Core Molding Technologies, Inc. — 2019 Form 10-K
Business context and reporting period. The company manufactures thermoset and thermoplastic structural composite products for truck, marine, automotive, agriculture, construction and other commercial markets. This annual filing covers the year ended December 31, 2019; it was filed March 13, 2020. Operations span seven production facilities in the United States, Mexico and Canada. Heavy- and medium-duty truck products represented 58% of 2019 sales.
Financial performance and liquidity
| Metric | 2019 | 2018 |
|---|---|---|
| Net sales | $284.3 million | $269.5 million |
| Product sales | $269.0 million | $256.2 million |
| Gross margin | $21.5 million; 7.6% of sales | $27.1 million; 10.1% of sales |
| Operating loss | $11.5 million | $3.1 million |
| Net loss | $15.2 million; $1.94 per diluted share | $4.8 million; $0.62 per diluted share |
| Operating cash flow | $16.7 million | $(6.5) million |
| Capital expenditures | $7.5 million | $5.8 million |
- Sales increased 5.5%; product sales rose 5%. Higher truck and marine sales were the principal drivers.
- Gross margin fell primarily because of unfavorable product mix and manufacturing inefficiencies. SG&A increased to $28.9 million from $27.8 million. Goodwill impairment was $4.1 million, compared with $2.4 million.
- Cash from operations reflected working-capital reductions, including lower receivables and inventory. Cash at year-end was $1.9 million.
- At December 31, debt principal was approximately $50.3 million; $49.451 million, net of deferred loan costs, was classified as current. Current liabilities exceeded current assets by $22.6 million. The filing reports $15.992 million of available revolving credit at year-end.
- The company reported $84.4 million of stockholders’ equity, down from $98.9 million. It paid no cash dividends in 2019; the quarterly dividend had ended after the May 2018 declaration.
Material changes and management commentary
- Operational inefficiencies, labor shortages, equipment constraints, overtime, scrap, rework and expedited shipping costs affected results. Management said delivery and quality had begun to improve under its turnaround plan, but financial benefits had not reached anticipated levels.
- Fourth-quarter product sales were 19% lower than in the third quarter, weighing on operating income. Full-year sales gains did not prevent a deeper operating loss.
- The company recorded a $4.1 million goodwill impairment at Horizon Plastics, citing margin pressure from selling-price decreases that were not fully offset by lower material costs. In 2018, it impaired all goodwill associated with Core Traditional, a $2.4 million charge.
- U.S. deferred tax assets were fully reserved in 2019, including a $3.267 million valuation allowance, reflecting cumulative losses and uncertainty about future realization.
- After giving Volvo notice in November 2019 that it intended to terminate the supply arrangement, the company and Volvo agreed to revised terms in March 2020; the company withdrew its notice. Volvo accounted for approximately 17% of 2019 sales.
Outlook, risks and contingencies
- Management expected 2020 product sales to decline from 2019, citing lower heavy-duty truck demand. Truck customers and industry analysts forecast approximately a 34% decrease in Class 8 truck sales in 2020. The filing provides no specific company earnings or margin guidance.
- Financing and going concern: The company breached its fixed-charge covenant and, as of December 31, 2019, was also in default of leverage and fixed-charge covenants. Actual year-end ratios were 0.59 against a 1.00 minimum fixed-charge ratio and 9.18 against a maximum 3.25 leverage ratio. Lenders agreed to forbear, and an amendment dated March 13, 2020 extended forbearance through May 29, 2020, subject to milestones and refinancing conditions. The company was pursuing refinancing or a new capital structure, but had no firm financing commitment. The auditor highlighted substantial doubt about the company’s ability to continue as a going concern; the financial statements were prepared on a going-concern basis.
- Other significant risks include customer concentration (four customers represented 62% of sales; four customers held 49% of receivables), truck-market cyclicality, continued labor and capacity challenges, raw-material costs, debt service and covenant compliance, and acquisition integration. The filing also identifies potential disruption from the coronavirus outbreak, including effects on suppliers, freight, production and demand.
- Management anticipated approximately $9 million of 2020 capital spending, subject to financing and liquidity; the amended forbearance agreement imposed a capital-expenditure limit through May 29, 2020.
- The filing reports no litigation that management considered likely to have a material adverse effect. The auditor and management reported effective internal control over financial reporting as of year-end.
Important facts for investors to verify
- Whether the company met the amended forbearance milestones and completed a refinancing or other capital restructuring, and the resulting debt terms, availability and covenants.
- Whether liquidity, cash generation and working capital can support operations and scheduled obligations, given low cash, negative working capital and debt classified as current.
- Whether the turnaround improves manufacturing efficiency, delivery, quality, labor retention and margins, and whether reported savings are sustainable.
- How actual 2020 sales and profitability compared with management’s expected decline and the industry’s Class 8 truck forecast.
- Whether customer concentration, the revised Volvo relationship, and Horizon Plastics’ margins or goodwill carrying value changed materially.