Core Molding Technologies, Inc. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. The company molds thermoplastic and thermoset structural products for truck, automotive, marine, building, and other markets, operating as one reportable segment.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net sales | $81.0 million | $59.9 million | $234.3 million | $161.7 million |
| Gross margin | $6.4 million (7.9%) | $10.8 million (18.1%) | $32.9 million (14.0%) | $24.5 million (15.2%) |
| Operating income (loss) | $(2.4) million | $4.3 million | $9.1 million | $7.4 million |
| Net income (loss) | $(3.3) million | $3.3 million | $4.2 million | $9.0 million |
| Diluted earnings (loss) per share | $(0.41) | $0.39 | $0.50 | $1.08 |
| Cash provided by operating activities | Not separately stated for the quarter | $5.0 million | $31.1 million |
Balance sheet and liquidity at September 30, 2021: Cash was $0.6 million, down from $4.1 million at December 31, 2020. Current assets were $71.0 million and current liabilities were $47.4 million. Term debt was $27.6 million, with $2.3 million outstanding on the revolving line; the company reported $22.0 million of net revolver availability. It was in compliance with its debt covenants. Property, plant and equipment purchases were $8.3 million during the first nine months.
Changes and key drivers
- Sales increased 35% in Q3 and 45% year to date, reflecting higher demand in several markets and recovery of some raw-material inflation through customer pricing. Tooling revenue also increased, but the filing notes that it is variable from period to period.
- Profitability weakened sharply in Q3: gross margin fell to 7.9% from 18.1%, and the company reported an operating and net loss. Management attributed the margin decline to the net effect of selling-price changes and raw-material costs, unfavorable product mix, and production inefficiencies; improved fixed-cost leverage partly offset these pressures.
- For the first nine months, raw-material inflation was approximately $19.1 million, of which approximately $12.3 million was recovered from customers. In Q3 alone, inflation was approximately $9.9 million and recovery was approximately $6.5 million. Contractual limits prevented full pass-through.
- Operating cash flow fell to $5.0 million from $31.1 million. Working-capital changes reduced 2021 operating cash flow by $10.1 million, chiefly reflecting higher receivables and inventory, partly offset by payables and accrued liabilities.
- Year-to-date net income declined despite higher sales. The comparison is affected by the 2020 CARES Act-related tax benefit, including a $5.6 million valuation-allowance reversal and tax-rate benefit.
Outlook, risks, and unusual items
- Management expected Q4 2021 sales to exceed Q4 2020 mainly because of raw-material cost recovery; excluding that recovery, it expected sales to be flat. It anticipated continued customer supply-chain disruptions and sporadic demand changes, continued raw-material inflation, and tight labor markets.
- The company expected to spend up to $15 million on 2021 capital expenditures, including approximately $3.4 million to expand D-LFT capacity in Matamoros, Mexico. It said cash, operating cash flow, and available borrowing were expected to meet liquidity needs for the next 12 months, subject to forecasts and covenant compliance.
- Batavia, Ohio facility closure costs were $2.3 million for the first nine months, including $0.6 million of fixed-asset disposal losses, $0.4 million of building repairs, and $0.4 million of severance. The product transition plan was completed in Q3; closure was expected by December 31, 2021, with no additional material Q4 expense anticipated.
- Key risks include raw-material price and availability, customer supply-chain disruptions, labor costs and availability, manufacturing inefficiencies, customer order changes, and reliance on major customers. Five customers individually exceeded 10% of sales in an annual or interim period; management warned that a substantial loss of sales to them could materially harm the business.
- Management reported no material change in previously disclosed risk factors, no significant off-balance-sheet arrangements, and no legal proceedings it believed likely to materially affect financial position or results. Disclosure controls were assessed as effective.
Important facts for investors to verify
- Whether customer pricing can recover the portion of raw-material and wage inflation that remains unrecovered, and how quickly recovery occurs.
- Whether supply disruptions, product mix, and manufacturing efficiencies improve enough to restore gross margins.
- Whether operating cash flow and working capital support planned capital spending while maintaining covenant compliance and liquidity.
- Whether the Batavia closure is completed on schedule and within management’s estimate of no additional material Q4 costs.
- How customer concentration and heavy-duty truck demand affect sales, given management’s stated outlook and market exposure.