Core Molding Technologies, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. The company molds thermoplastic and thermoset structural composite products for truck, automotive, marine, construction, and other commercial markets.
Financial results
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Net sales | $64.0 million | $72.3 million |
| Gross margin | $10.8 million (16.8% of sales) | $3.1 million (4.4% of sales) |
| Operating income (loss) | $4.3 million | $(4.0) million |
| Net income (loss) | $8.0 million; $0.97 per diluted share | $(3.8) million; $(0.49) per diluted share |
| Operating cash flow | $5.4 million | $2.9 million |
| Cash and cash equivalents at period end | $1.4 million | $0.8 million |
Q1 2020 net income included a $4.9 million income tax benefit. Management attributed $5.6 million of tax benefit to CARES Act provisions, including reversal of a U.S. deferred-tax valuation allowance and a benefit from carrying losses back to prior tax years. The quarter’s earnings therefore include a material tax-related benefit.
Changes and operating performance
- Sales declined 11% year over year; product sales fell 13%. Truck-customer product sales were down 34%, while tooling sales increased to $2.1 million from $0.8 million.
- Gross margin improved to 16.8% from 4.4%, and operating income improved by $8.3 million to a profit. Management cited better product mix and manufacturing efficiency, lower material costs relative to selling prices, and lower operating and SG&A costs.
- SG&A declined to $6.5 million from $7.2 million. Interest expense rose to $1.2 million from $0.9 million, including a $225,000 forbearance amendment fee and higher interest rates.
- Operating cash flow was positive, but working-capital changes reduced it by $6.2 million. Capital spending was $0.5 million; financing activities used $5.4 million, primarily for net revolver and scheduled term-loan repayments.
Liquidity, debt, and going-concern risk
- Debt was $44.9 million at March 31, all classified as current following covenant and forbearance non-compliance. The company reported $12.2 million of available revolving credit and $1.4 million of cash.
- Current liabilities exceeded current assets by $13.35 million. The company was in default of its leverage and fixed-charge coverage covenants; reported ratios were 3.53 versus a maximum of 3.25 and 0.97 versus a minimum of 1.10, respectively.
- The amended forbearance agreement ran through May 29, 2020, subject to milestones for a refinancing. Management said refinancing discussions were delayed by COVID-19 and that it was negotiating an extension with existing lenders. It had received multiple refinancing term sheets but had no firm commitment for additional financing.
- Management stated that these circumstances raise substantial doubt about the company’s ability to continue as a going concern within one year after issuance of the financial statements. If lenders demand repayment, the company may be unable to meet working-capital obligations.
Outlook, risks, and other notable items
- Management anticipated deteriorating demand for the rest of 2020, particularly Q2. Several major customers suspended operations during April, and the company temporarily shut some facilities. It reported production began increasing May 4 as customers returned and supply chains stabilized.
- Management said it expected to spend up to $5.0 million on capital expenditures during the remainder of 2020, subject to the applicable financing restrictions and liquidity needs.
- COVID-19 could further disrupt customer demand, operations, staffing, supply chains, and access to financing; the duration and impact were uncertain. The company also cited customer concentration, cyclical truck demand, raw-material prices, foreign exchange, and variable interest rates as risks.
- Five customers—Navistar, Volvo, UFP, PACCAR, and BRP—each met the filing’s major-customer threshold. The filing warns that loss of significant sales to these customers could materially harm the business.
Most important facts for investors to verify
- Whether the lenders extended forbearance and whether the company completed a refinancing or otherwise resolved its covenant defaults and debt classification.
- Whether the $6.2 million CARES Act-related tax receivable was collected as expected, and how much reported earnings depended on tax benefits versus ongoing operations.
- Actual customer restart, production, and sales trends after the April shutdowns, especially in the truck market and among major customers.
- Cash availability, borrowing capacity under lender restrictions, and the company’s ability to fund operations and planned capital spending.