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CMT > SEC Filings for CMT > Form 10-Q on 9-Nov-2012All Recent SEC Filings

Show all filings for CORE MOLDING TECHNOLOGIES INC | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for CORE MOLDING TECHNOLOGIES INC


9-Nov-2012

Quarterly Report


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 92% of the Company's sales for the nine months ended September 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 to produce parts for customers outside of the Company's traditional markets. Due to changing market conditions for products manufactured at the Warsaw facility the Company terminated its lease and closed its Warsaw facility in October 2012.


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Overview

For the nine months ended September 30, 2012 the Company recorded net income of $6,127,000, or $0.86 per basic and $0.83 per diluted share, compared with net income of $7,967,000, or $1.15 per basic and $1.09 per diluted share, for the nine months ended September 30, 2011. Product sales increased 18% for the nine months ended September 30, 2012 as compared to the same period in 2011. This increase, all of which occurred in the first six months of the year, was primarily the result of increased demand from North American heavy and medium-duty truck customers and new business awards. Product sales for the third quarter of 2012 decreased 14% as compared to the third quarter of 2011 for reasons noted below.

For the remainder of 2012, industry analysts and several of our customers are forecasting production rates to be consistent with those experienced in the third quarter of 2012. Considering these forecasts, the Company anticipates lower product sales during the fourth quarter of 2012 as compared to the same period in 2011. Recent truck industry analysts' forecasts for 2013 project combined heavy and medium-duty production levels to be slightly above the levels estimated for 2012. The Company also anticipates that new product launches expected to occur in the fourth quarter of 2012 and early 2013 will have a favorable impact on the Company's product sales in 2013.

As previously disclosed, due to changes in market conditions and business plans, the customer served by the Company's Warsaw, Kentucky facility informed the Company it did not intend to continue purchasing products produced at the Warsaw facility beyond June 2012. In October 2012, the Company and its customer agreed to terminate the supply agreement. The Company subsequently terminated its facility lease and permanently closed the Warsaw facility. The Company does not anticipate any adverse financial impact in the fourth quarter associated with this operation or the closure of this facility.

Results of Operations Three Months Ended September 30, 2012, as Compared to Three Months Ended September 30, 2011 Net sales for the three months ended September 30, 2012 and 2011 totaled $37,681,000 and $37,836,000, respectively. Included in total sales were tooling project sales of $5,532,000 and $663,000 for the three months ended September 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 14% lower for the three months ended September 30, 2012, as compared to the same period a year ago. The primary reasons for the decrease were lower demand from North American heavy and medium-duty truck customers. Sales to Navistar totaled $17,358,000 for the three months ended September 30, 2012, decreasing 3% from $17,968,000 in sales for the three months ended September 30, 2011. Included in total sales was $5,456,000 of tooling sales for the three months ended September 30, 2012 compared to $325,000 for the same three months in 2011. Product sales to Navistar decreased 33% for the three months ended September 30, 2012 as compared to the same period in the prior year due to an overall decline in demand from Navistar.
Sales to PACCAR totaled $12,547,000 for the three months ended September 30, 2012, decreasing 3% from $12,881,000 in sales for the three months ended September 30, 2011. Included in total sales was $40,000 of tooling sales for the three months ended September 30, 2012 compared to $127,000 for the same three months in 2011. Product sales to PACCAR decreased by 2% for the three months ended September 30, 2012 as compared to the same period in the prior year due to an overall decline in demand from PACCAR.
Sales to other customers for the three months ended September 30, 2012 increased 11% to $7,776,000 compared to $6,987,000 for the three months ended September 30, 2011. Included in total sales was $36,000 of tooling sales for the three months ended September 30, 2012 compared to $211,000 for the same three months in 2011. Product sales to other customers increased $964,000 or 14% for the three months ended September 30, 2012 as compared to the same period in the prior year, with $478,000 of the increase resulting from increased product sales to customers in the automotive industry. The remaining increase was primarily due to increased product sales to customers in the marine industry. Gross margin was approximately 13% of sales for the three months ended September 30, 2012, compared with 22% for the three months ended September 30, 2011. Production inefficiencies unfavorably impacted gross margin as a percent of sales by 4%. These inefficiencies were primarily related to both production and indirect labor. Fixed costs of production also increased as a percent of sales by 2%, primarily due to reduced sales volume. A change in the Company's sales mix to products with lower margins negatively impacted gross margin as a percent of sales by 1.5%. Additionally, tooling sales had a dilutive effect on gross margin as a percent of sales of 1.5% for the quarter. Tooling sales do not provide the same margins as product sales.


