Summary of CORE MOLDING TECHNOLOGIES INC

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

This Management's Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements within the meaning of the federal securities laws. As a general matter, forward-looking statements are those focused upon future plans, objectives or performance as opposed to historical items and include statements of anticipated events or trends and expectations and beliefs relating to matters not historical in nature. Such forward-looking statements involve known and unknown risks and are subject to uncertainties and factors relating to Core Molding Technologies' operations and business environment, all of which are difficult to predict and many of which are beyond Core Molding Technologies' control. These uncertainties and factors could cause Core Molding Technologies' actual results to differ materially from those matters expressed in or implied by such forward-looking statements.

Core Molding Technologies believes that the following factors, among others, could affect its future performance and cause actual results to differ materially from those expressed or implied by forward-looking statements made in this report: business conditions in the plastics, transportation, marine and commercial product industries; federal and state regulations (including engine emission regulations); general economic, social and political environments in the countries in which Core Molding Technologies operates; safety and security conditions in Mexico; dependence upon two major customers as the primary source of Core Molding Technologies' sales revenues; efforts of Core Molding Technologies to expand its customer base; the actions of competitors, customers, and suppliers; failure of Core Molding Technologies' suppliers to perform their obligations; the availability of raw materials; inflationary pressures; new technologies; regulatory matters; labor relations; the loss or inability of Core Molding Technologies to attract and retain key personnel; federal, state and local environmental laws and regulations; the availability of capital; the ability of Core Molding Technologies to provide on-time delivery to customers, which may require additional shipping expenses to ensure on-time delivery or otherwise result in late fees; risk of cancellation or rescheduling of orders; management's decision to pursue new products or businesses which involve additional costs, risks or capital expenditures; and other risks identified from time-to-time in Core Molding Technologies' other public documents on file with the Securities and Exchange Commission, including those described in Item 1A of the 2011 Annual Report to Shareholders on Form 10-K.

Description of the Company

Core Molding Technologies is a manufacturer of sheet molding compound ("SMC") and molder of fiberglass reinforced plastics. The Company specializes in large-format moldings and offers a wide range of fiberglass processes, including compression molding of SMC, glass mat thermoplastics ("GMT") and bulk molding compounds ("BMC"); spray-up, hand-lay-up, and resin transfer molding ("RTM"). Additionally, the Company offers reaction injection molding ("RIM"), utilizing dicyclopentadiene technology. Core Molding Technologies serves a wide variety of markets, including medium and heavy-duty truck, marine, automotive, and other commercial products. Product sales to heavy and medium-duty truck markets accounted for 86% and 91% of the Company's sales for the six months ended June 30, 2012 and 2011, respectively. The demand for Core Molding Technologies' products is affected by economic conditions in the United States, Canada, and Mexico. Core Molding Technologies' manufacturing operations have a significant fixed cost component. Accordingly, during periods of changing demand, the profitability of Core Molding Technologies' operations may change proportionately more than revenues from operations.

In 1996, Core Molding Technologies acquired substantially all of the assets and assumed certain liabilities of Columbus Plastics, a wholly owned operating unit of Navistar's truck manufacturing division since its formation in late 1980. Columbus Plastics, located in Columbus, Ohio, was a compounder and compression molder of SMC. In 1998, Core Molding Technologies began operations at its second facility in Gaffney, South Carolina, and in 2001, Core Molding Technologies acquired certain assets of Airshield Corporation. As a result of this acquisition, Core Molding Technologies expanded its fiberglass molding capabilities to include the spray up, hand-lay-up open mold processes and RTM closed molding. In 2004, Core Molding Technologies acquired substantially all the operating assets of Keystone Restyling Products, Inc., a privately held manufacturer and distributor of fiberglass reinforced products for the automotive-aftermarket industry. In 2005, Core Molding Technologies acquired certain assets of the Cincinnati Fiberglass Division of Diversified Glass, Inc., a Batavia, Ohio-based, privately held manufacturer and distributor of fiberglass reinforced plastic components supplied primarily to the heavy-duty truck market. In 2009, the Company completed construction of a production facility in Matamoros, Mexico that replaced its leased facility. In July 2011, the Company formed Core Specialty Composites and leased a facility in Warsaw, Kentucky for the purpose of adding additional manufacturing capabilities to produce parts for customers outside of the Company's traditional markets.

