TriMas Corporation 2013 First-Quarter Form 10-Q Summary
Business Context and Reporting Period
TriMas is a global manufacturer and distributor serving commercial, industrial and consumer markets through six reportable segments: Packaging, Energy, Aerospace & Defense, Engineered Components, Cequent Asia Pacific and Cequent Americas. This unaudited quarterly report covers the three months ended March 31, 2013, compared with the three months ended March 31, 2012.
Key Financial Metrics
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Net sales | $337.8 million | $297.6 million | +13.5% |
| Gross profit | $83.4 million | $78.9 million | +5.7% |
| Gross margin | 24.7% | 26.5% | Down 180 basis points |
| Operating profit | $23.7 million | $28.7 million | -17.4% |
| Operating margin | 7.0% | 9.7% | Down 270 basis points |
| Net income | $14.0 million | $12.3 million | +14.6% |
| Net income attributable to TriMas | $13.2 million | $12.5 million | +5.5% |
| Diluted earnings per share | $0.33 | $0.36 | Down $0.03 |
| Cash flow from operations | $(37.9) million | $(39.4) million | Use improved by $1.5 million |
| Capital expenditures | $14.0 million | $11.4 million | Increase of $2.6 million |
| Cash acquisitions | $28.2 million | $59.2 million | Decrease of $31.0 million |
Interest expense fell to $5.2 million from $10.7 million, primarily because the 2012 refinancing replaced higher-cost senior secured notes with lower-rate bank debt. Income tax expense declined to $2.3 million from $4.2 million, and the effective tax rate decreased to 13.9% from 25.4%.
Cash and equivalents were $21.3 million at March 31, 2013, compared with $20.6 million at December 31, 2012. Total assets were $1.221 billion and shareholders’ equity was $315.7 million. Receivables increased to $193.2 million and inventories increased to $247.9 million from $150.4 million and $238.0 million, respectively, at year-end.
Debt and Liquidity
Total debt was $506.2 million at March 31, 2013, including $22.5 million of current maturities and $483.7 million of long-term debt. The company had $30.0 million outstanding under revolving credit facilities, $66.0 million outstanding under its accounts receivable facility and approximately $23.6 million of letters of credit.
- Borrowing capacity available for general corporate purposes was $156.1 million after consideration of leverage restrictions, compared with $230.5 million at December 31, 2012.
- The company’s actual leverage ratio was 2.70x versus a 3.50x covenant limit.
- Actual interest coverage was 6.71x versus a 3.00x covenant requirement.
- The company was in compliance with its financial and other debt covenants at March 31, 2013.
- Interest-rate swaps fixed the LIBOR component on $175.0 million of term loan A debt at 0.74% beginning February 2013 and on $150.0 million of term loan B debt at 2.05% beginning February 2015.
Material Changes Versus the Prior Comparable Period
- Sales increased in five of six segments, led by Packaging, Cequent Americas, Cequent Asia Pacific, Aerospace & Defense and Energy. Engineered Components sales declined 6.9% because of weaker drilling activity and lower demand for engine and compression products.
- Packaging sales increased 36.9%, including the impact of the Arminak acquisition, and operating profit increased to $14.6 million from $9.9 million.
- Cequent Americas sales increased 12.6%, but operating profit fell to $0.7 million from $4.2 million because of facility consolidation, relocation and severance costs, manufacturing inefficiencies and unfavorable product mix.
- Operating profit declined despite higher sales because of approximately $5.8 million of Cequent Americas footprint-consolidation costs, higher corporate and acquisition-related expenses, less favorable product mix and manufacturing inefficiencies.
- Gross margin declined primarily because of the Goshen facility closure and relocation project, lower-margin acquired businesses, product mix and operational inefficiencies.
- Net income increased despite lower operating profit because of substantially lower interest expense and income taxes.
- Net cash used in operations remained significant, primarily reflecting a $38.3 million increase in receivables and a $18.7 million decrease in accounts payable and accrued liabilities.
Guidance, Outlook, Risks and Unusual Items
Management did not provide specific quantitative full-year revenue or earnings guidance in the filing. Management expects margins in Packaging and Energy to improve over time as acquisitions are integrated and productivity and volume efficiencies are realized. Cequent margins are expected to improve after facility consolidation and relocation projects are fully operational.
- During the first quarter, TriMas recorded approximately $3.8 million of severance costs for approximately 350 Goshen union employees and approximately $0.3 million of accelerated depreciation. The company expects approximately $1.6 million of additional accelerated depreciation through the facility closure date and expects the remaining severance payments to be made by the end of 2013.
- The company acquired businesses for approximately $29 million during the quarter, including Martinic Engineering in Aerospace & Defense and Wulfrun in Energy.
- On April 12, 2013, after quarter-end, TriMas acquired Witter in the United Kingdom for approximately $14 million. Witter generated approximately $20 million of revenue during the twelve months ended February 1, 2013.
- On April 12, 2013, the revolving credit facility was amended to permit up to $75 million of foreign-currency borrowings, increasing funding flexibility for international growth.
- Key risks include cyclical and unstable end markets, consumer sentiment, raw-material costs and availability, foreign-currency movements, acquisition integration, facility-transition execution, variable interest rates, leverage and covenant requirements.
- As of March 31, 2013, the company was party to 1,043 pending asbestos cases involving 7,913 claimants. Management does not currently expect these matters to have a material adverse effect, but cautions that future claims, settlements and defense costs could increase. The filing does not provide a clear estimate of maximum potential monetary exposure.
- Management stated that liquidity and capital resources, including anticipated operating cash flows and available credit facilities, should be sufficient for debt service, capital expenditures and other obligations for the foreseeable future.
Important Facts for Investors to Verify
- Whether Cequent Americas achieves the expected savings and operating improvements from the Goshen closure and broader footprint-consolidation program.
- Whether acquired businesses and new international branches reach targeted margins and generate sufficient cash returns.
- Working-capital conversion, particularly the increase in receivables and the continued use of revolving and accounts receivable facilities.
- Debt reduction progress, future mandatory amortization and compliance with leverage and interest-coverage covenants.
- The effect of weaker drilling activity on Engineered Components and the sensitivity of results to consumer and recreational-vehicle demand.
- Future asbestos defense and settlement costs, insurance recoveries and any potential lease obligation associated with the Goshen facility.
- The filing’s forward-looking statements and risk disclosures should be read together with TriMas’s 2012 Form 10-K; management reported no significant changes to the previously disclosed risk factors.