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. Words such as "may," "will," "could,"
"would," "should," "anticipate," "predict," "potential," "continue," "expect,"
"intend," "plans," "projects," "believes," "estimates," "encouraged,"
"confident" and similar expressions are used to identify these forward-looking
statements. 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 (including changes in demand for truck
production); federal and state regulations (including engine emission
regulations); general economic, social, regulatory (including foreign trade
policy) and political environments in the countries in which Core Molding
Technologies operates; the adverse impact of coronavirus (COVID-19) global
pandemic on our business, results of operations, financial position, liquidity
or cash flow, as well as impact on customers and supply chains; safety and
security conditions in Mexico and Canada; 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 ability to
develop new and innovative products and to diversify markets, materials and
processes and increase operational enhancements; 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; labor
availability; the loss or inability of Core Molding Technologies to attract and
retain key personnel; the Company's ability to successfully identify, evaluate
and manage potential acquisitions and to benefit from and properly integrate any
completed acquisitions; 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 and other customer charges; risk of cancellation or rescheduling of
orders; management's decision to pursue new products or businesses which involve
additional costs, risks or capital expenditures; inadequate insurance coverage
to protect against potential hazards; equipment and machinery failure; product
liability and warranty claims; 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 Annual
Report on Form 10-K for the year ended December 31, 2019.
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Description of the Company
Core Molding Technologies and its subsidiaries operate in the composites market
as one operating segment as a molder of thermoplastic and thermoset structural
products. The Company's operating segment consists of two component reporting
units, Core Traditional and Horizon Plastics. The Company offers customers a
wide range of manufacturing processes to fit various program volume and
investment requirements. These processes include compression molding of sheet
molding compound ("SMC"), bulk molding compounds ("BMC"), resin transfer molding
("RTM"), liquid molding of dicyclopentadiene ("DCPD"), spray-up and hand-lay-up,
glass mat thermoplastics ("GMT"), direct long-fiber thermoplastics ("D-LFT") and
structural foam and structural web injection molding ("SIM"). Core Molding
Technologies serves a wide variety of markets, including the medium and
heavy-duty truck, marine, automotive, agriculture, construction, and other
commercial products. The demand for Core Molding Technologies' products is
affected by economic conditions in the United States, Mexico, and Canada. 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
added a production facility in Matamoros, Mexico by acquiring 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 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 new production facility in Matamoros, Mexico that
replaced its leased facility. In March 2015, the Company acquired substantially
all of the assets of CPI Binani, Inc., a wholly owned subsidiary of Binani
Industries Limited, located in Winona, Minnesota ("CPI"), which expanded the
Company's process capabilities to include D-LFT and diversified the customer
base. In January 2018, the Company acquired substantially all the assets of
Horizon Plastics, which has manufacturing operations in Cobourg, Ontario and
Escobedo, Mexico. This acquisition expanded the Company's customer base,
geographic footprint, and process capabilities to include structural foam and
structural web molding.
Business Overview
General
The Company's business and operating results are directly affected by changes in
overall customer demand, operational costs and performance and leverage of our
fixed cost and selling, general and administrative ("SG&A") infrastructure.
Product sales fluctuate in response to several factors including many that are
beyond the Company's control, such as general economic conditions, interest
rates, government regulations, consumer spending, labor availability, and our
customers' production rates and inventory levels. Product sales consist of
demand from customers in many different markets with different levels of
cyclicality and seasonality. The North American truck market, which is highly
cyclical, accounted for 46% and 60% of the Company's product revenue for the
three months ended March 31, 2020 and 2019, respectively.
Operating performance is dependent on the Company's ability to manage changes in
input costs for items such as raw materials, labor, and overhead operating
costs. Performance is also affected by manufacturing efficiencies, including
items such as on time delivery, quality, scrap, and productivity. Market factors
of supply and demand can impact operating costs. In periods of rapid increases
or decreases in customer demand, the Company is required to ramp operations
activity up or down quickly which may impact manufacturing efficiencies more
than in periods of steady demand.
