Core Molding Technologies, Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020; unaudited. The company molds thermoplastic and thermoset structural composite products for truck, automotive, marine, construction, and other markets.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net sales | $37.8m | $81.2m | $101.8m | $153.5m |
| Gross margin | $2.9m (about 8% of sales) | $8.5m (about 10%) | $13.7m (about 13%) | $11.6m (about 8%) |
| Operating income (loss) | $(1.2)m | $1.3m | $3.1m | $(2.7)m |
| Net income (loss) | $(2.3)m | $0.2m | $5.7m | $(3.6)m |
| Diluted EPS | $(0.29) | $0.03 | $0.67 | $(0.47) |
- Q2 sales fell about 53% year over year; first-half sales fell about 34%. Product sales were $35.8m in Q2 and $97.8m for the first half. First-half truck product sales decreased 53%.
- First-half operating cash flow was $18.5m, versus $3.3m in 2019. Investing cash outflow was $1.6m, chiefly capital expenditure; financing cash outflow was $14.1m, including net revolving-loan repayments of $12.0m and term principal repayments of $2.3m.
- Cash was $4.6m at June 30, up from $1.9m at year-end 2019. Accounts receivable and inventory were $21.6m and $16.2m, respectively.
- Total debt was $36.2m, down from $50.3m at December 31, 2019. The principal credit-facility borrowings carried a variable rate of 8.0% at quarter-end. Nearly all credit-facility debt was classified as current following covenant noncompliance.
- Current liabilities exceeded current assets by $12.345m. The filing reports $20m of unblocked revolving availability, with none outstanding at June 30; availability is subject to the credit agreement and forbearance terms.
Material changes and management commentary
- COVID-19, the cyclical truck-market downturn, and temporary customer shutdowns in April and May sharply reduced sales. Management cited North American heavy-duty truck production down about 52% for the first half, based on ACT Research.
- Despite lower sales, first-half operating income improved from a loss to profit. Management attributed the improvement to manufacturing efficiencies, cost savings, and lower operating and SG&A costs. Q2 gross margin percentage declined year over year as lower fixed-cost absorption outweighed favorable mix, efficiency, selling-price, and material-cost effects.
- First-half net income included a $5.638m tax benefit from CARES Act net operating loss carrybacks and reversal of a U.S. deferred-tax valuation allowance. The company filed for a $6.155m refund, had received $0.466m by quarter-end, and expected the remainder by September 30, 2020. The balance-sheet income-tax receivable is reported as $6.870m; the filing also describes a $5.688m tax receivable in its going-concern discussion.
- Q2 SG&A benefited from $1.391m in government subsidies, primarily Canadian wage support and state shared-work programs. Q2 interest expense rose to $1.197m, including a $0.225m forbearance amendment fee; first-half interest expense was $2.371m, including $0.450m of such fees.
- Management expected demand to rebound from Q2 levels but emphasized that the outlook was uncertain. It cited potential further COVID-19 spread, government restrictions or shutdowns, economic conditions, and customer and supplier impacts. It anticipated up to $3.5m of additional capital spending for the remainder of 2020.
Debt, liquidity, risks, and contingencies
- The company was in default of its leverage and fixed-charge coverage covenants at June 30: actual leverage was 3.52 versus a maximum of 3.25, and fixed-charge coverage was 0.75 versus a minimum of 1.15.
- A second amended forbearance agreement extended lender forbearance through September 30, 2020, subject to conditions including minimum liquidity of $5m, specified year-to-date EBITDA thresholds, and refinancing milestones. The agreement also raised the credit-facility rate to LIBOR plus 700 basis points, with a 100-basis-point LIBOR floor.
- The company had executed refinancing term sheets, but not firm financing commitments; closing remained subject to due diligence, appraisals, documentation, and lender approval. Management disclosed substantial doubt about the company’s ability to continue as a going concern within one year after issuance of the financial statements if refinancing cannot be completed. The statements were prepared on a going-concern basis without adjustments for that uncertainty.
- Other notable risks include dependence on major customers, cyclical and concentrated truck demand, commodity and foreign-exchange exposure, and potential COVID-19 disruption. The company reported no significant off-balance-sheet arrangements and no legal proceedings management believed likely to have a material adverse effect.
Most important facts for investors to verify
- Whether refinancing closed by the September 30, 2020 forbearance deadline, and the final financing terms, covenants, and lender commitments.
- Whether the company met the forbearance liquidity and EBITDA requirements and obtained any further waivers or extensions.
- Receipt and reconciliation of the CARES Act tax refund: the filing cites a $6.155m claim, $0.466m received, and differing receivable figures in separate disclosures.
- Whether demand recovered after customer shutdowns and whether operating cash flow and margins remained resilient as production volumes changed.
- Customer concentration and the effects of truck-market demand: five customers are identified as major customers, and the filing warns that loss of significant sales to them could materially harm the business.