Core Molding Technologies, Inc. — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. The company manufactures sheet molding compound and molded thermoset and thermoplastic products for truck, automotive, marine, construction and other markets, operating across its Core Traditional and Horizon Plastics reporting units.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net sales | $81.247 million | $68.601 million | $153.513 million | $131.647 million |
| Gross margin | $8.491 million (10.5%) | $7.897 million (11.5%) | $11.641 million (7.6%) | $15.783 million (12.0%) |
| Operating income (loss) | $1.267 million | $1.418 million | $(2.749) million | $2.544 million |
| Net income (loss) | $0.209 million | $0.445 million | $(3.636) million | $0.963 million |
| Diluted EPS | $0.03 | $0.06 | $(0.47) | $0.12 |
- Q2 sales increased about 18%; six-month sales increased about 17%. Growth was attributed mainly to higher truck-customer demand and new truck and recreational-vehicle programs.
- Profitability weakened despite sales growth. Management attributed lower margins primarily to manufacturing inefficiencies and higher labor, benefits and overhead costs. First-half gross margin also reflected higher Matamoros union contract renewal payments.
- Q2 operating income improved from a $4.017 million loss in Q1 2019. Management said delivery and quality performance had improved as its turnaround plan progressed.
- Q2 SG&A was $7.224 million versus $6.479 million; first-half SG&A was $14.390 million versus $13.239 million. First-half 2018 included $1.289 million in one-time acquisition fees. Interest expense rose to $0.869 million for Q2 and $1.765 million for the first half, primarily due to higher average debt and interest rates.
Cash, liquidity and debt
- Six-month operating cash flow was $3.297 million, compared with $3.558 million in 2018. Investing cash use was $5.201 million, all for property, plant and equipment; financing provided $0.546 million. Cash declined by $1.358 million to $0.533 million.
- At June 30, gross debt was $60.041 million: $39.938 million in term loans and $20.103 million in revolving borrowings. The revolving facility was reduced to $32.5 million; reported unused availability was $12.397 million. Debt carried variable rates, with stated rates of 6.40% on term loans and 6.37% on revolving loans.
- Stockholders’ equity was $95.984 million. Current assets were $78.125 million and current liabilities $40.892 million. The balance sheet also reflected $3.761 million of operating lease liabilities following adoption of the lease accounting standard.
- The company reported compliance with its amended loan covenants at quarter-end, including a 1.42 fixed-charge coverage ratio against a 1.25 minimum. Management said cash from operations and available borrowing capacity should meet liquidity needs for the next 12 months, subject to continued covenant compliance.
Outlook, risks and notable items
- Management expected first-half strong product sales to soften slightly in the second half of 2019 as truck demand declined; it cited an ACT Research forecast of 160,000 heavy-duty truck units in the second half, about 12% below the first half.
- The turnaround plan addresses labor hiring, training and retention, equipment capacity and reliability, delivery, quality and manufacturing efficiency. Management warned that failure to achieve planned improvements could jeopardize future covenant compliance or require further amendments to the credit agreement.
- The credit amendment waived specified covenant non-compliance at December 31, 2018, deferred leverage-ratio testing until December 31, 2019, and set stepped future fixed-charge requirements. It also capped capital expenditures at $12.5 million for 2019. The company expected up to $7 million of capital spending in the remainder of 2019.
- Truck demand is cyclical: North American truck markets accounted for 60% of product revenue in the first half, versus 52% a year earlier. Navistar, Volvo, PACCAR and UFP were each major customers, creating customer-concentration exposure.
- Other cited risks include raw-material prices and availability, foreign exchange and interest-rate movements, labor availability, customer order changes, and integration of Horizon Plastics. The company reported no material legal proceeding, no significant off-balance-sheet arrangements, and no material change in previously disclosed risk factors.
- No goodwill impairment was recorded in the first half of 2019. The company had recorded a $2.403 million Core Traditional goodwill impairment in 2018 and noted that a prolonged stock price below book value could lead to future impairment charges.
Most important facts for investors to verify
- Whether the turnaround continues to improve plant efficiency, customer delivery and quality, and operating profitability.
- Whether the projected second-half truck-market slowdown and weaker sales affect revenue, margins and cash generation.
- Headroom under the amended credit covenants, upcoming covenant thresholds, and remaining revolving-credit availability.
- Whether planned capital spending and working-capital needs can be funded while maintaining liquidity.
- Customer concentration, input-cost exposure, and the realization of expected Horizon Plastics benefits.