Core Molding Technologies, Inc. — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018. The company manufactures sheet molding compound and molded thermoset and thermoplastic products for truck, automotive, marine and other markets. Results include Horizon Plastics, acquired January 16, 2018.
Financial results
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Net sales | $64.676 million | $38.494 million | $196.324 million | $122.608 million |
| Gross margin | $4.862 million; 7.5% | $5.752 million; 14.9% | $20.645 million; 10.5% | $19.571 million; 16.0% |
| Operating income (loss) | $(1.487) million | $1.394 million | $1.058 million | $7.121 million |
| Interest expense | $632,000 | $62,000 | $1.705 million | $191,000 |
| Net income (loss) | $(1.803) million | $855,000 | $(839,000) | $4.704 million |
| Diluted earnings (loss) per share | $(0.23) | $0.11 | $(0.11) | $0.61 |
- Product sales rose 66% in Q3 and 69% year to date, driven by Horizon Plastics and stronger truck demand. Horizon contributed $14.823 million of Q3 product sales and $47.514 million year to date.
- Operating income for the first nine months declined approximately 85%. Management attributed weaker margins and profitability mainly to manufacturing inefficiencies, labor and overhead costs, scrap and rework, and higher SG&A and interest expense.
- Operating cash flow was $6.524 million for the first nine months, versus $4.529 million a year earlier. Capital expenditures were $4.761 million; cash used for investing totaled $67.218 million, including the $62.457 million Horizon acquisition.
- At September 30, cash was zero; current assets were $69.437 million and current liabilities $42.307 million. Debt totaled $42.469 million, including $3.230 million current and $38.591 million long-term. The company had $40 million available on its revolving facility and reported compliance with covenants.
Material changes and unusual items
- Q3 sales increased $26.182 million year over year, but gross margin fell to 7.5% from 14.9% and the quarter moved to an operating loss. Management cited unfavorable product mix and manufacturing efficiency, particularly higher labor, scrap and overhead costs.
- Horizon Plastics expanded the company’s structural foam and structural web molding capabilities and its presence in Canada and Mexico. Purchase-price allocation remained preliminary; the acquisition added $20.554 million of goodwill and $17.520 million of initially estimated intangible assets.
- The company adopted ASC 606 on January 1, 2018. For the nine months, the standard increased reported revenue by $3.850 million and operating income by $844,000 relative to the filing’s “without adoption” presentation; the reported net loss was $839,000 versus $172,000 without adoption. The comparative 2017 figures were not restated.
- Horizon-related transaction costs were $1.289 million pre-tax for the first nine months. Management said these reduced net income by $941,000, or $0.12 per share; excluding them, nine-month net income would have been $102,000. Management reported Horizon’s contribution, excluding transaction costs, as $0.29 per share.
- On October 4, 2018, CEO Kevin L. Barnett announced retirement effective October 22 and resigned from the board. His separation agreement is expected to result in an approximately $858,000 fourth-quarter charge.
Outlook, risks and contingencies
- Management anticipated higher product sales for the remainder of 2018, supported by Horizon and truck demand. It cited an ACT Research forecast of 317,000 North American heavy-duty truck units for 2018, approximately 24% above 2017; this is an industry forecast, not company earnings guidance.
- Management expected many operating challenges to continue in Q4, with new program launches potentially adding startup inefficiencies and labor needs. Improvement measures include hiring, training and retention, added technical and consulting support, customer price increases, possible relocation of work, and investment in equipment capacity and reliability.
- Labor shortages, capacity and equipment reliability constraints had impaired delivery and quality performance for some major customers. Management warned that if improvement efforts fail, covenant compliance and debt obligations over the next 12 months could be at risk; it nevertheless believed available operating cash flow and revolver capacity would meet liquidity needs, subject to covenant compliance.
- Other stated exposures include cyclical truck demand, customer concentration, raw-material inflation and availability, foreign exchange, interest rates, acquisition integration and possible disruption or costs from operational restructuring. The company uses foreign-exchange contracts and interest-rate swaps to hedge some exposures.
- No material legal proceedings or significant off-balance-sheet arrangements were reported. The company said it was not involved in litigation likely to have a material adverse effect.
Important facts for investors to verify
- Whether manufacturing efficiency, labor retention, delivery and quality performance improve, and whether major customers retain or shift business.
- Whether the company meets credit-agreement covenants and sustains liquidity with no cash on hand and substantial acquisition-related debt.
- Horizon’s integration, realized synergies and earnings contribution, including final purchase-price and working-capital adjustments.
- The effect of ASC 606 on tooling revenue timing and comparability, as well as the significance of acquisition and CEO separation charges.
- Actual truck-market demand, customer concentration, input-cost trends, and the cost and outcome of planned capital spending and operational improvement measures.