TRIMAS CORP (TRS) FY 2023 MD&A
This page reproduces the company's own Item 7 MD&A text from the linked SEC filing. It is filer text, not grepcent analysis, scoring, or investment advice.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The statements in the discussion and analysis regarding industry outlook, our expectations regarding the performance of our business and the other non-historical statements in the discussion and analysis are forward-looking statements. These forward-looking statements are subject to numerous risks and uncertainties, including, but not limited to, the risks and uncertainties described in Item 1A "Risk Factors." Our actual results may differ materially from those contained in or implied by any forward-looking statements. You should read the following discussion together with Item 8, "Financial Statements and Supplementary Data."
Introduction
TriMas designs, develops and manufactures a diverse set of products primarily for the consumer products, aerospace & defense and industrial markets through its TriMas Packaging, TriMas Aerospace and Specialty Products groups. Our wide range of innovative products are designed and engineered to solve application-specific challenges that our customers face. We believe our businesses share important and distinguishing characteristics, including: well-recognized and leading brand names in the markets we serve; innovative product technologies and features; a high-degree of customer approved processes and qualifications; established distribution networks; modest capital investment requirements; strong cash flow conversion and long-term growth opportunities. While the majority of our revenue is in the United States, we manufacture and supply products globally to a wide range of companies. We report our business activity in three segments: Packaging, Aerospace and Specialty Products.
Key Factors Affecting Our Reported Results
Demand for the products our businesses produce and results of operations depend upon general economic conditions. We serve customers in industries that are highly competitive and that may be significantly impacted by changes in economic or geopolitical conditions.
Our results of operations have been materially impacted over the past few years by macro-economic factors, first by the onset and proliferation of the coronavirus pandemic ("pandemic"), then further from increased energy costs and supply chain disruptions from the Russia-Ukraine conflict, and more recently by cost inflation (raw materials, wage rates and freight) and a lack of material and in certain regions skilled labor availability. These factors significantly affected each of our businesses and how we operate, albeit in different ways and magnitudes. Sales in our Packaging segment for dispensing and closure products used in applications to help fight the spread of germs have experienced extreme volatility in demand, with demand spiking to record highs after the onset of the pandemic, demand abating as expected from those high levels beginning mid-2022 and continuing through most of 2023, with demand stabilizing toward the end of 2023, as a result of some of our larger customers' choices to rebalance on-hand inventory levels and caution in purchasing behaviors given the current inflationary macro-economic environment. Sales of certain of our aerospace-related products were significantly depressed from historical levels following the onset of the pandemic, but demand has significantly increased in recent quarters as air travel has picked-up and new aircraft build rates improve. Certain of our products for industrial applications, for example steel cylinders for packaged gas applications, and engines and compressors for oil & gas extraction, have experienced volatility in demand related to a number of channel and economic factors in more recent periods. Altogether, this significant level of volatility in demand levels, input and transportation costs, and material and labor availability, have pressured our ability to operate efficiently and at historical margin levels.
Overall, 2023 net sales increased $9.7 million, or 1.1%, compared to 2022. We experienced sales growth from acquisitions in our Packaging and Aerospace segments, as well as organic sales increases within our Aerospace and Specialty Product segments as a result of increased demand levels in North America, particularly in the first half of the year for Specialty Products. These increases were partially offset by reduced demand for dispensers and closures used in consumer products and industrial applications within our Packaging segment, which we believe declined due to lower customer order activity given high customer stocking levels, as well as continuing uncertainty around consumer sentiment as a result of the inflationary environment.
The most significant drivers affecting our financial results in 2023 compared with 2022, other than as directly impacted by sales changes, were the impact of our recent acquisitions, improved manufacturing throughput in our Aerospace segment, material cost abatement in our Packaging segment, realignment actions in our Packaging segment, the year-over-year impact of the sale of non-core real estate in 2022, the year-over-year impact of the termination of our existing cross-currency swap agreements in 2022, and a decrease in our effective tax rate.
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In April 2023, we acquired Weldmac Manufacturing Company ("Weldmac"), a designer and manufacturer of complex metal fabricated components and assemblies for the aerospace, defense and space launch end markets for a purchase price of $34.0 million, with additional contingent consideration ranging from zero to $10 million based on achievement of earnings targets. Weldmac, which is reported in our Aerospace segment, is located in El Cajon, California. Weldmac contributed $26.6 million of net sales during 2023. We recognized a $2.4 million purchase accounting non-cash charge related to the step-up of Weldmac's inventory to fair value in 2023. In July 2023, we made a cash payment of $5.5 million as additional consideration based on achievement of earnings targets. The remaining possible contingent consideration ranges from zero to $4.5 million, based on achievement of 2023 earnings targets, as defined in the purchase agreement. At December 31, 2023, we believe it is probable the maximum contingent consideration will be earned.
In February 2023, we acquired Aarts Packaging B.V. ("Aarts"), a luxury packaging solutions provider for beauty and lifestyle brands, as well as for customers in the food and life sciences end markets, for a purchase price of $37.8 million, net of cash acquired. Aarts, which is reported in our Packaging segment, is located in Waalwijk, the Netherlands, and contributed $23.6 million of net sales during 2023.
In February 2022, we acquired Intertech Plastics LLC and related companies (collectively, "Intertech"), a manufacturer of custom injection molded products used in medical applications, as well as products and assemblies for consumer and industrial applications, for an aggregate amount of $64.1 million, net of cash acquired. Intertech, which is reported in our Packaging segment, has two manufacturing facilities located in the Denver, Colorado area. Intertech contributed $5.3 million of acquisition-related sales growth during the period January through February 2023.
Over the past few years, we have been executing certain realignment actions in response to current and expected future end market demand and rising input costs. We recorded pre-tax realignment charges of $10.3 million in 2023, primarily related to our actions to close and consolidate two production facilities in China into one new, larger facility in Haining, China, and to close and consolidate our Rohnert Park, California, manufacturing facility operations into other existing U.S. production locations. These charges consisted of $2.1 million employee-related costs, $0.8 million for the write down of inventory to fair value, $5.2 million related to other facility move and consolidation costs, and $2.2 million were related to charges to accelerate the depreciation of certain fixed assets. We recorded pre-tax realignment charges of $5.0 million in 2022, of which $2.7 million related to facility move and consolidation costs and $2.3 million were for employee related costs.
