TriMas Corporation 2012 Q2 Form 10-Q Summary
Business Context and Reporting Period
TriMas is a global manufacturer and distributor serving commercial, industrial and consumer markets through Packaging, Energy, Aerospace & Defense, Engineered Components, Cequent Asia Pacific and Cequent North America. This unaudited Form 10-Q covers the three and six months ended June 30, 2012, compared with the corresponding 2011 periods.
Key Financial Metrics
| Metric | Three Months 2012 | Three Months 2011 | Six Months 2012 | Six Months 2011 |
|---|---|---|---|---|
| Net sales | $338.4 million | $288.1 million | $636.0 million | $546.7 million |
| Gross profit | $95.9 million | $88.3 million | $174.8 million | $160.1 million |
| Gross margin | 28.3% | 30.6% | 27.5% | 29.3% |
| Operating profit | $43.2 million | $40.8 million | $71.9 million | $69.1 million |
| Operating margin | 12.8% | 14.2% | 11.3% | 12.6% |
| Net income attributable to TriMas | $16.7 million | $17.1 million | $29.2 million | $28.8 million |
| Diluted EPS | $0.44 | $0.49 | $0.80 | $0.83 |
| Net cash used in operating activities | Not separately provided | Not separately provided | $(4.9) million | $(4.7) million |
Six-month sales increased 16.3%, while operating profit increased 4.1%. Net income from continuing operations rose to $29.4 million from $26.7 million. Results included $6.6 million of debt extinguishment costs in 2012 and $4.0 million in 2011. The effective tax rate was 29.7% for the first half of 2012 versus 32.9% in the prior-year period.
Cash and cash equivalents were $29.3 million at June 30, 2012, down from $88.9 million at December 31, 2011. Receivables increased to $186.7 million and inventories to $214.0 million, reflecting higher sales and inventory investment. Total assets were $1.10 billion and shareholders’ equity was $291.2 million.
Debt and Liquidity
- Total debt was $420.8 million at June 30, 2012, including $217.8 million of U.S. bank debt, $6.2 million of non-U.S. debt and $196.9 million carrying value of 9.75% senior secured notes.
- TriMas issued 4.0 million common shares in May 2012 for approximately $79.0 million of net proceeds. Approximately $54.9 million was used to redeem $50.0 million principal of senior notes.
- The company had no revolving credit or receivables-facility borrowings outstanding. Availability, after letters of credit and leverage restrictions, was approximately $191.7 million for general corporate purposes.
- Actual leverage was 2.19x versus a permitted 3.75x, and actual interest coverage was 4.96x versus a required 2.75x. The company was in compliance with its debt covenants.
- Operating cash flow was negative because of increased receivables and inventory investment. Investing cash outflows were $85.7 million, including $61.8 million for acquisitions and $26.6 million for capital expenditures.
Material Changes Versus the Prior Comparable Period
- Packaging sales increased 47.6% in the second quarter and 36.2% in the first half, primarily from the Innovative Molding and Arminak acquisitions. Packaging margins declined materially because the acquired businesses had lower historical margins and generated purchase-accounting and integration costs.
- Energy sales increased 11.9% in the second quarter and 17.6% year to date, but operating margins declined because of new-branch launch costs, market-entry pricing and an unfavorable mix.
- Engineered Components sales increased 20.0% in the second quarter and 26.5% year to date, with operating profit rising 30.0% and 44.6%, respectively, aided by oil and gas activity, market-share gains and operating leverage.
- Aerospace & Defense sales declined 9.4% in the second quarter and 6.6% year to date because defense-facility relocation reduced defense sales. Aerospace mix and productivity improved segment margins.
- Cequent Asia Pacific sales increased 32.4% in the second quarter and 37.2% year to date, but margins were pressured by Australian facility consolidation costs and unfavorable mix.
- Cequent North America sales increased 7.9% in the second quarter and 3.5% year to date. Profitability was pressured by manufacturing-footprint expansion, production transfers and higher selling, general and administrative expenses.
- Approximately $2.5 million of second-quarter costs and $4.0 million of first-half costs related to Cequent footprint consolidation and relocation projects.
- Discontinued precision tool cutting and specialty fittings operations contributed no income in 2012 versus $1.1 million in the second quarter and $2.1 million in the first half of 2011.
Guidance, Outlook, Risks and Unusual Items
Management did not provide a specific numerical earnings or revenue forecast in the filing. Management expects continued benefits from market-share gains, new products, acquisitions, geographic expansion, productivity initiatives and economic recovery in selected markets. It expects margins in Packaging and Energy to improve toward historical levels over time as acquisitions and new locations are integrated and achieve volume efficiencies.
- Key risks include cyclical end markets, unstable consumer sentiment affecting Cequent, foreign-currency fluctuations, raw-material inflation and supply disruptions.
- Acquisitions and new branches may continue to pressure margins through integration costs, purchase-accounting adjustments, lower initial pricing and additional depreciation and amortization.
- Asbestos litigation involved 1,089 pending cases and 7,911 claimants at June 30, 2012. Management did not expect the cases to have a material adverse effect, but noted potential future claims and a possible period of uninsured defense and settlement costs.
- The company acquired 70% of Arminak for approximately $67.4 million. The remaining 30% interest is subject to future put and call rights, creating a $25.5 million redeemable noncontrolling interest at June 30, 2012.
- In July 2012, TriMas agreed to acquire Brazilian fastener manufacturer CIFAL and acquired Trail Com in New Zealand and Australia for approximately $23 million in aggregate cash, plus potential future Brazilian acquisition payments.
- TriMas entered into a $100.0 million notional interest-rate swap fixing the LIBOR component at 1.80% through June 2016. Approximately $0.6 million of deferred pretax losses was expected to be reclassified to interest expense over the following 12 months.
- Management stated that available liquidity and anticipated operating cash flows should be sufficient for foreseeable debt service, capital expenditure, working capital and other obligations.
Important Facts for Investors to Verify
- Whether Packaging and Energy margins recover as acquired businesses and new branches mature.
- The sustainability of growth in Engineered Components and Cequent businesses after facility relocations and other one-time costs subside.
- Working-capital conversion, particularly the increase in receivables and inventories and the continued negative operating cash flow.
- Debt reduction plans, refinancing needs and compliance with progressively tighter leverage covenants.
- Final purchase-price accounting for Arminak, including the working-capital adjustment and remaining contingent consideration estimated at $5.4 million to $6.4 million.
- Potential cash exposure from asbestos claims and the timing of exhaustion of primary insurance coverage.
- Execution and funding requirements for the July 2012 CIFAL and Trail Com transactions.