TriMas Corporation
TRIMAS CORP (Form: 10-Q, Received: 10/26/2017 12:12:03)
Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-Q
(Mark One)
 
 
x
 
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
 
 
For the Quarterly Period Ended September 30, 2017
Or
o
 
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
 
 
For the Transition Period from                    to                    .
Commission file number 001-10716
TRIMAS CORPORATION
(Exact name of registrant as specified in its charter)
 
 
 
Delaware
(State or other jurisdiction of
incorporation or organization)
 
38-2687639
(IRS Employer
Identification No.)
38505 Woodward Avenue, Suite 200
Bloomfield Hills, Michigan 48304
(Address of principal executive offices, including zip code)
(248) 631-5450
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  x     No  o .
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  x     No  o .
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
x
 
Accelerated filer
o
 
 
 
 
 
Non-accelerated filer
o
(Do not check if a smaller reporting company)
 
 
 
 
 
 
 
 
 
Smaller reporting company
o
 
 
 
 
 
 
 
 
Emerging growth company
o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  o     No  x
As of October 19, 2017 , the number of outstanding shares of the Registrant's common stock, $0.01 par value, was 45,721,160 shares.


Table of Contents

TriMas Corporation
Index
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


1

Table of Contents

Forward-Looking Statements
This report may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 about our financial condition, results of operations and business. These forward-looking statements can be identified by the use of forward-looking words, such as “may,” “could,” “should,” “estimate,” “project,” “forecast,” “intend,” “expect,” “anticipate,” “believe,” “target,” “plan” or other comparable words, or by discussions of strategy that may involve risks and uncertainties.
These forward-looking statements are subject to numerous assumptions, risks and uncertainties which could materially affect our business, financial condition or future results including, but not limited to: general economic and currency conditions; material and energy costs; risks and uncertainties associated with intangible assets, including goodwill or other intangible asset impairment charges; competitive factors; future trends; our ability to realize our business strategies; our ability to identify attractive acquisition candidates, successfully integrate acquired operations or realize the intended benefits of such acquisitions; the performance of our subcontractors and suppliers; supply constraints; market demand; technology factors; intellectual property factors; litigation; government and regulatory actions; our leverage; liabilities imposed by our debt instruments; labor disputes; changes to fiscal and tax policies; contingent liabilities relating to acquisition activities; information technology factors; the disruption of operations from catastrophic or extraordinary events, including natural disasters; the potential impact of Brexit; tax considerations relating to the Cequent spin-off; our future prospects; and other risks that are discussed in Part I, Item 1A, "Risk Factors," in our Annual Report on Form 10-K for the year ended December 31, 2016. The risks described in our Annual Report on Form 10-K and elsewhere in this report are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deemed to be immaterial also may materially adversely affect our business, financial position and results of operations or cash flows.
The cautionary statements set forth above should be considered in connection with any subsequent written or oral forward-looking statements that we or persons acting on our behalf may issue. We caution readers not to place undue reliance on the statements, which speak only as of the date of this report. We do not undertake any obligation to review or confirm analysts' expectations or estimates or to release publicly any revisions to any forward-looking statement to reflect events or circumstances after the date of this report or to reflect the occurrence of unanticipated events.
We disclose important factors that could cause our actual results to differ materially from our expectations implied by our forward-looking statements under Part I, Item 2, " Management's Discussion and Analysis of Financial Condition and Results of Operations ," and elsewhere in this report. These cautionary statements qualify all forward-looking statements attributed to us or persons acting on our behalf. When we indicate that an event, condition or circumstance could or would have an adverse effect on us, we mean to include effects upon our business, financial and other conditions, results of operations, prospects and ability to service our debt.

2

Table of Contents

PART I. FINANCIAL INFORMATION

Item 1 .    Consolidated Financial Statements
TriMas Corporation
Consolidated Balance Sheet
(Dollars in thousands)


 
September 30,
2017

December 31,
2016
Assets
 
(unaudited)
 

Current assets:
 

 

Cash and cash equivalents
 
$
24,760


$
20,710

Receivables, net of reserves of approximately $5.2 million and $4.6 million as of September 30, 2017 and December 31, 2016, respectively
 
125,410


111,570

Inventories
 
160,180


160,460

Prepaid expenses and other current assets
 
8,800


16,060

Total current assets
 
319,150

 
308,800

Property and equipment, net
 
185,800


179,160

Goodwill
 
318,730


315,080

Other intangibles, net
 
199,150


213,920

Other assets
 
30,500


34,690

Total assets
 
$
1,053,330

 
$
1,051,650

Liabilities and Shareholders' Equity
 

 

Current liabilities:
 

 

Current maturities, long-term debt
 
$


$
13,810

Accounts payable
 
77,720


72,270

Accrued liabilities
 
41,600


47,190

Total current liabilities
 
119,320

 
133,270

Long-term debt, net
 
336,560


360,840

Deferred income taxes
 
5,750


5,910

Other long-term liabilities
 
44,740


51,910

Total liabilities
 
506,370

 
551,930

Preferred stock, $0.01 par: Authorized 100,000,000 shares;
Issued and outstanding: None
 

 

Common stock, $0.01 par: Authorized 400,000,000 shares;
Issued and outstanding: 45,721,160 shares at September 30, 2017 and 45,520,598 shares at December 31, 2016
 
460

 
460

Paid-in capital
 
822,190

 
817,580

Accumulated deficit
 
(258,950
)
 
(293,920
)
Accumulated other comprehensive loss
 
(16,740
)
 
(24,400
)
Total shareholders' equity
 
546,960

 
499,720

Total liabilities and shareholders' equity
 
$
1,053,330

 
$
1,051,650



The accompanying notes are an integral part of these financial statements.

3

Table of Contents

TriMas Corporation
Consolidated Statement of Income
(Unaudited—dollars in thousands, except for per share amounts)

 
 
Three months ended
September 30,
 
Nine months ended
September 30,
 
 
2017
 
2016
 
2017
 
2016
Net sales
 
$
209,330

 
$
202,290

 
$
622,530

 
$
608,490

Cost of sales
 
(150,500
)
 
(144,240
)
 
(452,530
)
 
(437,440
)
Gross profit
 
58,830

 
58,050

 
170,000

 
171,050

Selling, general and administrative expenses
 
(30,710
)
 
(40,260
)
 
(99,890
)
 
(118,150
)
Operating profit
 
28,120

 
17,790

 
70,110

 
52,900

Other expense, net:
 
 
 
 
 
 
 
 
Interest expense
 
(3,390
)
 
(3,480
)
 
(10,360
)
 
(10,230
)
Debt financing and related expenses
 
(6,640
)
 

 
(6,640
)
 

Other expense, net
 
(200
)
 
(200
)
 
(780
)
 
(130
)
Other expense, net
 
(10,230
)
 
(3,680
)
 
(17,780
)
 
(10,360
)
Income before income tax expense
 
17,890

 
14,110

 
52,330

 
42,540

Income tax expense
 
(4,760
)
 
(5,330
)
 
(17,360
)
 
(14,980
)
Net income
 
$
13,130

 
$
8,780

 
$
34,970

 
$
27,560

Basic earnings per share:
 
 
 
 
 
 
 
 
Net income per share
 
$
0.29

 
$
0.19

 
$
0.77

 
$
0.61

Weighted average common shares—basic
 
45,721,155

 
45,435,936

 
45,669,782

 
45,381,592

Diluted earnings per share:
 
 
 
 
 
 
 
 
Net income per share
 
$
0.29

 
$
0.19

 
$
0.76

 
$
0.60

Weighted average common shares—diluted
 
46,029,361

 
45,760,455

 
45,953,578

 
45,713,873



The accompanying notes are an integral part of these financial statements.