In the fourth quarter of 2022, we sold a non-core facility in City of Industry, California, for net cash proceeds of $23.3 million. The Company recognized a $17.6 million gain on the sale, which is included in the Corporate operating loss for 2022.
In the third quarter of 2022, we completed the sale of vacant land adjacent to our Tolleson, Arizona, manufacturing facility for net cash proceeds of $5.0 million, and recognized a $4.8 million gain on the sale, which is included within our Aerospace segment.
In 2022, we terminated our existing cross-currency swap agreements, de-designating the swaps as net investment hedges and received $26.2 million of cash. The cross-currency swap agreements had notional amounts totaling $250.0 million, which declined to $25.0 million over various contract periods ending between October 15, 2023, and October 15, 2027.
Our effective tax rate for 2023 and 2022 was 20.2%, and 24.5%, respectively. The rate for 2023 is lower primarily as a result of recognizing a $2.0 million tax benefit related to a net operating loss carryforward in a foreign jurisdiction, and a $0.6 million benefit related to tax incentives in another foreign jurisdiction.
Additional Key Risks that May Affect Our Reported Results
We have executed meaningful realignment actions over the past few years, primarily in our Packaging segment, to address manufacturing capacity where demand has fallen. We will continue to assess further actions if required. However, as a result of the current period of macroeconomic inflation and uncertainty and the potential impact of such factors to our future results of operations, as well as if there is an impact to TriMas' market capitalization, we may record additional cash and non-cash charges related to incremental realignment actions, asset impairments, including impairments to our goodwill, intangible assets, fixed assets, inventory or customer receivable account balances.
Despite the potential for declines in future demand levels and results of operations, at present, we believe our capital structure is in a strong position. We have sufficient cash and available liquidity under our revolving credit facility to meet our debt service obligations, capital expenditure requirements and other short-term and long-term obligations for the foreseeable future.
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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, or expand our geographic coverage; our ability to manage our cost structure more efficiently via supply chain management, internal sourcing and/or purchasing of materials, selective outsourcing and/or purchasing of support functions, working capital management, and greater leverage of our administrative functions; and our ability to absorb, or recover via commercial actions, inflationary or other cost increases.
Our overall business does not experience significant seasonal fluctuation, other than our fourth quarter, which has tended to be the lowest net sales quarter of the year due to holiday shutdowns at certain customers or other customers deferring capital spending to the following year. 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, superalloys (such as titanium, A286 stainless steel and Inconel) and other oil and metal-based purchased components, the costs for each of which have experienced recent volatility. There has also been some volatility over the past two years as a direct and indirect result of foreign trade policy, where tariffs on certain of our commodity-based products sourced from Asia have been instituted, the conflict in Eastern Europe, creating certain input material shortages, and labor shortages at certain of our raw material suppliers. We will continue to take actions to mitigate such increases, including implementing commercial pricing adjustments, holding extra inventories and resourcing to alternate suppliers and insourcing of previously sourced products. 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 to address fluctuations in input costs, or can modify prices based on market conditions to recover higher costs, our price increases generally lag the underlying input cost increase, and we cannot be assured of full cost recovery in the open market. If input costs increase at rapid rates, our ability to recover cost increases on a timely basis is made more difficult by the lag nature of these contracts.
Oil-based commodity costs are a significant driver of raw materials and purchased components used within our Packaging segment. As such, an increase in crude oil often is a precursor to rising input polymeric raw material costs, for which we may experience a contractual commercial recover lag. Separately, 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.
Each year, as a core tenet of the TriMas Business Model, our businesses target cost savings from Kaizen and continuous improvement initiatives in an effort to reduce, or otherwise offset, the impact of increased input and conversion costs through increased throughput and yield rates, with a goal of at least covering inflationary and market cost increases. In addition, we continuously review our operating cost structures to ensure alignment with current market demand.
We continue to evaluate alternatives to redeploy the cash generated by our businesses, one of which includes returning capital to our shareholders. In 2020, our Board of Directors increased the authorization of share repurchases to a cumulative amount of $250 million. During 2023, we purchased 680,594 shares of our outstanding common stock for an aggregate purchase price of $18.8 million. As of December 31, 2023, we had $86.9 million remaining under the repurchase authorization.
In addition, in 2023, we declared quarterly dividends of $0.04 per share of common stock, aggregating to dividends declared and paid on common shares during 2023 of $6.7 million. We will continue to evaluate opportunities to return capital to shareholders through the purchase of our common stock, as well as dividends, depending on market conditions and other factors.
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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, | |||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2023 | As a Percentage of Net Sales | 2022 | As a Percentage of Net Sales | 2021 | As a Percentage of Net Sales | ||||||||||||||||
| Net Sales | |||||||||||||||||||||
| Packaging | $ | 463,600 | 51.9 | % | $ | 522,180 | 59.1 | % | $ | 533,260 | 62.2 | % | |||||||||
| Aerospace | 241,400 | 27.0 | % | 188,090 | 21.3 | % | 183,340 | 21.4 | % | ||||||||||||
| Specialty Products | 188,550 | 21.1 | % | 173,560 | 19.6 | % | 140,510 | 16.4 | % | ||||||||||||
| Total | $ | 893,550 | 100.0 | % | $ | 883,830 | 100.0 | % | $ | 857,110 | 100.0 | % | |||||||||
| Gross Profit | |||||||||||||||||||||
