Core Molding Technologies, Inc. — Q2 2013 Form 10-Q
Business context and period. The company manufactures sheet molding compound and molded fiberglass-reinforced plastics for truck, marine, automotive, agriculture, construction and other markets. This unaudited filing covers the three and six months ended June 30, 2013, compared with the same 2012 periods. Heavy- and medium-duty truck sales represented 81% of first-half sales, versus 86% a year earlier.
Financial performance and position
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Net sales | $34.681 million | $44.544 million | $69.043 million | $89.073 million |
| Gross margin | $5.989 million (17.3%) | $7.026 million (15.8%) | $11.879 million (17.2%) | $14.657 million (16.5%) |
| Income before interest and taxes | $2.500 million | $3.439 million | $5.117 million | $7.457 million |
| Net income | $1.589 million | $2.341 million | $3.270 million | $4.976 million |
| Diluted EPS | $0.21 | $0.32 | $0.44 | $0.67 |
Cash flow and liquidity. First-half operating cash flow was $5.899 million, versus $1.287 million in 2012. Capital expenditures were $5.483 million; operating cash flow less these purchases was approximately $0.416 million. Cash declined from $7.838 million at year-end 2012 to $5.325 million. At June 30, total debt was $6.600 million, down from $9.477 million at December 31; the $18 million revolving credit facility was undrawn. The company reported $30.427 million in total liabilities and $61.300 million in stockholders’ equity. It was in compliance with debt covenants.
Material changes versus prior periods
- Sales fell approximately 22% in Q2 and 22% in the first half; product sales declined 22% and 24%, respectively. Management attributed the decline primarily to reduced North American truck demand.
- First-half net income declined 34%. Gross margin percentage improved, reflecting a more favorable product mix and the absence of Warsaw facility start-up costs and inefficiencies included in 2012 results; lower production volume continued to reduce fixed-cost absorption.
- Navistar and PACCAR together accounted for approximately 73% of Q2 sales and 71% of first-half sales. Their first-half sales were down 25% and 24%, respectively.
- Debt decreased through scheduled repayments; the industrial development revenue bond was paid in full in April 2013. The related swap expired, while the capex-loan swap remained outstanding.
Outlook, risks and notable items
- Management anticipated second-half 2013 sales would increase versus second-half 2012, citing industry and customer forecasts and new program launches. This is a forecast, not a reported result.
- The company planned to spend up to $12.5 million on its compression-molding capacity expansion; approximately $4.3 million had been spent by June 30. It expected up to $10 million of property, plant and equipment purchases across operations during the remainder of 2013. Capital expenditure commitments were $5.419 million at June 30. Additional SMC compounding capacity was under consideration.
- A March 2013 credit amendment raised the revolver limit from $8 million to $18 million, extended its commitment through May 31, 2015, and adjusted covenant treatment for up to $18 million of specified expansion capital expenditures.
- Key risks include truck-industry demand and customer concentration, commodity prices and raw-material availability, order cancellations or rescheduling, Mexico-related risks, and the company’s ability to maintain covenant compliance and fund investment. Management stated that forecasts supported covenant compliance for the next 12 months and that operating cash flow and available borrowing capacity should meet liquidity needs; materially weaker sales or higher expenses could impair liquidity.
- The filing reported no legal proceedings, no material changes to previously disclosed risk factors, and effective disclosure controls. The 2012 Warsaw facility closure is reflected in the prior-period comparison. No impairment of long-lived assets or goodwill was recorded in the first half.
Investor facts to verify
- Whether truck demand, customer forecasts and new program launches support the projected second-half sales recovery.
- Execution, cost, timing and expected returns of the compression-molding expansion, and whether SMC capacity investment proceeds.
- Ongoing exposure to Navistar and PACCAR and the effect of customer production changes or program end-of-life declines.
- Cash generation, remaining capital commitments, debt repayments and covenant headroom as expansion spending continues.
- Sensitivity of margins to lower production volumes, commodity costs, and changes in interest rates and foreign currency.