TRIMAS CORPORATION 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 theSecurities and Exchange Commission , including its Annual Report on Form 10-K for the year endedDecember 31, 2021 .
Introduction
TriMas designs, develops and manufactures a diverse set of products primarily for the consumer products, aerospace & defense and industrial markets through itsTriMas 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 inthe 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.
Over the past two years, the coronavirus ("COVID-19") pandemic has significantly
affected each of our businesses and how we operate, albeit in different ways and
magnitudes. Sales in our Packaging segment for dispensing and closure products
used in applications to fight the spread of germs experienced significant
increases in demand, while sales of our industrial and aerospace-related
products were significantly depressed from historical levels. Our
aerospace-related product sales continue to be depressed while industrial
product sales have recovered to pre-pandemic levels. The pandemic has also led
to increased uncertainty and inflation in the global business environment, and
we have experienced increases in input costs (raw materials, wage rates, energy
and freight), supply chain disruptions and delays, as well as labor availability
challenges, all pressuring our ability to operate efficiently and at the margin
levels previously experienced.
We have been, and continue to be, focused on making sure the working
environments for our employees are safe so our operations have the ability to
deliver the products needed to support efforts to mitigate the COVID-19
pandemic. We implemented new work rules and processes, which promote social
distancing and increased hygiene to ensure the safety of our employees,
particularly at our production facilities. These measures, while not easily
quantifiable, have increased the level of manufacturing inefficiencies due to
elevated levels of absenteeism, resulting in less efficient production
scheduling and, in certain cases, short-term idling of production. While these
increased costs and inefficiencies began in second quarter 2020, they continue
to persist into 2022. We expect that we will continue to operate with these
protocols in place, and that labor-related availability and inefficiencies will
be an ongoing challenge.
We continue to actively monitor the spread of certain variants of the virus, and
plan for potential future impacts. While conditions related to the pandemic
generally have improved compared to 2021, we anticipate conditions will continue
to vary by industry as well as geography. Late in first quarter 2022, and
continuing in second quarter, an increase of COVID-19 related cases in certain
parts of China resulted in widespread shut-downs and restrictions (in light of
China's zero-covid policy), including the re-institution of stay-at-home and
quarantine mandates. While these restrictions have not yet had a significant
impact on our overall financial results, and started to ease in June 2022 ,
further restrictions could have a more significant impact in the second half of
2022 and beyond.
Overall, our second quarter 2022 net sales increased approximately $18.7
million , or 8.5%, compared to second quarter 2021, primarily as a result of
increased industrial demand in our Specialty Products segment, the impact of our
recent acquisitions in our Packaging and Aerospace segments and increased sales
of products used in food and beverage markets and industrial markets within our
Packaging segment. These factors more than offset unfavorable currency exchange
and the expected decline in sales of our Packaging segment's dispensing and
closure products that are used in applications to fight the spread of germs,
which reached record-high levels in 2020 and first half of 2021 when there was a
significant spike in demand following the onset of the COVID-19 pandemic, but
now have abated to what we believe is a new, and higher, normalized level.
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The most significant drivers affecting our results of operations in second quarter 2022 compared with second quarter 2021, other than as directly impacted by demand level changes as a result of the COVID-19 pandemic, were the impact of our recent acquisitions, our continued realignment actions in response to reduced certain end-market demand following the outbreak of COVID-19, the impact of higher energy costs, the refinancing of our long-term debt agreements in 2021, and an increase in our effective tax rate primarily as a result of the recognition of deferred tax benefits inItaly in second quarter 2021. InFebruary 2022 , we acquiredIntertech 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 approximately$64.1 million , net of cash acquired. Intertech, which is