UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-Q
(Mark One) | |||
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 | |||
For the Quarterly Period Ended | |||
Or | |||
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
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization) | (IRS Employer Identification No.) | |
(Address of principal executive offices, including zip code)
(248 ) 631-5450
(Registrant's telephone number, including area code)
Title of each class | Trading symbol(s) | Name of exchange on which registered |
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 ☒ No ☐.
Indicate by check mark whether the registrant has submitted electronically, every Interactive Data File required to be submitted 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 such files). Yes ☒ No ☐.
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.
☒ | Accelerated filer | ☐ | ||
Non-accelerated filer | ☐ | Smaller reporting company | ||
Emerging growth company | ||||
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. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of April 22, 2020, the number of outstanding shares of the Registrant's common stock, $0.01 par value, was 43,409,552 shares.
TriMas Corporation
Index
1
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: the severity and duration of the ongoing corona virus (“COVID-19”) pandemic on our operations, customers and suppliers, as well as related actions taken by governmental authorities and other third parties in response, each of which is uncertain, rapidly changing and difficult to predict; 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; information technology and other cyber-related risks; the performance of our subcontractors and suppliers; supply constraints; market demand; intellectual property factors; litigation; government and regulatory actions, including, without limitation, the impact of tariffs, quotas and surcharges; our leverage; liabilities imposed by our debt instruments; labor disputes; changes to fiscal and tax policies; contingent liabilities relating to acquisition activities; the disruption of operations from catastrophic or extraordinary events, including natural disasters or public health crises; 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, 2019 and elsewhere in this report. 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, except as required by law.
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
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
TriMas Corporation
Consolidated Balance Sheet
(Dollars in thousands)
March 31, 2020 | December 31, 2019 | |||||||
Assets | (unaudited) | |||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | $ | ||||||
Receivables, net of reserves of approximately $2.4 million and $2.1 million as of March 31, 2020 and December 31, 2019, respectively | ||||||||
Inventories | ||||||||
Prepaid expenses and other current assets | ||||||||
Total current assets | ||||||||
Property and equipment, net | ||||||||
Operating lease right-of-use assets | ||||||||
Goodwill | ||||||||
Other intangibles, net | ||||||||
Deferred income taxes | ||||||||
Other assets | ||||||||
Total assets | $ | $ | ||||||
Liabilities and Shareholders' Equity | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | $ | ||||||
Accrued liabilities | ||||||||
Operating lease liabilities, current portion | ||||||||
Total current liabilities | ||||||||
Long-term debt, net | ||||||||
Operating lease liabilities | ||||||||
Deferred income taxes | ||||||||
Other long-term liabilities | ||||||||
Total liabilities | ||||||||
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: 43,409,552 shares at March 31, 2020 and 44,562,679 shares at December 31, 2019 | ||||||||
Paid-in capital | ||||||||
Accumulated deficit | ( | ) | ( | ) | ||||
Accumulated other comprehensive loss | ( | ) | ( | ) | ||||
Total shareholders' equity | ||||||||
Total liabilities and shareholders' equity | $ | $ | ||||||
The accompanying notes are an integral part of these financial statements.
3
TriMas Corporation
Consolidated Statement of Income
(Unaudited—dollars in thousands, except for per share amounts)
Three months ended March 31, | ||||||||
2020 | 2019 | |||||||
Net sales | $ | $ | ||||||
Cost of sales | ( | ) | ( | ) | ||||
Gross profit | ||||||||
Selling, general and administrative expenses | ( | ) | ( | ) | ||||
Operating profit | ||||||||
Other expense, net: | ||||||||
Interest expense | ( | ) | ( | ) | ||||
Other expense, net | ( | ) | ( | ) | ||||
Other expense, net | ( | ) | ( | ) | ||||
Income before income tax expense | ||||||||
Income tax expense | ( | ) | ( | ) | ||||
Income from continuing operations | ||||||||
Income from discontinued operations, net of tax | ||||||||
Net income | $ | $ | ||||||
Basic earnings per share: | ||||||||
Continuing operations | $ | $ | ||||||
Discontinued operations | ||||||||
Net income per share | $ | $ | ||||||
Weighted average common shares—basic | ||||||||
Diluted earnings per share: | ||||||||
Continuing operations | $ | $ | ||||||
Discontinued operations | ||||||||
Net income per share | $ | $ | ||||||
Weighted average common shares—diluted | ||||||||
The accompanying notes are an integral part of these financial statements.