| Packaging | $ | 109,050 | 23.5 | % | $ | 137,030 | 26.2 | % | $ | 145,750 | 27.3 | % | |||||||||
| Aerospace | 48,010 | 19.9 | % | 32,240 | 17.1 | % | 39,970 | 21.8 | % | ||||||||||||
| Specialty Products | 44,260 | 23.5 | % | 39,030 | 22.5 | % | 31,470 | 22.4 | % | ||||||||||||
| Total | $ | 201,320 | 22.5 | % | $ | 208,300 | 23.6 | % | $ | 217,190 | 25.3 | % | |||||||||
| Selling, General and Administrative | |||||||||||||||||||||
| Packaging | $ | 48,760 | 10.5 | % | $ | 55,670 | 10.7 | % | $ | 49,110 | 9.2 | % | |||||||||
| Aerospace | 31,370 | 13.0 | % | 28,990 | 15.4 | % | 26,690 | 14.6 | % | ||||||||||||
| Specialty Products | 7,830 | 4.2 | % | 8,680 | 5.0 | % | 8,950 | 6.4 | % | ||||||||||||
| Corporate expenses | 46,620 | N/A | 37,850 | N/A | 37,220 | N/A | |||||||||||||||
| Total | $ | 134,580 | 15.1 | % | $ | 131,190 | 14.8 | % | $ | 121,970 | 14.2 | % | |||||||||
| Operating Profit (Loss) | |||||||||||||||||||||
| Packaging | $ | 60,140 | 13.0 | % | $ | 81,000 | 15.5 | % | $ | 96,490 | 18.1 | % | |||||||||
| Aerospace | 15,520 | 6.4 | % | 8,060 | 4.3 | % | 13,270 | 7.2 | % | ||||||||||||
| Specialty Products | 36,400 | 19.3 | % | 30,250 | 17.4 | % | 22,550 | 16.0 | % | ||||||||||||
| Corporate | (46,620) | N/A | (20,250) | N/A | (37,220) | N/A | |||||||||||||||
| Total | $ | 65,440 | 7.3 | % | $ | 99,060 | 11.2 | % | $ | 95,090 | 11.1 | % | |||||||||
| Capital Expenditures | |||||||||||||||||||||
| Packaging | $ | 29,060 | 6.3 | % | $ | 33,170 | 6.4 | % | $ | 34,080 | 6.4 | % | |||||||||
| Aerospace | 14,620 | 6.1 | % | 6,900 | 3.7 | % | 5,390 | 2.9 | % | ||||||||||||
| Specialty Products | 10,410 | 5.5 | % | 5,860 | 3.4 | % | 5,500 | 3.9 | % | ||||||||||||
| Corporate | 100 | N/A | 30 | N/A | 90 | N/A | |||||||||||||||
| Total | $ | 54,190 | 6.1 | % | $ | 45,960 | 5.2 | % | $ | 45,060 | 5.3 | % | |||||||||
| Depreciation | |||||||||||||||||||||
| Packaging | $ | 27,740 | 6.0 | % | $ | 22,720 | 4.4 | % | $ | 20,950 | 3.9 | % | |||||||||
| Aerospace | 7,820 | 3.2 | % | 7,590 | 4.0 | % | 7,140 | 3.9 | % | ||||||||||||
| Specialty Products | 3,720 | 2.0 | % | 3,680 | 2.1 | % | 3,670 | 2.6 | % | ||||||||||||
| Corporate | 130 | N/A | 130 | N/A | 130 | N/A | |||||||||||||||
| Total | $ | 39,410 | 4.4 | % | $ | 34,120 | 3.9 | % | $ | 31,890 | 3.7 | % | |||||||||
| Amortization | |||||||||||||||||||||
| Packaging | $ | 6,430 | 1.4 | % | $ | 6,620 | 1.3 | % | $ | 9,550 | 1.8 | % | |||||||||
| Aerospace | 11,340 | 4.7 | % | 12,030 | 6.4 | % | 11,560 | 6.3 | % | ||||||||||||
| Specialty Products | 410 | 0.2 | % | 450 | 0.3 | % | 450 | 0.3 | % | ||||||||||||
| Corporate | — | N/A | — | N/A | — | N/A | |||||||||||||||
| Total | $ | 18,180 | 2.0 | % | $ | 19,100 | 2.2 | % | $ | 21,560 | 2.5 | % |
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The following "Results of Operations Year Ended December 31, 2023 Compared with Year Ended December 31, 2022" section presents an analysis of our consolidated operating results displayed in the Consolidated Statement of Income. A discussion regarding our financial condition and results of operations for the year ended December 31, 2022 compared to the year ended December 31, 2021 can be found under Item 7 in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022, filed with the Securities and Exchange Commission on February 23, 2023.
Results of Operations
Year Ended December 31, 2023 Compared with Year Ended December 31, 2022
The principal factors impacting us during the year ended December 31, 2023, compared with the year ended December 31, 2022 were:
•Significant demand reductions for products in certain end markets within our Packaging segment;
•Significant demand increases in our Aerospace and Specialty Products segments, particularly in the first half of 2023;
•Significant gains on the sale of non-core properties in City of Industry, California, and Tolleson, Arizona, in 2022, which did not repeat in 2023;
•The impact of recent acquisitions, primarily Intertech in February 2022, Aarts in February 2023 and Weldmac in April 2023;
•Improved manufacturing throughput in our Aerospace segment;
•Decreased material and other input costs in our Packaging segment;
•Realignment expenses in response to changes in end market demand;
•Higher business diligence and consulting fees in support of our growth initiatives;
•The third quarter 2022 termination of our existing cross-currency swaps; and
•A decrease in our effective tax rate in 2023 compared with 2022.
Overall, net sales increased $9.7 million, or 1.1%, to $893.6 million in 2023, as compared to $883.8 million in 2022. Acquisition-related sales growth was $55.5 million, comprised of $5.3 million resulting from the January through February 2023 sales of our February 2022 acquisition of Intertech, $23.6 million from our February 2023 acquisition of Aarts, and $26.6 million from our April 2023 acquisition of Weldmac. Organic sales, excluding the impact of currency exchange and acquisitions, decreased $47.3 million, as increases in sales of our industrial products in our Specialty Products segment, particularly in the first half of the year, and in our Aerospace segment driven by market demand improvements, were more than offset by a decrease in the Packaging segment due to lower market demand, primarily as a result of ongoing actions by many of our customers to rebalance their inventory levels and closely manage their order activity given continuing uncertainty around consumer sentiment as a result of the inflationary environment. In addition, net sales increased $1.5 million due to currency exchange, as our reported results in U.S. dollars were favorably impacted as a result of the weakening U.S. dollar relative to foreign currencies.
Gross profit margin (gross profit as a percentage of sales) approximated 22.5% and 23.6% in 2023 and 2022, respectively. Gross profit margin decreased due to lower sales levels and absorption of fixed costs, as well as increased realignment costs associated with our actions to close and consolidate two production facilities in China into a new, larger facility in Haining, China, and to close and consolidate our Rohnert Park, California, manufacturing facility operations into other existing U.S. production locations within our Packaging segment. Gross profit also decreased due to a $2.4 million purchase accounting non-cash charge related to the step-up of Weldmac's inventory to fair value in our Aerospace segment and wage inflation. These decreases were partially offset by higher sales and improved throughput and fixed cost absorption within our Aerospace segment, higher sales levels, particularly in the first half of 2023, and favorable pricing in our Specialty Products segment, and lower material and other input costs, including $4.3 million of lower energy costs, in our Packaging segment.