reported in the Company's Packaging segment, has two manufacturing facilities located in theDenver, Colorado area. Intertech contributed approximately$8.8 million of net sales during second quarter 2022. InDecember 2021 , we completed the acquisition of Omega Plastics ("Omega"), which specializes in manufacturing custom components and devices for drug delivery, diagnostic and orthopedic medical applications, as well as components for industrial applications, for an aggregate amount of approximately$22.5 million , net of cash acquired. Omega, which is reported in the Company's Packaging segment, is located inClinton Township, Michigan . Omega contributed approximately$5.6 million of net sales during second quarter 2022. InDecember 2021 , we acquiredTFI Aerospace ("TFI"), a manufacturer and supplier of specialty fasteners used in a variety of applications, predominately for the aerospace end market, for an aggregate amount of approximately$11.8 million , with additional contingent consideration ranging from zero to approximately$12.0 million to be paid based on 2023 and 2024 earnings per the purchase agreement. TFI, which is reported in the Company's Aerospace segment, is located nearToronto, Canada . TFI contributed approximately$1.4 million of net sales during second quarter 2022. Beginning in second quarter 2020, we have been executing certain realignment actions in response to current and expected future end market demand following the onset of the COVID-19 pandemic, as well as for the move to our new facility inNew Albany, Ohio . We recorded pre-tax facility move/consolidation and employee-related costs of approximately$1.4 million and$0.1 million , respectively, in the three months endedJune 30, 2022 . In the three months endedJune 30, 2021 , we recorded pre-tax facility consolidation and employee separation costs of approximately$0.7 million and$3.5 million , respectively. We also experienced a significant increase in the cost of energy in second quarter 2022 compared with second quarter 2021, primarily in ourEurope -based operations. Energy costs began to rise during late 2021, and have further increased into 2022, which we believe is primarily due to geopolitical tensions associated with theRussia -Ukraine conflict, as well as realized and expected energy supply constraints. We expect there could be additional cost and supply chain pressures going forward in 2022 as a result of the uncertainty surrounding the conflict inEastern Europe . InMarch 2021 , we refinanced our long-term debt, issuing$400 million principal amount of 4.125% senior unsecured notes dueApril 15, 2029 ("2029 Senior Notes") at par value in a private placement offering, and amending our existing credit agreement ("Credit Agreement"), extending the maturity toMarch 2026 . We used the proceeds from the 2029 Senior Notes offering to pay fees and expenses of approximately$5.1 million related to the offering and approximately$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. InApril 2021 , we completed the refinancing, redeeming all of our outstanding senior notes dueOctober 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 approximately$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 in second quarter 2022 was 25.5%, compared to (0.3)% in second quarter of 2021. The rate for the second quarter 2022 is higher primarily as a result of the recognition of approximately$3.0 million of deferred tax benefits inItaly in second quarter 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 COVID-19
pandemic's impact on global economic activity, and the continued potential
impact to our future results of operations, as well if there is an impact to
TriMas' market capitalization, we may record additional cash and non-cash
charges related to incremental realignment actions, as well as for uncollectible
customer account balances, excess inventory and idle production equipment.
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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. The extent of the COVID-19 pandemic's effect on our operational and financial performance will depend in large part on future developments, which cannot be predicted with confidence at this time. Future developments include the duration, scope and severity of the COVID-19 pandemic, the actions taken to contain or mitigate its impact, timing and acceptance of widespread vaccine availability, and the resumption of normalized global economic activity. Due to the inherent uncertainty of the unprecedented and rapidly evolving situation, we are unable to predict with any confidence the likely impact of the COVID-19 pandemic on our future operations. Beyond the unique risks presented by the COVID-19 pandemic, other critical factors affecting our ability to succeed include: our ability to create organic growth through product