Item 7. Management’s Discussion and Analysis
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The statements in the discussion and analysis regarding industry outlook, our expectations regarding the performance of our business and the other non-historical statements in the discussion and analysis are forward-looking statements. These forward-looking statements are subject to numerous risks and uncertainties, including, but not limited to, the risks and uncertainties described in Item 1A "Risk Factors." Our actual results may differ materially from those contained in or implied by any forward-looking statements. You should read the following discussion together with Item 8, "Financial Statements and Supplementary Data."
Introduction
We are a diversified manufacturer and provider of products for customers primarily in the consumer products, aerospace & defense and industrial markets. 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.
In December 2019, we completed the sale of our Lamons division ("Lamons"), a manufacturer and distributor of industrial sealing, fastening and specialty products primarily used in the petrochemical and petroleum-refining industries, to two wholly-owned subsidiaries of an investment fund sponsored by First Reserve. The sale of Lamons was an important strategic step for TriMas, in streamlining our portfolio of businesses, as it significantly reduced our exposure to the oil and gas market from over 20% of net sales in 2019 to less than 2% in 2020, and allowed us to further invest in our Packaging and Aerospace segments. We received net after-tax proceeds from the sale of approximately $112.7 million. The financial results of Lamons were previously reported within our Specialty Products segment. The financial position, results of operations and cash flows of Lamons are reported as discontinued operations for all periods presented through the date of disposition.
Key Factors and Risks Affecting Our Reported Results
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.
In March 2020, the President of the United States declared the coronavirus ("COVID-19") outbreak a national emergency, as the World Health Organization determined it was a pandemic. In response to the COVID-19 pandemic, federal, provincial, state, county and local governments and public health organizations or authorities around the world have implemented a variety of measures intended to control the spread of the virus, including quarantines, "shelter-in-place" or "stay-at-home" and similar orders, travel restrictions, business curtailments and closures, social distancing, personal hygiene requirements, and other measures.
We have been, and continue to be, focused on making sure the working environments for our employees are safe so our operations have the ability to deliver the products needed to support efforts to mitigate the COVID-19 pandemic. Nearly all of our manufacturing sites have been deemed essential operations and remained open during the pandemic, at varying levels of capacity and efficiency, experiencing only temporary shutdowns due to country-specific government mandates or for thorough cleaning as a result of suspected COVID-19 cases. The health of our employees, and the ability of our facilities to remain operational in the current regulated environment, is critical to our future results of operations.
Our divisions were impacted in first quarter 2020 at differing levels and times, beginning with our Asian facilities and strategic supply network, both primarily in China, in late January, followed by our European (primarily Italy) and North American facilities in February and March. We implemented new work rules and processes, which promote social distancing and increased hygiene to ensure the safety of our employees, particularly at our production facilities. These measures, while not easily quantifiable, have increased the level of manufacturing inefficiencies due to elevated levels of absenteeism, resulting in less efficient production scheduling and, in certain cases, short-term idling of production. We expect that we will continue to operate with these protocols in place, which have impacted our 2020 results.
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Overall, our 2020 net sales increased approximately $46.4 million compared to 2019, primarily as a result of robust organic sales growth in our Packaging segment, particularly for dispensing and closure products we supply that are used in applications to fight the spread of germs, and as a result of acquisitions. These increases more than offset declines in sales in our Aerospace and Specialty Products segments, primarily related to the effects of the COVID-19 pandemic.
The most significant drivers of change in results of operations in 2020 compared with 2019, other than as directly impacted by demand level changes as a result of the COVID-19 pandemic, were goodwill and intangible asset impairment charges in our Aerospace segment, our election to change our accounting policy for asbestos-related defense costs, realignment actions we undertook, primarily in our Aerospace and Specialty Products segments, in response to reduced end-market demand following the outbreak of COVID-19, the impact of our recent acquisitions and the recognition of income tax benefits related to tax-planning actions with respect to our intercompany debt restructuring.
During 2020, we determined there was a triggering event requiring an interim quantitative impairment assessment for goodwill and indefinite-lived intangible assets within our Aerospace segment. While third quarter operating results were below pre-pandemic projected levels, the larger driver of the triggering event was a significant reduction in the July financial projection update for the remainder of 2020 compared with prior projections, and uncertainty around the duration and magnitude of the impact of the COVID-19 pandemic on future financial results given the dependence of our Aerospace segment reporting units on future levels of air travel and new aircraft builds. We determined the carrying value of both of our Aerospace reporting units, as well as of certain trade names, exceeded the fair value, resulting in non-cash, pre-tax impairment charges of approximately $126.8 million to goodwill and $7.8 million to indefinite lived intangible assets.
The techniques used in our interim impairment tests incorporated a number of assumptions that we believe to be reasonable and to reflect the current market conditions. Assumptions in estimating future cash flows and earnings were based on Level 3 inputs under the fair value hierarchy and were primarily related to customer demand and revenue growth, and associated profitability and cash flows, all as part of an aerospace industry recovery post-pandemic. Data from aerospace publications and public companies was used to assess the reasonableness of management’s assumptions regarding the timing and extent of the industry recovery. To provide a level of sensitivity analysis, a 1% change in the discount rate would have impacted the total goodwill impairment charge by approximately $20 million, while a 0.5% change in the terminal growth rate would have impacted the total goodwill impairment charge by approximately $5 million.
Changes in future results, assumptions, and estimates from those used in the interim impairment test may lead to an outcome where additional impairment charges would be required in future periods. Specifically, actual results may vary from management's forecasts and such variations may be material and unfavorable, thereby triggering the need for future impairment tests where the conclusions may differ in reflection of prevailing market conditions. Further, continued adverse or worsening market conditions could result in the recognition of additional impairment if we determine that the fair value of our Aerospace Fasteners reporting unit has fallen below its carrying value. Certain circumstances that could reasonably be expected to negatively affect the underlying key assumptions and impact the estimated fair value of the Company’s Aerospace Fastener reporting unit may include such items as: (i) a decrease in expected future cash flows, due to the pandemic adversely impacting the aerospace industry longer or more deeply than currently estimated, (ii) inability to achieve the sales targeted as part of the Company’s strategic growth initiatives, and (iii) inability to efficiently leverage the projected sales growth at expected margin rates.
During 2020, we elected to change our accounting policy for asbestos-related defense costs from accruing for probable and reasonably estimable defense costs associated with known claims expected to settle to accruing for all future defense costs for both known and unknown claims, which we now believe can be reasonably estimated. This accounting change has been reflected as a change in accounting estimate effected by a change in accounting principle. We recorded a non-cash, pre-tax charge in second quarter 2020 for asbestos-related costs of approximately $23.4 million, which is included in selling, general and administrative expenses.
Following the onset of the COVID-19 pandemic, we undertook certain realignment actions, primarily in our Aerospace and Specialty Products segments, in response to current and expected future reduced end market demand. We recorded non-cash charges of approximately $13.8 million related to inventory reductions, primarily as a result of a strategic decision in our Arrow Engine division to streamline its product line offering. We also recorded charges of approximately $2.3 million related to certain production equipment removed from service given reduced demand levels. In addition, we reduced our employment levels given lower customer demand, incurring approximately $3.8 million in severance charges.
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In December 2020, we completed the acquisition of Affaba & Ferrari Srl ("Affaba & Ferrari"), which specializes in the design, development and manufacture of precision caps and closures for food & beverage and industrial product applications, for an aggregate amount of approximately $98.4 million, net of cash acquired, subject to normal course adjustments, which are expected to be completed by mid-2021. Affaba & Ferrari, which is reported in the Company's Packaging segment, operates out of a highly automated manufacturing facility and support office located in Borgo San Giovanni, Italy. Affaba & Ferrari contributed approximately $0.7 million of net sales during 2020 within our Packaging segment.
In April 2020, we acquired the Rapak brand, including certain bag-in-box product lines and assets ("Rapak") for an aggregate amount of approximately $11.4 million. Rapak, which is reported in our Packaging segment, has three manufacturing locations in the United States. Rapak contributed approximately $13.9 million of net sales during 2020 within our Packaging segment, although it is performing below break-even operating profit as demand for its products, particularly those used in quick service restaurant applications, has significantly declined from pre-acquisition levels in 2019 due to the impact of the COVID-19 pandemic.
In February 2020, we completed the acquisition of RSA Engineered Products ("RSA"), a provider of highly-engineered and proprietary components for air management systems used in critical flight applications, for an aggregate amount of approximately $83.7 million, net of cash acquired. RSA, located in Simi Valley, California, designs, engineers and manufactures highly-engineered components, including air ducting products, connectors and flexible joints, predominantly used in aerospace and defense engine bleed air, anti-icing and environmental control system applications. RSA contributed approximately $19.4 million of net sales during 2020 within our Aerospace segment.
