Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
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 Aerospace and 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 businesses and results of operations depend upon general economic conditions. We serve customers in industries that are highly competitive, cyclical and that may be significantly impacted by changes in economic or geopolitical conditions.
Our results of operations have been materially impacted over the past few years by macro-economic factors, first by the onset and proliferation of the coronavirus ("COVID-19") pandemic, then further from increased energy costs and supply chain disruptions from the Russia-Ukraine conflict, and more recently by cost inflation (raw materials, wage rates and freight). These factors 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 used in applications to help fight the spread of germs have experienced extreme volatility in demand, with demand spiking to record highs after the onset of the pandemic, demand abating as expected from those high levels over the past year, and in the second half of 2022 demand abruptly falling as a result of some of our large consumer goods customers' choices to rebalance on-hand inventory levels given the current macro-economic environment. Sales of certain of our industrial and aerospace-related products were significantly depressed from historical levels during 2020 and 2021, but demand has significantly increased in 2022, to where the industrial demand in our Specialty Products segment has rebounded to pre-pandemic levels, while demand in our Aerospace segment continues to increase (and more quickly than expected) as air travel has picked-up and new aircraft build rates improve. Altogether, this significant level of volatility in demand levels, input costs and supply chain availability, as well as internal labor availability, all have pressured our ability to operate efficiently and at historical margin levels.
Overall, 2022 net sales increased $26.7 million, or 3.1%, compared to 2021. Sales increased within our Specialty Products segment as a result of increased industrial demand and higher oil-field activity in North America. Sales also increased as a result of recent acquisitions in our Packaging and Aerospace segments, as well as from sales of products used in food and beverage markets within our Packaging segment. These factors were partially offset by an abrupt reduction in demand, which we believe is temporary, for personal care, home care and certain industrial products in the second half of 2022 in our Packaging segment, as well as unfavorable currency exchange.
The most significant drivers affecting our financial results in 2022 compared with 2021, other than as directly impacted by sales changes or as a result of the labor-related availability and inefficiencies, were gains on the sale of non-core real estate, the settlement of our cross currency swaps, the impact of higher energy and other input costs, non-cash charges to update our asbestos liability to actuarial valuations, the year-over-year impact of our realignment actions, the impact of our 2021 debt refinancing activities, and the impact of a change in effective tax rates from 2021 to 2022.
In February 2022, we acquired Intertech Plastics LLC and related companies (collectively, "Intertech"), a manufacturer of custom injection molded products used in medical applications, as well as products and assemblies for consumer and industrial applications, for an aggregate amount of $64.1 million, net of cash acquired. Intertech, which is reported in the Company's Packaging segment, has two manufacturing facilities located in the Denver, Colorado area. Intertech contributed $28.7 million of net sales during 2022.
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 $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 $15.0 million of acquisition-related sales growth during the period January through November 2022.
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 $11.8 million, with additional contingent consideration ranging from zero to $12.0 million to be paid based on 2023 and 2024 earnings per the purchase agreement. On the acquisition date, we recorded $3.7 million as our best estimate of fair value of the additional contingent consideration; however, based on a detailed fourth quarter 2022 review of TFI's updated forecasted operating results, the we determined the likelihood of the contingent consideration being paid was remote, and therefore reversed the liability, with such adjustment being included in other income (expense), net. TFI, which is reported in the Company's Aerospace segment, is located near Toronto, Canada. TFI contributed $4.9 million of acquisition-related sales growth during the period January through November 2022.
In the fourth quarter of 2022, we sold a non-core facility in City of Industry, California for net cash proceeds of $23.3 million. The Company recognized a $17.6 million gain on the sale, which is included in the Corporate operating loss for 2022.
In the third quarter of 2022, we completed the sale of vacant land adjacent to our Tolleson, Arizona manufacturing facility for net cash proceeds of $5.0 million, and recognized a $4.8 million gain on the sale, which is included within our Aerospace segment.
In 2022, we terminated our existing cross-currency swap agreements, de-designating the swaps as net investment hedges and received $26.2 million of cash. The cross-currency swap agreements had notional amounts totaling $250.0 million, which declined to $25.0 million over various contract periods ending between October 15, 2023 and October 15, 2027.
We also experienced a significant increase in the cost of energy, primarily in our Europe-based operations, as well as for other input costs in 2022 compared with 2021. Energy costs began to rise during late 2021, and further increased into 2022, which we believe is primarily due to geopolitical tensions associated with the Russia-Ukraine conflict, as well as realized and expected energy supply constraints. Energy costs were more than $5 million higher in 2022 than in 2021. While these costs have begun to stabilize and even recede at the end of 2022, we expect there could be additional cost and supply chain pressures going forward as a result of the uncertainty surrounding the conflict in Eastern Europe.
In 2022 and 2021, we commissioned our actuary to update our asbestos study, and upon completion we recorded non-cash, pre-tax charges of $5.6 million and $1.5 million, respectively, which are included in selling, general and administrative expenses.
We have been executing certain realignment actions in response to current and expected future end market demand, as well as for the move to our new Packaging facility in New Albany, Ohio. We recorded pre-tax facility move/consolidation and employee-related costs of $2.7 million and $2.3 million, respectively, in 2022. In 2021, we recorded pre-tax facility consolidation and employee separation costs of $3.5 million and $6.2 million, respectively.
In March 2021, we refinanced our long-term debt, issuing $400 million principal amount of 4.125% senior unsecured notes due April 15, 2029 ("2029 Senior Notes") at par value in a private placement offering 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 $5.1 million related to the offering and $1.1 million related 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. In April 2021, we completed the refinancing, redeeming all of our outstanding senior notes due October 2025 ("2025 Senior Notes"), paying cash for the entire $300.0 million outstanding principal amount plus $7.3 million as a redemption premium. The $5.1 million of fees and expenses related to the 2029 Senior Notes were capitalized as debt issuance costs, while the $7.3 million redemption premium as well as $3.0 million of unamortized debt issuance costs associated with the 2025 Senior Notes were expensed in the second quarter of 2021.
Our effective tax rate for 2022 and 2021 was 24.5%, and 17.1%, respectively. The rate for 2022 is higher primarily as a result of the recognition of $3.0 million of deferred tax benefits in Italy during the 2021, the majority of which related to a reduction in deferred tax liabilities in connection with certain tax incentives.
Additional Key Risks that May Affect Our Reported Results
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. We will continue to assess further actions if required. However, as a result of the current period of macroeconomic inflation and uncertainty, the continued impact of the COVID-19 pandemic, and the potential impact of such factors 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, asset impairments as well as for uncollectible customer account balances, excess inventory and idle production equipment.
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; and our ability to absorb, or recover via commercial actions, inflationary or other cost increases.
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 metal and non-metal-based purchased components. In addition to the pandemic and inflation-related factors affecting our 2021 and 2022 results, there has also 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. 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 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 2022, we purchased 1,264,088 shares of our outstanding common stock for an aggregate purchase price of $36.9 million. As of December 31, 2022, we had $105.7 million remaining under the repurchase authorization.
In addition, in 2022, we declared quarterly dividends of $0.04 per share of common stock, aggregating to dividends declared and paid on common shares during 2022 of $6.9 million. 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.
Segment Information and Supplemental Analysis
The following table summarizes financial information for our three reportable segments (dollars in thousands): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year ended December 31, |
| | 2022 | | As a Percentage of Net Sales | | 2021 | | As a Percentage of Net Sales | | 2020 | | As a Percentage of Net Sales |
Net Sales | | | | | | | | | | | | |
Packaging | | $ | 522,180 | | | 59.1 | % | | $ | 533,260 | | | 62.2 | % | | $ | 488,340 | | | 63.4 | % |
Aerospace | | 188,090 | | | 21.3 | % | | 183,340 | | | 21.4 | % | | 167,740 | | | 21.8 | % |
Specialty Products | | 173,560 | | | 19.6 | % | | 140,510 | | | 16.4 | % | | 113,890 | | | 14.8 | % |
Total | | $ | 883,830 | | | 100.0 | % | | $ | 857,110 | | | 100.0 | % | | $ | 769,970 | | | 100.0 | % |
Gross Profit | | | | | | | | | | | | |
Packaging | | $ | 137,030 | | | 26.2 | % | | $ | 145,750 | | | 27.3 | % | | $ | 142,410 | | | 29.2 | % |
Aerospace | | 32,240 | | | 17.1 | % | | 39,970 | | | 21.8 | % | | 27,020 | | | 16.1 | % |
Specialty Products | | 39,030 | | | 22.5 | % | | 31,470 | | | 22.4 | % | | 12,650 | | | 11.1 | % |
Total | | $ | 208,300 | | | 23.6 | % | | $ | 217,190 | | | 25.3 | % | | $ | 182,080 | | | 23.6 | % |
Selling, General and Administrative | | | | | | | | | | | | |
Packaging | | $ | 55,670 | | | 10.7 | % | | $ | 49,110 | | | 9.2 | % | | $ | 47,850 | | | 9.8 | % |
Aerospace | | 28,990 | | | 15.4 | % | | 26,690 | | | 14.6 | % | | 25,550 | | | 15.2 | % |
Specialty Products | | 8,680 | | | 5.0 | % | | 8,950 | | | 6.4 | % | | 7,890 | | | 6.9 | % |
Corporate expenses | | 37,850 | | | N/A | | 37,220 | | | N/A | | 53,190 | | | N/A |
Total | | $ | 131,190 | | | 14.8 | % | | $ | 121,970 | | | 14.2 | % | | $ | 134,480 | | | 17.5 | % |
Operating Profit (Loss) | | | | | | | | | | | | |
Packaging | | $ | 81,000 | | | 15.5 | % | | $ | 96,490 | | | 18.1 | % | | $ | 93,990 | | | 19.2 | % |
Aerospace | | 8,060 | | | 4.3 | % | | 13,270 | | | 7.2 | % | | (133,440) | | | (79.6) | % |
Specialty Products | | 30,250 | | | 17.4 | % | | 22,550 | | | 16.0 | % | | 4,350 | | | 3.8 | % |
Corporate | | (20,250) | | | N/A | | (37,220) | | | N/A | | (53,190) | | | N/A |
Total | | $ | 99,060 | | | 11.2 | % | | $ | 95,090 | | | 11.1 | % | | $ | (88,290) | | | (11.5) | % |
Capital Expenditures | | | | | | | | | | | | |
Packaging | | $ | 33,170 | | | 6.4 | % | | $ | 34,080 | | | 6.4 | % | | $ | 30,730 | | | 6.3 | % |
Aerospace | | 6,900 | | | 3.7 | % | | 5,390 | | | 2.9 | % | | 5,770 | | | 3.4 | % |
Specialty Products | | 5,860 | | | 3.4 | % | | 5,500 | | | 3.9 | % | | 3,890 | | | 3.4 | % |
Corporate | | 30 | | | N/A | | 90 | | | N/A | | 90 | | | N/A |
Total | | $ | 45,960 | | | 5.2 | % | | $ | 45,060 | | | 5.3 | % | | $ | 40,480 | | | 5.3 | % |
Depreciation | | | | | | | | | | | | |
Packaging | | $ | 22,720 | | | 4.4 | % | | $ | 20,950 | | | 3.9 | % | | $ | 18,330 | | | 3.8 | % |
Aerospace | | 7,590 | | | 4.0 | % | | 7,140 | | | 3.9 | % | | 7,110 | | | 4.2 | % |
Specialty Products | | 3,680 | | | 2.1 | % | | 3,670 | | | 2.6 | % | | 3,450 | | | 3.0 | % |
Corporate | | 130 | | | N/A | | 130 | | | N/A | | 130 | | | N/A |
Total | | $ | 34,120 | | | 3.9 | % | | $ | 31,890 | | | 3.7 | % | | $ | 29,020 | | | 3.8 | % |
Amortization | | | | | | | | | | | | |
Packaging | | $ | 6,620 | | | 1.3 | % | | $ | 9,550 | | | 1.8 | % | | $ | 9,270 | | | 1.9 | % |
Aerospace | | 12,030 | | | 6.4 | % | | 11,560 | | | 6.3 | % | | 11,020 | | | 6.6 | % |
Specialty Products | | 450 | | | 0.3 | % | | 450 | | | 0.3 | % | | 460 | | | 0.4 | % |
Corporate | | — | | | N/A | | — | | | N/A | | — | | | N/A |
Total | | $ | 19,100 | | | 2.2 | % | | $ | 21,560 | | | 2.5 | % | | $ | 20,750 | | | 2.7 | % |
The following “Results of Operations Year Ended December 31, 2022 Compared with Year Ended December 31, 2021” 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, 2021 compared to the year ended December 31, 2020 can be found under Item 7 in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, filed with the Securities and Exchange Commission on March 1, 2022.
Results of Operations
Year Ended December 31, 2022 Compared with Year Ended December 31, 2021
The principal factors impacting us during the year ended December 31, 2022, compared with the year ended December 31, 2021 were:
•the significant level of uncertainty and volatility in the markets we serve, whether impacted by the COVID-19 pandemic, the Russia-Ukraine conflict or other general inflationary pressures;
•reduced sales of our Packaging segment's products used in beauty and personal care and home care applications as a result of the abatement from peak demand levels following the pandemic, as well from an abrupt second-half 2022 demand reduction from large consumer packaged goods customers due to their choice to rebalance inventory levels;
•increases in sales in our Specialty Products segment as a result of a significant increase in industrial demand in 2022;
•the impact of recent acquisitions, primarily Omega and TFI in December 2021, and Intertech in February 2022;
•gains on the sale of non-core properties in City of Industry, California and Tolleson, Arizona;
•the impact of higher energy costs;
•expenses associated with our asbestos exposure to update the liability to recent actuarial studies;
•realignment expenses in response to reduced end-market demand following the outbreak of the COVID-19 pandemic;
•the impact of our debt refinancing activities; and
•the impact of a increase in our effective tax rate from 2021 to 2022.
Overall, net sales increased $26.7 million, or 3.1%, to $883.8 million in 2022, as compared to $857.1 million in 2021, primarily as a result of Intertech, Omega and TFI, which collectively added $48.6 million of acquisition-related sales. Organic sales, excluding the impact of currency exchange and acquisitions, decreased $4.0 million, as increases in sales of our industrial products in our Specialty Products segment as well as for food and beverage products in our Packaging segment were more than offset by declines in dispensing products for personal and home care applications, as demand for these products abated from peak levels following the pandemic, as well as the expected decline in sales of customers' stocking orders for highly-engineered fasteners in our Aerospace segment fulfilled in 2021. In addition, net sales decreased $17.9 million due to currency exchange, as our reported results in U.S. dollars were unfavorably impacted as a result of the strengthening U.S. dollar relative to foreign currencies.
Gross profit margin (gross profit as a percentage of sales) approximated 23.6% and 25.3% in 2022 and 2021, respectively. Gross profit margin decreased due to a less favorable sales mix, primarily as a result of lower sales of Aerospace segment customers' stocking orders for highly-engineered fasteners, and lower fixed cost absorption from the reduction in the Packaging segment's personal care, home care and certain industrial product sales. In addition, improved recovery of resin costs in our Packaging segment was offset by higher energy costs, primarily in our European Packaging segment facilities, higher steel costs in our Specialty Products segment, labor and production inefficiencies in our Aerospace segment, and unfavorable currency exchange.
Operating profit margin (operating profit as a percentage of sales) approximated 11.2% and 11.1% in 2022 and 2021, respectively. Operating profit increased $4.0 million, to $99.1 million in 2022, as compared to $95.1 million in 2021, primarily due to $22.4 million of gains on the sale of non-core properties in City of Industry, California and Tolleson, Arizona, improved recovery of resin costs, higher sales in our Specialty Products segment, and $4.7 million of lower realignment charges, partially offset by less favorable product sales mix, lower fixed cost absorption in our Packaging segment, $4.1 million of additional pre-tax charges related to updating our asbestos studies in 2022 compared with 2021, production inefficiencies resulting from supply chain constraints and labor volatility, and unfavorable currency exchange.
Interest expense decreased $0.4 million, to $14.1 million in 2022, as compared to $14.5 million in 2021, due to a lower effective interest rate and a decrease in our weighted average borrowings.
