UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-Q
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| | | |
(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 | June 30, 20172020 |
Or |
o☐ | | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
| | | |
For the Transition Period fromto. |
Commission file number 001-10716
TRIMAS CORPORATION
(Exact name of registrant as specified in its charter)
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| | |
Delaware | | 38-2687639 |
Delaware
(State or other jurisdiction of incorporation or organization) | | 38-2687639
(IRS Employer Identification No.) |
38505 Woodward Avenue, Suite 200
Bloomfield Hills, Michigan48304
(Address of principal executive offices, including zip code)
(248) (248) 631-5450
(Registrant's telephone number, including area code)
|
| | |
Title of each class | Trading symbol(s) | Name of exchange on which registered |
Common stock, $0.01 par value | TRS | The NASDAQ Global Market LLC |
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.
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| | | | |
Large accelerated filer | x☒ | | Accelerated filer | o☐ |
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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,July 22, 2020, the number of outstanding shares of the Registrant's common stock, $0.01 par value, was 45,721,16045,503,644 shares.
TriMas Corporation
Index
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; technology factors; intellectual property factors; litigation; government and regulatory actions;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; information technology factors; the disruption of operations from catastrophic or extraordinary events, including natural disasters;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, 2016.2019 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.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.
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
TriMas Corporation
Consolidated Balance Sheet
(Dollars in thousands)
| |
| | September 30, 2017 |
| December 31, 2016 | | June 30, 2020 |
| December 31, 2019 |
Assets | | (unaudited) | |
| | (unaudited) | |
|
Current assets: | |
| |
| |
| |
|
Cash and cash equivalents | | $ | 24,760 |
|
| $ | 20,710 |
| | $ | 65,250 |
|
| $ | 172,470 |
|
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 |
| |
Receivables, net of reserves of approximately $3.7 million and $2.1 million as of June 30, 2020 and December 31, 2019, respectively | | | 123,320 |
|
| 108,860 |
|
Inventories | | 160,180 |
|
| 160,460 |
| | 140,890 |
|
| 132,660 |
|
Prepaid expenses and other current assets | | 8,800 |
|
| 16,060 |
| | 18,900 |
|
| 20,050 |
|
Total current assets | | 319,150 |
| | 308,800 |
| | 348,360 |
| | 434,040 |
|
Property and equipment, net | | 185,800 |
|
| 179,160 |
| | 210,960 |
|
| 214,330 |
|
Operating lease right-of-use assets | | | 35,270 |
| | 27,850 |
|
Goodwill | | 318,730 |
|
| 315,080 |
| | 376,320 |
|
| 334,640 |
|
Other intangibles, net | | 199,150 |
|
| 213,920 |
| | 188,170 |
|
| 161,390 |
|
Deferred income taxes | | | 3,630 |
| | 500 |
|
Other assets | | 30,500 |
|
| 34,690 |
| | 22,190 |
|
| 19,950 |
|
Total assets | | $ | 1,053,330 |
| | $ | 1,051,650 |
| | $ | 1,184,900 |
| | $ | 1,192,700 |
|
Liabilities and Shareholders' Equity | |
| |
| |
| |
|
Current liabilities: | |
| |
| |
| |
|
Current maturities, long-term debt | | $ | — |
|
| $ | 13,810 |
| |
Accounts payable | | 77,720 |
|
| 72,270 |
| | $ | 60,180 |
|
| $ | 72,670 |
|
Accrued liabilities | | 41,600 |
|
| 47,190 |
| | 46,680 |
|
| 42,020 |
|
Operating lease liabilities, current portion | | | 6,480 |
| | 5,100 |
|
Total current liabilities | | 119,320 |
| | 133,270 |
| | 113,340 |
| | 119,790 |
|
Long-term debt, net | | 336,560 |
|
| 360,840 |
| | 295,260 |
|
| 294,690 |
|
Operating lease liabilities | | | 29,330 |
| | 23,100 |
|
Deferred income taxes | | 5,750 |
|
| 5,910 |
| | 27,960 |
|
| 16,830 |
|
Other long-term liabilities | | 44,740 |
|
| 51,910 |
| | 57,910 |
|
| 40,810 |
|
Total liabilities | | 506,370 |
| | 551,930 |
| | 523,800 |
| | 495,220 |
|
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 |
| |
Common stock, $0.01 par: Authorized 400,000,000 shares; Issued and outstanding: 43,502,103 shares at June 30, 2020 and 44,562,679 shares at December 31, 2019 | | | 440 |
| | 450 |
|
Paid-in capital | | 822,190 |
| | 817,580 |
| | 753,430 |
| | 782,880 |
|
Accumulated deficit | | (258,950 | ) | | (293,920 | ) | | (82,430 | ) | | (79,850 | ) |
Accumulated other comprehensive loss | | (16,740 | ) | | (24,400 | ) | | (10,340 | ) | | (6,000 | ) |
Total shareholders' equity | | 546,960 |
| | 499,720 |
| | 661,100 |
| | 697,480 |
|
Total liabilities and shareholders' equity | | $ | 1,053,330 |
| | $ | 1,051,650 |
| | $ | 1,184,900 |
| | $ | 1,192,700 |
|
The accompanying notes are an integral part of these financial statements.
TriMas Corporation
Consolidated Statement of IncomeOperations
(Unaudited—dollars in thousands, except for per share amounts)
| | | | Three months ended September 30, | | Nine months ended September 30, | | Three months ended June 30, | | Six months ended June 30, |
| | 2017 | | 2016 | | 2017 | | 2016 | | 2020 | | 2019 | | 2020 | | 2019 |
Net sales | | $ | 209,330 |
| | $ | 202,290 |
| | $ | 622,530 |
| | $ | 608,490 |
| | $ | 199,550 |
| | $ | 190,830 |
| | $ | 382,340 |
| | $ | 364,200 |
|
Cost of sales | | (150,500 | ) | | (144,240 | ) | | (452,530 | ) | | (437,440 | ) | | (162,320 | ) | | (137,040 | ) | | (298,740 | ) | | (263,620 | ) |
Gross profit | | 58,830 |
| | 58,050 |
| | 170,000 |
| | 171,050 |
| | 37,230 |
| | 53,790 |
| | 83,600 |
| | 100,580 |
|
Selling, general and administrative expenses | | (30,710 | ) | | (40,260 | ) | | (99,890 | ) | | (118,150 | ) | | (55,380 | ) | | (26,730 | ) | | (81,920 | ) | | (53,720 | ) |
Operating profit | | 28,120 |
| | 17,790 |
| | 70,110 |
| | 52,900 |
| |
Operating profit (loss) | | | (18,150 | ) | | 27,060 |
| | 1,680 |
| | 46,860 |
|
Other expense, net: | | | | | | | | | | | | | | | | |
Interest expense | | (3,390 | ) | | (3,480 | ) | | (10,360 | ) | | (10,230 | ) | | (4,230 | ) | | (3,490 | ) | | (7,810 | ) | | (6,930 | ) |
Debt financing and related expenses | | (6,640 | ) | | — |
| | (6,640 | ) | | — |
| |
Other income, net | | | 1,130 |
| | 1,220 |
| | 1,050 |
| | 650 |
|
Other expense, net | | (200 | ) | | (200 | ) | | (780 | ) | | (130 | ) | | (3,100 | ) | | (2,270 | ) | | (6,760 | ) | | (6,280 | ) |
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 |
| |
Income (loss) before income tax expense | | | (21,250 | ) | | 24,790 |
| | (5,080 | ) | | 40,580 |
|
Income tax benefit (expense) | | | 5,550 |
| | (6,070 | ) | | 2,500 |
| | (7,310 | ) |
Income (loss) from continuing operations | | | (15,700 | ) | | 18,720 |
| | (2,580 | ) | | 33,270 |
|
Income from discontinued operations, net of tax | | | — |
| | 3,300 |
| | — |
| | 7,840 |
|
Net income (loss) | | | $ | (15,700 | ) | | $ | 22,020 |
| | $ | (2,580 | ) | | $ | 41,110 |
|
Basic earnings (loss) per share: | | | | | | | | | |
Continuing operations | | | $ | (0.36 | ) | | $ | 0.41 |
| | $ | (0.06 | ) | | $ | 0.73 |
|
Discontinued operations | | | — |
| | 0.07 |
| | — |
| | 0.17 |
|
Net income (loss) per share | | | $ | (0.36 | ) | | $ | 0.48 |
| | $ | (0.06 | ) | | $ | 0.90 |
|
Weighted average common shares—basic | | 45,721,155 |
| | 45,435,936 |
| | 45,669,782 |
| | 45,381,592 |
| | 43,463,235 |
| | 45,592,075 |
| | 43,832,144 |
| | 45,585,445 |
|
Diluted earnings per share: | | | | | | | | | |
Net income per share | | $ | 0.29 |
| | $ | 0.19 |
| | $ | 0.76 |
| | $ | 0.60 |
| |
Diluted earnings (loss) per share: | | | | | | | | | |
Continuing operations | | | $ | (0.36 | ) | | $ | 0.41 |
| | $ | (0.06 | ) | | $ | 0.72 |
|
Discontinued operations | | | — |
| | 0.07 |
| | — |
| | 0.17 |
|
Net income (loss) per share | | | $ | (0.36 | ) | | $ | 0.48 |
| | $ | (0.06 | ) | | $ | 0.89 |
|
Weighted average common shares—diluted | | 46,029,361 |
| | 45,760,455 |
| | 45,953,578 |
| | 45,713,873 |
| | 43,463,235 |
| | 45,828,315 |
| | 43,832,144 |
| | 45,910,249 |
|
The accompanying notes are an integral part of these financial statements.
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 |
|
|
| | | | | | | | | | | | | | | | |
| | Three months ended June 30, | | Six months ended June 30, |
| | 2020 | | 2019 | | 2020 | | 2019 |
Net income (loss) | | $ | (15,700 | ) | | $ | 22,020 |
| | $ | (2,580 | ) | | $ | 41,110 |
|
Other comprehensive income (loss): | | | | | | | | |
Defined benefit plans (Note 18) | | 160 |
| | 100 |
| | 310 |
| | 200 |
|
Foreign currency translation | | 1,310 |
| | (900 | ) | | (6,950 | ) | | (200 | ) |
Derivative instruments (Note 11) | | (2,130 | ) | | (730 | ) | | 2,300 |
| | 1,490 |
|
Total other comprehensive income (loss) | | (660 | ) | | (1,530 | ) | | (4,340 | ) | | 1,490 |
|
Total comprehensive income (loss) | | $ | (16,360 | ) | | $ | 20,490 |
| | $ | (6,920 | ) | | $ | 42,600 |
|
The accompanying notes are an integral part of these financial statements.
TriMas Corporation
Consolidated Statement of Cash Flows
(Unaudited—dollars in thousands) | | | | Nine months ended September 30, | | Six months ended June 30, |
| | 2017 | | 2016 | | 2020 | | 2019 |
Cash Flows from Operating Activities: | | | | | | | | |
Net income | | $ | 34,970 |
| | $ | 27,560 |
| |
Adjustments to reconcile net income to net cash provided by operating activities: | |
| |
| |
Net income (loss) | | | $ | (2,580 | ) | | $ | 41,110 |
|
Income from discontinued operations | | | — |
| | 7,840 |
|
Income (loss) from continuing operations | | | (2,580 | ) | | 33,270 |
|
Adjustments to reconcile income (loss) from continuing operations to net cash provided by operating activities, net of acquisition impact: | | |
| |
|
Loss on dispositions of assets | | 3,210 |
| | 1,350 |
| | 1,010 |
| | 30 |
|
Depreciation | | 18,890 |
| | 17,710 |
| | 14,770 |
| | 11,990 |
|
Amortization of intangible assets | | 14,920 |
| | 15,330 |
| | 10,150 |
| | 9,380 |
|
Amortization of debt issue costs | | 1,030 |
| | 1,000 |
| | 570 |
| | 560 |
|
Deferred income taxes | | 2,420 |
| | 360 |
| | (1,460 | ) | | 4,130 |
|
Non-cash compensation expense | | 5,090 |
| | 5,240 |
| | 4,680 |
| | 3,040 |
|
Tax effect from stock based compensation | | — |
| | (640 | ) | |
Debt financing and related expenses | | 6,640 |
| | — |
| |
Non-cash change in legacy liability estimate | | | 23,400 |
| | — |
|
Increase in receivables | | (12,700 | ) | | (9,790 | ) | | (12,300 | ) | | (5,720 | ) |
Increase in inventories | | (580 | ) | | (4,560 | ) | |
Decrease in inventories | | | 5,260 |
| | 380 |
|
Decrease in prepaid expenses and other assets | | 7,110 |
| | 10,780 |
| | 290 |
| | 1,430 |
|
Decrease in accounts payable and accrued liabilities | | (8,590 | ) | | (17,150 | ) | | (14,530 | ) | | (24,410 | ) |
Other operating activities | | 240 |
| | (780 | ) | | 1,580 |
| | (1,310 | ) |
Net cash provided by operating activities | | 72,650 |
| | 46,410 |
| |
Net cash provided by operating activities of continuing operations | | | 30,840 |
| | 32,770 |
|
Net cash used for operating activities of discontinued operations | | | — |
| | (3,490 | ) |
Net cash provided by operating activities, net of acquisition impact | | | 30,840 |
| | 29,280 |
|
Cash Flows from Investing Activities: | | | | | | | | |
Capital expenditures | | (24,120 | ) | | (22,390 | ) | | (9,250 | ) | | (11,500 | ) |
Net proceeds from disposition of property and equipment | | 1,800 |
| | 120 |
| |
Acquisition of businesses, net of cash acquired | | | (95,160 | ) | | (67,030 | ) |
Net proceeds from disposition of business, property and equipment | | | 2,110 |
| | — |
|
Net cash used for investing activities of continuing operations | | | (102,300 | ) | | (78,530 | ) |
Net cash used for investing activities of discontinued operations | | | — |
| | (780 | ) |
Net cash used for investing activities | | (22,320 | ) | | (22,270 | ) | | (102,300 | ) | | (79,310 | ) |
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 |
| |
Proceeds from borrowings on revolving credit facilities | | | 245,700 |
| | 93,220 |
|
Repayments of borrowings on revolving credit facilities | | | (247,320 | ) | | (92,410 | ) |
Shares surrendered upon exercise and vesting of equity awards to cover taxes | | | (2,570 | ) | | (3,230 | ) |
Payments to purchase common stock | | | (31,570 | ) | | (15,420 | ) |
Net cash used for financing activities of continuing operations | | | (35,760 | ) | | (17,840 | ) |
Net cash provided by financing activities of discontinued operations | | | — |
| | — |
|
Net cash used for financing activities | | (46,280 | ) | | (21,040 | ) | | (35,760 | ) | | (17,840 | ) |
Cash and Cash Equivalents: | |
| |
| |
| |
|
Net increase for the period | | 4,050 |
| | 3,100 |
| |
Decrease for the period | | | (107,220 | ) | | (67,870 | ) |
At beginning of period | | 20,710 |
| | 19,450 |
| | 172,470 |
| | 108,150 |
|
At end of period | | $ | 24,760 |
| | $ | 22,550 |
| | $ | 65,250 |
| | $ | 40,280 |
|
Supplemental disclosure of cash flow information: | |
| |
| |
| |
|
Cash paid for interest | | $ | 9,020 |
| | $ | 8,870 |
| | $ | 7,150 |
| | $ | 6,190 |
|
Cash paid for taxes | | $ | 13,140 |
| | $ | 9,130 |
| | $ | 3,410 |
| | $ | 10,160 |
|
The accompanying notes are an integral part of these financial statements.
TriMas Corporation
Consolidated Statement of Shareholders' Equity
NineSix Months Ended SeptemberJune 30, 20172020 and 2019
(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 |
|
|
| | | | | | | | | | | | | | | | | | | | |
| | Common Stock | | Paid-in Capital | | Accumulated Deficit | | Accumulated Other Comprehensive Loss | | Total |
Balances, December 31, 2019 | | $ | 450 |
| | $ | 782,880 |
| | $ | (79,850 | ) | | $ | (6,000 | ) | | $ | 697,480 |
|
Net income | | — |
| | — |
| | 13,120 |
| | — |
| | 13,120 |
|
Other comprehensive loss | | — |
| | — |
| | — |
| | (3,680 | ) | | (3,680 | ) |
Purchase of common stock | | (20 | ) | | (31,550 | ) | | — |
| | — |
| | (31,570 | ) |
Shares surrendered upon exercise and vesting of equity awards to cover taxes | | — |
| | (1,830 | ) | | — |
| | — |
| | (1,830 | ) |
Non-cash compensation expense | | — |
| | 1,940 |
| | — |
| | — |
| | 1,940 |
|
Balances, March 31, 2020 | | $ | 430 |
| | $ | 751,440 |
| | $ | (66,730 | ) | | $ | (9,680 | ) | | $ | 675,460 |
|
Net loss | | — |
| | — |
| | (15,700 | ) | | — |
| | (15,700 | ) |
Other comprehensive loss | | — |
| | — |
| | — |
| | (660 | ) | | (660 | ) |
Shares surrendered upon exercise and vesting of equity awards to cover taxes | | — |
| | (740 | ) | | — |
| | — |
| | (740 | ) |
Non-cash compensation expense | | 10 |
| | 2,730 |
| | — |
| | — |
| | 2,740 |
|
Balances, June 30, 2020 | | $ | 440 |
| | $ | 753,430 |
| | $ | (82,430 | ) | | $ | (10,340 | ) | | $ | 661,100 |
|
|
| | | | | | | | | | | | | | | | | | | | |
| | Common Stock | | Paid-in Capital | | Accumulated Deficit | | Accumulated Other Comprehensive Loss | | Total |
Balances, December 31, 2018 | | $ | 460 |
| | $ | 816,500 |
| | $ | (179,660 | ) | | $ | (16,850 | ) | | $ | 620,450 |
|
Net income | | — |
| | — |
| | 19,090 |
| | — |
| | 19,090 |
|
Other comprehensive income | | — |
| | — |
| | — |
| | 3,020 |
| | 3,020 |
|
Purchase of common stock | | — |
| | (670 | ) | | — |
| | — |
| | (670 | ) |
Shares surrendered upon exercise and vesting of equity awards to cover taxes | | — |
| | (2,620 | ) | | — |
| | — |
| | (2,620 | ) |
Non-cash compensation expense | | — |
| | 1,320 |
| | — |
| | — |
| | 1,320 |
|
Impact of accounting standards adoption | | — |
| | — |
| | 1,190 |
| | (1,270 | ) | | (80 | ) |
Balances, March 31, 2019 | | $ | 460 |
| | $ | 814,530 |
| | $ | (159,380 | ) | | $ | (15,100 | ) | | $ | 640,510 |
|
Net income | | — |
| | — |
| | 22,020 |
| | — |
| | 22,020 |
|
Other comprehensive loss | | — |
| | — |
| | — |
| | (1,530 | ) | | (1,530 | ) |
Purchase of common stock | | (10 | ) | | (14,740 | ) | | — |
| | — |
| | (14,750 | ) |
Shares surrendered upon exercise and vesting of equity awards to cover taxes | | — |
| | (610 | ) | | — |
| | — |
| | (610 | ) |
Non-cash compensation expense | | — |
| | 1,720 |
| | — |
| | — |
| | 1,720 |
|
Balances, June 30, 2019 | | $ | 450 |
| | $ | 800,900 |
| | $ | (137,360 | ) | | $ | (16,630 | ) | | $ | 647,360 |
|
The accompanying notes are an integral part of these financial statements.
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 ofdesigns, engineers and manufactures innovative products under leading brand names for customers primarily in the consumer products, aerospace & defense, and industrial petrochemical, refinerymarkets.
In the first quarter of 2020, TriMas began reporting its machined components operations, located in Stanton, California and oil and gas end markets.Tolleson, Arizona, as part of its Aerospace segment. The Company is principally engagedoperations were previously reported in the following reportable segments with diverse productsSpecialty 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 market channels: Packaging, Aerospace, Energy and Engineered Components.resources across its aerospace businesses. See Note 10,15, "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.
In the second quarter of 2020, the Company elected to change its method of accounting for asbestos-related defense costs from accruing for probable and reasonably estimable defense costs associated with known claims expected to settle to accrue for all future defense costs for both known and unknown claims, which the Company now believes are reasonably estimable. The Company believes this change is preferable, as asbestos-related defense costs represent expenditures related to legacy activities that do not contribute to current or future revenue generating activities, and recording an estimate of the full liability for asbestos-related costs, where estimable with reasonable precision, provides a more complete assessment of the liability associated with resolving asbestos-related claims. This accounting change has been reflected as a change in accounting estimate effected by a change in accounting principle. See Note 14, "Commitments and Contingencies," for further information on this change.