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Table of Contents

TriMas Corporation
Consolidated Statement of Comprehensive Income
(Unaudited—dollars in thousands)

 
 
Three months ended
September 30,
 
Nine months ended
September 30,
 
 
2017
 
2016
 
2017
 
2016
Net income
 
$
13,130

 
$
8,780

 
$
34,970

 
$
27,560

Other comprehensive income (loss):
 
 
 
 
 
 
 
 
Defined benefit pension and postretirement plans (Note 13)
 
170

 
140

 
500

 
440

Foreign currency translation
 
910

 
(1,550
)
 
4,640

 
(8,290
)
Derivative instruments (Note 8)
 
2,540

 
630

 
2,520

 
(3,660
)
Total other comprehensive income (loss)
 
3,620

 
(780
)
 
7,660

 
(11,510
)
Total comprehensive income
 
$
16,750

 
$
8,000

 
$
42,630

 
$
16,050



The accompanying notes are an integral part of these financial statements.



5

Table of Contents

TriMas Corporation
Consolidated Statement of Cash Flows
(Unaudited—dollars in thousands)
 
 
Nine months ended September 30,
 
 
2017
 
2016
Cash Flows from Operating Activities:
 
 
 
 
Net income
 
$
34,970

 
$
27,560

Adjustments to reconcile net income to net cash provided by operating activities:
 

 

Loss on dispositions of assets
 
3,210

 
1,350

Depreciation
 
18,890

 
17,710

Amortization of intangible assets
 
14,920

 
15,330

Amortization of debt issue costs
 
1,030

 
1,000

Deferred income taxes
 
2,420

 
360

Non-cash compensation expense
 
5,090

 
5,240

Tax effect from stock based compensation
 

 
(640
)
Debt financing and related expenses
 
6,640

 

Increase in receivables
 
(12,700
)
 
(9,790
)
Increase in inventories
 
(580
)
 
(4,560
)
Decrease in prepaid expenses and other assets
 
7,110

 
10,780

Decrease in accounts payable and accrued liabilities
 
(8,590
)
 
(17,150
)
Other operating activities
 
240

 
(780
)
Net cash provided by operating activities
 
72,650

 
46,410

Cash Flows from Investing Activities:
 
 
 
 
Capital expenditures
 
(24,120
)
 
(22,390
)
Net proceeds from disposition of property and equipment
 
1,800

 
120

Net cash used for investing activities
 
(22,320
)
 
(22,270
)
Cash Flows from Financing Activities:
 
 
 
 
Proceeds from issuance of senior notes
 
300,000

 

Repayments of borrowings on term loan facilities
 
(257,940
)
 
(10,380
)
Proceeds from borrowings on revolving credit and accounts receivable facilities
 
353,710

 
314,860

Repayments of borrowings on revolving credit and accounts receivable facilities
 
(435,250
)
 
(324,780
)
Debt financing fees
 
(6,070
)
 

Shares surrendered upon options and restricted stock vesting to cover taxes
 
(480
)
 
(1,500
)
Other financing activities
 
(250
)
 
760

Net cash used for financing activities
 
(46,280
)
 
(21,040
)
Cash and Cash Equivalents:
 

 

Net increase for the period
 
4,050

 
3,100

At beginning of period
 
20,710

 
19,450

At end of period
 
$
24,760

 
$
22,550

Supplemental disclosure of cash flow information:
 

 

Cash paid for interest
 
$
9,020

 
$
8,870

Cash paid for taxes
 
$
13,140

 
$
9,130



The accompanying notes are an integral part of these financial statements.

6

Table of Contents

TriMas Corporation
Consolidated Statement of Shareholders' Equity
Nine Months Ended September 30, 2017
(Unaudited—dollars in thousands)

 
 
Common
Stock
 
Paid-in
Capital
 
Accumulated
Deficit
 
Accumulated
Other
Comprehensive
Loss
 
Total
Balances, December 31, 2016
 
$
460

 
$
817,580

 
$
(293,920
)
 
$
(24,400
)
 
$
499,720

Net income
 

 

 
34,970

 

 
34,970

Other comprehensive income
 

 

 

 
7,660

 
7,660

Shares surrendered upon options and restricted stock vesting to cover taxes
 

 
(480
)
 

 

 
(480
)
Non-cash compensation expense
 

 
5,090

 

 

 
5,090

Balances, September 30, 2017
 
$
460

 
$
822,190

 
$
(258,950
)
 
$
(16,740
)
 
$
546,960



The accompanying notes are an integral part of these financial statements.


7

Table of Contents

TRIMAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)


1. Basis of Presentation
TriMas Corporation ("TriMas" or the "Company"), and its consolidated subsidiaries, is a diversified industrial manufacturer of products for customers in the consumer products, aerospace, industrial, petrochemical, refinery and oil and gas end markets. The Company is principally engaged in the following reportable segments with diverse products and market channels: Packaging, Aerospace, Energy and Engineered Components. See Note  10 , " Segment Information ," for further information on each of the Company's reportable segments.
The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries and, in the opinion of management, contain all adjustments, including adjustments of a normal and recurring nature, necessary for a fair presentation of financial position and results of operations. Results of operations for interim periods are not necessarily indicative of results for the full year. The accompanying consolidated financial statements and notes thereto should be read in conjunction with the Company's 2016 Annual Report on Form 10-K.
2 . New Accounting Pronouncements
Recently Issued Accounting Pronouncements
In August 2017, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2017-12, "Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities" ("ASU 2017-12"), which better aligns an entity's risk management activities and financial reporting for hedging relationships, simplifies hedge accounting requirements and creates more transparency around how economic results are presented in the financial statements. ASU 2017-12 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018, with early adoption permitted. The Company is in the process of assessing the impact of adoption on its consolidated financial statements.
In March 2017, the FASB issued ASU 2017-07, "Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost" ("ASU 2017-07"). ASU 2017-07 requires that the service cost component of net period pension and postretirement benefit cost be presented in the same line item as other employee compensation costs, while the other components be presented separately as non-operating income (expense). ASU 2017-07 also allows only the service cost component to be eligible for capitalization when applicable. ASU 2017-07 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017, with early adoption permitted. The Company is in the process of assessing the impact of adoption on its consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04, "Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment" ("ASU 2017-04"), which simplifies the test for goodwill impairment by eliminating the requirement to perform a hypothetical purchase price allocation to measure the amount of goodwill impairment. ASU 2017-04 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2019, with early adoption permitted. The Company is in the process of assessing the impact of adoption on its consolidated financial statements.
In January 2017, the FASB issued ASU 2017-01, "Business Combinations (Topic 805): Clarifying the Definition of a Business" ("ASU 2017-01"). ASU 2017-01 provides guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. ASU 2017-01 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017, with early adoption permitted under certain circumstances. The Company is in the process of assessing the impact of adoption on its consolidated financial statements.
In October 2016, the FASB issued ASU 2016-16, "Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory" ("ASU 2016-16"), which requires that income tax consequences of an intra-entity transfer of an asset other than inventory are recognized when the transfer occurs. ASU 2016-16 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017, and is to be applied using a modified retrospective approach with early adoption permitted. The Company is in the process of assessing the impact of adoption on its consolidated financial statements.


8

Table of Contents

TRIMAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)

In August 2016, the FASB issued ASU 2016-15, "Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments" ("ASU 2016-15"), which clarifies how certain cash receipts and cash payments are presented and classified in the statement of cash flows. ASU 2016-15 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017, and is to be applied using a retrospective approach with early adoption permitted. The Company is in the process of assessing the impact of adoption on its consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)" ("ASU 2016-02"), which requires that lessees, at the lease commencement date, recognize a lease liability representing the lessee's obligation to make lease payments arising from a lease as well as a right-of-use asset, which represents the lessee's right to use, or control the use of a specified asset, for the lease term. The new guidance also aligns lessor accounting to the lessee accounting model and to Topic 606, "Revenue from Contracts with Customers." ASU 2016-02 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018, and is to be applied using a modified retrospective approach with early adoption permitted. The Company is in the process of assessing the impact of the adoption on its consolidated financial statements.
In May 2014, the FASB issued ASU 2014-09, "Revenue from Contracts with Customers (Topic 606)" ("ASU 2014-09"). ASU 2014-09 requires that an entity recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. Since the issuance of the original standard, the FASB has issued several subsequent updates as disclosed within the Company's 2016 Annual Report on Form 10-K. The Company has evaluated the standard and its customer contracts, and as a result, does not believe the adoption of this standard will have a material impact on the amount or timing of its revenues. The Company expects to adopt this standard on January 1, 2018 utilizing the modified retrospective approach.
3 . Facility Closures
Reynosa, Mexico facility
In March 2017, the Company announced plans within the Energy reportable segment to cease production at its Reynosa, Mexico facility, and consolidate production into its Houston, Texas facility. During the second quarter of 2017, upon the cease use date of the facility, the Company recorded a pre-tax charge of approximately $1.5 million within cost of sales for estimated future unrecoverable lease obligations, net of estimated sublease recoveries, for the lease that expires in 2025. In addition, in the second quarter of 2017, the Company incurred approximately $1.2 million of pre-tax non-cash charges within cost of sales related to accelerated depreciation expense as a result of shortening the expected lives on certain machinery, equipment and leasehold improvement assets that the Company no longer used following the facility closure.
Wolverhampton, United Kingdom facility
In March 2017, the Company exited its Wolverhampton, United Kingdom facility within the Energy reportable segment. In connection with this action, during the first quarter of 2017 the Company recorded pre-tax charges of approximately $3.5 million within selling, general and administrative expenses, of which approximately $3.2 million were non-cash charges related to the disposal of certain assets.
4 . Goodwill and Other Intangible Assets
Changes in the carrying amount of goodwill for the nine months ended September 30, 2017 are summarized as follows (dollars in thousands):
 
