TriMas Corporation Form 10-Q Summary
Business context and reporting period
TriMas is a diversified industrial manufacturer serving consumer, aerospace, industrial, petrochemical, refinery, and oil and gas markets. The filing covers the quarter and six months ended June 30, 2018, compared with the corresponding 2017 periods. Reporting was realigned from four segments to three: Packaging, Aerospace, and Specialty Products.
Key financial metrics
| Metric | Three months ended June 30, 2018 | Three months ended June 30, 2017 | Six months ended June 30, 2018 | Six months ended June 30, 2017 |
|---|---|---|---|---|
| Net sales | $224.9 million | $213.4 million | $442.0 million | $413.2 million |
| Gross profit | $64.8 million | $59.5 million | $125.2 million | $111.3 million |
| Gross margin | 28.8% | 27.9% | 28.3% | 26.9% |
| Operating profit | $31.5 million | $26.4 million | $66.7 million | $42.3 million |
| Operating margin | 14.0% | 12.4% | 15.1% | 10.2% |
| Net income | $19.6 million | $14.9 million | $43.9 million | $21.8 million |
| Diluted EPS | $0.42 | $0.32 | $0.95 | $0.48 |
| Operating cash flow | Not separately provided | Not separately provided | $51.6 million | $49.6 million |
At June 30, 2018, cash and cash equivalents were $53.4 million, compared with $27.6 million at December 31, 2017. Net long-term debt was $293.0 million, consisting primarily of $300.0 million of 4.875% senior notes due October 2025, net of debt issuance costs. The company had no revolving credit borrowings and approximately $285.9 million of borrowing capacity after letters of credit and leverage restrictions.
Total assets were $1.054 billion and shareholders’ equity was $585.7 million at June 30, 2018. Capital expenditures were $11.3 million during the first six months, while net cash used in investing activities was $11.1 million. Financing activities used $14.7 million, including $2.9 million for share repurchases.
Material changes versus the prior comparable period
- Second-quarter sales increased 5.4%; first-half sales increased 7.0%, driven mainly by Packaging health, beauty and home care products and higher Specialty Products industrial cylinder and oil and gas sales.
- First-half operating profit increased 57.6%, reflecting higher volume, operating improvements, facility-closure savings, and an $8.2 million non-cash reduction in a legacy Metaldyne liability.
- Specialty Products first-half sales rose 11.2% and operating profit increased to $18.9 million from $6.8 million, aided by stronger demand and lower facility-exit costs.
- Packaging sales increased, but second-quarter gross margin declined to 33.3% from 36.3% because of product mix, pricing pressure, and higher resin costs.
- Aerospace sales declined 1.7% for the first half, but operating profit increased modestly because of improved production efficiency and product mix.
- The effective tax rate declined to 24.2% from 35.0% in the second quarter and to 22.7% from 36.6% for the first half, primarily because of the Tax Cuts and Jobs Act.
- Net income benefited from improved operating performance and lower taxes, partially offset by a $2.5 million non-cash pension settlement charge in the second quarter.
Guidance, outlook, risks, and unusual items
Management expects 2018 sales to be higher than originally projected, supported by improved economic activity and internal growth initiatives. However, management expects second-half year-over-year growth to moderate from the 7.0% first-half rate because customers may have accelerated purchases, deferred spending, or reduced orders amid uncertainty related to tariffs.
Management is continuing the TriMas Business Model to improve productivity, manage the cost structure, optimize the manufacturing footprint, pursue growth programs, and reduce exposure to lower-margin products. The company expects commodity costs for resin, steel, aluminum, and other oil- and metal-based inputs to remain a pressure point and stated that cost recovery through pricing may lag increases.
- In May 2018, TriMas exited its Bangalore, India facility and recorded approximately $1.3 million of pre-tax charges.
- A sublease agreement for the Reynosa, Mexico facility reduced the estimated future unrecoverable lease obligation by approximately $1.1 million during the second quarter.
- A pension annuity transaction generated a one-time $2.5 million pre-tax settlement charge.
- The Metaldyne bankruptcy trust’s closure eliminated a legacy obligation and produced an $8.2 million non-cash reduction in first-quarter SG&A.
- TriMas had 4,841 pending asbestos claims at June 30, 2018. Management does not believe the litigation will have a material adverse effect, but noted potential future defense and indemnity costs, including a possible period of self-funding before excess insurance coverage begins.
- The company is exposed to foreign currency, interest-rate, commodity-price, tariff, supply-chain, cyclical demand, oil and gas activity, litigation, and goodwill or intangible-asset impairment risks.
- Credit ratings were upgraded by Moody’s and Standard & Poor’s during the period, with stable outlooks reported.
Important facts for investors to verify
- Whether Packaging pricing actions and contractual escalators fully offset rising resin and other commodity costs.
- Whether Specialty Products’ improved results are sustainable after facility-closure savings and other non-recurring benefits.
- The pace of second-half demand, particularly in aerospace, oil and gas, and customer markets affected by tariffs.
- Cash conversion and working-capital trends, including the $20.4 million first-half use of cash from increased receivables and the $5.9 million inventory investment.
- Debt covenant headroom: actual total net leverage was 1.67x versus a 4.00x limit, and interest coverage was 12.13x versus a 3.00x minimum.
- Future asbestos defense, settlement, and insurance costs despite management’s current assessment of immaterial financial impact.
- The effect of the lower tax rate, which may not represent a comparable recurring rate in future periods.