Trimas Corp: Form 10-Q for the period ended Jun 30, 2023

The following discussion and analysis of our financial condition contains forward-looking statements regarding industry outlook and our expectations regarding the performance of our business. These forward-looking statements are subject to numerous risks and uncertainties, including, but not limited to, the risks and uncertainties described under the heading "Forward-Looking Statements," at the beginning of this report. Our actual results may differ materially from those contained in or implied by any forward-looking statements. You should read the following discussion together with the Company's reports on file with the Securities and Exchange Commission, including its Annual Report on Form 10-K for the year ended December 31, 2022.

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) and a lack of material availability. 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, and for the last several quarters demand abruptly falling as a result of some of our larger customers' choices to rebalance on-hand inventory levels and caution in current purchasing behaviors given the current inflationary macro-economic environment. Sales of certain of our industrial and aerospace-related products were significantly depressed from historical levels following the onset of the pandemic, but demand has significantly increased in recent quarters, 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 and transportation costs and material and labor availability have pressured our ability to operate efficiently and at historical margin levels in our Packaging and Aerospace segments.

Overall, our second quarter 2023 net sales decreased $4.5 million, or 1.9%, compared to second quarter 2022. We experienced sales growth from acquisitions in our Packaging and Aerospace segments as well as organic sales increases within our Specialty Products and Aerospace segments as a result of increased demand levels in North America. These increases were more than offset by reduced demand for dispensers and closures used in consumer products and industrial applications within our Packaging segment, which we believe declined due to initiatives by several of our customers to rebalance their inventory levels while also closely managing their order activity given continuing uncertainty around consumer sentiment as a result of the inflationary environment.

The most significant drivers affecting our financial results in second quarter 2023 compared with second quarter 2022, other than as directly impacted by sales changes, were the impact of our recent acquisitions, realignment actions in our Packaging segment, and an increase in our effective tax rate.

In February 2023, we acquired Aarts Packaging B.V. ("Aarts"), a luxury packaging solutions provider for beauty and lifestyle brands, as well as for customers in the food and life sciences end markets, for a purchase price of $37.8 million, net of cash acquired. Aarts, which is reported in our Packaging segment, is located in Waalwijk, The Netherlands. Aarts contributed $7.5 million of net sales during second quarter 2023.

In April 2023, we acquired the operating net assets of Weldmac Manufacturing Company (“Weldmac”), a designer and manufacturer of complex metal fabricated components and assemblies for the aerospace, defense and space launch end markets for a purchase price of $34.0 million, with additional contingent consideration ranging from zero to $10 million based on achievement of earnings targets. Weldmac, which is reported in our Aerospace segment, is located in El Cajon, California. Weldmac contributed $7.3 million of net sales during second quarter 2023. We recognized $0.8 million of purchase accounting non-cash charge related to the step-up of Weldmac's inventory to fair value and subsequent amortization during second quarter 2023.

Over the past few years, we have been executing certain realignment actions in response to current and expected future end market demand as we are affected by certain macro-economic factors. We recorded pre-tax realignment charges of $3.7 million in second quarter 2023, primarily related to the closure and consolidation of two Packaging segment manufacturing facilities located in China into one new, larger facility in the Haining region. These charges consisted of $2.2 million to accelerate the depreciation of certain fixed assets, $1.3 million employee-related costs, and $0.2 million related to other facility move and consolidation costs. We recorded pre-tax realignment charges of $1.5 million in the second quarter 2022, of which $1.4 million related to facility move and consolidation costs and $0.1 million were for employee related costs.

The effective income tax rate for second quarter 2023 was 32.2% as compared to 25.5% for second quarter 2022. The effective tax rate for second quarter 2023 is higher than in the prior year primarily due to increased losses in jurisdictions where we do not recognize a tax benefit.

Additional Key Risks that May Affect Our Reported Results

We have executed significant realignment actions over the past few years, 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 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.

Despite the potential for declines in future demand levels and results of operations, at present, we believe our capital structure is in a strong position. We have sufficient cash and available liquidity under our revolving credit facility to meet our debt service obligations, capital expenditure requirements and other short-term and long-term obligations for the foreseeable future.

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 oil and metal-based purchased components, the costs for each of which have experienced recent volatility. 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, 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 second quarter 2023, we purchased 101,020 shares of our outstanding common stock for an aggregate purchase price of $2.7 million. As of June 30, 2023, we had $92.6 million remaining under the repurchase authorization.

In addition, in second quarter 2023, we declared dividends of $0.04 per share of common stock and paid dividends of $1.7 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 reportable segments for the three months ended June 30, 2023 and 2022 (dollars in thousands):

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The following table summarizes financial information for our reportable segments for the six months ended June 30, 2023 and 2022 (dollars in thousands):

Results of Operations

The principal factors impacting us during the three months ended June 30, 2023, compared with the three months ended June 30, 2022, were:

• reductions in demand for products in certain end markets within our Packaging segment;
• the impact of recent acquisitions, primarily Aarts and Weldmac;
• significant demand increases in our Aerospace and Specialty Products segments;
• realignment expenses in response to changes in end market demand; and
• an increase in our effective tax rate in second quarter 2023 compared with second quarter 2022.