We incurred $10.5 million of debt financing and related expense in 2021, of which $10.3 million was related to expenses incurred associated with the redemption of our 2025 Senior Notes and $0.2 million related to the write-off of previously capitalized deferred financing fees associated with our Credit Agreement.
Other income (expense) increased $3.7 million to other income of $2.7 million in 2022, from other expense of $1.0 million in 2021, primarily due to the reversal of the TFI contingent consideration liability in 2022.
The effective income tax rate for 2022 was 24.5%, compared to 17.1% for 2021. We recorded income tax expense of $21.5 million in 2022, as compared to income tax expense of $11.8 million in 2021. During 2022, we reported domestic and foreign pre-tax income of $56.8 million and $30.9 million, respectively, as compared to a domestic and foreign pre-tax income of $28.4 million and $40.7 million in 2021. The rate for 2022 is higher primarily as a result of the recognition of $3.0 million of deferred tax benefits in Italy during the 2021, the majority of which related to a reduction in deferred tax liabilities in connection with certain tax incentives.
Net income increased $8.9 million to $66.2 million in 2022, compared to a net income of $57.3 million in 2021. This increase was primarily a result of an increase in operating profit of $4.0 million, the year-over-year impact of the $10.5 million debt financing and related expenses in 2021, a $3.7 million increase in other income, as well as a decrease in interest expense of $0.4 million, partially offset by an increase in income tax expense in 2022.
See below for a discussion of operating results by segment.
Packaging. Net sales decreased $11.1 million, or 2.1%, to $522.2 million in 2022, as compared to $533.3 million in 2021. Acquisition-related sales growth was $43.7 million, comprised of $28.7 million of sales from our February 2022 acquisition of Intertech and $15.0 million resulting from the January through November 2022 sales of our December 2021 acquisition of Omega. Sales of products used in food and beverage markets increased by $13.9 million, primarily due to strong demand for closures, dispensers and bag-in-box packaging as the hospitality sector continues to rebound from prior COVID-19 pandemic-related shutdowns. Sales of products used in industrial markets decreased by $3.6 million, primarily as a result of lower demand for drum and pail closure products in North America. Sales of dispensing products used in personal care and home care applications decreased by $46.5 million, as COVID-19-related demand levels have abated for these products from the peak levels, as well as more recently due to further temporary lower demand from large consumer goods customers who we believe are rebalancing on-hand inventory levels given first half 2022 over-ordering to protect supply and as a result of the current macro-economic environment. Net sales decreased by $17.9 million due to currency exchange, as our reported results in U.S. dollars were unfavorably impacted as a result of the strengthening U.S. dollar relative to foreign currencies, as compared to 2021.
Packaging's gross profit decreased $8.7 million to $137.0 million, or 26.2% of sales, in 2022, as compared to $145.8 million, or 27.3% of sales, in 2021. During 2021, we were impacted by $11 million of higher resin costs than we were able to recover via commercial actions. We have generally recovered such costs during 2022, as market prices have generally stabilized. Gross profit from improved material cost recovery was more than offset by $4.1 million of higher energy costs, primarily in our European manufacturing facilities, lower sales levels, as well as $5.0 million of currency exchange, as our reported results in U.S. dollars were unfavorably impacted as a result of the strengthening U.S. dollar relative to foreign currencies. In addition, gross profit margin declined as a result of a less favorable product sales mix and lower fixed cost absorption primarily associated with the decline in personal care, home care and industrial products.
Packaging's selling, general and administrative expenses increased $6.6 million to $55.7 million, or 10.7% of sales, in 2022, as compared to $49.1 million, or 9.2% of sales, in 2021, primarily due to higher ongoing selling, general and administrative costs associated with our acquisitions as we integrate them into our portfolio, as well as higher realignment costs of $1.8 million primarily related to employee-related actions. The increase was partially offset by lower intangible asset amortization expense due to certain assets becoming fully amortized as well as lower employee-related costs.
Packaging's operating profit decreased $15.5 million to $81.0 million, or 15.5% of sales, in 2022, as compared to $96.5 million, or 18.1% of sales, in 2021, as the impact of improved year-over-year recovery of material costs was more than offset by a less favorable product sales mix, lower fixed cost absorption, higher energy costs, higher selling, general and administrative expenses and the impact of $2.6 million of unfavorable currency exchange.
Aerospace. Net sales increased $4.8 million, or 2.6%, to $188.1 million in 2022, as compared to $183.3 million in 2021. TFI, acquired in December 2021, added $4.9 million of sales from January through November 2022. Sales of our fasteners products decreased by $0.4 million, as increases in demand for fasteners used in new aircraft builds, and market share gains, were more than offset by the expected loss of $29.4 million of sales of customers' stocking orders for highly-engineered fasteners fulfilled in 2021. Sales of our engineered components products increased by $0.3 million.
Gross profit within Aerospace decreased $7.7 million to $32.2 million, or 17.1% of sales, in 2022, from $40.0 million, or 21.8% of sales, in 2021, primarily due to a less favorable product sales mix in 2022, with lower sales of the customers' stocking orders for highly-engineered fasteners, as well as production inefficiencies resulting from supply chain and labor constraints.
Selling, general and administrative expenses increased $2.3 million to $29.0 million, or 15.4% of sales, in 2022, as compared to $26.7 million, or 14.6% of sales, in 2021, primarily due to higher ongoing selling, general and administrative costs associated with our acquisition of TFI and higher employee-related costs.
Operating profit within Aerospace decreased $5.2 million to $8.1 million, or 4.3% of sales, in 2022, as compared to $13.3 million, or 7.2% of sales, in 2021, as the impact of a $4.8 million pre-tax gain on the sale of vacant land adjacent to the Tolleson, Arizona, manufacturing facility in 2022, as well as higher sales levels, was more than offset by a less favorable product sales mix, production inefficiencies resulting from supply chain constraints and volatility in labor availability and higher selling, general and administrative expenses.
Specialty Products. Net sales increased $33.1 million, or 23.5%, to $173.6 million in 2022, as compared to $140.5 million in 2021. Sales of our cylinder products increased by $19.4 million due to a higher demand for steel cylinders in North America as industrial activity continues to increase from depressed levels as a result of the COVID-19 pandemic. Sales of engines, compressors and related parts used in stationary power generation and assistance applications for natural gas and crude oil extraction increased by $13.7 million primarily as a result of higher oil-field activity in North America.
Gross profit within Specialty Products increased $7.6 million to $39.0 million, or 22.5% of sales, in 2022, as compared to $31.5 million, or 22.4% of sales, in 2021. Gross profit increased due to higher sales levels and leverage of our fixed cost footprint, partially offset by higher steel and labor costs.
Selling, general and administrative expenses within Specialty Products decreased $0.3 million to $8.7 million, or 5.0% of sales, in 2022, as compared to $9.0 million, or 6.4% of net sales, in 2021, primarily due to lower employee-related costs.
Operating profit within Specialty Products increased $7.7 million to $30.3 million, or 17.4% of sales, in 2022, as compared to $22.6 million, or 16.0% of sales, in 2021, primarily due to increased sales levels.
Corporate Expenses. Corporate expenses included in operating profit consist of the following (dollars in millions):
| | | | | | | | | | | | | | |
| | Year ended December 31, |
| | 2022 | | 2021 |
Corporate operating expenses | | $ | 22.4 | | | $ | 26.1 | |
Non-cash stock compensation | | 9.8 | | | 9.5 | |
Legacy (income) expenses, net | | 5.7 | | | 1.6 | |
(Gain) loss on disposition of assets | | (17.6) | | | — | |
Corporate expenses | | $ | 20.3 | | | $ | 37.2 | |
Corporate operating loss decreased $17.0 million to $20.3 million in 2022, from $37.2 million in 2021, primarily as a result of a $17.6 million gain on the sale of a non-core facility in City of Industry, California, and a $3.7 million decrease in corporate operating expenses as a result of the realignment charges related to the corporate office legal and finance groups in 2021. These amounts were partially offset by $4.1 million of additional pre-tax non-cash charges related to updating our asbestos studies in 2022 compared with 2021.
Liquidity and Capital Resources
Cash Flows
Cash flows provided by operating activities in 2022 were $72.6 million, as compared to $134.2 million in 2021. Significant changes in cash flows provided by operating activities and the reasons for such changes are as follows:
•In 2022, the Company generated $109.2 million in cash flows, based on the reported net income of $66.2 million and after considering the effects of non-cash items related to depreciation, amortization, (gain) loss on dispositions of assets, changes in deferred income taxes, stock-based compensation, change in legacy liability estimate, and other operating activities. In 2021, the Company generated $139.2 million in cash flows based on the reported net income of $57.3 million and after considering the effects of similar non-cash items and debt financing and related expenses.
•Increases in accounts receivable resulted in a use of cash of $6.7 million and $11.2 million in 2022 and 2021, respectively. The increased use of cash for 2022 and 2021 is due primarily to the timing of sales and collection of cash related thereto with the periods. Days sales outstanding of receivables increased by five days through 2022, and remained relatively consistent through 2021.
•We increased our investment in inventory by $7.0 million and $1.0 million in 2022 and 2021, respectively. Our days sales in inventory increased by seven days in 2022, primarily as a result of proactively investing in certain raw materials and purchased components to protect against supply chain disruptions and potential cost increases. Our days sales in inventory decreased by nine days in 2021, 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.
•Decreases in prepaid expenses and other assets resulted in a source of cash of $6.1 million and $5.0 million in 2022 and 2021, respectively. The changes in 2022 and 2021 are 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 use of cash of $29.1 million in 2022, while increases in accounts payable and accrued liabilities resulted in a source of cash of $2.1 million in 2021. Our days accounts payable on hand remained consistent through 2022 and increased by five days through 2021. Our days accounts payable on hand fluctuate primarily as a result of the timing of payments made to suppliers and the mix of vendors and related terms.
Net cash used for investing activities was $55.0 million and $79.2 million in 2022 and 2021, respectively. During 2022, we paid $64.1 million, net of cash acquired, to acquire Intertech. We invested $46.0 million in capital expenditures as we have continued our investment in growth, capacity and productivity-related capital projects. We received proceeds of $26.2 million from the termination of our cross-currency swap agreements. We also received proceeds of $28.8 million from the disposition of property and equipment, primarily related to the sale of vacant land adjacent to one of our manufacturing facilities and the sale of a non-core facility in California. During 2021, we paid $34.3 million, net of cash acquired, to acquire Omega and TFI. In 2021, we invested $45.1 million in capital expenditures and received cash from the disposition of business, property and equipment of $0.2 million.
Net cash used for financing activities was $46.2 million in 2022, while net cash provided by financing activities was $11.8 million in 2021. During 2022, we purchased $36.9 million of outstanding common stock, used a net cash amount of $2.4 million related to our stock compensation arrangements and paid dividends of $6.9 million. During 2021, we issued $400.0 million principal amount of the 2029 Senior Notes, made net repayments of $48.6 million on our revolving credit facilities, and redeemed $300.0 million principal amount of the 2025 Senior Notes. In connection with refinancing our long-term debt, we paid $13.6 million of debt financing fees and redemption premium. We also purchased $19.1 million of outstanding common stock, used a net cash amount of $5.2 million related to our stock compensation arrangements and paid dividends of $1.7 million.
Our Debt and Other Commitments
In 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 $5.1 million related to the offering and pay fees and expenses of $1.1 million related to amending our Credit Agreement. In connection with the issuance, we completed the redemption of our 2025 Senior Notes, paying $300.0 million to retire the outstanding principal amount plus $7.3 million as 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 million of fees and expenses related to the 2029 Senior Notes were capitalized as debt issuance costs, while the $7.3 million redemption premium, as well as $3.0 million of 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 15 and October 15. 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 2022, our consolidated subsidiaries that do not guarantee the Senior Notes represented 24% 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 37% and 14% of the total guarantor and non-guarantor assets and liabilities, respectively, as of December 31, 2022, 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 $1.1 million related to the amendment, all of which were capitalized as debt issuance costs. We also recorded $0.2 million of non-cash expense related to the write-off of previously capitalized deferred financing fees. The Credit Agreement consists of a $300.0 million senior secured revolving credit facility, which permits borrowings denominated in specific foreign currencies, subject to a $125.0 million sub limit, maturing on March 29, 2026.
In November 2021, we amended the Credit Agreement to replace LIBOR with a benchmark interest rate determined based on the currency denomination of borrowings. Effective January 1, 2022, the amendment replaced the reference rate terms for U.S. dollar LIBOR borrowings to the Secured Overnight Financing Rate ("SOFR"), British pound sterling LIBOR borrowings to the Sterling Overnight Index Average ("SONIA") and Euro LIBOR borrowings to the Euro Short Term Rate ("ESTR"), all plus a spread of 1.50%. The interest rate spread is based upon the leverage ratio, as defined, as of the most recent determination date.
The Credit Agreement provides for incremental revolving credit commitments in an amount not to exceed the greater of $200 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, 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, 2022. 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 1.86 to 1.00 at December 31, 2022. Our permitted interest expense coverage ratio under the Credit Agreement is 3.00 to 1.00, and our actual interest expense coverage ratio was 12.72 to 1.00 as of December 31, 2022. At December 31, 2022, 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 year ended December 31, 2022. 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, 2022 |
Net income | | $ | 66,170 | |
Bank stipulated adjustments: | | |
Interest expense, net (as defined) | | 14,110 | |
Income tax expense | | 21,500 | |
Depreciation and amortization | | 53,220 | |
| | |
Non-cash compensation expense(1) | | 9,840 | |
| | |
Other non-cash expenses or losses | | 570 | |
Non-recurring expenses or costs(2) | | 9,960 | |
Extraordinary, non-recurring or unusual gains or losses | | 5,590 | |
| | |
Effects of purchase accounting adjustments | | 1,160 | |
Business and asset dispositions | | (21,950) | |
| | |
Permitted acquisitions | | 710 | |
| | |
Currency gains and losses | | (720) | |
Consolidated Bank EBITDA, as defined | | $ | 160,160 | |
| | | | | | | | | | | |
| | December 31, 2022 |
Total Indebtedness, as defined | | $ | 297,910 | | |
Consolidated Bank EBITDA, as defined | | 160,160 | | |
Actual total net leverage ratio | | 1.86 | | x |
Covenant requirement | | 4.00 | | x |
| | | | | | | | |
| | Year ended December 31, 2022 |
Interest expense, as defined | | $ | 14,110 | |
Bank stipulated adjustments: | | |
Interest income | | (610) | |
Non-cash amounts attributable to amortization of financing costs | | (910) | |
| | |
Total Consolidated Cash Interest Expense, as defined | | $ | 12,590 | |
| | | | | | | | | | | |
| | December 31, 2022 | |
Consolidated Bank EBITDA, as defined | | $ | 160,160 | | |
Total Consolidated Cash Interest Expense, as defined | | 12,590 | | |
Actual interest expense coverage ratio | | 12.72 | | x |
Covenant requirement | | 3.00 | | x |
________________________________________
(1) Non-cash compensation expenses resulting from the grant of equity awards.
(2) Non-recurring costs and expenses relating to diligence and transaction costs, purchase accounting costs, severance, relocation, restructuring and curtailment expenses.
The Credit Agreement allows issuance of letters of credit, not to exceed $40.0 million in aggregate, against revolving credit facility commitments. As of December 31, 2021, we placed cash on deposit with a financial institution to be held as cash collateral for our outstanding letters of credit; effectively, as of December 31, 2021, we had no letters of credit issued against our revolving credit facility. At December 31, 2022, we had no amounts outstanding under our revolving credit facility and had $293.9 million potentially available after giving effect to $6.1 million of letters of credit issued and outstanding. At December 31, 2021, we had no amounts outstanding under our revolving credit facility and had $300.0 million potentially available. Our letters of credit, or corresponding 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, 2022 and December 31, 2021.
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 were $400.1 million during 2022, compared to $401.9 million during 2021, primarily due to a higher aggregate principal balance on our senior notes due to the issuance of the 2029 Senior Notes and the redemption of the 2025 Senior Notes during 2021.
In 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, 2022 and 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.