During 2020, we also undertook certain tax-planning actions with respect to intercompany debt restructuring, resulting in the recognition of approximately $6.4 million of income tax benefit.
Additional Key Risks that May Affect Our Reported Results
The COVID-19 pandemic significantly impacted our 2020 results, and we expect it will continue to impact us in the future at varying degrees. We expect the robust customer demand for our Packaging segment's dispensing pumps and closure products used in personal care and home care applications that fight the spread of germs will continue, as we believe there is a new secular trend for higher levels of health and cleanliness. We are actively collaborating with our customers and strategic supply partners to manage production capacity and supply chain availability as efficiently as possible. Industrial demand in North America was lower than 2019 levels, and we are uncertain how and when demand will be impacted as many of the shelter-in-place orders are adjusted or lifted, particularly in North America, where orders for our industrial cylinders, for example, are heavily influenced by the levels of construction and HVAC activity. We expect the aerospace market to continue to experience the most severe dislocation going forward. With the current travel restrictions and significant drop in passenger miles, aircraft manufacturers have now significantly slowed production, and since second quarter we have experienced a significant drop in aerospace-related sales compared to prior year levels. We expect this trend to continue for the foreseeable future.
We have executed realignment actions in 2020, primarily in our Aerospace and Specialty Products segments, and also in certain Packaging product areas where demand has fallen, such as in the quick-serve and restaurant applications, to protect against the uncertain end market demand. We will continue to assess further actions if required. However, as a result of the COVID-19 pandemic's impact on global economic activity, and the continued potential impact to our future results of operations, as well if there is an impact to TriMas' market capitalization, we may record additional cash and non-cash charges related to incremental realignment actions, as well as for uncollectible customer account balances, excess inventory and idle production equipment.
Despite the potential decline in future demand levels and results of operations as a result of the COVID-19 pandemic, at present, we believe our capital structure is in a solid position, and we have ample cash and available liquidity under our revolving credit facility to meet our debt service obligations, capital expenditure requirements and other short-term and long-term obligations for the foreseeable future. Even after deploying nearly $200 million in our three acquisitions and completing stock purchases totaling $39.4 million during 2020, our December 31, 2020 net leverage ratio, as defined in our credit agreement, is below our long-term target of 2.0x.
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 pandemic, the actions taken to contain or mitigate its impact, timing of widespread vaccine availability, and the resumption of widespread 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.
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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 base management, internal sourcing and/or purchasing of materials, selective outsourcing and/or purchasing of support functions, working capital management, and greater leverage of our administrative functions.
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. While material cost changes did not have a significant impact in 2020 compared with 2019, there has been some volatility over the past two years as a direct and indirect result of foreign trade policy, where tariffs on certain of our commodity-based products sourced from Asia have been instituted, and certain North American suppliers have opportunistically increased their prices. As needed, we have taken actions, and will continue to take actions, to mitigate such increases, including implementing commercial pricing adjustments, resourcing to alternate suppliers and insourcing of previously sourced products to better leverage our global manufacturing footprint. Although we believe we are generally able to mitigate the impact of higher commodity costs 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 lags the underlying material cost increase, and we cannot be assured of full cost recovery in the open market.
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 TBM, our businesses target cost savings from Kaizen and continuous improvement initiatives in an effort to reduce, or otherwise offset, the impact of increased input and conversion costs through increased throughput and yield rates, with a goal of at least covering inflationary and market cost increases. In addition, we 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 2020, 2019 and 2018, we purchased 1,582,049, 1,230,050 and 442,632 shares of our outstanding common stock for approximately $39.4 million, $36.7 million and $12.1 million, respectively.
As of December 31, 2020, the Company has approximately $161.7 million remaining under the repurchase authorization. We will continue to evaluate opportunities to return capital to shareholders through the purchase of our common stock, depending on market conditions and other factors.
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Segment Information and Supplemental Analysis
The following table summarizes financial information for our three reportable segments (dollars in thousands):
Year ended December 31,
2020 As a Percentage of Net Sales 2019 As a Percentage of Net Sales 2018 As a Percentage of Net Sales
Net Sales
Packaging $ 488,340 63.4 % $ 392,340 54.2 % $ 368,200 52.2 %
Aerospace 167,740 21.8 % 194,110 26.8 % 185,920 26.4 %
Specialty Products 113,890 14.8 % 137,080 19.0 % 150,910 21.4 %
Total $ 769,970 100.0 % $ 723,530 100.0 % $ 705,030 100.0 %
Gross Profit
Packaging $ 142,410 29.2 % $ 116,180 29.6 % $ 119,620 32.5 %
Aerospace 27,020 16.1 % 53,060 27.3 % 49,630 26.7 %
Specialty Products 12,650 11.1 % 24,660 18.0 % 30,860 20.4 %
Total $ 182,080 23.6 % $ 193,900 26.8 % $ 200,110 28.4 %
Selling, General and Administrative
Packaging $ 47,850 9.8 % $ 35,340 9.0 % $ 35,030 9.5 %
Aerospace 25,550 15.2 % 24,070 12.4 % 22,340 12.0 %
Specialty Products 7,890 6.9 % 8,620 6.3 % 9,780 6.5 %
Corporate expenses 53,190 N/A 34,500 N/A 24,060 N/A
Total $ 134,480 17.5 % $ 102,530 14.2 % $ 91,210 12.9 %
Operating Profit (Loss)
Packaging $ 93,990 19.2 % $ 80,770 20.6 % $ 84,590 23.0 %
Aerospace (133,440) (79.6) % 28,950 14.9 % 27,290 14.7 %
Specialty Products 4,350 3.8 % 16,000 11.7 % 20,990 13.9 %
Corporate (53,190) N/A (34,500) N/A (24,060) N/A
Total $ (88,290) (11.5) % $ 91,220 12.6 % $ 108,810 15.4 %
Capital Expenditures
Packaging $ 30,730 6.3 % $ 16,400 4.2 % $ 13,590 3.7 %
Aerospace 5,770 3.4 % 8,110 4.2 % 1,190 0.6 %
Specialty Products 3,890 3.4 % 5,090 3.7 % 3,750 2.5 %
Corporate (a)
90 N/A 70 N/A 4,890 N/A
Total $ 40,480 5.3 % $ 29,670 4.1 % $ 23,420 3.3 %
Depreciation
Packaging $ 18,330 3.8 % $ 15,070 3.8 % $ 12,510 3.4 %
Aerospace 7,110 4.2 % 6,560 3.4 % 6,570 3.5 %
Specialty Products 3,450 3.0 % 2,960 2.2 % 2,870 1.9 %
Corporate 130 N/A 280 N/A 280 N/A
Total $ 29,020 3.8 % $ 24,870 3.4 % $ 22,230 3.2 %
Amortization
Packaging $ 9,270 1.9 % $ 9,580 2.4 % $ 9,110 2.5 %
Aerospace 11,020 6.6 % 8,530 4.4 % 8,620 4.6 %
Specialty Products 460 0.4 % 520 0.4 % 530 0.4 %
Corporate — N/A — N/A — N/A
Total $ 20,750 2.7 % $ 18,630 2.6 % $ 18,260 2.6 %
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(a) Corporate capital expenditures for the year ended December 31, 2018 are primarily related to purchases of machinery and equipment formerly held under operating leases. These purchased assets were subsequently transferred from Corporate to the segment utilizing the assets.
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Results of Operations
Year Ended December 31, 2020 Compared with Year Ended December 31, 2019
The principal factors impacting us during the year ended December 31, 2020, compared with the year ended December 31, 2019 were:
• increases in our Packaging segment's organic sales and related operating profit as a result of significantly higher demand, primarily for our products used in applications to help fight the spread of germs;
• approximately $134.6 million of non-cash, pre-tax goodwill and indefinite-lived intangible asset impairment charges during 2020 in our Aerospace segment, primarily as a result of lower current and expected future financial results due to uncertainty around the duration and magnitude of the impact of the COVID-19 pandemic;
• reduced sales and related profit within our Aerospace and Specialty Products segments, primarily as a result of the COVID-19 pandemic;
• a change in our accounting policy for asbestos-related defense costs during 2020;
• the impact of our recent acquisitions, primarily RSA in February 2020 and Rapak in April 2020;
• realignment expenses, primarily in our Aerospace and Specialty Products segments, in response to reduced end-market demand following the outbreak of COVID-19; and
• an income tax benefit related to intercompany debt restructuring.