Operating performance is also dependent on the Company's ability to effectively
launch new customer programs, which are typically extremely complex in nature.
The start of production of a new program is the result of a process of
developing new molds and assembly equipment, validation testing, manufacturing
process design, development and testing, along with training and often
hiring employees. Meeting the targeted levels of manufacturing efficiency for
new programs usually occurs over time as the Company gains experience with new
tools and processes. Therefore, during a new program launch period, start-up
costs and inefficiencies can affect operating results.
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Three Months of 2020 Overview
Product sales for the three months ended March 31, 2020 decreased 13% compared
to the same period in 2019. Operating income increased from a loss of $4,017,000
to profit of $4,261,000 for the three months ended March 31, 2020 compared to
the same period a year ago. Lower demand from our truck customers was the
primary driver of the sales decrease, while the increase in operating income was
largely due to increased manufacturing efficiencies and cost savings at several
of the Company's facilities and lower operating and SG&A costs.
For the three months ended March 31, 2020, product sales to truck customers
decreased by 34% compared to the same period in 2019, as a result of a cyclical
downturn in the truck market. According to ACT Research, North American
heavy-duty truck production decreased approximately 28% for the three months
ended March 31, 2020 compared to the same period in 2019.
For the three months ended March 31, 2020, the Company recorded net income of
$7,961,000, or $0.97 per basic and diluted share, compared with net loss of
$3,845,000, or $(0.49) per basic and diluted share for the three months ended
March 31, 2019. Net income in 2020 was favorably impacted by $5,638,000, or
$0.69 per share, as a result of tax valuation allowance reversal and a tax rate
benefit, which due to tax law changes can be carried back to offset taxable
income in 2013 through 2017.
Looking forward, the Company expects a changing demand environment associated
with COVID-19 and the concurrent unfolding market dynamics. Among other items,
demand deterioration for the remainder of the fiscal year, particularly in the
second quarter, is anticipated. Future developments such as a longer duration
than assumed or a rebound in the spread of COVID-19, further actions taken by
governmental authorities, including potential shutdowns of our operations, or
delays in the stabilization and recovery of economic conditions could further
adversely affect our operations and financial results, as well as those of our
customers and suppliers.
Results of Operations
Three Months Ended March 31, 2020, as Compared to Three Months Ended March 31,
2019
Net sales for the three months ended March 31, 2020 and 2019 totaled $64,023,000
and $72,266,000, respectively. Included in total sales were tooling project
sales of $2,093,000 and $815,000 for the three months ended March 31, 2020 and
2019, respectively. These sales are sporadic in nature and fluctuate in regard
to scope and related revenue on a period-to-period basis. Product sales,
excluding tooling project sales, for the three months ended March 31, 2020 were
approximately $61,930,000 compared to $71,451,000 for the same period in 2019.
This decrease in sales is primarily the result of lower demand from truck
customers.
Gross margin was approximately 17% of sales for the three months ended March 31,
2020, compared with 4% for the three months ended March 31, 2019. The gross
margin percentage increase was due to a favorable net change in product mix and
manufacturing efficiency of 11% and a favorable net change in selling price and
material costs of 2%.
Selling, general and administrative expense ("SG&A") was $6,505,000 for the
three months ended March 31, 2020, compared to $7,166,000 for the three months
ended March 31, 2019. The decrease in SG&A expense primarily resulted from lower
costs from outside service and professional fees of $976,000, offset by higher
labor and benefit costs of $541,000.
Interest expense totaled $1,174,000 for the three months ended March 31, 2020,
compared to interest expense of $896,000 for the three months ended March 31,
2019. The increase in interest expense was due to a forbearance amendment fee of
$225,000 and higher interest rates during the three months ended March 31, 2020,
when compared to the same period in 2019.
Income tax benefit for the three months ended March 31, 2020 was 156% of income
before income taxes, and income tax benefit for the three months ended March 31,
2019 was 21% of the loss before income taxes. The effective rate in 2020
includes the impact of reversing the full valuation allowance against net
deferred tax assets in the United States of approximately $3,267,000 and a rate
benefit of $2,371,000 based on the losses being carried back to years where the
Company paid tax at 34% compared to the valuation of the losses being recorded
at the 21% current U.S. statutory tax rate.