Packaging
 
Aerospace
 
Energy
 
Engineered Components
 
Total
Balance, December 31, 2016
$
162,090

 
$
146,430

 
$

 
$
6,560

 
$
315,080

Foreign currency translation and other
3,650

 

 

 

 
3,650

Balance, September 30, 2017
$
165,740

 
$
146,430

 
$

 
$
6,560

 
$
318,730


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Table of Contents

TRIMAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)

The Company amortizes its other intangible assets over periods ranging from one to 30  years. The gross carrying amounts and accumulated amortization of the Company's other intangibles as of September 30, 2017 and December 31, 2016 are summarized below (dollars in thousands):
 
 
As of September 30, 2017
 
As of December 31, 2016
Intangible Category by Useful Life
 
Gross Carrying Amount
 
Accumulated Amortization
 
Gross Carrying Amount
 
Accumulated Amortization
Finite-lived intangible assets:
 

 

 

 

   Customer relationships, 5 – 12 years
 
$
73,790

 
$
(39,030
)
 
$
73,570

 
$
(33,200
)
   Customer relationships, 15 – 25 years
 
132,230

 
(50,150
)
 
132,230

 
(44,970
)
Total customer relationships
 
206,020

 
(89,180
)
 
205,800

 
(78,170
)
   Technology and other, 1 – 15 years
 
57,520

 
(28,480
)
 
57,470

 
(26,040
)
   Technology and other, 17 – 30 years
 
43,300

 
(32,960
)
 
43,300

 
(31,370
)
Total technology and other
 
100,820

 
(61,440
)
 
100,770

 
(57,410
)
Indefinite-lived intangible assets:
 

 

 

 

 Trademark/Trade names
 
42,930

 

 
42,930

 

Total other intangible assets
 
$
349,770

 
$
(150,620
)
 
$
349,500

 
$
(135,580
)
Amortization expense related to intangible assets as included in the accompanying consolidated statement of income is summarized as follows (dollars in thousands):
 
 
Three months ended September 30,
 
Nine months ended September 30,
 
 
2017
 
2016
 
2017
 
2016
Technology and other, included in cost of sales
 
$
1,280

 
$
1,460

 
$
3,990

 
$
4,230

Customer relationships, included in selling, general and administrative expenses
 
3,650

 
3,680

 
10,930

 
11,100

Total amortization expense
 
$
4,930

 
$
5,140

 
$
14,920

 
$
15,330

5 . Inventories
Inventories consist of the following components (dollars in thousands):
 
 
September 30,
2017
 
December 31,
2016
Finished goods
 
$
89,600

 
$
95,290

Work in process
 
24,890

 
22,930

Raw materials
 
45,690

 
42,240

Total inventories
 
$
160,180

 
$
160,460


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Table of Contents

TRIMAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)

6 . Property and Equipment, Net
Property and equipment consists of the following components (dollars in thousands):
 
 
September 30,
2017
 
December 31,
2016
Land and land improvements
 
$
15,180

 
$
14,910

Buildings
 
72,770

 
71,100

Machinery and equipment
 
295,500

 
281,180

 
 
383,450

 
367,190

Less: Accumulated depreciation
 
197,650

 
188,030

Property and equipment, net
 
$
185,800

 
$
179,160

Depreciation expense as included in the accompanying consolidated statement of income is as follows (dollars in thousands):
 
 
Three months ended September 30,
 
Nine months ended September 30,
 
 
2017
 
2016
 
2017
 
2016
Depreciation expense, included in cost of sales
 
$
5,440

 
$
5,120

 
$
17,380

 
$
15,590

Depreciation expense, included in selling, general and administrative expenses
 
400

 
610

 
1,510

 
2,120

Total depreciation expense
 
$
5,840

 
$
5,730

 
$
18,890

 
$
17,710

7 . Long-term Debt
The Company's long-term debt consists of the following (dollars in thousands):
 
 
September 30,
2017
 
December 31,
2016
4.875% Senior Notes due October 2025
 
$
300,000

 
$

Credit Agreement
 
37,510

 
333,720

Receivables facility and other
 
7,000

 
45,650

Debt issuance costs
 
(7,950
)
 
(4,720
)
 
 
336,560

 
374,650

Less: Current maturities, long-term debt
 

 
13,810

Long-term debt, net
 
$
336,560

 
$
360,840

Senior Notes
In September 2017, the Company issued $300.0 million aggregate principal amount of 4.875% senior notes due October 15, 2025 ("Senior Notes") at par value in a private placement under Rule 144A of the Securities Act of 1933, as amended. The Company used the proceeds from the offering to fully repay the $250.9 million principal, plus $0.4 million related interest, outstanding on its former senior secured term loan A facility due 2020 ("Term Loan A Facility"), repay approximately $41.7 million of outstanding obligations under the Company's accounts receivable facility, pay fees and expenses of $5.0 million related to the Senior Notes offering, pay fees and expenses of $1.1 million related to amending its existing credit agreement, with the remaining amount retained as cash on its consolidated balance sheet. Of the $5.0 million of fees and expenses related to the Senior Notes, approximately $4.9 million was capitalized as debt issuance costs and approximately $0.1 million was recorded as debt financing and related expenses in the accompanying consolidated statement of income.

11

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TRIMAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)

The Senior Notes accrue interest at a rate of 4.875% per annum, payable semi-annually in arrears on April 15 and October 15, commencing on April 15, 2018 . The payment of principal and interest is jointly and severally guaranteed, on a senior unsecured basis, by certain subsidiaries of the Company (each a "Guarantor" and collectively the "Guarantors"). The Senior Notes are pari passu in right of payment with all existing and future senior indebtedness and subordinated to all existing and future secured indebtedness to the extent of the value of the assets securing such indebtedness.
Prior to October 15, 2020, the Company may redeem up to 35% of the principal amount of the Senior Notes at a redemption price of 104.875% of the principal amount, plus accrued and unpaid interest, if any, to the redemption date, with the net cash proceeds of one or more equity offerings provided that each such redemption occurs within 90 days of the date of closing of each such equity offering. In addition, the Company may redeem all or part of the Senior Notes at a redemption price equal to 100% of the principal amount thereof, plus accrued and unpaid interest, if any, to the redemption date, plus a "make whole" premium. On or after October 15, 2020, the Company may redeem all or part of the Senior Notes at the redemption prices (expressed as percentages of principal amount) set forth below, plus accrued and unpaid interest, if any, to the redemption date, if redeemed during the twelve-month period beginning on October 15 of the years indicated below:
Year
 