Three Months Ended June 30, 2023 Compared with Three Months Ended June 30, 2022

Overall, net sales decreased $4.5 million, or 1.9%, to $233.2 million for the three months ended June 30, 2023, as compared with $237.7 million in the three months ended June 30, 2022. Acquisition-related sales growth was $14.8 million, comprised of $7.5 million from our February 2023 acquisition of Aarts and $7.3 million from our April 2023 acquisition of Weldmac. Organic sales, excluding the impact of currency exchange and acquisitions, decreased $19.3 million, as increases in our Specialty Products and Aerospace segments driven by end market demand improvements were more than offset by decreases in the Packaging segment due to lower market demand, primarily as a result of ongoing actions by many of our customers to rebalance their inventory levels and closely manage their order activity given continuing uncertainty around consumer sentiment as a result of the inflationary environment.

Gross profit margin (gross profit as a percentage of sales) approximated 23.4% and 25.5% for the three months ended June 30, 2023 and 2022, respectively. Gross profit margin decreased due to lower sales and lower absorption of fixed costs as well as higher realignment costs associated with our actions to close and consolidate production facilities in China all within our Packaging segment, inefficiencies driven by material availability delays and a non-cash charge related to the step-up of Weldmac's inventory to fair value and subsequent amortization within our Aerospace segment, partially offset by margin improvement within the Specialty Products segment due to higher sales leveraged across our existing fixed costs.

Operating profit margin (operating profit as a percentage of sales) approximated 8.6% and 12.6% for the three months ended June 30, 2023 and 2022, respectively. Operating profit decreased $9.8 million to $20.1 million in the three months ended June 30, 2023, from $29.9 million for the three months ended June 30, 2022, primarily due to lower sales levels and lower absorption of fixed costs as well as higher realignment costs within our Packaging segment, inefficiencies resulting from material availability delays, recognition of a non-cash charge related to Weldmac purchase accounting, and higher selling, general and administrative expenses in our Aerospace segment, and an increase in professional fees, partially offset by higher sales levels within our Specialty Products segment.

Interest expense increased $0.5 million, to $4.0 million for the three months ended June 30, 2023, compared to $3.5 million for the three months ended June 30, 2022, due to an increase in our weighted average borrowings and a higher effective interest rate as a result of lower notional amounts of cross-currency swaps.

Other income (expense) decreased $0.1 million to $0.2 million of income for the three months ended June 30, 2023, as compared to $0.3 million of income for the three months ended June 30, 2022, primarily due to a non-cash settlement charge for our Canadian defined benefit obligations partially offset by an increase in other income for the three months ended June 30, 2023 as compared to the three months ended June 30, 2022.

The effective income tax rate for the three months ended June 30, 2023 and 2022 was 32.2% and 25.5%, respectively. We recorded income tax expense of $5.2 million and $6.8 million for the three months ended June 30, 2023 and 2022, respectively. The effective tax rate increased primarily due to increased losses in jurisdictions where we do not recognize a tax benefit.

Net income decreased $8.8 million, to $11.0 million for the three months ended June 30, 2023, as compared to $19.9 million for the three months ended June 30, 2022. The decrease was primarily the result of a decrease in operating profit of $9.8 million, an increase in interest expense of $0.5 million, and a decrease in other income of $0.1 million, partially offset by a decrease in income tax expense of $1.6 million.

See below for a discussion of operating results by segment.

Packaging. Net sales decreased $31.0 million, or 20.9%, to $117.3 million in the three months ended June 30, 2023, as compared to $148.4 million in the three months ended June 30, 2022. Acquisition-related sales growth from our February 2023 acquisition of Aarts was $7.5 million. Sales of dispensing products used in beauty and personal care, as well as home care, applications decreased by $16.7 million. Sales of products used in food and beverage markets decreased by $11.6 million, primarily due to lower demand for closures and dispensers. Sales of products used in industrial markets decreased by $7.6 million, primarily as a result of lower demand for drum closure products in North America. We believe that the decrease in sales in each of these categories reflects ongoing actions by many of our customers to closely manage their order activity given continuing uncertainty around consumer sentiment as a result of the inflationary environment.

Gross profit decreased $12.7 million to $29.1 million, or 24.8% of sales, in the three months ended June 30, 2023, as compared to $41.8 million, or 28.2% of sales, in the three months ended June 30, 2022, primarily due to lower sales and resulting lower absorption of fixed costs. Gross profit further declined in second quarter 2023 due to $2.5 million of higher realignment expenses, primarily associated with our actions to close and consolidate production facilities in China, and purchase accounting expenses.