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Overview

For the six months ended June 30, 2012 the Company recorded net income of $4,976,000, or $0.70 per basic and $0.67 per diluted share, compared with net income of $5,111,000, or $0.74 per basic and $0.70 per diluted share, for the six months ended June 30, 2011. Product sales increased 37% as compared to the same period in 2011, which is primarily the result of increased demand from North American heavy and medium-duty truck customers, as well as new business awards.

Industry analysts and several of our customers are forecasting a slowdown in truck production rates for the second half of 2012. Considering these forecasts, the Company anticipates lower product sales during the second half of 2012 as compared to the same period in 2011. However, the Company remains encouraged by recent truck industry analysts' forecasts for 2013, which project production levels to be above the levels estimated for 2012. The Company also anticipates the favorable impact of new product launches scheduled for start in the third and fourth quarters of this year.

The Company previously reported that it anticipated limited production at its Warsaw, Kentucky facility in 2012. Due to changes in market conditions and business plans, the customer served by this operation has informed the Company that it does not intend to continue purchasing products produced at the Company's Warsaw facility beyond the most recent shipment in June 2012. Accordingly, the Company has idled all operations at its Warsaw facility. Through June 30, 2012 the Company recorded product sales of $355,000 and approximately $1,500,000 in pre-tax start-up losses related to this operation. Based upon the terms of the supply agreement and recent discussions with the Warsaw customer, the Company does not anticipate incurring any future expenses or asset impairment associated with this operation or the idling and likely closure of this facility.

Results of Operations Three Months Ended June 30, 2012, as Compared to Three Months Ended June 30, 2011 Net sales for the three months ended June 30, 2012 totaled $44,544,000, representing an approximate 26% increase from the $35,294,000 reported for the three months ended June 30, 2011. Included in total sales were tooling project sales of $3,335,000 and $1,747,000 for the three months ended June 30, 2012 and 2011, respectively. Tooling project sales result from billings to customers primarily for molds and assembly equipment specific to their products as well as other non-production billings. These sales are sporadic in nature and fluctuate in regard to scope and related revenue on a period-to-period basis. Total product sales, excluding tooling project sales, were approximately 23% higher for the three months ended June 30, 2012, as compared to the same period a year ago. The primary reasons for the increase were higher demand from North American heavy and medium-duty truck customers as well as increased sales from new business awards.
Sales to Navistar totaled $16,018,000 for the three months ended June 30, 2012, increasing 3% from $15,567,000 in sales for the three months ended June 30, 2011. Included in total sales was $963,000 of tooling sales for the three months ended June 30, 2012 compared to $828,000 for the same three months in 2011. Product sales to Navistar increased 2% for the three months ended June 30, 2012 as compared to the same period in the prior year.
Sales to PACCAR totaled $15,278,000 for the three months ended June 30, 2012, increasing 21% from $12,669,000 in sales for the three months ended June 30, 2011. Included in total sales was $196,000 of tooling sales for the three months ended June 30, 2012 compared to $223,000 for the same three months in 2011. Product sales to PACCAR increased by 21% for the three months ended June 30, 2012 as compared to the same period in the prior year. The primary reasons for the increase in product sales is higher demand for North American heavy and medium-duty trucks as noted above, further increased demand for certain truck models for which the Company provides content and new product launches. Sales to other customers for the three months ended June 30, 2012 increased 88% to $13,248,000 compared to $7,058,000 for the three months ended June 30, 2011. Included in total sales was $2,176,000 of tooling sales for the three months ended June 30, 2012 compared to $696,000 for the same three months in 2011. Product sales to other customers increased $6,190,000 or 74% for the three months ended June 30, 2012 as compared to the same period in the prior year, with $3,944,000 of the increase resulting from increased product sales to customers in the marine industry. The remaining increase was primarily due to increased demand for the Company's products from other heavy and medium-duty truck customers.
Gross margin was approximately 16% of sales for the three months ended June 30, 2012, compared with 22% for the three months ended June 30, 2011. The primary reason for the decrease in gross margin as a percent of sales was a change in the Company's product mix to products with lower margins. This change in mix negatively impacted gross margin as a percent of sales by approximately 3%. Start-up costs and production inefficiencies incurred at the Company's new production facility in Warsaw, Kentucky reduced gross margin as a percent of sales by approximately 1%. As discussed above, the Company has now idled all operations at this facility. Production inefficiencies at the Company's other facilities unfavorably impacted gross margin as a percent of sales by approximately 1%. These inefficiencies were primarily related to higher than expected use of production labor.

