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CMT > SEC Filings for CMT > Form 10-Q on 8-May-2013All 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


8-May-2013

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 certain 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 2012 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, agriculture, construction and other commercial products. Product sales to heavy and medium-duty truck markets accounted for 80% and 86% of the Company's sales for the three months ended March 31, 2013 and 2012, 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 a change in market conditions for the 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 three months ended March 31, 2013 the Company recorded net income of $1,681,000, or $0.24 per basic and $0.23 per diluted share, compared with net income of $2,635,000, or $0.37 per basic and $0.36 per diluted share, for the three months ended March 31, 2012. Product sales decreased 26% for the three months ended March 31, 2013 as compared to the same period in 2012. This decrease was primarily the result of lower demand from North American heavy and medium-duty truck customers.

Looking forward, the Company anticipates 2013 product sales levels to increase as compared to 2012, primarily due to the full year impact of certain programs launched in 2012, as well as new business awards for 2013.

Results of Operations Three Months Ended March 31, 2013, as Compared to Three Months Ended March 31, 2012 Net sales for the three months ended March 31, 2013 and 2012 totaled $34,362,000 and $44,529,000, respectively. Included in total sales were tooling project sales of $1,504,000 and $198,000 for the three months ended March 31, 2013 and 2012, 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 26% lower for the three months ended March 31, 2013, as compared to the same period a year ago. The primary reason for the decrease was lower demand from North American heavy and medium-duty truck customers.
Sales to Navistar totaled $12,267,000 for the three months ended March 31, 2013, decreasing 27% from $16,874,000 in sales for the three months ended March 31, 2012. Included in total sales was $29,000 of tooling sales for the three months ended March 31, 2013 compared to $75,000 for the same three months in 2012. Product sales to Navistar decreased 27% for the three months ended March 31, 2013 as compared to the same period in the prior year due to an overall decline in demand from Navistar.
Sales to PACCAR totaled $11,471,000 for the three months ended March 31, 2013, decreasing 31% from $16,533,000 in sales for the three months ended March 31, 2012. Included in total sales was $649,000 of tooling sales for the three months ended March 31, 2013 compared to $94,000 for the same three months in 2012. Product sales to PACCAR decreased by 34% for the three months ended March 31, 2013 as compared to the same period in the prior year due to an overall decline in demand from PACCAR.
Sales to Yamaha totaled $4,007,000 for the three months ended March 31, 2013, decreasing 5% from $4,199,000 in sales for the three months ended March 31, 2012. The decrease in sales to Yamaha was primarily due to lower demand from Yamaha for molded products.
Sales to other customers for the three months ended March 31, 2013 decreased 4% to $6,617,000 compared to $6,923,000 for the three months ended March 31, 2012. Included in total sales was $826,000 of tooling sales for the three months ended March 31, 2013 compared to $29,000 for the same three months in 2012. Product sales to other customers decreased by 16% for the three months ended March 31, 2013 as compared to the same period in the prior year. The decrease in sales to other customers is the result of lower demand from other customers in the heavy and medium-duty truck industry. This decrease was partially offset by increased sales to customers in the automotive industry from programs launched in 2012. Gross margin was approximately 17% of sales for the three months ended March 31, 2013 and 2012. For the three months ended March 31, 2013, production efficiencies favorably impacted gross margin as a percent of sales by approximately 0.5%. Lower absorption of fixed costs of production negatively impacted gross margin by approximately 2% of sales. A change in the Company's product mix negatively impacted gross margin by approximately 1% of sales, and higher material prices also negatively impacted gross margin by approximately 0.5% of sales. Comparatively, gross margin for the three months ended March 31, 2012 was unfavorably impacted by 2.5% of sales due to start-up costs and production inefficiencies at the Company's Warsaw, Kentucky facility which was closed in October 2012.
Selling, general and administrative expense ("SG&A") was $3,273,000 for the three months ended March 31, 2013, compared to $3,613,000 for the three months ended March 31, 2012. Contributing to the decrease in SG&A expense was lower profit sharing expense of $220,000. Outside service fees and travel fees decreased by $82,000 and $50,000, respectively, for the three months ended March 31, 2013.
Interest expense totaled $89,000 for the three months ended March 31, 2013, compared to interest expense of $109,000 for the three months ended March 31, 2012. Reductions in outstanding loan balances due to regularly scheduled principal payments reduced interest expense by approximately $39,000.


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Income tax expense for the three months ended March 31, 2013 and 2012 was approximately 34% and 33%, respectively, of total income before income taxes. The Company recorded net income of $1,681,000, or $0.24 per basic and $0.23 per diluted share for the three months ended March 31, 2013, compared with net income of $2,635,000, or $0.37 per basic and $0.36 per diluted share, for the three months ended March 31, 2012.

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 three months ended March 31, 2013 totaled $1,310,000. Net income of $1,681,000 positively impacted operating cash flows. Non-cash expenses of depreciation and amortization contributed $1,239,000 to operating cash flow. Changes in working capital decreased cash provided by operating activities by $1,530,000. Changes in working capital primarily relate to an increase in accounts receivable and a decrease in accrued liabilities, which included amounts accrued for profit sharing at December 31, 2012 that were paid in 2013. These were partially offset by increased accounts payable and decreases in inventories at March 31, 2013 as compared to December 31, 2012.

