The statements in the discussion and analysis regarding industry outlook, our expectations regarding the performance of our business and the other non-historical statements in the discussion and analysis are forward-looking statements. These forward-looking statements are subject to numerous risks and uncertainties, including, but not limited to, the risks and uncertainties described in Item 1A "Risk Factors." 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 Item 8, "Financial Statements and Supplementary Data." Introduction TriMas designs, develops and manufactures a diverse set of products primarily for the consumer products, aerospace & defense and industrial markets through its
TriMas Packaging, TriMas Aerospaceand Specialty Products groups. Our wide range of innovative products are designed and engineered to solve 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; innovative product technologies and features; a high-degree of customer approved processes and qualifications; established distribution networks; relatively low ongoing capital investment requirements; strong cash flow conversion and long-term growth opportunities. While the majority of our revenue is in the United States, we manufacture and supply products globally to a wide range of companies. We report our business activity in three segments: Packaging, Aerospace and Specialty Products.
Key Factors Affecting Our Reported Results
Our business and operating results are subject to general economic conditions. We serve clients in industries that are highly competitive, cyclical and likely to be significantly affected by changes in economic or geopolitical conditions.
March 2020, the President of the United Statesdeclared the coronavirus ("COVID-19") outbreak a national emergency, as the World Health Organizationdetermined it was a pandemic. In response to the COVID-19 pandemic, federal, provincial, state, county and local governments and public health organizations or authorities around the world 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, and 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 efforts to mitigate the COVID-19 pandemic. Nearly all of our manufacturing sites have been deemed essential operations and remained open during the COVID-19 pandemic, at varying levels of capacity and efficiency, experiencing only temporary shutdowns due to country-specific government mandates or for thorough cleaning as a result of suspected COVID-19 cases. The health of our employees, and the ability of our facilities to remain operational in the current regulated environment, will be critical to our future results of operations. Our divisions were impacted in 2020 at differing levels and times, beginning with our Asian facilities and strategic 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 safety of our employees, particularly at our production facilities. These measures, while not easily quantifiable, have increased the level of manufacturing inefficiencies due to elevated levels of absenteeism, resulting in less efficient production scheduling and, in certain cases, short-term idling of production. We expect that we will continue to operate with these protocols in place for the foreseeable future. Overall, 2021 net sales increased approximately $87.1 million, or 11.3%, compared to 2020, primarily as a result of increased industrial demand in our Specialty Products segment, acquisitions in our Packaging segment and the impact of customers' stocking orders within our Aerospace segment. These increases were partially offset by a decline in sales of our Packaging segment's dispensing and closure products that are used in applications to fight the spread of germs, which sales reached record-high levels in 2020 when there was a significant spike in demand following the onset of the COVID-19 pandemic, but now have abated to what we believe is a new, and higher, normalized level. The most significant drivers affecting our results of operations in 2021 compared with 2020, other than as directly impacted by demand level changes as a result of the COVID-19 pandemic, were goodwill and intangible asset impairment charges in 2020 in our Aerospace segment, our election to change our accounting policy for asbestos-related defense costs in 2020, realignment actions we undertook in response to reduced end-market demand following the outbreak of the COVID-19 pandemic, the impact of our recent acquisitions, increases in the cost of certain raw materials, the refinancing of our long term debt in 2021 and the recognition of the benefit of certain tax planning strategies. 28
During 2020, we determined there was a triggering event requiring an interim quantitative impairment assessment for goodwill and indefinite-lived intangible assets within our Aerospace segment. While third quarter 2020 operating results were below pre-pandemic projected levels, the larger driver of the triggering event was a significant reduction in the
July 2020financial projection update for the remainder of 2020 compared with prior projections, and uncertainty around the duration and magnitude of the impact of the COVID-19 pandemic on future financial results given the dependence of our Aerospace segment reporting units on future levels of air travel and new aircraft builds. We determined the carrying value of both of our Aerospace reporting units, as well as of certain trade names, exceeded the fair value, resulting in non-cash, pre-tax impairment charges of approximately $126.8 millionto goodwill and $7.8 millionto indefinite lived intangible assets. During 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 in second quarter 2020 for asbestos-related costs of approximately $23.4 million, which is included in selling, general and administrative expenses. In 2021, we commissioned our actuary to update the asbestos study based on data as of September 30, 2021, and recorded a non-cash, pre-tax charge of $1.5 million, which is included in selling, general and administrative expenses, to increase the liability estimate. Beginning in second quarter 2020, we have been executing certain realignment actions in response to reductions in current and expected future end market demand following the onset of the COVID-19 pandemic. We recorded pre-tax facility consolidation and employee separation costs of approximately $3.5 millionand $6.2 million, respectively, in 2021. In 2020, we recorded a pre-tax charge of approximately $13.8 millionrelated 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 $2.3 millionrelated to certain production equipment removed from service given reduced demand levels, and employee separation costs of approximately $3.8 million. In December 2021, we completed the acquisition of Omega Plastics ("Omega"), which specializes in manufacturing custom components and devices for drug delivery, diagnostic and orthopedic medical applications, as well as components for industrial applications, for an aggregate amount of approximately $22.5 million, net of cash acquired. Omega, which is reported in the Company's Packaging segment, is located in Clinton Township, Michigan. Omega contributed approximately $0.7 millionof net sales during 2021. In December 2021, we acquired TFI Aerospace("TFI"), a manufacturer and supplier of specialty fasteners used in a variety of applications, predominately for the aerospace end market, for an aggregate amount of approximately $11.8 million, with additional contingent consideration ranging from zero to approximately $12.0 millionto be paid based on 2023 and 2024 earnings per the purchase agreement. TFI, which is reported in the Company's Aerospace segment, is located near Toronto, Canada. TFI contributed approximately $0.3 millionof net sales during 2021. In December 2020, we completed the acquisition of Affaba & Ferrari Srl ("Affaba & Ferrari"), which specializes in the design, development and manufacture of precision caps and closures for food & beverage and industrial product applications, for an aggregate amount of approximately $98.4 million, net of cash acquired. Affaba & Ferrari, which is reported in our Packaging segment, operates out of a highly automated manufacturing facility and support office located in Borgo San Giovanni, Italy. Affaba & Ferrari contributed approximately $36.3 millionof incremental net sales during 2021. In April 2020, we acquired the Rapak brand, including certain bag-in-box product lines and assets ("Rapak") for an aggregate amount of approximately $11.4 million. Rapak, which is reported in our Packaging segment, has two manufacturing locations in the United States. Rapakcontributed approximately $5.3 millionof incremental net sales resulting from the January through March 2021sales. Rapakhas been performing below break-even operating profit as demand for its products, particularly those used in quick service restaurant applications, has significantly declined from pre-acquisition levels in 2019 due to the impact of the COVID-19 pandemic. In February 2020, we completed the acquisition 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, located in Simi Valley, California, 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 $4.3 millionof incremental net sales resulting from January and February 2021sales. 29
