Core Molding Technologies, Inc. — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017. The company manufactures sheet molding compound and molded reinforced-plastic products at five facilities, serving truck, automotive, marine and other markets.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Net sales | $38.5 million | $41.3 million | $122.6 million | $125.8 million |
| Gross margin | $5.8 million; 15.0% | $5.6 million; 13.5% | $19.6 million; 16.0% | $20.8 million; 16.5% |
| Operating income | $1.4 million | $1.7 million | $7.2 million | $8.4 million |
| Net income | $0.9 million | $1.0 million | $4.7 million | $5.4 million |
| Diluted EPS | $0.11 | $0.13 | $0.61 | $0.70 |
| Operating cash flow | Not separately provided for the quarter | $4.5 million | $20.4 million |
Q3 total sales fell about 7%, while product sales rose 11%; the decline reflected tooling sales falling to $0.9 million from $7.5 million. For the first nine months, total sales declined about 3% and product sales declined about 2%. Management attributed the product-sales decline mainly to lower heavy-truck and automotive demand, partly offset by marine growth. Q3 gross margin improved on production costs and product mix, while the nine-month margin declined due to selling-price and material-cost pressures and lower fixed-cost leverage. SG&A was $4.4 million in Q3 and $12.5 million year to date.
Cash, debt and liquidity
- Cash was $27.5 million at September 30, 2017, versus $28.3 million at year-end 2016. Nine-month operating cash flow was $4.5 million, down from $20.4 million, largely reflecting working-capital outflows, including higher receivables and inventory.
- Capital spending was $2.3 million year to date; management anticipated up to $3.0 million of additional 2017 spending.
- Total debt was $7.5 million, down from $9.8 million at year-end; the company also reported $18.0 million available on its revolving credit line. The term loan bears a variable rate, 3.05% at quarter-end.
- The company paid $0.4 million in dividends during the first nine months. It reported compliance with credit covenants and expected cash from operations and available borrowing to meet liquidity needs for the next 12 months.
Outlook, risks and notable items
- Management expected Q4 2017 product sales to exceed Q4 2016, full-year 2017 product revenue to be flat with 2016, and 2018 total product revenue to be higher than 2017. It cited industry forecasts for a 15% increase in North American Class 8 truck production in 2018.
- Truck-related products represented 68% of nine-month sales. Major-customer dependence, demand swings, raw-material prices and availability, Mexican peso movements, labor, delivery performance and equipment reliability are among the identified risks.
- The company uses Mexican-peso forward contracts; outstanding notional value was $5.0 million. It reported no hedge ineffectiveness. A hypothetical 10% increase in commodity prices or 10% decrease in the U.S. dollar/Mexican peso exchange rate would adversely affect margins, according to the filing.
- An August 2017 credit-agreement amendment revised the fixed-charge definition and restricted-payment provisions. The company said it was covenant-compliant at quarter-end. No material off-balance-sheet arrangements or material legal proceedings were reported; risk factors were unchanged from the 2016 Form 10-K.
- Revenue standard ASC 606 was expected to change tooling revenue and cost timing: tooling would be recognized over time using percentage of completion rather than upon completed contract. Adoption was planned for January 1, 2018; the company was still assessing the transition method and overall impact.
Important facts for investors to verify
- Whether the anticipated 2018 truck-production recovery and customer forecasts translate into orders and higher product revenue.
- How working-capital needs affect operating cash flow, and whether planned capital spending stays within management’s expectations.
- Customer concentration and demand trends, especially for heavy trucks, automotive and marine products; tooling revenue is sporadic and affects period comparisons.
- The eventual ASC 606 transition method and its effect on reported revenue, earnings and comparability.
- Continued covenant compliance, variable-rate debt exposure, and sensitivity to material costs and Mexican peso movements.