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, 2022 is located within the United States, and given available funding under our revolving credit facility of $300.0 million at December 31, 2022 (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 next 12 months and for the foreseeable future, as well as dividends and share repurchases.
We are subject to variable interest rates on our revolving credit facility, which is subject to a benchmark interest rate determined based on the currency denomination of borrowings. At December 31, 2022, 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 $13.9 million in 2022. 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 million in the aggregate, an increase of $100 million from the previous authorization. During 2022, 2021 and 2020, we purchased 1,264,088, 596,084 and 1,582,049 shares of our outstanding common stock for $36.9 million, $19.1 million and $39.4 million, respectively. Since the initial authorization through December 31, 2022, we have purchased 5,114,903 shares of our outstanding common stock for an aggregate purchase price of $144.3 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, 2022 (dollars in thousands).
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Payments Due by Periods |
| | Total | | Less than One Year | | 1 - 3 Years | | 3 - 5 Years | | More than 5 Years |
Contractual and other cash obligations: | | | | | | | | | | |
Long-term debt | | $ | 400,000 | | | $ | — | | | $ | — | | | $ | — | | | $ | 400,000 | |
Operating lease obligations | | 55,530 | | | 9,970 | | | 16,960 | | | 14,380 | | | 14,220 | |
Benefit obligations | | 14,940 | | | 1,220 | | | 2,550 | | | 2,760 | | | 8,410 | |
Interest obligations (a) | | 107,250 | | | 16,500 | | | 33,000 | | | 33,000 | | | 24,750 | |
| | | | | | | | | | |
| | | | | | | | | | |
Total contractual and other cash obligations | | $ | 577,720 | | | $ | 27,690 | | | $ | 52,510 | | | $ | 50,140 | | | $ | 447,380 | |
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(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 13, "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 22, "Income Taxes," included in Item 8, "Financial Statements and Supplementary Data," within this Form 10-K.
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 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. As of December 31, 2022, we were party to foreign exchange forward and swap contracts to hedge changes in foreign currency exchange rates with notional amounts of $127.2 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 13, "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 13, "Derivative Instruments," included in Item 8, "Financial Statements and Supplementary Data," within this Form 10-K 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 March 29, 2022, Moody's affirmed a Ba3 rating to our 2029 Senior Notes, as presented in Note 12, "Long-term Debt" included in Item 8, "Financial Statements and Supplementary Data" within this Form 10-K. Moody's also affirmed a Ba2 Corporate Family Rating and maintained its outlook as stable. On May 12, 2022, Standard & Poor's affirmed a BB- rating to our 2029 Senior Notes. Standard & Poor's also affirmed 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
Since the onset of the COVID-19 pandemic in 2020, each of our businesses has been impacted by significant macro-economic factors. Sales in our Packaging segment for dispensing and closure products we supply that are used in applications to fight the spread of germs spiked in 2020 and early 2021, and have now abated from those peak levels in 2022. 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 2022. Sales in our Aerospace segment were significantly depressed at the onset of the pandemic and for many quarters thereafter, but demand began to significantly increase during 2022.
Following the pandemic and now the Russia-Ukraine conflict, there have been significant challenges in inflationary pressures, supply chain disruptions, labor availability, as well as significant volatility in our customers' order patterns. We believe this period of uncertainty will continue to persist in the near-term. However, no matter the outcome of these factors, we expect to continue to mitigate, as much as practical, the impact of these challenges, executing on realignment actions and taking other proactive actions as necessary, to maintain our strong balance sheet and generate cash in support of our capital allocation strategy.
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 next 12 months and for the foreseeable future, as well as fund dividends, share repurchases and bolt-on acquisitions consistent with our capital allocation strategy.
We expect to continue to leverage the tenets of our TriMas Business Model to manage our multi-industry businesses on a longer-term basis, to 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," within 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. Certain of 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 $1.7 million and $1.6 million at December 31, 2022 and 2021, 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.
Goodwill and 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 2022 goodwill impairment test, we had six reporting units, four of which had goodwill, within our three reportable segments.
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 2022 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 million per occurrence under our retention program for workers' compensation, up to $1.5 million per occurrence under our retention programs for comprehensive general, product and vehicle liability, and have a $0.4 million per 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.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
In the normal course of 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 and credit markets, which may impact 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 12, "Long-term Debt," and Note 13, "Derivative Instruments," included in Item 8, "Financial Statements and Supplementary Data," within this Form 10-K for additional information.
Item 8. Financial Statements and Supplementary Data
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the shareholders and the Board of Directors of TriMas Corporation
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of TriMas Corporation and subsidiaries (the "Company") as of December 31, 2022 and 2021, the related consolidated statements of operations, comprehensive income, shareholders' equity, and cash flows, for each of the three years in the period ended December 31, 2022, and the related notes and the schedule listed in the Index at Item 15 (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 23, 2023 expressed an unqualified opinion on the Company's internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Goodwill – Aerospace Fasteners Reporting Unit — Refer to Notes 3 and 8 to the financial statements
Critical Audit Matter Description
The Company’s evaluation of goodwill impairment involves a qualitative assessment to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount. The qualitative assessment involves significant use of management's judgment and assumptions related to macroeconomic conditions, industry and market considerations, overall financial performance, entity and reporting unit specific events, capital markets pricing, as well as legal, regulatory, and contractual factors. The Company also considers recent valuations of its reporting units, including the difference between the most recent fair value estimate and the carrying amount. Changes in these assumptions could have a significant effect on management’s conclusion about whether a quantitative goodwill impairment test is necessary to estimate the fair value of its reporting units.
The Company’s goodwill balance was $340 million as of December 31, 2022, of which $70 million was allocated to the Aerospace Fasteners Reporting Unit (“Aerospace Fasteners”). The Company concluded there were no indications that the fair value of any reporting unit was less than the carrying amount, therefore a quantitative assessment was not performed, and no impairment was recognized.
Given the nature of the Aerospace Fasteners operations, the assumptions used in the qualitative assessment, and the difference between the most recent fair value estimate and the carrying amount of Aerospace Fasteners, auditing management’s judgments related to the impact of macroeconomic conditions, overall financial performance for Aerospace Fasteners, and capital markets pricing involved especially subjective judgment.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to management’s qualitative evaluation of goodwill impairment for Aerospace Fasteners included the following, among others:
•We tested the effectiveness of controls over goodwill, including those over management's judgments and assumptions related to macroeconomic conditions, industry and market considerations, overall financial performance, entity and reporting unit specific events, capital markets pricing, and recent fair value estimates and carrying amounts.
•We evaluated management’s ability to accurately forecast future revenues and EBITDA margins by comparing actual results to management’s historical forecasts.
•We evaluated the reasonableness of management’s qualitative assessment of factors affecting revenue and EBITDA margin forecasts by comparing the forecasts to:
i.Historical revenues and EBITDA.
ii.Internal communications to management and the Board of Directors.
iii.Forecasted information included in industry reports for the Company and certain of its peer companies.
•We evaluated the impact of changes in management’s forecasts from the October 1, 2022, annual measurement date to December 31, 2022.
•With the assistance of our fair value specialists, we evaluated the reasonableness of management’s qualitative assessment by performing the following: (1) Researching GDP growth, inflation and/or other macroeconomic variables, as well as industry growth rates; (2) Estimate industry discount rates; (3) Research and analyze valuation multiple of guideline public companies to understand valuation trends, and research trends in growth and margins in guideline public companies; and (4) Obtain information to analyze the trend of market capitalization of the entity and public peer companies.
/s/ Deloitte & Touche LLP
Detroit, Michigan
February 23, 2023
We have served as the Company's auditor since 2013.
TriMas Corporation
Consolidated Balance Sheet
(Dollars in thousands)
| | | | | | | | | | | | | | |
| | December 31, |
| | 2022 | | 2021 |
Assets | | | | |
Current assets: | | | | |
Cash and cash equivalents | | $ | 112,090 | | | $ | 140,740 | |
Receivables, net | | 132,370 | | | 125,630 | |
Inventories | | 163,360 | | | 152,450 | |
Prepaid expenses and other current assets | | 14,840 | | | 12,950 | |
| | | | |
Total current assets | | 422,660 | | | 431,770 | |
Property and equipment, net | | 277,750 | | | 265,630 | |
Operating lease right-of-use assets | | 47,280 | | | 50,650 | |
Goodwill | | 339,810 | | | 315,490 | |
Other intangibles, net | | 188,110 | | | 196,730 | |
Deferred income taxes | | 9,400 | | | 9,740 | |
Other assets | | 19,990 | | | 33,630 | |
| | | | |
Total assets | | $ | 1,305,000 | | | $ | 1,303,640 | |
Liabilities and Shareholders' Equity | | | | |
Current liabilities: | | | | |
| | | | |
Accounts payable | | $ | 85,210 | | | $ | 87,800 | |
Accrued liabilities | | 46,660 | | | 58,980 | |
Operating lease liabilities, current portion | | 8,280 | | | 8,120 | |
| | | | |
Total current liabilities | | 140,150 | | | 154,900 | |
Long-term debt, net | | 394,730 | | | 393,820 | |
Operating lease liabilities | | 41,010 | | | 43,780 | |
Deferred income taxes | | 20,940 | | | 21,260 | |
Other long-term liabilities | | 56,340 | | | 59,030 | |
| | | | |
Total liabilities | | 653,170 | | | 672,790 | |
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: 41,724,762 shares at December 31, 2022 and 42,836,574 shares at December 31, 2021 | | 420 | | | 430 | |
Paid-in capital | | 696,160 | | | 732,490 | |
Accumulated deficit | | (36,130) | | | (102,300) | |
Accumulated other comprehensive income (loss) | | (8,620) | | | 230 | |
Total shareholders' equity | | 651,830 | | | 630,850 | |
Total liabilities and shareholders' equity | | $ | 1,305,000 | | | $ | 1,303,640 | |
The accompanying notes are an integral part of these financial statements.
TriMas Corporation
Consolidated Statement of Operations
(Dollars in thousands, except per share amounts)
| | | | | | | | | | | | | | | | | | | | |
| | Year ended December 31, |
| | 2022 | | 2021 | | 2020 |
Net sales | | $ | 883,830 | | | $ | 857,110 | | | $ | 769,970 | |
Cost of sales | | (675,530) | | | (639,920) | | | (587,890) | |
Gross profit | | 208,300 | | | 217,190 | | | 182,080 | |
Selling, general and administrative expenses | | (131,190) | | | (121,970) | | | (134,480) | |
Net gain (loss) on dispositions of assets | | 21,950 | | | (130) | | | (1,290) | |
Impairment of goodwill and indefinite-lived intangible assets | | — | | | — | | | (134,600) | |
Operating profit (loss) | | 99,060 | | | 95,090 | | | (88,290) | |
Other expense, net: | | | | | | |
Interest expense | | (14,110) | | | (14,510) | | | (14,660) | |
Debt financing and related expenses | | — | | | (10,520) | | | — | |
Other income (expense), net | | 2,720 | | | (950) | | | 240 | |
Other expense, net | | (11,390) | | | (25,980) | | | (14,420) | |
Income (loss) before income taxes | | 87,670 | | | 69,110 | | | (102,710) | |
Income tax benefit (expense) | | (21,500) | | | (11,800) | | | 22,950 | |
| | | | | | |
| | | | | | |
Net income (loss) | | $ | 66,170 | | | $ | 57,310 | | | $ | (79,760) | |
Basic earnings (loss) per share: | | | | | | |
| | | | | | |
| | | | | | |
Net income (loss) per share | | $ | 1.57 | | | $ | 1.33 | | | $ | (1.83) | |
Weighted average common shares - basic | | 42,249,244 | | | 43,006,922 | | | 43,581,232 | |
Diluted earnings (loss) per share: | | | | | | |
| | | | | | |
| | | | | | |
Net income (loss) per share | | $ | 1.56 | | | $ | 1.32 | | | $ | (1.83) | |
Weighted average common shares - diluted | | 42,478,015 | | | 43,281,076 | | | 43,581,232 | |
The accompanying notes are an integral part of these financial statements.
TriMas Corporation
Consolidated Statement of Comprehensive Income
(Dollars in thousands)
| | | | | | | | | | | | | | | | | | | | |
| | Year ended December 31, |
| | 2022 | | 2021 | | 2020 |
Net income (loss) | | $ | 66,170 | | | $ | 57,310 | | | $ | (79,760) | |
Other comprehensive income (loss): | | | | | | |
Defined benefit plans (Note 17) | | (550) | | | 3,790 | | | 1,310 | |
Foreign currency translation | | (17,710) | | | (7,430) | | | 6,880 | |
Derivative instruments (Note 13) | | 9,410 | | | 9,490 | | | (7,810) | |
Total other comprehensive income (loss) | | (8,850) | | | 5,850 | | | 380 | |
Total comprehensive income (loss) | | $ | 57,320 | | | $ | 63,160 | | | $ | (79,380) | |
The accompanying notes are an integral part of these financial statements.
TriMas Corporation
Consolidated Statement of Cash Flows
(Dollars in thousands) | | | | | | | | | | | | | | | | | | |
| | Year ended December 31, |
| | 2022 | | 2021 | | 2020 |
Cash Flows from Operating Activities: | | | | | | |
Net income (loss) | | $ | 66,170 | | | $ | 57,310 | | | $ | (79,760) | |
| | | | | | |
| | | | | | |
Adjustments to reconcile net income (loss) to net cash provided by operating activities, net of acquisition impact: | | | | | | |
Impairment of goodwill and indefinite-lived intangible assets | | — | | | — | | | 134,600 | |
(Gain) loss on dispositions of assets | | (21,950) | | | 130 | | | 1,290 | |
Depreciation | | 34,120 | | | 31,890 | | | 29,020 | |
Amortization of intangible assets | | 19,100 | | | 21,560 | | | 20,750 | |
Amortization of debt issue costs | | 910 | | | 960 | | | 1,150 | |
Deferred income taxes | | (1,400) | | | 1,680 | | | (33,710) | |
Non-cash compensation expense | | 9,840 | | | 9,500 | | | 8,170 | |
| | | | | | |
Debt financing and related expenses | | — | | | 10,520 | | | — | |
Change in legacy liability estimate | | 5,590 | | | 1,450 | | | 23,400 | |
(Increase) decrease in receivables | | (6,650) | | | (11,180) | | | 9,580 | |
(Increase) decrease in inventories | | (6,970) | | | (960) | | | 3,980 | |
Decrease in prepaid expenses and other assets | | 6,120 | | | 5,030 | | | 4,400 | |
Increase (decrease) in accounts payable and accrued liabilities | | (29,130) | | | 2,120 | | | 4,490 | |
Other operating activities | | (3,180) | | | 4,210 | | | 50 | |
| | | | | | |
| | | | | | |
Net cash provided by operating activities | | 72,570 | | | 134,220 | | | 127,410 | |
Cash Flows from Investing Activities: | | | | | | |
Capital expenditures | | (45,960) | | | (45,060) | | | (40,480) | |
Acquisition of businesses, net of cash acquired | | (64,100) | | | (34,340) | | | (193,540) | |
Cross-currency swap terminations | | 26,230 | | | — | | | — | |
Net proceeds from dispositions of property and equipment | | 28,790 | | | 220 | | | 1,950 | |
| | | | | | |
| | | | | | |
Net cash used for investing activities | | (55,040) | | | (79,180) | | | (232,070) | |
Cash Flows from Financing Activities: | | | | | | |
Retirement of senior notes | | — | | | (300,000) | | | — | |
Proceeds from issuance of senior notes | | — | | | 400,000 | | | — | |
Proceeds from borrowings on revolving credit facilities | | 12,000 | | | — | | | 367,280 | |
Repayments of borrowings on revolving credit facilities | | (12,000) | | | (48,620) | | | (319,120) | |
Debt financing fees and senior notes redemption premium | | — | | | (13,570) | | | — | |
Payments to purchase common stock | | (36,920) | | | (19,090) | | | (39,420) | |
Shares surrendered upon exercise and vesting of equity awards to cover taxes | | (2,380) | | | (5,230) | | | (2,600) | |
Dividends paid | | (6,880) | | | (1,740) | | | — | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
Net cash provided by (used for) financing activities | | (46,180) | | | 11,750 | | | 6,140 | |
Cash and Cash Equivalents: | | | | | | |
Increase (decrease) for the year | | (28,650) | | | 66,790 | | | (98,520) | |
At beginning of year | | 140,740 | | | 73,950 | | | 172,470 | |
At end of year | | $ | 112,090 | | | $ | 140,740 | | | $ | 73,950 | |
Supplemental disclosure of cash flow information: | | | | | | |
Cash paid for interest | | $ | 12,960 | | | $ | 13,280 | | | $ | 13,210 | |
Cash paid for income taxes | | $ | 20,060 | | | $ | 10,520 | | | $ | 9,060 | |
The accompanying notes are an integral part of these financial statements.
