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| CMT > SEC Filings for CMT > Form 10-Q on 14-May-2009 | All Recent SEC Filings |
14-May-2009
Quarterly Report
Core Molding Technologies recorded a net loss for the three months ended
March 31, 2009 of $660,000, or $(0.10) per basic and diluted share, compared
with a net income of $864,000, or $.13 per basic and $.12 per diluted share, for
the three months ended March 31, 2008. During the three months ended March 31,
2009, the Company has incurred and recorded approximately $1,200,000 of expenses
for transfer and start-up costs associated with the construction of the
Company's new production facility in Mexico. The Company has also experienced a
31% decrease in product sales in the first quarter of 2009 as compared to the
same period in 2008. While industry analysts are forecasting an increase in
truck orders in the second half of 2009, the Company recognizes that this
expectation should be considered in light of an uncertain economy.
RESULTS OF OPERATIONS
Three Months Ended March 31, 2009, As Compared To Three Months Ended March 31,
2008
Net sales for the three months ended March 31, 2009, totaled $18,384,000,
representing an approximate 37% decrease from the $29,085,000 reported for the
three months ended March 31, 2008. Included in total sales are tooling project
sales of $554,000 and $3,102,000 for the three months ended March 31, 2009 and
March 31, 2008, respectively. Tooling project sales result from billings to
customers for molds and assembly equipment built specifically for their
products. These sales are sporadic in nature. Total product sales, excluding
tooling project sales, were approximately 31% lower for the three months ended
March 31, 2009, as compared to the same period a year ago. The primary reason
for the decrease in product sales is the continued downturn in the North
American medium and heavy-duty truck market caused by the overall economic
conditions.
Sales to Navistar totaled $10,360,000 for the three months ended March 31, 2009,
as compared to $16,232,000 reported for the three months ended March 31, 2008.
Included in total sales is $303,000 of tooling sales for the three months ended
March 31, 2009 compared to $2,757,000 for the same three months in 2008. Product
sales to Navistar decreased by 25% for the three months ended March 31, 2009
versus the same period of the prior year. The primary reason for the decrease in
product sales are the continued downturn in the North American medium and
heavy-duty truck market as noted above.
Sales to PACCAR totaled $4,203,000 for the three months ended March 31, 2009, as
compared to $7,500,000 reported for the three months ended March 31, 2008. Total
product sales to PACCAR decreased by 43% for the three months ended March 31,
2009 compared to the same period of the prior year. The decrease in total
product sales is primarily due to the continued downturn in the North American
medium and heavy-duty truck market and the United States economic conditions as
noted above as well as decrease in sales for more mature products the Company
manufactures for PACCAR.
Sales to other customers for the three months ended March 31, 2009 decreased 29%
to $3,821,000 compared to $5,353,000 for the three months ended March 31, 2008.
This decrease is primarily related to decreases in product sales to other North
American medium and heavy-duty truck manufacturers amounting to approximately
$1,343,000.
Gross margin was approximately 8.6% of sales for the three months ended
March 31, 2009, compared with 14.8% for the three months ended March 31, 2008.
The decrease in gross margin was due to approximately $1,071,000 of transition
and start up costs incurred during the three months ended March 31, 2009
associated with the Company's new production facility in Mexico as well as lower
fixed cost absorption due to lower product sales volumes. Our manufacturing
operations have significant fixed costs such as salary labor, energy,
depreciation, lease expense and post retirement healthcare costs that do not
change proportionately with sales.
Selling, general and administrative expenses ("SG&A") totaled $2,500,000 for the
three months ended March 31, 2009, decreasing from $2,814,000 for the three
months ended March 31, 2008. The primary reasons for the decrease were lower
professional fees and lower labor and benefit costs as compared to the period
ended March 31, 2008. Partially offsetting these reductions was approximately
$145,000 of transition and start-up costs incurred during the quarter associated
with the Company's new production facility in Mexico.
