Core Molding Technologies, Inc. — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016; comparative periods ended September 30, 2015. The company manufactures sheet molding compound and molded reinforced-plastic products for truck, automotive, marine, construction, and other markets, operating as one business segment.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net sales | $41.336 million | $48.049 million | $125.810 million | $152.505 million |
| Product sales | $33.816 million | $44.243 million | $113.159 million | $145.612 million |
| Tooling sales | $7.520 million | $3.806 million | $12.651 million | $6.893 million |
| Gross margin | $5.581 million; 13.5% of sales | $8.311 million; 17.3% | $20.767 million; 16.5% | $28.319 million; 18.6% |
| Operating income | $1.657 million | $3.902 million | $8.406 million | $15.025 million |
| Net income | $1.029 million | $2.484 million | $5.379 million | $9.719 million |
| Diluted EPS | $0.13 | $0.33 | $0.70 | $1.27 |
Cash flow and liquidity: Nine-month operating cash flow was $20.383 million, versus $9.614 million in 2015, supported in part by working-capital reductions, particularly receivables and inventory. Investing cash outflow was $1.901 million, all for property and equipment; financing cash outflow was $3.114 million, primarily scheduled debt repayments. Cash was $24.311 million at September 30, compared with $8.943 million at year-end 2015. The company reported $18 million available under its revolving credit facility and compliance with its debt covenants.
Debt and balance sheet: Total debt was $10.5 million ($3.0 million current; $7.5 million long-term), down from $13.464 million at December 31, 2015. Total assets were $133.802 million and stockholders’ equity was $94.608 million. Current liabilities were $21.552 million and current assets were $59.612 million.
Material changes and management commentary
- Product sales declined about 24% in Q3 and 22% for the nine-month period, primarily due to lower heavy-duty truck demand. The company attributed nine-month product sales declines in part to weaker demand from major truck customers; CPI acquisition sales partly offset the decline.
- Q3 total sales fell while tooling revenue increased; tooling sales are sporadic and can fluctuate materially by period. Nine-month tooling sales rose to $12.651 million from $6.893 million.
- Management attributed lower gross-margin rates to weaker fixed-cost leverage and unfavorable production costs and product mix. Foreign-exchange effects partly offset these pressures. SG&A declined, largely from lower profit-sharing expense.
- Heavy- and medium-duty truck product sales represented 69% of sales for the first nine months of 2016, versus 78% in 2015. Sales to major customers remain significant; for the nine-month period, Navistar, Volvo, PACCAR, and Yamaha sales were $32.470 million, $29.266 million, $21.888 million, and $11.658 million, respectively.
Outlook, risks, and other items
- Management expected product sales to remain below the prior year. It cited industry forecasts for North American heavy-duty truck production to be 30% below 2015 in 2016 and a further 10% below 2016 in 2017; it expected diversification to limit the decline in total product sales relative to the decline in heavy-duty truck sales.
- Management expected operating cash flow and available credit to cover liquidity needs for the next 12 months, subject to forecasts and assumptions. Actual sales or expenses materially differing from forecasts could pressure covenant compliance, liquidity, or access to financing.
- Key risks include truck-market cyclicality, customer concentration, raw-material price and availability, Mexican peso and interest-rate exposure, supplier performance, order cancellations or rescheduling, labor, and operational and regulatory risks. A 10% increase in commodity prices or 10% decrease in the U.S. dollar/Mexican peso exchange rate would adversely affect margins; management said a hypothetical 10% short-term rate change would not materially affect pretax earnings.
- The company had $5.772 million of notional foreign-exchange forward contracts at quarter-end; no ineffective hedge portion was reported. No goodwill or long-lived asset impairment was recorded or indicated for the periods discussed.
- The filing reported no material change in risk factors, no material legal proceedings, no off-balance-sheet arrangements, and no material changes outside the ordinary course in contractual obligations. The company was in compliance with credit covenants.
Important facts for investors to verify
- Whether heavy-duty truck production and demand follow the forecasts underlying management’s sales and covenant outlook.
- How lower production volumes, product mix, and fixed-cost absorption affect gross margins and earnings.
- Customer concentration and the sustainability and timing of tooling revenue, which management describes as irregular.
- Cash-flow quality and working-capital movements, along with planned capital spending of up to $2 million for the remainder of 2016.
- Debt terms, covenant headroom, and exposure to raw-material costs and Mexican peso movements.