TriMas Corporation 2016 Q2 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 Form 10-Q covers the three and six months ended June 30, 2016. The former Cequent businesses were spun off to Horizon Global on June 30, 2015 and are presented as discontinued operations for prior-period comparisons.
Key Financial Metrics
| Metric | Q2 2016 | Q2 2015 | Six Months 2016 | Six Months 2015 |
|---|---|---|---|---|
| Net sales | $203.3 million | $224.9 million | $406.2 million | $449.0 million |
| Gross profit / margin | $57.1 million / 28.1% | $61.7 million / 27.4% | $113.0 million / 27.8% | $124.6 million / 27.8% |
| Operating profit / margin | $18.7 million / 9.2% | $19.2 million / 8.5% | $35.1 million / 8.6% | $42.2 million / 9.4% |
| Income from continuing operations | $10.5 million | $8.5 million | $18.8 million | $20.4 million |
| Net income | $10.5 million | $1.7 million | $18.8 million | $15.7 million |
| Diluted EPS | $0.23 | $0.04 | $0.41 | $0.35 |
| Operating cash flow from continuing operations | Not separately provided | Not separately provided | $32.9 million | $20.5 million |
Q2 sales declined 9.6% year over year, while six-month sales declined 9.5%. Gross margin improved in Q2 but was flat year to date. Q2 net income benefited from the absence of 2015 discontinued-operation losses and approximately $2.0 million of 2015 debt financing and extinguishment costs.
At June 30, 2016, cash and cash equivalents were $23.7 million, compared with $19.5 million at December 31, 2015. Total debt was approximately $406.3 million net of debt issuance costs, including $13.8 million of current maturities. Total liabilities were $592.0 million and shareholders’ equity was $558.2 million.
Capital expenditures were $13.0 million in the first six months. Free cash flow, as a defined non-GAAP measure, is not clearly provided in the filing.
Material Changes Versus the Prior Comparable Period
- Packaging: Q2 sales fell 1.6%, but operating profit increased 3.4% to $21.4 million as cost reductions and lower SG&A offset currency and volume pressure.
- Aerospace: Q2 sales increased 2.0% due partly to the Tolleson, Arizona acquisition, but operating profit declined 50.8% to $3.6 million. Manufacturing inefficiencies, scheduling and throughput problems, lower distributor inventory demand and unfavorable mix reduced margins to 8.1% from 16.7%.
- Energy: Q2 sales declined 20.3% to $40.0 million, primarily from lower oil prices and reduced refinery and petrochemical spending. Operating loss narrowed to $3.1 million from $7.2 million as restructuring and sourcing savings improved gross margin.
- Engineered Components: Q2 sales declined 25.7% to $31.2 million due to lower oil-and-gas activity and industrial cylinder demand. Operating profit declined 37.9% to $3.9 million.
- The $22 million annualized Financial Improvement Plan, including the additional $7 million of actions announced in February 2016, was substantially complete and helped offset revenue declines.
- Six-month operating profit fell 16.9%, primarily because of lower sales, Aerospace inefficiencies and weaker fixed-cost absorption, partly offset by cost savings.
Liquidity, Debt and Market Risk
- The Credit Agreement includes a $500.0 million senior secured revolving facility and a $275.0 million term loan facility, both maturing June 30, 2020, generally priced at LIBOR plus 1.75% based on leverage.
- At June 30, 2016, approximately $264.7 million was outstanding on the term loan and $83.2 million on the revolver. Letters of credit totaled approximately $18.5 million.
- Including the accounts receivable facility and leverage restrictions, borrowing capacity for general corporate purposes was approximately $100.0 million, compared with $107.4 million at December 31, 2015.
- The accounts receivable facility had $63.6 million outstanding and approximately $2.1 million available but unused.
- Actual leverage was 2.82x versus a 3.50x covenant limit; interest coverage was 12.40x versus a 3.00x minimum. The company was in compliance with its covenants.
- Interest-rate swaps hedge a declining notional amount of approximately $251.5 million to $192.7 million through 2020. A one-percentage-point increase in annual interest rates would increase annual interest expense by approximately $1.6 million, after considering swaps.
Outlook, Commentary, Risks and Unusual Items
Management expects the uncertain macroeconomic environment and top-line pressure to persist through 2016. The company intends to continue Aerospace production improvements, shift production to lower-cost facilities, reduce lower-margin products, pursue lower-cost sourcing and optimize fixed costs. No specific revenue or earnings guidance is provided.
- Low oil prices continue to pressure Energy and Engineered Components, particularly upstream oil-and-gas customers and the Arrow Engine business.
- Aerospace remains exposed to customer inventory reductions, production constraints, scheduling issues and possible impairment of goodwill or long-lived assets if weakness becomes other than temporary.
- Foreign exchange, raw-material and energy costs, supply disruptions, cyclical demand, leverage and covenant restrictions remain significant risks.
- The United Kingdom’s Brexit referendum created additional currency, economic and operating uncertainty, particularly for the Packaging business and U.K. facilities.
- The company had 950 pending asbestos cases involving 6,031 claimants at June 30, 2016. Management does not believe the matters will have a material adverse effect, but expects a possible period of 6 to 18 months in which it may bear asbestos defense and indemnity costs before excess insurance coverage begins.
- Prior-year results included approximately $30 million of one-time pre-tax costs related to the Cequent spin-off, including approximately $2.0 million of debt financing and extinguishment costs in continuing operations and $4.7 million of discontinued-operation losses for the first six months of 2015.
Important Facts for Investors to Verify
- Whether Aerospace throughput and scheduling improvements restore margins toward historical levels.
- Whether lower oil prices continue to depress Energy and Engineered Components revenue and fixed-cost absorption.
- Progress toward the $22 million Financial Improvement Plan savings run rate and the cash-flow benefits actually realized.
- Available borrowing capacity after covenant calculations, accounts receivable financing and seasonal working-capital needs.
- The timing and amount of the $202.8 million final term-loan payment due June 30, 2020, and the company’s refinancing plans.
- Potential asbestos settlement and defense costs, insurance exhaustion timing and any change in litigation trends.
- Future impairment testing for Aerospace goodwill and indefinite-lived intangible assets if operating weakness persists.