TriMas Corporation
Consolidated Statement of Shareholders' Equity
Years Ended December 31, 2022, 2021 and 2020
(Dollars in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Common Stock | | Paid-In Capital | | Accumulated Deficit | | Accumulated Other Comprehensive Income (Loss) | | Total |
Balances at December 31, 2019 | | $ | 450 | | | $ | 782,880 | | | $ | (79,850) | | | $ | (6,000) | | | $ | 697,480 | |
Net loss | | — | | | — | | | (79,760) | | | — | | | (79,760) | |
Other comprehensive income | | — | | | — | | | — | | | 380 | | | 380 | |
| | | | | | | | | | |
Purchase of common stock | | (30) | | | (39,390) | | | — | | | — | | | (39,420) | |
Shares surrendered upon exercise and vesting of equity awards to cover taxes | | — | | | (2,600) | | | — | | | — | | | (2,600) | |
| | | | | | | | | | |
| | | | | | | | | | |
Non-cash compensation expense | | 10 | | | 8,160 | | | — | | | — | | | 8,170 | |
| | | | | | | | | | |
Balances at December 31, 2020 | | $ | 430 | | | $ | 749,050 | | | $ | (159,610) | | | $ | (5,620) | | | $ | 584,250 | |
Net income | | — | | | — | | | 57,310 | | | — | | | 57,310 | |
Other comprehensive income | | — | | | — | | | — | | | 5,850 | | | 5,850 | |
| | | | | | | | | | |
Purchase of common stock | | — | | | (19,090) | | | — | | | — | | | (19,090) | |
Shares surrendered upon exercise and vesting of equity awards to cover taxes | | — | | | (5,230) | | | — | | | — | | | (5,230) | |
| | | | | | | | | | |
| | | | | | | | | | |
Non-cash compensation expense | | — | | | 9,500 | | | — | | | — | | | 9,500 | |
Dividends declared | | — | | | (1,740) | | | — | | | — | | | (1,740) | |
Balances at December 31, 2021 | | $ | 430 | | | $ | 732,490 | | | $ | (102,300) | | | $ | 230 | | | $ | 630,850 | |
Net income | | — | | | — | | | 66,170 | | | — | | | 66,170 | |
Other comprehensive loss | | — | | | — | | | — | | | (8,850) | | | (8,850) | |
Purchase of common stock | | (10) | | | (36,910) | | | — | | | — | | | (36,920) | |
Shares surrendered upon exercise and vesting of equity awards to cover taxes | | — | | | (2,380) | | | — | | | — | | | (2,380) | |
| | | | | | | | | | |
| | | | | | | | | | |
Non-cash compensation expense | | — | | | 9,840 | | | — | | | — | | | 9,840 | |
Dividends declared | | — | | | (6,880) | | | — | | | — | | | (6,880) | |
Balances at December 31, 2022 | | $ | 420 | | | $ | 696,160 | | | $ | (36,130) | | | $ | (8,620) | | | $ | 651,830 | |
The accompanying notes are an integral part of these financial statements.
TRIMAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
TriMas Corporation ("TriMas" or the "Company"), and its consolidated subsidiaries, designs, engineers and manufactures innovative products under leading brand names for customers primarily in the consumer products, aerospace & defense, and industrial markets.
The preparation of financial statements 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 and volatility in the current economic environment due to input cost inflation, supply chain disruptions, and shortages in global markets for commodities, logistics and labor, all of which have followed outbreak of the coronavirus and related variants (“COVID-19”) since early 2020. To the extent there are differences between these estimates and actual results, the Company's consolidated financial statements may be materially affected.
2. New Accounting Pronouncements
Recently Adopted Accounting Pronouncements
In November 2021, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2021-10, "Government Assistance (Topic 832): Disclosures by Business Entities about Government Assistance" ("ASU 2021-10"), which requires annual disclosures to increase transparency around government assistance received by companies. ASU 2021-10 is effective for fiscal years beginning after December 15, 2021. The Company adopted ASU 2021-10 in the fourth quarter of 2022. Certain country, state and local governments in which the Company operates offer or have offered various business incentives related to investment and/or job creation. The Company's participation in these government incentive programs is accounted for by applying a grant or contribution model by analogy; however, the Company determined that the adoption of ASU 2021-10 did not have a material impact on its consolidated financial statements.
In October 2021, the FASB issued ASU 2021-08, "Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers" ("ASU 2021-08"), which requires that an acquirer recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Topic 606, "Revenue from Contracts with Customers." ASU 2021-08 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2022, with early adoption permitted. The Company adopted ASU 2021-08 in the fourth quarter of 2022, which did not have a significant impact on its consolidated financial statements.
3. Summary of Significant Accounting Policies
Principles of Consolidation. The accompanying consolidated financial statements include the accounts and transactions of TriMas and its subsidiaries. Intercompany transactions have been eliminated.
Use of Estimates. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management of the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements. Such estimates and assumptions also affect the reported amounts of revenues and expenses during the reporting periods. Significant items subject to such estimates and assumptions include the carrying amount of property and equipment, goodwill and other intangibles, valuation allowances for receivables, inventories and deferred income tax assets, valuation of derivatives, estimated fair value of contingent consideration resulting from business combinations, estimated future unrecoverable lease costs, reserves for asbestos and ordinary course litigation, assets and obligations related to employee benefits and estimated unrecognized tax benefits. Actual results may differ from such estimates and assumptions.
Cash and Cash Equivalents. The Company considers cash on hand and on deposit and investments in all highly liquid debt instruments with initial maturities of three months or less to be cash and cash equivalents. Cash and cash equivalents also includes restricted cash, if any, held on deposit with a financial institution as cash collateral for the Company's outstanding letters of credit. See Note 7, "Cash and Cash Equivalents," for further details regarding the Company's cash and cash equivalents.
Receivables. Receivables are presented net of allowances for doubtful accounts of $1.7 million and $1.6 million at December 31, 2022 and 2021, respectively. The Company monitors its exposure for credit losses and maintains allowances for doubtful accounts based upon the Company's best estimate of probable losses inherent in the accounts receivable balances. The Company does not believe that significant credit risk exists due to its diverse customer base.
TRIMAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Inventories. Inventories are stated at the lower of cost or net realizable value, with cost determined using the first-in, first-out method. Direct materials, direct labor and allocations of variable and fixed manufacturing-related overhead are included in inventory cost.
Property and Equipment. Property and equipment additions, including significant improvements, are recorded at cost. Upon retirement or disposal of property and equipment, the cost and accumulated depreciation are removed from the accounts, and any gain or loss is included in the accompanying statement of operations. Repair and maintenance costs are charged to expense as incurred.
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. The Company reviews, on at least a quarterly basis, the financial performance of its businesses for indicators of impairment. In reviewing for impairment indicators, the Company also considers 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.
Goodwill. The Company assesses goodwill for impairment on an annual basis (October 1 test date) by reviewing relevant qualitative and quantitative factors. More frequent evaluations may be required if the Company experiences changes in its business climate or as a result of other triggering events that take place. An impairment loss is recognized when the carrying value of a reporting unit's goodwill exceeds its fair value.
The Company determines its 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 to evaluate operating results. For purposes of the Company's 2022 goodwill impairment test, the Company had six reporting units, four of which had goodwill, within its three reportable segments.
The Company begins its goodwill reviews by conducting a qualitative assessment, considering relevant events and circumstances that affect the fair value or carrying amount of a reporting unit. Such events and circumstances can include macroeconomic conditions, industry and market considerations, overall financial performance, entity and reporting unit specific events, and capital markets pricing. The Company considers the extent to which any identified adverse events and circumstances affect the comparison of a reporting unit's fair value with its carrying amount. The Company places more weight on the events and circumstances that most affect a reporting unit's fair value or the carrying amount of its net assets. The Company considers positive and mitigating events and circumstances that may affect its determination of whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. The Company also considers its most recent valuations of its reporting units, including the difference between the most recent fair value estimate and the carrying amount. Each of these factors is considered by management in reaching its conclusion about whether a quantitative goodwill impairment test is necessary to estimate the fair value of its reporting units.
TRIMAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
If the Company concludes that conducting a quantitative assessment is required, the Company determines the fair value of the reporting unit being evaluated utilizing a combination of three valuation techniques: discounted cash flow (income approach), market comparable method (market approach) and market capitalization (direct market data method). The income approach is based on management's operating plan and internal five-year forecast and utilizes forward-looking assumptions and projections, on a discounted basis, but considers factors unique to each reporting unit and related long-range plans that may not be comparable to other companies and that are not yet public. The market approach considers potentially comparable companies and transactions within the industries where the Company's reporting units participate, and applies their trading multiples to the financial projections of the Company's reporting units. This approach utilizes data from actual marketplace transactions, but reliance on its results is limited by difficulty in identifying companies that are specifically comparable to the Company's reporting units, considering the diversity of the Company's businesses, the relative sizes and levels of complexity. The Company also uses the direct market data method by comparing its book value and the estimates of fair value of the reporting units to the Company's market capitalization. Management uses this comparison as additional evidence of the fair value of the Company, as its market capitalization may be suppressed by other factors such as the control premium associated with a controlling shareholder, the Company's degree of leverage and the float of the Company's common stock. Management evaluates and weights the results based on a combination of the income and market approaches, and, in situations where the income approach results differ significantly from the market and direct data approaches, management re-evaluates and adjusts, if necessary, its assumptions.
Based on the quantitative test, if it is determined that the carrying value of the reporting unit is higher than its fair value, goodwill is impaired and is written down to the fair value amount; however, the loss recognized will not exceed the total amount of goodwill allocated to the reporting unit. See Note 8, "Goodwill and Other Intangible Assets," for further details regarding the Company's goodwill impairment testing.
Indefinite-Lived Intangibles. The Company assesses indefinite-lived intangible assets (primarily trademark/trade names) for impairment on an annual basis (October 1 test date) by reviewing relevant qualitative and quantitative factors. More frequent evaluations may be required if the Company experiences changes in its 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.
In conducting a qualitative assessment, the Company considers relevant events and circumstances to determine whether it is more likely than not that the fair values of the indefinite-lived intangible assets are less than the carrying values. In addition to the events and circumstances that the Company considers above in its qualitative analysis for potential goodwill impairment, the Company also considers legal, regulatory and contractual factors that could affect the fair value or carrying amount of the Company's indefinite-lived intangible assets. The Company also considers its most recent valuations of its indefinite-lived intangible assets, including the difference between the most recent fair value estimates and the carrying amounts. These factors are all considered by management in reaching its conclusion about whether it is more likely than not that the fair values of the indefinite-lived intangible assets are less than the carrying values. If management concludes that further testing is required, the Company performs a quantitative valuation to estimate the fair value of its indefinite-lived intangible assets. In conducting the quantitative impairment analysis, the Company determines the fair value of its indefinite-lived intangible assets using the relief-from-royalty method. The relief-from-royalty method involves the estimation of appropriate market royalty rates for the indefinite-lived intangible assets and the application of these royalty rates to forecasted net sales attributable to the intangible assets. The resulting cash flows are then discounted to present value, using a rate appropriately reflecting the risks inherent in the cash flows, which then is compared to the carrying value of the assets. If the carrying value exceeds fair value, an impairment is recorded. See Note 8, "Goodwill and Other Intangible Assets," for further details regarding the Company's indefinite-lived intangible asset impairment testing.
TRIMAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
High Deductible Insurance. The Company generally has high deductible insurance programs for losses and liabilities related to workers' compensation, health and welfare claims and comprehensive general, product and vehicle liability. The Company is generally responsible for up to $0.8 million per occurrence under its retention program for workers' compensation, up to $1.5 million per occurrence under its retention programs for comprehensive general, product and vehicle liability, and has a $0.4 million per occurrence stop-loss limit with respect to its group medical plan. Total insurance limits under these retention programs vary by year for comprehensive general, product and vehicle liability and extend to the applicable statutory limits for workers' compensation. Reserves for claims losses, including an estimate of related litigation defense costs, are recorded based upon the Company's estimates of the aggregate liability for claims incurred using actuarial assumptions about future events. Changes in assumptions for factors such as medical costs and actual experience could cause these estimates to change.
Pension Plans. The Company engages independent actuaries to compute the amounts of liabilities and expenses under defined benefit pension plans, subject to the assumptions that the Company determines are appropriate based on historical trends, current market rates and future projections. Assumptions used in the actuarial calculations could have a significant impact on plan obligations, and a lesser impact on current period expense. Annually, the Company reviews the actual experience compared to the significant assumptions used and makes adjustments to the assumptions, if warranted. Discount rates are based on 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 fund assets is based on actual historical returns and a review of other public company pension asset return data, modified for known changes in the market and any expected change in investment policy. See Note 17, “Employee Benefit Plans,” for further information.
Asbestos-related Matters. The Company accrues 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. The Company utilizes 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 it believes 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.” See Note 16, “Commitments and Contingencies,” for further information.
Revenue Recognition. Revenue is recognized when control of promised goods is transferred to customers, which generally occurs when products are shipped from the Company’s facilities to its customers. The amount of revenue recorded reflects the consideration the Company expects to be entitled to receive in exchange for transferring those goods. Net sales are comprised of gross revenues, based on observed stand-alone selling prices, less estimates of expected returns, trade discounts and customer allowances, which include incentives such as volume and other discounts in connection with various supply programs. Such deductions are estimated and recorded during the period the related revenue is recognized. The Company may adjust these estimates when the expected amount of consideration changes based on sales volumes or other contractual terms. Sales and other consumption taxes the Company collects from customers and remits to government agencies are excluded from revenue. The Company accounts for freight and shipping costs that occur after control of the related goods transfer to the customer as a fulfillment cost within cost of sales. The nature and timing of the Company's revenue transactions are similar, as substantially all revenue is based on point-in-time transactions with customers under industry-standard payment terms. The Company may require shortened payment terms, including cash-in-advance, on an individual customer basis depending on its assessment of the customer's credit worthiness.
Cost of Sales. Cost of sales includes material, labor and overhead costs incurred in the manufacture of products sold in the period. Material costs include raw material, purchased components, outside processing and freight costs. Overhead costs consist of variable and fixed manufacturing costs, wages and fringe benefits, and purchasing, receiving and inspection costs.
Selling, General and Administrative Expenses. Selling, general and administrative expenses include the following: costs related to the advertising, sale, marketing and distribution of the Company's products, amortization of customer intangible assets, costs of finance, human resources, legal functions, executive management costs and other administrative expenses.
TRIMAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Income Taxes. The Company computes 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. The Company determines valuation allowances based on an assessment of positive and negative evidence on a jurisdiction-by-jurisdiction basis and records a valuation allowance to reduce deferred tax assets to the amount more likely than not to be realized. The Company recognizes the effect of income tax positions only if those positions are more likely than not of being sustained. 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. The Company records interest and penalties related to unrecognized tax benefits in income tax expense. See Note 22, "Income Taxes," for further information.
Foreign Currency Translation. The financial statements of subsidiaries located outside of the United States are measured using the currency of the primary economic environment in which they operate as the functional currency. When translating into U.S. dollars, income and expense items are translated at average monthly exchange rates and assets and liabilities are translated at exchange rates in effect at the balance sheet date. Adjustments resulting from translating the functional currency into U.S. dollars are deferred as a component of accumulated other comprehensive income (loss) ("AOCI") in the consolidated statement of shareholders' equity. The impact of net foreign currency transactions was a gain of $0.7 million for the year ended December 31, 2022, a loss of $0.9 million for the year ended December 31, 2021 and a gain of $0.6 million for the year ended 2020, and are included in other expense, net in the accompanying consolidated statement of operations.
