TriMas Corporation Form 10-Q Summary
Reporting period: Quarterly and nine-month periods ended September 30, 2011, compared with the corresponding 2010 periods. TriMas is a global manufacturer and distributor serving commercial, industrial and consumer markets through six segments: Packaging, Energy, Aerospace & Defense, Engineered Components, Cequent Asia Pacific and Cequent North America.
Financial performance and condition
| Metric | Q3 2011 | Q3 2010 | 9M 2011 | 9M 2010 |
|---|---|---|---|---|
| Net sales | $277.7 million | $237.7 million | $824.3 million | $690.0 million |
| Gross profit | $81.9 million | $72.1 million | $242.1 million | $208.8 million |
| Gross margin | 29.5% | 30.3% | 29.4% | 30.3% |
| Operating profit | $35.8 million | $31.7 million | $104.9 million | $90.7 million |
| Operating margin | 12.9% | 13.3% | 12.7% | 13.1% |
| Income from continuing operations | $17.0 million | $12.0 million | $43.7 million | $31.3 million |
| Net income | $18.3 million | $12.7 million | $47.1 million | $39.6 million |
| Diluted EPS | $0.52 | $0.37 | $1.36 | $1.15 |
| Adjusted EBITDA | $48.7 million | $42.1 million | $139.1 million | $131.6 million |
- Cash flow: Operating cash flow was $35.6 million for the first nine months, down from $61.6 million in 2010. Working capital absorbed significant cash, including $39.1 million for receivables and $13.5 million for inventories.
- Investing: Cash used in investing was $49.9 million, including $23.5 million of capital expenditures and $28.6 million for acquisitions.
- Liquidity: Cash and cash equivalents declined to $10.5 million from $46.4 million at December 31, 2010. Management reported $152.2 million of borrowing capacity for general corporate purposes after applicable leverage restrictions.
- Debt: Total debt was $476.0 million at September 30, 2011, including $224.4 million outstanding under the term loan, $5.0 million under revolving facilities and $245.8 million carrying value of 9.75% senior secured notes due 2017. The company was in compliance with its debt covenants.
- Leverage: Actual leverage was 2.65x versus a 4.00x covenant limit; interest coverage was 4.04x versus a 2.50x minimum.
- Capital structure: Shareholders’ equity increased to $162.4 million from $112.3 million at year-end 2010, principally reflecting year-to-date net income and equity award activity.
Material changes versus the prior comparable period
- Q3 sales increased 16.8%; nine-month sales increased 19.5%. Management attributed growth to economic recovery, market-share gains, new products, acquisitions and favorable currency translation.
- All six reportable segments increased Q3 sales. The largest Q3 growth rates were Engineered Components, up 50.7%; Cequent Asia Pacific, up 42.3%; and Energy, up 34.6%.
- Engineered Components produced particularly strong operating leverage: Q3 operating profit rose to $7.7 million from $3.2 million, while nine-month operating profit rose to $19.0 million from $8.6 million.
- Packaging results weakened in Q3 despite the Innovative Molding acquisition. Operating profit declined to $10.2 million from $13.1 million because of purchase-accounting adjustments, facility relocation costs, manufacturing inefficiencies and higher selling expenses.
- Cequent North America operating profit declined in Q3 to $9.6 million from $11.0 million due to higher steel and freight costs, delayed price increases and higher growth-related expenses.
- Gross and operating margins declined in both comparison periods primarily because lower-margin Energy and Engineered Components businesses represented a larger share of sales. Higher commodity costs and aggressive pricing in new markets also pressured margins.
- Interest expense declined to $10.7 million in Q3 and $34.4 million for nine months, partly because of lower variable borrowing rates and the expiration of interest-rate swaps.
- The company refinanced its U.S. bank debt in June 2011 and incurred $4.0 million of debt extinguishment costs. In September 2011, it amended its receivables facility, increasing committed funding to $90.0 million and extending maturity to September 2015.
- TriMas acquired Innovative Molding for $27.0 million on August 1, 2011, and acquired substantially all assets of an Indian gasket manufacturer for approximately $2.1 million. The acquisitions were not material to reported results during the period.
- During Q3, TriMas committed to exit and market for sale its precision tool cutting and specialty fittings businesses. These businesses are reported as discontinued operations.
Outlook, commentary and risks
Management remained cautiously optimistic about continued economic recovery, market-share gains, productivity improvements and operating leverage. Priorities included funding growth through cost savings, expanding products and international markets, pursuing bolt-on acquisitions, reducing debt leverage and increasing liquidity. The filing does not provide a quantified revenue or earnings forecast.
- Management expects continued exposure to cyclical end markets, consumer sentiment, uncertain employment and credit conditions, particularly in Cequent North America.
- Steel, copper, aluminum, resins, freight and energy costs may pressure earnings if price increases are delayed or cannot be passed through to customers.
- Substantial leverage, variable-rate debt, required term-loan repayments and the 2017 senior secured notes create refinancing and interest-rate risk.
- As of September 30, 2011, 1-Month LIBOR was approximately 0.23%; management estimated that a 1% increase in LIBOR would increase annual interest expense by approximately $0.1 million under then-current borrowing levels and rate floors.
- TriMas was defending 1,101 pending asbestos cases involving 8,081 claimants. The company estimated that the litigation would not have a material adverse effect, but acknowledged potential for additional claims, higher settlements and a period of direct defense and indemnity costs before excess insurance coverage becomes available.
- Heartland Industrial Partners beneficially owned approximately 20.9% of voting common equity and could strongly influence corporate transactions and other stockholder matters.
- The company stated that disclosure controls and procedures were effective and that no material changes occurred in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether operating cash flow improves as receivables and inventory normalize, given the decline from $61.6 million to $35.6 million year to date.
- The sustainability of margin performance after Innovative Molding integration costs, commodity inflation and aggressive pricing in new markets.
- Progress in reducing the $476.0 million debt balance and meeting required term-loan amortization and excess-cash-flow payments.
- The results and integration benefits of Innovative Molding and other recent acquisitions, including the final working-capital purchase-price adjustment expected in the first quarter of 2012.
- The financial impact and disposition timing of the precision tool cutting and specialty fittings businesses classified as discontinued operations.
- Potential exposure from asbestos litigation, union activity at the Houston facility and Heartland’s concentrated voting position.
- Future effects of the pending accounting standards on fair-value disclosures, comprehensive-income presentation and goodwill-impairment testing.