Core Molding Technologies, Inc. — Q2 2011 Form 10-Q
Business context and period. The company manufactures reinforced-plastic products, primarily for medium- and heavy-duty trucks. This unaudited report covers the quarter and six months ended June 30, 2011, compared with the corresponding 2010 periods.
Financial performance
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Total sales | $35.29 million, up 50% from $23.48 million | $64.28 million, up 46% from $43.92 million |
| Net income | $2.84 million, versus $0.44 million | $5.11 million, versus $0.30 million |
| EPS, basic / diluted | $0.41 / $0.39, versus $0.06 / $0.06 | $0.74 / $0.70, versus $0.04 / $0.04 |
| Gross margin | 21.9%, versus 14.6% | 22.3%, versus 17.1% |
| Interest expense | $0.27 million, versus $0.46 million | $0.45 million, versus $0.88 million |
Product sales rose 56% in Q2 and 52% in the first half; tooling sales declined in both comparisons. Management attributed growth mainly to stronger North American truck demand and new business awards. Six-month sales were 91% truck-related. Navistar and PACCAR together accounted for approximately 79% of first-half sales.
Gross-margin improvement reflected lower labor and benefit costs, improved production efficiencies and fixed-cost absorption, and the absence of 2010 Mexico-transfer costs. Higher material costs and unfavorable sales mix partly offset these gains. SG&A rose to $3.18 million in Q2 and $6.10 million for the first half, mainly due to higher employee profit sharing and labor and benefit costs.
Cash flow, balance sheet and liquidity
- First-half operating cash flow was $0.65 million, down from $2.47 million, despite net income of $5.11 million. Working-capital changes used $6.41 million, principally from higher receivables and inventories.
- Investing cash outflow was $3.39 million, primarily capital spending; financing outflow was $2.92 million, primarily scheduled debt repayments. Cash declined from $5.66 million at year-end to zero at June 30.
- Total debt was $14.81 million, down from $17.73 million at December 31, 2010. No amounts were drawn on the $8 million revolving line or the new $10 million Mexican expansion revolving loan. Current liabilities were $19.08 million against current assets of $34.78 million.
- The company reported $43.30 million of stockholders’ equity and $40.04 million of total liabilities at June 30. It was in compliance with debt covenants.
Outlook, financing and risks
Management anticipated sales would continue to increase in 2011, based on industry forecasts for higher truck production through the remainder of 2011 and into 2012; the filing gives no specific revenue or earnings guidance. The company planned approximately $14.5 million of Matamoros capacity expansion to meet expected demand in 2012 and beyond, including approximately $8.7 million planned for 2011. It reported about $2.7 million spent on the expansion in the first half and planned a further $6 million during the remainder of 2011.
A June 2011 credit amendment added the $10 million expansion facility, reduced applicable margins on certain loans and extended revolving commitments to May 31, 2013. Management believed operating cash flow and available borrowing capacity would meet liquidity needs and expected covenant compliance for the next 12 months. It cautioned that materially adverse financial changes or results differing substantially from forecasts could impair liquidity and access to financing.
Key risks include dependence on two major customers, truck-industry and broader economic conditions, raw-material prices and availability, variable interest rates, Mexican peso and operating risks, labor relations, customer order cancellations or rescheduling, and execution of the production transfer and capacity expansion. The company reported no material change to previously disclosed risk factors and no legal proceedings. Disclosure controls were assessed as effective, with no material quarterly change in internal control over financial reporting.
Other notable items: 2010 comparisons were affected by a $1.02 million tax charge related to retiree drug-subsidy tax changes and approximately $1.32 million of Mexico-transfer costs. The filing reports no current income-tax audits. Interest-rate swaps had a $0.32 million fair-value liability at June 30.
Important facts for investors to verify
- Whether truck-production demand and new business awards support management’s expectation of continued 2011 sales growth.
- Customer concentration and the durability of Navistar and PACCAR volumes and pricing.
- Cash conversion and working-capital needs, given zero cash at quarter-end and sharply lower first-half operating cash flow.
- Matamoros expansion spending, capacity ramp-up, and whether financing and covenant headroom remain adequate.
- Whether material costs, product mix, and labor efficiencies sustain recent gross-margin improvement.