TriMas Corporation — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2020. TriMas designs and manufactures products for consumer products, aerospace and defense, and industrial markets through its Packaging, Aerospace, and Specialty Products segments. Results were significantly affected by the COVID-19 pandemic, acquisitions, realignment actions, and a change in asbestos-related accounting.
Financial Performance and Position
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Net sales | $199.6 million, versus $190.8 million | $382.3 million, versus $364.2 million |
| Gross profit | $37.2 million, versus $53.8 million | $83.6 million, versus $100.6 million |
| Gross margin | 18.7%, versus 28.2% | 21.9%, versus 27.6% |
| Operating profit (loss) | $(18.2) million, versus $27.1 million | $1.7 million, versus $46.9 million |
| Income (loss) from continuing operations | $(15.7) million, versus $18.7 million | $(2.6) million, versus $33.3 million |
| Net income (loss) per diluted share | $(0.36), versus $0.48 | $(0.06), versus $0.89 |
The second-quarter operating loss margin was approximately negative 9.1%; the filing presents the operating margin as 9.1% without the negative sign. Six-month operating margin was approximately 0.4%, versus 12.9%.
- Segment sales, second quarter: Packaging $128.8 million, up 23.9%; Aerospace $42.6 million, down 13.9%; Specialty Products $28.1 million, down 24.7%.
- Segment operating profit, second quarter: Packaging $24.0 million; Aerospace $(4.2) million; Specialty Products $(5.9) million; Corporate $(32.0) million.
- Cash flow: Operating activities provided $30.8 million in the first six months, compared with $32.8 million in the prior-year period. Capital expenditures were $9.3 million and acquisitions used $95.2 million.
- Cash and liquidity: Cash declined to $65.3 million from $172.5 million at year-end 2019. The company had no revolving-credit borrowings outstanding and approximately $284.1 million of availability after letters of credit.
- Debt: Long-term debt, net, was $295.3 million, consisting primarily of $300.0 million of 4.875% senior notes due October 2025. The revolving facility matures in September 2022.
- Leverage and covenants: Actual total net leverage was 1.60x against a 4.00x covenant limit, and interest coverage was 12.71x against a 3.00x minimum. TriMas reported compliance with its covenants.
Material Changes Versus the Prior Comparable Period
- Sales increased 4.6% in the quarter and 5.0% year to date, but acquisitions contributed approximately $13.0 million and $23.5 million, respectively; organic sales declined excluding currency effects.
- Packaging benefited from increased demand for dispensing and closure products used in personal hygiene, cleaning, and sanitizer-related applications.
- Aerospace weakened as aircraft production and air travel declined, compounded by the Boeing 737 Max grounding. Specialty Products declined because of lower construction, HVAC, and oil-field activity.
- Gross margins fell because of lower fixed-cost absorption, production inefficiencies, adverse mix, realignment charges, and purchase-accounting inventory step-ups.
- TriMas acquired RSA Engineered Products for approximately $83.7 million and Rapak for approximately $11.4 million during the first half of 2020.
- The company repurchased 1.25 million shares for approximately $31.6 million in the first half, but suspended repurchases during the second quarter to preserve cash. The remaining authorization was approximately $169.5 million at June 30.
Guidance, Outlook, Risks, and Unusual Items
- Management expected Packaging demand, particularly for dispensers and closures supporting hygiene and cleaning applications, to remain robust in the second half of 2020.
- Specialty Products sales were expected to remain below the prior-year period unless industrial activity recovered. Aerospace was expected to experience a significant second-half decline as aircraft manufacturers reduced or halted production.
- Management stated that the full duration and financial impact of COVID-19 could not be predicted. Risks include facility disruptions, labor and supply-chain constraints, customer credit losses, weaker demand, higher costs, cybersecurity exposure, and reduced liquidity.
- TriMas may incur additional cash and non-cash charges for further realignment, excess or obsolete inventory, idle equipment, uncollectible receivables, or asset impairments. Potential goodwill or intangible-asset impairment was identified as a particular risk in Aerospace if the June sales decline continued.
- The company recorded approximately $18.5 million of second-quarter realignment expenses, including inventory, equipment, and severance charges, primarily in Aerospace and Specialty Products.
- TriMas changed its asbestos accounting policy and recorded a $23.4 million non-cash, pre-tax charge. Total asbestos-related liability was $30.3 million at June 30, 2020; the actuarial estimated range of future exposure was $31.5 million to $43.3 million.
- There were 352 pending asbestos cases involving 4,732 claims. Management stated that asbestos matters were not expected to have a material adverse effect on financial position or cash flows, but future claims and defense costs remain uncertain.
- Moody’s affirmed a Ba3 rating on the senior notes and a stable outlook; S&P affirmed a BB- senior unsecured debt rating and a BB corporate credit rating, also with a stable outlook.
Investor Verification Priorities
- Determine whether Packaging demand remains durable and whether its margin recovers from COVID-related inefficiencies and Rapak’s low current profitability.
- Track Aerospace orders, aircraft production rates, and any resulting goodwill, intangible-asset, inventory, or equipment impairments.
- Reconcile reported earnings with the $23.4 million asbestos charge and $18.5 million of realignment expenses, and monitor future cash payments versus non-cash charges.
- Verify liquidity, covenant headroom, acquisition-related leverage, and the October 2025 senior-note maturity profile.
- Assess whether continued cash generation supports acquisitions, capital expenditures, and any resumption of share repurchases.
- Monitor asbestos claim activity, insurance coverage availability, and whether actual costs remain within or exceed the actuarial range.