Core Molding Technologies Inc: Form 10-Q for the period ended Sep 30, 2024

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, which are subject to the "safe harbor" created by Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). 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 Quarterly Report on Form 10-Q:

• dependence upon certain major customers as the primary source of Core Molding Technologies’ sales revenues and the potential loss of any major customers due to the completion of existing production programs with those customers or otherwise;
• business conditions in the plastics, transportation, power sports, utilities and commercial product industries (including changes in demand for production);
• the availability and price increases of raw materials;
• general economic, social, regulatory (including foreign trade policy) and political environments in the countries in which Core Molding Technologies operates;
• safety and security conditions in Mexico;
• fluctuations in foreign currency exchange rates;
• 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;
• ability to accurately quote and execute manufacturing processes for new business; the actions of competitors, customers, and suppliers;
• failure of Core Molding Technologies’ suppliers to perform their obligations;
• inflationary pressures; new technologies; regulatory matters;
• labor relations and labor availability as well as possible work stoppages or labor disruptions at one or more of our union locations or one of our customer or supplier locations;
• the loss or inability of Core Molding Technologies to attract and retain key personnel;
• the 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 (including engine emission regulations);
• the availability of sufficient 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;
• cybersecurity incidents or other similar disruptions impacting Core Molding Technologies or significant customers and/or suppliers; 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 Core Molding Technologies' Annual Report on Form 10-K for the year ended December 31, 2023.

Description of the Company

Core Molding Technologies and its subsidiaries operate in the engineered materials market as one operating segment as a molder of thermoplastic and thermoset structural products. The Company produces and sells molded products for varied markets, including medium and heavy-duty trucks, power sports, building products, industrial and utilities and other commercial markets. Core Molding Technologies has its headquarters in Columbus, Ohio, and operates six production facilities in the United States, Canada and Mexico.

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, raw material cost inflation, labor availability, and our customers’ production rates and inventory levels. The Company's customers operate in many different markets with different cyclicality and seasonality.

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. The Company has certain contractual commitments that restrict its ability to pass through changes in input costs to certain customers. As a result, during periods of significant increases or decreases in input costs operating results may be impacted.

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 operational 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 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.

Business Outlook

Looking forward, based on industry analyst projections, customer forecasts, anticipated price changes, as well as anticipated new program launches, offset by current programs that we expect to continue to ramp down in the fourth quarter of 2024 as further described below, the Company expects revenues for the fourth quarter of 2024 to decrease by approximately 17 to 20 percent as compared to the same period in 2023. Additional factors contributing to our anticipated 2024 revenue outlook include an expected seasonal demand slowdown, decreased customer inventory builds due to optimizing inventory levels as well as a consumer demand environment that is more consistent with pre-pandemic levels.

Beginning in the second half of 2024 and continuing through 2026, the Company’s business with Volvo has and will begin transitioning from existing programs that the Company currently supplies to new programs that the Company does not support. Notwithstanding this transition and the completion of existing programs with Volvo, the Company continues to actively bid for new Volvo business, which we believe we will continue to secure outside of the current programs. Going forward we remain focused on continuing to replace phased out business from existing programs with new programs from Volvo or other customers.

The Company’s raw material supply chains remain stable, and the Company anticipates raw material pricing in the fourth quarter of 2024 to remain flat or slightly lower as compared to 2023. Labor markets have also stabilized, although at higher cost levels over the past several years. The Company does not anticipate challenges in hiring hourly labor, although management believes wage pressure will continue primarily in Mexico.

As a result of overall demand level declines by our customers, the Company restructured its fixed cost and selling, general and administrative costs by reducing labor levels during the third quarter. As a result, the Company incurred restructuring charges, primarily severance costs, of $228,000 for the three months ended September 30, 2024 and anticipates additional restructuring charges of approximately $81,000 in the three months ended December 31, 2024. The labor reduction is expected to provide annual savings of approximately $2,627,000.

