Business context and reporting period
Core Molding Technologies, Inc. filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2018. The company manufactures sheet molding compound and molded thermoset and thermoplastic products for truck, automotive, marine, construction, and other markets. Results include Horizon Plastics, acquired January 16, 2018, which added structural foam and web molding capabilities and facilities in Canada and Mexico.
Financial performance and liquidity
| Metric | Q2 2018 | Six months 2018 |
|---|---|---|
| Net sales | $68.6 million, versus $47.4 million | $131.6 million, versus $84.1 million |
| Gross margin | $7.9 million; 11.5% of sales, versus 15.5% | $15.8 million; 12.0% of sales, versus 16.4% |
| Operating income | $1.4 million, versus $3.2 million | $2.5 million, versus $5.7 million |
| Net income | $0.45 million, or $0.06 per diluted share, versus $2.16 million, or $0.28 | $0.96 million, or $0.12 per diluted share, versus $3.85 million, or $0.50 |
- Product sales rose 77% in Q2 and 71% for the first half. Horizon contributed $18.0 million and $32.7 million of product sales, respectively; higher truck demand also contributed. Tooling sales fell year over year in both periods and fluctuate with project timing.
- Operating cash flow was $3.6 million for the first half, compared with $6.0 million a year earlier. Working-capital changes reduced cash flow by $2.9 million, primarily reflecting higher receivables and prepaid assets, partly offset by higher payables and accruals.
- Cash was zero at June 30. Current assets were $66.7 million and current liabilities $39.2 million. The company reported $39.2 million available on its revolving facility, subject to credit agreement terms.
- Total debt was $44.1 million, including $4.0 million classified as current; long-term debt was $39.4 million. The company was in compliance with financial covenants at quarter-end.
- Investing cash outflow was $65.9 million, including $62.5 million for Horizon and $3.4 million for capital expenditures. The company expected up to $5.0 million of additional capital spending in the remainder of 2018.
Material changes versus the prior comparable periods
- Sales growth did not translate into higher operating profit: first-half operating income fell 56% and net income fell 75% year over year. Gross margin declined as manufacturing inefficiencies and costs outweighed acquisition contribution and improved fixed-cost absorption.
- Management cited higher labor, overtime, contract labor, scrap, rework, expedited shipping, customer charges, repairs, and raw-material costs. Capacity constraints and difficulty hiring, training, and retaining workers also affected delivery and quality performance.
- SG&A rose to $6.5 million in Q2 and $13.2 million for the first half. First-half increases included Horizon ongoing costs, $1.3 million of acquisition transaction costs, and higher amortization and professional fees.
- Interest expense increased to $0.6 million in Q2 and $1.1 million for the first half, reflecting higher average borrowing and interest rates. Debt rose substantially to fund the acquisition.
- First-half reported results included a $1.289 million pre-tax Horizon transaction expense ($0.12 per share after tax, according to management). Management stated first-half net income would have been $1.904 million, or $0.24 per share, excluding that expense; it also attributed $0.20 per share of first-half earnings to Horizon excluding transaction costs.
Outlook, risks, and unusual items
- Management anticipated higher product sales for the remainder of 2018 than in 2017, driven by Horizon and truck demand, but warned that first-half operating challenges would likely continue. Additional program launches could bring startup inefficiencies and labor needs. The filing gives no specific company revenue or earnings guidance.
- Management cited ACT Research’s forecast of 316,000 heavy-duty truck units for 2018, up 24% from 2017. This is an industry forecast, not company guidance.
- Improvement efforts include hiring, training, and retention programs; added technical and consulting support; customer price negotiations; potential transfers of work to other manufacturers; and investment in capacity and equipment reliability. Management warned that continued weak performance could put future covenant compliance at risk, despite compliance at June 30.
- Customer concentration and cyclical truck demand are significant risks. Four major customers—Navistar, Volvo, PACCAR, and UFP—each exceeded 10% of sales in at least one current reporting period. Other risks include acquisition integration and realization of expected benefits, labor availability, input-cost inflation, foreign exchange, and customer delivery or quality issues.
- ASC Topic 606 was adopted January 1, 2018, increasing the timing of recognition for certain tooling revenue. The company recorded a $1.069 million cumulative equity adjustment; 2018 reported revenue and income are therefore not fully comparable with prior-year figures. The filing’s pro forma acquisition results are expressly not indicative of future performance.
- Q2 comprehensive loss was $0.34 million despite net income, principally reflecting an unrealized foreign-currency hedge loss. The company had $20.983 million in foreign-exchange contract notional value and $33.688 million in interest-rate swap notional value at quarter-end. Management reported no material adverse legal proceedings and effective disclosure controls.
Important facts for investors to verify
- Whether hiring, training, retention, and capacity initiatives improve production efficiency, delivery, quality, scrap, and customer chargebacks.
- How much of future sales and earnings growth comes from Horizon versus existing operations, and whether acquisition synergies are realized; the purchase-price allocation and working-capital settlement remained preliminary or pending.
- Liquidity, cash conversion, debt repayment, interest costs, and covenant headroom if operating performance remains pressured.
- The effect of customer concentration, truck-market cyclicality, and potential customer transfers of work on future sales and margins.
- Comparability of reported tooling revenue and earnings following Topic 606 adoption, and the difference between reported results and management’s transaction-cost-excluded figures.