Core Molding Technologies, Inc. — Q1 2018 Form 10-Q
Business context and reporting period. This unaudited filing covers the three months ended March 31, 2018, compared with the three months ended March 31, 2017. Core manufactures sheet molding compound and molded thermoset and thermoplastic products for truck, automotive, marine, construction, and other markets. The quarter includes the January 16, 2018 acquisition of substantially all assets of Horizon Plastics.
Financial results
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Net sales | $63.046 million | $36.746 million |
| Gross profit / margin | $7.885 million / 12.5% | $6.479 million / 17.6% |
| Operating income | $1.125 million | $2.554 million |
| Interest expense | $449,000 | $64,000 |
| Net income | $518,000 | $1.688 million |
| Diluted EPS | $0.07 | $0.22 |
| Cash from operating activities | $(7.451) million | $3.626 million |
| Cash and cash equivalents at period end | $2.582 million | $30.591 million |
Product sales rose approximately 64%; total sales increased approximately 72%. Q1 2018 sales included $3.334 million of tooling revenue, versus $410,000 a year earlier. The filing attributes the increase primarily to $14.732 million of Horizon Plastics sales and stronger truck-customer demand. Net sales comparisons are affected by the adoption of ASC 606 in 2018; the company did not restate 2017.
Material changes and drivers
- Operating income fell approximately 56% despite higher sales. Gross margin declined to 12.5% from 17.6%, reflecting manufacturing inefficiencies and product mix, higher raw-material and labor costs, and expedited freight and customer chargebacks. Improved fixed-cost leverage and Horizon Plastics partly offset these pressures.
- SG&A rose to $6.760 million from $3.925 million. The increase included $1.283 million of acquisition-related costs, $619,000 of ongoing Horizon-related SG&A, $390,000 of higher intangible amortization, and $376,000 of higher outside-service and professional fees.
- Interest expense increased with higher average debt and interest rates. The effective tax rate was approximately 25%, versus 33%, reflecting the lower U.S. statutory rate, partly offset by taxes related to Horizon Plastics.
- Cash used in operations was $7.451 million, with accounts receivable reducing operating cash flow by $15.135 million. Investing cash outflow was $64.037 million, including the $62.457 million Horizon acquisition and $1.580 million of capital expenditures.
Acquisition, debt, and liquidity
The $62.457 million Horizon Plastics purchase added structural foam and structural web molding capabilities and facilities in Canada and Mexico. Preliminary purchase accounting recognized $20.554 million of goodwill and $17.520 million of acquired intangible assets; working-capital adjustments and the valuation remain subject to finalization. Pro forma results, assuming the acquisition occurred January 1, 2017, were revenue of $65.715 million and net income of $1.230 million in Q1 2018. These unaudited figures are not necessarily indicative of actual or future results.
At March 31, 2018, total debt was $55.156 million, including $11.000 million outstanding on the revolving facility and $44.156 million in term loans. Cash was $2.582 million; $29.000 million remained available under the $40 million revolving facility. Debt was primarily variable-rate, with interest-rate swaps covering $35 million of term loans at an initial fixed rate of approximately 4.49%. The company was in compliance with its financial covenants and management expected to remain compliant over the next 12 months.
Management said cash, operating cash flow, and available borrowings should meet liquidity needs for the next 12 months, while warning that materially weaker sales or higher expenses could adversely affect liquidity and access to financing. The company expected capital spending of up to $8.5 million during the remainder of 2018.
Outlook, risks, and notable items
Management anticipated 2018 product sales above 2017 levels, supported by Horizon Plastics and truck demand. It cited ACT Research’s forecast for a 28% increase in 2018 heavy-duty truck production versus 2017. Management expected elevated raw-material prices and tight labor conditions to continue, with some manufacturing inefficiencies and expedited delivery costs persisting but potentially easing as employees gain experience and new programs mature. Additional program launches were expected in the third and fourth quarters and could affect results. These are forward-looking expectations, not guaranteed outcomes.
Key risks include cyclical truck demand and dependence on major customers; raw-material, labor, freight, and foreign-exchange costs; manufacturing and program-launch execution; and the successful integration and realization of expected benefits from Horizon Plastics. The company also identified interest-rate, commodity-price, regulatory, supplier, and operational risks. No material changes to previously disclosed risk factors, material legal proceedings, or significant off-balance-sheet arrangements were reported.
ASC 606 adoption on January 1, 2018 resulted in a $1.069 million cumulative equity adjustment and changed the timing of revenue recognition for certain tooling programs. For Q1, adoption increased reported revenue by $658,000 and reduced reported net income by $43,000 compared with the filing’s presentation without adoption. The company also reported that adoption changed internal controls over financial reporting in the quarter.
Important facts for investors to verify
- Whether Horizon Plastics integration, preliminary purchase accounting, and expected revenue or cost benefits develop as anticipated.
- Whether gross margins recover as labor, material, freight, manufacturing-efficiency, and new-program pressures evolve.
- Whether receivables and working capital convert to cash and whether operating cash flow improves.
- Debt repayment, variable-rate exposure, revolver availability, and ongoing compliance with credit-agreement covenants.
- Truck-market forecasts, customer concentration, and the timing and performance of expected program launches.
- The effect of ASC 606 on tooling revenue timing and comparability with prior periods.