Overall, net sales increased approximately $46.4 million, or approximately 6.4%, to $770.0 million in 2020, as compared to $723.5 million in 2019. Our recent acquisitions contributed approximately $44.1 million of inorganic sales growth. Organic sales, excluding the impact of currency exchange, increased approximately $3.4 million, as approximately $72.4 million of sales increases in our Packaging segment, primarily for products used in applications that help fight the spread of germs, were more than offset by approximately $45.8 million of lower sales in our Aerospace segment and $23.2 million lower sales in our Specialty Products segment, both primarily due to lower demand as a result of the COVID-19 pandemic. In addition, net sales were lower by approximately $1.1 million due to unfavorable currency exchange, as our reported results in U.S. dollars were negatively impacted as a result of the stronger U.S. dollar relative to foreign currencies.
Gross profit margin (gross profit as a percentage of sales) approximated 23.6% and 26.8% in 2020 and 2019, respectively. Gross profit margin decreased, as the impact of higher sales levels was more than offset by the impact of approximately $17.1 million of realignment expenses during 2020, approximately $15.0 million of which were non-cash and approximately $2.1 million of which were cash expenses, primarily in our Aerospace and Specialty Products segments, where we executed actions to lower our cost structure in response to reduced end market demand following the outbreak of the COVID-19 pandemic. In addition, we recorded approximately $2.8 million of non-cash purchase accounting charges during 2020 for the step-up of inventory to fair value and subsequent amortization related to our RSA and Rapak acquisitions as compared to approximately $0.3 million of such charges in 2019. Gross profit margin was also negatively impacted by approximately $2.0 million for an updated estimate of a pre-acquisition contingent liability within our Aerospace segment during 2020, as well as lower fixed cost absorption, higher production inefficiencies and a less favorable product sales mix, all due primarily to the COVID-19 pandemic.
Operating profit (loss) margin (operating profit as a percentage of sales) approximated (11.5)% and 12.6% in 2020 and 2019, respectively. Operating profit (loss) decreased $179.5 million, to $88.3 million of operating loss in 2020, as compared to $91.2 million operating profit in 2019. This decrease was primarily a result of approximately $134.6 million of non-cash goodwill and indefinite-lived intangible asset impairment charges within our Aerospace segment and an approximate $23.4 million non-cash charge due to a change in accounting policy, both recorded during 2020. Operating profit further decreased due to approximately $19.9 million of realignment expenses recorded during 2020, of which $16.1 million were non-cash and $3.8 million were cash expenses, primarily in our Aerospace and Specialty Products segments, where we executed actions to lower our cost structure in response to reduced end market demand. Operating profit (loss) also decreased as a result of increased purchase accounting expenses, a less favorable product sales mix and as a result of unfavorable currency exchange.
Interest expense increased approximately $0.7 million, to $14.7 million in 2020, as compared to $14.0 million in 2019, primarily as a result of increased weighted average borrowings from approximately $338.0 million in 2019 to $368.9 million in 2020. We drew $150 million on our revolving credit facility in first quarter 2020 to ensure availability of cash on hand at the onset of the pandemic, but subsequently repaid this amount in second quarter 2020.
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Other income decreased approximately $0.8 million to $0.2 million in 2020, from $1.0 million in 2019, primarily due to lower year-over-year interest income on cash balances and higher defined benefit pension expenses.
The effective income tax rate for 2020 was 22.3%, compared to 20.9% for 2019. We recorded an income tax benefit of approximately $23.0 million in 2020, as compared to $16.3 million of income tax expense in 2019. During 2020, we reported a domestic income tax loss of approximately $134.6 million and foreign pre-tax income of approximately $31.9 million, compared to 2019 domestic and foreign pre-tax income of approximately $52.2 million and $26.1 million, respectively. The effective tax rate for 2020 was impacted by a decrease in profitability in the U.S. resulting from various one-time charges, including impairment of goodwill and indefinite-lived intangible assets and a change in our accounting policy for asbestos-related defense costs. During 2020, we also undertook certain tax-planning actions with respect to restructuring our intercompany debt, resulting in the recognition of a $6.4 million deferred tax benefit.
Income (loss) from continuing operations decreased approximately $141.7 million to a loss of approximately $79.8 million in 2020, compared to income of $61.9 million in 2019. The decrease was primarily the result of a decrease in operating profit (loss) of approximately $179.5 million, which was significantly impacted by the goodwill and indefinite-lived intangibles impairment charge, an increase in interest expense of approximately $0.7 million, and a decrease in other income of approximately $0.8 million, partially offset by an increase in income tax benefit of approximately $39.3 million.
See below for a discussion of operating results by segment.
Packaging. Net sales increased approximately $96.0 million, or 24.5%, to $488.3 million in 2020, as compared to $392.3 million in 2019. Acquisition-related growth was approximately $24.7 million, comprised of approximately $13.9 million of sales from our April 2020 acquisition of Rapak, approximately $0.7 million of sales from our December 2020 acquisition of Affaba & Ferrari, and approximately $10.1 million of January through April 2020 sales for Taplast, which was acquired in late April 2019. Sales of dispensing products used in beauty and personal care and home care applications increased by approximately $53.5 million, primarily as a result of increased demand for personal hygiene applications due to heightened awareness of reducing the spread of germs following the onset of the COVID-19 pandemic. Sales of products used in food and beverage markets increased by approximately $15.4 million, primarily due to higher sales of beverage dispensers, including pumps and related products, in North America. Sales of products used in industrial markets increased by approximately $2.1 million, primarily due to higher demand within North America, some of which we believe is attributable to higher sales of products used in the transportation of bulk sanitizer and industrial cleaning solutions. These increases were partially offset by approximately $1.1 million of unfavorable currency exchange, as our reported results in U.S. dollars were negatively impacted as a result of the stronger U.S. dollar relative to foreign currencies.
Packaging's gross profit increased approximately $26.2 million to $142.4 million, or 29.2% of sales, in 2020, as compared to $116.2 million, or 29.6% of sales, in 2019, primarily due to increased sales levels. These increases were partially offset by approximately $1.1 million in non-cash realignment costs during 2020 primarily related to the disposal of certain equipment that was taken out of service and approximately $0.8 million for a purchase accounting non-cash charge related to the step-up of Rapak's inventory to fair value and subsequent amortization. Gross profit margin was lower than 2019 due to a less favorable product sales mix as well as Rapak generating low gross profit at current demand levels, all as a result of the impacts of the COVID-19 pandemic.
Packaging's selling, general and administrative expenses increased approximately $12.5 million to $47.9 million, or 9.8% of sales, in 2020, as compared to $35.3 million, or 9.0% of sales, in 2019, as we incurred approximately $4.4 million of higher ongoing selling, general and administrative costs associated with our acquisitions, higher incentive costs in 2020 given the higher profit levels and higher employment levels given the higher sales levels. Additionally, we incurred approximately $1.2 million in charges associated with our realignment actions, primarily for severance in 2020, as well as recognized an approximate $3.9 million non-cash reversal of a contingent liability for which the underlying obligation expired during 2019, which did not repeat in 2020. These increases were partially offset by an approximate $0.8 million non-cash charge during 2019 related to the write-off of the trade name acquired in the Plastic Srl acquisition that was not used.
Packaging's operating profit increased approximately $13.2 million to $94.0 million, or 19.2% of sales, in 2020, as compared to $80.8 million, or 20.6% of sales, in 2019, primarily as a result of increased sales, which was partially offset by realignment charges taken during 2020, the recognition of the purchase accounting adjustment related to Rapak's inventory step-up to fair value and subsequent amortization, a less favorable product sales mix and higher selling, general and administrative expenses.
Aerospace. Net sales decreased approximately $26.4 million, or 13.6%, to $167.7 million in 2020, as compared to $194.1 million in 2019. The February 2020 acquisition of RSA contributed approximately $19.4 million of sales. Sales of our fastener and machined components products declined by approximately $35.5 million and $10.3 million, respectively, both due to lower demand resulting from current and expected future reduced air travel due to the COVID-19 pandemic, with fastener sales also lower, as expected, due to the 737 Max grounding.
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Gross profit within Aerospace decreased approximately $26.0 million to $27.0 million, or 16.1% of sales, in 2020, from $53.1 million, or 27.3% of sales, in 2019, due primarily to the decrease in sales levels and related lower fixed cost absorption and production inefficiencies due to the impact of the COVID-19 pandemic. In 2020, we also undertook certain realignment actions to protect against uncertain end-market demand related to the COVID-19 pandemic, resulting in charges of approximately $4.6 million related to inventory reductions, $2.1 million related to severance as we reduced our manufacturing employment levels and $0.3 million related to production equipment removed from service given current demand levels. In addition, we recorded charges during 2020 of approximately $2.0 million related to the non-cash step-up of RSA's inventory to fair value under purchase accounting and subsequent amortization as well as approximately $2.0 million for an update to a pre-acquisition contingent liability.
Selling, general and administrative expenses increased approximately $1.5 million to $25.6 million, or 15.2% of sales, in 2020, as compared to $24.1 million, or 12.4% of sales, in 2019, primarily due to approximately $3.8 million of ongoing costs of RSA. This increase was partially offset by cost reduction efforts to mitigate the impact of lower sales levels.
