TriMas Corporation — Form 10-Q Summary
Business context and reporting period
TriMas is a diversified industrial manufacturer serving consumer, aerospace, industrial, petrochemical, refinery and oil and gas markets through three reportable segments: Packaging, Aerospace and Specialty Products. This unaudited filing covers the three and nine months ended September 30, 2018, compared with the corresponding 2017 periods.
Financial performance and position
| Metric | Q3 2018 | Q3 2017 | 9M 2018 | 9M 2017 |
|---|---|---|---|---|
| Net sales | $223.8 million | $209.3 million | $665.8 million | $622.5 million |
| Gross profit | $61.7 million | $58.9 million | $186.9 million | $170.2 million |
| Gross margin | 27.6% | 28.1% | 28.1% | 27.3% |
| Operating profit | $29.9 million | $28.3 million | $96.6 million | $70.6 million |
| Operating margin | 13.4% | 13.5% | 14.5% | 11.3% |
| Net income | $22.7 million | $13.1 million | $66.6 million | $35.0 million |
| Diluted EPS | $0.49 | $0.29 | $1.44 | $0.76 |
| Operating cash flow | Not separately provided | Not separately provided | $83.1 million | $72.7 million |
At September 30, 2018, cash and equivalents were $79.6 million, compared with $27.6 million at December 31, 2017. Total assets were $1.077 billion and shareholders’ equity was $607.5 million. Long-term debt, net of issuance costs, was $293.3 million, consisting primarily of $300.0 million of 4.875% senior notes due October 2025.
The company had no revolving-credit borrowings and approximately $284.9 million of revolver availability after letters of credit. It was in compliance with its debt covenants. Actual total net leverage was 1.50x versus a 4.00x covenant limit, and interest coverage was 12.11x versus a 3.00x minimum.
Material changes versus the prior comparable period
- Q3 sales increased 6.9%, driven by Packaging health, beauty and home care products and Specialty Products industrial cylinders and oil and gas products. Nine-month sales also increased 6.9%.
- Nine-month operating profit increased 36.8%, primarily from higher sales, operating improvements, lower facility-exit costs and an $8.2 million non-cash benefit from termination of a legacy Metaldyne liability.
- Q3 gross margin declined because higher resin, steel and other commodity costs, product mix and pricing pressure more than offset volume growth. Packaging operating margin declined to 23.2% from 25.8%.
- Specialty Products was the strongest segment, with Q3 sales up 11.6% and operating profit up 54.0%; nine-month operating profit increased to $26.6 million from $11.8 million.
- Aerospace Q3 sales increased modestly and operating margin improved, while nine-month sales declined 0.7% but operating profit increased due to production efficiencies and mix.
- The effective tax rate declined to 15.4% in Q3 and 20.4% for the nine months, versus 26.6% and 33.2%, respectively, primarily because of the Tax Cuts and Jobs Act and a $2.7 million tax benefit from provision-to-return adjustments.
- Operating cash flow increased by $10.4 million year over year, although receivables and inventory used $20.1 million and $10.8 million of cash, respectively.
- The company repurchased 124,138 shares for approximately $3.6 million during the nine months, including 23,191 shares for approximately $0.7 million in Q3.
Guidance, outlook, risks and unusual items
Management expects 2018 sales to be higher than originally projected, supported by improved economic activity and organic growth programs. Management cautioned that fourth-quarter year-over-year growth may moderate because of economic uncertainty and the direct and indirect effects of tariffs on foreign-sourced materials.
- Commodity inflation, particularly in resin, steel and oil-based inputs, adversely affected Q3 results. Management is pursuing price increases, sourcing changes, insourcing and productivity actions, but cost recovery may lag or be incomplete.
- Demand in Specialty Products remains exposed to oil and gas drilling, well-completion and refinery activity. The business also faces cyclical industrial demand and foreign-currency exposure.
- Pending asbestos litigation involved 4,833 claims at September 30, 2018. Management does not believe the matters will have a material adverse effect, but expects a potential period of direct defense and indemnity costs before excess insurance coverage begins.
- Other notable items included a $2.5 million pension settlement charge, approximately $1.3 million of charges related to the Bangalore facility exit, and the $8.2 million non-cash Metaldyne liability reversal.
- The company plans to adopt the new lease standard on January 1, 2019 and expects a material balance-sheet impact from recognizing operating lease assets and liabilities, but no material income-statement impact.
- In October 2018, the company terminated existing cross-currency swaps, received approximately $1.1 million, and entered into replacement swaps with lower initial notional amounts and a higher fixed net interest rate.
Important facts for investors to verify
- Whether commodity-cost recovery and pricing actions offset continuing resin, steel and tariff-related inflation.
- Whether the expected moderation in fourth-quarter growth affects full-year sales and profit expectations.
- The sustainability of the lower effective tax rate, including the impact of one-time tax benefits and Tax Reform Act provisions.
- Cash conversion and working-capital requirements as receivables and inventories increase with sales growth.
- Debt covenant headroom, refinancing requirements for the 2025 senior notes, and the effect of interest-rate or currency movements.
- Developments in asbestos claims, insurance coverage and related defense or settlement costs.
- The balance-sheet impact of adopting the new lease accounting standard in 2019.