TriMas Corporation — 2017 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2017. The filing is an annual Form 10-K; fourth-quarter figures are included in the annual and quarterly data disclosures.
Business Context
TriMas is a diversified industrial manufacturer serving consumer products, aerospace, industrial, petrochemical, refinery, and oil and gas markets. Its four 2017 reportable segments were Packaging, Aerospace, Energy, and Engineered Components. Approximately 80% of 2017 revenue was generated from North American sales, and more than half came from consumer-product and aerospace markets.
Beginning in the first quarter of 2018, Energy and Engineered Components were to be combined into a new Specialty Products segment. The former Cequent businesses remained presented as discontinued operations following their 2015 spin-off.
2017 Financial Performance
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Net sales | $817.7 million | $794.0 million | +3.0% |
| Gross profit | $219.1 million | $210.5 million | +4.1% |
| Gross margin | 26.8% | 26.5% | +0.3 percentage points |
| Operating profit | $88.5 million | $(44.0) million | Improved $132.5 million |
| Operating margin | 10.8% | (5.5)% | Improved 16.3 percentage points |
| Income from continuing operations | $31.0 million | $(39.8) million | Improved $70.8 million |
| Diluted EPS from continuing operations | $0.67 | $(0.88) | Improved |
| Cash flow from operating activities | $120.1 million | $80.5 million | +49.2% |
| Capital expenditures | $36.8 million | $31.3 million | +$5.5 million |
| Cash and cash equivalents | $27.6 million | $20.7 million | +$6.9 million |
| Total debt | $303.1 million | $374.7 million | $(71.6) million |
Reported net income was $31.0 million, or $0.67 diluted EPS. Results included $35.3 million of income tax expense, including $12.7 million of provisional Tax Cuts and Jobs Act charges, and $6.6 million of debt refinancing and related expenses. No goodwill or indefinite-lived intangible impairment charge was recorded in 2017; 2016 included $98.9 million of such charges, primarily in Aerospace.
Segment Results
| Segment | 2017 Sales | 2017 Operating Profit/(Loss) | Key change versus 2016 |
|---|---|---|---|
| Packaging | $344.6 million | $80.4 million | Sales +0.9%; profit +3.3%; margin 23.3% |
| Aerospace | $184.3 million | $26.2 million | Sales +5.4%; returned to profitability from a $90.8 million loss |
| Energy | $161.6 million | $(5.4) million | Sales +1.6%; loss narrowed from $13.8 million |
| Engineered Components | $127.3 million | $15.7 million | Sales +7.2%; profit +2.9% |
Aerospace benefited from improved production scheduling, throughput, manufacturing efficiency, and lower administrative costs. Energy benefited from facility closures, footprint rationalization, and lower ongoing costs, although Hurricane Harvey reduced estimated 2017 operating profit by approximately $4 million. Engineered Components improved on higher oil-field, compression-related, and industrial-cylinder sales, but margins were pressured by higher steel costs and product mix. Packaging profit benefited from lower selling, general and administrative expenses, partly offset by facility relocation and start-up costs.
Cash Flow, Debt, and Liquidity
- Operating cash flow from continuing operations was $120.1 million, compared with $80.5 million in 2016.
- Investing cash outflow was $32.4 million, including $36.8 million of capital expenditures and $4.5 million of proceeds from asset dispositions.
- Financing cash outflow was $80.8 million. TriMas issued $300.0 million of 4.875% senior notes due October 2025, repaid the former Term Loan A, reduced receivables-facility borrowings, and made net repayments under revolving and receivables facilities.
- At year-end, $10.8 million was outstanding under the $300 million revolving credit facility, with $274.3 million potentially available after letters of credit. The accounts receivable facility had no balance and $57.8 million of unused availability.
- Aggregate borrowing capacity available for general corporate purposes, including the receivables facility and after leverage restrictions, was $332.1 million.