Selling, general and administrative expenses decreased $2.1 million to $11.8 million, or 10.1% of sales, in the three months ended June 30, 2023, as compared to $14.0 million, or 9.4% of sales, in the three months ended June 30, 2022, primarily due lower employee-related costs and overall spending levels in second quarter 2023, consistent with current lower demand levels. These decreases offset the higher ongoing selling, general and administrative costs associated with our acquisition of Aarts as well as higher costs related to our realignment actions in second quarter of 2023.

Operating profit decreased $10.5 million to $17.3 million, or 14.7% of sales, in the three months ended June 30, 2023, as compared to $27.8 million, or 18.7% of sales, in the three months ended June 30, 2022, as the impact of lower selling, general and administrative expenses was more than offset by lower sales levels, lower absorption of fixed costs and higher realignment costs.

Aerospace. Net sales for the three months ended June 30, 2023 increased $12.4 million, or 26.2%, to $59.8 million, as compared to $47.4 million in the three months ended June 30, 2022. Acquisition-related sales growth from our April 2023 acquisition of Weldmac was $7.3 million. Sales of our fasteners products increased by $2.7 million due to increases in demand for fasteners used in new aircraft builds plus market share gains. Sales of our engineered components products increased by $2.4 million due to higher end market demand.

Gross profit increased $1.3 million to $10.9 million, or 18.3% of sales, in the three months ended June 30, 2023, from $9.6 million, or 20.3% of sales, in the three months ended June 30, 2022. Gross profit dollars increased primarily due to higher sales levels, while gross profit margin declined due to inefficiencies driven by material availability constraints and delays as well as due to a $0.8 million purchase accounting non-cash charge related to the step-up of Weldmac's inventory to fair value and subsequent amortization.

Selling, general and administrative expenses increased $1.4 million to $8.3 million, or 13.9% of sales, in the three months ended June 30, 2023, as compared to $6.9 million, or 14.5% of sales, in the three months ended June 30, 2022, primarily due to higher ongoing selling, general and administrative costs associated with our acquisition of Weldmac, higher legal costs and higher employee-related costs in support of the increased sales levels.

Operating profit decreased $0.1 million to $2.6 million, or 4.4% of sales, in the three months ended June 30, 2023, as compared to $2.8 million, or 5.8% of sales, in the three months ended June 30, 2022, as the impact of higher sales was offset by inefficiencies resulting from material availability delays, the recognition of the purchase accounting adjustment related to Weldmac's inventory step-up to fair value and subsequent amortization, and higher selling, general and administrative expenses.

Specialty Products. Net sales for the three months ended June 30, 2023 increased $14.1 million, or 33.7%, to $56.1 million, as compared to $41.9 million in the three months ended June 30, 2022. Sales of our cylinder products increased $8.7 million due to higher demand for steel cylinders for packaged gas applications in North America. Sales of engines, compressors and related parts used in stationary power generation and assistance applications for natural gas and crude oil extraction increased by $5.4 million, primarily as a result of higher compression package sales.

Gross profit increased $5.2 million to $14.5 million, or 25.8% of sales, in the three months ended June 30, 2023, as compared to $9.3 million, or 22.1% of sales, in the three months ended June 30, 2022. Gross profit increased in the second quarter of 2023 primarily as a result of higher sales levels, while margin also improved due to leveraging the higher sales levels with the existing cost footprint.

Selling, general and administrative expenses decreased $0.1 million to $2.4 million, or 4.3% of sales, in the three months ended June 30, 2023, as compared to $2.5 million, or 6.0% of sales, in the three months ended June 30, 2022, as the business leveraged the higher sales levels without need for incremental spending.

Operating profit increased $5.3 million to $12.1 million, or 21.6% of sales, in the three months ended June 30, 2023, as compared to $6.8 million, or 16.1% of sales, in the three months ended June 30, 2022, primarily due to higher sales levels.

Corporate. Corporate expenses consist of the following (dollars in millions):

Corporate expenses increased $4.5 million to $12.0 million for the three months ended June 30, 2023, from $7.5 million for the three months ended June 30, 2022, primarily due to $1.2 million higher professional fees primarily for business diligence and strategic consulting, a $0.8 million increase in non-cash stock compensation due to timing and estimated attainment of existing awards, the addition of $1.8 million of costs now reported as corporate operating expenses related to centralizing certain of our information technology costs in 2023, and higher employee-related costs.