development, cross-selling and extending product-line offerings, and our ability to quickly and cost-effectively introduce and successfully launch new products; our ability to acquire and integrate companies or products that supplement existing product lines, add new distribution channels or customers, expand our geographic coverage or enable better absorption of overhead costs; our ability to manage our cost structure more efficiently via supply chain management, internal sourcing and/or purchasing of materials, selective outsourcing and/or purchasing of support functions, working capital management, and greater leverage of our administrative functions; 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. In addition to the factors affecting our 2021 and 2022 results, there has been some volatility over the past two years as a direct and indirect result of foreign trade policy, where tariffs on certain of our commodity-based products sourced fromAsia 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 inNorth 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 2022, we purchased 645,984 shares of our outstanding common stock for approximately$18.8 million . As ofJune 30, 2022 , we had approximately$114.7 million remaining under the repurchase authorization. In addition, in second quarter 2022, we declared dividends of$0.04 per share of common stock and we 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. 26
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Segment Information and Supplemental Analysis
The following table summarizes financial information for our reportable segments
for the three months ended
Three months ended
As a Percentage As a Percentage
2022 of Net Sales 2021 of Net Sales
Net Sales
Packaging $ 148,350 62.4 % $ 139,630 63.8 %
Aerospace 47,390 19.9 % 44,560 20.3 %
Specialty Products 41,940 17.7 % 34,800 15.9 %
Total $ 237,680 100.0 % $ 218,990 100.0 %
Gross Profit
Packaging $ 41,780 28.2 % $ 40,490 29.0 %
Aerospace 9,620 20.3 % 9,310 20.9 %
Specialty Products 9,280 22.1 % 8,230 23.6 %
Total $ 60,680 25.5 % $ 58,030 26.5 %
Selling, General and Administrative Expenses
Packaging $ 13,980 9.4 % $ 12,640 9.1 %
Aerospace 6,870 14.5 % 7,190 16.1 %
Specialty Products 2,510 6.0 % 2,220 6.4 %
Corporate 7,450 N/A 10,410 N/A
Total $ 30,810 13.0 % $ 32,460 14.8 %
Operating Profit (Loss)
Packaging $ 27,800 18.7 % $ 27,850 19.9 %
Aerospace 2,750 5.8 % 2,120 4.8 %
Specialty Products 6,770 16.1 % 6,010 17.3 %
Corporate (7,450) N/A (10,410) N/A
Total $ 29,870 12.6 % $ 25,570 11.7 %
Depreciation
Packaging $ 5,660 3.8 % $ 5,230 3.7 %
Aerospace 2,010 4.2 % 1,810 4.1 %
Specialty Products 980 2.3 % 910 2.6 %
Corporate 30 N/A 30 N/A
Total $ 8,680 3.7 % $ 7,980 3.6 %
Amortization
Packaging $ 1,620 1.1 % $ 2,400 1.7 %
Aerospace 3,010 6.4 % 2,880 6.5 %
Specialty Products 120 0.3 % 110 0.3 %
Corporate - N/A - N/A
Total $ 4,750 2.0 % $ 5,390 2.5 %
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The following table summarizes financial information for our reportable segments
for the six months ended
Six months ended
As a Percentage As a Percentage
2022 of Net Sales 2021 of Net Sales
Net Sales
Packaging 286,840 62.1 % 271,720 63.8 %
Aerospace 91,910 19.9 % 89,170 21.0 %
Specialty Products 83,240 18.0 % 64,830 15.2 %
Total $ 461,990 100.0 % $ 425,720 100.0 %
Gross Profit
Packaging 78,140 27.2 % 74,360 27.4 %
Aerospace 17,650 19.2 % 20,280 22.7 %
Specialty Products 18,600 22.3 % 14,720 22.7 %
Total $ 114,390 24.8 % $ 109,360 25.7 %
Selling, General and Administrative Expenses
Packaging 29,010 10.1 % 25,210 9.3 %
Aerospace 13,060 14.2 % 13,660 15.3 %
Specialty Products 4,590 5.5 % 4,190 6.5 %
Corporate 15,930 N/A 19,620 N/A
Total $ 62,590 13.5 % $ 62,680 14.7 %
Operating Profit (Loss)
Packaging 49,130 17.1 % 49,150 18.1 %
Aerospace 4,590 5.0 % 6,620 7.4 %
Specialty Products 14,010 16.8 % 10,530 16.2 %
Corporate (15,930) N/A (19,620) N/A
Total $ 51,800 11.2 % $ 46,680 11.0 %
Depreciation
Packaging 11,200 3.9 % 10,400 3.8 %
Aerospace 3,910 4.3 % 3,590 4.0 %
Specialty Products 1,970 2.4 % 1,780 2.7 %
Corporate 70 N/A 60 N/A
Total $ 17,150 3.7 % $ 15,830 3.7 %
Amortization
Packaging 3,790 1.3 % 4,800 1.8 %
Aerospace 6,020 6.5 % 5,760 6.5 %
Specialty Products 230 0.3 % 220 0.3 %
Corporate - N/A - N/A
Total $ 10,040 2.2 % $ 10,780 2.5 %
Results of Operations
The principal factors impacting us during the three months ended
•the impact on global business activity of the COVID-19 pandemic, as well as the volatility in input costs, supply chain and labor availability;
•the impact of our recent acquisitions, primarily Omega and TFI in
•realignment expenses in response to changes in end market demand;
•the impact of higher energy costs;
•the impact of our 2021 debt refinancing activities; and
•an increase in our effective tax rate in second quarter 2022 compared with second quarter 2021.