Interest expense totaled $110,000 for the three months ended March 31, 2009,
compared to interest expense of $229,000 for the three months ended March 31,
2008. The decrease in interest expense is primarily a result of lower interest
rates and lower outstanding daily average balances on the line of credit. IRB
ineffectiveness also contributed to the decrease in interest expenses due to
approximately $10,000 of interest income for the three months ended March 31,
2009 as compared to the $41,000 of interest expense for the same period a year
ago. Additionally the Company capitalized interest of approximately $58,000
during the quarter related to its new production facility in Mexico which will
not be placed into service until the second quarter of 2009.
Income taxes for the three months ended March 31, 2009 are estimated to be
approximately 36% of total earnings before taxes. In the three months ended
March 31, 2008 income taxes were estimated to be 32% of total earnings before
taxes. The increase in effective rate is primarily due to a higher percentage of
earnings being related to activities in the United States. The Company incurs a
higher effective tax rate in the United States compared to that incurred on
operations in Mexico.
Core Molding Technologies recorded a net loss for the three months ended
March 31, 2009 of $660,000 or $(0.10) per basic and diluted share, compared with
net income of $864,000, or $.13 per basic and $.12 per diluted share, for the
three months ended March 31, 2008.
Liquidity and Capital Resources
The Company's primary sources of funds have been cash generated from operating
activities and borrowings from third parties. Primary cash requirements are for
operating expenses and capital expenditures.
As widely reported, financial markets in the United States, Europe and Asia have
been experiencing extreme disruption in recent months, including, among other
things, extreme volatility in security prices, severely diminished liquidity and
credit availability, rating downgrades of certain investments and declining
valuations of others. Governments have taken unprecedented actions intended to
address extreme market conditions that include severely restricted credit and
declines in real estate values. While currently these conditions have not
impaired the Company's ability to access credit markets and finance operations,
there can be no assurance that there will not be a further deterioration in
financial markets and confidence in major economies, which may impact the
Company's ability to borrow in the future.
Cash provided by operating activities for the three months ended March 31, 2009
totaled $729,000. Net losses of $660,000 negatively impacted operating cash
flow. Non-cash deductions of depreciation and amortization contributed $924,000
to operating cash flow. In addition, the net increase in the postretirement
healthcare benefits liability of $211,000 is not a current cash obligation, and
this item will not be a cash obligation until additional employees retire and
begin to utilize these benefits. Changes in working capital increased cash
provided by operating activities by $126,000. Changes in working capital
primarily relate to a decrease in accounts receivable due to decreases in
product sales. These cash inflows were offset by an increase in prepaid expense
primarily related to timing of payments for annual business insurance premiums
as well as decreases in accounts payable and accrued liabilities.
Cash used in investing activities for the three months ended March 31, 2009 was
$4,580,000, primarily representing purchases related to the construction of the
Company's new production facility in Mexico. The Company currently plans an
additional $5,681,000 of capital expenditures for the remainder of the year, of
which $4,629,000 relates to the completion of the Company's new production
facility in Mexico. These capital additions will be funded by cash from
operations, the Company's unused $8,000,000 construction loan and borrowings on
the Company's line of credit. The Company may also undertake other capital
improvement projects in the future as deemed necessary and appropriate.
Financing activities increased cash by $3,851,000. This increase is related to
borrowings on the Company's construction loan of $3,879,000 as well as net
borrowings on the line of credit of $603,000. This was partially offset by
principal repayments on its secured note payable of $321,000 and the Company's
industrial revenue bond of $150,000.
At March 31, 2009, the Company had no cash on hand and a line of credit of
$8,000,000, with a scheduled maturity of April 30, 2010. At March 31, 2009, Core
Molding Technologies had outstanding borrowings of $1,797,000 on the line of
credit.
The Company is required to meet certain financial covenants included in its debt
agreements with respect to leverage ratios, fixed charge ratios, capital
expenditures as well as other customary affirmative and negative covenants. As
of March 31, 2009, the Company was in compliance with its financial debt
covenants for the Line of Credit, the secured note payable, the two construction
loans related to the new facility in Mexico, the letter of credit securing the
industrial revenue bond and certain equipment leases.