Six Months Ended June 30, 2023 Compared with Six Months Ended June 30, 2022

Overall, net sales decreased $13.3 million, or 2.9%, to $448.7 million for the six months ended June 30, 2023, as compared with $462.0 million in the six months ended June 30, 2022. Acquisition-related sales growth was $24.3 million, comprised of comprised of $5.3 million resulting from the January through February 2023 sales of our February 2022 acquisition of Intertech Plastics LLC and related companies (collectively, "Intertech"), $11.7 million from our February 2023 acquisition of Aarts, and $7.3 million from our April 2023 acquisition of Weldmac. Organic sales, excluding the impact of currency exchange and acquisitions, decreased $35.1 million, as increases of industrial products in our Specialty Products segment and Aerospace segment, driven by higher demand and gains in market shares, were more than offset by lower sales contributed by the Packaging segment due to lower market demand, primarily as a result of ongoing actions by many of our customers to rebalance their inventory levels and closely manage their order activity given continuing uncertainty around consumer sentiment as a result of the inflationary environment. In addition, net sales decreased by $2.5 million due to currency exchange, as our reported results in U.S. dollars were unfavorably impacted as a result of a strengthening U.S. dollar relative to foreign currencies.

Gross profit margin (gross profit as a percentage of sales) approximated 22.8% and 24.8% for the six months ended June 30, 2023 and 2022, respectively. Gross profit margin decreased primarily due to lower sales and lower absorption of fixed costs as well as higher realignment costs associated with our actions to close and consolidate production facilities in China within our Packaging segment, offset by $1.4 million of lower energy costs compared with the spike in costs in the first half of 2022, primarily in our Europe-based operations. Gross profit margin in our Aerospace segment declined due to inefficiencies driven by material availability constraints and delays as well as due to a $0.8 million purchase accounting non-cash charge related to the step-up of Weldmac's inventory to fair value and subsequent amortization. Gross profit also decreased due to unfavorable currency exchange, as our reported results in U.S. dollars were impacted as a result of the strengthening U.S. dollar relative to foreign currencies. These declines were partially offset by margin improvement in our Specialty Products segment due to higher sales leveraged across our existing fixed costs.

Operating profit margin (operating profit as a percentage of sales) approximated 6.7% and 11.2% for the six months ended June 30, 2023 and 2022, respectively. Operating profit decreased $21.8 million, to $30.1 million, for the six months ended June 30, 2023, compared to $51.8 million for the six months ended June 30, 2022, primarily due to lower sales levels and lower absorption of fixed costs as well as higher realignment costs within our Packaging segment. The impact of higher sales within our Aerospace segment was more than offset by inefficiencies resulting from material availability constraints, recognition of a non-cash charge related to Weldmac purchase accounting, and higher selling, general and administrative expenses. Our professional fees also increased for the six months ended June 30, 2023. These decreases in operating profit were partially offset by higher sales levels and a favorable product sales mix within our Specialty Products segment.

Interest expense increased $0.8 million, to $7.7 million, for the six months ended June 30, 2023, as compared to $6.9 million for the six months ended June 30, 2022, due to an increase in our weighted average borrowings and a higher effective interest rate as a result of lower notional amounts of cross-currency swaps.

Other income (expense) increased $0.1 million to $0.1 million of income for the six months ended June 30, 2023, as compared to a de minimus amount of expense for the six months ended June 30, 2022, primarily due to a decrease in losses on transactions denominated in foreign currencies and an increase in other income, partially offset by a non-cash settlement charge for our Canadian defined benefit obligations during the six months ended June 30, 2023.

The effective income tax rate for the six months ended June 30, 2023 and 2022 was 29.1% and 24.2%, respectively. We recorded tax expense of $6.5 million for the six months ended June 30, 2023 as compared to $10.9 million for the six months ended June 30, 2022. The effective tax rate for the six months ended June 30, 2023 is higher than in the prior year primarily due to increased losses in jurisdictions where we do not recognize a tax benefit.

Net income decreased by $18.1 million, to $15.9 million for the six months ended June 30, 2023, compared to $34.0 million for the six months ended June 30, 2022. The decrease was primarily the result of a decrease in operating profit of $21.8 million and an increase in interest expense of $0.8 million, partially offset by a decrease in income tax expense of $4.3 million and an increase in other income of $0.1 million.

See below for a discussion of operating results by segment.

Packaging. Net sales decreased $53.3 million, or 18.6%, to $233.5 million in the six months ended June 30, 2023, as compared to $286.8 million in the six months ended June 30, 2022. Acquisition-related sales growth was $17.0 million, comprised of $5.3 million resulting from the January through February 2023 sales of our February 2022 acquisition of Intertech and $11.7 million from our February 2023 acquisition of Aarts. Sales of dispensing products used in beauty and personal care, as well as home care, applications decreased by $26.4 million. Sales of products used in food and beverage markets decreased by $21.3 million, primarily due to lower demand for closures and dispensers. Sales of products used in industrial markets decreased by $17.5 million, primarily as a result of lower demand for drum closure products in North America. We believe that the decrease in sales in each of these categories reflects ongoing actions by many of our customers to work-down elevated inventory positions and closely manage their order activity given continuing uncertainty around consumer sentiment as a result of the inflationary environment. Net sales decreased by $2.3 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 first half 2022.