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Operating profit margin (operating profit as a percentage of sales) approximated 7.3% and 11.2% in 2023 and 2022, respectively. Operating profit decreased $33.6 million, to $65.4 million in 2023, as compared to $99.1 million in 2022, primarily due to the year-over-year impact of $22.4 million of gains on the sale of non-core properties in City of Industry, California, and Tolleson, Arizona, recorded in 2022, lower sales levels and lower absorption of fixed costs as well as higher realignment costs within our Packaging segment, and an increase in professional fees. Additionally, operating profit decreased due to wage inflation, the impact of a non-cash charge related to Weldmac purchase accounting, and a $1.1 million indefinite-lived intangible asset impairment charge in our Aerospace segment. These decreases were partially offset by the impact of higher sales levels and related improved fixed cost absorption within our Aerospace segment, higher sales levels and favorable pricing in our Specialty Products segment, and lower material and other input costs in our Packaging segment.
Interest expense increased $1.8 million, to $15.9 million in 2023, as compared to $14.1 million in 2022, due to a higher effective interest rate and an increase in our weighted average borrowings.
Other income decreased $1.6 million to $1.1 million in 2023, from $2.7 million in 2022, primarily due to the year-over-year impact of the reversal of the TFI contingent consideration liability in 2022 and a non-cash settlement charge for our Canadian defined benefit obligations, partially offset by a decrease in other expenses.
The effective income tax rate for 2023 was 20.2%, compared to 24.5% for 2022. We recorded income tax expense of $10.2 million in 2023, as compared to $21.5 million in 2022. During 2023, we reported domestic and foreign pre-tax income of $20.7 million and $29.9 million, respectively, as compared to domestic and foreign pre-tax income of $56.8 million and $30.9 million in 2022. The rate for 2023 is lower primarily as a result of recognizing a $2.0 million tax benefit related to a net operating loss carryforward in a foreign jurisdiction, and a $0.6 million benefit related to tax incentives in another foreign jurisdiction.
Net income decreased $25.8 million to $40.4 million in 2023, compared to $66.2 million in 2022. This decrease was primarily a result of a decrease in operating profit of $33.6 million, a $1.8 million increase in interest expense, and a $1.6 million decrease in other income, partially offset by a decrease in income tax expense of $11.3 million.
See below for a discussion of operating results by segment.
Packaging. Net sales decreased $58.6 million, or 11.2%, to $463.6 million in 2023, as compared to $522.2 million in 2022, as customer demand fell at a significant rate given overstock positions predominantly in consumer goods and industrial markets, and did not rebound as anticipated given the onset of significant inflationary pressure which occurred during much of 2023. Acquisition-related sales growth was $28.9 million, comprised of $5.3 million resulting from the January through February 2023 sales of our February 2022 acquisition of Intertech and $23.6 million from our February 2023 acquisition of Aarts. Sales of products used in food and beverage markets decreased by $38.1 million, primarily due to lower demand for food and certain beverage closures. Sales of products used in industrial markets decreased by $22.2 million, primarily as a result of lower demand for drum and pail closure products. Sales of dispensing products used in personal care and home care applications decreased by $27.1 million. We believe that the decrease in sales in each of these categories was due to lower customer order activity given higher customer stocking levels, as well as continuing uncertainty around consumer sentiment as a result of the inflationary environment. These decreases were partially offset by an increase in net sales of $1.7 million due to currency exchange, as our reported results in U.S. dollars were favorably impacted as a result of the weakening of the U.S. dollar relative to foreign currencies, as compared to 2022.
Packaging's gross profit decreased $28.0 million to $109.1 million, or 23.5% of sales, in 2023, as compared to $137.0 million, or 26.2% of sales, in 2022, primarily due to lower sales and resulting lower absorption of fixed costs. Gross profit further declined in 2023 due to $7.2 million of higher realignment costs, primarily associated with our actions to close and consolidate two production facilities in China into a new, larger facility in Haining, China, and to close and consolidate our Rohnert Park, California, manufacturing facility operations into other existing U.S. production locations. The decrease in gross profit was partially offset by lower material and other input costs, including $4.3 million of lower energy costs, as compared with the spike in costs in 2022, primarily in our Europe-based operations.
Packaging's selling, general and administrative expenses decreased $6.9 million to $48.8 million, or 10.5% of sales, in 2023, as compared to $55.7 million, or 10.7% of sales, in 2022, primarily due to the transfer of $5.5 million of information technology costs to Corporate in 2023, lower overall spending levels in 2023, consistent with current lower demand levels, as well as $1.0 million of lower costs associated with realignment actions. In addition, we incurred lower intangible asset amortization expense due to certain assets becoming fully amortized. These decreases more than offset higher ongoing selling, general and administrative costs associated with our acquisitions.
Packaging's operating profit decreased $20.9 million to $60.1 million, or 13.0% of sales, in 2023, as compared to $81.0 million, or 15.5% of sales, in 2022, as the impact of lower selling, general and administrative expenses and energy costs was more than offset by lower sales levels, lower absorption of fixed costs and higher realignment costs.
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Aerospace. Net sales increased $53.3 million, or 28.3%, to $241.4 million in 2023, as compared to $188.1 million in 2022. Acquisition-related sales growth from our April 2023 acquisition of Weldmac was $26.6 million. Sales of our fasteners products increased by $19.1 million due to increases in demand for fasteners used in new aircraft builds. Sales of our engineered components products increased by $7.6 million due to higher end market demand.
Gross profit within Aerospace increased $15.8 million to $48.0 million, or 19.9% of sales, in 2023, from $32.2 million, or 17.1% of sales, in 2022. Gross profit increased primarily due to higher sales levels and improved manufacturing throughput and fixed cost absorption, partially offset by increased material costs, wage inflation and a $2.4 million purchase accounting non-cash charge related to the step-up of Weldmac's inventory to fair value.
Selling, general and administrative expenses increased $2.4 million to $31.4 million, or 13.0% of sales, in 2023, as compared to $29.0 million, or 15.4% of sales, in 2022, primarily due to higher ongoing selling, general and administrative costs associated with our acquisition of Weldmac and higher facility costs, partially offset by lower employee-related costs and lower intangible asset amortization expense due to certain assets becoming fully amortized.