Derivative Financial Instruments. The Company records derivative financial instruments at fair value on the balance sheet as either assets or liabilities, and changes in their fair values are immediately recognized in earnings if the derivatives do not qualify as effective hedges. If a derivative is designated as a fair value hedge, then changes in the fair value of the derivative are offset against the changes in the fair value of the underlying hedged item. If a derivative is designated as a cash flow hedge, then the effective portion of the changes in the fair value of the derivative is recognized as a component of other comprehensive income until the underlying hedged item is recognized in earnings or the forecasted transaction is no longer probable of occurring. If a derivative is designated as a net investment hedge, then the effective portion of the changes in the fair value of the derivative is recognized in other comprehensive income and will be subsequently reclassified to earnings when the hedged net investment is either sold or substantially liquidated. The Company formally documents hedging relationships for its derivative transactions and the underlying hedged items, as well as its risk management objectives and strategies for undertaking the hedge transactions. See Note 13, "Derivative Instruments," for further information.
Fair Value of Financial Instruments. In accounting for and disclosing the fair value of financial instruments, the Company uses the following hierarchy:
•Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date;
•Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly; and
•Level 3 inputs are unobservable inputs for the asset or liability.
Valuation of the Company's cross-currency swaps are based on the income approach, which uses observable inputs such as interest rate yield curves and forward currency exchange rates, as applicable.
The carrying value of financial instruments reported in the balance sheet for current assets and current liabilities approximates fair value due to the short maturity of these instruments.
TRIMAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Business Combinations. The Company records assets acquired and liabilities assumed from acquisitions at fair value. The fair value of working capital accounts generally approximates book value. The valuation of inventory, property, plant and equipment, and intangible assets requires significant assumptions. Inventory is recorded at fair value based on the estimated selling price less costs to sell, including completion, disposal and holding period costs with a reasonable profit margin. Property and equipment is recorded at fair value using a combination of both the cost and market approaches for both the real and personal property acquired. Under the cost approach, consideration is given to the amount required to construct or purchase a new asset of equal value at current prices, with adjustments in value for physical deterioration, as well as functional and economic obsolescence. Under the market approach, recent transactions for similar types of assets are used as the basis for estimating fair value. For trademark/trade names and technology and other intangible assets, the estimated fair value is based on projected discounted future net cash flows using the relief-from-royalty method. For customer relationship intangible assets, the estimated fair value is based on projected discounted future cash flows using the excess earnings method. The relief-from-royalty and excess earnings method are both income approaches that utilize key assumptions such as forecasts of revenue and expenses over an extended period of time, royalty rate percentages, tax rates, and estimated costs of debt and equity capital to discount the projected cash flows.
Stock-based Compensation. The Company recognizes compensation expense related to equity awards based on their fair values as of the grant date. For awards with only a service condition, expense is recognized ratably over the vesting period. Performance-based equity awards may have targets tied to performance and/or market-based conditions. Market-based conditions are taken into consideration in determining the grant date fair value, and the related compensation expense is recognized regardless of whether the market condition is satisfied, provided the requisite service has been provided. For performance condition components, the Company periodically updates the probability that the performance conditions will be achieved and adjusts expense accordingly, reflecting the change from prior estimate, if any, in current period non-cash stock compensation expense. The disclosed number of awards granted considers only the targeted number of units until such time that the performance condition has been satisfied. If the performance conditions are not achieved, no award is earned. See Note 18, “Equity Awards,” for further information.
Other Comprehensive Income (Loss). The Company refers to other comprehensive income (loss) as revenues, expenses, gains and losses that under accounting principles generally accepted in the United States of America are included in comprehensive income (loss) but are excluded from net earnings as these amounts are recorded directly as an adjustment to stockholders' equity. Other comprehensive income (loss) is comprised of foreign currency translation adjustments, amortization of prior service costs and unrecognized gains and losses in actuarial assumptions for pension and postretirement plans and changes in unrealized gains and losses on derivative instruments.
4. Acquisitions
2022 Acquisitions
On February 28, 2022, the Company acquired Intertech Plastics LLC and related companies (collectively, "Intertech") for a purchase price of $64.1 million, net of cash acquired. Intertech is a manufacturer of custom injection molded products used in medical applications, as well as products and assemblies for consumer and industrial applications. The fair value of assets acquired and liabilities assumed included $32.4 million of goodwill, $13.5 million of intangible assets, $12.2 million of property and equipment and $6.0 million of net working capital. Intertech, which is reported in the Company's Packaging segment, has two manufacturing facilities located in the Denver, Colorado, area and historically generated $32 million in annual revenue.
2021 Acquisitions
On December 17, 2021, the Company acquired 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 $22.5 million, net of cash acquired. Omega, which is reported in the Company's Packaging segment, is located in Clinton Township, Michigan, and historically generated $18 million in annual revenue.
TRIMAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
On December 5, 2021, the Company 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 $11.8 million, with additional contingent consideration ranging from zero to $12.0 million to be paid based future earnings as defined in the purchase agreement. On the acquisition date, the Company recorded $3.7 million as its best estimate of fair value of the additional contingent consideration, with such estimate based on Level 3 inputs under the fair value hierarchy, as defined. TFI, which is reported in the Company's Aerospace segment, is located near Toronto, Canada and historically generated $6 million in annual revenue. Based on a detailed fourth quarter 2022 review of TFI's updated forecasted operating results, the Company determined the likelihood of the contingent consideration being paid was remote, and therefore reversed the liability, with such adjustment being included in other income (expense), net, in the accompanying consolidated statement of operations
2020 Acquisitions
On December 15, 2020, the Company acquired 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 $98.4 million, net of cash acquired. The fair value of assets acquired and liabilities assumed included $49.1 million of goodwill, $35.1 million of intangible assets, $9.4 million of net working capital, $17.4 million of property and equipment, and $12.6 million of net deferred tax liabilities. Affaba & Ferrari, which is reported in the Company's Packaging segment, operates out of a highly automated manufacturing facility and support office located in Borgo San Giovanni, Italy and historically generated $34 million in annual revenue.
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 $11.4 million. Rapak, which is reported in the Company's Packaging segment, has manufacturing locations in Indiana, California and Illinois, and historically generated $30 million in annual revenue.
On February 27, 2020, the Company acquired RSA Engineered Products ("RSA"), 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 $83.7 million, net of cash acquired. The fair value of assets acquired and liabilities assumed included $43.3 million of goodwill, $36.9 million of 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 $30 million in annual revenue.
5. Realignment Actions
2022 Realignment Actions
During 2022, the Company incurred realignment charges in its Packaging segment related to adjusting its labor force in facilities with lower demand, finalizing its Indianapolis, Indiana, facility consolidation, costs incurred to reorganize its benefit plans in the United Kingdom, and for costs incurred as part of the Company's start-up and relocation to a new, larger facility in New Albany, Ohio. The Company also completed the Aerospace segment footprint realignment which began in 2021. In connection with these actions, the Company recorded pre-tax realignment charges of $5.0 million, of which $2.7 million related to facility move and consolidation costs and $2.3 million was for employee-related costs. During 2022, $2.8 million of these charges were included in cost of sales, $2.0 million of these charges were included in selling, general and administrative expenses and $0.2 million of these charges were included in net gain (loss) on dispositions of assets in the accompanying consolidated statement of income.
2021 Realignment Actions
During 2021, the Company executed certain realignment actions in response to reductions in current and expected future end market demand. First, the Company closed its Packaging segment's Union City, California, manufacturing facility, consolidating the operation into its Indianapolis, Indiana, and Woodridge, Illinois, facilities. The Company also realigned its Aerospace segment footprint, consolidating certain activities previously in its Stanton, California, facilities into its Tolleson, Arizona, facility. In addition, the Company also reorganized its corporate office legal and finance groups. The Company recorded pre-tax realignment charges of $9.7 million, of which $3.5 million related to facility consolidations and $6.2 million were for employee separation costs. As of December 31, 2021, $2.4 million of the employee separation costs had been paid. During 2021, $4.1 million of these charges were included in cost of sales and $5.6 million were included in selling, general and administrative expenses, respectively, in the accompanying consolidated statement of operations.
TRIMAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2020 Realignment Actions
During 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 non-cash charges of $13.8 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 non-cash charges of $2.3 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, incurring $3.8 million in severance charges, of which $3.7 million was paid by December 31, 2020. During 2020, $17.1 million of these charges were included in cost of sales and $2.8 million were included in selling, general and administrative expenses in the accompanying consolidated statement of operations.
6. Revenue
The following table presents the Company’s disaggregated net sales by primary market served (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | Year ended December 31, |
Customer End Markets | | 2022 | | 2021 | | 2020 |
Consumer Products | | $ | 419,410 | | | $ | 424,320 | | | $ | 402,080 | |
Aerospace & Defense | | 188,090 | | | 183,340 | | | 167,740 | |
Industrial | | 276,330 | | | 249,450 | | | 200,150 | |
| | | | | | |
Total net sales | | $ | 883,830 | | | $ | 857,110 | | | $ | 769,970 | |
The Company’s Packaging segment earns revenues from the consumer products (comprised of the beauty and personal care, food and beverage, home care, pharmaceutical, nutraceutical and medical 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.
7. Cash and Cash Equivalents
Cash and cash equivalents consists of the following components (dollars in thousands):
| | | | | | | | | | | | | | |
| | December 31, 2022 | | December 31, 2021 |
Cash and cash equivalents - unrestricted | | $ | 112,090 | | | $ | 129,790 | |
Cash - restricted (a) | | — | | | 10,950 | |
Total cash and cash equivalents | | $ | 112,090 | | | $ | 140,740 | |
__________________________
(a) Includes cash placed on deposit with a financial institution to be held as cash collateral for the Company's outstanding letters of credit.
8. Goodwill and Other Intangible Assets
Goodwill
The Company performed a qualitative assessment as part of its 2022, 2021 and 2020 annual impairment tests (October 1 annual test date) for all reporting units, which included a review of the Company’s market capitalization. Based on results of the qualitative assessments for the 2022, 2021 and 2020 annual impairment tests, the Company determined there were no indications that the fair value of a reporting unit was less than its carrying amount; therefore, the Company determined that quantitative goodwill impairment tests were not required.
During the third quarter of 2020, as a result of a decline in its aerospace-related business' financial results, a significant reduction in its financial projections 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 their dependence on future levels of air travel and new aircraft builds, the Company determined there was a triggering event requiring an interim quantitative goodwill impairment assessment of each of its two aerospace-related reporting units: Aerospace Fasteners and Aerospace Engineered Products.
TRIMAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Upon completion of the quantitative goodwill impairment tests, the Company determined that the carrying values of the Aerospace Fasteners and Aerospace Engineered Products reporting units exceeded their fair values, resulting in goodwill impairment charges of $70.8 million in its Aerospace Fasteners reporting unit and $56.0 million in its Aerospace Engineered Products reporting unit.
Changes in the carrying amount of goodwill for the years ended December 31, 2022 and 2021 are as follows (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Specialty | | | | |
| Packaging | | Aerospace | | Products | | | | Total |
Balance, December 31, 2020 | $ | 234,560 | | | $ | 62,850 | | | $ | 6,560 | | | | | $ | 303,970 | |
Goodwill from acquisitions | 10,550 | | | 7,220 | | | — | | | | | 17,770 | |
| | | | | | | | | |
| | | | | | | | | |
Foreign currency translation and other | (6,370) | | | 120 | | | — | | | | | (6,250) | |
Balance, December 31, 2021 | $ | 238,740 | | | $ | 70,190 | | | $ | 6,560 | | | | | $ | 315,490 | |
Goodwill from acquisitions | 32,370 | | | — | | | — | | | | | 32,370 | |
| | | | | | | | | |
| | | | | | | | | |
Foreign currency translation and other | (7,560) | | | (490) | | | — | | | | | (8,050) | |
Balance, December 31, 2022 | $ | 263,550 | | | $ | 69,700 | | | $ | 6,560 | | | | | $ | 339,810 | |
Other Intangible Assets
For the purposes of the Company's 2022, 2021 and 2020 annual indefinite-lived intangible asset impairment tests (as of October 1), the Company performed a qualitative assessment to determine whether it was more likely than not that the fair values of the indefinite-lived intangible assets were less than the carrying values. Based on the qualitative assessment performed, the Company did not believe that it is more likely than not that the fair values of each of its indefinite-lived intangible assets were less than the carrying values; therefore, a fair value calculation of the indefinite-lived intangible assets was not required for the 2022, 2021 and 2020 annual indefinite-lived intangible asset impairment tests.
During the third quarter of 2020, as a result of the significant forecast reduction in the Company's aerospace-related businesses, the Company also performed an interim quantitative assessment for the indefinite-lived intangible assets within the Aerospace segment, using the relief-from-royalty method. Significant management assumptions used under the relief-from-royalty method reflected the Company's current assessment of the risks and uncertainties associated with the aerospace industry. Upon completion of the quantitative impairment test, the Company determined that certain of its aerospace-related trade names had carrying values that exceeded their fair values, and therefore recorded impairment charges of $7.8 million.
TRIMAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The gross carrying amounts and accumulated amortization of the Company's other intangibles as of December 31, 2022 and 2021 are summarized below (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of December 31, 2022 | | As of December 31, 2021 |
Intangible Category by Useful Life | | Gross Carrying Amount | | Accumulated Amortization | | Gross Carrying Amount | | Accumulated Amortization |
Finite-lived intangible assets: | | | | | | | | |
Customer relationships, 5 - 12 years | | $ | 131,660 | | | $ | (80,000) | | | $ | 124,310 | | | $ | (71,150) | |
Customer relationships, 15 - 25 years | | 129,650 | | | (74,380) | | | 130,190 | | | (68,190) | |
Total customer relationships | | 261,310 | | | (154,380) | | | 254,500 | | | (139,340) | |
Technology and other, 1 - 15 years | | 56,860 | | | (38,990) | | | 57,060 | | | (36,140) | |
Technology and other, 17 - 30 years | | 43,300 | | | (40,330) | | | 43,300 | | | (39,920) | |
Total technology and other | | 100,160 | | | (79,320) | | | 100,360 | | | (76,060) | |
Indefinite-lived intangible assets: | | | | | | | | |
Trademark/Trade names | | 60,340 | | | — | | | 57,270 | | | — | |
Total other intangible assets | | $ | 421,810 | | | $ | (233,700) | | | $ | 412,130 | | | $ | (215,400) | |
Amortization expense related to intangible assets as included in the accompanying consolidated statement of operations is summarized as follows (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | Year ended December 31, |
| | 2022 | | 2021 | | 2020 |
Technology and other, included in cost of sales | | $ | 3,300 | | | $ | 3,820 | | | $ | 4,930 | |
Customer relationships, included in selling, general and administrative expenses | | 15,800 | | | 17,740 | | | 15,820 | |
Total amortization expense | | $ | 19,100 | | | $ | 21,560 | | | $ | 20,750 | |
Estimated amortization expense for the next five fiscal years beginning after December 31, 2022 is as follows (dollars in thousands):
| | | | | | | | |
Year ended December 31, | Estimated Amortization Expense |
2023 | | $ | 17,990 | |
2024 | | $ | 16,490 | |
2025 | | $ | 16,140 | |
2026 | | $ | 14,420 | |
2027 | | $ | 14,360 | |
TRIMAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9. Inventories
Inventories consist of the following components (dollars in thousands):
| | | | | | | | | | | | | | |
| | December 31, 2022 | | December 31, 2021 |
Finished goods | | $ | 74,280 | | | $ | 74,600 | |
Work in process | | 38,090 | | | 28,790 | |
Raw materials | | 50,990 | | | 49,060 | |
Total inventories | | $ | 163,360 | | | $ | 152,450 | |
10. Property and Equipment, Net
Property and equipment consists of the following components (dollars in thousands):
| | | | | | | | | | | | | | |
| | December 31, 2022 | | December 31, 2021 |
Land and land improvements | | $ | 15,220 | | | $ | 19,630 | |
Building and building improvements | | 90,910 | | | 93,170 | |
Machinery and equipment | | 461,480 | | | 422,500 | |
| | 567,610 | | | 535,300 | |
Less: Accumulated depreciation | | 289,860 | | | 269,670 | |
Property and equipment, net | | $ | 277,750 | | | $ | 265,630 | |
Depreciation expense as included in the accompanying consolidated statement of operations is as follows (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | Year ended December 31, |
| | 2022 | | 2021 | | 2020 |
Depreciation expense, included in cost of sales | | $ | 33,130 | | | $ | 30,770 | | | $ | 27,920 | |
Depreciation expense, included in selling, general and administrative expense | | 990 | | | 1,120 | | | 1,100 | |
Total depreciation expense | | $ | 34,120 | | | $ | 31,890 | | | $ | 29,020 | |
11. Accrued Liabilities
Accrued liabilities consist of the following components (dollars in thousands):
| | | | | | | | | | | | | | |
| | December 31, 2022 | | December 31, 2021 |
Accrued payroll | | $ | 18,050 | | | $ | 24,960 | |
High deductible insurance | | 5,530 | | | 5,000 | |
Other | | 23,080 | | | 29,020 | |
Total accrued liabilities | | $ | 46,660 | | | $ | 58,980 | |
TRIMAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
12. Long-term Debt
The Company's long-term debt consists of the following (dollars in thousands):
| | | | | | | | | | | | | | |
| | December 31, 2022 | | December 31, 2021 |
4.125% Senior Notes due April 2029 | | $ | 400,000 | | | $ | 400,000 | |
| | | | |
| | | | |
| | | | |
Debt issuance costs | | (5,270) | | | (6,180) | |
| | | | |
| | | | |
Long-term debt, net | | $ | 394,730 | | | $ | 393,820 | |
Senior Notes due 2029
In March 2021, the Company issued $400.0 million aggregate principal amount of 4.125% senior notes outstanding 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 ("Securities Act"). The Company used the proceeds from the 2029 Senior Notes offering to pay fees and expenses of $5.1 million related to the offering and pay fees and expenses of $1.1 million related to amending its existing credit agreement. In connection with the issuance, the Company completed the redemption of its outstanding 4.875% senior notes due October 15, 2025 ("2025 Senior Notes"), paying $300.0 million to retire the outstanding principal amount plus $7.3 million as 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 million of fees and expenses related to the 2029 Senior Notes were capitalized as debt issuance costs, while the $7.3 million redemption premium, as well as $3.0 million of unamortized debt issuance costs associated with the 2025 Senior Notes, were included in 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 15 and October 15. The payment of principal and interest is jointly and severally guaranteed, on a senior unsecured basis, by certain subsidiaries of the Company. The 2029 Senior Notes are pari passu in right of payment with all existing and future senior indebtedness and effectively subordinated to all existing and future secured indebtedness to the extent of the value of the assets securing such indebtedness.
Prior to April 15, 2024, the Company 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, the Company 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. On or after April 15, 2024, the Company may redeem all or part of the 2029 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 April 15 of the years indicated below:
| | | | | | | | |
Year | | Percentage |
2024 | | 102.063 | % |
2025 | | 101.031 | % |
2026 and thereafter | | 100.000 | % |
Senior Notes due 2025
In September 2017, the Company issued $300.0 million aggregate principal amount of its 2025 Senior Notes at par value in a private placement under Rule 144A of the Securities Act. During the second quarter of 2021, and in connection with the issuance of the 2029 Senior Notes, the Company redeemed all of the outstanding 2025 Senior Notes, as permitted under the indenture, at a price of 102.438% of the principal amount.
TRIMAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Credit Agreement
In March 2021, the Company amended its existing credit agreement ("Credit Agreement") in connection with the issuance of the 2029 Senior Notes to extend the maturity date. The Company incurred fees and expenses of $1.1 million related to the amendment, all of which was capitalized as debt issuance costs. The Company also recorded $0.2 million of non-cash expense related to the write-off of previously capitalized deferred financing fees. The Credit Agreement consists of a $300.0 million senior secured revolving credit facility, which permits borrowings denominated in specific foreign currencies, subject to a $125.0 million sub limit, maturing on March 29, 2026.
In November 2021, the Company amended the Credit Agreement to replace LIBOR with a benchmark interest rate determined based on the currency denomination of borrowings. Effective January 1, 2022, the amendment replaced the reference rate terms for U.S. dollar LIBOR borrowings to the Secured Overnight Financing Rate ("SOFR"), British pound sterling LIBOR borrowings to the Sterling Overnight Index Average ("SONIA") and Euro LIBOR borrowings to the Euro Short Term Rate ("ESTR"), all plus a spread of 1.50%. The interest rate spread is based upon the leverage ratio, as defined, as of the most recent determination date.
The Credit Agreement also provides incremental revolving credit facility commitments in an amount not to exceed the greater of $200.0 million and an amount such that, after giving effect to such incremental commitments and the incurrence of any other indebtedness substantially simultaneously with the making of such commitments, the senior secured net leverage ratio, as defined, is no greater than 3.00 to 1.00. The terms and conditions of any incremental revolving credit facility commitments must be no more favorable than the existing credit facility.
The Company's revolving credit facility allows for the issuance of letters of credit, not to exceed $40.0 million in aggregate. As of December 31, 2021 the Company placed cash on deposit with a financial institution to be held as cash collateral for the Company's outstanding letters of credit; effectively, as of December 31, 2021, the Company had no letters of credit issued against its revolving credit facility. See Note 7, "Cash and Cash Equivalents," for further information on its cash deposits. At December 31, 2022, the Company had no amounts outstanding under its revolving credit facility and had $293.9 million potentially available after giving effect to $6.1 million of letters of credit issued and outstanding. At December 31, 2021, the Company had no amounts outstanding under its revolving credit facility and had $300.0 million potentially available. The Company's borrowing capacity was not reduced by leverage restrictions contained in the Credit Agreement as of December 31, 2022 and December 31, 2021.
The debt under the Credit Agreement is an obligation of the Company and certain of its domestic subsidiaries and is secured by substantially all of the assets of such parties. Borrowings under the $125.0 million (equivalent) foreign currency sub limit of the $300.0 million senior secured revolving credit facility are secured by a cross-guarantee amongst, and a pledge of the assets of, the foreign subsidiary borrowers that are a party to the agreement. The Credit Agreement also contains various negative and affirmative covenants and other requirements affecting the Company and its subsidiaries, including the ability to, subject to certain exceptions and limitations, incur debt, liens, mergers, investments, loans, advances, guarantee obligations, acquisitions, assets dispositions, sale-leaseback transactions, hedging agreements, dividends and other restricted payments, transactions with affiliates, restrictive agreements and amendments to charters, bylaws, and other material documents. The terms of the Credit Agreement also require the Company and its restricted subsidiaries to meet certain restrictive financial covenants and ratios computed quarterly, including a maximum total net leverage ratio (total consolidated indebtedness plus outstanding amounts under any 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 December 31, 2022, the Company was in compliance with the financial covenants contained in the Credit Agreement.
Other Revolving Loan Facility
In May 2021, the Company, through one of its 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 outstanding on this loan facility as of December 31, 2022 or 2021.
TRIMAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Long-term Debt Maturities
Future maturities of the face value of long-term debt at December 31, 2022 are as follows (dollars in thousands):
| | | | | | | | |
Year Ending December 31: | | Future Maturities |
2023 | | $ | — | |
2024 | | — | |
2025 | | — | |
2026 | | — | |
2027 | | — | |
Thereafter | | 400,000 | |
Total | | $ | 400,000 | |
Fair Value of Debt
The valuations of the Senior Notes and revolving credit facility were determined based on Level 2 inputs under the fair value hierarchy, as defined. The carrying amounts and fair values were as follows (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2022 | | December 31, 2021 |
| | Carrying Amount | | Fair Value | | Carrying Amount | | Fair Value |
4.125% Senior Notes due April 2029 | | $ | 400,000 | | | $ | 344,000 | | | $ | 400,000 | | | $ | 399,000 | |
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Debt Issuance Costs
The Company's unamortized debt issuance costs approximated $5.3 million and $6.2 million at December 31, 2022 and 2021, respectively, and are included as a direct reduction from the related debt liability in the accompanying consolidated balance sheet. These amounts consisted primarily of legal, accounting and other transaction advisory fees as well as facility fees paid to the lenders. Amortization expense for these items was $0.9 million, $1.0 million and $1.2 million in 2022, 2021 and 2020, respectively, and is included in interest expense in the accompanying consolidated statement of operations.
13. Derivative Instruments
Derivatives Designated as Hedging Instruments
In July 2022, 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 converts a portion of its U.S. dollar-based long-term debt into Euro-denominated long-term debt. The agreements have notional amounts totaling $150.0 million, which decline to $75.0 million over contract periods ending on October 15, 2023 and April 15, 2024. Under the terms of the agreements, the Company is to receive net interest payments at fixed rates of approximately 2.4% to 2.6% of the notional amounts. At inception, the cross-currency swaps were designated as net investment hedges.
In July 2022, immediately prior to entering into the new cross-currency swap agreements, the Company terminated its existing cross-currency swap agreements, de-designating the swaps as net investment hedges and receiving $26.2 million of cash. The cross-currency swap agreements had notional amounts totaling $250.0 million, which declined to $25.0 million over various contract periods ending between October 15, 2023 and October 15, 2027. Under the terms of the agreements, the Company was to receive net interest payments at fixed rates ranging from approximately 0.8% to 2.9% of the notional amounts.
TRIMAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
As of December 31, 2022 and 2021, the fair value carrying amount of the Company's derivatives designated as hedging instruments are recorded as follows (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | | | Asset / (Liability) Derivatives |
Derivatives designated as hedging instruments | | Balance Sheet Caption | | December 31, 2022 | | December 31, 2021 |
Net Investment Hedges | | | | | | |
Cross-currency swaps | | Other assets | | $ | — | | | $ | 7,590 | |
Cross-currency swaps | | Other long-term liabilities | | (7,090) | | | — | |
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The following table summarizes the income recognized in AOCI on derivative contracts designated as hedging instruments as of December 31, 2022 and 2021, and the amounts reclassified from AOCI into earnings for the years ended December 31, 2022, 2021 and 2020 (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Amount of Income (Loss) Recognized in AOCI on Derivative (Effective Portion, net of tax) | | Location of Loss Reclassified from AOCI into Earnings (Effective Portion) | | Amount of Loss Reclassified from AOCI into Earnings |
| | As of December 31, | | | Year ended December 31, |
| | 2022 | | 2021 | | | 2022 | | 2021 | | 2020 |
|
Net Investment Hedges | | | | | | | | | | | | |
Cross-currency swaps | | $ | 15,320 | | | $ | 5,910 | | | Other expense, net | | $ | — | | | $ | — | | | $ | — | |
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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 December 31, 2022, the Company was party to foreign currency exchange forward contracts to economically hedge changes in foreign currency rates with notional amounts of $127.2 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, Canadian dollar, Chinese yuan, and the Mexican peso, as well as between the Euro and British pound, and have various settlement dates through June 2023. 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 (Loss) Recognized in Earnings on Derivatives |
| | | | Year ended December 31, |
| | Location of Income (Loss) Recognized in Earnings on Derivatives | | 2022 | | 2021 | | 2020 |
Derivatives not designated as hedging instruments | | | | | | | | |
Foreign exchange contracts | | Other income (expense), net | | $ | 1,540 | | | $ | 7,130 | | | $ | (470) | |
TRIMAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Fair Value of Derivatives
The fair value of the Company's derivative instruments 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 December 31, 2022 and 2021 are as follows (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) |
December 31, 2022 | | | | | | | | | | |
Cross-currency swaps | | Recurring | | $ | (7,090) | | | $ | — | | | $ | (7,090) | | | $ | — | |
Foreign exchange contracts | | Recurring | | $ | (1,790) | | | $ | — | | | $ | (1,790) | | | $ | — | |
December 31, 2021 | | | | | | | | | | |
Cross-currency swaps | | Recurring | | $ | 7,590 | | | $ | — | | | $ | 7,590 | | | $ | — | |
Foreign exchange contracts | | Recurring | | $ | (110) | | | $ | — | | | $ | (110) | | | $ | — | |
14. 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):
| | | | | | | | | | | | | | | | | | | | |
| | Year ended December 31, |
| | 2022 | | 2021 | | 2020 |
Operating lease cost | | $ | 10,560 | | | 8,510 | | | 7,870 | |
Short-term, variable and other lease costs | | 3,350 | | | 2,460 | | | 1,540 | |
Total lease cost | | $ | 13,910 | | | $ | 10,970 | | | $ | 9,410 | |
Maturities of lease liabilities are as follows (dollars in thousands):
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Year ended December 31, | | Operating Leases(a) |
2023 | | $ | 9,970 | |
2024 | | 9,130 | |
2025 | | 7,830 | |
2026 | | 7,730 | |
2027 | | 6,650 | |
Thereafter | | 14,220 | |
Total lease payments | | 55,530 | |
Less: Imputed interest | | (6,240) | |
Present value of lease liabilities | | $ | 49,290 | |
__________________________
(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.
TRIMAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The weighted-average remaining term of the Company's operating leases as of December 31, 2022 is 6.7 years. The weighted-average discount rate as of December 31, 2022 is 3.7%.
Cash paid for amounts included in the measurement of operating lease liabilities was $9.9 million, $7.9 million and $7.9 million during 2022, 2021 and 2020 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 $5.8 million and $19.6 million during 2022 and 2021, respectively.
15. Other Long-term Liabilities
Other long-term liabilities consist of the following components (dollars in thousands):
| | | | | | | | | | | | | | |
| | December 31, 2022 | | December 31, 2021 |
Non-current asbestos-related liabilities | | $ | 26,370 | | | $ | 25,210 | |
Other long-term liabilities | | 29,970 | | | 33,820 | |
Total other long-term liabilities | | $ | 56,340 | | | $ | 59,030 | |
16. Commitments and Contingencies
Environmental
The Company is subject to increasingly stringent environmental laws and regulations, including those relating to air emissions, wastewater discharges and chemical and hazardous waste management and disposal. Some of these environmental laws hold owners or operators of land or businesses liable for their own and for previous owners' or operators' releases of hazardous or toxic substances or wastes. Other environmental laws and regulations require the obtainment and compliance with environmental permits. To date, costs of complying with environmental, health and safety requirements have not been material. However, the nature of the Company's operations and the long history of industrial activities at certain of the Company's current or former facilities, as well as those acquired, could potentially result in material environmental liabilities.
While the Company must comply with existing and pending climate change legislation, regulation and international treaties or accords, current laws and regulations have not had a material impact on the Company's business, capital expenditures or financial position. Future events, including those relating to climate change or greenhouse gas regulation, could require the Company to incur expenses related to the modification or curtailment of operations, installation of pollution control equipment or investigation and cleanup of contaminated sites.
Asbestos
As of December 31, 2022, the Company was a party to 426 pending cases involving an aggregate of 4,798 claimants primarily alleging personal injury from exposure to asbestos containing materials formerly used in gaskets (both encapsulated and otherwise) manufactured or distributed by its former Lamons division 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:
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| | 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 |
Fiscal year ended December 31, 2022 | | 4,754 | | | 236 | | | 168 | | | 24 | | | 4,798 | | | $ | 79,869 | | | $ | 2,180,000 | |
Fiscal year ended December 31, 2021 | | 4,655 | | | 265 | | | 134 | | | 32 | | | 4,754 | | | $ | 16,819 | | | $ | 1,950,000 | |
Fiscal year ended December 31, 2020 | | 4,759 | | | 219 | | | 287 | | | 36 | | | 4,655 | | | $ | 18,314 | | | $ | 2,130,000 | |
TRIMAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 the 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 4,798 claims pending at December 31, 2022, 45 set forth specific amounts of damages (other than those stating the statutory minimum or maximum). At December 31, 2022, of the 45 claims that set forth specific amounts, there was no claim seeking more than $5 million for punitive damages. Below is a breakdown of the compensatory damages sought for those claims seeking specific amounts:
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| | | Compensatory | | |
Range of damages sought (in millions) | | | | | | | $0.0 to $0.6 | | $0.6 to $5.0 | | $5.0+ | | |
Number of claims | | | | | | | — | | 3 | | 42 | | |
Relatively few of the claims have reached the discovery stage and even fewer claims have gone past the discovery stage. Total settlement costs (exclusive of defense costs) for all such cases, some of which were filed over 25 years ago, have been $12.5 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.