Percentage
2020
 
102.438
%
2021
 
101.219
%
2022 and thereafter
 
100.000
%
As of September 30, 2017 , the Company's Senior Notes traded at approximately 100.3% of par value. This valuation was determined based on Level 2 inputs under the fair value hierarchy, as defined.
Credit Agreement
In September 2017, the Company amended its existing credit agreement ("Credit Agreement") in connection with the Senior Notes offering and extended the maturity date, increased the permitted borrowings denominated in specific foreign currencies from $75.0 million to $125.0 million , removed the Term Loan A Facility and resized the revolving credit facility. The Company incurred fees and expenses of approximately $1.1 million related to the amendment, all of which was capitalized as debt issuance costs. The Company also recorded approximately $2.0 million non-cash expense related to the write-off of previously capitalized deferred financing fees within debt financing and related expenses in the accompanying consolidated statement of income.
Below is a summary of key terms under the Credit Agreement as of September 30, 2017, compared to the key terms prior to the amendment (the Term Loan A Facility shows the face amount of borrowing at debt issuance, while the revolving credit facilities show gross availability as of each date):
Instrument
 
Amount
($ in millions)
 
Maturity Date
 
Interest Rate
Credit Agreement (as amended)
 
 
 
 
 
 
Senior secured revolving credit facility
 
$300.0
 
9/20/2022
 
LIBOR (a)  plus 1.625% (b)
 
 
 
 
 
 
 
Credit Agreement (prior to amendment)
 
 
 
 
 
 
Senior secured revolving credit facility
 
$500.0
 
6/30/2020
 
LIBOR (a)  plus 1.625% (b)
Senior secured term loan A facility
 
$275.0
 
6/30/2020
 
LIBOR (a)  plus 1.625% (b)
__________________________
(a) London Interbank Offered Rate ("LIBOR")
(b) The initial interest rate spread for the amended Credit Agreement is stated as 1.625% . The interest rate spread is based upon the leverage ratio, as defined, as of the most recent determination date.

12

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TRIMAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)

The Credit Agreement also provides incremental revolving credit facility commitments in an amount not to exceed the greater of $200.0 million and an amount such that, after giving effect to such incremental commitments and the incurrence of any other indebtedness substantially simultaneously with the making of such commitments, the senior secured net leverage ratio, as defined, is no greater than 3.00 to 1.00. The terms and conditions of any incremental revolving credit facility commitments must be no more favorable than the existing credit facility.
The Company's revolving credit facility allows for the issuance of letters of credit, not to exceed $40.0 million in aggregate. At September 30, 2017 , the Company had approximately $37.5 million outstanding under its revolving credit facility and had approximately $248.3 million potentially available after giving effect to approximately $14.2 million of letters of credit issued and outstanding. At December 31, 2016 , the Company had approximately $75.9 million outstanding under its revolving credit facility and had approximately $408.2 million potentially available after giving effect to approximately $15.9 million of letters of credit issued and outstanding. However, including availability under its accounts receivable facility and after consideration of leverage restrictions contained in the Credit Agreement, the Company had approximately $295.4 million and $126.5 million at September 30, 2017 and December 31, 2016 , respectively, of borrowing capacity available for general corporate purposes.
The debt under the Credit Agreement is an obligation of the Company and certain of its domestic subsidiaries and is secured by substantially all of the assets of such parties. Borrowings under the $125.0 million (equivalent) foreign currency sub limit of the $300.0 million senior secured revolving credit facility are secured by a cross-guarantee amongst, and a pledge of the assets of, the foreign subsidiary borrowers that are a party to the agreement.  The Credit Agreement also contains various negative and affirmative covenants and other requirements affecting the Company and its subsidiaries, including the ability to, subject to certain exceptions and limitations, incur debt, liens, mergers, investments, loans, advances, guarantee obligations, acquisitions, assets dispositions, sale-leaseback transactions, hedging agreements, dividends and other restricted payments, transactions with affiliates, restrictive agreements and amendments to charters, bylaws, and other material documents. The terms of the Credit Agreement also require the Company and its restricted subsidiaries to meet certain restrictive financial covenants and ratios computed quarterly, including a maximum total net leverage ratio (total consolidated indebtedness plus outstanding amounts under the accounts receivable securitization facility, less the aggregate amount of certain unrestricted cash and unrestricted permitted investments, as defined, over consolidated EBITDA, as defined), a maximum senior secured net leverage ratio (total consolidated senior secured indebtedness, less the aggregate amount of certain unrestricted cash and unrestricted permitted investments, as defined, over consolidated EBITDA, as defined) and a minimum interest expense coverage ratio (consolidated EBITDA, as defined, over the sum of consolidated cash interest expense, as defined, and preferred dividends, as defined). At September 30, 2017 , the Company was in compliance with its financial covenants contained in the Credit Agreement.
As of September 30, 2017 and December 31, 2016 , the Company's revolving credit facility traded at approximately 99.6% and 99.3% of par value, respectively. These valuations were determined based on Level 2 inputs under the fair value hierarchy, as defined.
Receivables Facility
The Company is party to an accounts receivable facility through TSPC, Inc. ("TSPC"), a wholly-owned subsidiary, to sell trade accounts receivable of substantially all of the Company's domestic business operations. Under this facility, TSPC, from time to time, may sell an undivided fractional ownership interest in the pool of receivables up to $75.0 million to a third-party multi-seller receivables funding company. The net amount financed under the facility is less than the face amount of accounts receivable by an amount that approximates the purchaser's financing costs. The cost of funds under this facility consisted of a 1-month LIBOR-based rate plus a usage fee of 1.00% and a fee on the unused portion of the facility of 0.35% as of September 30, 2017 and 2016 .
The Company had approximately $7.0 million and $45.5 million outstanding under the facility as of September 30, 2017 and December 31, 2016 , respectively, and approximately $53.1 million and $10.1 million available but not utilized as of September 30, 2017 and December 31, 2016 , respectively. Aggregate costs incurred under the facility were approximately $0.3 million and $0.2 million for the three months ended September 30, 2017 and 2016 , and $0.9 million and $0.7 million for the nine months ended September 30, 2017 and 2016 , respectively, and are included in interest expense in the accompanying consolidated statement of income. The facility expires on June 30, 2020 .

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TRIMAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)

The cost of funds fees incurred are determined by calculating the estimated present value of the receivables sold compared to their carrying amount. The estimated present value factor is based on historical collection experience and a discount rate based on a 1-month LIBOR-based rate plus the usage fee discussed above and is computed in accordance with the terms of the agreement. As of September 30, 2017 , the cost of funds under the facility was based on an average liquidation period of the portfolio of approximately 1.7 months and an average discount rate of 2.0% .
8 . Derivative Instruments
The Company has historically utilized interest rate swap agreements to fix the LIBOR-based variable portion of the interest rate on its long-term debt. Prior to its debt refinancing in September 2017, the Company had interest rate swap agreements in place that hedged a declining notional value of debt ranging from approximately $238.4 million to approximately $192.7 million , amortizing consistent with future scheduled debt principal payments. The interest rate swap agreements required the Company to receive a variable interest rate and pay a fixed interest rate in a range of 0.74% to 2.68% with various expiration terms extending to June 30, 2020 . At inception, the interest rate swaps were designated as cash flow hedges.
In September 2017, immediately following the debt refinancing, the Company determined the likelihood of the hedged transactions occurring was less than probable and de-designated the interest rate swaps as cash flow hedges and terminated the interest rate swaps for a cash payment of approximately $4.7 million . There were no interest rate swaps outstanding as of September 30, 2017. The cash flows associated with the cash flow hedges are reported in net cash provided by operating activities on the statement of cash flows. Up to the date of the termination, the Company utilized hedge accounting, which allows for the effective portion of the interest rate swaps to be recorded in accumulated other comprehensive income or loss ("AOCI") in the accompanying consolidated balance sheet. At the date the Company de-designated the swaps as effective hedges, there was approximately $2.9 million (net of tax of $1.8 million ) of unrealized losses remaining in AOCI, which were reclassified into debt financing and related expenses in the accompanying consolidated statement of income during the third quarter of 2017.
As of September 30, 2017 and December 31, 2016 , the fair value carrying amount of the Company's derivative instruments are recorded as follows (dollars in thousands):
 
 
 
 
Asset / (Liability) Derivatives
 
 
Balance Sheet Caption
 
September 30,
2017
 
December 31,
2016
Derivatives designated as hedging instruments
 
 
 
 
 
