Core Molding Technologies, Inc. — Q1 2017 Form 10-Q
Business and period: The company manufactures sheet molding compound and molded reinforced-plastic products for truck, automotive, marine, construction and other markets. This unaudited report covers the three months ended March 31, 2017, compared with Q1 2016.
Financial performance and liquidity
| Metric | Q1 2017 | Q1 2016 / comparison |
|---|---|---|
| Net sales | $36.746 million | $45.468 million; down 19% |
| Product sales | $36.336 million | $42.530 million; down about 15% |
| Tooling sales | $0.410 million | $2.938 million |
| Gross margin | $6.491 million; 17.7% of sales | $8.863 million; 19.5% of sales |
| Operating income | $2.566 million | $4.442 million |
| Net income | $1.688 million; $0.22 per basic and diluted share | $2.890 million; $0.38 per share |
| Operating cash flow | $3.626 million | $7.858 million |
| Capital expenditures | $0.544 million | $1.247 million |
SG&A declined to $3.925 million from $4.421 million, principally reflecting lower profit-sharing expense and professional services, partly offset by higher labor and benefits. Interest expense was $64,000, versus $92,000. The effective tax rate was approximately 33%, compared with 34%.
At March 31, cash was $30.591 million, current assets were $65.893 million and current liabilities were $24.948 million. Debt totaled $9.0 million, including $3.0 million current and $6.0 million long-term; the $18.0 million revolving credit facility was undrawn. The company reported compliance with its debt covenants. Operating cash flow was below the prior-year period, with working-capital movements providing a net $155,000 benefit. Cash increased $2.306 million during the quarter.
Material changes and drivers
- Lower heavy-duty truck demand and substantially lower tooling sales were the principal revenue headwinds. Management attributed the gross-margin decline to reduced fixed-cost absorption, unfavorable net selling-price and material-cost changes, and product mix/production costs; foreign exchange partly offset these pressures.
- Sales to Volvo declined 43% overall and product sales to Volvo declined 41%; Navistar sales declined 15%, PACCAR sales declined 33%, and Yamaha sales declined 2%. BRP sales increased 20%, supported by a new business award.
- Heavy- and medium-duty truck products represented 59% of sales, compared with 65% a year earlier. Five customers—Navistar, Volvo, PACCAR, Yamaha and BRP—each met the filing’s major-customer threshold of more than 10% of sales in a reporting period.
- Tooling in progress was a net liability of $3.264 million, up from $1.084 million at year-end, reflecting progress billings and expenses; tooling revenue is described as sporadic and variable.
Outlook, risks and other items
Management expected 2017 sales to decrease versus 2016 because of lower heavy-duty truck demand and tooling sales. Customers and industry analysts forecast approximately 5% lower Class 8 truck production for 2017, with a larger decline in the first half and improvement in the second half. The company planned up to $8.4 million of capital spending for the remainder of 2017, funded with existing cash and operating cash flow. Management believed cash, operating cash flow and available borrowings would meet liquidity needs for the next 12 months, while cautioning that materially different sales or expenses could weaken liquidity and covenant capacity.
Key exposures include truck-industry demand and customer concentration, raw-material prices and availability, Mexican peso movements, variable interest rates, labor and supplier performance, delivery obligations, product liability, and operations and safety conditions in Mexico. The company held $6.181 million in foreign-exchange forward-contract notional value at quarter-end; the reported hedges had no ineffective portion. A hypothetical 10% rise in commodity prices or 10% decline in the dollar-to-peso exchange rate would adversely affect margins; a hypothetical 10% interest-rate change was not expected to materially affect pretax earnings.
The company adopted accounting updates on deferred-tax classification and stock compensation in Q1, with no material financial-statement impact. It expected the new revenue standard, effective for it in Q1 2018, to change timing of tooling revenue and costs by recognizing them over time using percentage of completion; the adoption method and overall impact were still under assessment. No significant off-balance-sheet arrangements, material legal proceedings, or material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Whether truck-market demand and the projected second-half 2017 recovery developed as management expected, and the resulting sales and margin effects.
- How much of the year-over-year sales and earnings decline reflected lower tooling revenue versus production volumes, pricing, costs and product mix.
- Customer concentration and the sustainability of BRP’s growth relative to declines among major truck customers.
- Execution and funding of the planned remaining 2017 capital expenditures, alongside scheduled debt repayment and covenant compliance.
- The eventual financial and comparative-period effects of adopting the revenue-recognition standard for tooling projects.