TriMas Corporation — Q2 2017 Form 10-Q Summary
Business context and reporting period
TriMas is a global manufacturer and distributor serving commercial, industrial and consumer markets through four segments: Packaging, Aerospace, Energy and Engineered Components. This unaudited Form 10-Q covers the three and six months ended June 30, 2017, compared with the corresponding 2016 periods.
Key financial metrics
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Net sales | $213.4 million | $203.3 million | $413.2 million | $406.2 million |
| Gross profit | $59.4 million | $57.1 million | $111.2 million | $113.0 million |
| Gross margin | 27.8% | 28.1% | 26.9% | 27.8% |
| Operating profit | $26.3 million | $18.7 million | $42.0 million | $35.1 million |
| Operating margin | 12.3% | 9.2% | 10.2% | 8.6% |
| Net income | $14.9 million | $10.5 million | $21.8 million | $18.8 million |
| Diluted EPS | $0.32 | $0.23 | $0.48 | $0.41 |
| Operating cash flow | Not separately provided | Not separately provided | $49.6 million | $32.9 million |
At June 30, 2017, cash and cash equivalents were $22.7 million. Total debt was approximately $346.5 million, including $13.8 million of current maturities, versus $374.7 million at December 31, 2016. Shareholders’ equity was $528.5 million, compared with $499.7 million at year-end 2016.
Capital expenditures were $16.9 million in the first half, and net cash used in investing activities was $15.1 million. Net cash used in financing activities was $32.5 million, including net repayments of revolving and accounts receivable facilities and $6.9 million of term-loan repayments.
Available borrowing capacity for general corporate purposes, including the accounts receivable facility and after leverage restrictions, was approximately $176.7 million at June 30, 2017. The company was in compliance with its debt covenants; actual leverage was 2.34x versus a 3.50x limit, and interest coverage was 12.12x versus a 3.00x minimum.
Material changes versus the prior comparable period
- Second-quarter sales increased 4.9%, while first-half sales increased 1.7%.
- Second-quarter operating profit increased 40.7%, primarily from higher sales, Aerospace productivity improvements and Energy cost reductions. First-half operating profit increased 19.6%.
- Gross margin declined modestly in both comparison periods because of facility-consolidation costs, Reynosa closure costs and unfavorable foreign exchange.
- Aerospace sales increased 7.9% in the quarter and 9.9% year to date. Operating margin improved to 14.6% in the quarter and 12.8% year to date from 8.1% and 8.3%, respectively, reflecting improved scheduling, throughput and manufacturing efficiency.
- Energy returned to slight profitability in the quarter, with $0.1 million of operating profit versus a $3.1 million loss in Q2 2016. The first-half operating loss narrowed to $3.8 million from $6.7 million.
- Packaging sales were broadly stable, but first-half operating profit declined to $38.4 million from $39.3 million due to consolidation costs, currency effects and a $1.1 million receivables reserve for a European customer bankruptcy.
- Engineered Components delivered higher second-quarter sales and operating profit, but first-half sales declined 3.8% because of industrial-cylinder customer consolidations. Low oil prices continue to suppress historical demand for the Arrow Engine business.
- Operating cash flow increased by $16.7 million year over year, despite a larger receivables-related cash use.
Guidance, outlook, risks and unusual items
Management remained cautiously optimistic about growth in 2017, particularly in Packaging and Aerospace, but was not relying on significant macroeconomic improvement. Priorities included applying the TriMas Business Model, improving Aerospace and Energy manufacturing processes, pruning lower-margin products, sourcing lower-cost inputs and continuing to evaluate the manufacturing footprint.
- Low and volatile oil prices remain a material risk to Engineered Components and portions of Energy. Management expects Arrow Engine sales to remain below historical levels until oil prices rise and remain higher for a sustained period.
- The Reynosa, Mexico facility closure generated approximately $2.7 million of second-quarter pre-tax charges, including $1.5 million for unrecoverable lease obligations and $1.2 million of accelerated depreciation. The Wolverhampton, U.K. exit generated approximately $3.5 million of first-quarter charges.
- Foreign exchange, raw-material costs, supply-chain disruptions, cyclical demand, customer concentration, competitive pressures and interest rates may affect results.
- The company had 5,274 pending asbestos claims in 609 cases at June 30, 2017. Management did not believe the matters would have a material adverse effect, but noted possible future defense and indemnity costs before excess insurance coverage begins.
- Interest-rate swaps hedged a declining debt notional amount of approximately $238.4 million to $192.7 million, with fixed rates ranging from 0.74% to 2.68%. A one-percentage-point increase in rates was estimated to increase annual interest expense by approximately $1.1 million.
- The company expects to contribute approximately $3.1 million to defined-benefit pension plans during 2017.
- Moody’s and Standard & Poor’s affirmed stable Ba3 and BB- ratings, respectively, for the company’s credit facilities or corporate credit.
- The company expects to adopt the new revenue-recognition standard on January 1, 2018 using the modified retrospective method and does not currently expect a material impact on revenue amount or timing.
Investor verification points
- Verify whether Aerospace’s improved throughput and customer ordering trends are sustainable and whether Energy’s restructuring benefits offset continuing oil-market weakness.
- Review the composition, maturity schedule and refinancing risk of approximately $346.5 million of debt, including the large final Term Loan A payment due June 30, 2020.
- Assess the cash-flow impact of capital expenditures, working-capital movements and receivables-facility usage.
- Monitor facility-consolidation costs, the Reynosa lease obligation and any further restructuring actions.
- Evaluate exposure to foreign exchange, steel and resin prices, variable interest rates and customer bankruptcies.
- Track asbestos claim activity, insurance exhaustion and potential periods of uninsured defense or settlement costs.
- Confirm the impact of pending accounting-standard adoptions, particularly revenue recognition and leases.