Cash used in investing activities for the three months ended March 31, 2013 was $2,308,000, which primarily represents equipment purchases related to the Company's compression molding capacity expansion discussed below.

Cash used in financing activities for the three months ended March 31, 2013 totaled $2,224,000, which primarily consisted of regularly scheduled repayments of principal on the Company's outstanding loans.

At March 31, 2013, the Company had $4,616,000 in cash on hand, and a revolving line of credit of up to $18,000,000. In order to support anticipated production levels, and to allow for additional capacity to provide for future growth, the Company is expanding its compression molding capacity. The Company is also considering an investment in additional SMC compounding capacity. To secure additional funding for this capacity expansion the Company and its wholly owned subsidiary, CoreComposites de Mexico, S. de R.L. de C.V., entered into an eighth amendment (the "Eighth Amendment") to the Credit Agreement on March 27, 2013. Pursuant to the terms of the Eighth Amendment, the parties agreed to modify certain terms of the Credit Agreement. These modifications included (1) an increase to the borrowing limit on the revolving line of credit from $8,000,000 to $18,000,000; (2) modification to the fixed charge definition to exclude capital expenditures of up to $18,000,000 associated with the Company's compression molding capacity expansion and any SMC compounding capacity expansion; (3) extending the commitment period for the revolving line of credit to May 31, 2015; and (4) canceling, effective immediately, the Mexican Expansion Revolving Loan, described below, which had a zero balance and was scheduled to expire 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 March 31, 2013, 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 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.


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Recent Accounting Pronouncements

In February 2013, the FASB issued Accounting Standards Update 2013-02, Comprehensive Income (Topic 220) - Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income (ASU 2013-02). The amendments require an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. ASU 2013-02 is effective for interim and annual reporting periods beginning on or after December 15, 2012. An entity should provide the required disclosures retrospectively for all comparative periods presented. As this accounting standard only requires enhanced disclosure, the adoption of this standard did not impact the Company's consolidated financial position, results of operations or cash flows.


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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 $229,000 and $258,000 at March 31, 2013 at December 31, 2012, 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 $861,000 at March 31, 2013 and $984,000 at December 31, 2012. 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. The Company has recorded an allowance for slow moving and obsolete inventory of $971,000 at March 31, 2013 and $987,000 at December 31, 2012.
Long-Lived Assets: Long-lived assets consist primarily of property, plant and equipment. The recoverability of long-lived assets is evaluated by an analysis of operating results and consideration of other significant events or changes in the business environment. The Company evaluates whether impairment exists for property, plant and equipment on the basis of undiscounted expected future cash flows from operations before interest. There was no impairment of the Company's long-lived assets for the three months ended March 31, 2013 or March 31, 2012. Goodwill: Core Molding Technologies acquired certain assets of Airshield Corporation in 2001, and as a result, recorded goodwill related to its Matamoros, Mexico operations in the amount of $1,097,000. The Company evaluates goodwill annually on December 31st to determine whether impairment exists, or at interim periods if an indicator of possible impairment exists. The Company evaluates goodwill for impairment using fair value measurements based on a projected discounted cash flow valuation model, in accordance with ASC 350, "Intangibles-Goodwill and Other." If impairment exists, the carrying amount of the goodwill is reduced to its estimated fair value. There was no impairment of the Company's goodwill for the three months ended March 31, 2013 or March 31, 2012.
Self-Insurance: The Company is self-insured with respect to its Columbus and Batavia, Ohio, Gaffney, South Carolina and Brownsville, Texas medical, dental and vision claims and Columbus and Batavia, Ohio workers' compensation claims, all of which are subject to stop-loss insurance thresholds. 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, 2013 and December 31, 2012 of $1,051,000 and $1,065,000, respectively.
Post retirement benefits: Management records an accrual for post retirement 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 11 of the Notes to Consolidated Financial Statements, which are contained in the Company's 2012 Annual Report to Shareholders on Form 10-K. Core Molding Technologies had a liability for post retirement healthcare benefits based on actuarially computed estimates of $9,940,000 at March 31, 2013 and $9,987,000 at December 31, 2012.


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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 Consolidated 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, 2013 the Company had a net asset related to tooling in progress of $708,000, which represents approximately $5,781,000 of progress tooling billings and $6,489,000 of progress tooling expenses. At December 31, 2012 the Company had a net liability related to tooling in progress of $3,000, which represents approximately $6,624,000 of progress tooling billings and $6,621,000 of progress tooling expenses.
Income taxes: The Consolidated Balance Sheets at March 31, 2013 and December 31, 2012, include a deferred tax asset of $3,178,000 and $3,164,000, 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 refer to Note 10 of the Notes to Consolidated Financial Statements, which are contained in the Company's 2012 Annual Report on Form 10-K.


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Part I - Financial Information

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