Core Molding Technologies, Inc. — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. The unaudited company manufactures sheet molding compound and reinforced-plastic products at five facilities, serving truck, automotive, marine, construction, and other markets.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Net sales | $47.37 million | $39.01 million | $84.11 million | $84.47 million |
| Gross margin | $7.35 million; 15.5% | $6.32 million; 16.2% | $13.84 million; 16.5% | $15.19 million; 18.0% |
| Operating income | $3.19 million | $2.31 million | $5.75 million | $6.75 million |
| Net income | $2.16 million | $1.46 million | $3.85 million | $4.35 million |
| Diluted EPS | $0.28 | $0.19 | $0.50 | $0.57 |
- Q2 sales rose 21% year over year, largely because tooling revenue increased to $10.57 million from $2.19 million. Product sales were essentially flat. Tooling sales are irregular and can vary significantly between periods.
- For the first half, sales were nearly flat, but product sales declined about 8%. Lower heavy-truck and automotive demand was partly offset by marine growth. Heavy- and medium-duty truck products represented 65% of first-half sales.
- First-half net income declined 12% and gross margin fell to 16.5% from 18.0%. Management cited unfavorable production costs/product mix and selling-price/material-cost changes, partly offset by foreign-exchange effects and fixed-cost leverage. Q2 gross margin percentage also declined, despite higher gross profit dollars.
- First-half operating cash flow was $6.03 million, versus $15.41 million a year earlier. Increased receivables and inventory used working capital, partly offset by higher payables. Capital expenditures were $1.38 million; financing cash use was $1.87 million, primarily scheduled debt repayment.
Financial position and liquidity
- At June 30, cash was $31.06 million, compared with $28.29 million at year-end 2016. Current assets were $67.79 million and current liabilities $24.10 million (current ratio approximately 2.8).
- Total debt was $8.25 million, down from $9.75 million at December 31, 2016; there were no revolver borrowings. The company reported $18 million available under its revolving credit line and was in compliance with loan covenants.
- Management expects cash from operations and available borrowing capacity to cover liquidity needs for the next 12 months. It anticipated up to $6 million of additional capital spending in the remainder of 2017.
- Stockholders’ equity was $101.44 million. The company paid $372,000 for treasury shares during the first half; Q2 repurchases reported were to satisfy tax withholding on vested restricted stock.
Outlook, risks, and notable items
- Management expected second-half 2017 product sales to increase year over year, citing anticipated higher customer demand and new business awards. It also noted industry forecasts for higher North American Class 8 truck production versus second-half 2016; this is an expectation, not quantified company guidance.
- Customer concentration, truck-industry cyclicality, customer order changes, raw-material prices and availability, Mexican peso exposure, labor, equipment, and execution/delivery risks could affect results. The company uses foreign-exchange forward contracts; their notional value was $7.18 million at June 30.
- Adoption of revenue standard ASC 606 was planned for January 1, 2018. Management expected tooling sales and costs to be recognized over time using percentage of completion rather than when the customer accepts the completed tool; the overall financial-statement impact was still under assessment.
- No material change in previously disclosed risk factors was reported. Management said there were no legal proceedings expected to materially harm financial position or results, no off-balance-sheet arrangements, and no goodwill impairment indicators during the first half.
Investor facts to verify
- How much of Q2’s sales and earnings improvement reflects recurring product demand versus the unusually high, timing-sensitive tooling revenue.
- Whether the expected second-half product-sales recovery and higher truck production materialize, given first-half product-sales declines and truck-market dependence.
- Drivers of the lower first-half gross margin and operating cash flow, including working-capital needs and the planned capital-spending program.
- The eventual ASC 606 adoption method and quantified effect on tooling revenue, earnings, and period-to-period comparability.
- Ongoing covenant compliance, revolver availability, and exposure to raw-material costs and Mexican peso movements.