TriMas Corporation 2017 Third-Quarter Form 10-Q Summary
Business Context and Reporting Period
TriMas is a diversified industrial manufacturer serving consumer products, aerospace, industrial, petrochemical, refinery, and oil and gas markets through four reportable segments: Packaging, Aerospace, Energy, and Engineered Components. This unaudited Form 10-Q covers the three and nine months ended September 30, 2017, compared with the corresponding 2016 periods.
Key Financial Metrics
| Metric | Q3 2017 | Q3 2016 | 9M 2017 | 9M 2016 |
|---|---|---|---|---|
| Net sales | $209.3 million | $202.3 million | $622.5 million | $608.5 million |
| Gross profit | $58.8 million | $58.1 million | $170.0 million | $171.1 million |
| Gross margin | 28.1% | 28.7% | 27.3% | 28.1% |
| Operating profit | $28.1 million | $17.8 million | $70.1 million | $52.9 million |
| Operating margin | 13.4% | 8.8% | 11.3% | 8.7% |
| Net income | $13.1 million | $8.8 million | $35.0 million | $27.6 million |
| Diluted EPS | $0.29 | $0.19 | $0.76 | $0.60 |
| Operating cash flow | Not separately provided | Not separately provided | $72.7 million | $46.4 million |
Q3 net sales increased 3.5%, while nine-month sales increased 2.3%. Q3 operating profit increased 58.1%, and nine-month operating profit increased 32.5%. The principal profitability improvement came from lower selling, general and administrative costs, Aerospace productivity improvements, and Energy footprint realignment.
At September 30, 2017, cash and cash equivalents were $24.8 million, compared with $20.7 million at December 31, 2016. Total assets were $1.05 billion and shareholders’ equity was $547.0 million, compared with $499.7 million at year-end 2016.
Cash Flow, Debt, and Liquidity
- Nine-month operating cash flow was $72.7 million, up from $46.4 million in the prior-year period.
- Capital expenditures were $24.1 million, producing approximate operating cash flow less capital expenditures of $48.5 million.
- Net cash used in financing activities was $46.3 million, primarily reflecting debt refinancing and repayments.
- In September 2017, TriMas issued $300.0 million of 4.875% senior unsecured notes due October 2025.
- Proceeds were used to repay the former Term Loan A, reduce accounts-receivable-facility borrowings, pay refinancing costs, and retain remaining cash.
- The amended senior secured revolving credit facility has $300.0 million of commitments and matures in September 2022. Approximately $37.5 million was outstanding at September 30, 2017, with approximately $248.3 million potentially available after letters of credit.
- The accounts receivable facility had $7.0 million outstanding and approximately $53.1 million available but unused.
- Total borrowing capacity available for general corporate purposes, after leverage restrictions, was approximately $295.4 million.
- Reported total net leverage was 2.14x versus a 4.00x covenant limit; senior secured net leverage was 0.23x versus 3.50x; and interest coverage was 12.79x versus a 3.00x minimum. The company was in compliance with its covenants.
Material Changes Versus the Prior Comparable Period
- Packaging: Q3 sales declined 0.9%, but operating profit increased to $23.1 million from $20.1 million because of lower SG&A. For nine months, sales were essentially flat and operating profit increased to $61.5 million from $59.3 million.
- Aerospace: Q3 sales increased 2.4% and operating profit increased 16.5%. Nine-month sales increased 7.2% and operating profit increased 44.0%, reflecting improved production scheduling, throughput, fixed-cost absorption, and lower SG&A.
- Energy: Q3 sales increased 5.8% and the segment returned to a $1.2 million operating profit from a $1.9 million loss. Nine-month operating loss narrowed to $2.6 million from $8.6 million, aided by facility closures and lower ongoing costs, although Reynosa closure costs and Hurricane Harvey reduced results.
- Engineered Components: Q3 sales increased 17.0%, but operating margin declined to 10.8% from 12.1% because of higher steel costs and product mix. Nine-month sales increased 2.0% and operating profit increased modestly to $13.0 million.
- Gross margin declined because of product mix, currency effects, facility consolidation and relocation costs, higher steel costs, and Hurricane Harvey-related inefficiencies.
- Debt refinancing generated approximately $6.6 million of debt financing and related expense in the third quarter, including non-cash deferred-fee write-offs and costs associated with terminating interest-rate swaps.
Guidance, Outlook, Risks, and Unusual Items
Management remained cautiously optimistic about growth in 2017, particularly in Packaging and Aerospace, but was not relying on significant macroeconomic improvement. Aerospace distribution demand and some oil and gas activity showed signs of stabilization. Management expected Energy turnaround activity following Gulf Coast hurricanes could be delayed into 2018.
- Hurricane Harvey closed the Houston facility for one week and certain Texas and Louisiana branches for up to two weeks. Management estimated approximately $1.0 million of adverse Q3 operating-profit impact.
- Low oil prices continued to depress upstream demand, especially at Arrow Engine. Management stated that Arrow Engine sales remained more than 75% below pre-2015 levels and might remain depressed until oil prices rise and remain higher for a sustained period.
- TriMas closed or exited facilities in Reynosa, Mexico, and Wolverhampton, United Kingdom. Related 2017 charges included approximately $1.5 million for Reynosa lease obligations, $1.2 million of accelerated depreciation, and $3.5 million of Wolverhampton-related charges.
- Asbestos litigation involved 600 pending cases and 5,265 claims at September 30, 2017. The company believes available insurance and historical experience indicate the matters will not have a material adverse effect, but it expects a potential period of direct defense and indemnity costs before excess insurance coverage begins.
- Key ongoing risks include cyclical demand, oil and gas activity, raw-material and energy costs, foreign currency movements, supply constraints, customer concentration and credit risk, leverage and covenant compliance, litigation, acquisitions and integration, goodwill impairment, regulatory changes, labor issues, catastrophic events, and cybersecurity or information-technology disruption.
- In October 2017, after the reporting date, TriMas entered into five-year cross-currency swaps with notional amounts declining from $150.0 million to $75.0 million to hedge Euro-denominated net investments.
- The company expected to adopt the new revenue-recognition standard on January 1, 2018 using the modified retrospective method and did not expect a material impact on the amount or timing of revenue.
Most Important Facts for Investors to Verify
- Whether Aerospace productivity gains and Energy cost reductions are sustainable after the reported improvement.
- The timing and magnitude of Gulf Coast hurricane-related Energy demand and turnaround activity.
- Oil prices, drilling activity, and their effect on Arrow Engine and other upstream businesses.
- Debt refinancing benefits, future interest expense, variable-rate exposure, and compliance with leverage and interest-coverage covenants.
- Whether gross-margin pressure from steel, resin, currency, facility-transition costs, and product mix reverses.
- The status, insurance coverage, and potential cash exposure of asbestos claims.
- The carrying value and impairment sensitivity of Aerospace goodwill, reported at approximately $146.4 million.
- Execution of facility consolidations, footprint reductions, and announced cross-currency hedging activities.