Core Molding Technologies, Inc. — Q2 2022 Form 10-Q
Business context and reporting period. The company manufactures thermoplastic and thermoset structural products for truck, power sports, building products, industrial, utilities and other markets. It operates as one segment with six production facilities in the U.S., Canada and Mexico. This unaudited report covers the quarter and six months ended June 30, 2022; comparisons are with the corresponding 2021 periods. Dollar amounts below are in millions unless stated otherwise.
Financial performance and position
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Net sales | $98.7 | $80.5 | $189.3 | $153.3 |
| Gross margin | $13.0; 13.2% | $13.7; 17.1% | $27.6; 14.6% | $26.5; 17.3% |
| Operating income | $4.4 | $6.2 | $10.4 | $11.5 |
| Net income | $2.2 | $4.1 | $6.1 | $7.5 |
| Diluted EPS | $0.26 | $0.48 | $0.71 | $0.89 |
- Cash flow: Six-month operating cash flow was $2.9 million, down from $8.5 million. Working capital reduced cash flow by $10.6 million, mainly from higher receivables and inventory, partly offset by higher payables. Capital expenditures were $8.6 million, versus $5.4 million; cash used in investing was $8.6 million.
- Liquidity: Cash was $0.1 million at June 30, down from $6.1 million at year-end 2021. The company reported $24.3 million of available revolving loans, with $6.7 million outstanding. Management said available cash, operating cash flow, borrowing availability and equipment financing would meet current liquidity needs.
- Debt: Term debt was $24.5 million before deferred loan costs, including $1.1 million current; revolving debt was $6.7 million. The company was compliant with its financial covenants at June 30. Term-loan and revolving-loan rates were variable in part, and the FGI term loan carried a fixed 8.25% rate.
- Balance sheet: Total assets were $204.8 million and stockholders’ equity was $106.6 million at June 30. Receivables were $54.1 million and inventory was $29.0 million.
Changes versus prior comparable periods
- Q2 sales increased 22.7%; six-month sales increased 23.5%. Higher demand in medium/heavy-duty trucks, power sports and industrial markets, price increases, and new program launches contributed. Tooling revenue rose to $5.4 million in Q2 from $1.3 million, but the company notes tooling sales fluctuate by period.
- Despite higher sales, Q2 gross margin fell to 13.2% from 17.1%; six-month gross margin fell to 14.6% from 17.3%. Management cited product mix and production inefficiencies, as well as unfavorable net selling-price and raw-material cost changes; improved fixed-cost leverage partly offset these factors.
- Net income declined 46% in Q2 and 20% for the first half. SG&A increased to $8.7 million for Q2 and $17.2 million for the first half, primarily due to higher labor and benefits, insurance and professional fees. Interest expense declined, partly because of income-tax-refund interest and lower average debt.
- Operating cash flow weakened as working capital absorbed cash. Six-month capital spending also increased year over year.
Outlook, risks and unusual items
- Outlook: Management expected second-half 2022 sales to exceed the second half of 2021, citing customer forecasts for higher truck demand and new or anticipated program launches. The company could not estimate when supply-chain disruption or higher interest rates might affect demand.
- Costs and operations: Raw-material costs, including thermoset resins and fiberglass, were expected to remain elevated in 2022. The company had recovered some increases and continued seeking cost recovery. Labor constraints had begun to improve, but wage inflation was expected to continue. Management anticipated up to $20 million of 2022 capital expenditures for capacity expansion, including a Mexico expansion and added presses in Minnesota and Ontario.
- Customer concentration: Five customers—BRP, Navistar, PACCAR, UFP and Volvo—were identified as major customers. The filing warns that losing a significant portion of sales to major customers could materially harm the business.
- Refinancing after quarter-end: On July 22, 2022, the company entered a secured Huntington credit facility with up to $75 million of commitments: a $25 million revolver, $25 million term loan and $25 million capex facility. It drew approximately $13.7 million on the revolver and $25 million on the term loan, using proceeds in part to repay prior debt and related obligations. A swap fixes the rate on the $25 million term loan at 4.75% through July 2027. The refinancing resulted in a $1.234 million write-off of deferred loan costs and an approximately $0.348 million FGI prepayment fee.
- Other risks and contingencies: Key exposures include raw-material prices and availability, inflation, interest and foreign-exchange rates, customer demand and cancellations, supply-chain disruption, labor availability, production efficiency and new-program execution. The company reported no significant off-balance-sheet arrangements and no legal proceedings that management considered likely to have a material adverse effect. No material changes to previously disclosed risk factors were reported.
- Taxes: The six-month effective tax rate was approximately 36%. U.S. operations incurred a net loss, but the related tax benefit was offset by a full valuation allowance; the company cited uncertainty in realizing U.S. deferred tax assets.
Investor verification points
- Whether price recovery, product mix and production efficiency improve gross margins as raw-material and wage costs remain elevated.
- Whether management’s second-half sales outlook is supported by truck-market demand and program launches, and how customer supply-chain disruptions and interest rates affect orders.
- Working-capital trends, particularly receivables and inventory, and the conversion of reported earnings into operating cash flow.
- Actual capital spending and the timing, cost and returns of planned capacity expansions.
- Huntington facility pricing, covenant requirements, borrowing levels and liquidity after refinancing; the filing gives terms and initial draws but not subsequent-period performance.
- Sales exposure to major customers and the effect of any customer production changes or lost business.
- Whether the U.S. deferred-tax valuation allowance or tax examinations lead to material changes.