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.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 20162019 Annual Report on Form 10-K.
2. New Accounting Pronouncements
Recently Issued Accounting Pronouncements
In August 2017,December 2019, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2017-12, "Derivatives and Hedging2019-12, "Income Taxes (Topic 815)740): Targeted Improvements toSimplifying the Accounting for Hedging Activities"Income Taxes" ("ASU 2017-12"2019-12"), which better aligns an entity's risk management activitiesremoves specific exceptions to the general principles in Topic 740, simplifies the accounting for income taxes and financial reporting for hedging relationships, simplifies hedge accounting requirements and creates more transparency around how economic results are presented in the financial statements.provides clarification of certain aspects of current guidance. ASU 2017-122019-12 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 approach2020, with early adoption permitted. The Company is in the process of assessing the impact of adoption on its consolidated financial statements.
TRIMAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
In August 2016,2018, the FASB issued ASU 2016-15, "Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments"2018-14, "Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20)" ("ASU 2016-15"2018-14"), which clarifies how certain cash receipts and cash payments are presented and classified inmodifies the statement of cash flows.disclosure requirements for employers who sponsor defined benefit pension or other postretirement plans. ASU 2016-152018-14 is effective for fiscal years and interim periods within those years, beginningending after December 15, 2017, and2020, with early adoption permitted. ASU 2018-14 is to be applied using a retrospective approach with early adoption permitted.retrospectively to all periods presented. The Company is in the process of assessing the impact of adoption on its consolidated financial statements.
3. Discontinued Operations
On December 20, 2019, the FASB issued ASU 2016-02, "Leases (Topic 842)" ("ASU 2016-02"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”), which requires that lessees, at the lease commencement date, recognizefor a lease liability representing the lessee's obligationpurchase price of $135 million, subject to make lease payments arising from a leasecertain adjustments 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 isset forth 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 customersPurchase Agreement. The transaction was finalized 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 $3.52020 and resulted in a $1.8 million within selling, general and administrative expenses, of which approximately $3.2 million were non-cash charges relatedpayment to the disposal of certain assets.Company.
4. Goodwill and Other Intangible Assets
ChangesThe Company's historical results for Lamons are shown in the carrying amountaccompanying consolidated statement of goodwill for the nine months ended September 30, 2017operations as a discontinued operation. Results of discontinued operations 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 |
|
|
| | | | | | | | |
| | Three months ended June 30, | | Six months ended June 30, |
| | 2019 | | 2019 |
Net sales | | $ | 48,540 |
| | $ | 96,460 |
|
Cost of sales | | (36,980 | ) | | (71,870 | ) |
Gross profit | | 11,560 |
| | 24,590 |
|
Selling, general and administrative expenses | | (7,510 | ) | | (14,490 | ) |
Operating profit | | 4,050 |
| | 10,100 |
|
Other income, net | | 130 |
| | 20 |
|
Income from discontinued operations, before income taxes | | 4,180 |
| | 10,120 |
|
Income tax expense | | (880 | ) | | (2,280 | ) |
Income from discontinued operations, net of tax | | $ | 3,300 |
| | $ | 7,840 |
|
4. Revenue
The following table presents the Company’s disaggregated net sales by primary market served (dollars in thousands):
|
| | | | | | | | | | | | | | | | |
| | Three months ended June 30, | | Six months ended June 30, |
Customer Markets | | 2020 | | 2019 | | 2020 | | 2019 |
Consumer Products | | $ | 104,530 |
| | $ | 82,060 |
| | $ | 183,590 |
| | $ | 149,980 |
|
Aerospace & Defense | | 42,610 |
| | 49,510 |
| | 91,530 |
| | 95,090 |
|
Industrial | | 52,410 |
| | 59,260 |
| | 107,220 |
| | 119,130 |
|
Total net sales | | $ | 199,550 |
| | $ | 190,830 |
| | $ | 382,340 |
| | $ | 364,200 |
|
The Company’s Packaging segment earns revenues from the consumer products (comprised of the beauty and personal care, home care, food and beverage, pharmaceutical and nutraceutical submarkets) and industrial markets. The Aerospace segment earns revenues from the aerospace & defense market (comprised of commercial, regional and business jet and military submarkets). The Specialty Products segment earns revenues from a variety of submarkets within the industrial market.
TRIMAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
5. Realignment Actions
In the three months ended June 30, 2020, the Company executed certain realignment actions, primarily in its Aerospace and Specialty Products segments, in response to reductions in current and expected future end market demand. The Company recorded a non-cash charge of approximately $13.2 million related to inventory reductions, primarily as a result of a strategic decision in its Arrow Engine division to narrow its product line focus. The Company also recorded a non-cash charge of approximately $2.2 million related to certain production equipment removed from service given reduced demand levels. In addition, the Company reduced its employment levels given lower customer demand during second quarter 2020, incurring approximately $3.1 million in severance charges, of which approximately $1.9 million was paid by June 30, 2020. For the three months ended June 30, 2020, approximately $16.0 million and $2.5 million of these charges were included in cost of sales and selling, general and administrative expenses, respectively, in the accompanying consolidated statement of operations.
6. Acquisitions
2020 Acquisitions
On April 17, 2020, the Company acquired the Rapak® brand, including certain bag-in-box product lines and assets ("Rapak") for an aggregate amount of approximately $11.4 million, subject to normal course adjustments. Rapak, which is reported in the Company's Packaging segment, has manufacturing locations in Indiana, California and Illinois, and historically generated approximately $30 million in annual revenue.
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 $83.7 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.
In connection with the acquisitions, the Company recorded approximately $2.3 million and $2.8 million of non-cash purchase accounting-related expenses during the three and six months ended June 30, 2020, respectively, 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 acquisitions, the Company recorded approximately $0.2 million and $1.2 million of non-cash purchase accounting-related expenses during the three and six months ended June 30, 2019, respectively. Of these amounts, approximately $0.9 million was recognized during the six months ended June 30, 2019, 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 $0.2 million and $0.3 million was recognized during the three and six months ended June 30, 2019, respectively, within cost of sales related to the step-up in value and subsequent sale of inventory.
TRIMAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
7. 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 pandemic, including its impact on the Company's reporting units, and also assessed the change in its market capitalization during the first and second 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 six months ended June 30, 2020 are summarized as follows (dollars in thousands): |
| | | | | | | | | | | | | | | |
| Packaging | | Aerospace | | Specialty Products | | Total |
Balance, December 31, 2019 | $ | 181,650 |
| | $ | 133,690 |
| | $ | 19,300 |
| | $ | 334,640 |
|
Goodwill from acquisitions | — |
| | 43,260 |
| | — |
| | 43,260 |
|
Goodwill reassigned in segment realignment | — |
| | 12,740 |
| | (12,740 | ) | | — |
|
Foreign currency translation and other | (1,580 | ) | | — |
| | — |
| | (1,580 | ) |
Balance, June 30, 2020 | $ | 180,070 |
| | $ | 189,690 |
| | $ | 6,560 |
| | $ | 376,320 |
|
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 June 30, 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 | | $ | 100,160 |
| | $ | (54,200 | ) | | $ | 73,860 |
| | $ | (49,910 | ) |
Customer relationships, 15 – 25 years | | 122,280 |
| | (59,230 | ) | | 122,280 |
| | (56,010 | ) |
Total customer relationships | | 222,440 |
| | (113,430 | ) | | 196,140 |
| | (105,920 | ) |
Technology and other, 1 – 15 years | | 54,100 |
| | (31,240 | ) | | 52,430 |
| | (29,790 | ) |
Technology and other, 17 – 30 years | | 43,300 |
| | (38,620 | ) | | 43,300 |
| | (37,620 | ) |
Total technology and other | | 97,400 |
| | (69,860 | ) | | 95,730 |
| | (67,410 | ) |
Indefinite-lived intangible assets: | |
| |
| |
| |
|
Trademark/Trade names | | 51,620 |
| | — |
| | 42,850 |
| | — |
|
Total other intangible assets | | $ | 371,460 |
| | $ | (183,290 | ) | | $ | 334,720 |
| | $ | (173,330 | ) |
TRIMAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
|
| | | | | | | | | | | | | | | | |
| | 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 incomeoperations is summarized as follows (dollars in thousands):
|
| | | | | | | | | | | | | | | | |
| | Three months ended June 30, | | Six months ended June 30, |
| | 2020 | | 2019 | | 2020 | | 2019 |
Technology and other, included in cost of sales | | $ | 1,260 |
| | $ | 1,200 |
| | $ | 2,470 |
| | $ | 2,400 |
|
Customer relationships, included in selling, general and administrative expenses | | 4,040 |
| | 3,550 |
| | 7,680 |
| | 6,980 |
|
Total amortization expense | | $ | 5,300 |
| | $ | 4,750 |
| | $ | 10,150 |
| | $ | 9,380 |
|
|
| | | | | | | | | | | | | | | | |
| | 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 |
|
5.8. Inventories
Inventories consist of the following components (dollars in thousands):
|
| | | | | | | | |
| | June 30, 2020 | | December 31, 2019 |
Finished goods | | $ | 73,320 |
| | $ | 68,350 |
|
Work in process | | 30,670 |
| | 30,560 |
|
Raw materials | | 36,900 |
| | 33,750 |
|
Total inventories | | $ | 140,890 |
| | $ | 132,660 |
|
|
| | | | | | | | |
| | 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 |
|
9. Property and Equipment, Net
Property and equipment consists of the following components (dollars in thousands):
|
| | | | | | | | |
| | June 30, 2020 | | December 31, 2019 |
Land and land improvements | | $ | 19,560 |
| | $ | 19,110 |
|
Buildings | | 85,820 |
| | 84,880 |
|
Machinery and equipment | | 329,120 |
| | 326,990 |
|
| | 434,500 |
| | 430,980 |
|
Less: Accumulated depreciation | | 223,540 |
| | 216,650 |
|
Property and equipment, net | | $ | 210,960 |
| | $ | 214,330 |
|
Depreciation expense as included in the accompanying consolidated statement of operations is as follows (dollars in thousands):
|
| | | | | | | | | | | | | | | | |
| | Three months ended June 30, | | Six months ended June 30, |
| | 2020 | | 2019 | | 2020 | | 2019 |
Depreciation expense, included in cost of sales | | $ | 7,830 |
| | $ | 6,010 |
| | $ | 14,190 |
| | $ | 11,440 |
|
Depreciation expense, included in selling, general and administrative expenses | | 280 |
| | 290 |
| | 580 |
| | 550 |
|
Total depreciation expense | | $ | 8,110 |
| | $ | 6,300 |
| | $ | 14,770 |
| | $ | 11,990 |
|
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 |
|
710. Long-term Debt
The Company's long-term debt consists of the following (dollars in thousands):
|
| | | | | | | | |
| | June 30, 2020 | | December 31, 2019 |
4.875% Senior Notes due October 2025 | | $ | 300,000 |
| | $ | 300,000 |
|
Debt issuance costs | | (4,740 | ) | | (5,310 | ) |
Long-term debt, net | | $ | 295,260 |
| | $ | 294,690 |
|
|
| | | | | | | | |
| | 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.
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, 2018.2018. 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, theThe Company amended its existingis a party to a credit agreement ("Credit Agreement") in connection with the Senior Notes offering and extended the maturity date, increased the permittedconsisting of a $300.0 million senior secured revolving credit facility, which permits borrowings denominated in specific foreign currencies, from $75.0 millionsubject to a $125.0 million removed the Term Loan A Facilitysub limit, matures on September 20, 2022 and resized the revolving credit facility. The Company incurred fees and expenses of approximately $1.1 million relatedis subject to the amendment, all of which was capitalized as debt issuance costs. The Company also recorded approximately $2.0 million non-cash expense related to the write-off of previously capitalized deferred financing fees within debt financing and related expenses in the accompanying consolidated statement of income.
Below is a summary of key terms under the Credit Agreement as of September 30, 2017, compared to the key terms prior to the amendment (the Term Loan A Facility shows the face amount of borrowinginterest at debt issuance, while the revolving credit facilities show gross availability as of each date):
|
| | | | | | |
Instrument | | Amount
($ 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% plus 1.50%. The interest rate spread is based upon the leverage ratio, as defined, as of the most recent determination date.
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.
TRIMAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
The Company's revolving credit facility allows for the issuance of letters of credit, not to exceed $40.0$40.0 million in aggregate. At SeptemberJune 30, 2017,2020, the Company had approximately $37.5 million0 amounts 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$284.1 million potentially available after giving effect to approximately $15.9 million of letters of credit issued and outstanding. However, including availabilityAt December 31, 2019, the Company had 0 amounts outstanding under its accounts receivablerevolving credit facility and had approximately $283.9 million potentially available after considerationgiving 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 the Company had approximately $295.4 million and $126.5 million at Septemberas of June 30, 20172020 and December 31, 2016, respectively,2019. The Company previously drew $150 million on its revolving credit facility in March 2020 to defend against potential uncertainty or liquidity issues in the financial markets as a result of borrowing capacity available for general corporate purposes.the COVID-19 pandemic, but repaid this amount during second quarter 2020.
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, 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 SeptemberJune 30, 2017,2020, the Company was in compliance with its financial covenants contained in the Credit Agreement.
AsFair Value of September 30, 2017Debt
The valuations of the Senior Notes and December 31, 2016, the Company's revolving credit facility traded at approximately 99.6% and 99.3% of par value, respectively. These valuationsother debt 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%carrying amounts 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 facilityfair values 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.
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 | ) |
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.
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.
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):
|
| | | | | | | | | | | | | | | | |
| | June 30, 2020 | | December 31, 2019 |
| | Carrying Amount | | Fair Value | | Carrying Amount | | Fair Value |
Senior Notes | | $ | 300,000 |
| | $ | 300,000 |
| | $ | 300,000 |
| | $ | 309,000 |
|
|
| | | | | | | | | | | | | | | | |
| | 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 |
|
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.
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.
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, "DerivativeDerivatives Designated as Hedging 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 2017,2018, 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 $150.0$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 2.10%2.9% of the notional amount. At inception, the cross-currency swaps were designated as net investment hedges.
TRIMAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
As of June 30, 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 | | June 30, 2020 | | December 31, 2019 |
Net Investment Hedges | | | | | | |
Cross-currency swaps | | Other assets | | $ | 7,580 |
| | $ | 4,460 |
|
The following table summarizes the income recognized in accumulated other comprehensive income (loss) ("AOCI") on derivative contracts designated as hedging instruments as of June 30, 2020 and December 31, 2019, and the amounts reclassified from AOCI into earnings for the three and six months ended June 30, 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 June 30, | | Six months ended June 30, |
| As of June 30, 2020 | | As of December 31, 2019 | | Location of Income (Loss) Reclassified from AOCI into Earnings (Effective Portion) | | 2020 | | 2019 | | 2020 | | 2019 |
Net Investment Hedges | | | | | | | | | | | | | |
Cross-currency swaps | $ | 6,530 |
| | $ | 4,230 |
| | Other income, net | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
Over the next 12 months, the Company does not expect to reclassify any pre-tax deferred amounts from AOCI into earnings.
Derivatives Not Designated as Hedging Instruments
As of June 30, 2020, the Company was party to foreign currency exchange forward contracts to economically hedge changes in foreign currency rates with notional amounts of approximately $48.8 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 July 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 operations.
The following table summarizes the effects of derivatives not designated as hedging instruments on the Company's consolidated statement of operations (dollars in thousands):
|
| | | | | | | | | | | | | | | | | | |
| | | | Amount of Income Recognized in Earnings on Derivatives |
| | | | Three months ended June 30, | | Six months ended June 30, |
| | Location of Income Recognized in Earnings on Derivatives | | 2020 | | 2019 | | 2020 | | 2019 |
Derivatives not designated as hedging instruments | | | | | | | | | | |
Foreign exchange contracts | | Other income, net | | $ | 550 |
| | $ | 220 |
| | $ | 480 |
| | $ | 220 |
|
TRIMAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
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 June 30, 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) |
June 30, 2020 | | | | | | | | | | |
Cross-currency swaps | | Recurring | | $ | 7,580 |
| | $ | — |
| | $ | 7,580 |
| | $ | — |
|
Foreign exchange contracts | | Recurring | | $ | 180 |
| | $ | — |
| | $ | 180 |
| | $ | — |
|
December 31, 2019 | | | | | | | | | | |
Cross-currency swaps | | Recurring | | $ | 4,460 |
| | $ | — |
| | $ | 4,460 |
| | $ | — |
|
Foreign exchange contracts | | Recurring | | $ | (770 | ) | | $ | — |
| | $ | (770 | ) | | $ | — |
|
12. 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.
The components of lease expense are as follows (dollars in thousands):
|
| | | | | | | | | | | | | | | | |
| | Three months ended June 30, | | Six months ended June 30, |
| | 2020 | | 2019 | | 2020 | | 2019 |
Operating lease cost | | $ | 2,020 |
| | $ | 1,620 |
| | $ | 3,670 |
| | $ | 3,140 |
|
Short-term, variable and other lease costs | | 270 |
| | 170 |
| | 580 |
| | 410 |
|
Total lease cost | | $ | 2,290 |
| | $ | 1,790 |
| | $ | 4,250 |
| | $ | 3,550 |
|
TRIMAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
Maturities of lease liabilities are as follows (dollars in thousands):
|
| | | | |
Year ended December 31, | | Operating Leases(a) |
2020 (excluding the six months ended June 30, 2020) | | $ | 3,880 |
|
2021 | | 7,370 |
|
2022 | | 6,590 |
|
2023 | | 5,630 |
|
2024 | | 4,320 |
|
Thereafter | | 13,560 |
|
Total lease payments | | 41,350 |
|
Less: Imputed interest | | (5,540 | ) |
Present value of lease liabilities | | $ | 35,810 |
|
__________________________
| |
(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 June 30, 2020 is approximately 6.6 years. The weighted-average discount rate as of June 30, 2020 is approximately 4.7%.
Cash paid for amounts included in the measurement of operating lease liabilities was approximately $3.0 million and $3.2 million during the six months ended June 30, 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 $10.2 million, primarily due to the acquisitions of RSA and Rapak, and $0.9 million during the six months ended June 30, 2020 and 2019, respectively.
13. Other long-term liabilities
Other long-term liabilities consist of the following components (dollars in thousands):
|
| | | | | | | | |
| | June 30, 2020 | | December 31, 2019 |
Non-current asbestos-related liabilities | | $ | 27,800 |
| | $ | 6,200 |
|
Other long-term liabilities | | 30,110 |
| | 34,610 |
|
Total other long-term liabilities | | $ | 57,910 |
| | $ | 40,810 |
|
TRIMAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
14. Commitments and Contingencies
Asbestos
As of June 30, 2020, the Company was a party to 352 pending cases involving an aggregate of 4,732 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, 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 |
Six Months Ended June 30, 2020 | | 4,759 |
| | 110 |
| | 129 |
| | 8 |
| | 4,732 |
| | $ | 54,375 |
| | $ | 1,090,000 |
|
Fiscal Year Ended December 31, 2019 | | 4,820 |
| | 143 |
| | 172 |
| | 32 |
| | 4,759 |
| | $ | 16,616 |
| | $ | 2,250,000 |
|
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.
The Company may be subjected to significant additional asbestos-related claims in the future, and will aggressively defend or reasonably resolve, as appropriate. 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 cost of claims varies as 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 4,732 claims pending at June 30, 2020, 55 set forth specific amounts of damages (other than those stating the statutory minimum or maximum). At June 30, 2020, of the 55 claims that set forth specific amounts, there were no claims seeking specific amounts 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 | | — | | 10 | | 45 |
Relatively few 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 $9.8 million. All relief sought in the asbestos cases is monetary in nature. 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.
There has been significant volatility in the historical number of claim filings and costs to defend, with previous claim counts and spend levels much higher than current levels. Management believes this volatility was associated more with tort reform, plaintiff practices and state-specific legal dockets than the Company’s underlying asbestos-related exposures. In the past 3 years, however, the number of new claim filings, and costs to defend, have become much more consistent, ranging between 143 to 173 new claims per year and total defense costs ranging between $2.2 million and $2.3 million.
TRIMAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
The higher degree of consistency in census data and spend levels, as well as lower claim activity levels and an evolving defense strategy, has allowed the Company to more effectively and efficiently manage claims, making process or local counsel arrangement improvements where possible. Given the consistency of activity over a multi-year period, the Company believed a trend may have formed where it could be possible to reasonably estimate its future cash exposure for all asbestos-related activity with an adequate level of precision. As such, the Company commissioned an actuary to help evaluate the nature and predictability of its asbestos-related costs, and provide an actuarial range of estimates of future exposures. Based upon its review of the actuarial study, which was completed in June 2020 using data as of December 31, 2019 and which projected spend levels through a terminal year of 2064, the Company affirmed its belief that it now has the ability to reasonably estimate its future asbestos-related exposures for pending as well as unknown future claims.
During the three months ended June 30, 2020, the Company elected to change its method of accounting for asbestos-related defense costs from accruing for probable and reasonably estimable defense costs associated with known claims expected to settle to accrue for all future defense costs for both known and unknown claims, which the Company now believes are reasonably estimable. The Company believes this change is preferable, as asbestos-related defense costs represent expenditures related to legacy activities that do not contribute to current or future revenue generating activities, and recording an estimate of the full liability for asbestos-related costs, where estimable with reasonable precision, provides a more complete assessment of the liability associated with resolving asbestos-related claims.
This accounting change has been reflected as a change in accounting estimate effected by a change in accounting principle. In the three months ended June 30, 2020, the Company recorded a non-cash, pre-tax charge for asbestos-related costs of approximately $23.4 million, which is included in selling, general and administrative expenses in the accompanying consolidated statement of operations.
Following the change in accounting estimate, the Company’s liability for asbestos-related claims will be based on a study from the Company’s third-party actuary, the Company's review of the study, as well as the Company’s own review of asbestos claims and claim resolution activity. The study from the Company’s actuary, based on data as of December 31, 2019, provided for a range of possible future liability from $31.5 million to $43.3 million. The Company does not believe any amount within the range of potential outcomes represents a better estimate than another given the many factors and assumptions inherent in the projections. Therefore, the Company has recorded the liability at the low-end of the range. As of June 30, 2020, the Company’s total asbestos-related liability is $30.3 million, and is included in accrued liabilities and other long-term liabilities, respectively, in the accompanying consolidated balance sheet.
The Company’s primary insurance, which covered approximately 40% of historical costs related to settlement and defense of asbestos litigation, expired in November 2018, upon which the Company became solely responsible for defense costs and indemnity payments. The Company is party to a coverage-in-place agreement (entered into in 2006) with its first level excess carriers regarding the coverage to be provided to the Company for asbestos-related claims. 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 will continue to 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. Based upon the Company’s review of the actuarial study, the Company does not believe it is probable that it will reach the threshold of qualified future settlements required to commence excess carrier insurance coverage under the coverage-in-place agreement.
While the Company recorded a significant non-cash charge in the three months ended June 30, 2020 in connection with its change in accounting policy, 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 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.
TRIMAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
15. 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, Stolz and Rapak® brands, develops and manufactures a broad array of dispensing products (such as foaming pumps, lotion and hand soap pumps, sanitizer 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 and pail closures and flexible spouts), polymeric jar products, and fully integrated dispensers for fill-ready bag-in-box applications, all for a variety of consumer products submarkets including, but not limited to, beauty and personal care, home care, food and beverage, and 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, tubular products and assemblies for fluid conveyance, 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.
Segment activity is as follows (dollars in thousands):
|
| | | | | | | | | | | | | | | | |
| | Three months ended June 30, | | Six months ended June 30, |
| | 2020 | | 2019 | | 2020 | | 2019 |
Net Sales | | | | | | | | |
Packaging | | $ | 128,830 |
| | $ | 103,990 |
| | $ | 228,880 |
| | $ | 192,830 |
|
Aerospace | | 42,610 |
| | 49,510 |
| | 91,530 |
| | 95,090 |
|
Specialty Products | | 28,110 |
| | 37,330 |
| | 61,930 |
| | 76,280 |
|
Total | | $ | 199,550 |
| | $ | 190,830 |
| | $ | 382,340 |
| | $ | 364,200 |
|
Operating Profit (Loss) | | | | | | | | |
Packaging | | $ | 24,040 |
| | $ | 22,640 |
| | $ | 42,320 |
| | $ | 40,280 |
|
Aerospace | | (4,210 | ) | | 7,650 |
| | 870 |
| | 13,460 |
|
Specialty Products | | (5,940 | ) | | 5,410 |
| | (2,510 | ) | | 10,110 |
|
Corporate | | (32,040 | ) | | (8,640 | ) | | (39,000 | ) | | (16,990 | ) |
Total | | $ | (18,150 | ) | | $ | 27,060 |
| | $ | 1,680 |
| | $ | 46,860 |
|
TRIMAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
16. Equity Awards
Stock Options
The Company did not grant any stock option awards during the six months ended June 30, 2020. Information related to stock options at June 30, 2020 is as follows:
|
| | | | | | | | | | | | | |
| | Number of Stock Options | | Weighted Average Option Price | | Average Remaining Contractual Life (Years) | | Aggregate Intrinsic Value |
Outstanding at January 1, 2020 | | 150,000 |
| | $ | 17.87 |
| |
| |
|
Granted | | — |
| | — |
| | | | |
Exercised | | — |
| | — |
| |
| |
|
Cancelled | | — |
| | — |
| |
| |
|
Expired | | — |
| | — |
| | | | |
Outstanding at June 30, 2020 | | 150,000 |
| | $ | 17.87 |
| | 6.1 | | $ | 912,000 |
|
As of June 30, 2020, 150,000 stock options outstanding were exercisable under the Company's long-term equity incentive plans. As of June 30, 2020, there was 0 unrecognized compensation cost related to stock options remaining.
The Company recognized 0 stock-based compensation expense related to stock options during the three and six months ended June 30, 2020 and approximately $0.1 million of stock-based compensation expense during the three and six months ended June 30, 2019. The stock-based compensation expense is included in selling, general and administrative expenses in the accompanying consolidated statement of operations.
Restricted Stock Units
The Company awarded the following restricted stock units ("RSUs") during the six months ended June 30, 2020:
granted 178,666 RSUs 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;
granted 31,816 RSUs to certain employees, which are subject only to a service condition and fully vest at the end of three years so long as the employee remains with the Company;
granted 2,558 RSUs to certain employees, which are subject only to a service condition and vest one year from the date of grant so long as the employee remains with the Company;
granted 30,590 RSUs 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; and
issued 2,394 RSUs related to director fee deferrals during the six months ended June 30, 2020 as certain of the Company's directors elected to defer all or a portion of their directors fees and to receive the amount in Company common stock at a future date.
TRIMAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
During 2020, the Company awarded 113,146 performance-based RSUs to certain Company key employees which vest three years from the grant date as long as the employee remains with the Company. These awards are earned 50% based upon the Company's achievement of an earnings per share compound annual growth rate ("EPS CAGR") metric over a period beginning January 1, 2020 and ending December 31, 2022. 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 estimates the grant-date fair value subject to a market condition using a Monte Carlo simulation model, using the following weighted average assumptions: risk-free rate of 0.56% and annualized volatility of 26.2%. Depending on the performance achieved for these two metrics, the amount of shares earned, if any, can vary for each metric from 0% of the target award to a maximum of 200% of the target award.
In addition, the Company awarded 87,034 performance-based RSUs to certain Company key divisional employees which vest three years from the grant date as long as the employee remains with the Company. These awards are earned based upon the Company's stock price performance over the period from January 1, 2020 and ending December 31, 2022. The stock price achievement is calculated based on the Company's average closing stock price for each quarter end for the 20 trading days up to and including March 31, June 30, September 30, and December 31, 2022, respectively. The Company estimates the grant-date fair value subject to a market condition using a Monte Carlo simulation model, using the following weighted average assumptions: risk-free rate of 0.85% and annualized volatility of 25.2%. Depending on the performance achieved for this metric, the amount of shares earned if any, can vary from 0% of the target award to a maximum of 160% of the target award, although it automatically is earned at the target award level if the Company's stock price is equal to or greater than a specified stock price for either five consecutive trading days or 20 total trading days during the performance period.
During 2017, the Company awarded performance-based RSUs to certain Company key employees which were earned based upon the Company's TSR relative to the TSR of the common stock of a pre-defined industry peer-group and measured over a period beginning January 1, 2017 and ending on December 31, 2019. Depending on the performance achieved, the amount of shares earned could vary from 0% of the target award to a maximum of 200% of the target award. The Company attained 127.4% of the target, resulting in an increase of 27,567 shares during the six months ended June 30, 2020.
Information related to RSUs at June 30, 2020 is as follows:
|
| | | | | | | | | | | | | |
| | Number of Unvested RSUs | | Weighted Average Grant Date Fair Value | | Average Remaining Contractual Life (Years) | | Aggregate Intrinsic Value |
Outstanding at January 1, 2020 | | 622,528 |
| | $ | 30.77 |
| |
| |
|
Granted | | 473,771 |
| | 21.37 |
| |
| |
|
Vested | | (297,203 | ) | | 27.91 |
| |
| |
|
Cancelled | | (9,583 | ) | | 29.59 |
| |
| |
|
Outstanding at June 30, 2020 | | 789,513 |
| | $ | 26.51 |
| | 1.7 | | $ | 18,908,836 |
|
As of June 30, 2020, there was approximately $12.2 million of unrecognized compensation cost related to unvested RSUs that is expected to be recorded over a weighted average period of 2.3 years.
The Company recognized stock-based compensation expense related to RSUs of approximately $2.7 million and $1.6 million during the three months ended June 30, 2020 and 2019, respectively and approximately $4.7 million and $2.9 million during the six months ended June 30, 2020 and 2019, respectively. The stock-based compensation expense is included in selling, general and administrative expenses in the accompanying consolidated statement of operations.
TRIMAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
17. 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 RSUs. For the three and six months ended June 30, 2020, no restricted shares or options to purchase shares were included in the computation of net income (loss) per share because to do so would be anti-dilutive. The following table summarizes the dilutive effect of RSUs and options to purchase common stock for the three and six months ended June 30, 2020 and 2019:
|
| | | | | | | | | | | | |
| | Three months ended June 30, | | Six months ended June 30, |
| | 2020 | | 2019 | | 2020 | | 2019 |
Weighted average common shares—basic | | 43,463,235 |
| | 45,592,075 |
| | 43,832,144 |
| | 45,585,445 |
|
Dilutive effect of restricted stock units | | — |
| | 174,571 |
| | — |
| | 253,796 |
|
Dilutive effect of stock options | | — |
| | 61,669 |
| | — |
| | 71,008 |
|
Weighted average common shares—diluted | | 43,463,235 |
| | 45,828,315 |
| | 43,832,144 |
| | 45,910,249 |
|
In March 2020, the Company announced its Board of Directors had authorized the Company to increase the purchase of its common stock up to $250 million in the aggregate. The initial authorization, approved in November 2015, authorized up to $50 million in the aggregate of its common stock. The Company purchased 0 shares during the three months ended June 30, 2020 and 1,253,650 shares of its outstanding common stock for approximately $31.6 million during the six months ended June 30, 2020. During the three and six months ended June 30, 2019, the Company purchased 502,500 and 527,400 shares of its outstanding common stock for approximately $14.7 million and $15.4 million, respectively.
18. 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 are as follows (dollars in thousands):
|
| | | | | | | | | | | | | | | | |
| | Pension Plans |
| | Three months ended June 30, | | Six months ended June 30, |
| | 2020 | | 2019 | | 2020 | | 2019 |
Service costs | | $ | 310 |
| | $ | 260 |
| | $ | 630 |
| | $ | 520 |
|
Interest costs | | 230 |
| | 270 |
| | 470 |
| | 540 |
|
Expected return on plan assets | | (360 | ) | | (350 | ) | | (730 | ) | | (700 | ) |
Amortization of net loss | | 230 |
| | 150 |
| | 450 |
| | 290 |
|
Net periodic benefit cost | | $ | 410 |
| | $ | 330 |
| | $ | 820 |
| | $ | 650 |
|
The service cost component of net periodic benefit cost is recorded in cost of goods sold and selling, general and administrative expenses, while non-service cost components are recorded in other income (expense), net in the accompanying consolidated statement of operations.
The Company contributed approximately $0.3 million and $0.7 million to its defined benefit pension plans during the three and six months ended June 30, 2020. The Company expects to contribute approximately $1.1 million to its defined benefit pension plans for the full year 2020.
TRIMAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
19. Other Comprehensive Income (Loss)
Changes in AOCI by component for the six months ended June 30, 2020 are summarized as follows, net of tax (dollars in thousands):
|
| | | | | | | | | | | | | | | | |
| | Defined Benefit Plans | | Derivative Instruments | | Foreign Currency Translation | | Total |
Balance, December 31, 2019 | | $ | (9,930 | ) | | $ | 4,230 |
| | $ | (300 | ) | | $ | (6,000 | ) |
Net unrealized gains (losses) arising during the period (a) | | — |
| | 2,300 |
| | (6,950 | ) | | (4,650 | ) |
Less: Net realized losses reclassified to net income (b) | | (310 | ) | | — |
| | — |
| | (310 | ) |
Net current-period other comprehensive income (loss) | | 310 |
| | 2,300 |
| | (6,950 | ) | | (4,340 | ) |
Balance, June 30, 2020 | | $ | (9,620 | ) | | $ | 6,530 |
| | $ | (7,250 | ) | | $ | (10,340 | ) |
__________________________
| |
(a) | Derivative instruments, net of income tax of approximately $0.8 million. See Note 11, "Derivative Instruments," for further details. |
| |
(b) | Defined benefit plans, net of income tax of approximately $0.1 million. See Note 18, "Defined Benefit Plans," for further details. |
Changes in AOCI by component for the six months ended June 30, 2019 are summarized as follows, net of tax (dollars in thousands):
|
| | | | | | | | | | | | | | | | |
| | Defined Benefit Plans | | Derivative Instruments | | Foreign Currency Translation | | Total |
Balance, December 31, 2018 | | $ | (7,200 | ) | | $ | 940 |
| | $ | (10,590 | ) | | $ | (16,850 | ) |
Net unrealized gains arising during the period (a) | | — |
| | 1,490 |
| | (200 | ) | | 1,290 |
|
Less: Net realized losses reclassified to net income (b) | | (200 | ) | | — |
| | — |
| | (200 | ) |
Net current-period other comprehensive income (loss) | | 200 |
| | 1,490 |
| | (200 | ) | | 1,490 |
|
Reclassification of stranded tax effects | | (1,260 | ) | | (10 | ) | | — |
| | (1,270 | ) |
Balance, June 30, 2019 | | $ | (8,260 | ) | | $ | 2,420 |
| | $ | (10,790 | ) | | $ | (16,630 | ) |
__________________________
| |
(a) | Derivative instruments, net of income tax of approximately $0.5 million. See Note 11, "Derivative Instruments," for further details. |
| |
(b) | Defined benefit plans, net of income tax of approximately $0.1 million. See Note 18, "Defined Benefit Plans," for further details. |
Item 2.2. 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, 2016.2019.
Introduction
We are a diversified industrialglobal manufacturer and provider of products for customers primarily in the consumer products, aerospace industrial, petrochemical, refinery& defense and oil and gas endindustrial markets. Our wide range of innovative and quality product solutions are engineered and designed to addresssolve 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; established distribution networks; relatively low ongoing capital investment requirements; strong cash flow conversion and long-term growth opportunities. WeWhile the majority of our revenue is in the United States, we manufacture and supply products globally to a wide range of companies. We are principally engagedreport our business activity in four reportablethree segments: Packaging, Aerospace Energy and Engineered Components.Specialty Products.
In December 2019, we completed the sale of our Lamons division ("Lamons"), a manufacturer and distributor of industrial sealing, fastening and specialty products primarily used in the petrochemical and petroleum-refining industries, to two wholly-owned subsidiaries of an investment fund sponsored by First Reserve. The sale of Lamons was an important strategic step for TriMas, in streamlining our portfolio of businesses, as it significantly reduced our exposure to the oil and gas market from over 20% of net sales in 2019 to less than 3% in second quarter 2020, and allowed us to further invest in our Packaging and Aerospace segments. We received net after-tax proceeds from the sale of approximately $110.9 million in 2019, subject to certain adjustments as set forth in the Purchase Agreement which were finalized in the first quarter of 2020, resulting in a $1.8 million payment to us. The financial results of Lamons were previously reported within our Specialty Products segment. The financial position, results of operations and cash flows of Lamons are reported as discontinued operations for all periods presented through the date of disposition.
Key Factors and Risks Affecting Our Reported Results.Results
Our businesses and results of operations depend upon general economic conditions and weconditions. We serve some customers in cyclical industries that are highly competitive, cyclical and are themselvesthat may be significantly impacted by changes in economic or geopolitical conditions. There has been low overall economic growth, particularly in
In March 2020, the President of the United States declared the coronavirus ("COVID-19") outbreak a national emergency, as the World Health Organization determined it was a pandemic. In response to the COVID-19 pandemic, federal, provincial, state, county and global economic conditionslocal governments and public health organizations or authorities around the world have implemented a variety of measures intended to control the spread of the virus, including quarantines, "shelter-in-place" or "stay-at-home" and similar orders, travel restrictions, business curtailments and closures, social distancing, personal hygiene requirements, and other measures.
We have been relatively stable overand continue to be focused on making sure the working environments for our employees are safe so our operations have the ability to deliver the products needed to support the COVID-19 pandemic. Nearly all of our manufacturing sites have been deemed essential operations and remained open through the past couplefour months at varying levels of years.
During the third quartercapacity and efficiency, experiencing only temporary shutdowns due to country-specific government mandates or for thorough cleaning as a result 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 obligationssuspected COVID-19 cases. The health of our prior term loan A facility, repay a portionemployees, and the ability of outstanding obligations under our accounts receivable facilityfacilities to remain operational in the current regulated environment, will be critical to our future results of operations.
Our divisions were impacted in first quarter 2020 at differing levels and pay feestimes, beginning with our Asian facilities and expenses relatedstrategic supply network, both primarily in China, in late January, followed by our European (primarily Italy) and North American facilities in February and March. We implemented new work rules and processes, which promote social distancing and increased hygiene to ensure the refinancing. In connection with the Senior Notes offering, we also amendedsafety of our existing credit agreement ("Credit Agreement") to increaseemployees, particularly at our production facilities. These measures, while not easily quantifiable, have increased the level of permitted foreign currency borrowings, resizeproduction inefficiencies related to absenteeism, the resulting inefficient manufacturing scheduling and short-term idling of production. We continue to operate with these protocols in place, which have impacted our revolving loan commitmentssecond quarter results.
Overall, our second quarter 2020 net sales increased compared to second quarter 2019, primarily as a result of robust organic sales growth in our Packaging segment, particularly for dispensing and extendclosure products we supply that are used to fight the maturity to September 2022. We paid feesspread of germs, and expensesas a result of approximately $10.8 millionacquisitions. These increases more than offset declines in connection with refinancing-related activities, of which approximately $6.0 million was capitalized as deferred financing feessales in our Aerospace and $4.8 million was expensed, which wasSpecialty Products segments, primarily related to the terminationeffects of interest rate swap agreements. the COVID-19 pandemic.
The most significant drivers of change in results of operations in second quarter 2020 compared with second quarter 2019 were a change in accounting policy for asbestos-related defense costs, realignment expenses we incurred in response to decreased customer demand following the COVID-19 outbreak, and the impact of our recent acquisitions.
In addition,second quarter 2020, we elected to change our accounting policy for asbestos-related defense costs from accruing for probable and reasonably estimable defense costs associated with known claims expected to settle to accruing for all future defense costs for both known and unknown claims, which we now believe can be reasonably estimated. This accounting change has been reflected as a change in accounting estimate effected by a change in accounting principle. We recorded a non-cash, pre-tax charge for asbestos-related costs of approximately $23.4 million, which is included in selling, general and administrative expenses.
We undertook certain realignment actions, primarily in our Aerospace and Specialty Products segments, during second quarter 2020 in response to reduced end market demand following the outbreak of COVID-19. We recorded non-cash charges of approximately $2.0$13.2 million related to inventory reductions, primarily as a result of a strategic decision in our Arrow Engine division to streamline its product line offering. We also recorded charges of approximately $2.2 million related to certain production equipment removed from service given reduced demand levels. In addition, we reduced our employment levels given lower customer demand, incurring approximately $3.1 million in severance charges.