Operating profit (loss) within Aerospace decreased approximately $162.4 million to an operating loss of $133.4 million, or (79.6)% of sales, in 2020, as compared to an operating profit of $29.0 million, or 14.9% of sales, in 2019. Operating profit and related margin decreased primarily due to approximately $134.6 million of pre-tax, non-cash goodwill and indefinite-lived intangible asset impairment charges in 2020. Operating profit also declined due to realignment charges, as well as the impact of lower sales levels, which resulted in lower fixed cost absorption and higher production inefficiencies as a result of the COVID-19 pandemic, the recognition of the purchase accounting adjustment related to RSA's inventory step-up to fair value and subsequent amortization, the update of a pre-acquisition contingent liability and higher selling, general and administrative expenses.
Specialty Products. Net sales decreased approximately $23.2 million, or 16.9%, to $113.9 million in 2020, as compared to $137.1 million in 2019. Sales of our cylinder products decreased by approximately $14.6 million, as low demand for steel cylinders used in construction and HVAC activity in North America was partially offset by a modest increase in the sale of cylinders used for oxygen and other medical applications. Sales of engines, compressors and related parts used in upstream oil and gas applications decreased by approximately $8.6 million, primarily as a result of low oil-field activity in North America given the low price of oil.
Gross profit within Specialty Products decreased approximately $12.0 million to $12.7 million, or 11.1% of sales, in 2020, as compared to $24.7 million, or 18.0% of sales, in 2019. During 2020, we undertook certain realignment actions in response to reduced end market demand, resulting in approximately $9.0 million of non-cash charges, primarily related to Arrow Engine streamlining its product line offering and liquidating its non-core inventory. The remainder of the decrease is primarily due to the decrease in sales levels, as well as to the related lower fixed cost absorption and production inefficiencies, all as a result of the COVID-19 pandemic.
Selling, general and administrative expenses within Specialty Products decreased approximately $0.7 million to $7.9 million, or 6.9% of sales, in 2020, as compared to $8.6 million, or 6.3% of net sales, in 2019. During 2020, we incurred realignment expenses of approximately $0.7 million related to severance for sales and administrative employees, which was more than offset by reduced year-over-year spending levels as a result of lower activity and employee levels.
Operating profit within Specialty Products decreased approximately $11.7 million to $4.4 million, or 3.8% of sales, in 2020, as compared to $16.0 million, or 11.7% of sales, in 2019, primarily as a result of the 2020 realignment actions, as well as due to the impact of lower sales and related lower fixed cost absorption and production inefficiencies.
Corporate Expenses. Corporate expenses included in operating profit consist of the following (dollars in millions):
Year ended December 31,
2020 2019
Corporate operating expenses $ 20.8 $ 25.4
Non-cash stock compensation 8.2 5.8
Legacy (income) expenses, net 24.2 3.3
Corporate expenses $ 53.2 $ 34.5
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Corporate expenses included in operating profit increased approximately $18.7 million to $53.2 million in 2020, from $34.5 million in 2019, primarily as a result of the $23.4 million non-cash charge due to the change of our accounting policy for asbestos-related defense costs during 2020 from accruing for probable and reasonably estimable defense costs associated with known claims expected to settle to accrue for all future defense costs for both known and unknown claims, which we now believe can be reasonably estimated. Non-cash stock compensation expense increased due to the timing and nature of equity awards in 2020 compared with 2019. We also incurred lower corporate operating expenses in 2020 and favorably resolved certain legacy matters during 2020.
Discontinued Operations. The results of discontinued operations consist of our former Lamons business, which was sold in December 2019. Income from discontinued operations, net of income tax expenses, was $36.7 million for the year ended December 31, 2019. See Note 5, “Discontinued Operations,” to our consolidated financial statements attached herein.
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Year Ended December 31, 2019 Compared with Year Ended December 31, 2018
The principal factors impacting us during the year ended December 31, 2019 compared with the year ended December 31, 2018 were:
• the impact of our two acquisitions, Plastic Srl and Taplast, acquired in January 2019 and April 2019, respectively, which drove the overall sales growth but at lower operating margins;
• a decline in North American industrial end market sales and related operating profit, primarily in our Specialty Products and Packaging segments;
• the termination of a Corporate liability, resulting in an approximate $8.2 million reduction in selling, general and administrative expenses during 2018 which did not repeat in 2019;
• an approximate $3.9 million non-cash reversal of a contingent liability in our Packaging segment, for which the underlying obligation expired in 2019; and
• the settlement of defined benefit obligations in 2018, which resulted in an approximate $2.5 million non-cash settlement charge that did not repeat in 2019.
Overall, net sales increased approximately $18.5 million, or approximately 2.6%, to $723.5 million in 2019, as compared to $705.0 million in 2018. The acquisitions of Taplast, in April 2019, and Plastic Srl, in January 2019, contributed approximately $35.3 million of sales in our Packaging segment. Organic sales overall, excluding the impact of currency exchange, decreased by approximately $11.0 million compared to 2018. We experienced approximately $12.2 million higher sales to the Packaging segment's health, beauty and home care end markets and $8.2 million higher sales within our Aerospace segment, both due to solid demand levels primarily in North America. These increases were more than offset by an approximate $19.6 million decline in sales of industrial-related products in our Specialty Products and Packaging segments, primarily as a result of end market conditions in North America, as well as approximately $11.8 million lower sales of products for food and beverage applications. Additionally, net sales were lower by approximately $5.8 million due to unfavorable currency exchange, as our reported results in U.S. dollars were negatively impacted as a result of the stronger U.S. dollar relative to foreign currencies.
Gross profit margin (gross profit as a percentage of sales) approximated 26.8% and 28.4% in 2019 and 2018, respectively. Gross profit margin decreased, as the impact of higher sales levels was more than offset by a less favorable product sales mix, resulting from higher levels of sales growth in product applications and end markets typically with lower margin profiles, and acquisition sales with gross margins below TriMas' overall gross margin rate. Gross profit margin further declined due to higher freight and conversion costs in 2019 and as a result of unfavorable currency exchange.
Operating profit margin (operating profit as a percentage of sales) approximated 12.6% and 15.4% in 2019 and 2018, respectively. Operating profit decreased approximately $17.6 million, to $91.2 million in 2019, as compared to an operating profit of $108.8 million in 2018. Operating profit and margin decreased primarily due to the year-over-year impact of an approximate $8.2 million non-cash reduction of our recorded liability to Metaldyne in 2018 following the U.S. Bankruptcy Court's final decree to close all remaining cases and terminate the Metaldyne bankruptcy distribution trust that did not repeat in 2019. In addition, during 2019, we also recognized a $3.9 million non-cash reversal of a contingent liability in our Packaging segment. Operating profit and related margin further declined as the impact of higher sales levels was more than offset by a less favorable product sales mix, increased purchase accounting expenses, increased professional fees primarily in support of corporate development activities, higher freight and conversion costs, and as a result of unfavorable currency exchange.
Interest expense increased approximately $0.1 million, to $14.0 million in 2019, as compared to $13.9 million in 2018, as a result of higher intra-period revolving credit borrowings in 2019 as compared to 2018.
Other income (expense), net increased approximately $3.5 million to $1.0 million in 2019, from $2.5 million in 2018, primarily due to a one-time charge of $2.5 million related to the settlement of defined benefit obligations in the second quarter of 2018 that did not repeat in 2019.
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Income tax expense decreased approximately $2.3 million, to $16.3 million in 2019 as compared to $18.7 million in 2018. The effective income tax rate for 2019 was 20.9%, compared to 20.2% for 2018. During 2019, we reported domestic and foreign pre-tax income of approximately $52.2 million and $26.1 million, respectively, and recognized tax benefits of approximately $1.2 million resulting from research and manufacturing tax incentives. We also incurred tax charges of approximately $3.6 million directly attributable to increases in valuation allowances on certain deferred tax assets including foreign tax operating loss carryforwards. In 2018, we reported domestic and foreign pre-tax income of approximately $64.7 million and $27.7 million, and recognized a net tax benefit of approximately $2.7 million related to provision to return adjustments for our U.S. Federal tax return, which included an approximate $1.1 million benefit due to additional regulations that were issued in connection with the Tax Cuts and Jobs Act ("Tax Reform Act").
Income from continuing operations decreased approximately $11.8 million to $61.9 million in 2019, from $73.7 million in 2018. The decrease was primarily the result of a decrease in operating profit of approximately $17.6 million, partially offset by a decrease in income tax expense of approximately $2.3 million and an increase of other income (expense) of approximately $3.5 million.
See below for a discussion of operating results by segment.
