Core Molding Technologies, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; comparisons are with Q1 2018 unless stated otherwise. The company manufactures sheet molding compound and molded thermoset and thermoplastic products for truck, automotive, marine, and other markets. Results are consolidated.
Financial performance
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Net sales | $72.3 million | $63.0 million |
| Gross margin | $3.1 million; 4.4% of sales | $7.9 million; 12.5% of sales |
| Operating income (loss) | $(4.0) million | $1.1 million |
| Net income (loss) | $(3.8) million | $0.5 million |
| Diluted EPS | $(0.49) | $0.07 |
| Operating cash flow | $2.9 million | $(7.5) million |
- Product sales were $71.5 million, up 20%; tooling sales were $0.8 million versus $3.3 million. Management attributed product growth mainly to stronger truck demand and $12.5 million of new recreational-vehicle program sales.
- Gross margin fell sharply, primarily due to manufacturing inefficiencies and unfavorable product mix, including higher labor, benefits, scrap, and overhead costs. Favorable selling prices and material costs partly offset these pressures. SG&A was $7.2 million, up from $6.8 million; Q1 2018 included $1.3 million in one-time acquisition costs.
- Interest expense increased to $0.9 million from $0.4 million, reflecting higher average debt and interest rates. The Q1 2019 income tax benefit was $1.0 million.
- Operating cash flow improved from the prior-year period, supported by working-capital movements, particularly higher accounts payable and accrued liabilities; increased receivables partly offset these inflows. Capital spending was $3.4 million, and cash declined by $1.1 million to $0.8 million.
Balance sheet and liquidity
- At March 31, 2019, total debt was $58.8 million: $40.8 million of term loans and $18.1 million of revolving borrowings. Debt was variable-rate; reported rates were 5.25% on term loans and 5.13% on revolving loans. Cash was $0.8 million.
- Revolver availability was $14.4 million under the amended credit agreement. Management said operating cash flow and available borrowing should meet liquidity needs for the next 12 months, subject to continued covenant compliance and planned operational improvements.
- Current assets were $84.5 million and current liabilities were $49.9 million. Total liabilities were $114.5 million and stockholders’ equity was $95.6 million.
- Q1 capital expenditure spending was subject to a $7.5 million limit for the first six months of 2019 and a $12.5 million full-year limit under the credit amendment. The company anticipated up to $8.0 million of additional property, plant, and equipment purchases during the remainder of 2019.
Material changes, outlook, and risks
- Sales growth did not translate into profitability: operating results deteriorated because high truck-related demand strained manufacturing capacity and labor availability. The company cited hiring, training, and retention challenges, equipment capacity and reliability constraints, and difficulty meeting some delivery and quality requirements. Related costs included overtime, scrap, rework, premium freight, outsourced production, and repairs.
- Management expected higher product sales through the first half of 2019 than in the prior-year half, supported by truck demand. It cited an ACT Research forecast of 180,000 North American heavy-duty truck units for H1 2019, up approximately 18.6%. Management said its turnaround plan was progressing, while acknowledging ongoing inefficiencies and higher labor costs.
- On March 14, 2019, the company amended its credit agreement. The amendment reduced U.S. revolving availability from $40.0 million to $32.5 million, increased interest and unused-commitment fees, changed covenant definitions, waived year-end 2018 leverage- and fixed-charge-covenant noncompliance, and suspended leverage-ratio testing until December 31, 2019. The company reported compliance at March 31, 2019, but future compliance depends on expected operating and financial improvements; failure to obtain further relief after a future breach could make debt payable on demand.
- North American trucks represented 60% of product revenue, up from 51% in Q1 2018. Navistar, Volvo, and PACCAR each met the filing’s major-customer threshold, exposing results to customer demand, orders, and production schedules.
- Other stated risks include raw-material prices and availability, foreign-exchange and interest-rate movements, labor relations and availability, customer delivery charges, acquisition integration, and cyclical end markets. The company uses currency forwards and interest-rate swaps to hedge some exposures. No material legal proceedings, significant off-balance-sheet arrangements, or material changes to previously disclosed risk factors were reported.
- The company adopted the lease accounting standard on January 1, 2019, recording approximately $4.5 million of right-of-use assets and $4.4 million of lease liabilities. Management said adoption did not materially affect income or cash flows. No Q1 2019 long-lived-asset impairment was reported; the company had recorded a $2.4 million goodwill impairment in 2018 for its Core Traditional reporting unit.
Important facts for investors to verify
- Whether manufacturing turnaround measures improve labor availability, plant reliability, delivery and quality performance, and gross margins.
- Whether elevated truck demand and new program sales persist, and how concentrated revenue remains among major customers and truck markets.
- Whether operating cash generation and the $14.4 million revolver availability are sufficient given low cash, debt service, and planned capital spending.
- Whether covenant compliance can be maintained after the temporary leverage-testing suspension, particularly if expected operational improvements are delayed.
- How variable-rate debt, raw-material costs, foreign exchange, and customer chargebacks affect future earnings and liquidity.