Core Molding Technologies, Inc. — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019; filed November 18, 2019. The company manufactures sheet molding compound and molded thermoset and thermoplastic products for truck, automotive, marine, construction, and other markets. Its operations include Core Traditional and Horizon Plastics.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net sales | $74.7 million | $64.7 million | $228.2 million | $196.3 million |
| Gross margin | $6.5 million; 8.7% of sales | $4.9 million; 7.5% | $18.1 million; 7.9% | $20.6 million; 10.5% |
| Operating income (loss) | $(4.7) million | $(1.5) million | $(7.4) million | $1.1 million |
| Net income (loss) | $(6.1) million | $(1.8) million | $(9.8) million | $(0.8) million |
| Basic and diluted loss per share | $(0.78) | $(0.23) | $(1.25) | $(0.11) |
| Operating cash flow | Not presented for the quarter | $4.0 million | $6.5 million |
- Q3 sales rose about 15% year over year, supported by truck and marine demand, new programs, and higher tooling revenue. Nine-month sales increased about 16%; product sales rose 15%.
- Q3 gross margin improved year over year, but nine-month margin fell from 10.5% to 7.9%, principally because of unfavorable product mix and manufacturing inefficiencies.
- Q3 operating loss included a $4.1 million goodwill impairment charge for Horizon Plastics. Excluding that charge, Q3 operating loss was $557,000, compared with $1.486 million in Q3 2018. Nine-month operating loss excluding the impairment was $3.306 million.
- Nine-month capital expenditures were $6.3 million; investing cash outflow was $6.3 million. Financing activities provided $416,000. Cash declined by $1.9 million to zero at September 30.
Balance sheet, debt, and liquidity
- At September 30, total assets were $195.0 million, total liabilities $105.1 million, and stockholders’ equity $89.9 million. Current assets were $75.1 million and current liabilities $94.8 million, a $19.7 million working-capital deficit.
- Total debt was $59.9 million: $39.1 million in term loans and $20.8 million in revolving borrowings. Because of covenant default and lender remedies, $59.0 million of debt, net of deferred loan costs, was classified as current. The company reported $11.7 million available on its revolving line at quarter-end.
- The company was below the required fixed-charge coverage ratio: actual 1.26 versus a minimum 1.50. It was negotiating a forbearance agreement and pursuing refinancing or restructuring. Potential financing routes included asset-backed lending, secured term loans, sale-leaseback, and equity financing; term sheets had been received, but financing was not committed.
- Management and the filing state that the uncertainty over forbearance and refinancing raises substantial doubt about the company’s ability to continue as a going concern. Lenders could, before a forbearance agreement takes effect, stop funding and demand repayment, potentially impairing the company’s ability to meet working-capital obligations.
Changes, outlook, and risks
- Management said turnaround efforts improved delivery, quality, equipment uptime, employee retention, and premium freight costs, but financial gains fell short of expectations. Higher material usage, labor variances, unfavorable mix, and elevated costs weighed on results.
- Management anticipated softer Q4 2019 product sales due to lower truck demand. The filing cited an ACT Research forecast of 71,662 heavy-duty truck units in Q4, down about 19% from Q3 and 14% from Q4 2018. No company-specific earnings or revenue guidance was provided.
- On November 15, 2019, the company notified Volvo of its intention to terminate their agreement, effective 12 months after notice unless mutually acceptable terms are reached. Volvo accounted for 18% of sales in the first nine months of 2019. The company said it intended to continue supplying Volvo until termination becomes effective.
- The company recorded a $4.1 million Horizon Plastics goodwill impairment after lower selling prices reduced margins and were not fully offset by material cost reductions. It also recorded a $1.904 million U.S. deferred-tax-asset valuation allowance due to cumulative losses and uncertainty about future realization.
- Key business risks include cyclical truck demand, significant customer concentration, manufacturing execution and labor availability, input-cost and foreign-exchange volatility, and the company’s ability to obtain financing and comply with debt covenants. Management reported no material legal proceedings and no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether the company reached a lender forbearance agreement or completed a refinancing, and any associated conditions, deadlines, or lender rights.
- Whether liquidity and covenant compliance improved, including actual revolver availability and the company’s ability to meet upcoming debt obligations.
- Whether operating improvements translated into better margins and cash generation as truck demand softened.
- Whether the Volvo relationship continued on revised terms or ended, and the resulting effect on sales and capacity.
- Whether further impairment or tax-asset valuation changes were required, particularly for Horizon Plastics and U.S. deferred tax assets.