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Three Months Ended
Overall, net sales increased approximately$18.7 million , or 8.5%, to$237.7 million for the three months endedJune 30, 2022 , as compared with$219.0 million in the three months endedJune 30, 2021 , primarily as a result of our Intertech, Omega and TFI acquisitions, which collectively added approximately$15.8 million of sales. Organic sales, excluding the impact of currency exchange and acquisitions, increased approximately$7.7 million , as increases in our Specialty Products segment as well as for food and beverage and industrial products in our Packaging segment were partially offset by declines in dispensing products that help fight the spread of germs in our Packaging segment, as demand for these products abated from peak levels in 2020 and the first half of 2021. In addition, net sales decreased by approximately$4.8 million due to currency exchange, as our reported results inU.S. dollars were unfavorably impacted as a result of a strengtheningU.S. dollar relative to foreign currencies. Gross profit margin (gross profit as a percentage of sales) approximated 25.5% and 26.5% for the three months endedJune 30, 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 during the three months endedJune 30, 2022 . In addition, improved recovery of resin costs in our Packaging segment was offset by higher energy costs, primarily in our Packaging segment's European facilities, higher steel costs in our Specialty Products segment, and unfavorable currency exchange. Operating profit margin (operating profit as a percentage of sales) approximated 12.6% and 11.7% for the three months endedJune 30, 2022 and 2021, respectively. Operating profit increased approximately$4.3 million to approximately$29.9 million in the three months endedJune 30, 2022 , from approximately$25.6 million for the three months endedJune 30, 2021 , primarily due to higher sales levels, improved recovery of resin costs and approximately$2.7 million of lower realignment costs. These increases were partially offset by a less favorable product sales mix and higher energy and steel costs, as well as unfavorable currency exchange. Interest expense decreased approximately$0.6 million , to approximately$3.5 million for the three months endedJune 30, 2022 , compared to approximately$4.1 million for the three months endedJune 30, 2021 , due to a lower effective interest rate and a decrease in our weighted average borrowings. In the three months endedJune 30, 2021 , we incurred approximately$10.3 million of debt financing and related expenses associated with the redemption of our 2025 Senior Notes. Other income decreased approximately$0.4 million to approximately$0.3 million for the three months endedJune 30, 2022 , as compared to approximately$0.7 million for the three months endedJune 30, 2021 , primarily due to lower foreign currency transactions gains. The effective income tax rate for the three months endedJune 30, 2022 and 2021 was 25.5% and (0.3)%, respectively. We recorded income tax expense of approximately$6.8 million for the three months endedJune 30, 2022 as compared to nominal income tax benefit for the three months endedJune 30, 2021 . The rate for the three months endedJune 30, 2022 is higher than in the prior year period, primarily as a result of recognizing approximately$3.0 million of deferred tax benefits inItaly during the three months endedJune 30, 2021 , the majority of which related to a reduction in deferred tax liabilities in connection with certain tax incentives. Net income increased approximately$8.0 million , to$19.9 million for the three months endedJune 30, 2022 , as compared to$11.8 million for the three months endedJune 30, 2021 . The increase was primarily the result of a decrease in debt financing and related expenses of$10.3 million , an increase in operating profit of approximately$4.3 million , and a decrease in interest expense of$0.6 million , partially offset by an increase in income tax expense of approximately$6.8 million and a decrease in other income of approximately$0.4 million .
See below for a discussion of operating results by segment.
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Packaging. Net sales increased approximately$8.7 million , or 6.2%, to$148.4 million in the three months endedJune 30, 2022 , as compared to$139.6 million in the three months endedJune 30, 2021 . Our recent Intertech and Omega acquisitions collectively contributed approximately$14.4 million of sales during the three months endedJune 30, 2022 . Sales of products used in food and beverage markets increased by approximately$9.2 million , primarily due to strong demand for closures, dispensers and flexible packaging as the hospitality sector continues to rebound from prior COVID-19 pandemic-related shutdowns. Sales of products used in industrial markets increased by approximately$2.6 million , primarily as a result of higher demand for closure products, primarily inNorth America . Sales of dispensing products used in beauty and personal care, as well as home care, applications that help fight the spread of germs decreased by approximately$9.5 million , as COVID-19-related demand levels have further abated in second quarter 2022 from peak levels in 2020 and 2021. Net sales decreased by approximately$4.8 million due to currency exchange, as our reported results inU.S. dollars were unfavorably impacted as a result of the strengtheningU.S. dollar relative to foreign currencies, as compared to second quarter 2021. Gross profit increased approximately$1.3 million to$41.8 million , or 28.2% of sales, in the three months endedJune 30, 2022 , as compared to$40.5 million , or 29.0% of sales, in the three months endedJune 30, 2021 . During second quarter 2021, we were impacted by approximately$4 million of higher resin costs than we were able to recover via commercial actions, while in second quarter 2022, we were generally able to recover current resin costs. Gross profit declined in second quarter 2022 due to