Operating profit within Aerospace increased $7.5 million to $15.5 million, or 6.4% of sales, in 2023, as compared to $8.1 million, or 4.3% of sales, in 2022, primarily due to the impact of higher sales levels and improved manufacturing throughput and fixed cost absorption. These increases were partially offset by increased material costs, wage inflation, higher selling, general and administrative expenses, a $1.1 million indefinite-lived intangible asset impairment charge, the recognition of the purchase accounting adjustment related to Weldmac's inventory step-up to fair value, and the year-over-year impact of the $4.8 million pre-tax gain on the sale of vacant land adjacent to our Tolleson, Arizona, manufacturing facility recorded in 2022.
Specialty Products. Net sales increased $15.0 million, or 8.6%, to $188.6 million in 2023, as compared to $173.6 million in 2022. Sales of our cylinder products increased $8.0 million due to higher demand for steel cylinders for packaged gas applications in North America, as industrial activity improved from 2022, mostly in the first half of 2023, as well as improved pricing. Sales of engines, compressors and related parts used in stationary power generation and assistance applications for natural gas and crude oil extraction increased by $7.0 million, most of which occurred in the first half of 2023, as customers increased capital spending earlier in the year as compared to 2022 purchasing rates. Additionally, in the second half of 2023 a customer did not renew its contract to purchase natural gas extraction compressors given a need for a much broader range of large compressors, which were not available from the Specialty Products' Arrow Engine business.
Gross profit within Specialty Products increased $5.2 million to $44.3 million, or 23.5% of sales, in 2023, as compared to $39.0 million, or 22.5% of sales, in 2022. Gross profit increased due to higher sales levels and favorable material pricing, partially offset by wage inflation.
Selling, general and administrative expenses within Specialty Products decreased $0.9 million to $7.8 million, or 4.2% of sales, in 2023, as compared to $8.7 million, or 5.0% of net sales, in 2022, primarily due to the transfer of information technology costs to Corporate in 2023, as well as lower overall spending levels.
Operating profit within Specialty Products increased $6.2 million to $36.4 million, or 19.3% of sales, in 2023, as compared to $30.3 million, or 17.4% of sales, in 2022, primarily due to increased sales levels, favorable material pricing and lower selling, general and administrative expenses, partially offset by wage inflation.
Corporate Expenses. Corporate expenses included in operating profit consist of the following (dollars in millions):
| Year ended December 31, | |||||||
|---|---|---|---|---|---|---|---|
| 2023 | 2022 | ||||||
| Corporate operating expenses | $ | 36.7 | $ | 22.4 | |||
| Non-cash stock compensation | 9.7 | 9.8 | |||||
| Legacy expenses | 0.2 | 5.7 | |||||
| Gain on disposition of assets | — | (17.6) | |||||
| Corporate expenses | $ | 46.6 | $ | 20.3 |
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Corporate expenses increased $26.4 million to $46.6 million in 2023, from $20.3 million in 2022, primarily due to the year-over-year impact of a $17.6 million gain recognized in 2022 on the sale of a non-core facility in City of Industry, California, $4.5 million of higher professional fees primarily for business diligence and strategic consulting, and $8.3 million of higher information technology costs in 2023, of which $6.8 million related to costs now reported as corporate expenses due to centralizing certain of our information technology costs in 2023. We incurred higher information technology costs in 2023 as we prepare for upgrades in certain of our information technology applications, including an enterprise resource planning software implementation. These increases were partially offset by the year-over-year impact of a $5.6 million non-cash charge in 2022 related to updating our asbestos studies.
Liquidity and Capital Resources
Cash Flows
Cash flows provided by operating activities in 2023 were $88.2 million, as compared to $72.6 million in 2022. Significant changes in cash flows provided by operating activities and the reasons for such changes are as follows:
•In 2023, the Company generated $110.5 million in cash flows, based on the reported net income of $40.4 million and after considering the effects of non-cash items related to impairment of indefinite-lived intangible assets, depreciation, amortization of intangible assets and debt issuance costs, (gain) loss on dispositions of assets, changes in deferred income taxes, stock-based compensation, provision for losses on accounts receivable and other operating activities. In 2022, the Company generated $109.2 million in cash flows based on the reported net income of $66.2 million and after considering the effects of similar non-cash items and change in legacy liability estimate.
•Increases in accounts receivable resulted in a use of cash of $5.5 million and $6.7 million in 2023 and 2022, respectively. The increased use of cash for 2023 and 2022 is due primarily to the timing of sales and related collection of cash during the periods. Days sales outstanding of receivables increased by six days in 2023 and five days in 2022.
•We increased our investment in inventory by $7.1 million and $7.0 million in 2023 and 2022, respectively. Our days sales in inventory increased by eleven days in 2023, primarily as a result of investing in certain inventories in our Aerospace segment as a result of increased customer demand. Our days sales in inventory increased by seven days in 2022, primarily as a result of proactively investing in certain raw materials and purchased components to protect against supply chain disruptions and potential cost increases.
•Decreases in prepaid expenses and other assets resulted in a source of cash of $4.8 million and $6.1 million in 2023 and 2022, respectively. The changes in 2023 and 2022 are primarily as a result of the timing of payments made for income taxes and certain operating expenses.
•Decreases in accounts payable and accrued liabilities resulted in a use of cash of $14.5 million and $29.1 million in 2023 and 2022, respectively. Our days accounts payable on hand increased by one day through 2023 and remained consistent through 2022. Our days accounts payable on hand fluctuate primarily as a result of the timing of payments made to suppliers and the mix of vendors and related terms.
Net cash used for investing activities was $134.4 million and $55.0 million in 2023 and 2022, respectively. During 2023, we paid $77.3 million, net of cash acquired, to acquire Aarts and Weldmac. We invested $54.2 million in capital expenditures as we have continued our investment in growth, capacity and productivity-related capital projects. We made a payment of $3.4 million related to the expiration of one of our cross-currency swap agreements. We also received proceeds of $0.5 million from the disposition of property and equipment. During 2022, we paid $64.1 million, net of cash acquired, to acquire Intertech, invested $46.0 million in capital expenditures and received cash from the disposition of business, property and equipment of $28.8 million, primarily related to the sale of vacant land adjacent to one of our manufacturing facilities and the sale of a non-core facility in California. We also received proceeds of $26.2 million from the termination of our cross-currency swap agreements.