4
TriMas Corporation
Consolidated Statement of Comprehensive Income
(Unaudited—dollars in thousands)
Three months ended March 31, | ||||||||
2020 | 2019 | |||||||
Net income | $ | $ | ||||||
Other comprehensive income (loss): | ||||||||
Defined benefit plans (Note 16) | ||||||||
Foreign currency translation | ( | ) | ||||||
Derivative instruments (Note 10) | ||||||||
Total other comprehensive income (loss) | ( | ) | ||||||
Total comprehensive income | $ | $ | ||||||
The accompanying notes are an integral part of these financial statements.
5
TriMas Corporation
Consolidated Statement of Cash Flows
(Unaudited—dollars in thousands)
Three months ended March 31, | ||||||||
2020 | 2019 | |||||||
Cash Flows from Operating Activities: | ||||||||
Net income | $ | $ | ||||||
Income from discontinued operations | ||||||||
Income from continuing operations | ||||||||
Adjustments to reconcile income from continuing operations to net cash provided by operating activities, net of acquisition impact: | ||||||||
Loss on dispositions of assets | ||||||||
Depreciation | ||||||||
Amortization of intangible assets | ||||||||
Amortization of debt issue costs | ||||||||
Deferred income taxes | ||||||||
Non-cash compensation expense | ||||||||
Increase in receivables | ( | ) | ( | ) | ||||
Increase in inventories | ( | ) | ( | ) | ||||
Increase in prepaid expenses and other assets | ( | ) | ( | ) | ||||
Decrease in accounts payable and accrued liabilities | ( | ) | ( | ) | ||||
Other operating activities | ( | ) | ||||||
Net cash provided by operating activities of continuing operations | ||||||||
Net cash used for operating activities of discontinued operations | ( | ) | ||||||
Net cash provided by operating activities, net of acquisition impact | ||||||||
Cash Flows from Investing Activities: | ||||||||
Capital expenditures | ( | ) | ( | ) | ||||
Acquisition of businesses, net of cash acquired | ( | ) | ( | ) | ||||
Net proceeds from disposition of business, property and equipment | ||||||||
Net cash used for investing activities of continuing operations | ( | ) | ( | ) | ||||
Net cash used for investing activities of discontinued operations | ( | ) | ||||||
Net cash used for investing activities | ( | ) | ( | ) | ||||
Cash Flows from Financing Activities: | ||||||||
Proceeds from borrowings on revolving credit facilities | ||||||||
Repayments of borrowings on revolving credit facilities | ( | ) | ( | ) | ||||
Shares surrendered upon exercise and vesting of equity awards to cover taxes | ( | ) | ( | ) | ||||
Payments to purchase common stock | ( | ) | ( | ) | ||||
Net cash provided by (used for) financing activities of continuing operations | ( | ) | ||||||
Net cash provided by financing activities of discontinued operations | ||||||||
Net cash provided by (used for) financing activities | ( | ) | ||||||
Cash and Cash Equivalents: | ||||||||
Increase (decrease) for the period | ( | ) | ||||||
At beginning of period | ||||||||
At end of period | $ | $ | ||||||
Supplemental disclosure of cash flow information: | ||||||||
Cash paid for interest | $ | $ | ||||||
Cash paid for taxes | $ | $ | ||||||
The accompanying notes are an integral part of these financial statements.