approximately$1.3 million of unfavorable currency exchange, as our reported results inU.S. dollars were impacted as a result of the strengtheningU.S. dollar relative to foreign currencies, approximately$1.2 million of higher energy costs, primarily in our European manufacturing facilities, and approximately$0.9 million of higher realignment and purchase accounting expenses. In addition, gross profit margin declined as a result of a less favorable sales mix. Selling, general and administrative expenses increased approximately$1.3 million to$14.0 million , or 9.4% of sales, in the three months endedJune 30, 2022 , as compared to$12.6 million , or 9.1% of sales, in the three months endedJune 30, 2021 , primarily due to higher ongoing selling, general and administrative costs associated with our acquisitions, partially offset by lower intangible asset amortization expense due to certain assets becoming fully amortized. Operating profit decreased approximately$0.1 million to$27.8 million , or 18.7% of sales, in the three months endedJune 30, 2022 , as compared to$27.9 million , or 19.9% of sales, in the three months endedJune 30, 2021 , as the impact of higher sales levels and improved recovery of material costs was offset by higher energy costs, higher selling, general and administrative expenses, higher realignment costs and the impact of unfavorable currency exchange. Aerospace. Net sales for the three months endedJune 30, 2022 increased approximately$2.8 million , or 6.4%, to$47.4 million , as compared to$44.6 million in the three months endedJune 30, 2021 . Acquisition-related sales growth from ourDecember 2021 acquisition of TFI was approximately$1.4 million . Sales of our fasteners products increased by approximately$1.2 million , as increases in demand for fasteners used in new aircraft builds plus market share gains more than offset the expected loss of sales of customers' stocking orders for highly-engineered fasteners that were predominantly fulfilled throughout 2021. Sales of our engineered components products increased by approximately$0.2 million . Gross profit increased approximately$0.3 million to$9.6 million , or 20.3% of sales, in the three months endedJune 30, 2022 , from$9.3 million , or 20.9% of sales, in the three months endedJune 30, 2021 . Although gross profit increased due to higher sales levels, gross profit margin decreased due to a less favorable product sales mix in second quarter 2022 with lower sales of the customers' stocking orders for highly-engineered fasteners. Selling, general and administrative expenses decreased approximately$0.3 million to$6.9 million , or 14.5% of sales, in the three months endedJune 30, 2022 , as compared to$7.2 million , or 16.1% of sales, in the three months endedJune 30, 2021 , primarily due to lower employee-related costs and third party expenses. Operating profit increased approximately$0.6 million to approximately$2.8 million , or 5.8% of sales, in the three months endedJune 30, 2022 , as compared to approximately$2.1 million , or 4.8% of sales, in the three months endedJune 30, 2021 , primarily due to higher sales levels and lower selling, general and administrative expenses, which were partially offset by a less favorable product sales mix. Specialty Products. Net sales for the three months endedJune 30, 2022 increased approximately$7.1 million , or 20.5%, to$41.9 million , as compared to$34.8 million in the three months endedJune 30, 2021 . Sales of our cylinder products increased approximately$5.3 million due to higher demand for steel cylinders inNorth 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 approximately$1.8 million , primarily as a result of higher oil-field activity inNorth America . 30
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Gross profit increased approximately$1.1 million to$9.3 million , or 22.1% of sales, in the three months endedJune 30, 2022 , as compared to$8.2 million , or 23.6% of sales, in the three months endedJune 30, 2021 . Gross profit increased in the second quarter of 2022 due to higher sales levels, while margins decreased due to higher steel costs as well as a less favorable product sales mix. Selling, general and administrative expenses increased approximately$0.3 million to$2.5 million , or 6.0% of sales, in the three months endedJune 30, 2022 , as compared to$2.2 million , or 6.4% of sales, in the three months endedJune 30, 2021 , primarily due to higher employment and spending levels in support of the increase in sales levels. Operating profit increased approximately$0.8 million to$6.8 million , or 16.1% of sales, in the three months endedJune 30, 2022 , as compared to$6.0 million , or 17.3% of sales, in the three months endedJune 30, 2021 , primarily due to increased sales levels which were partially offset by higher steel costs as well as a less favorable product sales mix. Corporate. Corporate expenses consist of the following (dollars in millions): Three months ended June 30, 2022 2021 Corporate operating expenses $ 4.9
Non-cash stock compensation 2.5 3.3
Legacy expenses 0.1 0.6
Corporate expenses $ 7.5 $ 10.4 Corporate expenses decreased approximately
Six Months Ended
