TriMas Corporation — Form 10-Q Summary
Business context and reporting period
TriMas is a global manufacturer and distributor serving commercial, industrial and consumer markets through six segments: Packaging, Energy, Aerospace & Defense, Engineered Components, Cequent APEA and Cequent Americas. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2014, with comparisons to the corresponding 2013 periods.
Key financial metrics
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Net sales | $404.0 million, up 6.9% | $771.7 million, up 7.8% |
| Gross profit | $109.8 million; 27.2% margin | $206.3 million; 26.7% margin |
| Operating profit | $44.0 million; 10.9% margin | $76.6 million; 9.9% margin |
| Net income attributable to TriMas | $26.2 million, versus $26.9 million | $44.8 million, versus $40.1 million |
| Diluted earnings per share | $0.58, versus $0.67 | $0.99, versus $1.01 |
| Operating cash flow | Not separately provided | $23.0 million, versus $13.5 million |
Six-month income from continuing operations increased to $45.6 million from $41.1 million, while the effective tax rate increased to 31.8% from 21.9%. The higher tax rate and higher other expense offset part of the operating improvement.
At June 30, 2014, cash and cash equivalents were $38.4 million, compared with $27.0 million at December 31, 2013. Accounts receivable increased to $246.3 million from $180.2 million, and inventory decreased to $261.0 million from $270.7 million.
Total debt was $368.5 million, including $14.6 million of current maturities, compared with $305.7 million at year-end 2013. The company had $356.4 million of borrowing capacity for general corporate purposes after considering accounts receivable facility availability and leverage restrictions. Revolving credit borrowings were $102.3 million, and accounts receivable facility borrowings were $88.9 million.
Material changes versus the prior comparable period
- Sales growth was broad-based, with the exception of Energy. Six-month sales increased in Packaging, Aerospace & Defense, Engineered Components, Cequent APEA and Cequent Americas.
- Energy sales declined 7.6% in the first six months, and segment operating profit fell to $2.0 million from $11.1 million, reflecting weaker engineering and construction demand, delayed refinery and petrochemical turnaround activity, lower-margin mix and restructuring costs.
- Cequent Americas operating profit increased to $22.7 million from $13.6 million in the first six months, primarily because 2013 facility relocation and consolidation charges did not recur and productivity initiatives improved results.
- Aerospace & Defense sales increased 39.4% in the first six months, substantially aided by acquisitions, but operating margin declined because of manufacturing inefficiencies, mix and lower margins at acquired businesses.
- Interest expense decreased to $6.9 million from $10.8 million for the first six months, primarily due to the 2013 refinancing and lower average variable-rate borrowings.
- The company acquired the remaining 30% of Arminak for $51.0 million in March 2014, eliminating the redeemable noncontrolling interest. Potential contingent consideration of up to $7.0 million remains, with an estimated liability of $3.1 million at June 30, 2014.
- Cash used for capital expenditures was $20.5 million, compared with $25.9 million. No acquisitions were made during the first six months, versus approximately $46.6 million of acquisition spending in the 2013 period.
Guidance, outlook, risks and unusual items
The filing does not provide a specific numerical earnings or revenue guidance range. Management expects 2014 demand to remain choppy amid limited economic growth, with Energy the primary challenge. Management expects continued benefits from acquisition integration, productivity, cost reduction, geographic expansion and Cequent facility efficiencies, but acknowledges that integration, growth initiatives and acquired businesses may pressure margins in the near term.
- TriMas announced the closure of a China sales branch and a São Paulo, Brazil manufacturing facility within Energy. The Brazil closure generated approximately $0.5 million of severance charges in the second quarter; future unrecoverable lease obligations remain under assessment.
- Cequent Americas incurred approximately $1.5 million of footprint consolidation and relocation costs in the second quarter. Further freight and production ramp-up inefficiencies also affected results.
- Working capital absorbed significant cash: receivables used $63.5 million in the first six months, and days sales outstanding increased to 56 days from 51 days.
- The company is exposed to cyclical demand, consumer sentiment, raw-material prices, foreign currency movements, supply disruptions, integration execution and variable interest rates. A 1% increase in applicable interest rates would increase annual interest expense by approximately $2.0 million after the interest-rate swap.
- At June 30, 2014, actual leverage was 1.83x versus a 3.50x covenant limit, and interest coverage was 16.72x versus a 3.00x minimum. The company was in compliance with its debt covenants.
- Asbestos litigation involved 1,087 pending cases and 7,985 claimants. Management does not believe the matters will have a material adverse effect, but warns that future claims and defense or settlement costs could increase, particularly as primary insurance coverage is exhausted.
- In July 2014, after the reporting date, TriMas acquired Lion Holdings in India and Vietnam for approximately $27 million, subject to a working-capital adjustment. Lion Holdings generated approximately $10 million of revenue for the twelve months ended June 30, 2014.
- The company expects to adopt new revenue-recognition guidance under ASU 2014-09 when required; the impact had not yet been determined.
Most important facts for investors to verify
- Whether Energy demand, refinery turnaround activity and restructuring actions improve segment profitability.
- Progress toward integrating the 2013 acquisitions and achieving expected margin and productivity benefits.
- Receivables collection, working-capital requirements and seasonal borrowing needs.
- Debt reduction capacity, covenant headroom and the effect of variable interest rates.
- Potential lease obligations related to the São Paulo closure and contingent consideration for Arminak.
- Future asbestos defense and settlement costs and the timing of primary and excess insurance coverage.
- The purchase accounting and operating contribution of the post-quarter Lion Holdings acquisition.