In first quarter 2021, we began experiencing an increase in material costs compared with 2020 levels, primarily for resin-based raw materials and components, as well as for certain types of steel. These material costs further increased throughout 2021. We have escalator/de-escalator clauses in our commercial contracts with certain of our customers, or can modify prices based on market conditions, and we have been taking actions to recover the increased cost of raw materials. However, given the lag nature of the commercial pricing mechanisms, we have and will continue to experience net earnings pressure until resin costs begin to stabilize and/or decline for several consecutive months. We estimate that due to the lag in timing between incurring the cost increases and recovering via commercial actions, our operating profit was negatively impacted by approximately
$11 millionin 2021, compared with 2020, primarily in our Packaging segment. In 2021, we refinanced our long-term debt, issuing $400 millionaggregate principal amount of 4.125% senior unsecured notes due April 15, 2029("2029 Senior Notes") at par value in a private placement under Rule 144A of the Securities Act of 1933, as amended, and amending our existing credit agreement ("Credit Agreement"), extending the maturity to March 2026. We used the proceeds from the 2029 Senior Notes offering to pay fees and expenses of approximately $5.1 millionrelated to the offering and approximately $1.1 millionrelated to amending the Credit Agreement. The remaining cash proceeds from the 2029 Senior Notes were used for general corporate purposes, including repaying all outstanding revolving credit facility borrowings and redeeming all of our outstanding senior notes due October 2025("2025 Senior Notes"), paying cash for the entire $300.0 millionoutstanding principal amount plus $7.3 millionas a redemption premium. The $5.1 millionof fees and expenses related to the 2029 Senior Notes were capitalized as debt issuance costs, while the $7.3 millionredemption premium as well as approximately $3.0 millionof unamortized debt issuance costs associated with the 2025 Senior Notes were expensed in 2021. In addition, our effective tax rate for 2021 was 17.1%, compared to 22.3% for 2020. We recorded income tax expense of approximately $11.9 millionin 2021, as compared to an income tax benefit of $23.0 millionin 2020. During 2021, we reported domestic and foreign pre-tax income of approximately $28.4and $40.7 million, respectively, as compared to a 2020 domestic pre-tax loss of approximately $134.6 millionand foreign pre-tax income of approximately $31.9 million. The rate for 2021 includes the impact of income tax incentives in a foreign jurisdiction, the impact of certain non-deductible expenses and an increase in the statutory tax rate in another foreign jurisdiction which increased the value of certain deferred tax assets. The effective tax rate for 2020 was impacted by a decrease in profitability in the U.S.resulting from various one-time charges, including impairment of goodwill and indefinite-lived intangible assets and a change in our accounting policy for asbestos-related defense costs. During 2020, we also undertook certain tax-planning actions with respect to restructuring our intercompany debt, resulting in the recognition of a $6.4 milliondeferred tax benefit.
Key additional risks that could affect our reported results
We expect the COVID-19 pandemic will continue to impact us in the future at varying degrees. We expect the robust customer demand, compared with pre-pandemic demand levels, for our Packaging segment's dispensing pumps and closure products used in personal care and home care applications will continue, albeit with some reduction from the surge experienced in 2020 and early 2021, as we believe there is a positive secular trend focused on consumers' desire to stop the spread of germs and improve personal hygiene. Industrial demand in
North Americawas lower in 2020 compared to previous levels, and while demand levels significantly increased in 2021, we are uncertain how and at what level demand will be impacted as governmental, travel or other restrictions are lifted, particularly in North America, where orders for our industrial cylinders, for example, are heavily influenced by the levels of construction and HVAC activity. We expect the aerospace market to continue to experience severe dislocation going forward, as except for the significant stocking orders for certain of our products received during 2021, our sales levels would be significantly lower than historical levels. With the current travel restrictions and sentiment, particularly low for international travel, aircraft manufacturers have slowed production, and since second quarter 2020 we have experienced a significant drop in aerospace-related sales related to new commercial airplane builds compared to prior levels. We expect, except as favorably impacted by the customers' stocking orders in 2021, lower levels of sales and related production to continue for the foreseeable future. We have executed significant realignment actions since the onset of the COVID-19 pandemic, primarily in our Aerospace and Specialty Products segments, and also in certain Packaging product areas where demand has fallen, such as in the quick service and restaurant applications, to protect against the uncertain end market demand. We will continue to assess further actions if required. However, as a result of the COVID-19 pandemic's impact on global economic activity, and the continued potential impact to our future results of operations, as well if there is an impact 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. Despite the potential decline in future demand levels and results of operations as a result of the COVID-19 pandemic, at present, we believe our capital structure is in a solid position. We have ample cash and available liquidity under our revolving credit facility to meet our debt service obligations, capital expenditure requirements and other short-term and long-term obligations for the foreseeable future. 30
The extent of the COVID-19 pandemic's effect on our operational and financial performance 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 COVID-19 pandemic, the actions taken to contain or mitigate its impact, timing of widespread vaccine availability, and the resumption of normalized global economic activity. Due to the inherent uncertainty of the unprecedented and rapidly evolving situation, we are unable to predict with any confidence the likely impact of the COVID-19 pandemic on our future operations. Beyond the unique 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-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 chain 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. 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 due to holiday shutdowns at certain customers or other customers deferring capital spending to the following year. Given the short-cycle nature of most of our businesses, we do not consider sales order backlog to be a material factor. A growing amount of our sales is derived from international sources, which exposes us to certain risks, including currency risks. We are sensitive to price movements and availability of our raw materials supply. Our largest raw material purchases are for resins (such as polypropylene and polyethylene), steel, aluminum and other oil and metal-based purchased components. In addition to the factors affecting our 2021 results, 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