Overall, net sales increased approximately$36.3 million , or 8.5%, to$462.0 million for the six months endedJune 30, 2022 , as compared with$425.7 million in the six months endedJune 30, 2021 , primarily as a result of our Intertech, Omega and TFI acquisitions, which collectively added approximately$24.8 million of sales. Organic sales, excluding the impact of currency exchange and acquisitions, increased approximately$18.7 million , as increases in our Specialty Products segment as well as for food and beverage and industrial products in our Packaging segment were partially offset by declines in dispensing products that help fight the spread of germs in our Packaging segment, as demand for these products abated from peak levels in 2020 and the first half of 2021. In addition, net sales decreased by approximately$7.2 million due to currency exchange, as our reported results inU.S. dollars were unfavorably impacted as a result of a strengtheningU.S. dollar relative to foreign currencies. Gross profit margin (gross profit as a percentage of sales) approximated 24.8% and 25.7% for the six months endedJune 30, 2022 and 2021, respectively. Gross profit margin decreased primarily due to a less favorable sales mix as a result of lower sales of Aerospace segment customers' stocking orders for highly-engineered fasteners during the three months endedJune 31, 2022 . In addition, improved recovery of resin costs in our Packaging segment was offset by higher energy costs, primarily in ourEuropean Packaging segment facilities, higher steel costs in our Specialty Products segment, and unfavorable currency exchange. Operating profit margin (operating profit as a percentage of sales) approximated 11.2% and 11.0% for the six months endedJune 30, 2022 and 2021, respectively. Operating profit increased approximately$5.1 million , to$51.8 million , for the six months endedJune 30, 2022 , compared to$46.7 million for the six months endedJune 30, 2021 , primarily due to higher sales levels, improved recovery of resin costs and as a result of approximately$4.4 million of lower realignment costs. These increases were partially offset by a less favorable product sales mix and higher energy costs. Interest expense decreased approximately$0.8 million , to$6.9 million , for the six months endedJune 30, 2022 , as compared to$7.7 million for the six months endedJune 30, 2021 , due to a lower effective interest rate and a decrease in our weighted average borrowings. 31
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In the six months endedJune 30, 2021 , we incurred approximately$10.5 million of debt financing and related expenses, of which approximately$10.3 million related to expenses associated with the redemption of our 2025 Senior Notes and approximately$0.2 million related to the write-off of previously capitalized deferred financing fees associated with our Credit Agreement. Other expense decreased approximately$0.3 million , to a nominal amount for the six months endedJune 30, 2022 , from$0.3 million for the six months endedJune 30, 2021 , primarily due to a decrease in losses on transactions denominated in foreign currencies. The effective income tax rate for the six months endedJune 30, 2022 and 2021 was 24.2% and 11.8%, respectively. We recorded tax expense of approximately$10.9 million for the six months endedJune 30, 2022 as compared to approximately$3.3 million for the six months endedJune 30, 2021 . The rate for the six months endedJune 30, 2022 is is higher than in the prior year as the effective tax rate for the six months endedJune 30, 2021 was impacted by the recognition of approximately$3.0 million of deferred tax benefits inItaly , the majority of which related to a reduction in deferred tax liabilities in connection with certain tax incentives. Net income increased by approximately$9.1 million , to$34.0 million for the six months endedJune 30, 2022 , compared to$24.9 million for the six months endedJune 30, 2021 . The increase was primarily the result of a decrease in debt financing and related expenses of$10.5 million , an increase in operating profit of approximately$5.1 million and a decrease in interest expense of$0.8 million , a decrease in other expense of approximately$0.3 million , partially offset by an increase in income tax expense of approximately$7.5 million .
See below for a discussion of operating results by segment.
Packaging. Net sales increased approximately$15.1 million , or 5.6%, to$286.8 million in the six months endedJune 30, 2022 , as compared to$271.7 million in the six months endedJune 30, 2021 . Our recent Intertech and Omega acquisitions collectively contributed approximately$22.0 million of sales during the six months endedJune 30, 2022 . Sales of products used in food and beverage markets increased by approximately$20.2 million , primarily due to strong demand for closures, dispensers and flexible packaging as the hospitality sector continues to rebound from prior COVID-19 pandemic-related shutdowns. Sales of products used in industrial markets increased by approximately$6.9 million , primarily as a result of higher demand for closure products, primarily inNorth America . Sales of dispensing products used in beauty and personal care, as well as home care, applications that help fight the spread of germs decreased largely as anticipated by approximately$24.0 million , as COVID-19-related demand levels have abated for these products from the peak levels in mid-2020 through the first half of 2021. Net sales decreased by approximately$7.1 million due to currency exchange, as our reported results inU.S. dollars were unfavorably impacted as a result of the strengtheningU.S. dollar relative to foreign currencies, as compared to first half 2021. Packaging's gross profit increased approximately$3.8 million to$78.1 million , or 27.2% of sales, in the six months endedJune 30, 2022 , as compared to$74.4 million , or 27.4% of sales, in the six months endedJune 30, 2021 . During the first half of 2021, we were impacted by approximately$6 million of higher resin costs than we were able to recover via commercial actions, while we have generally been able to recover such costs during the first half of 2022, as market prices have generally stabilized. The increase in gross profit from higher sales levels and improved material cost recovery was partially offset by approximately$3 million higher energy costs, primarily in our European manufacturing facilities, as well as a result of approximately$1.9 million of currency exchange, as our reported results inU.S. dollars were unfavorably impacted as a result of the strengtheningU.S. dollar relative to foreign currencies. In addition, gross profit margin declined as a result of a less favorable sales mix. Packaging's selling, general and administrative expenses increased approximately$3.8 million to$29.0 million , or 10.1% of sales, in the six months endedJune 30, 2022 , as compared to$25.2 million , or 9.3% of sales, in the six months endedJune 30, 2021 , primarily due to higher ongoing selling, general and administrative costs associated with our acquisitions as well as higher employee-related expenses as a result of our first quarter 2022 realignment actions, partially offset by lower intangible asset amortization expense due to certain assets becoming fully amortized. Packaging's operating profit remained relatively flat at$49.1 million , or 17.1% of sales, in the six months endedJune 30, 2022 , as compared to$49.2 million , or 18.1% of sales, in the six months endedJune 30, 2021 , as the impact of higher sales levels and improved recovery of material costs was offset by higher energy costs, higher selling, general and administrative expenses and the impact of unfavorable currency exchange. 32