6
TriMas Corporation
Consolidated Statement of Shareholders' Equity
Three Months Ended March 31, 2020 and 2019
(Unaudited—dollars in thousands)
Common Stock | Paid-in Capital | Accumulated Deficit | Accumulated Other Comprehensive Loss | Total | ||||||||||||||||
Balances, December 31, 2019 | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||
Net income | — | — | — | |||||||||||||||||
Other comprehensive loss | — | — | — | ( | ) | ( | ) | |||||||||||||
Purchase of common stock | ( | ) | ( | ) | — | — | ( | ) | ||||||||||||
Shares surrendered upon exercise and vesting of equity awards to cover taxes | — | ( | ) | — | — | ( | ) | |||||||||||||
Non-cash compensation expense | — | — | — | |||||||||||||||||
Balances, March 31, 2020 | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||
Common Stock | Paid-in Capital | Accumulated Deficit | Accumulated Other Comprehensive Loss | Total | ||||||||||||||||
Balances, December 31, 2018 | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||
Net income | — | — | — | |||||||||||||||||
Other comprehensive income | — | — | — | |||||||||||||||||
Purchase of common stock | — | ( | ) | — | — | ( | ) | |||||||||||||
Shares surrendered upon exercise and vesting of equity awards to cover taxes | — | ( | ) | — | — | ( | ) | |||||||||||||
Non-cash compensation expense | — | — | — | |||||||||||||||||
Impact of accounting standards adoption | — | — | ( | ) | ( | ) | ||||||||||||||
Balances, March 31, 2019 | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||
The accompanying notes are an integral part of these financial statements.
7
1. Basis of Presentation
TriMas Corporation ("TriMas" or the "Company"), and its consolidated subsidiaries, designs, engineers and manufactures innovative products under leading brand names for customers primarily in the consumer products, aerospace & defense, and industrial markets.
In the first quarter of 2020, TriMas began reporting its machined components operations, located in Stanton, California and Tolleson, Arizona, as part of its Aerospace segment. The operations were previously reported in the Specialty Products segment. The move of these operations into TriMas Aerospace facilitates a more rapid approach to achieving anticipated synergies from the recent RSA Engineered Products ("RSA") acquisition, allowing the Company to better leverage the machining competencies and resources across its aerospace businesses. See Note 13, "Segment Information," for further information on each of the Company's reportable segments.
In addition, on December 20, 2019, the Company completed the sale of its Lamons division (“Lamons”), a transaction entered into with an investment fund sponsored by First Reserve on November 1, 2019. Lamons was sold for approximately $135 million in cash. The financial results of Lamons were previously reported within the Company's Specialty Products segment, and are presented as discontinued operations for all periods presented in the financial statements attached hereto.
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. The preparation of financial statements also requires management of the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities. Actual results may differ from such estimates and assumptions due to risks and uncertainties, including uncertainty in the current economic environment due to the ongoing outbreak of a new strain of the coronavirus (“COVID-19”). While the full impact of COVID-19 is unknown and cannot be reasonably estimated at this time, the Company has made appropriate accounting estimates based on the facts and circumstances available as of the reporting date. To the extent there are differences between these estimates and actual results, the Company's consolidated financial statements may be materially affected.
Results of operations for interim periods are not necessarily indicative of results for the full year, and certain prior year amounts have been reclassified to conform to current year presentation. The accompanying consolidated financial statements and notes thereto should be read in conjunction with the Company's 2019 Annual Report on Form 10-K.
2. New Accounting Pronouncements
Recently Issued Accounting Pronouncements
In December 2019, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2019-12, "Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes" ("ASU 2019-12"), which removes specific exceptions to the general principles in Topic 740, simplifies the accounting for income taxes and provides clarification of certain aspects of current guidance. ASU 2019-12 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2020, with early adoption permitted. The Company is in the process of assessing the impact of adoption on its consolidated financial statements.
In August 2018, the FASB issued ASU 2018-14, "Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20)" ("ASU 2018-14"), which modifies the disclosure requirements for employers who sponsor defined benefit pension or other postretirement plans. ASU 2018-14 is effective for fiscal years ending after December 15, 2020, with early adoption permitted. ASU 2018-14 is to be applied retrospectively to all periods presented. The Company is in the process of assessing the impact of adoption on its consolidated financial statements.
Recently Adopted Accounting Pronouncements
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. The Company adopted ASU 2017-04 on January 1, 2020. The adoption of ASU 2017-04 did not have a material impact on the Company's consolidated financial statements.
8
TRIMAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
3. Discontinued Operations
On December 20, 2019, the Company completed the sale of Lamons to two wholly-owned subsidiaries of an investment fund sponsored by First Reserve, pursuant to an Asset and Stock Purchase Agreement dated as of November 1, 2019 (the “Purchase Agreement”), for a purchase price of $135 million, subject to certain adjustments as set forth in the Purchase Agreement. The transaction was finalized in the first quarter of 2020 and resulted in a $1.8 million payment to the Company.