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Selling, general and administrative expense ("SG&A") was $3,032,000 for the three months ended September 30, 2012, compared to $3,417,000 for the three months ended September 30, 2011. Contributing to the decrease in SG&A expense were a $436,000 decrease in profit sharing expense and a $144,000 net favorable impact of foreign currency. Partially offsetting these decreases were increases in SG&A labor and outside service costs of $151,000 and $118,000, respectively. Interest expense totaled $96,000 for the three months ended September 30, 2012, compared to interest expense of $171,000 for the three months ended September 30, 2011. The primary cause of the decrease was mark to market adjustments on the Company's interest rate swaps. In the three months ended September 30, 2012, approximately $24,000 of income was recorded related to the mark to market of the Company's interest rate swaps as compared to approximately $53,000 of expense for the three months ended September 30, 2011. Income tax expense for the three months ended September 30, 2012 and 2011 was approximately 38% of total income before income taxes.
The Company recorded net income for the three months ended September 30, 2012 of $1,151,000, or $0.16 per basic and diluted share, compared with net income of $2,856,000, or $0.41 per basic and $0.39 per diluted share, for the three months ended September 30, 2011.
Nine Months Ended September 30, 2012, as Compared to Nine Months Ended September 30, 2011 Net sales for the nine months ended September 30, 2012 totaled $126,754,000, representing an approximate 24% increase from the $102,119,000 reported for the nine months ended September 30, 2011. Included in total sales were tooling project sales of $9,065,000 and $2,425,000 for the nine months ended September 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 18% higher for the nine months ended September 30, 2012, as compared to the same period a year ago. The primary reasons for the increase in product sales 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 $50,250,000 for the nine months ended September 30, 2012, increasing 6% from $47,307,000 in sales for the nine months ended September 30, 2011. Included in total sales was $6,494,000 of tooling sales for the nine months ended September 30, 2012 compared to $1,152,000 for the same nine months in 2011. Product sales to Navistar decreased by 5% for the nine months ended September 30, 2012 as compared to the same period in the prior year due to an overall decline in demand from Navistar.
Sales to PACCAR totaled $44,358,000 for the nine months ended September 30, 2012, increasing 28% from $34,578,000 in sales for the nine months ended September 30, 2011. Included in total sales was $330,000 of tooling sales for the nine months ended September 30, 2012 compared to $351,000 for the same nine months in 2011. Product sales to PACCAR increased by 29% for the nine months ended September 30, 2012 as compared to the same period in the prior year. Sales to PACCAR were higher due to an overall increase in demand from PACCAR and due to new product launches.
Sales to other customers for the nine months ended September 30, 2012 increased 59% to $32,146,000 compared to $20,234,000 for the nine months ended September 30, 2011. Included in total sales was $2,241,000 of tooling sales for the nine months ended September 30, 2012 compared to $922,000 for the same nine months in 2011. Product sales to other customers increased $10,593,000 or 55% for the nine months ended September 30, 2012 as compared to the same period in the prior year, with $6,797,000 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 as well as customers in the automotive industry. Gross margin was approximately 15.5% of sales for the nine months ended September 30, 2012, compared with 22% for the nine months ended September 30, 2011. Start-up costs and production inefficiencies incurred at the Company's production facility in Warsaw, Kentucky reduced gross margin as a percent of sales by approximately 1.5%. As discussed above, the Company closed this facility in October 2012. Production inefficiencies at the Company's other facilities unfavorably impacted gross margin as a percent of sales by approximately 3%. These inefficiencies were primarily related to both production and indirect labor. A change in the Company's product mix to products with lower margins negatively impacted gross margin as a percent of sales by approximately 1.5%. Additionally, tooling sales had a dilutive effect on gross margin as a percent of sales of 0.5%. Tooling sales do not provide the same margins as product sales.
Selling, general and administrative expense ("SG&A") was $10,232,000 for the nine months ended September 30, 2012, compared to $9,517,000 for the nine months ended September 30, 2011. Outside service costs and labor costs increased $500,000 and