Asiahave been instituted, and certain North American suppliers have opportunistically increased their prices. We 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 over time, we may experience additional material costs and disruptions in supply in the future and may not be able to pass along higher costs to our customers in the form of price increases or otherwise mitigate the impacts to our operating results. Although we have escalator/de-escalator clauses in commercial contracts with certain of our customers, or can modify prices based on market conditions to recover higher costs, our price increases generally lag the underlying material cost increase, and we cannot be assured of full cost recovery in the open market. If input costs increase at rapid rates, as they did during 2021, our ability to recover cost increases on a timely basis, much less at all, is made more difficult by the lag nature of these contracts. Our Arrow Engine business in our Specialty Products segment is sensitive to the demand for natural gas and crude oil in North America. For example, demand for engine, pump jack and compressor products are impacted by active oil and gas rig counts and wellhead investment activities. Separately, oil-based commodity costs are a significant driver of raw materials and purchased components used within our Packaging segment. Each year, as a core tenet of the TriMas Business Model, 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 continuously review our operating cost structures to ensure alignment with current market demand. We continue to evaluate alternatives to redeploy the cash generated by our businesses, one of which includes returning capital to our shareholders. In 2020, our Board of Directors increased the authorization of share repurchases to a cumulative amount of $250 million. During 2021, we purchased 596,084 shares of our outstanding common stock for approximately $19.1 million. As of December 31, 2021, we had approximately $142.6 millionremaining under the repurchase authorization. In addition, in 2021 our Board of Directors declared the first dividend since our initial public offering in 2007. We declared dividends of $0.04per share of common stock and we paid dividends of $1.7 millionfor the year ended December 31, 2021. We will continue to evaluate opportunities to return capital to shareholders through the purchase of our common stock as well as dividends, depending on market conditions and other factors. 31
Segment information and additional analysis
The following table summarizes the financial information of our three reportable segments (in thousands of dollars):
Year ended December 31, As a Percentage of As a Percentage of As a Percentage of 2021 Net Sales 2020 Net Sales 2019 Net Sales
Net SalesPackaging $ 533,26062.2 % $ 488,34063.4 % $ 392,34054.2 % Aerospace 183,340 21.4 % 167,740 21.8 % 194,110 26.8 % Specialty Products 140,510 16.4 % 113,890 14.8 % 137,080 19.0 % Total $ 857,110100.0 % $ 769,970100.0 % $ 723,530100.0 % Gross Profit Packaging $ 145,75027.3 % $ 142,41029.2 % $ 116,18029.6 % Aerospace 39,970 21.8 % 27,020 16.1 % 53,060 27.3 % Specialty Products 31,470 22.4 % 12,650 11.1 % 24,660 18.0 % Total $ 217,19025.3 % $ 182,08023.6 % $ 193,90026.8 % Selling, General and Administrative Packaging $ 49,1109.2 % $ 47,8509.8 % $ 35,3409.0 % Aerospace 26,690 14.6 % 25,550 15.2 % 24,070 12.4 % Specialty Products 8,950 6.4 % 7,890 6.9 % 8,620 6.3 % Corporate expenses 37,220 N/A 53,190 N/A 34,500 N/A Total $ 121,97014.2 % $ 134,48017.5 % $ 102,53014.2 % Operating Profit (Loss) Packaging $ 96,49018.1 % $ 93,99019.2 % $ 80,77020.6 % Aerospace 13,270 7.2 % (133,440) (79.6) % 28,950 14.9 % Specialty Products 22,550 16.0 % 4,350 3.8 % 16,000 11.7 % Corporate (37,220) N/A (53,190) N/A (34,500) N/A Total $ 95,09011.1 % $ (88,290)(11.5) % $ 91,22012.6 % Capital Expenditures Packaging $ 34,0806.4 % $ 30,7306.3 % $ 16,4004.2 % Aerospace 5,390 2.9 % 5,770 3.4 % 8,110 4.2 % Specialty Products 5,500 3.9 % 3,890 3.4 % 5,090 3.7 % Corporate 90 N/A 90 N/A 70 N/A Total $ 45,0605.3 % $ 40,4805.3 % $ 29,6704.1 % Depreciation Packaging $ 20,9503.9 % $ 18,3303.8 % $ 15,0703.8 % Aerospace 7,140 3.9 % 7,110 4.2 % 6,560 3.4 % Specialty Products 3,670 2.6 % 3,450 3.0 % 2,960 2.2 % Corporate 130 N/A 130 N/A 280 N/A Total $ 31,8903.7 % $ 29,0203.8 % $ 24,8703.4 % Amortization Packaging $ 9,5501.8 % $ 9,2701.9 % $ 9,5802.4 % Aerospace 11,560 6.3 % 11,020 6.6 % 8,530 4.4 % Specialty Products 450 0.3 % 460 0.4 % 520 0.4 % Corporate - N/A - N/A - N/A Total $ 21,5602.5 % $ 20,7502.7 % $ 18,6302.6 % 32
The following "Results of Operations Year Ended
December 31, 2021Compared with Year Ended December 31, 2020" section presents an analysis of our consolidated operating results displayed in the Consolidated Statement of Operations. A discussion regarding our financial condition and results of operations for the year ended December 31, 2020compared to the year ended December 31, 2019can be found under Item 7 in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020, filed with the Securities and Exchange Commissionon February 25, 2021. Results of Operations
The main factors that affected us during the year ended
•the impact on global business activity of the COVID-19 pandemic;
•a change in our accounting policy for asbestos-related defense costs in 2020;
•realignment expenditures in response to lower end-market demand following the outbreak of the COVID-19 pandemic;
•the impact of our debt refinancing activities;
•the impact of our recent acquisitions, mainly Affaba & Ferrari, in
•the impact of the increase in the cost of materials, mainly related to resin; and
•the impact of a decrease in our effective tax rate from 2020 to 2021.
Overall, net sales increased approximately
$87.1 million, or approximately 11.3%, to $857.1 millionin 2021, as compared to $770.0 millionin 2020, primarily as a result of acquisitions, which added approximately $46.9 millionof sales. Organic sales, excluding the impact of currency exchange and acquisitions, increased approximately $31.5 million, primarily due to increases in sales of products used in food and beverage applications in our Packaging segment and of industrial products in both our Specialty Products and Packagingsegments. These increases were partially offset by the expected decline in sales of dispensing products that help fight the spread of germs in our Packaging segment, as the demand levels decreased compared with the record-high levels in 2020. In addition, net sales increased approximately $8.7 milliondue currency exchange, as our reported results in U.S.dollars were favorably impacted as a result of the weakening U.S.dollar relative to foreign currencies. Gross profit margin (gross profit as a percentage of sales) approximated 25.3% and 23.6% in 2021 and 2020, respectively. Gross profit margin increased primarily due the impact of lower realignment, contingent liability, and purchase accounting charges of approximately $13.0 million, $2.0 million, and $2.0 million, respectively, in 2021 than in 2020. These increases, plus a more favorable product sales mix and leveraging of our prior realignment actions in our Specialty Products segment were partially offset by approximately $11 millionhigher material costs than recovered via commercial actions (primarily for resin) in our Packaging segment and lower fixed cost absorption and labor inefficiencies within our Aerospace segment. Operating profit (loss) margin (operating profit as a percentage of sales) approximated 11.1% and (11.5)% in 2021 and 2020, respectively. Operating profit (loss) increased $183.4 million, to an operating profit of approximately $95.1 millionin 2021, as compared to an operating loss of approximately $88.3 millionin 2020, primarily due to approximately $134.6 millionof goodwill and indefinite-lived intangible asset impairment charges as well as the impact of the $2.0 millionpre-acquisition contingent liability charge within our Aerospace segment, which were recorded in 2020 and did not repeat in 2021. Operating profit and margin further increased due to higher sales levels and lower realignment and purchase accounting costs in 2021 than in 2020. These increases were partially offset by higher material costs (primarily resin) in our Packaging segment and labor inefficiencies and lower fixed cost absorption within our Aerospace segment. Interest expense decreased approximately $0.2 million, to $14.5 millionin 2021, as compared to $14.7 millionin 2020, as a lower effective interest rate more than offset an increase in our weighted average borrowings. We incurred approximately $10.5 millionof debt financing and related expense in 2021, of which approximately $10.3 millionwas related to expenses incurred associated with the redemption of our 2025 Senior Notes and approximately $0.2 millionrelated to the write-off of previously capitalized deferred financing fees associated with our Credit Agreement.
