TriMas Corporation: Q1 2017 Form 10-Q Summary
Business context and reporting period
TriMas is a global manufacturer and distributor serving commercial, industrial and consumer markets through four segments: Packaging, Aerospace, Energy and Engineered Components. The filing covers the unaudited three months ended March 31, 2017, compared with the three months ended March 31, 2016.
Financial performance and position
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Net sales | $199.8 million | $202.9 million | Down 1.5% |
| Gross profit | $51.8 million | $55.9 million | Down 7.4% |
| Gross margin | 25.9% | 27.6% | Down 170 bps |
| Operating profit | $15.7 million | $16.5 million | Down 4.3% |
| Operating margin | 7.9% | 8.1% | Down 20 bps |
| Net income | $7.0 million | $8.3 million | Down 15.8% |
| Diluted EPS | $0.15 | $0.18 | Down $0.03 |
| Cash flow from operations | $22.0 million | $(3.3) million | Improved $25.3 million |
| Capital expenditures | $10.7 million | $6.0 million | Up $4.8 million |
Cash and cash equivalents were $22.6 million at March 31, 2017, compared with $20.7 million at December 31, 2016. Total debt, net of debt issuance costs, was $366.9 million, including $13.8 million of current maturities. The company had approximately $146.5 million of borrowing capacity available for general corporate purposes after considering accounts receivable facility availability and leverage restrictions.
At March 31, 2017, revolving credit borrowings were approximately $73.4 million, term loan borrowings were approximately $254.4 million, and accounts receivable facility borrowings were approximately $43.7 million. The company was in compliance with its debt covenants; actual leverage was 2.52x versus a 3.50x limit, and interest coverage was 12.03x versus a 3.00x minimum.
Material changes versus the prior comparable period
- Packaging sales increased 1.1% to $81.0 million, but operating profit declined to $16.9 million from $17.8 million. Margin pressure reflected facility consolidation costs, higher resin costs and unfavorable currency effects.
- Aerospace sales increased 12.1% to $45.4 million, while operating profit rose to $5.0 million from $3.5 million. Improvements reflected higher distribution and original-equipment sales, better throughput and productivity initiatives.
- Energy sales declined 8.5% to $40.9 million and the operating loss widened to $3.9 million from $3.6 million, primarily because of continued weak oil-related demand and facility closure costs.
- Engineered Components sales declined 13.3% to $32.5 million. Operating profit decreased to $5.0 million from $5.6 million, although operating margin improved to 15.3% from 14.9% because of cost reductions.
- Consolidated gross margin declined because of Packaging facility consolidation and relocation costs, higher materials costs, less favorable product mix and currency effects. Operating profit also included higher footprint-consolidation charges.
- Operating cash flow improved substantially, primarily because the prior-year period included a larger reduction in accounts payable and accrued liabilities. Receivables used $7.6 million of cash in Q1 2017, while capital expenditures increased to $10.7 million.
Guidance, outlook, risks and unusual items
Management did not provide specific numerical full-year revenue or earnings guidance in the filing. Management remained cautiously optimistic about 2017, citing growth programs in Packaging and Aerospace, stabilization in aerospace distribution, increased upstream oil and gas quoting activity and potential improvement in the U.S. industrial economy. Management stated that it was not relying on significant market improvement and would focus on productivity, cost reductions, portfolio pruning and manufacturing-footprint optimization.
- The company announced the closure of its Wolverhampton, United Kingdom facility and recorded approximately $3.5 million of pretax charges in Q1 2017, including approximately $3.2 million of non-cash asset disposal charges.
- The company announced plans to cease production at its Reynosa, Mexico facility and consolidate production in Houston. It expected to determine and record any unrecoverable future lease obligations upon the anticipated cease-use date by June 30, 2017; the filing does not provide a clear estimate of that obligation.
- Arrow Engine sales have fallen more than 75% from pre-2015 levels because of low oil prices and reduced oil and gas activity. Management expects sales to remain low until oil prices increase and remain higher for a sustained period.
- The company had 5,310 asbestos claims pending in 629 cases at March 31, 2017. Management did not expect the litigation to have a material adverse effect based on historical experience and available insurance, but warned that it may bear defense and indemnity costs during a potential six- to 18-month period before excess coverage begins after primary insurance is exhausted.
- Key risks include leverage and debt covenants, variable interest rates, foreign currency movements, oil and gas demand, aerospace customer inventory patterns, raw-material costs, supply disruptions, litigation, facility-consolidation execution, acquisitions, impairment of goodwill or intangible assets and general economic conditions.
- The company adopted ASU 2016-09 on January 1, 2017, recognizing a $0.3 million discrete tax benefit in Q1. It expects to adopt the revenue-recognition standard on January 1, 2018 using the modified retrospective approach and does not currently expect a material impact on revenue amount or timing.
Important facts for investors to verify
- Whether Aerospace demand and distribution-channel order patterns continue to stabilize.
- Whether low oil prices continue to depress Energy and Engineered Components sales and whether cost actions can offset the pressure.
- The final lease obligation and total restructuring costs associated with the Reynosa closure and other footprint actions.
- The sustainability of the Q1 operating cash flow improvement amid higher capital expenditures and working-capital requirements.
- Debt repayment capacity and covenant headroom, including the approximately $202.8 million final term-loan payment due June 30, 2020.
- Progress in reducing Packaging margin pressure from resin costs, facility transitions, product mix and foreign exchange.
- Future asbestos defense and settlement costs and the timing and availability of excess insurance coverage.
- The financial and disclosure impact of upcoming accounting-standard adoptions, particularly revenue recognition and leases.