The Company's historical results for Lamons are shown in the accompanying consolidated statement of income as a discontinued operation. Results of discontinued operations are summarized as follows (dollars in thousands):
Three months ended March 31, | ||||
2019 | ||||
Net sales | $ | |||
Cost of sales | ( | ) | ||
Gross profit | ||||
Selling, general and administrative expenses | ( | ) | ||
Operating profit | ||||
Other expense, net | ( | ) | ||
Income from discontinued operations, before income taxes | ||||
Income tax expense | ( | ) | ||
Income from discontinued operations, net of tax | $ | |||
4. Revenue
The following table presents the Company’s disaggregated net sales by primary market served (dollars in thousands):
Three months ended March 31, | ||||||||
Customer Markets | 2020 | 2019 | ||||||
Consumer Products | $ | $ | ||||||
Aerospace & Defense | ||||||||
Industrial | ||||||||
Total net sales | $ | $ | ||||||
5. Acquisitions
2020 Acquisitions
On February 27, 2020, the Company acquired RSA Engineered Products, a manufacturer of complex, highly-engineered and proprietary ducting, connectors and related products for air management systems used in aerospace and defense applications, for an aggregate amount of approximately $84.3 million, net of cash acquired, subject to normal course adjustments. The fair value of assets acquired and liabilities assumed included approximately $80.2 million of goodwill and intangible assets, $10.1 million of net working capital, $2.1 million of property and equipment, and $8.7 million of net deferred tax liabilities. RSA, which is reported in the Company's Aerospace segment, is located in Simi Valley, California and historically generated approximately $30 million in annual revenue.
9
TRIMAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
In connection with the acquisition of RSA, the Company recorded approximately $0.5 million of non-cash purchase accounting-related expenses during the three months ended March 31, 2020 within cost of sales related to the step-up in value and subsequent sale of inventory.
2019 Acquisitions
In April 2019, the Company acquired Taplast S.p.A. ("Taplast"), a designer and manufacturer of dispensers, closures and containers for the beauty and personal care, home care, and food and beverage packaging markets, for an aggregate amount of approximately $44.7 million, net of cash acquired. With manufacturing locations in both Italy and Slovakia, Taplast serves markets in Europe and North America and historically generated approximately $32 million in annual revenue. Taplast is reported in the Company's Packaging segment.
In January 2019, the Company acquired Plastic Srl, a manufacturer of single-bodied and assembled polymeric caps and closures for use in home care products, for an aggregate amount of approximately $22.4 million, net of cash acquired. Located in Italy, Plastic Srl serves the home care market throughout Italy and other European countries and historically generated approximately $12 million in annual revenue. Plastic Srl is reported in the Company's Packaging segment.
In connection with the acquisition of Plastic Srl, the Company recorded approximately $1.0 million of non-cash purchase accounting-related expenses during the three months ended March 31, 2019, of which approximately $0.9 million was recognized within selling, general and administrative expenses, primarily related to the write-off of the Plastic Srl trade name acquired that will not be used. In addition, approximately $0.1 million was recognized during the three months ended March 31, 2019, within cost of sales related to the step-up in value and subsequent sale of inventory.
6. Goodwill and Other Intangible Assets
The Company assesses goodwill and other intangible assets for impairment on an annual basis as of October 1, and more frequently if there are changes in the business climate or as a result of a triggering event taking place. The Company considered the current and potential future market and economic impacts that may result from the COVID-19 crisis, including its impact on the Company's reporting units, and also assessed the change in its market capitalization during the first quarter of 2020. Based on this review, and after consideration of the historical excess in fair value over carrying value within the Company's reporting units, the Company determined that there was not a triggering event which would require an interim impairment test to be performed.
In the first quarter of 2020, the Company began reporting its machined products operations within the Aerospace segment. These operations were previously reported in the Company's Specialty Products segment. As a result of the reporting structure change, goodwill of approximately $12.7 million was reassigned from the Specialty Products segment to the Aerospace segment.