Other income (expenses) decreased by approximately
The effective income tax rate for 2021 was 17.1%, compared to 22.3% for 2020. We recorded income tax expense of approximately
$11.8 millionin 2021, as compared to an income tax benefit of $23.0 millionin 2020. During 2021, we reported domestic and foreign pre-tax income of approximately $28.4 millionand $40.7 million, respectively, as compared to a 2020 domestic pre-tax loss of approximately $134.6 millionand foreign pre-tax income of approximately $31.9 million. The effective tax rate for 2021 varied from the U.S.federal statutory rate primarily as a result of income tax incentives in a foreign jurisdiction, the impact of certain non-deductible expenses and an increase in the statutory tax rate in another foreign jurisdiction which increased the value of certain deferred tax assets. Our effective tax rate for 2020 was impacted by a decrease in profitability in the U.S.resulting from various one-time charges, including impairment of goodwill and indefinite-lived intangible assets and a change in our accounting policy for asbestos-related defense costs. During 2020, we also undertook certain tax-planning actions with respect to restructuring our intercompany debt, resulting in the recognition of a $6.4 milliondeferred tax benefit. Net income (loss) increased approximately $137.1 millionto net income of approximately $57.3 millionin 2021, compared to a net loss of $79.8 millionin 2020. This increase was primarily a result of an increase in operating profit of approximately $183.4 millionand a decrease in interest expense of $0.2 million, partially offset by debt financing and related expenses of approximately $10.5 million, an increase in tax expense of approximately $34.8 millionand an increase in other expense of $1.2 million.
See below for an analysis of operating results by segment.
Packaging. Net sales increased approximately
$44.9 million, or 9.2%, to $533.3 millionin 2021, as compared to $488.3 millionin 2020. Acquisition-related sales growth was approximately $42.3 million, comprised of $36.3 millionof sales from our December 2020acquisition of Affaba & Ferrari, $5.3 millionresulting from the January through March 2021sales of our April 2020acquisition of Rapakand $0.7 millionof sales from our December 2021acquisition of Omega. Sales of products used in food and beverage markets increased by approximately $19.1 million, primarily due to increased demand for caps and closures and flexible packaging as the hospitality sector began to rebound from prior COVID-19 pandemic-related shutdowns. Sales of products used in industrial markets increased by approximately $13.5 million, primarily as a result of higher demand for closure products in North America. Sales of dispensing products used in beauty and personal care as well as home care applications that help fight the spread of germs decreased by approximately $42.4 million, as demand has abated for these products from the peak levels in 2020 as a result of the COVID-19 pandemic. Net sales also increased by approximately $8.7 milliondue to currency exchange, as our reported results in U.S.dollars were favorably impacted as a result of the weakening U.S.dollar relative to foreign currencies. Packaging's gross profit increased approximately $3.3 millionto $145.8 million, or 27.3% of sales, in 2021, as compared to $142.4 million, or 29.2% of sales, in 2020, primarily due to the higher sales levels, plus approximately $3.1 millionof currency exchange, as our reported results in U.S.dollars were favorably impacted as a result of the weakening U.S.dollar relative to foreign currencies. Although gross profit dollars increased, gross profit margin decreased as the impact of a more favorable product sales mix, as higher margin industrial and food and beverage products comprised a larger percentage of total sales, was offset by approximately $11 millionof higher material costs (primarily resin) than were recovered via sales price increases during 2021. Gross profit margin was also unfavorably impacted by inflationary headwinds on utilities costs, higher labor costs driven by pandemic-related shortages and higher freight costs driven by increased container costs and freight lane rates. In addition, we recognized approximately $1.6 millionof realignment costs during 2021 primarily related to the closure of our Union City, Californiamanufacturing facility and consolidation into our Indianapolis, Indianaand Woodridge, Illinoisfacilities as compared to $1.1 millionof realignment costs in 2020, primarily related to the disposal of certain equipment removed from service. Packaging's selling, general and administrative expenses increased approximately $1.3 millionto $49.1 million, or 9.2% of sales, in 2021, as compared to $47.9 million, or 9.8% of sales, in 2020, primarily due to higher ongoing selling, general and administrative costs associated with our acquisitions, partially offset by approximately $1.2 millionin charges associated with realignment actions in 2020, primarily for severance, that did not repeat in 2021. Packaging's operating profit increased approximately $2.5 millionto $96.5 million, or 18.1% of sales, in 2021, as compared to $94.0 million, or 19.2% of sales, in 2020, primarily due to higher sales levels, a more favorable product sales mix and favorable currency exchange, which were partially offset by the impact of higher material and other manufacturing input costs, incremental realignment charges and higher selling, general and administrative expenses. Aerospace. Net sales increased approximately $15.6 million, or 9.3%, to $183.3 millionin 2021, as compared to $167.7 millionin 2020. RSA, acquired in February 2020, added approximately $4.3 millionof sales for January and February 2021and TFI, acquired in December 2021, added approximately $0.3 millionof sales. Sales of our fastener products increased approximately $11.2 million, as approximately $29.4 millionof sales of customers' stocking orders for highly-engineered fasteners in 2021 were partially offset by lower year-over-year sales resulting from current and expected future reduced air travel due to the COVID-19 pandemic. Sales of our engineered components products declined by approximately $0.2 million. 34
Gross profit within Aerospace increased approximately
$13.0 millionto $40.0 million, or 21.8% of sales, in 2021, from $27.0 million, or 16.1% of sales, in 2020, primarily due to charges recorded in 2020 that did not repeat in 2021. First, we recorded approximately $4.5 millionlower realignment charges in 2021 compared with 2020, which were principally related to inventory reductions and facility consolidations in response to the COVID-19 pandemic. In addition, in 2020, we recorded a $2.0 millioncharge related to an updated estimate of a pre-acquisition contingent liability, as well as an approximate $2.0 millionpurchase accounting non-cash charge related to the step-up of RSA's inventory to fair value and subsequent amortization, each of which did not repeat in 2021. Gross profit margin was further aided by a more favorable product sales mix in 2021, as the stocking orders were primarily for highly-engineered fasteners that command above-average profit margins. All of these factors were partially offset by lower absorption of fixed costs and labor inefficiencies during 2021 driven by the COVID-19 pandemic.