Net cash used for financing activities was $30.9 million and $46.2 million in 2023 and 2022, respectively. During 2023, we received net proceeds of $0.6 million from borrowings on our revolving credit facilities, purchased $18.8 million of outstanding common stock, used a net cash amount of $2.7 million related to our stock compensation arrangements, paid dividends of $6.7 million, and paid $3.3 million related to liabilities assumed in our acquisition of Aarts. Our reported net proceeds from borrowings on our revolving credit facilities considers the impact of foreign currency translation. During 2022, we purchased $36.9 million of outstanding common stock, used a net cash amount of $2.4 million related to our stock compensation arrangements and paid dividends of $6.9 million.
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Our Debt and Other Commitments
In March 2021, we issued the 2029 Senior Notes in a private placement under Rule 144A of the Securities Act of 1933, as amended. We used the proceeds from the 2029 Senior Notes offering to pay fees and expenses of $5.1 million related to the offering and pay fees and expenses of $1.1 million related to amending our Credit Agreement. In connection with the issuance, we completed the redemption of our 2025 Senior Notes, paying $300.0 million to retire the outstanding principal amount plus $7.3 million as a redemption premium. The remaining cash proceeds from the 2029 Senior Notes were used for general corporate purposes, including repaying all outstanding revolving credit facility borrowings. The $5.1 million of fees and expenses related to the 2029 Senior Notes were capitalized as debt issuance costs, while the $7.3 million redemption premium, as well as $3.0 million of unamortized debt issuance costs associated with the 2025 Senior Notes were recorded as expense within debt financing and related expenses in the accompanying consolidated statement of income.
The 2029 Senior Notes accrue interest at a rate of 4.125% per annum, payable semi-annually in arrears on April 15 and October 15. The payment of principal and interest is jointly and severally guaranteed, on a senior unsecured basis by certain named subsidiaries of the Company. The 2029 Senior Notes are pari passu in right of payment with all existing and future senior indebtedness and subordinated to all existing and future secured indebtedness to the extent of the value of the assets securing such indebtedness. In 2023, our consolidated subsidiaries that do not guarantee the Senior Notes represented 28% of the total of guarantor and non-guarantor net sales, treating each as a consolidated group and excluding intercompany transactions between guarantor and non-guarantor subsidiaries. In addition, our non-guarantor subsidiaries represented 38% and 15% of the total guarantor and non-guarantor assets and liabilities, respectively, as of December 31, 2023, treating the guarantor and non-guarantor subsidiaries each as a consolidated group.
Prior to April 15, 2024, we may redeem up to 40% of the principal amount of the 2029 Senior Notes at a redemption price of 104.125% of the principal amount, plus accrued and unpaid interest, if any, to the redemption date, with the net cash proceeds of one or more equity offerings provided that each such redemption occurs within 90 days of the date of closing of each such equity offering. In addition, prior to April 15, 2024, we may redeem all or part of the 2029 Senior Notes at a redemption price equal to 100% of the principal amount thereof, plus accrued and unpaid interest, if any, to the redemption date, plus a "make whole" premium.
In March 2021, we amended our Credit Agreement in connection with the issuance of the 2029 Senior Notes to extend the maturity date. We incurred fees and expenses of $1.1 million related to the amendment, all of which were capitalized as debt issuance costs. We also recorded $0.2 million of non-cash expense related to the write-off of previously capitalized deferred financing fees. The Credit Agreement consists of a $300.0 million senior secured revolving credit facility, which permits borrowings denominated in specific foreign currencies, subject to a $125.0 million sub limit, maturing on March 29, 2026.
In November 2021 and April 2023, we amended the Credit Agreement to replace LIBOR. As of December 31, 2023, the Credit Agreement is subject to benchmark interest rates that are based on the currency denomination of borrowings, with British pound sterling borrowings subject to the Sterling Overnight Index Average and Euro borrowings subject to the Euro InterBank Offered Rate, both plus a spread of 1.625%, and U.S. dollar borrowings subject to the Secured Overnight Financing Rate plus a spread of 1.725%. The interest rate spread is based upon the leverage ratio, as defined, as of the most recent determination date.
The Credit Agreement provides for incremental revolving credit commitments in an amount not to exceed the greater of $200 million and an amount such that, after giving effect to such incremental commitments and the incurrence of any other indebtedness substantially simultaneously with the making of such commitments, the senior secured net leverage ratio, as defined in the Credit Agreement, is no greater than 3.00 to 1.00. The terms and conditions of any incremental revolving credit facility commitments must be no more favorable than the existing credit facility.
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Amounts drawn under our revolving credit facility fluctuate daily based upon our working capital and other ordinary course needs. Availability under our revolving credit facility depends upon, among other things, compliance with our Credit Agreement's financial covenants. Our Credit Agreement contains various negative and affirmative covenants and other requirements affecting us and our subsidiaries, including the ability to, subject to certain exceptions and limitations, incur debt, liens, mergers, investments, loans, advances, guarantee obligations, acquisitions, assets dispositions, sale-leaseback transactions, hedging agreements, dividends and other restricted payments, transactions with affiliates, restrictive agreements and amendments to charters, bylaws, and other material documents. The terms of our Credit Agreement require us and our subsidiaries to meet certain restrictive financial covenants and ratios computed quarterly, including a maximum total net leverage ratio (total consolidated indebtedness plus outstanding amounts under any accounts receivable securitization facility, less the aggregate amount of certain unrestricted cash and unrestricted permitted investments, as defined, over consolidated EBITDA, as defined) and a minimum interest expense coverage ratio (consolidated EBITDA, as defined, over the sum of consolidated cash interest expense, as defined, and preferred dividends, as defined). Our permitted total net leverage ratio under the Credit Agreement is 4.00 to 1.00 as of December 31, 2023. If we were to complete an acquisition which qualifies for a Covenant Holiday Period, as defined in our Credit Agreement, then our permitted total net leverage ratio cannot exceed 4.50 to 1.00 during that period. Our actual total net leverage ratio was 2.39 to 1.00 at December 31, 2023. Our permitted interest expense coverage ratio under the Credit Agreement is 3.00 to 1.00, and our actual interest expense coverage ratio was 11.13 to 1.00 as of December 31, 2023. At December 31, 2023, we were in compliance with our financial covenants.