The Company recorded net income for the three months ended March 31, 2020 of
$7,961,000, or $0.97 per basic and diluted share, compared with a net loss of
$3,845,000, or $(0.49) per basic and diluted share, for the three months ended
March 31, 2019.
Comprehensive income totaled $5,980,000 for the three months ended March 31,
2020, compared to comprehensive loss of $3,726,000 for the same period ended
March 31, 2019. The increase was primarily related to higher net income of
$11,806,000, offset by unrealized losses of $2,113,000 attributable to
derivatives.
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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, capital expenditures,
repayment of long-term debt and business acquisitions. The Company from time to
time will enter into foreign exchange contracts and interest rate swaps to
mitigate risk of foreign exchange and interest rate volatility. As of March 31,
2020, the Company had outstanding foreign exchange contracts with notional
amounts totaling $7,699,000, compared to $15,358,000 outstanding as of
December 31, 2019. As of March 31, 2020, the Company also had outstanding
interest rate swaps with notional amounts totaling $28,875,000, compared to
$29,750,000 outstanding as of December 31, 2019.
Cash provided by operating activities for the three months ended March 31, 2020
totaled $5,379,000. Net income of $7,961,000 positively impacted operating cash
flows. Non-cash deductions of depreciation and amortization included in net
income amounted to $2,823,000. Changes in working capital decreased cash
provided by operating activities by $6,164,000, which primarily related to
changes in accounts payable and other prepaid assets, offset by changes in
accounts receivable and inventory due to the decrease in sales.
At March 31, 2020, the Company had $1,422,000 cash on hand, and an available
balance on the revolving line of credit of $12,224,000. If a material adverse
change in the financial position of the Company should occur, or if actual sales
or expenses are substantially different than what has been forecasted, the
Company's liquidity and ability to obtain further financing to fund future
operating and capital requirements could be negatively impacted.
Cash used in investing activities for the three months ended March 31, 2020 was
$456,000, which primarily related to purchases of property, plant and equipment.
The Company anticipates spending up to $5,000,000 during the remainder of 2020
on property, plant and equipment purchases for all of the Company's operations.
At March 31, 2020, purchase commitments for capital expenditures in progress
were $694,000. The Company anticipates using cash from operations and its
available revolving line of credit to fund capital investments.
Cash used in financing activities for the three months ended March 31, 2020
totaled $5,357,000, which primarily consisted of net revolving loan payments of
$4,231,000 and net scheduled repayments of principal on outstanding term loans
of $1,125,000.
The Company is required to meet certain financial covenants included in the
Amended Credit Agreement with respect to leverage ratios and fixed charge ratios
and capital expenditures, as well as other customary affirmative and negative
covenants. As of March 31, 2020, the Company was not in compliance with its
financial covenants. The following table presents the financial covenants
specified in our Amended A/R Credit Agreement and the actual covenant
calculations as of March 31, 2020:
Financial Covenants Actual Covenants as of March 31, 2020
Fixed Charge Coverage
Ratio (A) Minimum 1.10 0.97
Leverage Ratio 3.25 or Lower 3.53
(A) The terms of the A/R Credit Agreement that the fixed charge coverage ratio
will be maintained at a minimum of 1.10 on March 31, 2020, and from June 30,
2020 and thereafter set at a minimum of 1.15.