Changes in the carrying amount of goodwill for the three months ended March 31, 2020 are summarized as follows (dollars in thousands):
Packaging | Aerospace | Specialty Products | Total | ||||||||||||
Balance, December 31, 2019 | $ | $ | $ | $ | |||||||||||
Goodwill from acquisitions | |||||||||||||||
Goodwill reassigned in segment realignment | ( | ) | |||||||||||||
Foreign currency translation and other | ( | ) | ( | ) | |||||||||||
Balance, March 31, 2020 | $ | $ | $ | $ | |||||||||||
10
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 are summarized below (dollars in thousands):
As of March 31, 2020 | As of December 31, 2019 | |||||||||||||||
Intangible Category by Useful Life | Gross Carrying Amount | Accumulated Amortization | Gross Carrying Amount | Accumulated Amortization | ||||||||||||
Finite-lived intangible assets: | ||||||||||||||||
Customer relationships, 5 – 12 years | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||
Customer relationships, 15 – 25 years | ( | ) | ( | ) | ||||||||||||
Total customer relationships | ( | ) | ( | ) | ||||||||||||
Technology and other, 1 – 15 years | ( | ) | ( | ) | ||||||||||||
Technology and other, 17 – 30 years | ( | ) | ( | ) | ||||||||||||
Total technology and other | ( | ) | ( | ) | ||||||||||||
Indefinite-lived intangible assets: | ||||||||||||||||
Trademark/Trade names | — | — | ||||||||||||||
Total other intangible assets | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||
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 March 31, | ||||||||
2020 | 2019 | |||||||
Technology and other, included in cost of sales | $ | $ | ||||||
Customer relationships, included in selling, general and administrative expenses | ||||||||
Total amortization expense | $ | $ | ||||||
7. Inventories
Inventories consist of the following components (dollars in thousands):
March 31, 2020 | December 31, 2019 | |||||||
Finished goods | $ | $ | ||||||
Work in process | ||||||||
Raw materials | ||||||||
Total inventories | $ | $ | ||||||
11
TRIMAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
8. Property and Equipment, Net
Property and equipment consists of the following components (dollars in thousands):
March 31, 2020 | December 31, 2019 | |||||||
Land and land improvements | $ | $ | ||||||
Buildings | ||||||||
Machinery and equipment | ||||||||
Less: Accumulated depreciation | ||||||||
Property and equipment, net | $ | $ | ||||||
Depreciation expense as included in the accompanying consolidated statement of income is as follows (dollars in thousands):
Three months ended March 31, | ||||||||
2020 | 2019 | |||||||
Depreciation expense, included in cost of sales | $ | $ | ||||||
Depreciation expense, included in selling, general and administrative expenses | ||||||||
Total depreciation expense | $ | $ | ||||||
9. Long-term Debt
The Company's long-term debt consists of the following (dollars in thousands):
March 31, 2020 | December 31, 2019 | |||||||
4.875% Senior Notes due October 2025 | $ | $ | ||||||
Credit Agreement | ||||||||
Debt issuance costs | ( | ) | ( | ) | ||||
Long-term debt, net | $ | $ | ||||||
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 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.
12
TRIMAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
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 | % | ||
2021 | % | ||
2022 and thereafter | % | ||
Credit Agreement
The Company is a party to a credit agreement ("Credit Agreement") consisting of a $300.0 million senior secured revolving credit facility, which permits borrowings denominated in specific foreign currencies, subject to a $125.0 million sub limit, matures on September 20, 2022 and is subject to interest at London Interbank Offered Rate ("LIBOR") plus 1.50 %. The interest rate spread is based upon the leverage ratio, as defined, as of the most recent determination date.
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 March 31, 2020, the Company had $150.0 million outstanding under its revolving credit facility and had approximately $131.2 million potentially available after giving effect to approximately $18.8 million of letters of credit issued and outstanding. At December 31, 2019, the Company had no amounts outstanding under its revolving credit facility and had approximately $283.9 million potentially available after giving effect to approximately $16.1 million of letters of credit issued and outstanding. The Company's borrowing capacity was not reduced by leverage restrictions contained in the Credit Agreement as of March 31, 2020 and December 31, 2019. In March 2020, the Company drew $150 million on its revolving credit facility to defend against potential uncertainty or liquidity issues in the financial markets as a result of the COVID-19 crisis.
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, subject to certain exceptions and limitations, to 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 March 31, 2020, the Company was in compliance with its financial covenants contained in the Credit Agreement.