The following is a reconciliation of net income, as reported, which is a GAAP measure of our operating results, to Consolidated Bank EBITDA, as defined in our Credit Agreement, for the year ended December 31, 2023. 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, 2023 | |||
|---|---|---|---|
| Net income | $ | 40,360 | |
| Bank stipulated adjustments: | |||
| Interest expense, net (as defined) | 15,920 | ||
| Income tax expense | 10,230 | ||
| Depreciation and amortization | 57,590 | ||
| Non-cash compensation expense(1) | 9,670 | ||
| Other non-cash expenses or losses | 760 | ||
| Non-recurring expenses or costs(2) | 18,950 | ||
| Effects of purchase accounting adjustments | 3,190 | ||
| Business and asset dispositions | 410 | ||
| Permitted acquisitions | 3,030 | ||
| Currency gains and losses | (130) | ||
| Consolidated Bank EBITDA, as defined | $ | 159,980 |
| December 31, 2023 | ||||
|---|---|---|---|---|
| Total Indebtedness, as defined(3) | $ | 383,070 | ||
| Consolidated Bank EBITDA, as defined | 159,980 | |||
| Actual total net leverage ratio | 2.39 | x | ||
| Covenant requirement | 4.00 | x |
| Year ended December 31, 2023 | |||
|---|---|---|---|
| Interest expense, as defined | $ | 15,920 | |
| Bank stipulated adjustments: | |||
| Interest income | (620) | ||
| Non-cash amounts attributable to amortization of financing costs | (930) | ||
| Total Consolidated Cash Interest Expense, as defined | $ | 14,370 |
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| December 31, 2023 | ||||
|---|---|---|---|---|
| Consolidated Bank EBITDA, as defined | $ | 159,980 | ||
| Total Consolidated Cash Interest Expense, as defined | 14,370 | |||
| Actual interest expense coverage ratio | 11.13 | 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 trade name impairment charges, diligence and transaction costs, purchase accounting costs, severance, relocation, restructuring and settlement expenses.
(3) Includes $4.5 million of acquisition-related contingent consideration, $1.3 million of derivative liabilities and $2.2 million of finance leases as of December 31, 2023.
The Credit Agreement allows issuance of letters of credit, not to exceed $40.0 million in aggregate, against revolving credit facility commitments. At December 31, 2023, we had no amounts outstanding under our revolving credit facility and had $294.0 million potentially available after giving effect to $6.0 million of letters of credit issued and outstanding. At December 31, 2022, we had no amounts outstanding under our revolving credit facility and had $293.9 million potentially available after giving effect to $6.1 million of letters of credit issued and outstanding. Our letters of credit are used for a variety of purposes, including support of certain operating lease agreements, vendor payment terms and other subsidiary operating activities, and to meet various states' requirements to self-insure workers' compensation claims, including incurred but not reported claims. After consideration of leverage restrictions contained in the Credit Agreement, as of December 31, 2023, we had $256.9 million of borrowing capacity available for general corporate purposes. Our borrowing capacity was not reduced by leverage restrictions contained in the Credit Agreement as of December 31, 2022.
We rely upon our cash flow from operations and available liquidity under our revolving credit facility to fund our debt service obligations and other contractual commitments, working capital and capital expenditure requirements. At the end of each quarter, we have historically used cash on hand from our domestic and certain foreign subsidiaries to pay down amounts outstanding under our revolving credit facility, as applicable.
Our weighted average borrowings were $417.4 million during 2023, compared to $400.1 million during 2022, primarily due to the aggregate principal balance on our senior notes as well as higher borrowings on revolving credit facilities during 2023.
In May 2021, we, through one of our non-U.S. subsidiaries, entered into a revolving loan facility with a borrowing capacity of $4 million. The facility is guaranteed by TriMas Corporation. There were no borrowings on this loan facility as of December 31, 2023, and 2022.
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.
The majority of our cash on hand as of December 31, 2023, is located in jurisdictions outside the United States. We have available funding under our revolving credit facility of $256.9 million at December 31, 2023, (after consideration of the aforementioned 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 next 12 months and for the foreseeable future, as well as dividends and share repurchases.
We are subject to variable interest rates on our revolving credit facility, which is subject to a benchmark interest rate determined based on the currency denomination of borrowings. At December 31, 2023, we had no amounts outstanding on our revolving credit facility and, therefore, no variable rate-based borrowings outstanding.
In addition to our long-term debt, we have other cash commitments related to leases. The majority of our lease transactions are accounted for as operating leases, and we incurred rent expense for continuing operations related thereto of $14.9 million in 2023. 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.
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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 2023, 2022 and 2021, we purchased 680,594, 1,264,088 and 596,084 shares of our outstanding common stock for $18.8 million, $36.9 million and $19.1 million, respectively. Since the initial authorization through December 31, 2023, we have purchased 5,795,497 shares of our outstanding common stock for an aggregate purchase price of $163.1 million. 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.
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 and finance lease agreements, certain benefit obligations and interest obligations on our long-term debt. The following table summarizes our material contractual cash obligations as of December 31, 2023 (dollars in thousands).
| Payments Due by Periods | |||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Total | Less than One Year | 1 - 3 Years | 3 - 5 Years | More than 5 Years | |||||||||||||||
| Contractual and other cash obligations: | |||||||||||||||||||
| Long-term debt | $ | 400,000 | $ | — | $ | — | $ | — | $ | 400,000 | |||||||||
| Operating lease obligations | 52,420 | 9,560 | 16,770 | 13,140 | 12,950 | ||||||||||||||
| Finance lease obligations | 2,370 | 540 | 1,130 | 700 | — | ||||||||||||||
| Benefit obligations | 16,400 | 1,310 | 2,780 | 3,040 | 9,270 | ||||||||||||||
| Interest obligations (a) | 90,750 | 16,500 | 33,000 | 33,000 | 8,250 | ||||||||||||||
| Total contractual and other cash obligations | $ | 561,940 | $ | 27,910 | $ | 53,680 | $ | 49,880 | $ | 430,470 |
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(a) Our Senior Notes bear interest at 4.125%. The future interest obligations calculation excludes the impact of our cross-currency swap agreements. See Note 12, "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 21, "Income Taxes," included in Item 8, "Financial Statements and Supplementary Data," within this Form 10-K.