Packaging's gross profit decreased $21.8 million to $56.4 million, or 24.1% of sales, in the six months ended June 30, 2023, as compared to $78.1 million, or 27.2% of sales, in the six months ended June 30, 2022, primarily due to lower sales and resulting lower absorption of fixed costs. Gross profit further declined in the first half of 2023 due to $2.1 million of higher realignment costs, primarily associated with our actions to close and consolidate production facilities in China, as well as by $0.8 million of unfavorable currency exchange, as our reported results in U.S. dollars were impacted as a result of the strengthening U.S. dollar relative to foreign currencies. The decrease in gross profit was partially offset by $1.4 million of lower energy costs compared with the spike in costs in the first half of 2022, primarily in our Europe-based operations.

Packaging's selling, general and administrative expenses decreased $4.3 million to $24.7 million, or 10.6% of sales, in the six months ended June 30, 2023, as compared to $29.0 million, or 10.1% of sales, in the six months ended June 30, 2022, primarily due to lower overall spending levels in the first half of 2023, consistent with current lower demand levels, as well as $1.0 million of lower employee-related costs associated with realignment actions. In addition, we incurred lower intangible asset amortization expense due to certain assets becoming fully amortized. These decreases offset the higher ongoing selling, general and administrative costs associated with our acquisitions.

Packaging's operating profit decreased $17.5 million to $31.7 million, or 13.6% of sales, in the six months ended June 30, 2023, as compared to $49.1 million, or 17.1% of sales, in the six months ended June 30, 2022, as the impact of lower selling, general and administrative expenses and energy costs was more than offset by lower sales levels, lower absorption of fixed costs, higher realignment costs and the impact of $0.4 million of unfavorable currency exchange.

Aerospace. Net sales for the six months ended June 30, 2023 increased $17.9 million, or 19.5%, to $109.8 million, as compared to $91.9 million in the six months ended June 30, 2022. Acquisition-related sales growth from our April 2023 acquisition of Weldmac was $7.3 million. Sales of our fasteners products increased by $6.1 million due to increases in demand for fasteners used in new aircraft builds plus market share gains. Sales of our engineered components products increased by $4.5 million due to higher end market demand.

Gross profit within Aerospace increased $1.9 million to $19.5 million, or 17.8% of sales, in the six months ended June 30, 2023, from $17.7 million, or 19.2% of sales, in the six months ended June 30, 2022. Gross profit dollars increased primarily due to higher sales levels, while gross profit margin declined due to inefficiencies driven by material availability constraints and delays as well as due to a $0.8 million purchase accounting non-cash charge related to the step-up of Weldmac's inventory to fair value and subsequent amortization.

Selling, general and administrative expenses increased $2.4 million to $15.4 million, or 14.1% of sales, in the six months ended June 30, 2023, as compared to $13.1 million, or 14.2% of sales, in the six months ended June 30, 2022, primarily due to higher ongoing selling, general and administrative costs associated with our acquisition of Weldmac, higher legal costs and higher employee-related costs in support of the increased sales levels.

Operating profit within Aerospace decreased $0.5 million to $4.1 million, or 3.7% of sales, in the six months ended June 30, 2023, as compared to $4.6 million, or 5.0% of sales, in the six months ended June 30, 2022, as the impact of higher sales was more than offset by inefficiencies resulting from material availability delays, the recognition of the purchase accounting adjustment related to Weldmac's inventory step-up to fair value and subsequent amortization, and higher selling, general and administrative expenses.

Specialty Products. Net sales for the six months ended June 30, 2023 increased $22.1 million, or 26.5%, to $105.3 million, as compared to $83.2 million in the six months ended June 30, 2022. Sales of our cylinder products increased $12.2 million, due to higher demand for steel cylinders for packaged gas applications 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 $9.9 million, primarily as a result of higher compression package sales.

Gross profit within Specialty Products increased $7.8 million to $26.4 million, or 25.0% of sales, in the six months ended June 30, 2023, as compared to $18.6 million, or 22.3% of sales, in the six months ended June 30, 2022. Gross profit and margin increased due to higher sales leveraged across our existing cost footprint.

Selling, general and administrative expenses within Specialty Products decreased $0.1 million to $4.5 million, or 4.3% of sales, in the six months ended June 30, 2023, as compared to $4.6 million, or 5.5% of sales, in the six months ended June 30, 2022, as we leveraged the higher sales levels without need for incremental spending.

Operating profit within Specialty Product increased $7.8 million to $21.9 million, or 20.7% of sales, in the six months ended June 30, 2023, as compared to $14.0 million, or 16.8% of sales, in the six months ended June 30, 2022, primarily due to increased sales levels.