 
Interest rate swaps
 
Prepaid expenses and other current assets
 
$

 
$
160

Interest rate swaps
 
Accrued liabilities
 

 
(870
)
Interest rate swaps
 
Other long-term liabilities
 

 
(3,360
)
Total derivatives designated as hedging instruments
 
$

 
$
(4,070
)

14

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TRIMAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)

The following table summarizes the loss recognized in AOCI as of September 30, 2017 and December 31, 2016 , and the amounts reclassified from AOCI into earnings for the three and nine months ended September 30, 2017 and 2016 (dollars in thousands):
 
Amount of Loss Recognized
in AOCI on Derivative
(Effective Portion, net of tax)
 
 
 
Amount of Loss Reclassified
from AOCI into Earnings
 
 
 
 
Three months ended
September 30,
 
Nine months ended
September 30,
 
As of
September 30,
2017
 
As of December 31, 2016
 
Location of Loss Reclassified from AOCI into Earnings (Effective Portion)
 
2017
 
2016
 
2017
 
2016
Derivatives designated as hedging instruments
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
$

 
$
(2,520
)
 
Interest expense
 
$
20

 
$
(250
)
 
$
(320
)
 
$
(470
)
 
 
 
 
 
Debt financing and related expenses
 
$
(4,680
)
 
$

 
$
(4,680
)
 
$

The fair value of the Company's derivatives are estimated using an income approach based on valuation techniques to convert future amounts to a single, discounted amount. Estimates of the fair value of the Company's interest rate swaps use observable inputs such as interest rate yield curves. Fair value measurements and the fair value hierarchy level for the Company's assets and liabilities measured at fair value on a recurring basis as of September 30, 2017 and December 31, 2016 are shown below (dollars in thousands):  
 
Description
 
Frequency
 
Asset / (Liability)
 
Quoted Prices in Active Markets for Identical Assets
(Level 1)
 
Significant Other Observable Inputs
(Level 2)
 
Significant Unobservable Inputs
(Level 3)
September 30, 2017
Interest rate swaps
 
Recurring
 
$

 
$

 
$

 
$

December 31, 2016
Interest rate swaps
 
Recurring
 
$
(4,070
)
 
$

 
$
(4,070
)
 
$

9 . Commitments and Contingencies
Asbestos
As of September 30, 2017 , the Company was a party to 600 pending cases involving an aggregate of 5,265 claims primarily alleging personal injury from exposure to asbestos containing materials formerly used in gaskets (both encapsulated and otherwise) allegedly manufactured or distributed by certain of its subsidiaries for use primarily in the petrochemical refining and exploration industries. The following chart summarizes the number of claims, number of claims filed, number of claims dismissed, number of claims settled, the average settlement amount per claim and the total defense costs, excluding amounts reimbursed under the Company's primary insurance, at the applicable date and for the applicable periods:
 
 
Claims
pending at
beginning of
period
 
Claims filed
during
period
 
Claims
dismissed
during
period
 
Claims
settled
during
period
 
Average
settlement
amount per
claim during
period
 
Total defense
costs during
period
Nine Months Ended September 30, 2017
 
5,339

 
128

 
180

 
22

 
$
5,375

 
$
1,697,400

Fiscal Year Ended December 31, 2016
 
6,242

 
140

 
1,009

 
34

 
$
15,624

 
$
2,920,000

In addition, the Company acquired various companies to distribute its products that had distributed gaskets of other manufacturers prior to acquisition. The Company believes that many of its pending cases relate to locations at which none of its gaskets were distributed or used.

15

Table of Contents

TRIMAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)

The Company may be subjected to significant additional asbestos-related claims in the future, the cost of settling cases in which product identification can be made may increase, and the Company may be subjected to further claims in respect of the former activities of its acquired gasket distributors. The Company is unable to make a meaningful statement concerning the monetary claims made in the asbestos cases given that, among other things, claims may be initially made in some jurisdictions without specifying the amount sought or by simply stating the requisite or maximum permissible monetary relief, and may be amended to alter the amount sought. The large majority of claims do not specify the amount sought. Of the 5,265 claims pending at September 30, 2017 , 54 set forth specific amounts of damages (other than those stating the statutory minimum or maximum). At September 30, 2017 , of the 54 claims that set forth specific amounts, there were no claims seeking specific amounts for punitive damages. Below is a breakdown of the amount sought for those claims seeking specific amounts:
 
 
Compensatory
Range of damages sought (dollars in millions)
 
$0.0 to $0.6
 
$0.6 to $5.0
 
$5.0+
Number of claims
 
 
13
 
41
In addition, relatively few of the claims have reached the discovery stage and even fewer claims have gone past the discovery stage.
Total settlement costs (exclusive of defense costs) for all such cases, some of which were filed over 20 years ago, have been approximately $8.4 million . All relief sought in the asbestos cases is monetary in nature. To date, approximately 40% of the Company's costs related to settlement and defense of asbestos litigation have been covered by its primary insurance. Effective February 14, 2006, the Company entered into a coverage-in-place agreement with its first level excess carriers regarding the coverage to be provided to the Company for asbestos-related claims when the primary insurance is exhausted. The coverage-in-place agreement makes asbestos defense costs and indemnity insurance coverage available to the Company that might otherwise be disputed by the carriers and provides a methodology for the administration of such expenses. Nonetheless, the Company believes it is likely there will be a period within the next 12 months, prior to the commencement of coverage under this agreement and following exhaustion of the Company's primary insurance coverage, during which the Company will be solely responsible for defense costs and indemnity payments, the duration of which would be subject to the scope of damage awards and settlements paid.
Based on the settlements made to date and the number of claims dismissed or withdrawn for lack of product identification, the Company believes that the relief sought (when specified) does not bear a reasonable relationship to its potential liability. Based upon the Company's experience to date, including the trend in annual defense and settlement costs incurred to date, and other available information (including the availability of excess insurance), the Company does not believe these cases will have a material adverse effect on its financial position and results of operations or cash flows.
Claims and Litigation
The Company is subject to other claims and litigation in the ordinary course of business, but does not believe that any such claim or litigation will have a material adverse effect on its financial position and results of operations or cash flows.
10 . Segment Information
TriMas groups its operating segments into reportable segments that provide similar products and services. Each operating segment has discrete financial information evaluated regularly by the Company's chief operating decision maker in determining resource allocation and assessing performance. Within these reportable segments, there are no individual products or product families for which reported net sales accounted for more than 10% of the Company's consolidated net sales. See below for more information regarding the types of products and services provided within each reportable segment:
Packaging – Highly engineered closure and dispensing systems for a range of end markets, including steel and plastic within industrial and consumer packaging applications.
Aerospace – Permanent blind bolts, temporary fasteners, highly engineered specialty fasteners, and other precision machined parts used in the commercial, business and military aerospace industries.
Energy – Metallic and non-metallic industrial sealant products and fasteners for the petroleum refining, petrochemical and other industrial markets.

16

Table of Contents

TRIMAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)

Engineered Components – High-pressure and low-pressure steel cylinders for the transportation, storage and dispensing of compressed gases, and natural gas engines, compressors, gas production equipment and chemical pumps engineered at well sites for the oil and gas industry.
Segment activity is as follows (dollars in thousands):
 
 
Three months ended
September 30,
 
Nine months ended
September 30,
 
 
2017
 
2016
 
2017
 
2016
Net Sales
 
 
 
 
 
 
 
 
Packaging
 
$
89,560

 
$
90,330

 
$
259,260

 
$
258,550

Aerospace
 
48,550

 
47,430

 
141,550

 
132,020

Energy
 
40,440

 
38,230

 
124,860

 
122,930

Engineered Components
 
30,780

 
26,300

 
96,860

 
94,990

Total
 
$
209,330

 
$
202,290

 
$
622,530

 
$
608,490

Operating Profit (Loss)
 
 
 
 
 
 
 
 
Packaging
 
$
23,090

 
$
20,090

 
$
61,480

 
$
59,340

Aerospace
 
7,760

 
6,660

 
19,690

 
13,670

Energy
 
1,240

 
(1,870
)
 
(2,550
)
 