Results of Operations

Three Months Ended September 30, 2024, as Compared to Three Months Ended September 30, 2023

Net sales for the three months ended September 30, 2024 and 2023 totaled $72,992,000 and $86,728,000, respectively. Included in net sales were tooling project sales of $1,734,000 and $5,832,000 for the three months ended September 30, 2024 and 2023, respectively. Tooling 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 September 30, 2024 were $71,258,000 compared to $80,896,000 for the same period in 2023. The decrease in sales is primarily the result of lower demand across most industries. The Company's product sales for the three months ended September 30, 2024 compared to the same period in 2023 by market are as follows (in thousands):

Gross margin was 16.9% and 17.6% of sales for the three months ended September 30, 2024 and 2023, respectively. Gross margin compared to last year was unfavorably impacted by lower fixed cost leverage of 1.5% and operational inefficiencies and product mix of 2.4%, offset by net changes in selling price and raw material costs of 3.2%.

Selling general and administrative expense ("SG&A") was $8,740,000 for the three months ended September 30, 2024, compared to $9,403,000 for the three months ended September 30, 2023. Decreased SG&A expenses resulted primarily from lower bonus and labor and benefits of $961,000 offset by higher severance payment cost of $228,000 and unfavorable foreign currency translation of $612,000. In the three months ended September 30, 2023 the Company also incurred a $540,000 one-time press relocation cost.

Net interest income totaled $144,000 for the three months ended September 30, 2024, compared to net interest expense of $187,000 for the three months ended September 30, 2023. Lower net interest expense was primarily due to higher interest income of $440,000 from investment of the Company's accumulated cash balances.

Income tax expense for the three months ended September 30, 2024 is estimated to be $727,000, approximately 18.7% of income before income taxes. Income tax expense for the three months ended September 30, 2023 was estimated to be $1,386,000, approximately 24.1% of income before income taxes. The company's effective tax rate reflects the effects of taxable income being generated in lower tax rate jurisdictions and the benefit of lower tax rates of foreign derived intangible income.

The Company recorded net income for the three months ended September 30, 2024 of $3,160,000 or $0.36 per basic and diluted share compared with net income of $4,354,000, or $0.50 per basic and $0.49 per diluted share, for the three months ended September 30, 2023.

Comprehensive income totaled $1,767,000 for the three months ended September 30, 2024, compared to comprehensive income of $3,720,000 for the same period ended September 30, 2023. The decrease was primarily related to the decrease in net income of $1,194,000 and decrease in valuation of interest rate swaps of $607,000.

Nine Months Ended September 30, 2024, as Compared to Nine Months Ended September 30, 2023

Net sales for the nine months ended September 30, 2024 and 2023 totaled $239,880,000 and $283,961,000, respectively. Included in net sales were tooling project sales of $8,835,000 and $9,028,000 for the nine months ended September 30, 2024 and 2023, respectively. Tooling 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 nine months ended September 30, 2024 were $231,045,000 compared to $274,933,000 for the same period in 2023. The decrease in sales is primarily the result of lower demand across most industries. The Company's product sales for the nine months ended September 30, 2024 compared to the same period in 2023 by market are as follows (in thousands):

Gross margin was approximately 18.1% of sales for the nine months ended September 30, 2024, compared with 18.9% for the same period in 2023. The gross margin percentage decrease was due to lower fixed cost leverage of 1.4% and operational inefficiencies and product mix of 1.3%, offset by net changes in selling price and raw material costs of 1.9% .

SG&A was $27,550,000 for the nine months ended September 30, 2024, compared to SG&A costs of $29,562,000 for the same period in 2023. Decreased SG&A expenses resulted primarily from lower bonus and labor and benefits of $2,262,000 and offset by severance payment cost of $228,000. The Company also incurred a one-time press relocation cost of $540,000 in 2023.

