TriMas Corporation 10-Q Summary
Business context and reporting period
TriMas is a global manufacturer and distributor serving commercial, industrial and consumer markets through six segments: Packaging, Energy, Aerospace & Defense, Engineered Components, Cequent APEA and Cequent Americas. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2013, compared primarily with the corresponding 2012 periods.
Key financial metrics
| Metric | Three months ended June 30, 2013 | Three months ended June 30, 2012 | Six months ended June 30, 2013 | Six months ended June 30, 2012 |
|---|---|---|---|---|
| Net sales | $378.0 million | $338.4 million | $715.8 million | $636.0 million |
| Gross profit | $103.3 million | $95.9 million | $186.7 million | $174.8 million |
| Gross margin | 27.3% | 28.3% | 26.1% | 27.5% |
| Operating profit | $41.6 million | $43.2 million | $65.4 million | $71.9 million |
| Operating margin | 11.0% | 12.8% | 9.1% | 11.3% |
| Net income attributable to TriMas | $26.9 million | $16.7 million | $40.1 million | $29.2 million |
| Diluted EPS | $0.67 | $0.44 | $1.01 | $0.80 |
Interest expense was $5.5 million in the second quarter and $10.8 million for the first half, down from $10.3 million and $21.0 million, respectively, primarily because 2012 refinancing replaced higher-cost senior secured notes with lower-rate bank debt. The 2012 periods also included $6.6 million of debt extinguishment costs.
Six-month operating cash flow was $13.5 million, compared with cash used of $4.9 million in the prior-year period. Investing cash outflow was $71.8 million, including $46.6 million for acquisitions and $25.9 million of capital expenditures. Financing cash inflow was $56.5 million. Cash and cash equivalents declined from $20.6 million at December 31, 2012 to $18.8 million at June 30, 2013.
At June 30, 2013, total debt was $480.7 million, including $20.8 million of current maturities, compared with $422.4 million at year-end 2012. The company had $58.5 million outstanding under its accounts receivable facility, $16.2 million outstanding under its revolving credit facility and approximately $179.2 million of borrowing capacity available for general corporate purposes after leverage restrictions. The company was in compliance with its debt covenants; actual leverage was 2.57x versus a 3.50x limit, and interest coverage was 7.89x versus a 3.00x requirement.
Material changes versus the prior comparable period
- Second-quarter sales increased 11.7%; first-half sales increased 12.5%. Acquisitions contributed approximately $18.4 million of second-quarter growth and $41.3 million of first-half growth.
- Sales increased in five of six segments. Engineered Components declined due to weaker drilling activity and lower demand for engine and compression products.
- Packaging, Energy and Cequent APEA improved gross margins, while Aerospace & Defense, Engineered Components and Cequent Americas experienced margin pressure.
- Cequent Americas operating profit declined to $12.9 million in the quarter and $13.6 million for the first half, primarily because of facility relocation, inefficiency, severance and other footprint-consolidation costs.
- First-half operating profit declined 9.1% despite higher sales, reflecting lower-margin acquired businesses, acquisition and integration costs, increased corporate expenses and Cequent restructuring costs.
- Income from discontinued operations contributed $0.7 million in both the quarter and first half, representing contingent consideration related to a 2011 divestiture.
- During the first half, TriMas acquired Martinic Engineering, Wulfrun Specialised Fasteners and C.P. Witter, among other businesses, for aggregate consideration of approximately $47 million net of cash acquired.
- Foreign currency translation reduced other comprehensive income by $10.6 million in the first half.
Guidance, outlook, risks and unusual items
Management did not provide a specific numerical revenue or earnings forecast in the filing. Management expects continued opportunities from acquisitions, market-share gains, new products, international expansion and productivity initiatives, but noted that ongoing acquisitions, branch expansions and growth investments may continue to pressure margins in the near term. Management expects margins to improve over time as acquired businesses are integrated and Cequent footprint projects are completed, generally by the end of 2013.
- Key operating risks include weak or cyclical end markets, consumer sentiment affecting Cequent demand, foreign exchange fluctuations, raw-material and energy-cost inflation, supply disruptions and the ability to pass cost increases to customers.
- Cequent businesses have seasonal demand, with stronger towing and trailering sales generally in the second and third quarters.
- The Goshen, Indiana facility closure involves approximately $5.0 million of severance charges recorded through June 30, 2013, approximately $0.7 million of accelerated depreciation during the first half, and expected additional accelerated depreciation of approximately $1.6 million in total. Future unrecoverable lease obligations remain under assessment.
- The company faces 1,045 pending asbestos cases involving 7,897 claimants at June 30, 2013. Management does not believe the matters will have a material adverse effect based on current experience, available insurance and claim trends, but acknowledges potential for additional claims and periods of direct defense and indemnity costs.
- Debt is substantially variable-rate. Interest-rate swaps hedge portions of the term loans; management estimated that a 1 percentage-point increase in applicable rates would increase annual interest expense by approximately $0.6 million.
- An Australian subsidiary had approximately $8.2 million of debt maturing August 31, 2013. The filing states that the subsidiary was in compliance with applicable covenants.
- On July 19, 2013, TriMas acquired towbar-manufacturing assets in Germany and Finland for approximately $6 million in cash, subject to a working-capital adjustment.
Important facts for investors to verify
- Whether margin recovery occurs after completion of Cequent facility relocations and integration of recent acquisitions.
- Progress in reducing leverage and the effect of required excess-cash-flow repayments beginning in 2014.
- Working-capital conversion, particularly receivables, which used $54.5 million of cash in the first half and reflected a four-day increase in days sales outstanding.
- Performance of Engineered Components amid reduced drilling and compression demand.
- Actual costs and lease obligations associated with the Goshen closure.
- Developments in asbestos litigation, insurance coverage and potential uninsured defense or settlement costs.
- Contribution and integration performance of Martinic, Wulfrun, Witter and the subsequent Germany/Finland acquisition.
- Any changes to management’s stated expectation that liquidity and operating cash flow will be sufficient to meet debt service, capital expenditures and other obligations.