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$432,000, respectively. Also impacting SG&A were increased travel costs of $178,000 and higher supplies, repairs and maintenance of $107,000. These increases were partially offset by lower profit sharing expense of $507,000. Interest expense totaled $221,000 for the nine months ended September 30, 2012, compared to interest expense of $620,000 for the nine months ended September 30, 2011. Increased capitalized interest related to the Matamoros, Mexico facility expansion project reduced interest expense by $139,000. Reductions in outstanding loan balances due to regularly scheduled principal payments also reduced interest expense by $111,000. Mark to market adjustments on the Company's interest rate swaps also contributed to the decrease in interest expense. For the nine months ended September 30, 2012, the Company recorded approximately $79,000 of income related to the mark to market of the Company's interest rate swaps as compared to approximately $27,000 of expense for the nine months ended September 30, 2011.
Income tax expense for the nine months ended September 30, 2012 was approximately 33% of income before income taxes. Income tax expense for the nine months ended September 30, 2011 was approximately 36% of income before income taxes. The decrease in income taxes as a percent of income before taxes is primarily due to a lower Mexican effective income tax rate and 2011 taxes including $105,000 of interest and penalties related to Mexican income tax filings.

The Company recorded net income for the nine months ended September 30, 2012 of $6,127,000 or $0.86 per basic and $0.83 per diluted share, compared with net income of $7,967,000, or $1.15 per basic and $1.09 per diluted share, for the nine months ended September 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 nine months ended September 30, 2012 totaled $5,323,000. Net income of $6,127,000 positively impacted operating cash flows. Non-cash expenses of depreciation and amortization contributed $3,492,000 to operating cash flow. Changes in working capital decreased cash provided by operating activities by $3,968,000. Changes in working capital primarily relate to a decrease in accrued liabilities, which included amounts accrued for profit sharing at December 31, 2011 that were paid in 2012. Increases in inventories and increased prepaid and other assets at September 30, 2012 as compared to December 31, 2011 had a negative impact on working capital. These were partially offset by decreased accounts receivable at September 30, 2012 as compared to December 31, 2011.

Cash used in investing activities for the nine months ended September 30, 2012 was $7,066,000, which primarily represents equipment purchases, 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. The Company plans to invest approximately $14,500,000 for this capacity expansion, of which approximately $12,500,000 had been spent as of September 30, 2012. In total, Core Molding Technologies anticipates spending approximately $2,500,000 during the remainder of 2012 on property, plant and equipment purchases for all of the Company's operations. At September 30, 2012, purchase commitments for capital expenditures in progress were $1,403,000, and are primarily related to the Company's Matamoros production facility expansion project.

Cash used in financing activities for the nine months ended September 30, 2012 totaled $2,891,000, which was primarily a result of scheduled repayments of principal on the Company's outstanding loans.

At September 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 September 30, 2012, Core Molding Technologies had outstanding borrowings on the revolving line of credit of $752,000, 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 has not utilized, and does not anticipate the need to utilize or renew, the Mexican expansion revolving loan to complete the remaining portion of the Matamoros expansion.

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 September 30, 2012, the Company was in compliance with its financial covenants.


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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 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 $316,000 and $236,000 at September 30, 2012 at December 31, 2011, respectively. Management also records estimates for customer returns and deductions, discounts offered to customers, and for price . . .

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