In April 2020, we acquired the write-offRapak brand, including certain bag-in-box product lines and assets ("Rapak") for an aggregate amount of previously capitalized deferred financing fees.
The second factor affectingapproximately $11.4 million. Rapak, which is reported in our third quarter 2017 results was Hurricane Harvey, which primarily impacted our Energy reportable segment. While we sustained limited structural damage, ourPackaging segment, has three manufacturing facility in Houston, Texas was closed for one week and certain of our branch locations in Texas and Louisiana were closedthe United States. Rapak contributed approximately $4.5 million of net sales during the second quarter within our Packaging segment, although it is performing near break-even operating profit as demand for up to two weeks following the stormits products, particularly those used in quick service restaurant applications, has significantly declined from pre-acquisition levels in 2019 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 COVID-19.
In February 2020, we completed the storm before resuming operations. Inacquisition of RSA Engineered Products ("RSA"), a provider of highly-engineered and proprietary components for air management systems used in critical flight applications, for an aggregate amount of approximately $83.7 million, net of cash acquired. RSA is located in Simi Valley, California and designs, engineers and manufactures highly-engineered components, including air ducting products, connectors and flexible joints, predominantly used in aerospace and defense engine bleed air, anti-icing and environmental control system applications. RSA contributed approximately $5.9 million of net sales during the second half of September,quarter within our Aerospace segment.
Additional Key Risks that May Affect Our Reported Results
The COVID-19 pandemic impacted our second quarter results, and we increased our staffing levelsexpect it will continue to ensure we could meet our customers' requirements as they assessedimpact us in the condition of their facilities and product requirements. While we were able to respond tofuture at varying degrees. We expect the immediatesecond quarter robust customer demand we experienced for our Packaging segment's dispensers and achieve expected salesclosures used in personal care and home care (such as cleaning and laundry applications) to continue. We are actively collaborating with our customers and strategic supply partners to manage production capacity and supply chain availability as efficiently as possible. We believe industrial demand in North America will continue to be lower than in 2019, and we are uncertain how demand will be impacted as many of the shelter-in-place orders are adjusted or lifted, particularly in North America, where orders for our industrial cylinders, for example, are heavily influenced by spring and summer levels we also incurred higher-than-normal operating costs dueof construction and HVAC activity, which has yet 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, resultingcommence in a less favorable productmeaningful way. We expect the aerospace market to experience the most severe dislocation going forward. With the current travel restrictions and significant drop in passenger miles, aircraft manufacturers have begun to slow or halt production, and we experienced a significant drop in aerospace-related sales mix. As a resultin late second quarter, and expect demand for our products tied to commercial aircraft build rates to decline significantly compared with first half 2020 as well as 2019 levels for the remainder 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 millionyear.
We have executed realignment actions in the thirdsecond quarter of 2017.
In addition2020, primarily in our Aerospace and Specialty Products segments, to protect against the third quarter 2017 events, the most significant external factor affecting us recently has been the impact of low oil prices, which beganuncertain end market demand. We will continue 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 levelsassess further actions if required. However, as a result of the low oil-relatedpandemic's impact on global economic activity, and end-market demand. Net sales were slightly higherthe continued potential impact to our future results of operations, as well as to TriMas' market capitalization, we may record additional cash and non-cash charges related to incremental realignment actions, as well as for uncollectible customer account balances, excess inventory and idle production equipment. Further, we may be required to conduct an evaluation of triggering events as to whether there is a reduction in the first nine monthsfair value of 2017 compared withour goodwill and intangible assets, particularly in our Aerospace divisions, if the first nine months of 2016. While oil prices have fluctuatedsales decline that occurred in recent months, they remain at low levels. We expect net sales to remain at a low level compared with historical levels untilJune 2020 continues, which could result in an impairment charge.
Despite 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 currentpotential decline in future demand levels and allowed it to attain approximately break-even operating profit during full year 2016 and the first nine monthsresults of 2017.
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 wereoperations as a result of productionthe COVID-19 pandemic, at present, we believe our capital structure is in a solid position, and scheduling challengeswe have ample cash and available liquidity under our revolving credit facility sufficient to meet our debt service obligations, capital expenditure requirements and other short-term and long-term obligations for the foreseeable future.
The extent of the COVID-19 pandemic's effect on our operational and financial performance will depend in onelarge part on future developments, which cannot be predicted with confidence at this time. Future developments include the duration, scope and severity of our Aerospace fastener facilities, significantly lower fixed cost absorptionthe pandemic, the actions taken to contain or mitigate its impact, 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 monthsresumption of 2017 comparedwidespread economic activity. Due to the first nine monthsinherent uncertainty of 2016, as well asthe unprecedented and rapidly evolving situation, we are unable to predict with any confidence the likely impact of the COVID-19 pandemic on a sequential quarterly basis throughour future operations.
Beyond 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.
Criticalunique risks presented by the COVID-19 pandemic, other critical factors affecting our ability to succeed include: our ability to create organic growth through product development, cross sellingcross-selling and extending product-line offerings, and our ability to quickly and cost-effectively introduce and successfully launch new products; our ability to acquire and integrate companies or products that supplement existing product lines, add new distribution channels or customers, 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 givendue to holiday shutdowns inat certain customers or other customers deferring capital spending to the newfollowing year. WeGiven the short-cycle nature of most of our businesses, we do not consider sales order backlog to be a material factor in our business.factor. A growing portionamount 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 raw material purchases are for steel, aluminum, polyethyleneresins (such as polypropylene 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 increasedpolyethylene), steel, aluminum and resinother oil and metal-based purchased components. While material cost changes did not have a significant impact in the first half of 2020 compared with first half 2019, there has been some volatility over the past two years as a direct and indirect result of foreign trade policy, where tariffs on certain of our commodity-based products sourced from Asia have been instituted, and certain North American suppliers have opportunistically increased their prices. As needed, we have taken actions, and will continue to take actions, to mitigate such increases, including implementing commercial pricing adjustments, resourcing to alternate suppliers and insourcing of previously sourced products to better leverage our global manufacturing footprint. Although we believe we are generally able to mitigate the impact of higher commodity 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 experienceadditional material costs and 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.increases or otherwise mitigate the impacts to our operating results.
CertainAlthough we have escalator/de-escalator clauses in commercial contracts with certain of our businesses are sensitivecustomers, or can modify prices based on market conditions to oil price movements. As noted earlier, ourrecover higher costs, we cannot be assured of full cost recovery in the open market.
Our Arrow Engine business in our Specialty Products segment is most directly impacted by significant volatilitysensitive to the demand for natural gas and crude oil in oil prices. Arrow Engine's pumpjackNorth America. For example, demand for engine, pump jack and other engine sales and related parts, which comprise a significant portion of the business,compressor products are impacted by active oil and gas drilling levels, rig counts well completion activities and wellhead investment activities. Separately, oil-based 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 iscosts are a significant driver of resin pricing, althoughraw materials and purchased components used within our Packaging segment.
Each year, as a core tenet of the TBM, our businesses target cost savings from Kaizen and continuous improvement initiatives in an effort to reduce, or otherwise offset, the impact of increased input and conversion costs through increased throughput and yield rates, with a goal of at least covering inflationary and market cost increases. In addition, we generally are ablecontinuously review our operating cost structures to maintain profit levels when oil prices change dueensure alignment with current market demand.
We continue to escalator/de-escalator clausesevaluate alternatives to redeploy the cash generated by our businesses, one of which includes returning capital to our shareholders. In November 2015, our Board of Directors authorized up to $50 million in contracts with manyshare repurchases. During 2019, our Board of Directors increased the authorization to $75 million in February, and later to $150 million in November. In first quarter 2020, our Board of Directors further increased the authorization to $250 million. In the six months ended June 30, 2020, we purchased 1,253,650 shares of our customers.outstanding common stock for approximately $31.6 million. During the three and six months ended June 30, 2019, we purchased 527,400 shares of our outstanding common stock for approximately $15.4 million.
Each increase in share repurchase authorization includes the value of shares already purchased under the previous authorization. We will continue to evaluate opportunities to return capital to shareholders through the purchase of our common stock, depending on market conditions and other factors. In March 2020, given the uncertainty surrounding the COVID-19 pandemic, we temporarily suspended our share repurchase program in order to conserve available cash.
Segment Information and Supplemental Analysis
The following table summarizes financial information for our reportable segments for the three months ended SeptemberJune 30, 20172020 and 20162019 (dollars in thousands):
| | | Three months ended September 30, | Three months ended June 30, |
| 2017 | | As a Percentage of Net Sales | | 2016 | | As a Percentage of Net Sales | 2020 | | As a Percentage of Net Sales | | 2019 | | As a Percentage of Net Sales |
Net Sales | | | | | | | | | | | | | | |
Packaging | $ | 89,560 |
| | 42.8 | % | | $ | 90,330 |
| | 44.7 | % | $ | 128,830 |
| | 64.6 | % | | $ | 103,990 |
| | 54.5 | % |
Aerospace | 48,550 |
| | 23.2 | % | | 47,430 |
| | 23.4 | % | 42,610 |
| | 21.4 | % | | 49,510 |
| | 25.9 | % |
Energy | 40,440 |
| | 19.3 | % | | 38,230 |
| | 18.9 | % | |
Engineered Components | 30,780 |
| | 14.7 | % | | 26,300 |
| | 13.0 | % | |
Specialty Products | | 28,110 |
| | 14.1 | % | | 37,330 |
| | 19.6 | % |
Total | $ | 209,330 |
| | 100.0 | % | | $ | 202,290 |
| | 100.0 | % | $ | 199,550 |
| | 100.0 | % | | $ | 190,830 |
| | 100.0 | % |
Gross Profit | | | | | | | | |
Gross Profit (Loss) | | | | | | | | |
Packaging | $ | 31,870 |
| | 35.6 | % | | $ | 32,180 |
| | 35.6 | % | $ | 37,850 |
| | 29.4 | % | | $ | 32,740 |
| | 31.5 | % |
Aerospace | 13,450 |
| | 27.7 | % | | 13,080 |
| | 27.6 | % | 2,670 |
| | 6.3 | % | | 13,230 |
| | 26.7 | % |
Energy | 8,370 |
| | 20.7 | % | | 7,670 |
| | 20.1 | % | |
Engineered Components | 5,140 |
| | 16.7 | % | | 5,120 |
| | 19.5 | % | |
Specialty Products | | (3,290 | ) | | (11.7 | )% | | 7,820 |
| | 20.9 | % |
Total | $ | 58,830 |
| | 28.1 | % | | $ | 58,050 |
| | 28.7 | % | $ | 37,230 |
| | 18.7 | % | | $ | 53,790 |
| | 28.2 | % |
Selling, General and Administrative Expenses | | | | | | | | | | | | | | |
Packaging | $ | 8,780 |
| | 9.8 | % | | $ | 12,090 |
| | 13.4 | % | $ | 13,810 |
| | 10.7 | % | | $ | 10,100 |
| | 9.7 | % |
Aerospace | 5,690 |
| | 11.7 | % | | 6,420 |
| | 13.5 | % | 6,880 |
| | 16.1 | % | | 5,580 |
| | 11.3 | % |
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 |
| |
Specialty Products | | 2,650 |
| | 9.4 | % | | 2,410 |
| | 6.5 | % |
Corporate | | 32,040 |
| | N/A |
| | 8,640 |
| | N/A |
|
Total | $ | 30,710 |
| | 14.7 | % | | $ | 40,260 |
| | 19.9 | % | $ | 55,380 |
| | 27.8 | % | | $ | 26,730 |
| | 14.0 | % |
Operating Profit (Loss) | | | | | | | | | | | | | | |
Packaging | $ | 23,090 |
| | 25.8 | % | | $ | 20,090 |
| | 22.2 | % | $ | 24,040 |
| | 18.7 | % | | $ | 22,640 |
| | 21.8 | % |
Aerospace | 7,760 |
| | 16.0 | % | | 6,660 |
| | 14.0 | % | (4,210 | ) | | (9.9 | )% | | 7,650 |
| | 15.5 | % |
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 |
| |
Specialty Products | | (5,940 | ) | | (21.1 | )% | | 5,410 |
| | 14.5 | % |
Corporate | | (32,040 | ) | | N/A |
| | (8,640 | ) | | N/A |
|
Total | $ | 28,120 |
| | 13.4 | % | | $ | 17,790 |
| | 8.8 | % | $ | (18,150 | ) | | (9.1 | )% | | $ | 27,060 |
| | 14.2 | % |
Depreciation and Amortization | | | | | | | | |
Depreciation | | | | | | | | |
Packaging | $ | 5,480 |
| | 6.1 | % | | $ | 5,240 |
| | 5.8 | % | $ | 5,050 |
| | 3.9 | % | | $ | 3,800 |
| | 3.7 | % |
Aerospace | 3,610 |
| | 7.4 | % | | 3,560 |
| | 7.5 | % | 2,070 |
| | 4.9 | % | | 1,680 |
| | 3.4 | % |
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 |
| |
Specialty Products | | 960 |
| | 3.4 | % | | 750 |
| | 2.0 | % |
Corporate | | 30 |
| | N/A |
| | 70 |
| | N/A |
|
Total | $ | 10,770 |
| | 5.1 | % | | $ | 10,870 |
| | 5.4 | % | $ | 8,110 |
| | 4.1 | % | | $ | 6,300 |
| | 3.3 | % |
Amortization | | | | | | | | |
Packaging | | $ | 2,320 |
| | 1.8 | % | | $ | 2,480 |
| | 2.4 | % |
Aerospace | | 2,860 |
| | 6.7 | % | | 2,130 |
| | 4.3 | % |
Specialty Products | | 120 |
| | 0.4 | % | | 140 |
| | 0.4 | % |
Corporate | | — |
| | N/A |
| | — |
| | N/A |
|
Total | | $ | 5,300 |
| | 2.7 | % | | $ | 4,750 |
| | 2.5 | % |
The following table summarizes financial information for our reportable segments for the ninesix months ended SeptemberJune 30, 20172020 and 20162019 (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 | )% | | (8,570 | ) | | (7.0 | )% |
Engineered Components | 13,000 |
| | 13.4 | % | | 12,620 |
| | 13.3 | % |
Corporate expenses | (21,510 | ) | | N/A |
| | (24,160 | ) | | N/A |
|
Total | $ | 70,110 |
| | 11.3 | % | | $ | 52,900 |
| | 8.7 | % |
Depreciation and Amortization | | | | | | | |
Packaging | $ | 16,350 |
| | 6.3 | % | | $ | 15,850 |
| | 6.1 | % |
Aerospace | 10,840 |
| | 7.7 | % | | 10,520 |
| | 8.0 | % |
Energy | 3,770 |
| | 3.0 | % | | 3,350 |
| | 2.7 | % |
Engineered Components | 2,700 |
| | 2.8 | % | | 3,100 |
| | 3.3 | % |
Corporate expenses | 150 |
| | N/A |
| | 220 |
| | N/A |
|
Total | $ | 33,810 |
| | 5.4 | % | | $ | 33,040 |
| | 5.4 | % |
| | | | | | | |
|
| | | | | | | | | | | | | |
| Six months ended June 30, |
| 2020 | | As a Percentage of Net Sales | | 2019 | | As a Percentage of Net Sales |
Net Sales | | | | | | | |
Packaging | $ | 228,880 |
| | 59.9 | % | | $ | 192,830 |
| | 52.9 | % |
Aerospace | 91,530 |
| | 23.9 | % | | 95,090 |
| | 26.1 | % |
Specialty Products | 61,930 |
| | 16.2 | % | | 76,280 |
| | 20.9 | % |
Total | $ | 382,340 |
| | 100.0 | % | | $ | 364,200 |
| | 100.0 | % |
Gross Profit (Loss) | | | | | | | |
Packaging | $ | 66,530 |
| | 29.1 | % | | $ | 60,710 |
| | 31.5 | % |
Aerospace | 14,580 |
| | 15.9 | % | | 25,030 |
| | 26.3 | % |
Specialty Products | 2,490 |
| | 4.0 | % | | 14,840 |
| | 19.5 | % |
Total | $ | 83,600 |
| | 21.9 | % | | $ | 100,580 |
| | 27.6 | % |
Selling, General and Administrative Expenses | | | | | | | |
Packaging | $ | 24,210 |
| | 10.6 | % | | $ | 20,430 |
| | 10.6 | % |
Aerospace | 13,710 |
| | 15.0 | % | | 11,570 |
| | 12.2 | % |
Specialty Products | 5,000 |
| | 8.1 | % | | 4,730 |
| | 6.2 | % |
Corporate | 39,000 |
| | N/A |
| | 16,990 |
| | N/A |
|
Total | $ | 81,920 |
| | 21.4 | % | | $ | 53,720 |
| | 14.8 | % |
Operating Profit (Loss) | | | | | | | |
Packaging | $ | 42,320 |
| | 18.5 | % | | $ | 40,280 |
| | 20.9 | % |
Aerospace | 870 |
| | 1.0 | % | | 13,460 |
| | 14.2 | % |
Specialty Products | (2,510 | ) | | (4.1 | )% | | 10,110 |
| | 13.3 | % |
Corporate | (39,000 | ) | | N/A |
| | (16,990 | ) | | N/A |
|
Total | $ | 1,680 |
| | 0.4 | % | | $ | 46,860 |
| | 12.9 | % |
Depreciation | | | | | | | |
Packaging | $ | 9,140 |
| | 4.0 | % | | $ | 7,060 |
| | 3.7 | % |
Aerospace | 3,760 |
| | 4.1 | % | | 3,340 |
| | 3.5 | % |
Specialty Products | 1,800 |
| | 2.9 | % | | 1,450 |
| | 1.9 | % |
Corporate | 70 |
| | N/A |
| | 140 |
| | N/A |
|
Total | $ | 14,770 |
| | 3.9 | % | | $ | 11,990 |
| | 3.3 | % |
Amortization | | | | | | | |
Packaging | $ | 4,650 |
| | 2.0 | % | | $ | 4,850 |
| | 2.5 | % |
Aerospace | 5,260 |
| | 5.7 | % | | 4,270 |
| | 4.5 | % |
Specialty Products | 240 |
| | 0.4 | % | | 260 |
| | 0.3 | % |
Corporate | — |
| | N/A |
| | — |
| | N/A |
|
Total | $ | 10,150 |
| | 2.7 | % | | $ | 9,380 |
| | 2.6 | % |
Results of Operations
The principal factors impacting us during the three months ended SeptemberJune 30, 2017,2020, compared with the three months ended SeptemberJune 30, 2016,2019, were:
the impact of improved throughput and productivitya change in our accounting policy for asbestos-related defense costs in second quarter 2020;
realignment expenses, primarily in our Aerospace and Specialty Products segments, in response to reduced end market demand following the outbreak of COVID-19;
increases in our Packaging segment's organic sales and related operating profit as a result of significantly higher demand, primarily for products used to help fight the spread of germs;
reduced sales and related profit within our Specialty Products and Aerospace reportable segment, enabling this segment to achieve higher sales levels in the three months ended September 30, 2017;
the continued benefitssegments, primarily as a result of the realigned footprint within our Energy reportable segment, with lower ongoing operating costs following several facility consolidations and closures;
the impact of Hurricane Harvey, primarily within our Energy reportable segment;
the impact of continued low oil prices, primarily impacting sales and profit levels in our Engineered Components reportable segment;COVID-19 pandemic; and
the impact of feesour recent acquisitions, primarily RSA in February 2020, and expenses related to our issuance of Senior Notes and other refinancing activities.Rapak in April 2020.
Three Months Ended SeptemberJune 30, 20172020 Compared with Three Months Ended SeptemberJune 30, 20162019
Overall, net sales increased approximately $7.0$8.7 million, or 3.5%4.6%, to $209.3$199.6 million for the three months ended SeptemberJune 30, 2017,2020, as compared with $202.3$190.8 million in the three months ended SeptemberJune 30, 2016. Our Energy and Engineered Components reportable segments had a combined2019, driven by our recent acquisitions, which contributed approximately $13.0 million of inorganic sales. Organic sales, increase of approximately $6.4 million, excluding the effectsimpact of foreign currency exchange, decreased approximately $1.9 million, as sales increases in our Packaging segment, primarily as a resultfor dispenser products used in applications that help fight the spread of increased market share gains following our improvementsgerms, were offset by lower sales in on-time delivery in the Energy segment, as well as some market stabilization despite continued low oil prices. Sales within our Aerospace reportable segment increasedand Specialty Products segments. In addition, net sales were lower by approximately $1.2$2.4 million primarily due to increases in sales to distribution customers. In addition, sales increased by approximately $0.5 million of net favorableunfavorable currency exchange, as our reported results in U.S. dollars were positivelynegatively impacted as a result of the weakerstronger U.S. dollar relative to foreign currencies. These increases were partially offset by a sales decrease of approximately $1.1 million, excluding the effects of foreign currency exchange, within our Packaging reportable segment, primarily due to lower sales of health, beauty and home care products in North America.