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Aerospace. Net sales for the six months endedJune 30, 2022 increased approximately$2.7 million , or 3.1%, to$91.9 million , as compared to$89.2 million in the six months endedJune 30, 2021 . Acquisition-related sales growth from ourDecember 2021 acquisition of TFI was approximately$2.8 million . Sales of our fasteners products increased by approximately$0.7 million , as increases in demand for fasteners used in new aircraft builds plus market share gains more than offset the expected loss of sales of customers' stocking orders for highly-engineered fasteners that were predominantly fulfilled throughout 2021. Sales of our engineered components products decreased by approximately$0.8 million , primarily due to lower end market demand. Gross profit within Aerospace decreased approximately$2.6 million to$17.7 million , or 19.2% of sales, in the six months endedJune 30, 2022 , from$20.3 million , or 22.7% of sales, in the six months endedJune 30, 2021 , primarily due to a less favorable product sales mix in the first half of 2022, with lower sales of the customers' stocking orders for highly-engineered fasteners. Selling, general and administrative expenses decreased approximately$0.6 million to$13.1 million , or 14.2% of sales, in the six months endedJune 30, 2022 , as compared to$13.7 million , or 15.3% of sales, in the six months endedJune 30, 2021 , primarily due to lower employee-related costs and third party expenses. Operating profit within Aerospace decreased approximately$2.0 million to$4.6 million , or 5.0% of sales, in the six months endedJune 30, 2022 , as compared to$6.6 million , or 7.4% of sales, in the six months endedJune 30, 2021 , as the impact of higher sales levels and lower selling, general and administrative expenses were more than offset by a less favorable product sales mix. Specialty Products. Net sales for the six months endedJune 30, 2022 increased approximately$18.4 million , or 28.4%, to$83.2 million , as compared to$64.8 million in the six months endedJune 30, 2021 . Sales of our cylinder products increased approximately$12.9 million , due to higher demand for steel cylinders inNorth 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 approximately$5.5 million , primarily as a result of higher oil-field activity inNorth America . Gross profit within Specialty Products increased approximately$3.9 million to$18.6 million , or 22.3% of sales, in the six months endedJune 30, 2022 , as compared to$14.7 million , or 22.7% of sales, in the six months endedJune 30, 2021 . Gross profit increased due to higher sales levels, while margins decreased slightly due to higher steel costs. Selling, general and administrative expenses within Specialty Products increased approximately$0.4 million to$4.6 million , or 5.5% of sales, in the six months endedJune 30, 2022 , as compared to$4.2 million , or 6.5% of sales, in the six months endedJune 30, 2021 , primarily due to higher employment and spending levels in support of the increase in sales levels. Operating profit within Specialty Products increased approximately$3.5 million to$14.0 million , or 16.8% of sales, in the six months endedJune 30, 2022 , as compared to$10.5 million , or 16.2% of sales, in the six months endedJune 30, 2021 , primarily due to increased sales levels. Corporate. Corporate expenses, net consist of the following (dollars in millions): Six months ended June 30, 2022 2021 Corporate operating expenses $ 10.4$ 13.0 Non-cash stock compensation 5.3 5.7 Legacy expenses 0.2 0.9 Corporate expenses $ 15.9$ 19.6 Corporate expenses decreased approximately$3.7 million to$15.9 million for the six months endedJune 30, 2022 , from$19.6 million for the six months endedJune 30, 2021 , primarily as a result of the realignment charges related to the corporate office legal and finance groups in the six months endedJune 30, 2021 . 33
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Liquidity and Capital Resources
Cash Flows
Cash flows provided by operating activities were approximately$27.7 million for the six months endedJune 30, 2022 , as compared to approximately$42.7 million for the six months endedJune 30, 2021 . Significant changes in cash flows provided by operating activities and the reasons for such changes were as follows: •For the six months endedJune 30, 2022 , the Company generated approximately$73.1 million in cash flows, based on the reported net income of approximately$34.0 million and after considering the effects of non-cash items related to depreciation, amortization, loss on dispositions of assets, changes in deferred income taxes, stock-based compensation and other operating activities. For the six months endedJune 30, 2021 , the Company generated approximately$72.3 million in cash flows based on the reported net income of approximately$24.9 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 approximately$29.4 million and$22.6 million for the six months endedJune 30, 2022 and 2021, 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 approximately four days through the six months endedJune 30, 2022 , and remained relatively consistent through the six months endedJune 30, 2021 . •We increased