Packaging. Net sales increased approximately $24.1 million, or 6.6%, to $392.3 million in 2019, as compared to $368.2 million in 2018. The Taplast and Plastic Srl acquisitions contributed approximately $35.3 million in 2019. Sales to the health, beauty and home care end market increased approximately $12.2 million, primarily due to higher demand in North America and Europe as well as sales growth in Asia. These increases were partially offset by a decrease in sales of products to the food and beverage end market by approximately $11.8 million, primarily due to lower sales of pumps as well as labor and capacity constraints to manufacture caps for certain food applications. Sales of products to the industrial end market declined by approximately $5.8 million due to lower demand in North America. Additionally, net sales were lower by approximately $5.8 million due to unfavorable currency exchange, as our reported results in U.S. dollars were negatively impacted as a result of the stronger U.S. dollar relative to foreign currencies.
Packaging's gross profit decreased approximately $3.4 million to $116.2 million, or 29.6% of sales, in 2019, as compared to $119.6 million, or 32.5% of sales, in 2018. Gross profit decreased by approximately $3.2 million due to higher freight costs, more than half of which was as a result of expediting shipments to fulfill committed delivery dates, and by approximately $2.0 million due to unfavorable currency exchange, as our reported results in U.S. dollars were negatively impacted as a result of the stronger U.S. dollar relative to foreign currencies. While the increase in net sales contributed incremental gross profit dollars, we experienced a less favorable product sales mix, primarily due to gross margins of the acquired businesses being below the current overall segment margin, which impacted gross margin by nearly 100 basis points. In addition, sales to the health, beauty and home care end market comprised a larger percentage of net sales in 2019 compared to 2018, and yield a lower gross profit margin.
Packaging's selling, general and administrative expenses increased approximately $0.3 million to $35.3 million, or 9% of sales, in 2019, as compared to $35.0 million, or 9.5% of sales, in 2018, primarily due to higher ongoing selling, general and administrative costs associated with the acquisitions completed in 2019 as well as non-cash purchase accounting-related expenses of approximately $0.8 million related to the write-off of the trade name acquired in the Plastic Srl acquisition that will not be used. These increases were partially offset by an approximate $3.9 million non-cash reversal of a contingent liability for which the underlying obligation expired in 2019.
Packaging's operating profit decreased approximately $3.8 million to $80.8 million, or 20.6% of sales, in 2019, as compared to $84.6 million, or 23.0% of sales, in 2018, as the impact of higher freight costs, unfavorable foreign currency exchange, a less favorable product sales mix, and higher selling, general and administrative expenses more than offset the impact of higher sales levels.
Aerospace. Net sales increased approximately $8.2 million, or 4.4%, to $194.1 million in 2019, as compared to $185.9 million in 2018, due to an increase of approximately $8.5 million due to steady demand levels for fastener products combined with improved production throughput at our manufacturing facilities, partially offset by a decrease of approximately $0.3 million due to lower sales of machined components products.
Gross profit within Aerospace increased approximately $3.4 million to $53.1 million, or 27.3% of sales, in 2019, from $49.6 million, or 26.7% of sales, in 2018, as the higher sales were more profitable as a result of production efficiencies. In addition, gross profit and related margin increased due to a favorable product sales mix of more highly-engineered fasteners.
Selling, general and administrative expenses increased approximately $1.7 million to $24.1 million, or 12.4% of sales, in 2019, as compared to $22.3 million, or 12.0% of sales, in 2018, primarily due to higher employee costs.
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Operating profit within Aerospace increased approximately $1.7 million to $29.0 million, or 14.9% of sales, in 2019, as compared to $27.3 million, or 14.7% of sales, in 2018, primarily due to higher sales levels, improved production efficiencies and a more favorable product sales mix, which were partially offset by higher selling, general and administrative expenses.
Specialty Products. Net sales for 2019 decreased approximately $13.8 million, or 9.2%, to $137.1 million, as compared to $150.9 million in 2018. Sales of engines, compressors and related parts used in upstream oil and gas applications decreased approximately $7.1 million due to lower oil and gas drilling investment activity in the U.S. and Canada. Sales of our industrial cylinder products decreased approximately $6.7 million, primarily due to decreased demand for both high pressure and acetylene steel cylinders, we believe, as a result of customer consolidation and related asset cylinder inventory management.
Gross profit within Specialty Products decreased approximately $6.2 million to $24.7 million, or 18.0% of sales, in 2019, as compared to $30.9 million, or 20.4% of sales, in 2018. Gross profit decreased primarily due to lower sales, reduced fixed cost absorption, and higher conversion costs for our cylinder products.
Selling, general and administrative expenses within Specialty Products decreased approximately $1.2 million to $8.6 million, or 6.3% of sales, in 2019, as compared to $9.8 million, or 6.5% of sales, in 2018. Selling, general and administrative expenses decreased as we have continued to manage spending levels consistent with current lower demand levels.
Operating profit within Specialty Products decreased approximately $5.0 million to $16.0 million, or 11.7% of sales, in 2019, as compared to $21.0 million, or 13.9% of sales, in 2018, primarily due to lower sales levels, reduced fixed cost absorption and higher conversion costs.
Corporate Expenses. Corporate expenses included in operating profit consist of the following (dollars in millions):
Year ended December 31,
2019 2018
Corporate operating expenses $ 25.4 $ 22.3
Non-cash stock compensation 5.8 7.2
Legacy expenses 3.3 (5.4)
Corporate expenses $ 34.5 $ 24.1
Corporate expenses included in operating profit increased approximately $10.4 million to $34.5 million in 2019, from $24.1 million in 2018. Legacy (income) expenses, net increased approximately $8.7 million, primarily due to the termination of the liability to Metaldyne in first quarter 2018, which resulted in an approximate $8.2 million non-cash reduction in legacy (income) expenses, net, that did not occur in 2019. Corporate operating expenses increased approximately $3.1 million, primarily due to increased professional fees in support of corporate development activities.
Discontinued Operations. The results of discontinued operations consists of our former Lamons business, which was sold on December 20, 2019. Income from discontinued operations, net of income tax expenses, was $36.7 million for the year ended December, 31 2019, as compared to a loss from discontinued operations, net of income taxes, of $9.6 million for the year ended December 31, 2018. See Note 5, “Discontinued Operations,” to our consolidated financial statements attached herein.
Liquidity and Capital Resources
Cash Flows
Cash flows provided by operating activities of continuing operations in 2020 were approximately $127.4 million, as compared to approximately $95.7 million in 2019. Significant changes in cash flows provided by operating activities of continuing operations and the reasons for such changes are as follows:
• In 2020, the Company generated approximately $105.0 million in cash flows, based on the reported net loss of approximately $79.8 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, change in legacy liability estimate, impairment of goodwill and indefinite-lived intangible assets and other operating activities. In 2019, the Company generated approximately $111.4 million in cash flows based on the reported net income from continuing operations of approximately $61.9 million and after considering the effects of similar non-cash items.
• Decreases in accounts receivable resulted in a source of cash of approximately $9.6 million and $3.3 million in 2020 and 2019, respectively, primarily due to timing of cash collections. Days sales outstanding of receivables decreased by approximately four days compared to 2019, as we placed a significant focus on our credit and collections process, particularly in those businesses most impacted by the pandemic where credit risk was heightened.
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• We decreased our investment in inventory by approximately $4.0 million and $0.7 million in 2020 and 2019, respectively. Our days sales in inventory decreased by approximately eight days in 2020 as compared to 2019, primarily as a result of the strategic decision in our Arrow Engine division to streamline its product line offering during 2020. We continue to moderate inventory levels in line with sales levels.
• Decreases in prepaid expenses and other assets resulted in a source of cash of approximately $4.4 million in 2020, while increases in prepaid expense and other assets resulted in a use of cash of approximately $6.9 million in 2019. The changes in both 2020 and 2019 are primarily as a result of the timing of payments made for income taxes and certain operating expenses.
• Increases in accounts payable and accrued liabilities resulted in a source of cash of approximately $4.5 million in 2020, while decreases in accounts payable and accrued liabilities resulted in a use of cash of approximately $12.8 million in 2019. Our days accounts payable on hand decreased by approximately 15 days in 2020 as we paid certain key Packaging vendors more quickly in 2020 to ensure our orders remained a top priority for them given our robust demand levels and minimal available capacity in the marketplace. This decrease was more than offset by our increase in accrued liabilities during 2020, primarily as a result of the timing and amount of wage-related accruals. Our days accounts payable on hand increased by approximately seven days in 2019 due to the timing and mix of payment terms with our vendors. The decrease in accounts payable and accrued liabilities was further impacted by net non-cash reductions of obligations of approximately $3.9 million in 2019.