On January 16, 2018, the Company entered into an Amended and Restated Credit
Agreement (the "A/R Credit Agreement") with KeyBank National Association as
administrative agent and various financial institutions party thereto as lenders
(the "Lenders"). Pursuant to the terms of the A/R Credit Agreement (i) the
Company may borrow revolving loans in the aggregate principal amount of up to
$40,000,000 (the "U.S. Revolving Loans") from the Lenders and term loans in the
aggregate principal amount of up to $32,000,000 from the Lenders, (ii) the
Company's wholly-owned subsidiary, Horizon Plastics International, Inc., (the
"Subsidiary") may borrow revolving loans in an aggregate principal amount of up
to $10,000,000 from the Lenders (which revolving loans shall reduce the
availability of the U.S. Revolving Loans to the Company on a dollar-for-dollar
basis) and term loans in an aggregate principal amount of up to $13,000,000 from
the Lenders, (iii) the Company obtained a Letter of Credit Commitment of
$250,000, of which $160,000 has been issued and (iv) the Company repaid the
outstanding term loan balance of $6,750,000. The Credit Agreement is secured by
a guarantee of each U.S. and Canadian subsidiary of the Company, and by a lien
on substantially all of the present and future assets of the Company and its
U.S. and Canadian subsidiaries, except that only 65% of the stock issued by
Corecomposites de Mexico, S. de R.L. de C.V. has been pledged.
Concurrent with the closing of the A/R Credit Agreement the Company borrowed the
$32,000,000 term loan and $2,000,000 from the U.S. Revolving Loan and the
Subsidiary borrowed the $13,000,000 term loan and $2,500,000 from revolving
loans to provide
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$49,500,000 of funding for the acquisition of Horizon Plastics. Interest is
payable monthly at one month LIBOR plus a basis point margin of 650 basis
points.
On March 14, 2019, the Company entered into the first amendment ("First
Amendment") to the A/R Credit Agreement (as amended by the First Amendment, the
"Amended Credit Agreement") with the Lenders. Pursuant to the terms of the First
Amendment, the Company and Lenders agreed to modify certain terms of the A/R
Credit Agreement. These modifications included (1) implementation of an
availability block on the U.S. Revolving Loans reducing availability
from $40,000,000 to $32,500,000, (2) modification to the definition of EBITDA to
add back certain one-time expenses, (3) waiver of non-compliance with the
leverage covenant as of December 31, 2018 and modification of the leverage ratio
definition and covenant to eliminate testing of the leverage ratio until
December 31, 2019, (4) waiver of non-compliance with the fixed charge covenant
as of December 31, 2018 and modification of the fixed charge coverage ratio
definition and covenant requirement, (5) implementation of a capital expenditure
spend limit of $7,500,000 during the first six months of 2019
and $12,500,000 for the full year 2019, (6) an increase of the applicable
interest margin spread for existing term and revolving loans, and (7) an
increase in the commitment fees on any unused U.S. Revolving Loans.
On November 22, 2019, the Company entered into a forbearance agreement (the
"Forbearance Agreement") with the Lenders. Pursuant to the Forbearance
Agreement, the Borrowers and the Lenders acknowledged and confirmed that an
event of default occurred under the A/R Credit Agreement resulting from the
Borrowers failure to maintain the required Fixed Charge Coverage Ratio (as
defined in the A/R Credit Agreement) for the fiscal quarter ended September 30,
2019. The Forbearance Agreement provides that the Administrative Agent and
Lenders shall forbear from the exercise of rights and remedies pursuant to the
Loan Documents described in the A/R Credit Agreement through March 13, 2020, as
long as the Company satisfies the conditions set forth in the Forbearance
Agreement, including, (i) the Borrowers shall remain current on all loan
payments during the forbearance period, (ii) on or before December 6, 2019, the
Administrative Agent and Lenders shall each receive a copy of a report of Huron
Consulting Group containing findings and observations in respect of the
businesses and operations of the Company, and the Borrowers shall deliver a
strategic alternative assessment in respect of the Borrowers' operations and
financing, (iii) on or before December 15, 2019, the Administrative Agent and
Lenders shall each receive a copy of appraisals of machinery and equipment and
inventory appraisals, and the Borrowers shall have determined and proposed a new
capital structure to the Administrative Agent and Lenders, (iv) on or before
February 14, 2020, the Borrowers shall have obtained a definitive, written
commitment from involved parties and/or lenders providing the basis for
implementation of a new capital structure, and (v) on or before March 13, 2020,
the Borrowers shall have closed on a new capital structure, acceptable to the
Administrative Agents and Lenders. The Forbearance Agreement also implemented a
new availability block with respect to the U.S. Revolving Loans portion of the
A/R Credit Agreement, reducing availability from $32,500,000 to $28,000,000 and
increasing the applicable margin for existing term and revolving loans, as well
as increasing the commitment fees on any unused U.S. Revolving Loans.