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Higher raw material prices negatively impacted gross margin as a percent of sales by approximately 1%.
Selling, general and administrative expense ("SG&A") was $3,587,000 for the three months ended June 30, 2012, compared to $3,177,000 for the three months ended June 30, 2011. The primary reasons for the increase were higher consulting and outside service costs of $171,000, increased travel costs of $85,000 and foreign currency losses of $59,000.
Interest expense totaled $16,000 for the three months ended June 30, 2012, compared to interest expense of $267,000 for the three months ended June 30, 2011. The Company recorded capitalized interest of $122,000 associated with the facility expansion in Mexico for the three months ended June 20, 2012 and recorded no capitalized interest for the same period of 2011. Reductions in interest rates and reductions in outstanding loan balances due to regularly scheduled principal payments also contributed to the decrease in interest expense.
Income tax expense for the three months ended June 30, 2012 and 2011 was approximately 32% and 34% of total income before income taxes, respectively. Income tax expense decreased as a percent of income before income taxes primarily due to a lower Mexican effective income tax rate for the three months ended June 30, 2012, as compared to the same period in 2011.
The Company recorded net income for the three months ended June 30, 2012 of $2,341,000, or $0.33 per basic and $0.32 per diluted share, compared with net income of $2,842,000, or $0.41 per basic and $0.39 per diluted share, for the three months ended June 30, 2011.
Six Months Ended June 30, 2012, as Compared to Six Months Ended June 30, 2011 Net sales for the six months ended June 30, 2012 totaled $89,073,000, representing an approximate 39% increase from the $64,283,000 reported for the six months ended June 30, 2011. Included in total sales were tooling project sales of $3,533,000 and $1,762,000 for the six months ended June 30, 2012 and 2011, respectively. Tooling project sales result from billings to customers primarily for molds and assembly equipment specific to their products as well as other non-production billings. These sales are sporadic in nature and fluctuate in regard to scope and related revenue on a period-to-period basis. Total product sales, excluding tooling project sales, were approximately 37% higher for the six months ended June 30, 2012, as compared to the same period a year ago. The primary reasons for the increase were higher demand from North American heavy and medium-duty truck customers as well as increased sales from new business awards.
Sales to Navistar totaled $32,892,000 for the six months ended June 30, 2012, increasing 12% from $29,339,000 in sales for the six months ended June 30, 2011. Included in total sales was $1,038,000 of tooling sales for the six months ended June 30, 2012 compared to $828,000 for the same six months in 2011. Product sales to Navistar increased by 12% for the six months ended June 30, 2012 as compared to the same period in the prior year. The primary reasons for the increase in product sales are higher demand for North American heavy and medium-duty trucks and new product launches.
Sales to PACCAR totaled $31,811,000 for the six months ended June 30, 2012, increasing 47% from $21,697,000 in sales for the six months ended June 30, 2011. Included in total sales was $290,000 of tooling sales for the six months ended June 30, 2012 compared to $223,000 for the same six months in 2011. Product sales to PACCAR increased by 47% for the six months ended June 30, 2012 as compared to the same period in the prior year. The primary reasons for the increase in product sales is higher demand for North American heavy and medium-duty trucks as noted above, further increased demand for certain truck models for which the Company provides content and new product launches. Sales to other customers for the six months ended June 30, 2012 increased 84% to $24,370,000 compared to $13,247,000 for the six months ended June 30, 2011. Included in total sales was $2,205,000 of tooling sales for the six months ended June 30, 2012 compared to $711,000 for the same six months in 2011. Product sales to other customers increased $11,123,000 or 77% for the six months ended June 30, 2012 as compared to the same period in the prior year, with $7,269,000 of the increase resulting from increased product sales to customers in the marine industry. The remaining increase was primarily due to increased demand for the Company's products from other heavy and medium-duty truck customers. Gross margin was approximately 16% of sales for the six months ended June 30, 2012, compared with 22% for the six months ended June 30, 2011. A change in the Company's product mix to products with lower margins negatively impacted gross margin as a percent of sales by approximately 2%. Start-up costs and production inefficiencies incurred at the Company's new production facility in Warsaw, Kentucky reduced gross margin as a percent of sales by approximately 2%. As discussed above, the Company has now idled all operations at this facility. Production inefficiencies at the Company's other facilities unfavorably impacted gross margin as a percent of sales by approximately 1%. These inefficiencies were primarily related to higher than expected use of production labor. Higher raw material prices also negatively impacted gross margin as a percent of sales by approximately 1%.