Gross profit margin (gross profit as a percentage of sales) approximated 28.1%18.7% and 28.7%28.2% for the three months ended SeptemberJune 30, 20172020 and 2016,2019, respectively. Gross profit margin decreased, as the impact of higher sales levels was more than offset by the impact of approximately $16.0 million of realignment expenses, $14.3 million of which were non-cash and $1.7 million were cash expenses, primarily due a less favorable segment sales mix, asin our lowestAerospace and Specialty Products segments, of which where we executed actions to lower our cost structure in response to reduced end market demand following the outbreak of the COVID-19 pandemic. In addition, we recorded approximately $2.1 million greater non-cash purchase accounting charges in the three months ended June 30, 2020 than the three months ended June 30, 2019 for the step-up of inventory to fair value and subsequent amortization related to our acquisitions. Our second quarter 2020 gross profit margin reportable segment, Engineered Components, increased as a percentage of total sales, andwas also experienced higher steel costs andimpacted by a less favorable product sales mix, withinas well as lower fixed cost absorption and higher production inefficiencies, both due primarily to the segment. This decline was partially offset by increased gross profit margin within our Energy reportable segment as a result of savings achieved from ongoing footprint realignment initiatives and improvements in manufacturing efficiencies within our Houston, Texas manufacturing facility, which more than offset the impact of hurricane Harvey.COVID-19 pandemic.
Operating profit (loss) margin (operating profit as a percentage of sales) approximated 13.4%9.1% and 8.8%14.2% for the three months ended SeptemberJune 30, 20172020 and 2016,2019, respectively. Operating profit increased(loss) decreased approximately $10.3$45.2 million or 58.1%, to $28.1an operating loss of approximately $18.2 million in the three months ended June 30, 2020, from an operating profit of approximately $27.1 million for the three months ended SeptemberJune 30, 2017, from $17.82019. This decrease was primarily as a result of a non-cash, pre-tax charge for asbestos-related costs of approximately $23.4 million in second quarter 2020 due to a change in accounting policy, as well as due to approximately $18.5 million of realignment expenses recorded in second quarter 2020, of which $15.4 million were non-cash and $3.1 million were cash expenses, primarily in our Aerospace and Specialty Products segments, where we executed actions to lower our cost structure in response to reduced end market demand following the outbreak of COVID-19. While higher sales contributed additional operating profit, this increase was more than offset by increased purchase accounting expenses, a less favorable product sales mix, and lower fixed cost absorption and higher production inefficiencies, both due in large part to the COVID-19 pandemic.
Interest expense increased approximately $0.7 million to $4.2 million for the three months ended SeptemberJune 30, 2016. Operating profit and margin increased due to higher sales levels in three of our four reportable segments, due to improved production scheduling and manufacturing efficiencies in our Aerospace reportable segment, footprint realignment activities within our Energy reportable segment and lower overall selling, general and administrative expenses compared to 2016, primarily related to costs associated with the change in our President and Chief Executive Officer in 2016.
Interest expense decreased approximately $0.1 million, to $3.4 million for the three months ended September 30, 2017,2020, as compared to $3.5 million for the three months ended SeptemberJune 30, 2016. Our2019, primarily as a result of increased weighted average borrowings decreased tofrom approximately $364.7$338.3 million induring the three months ended SeptemberJune 30, 2017, from2019 to approximately $446.3$465.6 million induring the three months ended SeptemberJune 30, 2016. The effective weighted average interest rate2020. We drew $150 million on our outstanding variable rate borrowings, including our Credit Agreement and accounts receivable facilities, increasedrevolving credit facility in first quarter 2020 to ensure availability of cash on hand, but subsequently repaid this amount late in second quarter 2020.
Other income, net decreased approximately 2.6% for three months ended September 30, 2017, from approximately 2.1% for the three months ended September 30, 2016.
We incurred debt financing and related expenses of approximately $6.6$0.1 million, to $1.1 million for the three months ended SeptemberJune 30, 2017 related2020, as compared to costs associated with the issuance of our Senior Notes, repayment of all outstanding obligations of the Term Loan A Facility, termination of the interest rate swaps and the amendment of our Credit Agreement.
Other expense, net was approximately $0.2$1.2 million for the three months ended SeptemberJune 30, 2017 and 2016, respectively,2019, primarily due to losses on transactions denominateda decrease in foreign currencies.currency gains.
The effective income tax ratesrate for the three months ended SeptemberJune 30, 20172020 and 2016 were 26.6%2019 was 26.1% and 37.8%24.5%, respectively. The decrease in the rate was primarilyrespectively, as we recorded a result of losses at certain foreign subsidiaries in third quarter 2016 where no tax benefit could be recorded that did not repeat in the third quarter of 2017, and the year-over-year impact of recognizing certain tax benefits due to a lapse of a statutory limitation.
Net income increased by approximately $4.3 million, to $13.1$5.6 million for the three months ended SeptemberJune 30, 2017,2020 as compared to $8.8tax expense of approximately $6.1 million for the three months ended SeptemberJune 30, 2016.2019. The increaseeffective tax rate for the quarter ended June 30, 2020 was primarilyimpacted by a decrease in profitability resulting from various one-time charges, including a change in the Company’s accounting policy for asbestos-related defense costs. This change was treated as a discrete item in determining tax expense for the quarter.
Income (loss) from continuing operations decreased approximately $34.4 million, to a net loss of $15.7 million for the three months ended June 30, 2020, as compared to net income of $18.7 million for the three months ended June 30, 2019. The decrease was the result of a $10.3 million increasedecrease in operating profit (loss) of approximately $45.2 million, an increase in interest expense, a $0.5 million decrease in other income, net, partially offset by an increase in income tax expense and a $0.1 million decrease in interest, partially offset by a $6.6 million increase in debt financing and related expenses.benefit (expense) of approximately $11.6 million.
See below for a discussion of operating results by segment.
Packaging. Net sales decreasedincreased approximately $0.824.8 million, or 0.9%23.9%, to $89.6128.8 million in the three months ended SeptemberJune 30, 20172020, as compared to $90.3104.0 million in the three months ended SeptemberJune 30, 2016.2019. Acquisition-related growth was approximately $7.1 million, comprised of approximately $4.5 million of sales from our April 2020 acquisition of Rapak as well as $2.6 million of April 2020 sales for Taplast, which was acquired in late April 2019. Sales of our health,dispensing products used in beauty and personal care and home care applications increased by approximately $8.6 million, primarily for personal hygiene applications, as demand rose, in part, due to the COVID-19 pandemic. Sales of products decreasedused in food and beverage markets increased by approximately $2.1$5.7 million, asprimarily due to higher sales in Asia were more than offset by lower demandof beverage dispensers, including pumps and related products, in North America. Sales of products used in industrial markets increased by approximately $3.0 million, primarily due to higher demand within North America, and Europe. Additionally,some of which we believe is attributable to higher sales of ourproducts used in the transportation of bulk sanitizer and industrial closures decreased approximately $0.5 million due to soft demand.cleaning solutions. These decreasesincreases were partially offset by an increase in sales of our food and beverage products in North America of approximately $1.5 million, as well as by approximately $0.3$2.4 million of favorableunfavorable currency exchange, as our reported results in U.S. dollars were favorablynegatively impacted as a result of the weakening of thestronger U.S. dollar relative to foreign currencies.
Packaging's grossGross profit decreasedincreased approximately $0.3$5.1 million to $31.9$37.9 million, or 35.6%29.4% of sales, in the three months ended SeptemberJune 30, 2017,2020, as compared to $32.2$32.7 million, or 35.6%31.5% of sales, in the three months ended SeptemberJune 30, 2016,2019, primarily due to increased sales levels. These increases were partially offset by approximately $0.9 million in non-cash realignment costs during second quarter 2020 primarily related to the disposal of certain equipment removed from service and approximately $0.8 million for a purchase accounting non-cash charge related to the step-up of Rapak's inventory to fair value and subsequent amortization. Gross profit margin was lower than second quarter 2019 due to lower production efficiencies and a less favorable product sales mix, including the impact of Rapak generating low gross profit, excluding the inventory step-up amortization, at current demand levels. Gross profit and margin were also impacted by approximately $0.7 million of unfavorable currency exchange, as our reported results in U.S. dollars were negatively impacted as a result of the lower sales levels.stronger U.S. dollar relative to foreign currencies.
Packaging's selling,Selling, general and administrative expenses decreasedincreased approximately $3.3$3.7 million to $8.8$13.8 million, or 9.8%10.7% of sales, in the three months ended SeptemberJune 30, 2017,2020, as compared to $12.1$10.1 million, or 13.4%9.7% of sales, in the three months ended SeptemberJune 30, 2016. The decrease is2019, as we incurred approximately $1.4 million in charges associated with second quarter 2020 realignment actions, primarily due tofor severance. In addition, our acquisitions added approximately $1.2$0.9 million of lower third party professional feeshigher ongoing selling, general and approximately $1.1 million of severance and other costsadministrative costs. The remaining increase was primarily related to the closure ofhigher personnel-related expenses to support our former Mexico facility during the three months ended September 30, 2016 that did not repeat in the three months ended September 30, 2017. The remaining $1.0 million decrease was primarily due to lower employee and administrative related costs.sales growth initiatives.
Packaging's operatingOperating profit increased approximately $3.0$1.4 million to $23.1$24.0 million, or 25.8%18.7% of sales, in the three months ended SeptemberJune 30, 2017,2020, as compared to $20.1$22.6 million, or 22.2%21.8% of sales, in the three months ended SeptemberJune 30, 2016. Although2019, as the impact of increased sales decreased, operating profit andwas mostly offset by realignment charges taken during the related margin improved primarilyquarter, purchase accounting adjustments, a less favorable product sales mix, production inefficiencies as a result of the decrease in Packaging'sCOVID-19 pandemic and higher selling, general and administrative expenses.
Aerospace. Net sales for the three months ended SeptemberJune 30, 2017increased2020decreased approximately $1.2$6.9 million, or 2.4%13.9%, to $48.642.6 million, as compared to $47.449.5 million in the three months ended SeptemberJune 30, 2016. As we have moved thorough 2017, we continue2019. RSA, acquired in February 2020, contributed approximately $5.9 million of sales. Sales of our fastener and machined components products declined by approximately $8.7 million and $4.1 million, respectively, both due to improvelower demand resulting from reduced aircraft production scheduling and manufacturing efficiencies, which enabled usfollowing the onset of the COVID-19 pandemic, with fastener sales also lower than second quarter 2019, as expected, due to increase daily production rates and ship higher levels of net sales in 2017 as compared to 2016. Sales to our distribution customers increased approximately $2.3 million, while sales to OE customers decreased approximately $1.1 million.the 737 Max grounding.
Gross profit within Aerospace increaseddecreased approximately $0.4$10.6 million to $13.5$2.7 million, or 27.7%6.3% of sales, in the three months ended SeptemberJune 30, 2017,2020, from $13.1$13.2 million, or 27.6%26.7% of sales, in the three months ended SeptemberJune 30, 2016, primarily as a result of higher2019, due in part to the decrease in sales levels and related improvedlower fixed cost absorption.absorption and production inefficiencies due to the impact of the COVID-19 pandemic. During the second quarter of 2020, we executed certain realignment actions to protect against uncertain end market demand and other adverse effects following the outbreak of the COVID-19 pandemic, resulting in charges of approximately $4.2 million related to inventory reductions, approximately $1.7 million related to severance as we reduced our manufacturing employment levels and approximately $0.3 million related to production equipment removed from service. In addition, we recorded an approximate $1.5 million purchase accounting non-cash charge related to the step-up of RSA's inventory to fair value and subsequent amortization.
Selling, general and administrative expenses increased approximately $1.3 million to approximately $6.9 million, or 16.1% of sales, in the three months ended June 30, 2020, as compared to $5.6 million, or 11.3% of sales, in the three months ended June 30, 2019, primarily due to ongoing costs of RSA as well as approximately $0.4 million of realignment expenses.
Operating profit (loss) decreased approximately $11.9 million to an operating loss of $4.2 million, or 9.9% of sales, in the three months ended June 30, 2020, as compared to an operating profit of $7.7 million, or 15.5% of sales in the three months ended June 30, 2019, primarily due to the impact of realignment charges taken during the second quarter of 2020, as well as the impact of lower sales levels which resulted in lower fixed cost absorption and higher production inefficiencies as a result of the COVID-19 pandemic, and the recognition of the purchase accounting adjustment related to RSA's inventory step-up to fair value and subsequent amortization.
Specialty Products. Net sales for the three months ended June 30, 2020 decreased approximately $9.2 million, or 24.7%, to $28.1 million, as compared to $37.3 million in the three months ended June 30, 2019. Sales of our cylinder products decreased approximately $8.2 million, as lower demand for steel cylinders used in construction and HVAC end markets in North America more than offset a modest increase in the sale of cylinders used for oxygen and other medical applications. Sales of engines, compressors and related parts used in upstream oil and gas applications decreased by approximately $1.0 million, primarily as a result low oil-field activity in North America given further reductions in rig counts, and included approximately $0.7 million of sales in second quarter 2020 related to $5.7the liquidation of non-core inventory following our strategic decision to streamline Arrow Engine's product line offering.
Gross profit (loss) decreased approximately $11.1 million to a gross loss of $3.3 million, or 11.7% of sales, in the three months ended SeptemberJune 30, 2017,2020, as compared to $6.4gross profit of $7.8 million,, or 13.5%20.9% of sales, in the three months ended SeptemberJune 30, 2016,2019, due in part to the decrease in sales levels and related lower fixed cost absorption and production inefficiencies, primarily duefrom the impact of the COVID-19 pandemic. During the second quarter of 2020, we executed certain realignment actions in response to reduced end market demand, resulting in approximately $0.3$9.0 million non-cash charges in the second quarter of lower estimated uncollectable accounts receivable2020, primarily related to Arrow Engine streamlining its product line offering and liquidating the non-core inventory.
Selling, general and administrative expenses as a result of collection of previously reserved customer balances, as well as decreased spending in certain administrative support costs.
Operating profit within Aerospace increased approximately $1.1$0.2 million to $7.8$2.7 million, or 16.0%9.4% of sales, in the three months ended SeptemberJune 30, 2017,2020, as compared to $6.7$2.4 million, or 14.0%6.5% of sales, in the three months ended SeptemberJune 30, 2016. Operating profit improved primarily2019. During second quarter 2020, we incurred selling, general and administrative realignment expenses of approximately $0.7 million related to severance as we reduced our employment levels, which was partially offset by reduced spending levels as a result of higher sales levels and continued improvement in production scheduling and manufacturing efficiencies, as well as lower selling, general and administrative expenses.activity levels.
Energy. Net sales for the three months ended September 30, 2017increasedOperating profit (loss) decreased approximately $2.2 million, or 5.8%, to $40.4 million, as compared to $38.2 million in the three months ended September 30, 2016. Sales increased by approximately $3.2 million in North America, primarily due to increased customer demand resulting from improved on time delivery, as well as increasing production rates in September 2017 to meet customers' immediate needs following Hurricane Harvey. The increase was partially offset by a decrease in net sales of approximately $0.8 million in Europe, primarily due to exiting our facility in Wolverhampton, United Kingdom.
Gross profit within Energy increased approximately $0.7$11.4 million to $8.4an operating loss of $5.9 million, or 20.7%21.1% of sales, in the three months ended SeptemberJune 30, 2017,2020, as compared to $7.7an operating profit of $5.4 million, or 20.1%14.5% of sales, in the three months ended SeptemberJune 30, 2016. Gross profit increased approximately $1.1 million2019, primarily as a result of the second quarter 2020 realignment actions, as well as due to the impact of lower costs in the third quarter of 2017 following the closure of our facilities in Reynosa, Mexicosales and Wolverhampton, United Kingdom, and by approximately $0.4 million related to higher sales levels. These increases were partially offset by higher labor costs, lower fixed cost absorption and a less favorable product sales mix in the United States following the August 2017 hurricane.
Selling, general and administrative expenses within Energy decreased approximately $2.4 million to $7.1 million, or 17.6% of sales, in the three months ended September 30, 2017, as compared to $9.5 million, or 25.0% of sales, in the three months ended September 30, 2016. The decrease in selling, general and administrative expenses is due to this segment's reduced cost structure and footprint, with approximately $1.3 million of the reduction due to eliminating costs specific to facilities that have been closed in the last twelve months, and the remaining $1.1 million due to lower ongoing spending levels in the remaining locations.
Operating profit within Energy increased approximately $3.1 million to approximately $1.2 million of profit, or 3.1% of sales, in the three months ended September 30, 2017, as compared to a loss of $1.9 million, or 4.9% of sales, in the three months ended September 30, 2016, as a result of lower selling, general and administrative expenses related to prior footprint realignment activities and higher sales levels, which were partially offset by higher costs and a less favorable product sales mix impacted by the August 2017 hurricane.
Engineered Components. Net sales for the three months ended September 30, 2017increased approximately $4.5 million, or 17.0%, to $30.8 million, as compared to $26.3 million in the three months ended September 30, 2016. Sales of our industrial cylinders increased by approximately $3.0 million, primarily due to higher sales of acetylene cylinders used in industrial applications. Sales of our engines and compression-related products increased by approximately $1.5 million, as we experienced improved demand levels compared with prior year consistent with drilling activity in the United States and Canada and continued stabilization of oil prices.
Gross profit within Engineered Components remained flat at $5.1 million, or 16.7% of sales, in the three months ended September 30, 2017, as compared to 19.5% of sales in the three months ended September 30, 2016. Gross profit and related margin on our engines and compression-related products increased primarily as a result of higher sales levels and fixed cost leverage, while gross profit and related margin on sales of our industrial cylinders decreased primarily due to higher steel costs and a less favorable product mix, with a greater percentage of sales of lower-margin small high pressure and acetylene cylinder products.
Selling, general and administrative expenses decreased approximately $0.1 million to $1.8 million, or 5.9% of sales, in the three months ended September 30, 2017, as compared to $1.9 million, or 7.4% of sales, in the three months ended September 30, 2016, as we have continued to align our ongoing operating costs consistent with current demand levels.
Operating profit within Engineered Components increased approximately $0.1 million to $3.3 million, or 10.8% of sales, in the three months ended September 30, 2017, as compared to $3.2 million, or 12.1% of sales in the three months ended September 30, 2016. Operating profit increased due to higher sales levels and continued cost reduction actions to align our cost structure with demand levels, while operating profit margin decreased as a result of higher steel costs and a less favorable product mix on sales of our industrial cylinders.production inefficiencies.
Corporate Expenses.Corporate. Corporate expenses consist of the following (dollars in millions):
| | | | Three months ended September 30, | | Three months ended June 30, |
| | 2017 | | 2016 | | 2020 | | 2019 |
Corporate operating expenses | | $ | 2.7 |
| | $ | 6.0 |
| | $ | 5.6 |
| | $ | 5.9 |
|
Employee costs and related benefits | | 4.6 |
| | 4.3 |
| |
Non-cash stock compensation | | | 2.8 |
| | 1.6 |
|
Legacy expenses | | | 23.6 |
| | 1.1 |
|
Corporate expenses | | $ | 7.3 |
| | $ | 10.3 |
| | $ | 32.0 |
| | $ | 8.6 |
|
Corporate expenses decreasedincreased approximately $3.0$23.4 million to $7.332.0 million for the three months ended SeptemberJune 30, 20172020, from $10.38.6 million for the three months ended SeptemberJune 30, 2016. Corporate operating expenses decreased approximately $3.32019, primarily as a result of the $23.4 million primarilynon-cash charge in second quarter 2020 due to approximately $3.5 millionthe change of costs related to the July 2016 change in our President and Chief Executive Officer. Employee costs and related benefitsaccounting policy for asbestos-related defense costs. Non-cash stock compensation expense increased by approximately $0.3 million, primarily due to an increase in expense related to the timing and estimated attainmentnature of our incentive compensation plans.equity awards in 2020 compared with 2019, the impact of which was offset by lower corporate operating expenses and reduced non-asbestos-related legacy expenses.