- Actual total net leverage was 1.91x versus a 4.00x covenant limit, and interest coverage was 12.18x versus a 3.00x minimum. TriMas reported compliance with its debt covenants.
Material Changes and Unusual Items
- Operating performance improved substantially because the $98.9 million 2016 Aerospace goodwill and intangible impairment did not recur.
- The Tax Cuts and Jobs Act generated provisional 2017 tax expense of $3.7 million from deferred-tax remeasurement and $9.0 million from deemed repatriation of approximately $110 million of undistributed foreign earnings. The ultimate tax impact remained subject to further analysis and guidance.
- Debt was refinanced with fixed-rate senior notes, extending major debt maturity to 2025 and the revolving facility maturity to 2022, but refinancing generated approximately $6.6 million of expense and $6.1 million of cash debt-financing fees.
- Hurricane Harvey caused temporary facility closures and inefficiencies, primarily in Energy, with an estimated $4 million adverse operating-profit impact.
- TriMas closed or consolidated facilities in Mexico, the United Kingdom, and elsewhere. These actions reduced the cost structure but generated closure, relocation, accelerated depreciation, and lease-related charges.
- Goodwill and other intangible assets totaled approximately $513.6 million, or 49.7% of total assets. The 2017 Aerospace impairment test found fair value exceeded carrying value by more than 15%, but future underperformance could result in additional impairment.
Outlook, Risks, and Contingencies
Management characterized 2017 as a solid year and expected continued efficiency, cost savings, growth initiatives in Packaging and Aerospace, and further footprint and product-portfolio optimization. Management stated that it was not relying on significant market improvement and would focus on factors within its control. It expected the lower U.S. corporate tax rate to benefit future results.
- Energy-related demand remains sensitive to oil and natural gas prices. Arrow Engine sales were more than 75% below pre-2015 levels and were expected to remain subdued until sustained improvement in oil prices and customer activity.
- Raw-material exposure includes steel, resins, aluminum, titanium, and copper. Price increases may not always be passed through promptly.
- The company faces cyclical demand, customer concentration at the segment level, competitive pressure, foreign-exchange exposure, supply-chain disruptions, labor risks, cybersecurity risks, and potential manufacturing interruptions.
- TriMas was involved in 605 asbestos cases involving 5,256 claimants at December 31, 2017. Historical settlement costs were approximately $8.5 million, and approximately 40% of asbestos settlement and defense costs had been covered by primary insurance. Management did not believe the matters would have a material adverse effect, but warned of a potential period of direct responsibility for defense and indemnity costs as primary insurance is exhausted.
- TriMas had accrued approximately $8.0 million related to legacy Metaldyne obligations and could ultimately owe up to approximately $10.4 million, implying potential additional charges of up to $2.4 million. A final assessment was expected after the Metaldyne bankruptcy trust closure.
- Operating lease obligations totaled $77.0 million, and total contractual cash obligations were $528.1 million as of year-end.
Investor Verification Checklist
- Verify that the 2017 earnings improvement is sustainable after excluding the nonrecurrence of 2016 impairment charges, Tax Reform Act effects, refinancing costs, and Hurricane Harvey impacts.
- Review Aerospace production efficiency, customer order patterns, and the sensitivity of the $146.4 million Aerospace goodwill balance to future performance.
- Monitor Energy and Engineered Components demand, especially oil prices, drilling activity, refinery turnaround spending, and steel costs.
- Reconcile debt balances, borrowing capacity, covenant calculations, and the refinancing terms for the 2025 senior notes and 2022 revolving facility.
- Assess the cash impact of asbestos litigation, the Metaldyne liability, environmental matters, pension contributions, and other contractual obligations.
- Confirm the final accounting impact of the Tax Cuts and Jobs Act and the effect of the 21% U.S. corporate tax rate beginning in 2018.
- Review the 2018 segment realignment combining Energy and Engineered Components into Specialty Products and evaluate whether comparability of future segment results is affected.