Core Molding Technologies, Inc. — Q3 2014 Form 10-Q
Reporting period: Three and nine months ended September 30, 2014. The company manufactures sheet molding compound and molded reinforced-plastic products at facilities in Ohio, South Carolina, and Mexico, serving truck, automotive, marine, construction, and other markets. Figures below are unaudited.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Net sales | $43.6 million | $37.4 million | $130.8 million | $106.5 million |
| Gross margin | $8.1 million; 18.7% | $6.4 million; 17.0% | $22.4 million; 17.1% | $18.2 million; 17.1% |
| Income before tax | $3.7 million | $2.9 million | $10.6 million | $7.9 million |
| Net income | $2.4 million | $2.0 million | $7.1 million | $5.2 million |
| Diluted EPS | $0.32 | $0.26 | $0.94 | $0.71 |
- For the first nine months, sales increased 23%, while product sales, excluding tooling, rose about 31%. Net income increased about 35%.
- Q3 sales rose about 16% and net income about 24%. Higher volume improved fixed-cost absorption and production efficiencies; sales mix partly offset those gains. Nine-month gross margin remained 17.1% year over year.
- Operating cash flow was $4.6 million, down from $5.8 million. A $8.9 million increase in accounts receivable was a major working-capital use. Capital expenditures were $9.4 million, principally for compression-molding and SMC capacity expansion.
- Cash was $1.4 million at September 30, 2014, versus $2.3 million at year-end 2013. Total debt was $9.2 million, including $6.4 million drawn on the revolving facility. The company reported $11.6 million of remaining revolver availability; the $18 million facility matures May 31, 2015. Current assets exceeded current liabilities by approximately $19.1 million.
- Interest expense for the first nine months was $99,000, compared with $183,000 a year earlier. The company was in compliance with debt covenants at quarter-end.
Drivers, outlook, and risks
- Growth chiefly reflected Volvo business awards that began generating product revenue in 2013, plus higher demand from Navistar and Yamaha. Nine-month Volvo sales rose to $35.3 million from $5.0 million; Yamaha sales rose to $12.5 million from $9.0 million.
- PACCAR sales declined to $26.8 million from $40.9 million for the nine-month period. Management cited lower demand for products nearing the end of their production life and new programs not yet meeting expectations.
- Heavy- and medium-duty truck markets accounted for 83% of nine-month sales, up from 81%. Major-customer concentration and exposure to truck production levels are important sensitivities.
- Management expected Q4 2014 sales to exceed Q4 2013, citing industry forecasts for higher truck production and a full quarter of Volvo program production. This is management’s outlook, not a guarantee.
- Management planned up to $1.5 million of additional capital spending during the remainder of 2014. It expected operating cash flow and revolver borrowings to fund liquidity needs and forecast covenant compliance for the next 12 months, while noting that weaker sales or materially different costs could impair liquidity or access to financing.
- Q3 SG&A included $423,000 of higher professional-service fees; about $397,000 related to strategic initiatives, including an unsuccessful acquisition bid. Management noted similar costs could recur.
- Key risks cited include industry and economic conditions, dependence on major customers, order cancellations or rescheduling, raw-material availability and pricing, Mexico-related conditions, labor, delivery performance, and access to capital. A hypothetical 10% increase in commodity prices would adversely affect margins; management said a 10% short-term interest-rate change would not materially affect pretax earnings.
- No legal proceedings were reported; the company said risk factors had not materially changed from its 2013 Form 10-K. Management reported disclosure controls were effective and no material quarterly change in internal control over financial reporting.
Investor verification points
- Track Volvo program volumes and whether PACCAR replacement programs reach expected production levels; assess customer and truck-market concentration.
- Review receivables and cash conversion: receivables increased to $31.0 million from $22.1 million, while operating cash flow declined despite higher earnings.
- Check expansion spending, production ramp-up, returns on added capacity, and the company’s ability to fund investment with cash and revolver capacity.
- Monitor the May 2015 revolver maturity, covenant compliance, and refinancing or replacement arrangements.
- Assess recurring costs from strategic initiatives and the effect of commodity prices, sales mix, and post-retirement benefit assumptions on margins and cash needs.