Net cash used for investing activities of continuing operations was approximately $232.1 million in 2020, while net cash provided by investing activities of continuing operations was approximately $31.3 million in 2019. During 2020, we paid approximately $193.5 million, net of cash acquired, in the aggregate to acquire RSA, Rapak, and Affaba & Ferrari. We invested approximately $40.5 million in capital expenditures as we have continued our investment in growth, capacity and productivity-related capital projects. Cash received from the disposition of business, property and equipment was approximately $2.0 million in 2020. During 2019, we invested approximately $29.7 million in capital expenditures and received cash from the disposition of business, property and equipment of approximately $128.1 million, primarily related to the sale of Lamons. During 2019, we paid approximately $67.1 million, net of cash acquired, to acquire Plastic Srl and Taplast.
Net cash provided by financing activities in 2020 was approximately $6.1 million, while net cash used for financing activities was approximately $40.4 million in 2019. During 2020, we received proceeds from borrowings, net of repayments, of approximately $48.2 million on our revolving credit facilities. We also purchased approximately $39.4 million of outstanding common stock and used a net cash amount of approximately $2.6 million related to our stock compensation arrangements. During 2019, we made net repayments of approximately $0.3 million on our revolving credit facilities, purchased approximately $36.7 million of outstanding common stock and used a net cash amount of approximately $3.3 million related to our stock compensation arrangements.
Our Debt and Other Commitments
The $300.0 million aggregate principal amount of our senior notes due 2025 ("Senior Notes") accrues interest at a rate of 4.875% per annum, payable semi-annually in arrears on April 15 and October 15, and mature on October 15, 2025. The payment of principal and interest is jointly and severally guaranteed, on a senior unsecured basis by certain named subsidiaries of the Company (each a "Guarantor" and collectively the "Guarantors"). The Senior Notes are pari passu in right of payment with all existing and future senior indebtedness and subordinated to all existing and future secured indebtedness to the extent of the value of the assets securing such indebtedness. In 2020, our consolidated subsidiaries that do not guarantee the Senior Notes represented approximately 22% 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 34% and 54% of the total guarantor and non-guarantor assets and liabilities, respectively, as of December 31, 2020, treating the guarantor and non-guarantor subsidiaries each as a consolidated group.
We may redeem all or part of the Senior Notes at a redemption price equal to 102.438% (reducing to 101.219% from October 15, 2021 through October 15, 2022 and 100% thereafter) of the principal amount thereof, plus accrued and unpaid interest, if any, to the redemption date.
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. The Credit Agreement matures on September 20, 2022 and is subject to interest at London Interbank Offered Rate ("LIBOR") plus 1.50%. The interest rate spread is based upon the leverage ratio, as defined, as of the most recent determination date. The Credit Agreement allows issuance of letters of credit, not to exceed $40.0 million in aggregate, against revolving credit facility commitments.
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The Credit Agreement also provides for incremental revolving credit commitments in an amount not to exceed the greater of $200 million and an amount such that, after giving effect to such incremental commitments and the incurrence of any other indebtedness substantially simultaneously with the making of such commitments, the senior secured net leverage ratio, as defined in the Credit Agreement, is no greater than 3.00 to 1.00. The terms and conditions of any incremental revolving credit facility commitments must be no more favorable than the existing credit facility.
Amounts drawn under our revolving credit facility fluctuate daily based upon our working capital and other ordinary course needs. Availability under our revolving credit facility depends upon, among other things, compliance with our Credit Agreement's financial covenants. Our Credit Agreement contains various negative and affirmative covenants and other requirements affecting us and our subsidiaries, including the ability to, subject to certain exceptions and limitations, incur debt, liens, mergers, investments, loans, advances, guarantee obligations, acquisitions, assets dispositions, sale-leaseback transactions, hedging agreements, dividends and other restricted payments, transactions with affiliates, restrictive agreements and amendments to charters, bylaws, and other material documents. The terms of our Credit Agreement require us and our subsidiaries to meet certain restrictive financial covenants and ratios computed quarterly, including a maximum total net leverage ratio (total consolidated indebtedness plus outstanding amounts under any accounts receivable securitization facility, less the aggregate amount of certain unrestricted cash and unrestricted permitted investments, as defined, over consolidated EBITDA, as defined), a maximum senior secured net leverage ratio (total consolidated senior secured indebtedness, less the aggregate amount of certain unrestricted cash and unrestricted permitted investments, as defined, over consolidated EBITDA, as defined) and a minimum interest expense coverage ratio (consolidated EBITDA, as defined, over the sum of consolidated cash interest expense, as defined, and preferred dividends, as defined). Our permitted total net leverage ratio under the Credit Agreement is 4.00 to 1.00 as of December 31, 2020. If we were to complete an acquisition which qualifies for a Covenant Holiday Period, as defined in our Credit Agreement, then our permitted total net leverage ratio cannot exceed 4.50 to 1.00 during that period. Our actual total net leverage ratio was 1.83 to 1.00 at December 31, 2020. Our permitted senior secured net leverage ratio under the Credit Agreement is 3.50 to 1.00 as of December 31, 2020. If we were to complete an acquisition which qualifies for a Covenant Holiday Period, as defined in our Credit Agreement, then our permitted senior secured net leverage ratio cannot exceed 4.00 to 1.00 during that period. Our actual senior secured net leverage ratio was 0.08 at December 31, 2020. Our permitted interest expense coverage ratio under the Credit Agreement is 3.00 to 1.00 and, our actual interest expense coverage ratio was 13.26 to 1.00 as of December 31, 2020. At December 31, 2020, we were in compliance with our financial and other covenants contained in the Credit Agreement.
The following is a reconciliation of net income (loss), as reported, which is a GAAP measure of our operating results, to Consolidated Bank EBITDA, as defined in our Credit Agreement, for the year ended December 31, 2020. We present Consolidated Bank EBITDA to show our performance under our financial covenants. Dollars are in thousands in the below tables.
Year ended
December 31, 2020
Net loss $ (79,760)
Bank stipulated adjustments:
Interest expense, net (as defined) 14,660
Income tax benefit (14,810)
Depreciation and amortization 49,770
Impairment charges and asset write-offs 134,600
Non-cash compensation expense (1)
8,170
Other non-cash expenses or losses 17,420
Non-recurring expenses or costs (2)
5,860
Extraordinary, non-recurring or unusual gains or losses 22,340
Effects of purchase accounting adjustments 2,110
Business and asset dispositions 1,010
Permitted acquisitions 9,570
Consolidated Bank EBITDA, as defined $ 170,940
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December 31, 2020
Total Indebtedness, as defined $ 312,970
Consolidated Bank EBITDA, as defined 170,940
Actual total net leverage ratio 1.83 x
Covenant requirement 4.00 x
December 31, 2020
Total senior secured indebtedness $ 12,970
Consolidated Bank EBITDA, as defined 170,940
Senior secured net leverage ratio 0.08 x
Covenant requirement 3.50 x
December 31, 2020
Interest expense, as defined $ 14,660
Bank stipulated adjustments:
Interest income (440)
Non-cash amounts attributable to amortization of financing costs (1,320)
Total Consolidated Cash Interest Expense, as defined $ 12,900
December 31, 2020
Consolidated Bank EBITDA, as defined $ 170,940
Total Consolidated Cash Interest Expense, as defined 12,900
Actual interest expense coverage ratio 13.26 x
Covenant requirement 3.00 x
________________________________________
(1) Non-cash compensation expenses resulting from the grant of equity awards.
(2) Non-recurring costs and expenses relating to severance, relocation, restructuring and curtailment expenses.
During 2018, we terminated our $75.0 million accounts receivable facility, under which we had the ability to sell eligible accounts receivable to a third-party multi-seller receivables funding company.
In 2020, we placed cash on deposit with a financial institution to be held as cash collateral for our outstanding letters of credit; therefore, as of December 31, 2020, we had no letters of credit issued against our revolving credit facility. At December 31, 2020, we had $50.5 million outstanding under our revolving credit facility and had $249.5 million potentially available. At December 31, 2019, we had no amounts outstanding under our revolving credit facility and had $283.9 million potentially available after giving effect to approximately $16.1 million of letters of credit issued and outstanding. The letters of credit are used for a variety of purposes, including support of certain operating lease agreements, vendor payment terms and other subsidiary operating activities, and to meet various states' requirements to self-insure workers' compensation claims, including incurred but not reported claims. Our borrowing capacity was not reduced by leverage restrictions contained in the Credit Agreement as of December 31, 2020 and December 31, 2019.
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, as well as for discretionary spending such as any repurchases of our common stock. At the end of each quarter, we have historically used cash on hand from our domestic and certain foreign subsidiaries to pay down amounts outstanding under our revolving credit facility, as applicable.
