Business context and reporting period
Core Molding Technologies, Inc. manufactures sheet molding compound and molded fiberglass-reinforced plastics for truck, automotive, marine, construction and other markets. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2016; comparisons are with the corresponding 2015 periods.
Financial performance
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Net sales | $39.006 million | $54.856 million | $84.474 million | $104.455 million |
| Gross margin | $6.323 million (16.2%) | $10.982 million (20.0%) | $15.186 million (18.0%) | $20.007 million (19.2%) |
| Income before interest and taxes | $2.307 million | $6.232 million | $6.749 million | $11.122 million |
| Net income | $1.460 million | $4.039 million | $4.350 million | $7.235 million |
| Diluted earnings per share | $0.19 | $0.53 | $0.57 | $0.95 |
- Q2 sales fell about 29% year over year, while net income fell about 64%. For the first half, sales declined about 19% and net income about 40%.
- First-half operating cash flow was $15.411 million, versus $8.203 million in 2015. The company ended June with $20.364 million in cash, compared with $8.943 million at year-end 2015.
- Capital expenditures were $1.626 million in the first half. Management expected up to $5 million of additional capital spending during the remainder of 2016.
- Total debt was $11.250 million, down from $13.464 million at December 31, 2015. Cash exceeded debt by approximately $9.1 million. The company also reported the full $18 million revolving credit line available.
- Current assets were $59.456 million and current liabilities $22.703 million at June 30. The company reported compliance with its debt covenants.
Material changes and management commentary
- Lower heavy-duty truck demand was the primary driver of weaker product sales. First-half product sales declined about 22%; decreases in truck and marine demand were partly offset by CPI acquisition sales and stronger demand from an automotive customer.
- Heavy- and medium-duty truck markets represented 67% of first-half 2016 sales, compared with 77% in 2015. Major-customer sales were lower overall: first-half sales to Volvo fell 41%, PACCAR 25%, Navistar 18%, and Yamaha 15% (approximate changes based on reported totals).
- Gross margin contracted. Management attributed the first-half decline mainly to lower fixed-cost absorption and an unfavorable production-cost and product-mix effect, partly offset by favorable foreign exchange and selling-price/material-cost changes.
- SG&A decreased to $8.437 million for the first half, primarily due to lower profit-sharing expense. Interest expense increased to $166,000, primarily because acquisition-related debt was outstanding throughout the 2016 period.
- Management expected 2016 product sales to remain below 2015 levels. Industry analysts then forecast North American heavy-duty truck production to be 25%–30% below 2015; management expected the percentage decline in total company product sales to be smaller, citing diversification and new business.
Risks, contingencies and unusual items
- Management cited demand and production cycles, customer concentration, order cancellations or rescheduling, raw-material availability and prices, foreign exchange, interest rates, Mexico operating conditions, labor, suppliers, regulation, and execution of acquisitions and new business as risks.
- A hypothetical 10% increase in commodity prices would adversely affect operating margins. Management said a hypothetical 10% short-term interest-rate change would not materially affect pretax earnings.
- The $18 million revolving facility is secured by substantially all assets of the company and its U.S. subsidiaries; it matures May 31, 2018. The June 2016 credit amendment extended the commitment period and increased the letter-of-credit commitment to $250,000.
- Tooling revenue is sporadic. The June 30 balance sheet included a $4.043 million net tooling-in-progress liability, versus $2.271 million at year-end 2015.
- No legal proceedings, material risk-factor changes, off-balance-sheet arrangements, or long-lived-asset or goodwill impairments were reported. Management said cash from operations and available borrowings should meet liquidity needs for the next 12 months, but warned that materially weaker sales or higher expenses could impair liquidity and covenant compliance.
Important facts for investors to verify
- Whether truck-production forecasts and customer demand developed as management expected, particularly for major truck customers.
- Whether diversification, CPI-related sales and new business offset continued weakness in truck and marine markets.
- Whether gross margins recover as production volumes, mix and fixed-cost absorption change.
- Actual capital spending, operating cash generation, debt repayments and continued compliance with credit-agreement covenants.
- The sustainability and timing of tooling revenue, which management describes as variable between periods.