13
TRIMAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
Fair Value of Debt
The valuations of the Senior Notes and other debt were determined based on Level 2 inputs under the fair value hierarchy, as defined. The carrying amounts and fair values were as follows (dollars in thousands):
March 31, 2020 | December 31, 2019 | |||||||||||||||
Carrying Amount | Fair Value | Carrying Amount | Fair Value | |||||||||||||
Senior Notes | $ | $ | $ | $ | ||||||||||||
Revolving credit facility | ||||||||||||||||
10. Derivative Instruments
Derivatives Designated as Hedging Instruments
In October 2018, 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 $125.0 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 2.9 % of the notional amount. At inception, the cross-currency swaps were designated as net investment hedges.
As of March 31, 2020 and December 31, 2019, the fair value carrying amount of the Company's derivative instruments are recorded as follows (dollars in thousands):
Asset / (Liability) Derivatives | ||||||||||
Derivatives designated as hedging instruments | Balance Sheet Caption | March 31, 2020 | December 31, 2019 | |||||||
Net Investment Hedges | ||||||||||
Cross-currency swaps | Other assets | $ | $ | |||||||
The following table summarizes the income recognized in accumulated other comprehensive income (loss) ("AOCI") on derivative contracts designated as hedging instruments as of March 31, 2020 and December 31, 2019, and the amounts reclassified from AOCI into earnings for the three months ended March 31, 2020 and 2019 (dollars in thousands):
Amount of Income Recognized in AOCI on Derivative (Effective Portion, net of tax) | Amount of Income (Loss) Reclassified from AOCI into Earnings | ||||||||||||||||
Three months ended March 31, | |||||||||||||||||
As of March 31, 2020 | As of December 31, 2019 | Location of Income (Loss) Reclassified from AOCI into Earnings (Effective Portion) | 2020 | 2019 | |||||||||||||
Net Investment Hedges | |||||||||||||||||
Cross-currency swaps | $ | $ | Other income (expense), net | $ | $ | ||||||||||||
Over the next 12 months, the Company does not expect to reclassify any pre-tax deferred amounts from AOCI into earnings.
14
TRIMAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
Derivatives Not Designated as Hedging Instruments
As of March 31, 2020, the Company was party to foreign currency exchange forward contracts to economically hedge changes in foreign currency rates with notional amounts of approximately $77.3 million. The Company uses foreign exchange contracts to mitigate the risk associated with fluctuations in currency rates impacting cash flows related to certain of its receivables, payables and intercompany transactions denominated in foreign currencies. The foreign exchange contracts primarily mitigate currency exposures between the U.S. dollar and the Euro, British pound and the Chinese yuan, and have various settlement dates through September 2020. These contracts are not designated as hedge instruments; therefore, gains and losses on these contracts are recognized each period directly into the consolidated statement of income.
The following table summarizes the effects of derivatives not designated as hedging instruments on the Company's consolidated statement of income (dollars in thousands):
Amount of Loss Recognized in Earnings on Derivatives | ||||||||||
Three months ended March 31, | ||||||||||
Location of Loss Recognized in Earnings on Derivatives | 2020 | 2019 | ||||||||
Derivatives not designated as hedging instruments | ||||||||||
Foreign exchange contracts | Other expense, net | $ | ( | ) | $ | |||||
Fair Value of Derivatives
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 cross-currency swaps and foreign exchange contracts use observable inputs such as interest rate yield curves and forward currency exchange rates. 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 March 31, 2020 and December 31, 2019 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) | |||||||||||||
March 31, 2020 | ||||||||||||||||||
Cross-currency swaps | Recurring | $ | $ | $ | $ | |||||||||||||
Foreign exchange contracts | Recurring | $ | ( | ) | $ | $ | ( | ) | $ | |||||||||
December 31, 2019 | ||||||||||||||||||
Cross-currency swaps | Recurring | $ | $ | $ | $ | |||||||||||||
Foreign exchange contracts | Recurring | $ | ( | ) | $ | $ | ( | ) | $ | |||||||||
11. Leases
The Company leases certain equipment and facilities under non-cancelable operating leases. Leases with an initial term of 12 months or less are not recorded on the balance sheet; expense related to these leases is recognized on a straight-line basis over the lease term.