On March 31, 2009, the Company entered into the First Amendment to the Credit
Agreement with KeyBank. Pursuant to the terms of the First Amendment, the lender
agreed to modify certain terms of the Credit Agreement. These modifications
included (1) modification of the definition of EBITDA to add back transition
costs up to $3,200,000 associated with the transition and startup of the new
production facility in Matamoros and add back non-cash compensation expense
recorded under SFAS 123R (2) modification of the fixed charge definition to
exclude from consolidated interest expense any measure of ineffectiveness from
interest rate swaps and amortization of loan origination and issuance costs
(3) modification of the leverage ratio from 3.0x to 3.2x at June 30, 2009, 3.4x
at September 30, 2009, and 3.2x at December 31, 2009 (4) increase the applicable
margin for interest rates applicable to LIBOR loans effective March 31, 2009 to
400 basis points for both construction loans and the revolving line of credit;
all rates decrease 25 basis points upon reaching a leverage ratio of less than
2.25 to 1.00 (5) increase the letter of credit fee on the Industrial Revenue
Bond to 300 basis points (6) increase the 1% Libor floor on the $8,000,000
construction loan and revolving line of credit to 1.5% and (7) implement a 1.5%
Libor floor on the $12,000,000 construction loan.
Based on the Company's forecasts which are primarily based on industry analysts'
estimates of 2009 heavy and medium-duty truck production volumes as well as
other assumptions management believes to be reasonable, management believes that
the Company will be able to maintain compliance with the covenants as amended
under the First Amendment to the Credit Agreement for the next 12 months.
Management believes that cash flow from operating activities together with
available borrowings under the Credit Agreement will be sufficient to meet Core
Molding Technologies liquidity needs. However, if a material adverse change in
the financial position of Core Molding Technologies should occur, or if actual
sales or expenses are substantially different than what has been forecasted,
Core Molding Technologies' liquidity and ability to obtain further financing to
fund future operating and capital requirements could be negatively impacted.
Recent Accounting Pronouncements
In December 2008, the FASB issued FSP FAS 132(R)-1 to amend SFAS No. 132(R), to
provide guidance on an employer's disclosures about plan assets of a defined
benefit pension or other postretirement plan. FSP FAS 132(R)-1 is effective for
fiscal years ending after December 15, 2009 with earlier adoption permitted. The
Company is currently reviewing the additional disclosure requirements to
determine the impact on the Consolidated Financial Statements and Notes to
Consolidated Financial Statements.
In April 2009, the FASB issued FSP FAS 107-1 and APB 28-1 to require disclosures
about fair value of financial instruments for interim reporting periods of
publicly traded companies as well as annual financial statements. This FSP is
effective for interim reporting periods ending after June 15, 2009, with early
adoption permitted. The Company is currently reviewing the additional disclosure
requirements to determine the impact on the Consolidated Financial Statements
and Notes to Consolidated Financial Statements.
In April 2009, the FASB issued FSP FAS 157-4 to provide additional guidance for
estimating fair value when the volume and level of activity for the asset or
liability have significantly decreased. This FSP is effective for interim
reporting periods ending after June 15, 2009, with early adoption permitted. The
Company is currently reviewing the additional guidance to determine the impact
on the Consolidated Financial Statements and Notes to Consolidated Financial
Statements.
Critical Accounting Policies and Estimates
Management's Discussion and Analysis of Financial Condition and Results of
Operations discuss the Company's consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these consolidated financial statements
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and the disclosure of contingent assets and
liabilities at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the reporting period. On an
on-going basis, management evaluates its estimates and judgments, including
those related to accounts receivable, inventories, post retirement benefits,
workers compensation reserves, self-insured healthcare reserves and income
taxes. Management bases its estimates and judgments on historical experience and
on various other factors that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying value of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different
assumptions or conditions.
Management believes the following critical accounting policies, among others,
affect its more significant judgments and estimates used in the preparation of
its consolidated financial statements.