Selling, general and administrative expenses increased by approximately
Operating profit (loss) within Aerospace increased approximately
$146.7 millionto an operating profit of $13.3 million, or 7.2% of sales, in 2021, as compared to an operating loss of $133.4 million, or 79.6% of sales, in 2020, primarily due to approximately $134.6 millionof goodwill and indefinite-lived intangible asset impairment charges during 2020. Operating profit also improved due to realignment and other charges recorded in 2020 that did not repeat in 2021, as well as through a more favorable product sales mix, partially offset by labor inefficiencies, lower absorption of fixed costs and higher selling, general and administrative expenses. Specialty Products. Net sales increased approximately $26.6 million, or 23.4%, to $140.5 millionin 2021, as compared to $113.9 millionin 2020. Sales of our cylinder products increased by approximately $17.9 milliondue to a higher demand for steel cylinders in North Americaas industrial activity continues to rebound following significantly depressed demand in 2020 as result of the COVID-19 pandemic. Sales of engines, compressors and related parts used in upstream oil and gas applications increased by approximately $8.7 millionprimarily as a result of higher oil-field activity in North America. Our 2020 sales included approximately $0.7 millionrelated to the liquidation of non-core inventory following our strategic decision to streamline Arrow Engine's product line offering. Gross profit within Specialty Products increased approximately $18.8 millionto $31.5 million, or 22.4% of sales, in 2021, as compared to $12.7 million, or 11.1% of sales, in 2020. During 2020, we executed certain realignment actions in response to reduced end market demand as a result of the COVID-19 pandemic, resulting in approximately $9.0 millionof non-cash charges, primarily related to Arrow Engine streamlining its product line offering and liquidating its non-core inventory, which did not repeat in 2021. In addition, gross profit increased in 2021 due to higher sales levels, while margins improved due to favorable product sales mix and leveraging previous realignment actions. Selling, general and administrative expenses within Specialty Products increased approximately $1.1 millionto $9.0 million, or 6.4% of sales, in 2021, as compared to $7.9 million, or 6.9% of net sales, in 2020. Our 2021 selling, general and administrative expenses have increased primarily due to higher employment and spending levels incurred to support the increase in sales levels. We incurred selling, general and administrative realignment expenses of approximately $0.7 millionin 2020 related to severance that did not repeat in 2021. Operating profit within Specialty Products increased approximately $18.2 millionto $22.6 million, or 16.0% of sales, in 2021, as compared to $4.4 million, or 3.8% of sales, in 2020, primarily due to the impact of 2020 realignment costs that did not repeat in 2021, as well as higher sales and related profit conversion leveraging the 2020 realignment actions without the need to add significant incremental fixed costs.
Business expenses. Corporate expenses included in operating income include the following (in millions of dollars):
Year ended December 31, 2021 2020 Corporate operating expenses
$ 26.1 $ 20.8Non-cash stock compensation 9.5 8.2 Legacy (income) expenses, net 1.6 24.2 Corporate expenses $ 37.2 $ 53.235
Corporate expenses included in operating profit decreased approximately
$16.0 millionto $37.2 millionin 2021, from $53.2 millionin 2020, primarily as a result of the $23.4 millionnon-cash charge recorded in 2020 due to the change of our accounting policy for asbestos-related defense costs. In 2021, we commissioned our actuary to update the asbestos study, and recorded a non-cash charge of $1.5 millionto increase the liability estimate. Corporate operating expenses increased primarily as a result of realignment charges related to the corporate office legal and finance groups in 2021 as well as an increase in professional fees related to corporate development activities.
Cash and capital resources
Cash flows provided by operating activities in 2021 were approximately
$134.2 million, as compared to approximately $127.4 millionin 2020. Significant changes in cash flows provided by operating activities and the reasons for such changes are as follows: •In 2021, the Company generated approximately $139.2 millionin cash flows, based on the reported net income of approximately $57.3 millionand after considering the effects of non-cash items related to depreciation, amortization, loss on dispositions of assets, changes in deferred income taxes, debt financing and related expenses, stock-based compensation, change in legacy liability estimate, and other operating activities. In 2020, the Company generated approximately $105.0 millionin cash flows based on the reported net loss of approximately $79.8 millionand after considering the effects of similar non-cash items and the impairment of goodwill and indefinite-lived intangible assets. •Increases in accounts receivable resulted in a use of cash of approximately $11.2 millionin 2021, while decreases in accounts receivable resulted in a source of cash of approximately $9.6 million2020, primarily due to timing of net sales and related cash collections. Days sales outstanding of receivables remained relatively consistent in 2021 compared to 2020, and decreased by approximately four days through 2020 compared to 2019, as we placed a significant focus on our credit and collections process, particularly in those businesses most impacted by the pandemic where credit risk was heightened. •We increased our investment in inventory by approximately $1.0 millionin 2021, while decreasing our investment in inventory by approximately $4.0 millionin 2020. Our days sales in inventory decreased by approximately nine days in 2021 compared with 2020 through active inventory management and selling through certain inventory items that were at elevated levels at the end of 2020 due to lower demand as a result of the COVID-19 pandemic. Our days sales in inventory decreased by approximately eight days in 2020 compared to 2019, primarily as a result of the strategic decision in our Arrow Engine division to streamline its product line offering during 2020. We continue to moderate inventory levels in line with sales levels. •Decreases in prepaid expenses and other assets resulted in a source of cash of approximately $5.0 millionand $4.4 millionin 2021 and 2020, respectively. The changes in 2021 and 2020 are primarily as a result of the timing of payments made for income taxes and certain operating expenses. •Increases in accounts payable and accrued liabilities resulted in a source of cash of approximately $2.1 millionand $4.5 millionin 2021 and 2020, respectively. Our days accounts payable on hand increased by approximately five days in 2021 due to timing and mix of payments terms in 2021 while days payables decreased by approximately 15 days in 2020, primarily as we paid certain key Packaging vendors more quickly in 2020 to ensure our orders remained a top priority for them given our robust demand levels and minimal available capacity in the marketplace. This decrease was more than offset by our increase in accrued liabilities in 2020, primarily as a result of the timing and amount of wage-related accruals. Net cash used for investing activities was approximately $79.2 millionand $232.1 millionin 2021 and 2020, respectively. During 2021, we paid approximately $34.3 million, net of cash acquired, to acquire Omega and TFI. We invested approximately $45.1 millionin capital expenditures as we have continued our investment in growth, capacity and productivity-related capital projects. During 2020, we paid approximately $193.5 million, net of cash acquired, to acquire RSA, Rapakand Affaba & Ferrari. In 2020, we invested approximately $40.5 millionin capital expenditures and received cash from the disposition of business, property and equipment of approximately $2.0 million. 36
Net cash provided by financing activities was approximately
$11.8 millionand $6.1 millionin 2021 and 2020, respectively. During 2021, we issued $400.0 millionprincipal amount of senior notes, made net repayments of approximately $48.6 millionon our revolving credit facilities, and redeemed $300.0 millionprincipal amount of senior notes. In connection with refinancing our long-term debt, we paid approximately $13.6 millionof debt financing fees and redemption premium. We also purchased approximately $19.1 millionof outstanding common stock, used a net cash amount of approximately $5.2 millionrelated to our stock compensation arrangements and paid dividends of approximately $1.7 million. During 2020, we received proceeds from borrowings, net of repayments, of approximately $48.2 millionon our revolving credit facilities, purchased approximately $39.4 millionof outstanding common stock and used a net cash amount of approximately $2.6 millionrelated to our stock compensation arrangements.
