TriMas Corporation 2016 Q3 10-Q Summary
Business context and reporting period
TriMas is a global manufacturer and distributor serving commercial, industrial and consumer markets through four reportable segments: Packaging, Aerospace, Energy and Engineered Components. This Form 10-Q covers the three and nine months ended September 30, 2016. The former Cequent businesses were spun off to Horizon Global Corporation on June 30, 2015 and are presented as discontinued operations for prior-period comparisons.
Key financial metrics
| Metric | Q3 2016 | Q3 2015 | 9M 2016 | 9M 2015 |
|---|---|---|---|---|
| Net sales | $202.3 million | $222.2 million | $608.5 million | $671.2 million |
| Gross profit | $58.1 million | $62.5 million | $171.1 million | $187.1 million |
| Gross margin | 28.7% | 28.1% | 28.1% | 27.9% |
| Operating profit | $17.8 million | $21.6 million | $52.9 million | $63.8 million |
| Operating margin | 8.8% | 9.7% | 8.7% | 9.5% |
| Net income | $8.8 million | $11.7 million | $27.6 million | $27.4 million |
| Diluted EPS | $0.19 | $0.26 | $0.60 | $0.60 |
For the nine months, cash flow from operating activities was $46.4 million, compared with $28.7 million from continuing operations in the prior-year period. Capital expenditures were $22.4 million, producing approximate operating cash flow less capital expenditures of $24.0 million.
At September 30, 2016, cash and cash equivalents were $22.6 million, compared with $19.5 million at December 31, 2015. Total debt was $402.4 million, including $261.2 million outstanding under the Term Loan A facility, $97.2 million under the revolving credit facility and $48.8 million under the receivables facility, net of debt issuance costs. Borrowing capacity available for general corporate purposes was approximately $78.3 million after leverage restrictions, compared with $107.4 million at December 31, 2015.
The company was in compliance with its debt covenants. Actual leverage was 2.94x versus a 3.50x maximum, and interest coverage was 11.65x versus a 3.00x minimum. The Credit Agreement matures June 30, 2020; approximately $202.8 million of Term Loan A principal is due at maturity.
Material changes versus the prior comparable period
- Q3 sales declined 9.0% year over year, while nine-month sales declined 9.3%, primarily because of lower oil prices and weaker energy-related demand.
- Energy sales declined 25.9% in Q3 and 19.6% for the nine months. Engineered Components sales declined 29.5% in Q3 and 25.5% for the nine months.
- Aerospace sales increased 4.5% in Q3, partly reflecting the November 2015 machined-components acquisition, but nine-month sales declined 1.7%. Aerospace gross margin fell to 27.6% in Q3 and 24.8% for the nine months, primarily because of manufacturing inefficiencies, lower fixed-cost absorption, unfavorable mix and integration costs.
- Packaging sales increased 2.7% in Q3 and 0.8% for the nine months, excluding the reported adverse effect of currency translation. Packaging operating margin declined because of Mexico facility transition costs, professional fees and the nonrecurrence of a prior-year acquisition-liability reduction.
- Energy remained loss-making but improved: operating loss was $1.9 million in Q3 versus $3.6 million in the prior year and $8.6 million for the nine months versus $10.4 million.
- Gross margins improved modestly because of Financial Improvement Plan savings, lower restructuring costs and lower material costs, but operating margins declined because of lower sales, reduced fixed-cost absorption and Aerospace inefficiencies.
- Net income for the nine months was slightly higher than the prior year because the 2015 period included a $4.7 million loss from discontinued operations. Continuing-operations income declined from $32.1 million to $27.6 million.
- Net debt declined from approximately $400.2 million at December 31, 2015 to approximately $379.9 million at September 30, 2016, based on reported total debt less cash.
Guidance, outlook, commentary and risks
Management did not provide a specific numerical earnings or sales forecast. It expected fourth-quarter 2016 sales to be reasonably comparable with fourth-quarter 2015 and anticipated continued macroeconomic uncertainty.
The $22 million annual run-rate Financial Improvement Plan was described as substantially complete. Management is continuing cost reductions, facility consolidation, production and scheduling improvements in Aerospace, portfolio pruning, lower-cost sourcing and working-capital management. Additional cost reductions or facility closures may be considered if sales and profitability remain below historical levels.
- Persistently low oil prices may continue to depress drilling, well-completion, refinery, petrochemical and engineering-and-construction activity.
- Aerospace distribution customers continue to reduce inventory, while production and scheduling problems could affect sales, margins and potential goodwill or long-lived-asset impairment assessments.
- Foreign-currency movements, raw-material prices, supply disruptions and general economic conditions may materially affect results.
- The July 2016 change in the President and Chief Executive Officer generated approximately $3.5 million of Q3 costs.
- There were 800 pending asbestos cases involving 5,714 claimants at September 30, 2016. Management did not believe the matters would have a material adverse effect, but noted a possible 6-to-18-month period before excess insurance coverage begins after primary insurance is exhausted.
- The company’s variable-rate debt creates interest-rate exposure; a 1 percentage-point increase in rates was estimated to increase annual interest expense by approximately $1.6 million after swaps.
- The United Kingdom’s Brexit referendum could adversely affect currencies, global economic conditions and TriMas’s UK and other international operations.
- Management concluded that disclosure controls and procedures were effective and reported no material changes in internal control over financial reporting.
Important facts for investors to verify
- Whether Energy and Engineered Components demand has stabilized and whether low oil prices continue to affect revenue.
- Whether Aerospace production, scheduling and throughput improvements restore historical gross-margin levels.
- The sustainability of the Financial Improvement Plan savings and the cash costs of further facility consolidations.
- Liquidity headroom under the revolving and receivables facilities, covenant compliance and the company’s ability to refinance or repay the large 2020 maturity.
- Progress and costs associated with the Mexico facility transition and the impact of foreign-currency movements.
- Developments in asbestos claims, insurance coverage and any other litigation or contingencies.
- The effect of the CEO transition and related compensation or separation costs on future corporate expenses.