NineSix Months Ended SeptemberJune 30, 20172020 Compared with NineSix Months Ended SeptemberJune 30, 20162019
Overall, net sales increased approximately $14.0$18.1 million, or 2.3%5.0%, to $622.5$382.3 million for the ninesix months ended SeptemberJune 30, 2017,2020, as compared with $608.5$364.2 million in the ninesix months ended SeptemberJune 30, 2016. Sales within our Aerospace reportable segment increased2019. Acquisitions contributed approximately $9.5$23.5 million with increases inof inorganic sales to distribution and OE customers, as a result of improved manufacturing throughput. Our Energy and Engineered Components reportable segments had a combinedgrowth. Organic sales, increase of approximately $3.8 million, primarily as a result of increased market share gains following our improvements in on-time delivery in the Energy segment, as well as some market stabilization despite continued low oil prices. In addition, excluding the effectsimpact of foreign currency exchange, sales within our Packaging reportable segment increaseddecreased by approximately $3.7$2.0 million, primarily due to increased demand for our industrial closures in North America and Europe and for our health, beauty and home care products in Europe and Asia. Theseas sales increases were partially offset by approximately $3.0 million of net unfavorable currency exchange, primarily in our Packaging reportable segment, primarily for products used in applications that help fight the spread of germs, were offset by lower sales in our Aerospace and Specialty Products segments. In addition, net sales were lower by approximately $3.3 million due to unfavorable currency exchange, as our reported results in U.S. dollars were negatively impacted as a result of the stronger U.S. dollar relative to foreign currencies.
Gross profit margin (gross profit as a percentage of sales) approximated 27.3%21.9% and 28.1%27.6% for the ninesix months ended SeptemberJune 30, 20172020 and 2016,2019, respectively. Gross profit margin decreased, as the impact of higher sales levels was more than offset by the impact of approximately $16.0 million of realignment expenses, $14.3 million of which were non-cash and $1.7 million were cash expenses, primarily duein our Aerospace and Specialty Products segments, where we executed actions to costs associated withlower our cost structure in response to reduced end market demand following the consolidationoutbreak of manufacturing facilities in India and to finalize the move to a new Mexico facility, both within our Packaging reportable segment, as well as costs associated with the closure of the Reynosa, Mexico facility within our Energy reportable segment.COVID-19 pandemic. In addition, we recorded approximately $2.8 million of purchase accounting non-cash charges in the six months ended June 30, 2020 for the step-up of inventory to fair value and subsequent amortization related to our RSA and Rapak acquisitions as compared to approximately $0.3 million of such charges for our 2019 acquisitions in the six months ended June 30, 2019. Our gross profit decreased comparedmargin in the first six months of 2020 was also impacted by a less favorable product sales mix, lower fixed cost absorption and higher production inefficiencies due primarily to the prior year period by approximately $1.6 million as a result of unfavorable currency exchange, as our reported results in U.S. dollars were negatively impacted as a result of the stronger U.S. dollar relative to foreign currencies. These decreases were partially offset by improved manufacturing efficiency levels and reduced manufacturing spend, primarily within our Aerospace reportable segment.COVID-19 pandemic.
Operating profit margin (operating profit as a percentage of sales) approximated 11.3%0.4% and 8.7%12.9% for the ninesix months ended SeptemberJune 30, 20172020 and 2016,2019, respectively. Operating profit increaseddecreased approximately $17.2$45.2 million, or 32.5%96.4%, to $70.1$1.7 million for the ninesix months ended SeptemberJune 30, 2017,2020, compared to $52.9$46.9 million for the ninesix months ended SeptemberJune 30, 2016. Operating profit and margin increased2019. This decrease was primarily as a result of a non-cash, pre-tax charge for asbestos-related costs of approximately $23.4 million in the first half of 2020 due to a change in accounting policy, as well as due to approximately $18.5 million of realignment expenses recorded in the first half of 2020, of which $15.4 million were non-cash and $3.1 million were cash expenses, primarily in our Aerospace and Specialty Products segments, where we executed actions to lower our cost structure in response to reduced end market demand following the outbreak of COVID-19. While higher operating profit was generated from higher sales levels, and productivity initiatives to improve scheduling and throughput, particularly in our Aerospace reportable segment, and thethis impact of our completed 2016 footprint realignment activities within our Energy reportable segment. These factors were partiallywas more than offset by a less favorable product sales mix, lower fixed cost absorption and higher production inefficiencies due in large part to the costs incurred in the first nine monthsCOVID-19 pandemic. Operating profit (loss) also decreased as a result of 2017 associated with footprint consolidationincreased purchase accounting expenses and relocation projects within our Packaging and Energy reportable segments.as a result of unfavorable currency exchange.
Interest expense increased approximately $0.2$0.9 million, to $10.4$7.8 million, for the ninesix months ended SeptemberJune 30, 2017,2020, as compared to $10.2$6.9 million for the ninesix months ended SeptemberJune 30, 2016. The increase2019, primarily as a result of increased weighted average borrowings from approximately $329.5 million during the six months ended June 30, 2019 to approximately $413.6 million during the six months ended June 30, 2020. We drew $150 million on our revolving credit facility in interestfirst quarter 2020 to ensure availability of cash on hand, but subsequently repaid this amount late in second quarter 2020.
Other income, net increased approximately $0.4 million, to $1.1 million for the six months ended June 30, 2020, from $0.7 million of other expense, wasnet for the six months ended June 30, 2019, primarily due to an increase in our interest rates, which more than offset lower average borrowings. Our weighted average borrowings decreased to approximately $390.9 million in the nine months ended September 30, 2017, from approximately $461.6 million in the nine months ended September 30, 2016. The effective weighted average interest rate on our outstanding variable rate borrowings, including our Credit Agreement and accounts receivable facilities, increased to approximately 2.6% for the nine months ended September 30, 2017, from approximately 2.1% for the nine months ended September 30, 2016.
We incurred debt financing and related expenses of approximately $6.6 million for the nine months ended September 30, 2017 related to costs associated with the issuance of our Senior Notes, repayment of all outstanding obligations of the Term Loan A Facility, termination of the interest rate swaps and the amendment of our Credit Agreement.
Other expense, net increased approximately $0.7 million, to $0.8 million for the nine months ended September 30, 2017, from $0.1 million for the nine months ended September 30, 2016, primarily due to an increasea year over year decrease in losses on transactions denominated in foreign currencies.
The effective income tax ratesrate for the ninesix months ended SeptemberJune 30, 20172020 and 2016 were 33.2%2019 was 49.2% and 35.2%18.0%, respectively.respectively, as we recorded a tax benefit of approximately $2.5 million for the six months ended June 30, 2020 as compared to tax expense of approximately $7.3 million for the six months ended June 30, 2019. The effective tax rate for the six months ended June 30, 2020 was impacted by a decrease in the rate was primarily a result of losses at certain foreign subsidiaries in 2016 where no tax benefit could be recorded, the year-over-year impact of recognizing certain tax benefits due to a lapse of a statutory limitation, andprofitability resulting from various one-time charges, including a change in the Company's indefinite reinvestment assertion in undistributed foreign earnings in two of its foreign subsidiaries. These increases were partially offset byCompany’s accounting policy for asbestos-related defense costs. This change was treated as a discrete item in determining tax benefitexpense for the six months ended June 30, 2020. In addition, we recognized discrete items that occurred during the first six months of 2019 as compared to first six months of 2020, including the reversal of uncertain tax benefits for which the statute of limitations expired, excess tax benefits related to stockshare based compensation recognizedthat vested in 2019, and a reduction in deferred tax liabilities resulting from the nine months ended September 30, 2017.implementation of state tax planning initiatives.
Net income increasedIncome (loss) from continuing operations decreased by approximately $7.4$35.9 million, to $35.0a loss of $2.6 million for the ninesix months ended SeptemberJune 30, 2017,2020, compared to $27.6income of $33.3 million for the ninesix months ended SeptemberJune 30, 2016.2019. The increasedecrease was primarily the result of a $17.2decrease in operating profit of approximately $45.2 million and an increase in operating profit,interest expense, partially offset by an increase in debt financing and related expenses of $6.6 million, a $2.4 million increase in income tax expense, a $0.7benefit (expense) of approximately $9.8 million and an increase in other expense, net and a $0.2 million increase in interest expense.income, net.
See below for a discussion of operating results by segment.
Packaging. Net sales increased approximately $0.7$36.1 million, or 0.3%18.7%, to $259.3$228.9 million in the ninesix months ended SeptemberJune 30, 2017,2020, as compared to $258.6$192.8 million in the ninesix months ended SeptemberJune 30, 2016.2019. Acquisition-related growth was approximately $14.6 million, comprised of approximately $4.5 million of sales from our April 2020 acquisition of Rapak as well as $10.1 million of January through April 2020 sales for Taplast, which was acquired in late April 2019. Sales of ourdispensing products used in beauty and personal care and home care applications increased by approximately $12.1 million, primarily as demand increased for personal hygiene applications due to heightened awareness of reducing the spread of germs following the COVID-19 pandemic. Sales of products used in food and beverage productsmarkets increased by approximately $2.3$7.2 million, primarily due to increased demandhigher sales of beverage dispensers, including pumps and related products, in North America. Sales of ourproducts used in industrial closuresmarkets increased by approximately $1.0 million due to higher demand in Europe. Additionally, sales of our health, beauty and home care products increased approximately $0.4$3.4 million, primarily due to higher demand within North America, some of which we believe is attributable to higher sales of products used in Asiathe transportation of bulk sanitizer and Europe, which offset lower demand in North America.industrial cleaning solutions. These increases were partially offset by approximately $3.0$3.3 million of unfavorable currency exchange, as our reported results in U.S. dollars were negatively impacted as a result of the stronger U.S. dollar relative to foreign currencies.
Packaging's gross profit decreasedincreased approximately $2.5$5.8 million to $89.8$66.5 million, or 34.6%29.1% of sales, in the ninesix months ended SeptemberJune 30, 2017,2020, as compared to $92.3$60.7 million, or 35.7%31.5% of sales, in the ninesix months ended SeptemberJune 30, 2016. Although2019, primarily due to increased sales levels, increased, grosswhich was partially offset by approximately $0.9 million in non-cash realignment costs during second quarter 2020 primarily related to the disposal of certain equipment which was taken out of service and approximately $0.8 million for a purchase accounting non-cash charge related to the step-up of Rapak's inventory to fair value and subsequent amortization. Gross profit decreasedmargin was lower than second quarter 2019 due to approximately $1.4 million of costs to consolidate manufacturing facilities in India and to finalize the move to a new facility in Mexico in the first quarter of 2017.less favorable product sales mix. In addition, gross profit declinedmargin was further reduced due to generally lower production efficiencies, as well as Rapak currently generating low gross profit at current demand levels, both as a result of the impacts of the COVID-19 pandemic. Gross profit and margin were also impacted by approximately $1.7$1.0 million due toof unfavorable currency exchange, as our reported results in U.S. dollars were negatively impacted as a result of the stronger U.S. dollar relative to foreign currencies.
Packaging's selling, general and administrative expenses decreasedincreased approximately $4.7$3.8 million to $28.3$24.2 million, or 10.9%10.6% of sales, in the ninesix months ended SeptemberJune 30, 2017,2020, as compared to $33.0$20.4 million, or 12.7%10.6% of sales, in the ninesix months ended SeptemberJune 30, 2016. The decrease was2019, as we incurred approximately $1.4 million in charges associated with our realignment actions, primarily due tofor severance. We also incurred approximately $1.6 million of higher ongoing selling, general and administrative costs incurred in the first quarter of 2016 in connectionassociated with re-organizing our go-to-market strategy based on global product categories,acquisitions, as well as generally lower go-forward spending levels resulting from this reorganization. Additionally, we recognized approximately $1.1 million of severance and other costs related to the closure ofrecorded higher personnel-related expenses given higher demand for our former Mexico facility and the establishment and move to the new manufacturing facility in Mexico during the three months ended September 30, 2016 that did not repeat in the three months ended September 30, 2017. The decreaseproducts. This increase was partially offset by an approximate $1.1$0.8 million non-cash charge recordedduring the three months ended March 31, 2019 related to the write-off of the trade name acquired in the second quarter of 2017 to reserve an outstanding accounts receivable amount for a European customer who filed for bankruptcy.Plastic Srl acquisition that was not used.
Packaging's operating profit increased approximately $2.1$2.0 million to $61.5$42.3 million, or 23.7%18.5% of sales, in the ninesix months ended SeptemberJune 30, 2017,2020, as compared to $59.3$40.3 million, or 23.0%20.9% of sales, in the ninesix months ended SeptemberJune 30, 2016. Operating profit improved primarily due to lower ongoing selling, general and administrative expenses associated with our re-organization efforts,2019, as a result of increased sales, which was partially offset costs incurred in 2017 to consolidate facilities in India and finalize the move to a new manufacturing facility in Mexico, the charge recorded inby realignment charges taken during the second quarter of 20172020, the recognition of the purchase accounting adjustment related to reserve an outstanding accounts receivable amountRapak's inventory step-up to fair value and approximately $1.1 million of unfavorable currency exchange.
Aerospace. Netsubsequent amortization, a less favorable product sales for the nine months ended September 30, 2017increased approximately $9.5 million, or 7.2%, to $141.6 million, as compared to $132.0 million in the nine months ended September 30, 2016. We continued to improvemix, production scheduling and manufacturing efficiencies, which enabled us to increase daily production rates and ship higher levels of net sales in 2017 as compared to 2016. Sales to our distribution customers increased approximately $9.0 million, as order patterns from our customers continued to stabilize and increase in 2017 as compared to the lower and more volatile levels throughout 2016. Sales to our OE customers increased approximately $0.5 million.
Gross profit within Aerospace increased approximately $3.8 million to $36.5 million, or 25.8% of sales, in the nine months ended September 30, 2017, from $32.7 million, or 24.8% of sales, in the nine months ended September 30, 2016, primarilyinefficiencies as a result of higher sales levels. In addition, during the first nine months of 2016, we incurred additional costsCOVID-19 and experienced lower fixed cost absorption associated with production scheduling and manufacturing inefficiencies, primarily in our Commerce, California facility. We have improved the efficiency levels during the first nine months of 2017 and reduced manufacturing spend levels despite higher demand level in this facility. These improvements were partially offset by higher costs due to manufacturing costs and inefficiencies at our standard fastener facility in Ottawa, Kansas.
Selling, general and administrative expenses decreased approximately $2.2 million to $16.9 million, or 11.9% of sales, in the nine months ended September 30, 2017, as compared to $19.1 million, or 14.4% of sales, in the nine months ended September 30, 2016, primarily due to approximately $1.1 million of lower estimated uncollectable accounts receivable expenses as a result of collection of previously reserved customer balances and approximately $1.1 million of reduced professional fees and certain administrative support costs.
Operating profit within Aerospace increased approximately $6.0 million to $19.7 million, or 13.9% of sales, in the nine months ended September 30, 2017, as compared to $13.7 million, or 10.4% of sales, in the nine months ended September 30, 2016. Operating profit improved primarily as a result of higher sales levels, continued improvement in production scheduling and manufacturing efficiencies and lower selling, general and administrative expenses.
Energy.Aerospace. Net sales for the ninesix months ended SeptemberJune 30, 2017 increased2020 decreased approximately $1.9$3.6 million, or 1.6%3.7%, to $124.9$91.5 million, as compared to $122.9$95.1 million in the ninesix months ended SeptemberJune 30, 2016.2019. The February 2020 acquisition of RSA contributed approximately $8.9 million of sales. Sales increased approximately $5.5 million in North Americaof our fastener and machined components products declined by approximately $0.2$7.8 million in Asia primarilyand $4.7 million, respectively, both due to increased customerlower demand following improvements in our on-time deliveryresulting from current and increasing our share of turnaround activity. These increases were more than offset by a decrease in net sales of approximately $3.8 million in Europe, primarilyexpected future reduced air travel due to exiting our facility in Wolverhampton, United Kingdom.the COVID-19 pandemic, with fastener sales also lower than the first half of 2019, as expected, due to the 737 Max grounding.
Gross profit within EnergyAerospace decreased approximately $1.6$10.5 million to $24.9$14.6 million, or 19.9%15.9% of sales, in the ninesix months ended SeptemberJune 30, 2017, as compared to $26.52020, from $25.0 million, or 21.5%26.3% of sales, in the ninesix months ended SeptemberJune 30, 2016. Gross profit decreased approximately $2.3 million as a result2019, due in part to the decrease in sales levels and related lower fixed cost absorption and production inefficiencies due to the impact of higher coststhe COVID-19 pandemic. During the second quarter of 2020, we undertook certain realignment actions to protect against uncertain end market demand related to the exitCOVID-19 pandemic, resulting in charges of approximately $4.2 million related to inventory reductions, $1.7 million related to severance as we reduced our facilitymanufacturing employment levels and $0.3 million related to production equipment removed from service given current demand levels. In addition, we recorded an approximate $2.0 million purchase accounting non-cash charge related to the step-up of RSA's inventory to fair value and subsequent amortization during the first half of 2020.
Selling, general and administrative expenses increased approximately $2.1 million to $13.7 million, or 15.0% of sales, in Reynosa, Mexicothe six months ended June 30, 2020, as compared to $11.6 million, or 12.2% of sales, in the six months ended June 30, 2019, primarily due to ongoing costs of RSA, as well as approximately $0.4 million of realignment expenses incurred in the first half of 2017. While2020.
Operating profit within Aerospace decreased approximately $12.6 million to $0.9 million, or 1.0% of sales, increased in the United States, gross profit decreasedsix months ended June 30, 2020, as compared to $13.5 million, or 14.2% of sales, in the six months ended June 30, 2019, primarily due to a less favorable product sales mix,the impact of realignment charges in second quarter 2020, as well as the impact of lower sales levels which resulted in lower fixed cost absorption and higher costs associated withproduction inefficiencies as a result of the COVID-19 pandemic, the recognition of the purchase accounting adjustment related to RSA's inventory step-up to fair value and subsequent amortization and higher selling, general and administrative expenses.
Specialty Products. Net sales for the six months ended June 30, 2020 decreased approximately $14.4 million, or 18.8%, to $61.9 million, as compared to $76.3 million in the six months ended June 30, 2019. Sales of our cylinder products decreased by approximately $11.9 million, as lower demand for steel cylinders used in construction and HVAC activity in North America more than offset a modest increase in the sale of cylinders used for oxygen and other medical applications. Sales of engines, compressors and related parts used in upstream oil and gas applications decreased by approximately $2.5 million, primarily as a result of low oil-field activity in North America given the low price of oil and included approximately $0.7 million of sales related to the liquidation of non-core inventory following our strategic decision to streamline Arrow Engine's product line offering.
Gross profit within Specialty Products decreased approximately $12.4 million to $2.5 million, or 4.0% of sales, in the August 2017 hurricane.
six months ended June 30, 2020, as compared to $14.8 million, or 19.5% of sales, in the six months ended June 30, 2019, due in part to the decrease in sales levels and related lower fixed cost absorption and production inefficiencies due primarily to the impact of the COVID-19 pandemic. During the second quarter of 2020, we undertook certain realignment actions in response to reduced end market demand as a result of the COVID-19 pandemic, resulting in approximately $9.0 million of non-cash charges in the second quarter of 2020, primarily related to Arrow Engine streamlining its product line offering and liquidating its non-core inventory.
Selling, general and administrative expenses within Energy decreasedSpecialty Products increased approximately $7.6$0.3 million to $27.4$5.0 million, or 22.0%8.1% of sales, in the ninesix months ended SeptemberJune 30, 2017,2020, as compared to $35.0$4.7 million, or 28.5%6.2% of sales, in the ninesix months ended SeptemberJune 30, 2016. Selling,2019. During the first half of 2020, we incurred selling, general and administrative realignment expenses decreased byof approximately $3.2$0.7 million as a result of elimination of costs related to closed facilities,severance as we reduced our employment levels, which was partially offset by approximately $1.0 million as a result of an increase in reserves for past due accounts receivable in the first nine months of 2016 that did not repeat in the first nine months of 2017, and by approximately $0.8 millionreduced spending levels as a result of lower third-party professional fees. The remaining $2.6activity levels.
