TriMas Corporation — Q1 2019 Form 10-Q Summary
Business context and reporting period
TriMas is a diversified industrial manufacturer serving consumer products, aerospace, industrial, petrochemical, refinery, and oil and gas markets through its Packaging, Aerospace, and Specialty Products segments. The filing covers the unaudited three months ended March 31, 2019, compared with the three months ended March 31, 2018.
- Packaging sales were $88.8 million, Aerospace sales were $38.3 million, and Specialty Products sales were $94.1 million.
- Machined components operations were transferred from Aerospace to Specialty Products for segment reporting purposes beginning in Q1 2019.
Financial performance and liquidity
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Net sales | $221.3 million | $217.1 million | Up 1.9% |
| Gross profit | $59.8 million | $60.4 million | Down $0.6 million |
| Gross margin | 27.0% | 27.8% | Down 80 bps |
| Operating profit | $25.9 million | $35.2 million | Down 26.6% |
| Operating margin | 11.7% | 16.2% | Down 450 bps |
| Net income | $19.1 million | $24.3 million | Down $5.2 million |
| Diluted EPS | $0.42 | $0.53 | Down $0.11 |
| Operating cash flow | $8.1 million | $16.2 million | Down $8.2 million |
- Interest expense declined to $3.4 million from $3.7 million. The effective tax rate decreased to 12.1% from 21.4%, primarily due to discrete tax benefits.
- Cash and cash equivalents were $84.4 million at March 31, 2019, compared with $108.2 million at December 31, 2018.
- Net cash used in investing activities was $28.9 million, including $22.3 million for the Plastic Srl acquisition and $6.6 million of capital expenditures.
- Total debt was approximately $293.9 million, consisting primarily of $300.0 million of 4.875% senior notes due October 2025, net of debt issuance costs.
- No amounts were outstanding under the $300.0 million revolving credit facility. Approximately $284.9 million was available after letters of credit and leverage restrictions.
- Actual total net leverage was 1.38x versus a 4.00x covenant limit; interest coverage was 14.48x versus a 3.00x minimum. The Company was in compliance with its covenants.
- Operating lease right-of-use assets and lease liabilities recognized upon adoption of the new lease standard were approximately $40 million.
Material changes versus the prior comparable period
- Sales increased in all three reportable segments, led by Packaging health, beauty and home care products and Specialty Products industrial cylinders and oil and gas products.
- Organic sales increased approximately $3.6 million, while Plastic Srl contributed approximately $2.8 million of sales. Unfavorable currency translation reduced sales by approximately $2.2 million.
- Gross and operating margins declined due to product mix, higher input costs, unfavorable currency effects, competitive pricing, purchase accounting expenses, and higher corporate professional fees.
- Q1 2018 included an approximately $8.2 million non-cash reduction in corporate expenses from termination of a legacy Metaldyne liability; this benefit did not recur in 2019 and was the largest driver of the operating profit comparison.
- Packaging operating profit declined to $17.6 million from $19.6 million, while Aerospace operating profit increased to $5.7 million from $4.6 million and Specialty Products operating profit increased to $10.9 million from $10.1 million.
- Working capital consumed cash, including $11.5 million from higher receivables, $4.8 million from higher inventories, and $10.0 million from lower accounts payable and accrued liabilities.
- The Company repurchased 24,900 shares for approximately $0.7 million and increased its aggregate repurchase authorization to $75 million.
Outlook, commentary, risks, and unusual items
Management described Q1 results as consistent with expectations and remained cautiously optimistic about 2019 growth and earnings expansion. Management expects continued benefit from the TriMas Business Model, product development, productivity initiatives, cost savings, and growth programs in Packaging and Aerospace, while maintaining cost discipline in Specialty Products. The Company is not assuming significant end-market improvement and cited economic uncertainty and foreign trade policies.
- In January 2019, TriMas acquired Plastic Srl for approximately $22.3 million net of cash acquired. The acquisition contributed approximately $2.8 million of Q1 sales and generated approximately $1.0 million of purchase accounting-related expenses.
- On April 29, 2019, after quarter-end, TriMas acquired Taplast S.p.A. for approximately $46 million. Taplast generated approximately $32 million of 2018 sales and will be included in Packaging.
- Key risks include cyclical demand, commodity and energy costs, inability to recover higher input costs, foreign currency volatility, tariffs and other trade policies, supply constraints, oil and gas activity, acquisition integration, leverage and debt covenants, cyber risks, litigation, and impairment of goodwill or intangible assets.
- As of March 31, 2019, the Company faced 370 pending asbestos cases involving 4,811 claims. Management did not believe the matters would have a material adverse effect, but primary asbestos insurance had been exhausted in November 2018, increasing the Company’s responsibility for defense and indemnity costs before applicable excess coverage.
- The Company adopted the new lease standard and ASU 2018-02 during the quarter. ASU 2018-02 reclassified approximately $1.3 million of stranded tax effects from accumulated other comprehensive loss to accumulated deficit.
Important facts for investors to verify
- Whether margin pressure from product mix, input costs, currency, and competitive pricing persists through the remainder of 2019.
- The contribution, integration costs, and purchase accounting effects of Plastic Srl and the post-quarter-end Taplast acquisition.
- Cash conversion and working-capital trends, particularly receivables and inventory levels.
- Use of the revolving facility, covenant headroom, and leverage following the Taplast acquisition and any further capital deployment.
- The financial impact and insurance coverage available for asbestos-related claims after exhaustion of primary insurance.
- Whether management’s planned Packaging and Aerospace growth initiatives and continuous-improvement programs produce the expected earnings benefits.