TriMas Corporation — Form 10-Q Summary
Business Context and Reporting Period
TriMas filed its unaudited Form 10-Q for the quarter and six months ended June 30, 2015. The company manufactures and distributes products through four continuing segments: Packaging, Aerospace, Energy, and Engineered Components.
On June 30, 2015, TriMas completed the spin-off of its Cequent businesses into Horizon Global Corporation. Cequent results are presented as discontinued operations for all periods shown. TriMas shareholders received two Horizon shares for every five TriMas shares held.
Financial Performance and Liquidity
| Metric | Three Months Ended June 30 | Six Months Ended June 30 |
|---|---|---|
| Net sales | $224.9 million, versus $224.7 million | $449.0 million, versus $441.5 million |
| Gross profit | $61.7 million, versus $62.8 million | $124.6 million, versus $123.2 million |
| Gross margin | 27.4%, versus 27.9% | 27.8%, versus 27.9% |
| Operating profit | $19.2 million, versus $25.4 million | $42.2 million, versus $49.5 million |
| Operating margin | 8.5%, versus 11.3% | 9.4%, versus 11.2% |
| Income from continuing operations | $8.5 million, versus $14.4 million | $20.4 million, versus $28.1 million |
| Net income attributable to TriMas | $1.7 million, versus $26.2 million | $15.7 million, versus $44.8 million |
| Diluted EPS | $0.04, versus $0.58 | $0.35, versus $0.99 |
Continuing-operations results excluded losses from discontinued operations of $6.8 million in the second quarter and $4.7 million for the first six months. The prior-year periods included discontinued-operations income of $11.8 million and $17.5 million, respectively.
- Operating cash flow from continuing operations was $20.5 million for the first six months, compared with $39.2 million in the prior-year period. Consolidated operating cash flow, including discontinued operations, was $6.5 million versus $23.0 million.
- Capital expenditures were $12.9 million, producing continuing-operations free cash flow of approximately $7.6 million before other investing items.
- Cash and cash equivalents were $26.2 million at June 30, 2015, compared with $24.4 million at December 31, 2014.
- Total debt was approximately $464.0 million, including $453.5 million of long-term debt and $10.5 million of current maturities, versus $638.6 million at year-end 2014. The reduction primarily followed the Horizon cash distribution and debt refinancing.
- TriMas received a $214.5 million cash distribution from Horizon and used it principally to repay term-loan borrowings. Borrowing capacity available for general corporate purposes was $123.0 million after leverage restrictions, compared with $192.0 million at December 31, 2014.
- At June 30, $128.3 million was outstanding under the revolving credit facility, with $349.0 million potentially available after letters of credit. The accounts receivable facility had $60.3 million outstanding and approximately $0.1 million available.
- The company reported an actual leverage ratio of 2.78x versus a 3.50x covenant limit and interest-expense coverage of 13.99x versus a 3.00x requirement. TriMas was in compliance with its financial covenants.
Material Changes Versus the Prior Comparable Period
- Sales increased modestly, but profit declined because of Energy restructuring and footprint costs, port-related sourcing inefficiencies, higher legal expenses, lower fixed-cost absorption, higher interest expense, and debt refinancing costs.
- Aerospace sales increased 35.8% in the quarter and 50.8% year to date, primarily from the Allfast acquisition. Aerospace operating profit rose to $7.2 million in the quarter and $15.3 million year to date, although margins were affected by acquisition-related inventory step-up, amortization, and higher selling, general and administrative expenses.
- Packaging sales increased 3.9% in the quarter but only 0.5% year to date. Operating profit was broadly stable in the quarter and declined modestly year to date because of currency effects and higher corporate and acquisition-related spending.
- Energy sales declined 4.1% in the quarter and 3.6% year to date. The segment recorded an operating loss of $7.2 million in the quarter and $6.8 million year to date, compared with losses of $0.6 million and profit of $2.0 million in the comparable periods.
- Engineered Components sales declined 22.8% in the quarter and 17.8% year to date, driven by lower oil prices and reduced drilling, well-completion, engine, and compression demand. Operating margins also declined because of lower fixed-cost absorption.
- Approximately $30 million of one-time pre-tax costs were associated with the Cequent spin-off, with approximately $29 million incurred during 2015. Approximately $18 million was recorded in discontinued operations, $2 million in continuing operations as debt financing and extinguishment costs, and the remainder was capitalized.
Outlook, Commentary, Risks, and Unusual Items
Management expects continued headwinds from lower oil prices, a stronger U.S. dollar, limited overall economic growth, cyclical end markets, and competitive conditions. The company did not provide specific quantitative revenue or earnings guidance in the filing.
- Management intends to emphasize Packaging and Aerospace as higher-growth and higher-margin platforms following the Horizon spin-off and the Lion Holdings and Allfast acquisitions.
- Energy restructuring continues, including facility consolidation, the planned relocation of certain Houston production to Mexico, and efforts to reduce costs and improve the manufacturing footprint.
- Management implemented cost reductions in Engineered Components to align capacity with lower oil-related demand and expects productivity and restructuring initiatives to support future margin improvement.
- In July 2015, TriMas entered additional interest-rate swaps covering portions of its Term Loan A exposure from July 2016 through June 2020. A 1% increase in annual interest rates was estimated to increase annual interest expense by approximately $3.1 million based on June 30 borrowings.
- The company incurred approximately $2.8 million to resolve a competitor’s false-advertising claim during the second quarter.
- TriMas had 1,086 pending asbestos cases involving 6,967 claimants at June 30, 2015. Management does not expect the matters to have a material adverse effect, but notes potential exposure if primary insurance is exhausted before excess coverage begins.
- Defined-benefit pension expense included a one-time settlement charge of approximately $2.8 million related to certain Cequent obligations. TriMas expects approximately $3.5 million of pension contributions for full-year 2015.
- Moody’s assigned a Ba3 rating to the new senior secured facilities and downgraded the Corporate Family Rating from Ba2 to Ba3; Standard & Poor’s affirmed a BB- corporate credit rating. Both outlooks were stable.
- Management stated that liquidity and expected operating cash flows should be sufficient to meet debt service, capital expenditures, working capital, and other obligations for the foreseeable future.
Important Facts for Investors to Verify
- Whether Energy restructuring, port delays, legal costs, and lower oil-related demand continue to pressure margins.
- The sustainability and integration benefits of the Allfast and Lion Holdings acquisitions, including acquisition-related amortization and operating costs.
- Post-spin-off debt repayment, refinancing terms, covenant compliance, and the availability of $123.0 million of general-purpose borrowing capacity.
- Operating cash conversion, inventory growth, receivables collections, and the company’s ability to fund capital expenditures while servicing variable-rate debt.
- The financial effects of the Horizon separation, including transition services, tax-sharing, employee matters, and other separation agreements.
- Potential future asbestos defense and settlement costs, insurance coverage availability, and the impact of other litigation contingencies.
- Exposure to foreign-currency movements, oil prices, raw-material costs, supply disruptions, and interest-rate increases.