Operating profit (loss) within Specialty Products decreased approximately $12.6 million decrease was primarily due to lower ongoing costs associated with the Company's current operating footprint following completion of significant realignment activities.
Overall,an operating loss within Energy decreased approximately $6.0of $2.5 million, to a $2.6 million loss, or 2.0%4.1% of sales, in the ninesix months ended SeptemberJune 30, 2017,2020, as compared to a $8.6$10.1 million loss, or 7.0% of sales, in the nine months ended September 30, 2016, as a result of lower selling, general and administrative expenses related to prior footprint realignment activities, lower bad debt expense, which more than offset the costs incurred in 2017 associated with the closure of our Reynosa, Mexico facility.
Engineered Components. Net sales for the nine months ended September 30, 2017increased approximately $1.9 million, or 2.0%, to $96.9 million, as compared to $95.0 million in the nine months ended September 30, 2016. Sales of our oil-field engines and compression-related products increased by approximately $2.7 million primarily due to increases in drilling activity in the United States and Canada and the continued stabilization of oil prices. Sales of our industrial cylinders decreased by approximately $0.8 million, primarily due to the impact of certain of our large customers consolidating operations and lowering their current cylinder purchases.
Gross profit within Engineered Components decreased approximately $0.8 million to $18.8 million, or 19.4% of sales, in the nine months ended September 30, 2017, from $19.6 million, or 20.6% of sales, in the nine months ended September 30, 2016. Gross profit and related margin from sales of our industrial cylinders decreased approximately $2.1 million as a result of higher steel costs, lower sales in the U.S. industrial packaged gas market and a less favorable product mix. Gross profit from sales of our engines and compression-related products increased approximately $1.3 million due to higher sales levels and leveraging our lower fixed cost structure.
Selling, general and administrative expenses decreased approximately $1.1 million to $5.8 million, or 6.0% of sales, in the nine months ended September 30, 2017, as compared to $6.9 million, or 7.3% of sales, in the nine months ended September 30, 2016 primarily due to lowering our ongoing operating costs consistent with current demand levels.
Operating profit within Engineered Components increased approximately $0.4 million to $13.0 million, or 13.4% of sales, in the nine months ended September 30, 2017, as compared to operating profit, of $12.6 million, or 13.3% of sales, in the ninesix months ended SeptemberJune 30, 2016. Operating profit improved2019, primarily as a result of the second quarter 2020 realignment actions, as well as due to increasedthe impact of lower sales levels of our oil-field engines and compression-related products and better leveraging of ourrelated lower fixed cost structure, while operating profit margin as a percentage of sales remained flat primarily due to lower sales in the U.S. industrial packaged gas market, higher steel costsabsorption and a less favorable product mix.production inefficiencies.
Corporate Expenses.Corporate. Corporate expenses, net consist of the following (dollars in millions):
| | | | Nine months ended September 30, | | Six months ended June 30, |
| | 2017 | | 2016 | | 2020 | | 2019 |
Corporate operating expenses | | $ | 7.4 |
| | $ | 10.4 |
| | $ | 10.9 |
| | $ | 11.8 |
|
Employee costs and related benefits | | 14.1 |
| | 13.8 |
| |
Non-cash stock compensation | | | 4.7 |
| | 2.9 |
|
Legacy expenses | | | 23.4 |
| | 2.3 |
|
Corporate expenses | | $ | 21.5 |
| | $ | 24.2 |
| | $ | 39.0 |
| | $ | 17.0 |
|
Corporate expenses decreasedincreased approximately $2.7$22.0 million to $21.539.0 million for the ninesix months ended SeptemberJune 30, 20172020, from $24.217.0 million for the ninesix months ended SeptemberJune 30, 2016. Corporate operating expenses decreased approximately $3.02019, primarily as a result of the $23.4 million primarilynon-cash charge in second quarter 2020 due to approximately $3.5 millionthe change of our accounting policy for asbestos-related defense costs relatedfrom accruing for probable and reasonably estimable defense costs associated with known claims expected to the July 2016 change in our Presidentsettle to accrue for all future defense costs for both known and Chief Executive Officer that did not repeat in 2017, partially offset by a favorable property tax assessment settlement of approximately $0.4 million for a former business unit that did not repeat in 2017. Employee costs and related benefitsunknown claims, which we now believe can be reasonably estimated. Non-cash stock compensation expense increased by approximately $0.3 million, primarily due to an increase in expense related to the timing and estimated attainmentnature of our incentive compensation plans.equity awards in 2020 compared with 2019, the impact of which was more than offset by lower corporate operating expenses and the favorable resolution of a legacy matter during the first half of 2020.
Liquidity and Capital Resources
Cash Flows
Cash flows provided by operating activities were approximately $72.7$30.8 million for the ninesix months ended SeptemberJune 30, 2017,2020, as compared to approximately $46.4$32.8 million for the ninesix months ended SeptemberJune 30, 2016.2019. Significant changes in cash flows provided by operating activities and the reasons for such changes were as follows:
For the ninesix months ended SeptemberJune 30, 2017,2020, the Company generated approximately $87.4$52.1 million of cash, based on the reported net incomeloss of approximately $35.0$2.6 million and after considering the effects of non-cash items related to lossesdepreciation, amortization, loss on dispositions of assets, depreciation, amortization, changes in deferred income taxes, debt financing and related expenses, stock-based compensation, asbestos-related change in liability estimate and other operating activities. For the ninesix months ended SeptemberJune 30, 2016,2019, the Company generated approximately $67.1$61.1 million in cash flows based on the reported net income from continuing operations of approximately $27.6$33.3 million and after considering the effects of similar non-cash items.
Increases in accounts receivable resulted in a use of cash of approximately $12.7$12.3 million and $9.8$5.7 million for the ninesix months ended SeptemberJune 30, 20172020 and 2016,2019, respectively. The increased use of cash for each of the ninesix month periods is due primarily to the timing of sales and collection of cash related thereto within the periods. Days sales outstanding of receivables decreased by four days as of September 30, 2017 asremained relatively flat compared to September 30, 2016, primarily as a result of our increased focus on collections activity.the comparable 2019 period.
For the nine months ended September 30, 2017, we increasedWe decreased our investment in inventory by approximately $0.6 million. For$5.3 million for the ninesix months ended SeptemberJune 30, 2016, we increased our investment2020, and by approximately $0.4 million for the six months ended June 30, 2019. Our days sales in inventory decreased by approximately $4.6 million, primarilyten days in 2020 compared with the comparable 2019 period as a result of lower than expectedsecond quarter 2020 realignment actions to reduce inventory, primarily related to our strategic decision in our Arrow Engine division to streamline its product line offering. We continue to moderate inventory levels in line with sales as we operated at higher production levels earlier in 2016 in anticipation of higher customer demand.levels.
Decreases in prepaid expenses and other assets resulted in a cash source of cash of approximately $7.1 million and $10.8$0.3 million for the ninesix months ended SeptemberJune 30, 20172020 and 2016, respectively,of approximately $1.4 million for the six months ended June 30, 2019. These changes were primarily as a result of the timing of payments made for income taxes and certain operating expenses.
Decreases in accounts payable and accrued liabilities resulted in a cash use of cash of approximately $8.6$14.5 million and $24.4 million for the ninesix months ended SeptemberJune 30, 2017, primarily related to our cash payment of approximately $4.7 million to terminate our interest rate swap agreements. Decreases in accounts payable2020 and accrued liabilities resulted in a cash use of approximately $17.2 million for the nine months ended September 30, 20162019, respectively, primarily as a result of the timing of payments made to suppliers and the mix of vendors and related terms. There was no significant change in our daysDays accounts payable on hand decreased by approximately nine days in 2020 compared with the comparable 2019 period, primarily as of September 30, 2017 as comparedwe paid certain key Packaging vendors more quickly in 2020 to September 30, 2016.ensure our orders remained a top priority for them given our robust demand levels and minimal available capacity in the marketplace.
Net cash used for investing activities of continuing operations for the ninesix months ended SeptemberJune 30, 20172020 and 20162019 was approximately $22.3$102.3 million and $22.3$78.5 million, respectively. During the first ninesix months of 2017,2020, we paid approximately $95.2 million, net of cash acquired, to acquire RSA and Rapak. We incurred approximately $24.1$9.3 million in capital expenditures, as we have continued our investment in growth, capacity and productivity-related capital projects. CashWe also received proceeds from the disposition of business, property and equipment wasof approximately $1.8$2.1 million. During the first ninesix months of 2016,2019, we incurred approximately $22.4$11.5 million in capital expenditures and receivedpaid approximately $67.0 million, net of cash from the disposition of propertyacquired, to acquire Plastic Srl and equipment of approximately $0.1 million.Taplast.
Net cash used for financing activities for the ninesix months ended SeptemberJune 30, 2017 and 20162020 was approximately $46.3$35.8 million, and $21.0while net cash used for financing activities was $17.8 million respectively. Infor the ninesix months ended SeptemberJune 30, 2017,2019. During the Company issued $300.0 million principal Senior Notes, repaid approximately $257.9 million on our former Term Loan A Facility andfirst six months of 2020, we made net repayments of approximately $81.5$1.6 million on our revolving credit and accounts receivable facilities. In connection with refinancing our long-term debt in the third quarter of 2017, we paidWe also purchased approximately $6.1$31.6 million of debt financing fees. We alsooutstanding common stock and used a net cash amount of approximately $0.5$2.6 million related to our stock compensation arrangements. During the first ninesix months of 2016,2019, we madeborrowed approximately $0.8 million, net repayments of approximately $9.9 millionrepayments, on our revolving credit and accounts receivable facilities, and repaidfacilities. We also purchased approximately $10.4$15.4 million on our former Term Loan A Facility. We alsoof outstanding common stock and used a net cash amount of approximately $1.5$3.2 million related to our stock compensation arrangements.
Our Debt and Other Commitments
In September 2017, we issuedThe $300.0 million aggregate principal amount of 4.875% senior unsecured notes due October 15, 2025 at par value in a private placement under Rule 144A of the Securities Act of 1933, as amended. We used the proceeds from the offering to fully repay the $250.9 million principal, plus $0.4 million related interest, outstanding on our former senior secured term loan A facility due 2020 ("Term Loan A Facility"), repay approximately $41.7 million of outstanding obligations under the our 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 our Credit Agreement, with the remaining amount retained as cash on our 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 extinguishment expense in the consolidated statement of income.
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, 2018.2018 ("Senior Notes"). The payment of principal and interest is jointly and severally guaranteed, on a senior unsecured basis by certain named 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. For the ninesix months ended SeptemberJune 30, 2017,2020, our consolidated subsidiaries that do not guarantee the Senior Notes represented approximately 14%21% of the total of guarantor and non-guarantor net sales, treating each as a consolidated group and excluding intercompany transactions between guarantor and non-guarantor subsidiaries. In addition, our non-guarantor subsidiaries represented approximately 33%31% and 52%15% of the total guarantor and non-guarantor assets and liabilities, respectively, as of SeptemberJune 30, 2017,2020, treating the guarantor and non-guarantor subsidiaries each as a consolidated group and excluding intercompany transactions between such groups.
Prior to October 15, 2020, we 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, we 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.
In September 2017, we also amended our We are party to a credit agreement ("Credit Agreement, pursuant toAgreement") consisting of a $300.0 million senior secured revolving credit facility, which we were able to extend the maturity date, increase the permittedpermits borrowings denominated in specific foreign currencies, from $75.0 millionsubject to a $125.0 million remove the Term Loan A Facility and resize the revolving credit facility. We incurred fees and expenses of approximately $1.1 million related to the amendment, all of which was capitalized as debt issuance costs. We also recorded non-cash debt financing and extinguishment expense of $2.0 million related to the write-off of previously capitalized deferred financing fees.
Below is a summary of key terms under thesub limit. The Credit Agreement as of September 30, 2017, and the key terms of the previous credit agreement in place immediately prior to entering into the amended Credit Agreementmatures on September 20, 2017 (the Term Loan A Facility shows the face amount of borrowing2022 and is subject to interest at debt issuance, while the revolving credit facilities show gross availability as of each date):
|
| | | | | | |
Instrument | | Amount
($ in millions) | | Maturity Date | | Interest Rate |
Credit Agreement | | | | | | |
Senior secured revolving credit facility | | $300.0 | | 9/20/2022 | | LIBOR(a) plus 1.625%(b)
|
| | | | | | |
Previous Credit Agreement | | | | | | |
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% plus 1.50%. The interest rate spread is based upon the leverage ratio, as defined, as of the most recent determination date.
At September 30, 2017, approximately $37.5 million was outstanding on the revolving credit facility. The Credit Agreement allows issuance of letters of credit, not to exceed $40.0 million in aggregate, against revolving credit facility commitments, of which approximately $14.2 million was outstanding at September 30, 2017.
commitments.
The Credit Agreement also provides for incremental revolving credit 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 in the Credit Agreement, 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.
Amounts drawn under our revolving credit facility fluctuate daily based upon our working capital and other ordinary course needs. Availability under our revolving credit facility depends upon, among other things, compliance with our Credit Agreement's financial covenants. Our Credit Agreement contains various negative and affirmative covenants and other requirements affecting us and our subsidiaries, including the ability to, subject to certain exceptions and limitations, incur debt, liens, mergers, investments, loans, advances, guarantee obligations, acquisitions, assetsasset 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 our Credit Agreement require us and our 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). Our permitted total net leverage ratio under the Credit Agreement is 4.00 to 1.00 as of SeptemberJune 30, 2017.2020. If we were to complete an acquisition which qualifies for a Covenant Holiday Period, as defined in our Credit Agreement, then our permitted total net leverage ratio cannot exceed 4.50 to 1.00 during that period. Our actual total net leverage ratio was 2.141.60 to 1.00 at SeptemberJune 30, 2017.2020. Our permitted senior secured net leverage ratio under the Credit Agreement is 3.50 to 1.00 as of SeptemberJune 30, 2017.2020. If we were to complete an acquisition which qualifies for a Covenant Holiday Period, as defined in our Credit Agreement, then our permitted senior secured net leverage ratio cannot exceed 4.00 to 1.00 during that period. Our actual senior secured net leverage ratio was 0.23 to 1.00not meaningful at SeptemberJune 30, 2017.2020. Our permitted interest expense coverage ratio under the Credit Agreement is 3.00 to 1.00 as of SeptemberJune 30, 2017.2020. Our actual interest expense coverage ratio was 12.7912.71 to 1.00 at SeptemberJune 30, 2017.2020. At SeptemberJune 30, 2017,2020, we were in compliance with our financial covenants.
The following is a reconciliation of net income, as reported, which is a GAAP measure of our operating results, to Consolidated Bank EBITDA, as defined in our Credit Agreement, for the twelve months ended SeptemberJune 30, 20172020 (dollars in thousands). We present Consolidated Bank EBITDA to show our performance under our financial covenants.
| | | | | | Twelve Months Ended June 30, 2020 |
| | Twelve Months Ended September 30, 2017 | |
Net loss | | $ | (32,390 | ) | |
Net income | | | $ | 54,930 |
|
Bank stipulated adjustments: | | | | |
Interest expense | | 13,850 |
| | 14,830 |
|
Income tax expense | | | 26,250 |
|
Depreciation and amortization | | 45,630 |
| | 48,770 |
|
Impairment charges and asset write-offs | | 104,610 |
| |
Non-cash compensation expense(1) | | 7,770 |
| | 8,090 |
|
Other non-cash expenses or losses | | 2,080 |
| | 16,920 |
|
Non-recurring expenses or costs(2) | | 7,320 |
| | 7,310 |
|
Extraordinary, non-recurring or unusual gains or losses | | | 20,990 |
|
Effects of purchase accounting adjustments | | | 2,110 |
|
Business and asset dispositions
| | 3,590 |
| | 870 |
|
Debt financing and extinguishment costs | | 6,640 |
| |
Permitted acquisitions | | | 5,030 |
|
Permitted dispositions(3) | | | (46,430 | ) |
Consolidated Bank EBITDA, as defined | | $ | 159,100 |
| | $ | 159,670 |
|
| | | September 30, 2017 | | June 30, 2020 | |
Total Indebtedness, as defined(3) | $ | 341,030 |
| | $ | 254,890 |
| |
Consolidated Bank EBITDA, as defined | 159,100 |
| | 159,670 |
| |
Total net leverage ratio | 2.14 |
| x | 1.60 |
| x |
Covenant requirement | 4.00 |
| x | 4.00 |
| x |
|
| | | | |
| June 30, 2020 | |
Total Senior Secured Indebtedness(4) | $ | (45,110 | ) | |
Consolidated Bank EBITDA, as defined | 159,670 |
| |
Senior secured net leverage ratio | n/m |
| x |
Covenant requirement | 3.50 |
| x |
|
| | | | |
| | Twelve Months Ended June 30, 2020 |
Interest expense | | $ | 14,830 |
|
Bank stipulated adjustments: | | |
Interest income | | (900 | ) |
Non-cash amounts attributable to amortization of financing costs | | (1,370 | ) |
Total Consolidated Cash Interest Expense, as defined | | $ | 12,560 |
|
|
| | | | |
| September 30, 2017 | |
Total Senior Secured Indebtedness | $ | 37,080 |
| |
Consolidated Bank EBITDA, as defined | 159,100 |
| |
Senior secured net leverage ratio | 0.23 |
| x |
Covenant requirement | 3.50 |
| x |
|
| | | | |
| | |
| | Twelve Months Ended September 30, 2017 |
Interest expense | | $ | 13,850 |
|
Bank stipulated adjustments: | | |
Non-cash amounts attributable to amortization of financing costs | | (1,410 | ) |
Total Consolidated Cash Interest Expense, as defined | | $ | 12,440 |
|
| | | September 30, 2017 | | June 30, 2020 | |
Consolidated Bank EBITDA, as defined | $ | 159,100 |
| | $ | 159,670 |
| |
Total Consolidated Cash Interest Expense, as defined | 12,440 |
| | 12,560 |
| |
Actual interest expense coverage ratio | 12.79 |
| x | 12.71 |
| x |
Covenant requirement | 3.00 |
| x | 3.00 |
| x |
_____________________________
| |
(1) | Non-cash compensation expenses resulting from the grant of restricted shares and units of common stock and common stock options.equity awards. |
| |
(2) | Non-recurring costs and expenses relating to diligence and transaction costs, purchase accounting costs, severance, relocation, restructuring and curtailment expenses. |
| |
(3) | Includes $4.0 millionEBITDA from permitted dispositions, as defined. |
| |
(4) | Senior secured indebtedness is negative at June 30, 2020 due to the deduction of acquisition deferred purchase price.certain unrestricted cash and unrestricted permitted investments as allowed under the Credit Agreement. |
Another important source of liquidity is our $75.0 million accounts receivable facility, under which we have the ability to sell eligible accounts receivable to a third-party multi-seller receivables funding company. Our available liquidity under our accounts receivable facility has ranged from approximately $49 million to $65 million, depending on the level of our receivables outstanding at a given point in time during the year. We had approximately $7.0 million and $45.5 million outstanding under the facility as of SeptemberAt June 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. At September 30, 2017,2020, we had approximately $37.5 millionno amounts outstanding under our revolving credit facility and had approximately $248.3$284.1 million potentially available after giving effect to approximately $14.2$15.9 million of letters of credit issued and outstanding. At December 31, 2016,2019, we had approximately $75.9 millionno amounts outstanding under our revolving credit facilityfacility and had approximately$408.2 $283.9 million potentially available after giving effect to approximately $15.9$16.1 million of letters of credit issued and outstanding. The letters of credit are used for a variety of purposes, including support of certain operating lease agreements, vendor payment terms and other subsidiary operating activities, and to meet various states' requirements to self-insure workers' compensation claims, including incurred but not reported claims. Including availability under our accounts receivable facility and after consideration ofOur borrowing capacity was not reduced by leverage restrictions contained in the Credit Agreement as of SeptemberJune 30, 20172020 and December 31, 2016, we had approximately $295.4 million and $126.5 million, respectively, of borrowing capacity available for general corporate purposes.2019.
We rely upon our cash flow from operations and available liquidity under our revolving credit and accounts receivable facilitiesfacility to fund our debt service obligations and other contractual commitments, working capital and capital expenditure requirements. At the end of each quarter, we typically use cash on hand from our domestic and foreign subsidiaries to pay down amounts outstanding under our revolving credit and accounts receivable facilities.facility, as applicable.