(8,570
)
Engineered Components
 
3,310

 
3,180

 
13,000

 
12,620

Corporate expenses
 
(7,280
)
 
(10,270
)
 
(21,510
)
 
(24,160
)
Total
 
$
28,120

 
$
17,790

 
$
70,110

 
$
52,900

11 . Equity Awards
The Company maintains (or has maintained) the following long-term equity incentive plans or programs: the TriMas Corporation 2017 Equity and Incentive Compensation Plan, the TriMas Corporation Director Retainer Share Election Program, the 2011 TriMas Corporation Omnibus Incentive Compensation Plan and the TriMas Corporation 2006 Long Term Equity Incentive Plan (collectively, the "Plans"). The 2006 Long Term Equity Incentive Plan expired in 2016, such that, while existing grants will remain outstanding until exercised, settled, canceled, forfeited or expired, no new awards may be granted under the plan. See below for details of awards under the Plans by type.
Stock Options
The Company did not grant any stock option awards during the nine months ended September 30, 2017 . Information related to stock options at September 30, 2017 is as follows:
 
 
Number of
Stock Options
 
Weighted Average Option Price
 
Average  Remaining Contractual Life (Years)
 
Aggregate Intrinsic Value
Outstanding at January 1, 2017
 
206,854

 
$
13.19

 

 

Granted
 

 

 
 
 
 
  Exercised
 

 

 

 

  Cancelled
 

 

 

 

  Expired
 

 

 
 
 
 
Outstanding at September 30, 2017
 
206,854

 
$
13.19

 
6.8
 
$
2,855,664


17

Table of Contents

TRIMAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)

As of September 30, 2017 , 106,854 stock options outstanding were exercisable under the Plans. As of September 30, 2017, there was approximately $0.4 million of unrecognized compensation cost related to stock options that is expected to be recorded over a weighted average period of 1.8 years.
The Company recognized approximately $0.1 million of stock-based compensation expense related to stock options during the three months ended September 30, 2017 and 2016 , respectively, and approximately $0.5 million and $0.1 million during the nine months ended September 30, 2017 and 2016 , respectively. The stock-based compensation expense is included in selling, general and administrative expenses in the accompanying consolidated statement of income.
Restricted Shares
The Company awarded the following restricted shares during the nine months ended September 30, 2017 :
granted 189,062 restricted shares of common stock to certain employees, which are subject only to a service condition and vest ratably over three years so long as the employee remains with the Company; and
granted 30,429 restricted shares of common stock to its non-employee independent directors, which vest one year from date of grant so long as the director and/or Company does not terminate the director's service prior to the vesting date.
In addition, during the nine months ended September 30, 2017 , the Company issued 10,389 shares related to director fee deferrals. The Company allows for its non-employee independent directors to make an annual election to defer all or a portion of their directors fees and to receive the deferred amount in cash or equity. Certain of the Company's directors have elected to defer all or a portion of their directors fees and to receive the amount in Company common stock at a future date.
During the nine months ended September 30, 2017 , the Company awarded 111,761 performance-based shares of common stock to certain Company key employees which vest three years from the grant date so long as the employee remains with the Company. These awards are earned 50% based upon the Company's achievement of earnings per share compound annual growth rate ("EPS CAGR") metrics over a period beginning January 1, 2017 and ending December 31, 2019. The remaining 50% of the awards are earned based on the Company's total shareholder return ("TSR") relative to the TSR of the common stock of a pre-defined industry peer-group, measured over the performance period. TSR is calculated as the Company's average closing stock price for the 20-trading days at the end of the performance period plus Company dividends, divided by the Company's average closing stock price for the 20-trading days prior to the start of the performance period. The Company estimated the grant-date fair value and term of the awards subject to a market condition using a Monte Carlo simulation model, using the following weighted average assumptions: risk-free interest rate of 1.52% and annualized volatility of 35.6% . Depending on the performance achieved for these two metrics, the amount of shares earned, if any, can vary from 40% of the target award to a maximum of 200% of the target award for the EPS CAGR metric and 0% of the target award to a maximum of 200% of the target award for the TSR metric.
During 2015, the Company awarded performance-based shares of common stock to certain Company key employees which were earned based upon the Company's total TSR relative to the TSR of the common stock of a pre-defined industry peer-group and measured over a period beginning September 10, 2015 and ending on December 31, 2016. The Company attained 121.1% of the target on a weighted average basis, resulting in an increase of 12,718 shares during the nine months ended September 30, 2017 .
Information related to restricted shares at September 30, 2017 is as follows:
 
 
Number of Unvested Restricted Shares
 
Weighted Average Grant Date Fair Value
 
Average Remaining Contractual Life (Years)
 
Aggregate Intrinsic Value
Outstanding at January 1, 2017
 
645,660

 
$
20.45

 

 

  Granted
 
354,359

 
24.96

 

 

  Vested
 
(236,198
)
 
20.41

 

 

  Cancelled
 
(18,561
)
 
21.06

 

 

Outstanding at September 30, 2017
 
745,260

 
$
22.59

 
1.1
 
$
20,122,020

As of September 30, 2017 , there was approximately $7.5 million of unrecognized compensation cost related to unvested restricted shares that is expected to be recorded over a weighted average period of 2.1 years.

18

Table of Contents

TRIMAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)

The Company recognized approximately $1.6 million and $1.0 million of stock-based compensation expense related to restricted shares during the three months ended September 30, 2017 and 2016 , respectively, and approximately $4.6 million and $5.1 million during the nine months ended September 30, 2017 and 2016 , respectively. The stock-based compensation expense is included in selling, general and administrative expenses in the accompanying consolidated statement of income.
12 . Earnings per Share
Net income is divided by the weighted average number of common shares outstanding during the period to calculate basic earnings per share. Diluted earnings per share is calculated to give effect to stock options and restricted share awards. The following table summarizes the dilutive effect of restricted shares and options to purchase common stock for the three and nine months ended September 30, 2017 and 2016 :
 
 
Three months ended
September 30,
 
Nine months ended
September 30,
 
 
2017
 
2016
 
2017
 
2016
Weighted average common shares—basic
 
45,721,155

 
45,435,936

 
45,669,782

 
45,381,592

Dilutive effect of restricted share awards
 
233,859

 
244,757

 
226,617

 
248,942

Dilutive effect of stock options
 
74,347

 
79,762

 
57,179

 
83,339

Weighted average common shares—diluted
 
46,029,361

 
45,760,455

 
45,953,578

 
45,713,873

13 . Defined Benefit Plans
Net periodic pension benefit costs for the Company's defined benefit pension plans cover certain foreign employees, union hourly employees and salaried employees. The components of net periodic pension cost for the three and nine months ended September 30, 2017 and 2016 are as follows (dollars in thousands):
 
 
Pension Plans
 
 
Three months ended
September 30,
 
Nine months ended
September 30,
 
 
2017
 
2016
 
2017
 
2016
Service costs
 
$
290

 
$
250

 
$
840

 
$
740

Interest costs
 
310

 
390

 
950

 
1,180

Expected return on plan assets
 
(370
)
 
(420
)
 
(1,100
)
 
(1,260
)
Amortization of net loss
 
260

 
230

 
760

 
710

Net periodic benefit cost
 
$
490

 
$
450

 
$
1,450

 
$
1,370

The Company contributed approximately $1.7 million and $2.8 million to its defined benefit pension plans during the three and nine months ended September 30, 2017 , respectively. The Company expects to contribute approximately $3.4 million to its defined benefit pension plans for the full year 2017 .