Our debt and other commitments
March 2021, we issued the 2029 Senior Notes in a private placement under Rule 144A of the Securities Act of 1933, as amended. We used the proceeds from the 2029 Senior Notes offering to pay fees and expenses of approximately $5.1 millionrelated to the offering and pay fees and expenses of $1.1 millionrelated to amending our Credit Agreement. In connection with the issuance, we completed the redemption of our 2025 Senior Notes, paying $300.0 millionto retire the outstanding principal amount plus $7.3 millionas a redemption premium. The remaining cash proceeds from the 2029 Senior Notes were used for general corporate purposes, including repaying all outstanding revolving credit facility borrowings. The $5.1 millionof fees and expenses related to the 2029 Senior Notes were capitalized as debt issuance costs, while the $7.3 millionredemption premium, as well as approximately $3.0 millionof unamortized debt issuance costs associated with the 2025 Senior Notes were recorded as expense within debt financing and related expenses in the accompanying consolidated statement of operations. The 2029 Senior Notes accrue interest at a rate of 4.125% per annum, payable semi-annually in arrears on April 15and October 15, commencing on October 15, 2021. The payment of principal and interest is jointly and severally guaranteed, on a senior unsecured basis by certain named subsidiaries of the Company. The 2029 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. In 2021, our consolidated subsidiaries that do not guarantee the Senior Notes represented approximately 28% 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 42% and 50% of the total guarantor and non-guarantor assets and liabilities, respectively, as of December 31, 2021, treating the guarantor and non-guarantor subsidiaries each as a consolidated group. Prior to April 15, 2024, we may redeem up to 40% of the principal amount of the 2029 Senior Notes at a redemption price of 104.125% 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, prior to April 15, 2024, we may redeem all or part of the 2029 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 March 2021, we amended our Credit Agreement in connection with the issuance of the 2029 Senior Notes to extend the maturity date. We incurred fees and expenses of approximately $1.1 millionrelated to the amendment, all of which were capitalized as debt issuance costs. We also recorded approximately $0.2 millionof non-cash expense related to the write-off of previously capitalized deferred financing fees. Below is a summary of key terms under the Credit Agreement as of December 31, 2021, compared to the key terms prior to the amendment (showing gross availability): Amount Maturity Instrument ($ in millions) Date Interest Rate Credit Agreement (as amended) Senior secured revolving credit facility $300.0
Credit Agreement (prior to amending) Senior secured revolving credit facility
(a) London Interbank Offered Rate (“LIBOR”)
(a) The interest rate differential is based on the leverage ratio, as defined, at the most recent date of determination.
The senior secured revolving credit facility under the Credit Agreement permits borrowings denominated in specific foreign currencies, subject to a
$125.0 millionsub limit. The Credit Agreement also provides for incremental revolving credit commitments in an amount not to exceed the greater of $200 millionand 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, 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 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 any accounts receivable securitization facility, 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 December 31, 2021. 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 1.60 to 1.00 at December 31, 2021. Our permitted interest expense coverage ratio under the Credit Agreement is 3.00 to 1.00, and our actual interest expense coverage ratio was 13.31 to 1.00 as of December 31, 2021. At December 31, 2021, we were in compliance with our financial and other covenants contained in the Credit Agreement. The following is a reconciliation of net income (loss), as reported, which is a GAAP measure of our operating results, to Consolidated Bank EBITDA, as defined in our Credit Agreement, for the year ended December 31, 2021. We present Consolidated Bank EBITDA to show our performance under our financial covenants. Dollars are in thousands in the below tables. Year ended December 31, 2021 Net income $ 57,310 Bank stipulated adjustments: Interest expense, net (as defined) 14,510 Income tax expense 11,800 Depreciation and amortization 53,450 Non-cash compensation expense(1)
Non-cash charges for deferred tax asset valuation allowances
Other non-cash expenses or losses
Non-recurring expenses or costs(2)
Extraordinary, non-recurring or unusual gains or losses
Effects of purchase accounting adjustments
Business and asset dispositions
Net losses on early extinguishment of debt 3,000 Permitted acquisitions 3,290 Currency gains and losses 890 Consolidated Bank EBITDA, as defined $
December 31, 2021
Total debt, as defined(3) $283,960 Consolidated bank EBITDA, as defined
177,460 Actual total net leverage ratio 1.60 x Covenant requirement 4.00 x Year ended December 31, 2021 Interest expense, as defined $ 14,510 Bank stipulated adjustments: Interest income (210) Non-cash amounts attributable to amortization of financing costs (960) Total Consolidated Cash Interest Expense, as defined $ 13,340 December 31, 2021 Consolidated Bank EBITDA, as defined $
Total Consolidated Cash Interest Expense, as defined
Actual interest expense coverage ratio 13.31 x Covenant requirement 3.00 x
(1) Non-cash compensation expense resulting from the grant of stock awards.
(2) One-time costs and expenses related to due diligence and transaction fees, purchase accounting fees, severance, relocation and restructuring costs.
(3) Includes approx.
The Credit Agreement allows issuance of letters of credit, not to exceed
$40.0 millionin aggregate, against revolving credit facility commitments. We placed cash on deposit with a financial institution to be held as cash collateral for our outstanding letters of credit; therefore, as of December 31, 2021and December 31, 2020, we had no letters of credit issued against our revolving credit facility. At December 31, 2021, we had no amounts outstanding under our revolving credit facility and had $300.0 millionpotentially available after giving effect to letters of credit issued and outstanding. At December 31, 2020, we had $50.5 millionamounts outstanding under our revolving credit facility and had $249.5 millionpotentially available after giving effect to letters of credit issued and outstanding. Our restricted cash deposits 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. Our borrowing capacity was not reduced by leverage restrictions contained in the Credit Agreement as of December 31, 2021and December 31, 2020. We rely upon our cash flow from operations and available liquidity under our revolving credit facility to fund our debt service obligations and other contractual commitments, working capital and capital expenditure requirements. At the end of each quarter, we have historically used cash on hand from our domestic and certain foreign subsidiaries to pay down amounts outstanding under our revolving credit facility, as applicable.
