TriMas Corporation — Q1 2012 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 North America. The filing covers the three months ended March 31, 2012, compared with the three months ended March 31, 2011. The financial statements are unaudited.
Financial performance and position
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Net sales | $297.6 million | $258.6 million | +15.1% |
| Gross profit | $78.9 million | $71.8 million | +9.9% |
| Gross margin | 26.5% | 27.8% | Down 130 bps |
| Operating profit | $28.7 million | $28.4 million | +1.4% |
| Operating margin | 9.7% | 11.0% | Down 130 bps |
| Income from continuing operations | $12.3 million | $10.7 million | +14.6% |
| Net income attributable to TriMas | $12.5 million | $11.8 million | +6.3% |
| Diluted EPS | $0.36 | $0.34 | +0.02 |
| Cash flow from operating activities | $(39.4) million | $(27.0) million | Greater use of cash |
Net sales increased in Packaging, Energy, Engineered Components and Cequent Asia Pacific, while Aerospace & Defense and Cequent North America declined. Engineered Components had the strongest reported sales growth at 34.3%; Cequent Asia Pacific grew 42.4%; Packaging grew 23.7%; and Energy grew 23.5%. Cequent North America declined 1.5%, partly because a $4.5 million customer stocking order in Q1 2011 did not recur.
At March 31, 2012, cash and cash equivalents were $15.0 million, compared with $88.9 million at December 31, 2011. Receivables were $179.8 million and inventories were $198.5 million. Total assets were $1.07 billion and shareholders’ equity was $198.2 million.
Total debt was approximately $499.1 million, including $223.3 million outstanding under the term loan, $24.0 million under the accounts receivable facility, approximately $5.7 million of Australian debt and $246.0 million carrying value of 9.75% senior secured notes due 2017. The company had no revolver borrowings, $101.7 million of revolver availability after letters of credit, and $150.3 million of aggregate borrowing capacity after considering receivables-facility availability and leverage restrictions.
Capital expenditures were $11.4 million and acquisition spending was $59.2 million. Financing activities provided $35.7 million, but total cash decreased by $74.0 million during the quarter. The company contributed approximately $4.0 million to defined benefit pension plans and expects approximately $5.8 million of contributions for full-year 2012.
Material changes versus the prior comparable period
- TriMas acquired 70% of Arminak & Associates on February 24, 2012, for total estimated consideration of $67.4 million. Arminak contributed $5.4 million of sales and a $0.8 million net loss during the quarter.
- The acquisition added $34.6 million of preliminary goodwill, $48.4 million of identifiable intangible assets and $25.4 million of redeemable noncontrolling interest. Purchase accounting and acquisition-related costs reduced first-quarter margins.
- Packaging operating profit declined to $9.9 million from $11.8 million, primarily due to Arminak purchase accounting adjustments, acquisition costs and lower-margin acquired businesses.
- Cequent North America operating profit declined to $4.2 million from $6.7 million, reflecting lower sales, manufacturing-capacity expansion and relocation costs, and higher selling and marketing expenses.
- Aerospace & Defense operating profit increased to $4.9 million from $3.7 million, while Engineered Components operating profit increased to $7.7 million from $4.7 million.
- Approximately $1.7 million of manufacturing inefficiency, facility-move and duplicate costs were incurred in Cequent Asia Pacific and Cequent North America. Approximately $1.4 million of Arminak purchase accounting adjustments affected gross profit.
- Interest expense declined to $10.7 million from $12.0 million, principally because of lower variable borrowing rates and lower swap-related expense. The effective tax rate declined to 25.4% from 29.5%, partly due to a $1.2 million tax benefit related to an expired uncertain-tax-position statute of limitations.
- Q1 2011 included $1.1 million of after-tax income from discontinued operations; the related businesses had been sold in December 2011.
Guidance, outlook, commentary and risks
Management did not provide a specific numerical revenue or earnings forecast in the filing. Management expects continued growth from market-share gains, new products, acquisitions, international expansion and productivity initiatives. It expects margins in acquired and newly expanded businesses to improve toward historical levels as integration, volume efficiencies and productivity initiatives progress.
Management believes liquidity and capital resources, including anticipated operating cash flow and available credit facilities, will be sufficient for debt service, capital expenditures and other obligations for the foreseeable future. The company’s actual leverage ratio was 2.68x versus a 4.00x covenant limit, and its interest expense coverage ratio was 4.58x versus a 2.50x requirement at March 31, 2012. The company was in compliance with its debt covenants.
- Working-capital investment and cash usage are expected to be seasonally higher in the first half of the year, particularly in Cequent North America; sales are generally stronger in the second and third quarters.
- Growth initiatives, acquisitions, facility relocations and new branches may continue to pressure margins through integration, setup, diligence, pricing and underutilization costs.
- Raw-material exposure includes steel, copper, aluminum, polyethylene, resins and energy. The company may be unable to pass all cost increases to customers or avoid supply disruptions.
- Demand is sensitive to cyclical industrial markets, consumer sentiment, employment, consumer credit availability and general economic conditions.
- Foreign currency movements affect reported results; the company does not currently use derivatives to manage foreign-currency risk.
- The company entered into a $100.0 million notional interest-rate swap fixing the LIBOR-based portion at 1.80% through June 2016. Approximately $0.6 million of pretax deferred losses were expected to be reclassified into interest expense over the following 12 months.
- There were 1,121 pending asbestos cases involving 7,947 claimants at March 31, 2012. Management did not believe the cases would have a material adverse effect, but noted potential future claims, rising settlement costs and a possible period of uninsured defense and indemnity costs before excess coverage begins.
- The $5.7 million Australian debt agreement matured May 31, 2012. The filing states that the company was in compliance with related covenants at March 31, 2012.
Management reported effective disclosure controls and procedures as of March 31, 2012, with no material changes to internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether Arminak integration delivers the expected growth and restores Packaging margins after purchase accounting and acquisition costs.
- Progress and final costs of Cequent facility consolidation and relocation projects, including expected productivity savings.
- Conversion of higher sales into operating cash flow, particularly as receivables and inventories increased materially during the quarter.
- Debt reduction plans, refinancing or maturity management for the term loan, Australian debt and 2017 senior secured notes.
- Compliance with tightening leverage and interest-coverage covenant thresholds during 2012 and beyond.
- Exposure to raw-material inflation, foreign-currency movements, cyclical demand and consumer spending in Cequent markets.
- Developments in the asbestos litigation portfolio and the timing and adequacy of insurance coverage.
- Actual 2012 results versus management’s qualitative expectations for revenue growth, margin recovery, productivity and liquidity.