Business context and reporting period
Core Molding Technologies, Inc. filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2014. The company manufactures sheet molding compound and molded reinforced-plastic products for truck, automotive, marine, construction, and other markets. Medium- and heavy-duty truck sales represented 82% of first-half 2014 sales. Amounts below are in millions of dollars except per-share data.
Financial performance
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Net sales | $46.124 | $34.681 | $87.199 | $69.043 |
| Gross profit | $7.599 | $5.989 | $14.244 | $11.879 |
| Gross margin | 16.5% | 17.3% | 16.3% | 17.2% |
| Income before interest and taxes | $3.873 | $2.500 | $6.989 | $5.117 |
| Interest expense | $0.040 | $0.049 | $0.072 | $0.138 |
| Net income | $2.520 | $1.589 | $4.640 | $3.270 |
| Diluted earnings per share | $0.33 | $0.21 | $0.62 | $0.44 |
For the six months, operating cash flow was $1.128 million, investing cash outflow was $7.480 million, and financing cash inflow was $5.564 million. Cash ended the period at $1.478 million. The company attributed the modest operating cash generation chiefly to a $6.357 million increase in accounts receivable.
At June 30, 2014, total debt was $10.898 million, including $7.612 million drawn on the revolving credit line; cash was $1.478 million. The revolver had an $18 million limit and $10.388 million available. Current assets were $45.041 million and current liabilities were $27.855 million. The company reported compliance with its debt covenants. The revolver matures May 31, 2015.
Material changes versus the prior comparable periods
- Q2 sales rose approximately 33% and first-half sales rose approximately 26%. Product sales increased 35% in Q2 and 29% in the first half; tooling revenue is variable and declined year over year in the first half.
- Growth was led by Volvo, whose first-half sales reached $23.005 million versus $3.137 million a year earlier, reflecting new business awards. Navistar and Yamaha sales also increased.
- PACCAR sales fell 32% in Q2 and 29% in the first half, as products neared the end of production and replacement-program sales were below expectations.
- Net income increased in both periods, while gross margin declined. Management cited unfavorable product mix and production inefficiencies, partly offset by better fixed-cost absorption from higher volumes.
- Capital spending and expansion activity increased: first-half property and equipment purchases were $7.480 million versus $5.483 million, primarily for compression-molding and SMC capacity expansions. The company reported $7.053 million of additions in progress at June 30.
Outlook, risks, and other notable items
- Management expected second-half 2014 sales to exceed second-half 2013, citing industry forecasts for increased medium- and heavy-duty truck production and the full-year benefit of Volvo awards. This is management’s expectation, not a quantified earnings forecast.
- The company anticipated up to $5.595 million of additional 2014 property and equipment purchases and planned to fund investment with operating cash and revolver borrowings. Management believed available liquidity would meet needs and forecast covenant compliance for the next 12 months, subject to assumptions about truck production, sales, and expenses.
- Risks highlighted include dependence on major customers and truck markets, order cancellations or rescheduling, raw-material availability and commodity-price inflation, Mexican operations and currency exposure, labor and regulatory matters, and execution of expansion plans. A hypothetical 10% increase in commodity prices would adversely affect margins; a 10% change in short-term interest rates was not expected to materially affect pretax earnings.
- No material change to previously disclosed risk factors was reported; the filing lists no legal proceedings. Disclosure controls were deemed effective, with no material change in internal control reported.
- The company adopted no new revenue standard in the period; it was assessing the potential effect of ASC 606, then scheduled to become effective in fiscal 2017.
Important facts for investors to verify
- Whether Volvo growth and the anticipated truck-production recovery continue, and whether lower PACCAR demand or delayed replacement programs persist.
- Whether expansion projects are completed on schedule and within budget, and whether added capacity translates into profitable production.
- Whether receivables convert to cash: accounts receivable increased to $28.426 million from $22.069 million at year-end, contributing to weak operating cash flow.
- Whether margins recover from mix and production inefficiencies, and how raw-material costs affect profitability.
- Available revolver capacity, covenant headroom, and refinancing or repayment plans ahead of the May 2015 maturity.