Market Risk
We conduct business in various locations throughout the world and are subject to market risk due to changes in the value of foreign currencies. The functional currencies of our foreign subsidiaries are primarily the local currency in the country of domicile. We manage these operating activities at the local level and revenues and costs are generally denominated in local currencies; however, results of operations and assets and liabilities reported in U.S. dollars will fluctuate with changes in exchange rates between such local currencies and the U.S. dollar.
We use derivative financial instruments to manage currency risks associated with our procurement activities denominated in currencies other than the functional currency of our subsidiaries and the impact of currency rate volatility on our earnings. As of December 31, 2023, we were party to foreign exchange forward and swap contracts to hedge changes in foreign currency exchange rates with notional amounts of $138.6 million. We also use cross-currency swap agreements to mitigate currency risks associated with the net investment in certain of our foreign subsidiaries. See Note 12, "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.
Common Stock
TriMas is listed in the NASDAQ Global Select MarketSM. Our stock trades under the symbol "TRS."
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Credit Rating
We and certain of our outstanding debt obligations are rated by Standard & Poor's and Moody's. On March 31, 2023, Moody's affirmed a Ba3 rating to our 2029 Senior Notes, as presented in Note 11, "Long-term Debt" included in Item 8, "Financial Statements and Supplementary Data" within this Form 10-K. Moody's also affirmed a Ba2 Corporate Family Rating and maintained its outlook as stable. On May 22, 2023, Standard & Poor's affirmed a BB- rating to our 2029 Senior Notes. Standard & Poor's also affirmed a BB corporate credit rating and maintained its outlook as stable. If our credit ratings were to decline, our ability to access certain financial markets may become limited, our cost of borrowings may increase, the perception of us in the view of our customers, suppliers and security holders may worsen and as a result, we may be adversely affected.
Outlook
Following 2023, where we proactively managed through demand weakness in the consumer products and industrial markets, we anticipate the beginning of a gradual recovery within both of these markets in 2024, with consumer spending leading the way in the earlier part of the year. We also anticipate that demand in the aerospace & defense market will continue to remain strong in 2024. As our Aerospace segment continues to experience strong order intake, we will continue to increase capacity and address challenges to manufacturing throughput in order to support market demand.
We have seen a number of global market uncertainties stemming from the macro-economic environment in the past few years, including significant challenges in inflationary pressures, supply chain disruptions and labor availability, as well as significant volatility in our customers' sentiment and order patterns. While we expect gradual demand recovery in the consumer products and industrial markets and continued strength in our aerospace & defense market, we believe this period of global market uncertainty will continue into 2024, at least in the near-term. However, no matter the outcome of these factors, we expect to continue to mitigate, as much as practical, the impact of these challenges, executing on streamlining actions and taking other steps as necessary, to maintain our strong balance sheet and generate cash in support of our capital allocation strategy.
We believe our capital structure remains strong and that we have sufficient headroom under our financial covenants, and ample cash and available liquidity under our revolving credit facility, to meet our debt service, capital expenditure and other short-term and long-term obligations for the next 12 months and for the foreseeable future, as well as fund dividends, share repurchases and bolt-on acquisitions consistent with our capital allocation strategy.
We expect to continue to leverage the tenets of our TriMas Business Model to manage our multi-industry businesses on a longer-term basis, 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 $4.2 million and $1.7 million at December 31, 2023 and 2022, respectively. We monitor our exposure for credit losses and maintain adequate allowances for doubtful accounts. We determine these allowances based on our historical write-off experience and/or specific customer circumstances and provide such allowances when amounts are reasonably estimable and it is probable a loss has been incurred. Although we have been growing business with certain of our larger customers, and there has been some industry consolidation where certain of our customers are merging, we do not believe that significant credit risk exists or that we have a significant concentration of accounts receivable with a single customer or group of customers due to our diverse customer base. See Item 1A, "Risk Factors," for additional information regarding risks associated with a concentrated customer base.
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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 2023 goodwill impairment test, we had six reporting units, four of which had goodwill, within our three reportable segments.
For purposes of the 2023 annual impairment tests, we elected the option to bypass the qualitative assessment and performed a quantitative assessment. In conducting the quantitative analysis, we determined the estimated fair value of each reporting unit 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 fair values of the TriMas Packaging, Life Sciences, Aerospace Fasteners, and Norris Cylinder reporting units exceeded their carrying values by approximately 43%, 15%, 7%, and 254%, respectively, and thus there was no goodwill impairment.
Additionally, we performed a quantitative assessment for all of our indefinite-lived intangible assets, except for the Aarts trade name, using the relief-from-royalty method. We performed a qualitative assessment for the Aarts trade name as it was acquired less than one year prior and has long-term sales projections consistent with those expected in the purchase price valuation. 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 one of our aerospace-related trade names had a carrying value that exceeded its fair value, and therefore recorded an impairment charge of $1.1 million during 2023.
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.
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Asbestos-related Matters. We accrue loss reserves for asbestos-related matters based upon an estimate of the ultimate liability for claims incurred, whether reported or not, including an estimate of future settlement costs and costs to defend. We utilize known facts and historical trends for Company-specific and general market asbestos-related activity, as well as an actuarial valuation in determining estimated required reserves which we believe are probable and reasonably estimable. Asbestos-related accruals are assessed at each balance sheet date to determine if the liability remains reasonably stated. Accruals for asbestos-related matters are included in the consolidated balance sheet in "Accrued liabilities" and "Other long-term liabilities."
Other Loss Reserves. We have other loss exposures related to insurance, litigation and environmental claims. Establishing loss reserves for these matters requires the use of estimates and judgment in regard to risk exposure and ultimate liability. We are generally party to high deductible insurance programs for losses and liabilities related principally to workers' compensation, health and welfare claims and comprehensive general, product and vehicle liability. Generally, we are responsible for up to $0.8 million per occurrence under our retention program for workers' compensation, up to $1.5 million per occurrence under our retention programs for comprehensive general, product and vehicle liability, and have a $0.4 million per occurrence stop-loss limit with respect to our self-insured group medical plan. We accrue loss reserves up to our retention amounts based upon our estimates of the ultimate liability for claims incurred, including an estimate of related litigation defense costs, and an estimate of claims incurred but not reported using actuarial assumptions about future events. We accrue for such items when such amounts are reasonably estimable and probable. We utilize known facts and historical trends, as well as actuarial valuations in determining estimated required reserves. Changes in assumptions for factors such as medical costs and actual experience could cause these estimates to change significantly.
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