TriMas Corporation 2011 Q2 Form 10-Q Summary
Business context and reporting period
TriMas is a global manufacturer and distributor serving commercial, industrial and consumer markets through six reportable segments: Packaging, Energy, Aerospace & Defense, Engineered Components, Cequent Asia Pacific and Cequent North America. This unaudited report covers the three and six months ended June 30, 2011, compared with the corresponding 2010 periods.
Financial performance and position
| Metric | Three months ended June 30, 2011 | Three months ended June 30, 2010 | Six months ended June 30, 2011 | Six months ended June 30, 2010 |
|---|---|---|---|---|
| Net sales | $299.7 million | $252.1 million | $569.4 million | $472.1 million |
| Gross profit | $91.4 million | $78.3 million | $166.1 million | $141.4 million |
| Gross margin | 30.5% | 31.1% | 29.2% | 29.9% |
| Operating profit | $42.5 million | $36.5 million | $72.5 million | $61.6 million |
| Operating margin | 14.2% | 14.5% | 12.7% | 13.0% |
| Income from continuing operations | $17.1 million | $15.2 million | $28.8 million | $21.0 million |
| Net income | $17.1 million | $21.4 million | $28.8 million | $26.9 million |
| Diluted EPS from continuing operations | $0.49 | $0.44 | $0.83 | $0.61 |
| Adjusted EBITDA from continuing operations | $51.9 million | $45.8 million | $90.5 million | $80.0 million |
Six-month operating cash flow was negative $4.7 million, compared with positive $31.4 million in the prior-year period. The change primarily reflected a $52.1 million increase in receivables, a $13.2 million inventory investment and a $3.9 million increase in prepaid expenses and other assets. Capital expenditures were $14.0 million, compared with $5.3 million in the prior-year period.
Cash and cash equivalents declined to $10.1 million at June 30, 2011, from $46.4 million at December 31, 2010. Total debt was $478.4 million, including $225.0 million outstanding under the new term loan, approximately $245.7 million of 9.75% senior secured notes due 2017, and other bank debt. Shareholders’ equity increased to $154.3 million from $112.3 million at year-end.
Material changes versus the prior comparable period
- Second-quarter sales increased 18.9%; six-month sales increased 20.6%. Growth reflected economic recovery, market-share gains, new products, acquisitions completed in 2010 and favorable currency translation.
- All six reportable segments increased second-quarter sales. The largest increases were in Engineered Components, up 51.2%, Energy, up 38.9%, and Aerospace & Defense, up 23.9%.
- Engineered Components and Energy produced substantial sales growth, but their lower margins and growth-related pricing reduced consolidated gross and operating margins.
- Cequent Asia Pacific weakened materially: second-quarter operating profit declined to $1.9 million from $3.3 million, and six-month operating profit declined to $4.5 million from $7.0 million. Results were affected by Australian flooding, reduced vehicle availability following the Japanese tsunami, lower local-currency sales and $0.7 million of start-up costs for a new program.
- Interest expense declined to $11.6 million in the second quarter and $23.6 million for the first half, primarily because of lower variable borrowing rates and lower interest-rate-swap costs.
- Net income benefited in 2010 from discontinued operations of $6.2 million in the second quarter and $5.9 million for the first half; no discontinued operations remained in 2011. Accordingly, reported net income declined year over year in the second quarter despite higher continuing-operations earnings.
- Adjusted EBITDA from continuing operations increased 13.2% in the second quarter and 13.2% for the first half, while the related margins declined to 17.3% and 15.9%, respectively.
Debt, liquidity and unusual items
- TriMas refinanced its U.S. bank debt on June 21, 2011. The new facility includes a $225.0 million term loan maturing in 2017 at LIBOR plus 3.00%, subject to a 1.25% LIBOR floor, and a $110.0 million revolving facility maturing in 2016 at LIBOR plus 3.25%.
- The refinancing generated $4.0 million of debt extinguishment costs and total financing fees of $6.6 million. Management stated that the refinancing reduced interest costs, extended maturities and increased liquidity.
- Available borrowing capacity for general corporate purposes was $151.7 million at June 30, 2011, including revolving and receivables-facility availability after leverage restrictions. The accounts receivable facility had $71.0 million available and unused.
- The company was in compliance with its debt covenants. Actual leverage was 2.82x versus a 4.00x limit, and the interest expense coverage ratio was 3.66x versus a 2.50x minimum.
- Management expected liquidity and capital resources, including anticipated operating cash flows, to fund debt service, capital expenditures and other obligations for the foreseeable future. However, the company remains highly leveraged and exposed to variable interest rates, economic cyclicality and refinancing constraints.
- On July 27, 2011, TriMas agreed to acquire Innovative Molding, Inc. for $27 million in cash, subject to a working-capital adjustment. Closing was expected August 1, 2011. Innovative reported approximately $28 million of revenue for the twelve months ended May 31, 2011.
- Asbestos litigation involved approximately 1,102 pending cases and 8,229 claimants at June 30, 2011. TriMas stated that it did not believe the matters would materially affect financial position, results or cash flows, but noted potential future claims and a possible period of uninsured defense and indemnity costs.
Guidance, outlook and management commentary
Management remained cautiously optimistic about continued economic recovery, market-share gains and operating leverage. Priorities for 2011 were to pursue productivity and cost savings, expand products and international markets, reduce debt leverage and increase liquidity. Management expected additional growth capacity without significant incremental fixed costs, but acknowledged that pricing investments, commodity costs, unfavorable product mix and start-up expenses could pressure margins.
Key risks include cyclical and consumer-sensitive demand, raw-material inflation for steel, copper, aluminum, resins and energy, foreign-currency movements, substantial leverage, variable interest rates, seasonal working-capital needs, customer and supplier concentration risks, asbestos litigation, and Heartland Industrial Partners’ approximately 20.9% voting ownership and resulting influence over corporate matters. The filing states that no significant changes were made to previously disclosed risk factors other than the updated Heartland ownership discussion.
Investor verification checklist
- Verify the sustainability of sales growth and market-share gains, particularly in Engineered Components, Energy and Cequent North America.
- Monitor gross-margin recovery after lower-margin growth initiatives, commodity inflation, delayed price increases and Cequent Asia Pacific start-up costs.
- Reconcile negative first-half operating cash flow with reported earnings and track receivables, inventory and working-capital normalization.
- Review post-refinancing debt balances, covenant headroom, excess-cash-flow sweep requirements and the maturity concentration in 2017.
- Assess the cash funding and integration impact of the planned $27 million Innovative Molding acquisition.
- Track asbestos claims, settlement and defense costs, insurance coverage and the timing of any potential uninsured period.
- Confirm the effect of discontinued operations on year-over-year net income and EBITDA comparisons.