Corporate. Corporate expenses, net consist of the following (dollars in millions):

Corporate expenses increased $11.6 million to $27.5 million for the six months ended June 30, 2023, from $15.9 million for the six months ended June 30, 2022, primarily due to $4.9 million higher professional fees primarily for business diligence and strategic consulting, a $0.9 million increase in non-cash stock compensation due to timing and estimated attainment of existing awards, the addition of $3.3 million of costs now reported as corporate operating expenses related to centralizing certain of our information technology costs in 2023, as well as an increase in employee-related costs.

Liquidity and Capital Resources

Cash Flows

Cash flows provided by operating activities were $26.2 million for the six months ended June 30, 2023, as compared to $27.7 million for the six months ended June 30, 2022. Significant changes in cash flows provided by operating activities and the reasons for such changes were as follows:

• For the six months ended June 30, 2023, the Company generated $56.6 million in cash flows, based on the reported net income of $15.9 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 and other operating activities. For the six months ended June 30, 2022, the Company generated $73.1 million in cash flows based on the reported net income of $34.0 million and after considering the effects of similar non-cash items.
• Increases in accounts receivable resulted in a use of cash of $20.1 million and $29.4 million for the six months ended June 30, 2023 and 2022, respectively. The increased use of cash for each of the six month periods is due primarily to the timing of sales and collection of cash related thereto within the periods. Days sales outstanding of receivables increased by four days through the six months ended June 30, 2023, and increased by four days through the six months ended June 30, 2022.
• We decreased our investment in inventory by $2.5 million for the six months ended June 30, 2023 while we increased our investment in inventory by $7.9 million for the six months ended June 30, 2022. Our days sales in inventory decreased by two days through the six months ended June 30, 2023, and decreased by three days through the six months ended June 30, 2022, as we continue to moderate inventory levels in line with sales levels.
• Decreases in prepaid expenses and other assets resulted in a source of cash of $1.2 million and $0.8 million for the six months ended June 30, 2023 and 2022, respectively. These changes were primarily 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 $14.1 million and $8.9 million for the six months ended June 30, 2023 and 2022, respectively. Days accounts payable on hand decreased by seven days through the six months ended June 30, 2023 while remaining consistent through the six months ended June 30, 2022. 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 for the six months ended June 30, 2023 and 2022 was $96.5 million and $85.7 million, respectively. During the first six months of 2023, we invested $24.9 million in capital expenditures, as we continued our investment in growth, capacity and productivity-related capital projects, and paid $71.8 million, net of cash acquired, to acquire Aarts and Weldmac. During the first six months of 2022, we invested $21.7 million in capital expenditures and paid $64.1 million, net of cash acquired, to acquire Intertech.

Net cash provided by financing activities for the six months ended June 30, 2023 was $0.1 million, while net cash used for financing activities was $33.6 million for the six months ended June 30, 2022. During the six months ended June 30, 2023, we received net proceeds of $22.2 million from borrowings on our revolving credit facilities, purchased $13.1 million of outstanding common stock, used a net cash amount of $2.6 million related to our stock compensation arrangements, paid dividends of $3.3 million and paid $3.1 million related to liabilities assumed in our acquisition of Aarts. During the six months ended June 30, 2022, we purchased $27.9 million of outstanding common stock, used a net cash amount of $2.3 million related to our stock compensation arrangements, and paid dividends of $3.5 million.

Our Debt and Other Commitments

In March 2021, we issued $400.0 million aggregate principal amount of 4.125% senior notes due April 15, 2029 ("Senior Notes") at par value in a private placement under Rule 144A of the Securities Act of 1933, as amended ("Securities Act"). The Senior Notes accrues 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 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, we may redeem up to 40% of the principal amount of the 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 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.

For the six months ended June 30, 2023, our consolidated subsidiaries that do not guarantee the Senior Notes represented 29% 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 38% and 16% of the total guarantor and non-guarantor assets and liabilities, respectively, as of June 30, 2023, treating the guarantor and non-guarantor subsidiaries each as a consolidated group.

We are party to a credit agreement ("Credit Agreement") consisting of a $300.0 million senior secured revolving credit facility, which permits borrowings denominated in specific foreign currencies, subject to a $125.0 million sub limit, maturing on March 29, 2026. The Credit Agreement is subject to benchmark interest rates determined based on the currency denomination of borrowings, with British pound sterling borrowings subject to the Sterling Overnight Index Average ("SONIA") and Euro borrowings to the Euro InterBank Offered Rate (“EURIBOR”), both plus a spread of 1.625%, and U.S. dollar borrowings subject to the Secured Overnight Financing Rate ("SOFR") plus a spread of 1.725%. The interest rate spread is based upon the leverage ratio, as defined, as of the most recent determination date. Our revolving credit facility allows for the issuance of letters of credit, not to exceed $40.0 million in aggregate.

