Core Molding Technologies, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; unaudited consolidated results. The company manufactures sheet molding compound and molded reinforced-plastic products for truck, automotive, marine, construction and other markets.
Financial performance
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Net sales | $45.468 million | $49.599 million | Down 8.3% |
| Product sales | $42.530 million | $47.854 million | Down about 11% |
| Tooling sales | $2.938 million | $1.745 million | Up about 68% |
| Gross margin | $8.863 million; 19.5% of sales | $9.025 million; 18.2% of sales | Margin improved 1.3 percentage points |
| Income before interest and taxes | $4.442 million | $4.890 million | Down about 9% |
| Net income | $2.890 million | $3.196 million | Down about 10% |
| Diluted earnings per share | $0.38 | $0.42 | Down $0.04 |
| Operating cash flow | $7.858 million | $2.127 million | Up $5.731 million |
| Capital expenditures | $1.247 million | $1.535 million | Down $0.288 million |
Gross-margin improvement reflected favorable foreign exchange, pricing and material costs, and product mix/production costs; these benefits were partly offset by lower fixed-cost leverage. SG&A increased to $4.421 million from $4.135 million, while interest expense rose to $92,000 from $41,000, primarily due to higher average debt.
Liquidity and balance sheet
- At March 31, 2016, cash was $14.376 million, versus $8.943 million at year-end 2015. Cash increased $5.433 million during the quarter.
- Funded debt totaled $12.286 million ($3.286 million current and $9.000 million long term), down from $13.464 million at December 31, 2015. The company also reported an unused $18 million revolving credit facility, scheduled to mature May 31, 2017.
- Current assets were $61.676 million and current liabilities were $27.175 million. Total liabilities were $46.361 million; stockholders’ equity was $91.742 million.
- Operating cash flow benefited from a $4.933 million decrease in receivables and a $690,000 decrease in inventory, partly offset by a $3.801 million decrease in accounts payable. Management said working-capital changes contributed $3.132 million to operating cash flow.
- The company was in compliance with its debt covenants at quarter-end. Management believed operating cash flow and available credit would meet liquidity needs for the next 12 months, subject to forecast and business conditions.
Material changes and business drivers
- Lower heavy-duty truck demand drove much of the product-sales decline. Heavy- and medium-duty truck markets represented 65% of sales, compared with 80% a year earlier.
- Sales to Volvo fell 35% and sales to PACCAR fell 37%; Navistar product sales declined 15%. Other-customer sales rose 73%, helped by the CPI acquisition and higher automotive demand; Yamaha product sales increased 4%.
- Gross margin rose despite lower revenue. The 2015 comparison included $240,000 of CPI acquisition-related expense in SG&A; Q1 2016 included $228,000 of CPI-related SG&A expense.
- Tooling in progress was a net liability of $4.802 million at quarter-end, compared with $2.271 million at year-end. The filing notes that this balance fluctuates with project progress, billings and expenses and does not necessarily indicate expected project profit or loss.
Outlook, risks and other disclosures
- Management expected product sales to remain below prior-year levels. Industry analysts forecast North American heavy-duty truck production in 2016 to be 25%–30% below 2015; management expected the company’s total product-sales decline to be smaller, citing diversification and new-business efforts.
- The company anticipated up to $6 million of capital spending during the remainder of 2016, funded with operating cash and potentially the revolving credit facility.
- Key stated risks include truck-industry demand, reliance on major customers, raw-material availability and pricing, competition, customer order cancellations or rescheduling, supplier performance, Mexico operating conditions and currency exposure, labor, regulation, and acquisition execution and integration.
- A hypothetical 10% rise in commodity prices would adversely affect operating margins. Management said a 10% short-term interest-rate change would not materially affect pretax earnings. The company also identified exposure to Mexican peso movements.
- No legal proceedings, material changes to previously disclosed risk factors, off-balance-sheet arrangements or material changes in contractual obligations were reported. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting.
- The filing discusses upcoming accounting standards, including revenue recognition (Topic 606), deferred-tax classification, leases and stock compensation. The company was assessing the potential effect of Topic 606 and ASU 2016-09; it did not expect material effects from the deferred-tax and lease updates.
Important facts for investors to verify
- Whether truck production and demand develop in line with the cited 25%–30% 2016 decline forecast, and how that affects sales and fixed-cost absorption.
- Whether growth in non-truck customers and newer business offsets concentration: four named major customers accounted for about three-quarters of Q1 sales.
- How much of Q1 operating cash flow came from working-capital movements and whether cash generation remains durable.
- Whether the higher tooling-in-progress liability converts into accepted tooling revenue and cash collection on expected schedules.
- Future covenant headroom, debt repayments, planned capital spending, and access to the revolving facility as it approaches its May 2017 maturity.