarding the reliability of the
Company’s financial reporting and its compliance with GAAP (as derived in accordance with IFRS) in its consolidated financial statements.
Management, under the supervision of the Company's CEO and CFO, evaluated the effectiveness of the Company's disclosure controls and procedures as well as the effectiveness of the Company's internal control over financial reporting. The CEO and CFO have concluded that the Company’s disclosure controls and procedures and internal control over financial reporting as of June 30, 2020 were effective.
There
have been no changes to the Company’s internal control over financial reporting during the Company’s most recent interim period that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
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All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation
and presentation. Because of its inherent limitation, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Additional Information
Additional information relating to the Company, including its Form 20-F filed in lieu of an Annual Information Form for 2019, is available on the Company’s website
(www.itape.com) as well as under the Company’s profile on SEDAR at www.sedar.com and on EDGAR at www.sec.gov.
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Forward-Looking Statements
Certain statements and information included in this MD&A constitute “forward-looking information” within the meaning of
applicable Canadian securities legislation and “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (collectively, “forward-looking statements”), which are made in reliance upon the protections provided by such legislation for forward-looking statements. All statements other than statements of historical facts included in this MD&A, including statements regarding the COVID-19 pandemic (including the Company’s priorities as we move through the pandemic, the uncertainty for the duration of the downturn resulting from the pandemic, the exposure of the Company’s business to the pandemic, and the duration of the pandemic), the
Company’s positioning to weather the downturn, the Company’s characteristics that position it, in its belief, to come out the other side of the COVID-19 pandemic in a strong position in the market, the Company’s adjustment of its production plans to align with demand and slowdown as deemed necessary in order to manage working capital and associated cost levels, the Company’s industry and the Company’s outlook, prospects, plans, financial position, future transactions, acquisitions and partnerships, capital expenditures, sales and financial results, inventory, income tax and effective tax rate, availability of funds and credit, expected
credit spread, level of indebtedness, payment of dividends, capital and other significant expenditures, working capital requirements, liquidity, selling prices, fluctuations in costs, the Company’s integration of Nortech and the expected costs, capabilities, earnings and contingent consideration related to the Nortech Acquisition, expected charges and savings in connection with restructuring initiatives, the impacts of new accounting standards, judgments, estimates, assumptions, litigation and business strategy, may constitute forward-looking statements. These forward-looking statements are based on current beliefs, assumptions, expectations, estimates, forecasts and projections made by the Company’s management. Words such as “may,”“will,”“should,”“expect,”“continue,”“intend,”“estimate,”“anticipate,”“plan,”“foresee,”“believe” or “seek” or the negatives of these terms or variations of them or similar terminology are intended to identify such forward-looking statements. Although the Company believes that the expectations reflected in these forward-looking statements are reasonable, these statements, by their nature, involve risks and uncertainties and are not guarantees of future performance. Such statements are also subject to assumptions concerning, among other things: business conditions and growth or declines in the Company’s industry, the Company’s customers’ industries and the general economy, including as a result of the
impact of COVID-19; the impact of changes to tariffs and other international trade developments; the anticipated benefits from the Company’s greenfield projects and manufacturing facility expansions; the impact of fluctuations in selling prices; the impact of fluctuations in raw material prices and freight costs; costs associated with the impact of climate change, including weather related events and environmental matters; the anticipated benefits from the Company’s acquisitions and partnerships; the expected financial performance and benefits of the Nortech Acquisition; the Company’s growth strategy and the strength of the Company’s
competitive position moving forward; the anticipated benefits from the Company’s capital expenditures; the quality, and market reception, of the Company’s products; the Company’s anticipated business strategies; risks and costs inherent in litigation; legal and regulatory requirements, including as related to COVID-19; the Company’s ability to maintain and improve quality and customer service; anticipated trends in the Company’s business; anticipated cash flows from the
Company’s operations; anticipated changes in the tax treatment of intercompany debt; availability of funds under the Company’s 2018 Credit Facility; the Company’s flexibility to allocated capital as a result of the Senior Unsecured Notes offering; changes to accounting rules and standards; and the Company’s ability to continue to control costs. The Company can give no assurance that these statements and expectations will prove to have been correct. Actual outcomes and results may, and often do, differ from what is expressed, implied or projected in such forward-looking statements, and such differences may be material. Readers are
cautioned not to place undue reliance on any forward-looking statement. For additional information regarding some important factors that could cause actual results to differ materially from those expressed in these forward-looking statements and other risks and uncertainties, and the assumptions underlying the forward-looking statements, you are encouraged to read “Item 3. Key Information - Risk Factors,”“Item 5 Operating and Financial Review and Prospects (Management’s Discussion & Analysis)” and statements located elsewhere in the Company’s annual report on Form 20-F for the year ended December 31, 2019 and the other statements and factors contained in the Company’s filings with the Canadian securities regulators and the US Securities
and Exchange Commission. Each of the forward-looking statements speaks only as of the date of this MD&A. The Company will not update these statements unless applicable securities laws require it to do so.
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Dates Referenced Herein and Documents Incorporated by Reference
