Core Molding Technologies, Inc. — FY 2018 Form 10-K
Reporting period: Year ended December 31, 2018; includes unaudited fourth-quarter results. The company manufactures structural composite materials and molded components for truck, marine, automotive, and other markets.
Financial results and liquidity
| Metric | 2018 | 2017 |
|---|---|---|
| Net sales | $269.5 million | $161.7 million |
| Product sales | $256.2 million | $148.6 million |
| Gross margin | $27.1 million; 10.1% of sales | $24.6 million; 15.2% of sales |
| Operating income (loss) | $(3.1) million | $7.9 million |
| Net income (loss) | $(4.8) million; $(0.62) per diluted share | $5.5 million; $0.70 per diluted share |
| Cash from operations | $(6.5) million | $6.9 million |
| Capital expenditures | $5.8 million | $4.3 million |
- Cash and cash equivalents were $1.9 million at year-end, down from $26.8 million. Working-capital growth used $13.3 million of cash, primarily as receivables and inventory rose with sales.
- Gross debt was $59.0 million at year-end: $41.6 million of term loans and $17.4 million of revolving loans. Net interest expense was $2.4 million, versus $0.2 million in 2017. The filing also cites $58.4 million of aggregate principal debt in its risk factors, which differs from the debt note’s $59.0 million figure.
- Year-end revolving availability was reported as $22.6 million. Total assets were $201.2 million, working capital $40.1 million, and stockholders’ equity $98.9 million.
- Cash used in investing was $68.8 million, including the $63.0 million Horizon Plastics acquisition. Cash provided by financing was $50.4 million.
Changes versus prior period
- Sales rose 67% overall; product sales rose 72%. Growth reflected $62.6 million of acquired Horizon Plastics sales and $45.0 million of higher truck-customer demand.
- Despite higher sales, gross margin fell to 10.1% from 15.2%. Management attributed the decline principally to production inefficiencies and unfavorable product mix, as well as selling-price/material-cost changes and sales returns. Fixed-cost leverage and Horizon’s margin contribution partly offset the decline.
- SG&A increased to $27.8 million from $16.7 million, including Horizon-related ongoing costs, professional services, amortization, labor costs, severance, and acquisition fees. A $2.4 million goodwill impairment eliminated goodwill associated with the traditional business reporting unit.
- Truck markets accounted for 56% of product sales, down from 68% in 2017. Four major customers—Navistar, Volvo, PACCAR, and UFP—represented approximately 65% of 2018 sales; UFP was a new major customer.
- Fourth-quarter sales were $73.2 million, but the company recorded an operating loss of $4.2 million and net loss of $3.9 million. Losses also occurred in the third quarter.
Outlook, risks, and notable items
- Management expected 2019 product sales to increase, citing higher heavy-duty truck demand and new programs; truck customers and industry analysts forecast approximately 5% growth in Class 8 truck sales versus 2018. These are expectations, not guarantees.
- Management expected Horizon integration to continue through 2019. The acquisition expanded capabilities and geographic reach, but integration costs, execution challenges, and expected synergies remain uncertain.
- Capacity constraints and difficulty hiring, training, and retaining workers contributed to inefficiencies, overtime and contract-labor costs, scrap, rework, expedited shipping, and missed delivery or quality requirements. Large-press utilization was 91% at specified U.S. and Matamoros facilities, versus 63% in 2017.
- At December 31, 2018, the company was not compliant with leverage and fixed-charge covenants. A March 14, 2019 credit amendment waived those breaches and revised covenant terms, including suspending leverage-ratio testing until December 31, 2019. It also reduced U.S. revolver availability from $40.0 million to $32.5 million, increased loan pricing and unused commitment fees, and imposed capital-spending limits. Management’s ability to meet future covenants depends on planned operational and financial improvements.
- Management anticipated about $12.0 million of 2019 capital expenditures; the amended credit agreement capped spending at $7.5 million for the first six months and $12.5 million for the full year.
- Raw-material prices and availability, cyclical truck demand, customer concentration, labor relations, foreign currency exposure, acquisition integration, debt service and covenant compliance, and customer delivery/quality performance are material risks. Four customers also represented 64% of year-end receivables.
- The company ended its $0.05 quarterly dividend after the May 2018 declaration. It adopted ASC 606 in 2018; reported revenue and earnings differ from prior accounting treatment, and the filing states comparative periods were not restated. The new lease standard was expected to add $6–7 million of lease assets and liabilities in 2019.
- Management and the auditor reported effective internal control over financial reporting; Horizon’s operations were excluded from the control assessment and audit scope. Management reported no legal proceedings expected to have a material adverse effect.
Important facts for investors to verify
- Whether manufacturing efficiency, labor availability, quality, and on-time delivery improve, and whether high utilization constrains production or customer retention.
- Whether the company achieves its 2019 sales outlook and integrates Horizon within expected cost and timing assumptions.
- Liquidity, actual borrowing availability under the amended facility, debt balances and interest costs, compliance with revised covenants, and the capacity to fund operations and capital spending.
- Customer and receivables concentration, including the sustainability of demand from major truck customers and UFP.
- The drivers and accounting effects of the goodwill impairment and ASC 606 adoption; also reconcile the filing’s $58.4 million and $59.0 million debt disclosures.