TriMas Corporation 2016 Form 10-K Summary
Business context and reporting period
TriMas Corporation filed an annual report for the fiscal year ended December 31, 2016. The company designs, manufactures and distributes engineered products through four continuing-operation segments: Packaging, Aerospace, Energy and Engineered Components. The former Cequent businesses were spun off to Horizon Global Corporation on June 30, 2015 and are presented as discontinued operations for prior periods.
- Approximately 4,000 employees at year-end; 21% were unionized.
- Approximately 14.0% of 2016 net sales came from non-U.S. subsidiaries, with an additional $76.2 million of U.S. export sales.
- Thomas A. Amato became president and chief executive officer in July 2016.
Financial performance and key metrics
| Metric | 2016 | 2015 | Change |
|---|---|---|---|
| Net sales | $794.0 million | $864.0 million | Down 8.1% |
| Gross profit | $210.5 million | $236.1 million | Down $25.6 million |
| Gross margin | 26.5% | 27.3% | Down 80 basis points |
| Operating profit (loss) | $(44.0) million | $(4.3) million | Higher loss |
| Operating margin | (5.5)% | (0.5)% | Down 500 basis points |
| Loss from continuing operations | $(39.8) million | $(28.7) million | Higher loss |
| Diluted loss per share | $(0.88) | $(0.64) | Lower |
| Operating cash flow from continuing operations | $80.5 million | $76.6 million | Up $3.9 million |
| Capital expenditures | $31.3 million | $28.7 million | Higher |
| Total debt | $374.7 million | $419.6 million | Down $45.0 million |
Year-end cash and cash equivalents were $20.7 million, compared with $19.5 million in 2015. The company generated $80.5 million of operating cash flow, used $31.1 million in investing activities and used $48.1 million in financing activities. Accounts receivable and inventory declined by approximately $8.0 million and $5.2 million, respectively, while lower accounts payable and accrued liabilities used approximately $18.1 million of cash.
At December 31, 2016, total assets were $1.052 billion and shareholders’ equity was $499.7 million. Goodwill and other intangible assets totaled $529.0 million, or approximately 50.3% of total assets.
Segment results and material changes
| Segment | 2016 sales | 2016 operating profit (loss) | Key change versus 2015 |
|---|---|---|---|
| Packaging | $341.3 million | $77.8 million | Sales up 2.1%; operating margin declined to 22.8% from 23.5% |
| Aerospace | $174.9 million | $(90.8) million | Sales down 0.9%; severe margin deterioration and $98.9 million impairment charge |
| Energy | $159.0 million | $(13.8) million | Sales down 17.8%; operating loss improved substantially as prior-year impairment and restructuring costs did not recur |
| Engineered Components | $118.8 million | $15.3 million | Sales down 25.7%; profit down, but margin improved to 12.9% |
- Lower oil prices and reduced drilling, refinery and petrochemical activity drove most of the sales decline in Energy and Engineered Components. Combined sales in those segments declined approximately $74.3 million, excluding foreign currency effects.
- Aerospace was affected by reduced distributor inventory purchases, production and scheduling problems, lower fixed-cost absorption, unfavorable product mix, inventory adjustments and integration costs related to the 2015 machined-components acquisition.
- Packaging benefited from growth in health, beauty and home-care products, partially offset by unfavorable foreign currency effects and costs associated with relocating its Mexico facility.
- The Financial Improvement Plan was fully implemented. Management increased its targeted annual run-rate savings to $22 million, supported by headcount reductions, facility actions and manufacturing and administrative cost reductions.
Debt, liquidity and unusual items
- Debt consisted principally of a $275.0 million senior secured term loan and a $500.0 million revolving credit facility, both maturing June 30, 2020, plus a $75.0 million accounts receivable facility.
- At year-end, $75.9 million was outstanding under the revolving facility and $45.5 million under the receivables facility. After leverage restrictions, borrowing capacity available for general corporate purposes was $126.5 million.
- Actual leverage was 2.63x against a 3.50x covenant limit; interest coverage was 11.94x against a 3.00x minimum. The company was in compliance with its debt covenants.
- Approximately 35% of debt bore variable interest rates after swaps. Management estimated that a 1% increase in applicable rates would increase annual interest expense by approximately $1.3 million.
- The fourth quarter included $60.2 million of Aerospace goodwill impairment and $38.7 million of Aerospace trade-name impairment. These non-cash charges drove a fourth-quarter net loss of $67.4 million, or $1.48 per diluted share.
- Other notable items included approximately $2.5 million of Packaging Mexico facility-transition charges, a $1.3 million pension settlement and curtailment charge, and approximately $2.2 million of CEO and former human-resources executive transition costs.
Outlook, risks and contingencies
Management expressed cautious optimism for 2017, citing potential stabilization in Aerospace distribution and increased quoting activity in upstream oil and gas. The company is focusing on Packaging and Aerospace growth initiatives, Aerospace and Energy turnaround plans, product-line pruning, lower-cost sourcing and further footprint optimization. Management stated that it was not relying on significant macroeconomic improvement.
- Major risks include continued weakness or volatility in oil and gas markets, cyclical industrial and aerospace demand, customer inventory reductions, pricing pressure and raw-material volatility.
- Goodwill and intangible assets remain a significant risk. Further sales, margin or stock-price deterioration could result in additional impairment charges.
- TriMas is involved in asbestos-related litigation involving 5,339 claimants in 636 pending cases at year-end. Historical settlement costs were approximately $8.3 million, excluding defense costs; the company expects a possible six-to-18-month period during which it may bear asbestos defense and indemnity costs before excess insurance coverage begins.
- The company had approximately $7.6 million accrued for obligations related to Metaldyne and could be required to reimburse up to approximately $10.0 million if certain liabilities are accelerated.
- Other risks include environmental liabilities, foreign currency exposure, Brexit-related uncertainty, supplier disruptions, cybersecurity, labor relations, product liability and restrictions under secured debt agreements.
Important facts for investors to verify
- Whether Aerospace recovery actions improve sales, manufacturing efficiency, delivery performance and margins without additional impairment charges.
- Whether Energy and Engineered Components demand improves as oil and gas activity recovers, and whether cost reductions are sustainable.
- Progress against the $22 million Financial Improvement Plan and the effect of facility consolidations on cash flow and operating margins.
- Debt maturities and refinancing requirements, particularly the approximately $329.4 million of debt scheduled for 2020.
- Future goodwill, trade-name and other intangible impairment exposure given the $529.0 million year-end balance.
- Developments in asbestos litigation, insurance coverage and the Metaldyne reimbursement obligation.
- Whether the company can maintain covenant compliance and the stated $126.5 million of general-purpose borrowing capacity.