During 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 was reflected as a change in accounting estimate effected by a change in accounting principle. 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. After completing its study in the second quarter of 2020, the Company recorded a non-cash, pre-tax charge of $23.4 million. In 2021, the Company commissioned its actuary to update the asbestos study based on data as of September 30, 2021. The Company recorded a non-cash, pre-tax charge of $1.5 million to increase the liability estimate to $28.2 million, at the low-end of the range of the 2021 study. These pre-tax charges for 2020 and 2021 are included in selling, general and administrative expenses in the accompanying consolidated statement of operations.
In 2022, the Company commissioned its actuary to update the asbestos study based on data as of September 30, 2022, which yielded a range of possible future liability of $29.6 million to $39.5 million. The Company did not believe any amount within the range of potential outcomes represented a better estimate than another given the many factors and assumptions inherent in the projections, and therefore recorded a non-cash, pre-tax charge of $5.6 million to increase the liability estimate to $29.6 million, at the low-end of the range. This charge is included in selling, general and administrative expenses in the accompanying consolidated statement of operations. As of December 31, 2022, the Company’s total asbestos-related liability is $29.1 million, and is included in accrued liabilities and other long-term liabilities, respectively, in the accompanying consolidated balance sheet.
TRIMAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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.
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, 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.
17. Employee Benefit Plans
Pension and Profit-Sharing Benefits
The Company provides a defined contribution profit sharing plan for the benefit of substantially all the Company's domestic salaried and non-union hourly employees. The plan contains both contributory and noncontributory profit sharing arrangements, as defined. Aggregate charges included in the accompanying consolidated statement of operations under this plan were $3.7 million in 2022 and $3.4 million in each of 2021 and 2020, respectively. Certain of the Company's non-U.S. and union hourly employees participate in defined benefit pension plans.
Plan Assets, Expenses and Obligations
Net periodic pension benefit expense recorded in the Company's consolidated statement of operations for defined benefit pension plans include the following components (dollars in thousands):
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| | Pension Benefit | | |
| | 2022 | | 2021 | | 2020 | | | | | | |
Service cost | | $ | 690 | | | $ | 1,280 | | | $ | 1,230 | | | | | | | |
Interest cost | | 890 | | | 800 | | | 930 | | | | | | | |
Expected return on plan assets | | (1,590) | | | (1,530) | | | (1,450) | | | | | | | |
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Settlements and curtailments | | 150 | | | — | | | — | | | | | | | |
Amortization of net loss | | 570 | | | 910 | | | 890 | | | | | | | |
Net periodic benefit expense | | $ | 710 | | | $ | 1,460 | | | $ | 1,600 | | | | | | | |
The service cost component of net periodic benefit expense 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.
During the 2022, the Company recorded a non-cash curtailment expense of $0.2 million, as it transitioned certain active employees previously participating in a defined benefit plan in the United Kingdom to a defined contribution plan, thereby eliminating future service cost accruals for all employees under this defined benefit plan.
TRIMAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Actuarial valuations of the Company's defined benefit pension plans were prepared as of December 31, 2022, 2021 and 2020. Weighted average assumptions used in accounting for the U.S. defined benefit pension plans are as follows:
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| | Pension Benefit | | |
| | 2022 | | 2021 | | 2020 | | | | | | |
Discount rate for obligations | | 5.24 | % | | 3.06 | % | | 2.79 | % | | | | | | |
Discount rate for benefit costs | | 3.06 | % | | 2.79 | % | | 3.41 | % | | | | | | |
Rate of increase in compensation levels | | N/A | | N/A | | N/A | | | | | | |
Expected long-term rate of return on plan assets | | 6.13 | % | | 6.13 | % | | 6.13 | % | | | | | | |
The Company utilizes a high-quality (Aa or greater) corporate bond yield curve as the basis for its domestic discount rate for its pension benefit plans. Management believes this yield curve removes the impact of including additional required corporate bond yields (potentially considered in the above-median curve) resulting from the uncertain economic climate that does not necessarily reflect the general trend in high-quality interest rates.
Weighted average assumptions used in accounting for the non-U.S. defined benefit pension plans are as follows:
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| | Pension Benefit |
| | 2022 | | 2021 | | 2020 |
Discount rate for obligations | | 4.90 | % | | 2.10 | % | | 1.50 | % |
Discount rate for benefit costs | | 2.10 | % | | 1.50 | % | | 2.10 | % |
Rate of increase in compensation levels | | 4.80 | % | | 3.30 | % | | 2.80 | % |
Expected long-term rate of return on plan assets | | 4.20 | % | | 3.90 | % | | 4.10 | % |
TRIMAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following provides a reconciliation of the changes in the Company's defined benefit pension plans' projected benefit obligations and fair value of assets for each of the years ended December 31, 2022 and 2021 and the funded status as of December 31, 2022 and 2021 (dollars in thousands):
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| | Pension Benefit |
| | 2022 | | 2021 |
Changes in Projected Benefit Obligations | | | | |
Benefit obligations at January 1 | | $ | (37,560) | | | $ | (40,830) | |
Service cost | | (690) | | | (1,280) | |
Interest cost | | (890) | | | (800) | |
Participant contributions | | (10) | | | (50) | |
Actuarial gain (a) | | 10,260 | | | 3,290 | |
Benefit payments | | 1,310 | | | 1,840 | |
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| | | | |
| | | | |
Change in foreign currency | | 2,020 | | | 270 | |
Projected benefit obligations at December 31 | | $ | (25,560) | | | $ | (37,560) | |
Changes in Plan Assets | | | | |
Fair value of plan assets at January 1 | | $ | 38,130 | | | $ | 36,060 | |
Actual return on plan assets | | (10,070) | | | 2,060 | |
Employer contributions | | 1,520 | | | 2,050 | |
Participant contributions | | 10 | | | 50 | |
Benefit payments | | (1,310) | | | (1,840) | |
| | | | |
| | | | |
Change in foreign currency | | (2,810) | | | (250) | |
Fair value of plan assets at December 31 | | $ | 25,470 | | | $ | 38,130 | |
Funded status at December 31 | | $ | (90) | | | $ | 570 | |
__________________________
(a) The actuarial gain for the year ended December 31, 2022 was primarily due to an increase in the discount rate utilized in measuring the projected benefit obligations, partially offset by experience losses. The actuarial gain for the year ended December 31, 2021 was primarily due to an increase in the discount rate utilized in measuring the projected benefit obligations as well as other assumptions and experience gains.
| | | | | | | | | | | | | | | | | | |
| | Pension Benefit | | |
| | 2022 | | 2021 | | | | |
Amounts Recognized in Balance Sheet | | | | | | | | |
Other assets | | $ | 4,860 | | | $ | 7,740 | | | | | |
Current liabilities | | (310) | | | (300) | | | | | |
Noncurrent liabilities | | (4,640) | | | (6,870) | | | | | |
Net asset (liability) recognized at December 31 | | $ | (90) | | | $ | 570 | | | | | |
| | | | | | | | | | | | | | | | | | |
| | Pension Benefit | | |
| | 2022 | | 2021 | | | | |
Amounts Recognized in Accumulated Other Comprehensive Loss | | | | | | | | |
Unrecognized prior service cost | | $ | 160 | | | $ | 310 | | | | | |
Unrecognized net loss | | 7,370 | | | 6,550 | | | | | |
Total accumulated other comprehensive loss recognized at December 31 | | $ | 7,530 | | | $ | 6,860 | | | | | |
TRIMAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Accumulated Benefit Obligations | | Projected Benefit Obligations |
| | 2022 | | 2021 | | 2022 | | 2021 |
Benefit Obligations at December 31, | | | | | | | | |
Total benefit obligations | | $ | (25,400) | | | $ | (35,970) | | | $ | (25,560) | | | $ | (37,560) | |
Plans with benefit obligations exceeding plan assets | | | | | | | | |
Benefit obligations | | $ | (13,000) | | | $ | (16,630) | | | $ | (13,170) | | | $ | (16,780) | |
Plan assets | | $ | 8,220 | | | $ | 9,610 | | | $ | 8,220 | | | $ | 9,610 | |
The assumptions regarding discount rates and expected return on plan assets can have a significant impact on amounts reported for benefit plans. A 25 basis point change in benefit obligation discount rates or 50 basis point change in expected return on plan assets would have the following effect (dollars in thousands):
| | | | | | | | | | | | | | | | | | |
| | Pension Benefit | | |
| | December 31, 2022 Benefit Obligation | | | | 2022 Expense | | |
Discount rate | | | | | | | | |
25 basis point increase | | $ | (810) | | | | | $ | (60) | | | |
25 basis point decrease | | $ | 860 | | | | | $ | 60 | | | |
Expected return on assets | | | | | | | | |
50 basis point increase | | N/A | | | | $ | (160) | | | |
50 basis point decrease | | N/A | | | | $ | 160 | | | |
The Company expects to make contributions of $1.2 million to fund its pension plans during 2023.
Plan Assets
The Company's overall investment goal is to provide for capital growth with a moderate level of volatility by investing assets in targeted allocation ranges. Specific long term investment goals include total investment return, diversity to reduce volatility and risk, and to achieve an asset allocation profile that reflects the general nature and sensitivity of the plans' liabilities. Investment goals are established after a comprehensive review of current and projected financial statement requirements, plan assets and liability structure, market returns and risks as well as special requirements of the plans. The Company reviews investment goals and actual results annually to determine whether stated objectives are still relevant and the continued feasibility of achieving the objectives.
The actual weighted average asset allocation of the Company's domestic and foreign pension plans' assets at December 31, 2022 and 2021 and target allocations by class, were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Domestic Pension | | Foreign Pension |
| | | | Actual | | | | Actual |
| | Target | | 2022 | | 2021 | | Target | | 2022 | | 2021 |
Equity securities | | 60 | % | | 60 | % | | 62 | % | | 12 | % | | 14 | % | | 34 | % |
Fixed income | | 36 | % | | 37 | % | | 37 | % | | 70 | % | | 66 | % | | 44 | % |
Diversified growth(a) | | — | % | | — | % | | — | % | | 18 | % | | 19 | % | | 22 | % |
| | | | | | | | | | | | |
Cash and other | | 4 | % | | 3 | % | | 1 | % | | — | | | 1 | % | | — | % |
Total | | 100 | % | | 100 | % | | 100 | % | | 100 | % | | 100 | % | | 100 | % |
________________________________________
(a) Diversified growth funds invest in a broad range of asset classes including equities, investment grade and high yield bonds, commodities, property, private equity, infrastructure and currencies.
TRIMAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Actual allocations to each asset vary from target allocations due to periodic investment strategy changes, market value fluctuations and the timing of benefit payments and contributions. The expected long-term rate of return for both the domestic and foreign plans' total assets is based on the expected return of each of the above categories, weighted based on the target allocation for each class. Actual allocation is reviewed regularly and investments are rebalanced to their targeted allocation range when deemed appropriate.
In managing the plan assets, the Company reviews and manages risk associated with the funded status risk, interest rate risk, market risk, liquidity risk and operational risk. Investment policies reflect the unique circumstances of the respective plans and include requirements designed to mitigate these risks by including quality and diversification standards.
The following table summarizes the level under the fair value hierarchy (see Note 3, "Summary of Significant Accounting Policies") that the Company's pension plan assets are measured, on a recurring basis as of December 31, 2022 (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Total | | Level 1 | | Level 2 | | Level 3 |
Plan assets subject to leveling | | | | | | | | |
Investment funds | | | | | | | | |
Equity securities | | $ | 4,870 | | | $ | 4,870 | | | $ | — | | | $ | — | |
Fixed income | | 3,030 | | | 3,030 | | | — | | | — | |
Cash and cash equivalents | | 160 | | | 160 | | | — | | | — | |
Plan assets measured at net asset value(a) | | | | | | | | |
Investment funds | | | | | | | | |
Equity securities | | 2,350 | | | | | | | |
Fixed income | | 11,410 | | | | | | | |
Diversified growth | | 3,330 | | | | | | | |
| | | | | | | | |
Cash and cash equivalents | | 320 | | | | | | | |
| | | | | | | | |
Total | | $ | 25,470 | | | $ | 8,060 | | | $ | — | | | $ | — | |
________________________________________
(a) Certain investments that are measured at fair value using the net asset value per share as a practical expedient have not been classified in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amount presented in the fair value of plan assets.
The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid during the following years (dollars in thousands):
| | | | | | | | |
| | Pension Benefit |
2023 | | $ | 1,220 | |
2024 | | 1,240 | |
2025 | | 1,310 | |
2026 | | 1,340 | |
2027 | | 1,420 | |
Years 2028-2032 | | 8,410 | |
TRIMAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
18. Equity Awards
The Company maintains the following long-term equity incentive plans (collectively, the "Plans"):
| | | | | | | | | |
Plan Names | | Shares Approved for Issuance | |
TriMas Corporation 2017 Equity and Incentive Compensation Plan | | 2,000,000 | | |
TriMas Corporation Director Retainer Share Election Program | | 100,000 | | |
The Company awarded the following restricted stock units ("RSUs") during 2022, 2021, and 2020:
•granted 209,617, 131,198, and 190,650, RSUs, respectively, 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 22,554, 21,112 and 30,590 RSUs, respectively, 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 their service prior to the vesting date; and
•issued 337, 1,792 and 3,673 RSUs, respectively, related to director fee deferrals 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.
The Company awarded the following RSUs during 2022 and 2021:
•issued 260 and 49 RSUs, respectively, to certain employees related to dividend equivalent rights on existing equity awards.
The Company awarded the following RSUs during 2020:
•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; and
•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.
During 2022, the Company awarded 85,156 performance-based RSUs to certain 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, 2022 and ending December 31, 2024. 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 1.88% and annualized volatility of 36.5%. 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. The Company awarded 72,962 and 113,146 of similar performance-based RSUs in 2021 and 2020, respectively. For similar performance-based RSUs awarded in 2019, the Company attained 65.4% of the target on a weighted average basis, resulting in a decrease of 24,975 shares during 2022.
TRIMAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
During 2020, the Company awarded 87,034 performance-based RSUs to certain 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.
Information related to restricted shares as of and for the year ended December 31, 2022 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, 2022 | | 673,732 | | | $ | 27.38 | | | | | |
Granted | | 317,924 | | | 32.87 | | | | | |
Vested | | (231,170) | | | 30.34 | | | | | |
Cancelled | | (41,037) | | | 35.25 | | | | | |
Outstanding at December 31, 2022 | | 719,449 | | | $ | 28.40 | | | 0.9 | | $ | 19,957,515 | |
As of December 31, 2022, there was $6.2 million of unrecognized compensation cost related to unvested restricted shares that is expected to be recorded over a weighted average period of 1.6 years.
The Company recognized stock-based compensation expense related to restricted shares of $9.8 million, $9.5 million and $8.2 million in 2022, 2021 and 2020, respectively. The stock-based compensation expense is included in selling, general and administrative expenses in the accompanying statement of operations.
19. Earnings per Share
Net income is divided by the weighted average number of common shares outstanding during the year to calculate basic earnings per share. For the year ended December 31, 2020, no restricted shares or stock options 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:
| | | | | | | | | | | | | | | | | | | | |
| | Year ended December 31, |
| | 2022 | | 2021 | | 2020 |
Weighted average common shares—basic | | 42,249,244 | | | 43,006,922 | | | 43,581,232 | |
Dilutive effect of restricted stock units | | 228,771 | | | 261,858 | | | — | |
Dilutive effect of stock options | | — | | | 12,296 | | | — | |
Weighted average common shares—diluted | | 42,478,015 | | | 43,281,076 | | | 43,581,232 | |
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 of purchases in the aggregate of its common stock. During 2022, 2021 and 2020, the Company purchased 1,264,088, 596,084 and 1,582,049 shares of its outstanding common stock for $36.9 million, $19.1 million and $39.4 million, respectively. As of December 31, 2022, the Company has $105.7 million remaining under the repurchase authorization.