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Selling, general and administrative expense ("SG&A") was $7,200,000 for the six months ended June 30, 2012, compared to $6,100,000 for the six months ended June 30, 2011. The primary reasons for the increase were higher consulting and outside service costs of $381,000, increased labor and benefit costs of $310,000 and increased travel costs of $169,000.
Interest expense totaled $125,000 for the six months ended June 30, 2012, compared to interest expense of $449,000 for the six months ended June 30, 2011. The Company recorded capitalized interest of $139,000 associated with the facility expansion in Mexico for the six months ended June 20, 2012 and recorded no capitalized interest for the same period of 2011. Reductions in interest rates and reductions in outstanding loan balances due to regularly scheduled principal payments also contributed to the decrease in interest expense. Income tax expense for the six months ended June 30, 2012 was approximately 32% of income before income taxes. Income tax expense for the six months ended June 30, 2011 was approximately 34% of income before income taxes. Income tax expense decreased as a percent of income before income taxes primarily due to a lower Mexican effective income tax rate for the six months ended June 30, 2012, as compared to the same period in 2011.

The Company recorded net income for the six months ended June 30, 2012 of $4,976,000 or $0.70 per basic and $0.67 per diluted share, compared with net income of $5,111,000, or $0.74 per basic and $0.70 per diluted share, for the six months ended June 30, 2011.

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, increases in working capital and capital expenditures.

Cash provided by operating activities for the six months ended June 30, 2012 totaled $1,287,000. Net income of $4,976,000 positively impacted operating cash flows. Non-cash expenses of depreciation and amortization contributed $2,404,000 to operating cash flow. Changes in working capital decreased cash provided by operating activities by $5,822,000. Changes in working capital primarily relate to an increase in accounts receivable due to increased product sales as well as higher inventory levels to support the increase in sales, and decreases in accrued liabilities, which included amounts accrued for profit sharing at December 31, 2011 that were paid during the six months ended June 30, 2012. These were partially offset by increased accounts payable at June 30, 2012 as compared to December 31, 2011.

Cash used in investing activities for the six months ended June 30, 2012 was $5,301,000, which primarily represents building expansion and improvements at the Company's Matamoros, Mexico facility. As previously disclosed, the Company will require additional capacity at its Matamoros, Mexico facility, which will support increased production volumes as well as new programs for customers expected to launch later this year. The Company plans to invest approximately $14,500,000 for this capacity expansion, of which approximately $10,700,000 had been spent as of June 30, 2012. In total, Core Molding Technologies anticipates spending approximately $4,500,000 during the remainder of 2012 on property, plant and equipment purchases for all of the Company's operations.

Cash used in financing activities for the six months ended June 30, 2012 totaled $620,000, which was primarily a result of scheduled repayments of principal on the Company's outstanding loans.

