Business context and reporting period
Core Molding Technologies, Inc. manufactures reinforced-plastic components for truck, marine, automotive and other commercial markets. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2011; comparisons are with the corresponding 2010 periods. Medium- and heavy-duty truck markets represented 92% of nine-month sales.
Financial performance and position
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Net sales | $37.84 million | $25.29 million | $102.12 million | $69.21 million |
| Gross margin | $8.17 million; 21.6% | $3.13 million; 12.4% | $22.49 million; 22.0% | $10.64 million; 15.4% |
| Income before interest and taxes | $4.75 million | $0.84 million | $12.98 million | $3.73 million |
| Net income | $2.86 million | $0.31 million | $7.97 million | $0.61 million |
| Diluted earnings per share | $0.39 | $0.04 | $1.09 | $0.09 |
For the nine months, operating cash flow was $4.71 million, capital expenditures were $4.94 million, and cash declined $3.64 million to $2.01 million. Working-capital changes used $6.44 million, chiefly from higher receivables and inventory as sales expanded. At September 30, total debt was $14.20 million, down from $17.73 million at year-end 2010. The company had no borrowings on its revolving facilities and reported $18 million of available capacity; it was in compliance with debt covenants. Total assets were $89.70 million and stockholders’ equity was $46.33 million.
Material changes versus the prior comparable periods
- Q3 sales rose about 50%; nine-month sales rose about 48%. Product sales increased 61% in Q3 and 55% for the nine months, primarily from stronger North American truck demand and new business awards.
- Higher production volume improved fixed-cost absorption and lower benefit and labor costs supported gross margin. Higher material prices offset part of the improvement; nine-month sales mix also reduced margin.
- Q3 and nine-month net income rose substantially from 2010. The comparisons also reflect 2010 items: approximately $1.47 million of production-transfer costs and a $1.02 million tax charge related to the PPACA deferred-tax change. Those items did not recur in 2011.
- Interest expense fell to $0.62 million for the nine months from $1.24 million, reflecting lower borrowing costs and balances and reduced swap mark-to-market expense.
Outlook, commentary and risks
Management expected 2011 sales to continue increasing, citing industry forecasts for higher medium- and heavy-duty truck production through the rest of 2011 and into 2012. It planned approximately $14.5 million of Matamoros capacity expansion spending across 2011 and 2012, including approximately $4.85 million during the remainder of 2011. Management believed operating cash flow and available borrowing capacity would meet liquidity needs and forecast covenant compliance for the next 12 months; these expectations depend on forecasts and assumptions.
Key risks include reliance on two major customers, Navistar and PACCAR (together about 80% of nine-month sales), cyclicality in truck production, raw-material price and availability, Mexican peso and interest-rate fluctuations, execution of the Matamoros expansion and production transfers, and potential differences between actual results and forecasts. A hypothetical 10% increase in commodity prices would adversely affect margins. The company also reported $10.84 million of post-retirement benefit liabilities and a continuing audit of its 2009 Mexican tax return. It recorded $105,000 of Mexican tax-related interest and penalties in 2011. No legal proceedings or material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Whether truck demand and new business awards sustain the sales growth, particularly given customer and end-market concentration.
- Whether margin gains persist despite higher material costs, pricing reductions on transferred products and changes in sales mix.
- Actual Matamoros expansion costs, timing, funding needs and the expected capacity ramp.
- Receivables, inventory and operating cash flow trends as sales grow, along with available revolver capacity and covenant headroom.
- Outcomes of the Mexican tax audit and any further tax interest or penalties.