15
TRIMAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
The components of lease expense are as follows (dollars in thousands):
Three Months Ended March 31, 2020 | Three Months Ended March 31, 2019 | ||||||
Operating lease cost | $ | $ | |||||
Short-term, variable and other lease costs | |||||||
Total lease cost | $ | $ | |||||
Maturities of lease liabilities are as follows (dollars in thousands):
Year ended December 31, | Operating Leases(a) | |||
2020 (excluding the three months ended March 31, 2020) | $ | |||
2021 | ||||
2022 | ||||
2023 | ||||
2024 | ||||
Thereafter | ||||
Total lease payments | ||||
Less: Imputed interest | ( | ) | ||
Present value of lease liabilities | $ | |||
__________________________
(a) | The maturity table excludes cash flows associated with exited lease facilities. Liabilities for exited lease facilities are included in accrued liabilities and other long-term liabilities in the accompanying consolidated balance sheet. |
The weighted-average remaining lease term of the Company's operating leases as of March 31, 2020 is approximately 6.6 years. The weighted-average discount rate as of March 31, 2020 is approximately 4.9 %.
Cash paid for amounts included in the measurement of operating lease liabilities was approximately $1.7 million and $1.6 million during the three months ended March 31, 2020 and 2019, respectively, and is included in cash flows provided by operating activities in the consolidated statement of cash flows.
Right-of-use assets obtained in exchange for lease liabilities were approximately $2.9 million, primarily due to the acquisition of RSA, and $0.1 million during the three months ended March 31, 2020 and 2019, respectively.
16
TRIMAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
12. Commitments and Contingencies
Asbestos
As of March 31, 2020, the Company was a party to 348 pending cases involving an aggregate of 4,719 claims primarily alleging personal injury from exposure to asbestos containing materials formerly used in gaskets (both encapsulated and otherwise) manufactured or distributed by Lamons and certain other related 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 | Claims pending at end of period | Average settlement amount per claim during period | Total defense costs during period | |||||||||||||||||
Three Months Ended March 31, 2020 | $ | $ | |||||||||||||||||||||
Fiscal Year Ended December 31, 2019 | $ | $ | |||||||||||||||||||||
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.
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 4,719 claims pending at March 31, 2020, 55 set forth specific amounts of damages (other than those stating the statutory minimum or maximum). At March 31, 2020, of the 55 claims that set forth specific amounts, there was one claim seeking more than $5 million for punitive damages. Below is a breakdown of the compensatory damages 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 | ||||||
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 25 years ago, have been approximately $9.7 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. The Company's primary insurance exhausted in November 2018, and the Company will be solely responsible for defense costs and indemnity payments prior to the commencement of coverage under this agreement, the duration of which would be subject to the scope of damage awards and settlements paid.
17
TRIMAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
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.
13. Segment Information
TriMas reports its operations in three reportable segments: Packaging, Aerospace, and Specialty Products. Each of these segments has discrete financial information that is regularly evaluated by TriMas' president and chief executive officer (chief operating decision maker) in determining resource, personnel and capital allocation, as well as assessing strategy and performance. The Company utilizes its proprietary TriMas Business Model as a standardized set of processes to manage and drive results and strategy across its multi-industry businesses.
Within each of the Company's 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 – The Packaging segment, which consists primarily of the Rieke®, Taplast and Stolz brands, develops and manufactures a broad array of dispensing products (such as foaming pumps, lotion and soap pumps, beverage dispensers, perfume sprayers, nasal sprayers and trigger sprayers), polymeric and steel caps and closures (such as food lids, flip-top closures, child resistance caps, drum closures and flexible spouts), and polymeric jar products for a variety of consumer products submarkets including, but not limited to, beauty and personal care, home care, food and beverage, and health (including pharmaceutical and nutraceutical), as well as the industrial market.
Aerospace – The Aerospace segment, which includes the Monogram Aerospace Fasteners™, Allfast Fastening Systems®, Mac Fasteners™, RSA Engineered Products and Martinic Engineering™ brands, develops, qualifies and manufactures highly-engineered, precision fasteners and machined products and assemblies to serve the aerospace and defense market.
Specialty Products – The Specialty Products segment, which includes the Norris Cylinder™ and Arrow® Engine brands, designs, manufactures and distributes highly-engineered steel cylinders, wellhead engines and compression systems for use within industrial markets.
18
TRIMAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
Segment activity is as follows (dollars in thousands):