The combinedOur weighted average monthly amounts outstanding on our Credit Agreement and accounts receivable facilitiesborrowings during the first ninesix months of 20172020 approximated $380.0$413.6 million, compared to the weighted average monthly amounts outstandingapproximately $329.5 million during the first ninesix months of 2016 of approximately $461.6 million. The overall decrease is primarily2019, due to the use of proceeds from the Senior Notes offering to fully repay amounts outstandingour March 2020 proactive $150 million draw on our former Term Loan A Facility and repayrevolving credit facility to ensure availability of cash on hand given the potential uncertainty surrounding the financial markets as a portionresult of the outstanding obligations under our accounts receivable facility.COVID-19 pandemic. We repaid the $150 million during second quarter 2020.
Cash management related to our revolving credit and accounts receivable facilitiesfacility is centralized. We monitor our cash position and available liquidity on a daily basis and forecast our cash needs on a weekly basis within the current quarter and on a monthly basis outside the current quarter over the remainder of the year. Our business and related cash forecasts are updated monthly.
In considering the economic uncertainty surrounding the potential business impacts from the COVID-19 pandemic with respect to our operations, supply chains, distribution channels, and end-market customers, we have taken certain defensive actions as we monitor our cash position and available liquidity. These actions have included suspending our repurchase of our common stock during second quarter 2020, borrowing on our revolving credit facility, tightening our capital expenditures, advanced monitoring of our accounts receivable balances and flexing cost structures of operations expected to be most impacted by COVID-19.
While the majoritymore than half of our cash on hand as of SeptemberJune 30, 20172020 is located in jurisdictions outside of the U.S., given aggregate available funding under our revolving credit and accounts receivable facilitiesfacility of $295.4$284.1 million at SeptemberJune 30, 20172020 (after consideration of the aforementioned leverage restrictions) and based on forecasted cash sources and requirements inherent in our business plans, we believe that our liquidity and capital resources, including anticipated cash flows from operations, will be sufficient to meet our debt service, capital expenditure and other short-term and long-term obligations for the foreseeable future.
We are subject to variable interest rates on our revolving credit and accounts receivable facilities.facility. At SeptemberJune 30, 2017,2020, 1-Month LIBOR approximated 1.23%0.16%. BasedAt June 30, 2020, we had no amounts outstanding on our revolving credit facility and, therefore, no variable rate-based borrowings outstanding at September 30, 2017, a 1% increase in the per annum interest rate would increase our interest expense by approximately $0.5 million annually.outstanding.
In addition to our long-term debt, we have other cash commitments related to leases. We account for these lease transactions as operating leases, and annual rent expense for continuing operations related thereto approximated $17.4$7.5 million in 2016.2019. We expect toleasing will continue to utilize leasing as abe an available financing strategyoption to fund future capital expenditure requirements.
In March 2020, we announced our Board of Directors had authorized us to increase the purchase of our common stock up to $250 million in the futureaggregate, an increase of $100 million from the prior authorization. In addition in March 2020, given the uncertainty surrounding the COVID-19 pandemic, we temporarily suspended our share repurchase program; therefore, we did not purchase any common stock during the three months ended June 30, 2020. In the six months ended June 30, 2020, we purchased 1,253,650 shares of our outstanding common stock for an aggregate purchase price of approximately $31.6 million. Since the initial authorization through June 30, 2020 we have purchased 2,926,332 shares of our outstanding common stock for an aggregate purchase price of approximately $80.5 million. We will continue to meetevaluate opportunities to return capital expenditure needsto shareholders through the purchase of our common stock, depending on market conditions, including the potential impact of the COVID-19 pandemic and to reduce debt levels.other factors.
Market Risk
We conduct business in various locations throughout the world and are subject to market risk due to changes in the value of foreign currencies. The functional currencies of our foreign subsidiaries are primarily the local currency in the country of domicile. We manage these operating activities at the local level and revenues and costs are generally denominated in local currencies; however, results of operations and assets and liabilities reported in U.S. dollars will fluctuate with changes in exchange rates between such local currencies and the U.S. dollar.
We have historically useduse derivative financial instruments to manage currency risks albeit in immaterial notional contracts, as we explored the predictability ofassociated with our procurement activities denominated in currencies other than the functional currency of our subsidiaries and the impact of currency rate volatility on our earnings. As of June 30, 2020, we were party to foreign exchange forward and swap contracts to hedge changes in foreign currency exchange rates with notional amounts of approximately $48.8 million. We also use cross-currency swap agreements to mitigate currency risks associated with the net investment in certain of our foreign subsidiaries. See Note 11, "Derivative Instruments," included in Part 1, Item 1, "Notes to Unaudited Consolidated Financial Statements," within this quarterly report on Form 10-Q for additional information.
We are also subject to interest risk as it relates to our long-term debt. We have historically used interest rate swap agreements to fix the variable portion of our debt to manage this risk. See Note 8,10, "Derivative InstrumentsLong-term Debt," included in Part 1, Item 1, "Notes to Unaudited Consolidated Financial Statements," within this quarterly report on Form 10-Q for additional information.
Common Stock
TriMas is listed in the NASDAQ Global Select MarketSM. Our stock trades under the symbol "TRS."
Credit Rating
We and certain of our outstanding debt obligations are rated by Standard & Poor's and Moody's. On September 13, 2017,June 12, 2020, Moody's assignedaffirmed a B1Ba3 rating to our Senior Notes, and affirmed a rating of Ba3 to our Credit Agreement, as presented in Note 710, "Long-term Debt" included in Part I, Item 1, "Notes to Unaudited Consolidated Financial Statements" within this quarterly report on Form 10-Q. Moody's also affirmed a Ba3 to ourBa2 Corporate Family Rating and maintained its outlook as stable. On September 11, 2017,February 12, 2020, Standard & Poor's assignedaffirmed a B+BB- rating to our senior unsecured notes,debt, affirmed a BB-BB corporate credit rating to our credit facilities and maintained its outlook as stable. If our credit ratings were to decline, our ability to access certain financial markets may become limited, our cost of borrowings may increase, the perception of us in the view of our customers, suppliers and security holders may worsen and as a result, we may be adversely affected.
Outlook
The past few years have been a periodThrough the first half of significant change for TriMas, with portfolio reshaping as part of spinning-off our former Cequent business2020, we experienced year-over-year overall growth in 2015, various acquisitions withinsales, driven by robust organic growth in our Packaging segment and Aerospace businesses and significant reductionsfrom acquisitions, which were partially offset by organic sales decreases in our fixed cost structureAerospace and Specialty Products segments. We expect these general segment trends for sales to continue in the back half of 2020 compared with back half 2019, with Packaging likely to continue to experience robust demand, particularly for dispensing and closure products that help fight the spread of germs, while Specialty Products sales are expected to be lower than back half 2019 unless industrial activity begins to recover. However, we expect our Aerospace segment to experience a further sales decline in the second half of 2020, as compared to the second half of 2019, as customer orders have reduced significantly as aircraft manufacturers slow or halt production in response to challenging macroeconomic conditions. In addition,low demand for new planes following the onset of the COVID-19 pandemic. Although we underwenthave taken realignment actions to somewhat mitigate the impact of the lower demand levels, a CEO leadership transition in July 2016,clear picture for our business has yet to emerge, and we are unable to predict the full extent or duration of these impacts at this time.
We are managing production capacity to prevailing demand conditions where practical and have taken steps to reduce controllable costs. As we continue to navigate through this uncertain period, our goal will be to continue to mitigate the impact of lower volumes and execute strategic manufacturing footprint actions for our businesses experiencing decreased end-market demand, so we are positioned to gain operating leverage when certain end markets begin to recover. For those end markets where demand may increase, such as for our Packaging segment's dispensers and closures used in applications that help fight the spread of germs, improve personal hygiene, and advance home and industrial cleaning, we will continue to collaborate with our customers and strategic supply partners to ensure availability of capacity to fulfill requisite orders, while also investing in localizing supply where necessary.
As a renewed focus on optimizingresult of continued uncertainties resulting from the financial performanceCOVID-19 pandemic, their potential impact to our future results of operations, as well as to TriMas' market capitalization, we may record additional cash and non-cash charges related to further realignment actions, as well for uncollectible customer account balances, excess inventory and idle production equipment. Further, we may be required to conduct an evaluation of triggering events as to whether there is a reduction in the fair value of our current portfolio of businesses. We have also implemented a redefined TriMas Business Model that establishes the major tenants of how we now operate in 2017goodwill and will in future years.
We remain cautiously optimistic about the possibility for growth in 2017,intangible assets, particularly focused on growth programs in our PackagingAerospace divisions where the impact of COVID-19 has resulted in decreased end-market demand for our fastener and Aerospace reportable segments, and have realized year-over-year growthmachined component product, which we believe could result in both of these segments throughan impairment charge if the first nine months of 2017. In addition, while uncertainty still exists with respect to the broader macroeconomic environment, there are signs of stabilizationsignificant decline in certain of our key end markets, most notably within the Aerospace distribution channel, where year-over-year sales continue to increasethat began in 2017 compared to 2016, and increased quoting activity for upstream oil and gas-related business. There remains the potential that the new U.S. presidential administration might initiate legislative or regulatory actions that accelerate the U.S. industrial economy, which would benefit us given a majority of our sales and production is in the U.S. While these additional factors would be positive for TriMas,June 2020 continues. At this time, we are not counting on significant market improvement. In addition, givenable to practically estimate the natural disasters relatedextent or amount of such potential cash and non-cash charges.
Despite the expected pressure to hurricanesfuture demand levels and results of operations, at present, we believe our capital structure is in solid position. We believe we have sufficient headroom under our financial covenants, and ample cash and available liquidity under our revolving credit facility, to meet our debt service, capital expenditure and other short-term and long-term obligations for the Gulf Coast region, there is uncertainty around the level and timing of potential turn-around activity in the petrochemical and refining industries, as they may be delayed into 2018, further impacting our Energy reportable segment's current year sales and profit levels. While we striveforeseeable future.
We expect to mitigate the risk of external factors, we continue to concentrate on managing internal projects that we control, including continued applicationleverage the tenets of the TriMas Business Model within Energyto address the ongoing challenges presented by the COVID-19 pandemic, and Aerospaceon a longer-term basis, achieve our growth plans, execute continuous improvement initiatives to improve our manufacturing processesoffset inflationary pressures, and product delivery, pruning our product portfolios to de-emphasize or no longer sell certain lower-margin products within certain regions, and seekingseek lower-cost sources for input costs, all while continuously assessing the appropriateness of our manufacturing footprint and fixed costfixed-cost structure.
Impact of New Accounting Standards
See Note 2, "New Accounting Pronouncements," included in Part 1, Item 1, "Notes to Unaudited Consolidated Financial Statements," within this quarterly report on Form 10-Q.
Critical Accounting Policies
Certain of our accounting policies require the application of significant judgment by management in selecting the appropriate assumptions forused in calculating financial estimates. By their nature, these judgments are subject to an inherent degree of uncertainty. These judgments are based on our historical experience, our evaluation of business and macroeconomic trends, and information from other outside sources, as appropriate.
During the quarter ended SeptemberJune 30, 20172020, the Company changed its accounting policy for asbestos-related matters, for which the new policy is described below.
Asbestos-related Matters
We accrue loss reserves for asbestos-related matters based upon an estimate of the ultimate liability for claims incurred, whether reported or not, including an estimate of future settlement costs and costs to defend. We utilize known facts and historical trends for Company-specific and general market asbestos-related activity, as well as an actuarial valuation in determining estimated required reserves which we believe are probable and reasonably estimable. Asbestos-related accruals are assessed at each balance sheet date to determine if the liability remains reasonably stated. Accruals for asbestos-related matters are included in the consolidated balance sheet in “Accrued liabilities” and “Other long-term liabilities.”
Other than for the accounting policy for asbestos-related matters, there were no material changes to the items that we disclosed as our critical accounting policies in Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," in the Annual Report on Form 10-K for the year ended December 31, 20162019.
In completing our 2016 assessment of goodwill and indefinite-lived intangible assets, the fair value of the Aerospace reporting unit equaled carrying value following our recognition of goodwill and intangible asset impairment charges in the fourth quarter of 2016. All other reporting units with goodwill had an implied fair value greater than carrying value by more than 89% in our last quantitative assessment. The amount of remaining goodwill attributable to the Aerospace reporting unit was approximately $146.4 million as of each of September 30, 2017 and December 31, 2016. We have not identified any events or changes in circumstances that could reasonably be expected to have an other than temporary effect on the significant assumptions used in estimating the fair value of our Aerospace or other reporting units with goodwill.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
In the normal course of business, we are exposed to market risk associated with fluctuations in foreign currency exchange rates. We are also subject to interest risk as it relates to long-term debt. See Part I, Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations," for details about our primary market risks, and the objectives and strategies used to manage these risks. Also see Note 710, "Long-term Debt," and Note 811, "Derivative Instruments," in Part I, Item 1, "Notes to Unaudited Consolidated Financial Statements," included within this quarterly report on Form 10-Q for additional information.
Item 4. Controls and Procedures
The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports that the Company files or submits under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), is recorded, processed, summarized, and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to the Company's management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.
Evaluation of disclosure controls and procedures
As of SeptemberJune 30, 20172020, an evaluation was carried out by management, with the participation of the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company's disclosure controls and procedures (as such term is defined in Rule 13a-15(e) and Rule 15d-15(e) of the Exchange Act) pursuant to Rule 13a-15 of the Exchange Act. The Company's disclosure controls and procedures are designed only to provide reasonable assurance that they will meet their objectives. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that as of SeptemberJune 30, 20172020, the Company's disclosure controls and procedures are effective to provide reasonable assurance that they would meet their objectives.
Changes in internal control over financial reporting
ThereIn response to the COVID-19 pandemic, we have required certain employees, some of whom are involved in the operation of our internal controls over financial reporting, to work from home. Despite this change, there have been no changes in the Company's internal control over financial reporting during the quarter ended SeptemberJune 30, 20172020 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. We are continually monitoring and assessing the COVID-19 pandemic on our internal controls to minimize any impact it may have on their design and operating effectiveness.
PART II. OTHER INFORMATION
TRIMAS CORPORATION
Item 1. Legal Proceedings
See Note 914, "Commitments and Contingencies," included in Part I, Item 1, "Notes to Unaudited Consolidated Financial Statements," within this quarterly report on Form 10-Q.
Item 1A. Risk Factors
In addition to the otherThe information set forth in this report, youincluding without limitation, the risk factor presented below, updates and should carefully considerbe read in conjunction with, the risk factors discussedand information disclosed in Part 1, Item 1A., "Risk Factors," in our Annual Report on Form 10-K for the year ended December 31, 2016,2019.
The novel coronavirus (COVID-19) pandemic has had, and is expected to continue to have, a significant impact on the Company's operations and results.
Since late January 2020, we have been managing matters related to the global COVID-19 pandemic, including impacts to our operations and strategic supplier-partners in Asia, and, more recently, our manufacturing operations in Europe and North America. As a result of COVID-19, we have experienced temporary disruptions in the operation and workforce staffing of certain of our manufacturing facilities, as we were early adopters of many of the workplace guidelines recently published by the U.S. Centers for Disease Control and Prevention ("CDC") and took precautionary measures when necessary. COVID-19 has also affected our customers and suppliers, and we are collaborating with them to minimize supply chain disruptions. In response to the pandemic and related mitigation measures, we also implemented pandemic and business continuity plans, as well as other precautionary measures on behalf of our customers and employees, including supporting remote work opportunities for certain of our employees. While we believe that all these measures have been necessary or appropriate, they have resulted in additional costs and may adversely impact our business and financial performance in the future or expose us to additional unknown risks.
The COVID-19 pandemic has impacted our results of operations, and we expect it will continue to impact us in the future at varying levels. For example, due in part to the impact of the COVID-19 pandemic, sales for our dispensing and closure products increased, while sales in our Aerospace and Specialty Products segments decreased, in the second quarter of 2020. Although it is not possible to predict the ultimate impact of COVID-19, including on our business, results of operations, financial position or cash flows, such impacts that may be material include, but are not limited to: (i) shifting customer demand for many of our products, including those used in cosmetic, personal care, pharmaceutical, household product, food and beverage, and industrial markets, as well as aerospace markets; (ii) increased credit risk, including increased failure by customers experiencing business disruptions to make timely payments; (iii) reduced availability and productivity of employees, as well as increased costs associated with our high-deductible medical insurance plan if our employees become ill; (iv) increased operational risks as a result of manufacturing facility disruptions or remote work arrangements, including the potential effects on internal controls and procedures, as well as cybersecurity risks and increased vulnerability to security breaches, information technology disruptions and other similar events; (v) delays and disruptions in the availability of and timely delivery of materials and components used in our operations, as well as increased costs for such materials and components; (vi) customer requirements to accelerate the relocation of certain of our production lines to North America, which may increase our capital investment needs and launch costs; (vii) a negative impact on liquidity position; (viii) any impairment in value of tangible or intangible assets which could materially affectbe recorded as a result of weaker economic conditions; and (ix) increased costs and less ability to access funds under our business,existing credit facility and the capital markets.
The extent of the COVID-19 pandemic's effect on our operational and financial conditionperformance will depend in large part on future developments, which cannot be predicted with confidence at this time. Future developments include the duration, scope and severity of the pandemic, the actions taken to contain or future results. Theremitigate its impact, and the resumption of widespread economic activity. In addition, because we cannot predict the impact that COVID-19 will ultimately have, been no significant changesthe actual impact may also exacerbate other risks discussed in Item 1A. “Risk Factors” in our risk factors as disclosed in our 2016Annual Report on Form 10-K.10-K for the fiscal year ended December 31, 2019, any of which could have a material effect on us.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.The following table provides information about purchases made by the Company, or on behalf of the Company by an affiliated purchaser, of shares of the Company's common stock during the three months ended June 30, 2020.
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| | | | | | | | | | | | | | |
Period | | Total Number of Shares Purchased | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1) | | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Program (1) |
April 1, 2020 to April 30, 2020 | | — |
| | $ | — |
| | — |
| | $ | 169,543,834 |
|
May 1, 2020 to May 31, 2020 | | — |
| | $ | — |
| | — |
| | $ | 169,543,834 |
|
June 1, 2020 to June 30, 2020 | | — |
| | $ | — |
| | — |
| | $ | 169,543,834 |
|
Total | | — |
| | $ | — |
| | — |
| | $ | 169,543,834 |
|
__________________________
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(1) | In March 2020, the Company announced its Board of Directors had authorized the Company to increase the purchase of its common stock up to $250 million in the aggregate from its previous authorization of $150 million. The increased authorization includes the value of shares already purchased under the previous authorization. Pursuant to this share repurchase program, during the three months ended June 30, 2020, the Company did not repurchase any shares of its common stock. The share repurchase program is effective and has no expiration date. |
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
Not applicable.
Item 6. Exhibits
Exhibits Index:
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3.1(a)3.1 | |
3.2(b)3.2 | |
4.1(c) | |
10.1(c) | |
31.1 | |
31.2 | |
32.1 | |
32.2 | |
101.INS101 | XBRL Instance Document. |
101.SCH | XBRL Taxonomy Extension Schema Document. |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document. |
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document. |
101.LAB | XBRL Taxonomy Extension Label Linkbase Document. |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document. |
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(a) | | Incorporated by reference to the Exhibits filed with ourThe following materials from TriMas Corporation's Quarterly Report on Form 10-Q filed on August 3, 2007 (File No. 001-10716).for the quarter ended June 30, 2020, formatted in Inline XBRL (eXtensible Business Reporting Language): (i) the Consolidated Balance Sheet, (ii) the Consolidated Statement of Operations, (iii) the Consolidated Statement of Comprehensive Income, (iv) the Consolidated Statement of Cash Flows, (v) the Consolidated Statement of Shareholders' Equity, (vi) Notes to Consolidated Financial Statements, and (vii) document and entity information. |
(b)104 | | Incorporated by reference toCover Page Interactive Data File (embedded within the Exhibits filed with our Current Report on Form 8-K filed on December 18, 2015 (File No. 001-10716). |
(c) | | Incorporated by reference to the Exhibits filed with our Current Report on Form 8-K filed on September 20, 2017 (File No. 001-10716).Inline XBRL document) |
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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| | TRIMAS CORPORATION (Registrant) |
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| | | | /s/ ROBERT J. ZALUPSKI |
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Date: | October 26, 2017July 30, 2020 |
By: | | Robert J. Zalupski Chief Financial Officer |