Our weighted average borrowings approximated $368.9 million during 2020, compared to $338.0 million during 2019, due to our March 2020 proactive $150 million draw on our revolving credit facility to ensure availability of cash on hand given the potential uncertainty surrounding the financial markets as a result of the COVID-19 pandemic, and as a result of an increase in December 2020 as part of funding the Affaba & Ferrari acquisition. We repaid the $150 million during second quarter 2020.
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Cash management related to our revolving credit facility is centralized. We monitor our cash position and available liquidity on a daily basis and forecast our cash needs on a weekly basis within the current quarter and on a monthly basis outside the current quarter over the remainder of the year. Our business and related cash forecasts are updated monthly.
In considering the economic uncertainty surrounding the potential business impacts from the COVID-19 pandemic with respect to our operations, supply chains, distribution channels, and end-market customers, during 2020, we took certain defensive actions as we monitored our cash position and available liquidity. Those actions included suspending our repurchase of our common stock during second quarter 2020, borrowing on our revolving credit facility, tightening our capital expenditures, advanced monitoring of our accounts receivable balances and flexing cost structures of operations expected to be most impacted by COVID-19. Given strong cash generation and our current liquidity position, we relaxed certain of these actions in the third quarter of 2020, choosing to further invest in capital expenditures and resume purchasing shares of our common stock.
The majority of our cash on hand as of December 31, 2020 is located in jurisdictions outside the United States. We have aggregate available funding under our revolving credit facility of $249.5 million at December 31, 2020, which is not reduced by leverage restrictions. Based on forecasted cash sources and requirements inherent in our business plans, we believe that our liquidity and capital resources, including anticipated cash flows from operations, will be sufficient to meet our debt service, capital expenditure and other short-term and long-term obligation needs for the foreseeable future. In addition, we may evaluate opportunities to refinance our Senior Notes and/or the Credit Agreement ahead of their maturity dates. There can be no assurance, however, that we will be able to refinance our Senior Notes or the Credit Agreement on more favorable terms.
We are subject to variable interest rates on our revolving credit facility. At December 31, 2020, 1-Month LIBOR approximated 0.14%. Based on our variable rate-based borrowings outstanding at December 31, 2020, a 1% increase in the per annum interest rate would increase our interest expense by approximately $0.5 million annually.
In addition to our long-term debt, we have other cash commitments related to leases. We account for these lease transactions primarily as operating leases, and incurred expense from continuing operations related thereto of approximately $9.4 million in 2020. We continue to be party to non-cancelable leases for certain facilities we have exited as part of restructuring activities, and have entered into sublease agreements to minimize our net lease payments. We expect leasing will continue to be an available financing option to fund future capital expenditure requirements.
In March 2020, we announced our Board of Directors had authorized us to increase the purchase of our common stock up to $250 million in the aggregate, an increase of $100 million from the previous authorization. During 2020, 2019 and 2018, we purchased 1,582,049, 1,230,050 and 442,632 shares of our outstanding common stock for approximately $39.4 million, $36.7 million and $12.1 million, respectively. Since the initial authorization through December 31, 2020, we have purchased 3,254,731 shares of our outstanding common stock for an aggregate purchase price of approximately $88.3 million. We will continue to evaluate opportunities to return capital to shareholders through the purchase of our common stock, depending on market conditions, including the potential impact of the COVID-19 pandemic, and other factors.
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Under various agreements, we are obligated to make future cash payments in fixed amounts. These include payments under our long-term debt agreements, rent payments required under operating lease agreements, certain benefit obligations and interest obligations on our long-term debt. The following table summarizes our significant contractual cash obligations as of December 31, 2020 (dollars in thousands).
Payments Due by Periods
Total Less than
One Year 1 - 3 Years 3 - 5 Years More than
5 Years
Contractual cash obligations:
Long-term debt $ 350,450 $ — $ 50,450 $ 300,000 $ —
Operating lease obligations 43,880 8,070 13,590 9,520 12,700
Benefit obligations 13,980 1,160 2,450 2,660 7,710
Interest obligations (a)
73,130 14,630 29,250 29,250 —
Total contractual obligations $ 481,440 $ 23,860 $ 95,740 $ 341,430 $ 20,410
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(a) Our Senior Notes bear interest at 4.875%. The future interest obligations calculation excludes the impact of our cross-currency swap agreements. See Note 14, " Derivative Instruments ," included in Item 8, " Financial Statements and Supplementary Data ," within this Form 10-K for additional information.
The liability related to unrecognized tax benefits has been excluded from the contractual obligations table because a reasonable estimate of the timing and amount of cash flows from future tax settlements cannot be determined. For additional information, refer to Note 23, " Income Taxes ," included in Item 8, " Financial Statements and Supplementary Data ," within this Form 10-K.
Market Risk
We conduct business in various locations throughout the world and are subject to market risk due to changes in the value of foreign currencies. The functional currencies of our foreign subsidiaries are primarily the local currency in the country of domicile. We manage these operating activities at the local level and revenues and costs are generally denominated in local currencies; however, results of operations and assets and liabilities reported in U.S. dollars will fluctuate with changes in exchange rates between such local currencies and the U.S. dollar.
We have historically used derivative financial instruments to manage currency risks, as we seek to to mitigate the risk associated with fluctuations in currency rates impacting cash flows related to certain receivables, payables and intercompany transactions denominated in foreign currencies. We also use cross-currency swap agreements to mitigate currency risks associated with the net investment in certain of our foreign subsidiaries. See Note 14, " Derivative Instruments ," included in Item 8, " Financial Statements and Supplementary Data ," within this Form 10-K for additional information.
We are also subject to interest risk as it relates to our long-term debt. We have historically used interest rate swap agreements to fix the variable portion of our debt to manage this risk. See Note 14, " Derivative Instruments ," included in Item 8, " Financial Statements and Supplementary Data ," within this Form 10-K for additional information.
Common Stock
TriMas is listed in the NASDAQ Global Select Market SM . 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 June 12, 2020, Moody's affirmed a Ba3 rating to our Senior Notes, as presented in Note 13, "Long-term Debt" included in Item 8, "Financial Statements and Supplementary Data" within this Form 10-K. Moody's also affirmed a Ba2 Corporate Family Rating and maintained its outlook as stable. On February 12, 2020, Standard & Poor's affirmed a BB- rating to our senior unsecured debt, 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.
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Outlook
On the whole, 2020 was an unprecedented and particularly challenging year following the onset of the COVID-19 pandemic, which significantly affected each of our businesses and how we operate, albeit in different ways and magnitudes. We believe our financial results demonstrate our ability to effectively leverage our TriMas Business Model, working across our businesses with a high degree of connectivity to respond to changing market conditions. We capitalized on opportunities where market demand was high, while also taking swift actions where market demand was sharply reduced. In 2020, we experienced year-over-year overall growth in sales, driven by robust organic growth in our Packaging segment and from acquisitions, which were partially offset by significant sales decreases in our Aerospace and Specialty Products segments, where we took proactive realignment actions to mitigate the effects of lower demand from the pandemic as much as practical.
Looking forward, we believe there will be a continued period of uncertainty related to demand levels for our products, whether it be when new aircraft builds will ramp-up that require our fasteners or engineered products, if industrial production will increase over the lower 2020 levels that may require our cylinder or closure products, and how long and at what rate the recent high demand will continue for our dispenser and closure product applications that help fight the spread of germs. We expect to continue to mitigate, as much as practical, the impact of lower volumes in the most challenged end markets, executing realignment actions as necessary so we are positioned to gain operating leverage when these end markets begin to recover. We believe we remain well positioned to capitalize on the recovery of the aerospace and industrial markets, as well as available market growth opportunities. We believe the availability and effectiveness of vaccines, as well as continued measures intended to control the spread of the virus, are among the most significant factors that could impact demand for our products.
As a result of continued uncertainties resulting from the COVID-19 pandemic, and their potential impact to our future results of operations, as well as to TriMas' market capitalization, we may record additional cash and non-cash charges related to further realignment actions, as well for uncollectible customer account balances, excess inventory and idle production equipment. At this time, we are not able to practically estimate the extent or amount of any such potential cash and non-cash charges.
At present, we believe our capital structure is strong and that we have sufficient headroom under our financial covenants, and ample cash and available liquidity under our revolving credit facility, to meet our debt service, capital expenditure and other short-term and long-term obligations for the foreseeable future.
We expect to continue to leverage the tenets of our TriMas Business Model to manage our multi-industry businesses and address the ongoing challenges presented by the COVID-19 pandemic, and on a longer-term basis, achieve our growth plans, execute continuous improvement initiatives to offset inflationary pressures, and seek lower-cost sources for input costs, all while continuously assessing the appropriateness of our manufacturing footprint and fixed-cost structure.
Impact of New Accounting Standards
See Note 2, " New Accounting Pronouncements ," included in Item 8, " Financial Statements and Supplementary Data ," within this Form 10-K.