Accounts receivable allowances: Management maintains allowances for doubtful
accounts for estimated losses resulting from the inability of its customers to
make required payments. If the financial condition of the Company's customers
were to deteriorate, resulting in an impairment of their ability to make
payments, additional allowances may be required. The Company recorded an
allowance for doubtful accounts of $91,000 at March 31, 2009 and $109,000 at
December 31, 2008. Management also records estimates for customer returns and
deductions, discounts offered to customers, and for price adjustments. Should
customer returns and deductions, discounts, and price adjustments fluctuate from
the estimated amounts, additional allowances may be required. The Company has
reduced accounts receivable for chargebacks of $690,000 at March 31, 2009 and
$740,000 at December 31, 2008.
Inventories: Inventories, which include material, labor and manufacturing
overhead, are valued at the lower of cost or market. The inventories are
accounted for using the first-in, first-out (FIFO) method of determining
inventory costs. Inventory quantities on-hand are regularly reviewed, and where
necessary, provisions for excess and obsolete inventory are recorded based on
historical and anticipated usage.
Goodwill and Long-Lived Assets: Management evaluates whether impairment exists
for goodwill and long-lived assets annually on December 31 or at interim periods
if an indicator of impairment exists. Should actual results differ from the
assumptions used to determine impairment, additional provisions may be required.
If there is a sustained downturn in the economy or the disruption of the
financial and credit markets continues, demand for our products could fall below
our current expectations and our forecasts of revenues and operating results
could decline. Impairment charges of our goodwill or long-lived assets may be
required in the future if our expected future cash flows decline. The Company
has not recorded any impairment to goodwill or long-lived assets for the three
months ended March 31, 2009 or the year ended December 31, 2008. A 10% decrease
in future cash flows would not adversely impact the net book value of goodwill
and a 1% increase in the rate used to discount future cash flows would not
adversely impact the net book value of goodwill.
Self-Insurance: The Company is self-insured with respect to most of its Columbus
and Batavia, Ohio and Gaffney, South Carolina medical and dental claims and
Columbus and Batavia, Ohio workers' compensation claims. The Company has
recorded an estimated liability for self-insured medical and dental claims
incurred but not reported and worker's compensation claims incurred but not
reported at March 31, 2009 and December 31, 2008 of $1,012,000 and $1,109,000,
respectively.
Post retirement benefits: Management records an accrual for postretirement costs
associated with the health care plan sponsored by Core Molding Technologies.
Should actual results differ from the assumptions used to determine the
reserves, additional provisions may be required. In particular, increases in
future healthcare costs above the assumptions could have an adverse effect on
Core Molding Technologies' operations. The effect of a change in healthcare
costs is described in Note 10 of the Consolidated Notes to Financial Statements,
which are contained in the 2008 Annual Report to Shareholders. Core Molding
Technologies recorded a liability for postretirement healthcare benefits based
on actuarially computed estimates of $16,089,000 at March 31, 2009 and
$15,878,000 at December 31, 2008.
Revenue Recognition: Revenue from product sales is recognized at the time
products are shipped and title transfers. Allowances for returned products and
other credits are estimated and recorded as revenue is recognized. Tooling
revenue is recognized when the customer approves the tool and accepts ownership.
Progress billings and expenses are shown net as an asset or liability on the
Company's balance sheet. Tooling in progress can fluctuate significantly from
period to period and is dependent upon the stage of tooling projects and the
related billing and expense payment timetable for individual projects and
therefore does not necessarily reflect projected income or loss from tooling
projects. At March 31, 2009 the Company has recorded a net liability related to
tooling in progress of $313,000, which represents approximately $4,444,000 of
progress tooling billings and $4,131,000 of progress tooling expenses. At
December 31, 2008 the Company had recorded a net liability related to tooling in
progress of $212,000, which represents approximately $3,555,000 of progress
tooling billings and $3,343,000 of progress tooling expenses.
Income taxes: The Consolidated Balance Sheet at March 31, 2009 and December 31,
2008, includes a deferred tax asset of $7,193,000 and $7,188,000, respectively.
The Company performs analyses to evaluate the balance of deferred tax assets
that will be realized. Such analyses are based on the premise that the company
is, and will continue to be, a going concern and that it is more likely than not
that deferred tax benefits will be realized through the generation of future
taxable income. For more information, refer to Note 9 in Core Molding
Technologies 2008 Annual Report to Shareholders.
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