At June 30, 2012, the Company had no cash on hand, a revolving line of credit of up to $8,000,000 and a Mexican expansion revolving loan of $10,000,000. At June 30, 2012, Core Molding Technologies had outstanding borrowings on the revolving line of credit of $2,233,000, and no outstanding borrowings on the Mexican expansion revolving loan. On July 9, 2012, the Company and its wholly owned subsidiary, CoreComposites de Mexico, S. de R.L. de C.V., entered into a seventh amendment (the "Seventh Amendment") to the Credit Agreement. Pursuant to the terms of the Seventh Amendment, the parties agreed to extend the commitment for the revolving line of credit to May 31, 2014. The Mexican expansion revolving loan is scheduled to mature on May 31, 2013.

The Company is required to meet certain financial covenants included in the Credit Agreement with respect to leverage ratios, fixed charge ratios, capital expenditures as well as other customary affirmative and negative covenants. As of June 30, 2012, the Company was in compliance with its financial covenants.

Management regularly evaluates the Company's ability to effectively meet its debt covenants based on the Company's forecasts. Based on the Company's forecasts which are primarily based on industry analysts' estimates of heavy and medium-duty truck production volumes, as well as other assumptions, management believes that the Company will be able to maintain compliance with its financial covenants for the next 12 months. Management believes that cash flow from operating activities and available

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borrowings under the Credit Agreement will be sufficient to meet the Company's liquidity needs. 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 May 2011, the Financial Accounting Standards Board (the "FASB") issued Accounting Standards Update 2011-04, Fair Value Measurement (Topic 820) - Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs (ASU 2011-04). ASU 2011-04 represents the converged guidance of the FASB and the International Accounting Standards Board on fair value measurement. The guidance clarifies certain existing requirements and changes certain principles to achieve convergence between U.S. GAAP and IFRS. ASU 2011-04 also expands the disclosures for fair value measurements. ASU 2011-04 is effective for interim and annual periods beginning after December 15, 2011. The adoption of this guidance did not have a material impact on the Company's consolidated financial statements.

In June 2011, the FASB issued Accounting Standards Update 2011-05, Presentation of Comprehensive Income (ASU 2011-05). ASU 2011-05 amends guidance on the presentation of comprehensive income to require entities to report components of comprehensive income in either a continuous statement of comprehensive income or two separate but consecutive statements. In addition, an entity is required to present on the face of the financial statements reclassification adjustments for items that are reclassified from other comprehensive income to net income in the statement(s) where the components of net income and the components of other comprehensive income are presented. In December 2011, the FASB issued an update to this guidance, Accounting Standards Update 2011-12, Comprehensive Income (Topic 220) - Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05 (ASU 2011-12), which defers the effective date for the presentation of reclassification of items out of accumulated other comprehensive income to some future period. Except for the presentation of reclassification adjustments, the provisions of this guidance are effective for interim and annual periods beginning after December 15, 2011. This accounting standards update impacted our disclosures only, and did not have any impact on our financial condition, results of operations or liquidity. The disclosures required by this accounting standards update are presented in the Consolidated Statements of Comprehensive Income.

In September 2011, the FASB issued Accounting Standards Update 2011-08, Intangibles - Goodwill and Other (Topic 350) - Testing Goodwill for Impairment (ASU 2011-08). ASU 2011-08 amends guidance on the testing of goodwill for impairment to reduce complexity and costs by allowing an entity the option to make a qualitative evaluation about the likelihood of goodwill impairment to determine whether it should calculate the fair value of a reporting unit. ASU 2011-08 is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The adoption of this guidance did not have a material impact on the Company's consolidated financial statements.

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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, self-insurance, post retirement benefits, 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 $307,000 and $236,000 at June 30, 2012 at December 31, 2011, respectively. 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 by $1,724,000 at June 30, 2012 and $1,283,000 at December 31, 2011. Inventories: Inventories, which include material, labor and manufacturing overhead, are valued at the lower of cost or market. The inventories are . . .