The Credit Agreement provides for incremental revolving credit commitments in an amount not to exceed the greater of $200.0 million and an amount such that, after giving effect to such incremental commitments and the incurrence of any other indebtedness substantially simultaneously with the making of such commitments, the senior secured net leverage ratio, as defined in the Credit Agreement, is no greater than 3.00 to 1.00. The terms and conditions of any incremental revolving credit facility commitments must be no more favorable than the existing credit facility.

Amounts drawn under our revolving credit facility fluctuate daily based upon our working capital and other ordinary course needs. Availability under our revolving credit facility depends upon, among other things, compliance with our Credit Agreement's financial covenants. Our Credit Agreement contains various negative and affirmative covenants and other requirements affecting us and our subsidiaries, including the ability to, subject to certain exceptions and limitations, incur debt, liens, mergers, investments, loans, advances, guarantee obligations, acquisitions, asset dispositions, sale-leaseback transactions, hedging agreements, dividends and other restricted payments, transactions with affiliates, restrictive agreements and amendments to charters, bylaws, and other material documents. The terms of our Credit Agreement require us and our subsidiaries to meet certain restrictive financial covenants and ratios computed quarterly, including a maximum total net leverage ratio (total consolidated indebtedness plus outstanding amounts under the accounts receivable securitization facility, less the aggregate amount of certain unrestricted cash and unrestricted permitted investments, as defined, over consolidated EBITDA, as defined) 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 June 30, 2023. If we were to complete an acquisition which qualifies for a Covenant Holiday Period, as defined in our Credit Agreement, then our permitted total net leverage ratio cannot exceed 4.50 to 1.00 during that period. Our actual total net leverage ratio was 2.63 to 1.00 at June 30, 2023. Our permitted interest expense coverage ratio under the Credit Agreement is 3.00 to 1.00 as of June 30, 2023. Our actual interest expense coverage ratio was 11.89 to 1.00 at June 30, 2023. At June 30, 2023, we were in compliance with our financial covenants.

The following is a reconciliation of net income, as reported, which is a GAAP measure of our operating results, to Consolidated Bank EBITDA, as defined in our Credit Agreement, for the twelve months ended June 30, 2023 (dollars in thousands). We present Consolidated Bank EBITDA to show our performance under our financial covenants.

(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.

(3) Includes $10.0 million of acquisition-related contingent consideration, $5.5 million of derivative liabilities and $2.4 million of finance leases as of June 30, 2023.

At June 30, 2023, we had $21.8 million outstanding under our revolving credit facility and had $272.2 million potentially available after giving effect to $6.0 million of letters of credit issued and outstanding. 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. Our letters of credit are used for a variety of purposes, including support of certain operating lease agreements, vendor payment terms and other subsidiary operating activities, and to meet various states' requirements to self-insure workers' compensation claims, including incurred but not reported claims. After consideration of leverage restrictions contained in the Credit Agreement, as of June 30, 2023, we had $211.5 million of borrowing capacity available for general corporate purposes. Our borrowing capacity was not reduced by leverage restrictions contained in the Credit Agreement as of December 31, 2022.

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 foreign subsidiaries to pay down amounts outstanding under our revolving credit facility, as applicable.

Our weighted average borrowings during the first six months of 2023 approximated $432.0 million, compared to $400.1 million during the first six months of 2022, primarily due to borrowings made on our revolving credit facility.

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 June 30, 2023.

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.

While the majority of our cash on hand as of June 30, 2023 is located outside of the U.S., given available funding under our revolving credit facility of $211.5 million at June 30, 2023 (after consideration of the aforementioned leverage restrictions) and based on forecasted cash sources and requirements inherent in our business plans, we believe that our liquidity and capital resources, including anticipated cash flows from operations, will be sufficient to meet our debt service, capital expenditure and other short-term and long-term obligations for the foreseeable future, 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 June 30, 2023, 1-Month EURIBOR approximated 3.4%. Based on our variable rate-based borrowings outstanding at June 30, 2023, a 1% increase in the per annum interest rate would increase our interest expense by $0.2 million annually.

In addition to our long-term debt, we have other cash commitments related to leases. The majority of our lease transactions are accounted for as operating leases, and annual rent expense for continuing operations related thereto approximated $13.9 million in 2022. We expect leasing will continue to be an available financing option to fund future capital expenditure requirements.

As part of our first quarter 2023 acquisition of Aarts, we assumed a $2.9 million liability to a bank related to the advance funding of certain accounts receivable invoices. We terminated this arrangement, and repaid the outstanding balance, in March 2023.

