TriMas Corporation — 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. The filing covers the three months ended March 31, 2018, compared with the three months ended March 31, 2017. TriMas reorganized its reporting structure into three segments: Packaging, Aerospace, and Specialty Products.
Key financial metrics
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Net sales | $217.1 million | $199.8 million | 8.6% increase |
| Gross profit | $60.4 million | $51.8 million | 16.5% increase |
| Gross margin | 27.8% | 25.9% | 190 basis-point increase |
| Operating profit | $35.2 million | $15.9 million | 121.3% increase |
| Operating margin | 16.2% | 8.0% | 820 basis-point increase |
| Net income | $24.3 million | $7.0 million | Increase of $17.3 million |
| Diluted EPS | $0.53 | $0.15 | Increase of $0.38 |
| Operating cash flow | $16.2 million | $22.0 million | Decrease of $5.7 million |
| Capital expenditures | $3.2 million | $10.7 million | Decrease of $7.6 million |
End-market sales increased to $64.7 million in Consumer, $45.8 million in Aerospace, $54.4 million in Industrial, and $52.2 million in Oil and Gas. Segment sales were $88.2 million for Packaging, $45.8 million for Aerospace, and $83.1 million for Specialty Products.
At March 31, 2018, cash and cash equivalents were $36.7 million, compared with $27.6 million at December 31, 2017. Total assets were $1.045 billion and shareholders’ equity was $565.8 million. Long-term debt, net, was $301.7 million, consisting primarily of $300.0 million of 4.875% senior notes due October 2025 and $9.0 million drawn on the revolving facility, net of debt issuance costs.
The company had approximately $276.2 million of borrowing capacity for general corporate purposes after consideration of letters of credit and leverage restrictions. It was in compliance with all financial covenants. Actual total net leverage was 1.80x versus a 4.00x covenant limit, and actual interest coverage was 12.30x versus a 3.00x minimum.
Material changes versus the prior comparable period
- Sales increased in all three segments, with the strongest growth in Specialty Products, driven by higher refinery turnaround activity, increased drilling activity, and demand for large high-pressure cylinders.
- Specialty Products operating profit rose to $9.7 million from $1.5 million, reflecting higher sales, footprint realignment savings, and the absence of a $3.5 million Wolverhampton facility-closure charge recorded in Q1 2017.
- Packaging operating profit increased to $19.6 million from $16.9 million, helped by higher sales, improved fixed-cost absorption, favorable currency effects, and lower facility-consolidation costs.
- Aerospace sales and operating profit were broadly stable; operating profit remained approximately $5.1 million as improved throughput and sales were offset by product mix and higher employee costs.
- Corporate expenses changed from $7.6 million of expense to $0.9 million of income, primarily because a $8.2 million legacy Metaldyne obligation was released following the closure of the related bankruptcy trust. This was a non-cash benefit.
- The effective tax rate declined to 21.4% from 39.6%, primarily because of the Tax Cuts and Jobs Act reduction in the U.S. federal corporate tax rate. The company had recorded approximately $12.7 million of provisional one-time tax charges in Q4 2017 related to the legislation.
- Operating cash flow declined despite higher net income, mainly because receivables increased and accounts payable and accrued liabilities decreased. Cash flow benefited from lower capital expenditures and ended the quarter $9.1 million above the December 31, 2017 balance.
- The company terminated its $75.0 million accounts receivable facility during the quarter. No amounts were outstanding at December 31, 2017.
Guidance, outlook, risks, contingencies, and unusual items
Management remained cautiously optimistic about 2018 growth and earnings prospects, citing internal efficiency initiatives, growth programs in Packaging and Aerospace, and continued Specialty Products cost optimization. Management does not expect Q1 2018 market conditions or the 8.6% sales growth rate to continue at the same pace. Some Q1 demand may have been pulled forward because of actual or potential tariffs on foreign-sourced materials.
- Key operating risks include cyclical demand, economic and political uncertainty, tariffs, raw-material and energy costs, supply disruptions, foreign-currency movements, competition, labor issues, technology and intellectual-property matters, and interest-rate exposure.
- Oil and gas-related businesses remain sensitive to oil prices, drilling activity, refinery spending, rig counts, and well-completion activity.
- The company had 4,913 pending asbestos claims in 446 cases at March 31, 2018. Management does not believe the matters will have a material adverse effect, but insurance coverage may not fully apply during a period before excess coverage begins.
- Cross-currency swaps generated a $4.0 million net-of-tax loss in other comprehensive income during the quarter, increasing the derivative-related AOCI loss to $7.2 million.
- The company adopted revenue recognition guidance under Topic 606 and other accounting standards during 2018; management reported no material impact from adoption.
- Management stated that liquidity and anticipated operating cash flow should be sufficient for debt service, capital expenditures, working capital, and other obligations for the foreseeable future.
Important facts for investors to verify
- Whether the Q1 sales increase reflects sustainable demand or customer purchases accelerated ahead of potential tariffs.
- The extent to which operating-profit growth depends on the nonrecurring $8.2 million Metaldyne liability release and the absence of prior-year restructuring charges.
- Specialty Products’ ability to sustain growth amid oil and gas market volatility and continued footprint restructuring.
- Working-capital trends, particularly receivables, inventory, and accounts payable, given the year-over-year decline in operating cash flow.
- Debt covenant compliance, revolving-credit availability, refinancing terms, and the effect of higher interest rates.
- Potential future asbestos defense and settlement costs, including the timing and adequacy of insurance coverage.
- Finalization of provisional Tax Cuts and Jobs Act amounts and the sustainability of the lower effective tax rate.