Our weighted average borrowings approached
May 2021, we, through one of our non- U.S.subsidiaries, entered into a revolving loan facility with a borrowing capacity of $4 million. The facility is guaranteed by TriMas Corporation. There were no borrowings on this loan facility as of December 31, 2021. Cash management related to our revolving credit facility 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. 39
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 took certain defensive actions during 2020 as we monitored our cash position and available liquidity. These actions included suspending our repurchase of our common stock, 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. Given strong cash generation and our current liquidity position, we subsequently relaxed certain of these actions, choosing to further invest in capital expenditures, resume purchasing shares of our common stock and initiating a cash dividend. The majority of our cash on hand as of
December 31, 2021is located within the United States, and given available funding under our revolving credit facility of $300.0 millionat December 31, 2021(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 obligation needs for the foreseeable future, as well as dividends and share repurchases. We are subject to variable interest rates on our revolving credit facility. At December 31, 2021, 1-Month LIBOR approximated 0.10%. At December 31, 2021, we had no amounts outstanding on our revolving credit facility and, therefore, no variable rate-based borrowings 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 incurred rent expense for continuing operations related thereto of approximately
$11.0 millionin 2021. We continue to be party to non-cancelable leases for certain facilities we have exited as part of restructuring activities, and have entered into sublease agreements to minimize our net lease payments. We expect leasing will continue to be an available financing option 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 millionin the aggregate, an increase of $100 millionfrom the previous authorization. During 2021, 2020 and 2019, we purchased 596,084, 1,582,049 and 1,230,050 shares of our outstanding common stock for approximately $19.1 million, $39.4 millionand $36.7 million, respectively. Since the initial authorization through December 31, 2021, we have purchased 3,850,815 shares of our outstanding common stock for an aggregate purchase price of approximately $107.4 million. We will continue to evaluate opportunities to return capital to shareholders through the purchase of our common stock, depending on market conditions, including the potential impact of the COVID-19 pandemic, and other factors. Under various agreements, we are obligated to make future cash payments in fixed amounts. These include payments under our long-term debt agreements, rent payments required under operating lease agreements, certain benefit obligations and interest obligations on our long-term debt. The following table summarizes our material contractual cash obligations as of December 31, 2021(dollars in thousands). Payments Due by Periods Less than More than Total One Year 1 - 3 Years 3 - 5 Years 5 Years Contractual cash obligations: Long-term debt $ 400,000$ - $ - $ - $ 400,000Operating lease obligations 57,500 8,500 16,860 13,210 18,930 Benefit obligations 14,220 1,170 2,470 2,660 7,920 Interest obligations (a) 123,750 16,500 33,000 33,000 41,250 Contingent consideration 3,760 - 3,760 - - Total contractual obligations $ 599,230 $ 26,170 $ 56,090 $ 48,870 $ 468,100__________________________ (a) Our Senior Notes bear interest at 4.125%. The future interest obligations calculation excludes the impact of our cross-currency swap agreements. See Note 14, "Derivative Instruments," included in Item 8, "Financial Statements and Supplementary Data," within this Form 10-K for additional information. The liability related to unrecognized tax benefits has been excluded from the contractual obligations table because a reasonable estimate of the timing and amount of cash flows from future tax settlements cannot be determined. For additional information, refer to Note 23, "Income Taxes," included in Item 8, "Financial Statements and Supplementary Data," within this Form 10-K. 40
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 used derivative financial instruments to manage currency risks, as we seek to mitigate the risk associated with fluctuations in currency rates impacting cash flows related to certain receivables, payables and intercompany transactions denominated in foreign currencies. We also use cross-currency swap agreements to mitigate currency risks associated with the net investment in certain of our foreign subsidiaries. See Note 14, "Derivative Instruments," included in Item 8, "Financial Statements and Supplementary Data," within this Form 10-K 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 14, "Derivative Instruments," included in Item 8, "Financial Statements and Supplementary Data," within this Form 10-K for additional information. Common Stock
TriMas is listed on the NASDAQ Global Select MarketSM. Our shares trade under the symbol “TRS”.
Credit Rating We and certain of our outstanding debt obligations are rated by
Standard & Poor'sand Moody's. On March 24, 2021, Moody's assigned a Ba3 rating to our 2029 Senior Notes, as presented in Note 13, "Long-term Debt" included in Item 8, "Financial Statements and Supplementary Data" within this Form 10- K. Moody'salso affirmed a Ba2 Corporate Family Rating and maintained its outlook as stable. On March 15, 2021, Standard & Poor'sassigned a BB- rating to our 2029 Senior Notes. On February 26, 2021 Standard & Poor'saffirmed a BB corporate credit rating 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 Over the past two years, the COVID-19 pandemic has significantly affected each of our businesses and how we operate, albeit in different ways and magnitudes. Sales in our Packaging segment for dispensing and closure products we supply that are used in applications to fight the spread of germs have continued to be much stronger than before the COVID-19 pandemic, although, as expected, have abated from peak levels in 2020 at the onset of the COVID-19 pandemic. Sales in our Specialty Products segment had been depressed by low levels of industrial activity in the U.S.during 2020, but have since strongly rebounded in the last nine months of 2021. Sales in our Aerospace segment are expected to be lower than historical levels for an indefinite period as a result of low new commercial aircraft builds, but have been significantly boosted by customers' stocking orders throughout 2021. We believe our 2021 financial results demonstrate our ability to effectively leverage our TriMas Business Model, working across our businesses with a high degree of connectivity to respond to changing market conditions, including the ongoing challenges presented by the COVID-19 pandemic. We have capitalized on opportunities where market demand was high, while also taking swift actions where market demand was sharply reduced. We have continued to take proactive realignment actions to mitigate the effects of lower demand from the COVID-19 pandemic as much as practical, while at the same time growing our businesses through organic new products as well as via bolt-on acquisitions. Looking forward, we believe there will be a continued period of uncertainty related to demand levels for our products, whether it be when production rates for new aircraft builds, which require our fasteners and engineered products, will ramp-up, or whether general industrial activity will continue to increase toward pre-pandemic levels. We expect to continue to mitigate, as much as practical, the impact of low volumes in the most challenged end markets, executing realignment actions as necessary so we are positioned to gain operating leverage when these end markets recover. We believe we remain well positioned to capitalize on the recovery of the aerospace market, just as we have with the improvement in the industrial markets in the back half of 2021, as well as capture available market growth opportunities. We believe the continued effectiveness of vaccines, as well as continued measures intended to control the spread of the virus and future variants thereof, are among the most significant factors that could impact demand for our products. 41
As a result of continued uncertainties resulting from the COVID-19 pandemic, and 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. At this time, we are not able to estimate the extent or amount of any such potential cash and non-cash charges. Following the issuance of our 2029 Senior Notes and the amendment of our Credit Agreement in 2021, we believe our capital structure remains strong and that 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 foreseeable future, as well as dividends and share repurchases. We expect to continue to leverage the tenets of our TriMas Business Model to manage our multi-industry businesses and address the ongoing challenges presented by the COVID-19 pandemic, and on a longer-term basis, achieve our growth plans, execute continuous improvement initiatives to offset inflationary pressures, and seek lower-cost sources for input costs, all while continuously assessing the appropriateness of our manufacturing footprint and fixed-cost structure.