our investment in inventory by approximately$7.9 million and$0.9 million for the six months endedJune 30, 2022 and 2021, respectively. The increase in the first half of 2022 is primarily a result of proactively investing in certain raw materials and purchased components to protect against supply chain disruptions. •Decreases in prepaid expenses and other assets resulted in a source of cash of approximately$0.8 million for the six months endedJune 30, 2022 . Increases in prepaid expenses and other assets resulted in a use of cash of approximately$7.4 million for the six months endedJune 30, 2021 . These changes were primarily a result of the timing of payments made for income taxes and certain operating expenses. •A decrease in accounts payable and accrued liabilities resulted in a use of cash of approximately$8.9 million for the six months endedJune 30, 2022 , while an increase in accounts payable and accrued liabilities resulted in a source of cash of approximately$1.4 million for the six months endedJune 30, 2021 . Days accounts payable on hand decreased by one day through the six months endedJune 30, 2022 compared with a decrease of approximately two days in the six months endedJune 30, 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 for the six months endedJune 30, 2022 and 2021 was approximately$85.7 million and$18.2 million , respectively. During the first six months of 2022, we invested approximately$21.7 million in capital expenditures, as we continued our investment in growth, capacity and productivity-related capital projects, and paid approximately$64.1 million , net of cash acquired, to acquire Intertech. During the first six months of 2021, we invested approximately$18.3 million in capital expenditures. Net cash used for financing activities for the six months endedJune 30, 2022 was approximately$33.6 million , while net cash provided by financing activities was approximately$19.0 million for the six months endedJune 30, 2021 . During the six months endedJune 30, 2022 , we purchased approximately$27.9 million of outstanding common stock, used a net cash amount of approximately$2.3 million related to our stock compensation arrangements and paid dividends of approximately$3.5 million . During the six months endedJune 30, 2021 , we issued$400.0 million principal amount of the 2029 Senior Notes, made net repayments of approximately$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 approximately$13.6 million of debt financing fees and redemption premium. We also purchased approximately$14.2 million of outstanding common stock and used a net cash amount of approximately$4.6 million related to our stock compensation arrangements. 34
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Our Debt and Other Commitments
InMarch 2021 , we issued the 2029 Senior Notes in a private placement under Rule 144A of the Securities Act of 1933, as amended. We used the proceeds from the 2029 Senior Notes offering to pay fees and expenses of approximately$5.1 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 approximately$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 onApril 15 andOctober 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 toApril 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 toApril 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. For the six months endedJune 30, 2022 , our consolidated subsidiaries that do not guarantee the 2029 Senior Notes represented approximately 25% of the total of guarantor and non-guarantor net sales, treating each as a consolidated group and excluding intercompany transactions between guarantor and non-guarantor subsidiaries. In addition, our non-guarantor subsidiaries represented approximately 36% and 13% of the total guarantor and non-guarantor assets and liabilities, respectively, as ofJune 30, 2022 , treating the guarantor and non-guarantor subsidiaries each as a consolidated group. InMarch 2021 , we amended our Credit Agreement in connection with the issuance of the 2029 Senior Notes to extend the maturity date. We incurred fees and expenses of approximately$1.1 million related to the amendment, all of which were capitalized as debt issuance costs. We also recorded approximately$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 onMarch 29, 2026 . InNovember 2021 , we amended the Credit Agreement to replace LIBOR with a benchmark interest rate determined based on the currency denomination of borrowings. EffectiveJanuary 1, 2022 , the amendment replaced the reference rate terms forU.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$200.0 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. 35
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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 ofJune 30, 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 1.99 to 1.00 atJune 30, 2022 . Our permitted interest expense coverage ratio under the Credit Agreement is 3.00 to 1.00 as ofJune 30, 2022 . Our actual interest expense coverage ratio was 14.39 to 1.00 atJune 30, 2022 . AtJune 30, 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 twelve months endedJune 30, 2022 (dollars in thousands). We present Consolidated Bank EBITDA to show our performance under our financial covenants. Twelve Months Ended June 30, 2022 Net income$ 66,440 Bank stipulated adjustments: Interest expense 13,750 Income tax expense 19,570 Depreciation and amortization 54,030 Non-cash compensation expense(1) 9,140 Other non-cash expenses or losses 740 Non-recurring expenses or costs(2) 11,420 Extraordinary, non-recurring or unusual gains or losses 1,490 Effects of purchase accounting adjustments 1,160 Business and asset dispositions 210 Net losses on early extinguishment of debt - Permitted acquisitions 4,980 Currency gains and losses 20 Consolidated Bank EBITDA, as defined$ 182,950 June 30, 2022 Total Indebtedness, as defined(3)$ 364,670 Consolidated Bank EBITDA, as defined 182,950 Total net leverage ratio 1.99 x Covenant requirement 4.00 x 36
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