Critical Accounting Policies
The following discussion of accounting policies is intended to supplement the accounting policies presented in Note 3, " Summary of Significant Accounting Policies " included in Item 8, " Financial Statements and Supplementary Data ," within this Form 10-K. Certain of our accounting policies require the application of significant judgment by management in selecting the appropriate assumptions for calculating financial estimates. By their nature, these judgments are subject to an inherent degree of uncertainty. These judgments are based on our historical experience, our evaluation of business and macroeconomic trends, and information from other outside sources, as appropriate.
Receivables. Receivables are presented net of allowances for doubtful accounts of approximately $2.1 million at December 31, 2020 and 2019. We monitor our exposure for credit losses and maintain adequate allowances for doubtful accounts. We determine these allowances based on our historical write-off experience and/or specific customer circumstances and provide such allowances when amounts are reasonably estimable and it is probable a loss has been incurred. Although we have been growing business with certain of our larger customers, and there has been some industry consolidation where certain of our customers are merging, we do not believe that significant credit risk exists or that we have a significant concentration of accounts receivable with a single customer or group of customers due to our diverse customer base. See Item 1A, "Risk Factors," for additional information regarding risks associated with a concentrated customer base.
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Depreciation and Amortization. Depreciation is computed principally using the straight-line method over the estimated useful lives of the assets. Annual depreciation rates are as follows: building and land/building improvements three to 40 years, and machinery and equipment, three to 15 years. Capitalized debt issuance costs are amortized over the underlying terms of the related debt securities. Customer relationship intangibles are amortized over periods ranging from five to 25 years, while technology and other intangibles are amortized over periods ranging from one to 30 years.
Impairment of Long-Lived Assets and Definite-Lived Intangible Assets. We review, on at least a quarterly basis, the financial performance of each business unit for indicators of impairment. In reviewing for impairment indicators, we also consider events or changes in circumstances such as business prospects, customer retention, market trends, potential product obsolescence, competitive activities and other economic factors. An impairment loss is recognized when the carrying value of an asset group exceeds the future net undiscounted cash flows expected to be generated by that asset group. The impairment loss recognized is the amount by which the carrying value of the asset group exceeds its fair value.
Goodwill and Indefinite-Lived Intangibles. We assess goodwill and indefinite-lived intangible assets for impairment at the reporting unit level on an annual basis as of October 1, by reviewing relevant qualitative and quantitative factors. More frequent evaluations may be required if we experience changes in our business climate or as a result of other triggering events that take place. An impairment loss is recognized when the carrying value of the asset exceeds its fair value.
We determine our reporting units at the individual operating segment level, or one level below, when there is discrete financial information available that is regularly reviewed by segment management for evaluating operating results. For purposes of our 2020 goodwill impairment test, we had six reporting units, three of which had goodwill, within our three reportable segments.
We first perform a qualitative assessment for our annual goodwill impairment test and for our indefinite-lived intangible asset impairment test, which involves significant use of management's judgment and assumptions to determine whether it is more likely than not that the fair value of a reporting unit or indefinite-lived intangible asset is less than its carrying amount. In conducting the qualitative assessment, we consider macroeconomic conditions, industry and market considerations, overall financial performance, entity and reporting unit specific events, capital markets pricing, recent fair value estimates and carrying amounts, as well as legal, regulatory, and contractual factors. These factors are all considered in reaching a conclusion about whether it is more likely than not that the fair values of the intangible assets are less than the carrying values. If we conclude that further testing is required, we would perform a quantitative valuation to estimate the fair value of our intangible assets.
For purposes of the 2020 annual impairment tests, based on the qualitative assessments, we determined there were no indications that the fair value of a reporting unit or indefinite-lived intangible asset was less than its carrying amount; therefore, we determined that quantitative assessments were not required.
During the third quarter of 2020, as a result of a decline in our aerospace-related business' financial results, a significant reduction in financial projections for the remainder of 2020 compared with prior projections, and uncertainty around the duration and magnitude of the impact of the COVID-19 pandemic on future financial results given their dependence on future levels of air travel and new aircraft builds, we determined there was a triggering event requiring an interim quantitative goodwill impairment assessment of each of our two aerospace-related reporting units: Aerospace Fasteners and Aerospace Engineered Products. In conducting the quantitative analysis, we determined the estimated fair value of the Aerospace reporting units utilizing both income and market-based approaches. The income approach relies on the present value of estimated future cash flows of the business, discounted using a rate appropriately reflecting the risks inherent in the cash flows. The market approach relies on market data of other public companies that we deem comparable in operations to our reporting units. Upon completion of the goodwill impairment test, we determined that the carrying values of the Aerospace Fasteners and Aerospace Engineered Products reporting units exceeded their fair values, resulting goodwill impairment charges of approximately $70.8 million in its Aerospace Fasteners reporting unit and approximately $56.0 million in its Aerospace Engineered Products reporting unit. We note that a 1% change in the discount rate would have impacted the total goodwill impairment charge by approximately $20 million, while a 0.5% change in the terminal growth rate would have impacted the total goodwill impairment charge by approximately $5 million.
Additionally, because of the factors previously mentioned, we also performed a quantitative assessment for all of our indefinite-lived intangible assets included within the Aerospace segment, using a relief-from-royalty method. The relief-from-royalty method involves the estimation of appropriate market royalty rates for our indefinite-lived intangible assets and the application of these royalty rates to forecasted net sales attributable to the intangible assets. The resulting cash flows are then discounted to present value, using a rate appropriately reflecting the risks inherent in the cash flows, which is compared to the carrying value of the assets. Upon completion of the quantitative impairment test, we determined that certain of our aerospace-related trade names had carrying values that exceeded their fair values, and therefore recorded impairment charges of approximately $7.8 million during 2020.
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Future declines in sales and/or operating profit, declines in our stock price, or other changes in our business or the markets for our products could result in further impairments of our goodwill and indefinite-lived intangible assets.
Pension Benefits. We engage independent actuaries to compute the amounts of liabilities and expenses under defined benefit pension plans, subject to the assumptions that we determine are appropriate based on historical trends, current market rates and future projections as of the measurement date. Annually, we review the actual experience compared to the most significant assumptions used and makes adjustments to the assumptions, if warranted. Discount rates are based upon an expected benefit payments duration analysis and the equivalent average yield rate for high-quality fixed-income investments. Pension benefits are funded through deposits with trustees and the expected long-term rate of return on plan assets is based upon actual historical returns modified for known changes in the market and any expected change in investment policy. Certain accounting guidance, including the guidance applicable to pensions, does not require immediate recognition of the effects of a deviation between actual and assumed experience or the revision of an estimate. This approach allows the favorable and unfavorable effects that fall within an acceptable range to be netted.
Income Taxes. We compute income taxes using the asset and liability method, whereby deferred income taxes using current enacted tax rates are provided for the temporary differences between the financial reporting basis and the tax basis of assets and liabilities and for operating loss and tax credit carryforwards. We determine valuation allowances based on an assessment of positive and negative evidence on a jurisdiction-by-jurisdiction basis and record a valuation allowance to reduce deferred tax assets to the amount more likely than not to be realized. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. We record interest and penalties related to unrecognized tax benefits in income tax expense.
Asbestos-related Matters. We accrue loss reserves for asbestos-related matters based upon an estimate of the ultimate liability for claims incurred, whether reported or not, including an estimate of future settlement costs and costs to defend. We utilize known facts and historical trends for Company-specific and general market asbestos-related activity, as well as an actuarial valuation in determining estimated required reserves which we believe are probable and reasonably estimable. Asbestos-related accruals are assessed at each balance sheet date to determine if the liability remains reasonably stated. Accruals for asbestos-related matters are included in the consolidated balance sheet in “Accrued liabilities” and “Other long-term liabilities.”
Other Loss Reserves. We have other loss exposures related to insurance, litigation and environmental claims. Establishing loss reserves for these matters requires the use of estimates and judgment in regard to risk exposure and ultimate liability. We are generally party to high deductible insurance programs for losses and liabilities related principally to workers' compensation, health and welfare claims and comprehensive general, product and vehicle liability. Generally, we are responsible for up to $0.8 million per occurrence under our retention program for workers' compensation, between $0.3 million and $1.5 million per occurrence under our retention programs for comprehensive general, product and vehicle liability, and have a $0.4 million per occurrence stop-loss limit with respect to our self-insured group medical plan. We accrue loss reserves up to our retention amounts based upon our estimates of the ultimate liability for claims incurred, including an estimate of related litigation defense costs, and an estimate of claims incurred but not reported using actuarial assumptions about future events. We accrue for such items when such amounts are reasonably estimable and probable. We utilize known facts and historical trends, as well as actuarial valuations in determining estimated required reserves. Changes in assumptions for factors such as medical costs and actual experience could cause these estimates to change significantly.
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Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.