TriMas Corporation 2019 Q3 Form 10-Q Summary
Business Context and Reporting Period
TriMas is a diversified industrial manufacturer serving consumer products, aerospace, industrial, petrochemical, refinery, and oil and gas markets through its Packaging, Aerospace, and Specialty Products segments. This unaudited Form 10-Q covers the three and nine months ended September 30, 2019, compared with the corresponding 2018 periods.
In 2019, machined components operations were moved from Aerospace to Specialty Products for segment reporting. TriMas also acquired Plastic Srl in January and Taplast S.p.A. in April, both included in Packaging.
Key Financial Metrics
| Metric | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 |
|---|---|---|---|---|
| Net sales | $236.8 million | $223.8 million | $697.5 million | $665.8 million |
| Gross profit | $61.2 million | $61.7 million | $186.4 million | $186.9 million |
| Gross margin | 25.9% | 27.6% | 26.7% | 28.1% |
| Operating profit | $28.7 million | $29.9 million | $85.7 million | $96.6 million |
| Operating margin | 12.1% | 13.4% | 12.3% | 14.5% |
| Net income | $19.1 million | $22.7 million | $60.2 million | $66.6 million |
| Diluted EPS | $0.42 | $0.49 | $1.32 | $1.44 |
| Cash flow from operations | Not separately provided | Not separately provided | $64.1 million | $83.1 million |
Q3 sales increased 5.8%, while nine-month sales increased 4.8%. The acquisitions contributed approximately $11.5 million of Q3 sales and $23.9 million of nine-month sales. Organic sales, excluding currency effects, increased approximately $3.0 million in Q3 and $13.4 million for the nine-month period.
At September 30, 2019, cash and cash equivalents were $57.9 million, compared with $108.2 million at December 31, 2018. Total assets were $1.185 billion and shareholders’ equity was $662.1 million. Inventories were $176.3 million and receivables were $152.2 million.
Segment Performance
- Packaging: Q3 sales increased 10.7% to $105.5 million, primarily from the acquisitions and higher health, beauty, and home care demand. Operating profit declined to $19.7 million from $22.1 million, and operating margin fell to 18.7% from 23.2%, reflecting lower acquisition margins, unfavorable mix, higher freight costs, and currency effects.
- Aerospace: Q3 sales increased 5.5% to $43.1 million. Operating profit increased to $8.2 million from $7.7 million, with margin improving to 19.1% from 18.8% due to higher volumes and improved production efficiency.
- Specialty Products: Q3 sales increased 0.7% to $88.2 million. Operating profit was $8.4 million versus $8.3 million, with margin unchanged at 9.5%. Higher petrochemical and refining demand offset weaker upstream oil and gas, industrial cylinder, and machined component demand.
Debt, Liquidity, and Capital Allocation
- Debt consisted primarily of $300.0 million of 4.875% senior notes due October 2025. Net long-term debt was $294.4 million, including debt issuance costs.
- TriMas had no borrowings outstanding under its $300.0 million revolving credit facility and approximately $284.1 million of borrowing capacity after $15.9 million of outstanding letters of credit.
- The company reported a total net leverage ratio of 1.48x versus a 4.00x covenant limit and interest coverage of 15.45x versus a 3.00x covenant requirement. TriMas was in compliance with its financial covenants.
- Operating cash flow declined to $64.1 million from $83.1 million. Investing cash use increased to $90.4 million, including $67.1 million for acquisitions and $23.4 million of capital expenditures.
- Financing cash use was $23.9 million, including $21.1 million of share repurchases. The company repurchased 723,528 shares during the first nine months and had approximately $41.8 million remaining under the then-current authorization at September 30.
Material Changes Versus the Prior Comparable Period
- Sales growth was driven primarily by the two Packaging acquisitions, but acquired businesses had lower margins than the existing Packaging portfolio.
- Gross and operating margins declined because of unfavorable product mix, higher freight and logistics costs, currency headwinds, and acquisition-related expenses.
- Nine-month operating profit declined $11.0 million, partly because 2018 included an $8.2 million non-cash benefit from terminating a legacy Metaldyne liability.
- Operating cash flow fell by $19.0 million, while acquisition spending and capital expenditures substantially increased investing cash requirements.
- The company adopted the new lease standard on January 1, 2019, recognizing approximately $40 million of operating lease right-of-use assets and lease liabilities.
- In November 2019, the board increased the aggregate share repurchase authorization to $150 million, including amounts already repurchased under the prior authorization.
Outlook, Risks, Contingencies, and Unusual Items
Management reported challenging macroeconomic and end-market conditions, particularly in North American industrial and oil and gas markets, and did not anticipate broad market improvement. Management plans to emphasize growth in Packaging and Aerospace, continuous improvement, cost control, sourcing initiatives, and alignment of Specialty Products capacity with demand. No formal quantitative earnings or revenue guidance was provided.
In November 2019, TriMas entered into an agreement to sell Lamons to First Reserve for approximately $135 million in cash, subject to customary adjustments and closing conditions. Lamons generated approximately $186 million of sales during the twelve months ended September 30, 2019. Its results were expected to be reported as discontinued operations beginning in the fourth quarter. The sale is intended to reduce energy-market exposure and simplify the portfolio, but execution, approval, valuation, separation, and contingent-liability risks remain.
- Demand is exposed to economic cycles, trade restrictions, tariffs, currency movements, commodity prices, and supply constraints.
- Packaging faced higher resin and freight costs; the company may not always recover cost increases through pricing.
- TriMas was a party to 356 pending asbestos cases involving 4,778 claims at September 30, 2019. Primary insurance had been exhausted in November 2018; management did not believe the matters would have a material adverse effect, but future claims and costs remain uncertain.
- Foreign exchange exposure was managed with derivative contracts, including approximately $102.9 million of foreign exchange forward contract notional amounts and cross-currency swaps.
- Credit ratings were below investment grade but stable: Moody’s affirmed Ba3 senior notes and Ba2 corporate family ratings; S&P affirmed BB- senior debt and BB corporate ratings.
Important Facts for Investors to Verify
- Whether the Lamons transaction closes on expected terms and how the proceeds are allocated among debt reduction, acquisitions, capital expenditures, and share repurchases.
- Whether Packaging acquisition margins improve through integration and the TriMas Business Model.
- Whether freight, material, tariff, and currency pressures continue to compress margins.
- Trends in North American industrial, upstream oil and gas, and industrial cylinder demand.
- Cash conversion, working-capital requirements, and the effect of continued capital expenditures and repurchases on liquidity.
- Future asbestos defense and settlement costs after exhaustion of primary insurance.
- Compliance with debt covenants and the refinancing or repayment plan for the 2025 senior notes.