19

Table of Contents

TRIMAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)

14 . Other Comprehensive Income (Loss)
Changes in AOCI by component for the nine months ended September 30, 2017 are summarized as follows, net of tax (dollars in thousands):
 
 
Defined Benefit Plans
 
 Derivative Instruments
 
Foreign Currency Translation
 
Total
Balance, December 31, 2016
 
$
(12,120
)
 
$
(2,520
)
 
$
(9,760
)
 
$
(24,400
)
Net unrealized gains (losses) arising during the period (a)
 

 
(580
)
 
4,640

 
4,060

Less: Net realized losses reclassified to net income (b)
 
(500
)
 
(3,100
)
 

 
(3,600
)
Net current-period other comprehensive income
 
500

 
2,520

 
4,640

 
7,660

Balance, September 30, 2017
 
$
(11,620
)
 
$

 
$
(5,120
)
 
$
(16,740
)
__________________________
(a) Derivative instruments, net of income tax of approximately $0.4 million . See Note 8 , " Derivative Instruments ," for further details.
(b) Defined benefit plans, net of income tax of approximately $0.2 million . See Note 13 , " Defined Benefit Plans ," for further details. Derivative instruments, net of income tax of approximately $1.9 million . See Note 8 , " Derivative Instruments ," for further details.
Changes in AOCI by component for the nine months ended September 30, 2016 are summarized as follows, net of tax (dollars in thousands):
 
 
Defined Benefit Plans
 
 Derivative Instruments
 
Foreign Currency Translation
 
Total
Balance, December 31, 2015
 
$
(12,370
)
 
$
(1,790
)
 
$
2,860

 
$
(11,300
)
Net unrealized losses arising during the period (a)
 

 
(3,950
)
 
(8,290
)
 
(12,240
)
Less: Net realized losses reclassified to net income (b)
 
(440
)
 
(290
)
 

 
(730
)
Net current-period other comprehensive income (loss)
 
440

 
(3,660
)
 
(8,290
)
 
(11,510
)
Balance, September 30, 2016
 
$
(11,930
)
 
$
(5,450
)
 
$
(5,430
)
 
$
(22,810
)
__________________________
(a) Derivative instruments, net of income tax of approximately $2.4 million . See Note 8 , " Derivative Instruments ," for further details.
(b) Defined benefit plans, net of income tax of approximately $0.2 million . See Note 13 , " Defined Benefit Plans ," for further details. Derivative instruments, net of income tax of approximately $0.2 million . See Note 8 , " Derivative Instruments ," for further details.
15 . Subsequent Event
In October 2017, the Company entered into cross-currency swap agreements to hedge its net investment in Euro-denominated assets against future volatility in the exchange rate between the U.S. dollar and the Euro. By doing so, the Company synthetically converted a portion of its U.S. dollar-based long-term debt into Euro-denominated long-term debt. The agreements have a five year tenor at notional amounts declining from $150.0 million to $75.0 million over the contract period. Under the terms of the swap agreements, the Company is to receive net interest payments at a fixed rate of approximately 2.10% of the notional amount.

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Item 2 .    Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition contains forward-looking statements regarding industry outlook and our expectations regarding the performance of our business. These forward-looking statements are subject to numerous risks and uncertainties, including, but not limited to, the risks and uncertainties described under the heading "Forward-Looking Statements," at the beginning of this report. Our actual results may differ materially from those contained in or implied by any forward-looking statements. You should read the following discussion together with the Company's reports on file with the Securities and Exchange Commission, including its Annual Report on Form 10-K for the year ended December 31, 2016.
Introduction
We are a diversified industrial manufacturer of products for customers in the consumer products, aerospace, industrial, petrochemical, refinery and oil and gas end markets. Our wide range of innovative and quality product solutions are engineered and designed to address application-specific challenges that our customers face. We believe our businesses share important and distinguishing characteristics, including: well-recognized and leading brand names in the focused markets we serve; established distribution networks; innovative product technologies and features; customer approved processes and qualified products; relatively low ongoing capital investment requirements; strong cash flow conversion and long-term growth opportunities. We manufacture and supply products globally to a wide range of companies. We are principally engaged in four reportable segments: Packaging, Aerospace, Energy and Engineered Components.
Key Factors and Risks Affecting Our Reported Results.   
Our businesses and results of operations depend upon general economic conditions and we serve some customers in cyclical industries that are highly competitive and are themselves significantly impacted by changes in economic conditions. There has been low overall economic growth, particularly in the United States, and global economic conditions have been relatively stable over the past couple of years.
During the third quarter of 2017, there were two main factors impacting our reported results. First, in September 2017, we refinanced our long-term debt, issuing $300 million principal of 4.875% senior unsecured notes due October 2025 ("Senior Notes") at par value in a private placement offering. Proceeds from the Senior Notes offering were used to repay all outstanding obligations of our prior term loan A facility, repay a portion of outstanding obligations under our accounts receivable facility and pay fees and expenses related to the refinancing. In connection with the Senior Notes offering, we also amended our existing credit agreement ("Credit Agreement") to increase the level of permitted foreign currency borrowings, resize our revolving loan commitments and extend the maturity to September 2022. We paid fees and expenses of approximately $10.8 million in connection with refinancing-related activities, of which approximately $6.0 million was capitalized as deferred financing fees and $4.8 million was expensed, which was primarily related to the termination of interest rate swap agreements. In addition, we recorded non-cash charges of approximately $2.0 million related to the write-off of previously capitalized deferred financing fees.
The second factor affecting our third quarter 2017 results was Hurricane Harvey, which primarily impacted our Energy reportable segment.  While we sustained limited structural damage, our manufacturing facility in Houston, Texas was closed for one week and certain of our branch locations in Texas and Louisiana were closed for up to two weeks following the storm due to flooding in the surrounding region.  When we initially resumed operations, our facilities did not operate at full capacity or efficiency.  In addition, many of our customers’ facilities were temporarily idled as these companies evaluated the impact of the storm before resuming operations. In the second half of September, we increased our staffing levels to ensure we could meet our customers' requirements as they assessed the condition of their facilities and product requirements.  While we were able to respond to the immediate customer demand and achieve expected sales levels, we also incurred higher-than-normal operating costs due to the inability to efficiently plan and schedule required production.  In addition, initial customer demand was for standard products rather than our more highly-engineered products, resulting in a less favorable product sales mix.  As a result of lower absorption due to the lost production days, the higher cost of production when we resumed operations, and the less favorable product sales mix, we estimate our operating profit was negatively impacted by approximately $1 million in the third quarter of 2017.  
In addition to the third quarter 2017 events, the most significant external factor affecting us recently has been the impact of low oil prices, which began to decline in the fourth quarter of 2014, and since have remained at low levels. This decline has most directly impacted the Arrow Engine business, which serves the upstream oil and natural gas markets at the well site, within our Engineered Components reportable segment. Arrow Engine has experienced a more than 75% decline in net sales from pre-2015 levels as a result of the low oil-related activity and end-market demand. Net sales were slightly higher in the first nine months of 2017 compared with the first nine months of 2016. While oil prices have fluctuated in recent months, they remain at low levels. We expect net sales to remain at a low level compared with historical levels until the price of oil increases and remains higher over a sustained period where our customers decide to increase their activity levels and related well-site investments. In response to the reduced demand, Arrow Engine has lowered its cost structure over the past two years to align with current demand levels, and allowed it to attain approximately break-even operating profit during full year 2016 and the first nine months of 2017.

