Core Molding Technologies, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. The company molds thermoplastic and thermoset structural products for truck, automotive, marine, construction, and other markets. It reports one operating segment.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net sales | $59.9 million | $74.7 million | $161.7 million | $228.2 million |
| Gross margin | $10.8 million (18.1%) | $6.5 million (8.7%) | $24.5 million (15.2%) | $18.1 million (7.9%) |
| Operating income (loss) | $4.3 million | ($4.7 million) | $7.4 million | ($7.4 million) |
| Net income (loss) | $3.3 million | ($6.1 million) | $9.0 million | ($9.8 million) |
| Diluted EPS | $0.39 | ($0.78) | $1.07 | ($1.25) |
- Cash flow: Nine-month operating cash flow was $31.1 million, versus $4.0 million a year earlier. Investing used $2.7 million, mainly for capital expenditures; financing used $15.4 million. Cash increased by $13.0 million to $14.8 million. Working-capital changes contributed to operating cash flow.
- Liquidity and debt at September 30: Current assets were $62.7 million and current liabilities $37.0 million. Debt was $35.0 million gross, including $31.5 million long-term debt and $2.8 million current debt on the balance sheet; cash was $14.8 million. The company reported $20 million of revolving availability, with none drawn.
Changes versus the prior comparable period
- Sales declined about 20% in Q3 and 29% for the first nine months. Management attributed the decline mainly to the truck-market downturn and COVID-19 effects; nine-month truck product sales fell 45%.
- Gross margin improved substantially in both periods, which management attributed primarily to better product mix, manufacturing efficiency, and cost savings. Lower fixed-cost absorption partly offset the improvement.
- SG&A declined to $6.5 million in Q3 and $17.1 million for the nine months. Nine-month SG&A benefited from $1.4 million of government subsidies, as well as lower professional-service and travel costs.
- The prior-year periods included a $4.1 million goodwill impairment charge related to Horizon Plastics; no impairment was recorded in 2020.
- Nine-month interest expense rose to $3.3 million from $2.9 million, reflecting higher interest rates; Q3 interest expense declined, primarily with lower average debt.
Outlook, risks, and unusual items
- Management expected 2020 product sales to be below 2019 levels and forecast Q4 product demand slightly below Q4 2019, based on customer forecasts.
- Credit default and refinancing: The company was in default under its KeyBank credit agreement after failing a fixed-charge coverage requirement. Forbearance was extended through September 30, 2020, with liquidity, EBITDA, capital-spending, and new-financing conditions. Management said the default created substantial doubt about going concern at quarter-end. On October 27, 2020, the company refinanced and repaid the KeyBank obligations, and management said the new facilities provided sufficient liquidity for the next 12 months.
- The October refinancing included Wells Fargo commitments of up to $43.5 million and a separate $13.2 million FGI loan secured by certain Mexican assets. The facilities are secured; stated rates on October 28 were 4.75% for the revolving loan, 3.75% for the term loan, and 8.25% fixed for the FGI loan. Termination of interest-rate swaps resulted in a $1.253 million loss and cash outflow; $605,000 of deferred loan costs was also written off.
- Nine-month income tax benefit was $4.9 million, including a $5.638 million first-quarter benefit from reversing a U.S. deferred-tax valuation allowance and carrying net operating losses back under the CARES Act. The company reported collecting a $6.155 million tax refund by September 30. This benefit materially supported reported net income.
- On November 5, the company announced plans to close its Batavia, Ohio facility in 2021. The facility generated less than 5% of revenue; management anticipated about half would transfer to other company locations and characterized expected closure costs as immaterial.
- Key risks include COVID-19 impacts on demand, operations and supply chains; cyclical truck-market demand; reliance on major customers; raw-material prices, currency and interest-rate exposure; and the ability to maintain liquidity and meet forecasts. Five major customers were identified; management said losing significant sales to them could materially harm the business.
- Management concluded disclosure controls were effective, and reported no material change in internal control over financial reporting during the quarter. It disclosed no material legal proceedings or significant off-balance-sheet arrangements.
Important facts for investors to verify
- Whether the refinancing provides adequate liquidity and covenant headroom as the company services secured debt.
- Actual sales, margins, and cash generation against management’s Q4 and full-year expectations, particularly as truck demand and COVID-19 conditions evolve.
- How much of the tax benefit is nonrecurring and the sustainability of earnings excluding that benefit.
- Customer concentration and the extent to which sales lost from the Batavia closure can be transferred or retained.
- Potential impairment exposure if operating conditions weaken or COVID-19 causes prolonged disruption.