TriMas Corporation — 2016 First-Quarter Form 10-Q Summary
Business Context and Reporting Period
TriMas Corporation is a global manufacturer and distributor serving commercial, industrial and consumer markets through four reportable segments: Packaging, Aerospace, Energy and Engineered Components. This unaudited Form 10-Q covers the three months ended March 31, 2016, compared with the three months ended March 31, 2015.
The Cequent businesses were spun off to Horizon Global Corporation on June 30, 2015. Cequent results are presented as discontinued operations for prior-period comparisons; 2016 continuing operations therefore exclude Cequent.
Financial Performance and Key Metrics
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Net sales | $202.9 million | $224.1 million | Down 9.5% |
| Gross profit | $55.9 million | $62.9 million | Down 11.1% |
| Gross margin | 27.6% | 28.1% | Down 50 basis points |
| Operating profit | $16.5 million | $23.0 million | Down 28.5% |
| Operating margin | 8.1% | 10.3% | Down 220 basis points |
| Income from continuing operations | $8.3 million | $11.9 million | Down 30.5% |
| Net income | $8.3 million | $14.0 million | Down 40.7% |
| Diluted EPS | $0.18 | $0.31 | Down $0.13 |
Interest expense was approximately $3.4 million in both periods. The effective tax rate increased to 35.9% from 34.6%. Comprehensive income declined to $2.8 million from $7.3 million, reflecting $5.5 million of other comprehensive loss, including foreign currency translation and derivative losses.
Cash flow from continuing operations was a use of $3.3 million, compared with $3.9 million provided in Q1 2015. Capital expenditures were $6.0 million, compared with $5.7 million. Financing activities provided $15.2 million, primarily reflecting net borrowings for working capital. Cash increased by $6.0 million to $25.4 million at March 31, 2016.
Segment Results
| Segment | Q1 2016 Sales | Year-over-Year Sales Change | Q1 2016 Operating Profit |
|---|---|---|---|
| Packaging | $80.1 million | Up 1.5% | $17.8 million |
| Aerospace | $40.5 million | Down 11.5% | $3.5 million |
| Energy | $44.8 million | Down 12.5% | $(3.6) million |
| Engineered Components | $37.5 million | Down 22.3% | $5.6 million |
Packaging benefited from stronger demand and productivity initiatives. Aerospace profitability was pressured by lower distributor inventory purchases, production and scheduling constraints, unfavorable product mix, and integration costs related to the Tolleson, Arizona acquisition. Energy reported an operating loss due to lower oil-related demand, restructuring costs and higher reserves for past-due receivables, including exposure to a customer bankruptcy. Engineered Components experienced lower oil and gas activity but maintained approximately break-even profitability in its engine-related business through cost reductions.
Balance Sheet, Debt and Liquidity
- Total assets were $1.172 billion at March 31, 2016, compared with $1.170 billion at December 31, 2015.
- Cash and cash equivalents were $25.4 million, compared with $19.5 million at year-end.
- Total debt, including current maturities and net of debt issuance costs, was $437.9 million, compared with $419.6 million at December 31, 2015.
- Revolving credit borrowings were approximately $121.2 million; approximately $360.7 million of revolving capacity remained potentially available after letters of credit.
- Accounts receivable facility borrowings were approximately $54.0 million, with no unused availability at quarter-end.
- After leverage restrictions and including the receivables facility, borrowing capacity available for general corporate purposes was approximately $66.8 million, down from $107.4 million at year-end.
- Actual leverage was 3.05x versus a 3.50x covenant limit. Interest coverage was 12.16x versus a 3.00x minimum. The Company was in compliance with its financial covenants.
The senior secured credit agreement matures June 30, 2020. The Term Loan A requires scheduled amortization and a final payment of approximately $202.8 million on June 30, 2020. Interest-rate swaps hedge a portion of variable-rate debt; management estimated that a 1 percentage-point increase in interest rates would increase annual interest expense by approximately $3.0 million.
Material Changes Versus the Prior Comparable Period
- Sales declined $21.2 million, primarily from lower oil prices and energy-market weakness, reduced Aerospace distributor inventory, production constraints, and unfavorable currency translation.
- Operating profit declined $6.5 million, with the largest pressure in Aerospace and Energy.
- Cash flow from continuing operations shifted from a $3.9 million source to a $3.3 million use, principally due to higher receivables and lower accounts payable and accrued liabilities.
- Debt increased approximately $18.2 million from year-end as the Company funded working capital through revolving and receivables facilities.
- Corporate expenses decreased $2.1 million to $6.8 million, reflecting lower headcount, reduced professional fees and a favorable property-tax settlement.
Outlook, Commentary, Risks and Unusual Items
Management expects uncertain macroeconomic conditions to persist through 2016, including low oil prices, a strong U.S. dollar, weak industrial markets and limited general economic growth. The Company expects oil-related demand, particularly for Arrow Engine and portions of Energy, to remain low until oil prices recover for a sustained period.
TriMas is implementing a Financial Improvement Plan targeting approximately $22 million of annual run-rate cost savings, including $7 million of additional actions announced in February 2016. Management expects restructuring, facility consolidation, lower-cost sourcing and product-portfolio actions to support future margin expansion, while noting that further cost reductions or facility closures may be considered if demand remains weak.
Material risks include leverage and debt covenant compliance, variable interest rates, foreign currency movements, raw-material and energy costs, supply disruptions, cyclical demand, customer concentration and inventory reductions, acquisition integration, goodwill and intangible-asset impairment, litigation and the ability to realize targeted savings and free cash flow.
As of March 31, 2016, the Company faced 1,009 pending asbestos cases involving 6,184 claimants. Management does not believe the cases will have a material adverse effect, but warned that future claims, settlements and defense costs could increase and that there may be a period of direct responsibility before excess insurance coverage begins.
The Company also adopted no material changes to its critical accounting policies during the quarter and was assessing the potential effects of recently issued lease, revenue recognition, inventory and stock-compensation standards.
Investor Verification Checklist
- Verify whether the Financial Improvement Plan delivers the targeted $22 million annual run-rate savings and whether savings offset continuing demand weakness.
- Monitor leverage, borrowing capacity and the scheduled $202.8 million Term Loan A maturity in 2020.
- Assess whether low oil prices continue to affect Energy and Engineered Components revenue and profitability.
- Track Aerospace production constraints, integration costs and customer inventory behavior.
- Review working-capital trends, particularly receivables collection, accounts payable timing and reliance on revolving debt.
- Evaluate asbestos claims, insurance coverage transition and related defense or settlement costs.
- Consider currency effects, variable-rate debt exposure and the fair value losses recorded on interest-rate swaps.