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Table of Contents

Low oil prices have also impacted our Energy reportable segment. Historically, a portion of this business has served the upstream market, in addition to primarily serving petrochemical facilities and oil refineries in the downstream oil and gas markets. There have been minimal upstream sales in our Energy reportable segment over the past 18 to 24 months. In addition to the impact of lower oil prices, there has been a shift over the past few years in our Energy reportable segment from historical demand and activity, both in the United States and internationally. Petrochemical plants and refinery customers deferred shutdown activity, and we experienced decreases in engineering and construction ("E&C") customer activity. Our sales and margin levels over this period have declined significantly due to the mix of product sales and inefficiencies that resulted from the shift in activity levels. The current lower oil prices have continued to place further pressure on the top-line and predictability of customer order patterns. Given these factors, we have been realigning the business and its fixed cost structure with the current business environment, aggressively closing and consolidating facilities and seeking alternate lower-cost sources for input costs, including exits of our Wolverhampton, United Kingdom and Reynosa, Mexico facilities during 2017. We are now realizing the benefit of the cost savings and operational efficiencies associated with leveraging the new lower fixed cost structure and other initiatives, as evidenced by our improvement in year-over-year operating profit in 2017, albeit tempered in third quarter 2017 by the impact of hurricane Harvey. We will continue to evaluate the cost structure and physical footprint of the business.
One other recent factor impacting our businesses was within our Aerospace reportable segment, where in the first nine months of 2016, we experienced a reduction in sales, and significantly lower profit margins compared to the prior year. These reductions were as a result of production and scheduling challenges in one of our Aerospace fastener facilities, significantly lower fixed cost absorption and inefficiencies as we adjusted to changes in demand levels and customer order patterns, and integration costs associated with our November 2015 machined components facility acquisition. We established plans to address these matters, and have been executing against those plans, as evidenced by improved operating profit margins in the first nine months of 2017 compared to the first nine months of 2016, as well as on a sequential quarterly basis through the first three quarters of 2017.
Each year, our businesses target cost savings from continuous improvement and productivity initiatives in an effort to lower input costs or improve throughput and yield rates with a goal of at least covering inflationary and market cost increases. In addition, we continuously review our costs to ensure alignment between current demand and cost structure.
Critical factors affecting our ability to succeed include: our ability to create organic growth through product development, cross selling and extending product-line offerings, and our ability to quickly and cost-effectively introduce new products; our ability to acquire and integrate companies or products that supplement existing product lines, add new distribution channels, expand our geographic coverage or enable better absorption of overhead costs; our ability to manage our cost structure more efficiently via supply base management, internal sourcing and/or purchasing of materials, selective outsourcing and/or purchasing of support functions, working capital management, and greater leverage of our administrative functions. If we are unable to do any of the foregoing successfully, our financial condition and results of operations could be materially and adversely impacted.
Our overall business does not experience significant seasonal fluctuation, other than our fourth quarter, which has tended to be the lowest net sales quarter of the year given holiday shutdowns in certain customers or other customers deferring capital spending to the new year. We do not consider sales order backlog to be a material factor in our business. A growing portion of our sales is derived from international sources, which exposes us to certain risks, including currency risks.
We are sensitive to price movements in our raw materials supply base. Our largest material purchases are for steel, aluminum, polyethylene and other resins and utility-related inputs. Historically, we have experienced volatility in costs of steel and resin and have worked with our suppliers to manage costs and disruptions in supply. We also utilize pricing programs to pass increased steel, aluminum and resin costs to customers. Although we may experience delays in our ability to implement price increases, we have been generally able to recover such increased costs. We may experience disruptions in supply in the future and may not be able to pass along higher costs associated with such disruptions to our customers in the form of price increases.
Certain of our businesses are sensitive to oil price movements. As noted earlier, our Arrow Engine business is most directly impacted by significant volatility in oil prices. Arrow Engine's pumpjack and other engine sales and related parts, which comprise a significant portion of the business, are impacted by oil and gas drilling levels, rig counts, well completion activities and commodity pricing. In addition, a portion of our Energy reportable segment serves upstream customers at oil well sites that have been impacted by lower oil prices. The majority of this segment provides parts for refineries and chemical plants, which may or may not decide to incur capital expenditures for preventive maintenance or capacity expansion activities, both of which require use of our gaskets and bolts, in times of fluctuating oil prices. Our Packaging reportable segment may be impacted by oil prices, as it is a significant driver of resin pricing, although we generally are able to maintain profit levels when oil prices change due to escalator/de-escalator clauses in contracts with many of our customers.

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Table of Contents

Segment Information and Supplemental Analysis
The following table summarizes financial information for our reportable segments for the three months ended September 30, 2017 and 2016 (dollars in thousands):
 
Three months ended September 30,
 
2017
 
As a Percentage
of Net Sales
 
2016
 
As a Percentage
of Net Sales
Net Sales
 
 
 
 
 
 
 
Packaging
$
89,560

 
42.8
%
 
$
90,330

 
44.7
 %
Aerospace
48,550

 
23.2
%
 
47,430

 
23.4
 %
Energy
40,440

 
19.3
%
 
38,230

 
18.9
 %
Engineered Components
30,780

 
14.7
%
 
26,300

 
13.0
 %
Total
$
209,330

 
100.0
%
 
$
202,290

 
100.0
 %
Gross Profit
 
 
 
 
 
 
 
Packaging
$
31,870

 
35.6
%
 
$
32,180

 
35.6
 %
Aerospace
13,450

 
27.7
%
 
13,080

 
27.6
 %
Energy
8,370

 
20.7
%
 
7,670

 
20.1
 %
Engineered Components
5,140

 
16.7
%
 
5,120

 
19.5
 %
Total
$
58,830

 
28.1
%
 
$
58,050

 
28.7
 %
Selling, General and Administrative Expenses
 
 
 
 
 
 
 
Packaging
$
8,780

 
9.8
%
 
$
12,090

 
13.4
 %
Aerospace
5,690

 
11.7
%
 
6,420

 
13.5
 %
Energy
7,130

 
17.6
%
 
9,540

 
25.0
 %
Engineered Components
1,830

 
5.9
%
 
1,940

 
7.4
 %
Corporate expenses
7,280

 
N/A

 
10,270

 
N/A

Total
$
30,710

 
14.7
%
 
$
40,260

 
19.9
 %
Operating Profit (Loss)
 
 
 
 
 
 
 
Packaging
$
23,090

 
25.8
%
 
$
20,090

 
22.2
 %
Aerospace
7,760

 
16.0
%
 
6,660

 
14.0
 %
Energy
1,240

 
3.1
%
 
(1,870
)
 
(4.9
)%
Engineered Components
3,310

 
10.8
%
 
3,180

 
12.1
 %
Corporate expenses
(7,280
)
 
N/A

 
(10,270
)
 
N/A

Total
$
28,120

 
13.4
%
 
$
17,790

 
8.8
 %
Depreciation and Amortization
 
 
 
 
 
 
 
Packaging
$
5,480

 
6.1
%
 
$
5,240

 
5.8
 %
Aerospace
3,610

 
7.4
%
 
3,560

 
7.5
 %
Energy
820

 
2.0
%
 
1,000

 
2.6
 %
Engineered Components
840

 
2.7
%
 
1,020

 
3.9
 %
Corporate expenses
20

 
N/A

 
50

 
N/A

Total
$
10,770

 
5.1
%
 
$
10,870

 
5.4
 %

23

Table of Contents

The following table summarizes financial information for our reportable segments for the nine months ended September 30, 2017 and 2016 (dollars in thousands):
 
Nine months ended September 30,
 
2017
 
As a Percentage
of Net Sales
 
2016
 
As a Percentage
of Net Sales
Net Sales
 
 
 
 
 
 
 
Packaging
$
259,260

 
41.6
 %
 
$
258,550

 
42.5
 %
Aerospace
141,550

 
22.7
 %
 
132,020

 
21.7
 %
Energy
124,860

 
20.1
 %
 
122,930

 
20.2
 %
Engineered Components
96,860

 
15.6
 %
 
94,990

 
15.6
 %
Total
$
622,530

 
100.0
 %
 
$
608,490

 
100.0
 %
Gross Profit
 
 
 
 
 
 
 
Packaging
$
89,760

 
34.6
 %
 
$
92,300

 
35.7
 %
Aerospace
36,540

 
25.8
 %
 
32,730

 
24.8
 %
Energy
24,880

 
19.9
 %
 
26,470

 
21.5
 %
Engineered Components
18,820

 
19.4
 %
 
19,550

 
20.6
 %
Total
$
170,000

 
27.3
 %
 
$
171,050

 
28.1
 %
Selling, General and Administrative Expenses
 
 
 
 
 
 
 
Packaging
$
28,280

 
10.9
 %
 
$
32,960

 
12.7
 %
Aerospace
16,850

 
11.9
 %
 
19,060

 
14.4
 %
Energy
27,430

 
22.0
 %
 
35,040

 
28.5
 %
Engineered Components
5,820

 
6.0
 %
 
6,930

 
7.3
 %
Corporate expenses
21,510

 
N/A

 
24,160

 
N/A

Total
$
99,890

 
16.0
 %
 
$
118,150

 
19.4
 %
Operating Profit (Loss)
 
 
 
 
 
 
 
Packaging
$
61,480

 
23.7
 %
 
$
59,340

 
23.0
 %
Aerospace
19,690

 
13.9
 %
 
13,670

 
10.4
 %
Energy
(2,550
)
 
(2.0
)%