Net interest income totaled $99,000 for the nine months ended September 30, 2024, compared to net interest expense of $836,000 for the same period in 2023. Lower interest expense was primarily due to higher interest income of $1,032,000 from investment of the Company's accumulated cash balances.

Income tax expense for the nine months ended September 30, 2024 is estimated to be $3,000,000, approximately 18.4% of income before income taxes, and includes tax expense in United States, Canadian and Mexican tax jurisdictions. The Company recognized a tax benefit of $282,000 related to the difference in grant price and vest price for stock awards that vested during the nine months ended September 30, 2024. Income tax expense for the same period in 2023 was estimated to be $5,198,000, approximately 22.3% of income before income taxes, and includes tax expense in United States, Canadian and Mexican tax jurisdictions. The Company recognized a tax benefit of $535,000 related to the difference in grant price and vest price for stock awards that vested during the nine months ended September 30, 2023. The Company's effective tax rate reflects the effects of taxable income being generated in lower tax rate jurisdictions and Foreign-Derived Intangible Income rate utilization throughout the year.

The Company recorded net income for the nine months ended September 30, 2024 of $13,338,000 or $1.53 per basic share and $1.51 per diluted share, compared with net income of $18,142,000, or $2.13 per basic and $2.08 per diluted share, for the same period in 2023.

Comprehensive income totaled $10,620,000 for the nine months ended September 30, 2024, compared to comprehensive income of $18,311,000 for the same period in 2023. The decrease was related to the decrease in net income of $4,804,000 and a decrease in valuation of foreign currency hedging of $2,267,000.

Liquidity and Capital Resources

Historically, 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, capital expenditures, repayments of debt, and 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 September 30, 2024, the Company had outstanding foreign exchange contracts with notional amounts totaling $33,813,000. As of September 30, 2024, the Company had outstanding interest rate swaps with notional amounts totaling $22,187,000.

Cash provided by operating activities for the nine months ended September 30, 2024 totaled $30,162,000. Net income of $13,338,000 positively impacted operating cash flows. Non-cash deductions of depreciation and amortization, and share-based compensation included in net income amounted to $10,018,000 and $2,067,000, respectively. Decreased working capital increased cash provided by operating activities by $3,192,000.

Cash used in investing activities for the nine months ended September 30, 2024 was $7,045,000, which related to purchases of property, plant and equipment. The Company anticipates spending approximately $11,000,000 to $13,000,000 during 2024 on property, plant and equipment purchases for all of the Company's operations. At September 30, 2024, purchase commitments for capital expenditures in progress were $3,184,000. The Company anticipates using cash from operations, its available revolving line of credit or its capex line to fund capital investments.

Cash used in financing activities for the nine months ended September 30, 2024 totaled $4,873,000, which consisted of the purchase of treasury stock of $1,439,000 in exchange for payment of taxes related to net shares settlements of equity awards, repayments of long-term debt of $1,071,000 and purchase of treasury stock of $2,363,000.

At September 30, 2024, the Company had $42,348,000 cash on hand, a $25,000,000 revolving loan facility of which none is outstanding, and a $25,000,000 Capex loan facility with no outstanding balance.

The Company is required to meet certain financial covenants included in the Huntington Credit Agreement (defined below), which covenants include a net debt leverage and a fixed charge coverage ratio. As of September 30, 2024, the Company was in compliance with its financial covenants associated with the loans made under the Huntington Credit Agreement as described below.

Management believes cash on hand, cash flow from operating activities and available borrowings under the Company's credit agreement will be sufficient to meet the Company's current liquidity needs.

Huntington Credit Agreement

On July 22, 2022, the Company entered into a credit agreement (the “Huntington Credit Agreement”) with The Huntington National Bank (“Huntington”), as the sole lender, administrative agent, lead arranger and book runner, and the lenders from time to time thereto. Pursuant to the terms of the Huntington Credit Agreement, Huntington made available to the Company secured loans (the “Huntington Loans”) in the maximum aggregate principal amount of $75,000,000, comprised of three $25,000,000 commitments: a term loan commitment, a CapEx loan commitment and a revolving loan commitment.