On March 13, 2020, the Company entered into the first Amendment to the
Forbearance Agreement (the "Amended Forbearance Agreement") with the Lenders.
Pursuant to the terms of the Amended Forbearance Agreement, the Company and
Lenders agreed to modify certain terms of the Forbearance Agreement and extend
the Forbearance Agreement through May 29, 2020. The modifications include (1) a
reduction in the U.S. Revolving Loan to $25,000,000 with an availability block
of $5,000,000 which can be borrowed with the approval of the lenders, (2) a
change of interest rate to LIBOR rate plus 650 basis points, (3) forebear
compliance with the leverage covenant and fixed charge covenant through May 29,
2020, and (4) implementation of a capital expenditure spend limit of $3,500,000
from the effective date of the Amended Forbearance Agreement through May 29,
2020.
The Amended Forbearance Agreement provides that the Administrative Agent and
Lenders shall forbear from the exercise of rights and remedies pursuant to the
Loan Documents described in the Credit Agreement through May 29, 2020, as long
as the Company satisfies the conditions set forth in the Amended Forbearance
Agreement, including, (i) on or before March 31, 2020, the borrowers shall have
obtained an executed term sheet from involved parties and/or lenders providing
the basis for implementation of a new capital structure and defined due
diligence parameters, (ii) on or before May 15, 2020 the Borrowers shall have
obtained an executed definitive, written commitment from the new lenders to
enter into a definitive agreement to effect the refinancing, and (iii) on or
before May 29, 2020, the borrowers shall have closed on a new capital structure.
Due to the COVID-19 pandemic, several of the Company's customers have suspended
operations due to reduced demand and government regulations and mandates. As a
result of customer demand reductions, the Company temporarily ceased operations
at several of its manufacturing facilities. Because of the temporary shutdown of
the Company's facilities and the economic uncertainty due to the pandemic, the
Company's ability to complete a refinancing has been delayed. Potential lenders
are requiring the reestablishment of normal operations in order to proceed with
a refinancing. The Company and its current lenders are negotiating an extension
of the forbearance agreement that will allow the Company to continue with its
refinancing efforts once operations resume.
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As a result of non-compliance with the Amended Forbearance Agreement and Amended
Credit Agreement, the Company's remaining borrowings under the Amended Credit
Agreement, consisting of $44,901,000 under the revolving credit commitment and
the term loan commitments, was classified as a current liability in the
Company's consolidated balance sheet as of March 31, 2020. As a result, the
Company's current liabilities exceeded its current assets by $13,350,000 as of
March 31, 2020. If the Lenders were to call the loans or demand repayment of all
existing borrowings, this could result in the Company being unable to meet its
working capital obligations.
Off-Balance Sheet Arrangements
The Company did not have any significant off-balance sheet arrangements as of
March 31, 2020 or December 31, 2019.
The Company did not have or experience any material changes outside the ordinary
course of business as to contractual obligations, including long-term debt
obligations, capital lease obligations, operating lease obligations, purchase
obligations or other long-term liabilities reflected on the Company's balance
sheet under GAAP, as of March 31, 2020 or December 31, 2019.
Critical Accounting Policies and Estimates
For information on critical accounting policies and estimates, see Note 2,
"Critical Accounting Policies and Estimates," to the consolidated financial
statements included herein.
Recent Accounting Pronouncements
For information on the impact of recently issued accounting pronouncements, see
Note 3, "Recent Accounting Pronouncements," to the consolidated financial
statements included herein.
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Part I - Financial Information
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CORE MOLDING TECHNOLOGIES, INC. 