Holders of common stock are entitled to dividends at the discretion of the Company's Board of Directors. In 2021, the Company's Board of Directors declared the first dividend since the Company's initial public offering in 2007. Since the fourth quarter of 2021, we have declared dividends of $0.04 per share of common stock in each quarter, and total dividends declared and paid on common shares during 2022 and 2021 were $6.9 million and $1.7 million, respectively.
TRIMAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
20. Other Comprehensive Income
Changes in AOCI by component for the year ended December 31, 2022 are summarized as follows, net of tax (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Defined Benefit Plans | | Derivative Instruments | | Foreign Currency Translation | | Total |
Balance, December 31, 2021 | | $ | (4,830) | | | $ | 5,910 | | | $ | (850) | | | $ | 230 | |
Net unrealized gains (losses) arising during the period (a) | | (1,070) | | | 9,410 | | | (17,710) | | | (9,370) | |
Less: Net realized losses reclassified to net income (b) | | (520) | | | — | | | — | | | (520) | |
Net current-period other comprehensive income (loss) | | (550) | | | 9,410 | | | (17,710) | | | (8,850) | |
| | | | | | | | |
Balance, December 31, 2022 | | $ | (5,380) | | | $ | 15,320 | | | $ | (18,560) | | | $ | (8,620) | |
__________________________
(a) Defined benefit plans, net of income tax of $0.3 million. See Note 17, "Employee Benefit Plans," for additional details. Derivative instruments, net of income tax of $3.2 million. See Note 13, "Derivative Instruments," for further details.
(b) Defined benefit plans, net of income tax of $0.2 million. See Note 17, "Employee Benefit Plans," for additional details.
Changes in AOCI by component for the year ended December 31, 2021 are summarized as follows, net of tax (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Defined Benefit Plans | | Derivative Instruments | | Foreign Currency Translation | | Total |
Balance, December 31, 2020 | | $ | (8,620) | | | $ | (3,580) | | | $ | 6,580 | | | $ | (5,620) | |
Net unrealized gains (losses) arising during the period (a) | | 3,150 | | | 9,490 | | | (7,430) | | | 5,210 | |
Less: Net realized losses reclassified to net income (b) | | (640) | | | — | | | — | | | (640) | |
Net current-period other comprehensive income (loss) | | 3,790 | | | 9,490 | | | (7,430) | | | 5,850 | |
| | | | | | | | |
Balance, December 31, 2021 | | $ | (4,830) | | | $ | 5,910 | | | $ | (850) | | | $ | 230 | |
__________________________
(a) Defined benefit plans, net of income tax of $0.8 million. See Note 17, "Employee Benefit Plans," for additional details. Derivative instruments, net of income tax expense of $3.1 million. See Note 13, "Derivative Instruments," for further details.
(b) Defined benefit plans, net of income tax of $0.2 million. See Note 17, "Employee Benefit Plans," for additional details.
21. Segment Information
TriMas reports its operations in three 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 its platform which is based upon 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:
TRIMAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Packaging – TriMas' Packaging segment consists primarily of the Rieke® brand, as well as more recently acquired brands which include the Affaba & Ferrari™, Taplast™, Rapak®, Plastic Srl, Intertech and Omega brands. TriMas Packaging develops and manufactures a broad array of dispensing products (such as foaming pumps, lotion and hand soaps and 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, beverage closures, drum and pail closures, and flexible spouts), polymeric jar products, fully integrated dispensers for fill-ready bag-in-box applications, and consumable vascular delivery and diagnostic test components, all for a variety of consumer products submarkets including, but not limited to, beauty and personal care, food and beverage, home care, and life sciences, including, but not limited to, pharmaceutical, nutraceutical and medical, as well as industrial markets (including agricultural).
Aerospace – TriMas' Aerospace segment, which includes the Monogram Aerospace Fasteners™, Allfast Fastening Systems®, Mac Fasteners™, TFI Aerospace, 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 – TriMas' 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.
TRIMAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Segment activity is as follows (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | Year ended December 31, |
| | 2022 | | 2021 | | 2020 |
Net Sales | | | | | | |
Packaging | | $ | 522,180 | | | $ | 533,260 | | | $ | 488,340 | |
Aerospace | | 188,090 | | | 183,340 | | | 167,740 | |
Specialty Products | | 173,560 | | | 140,510 | | | 113,890 | |
Total | | $ | 883,830 | | | $ | 857,110 | | | $ | 769,970 | |
Operating Profit (Loss) | | | | | | |
Packaging | | $ | 81,000 | | | $ | 96,490 | | | $ | 93,990 | |
Aerospace (a) | | 8,060 | | | 13,270 | | | (133,440) | |
Specialty Products | | 30,250 | | | 22,550 | | | 4,350 | |
Corporate (b) | | (20,250) | | | (37,220) | | | (53,190) | |
Total | | $ | 99,060 | | | $ | 95,090 | | | $ | (88,290) | |
Capital Expenditures | | | | | | |
Packaging | | $ | 33,170 | | | $ | 34,080 | | | $ | 30,730 | |
Aerospace | | 6,900 | | | 5,390 | | | 5,770 | |
Specialty Products | | 5,860 | | | 5,500 | | | 3,890 | |
Corporate | | 30 | | | 90 | | | 90 | |
Total | | $ | 45,960 | | | $ | 45,060 | | | $ | 40,480 | |
Depreciation and Amortization | | | | | | |
Packaging | | $ | 29,340 | | | $ | 30,500 | | | $ | 27,600 | |
Aerospace | | 19,620 | | | 18,700 | | | 18,130 | |
Specialty Products | | 4,130 | | | 4,120 | | | 3,910 | |
Corporate | | 130 | | | 130 | | | 130 | |
Total | | $ | 53,220 | | | $ | 53,450 | | | $ | 49,770 | |
Total Assets | | | | | | |
Packaging | | $ | 776,550 | | | $ | 739,920 | | | $ | 721,440 | |
Aerospace | | 347,720 | | | 353,800 | | | 348,190 | |
Specialty Products | | 86,290 | | | 73,260 | | | 65,520 | |
Corporate | | 94,440 | | | 136,660 | | | 58,730 | |
| | | | | | |
| | | | | | |
Total | | $ | 1,305,000 | | | $ | 1,303,640 | | | $ | 1,193,880 | |
__________________________
(a) In 2022, the Company completed the sale of vacant land adjacent to the Company's Tolleson, Arizona, manufacturing facility for net proceeds of $5.0 million, and recognized a $4.8 million gain on the sale, which is included within the Aerospace segment.
(b) In 2022, the Company sold a non-core facility in City of Industry, California, for net proceeds of $23.3 million, and recognized a $17.6 million gain on the sale, which is included in Corporate operating loss for 2022 and included within net gain (loss) on disposition of assets in the accompanying consolidated statement of operations.
TRIMAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table presents the Company's net sales for each of the years ended December 31 and long-lived assets at each year ended December 31, attributed to each subsidiary's continent of domicile (dollars in thousands).
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of December 31, |
| | 2022 | | 2021 | | 2020 |
| | Net Sales | | Long-lived Assets | | Net Sales | | Long-lived Assets | | Net Sales | | Long-lived Assets |
Non-U.S. | | | | | | | | | | | | |
Europe | | $ | 139,780 | | | $ | 192,600 | | | $ | 160,650 | | | $ | 209,380 | | | $ | 116,350 | | | $ | 225,120 | |
Asia Pacific | | 35,260 | | | 29,720 | | | 41,310 | | | 37,080 | | | 46,350 | | | 41,140 | |
Other Americas | | 18,040 | | | 41,840 | | | 15,290 | | | 42,000 | | | 11,740 | | | 19,510 | |
Total non-U.S. | | 193,080 | | | 264,160 | | | 217,250 | | | 288,460 | | | 174,440 | | | 285,770 | |
| | | | | | | | | | | | |
Total U.S. | | 690,750 | | | 541,510 | | | 639,860 | | | 489,390 | | | 595,530 | | | 477,460 | |
Total | | $ | 883,830 | | | $ | 805,670 | | | $ | 857,110 | | | $ | 777,850 | | | $ | 769,970 | | | $ | 763,230 | |
The Company's export sales from the U.S. approximated $74.5 million, $80.6 million and $70.0 million in 2022, 2021 and 2020, respectively.
22. Income Taxes
The Company's income (loss) before income taxes and income tax expense (benefit), each by tax jurisdiction, consists of the following (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | Year ended December 31, |
| | 2022 | | 2021 | | 2020 |
Income (loss) before income taxes: | | | | | | |
Domestic | | $ | 56,750 | | | $ | 28,380 | | | $ | (134,630) | |
Foreign | | 30,920 | | | 40,730 | | | 31,920 | |
Total income (loss) before income taxes | | $ | 87,670 | | | $ | 69,110 | | | $ | (102,710) | |
Current income tax expense: | | | | | | |
Federal | | $ | 13,300 | | | $ | 940 | | | $ | 200 | |
State and local | | 3,470 | | | 530 | | | 810 | |
Foreign | | 6,170 | | | 8,840 | | | 7,750 | |
Total current income tax expense | | 22,940 | | | 10,310 | | | 8,760 | |
Deferred income tax expense (benefit): | | | | | | |
Federal | | (1,780) | | | 5,450 | | | (16,900) | |
State and local | | 50 | | | 670 | | | (4,430) | |
Foreign | | 290 | | | (4,630) | | | (10,380) | |
Total deferred income tax expense (benefit) | | (1,440) | | | 1,490 | | | (31,710) | |
Income tax expense (benefit) | | $ | 21,500 | | | $ | 11,800 | | | $ | (22,950) | |
TRIMAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The components of deferred taxes are as follows (dollars in thousands):
| | | | | | | | | | | | | | |
| | December 31, 2022 | | December 31, 2021 |
Deferred tax assets: | | | | |
Accounts receivable | | $ | 1,290 | | | $ | 950 | |
Inventories | | 5,640 | | | 5,330 | |
| | | | |
Accrued liabilities and other long-term liabilities | | 14,580 | | | 15,320 | |
Operating lease liability | | 12,670 | | | 13,440 | |
Research and experimentation costs (a) | | 4,130 | | | — | |
Tax loss and credit carryforwards | | 27,310 | | | 30,690 | |
Other | | 110 | | | 340 | |
Gross deferred tax asset | | 65,730 | | | 66,070 | |
Valuation allowances | | (17,180) | | | (19,960) | |
Net deferred tax asset | | 48,550 | | | 46,110 | |
Deferred tax liabilities: | | | | |
Property and equipment | | (25,100) | | | (23,920) | |
Right of use asset | | (12,170) | | | (13,130) | |
Goodwill and other intangible assets | | (22,050) | | | (20,160) | |
Investment in foreign affiliates, including withholding tax | | (770) | | | (420) | |
| | | | |
Gross deferred tax liability | | (60,090) | | | (57,630) | |
Net deferred tax liability | | $ | (11,540) | | | $ | (11,520) | |
__________________________
(a) Effective for tax years beginning after December 31, 2021, research and experimentation expenditures are to be capitalized and amortized for tax-purposes as part of the Tax Cuts and Jobs Act of 2017.
The following is a reconciliation of income tax expense (benefit) computed at the U.S. federal statutory rate to income tax expense (benefit) allocated to income (loss) before income taxes (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | Year ended December 31, |
| | 2022 | | 2021 | | 2020 |
U.S. federal statutory rate | | 21 | % | | 21 | % | | 21 | % |
Tax at U.S. federal statutory rate | | $ | 18,380 | | | $ | 14,550 | | | $ | (21,570) | |
State and local taxes, net of federal tax benefit | | 2,790 | | | 960 | | | (2,850) | |
Differences in statutory foreign tax rates | | 1,150 | | | (1,690) | | | (1,500) | |
Change in recognized tax benefits | | (600) | | | (550) | | | (920) | |
Goodwill and other intangible assets impairment | | — | | | — | | | 13,430 | |
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| | | | | | |
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Tax credits and incentives | | (1,260) | | | (5,060) | | | (2,130) | |
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Net change in valuation allowance | | 340 | | | 2,100 | | | (6,390) | |
Nondeductible compensation | | 990 | | | 2,280 | | | 260 | |
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Other, net | | $ | (290) | | | $ | (790) | | | $ | (1,280) | |
Income tax expense (benefit) | | $ | 21,500 | | | $ | 11,800 | | | $ | (22,950) | |
During 2020, the Company undertook certain tax-planning actions with respect to intercompany debt restructuring within the group. These actions resulted in the recognition of a $6.4 million deferred tax benefit related to an interest limitation carryforward.
TRIMAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Company has recorded deferred tax assets on $21.3 million of various state operating loss carryforwards and $54.3 million of various foreign operating loss carryforwards. The majority of the state tax loss carryforwards expire between 2026 and 2032 and the majority of the foreign losses have indefinite carryforward periods.
The Company has not made a provision for U.S. or additional foreign withholding taxes related to investments in foreign subsidiaries that are indefinitely reinvested since any excess of the amount for financial reporting over the tax basis in these investments is not significant as of December 31, 2022.
Unrecognized Tax Benefits
The Company had $1.1 million and $1.3 million of unrecognized tax benefits ("UTBs") as of December 31, 2022 and 2021, respectively. If the UTBs were recognized, the impact to the Company's effective tax rate would be to reduce reported income tax expense for the years ended December 31, 2022 and 2021 by $1.1 million and $1.1 million, respectively.
A reconciliation of the change in the UTBs for the years ended December 31, 2022 and 2021 is as follows (dollars in thousands):
| | | | | | | | |
| | Unrecognized Tax Benefits |
Balance at December 31, 2020 | | $ | 1,640 | |
Tax positions related to current year: | | |
Additions | | 130 | |
Tax positions related to prior years: | | |
Additions | | 20 | |
Reductions | | — | |
Settlements | | — | |
Lapses in the statutes of limitations | | (540) | |
Balance at December 31, 2021 | | $ | 1,250 | |
Tax positions related to current year: | | |
Additions | | 140 | |
Tax positions related to prior years: | | |
Additions | | — | |
Reductions | | (50) | |
Settlements | | — | |
Lapses in the statutes of limitations | | (230) | |
Balance at December 31, 2022 | | $ | 1,110 | |
In addition to the UTBs summarized above, the Company has recorded $0.8 million and $0.8 million in potential interest and penalties associated with uncertain tax positions as of December 31, 2022 and 2021, respectively.
The Company is subject to U.S. federal, state and local, and certain non-U.S. income tax examinations for tax years 2015 through 2022. In addition, there are currently several state and foreign income tax examinations in process. The Company does not believe that the results of these examinations will have a significant impact on the Company's tax position or its effective tax rate.
Management monitors changes in tax statutes and regulations and the issuance of judicial decisions to determine the potential impact to UTBs and is not aware of, nor does it anticipate, any subsequent events that could have a significant impact on the Company's financial position during the next twelve months.
TRIMAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
23. Subsequent Events
On February 1, 2023, the Company acquired Aarts Packaging B.V. ("Aarts") for a purchase price of approximately €35 million, subject to customary closing conditions. Aarts is a luxury packaging solutions provider for beauty and lifestyle brands, as well as for customers in the food and life sciences end markets, and has annual net sales of approximately €23 million. Aarts will become part of the Packaging reportable segment.
On February 16, 2023, the Company announced that its Board of Directors had declared a cash dividend of $0.04 per share of TriMas Corporation common stock, which will be payable on March 9, 2023 to shareholders of record as of the close of business on March 2, 2023.
On February 23, 2023, the Company announced it has signed an agreement to acquire the operating net assets of Weldmac Manufacturing Company (“Weldmac”), a leading designer and manufacturer of high-performance, complex metal fabricated components and assemblies for the aerospace, defense and space launch end markets with annual net sales of approximately $33 million. Weldmac will become part of the Aerospace reportable segment upon closing, which the Company expects to be during second quarter 2022.