Core Molding Technologies, Inc. — 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. The filing also reports fourth-quarter results. Core manufactures sheet molding compound and molded reinforced-plastic components for truck, marine, automotive, and other markets.
Financial performance and liquidity
| Metric | 2017 | 2016 |
|---|---|---|
| Net sales | $161.7 million | $174.9 million |
| Product sales | $148.6 million | $146.6 million |
| Tooling sales | $13.1 million | $28.3 million |
| Gross margin | $24.7 million; 15.3% of sales | $27.9 million; 16.0% of sales |
| Operating income | $8.0 million | $11.5 million |
| Net income | $5.5 million; diluted EPS $0.70 | $7.4 million; diluted EPS $0.97 |
| Operating cash flow | $6.9 million | $26.1 million |
| Cash at year-end | $26.8 million | $28.3 million |
| Long-term debt, including current portion | $6.8 million | $9.8 million |
| Working capital | $40.4 million | $38.6 million |
Fourth-quarter 2017 net sales were $39.1 million and net income was $0.8 million, versus $49.1 million and $2.0 million, respectively, in fourth-quarter 2016. Lower tooling revenue accounts for much of the reported annual sales decline: product sales increased 1%, while total sales fell about 8%.
Operating cash flow declined substantially, with increased working capital reducing cash generation by $5.1 million in 2017. Investing cash outflow was $4.3 million, primarily for equipment, programs, and capacity. The company repaid $3.0 million of term debt, paid $0.8 million in dividends, and ended the year compliant with its debt covenants. It had an $18 million undrawn revolver at year-end under the then-existing facility.
Changes versus the prior year
- Product sales rose modestly, supported by heavy-truck and marine demand, partly offset by weaker automotive demand.
- Tooling sales fell from $28.3 million to $13.1 million; the filing describes tooling revenue as variable and project-dependent.
- Gross margin declined 0.7 percentage points. Management cited unfavorable selling-price/material-cost changes and lower fixed-cost leverage, partly offset by product mix, efficiency, and currency effects.
- Net income decreased 26%, reflecting lower gross margin and operating income. The effective tax rate fell to about 30% from 34%, partly due to Tax Cuts and Jobs Act adjustments and stock-vesting tax benefits.
- Operating cash flow fell from $26.1 million to $6.9 million, mainly reflecting working-capital movements.
Outlook, significant events, and risks
- Management expected 2018 product sales to increase, driven by higher heavy-duty truck demand and the Horizon Plastics acquisition. Industry forecasts cited for Class 8 truck sales ranged from 6% to 25% growth in 2018; this is an industry forecast, not a company sales target.
- On January 16, 2018, Core acquired substantially all Horizon Plastics assets for approximately $63 million in cash, subject to working-capital adjustment. Horizon reported approximately $60 million in fiscal 2017 sales. Management expected the acquisition to add approximately $0.15–$0.20 to 2018 EPS. Purchase accounting was incomplete when the 10-K was issued.
- The acquisition and repayment of the existing term loan were funded with cash and $49.5 million of borrowings under a new credit agreement. The agreement provides for term and revolving facilities, and the company entered into interest-rate swaps at a fixed rate of 4.58% on specified term-loan amounts. Management believed liquidity and covenant compliance would be adequate for the next 12 months.
- Management anticipated approximately $9 million of 2018 capital expenditures, funded by operating cash and revolving-credit availability. The company began a $0.05 quarterly dividend in August 2017 and expected to continue it, subject to earnings and cash flows.
- Key risks include customer concentration (five customers represented 84% of 2017 sales and 84% of year-end receivables), cyclical truck demand (about 68% of product sales), raw-material cost and availability, customer pricing pressure, labor disruptions, foreign-exchange and cross-border trade uncertainty, and successful integration of Horizon Plastics.
- The Tax Cuts and Jobs Act accounting included provisional estimates: a $484,000 deferred-tax remeasurement benefit and a $299,000 transition-tax charge. Management expected to finalize the transition-tax analysis by the second quarter of 2018; estimates could change.
- The company reported no litigation it believed likely to have a material adverse effect. Management and the auditor concluded internal control over financial reporting was effective as of year-end; the auditor issued an unqualified opinion.
Important facts for investors to verify
- Whether the expected Horizon Plastics accretion, revenue contribution, and integration benefits materialized, and how the acquisition affected leverage and cash flow.
- Whether truck-market forecasts and customer production schedules translated into growth, given the company’s substantial exposure to a few customers and cyclical markets.
- Whether margins recovered from 2017 levels amid material-cost and customer-pricing pressures.
- The final Tax Act accounting and the effect of the 2018 adoption of the new revenue-recognition standard, which management expected to accelerate recognition for certain tooling programs.
- Whether planned capital spending, dividend payments, and debt-covenant obligations remained supportable by operating cash generation.