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 prior authorization. In the three and six months ended June 30, 2023, we purchased 101,020 and 451,882 shares of our outstanding common stock for an aggregate purchase price of $2.7 million and $13.1 million, respectively. Since the initial authorization through June 30, 2023, we have purchased 5,566,785 shares of our outstanding common stock for an aggregate purchase price of $157.4 million. We will continue to evaluate opportunities to return capital to shareholders through the purchase of our common stock and the payment of dividends, depending on market conditions, including the potential impact of the COVID-19 pandemic, and other factors.

Market Risk

We conduct business in various locations throughout the world and are subject to market risk due to changes in the value of foreign currencies. The functional currencies of our foreign subsidiaries are primarily the local currency in the country of domicile. We manage these operating activities at the local level and revenues and costs are generally denominated in local currencies; however, results of operations and assets and liabilities reported in U.S. dollars will fluctuate with changes in exchange rates between such local currencies and the U.S. dollar.

We 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 June 30, 2023, we were party to foreign exchange forward and swap contracts to hedge changes in foreign currency exchange rates with notional amounts of $158.8 million. We also use cross-currency swap agreements to mitigate currency risks associated with the net investment in certain of our foreign subsidiaries. See Note 9, "Derivative Instruments," included in Part 1, Item 1, "Notes to Unaudited Consolidated Financial Statements," within this quarterly report on Form 10-Q for additional information.

We are also subject to interest risk as it relates to our long-term debt. See Note 8, "Long-term Debt," included in Part 1, Item 1, "Notes to Unaudited Consolidated Financial Statements," within this quarterly report on Form 10-Q for additional information.

Common Stock

TriMas is listed in the NASDAQ Global Select Market. 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 31, 2023, Moody's affirmed a Ba3 rating to our Senior Notes. See Note 8, "Long-term Debt" included in Part I, Item 1, "Notes to Unaudited Consolidated Financial Statements" within this quarterly report on Form 10-Q. Moody's also affirmed a Ba2 Corporate Family Rating and maintained its outlook as stable. On May 22, 2023, Standard & Poor's affirmed a BB- rating to our 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

We expect that the current macro-economic and global market uncertainties will persist in 2023, making it a challenging environment to effectively and efficiently transact business in the end markets we serve. We continue to experience volatility in our customers' order patterns, inflationary pressures for certain input costs (raw materials and wage rates in particular), with supply chain disruptions limiting material availability for certain products, and with labor availability remaining at lower levels than prior to the pandemic. While our Specialty Products segment continues to grow to meet higher industrial demand, and is converting that demand at record-level margins, the macro-economic impacts are more challenging in our Packaging segment, primarily due to customer inventory rebalancing and uncertainty regarding future consumer sentiment in the current inflationary environment, all of which have reduced current demand levels, and in our Aerospace segment, which is experiencing strong order intake but is challenged with supply chain volatility. No matter the outcome of these factors, we expect to continue to mitigate, as much as practical, the impact of these challenges, executing on streamlining actions and taking other steps 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

There were no new accounting pronouncements issued or effective as of June 30, 2023 that are expected to have a material impact on our consolidated financial statements.

Critical Accounting Policies

Certain of our accounting policies require the application of significant judgment by management in selecting the appropriate assumptions used in calculating financial estimates. By their nature, these judgments are subject to an inherent degree of uncertainty. These judgments are based on our historical experience, our evaluation of business and macroeconomic trends, and information from other outside sources, as appropriate.

During the quarter ended June 30, 2023, there were no material changes to the items that we disclosed as our critical accounting policies in Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," in the Annual Report on Form 10-K for the year ended December 31, 2022.

In the normal course of business, we are exposed to market risk associated with fluctuations in foreign currency exchange rates. We are also subject to interest risk as it relates to long-term debt. See Part I, Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations," for details about our primary market risks, and the objectives and strategies used to manage these risks. Also see Note 8, "Long-term Debt," and Note 9, "Derivative Instruments," in Part I, Item 1, "Notes to Unaudited Consolidated Financial Statements," included within this quarterly report on Form 10-Q for additional information.

The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports that the Company files or submits under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), is recorded, processed, summarized, and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to the Company's management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.

Evaluation of disclosure controls and procedures

As of June 30, 2023, an evaluation was carried out by management, with the participation of the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company's disclosure controls and procedures (as such term is defined in Rule 13a-15(e) and Rule 15d-15(e) of the Exchange Act) pursuant to Rule 13a-15 of the Exchange Act. The Company's disclosure controls and procedures are designed only to provide reasonable assurance that they will meet their objectives. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that as of June 30, 2023, the Company's disclosure controls and procedures are effective to provide reasonable assurance that they would meet their objectives.

Changes in internal control over financial reporting

There have been no changes in the Company's internal control over financial reporting during the quarter ended June 30, 2023 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part 1, Item 1A., "Risk Factors," in our 2022 Annual Report on Form 10-K, which could materially affect our business, financial condition or future results. There have been no significant changes in our risk factors as disclosed in our 2022 Annual Report on Form 10-K.