At the option of the Company, the Huntington Loans shall be comprised of Alternative Base Rate (ABR) Loans or Secure Overnight Financing Rate (SOFR) Loans.

ABR Loans bear interest at a per annum rate equal to ABR plus a margin of 280 to 330 basis points determined based on the Company’s leverage ratio. ABR is the greatest of (a) the Prime Rate in effect on such day, (b) the Federal Funds Rate in effect on such day plus 0.50% per annum and (c) Daily Simple SOFR for such day (taking into account any floor set forth in the definition of “Daily Simple SOFR”) plus 1.00% per annum; provided, that if the ABR shall be less than 0.00%, then ABR shall be deemed to be 0.00%.

SOFR Loans bear interest at a per annum rate equal to Daily Simple SOFR plus a margin of 180 to 230 basis points determined based on the Company’s leverage ratio. Daily Simple SOFR means, for any day (a “SOFR Rate Day”), a rate per annum equal to the greater of (a) SOFR for the day (such day, the “SOFR Determination Date”) that is five (5) U.S. Government Securities Business Days prior to (i) if such SOFR Rate Day is a U.S. Government Securities Business Day, such SOFR Rate Day or (ii) if such SOFR Rate Day is not a U.S. Government Securities Business Day, the U.S. Government Securities Business Day immediately preceding such SOFR Rate Day, in each case, as such SOFR is published by the SOFR Administrator on the SOFR Administrator’s Website, and (b) 0.00%.

The Company’s obligations under the Huntington Credit Agreement are secured by all of the U.S. and Canadian assets of the Company, including all of its equity interests in each of the Company’s U.S. and Canadian subsidiaries and 65% of the Company’s equity interest in its Mexican subsidiaries, and are unconditionally guaranteed by certain subsidiaries of the Company.

The Huntington Credit Agreement contains certain customary representations and warranties, conditions, affirmative and negative covenants and events of default. The Company is in compliance with such covenants as of September 30, 2024.

Voluntary prepayments of amounts outstanding under the Huntington Loans are permitted at any time without premium or penalty.

The Company incurred debt origination fees of $402,000 related to the Huntington Credit Agreement, which is being amortized over the life of the agreement.

Huntington Capex Loan

Pursuant to the terms of the Huntington Credit Agreement, Huntington made available to the Company secured Capex loan (the “Huntington Capex Loan”) in the maximum aggregate principal amount of $25,000,000. Proceeds of the Huntington Capex Loan will be used to finance the ongoing capital expenditure needs of the Company.

Any borrowings from the Huntington Capex Loan will be converted to new term loans annually each February, beginning February 2025, and will have monthly principal repayments based on a sixty-month amortization period with all amounts outstanding on the Huntington Capex Loan being fully due on July 22, 2027.

Huntington Revolving Loan

Pursuant to the terms of the Huntington Credit Agreement, Huntington made available to the Company a revolving loan commitment (the “Huntington Revolving Loan”) of $25,000,000. The Company has $25,000,000 of available revolving loans of which none was outstanding as of September 30, 2024 and December 31, 2023, respectively.

The Huntington Credit Agreement makes available to the Company a revolving commitment in the maximum amount of $25,000,000 at the Company’s option at any time during the five-year period following the closing. The revolving loan commitment terminates, and all outstanding borrowings thereunder must be repaid on July 22, 2027.

The interest rate for the Huntington Revolving Loan was 6.85% and 7.11% as of September 30, 2024 and December 31, 2023, respectively.

