TriMas Corporation 10-Q Summary
Business context and reporting period
TriMas Corporation filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2015. TriMas manufactures and distributes products for commercial, industrial and consumer markets through four continuing segments: Packaging, Aerospace, Energy and Engineered Components.
On June 30, 2015, TriMas completed the spin-off of its Cequent businesses into Horizon Global Corporation. Cequent results are presented as discontinued operations for all periods through the spin-off date. TriMas received a $214.5 million cash distribution from Horizon and incurred approximately $30 million of pre-tax spin-off costs, including approximately $29 million in 2015.
Key financial metrics
| Metric | Q3 2015 | Q3 2014 | 9M 2015 | 9M 2014 |
|---|---|---|---|---|
| Net sales | $222.2 million | $222.3 million | $671.2 million | $663.9 million |
| Gross profit | $62.5 million | $59.9 million | $187.1 million | $183.1 million |
| Gross margin | 28.1% | 26.9% | 27.9% | 27.6% |
| Operating profit | $21.6 million | $20.5 million | $63.8 million | $70.0 million |
| Operating margin | 9.7% | 9.2% | 9.5% | 10.5% |
| Income from continuing operations | $11.7 million | $11.1 million | $32.1 million | $39.2 million |
| Net income attributable to TriMas | $11.7 million | $22.2 million | $27.4 million | $67.0 million |
| Diluted EPS | $0.26 | $0.49 | $0.60 | $1.48 |
Reported net income and EPS declined primarily because 2014 included income from discontinued operations, while 2015 included a loss from discontinued operations and spin-off-related costs.
Cash flow, debt and liquidity
- Operating cash flow from continuing operations was $28.7 million in the first nine months of 2015, compared with $52.6 million in the prior-year period. Total operating cash flow, including discontinued operations, was $14.7 million versus $64.9 million.
- Capital expenditures were $20.4 million, compared with $18.3 million in the prior-year period. Net cash used in investing activities was $21.2 million.
- Cash and cash equivalents were $22.5 million at September 30, 2015, compared with $24.4 million at December 31, 2014.
- Total debt was $459.4 million, including $390.1 million under the Credit Agreement and $69.3 million under the receivables facility and other arrangements, versus $638.6 million at December 31, 2014.
- The amended Credit Agreement includes a $500 million revolving facility and a $275 million term loan facility, both maturing June 30, 2020. Revolver borrowings were $115.1 million, with $362.5 million of stated availability after letters of credit.
- After leverage restrictions and including the receivables facility, borrowing capacity available for general corporate purposes was $107.3 million, down from $192.0 million at December 31, 2014.
- Actual leverage was 2.85x versus a 3.50x covenant limit; interest coverage was 13.42x versus a 3.00x minimum. TriMas was in compliance with its financial covenants.
Material changes versus the prior comparable period
- Third-quarter sales were essentially flat. Aerospace sales increased 65.6% to $45.4 million, primarily from the Allfast acquisition, while Engineered Components sales declined 32.6% to $37.3 million due to lower oil and gas activity.
- For the first nine months, Aerospace sales increased 55.5% to $134.3 million, while Engineered Components sales declined 22.8% to $127.5 million.
- Energy generated a third-quarter operating loss of $3.6 million and a nine-month operating loss of $10.4 million, compared with losses of $1.1 million and profit of $0.9 million, respectively, in the comparable periods.
- Gross margin improved in both the quarter and year-to-date period, supported by Aerospace and Packaging productivity, product mix and acquisitions. Year-to-date operating margin declined because of Energy restructuring costs, legal expenses, port-related sourcing costs and lower fixed-cost absorption in Engineered Components.
- Interest expense rose to $10.6 million for the first nine months from $6.3 million, reflecting higher average borrowings associated principally with the Allfast acquisition. TriMas also recorded $2.0 million of debt financing and extinguishment costs.
- Operating cash flow from continuing operations fell by $23.9 million, reflecting working-capital uses, including increases in receivables and inventory and a reduction in accounts payable and accrued liabilities.
Guidance, outlook, risks and unusual items
Management expects challenging conditions to continue through the remainder of 2015, including lower oil prices, a stronger U.S. dollar, industrial-channel weakness and limited overall economic growth. The company is emphasizing Packaging and Aerospace as higher-growth and higher-margin platforms.
In September 2015, TriMas announced a Financial Improvement Plan targeting $15 million of annual savings, including $5 million in additional Energy savings and $10 million across the remainder of the company. Estimated implementation charges are approximately $6 million to $7 million in cash and non-cash costs. Management expects limited earnings benefit in 2015 but improved profitability and cash generation entering 2016.
TriMas identified potential impairment indicators for goodwill and indefinite-lived intangible assets, including significant profitability declines in Energy and engine products and an approximately 30% decline in stock price during the quarter. The affected Energy and engine product reporting units had approximately $77.3 million and $3.2 million, respectively, of recorded goodwill and indefinite-lived intangible assets. Testing had not been completed as of September 30, 2015 and was expected during the fourth quarter; the filing does not provide a resulting impairment charge.
Other risks include exposure to oil prices, foreign currency, raw-material costs, variable interest rates, customer and industry cyclicality, acquisition integration, restructuring execution, leverage and debt covenants. A 1% increase in annual interest rates was estimated to increase annual interest expense by approximately $2.8 million after considering interest-rate swaps.
TriMas reported 1,056 pending asbestos cases involving 6,297 claimants. Management stated that, based on historical experience and available insurance, these matters were not expected to have a material adverse effect, although future claims and periods of uninsured costs remain possible.
Management stated that liquidity and capital resources should be sufficient for foreseeable debt service, capital expenditures, working capital and other obligations. The filing also states that disclosure controls and procedures were effective as of September 30, 2015, with no material changes in internal control over financial reporting.
Important facts for investors to verify
- Outcome and timing of the fourth-quarter 2015 impairment testing, particularly for Energy and engine products.
- Whether the Financial Improvement Plan achieves the targeted $15 million of annual savings and the estimated implementation costs.
- Trajectory of oil-related demand, especially Engineered Components and Energy, and the effect of any recovery or further deterioration in oil prices.
- Integration, margins and cash generation from the Allfast and Lion Holdings acquisitions.
- Liquidity after considering the $107.3 million of borrowing capacity, receivables-facility utilization, working-capital needs and scheduled term-loan amortization.
- Compliance with leverage and interest-coverage covenants as operating performance changes.
- Potential asbestos defense and settlement costs, insurance availability and other litigation contingencies.