Impact of new accounting standards
See Note 2, “New Accounting Pronouncements,” included in Item 8, “Financial Statements and Supplementary Data,” in this Form 10-K.
Critical accounting policies
The following discussion of accounting policies is intended to supplement the accounting policies presented in Note 3, "Summary of Significant Accounting Policies" included in Item 8, "Financial Statements and Supplementary Data," within this Form 10-
K. Certainof our accounting policies require the application of significant judgment by management in selecting the appropriate assumptions for 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. Receivables. Receivables are presented net of allowances for doubtful accounts of approximately $1.6 millionand $2.1 millionat December 31, 2021and 2020, respectively. We monitor our exposure for credit losses and maintain adequate allowances for doubtful accounts. We determine these allowances based on our historical write-off experience and/or specific customer circumstances and provide such allowances when amounts are reasonably estimable and it is probable a loss has been incurred. Although we have been growing business with certain of our larger customers, and there has been some industry consolidation where certain of our customers are merging, we do not believe that significant credit risk exists or that we have a significant concentration of accounts receivable with a single customer or group of customers due to our diverse customer base. See Item 1A, "Risk Factors," for additional information regarding risks associated with a concentrated customer base. Depreciation and Amortization. Depreciation is computed principally using the straight-line method over the estimated useful lives of the assets. Annual depreciation rates are as follows: building and land/building improvements three to 40 years, and machinery and equipment, three to 15 years. Capitalized debt issuance costs are amortized over the underlying terms of the related debt securities. Customer relationship intangibles are amortized over periods ranging from five to 25 years, while technology and other intangibles are amortized over periods ranging from one to 30 years. Impairment of Long-Lived Assets and Definite-Lived Intangible Assets. We review, on at least a quarterly basis, the financial performance of each business unit for indicators of impairment. In reviewing for impairment indicators, we also consider events or changes in circumstances such as business prospects, customer retention, market trends, potential product obsolescence, competitive activities and other economic factors. An impairment loss is recognized when the carrying value of an asset group exceeds the future net undiscounted cash flows expected to be generated by that asset group. The impairment loss recognized is the amount by which the carrying value of the asset group exceeds its fair value. Goodwilland Indefinite-Lived Intangibles. We assess goodwill and indefinite-lived intangible assets for impairment at the reporting unit level on an annual basis as of October 1, by reviewing relevant qualitative and quantitative factors. More frequent evaluations may be required if we experience changes in our business climate or as a result of other triggering events that take place. An impairment loss is recognized when the carrying value of the asset exceeds its fair value. We determine our reporting units at the individual operating segment level, or one level below, when there is discrete financial information available that is regularly reviewed by segment management for evaluating operating results. For purposes of our 2021 goodwill impairment test, we had five reporting units, three of which had goodwill, within our three reportable segments. 42
We first perform a qualitative assessment for our annual goodwill impairment test and for our indefinite-lived intangible asset impairment test, which involves significant use of management's judgment and assumptions to determine whether it is more likely than not that the fair value of a reporting unit or indefinite-lived intangible asset is less than its carrying amount. In conducting the qualitative assessment, we consider macroeconomic conditions, industry and market considerations, overall financial performance, entity and reporting unit specific events, capital markets pricing, recent fair value estimates and carrying amounts, as well as legal, regulatory, and contractual factors. These factors are all considered in reaching a conclusion about whether it is more likely than not that the fair values of the intangible assets are less than the carrying values. If we conclude that further testing is required, we would perform a quantitative valuation to estimate the fair value of our intangible assets. For purposes of the 2021 annual impairment tests, based on the qualitative assessments, we determined there were no indications that the fair value of a reporting unit or indefinite-lived intangible asset was less than its carrying amount; therefore, we determined that quantitative assessments were not required. Future declines in sales and/or operating profit, declines in our stock price, or other changes in our business or the markets for our products could result in further impairments of our goodwill and indefinite-lived intangible assets. Pension Benefits. We engage independent actuaries to compute the amounts of liabilities and expenses under defined benefit pension plans, subject to the assumptions that we determine are appropriate based on historical trends, current market rates and future projections as of the measurement date. Annually, we review the actual experience compared to the most significant assumptions used and makes adjustments to the assumptions, if warranted. Discount rates are based upon an expected benefit payments duration analysis and the equivalent average yield rate for high-quality fixed-income investments. Pension benefits are funded through deposits with trustees and the expected long-term rate of return on plan assets is based upon actual historical returns modified for known changes in the market and any expected change in investment policy. Certain accounting guidance, including the guidance applicable to pensions, does not require immediate recognition of the effects of a deviation between actual and assumed experience or the revision of an estimate. This approach allows the favorable and unfavorable effects that fall within an acceptable range to be netted. Income Taxes. We compute income taxes using the asset and liability method, whereby deferred income taxes using current enacted tax rates are provided for the temporary differences between the financial reporting basis and the tax basis of assets and liabilities and for operating loss and tax credit carryforwards. We determine valuation allowances based on an assessment of positive and negative evidence on a jurisdiction-by-jurisdiction basis and record a valuation allowance to reduce deferred tax assets to the amount more likely than not to be realized. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. We record interest and penalties related to unrecognized tax benefits in income tax expense. 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 Loss Reserves. We have other loss exposures related to insurance, litigation and environmental claims. Establishing loss reserves for these matters requires the use of estimates and judgment in regard to risk exposure and ultimate liability. We are generally party to high deductible insurance programs for losses and liabilities related principally to workers' compensation, health and welfare claims and comprehensive general, product and vehicle liability. Generally, we are responsible for up to
$0.8 millionper occurrence under our retention program for workers' compensation, up to $1.5 millionper occurrence under our retention programs for comprehensive general, product and vehicle liability, and have a $0.4 millionper occurrence stop-loss limit with respect to our self-insured group medical plan. We accrue loss reserves up to our retention amounts based upon our estimates of the ultimate liability for claims incurred, including an estimate of related litigation defense costs, and an estimate of claims incurred but not reported using actuarial assumptions about future events. We accrue for such items when such amounts are reasonably estimable and probable. We utilize known facts and historical trends, as well as actuarial valuations in determining estimated required reserves. Changes in assumptions for factors such as medical costs and actual experience could cause these estimates to change significantly. 43
Item 7A. Quantitative and qualitative information on market risk
In the normal course of our business, we are exposed to market risk associated with fluctuations in commodity prices, insurable risks due to property damage, employee and liability claims, and other uncertainties in the financial markets. and credit, which may affect demand for our products.
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 use derivative financial instruments to manage currency risks associated 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. We may also be subject to interest risk as it relates to long-term debt, for which we have historically and may prospectively employ derivative instruments such as interest rate swaps to mitigate the risk of variable interest rates. See Item 7 "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 13, "Long-term Debt," and Note 14, "Derivative Instruments," included in Item 8, "Financial Statements and Supplementary Data," within this Form 10-K for additional information. 44
© Edgar Online, source