Huntington Term Loan

Pursuant to the terms of the Huntington Credit Agreement, Huntington made available to the Company a Term Loan commitment (the “Huntington Term Loan”) of $25,000,000 ($25,000,000 of which was advanced to the Company on July 22, 2022). The Huntington Term Loan is to be repaid in monthly installments beginning August 2022 of $104,000 per month for the first 24 months, $156,000 per month for the next 24 months, $208,000 for the next 12 months and the remaining balance to be paid on July 22, 2027. The interest rate for the Huntington Term Loan was 6.85% and 7.11% as of September 30, 2024 and December 31, 2023, respectively.

Interest Rate Swap Agreement

The Company entered into an interest rate swap agreement that became effective July 22, 2022 and continues through July 2027, which was designed as a cash flow hedge for $25,000,000 of the Huntington Term Loan. Under this agreement, the Company will pay a fixed rate of 2.95% to the swap counterparty in exchange for the Term Loans daily variable SOFR. As a result the interest rate paid on the Huntington Term Loan was 4.75% as of March 31, 2024 and December 31, 2023. The fair value of the interest rate swap was an asset of $237,000 and $524,000 at September 30, 2024 and December 31, 2023, respectively.

Leaf Capital Funding

On April 24, 2020 the Company entered into a finance agreement with Leaf Capital Funding of $175,000 for equipment. The parties agreed to a fixed interest rate of 5.50% and a term of 60 months.

Off-Balance Sheet Arrangements

The Company did not have any significant off-balance sheet arrangements as of September 30, 2024 or December 31, 2023.

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 in the Company’s Consolidated Balance Sheet under GAAP, as of September 30, 2024 and December 31, 2023.

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.

Core Molding Technologies’ primary market risk results from changes in the price of commodities used in its manufacturing operations. Core Molding Technologies is also exposed to fluctuations in interest rates and foreign currency fluctuations associated with the Mexican Peso and Canadian Dollar. Core Molding Technologies does not hold any material market risk sensitive instruments for trading purposes. The Company uses derivative financial instruments to hedge exposure to fluctuations in foreign exchange rates and interest rates.

Core Molding Technologies has the following three items that are sensitive to market risks: (1) non-hedged loans under the Huntington Credit Agreement, all of which bear a variable interest rate; (2) non-hedged foreign currency purchases in which the Company purchases Mexican Pesos and Canadian Dollars with United States Dollars to meet certain obligations; and (3) raw material purchases in which Core Molding Technologies purchases various resins, fiberglass, and metal components for use in production. The prices and availability of these materials are affected by the prices of crude oil, natural gas and other feedstocks, tariffs, as well as processing capacity versus demand.

Assuming a hypothetical 10% change in short-term interest rates, interest paid on the Term Loan would be impacted, as the interest rate on these loans is based upon SOFR. It would not, however, have a material effect on earnings before tax as the Company has entered into a hedge to offset changes in SOFR.

Assuming a hypothetical 10% decrease in the United States Dollar to Mexican Peso and Canadian Dollar exchange rate, the Company would be impacted by an increase in operating costs, which would have an adverse effect on operating margins.

Assuming a hypothetical 10% increase in commodity prices, Core Molding Technologies would be impacted by an increase in raw material costs, which would have an adverse effect on operating margins.

As of the end of the period covered by this report, the Company has carried out an evaluation, under the supervision and with the participation of its management, including its Chief Executive Officer and its Chief Financial Officer, of the effectiveness of the design and operation of its disclosure controls and procedures (as defined in Rule 13a-15(e) of the Exchange Act). Based upon this evaluation, the Company’s management, including its Chief Executive Officer and its Chief Financial Officer, concluded that the Company’s disclosure controls and procedures were (i) effective to ensure that information required to be disclosed in the Company’s reports filed or submitted under the Exchange Act was accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure, and (ii) effective to ensure that information required to be disclosed in the Company’s reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. There were no changes in internal controls over financial reporting (as such term is defined in Exchange Act Rule 13a-15(f)) that occurred in the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

There have been no material changes in Core Molding Technologies' risk factors from those previously disclosed in Core Molding Technologies' Annual Report on Form 10-K for the year ended December 31, 2023.